THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. WE ARE NOT USING THIS
PROSPECTUS TO OFFER TO SELL THESE SECURITIES OR TO SOLICIT OFFERS TO BUY THESE
SECURITIES IN ANY PLACE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(5)
File No. 333-99273
Subject to completion, dated May 5, 2003
PRELIMINARY PROSPECTUS SUPPLEMENT
To prospectus dated October 22, 2002
[US STEEL CORPORATION LOGO]
UNITED STATES STEEL CORPORATION
$350,000,000
% SENIOR NOTES DUE 2010
Interest on the notes is payable on and of each year,
beginning on , 2003. The notes will mature on , 2010.
Interest will accrue from , 2003.
We may redeem up to 35% of the aggregate principal amount of the notes before
, 2006, with net proceeds that we raise in public equity offerings at
a redemption price equal to % of the principal amount of the notes being
redeemed plus accrued interest. Additionally, we may redeem some or all of the
notes at any time on and after , 2007 at the redemption prices
described on page S-114 of this prospectus supplement. If we sell all or
substantially all of our assets or experience specific kinds of changes in
control, we must offer to repurchase the notes.
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-13
OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE 2 OF THE ATTACHED PROSPECTUS FOR A
DISCUSSION OF CERTAIN RISKS THAT YOU SHOULD CONSIDER IN CONNECTION WITH AN
INVESTMENT IN THE NOTES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
------------------------------------------------------------------------------------------------------------
PROCEEDS, BEFORE EXPENSES,
PUBLIC OFFERING PRICE(1) UNDERWRITING DISCOUNT TO U.S. STEEL(1)
------------------------------------------------------------------------------------------------------------
Per note % % %
Total $ $ $
------------------------------------------------------------------------------------------------------------
(1) Plus interest, if any, from , 2003 to the date of delivery.
The notes will not be listed on any securities exchange. Currently, there is no
public market for the notes.
We expect to deliver the notes to investors in registered book-entry form
through The Depository Trust Company on or about , 2003.
Joint book-running managers
JPMORGAN GOLDMAN, SACHS & CO.
------------------------
LEHMAN BROTHERS SCOTIA CAPITAL
BNY CAPITAL MARKETS, INC. NATCITY INVESTMENTS, INC. PNC CAPITAL MARKETS, INC.
The date of this prospectus supplement is May , 2003
IN MAKING YOUR INVESTMENT DECISION, YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE
ATTACHED PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH ANY OTHER INFORMATION. IF YOU RECEIVE ANY OTHER INFORMATION,
YOU SHOULD NOT RELY ON IT.
WE AND THE UNDERWRITERS ARE OFFERING TO SELL THE SECURITIES ONLY IN PLACES WHERE
OFFERS AND SALES ARE PERMITTED.
YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF THIS PROSPECTUS
SUPPLEMENT.
---------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Forward-looking statements.......... iii
Summary............................. S-1
Risk factors........................ S-13
Use of proceeds..................... S-24
Capitalization...................... S-25
Unaudited pro forma condensed
combined financial statements..... S-26
National Steel selected financial
information....................... S-35
U. S. Steel selected financial
information....................... S-36
Management's discussion and analysis
of financial condition and results
of operations--U. S. Steel........ S-38
Business--U. S. Steel............... S-76
Business--National Steel............ S-101
National Steel transaction.......... S-104
Management.......................... S-107
Description of other indebtedness
and receivables sales program..... S-109
Description of the notes............ S-113
Certain federal income tax
considerations.................... S-155
Certain ERISA considerations........ S-159
Underwriting........................ S-161
Legal matters....................... S-162
Index to financial statements....... F-1
PAGE
PROSPECTUS
Where you can find more
information....................... ii
Our company......................... 1
Risk factors........................ 2
Summary consolidated financial
information....................... 16
Ratio of earnings to fixed
charges........................... 19
Use of proceeds..................... 19
Description of the debt
securities........................ 19
Description of capital stock........ 30
Description of depositary shares.... 37
Description of warrants............. 40
Description of convertible or
exchangeable securities........... 41
Description of stock purchase
contracts and stock purchase
units............................. 41
Plan of distribution................ 41
Validity of securities.............. 43
Experts............................. 44
i
ALTERNATIVE SETTLEMENT DATE
It is expected that delivery of the notes will be made on or about the date
specified on the cover page of this prospectus supplement, which will be the
fourth business day following the date of this prospectus supplement. Under Rule
15c6-1 of the Securities Exchange Act of 1934, as amended, trades in the
secondary market generally are required to settle in three business days, unless
the parties to any such trade expressly agree otherwise. Accordingly, the
purchasers who wish to trade notes on the date of this prospectus supplement or
the next succeeding business day will be required to specify an alternate
settlement cycle at the time of any such trade to prevent failed settlement.
Purchasers of notes who wish to trade notes on the date of this prospectus
supplement or the next succeeding business day should consult their own
advisors.
ii
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the attached prospectus and the documents
incorporated herein and therein by reference include "forward-looking
statements" that are identified by the use of forward-looking words or phrases,
including, but not limited to, "intends," "intended," "expects," "expected,"
"anticipates" and "anticipated." These forward-looking statements are based on
(1) a number of assumptions made by management concerning future events and (2)
information currently available to management. Readers are cautioned not to put
undue reliance on those forward-looking statements, which are not a guarantee of
performance and are subject to a number of uncertainties and other facts, many
of which are outside our control, that could cause actual events to differ
materially from those statements. All statements other than statements of
historical facts included in this prospectus supplement and the attached
prospectus and the documents incorporated herein and therein by reference,
including those regarding our future financial position, results of operations,
cash flows and costs, and those regarding our business strategy and growth
opportunities, are forward-looking statements. Although we believe that our
expectations reflected in those forward-looking statements are reasonable, we
cannot assure you that these expectations will prove to be correct. Important
factors that could cause actual results to differ materially from our
expectations, in addition to those factors disclosed under "Risk factors"
beginning on page 2 of the attached prospectus and page S-13 of this prospectus
supplement, and in our SEC filings described under "Where you can find more
information" on page ii of the attached prospectus, include:
-- prices and volumes of our sales of steel products;
-- levels of imports of steel products into the United States;
-- general economic and financial market conditions;
-- ability to finance our future business requirements through
internally generated funds and available external financing sources;
and
-- the extent to which we are successful in implementing our
consolidation strategy.
These forward-looking statements represent our judgment as of the date of this
prospectus supplement. All subsequent written and oral forward-looking
statements are expressly qualified in their entirety by the factors referred to
above. Unless otherwise required by law, we disclaim any intent or obligation to
update the respective forward-looking statements.
iii
SUMMARY
The following information supplements, and should be read together with, the
information contained or incorporated by reference in other parts of this
prospectus supplement and the attached prospectus. This summary highlights
selected information from the prospectus supplement and the attached prospectus.
As a result, it does not contain all of the information you should consider
before investing in our senior notes. You should carefully read this prospectus
supplement and the attached prospectus, including the documents incorporated by
reference in it, which are described under "Where you can find more information"
in the attached prospectus. Unless the context otherwise requires, references in
this prospectus to "U. S. Steel," "USS," "we," "us" and "our" are to United
States Steel Corporation and its subsidiaries, and references to "National" are
to National Steel Corporation and its subsidiaries. References to tons are to
U.S. short or "net" tons (2,000 lbs.) unless otherwise indicated. A metric ton
("mt" or "tonne") is equal to roughly 1.10 U.S. short tons (2,205 lbs).
UNITED STATES STEEL CORPORATION
We are the largest integrated steel producer based in North America with annual
global steelmaking capacity of 17.8 million tons. We have a broad and diverse
mix of products and customers. We make, sell and transport a wide range of
value-added steel products to customers with demanding technical applications in
the automotive, appliance, container, industrial machinery, construction and oil
and gas industries. We have a significant market presence in each of our major
product areas and we have long-term relationships with many of our major
customers. We are one of the leading steel sheet suppliers to the North American
automotive and appliance industries, one of the largest producers of tin mill
products in North America, the largest integrated flat-rolled producer in
Central Europe and the largest domestic producer of seamless oil country tubular
goods. For the year ended December 31, 2002, we generated revenues and other
income of $7,054 million, net income of $61 million, cash flow from operations
of $279 million and EBITDA of $478 million. After giving effect to the
acquisition of the assets of National (including the effects of the new labor
agreement with the United Steelworkers of America (USWA) as it relates to
National's employees and the associated financing incurred by U. S. Steel to
complete the acquisition), and the sale of the assets of U. S. Steel's coal
mining business, all of which are described below, for the year ended December
31, 2002, we had pro forma revenues of $9,411 million, pro forma net income of
$43 million and pro forma EBITDA of $553 million. For a reconciliation of EBITDA
to net income and operating cash flow and of pro forma EBITDA to pro forma net
income, see "--Summary financial data."
We operate three integrated steel mills in North America--Gary Works in Indiana,
Mon Valley Works in Pennsylvania and Fairfield Works in Alabama--which have
annual steelmaking capacity of 12.8 million tons. We also operate processing and
finishing facilities at six locations in those three states and in Ohio. We
produce most of the iron ore and coke and a portion of the coal we use as raw
materials in our domestic steel-making process, and we sell some of this
production to third parties. We also own steel distribution, real estate and
engineering and consulting services businesses.
In addition to our domestic facilities, we have significant operations in
Central Europe through U. S. Steel Kosice, s.r.o. (USSK), which we acquired in
November 2000. USSK, headquartered in Kosice in the Slovak Republic, is the
largest integrated steel sheet producer in Central Europe. Currently, USSK has
annual steelmaking capacity of 5.0 million tons and produces and sells sheet,
plate, tin, tubular, precision tube and specialty steel products, as well as
coke. USSK has
S-1
enabled us to establish a low-cost manufacturing base in Europe and positioned
us to serve our global customers.
PURCHASE OF NATIONAL STEEL ASSETS
On April 21, 2003, we signed an asset purchase agreement with National Steel
Corporation, which filed for bankruptcy protection on March 6, 2002, to acquire
substantially all of National's assets for approximately $850 million and the
assumption of approximately $200 million of liabilities. The Bankruptcy Court
for the Northern District of Illinois, Eastern Division, approved the agreement
on April 21, 2003. We expect to complete the acquisition of National's assets in
May 2003. The assets of National we will acquire in the National transaction
include: facilities at National's two integrated steel plants, Great Lakes
Steel, in Ecorse and River Rouge, Michigan, and Granite City Division in Granite
City, Illinois; the Midwest finishing facility in Portage, Indiana; ProCoil, a
steel-processing facility in Canton, Michigan; National Steel Pellet Company,
which produces iron ore pellets; and various other subsidiaries and joint-
venture interests, including National's interest in Double G Coatings, a hot-dip
galvanizing and Galvalume(R) steel facility near Jackson, Mississippi.
National's facilities have annual steelmaking capacity of 6.6 million tons. We
believe the acquisition of National is consistent with our business strategy to
focus on value-added products, expand our business platform and reduce costs per
ton.
- Strengthen our overall position in domestic value-added
materials. With the addition of the National assets, we will be the
largest steel producer in North America and the sixth largest in the
world. In addition, we will have stronger positions in value-added
products to serve the automotive, container and construction end markets.
- Implement new labor agreement. The new labor agreement reached by U.
S. Steel and the USWA provides for a workforce restructuring through
which U. S. Steel expects to achieve productivity improvements of at
least 20% at both U. S. Steel and the acquired National facilities.
- Generate significant cost savings. Based on preliminary assessments,
U. S. Steel expects annual acquisition synergies of at least $200 million
within two years of completing the transaction. These synergies do not
include the elimination of costs related to National's pension and
retiree medical and life insurance plans, which have not been assumed by
U. S. Steel, nor do they include the impact of the reduced depreciation
resulting from the fact that the purchase price we paid for some of
National's assets is lower than National's cost basis in these assets.
Savings are expected to result from a number of actions, including
increased scheduling and operating efficiencies, the elimination of
redundant overhead costs, the reduction of freight costs and the effects
of the new labor contract as it relates to active employees at the
acquired National facilities.
The preceding discussion includes forward-looking statements. Predictions
regarding these estimates are subject to substantial uncertainties such as
(among other things) our ability to source the combined facilities more
efficiently, the number, age and years of service of employees electing early
retirement, and the ratification by the union employees of the new labor
agreement.
S-2
STEEL INDUSTRY CONDITIONS
RESTRUCTURING AND CONSOLIDATION ARE UNDERWAY. The domestic steel industry is
restructuring after many years of low prices and oversupply, which resulted in
significant temporary and permanent capacity closures starting in late 2000 and
led to the introduction of Section 201 import tariffs in March 2002. The
combination of capacity closures, trade restrictions and the imposition of
tariffs led to a recovery in steel prices from a 20-year low in late 2001 and
early 2002.
The pace of domestic steel industry consolidation has accelerated as evidenced
by a number of recent acquisitions, including the acquisition of assets from
bankrupt companies. Transactions during 2002 included the purchases of assets of
Trico Steel Co. LLC, Acme Metals, Inc. and LTV Corporation out of bankruptcy and
the purchase of Birmingham Steel Corporation. In addition, in April 2003 a
bankruptcy court approved the sale of substantially all of the assets of
Bethlehem Steel Corporation to International Steel Group. One factor
facilitating the restructuring of the domestic integrated steel industry has
been the elimination of unfunded pension, healthcare and other legacy costs
through the bankruptcy process. We believe the continuing consolidation of
steelmaking assets will reduce the domestic steel industry's cost basis,
creating a more globally competitive industry structure.
STEEL PRICES HAVE RECOVERED. In December of 2001, hot-rolled prices in spot
markets hit a 20-year low of $210 per ton, according to published sources. In
March 2002, President Bush announced his decision to impose trade restrictions
in response to the prior finding of the International Trade Commission under
Section 201 of the Trade Act of 1974 that imports were a substantial cause of
serious injury to the domestic steel industry. Following this, steel prices
recovered. Although, as reported by published sources, average first quarter
2003 spot market prices dropped by approximately $50 per ton from average fourth
quarter 2002 levels, domestic spot market hot-rolled prices for March 2003 were
$280 per ton, more than $70 per ton higher than those realized in December of
2001. In May 2003 the World Trade Organization issued a final ruling against the
Section 201 remedies. Although President Bush's administration has indicated
preliminarily that it will appeal the ruling if it is finalized without
modification, we cannot predict whether the administration will appeal the
ruling or the likelihood of success of any appeal.
COMPETITIVE STRENGTHS
LEADING GLOBAL STEEL PRODUCER. We believe that our size and global market
position enable us to serve the needs of our global customers and position us to
profitably grow our business. Before giving effect to the acquisition of
National, we are the 11th largest global steel producer, as measured by
steelmaking capacity, and the largest integrated steel producer based in North
America. We are a leading provider of flat-rolled steel to customers with
demanding technical applications in the automotive, appliance, container and
construction industries. We supply each of the "Big 3" automotive companies and
are a growing supplier to foreign automotive companies with manufacturing
facilities in the United States. We are a leading supplier of carbon sheet
products to the North American appliance industries and one of the largest tin
mill product producers in North America. We are the largest domestic producer of
seamless oil country tubular goods.
The acquisition of USSK in 2000 has enabled us to establish a low-cost
manufacturing base in Central Europe and positioned us to serve our global
customers. In March 2003 we entered into
S-3
agreements to purchase out of bankruptcy, Sartid a.d., a steel producer located
in Serbia for a purchase price of $23 million, in addition to certain other
commitments. Sartid's production facilities include an integrated mill with
annual raw steel design production capability of 2.4 million net tons, although
Sartid is currently operating at less than half of capacity. Sartid primarily
produces sheet products and its tinning facility has an annual capability of
130,000 tons. In April 2003 we submitted an offer to purchase Polskie Huty
Stali, a holding company that owns four steel mills, including the two largest
integrated steel mills, in Poland.
Upon completion of the National transaction, we will be the largest steel
producer in North America and the sixth largest steel producer in the world, as
measured by steelmaking capacity. The acquisition of National's assets would
complement our existing product base and end markets, further enhancing our
strong market position.
HIGH QUALITY ASSET BASE. We operate four globally competitive integrated steel
manufacturing facilities. Since 1998, we have invested $1.4 billion to reduce
costs and improve efficiency. Our 2000 acquisition of USSK has enabled us to
establish a low-cost manufacturing base in Central Europe and positioned us to
serve our global customers. With National Steel's assets, most of which are
located in the midwestern United States, we will be able to reduce
transportation costs, employ more facilities that produce value-added products
for the automotive and container industry, and enjoy a much more significant
presence in the construction industry.
DIVERSIFIED PRODUCT BASE AND STRONG CUSTOMER RELATIONSHIPS. We have a
diversified asset base including facilities that produce sheet, tin, plate and
tubular products, as well as coke, iron ore and coal. We focus on providing high
quality products and services to our customers, which we believe leads to
longstanding customer relationships. Our customers include the automotive,
appliance, container, industrial machinery, construction and oil and gas
industries. None of our customers represented more than 5% of our revenues in
2002. We believe that we have an excellent reputation with our customers for
providing top quality products and customer service, as well as for timely
delivery. We believe our existing product and market diversity combined with
National's products and markets decreases the potential impact of a downturn in
any product or industry.
EXPERIENCED, COMMITTED MANAGEMENT TEAM. Our business is managed by an
experienced team of executive officers, led by Thomas J. Usher, our chairman and
chief executive officer and John P. Surma, our president. Our management team
includes many other experienced officers in each of the key functional areas,
including operations, sales, marketing, accounting and finance. Together, our
executives bring a substantial amount of steel industry experience to our
business.
BUSINESS STRATEGY
CONTINUE TO GROW OUR HIGHER VALUE-ADDED CAPABILITIES. We are focused on
providing value-added steel products to our target markets where we believe our
leadership position, production and processing capabilities and technical
service give us a competitive advantage. We continue to enhance our value-added
businesses through the upgrading and modernization of our production facilities.
We intend to expand our capabilities and market positions in our key markets.
The acquisition of National's assets, which will further strengthen our position
in automotive and tin mill products and enhance our value-added construction
products business, is evidence of our commitment to this strategy.
S-4
EXPAND OUR GLOBAL BUSINESS PLATFORM. We plan to create a global company through
the utilization of our European and domestic assets and the pursuit of further
strategic opportunities that are consistent with our business strategy. Through
our purchase of USSK, we initiated a major offshore expansion and followed many
of our customers into the European market. Our subsidiary, U. S. Steel Balkan,
has entered into agreements to acquire Sartid, a.d., an integrated steel
producer in Serbia. We continue to explore additional opportunities for
investment in Central and Western Europe to serve those customers who are
seeking worldwide supply arrangements. We have submitted an offer to purchase
Polskie Huty Stali, a holding company that owns four steel mills, including the
two largest integrated steel mills, in Poland. We have also entered into a
number of joint ventures with domestic and international partners to take
advantage of market or manufacturing opportunities in the sheet, tin mill,
tubular and plate consuming industries. Our long-range strategy is to operate a
global company, integrating our European and domestic operations to best serve
customers.
CONTINUE TO REDUCE COSTS. We previously announced a plan to reduce our domestic
costs by $30 per ton over a three-year period beginning with 2002. Currently we
are on pace to achieve this objective, which should ultimately result in annual
operating savings of over $300 million, from 2001 levels, by the end of 2004. We
also have a cost savings program at USSK, which has achieved cost savings of
more than $30 per ton since our acquisition of USSK in November 2000. We are
also targeting an additional $10 per ton in savings at USSK in 2003. In
connection with our acquisition of National's assets, we have negotiated a new
labor agreement with the United Steelworkers of America, which covers employees
at our facilities and the acquired National facilities. We believe this new
labor agreement provides us the flexibility to staff and operate the combined
facilities with a more competitive cost structure. We believe the acquisition of
National's assets would further reduce our costs per ton as a result of, among
other things, increased scheduling and operating efficiencies, elimination of
redundant overhead costs and reduction of freight costs.
RECENT DEVELOPMENTS
USWA AGREEMENT
In connection with our acquisition of the assets of National, we have reached a
new labor agreement with the USWA, which will cover employees at our facilities
and the acquired National facilities. The agreement is scheduled for a
ratification vote by USWA membership in May. The new labor agreement expires in
2008 and provides for a workforce restructuring through which U. S. Steel
expects to achieve productivity improvements of at least 20% at both U. S. Steel
and the acquired National facilities. The agreement also enables U. S. Steel to
introduce variable cost sharing mechanisms with respect to its employee and
retiree healthcare expenses. U. S. Steel also anticipates realigning its
non-represented staff in the near-term so as to achieve significant productivity
gains, the effects of which are not reflected in the amounts below.
Implementation of the new labor agreement and related actions for U. S. Steel
employees and retirees will result in pre-tax charges in 2003 broadly estimated
to be $440 million, of which approximately $115 million for early retirement
incentives is expected to have a cash impact in 2003. The balance of the charge
mainly relates to the recognition of deferred actuarial losses as a result of an
expected 2003 pension plan curtailment triggered by the anticipated early
retirements.
S-5
U. S. Steel will record liabilities on its balance sheet related to current
active National employees primarily for future retiree medical costs, subject to
certain eligibility requirements. These liabilities are broadly estimated at
$290 million, of which at least $35 million for early retirement incentives and
lump sum payments to the Steelworkers Pension Trust is expected to have a cash
impact in 2003. The Steelworkers Pension Trust is a multi-employer pension plan
to which U. S. Steel will make defined contributions for all National union
employees who join U. S. Steel and, in the future, for all new U. S. Steel
employees represented by the USWA.
Included in the new labor agreement are three specific profit-based payments,
calculated as percentages of income from operations and subject to various
thresholds, which will increase the variable component of our costs. These
profit-based payments include amounts: (1) paid as profit sharing to active
employees; (2) used to offset a portion of future medical insurance premiums to
be paid by U. S. Steel retirees; and (3) contributed to a trust administered by
the USWA to assist National retirees with healthcare costs. U. S. Steel expects
to record a balance sheet liability of approximately $100 million upon the
closing of the National transaction which reflects U. S. Steel's estimate of the
fair value of future contributions to the trust administered by the USWA.
PLAN MERGER
U. S. Steel intends to merge its two major pension plans covering benefits for
most domestic U. S. Steel employees and retirees. Pension accounting rules
require a remeasurement of the combined plans upon the merger. The remeasurement
may require that U. S. Steel record an additional minimum liability, which would
result in a non-cash net charge to equity in a range of $750 to $800 million.
This estimate is based upon a number of assumptions including the value of plan
assets and discount rates. Many of these factors historically have been volatile
and the actual amount of the charge to equity may be materially different. It is
possible that no charge may be incurred and even that the charge recorded in the
fourth quarter of 2002 could be reversed. These entries will have no impact on
income.
FIRST QUARTER OPERATING RESULTS
We reported revenues and other income of $1,907 million, a net loss of $38
million, net cash used in operating activities of $44 million and EBITDA of $46
million in the first quarter of 2003, compared with revenues and other income of
$1,434 million, a net loss of $83 million, net cash provided from operating
activities of $19 million and EBITDA of $27 million in the first quarter of
2002, and revenues and other income of $1,899 million, net income of $11
million, net cash provided from operating activities of $203 million and EBITDA
of $86 million in the fourth quarter of 2002.
EBITDA represents net income before interest and other financial costs,
provision for income taxes and depreciation, depletion, and amortization
expense. EBITDA is not a measure of performance under generally accepted
accounting principles (GAAP) and has been presented because we believe that
investors use EBITDA to analyze operating performance, which includes the
company's ability to incur additional indebtedness and to service existing
indebtedness. EBITDA should not be considered in isolation or as a substitute
for net income, net cash from operating activities or other income or cash flow
statement data prepared in accordance with GAAP. In addition, comparability to
other companies using similarly titled measures is not recommended due to
differences in the definitions and methods of calculation used by various
companies. The following table reconciles EBITDA to the most directly comparable
GAAP measure of operating performance, which we believe to be net income (loss)
S-6
and to the most directly comparable GAAP measure of ability to service and incur
indebtedness, which we believe to be cash provided from (used in) operating
activities.
-----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------
MARCH 31, MARCH 31, DECEMBER 31,
--------- --------- ------------
(DOLLARS IN MILLIONS) 2003 2002 2002
-----------------------------------------------------------------------------------------------
EBITDA................................................. $ 46 $ 27 $ 86
Less
Cumulative effect of change in accounting
principle......................................... 5 -- --
Depreciation, depletion and amortization............. 90 88 84
Net interest and other financial costs............... 38 34 30
Income tax provision (benefit)....................... (49) (12) (39)
--------------------------------------
Net income (loss)...................................... (38) (83) 11
Cumulative effect of change in accounting
principle......................................... 5 -- --
Depreciation, depletion and amortization............. 90 88 84
Working capital changes.............................. (62) 96 63
Other operating activities........................... (39) (82) 45
--------------------------------------
Cash provided from (used in) operating activities...... $(44) $ 19 $203
-----------------------------------------------------------------------------------------------
Higher prices for domestic natural gas, which averaged $7.21 per million BTU in
the first quarter of 2003 as compared to $4.49 per million BTU in the fourth
quarter of 2002, increased costs $54 million from first quarter of 2002 and $36
million from the fourth quarter of 2002. Pension and other postretirement
benefit costs, excluding settlement charges, increased by $61 million versus
first quarter 2002 and $50 million versus fourth quarter 2002.
Total liquidity as of March 31, 2003, was $1.15 billion, an increase of $122
million from year-end 2002, primarily due to net proceeds of $242 million from
the convertible preferred stock offering that was completed in February 2003,
partially offset by first quarter cash requirements.
SALE OF COAL MINING ASSETS
As part of our strategy to monetize our non-strategic assets, we are negotiating
an asset purchase agreement to sell all of the coal and related assets
associated with U. S. Steel's coal mining business for approximately $57
million. We anticipate that this sale will result in a pre-tax loss of
approximately $9 million. In addition, we remain secondarily liable for the
withdrawal fee in the event the purchaser withdraws from the multiemployer
pension plan covering employees of the mining business within five years of the
closing date. The withdrawal fee is currently broadly appraised at approximately
$80 million. In addition to the loss on the sale of these assets, we will
recognize the present value of obligations related to a multiemployer health
care benefit plan created by the Coal Industry Retiree Health Benefit Act of
1992. These obligations, which were broadly estimated to be $76 million at
December 31, 2002, and would result in an extraordinary loss of approximately
$50 million on an after-tax basis, will be recognized when the sale is
consummated. U. S. Steel Mining recorded income from operations in 2002 of $42
million, which included $38 million resulting from a federal excise tax refund.
U. S. Steel Mining recorded operating losses in each of the four years prior to
2002.
S-7
THE OFFERING
The following brief summary contains basic information about this offering. The
summary is not intended to be complete. You should read the full text and more
specific details contained elsewhere in this prospectus supplement. For a more
detailed description of the notes, see "Description of the notes."
ISSUER........................ United States Steel Corporation.
SECURITIES OFFERED............ $ million aggregate principal amount of
% Senior Notes due 2010 (the "notes").
MATURITY...................... , 2010.
INTEREST PAYMENT DATES........ and of each year,
beginning on , 2003.
RANKING....................... The notes:
-- are unsecured;
-- will rank equally in right of
payment with all of the existing and
future senior unsecured indebtedness of
U. S. Steel;
-- will rank senior in right of payment
to all of our existing and future
subordinated indebtedness; and
-- are effectively junior to any of our
secured debt and any indebtedness of USSK
or other subsidiaries of ours from time
to time outstanding.
As of March 31, 2003, we had $1.05 billion of
senior unsecured indebtedness, no subordinated
indebtedness and $383 million of secured debt
and indebtedness of USSK.
OPTIONAL REDEMPTION........... At any time prior to , 2006, we may
redeem up to 35% of the aggregate principal
amount of the notes with the proceeds of public
offerings of certain of our capital stock at a
redemption price of % of the principal
amount plus accrued interest.
On and after , 2007, we may redeem
all or a portion of the notes in cash at the
redemption prices described in the section
entitled "Description of the notes--Optional
redemption" plus accrued and unpaid interest.
CHANGE OF CONTROL OFFER....... Upon a change of control (as defined under
"Description of the notes--Change of control
offer"), we are required to make an offer to
repurchase the notes. The purchase price will
equal 101% of the principal amount of the notes
plus accrued interest. For more details, see
the
S-8
section entitled "Description of the
notes--Change of control offer." We cannot
assure you that upon a change of control we
will have sufficient funds to repurchase any of
the notes.
CERTAIN COVENANTS............. We will issue the notes under an indenture with
The Bank of New York, as trustee. The indenture
will, among other things, restrict our ability
and the ability of all or some of our
subsidiaries to:
-- incur additional debt;
-- make certain restricted payments,
including without limitation,
investments;
-- issue or sell capital stock of
subsidiaries;
-- engage in transactions with
affiliates;
-- create liens on our or their
assets to secure indebtedness;
-- transfer or sell assets;
-- restrict dividend or other
payments to U. S. Steel from its
subsidiaries; and
-- consolidate, merge or transfer
all or substantially all of U. S.
Steel's assets and the assets of its
subsidiaries.
These covenants are subject to important
exceptions and qualifications, which are
described in the "Description of the
notes--Certain covenants" section of this
prospectus supplement.
INVESTMENT GRADE FALL-AWAY
COVENANTS..................... Following the first day that:
-- the notes have an Investment
Grade Rating from both Standard &
Poor's and Moody's; and
-- no Default has occurred and is
continuing under the Indenture,
we will no longer be subject to certain of the
covenants referred to above unless and until
one of Standard & Poor's and Moody's either
withdraws its rating or downgrades the rating
of the notes below investment grade.
USE OF PROCEEDS............... The net proceeds from this offering will be
used to finance the National transaction.
RISK FACTORS.................. You should consider carefully all the
information in this prospectus supplement and
the accompanying prospectus and in particular
the sections entitled "Risk factors" for an
explanation of the risks of investing in the
notes.
S-9
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for U. S. Steel. Prior to
December 31, 2001, the businesses of U. S. Steel comprised an operating unit of
USX Corporation, now named Marathon Oil Corporation (Marathon). Marathon had two
outstanding classes of common stock: USX-Marathon Group common stock, which was
intended to reflect the performance of Marathon's energy business, and USX-U. S.
Steel Group common stock (Steel Stock), which was intended to reflect the
performance of Marathon's steel business. On December 31, 2001, U. S. Steel was
capitalized through the issuance of 89.2 million shares of common stock to
holders of Steel Stock in exchange for all outstanding shares of Steel Stock on
a one-for-one basis (the Separation). Consolidated balance sheet data as of
December 31, 2002 and 2001, and statement of operations data for the year ended
December 31, 2002, reflect U. S. Steel as a separate, stand-alone entity. All
other balance sheet and statement of operations data presented in the table
below represent a carve-out presentation of the business comprising U. S. Steel,
and are not intended to be a complete presentation of the financial position or
results of operations for U. S. Steel on a stand-alone basis. This information
should be read in conjunction with the more detailed information and
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2002, and the additional reports and documents also
incorporated by reference in the accompanying prospectus.
The following table also includes unaudited pro forma balance sheet information
as of December 31, 2002, and statement of operations data and other operating
data for the twelve months ended December 31, 2002, giving effect to the
acquisition of substantially all of the assets of National, including the
effects of the new labor agreement with the USWA as it relates to National's
employees and the associated financing incurred by U. S. Steel to complete the
acquisition, as well as the sale of the assets of U. S. Steel's coal mining
business. This information is presented for illustrative purposes only and is
not necessarily indicative of the future operating results or financial position
of U. S. Steel. This information should be read in conjunction with the
unaudited pro forma financial statements of U. S. Steel, including the notes
thereto, included elsewhere in this prospectus supplement.
S-10
----------------------------------------------------------------------------------------------------------
PRO FORMA YEAR ENDED DECEMBER 31,
(UNAUDITED) -----------------------------------------------
(DOLLARS IN MILLIONS) 2002 2002 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (1)
Total revenues and other income(2)........... $ 9,411 $ 7,054 $ 6,375 $ 6,132 $ 5,467 $ 6,477
Costs and expenses........................... 9,246 6,926 6,780 6,028 5,320 5,898
---------------------------------------------------------
Income (loss) from operations................ 165 128 (405) 104 147 579
Net interest and other financial costs....... 156 115 141 105 82 42
---------------------------------------------------------
Income (loss) before income taxes............ 9 13 (546) (1) 65 537
Income tax provision (benefit)............... (34) (48) (328) 20 21 173
---------------------------------------------------------
Net income (loss)(3)......................... 43 61 (218) (21) 44 364
OTHER OPERATING DATA: (1)
Net cash provided from (used in) operating
activities (operating cash flow)........... N/A 279 669 (627) (80) 380
Ratio of operating cash flow to net interest
expense and other financial costs.......... N/A 2.43x 4.74x -- -- 9.05x
Ratio of total debt to operating cash flow... N/A 5.14x 2.19x -- -- 1.94x
EBITDA(4).................................... 553 478 (61) 464 451 862
Ratio of EBITDA to net interest and other
financial costs(4)......................... 3.54x 4.16x -- 4.42x 5.50x 20.52x
Ratio of total debt to EBITDA(4)............. 3.23x 3.00x -- 5.81x 2.58x 0.85x
Ratio of earnings to fixed charges(5)........ N/A 1.04x -- 1.13x 2.33x 5.89x
Capital expenditures......................... N/A 258 287 244 287 310
Steel shipments (in thousands of tons)
--Domestic................................... 15,992 10,673 9,801 10,756 10,629 10,686
--USSK....................................... 3,949 3,949 3,714 317 -- --
BALANCE SHEET DATA: (1)
Cash and cash equivalents.................... $ 300 $ 243 $ 147 $ 219 $ 22 $ 9
Working capital.............................. 1,310 1,068 815 1,326 697 259
Pension asset................................ 1,654 1,654 2,745 2,672 2,404 2,172
Total assets................................. 9,170 7,977 8,337 8,711 7,525 6,749
Long-term employee benefit obligations....... 2,869 2,601 2,008 1,767 2,245 2,315
Total debt(6)................................ 1,788 1,434 1,466 2,694 1,164 737
Stockholders' equity......................... 2,211 2,027 2,506 1,919 2,056 2,093
----------------------------------------------------------------------------------------------------------
(1) For a discussion of events affecting the comparability of the historical
amounts presented, see Note 2, "The Separation" and Note 5, "Business
Combinations" of the notes to our audited financial statements included
elsewhere in this prospectus supplement. In addition, certain amounts from
the statement of operations for the year 1999 have been restated to reflect
the reclassification of extraordinary losses of $7 million, net of tax,
recognized in 1999 in accordance with Statement of Financial Accounting
Standards (SFAS) No. 145. The following restatements have been made: (a)
revenues and other income was reduced by $3 million for our share of the
extraordinary loss recorded by an equity investee related to the early
extinguishment of their debt, (b) net interest and other financial costs
increased by $8 million related to U. S. Steel's early extinguishment of its
indexed debt, and (c) the provision for income taxes was reduced by $4
million for the related tax effects of items (a) and (b) above. These
restatements also reduced income from operations by $3 million, income
before income taxes by $11 million, and the financial statement line items
for income before extraordinary items and extraordinary items have been
removed from the summary. Net income was unaffected by these changes. For
additional discussion of SFAS No. 145 see Note 4 to U. S. Steel's audited
financial statements located elsewhere in this prospectus supplement.
(2) Consists of revenues, dividend and investee income (loss), net gains
(losses) on disposal of assets, and other income.
S-11
(3) For discussion of the effects of adopting SFAS No. 143 effective January 1,
2003, see "U. S. Steel selected financial information."
(4) EBITDA represents net income before interest and other financial costs,
provision for income taxes and depreciation, depletion, and amortization
expense. EBITDA is not a measure of performance under GAAP and has been
presented because we believe that investors use EBITDA and the associated
ratios to analyze operating performance, which includes the company's
ability to incur additional indebtedness and to service existing
indebtedness. EBITDA should not be considered in isolation or as a
substitute for net income, net cash from operating activities or other
income or cash flow statement data prepared in accordance with GAAP. In
addition, comparability to other companies using similarly titled measures
is not recommended due to differences in the definitions and methods of
calculation used by various companies. The indenture for the notes contains
covenants based in part on meeting a minimum fixed charge coverage ratio
that includes a differently defined measure of EBITDA. See "Description of
the notes--Certain definitions--EBITDA."
The following table reconciles EBITDA to the most directly comparable GAAP
measure of operating performance, which we believe to be net income (loss)
and to the most directly comparable GAAP measure of ability to service and
incur indebtedness, which we believe to be cash provided from (used in)
operating activities. No reconciliation of pro forma EBITDA to pro forma net
cash provided from (used in) operating activities is presented since pro
forma cash flow information is prohibited by SEC regulations.
---------------------------------------------------------------------------------------------------------
PRO FORMA
(DOLLARS IN MILLIONS) 2002 2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------------------------
EBITDA...................................................... $553 $478 $ (61) $ 464 $ 451 $ 862
Less:
Depreciation, depletion and amortization................... 388 350 344 360 304 283
Net interest and other financial costs..................... 156 115 141 105 82 42
Income tax provision (benefit)............................. (34) (48) (328) 20 21 173
-------------------------------------------
Net income (loss)........................................... 43 61 (218) (21) 44 364
Depreciation, depletion and amortization................... 350 344 360 304 283
Pensions and other postretirement benefits................. 87 (57) (847) (256) (215)
Deferred income taxes...................................... (39) 18 389 107 158
Net gains on disposal of assets............................ (29) (22) (46) (21) (54)
Income (loss) from equity investees, net of
distributions............................................ (9) (47) 18 94 (27)
Changes in working capital................................. (69) 577 (588) (337) (76)
All other--net............................................. (73) 74 108 (15) (53)
------------------------------------
Net cash provided from (used in) operating activities....... 279 669 (627) (80) 380
---------------------------------------------------------------------------------------------------------
(5) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are defined as income before income taxes and extraordinary items
adjusted for distributions from equity investees. "Fixed charges" consist of
interest, whether expensed or capitalized, on all indebtedness, amortization
of premiums, discounts and capitalized expenses related to indebtedness, and
an interest component equal to one-third of rental expense, representing
that portion of interest expense that management believes is attributable to
interest. Earnings did not cover fixed charges by $586 million for the year
ended December 31, 2001.
(6) Total debt consists of notes payable, current portion of long-term debt,
long-term debt, trust preferred securities and preferred stock of a
subsidiary. The trust preferred securities and preferred stock of a
subsidiary were either redeemed or retained by Marathon in connection with
the Separation.
S-12
RISK FACTORS
In addition to the risk factors disclosed in the accompanying prospectus, the
other information contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus, the following factors should be
carefully considered prior to deciding whether to purchase the notes.
RISKS RELATED TO THE NATIONAL TRANSACTION
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE NATIONAL'S OPERATIONS AND REALIZE THE
FULL COST SAVINGS WE ANTICIPATE.
The process of integrating the operations of National could cause an
interruption of, or loss of momentum in, the activities of our or National's
business or the loss of key personnel. The diversion of management's attention
and any delays or difficulties encountered with the integration of National's
operations could have an adverse effect on our business, results of operations
and financial condition. Among the factors considered by our board of directors
in approving the National transaction were the anticipated cost savings and
operating synergies that could result from the National transaction, including
the anticipated cost savings under the new labor agreement with the United
Steelworkers of America, which is subject to ratification by the union. We
cannot give any assurance that these savings will be realized within the time
periods contemplated or that they will be realized at all.
WE WILL INCUR SIGNIFICANT ADDITIONAL INDEBTEDNESS AS A RESULT OF THE NATIONAL
TRANSACTION.
We intend to finance a portion of the purchase price of the National transaction
with the proceeds of this offering. Upon completion of the National transaction
and the notes offering, our indebtedness will increase to approximately $1.8
billion. We also intend to use proceeds from the sale of 7.00% Series B
Mandatory Convertible Preferred Shares, which were issued in February 2003 and
sales of receivables under our receivables sales program to fund the remainder
of the purchase price.
WE WILL INCUR SIGNIFICANT LIABILITIES, SOME OF WHICH WILL HAVE A CASH IMPACT IN
2003, AS A RESULT OF OUR NEW LABOR AGREEMENT.
Balance sheet liabilities related to current active National union employees,
primarily for future retiree medical costs, are broadly estimated at $290
million and include at least $35 million for early retirement incentives and
other payments that will have a cash impact in 2003. We will incur pre-tax
charges in 2003 broadly estimated to be $440 million related to U. S. Steel
union employees and retirees, of which approximately $115 million for early
retirement incentives are expected to have a cash impact in 2003. We may also
incur significant liabilities related to a reduction of our non union workforce.
THE NATIONAL TRANSACTION WILL RESULT IN COSTS OF INTEGRATION AND TRANSACTION
EXPENSES.
We expect to incur charges to reflect costs of integration, including
information technology integration, as well as transaction fees and other
expenses related to the National transaction. Integration-related costs will be
recognized as integration-related activities take place subsequent to the
closing of the National transaction. Although we expect that the elimination of
duplicative costs, as well as the realization of other benefits related to the
integration of
S-13
National's business, may offset additional expenses over time, we cannot give
any assurance that a net benefit will be achieved in the near term or at all. In
addition, we must renegotiate contractual arrangements with a number of
National's suppliers, vendors and lessors. Actual costs may substantially exceed
estimates. Unanticipated expenses associated with the integration of National's
operations may also arise.
THERE MAY BE UNKNOWN ENVIRONMENTAL OR OTHER RISKS INHERENT IN THE NATIONAL
TRANSACTION.
Although we have conducted due diligence with respect to National, we may not be
aware of all of the risks associated with the National transaction. For example,
we may not be aware of all of the existing environmental conditions at the
National facilities we are acquiring. Any discovery of adverse information
concerning National after the closing of the transaction could have a material
adverse effect on our business, financial condition and results of operations.
We are not entitled to seek indemnification from National. Following completion
of the National transaction, we will need to make capital expenditures, which
may be significant, to maintain the assets we acquire and to comply with
regulatory requirements, including environmental laws.
CUSTOMERS MAY PURCHASE LESS FROM US FOLLOWING THE NATIONAL TRANSACTION THAN THEY
DID FROM NATIONAL AND US PRIOR TO THE NATIONAL TRANSACTION.
Customers who purchase steel from us and National may not buy as much steel from
us after the National transaction as they previously bought from the separate
companies, in order to diversify their suppliers. They may also seek to
negotiate price concessions from us.
THE NATIONAL TRANSACTION MAY GO FORWARD IN CERTAIN CIRCUMSTANCES EVEN IF
NATIONAL SUFFERS A MATERIAL ADVERSE CHANGE.
In general, we can refuse to complete the National transaction if there is a
material adverse change affecting National before the closing. We may
nevertheless elect to complete the transaction even if there is a material
adverse change. In addition, we may not refuse to complete the transaction if
the material adverse change results from:
-- changes in economic or business conditions generally or in the steel
industry specifically, unless National is materially disproportionately
affected by such changes;
-- changes in laws and regulations impacting the steel industry
generally, other than the termination of, or the granting of additional
exclusions from, the Section 201 relief; or
-- changes resulting from the execution or announcement of the purchase
agreement.
If a material adverse change occurs and we were nevertheless obligated to, or we
chose to, complete the National transaction, our business, results of operations
and financial condition could be adversely affected.
RISKS RELATED TO OUR BUSINESS
In addition to the risks described below, there are other risks related to our
business, some of which are described in "Risk factors--Risks related to our
business," in the attached prospectus.
S-14
OVERCAPACITY IN THE STEEL INDUSTRY MAY NEGATIVELY AFFECT OUR PRODUCTION LEVELS.
There is an excess of global steelmaking capacity over global consumption of
steel products. Recently, a number of domestic steel facilities that had been
closed have become operational again, contributing to the overcapacity. This has
caused shipments and prices for our domestic operations to vary from year to
year and quarter to quarter, affecting our results of operations and cash flows.
From 1997 through 2002, our domestic steel shipments have varied from a high of
11.6 million net tons in 1997 to a low of 9.8 million net tons in 2001. Domestic
production levels as a percentage of capacity during this period have ranged
from a high of 96.5% in 1997 to a low of 78.9% in 2001. Many factors influence
these results, including demand in the domestic market, international currency
conversion rates and domestic and international government actions.
OUR BUSINESS IS CYCLICAL. FUTURE ECONOMIC DOWNTURNS, A STAGNANT ECONOMY OR
CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Demand for most of our products is cyclical in nature and sensitive to general
economic conditions. Our business supports cyclical industries such as the
automotive, appliance, construction and energy industries. As a result, future
downturns in the U.S. or European economy or in any of these industries could
adversely affect our results of operations and cash flows. Because we and other
integrated steel producers generally have high fixed costs, reduced volumes
result in operating inefficiencies, such as those experienced in 2001. From 1997
through 2002, our net income has varied from a high of $452 million in 1997 to a
loss of $218 million in 2001 (which included $110 million of income from
operations attributable to USSK) as our domestic steel shipments during that
period have varied from a high of 11.6 million net tons in 1997 to a low of 9.8
million net tons in 2001 (which does not include 3.7 million net tons shipped by
USSK). Future economic downturns, a stagnant economy or currency fluctuations,
such as an increase in the strength of the dollar, which would lead to a
decrease in the cost of imported products, may adversely affect our business,
results of operations and financial condition.
HIGH ENERGY COSTS ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Our operations consume large amounts of energy and we consume significant
amounts of natural gas. Domestic natural gas prices increased from an average of
$2.74 per million BTU in 1999 to an average of $4.96 per million BTU in 2001.
Natural gas prices averaged $3.43 per million BTU in the first nine months of
2002, increased to $4.49 per million BTU in the fourth quarter of 2002, and to
$7.21 per million BTU in the first quarter of 2003. Although gas prices have
decreased from first quarter 2003 levels, average natural gas prices for 2003
are expected to be higher than average natural gas prices for 2002. An increase
in natural gas prices would increase our costs and adversely impact our results
of operations.
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS AND OTHER OBLIGATIONS, WHICH COULD
LIMIT OUR OPERATING FLEXIBILITY AND OTHERWISE ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
As of December 31, 2002, we were liable for indebtedness of approximately $1.4
billion. Upon completion of the National transaction and the notes offering, our
indebtedness will increase to approximately $1.8 billion and we expect to have
sold approximately $300 million of receivables under our receivables sales
program. This does not include obligations of Marathon for which we are
contingently liable and that are not recorded on our balance sheet. As of
December 31, 2002, such obligations of Marathon were $168 million. We may incur
other
S-15
indebtedness in connection with the National transaction for working capital, to
refinance a portion of our existing indebtedness or for other purposes. This
substantial amount of indebtedness and the covenants to which we are subject
under the terms of this indebtedness could limit our operating flexibility and
otherwise adversely affect our financial condition. Our high degree of leverage
could have important consequences to you, including the following:
-- our ability to satisfy our obligations with respect to any other
debt securities or preferred stock may be impaired in the future;
-- it may become difficult for us to obtain additional financing for
working capital, capital expenditures, debt service requirements,
acquisitions or general corporate or other purposes in the future;
-- a substantial portion of our cash flow from operations must be
dedicated to the payment of principal and interest on our
indebtedness, thereby reducing the funds available to us for other
purposes;
-- some of our borrowings are and are expected to be at variable
rates of interest (including borrowings under our inventory credit
facility), which will expose us to the risk of increased interest
rates;
-- the sale prices, costs of selling receivables and amounts
available under our receivables sales program fluctuate due to factors
that include the amount of eligible receivables available, the costs
of the commercial paper funding and our long-term debt ratings; and
-- our substantial leverage may limit our flexibility to adjust to
changing economic or market conditions, reduce our ability to
withstand competitive pressures and make us more vulnerable to a
downturn in general economic conditions.
OUR BUSINESS REQUIRES SUBSTANTIAL DEBT SERVICE, CAPITAL INVESTMENT, OPERATING
LEASE, CAPITAL COMMITMENTS AND MAINTENANCE EXPENDITURES THAT WE MAY BE UNABLE
TO FULFILL.
With approximately $1.4 billion of debt outstanding as of December 31, 2002, and
$1.8 billion after giving effect to this offering, we have substantial debt
service requirements. Based on this outstanding debt, almost all of which is at
fixed rates, we will annually have interest and other financial cost payments of
approximately $165 million after giving effect to this offering and the sale of
receivables under our receivables sales program. For information about principal
payments, see the table of contractual obligations on page S-58.
Our operations are capital intensive. For the five-year period ended December
31, 2002, total capital expenditures were $1.4 billion. Capital expenditures in
2003, including capital expenditures relating to the assets we acquire from
National and Sartid, are expected to be approximately $350 million. Our business
also requires substantial expenditures for routine maintenance. USSK has a
commitment to the Slovak government for a capital improvements program over a
period commencing with the acquisition date and ending on December 31, 2010,
and, as of December 31, 2002, the remaining commitment under this program was
$541 million. At December 31, 2002, our domestic contract commitments to acquire
property, plant and equipment totaled $24 million. We are required to make a
final payment of $38 million in July of 2003 in connection with our acquisition
of USSK.
As of December 31, 2002, we were obligated to make aggregate lease payments of
$499 million under operating leases. Some of our operating lease agreements
include
S-16
contingent rental charges that are not determinable to any degree of certainty.
These charges are primarily based on utilization of the power generation
facility at our Gary Works location and operating expenses incurred related to
our headquarters' office space. Upon completion of the National transaction, we
would be obligated to make additional aggregate lease payments over the next
five years of approximately $164 million under operating leases relating to the
acquired assets.
As of December 31, 2002 we had contingent obligations consisting of indemnity
obligations under active surety bonds, trusts and letters of credit being used
for financial assurance totaling approximately $144 million, guarantees of
approximately $27 million of indebtedness for unconsolidated entities and
commitments under take or pay arrangements of approximately $717 million. As the
general partner of the Clairton 1314B Partnership, L.P., we are obligated to
fund cash shortfalls incurred by that partnership but may withdraw as the
general partner if we are required to fund in excess of $150 million in
operating cash shortfalls. As of December 31, 2002, we were also contingently
liable for $168 million of debt and other obligations of Marathon. In addition,
upon completion of the sale of the assets of the coal mining business U. S.
Steel will remain secondarily liable for a withdrawal fee under a multiemployer
plan, which fee is broadly appraised to be approximately $80 million.
Our business may not generate sufficient operating cash flow or external
financing sources may not be available in an amount sufficient to enable us to
service or refinance our indebtedness or to fund other liquidity needs.
RATING AGENCIES MAY DOWNGRADE OUR CREDIT RATINGS, WHICH WOULD INCREASE OUR
FINANCIAL COSTS AND MAKE IT MORE DIFFICULT FOR US TO RAISE CAPITAL.
The fees payable and the amount of receivables eligible under our receivables
sales program are determined, in part, by our credit ratings. In January 2003,
following our announcement that we had entered into an asset purchase agreement
with National, rating agencies placed our credit ratings under review. If our
credit ratings are downgraded as a result of the acquisition of National's
assets, any future acquisitions that we may make or any other factor:
-- the fees payable under our receivables sales program would increase;
and
-- the amount of receivables eligible for sale under our receivables
sales program could be reduced.
In addition, a downgrade in our credit ratings could make capital raising more
difficult and increase the cost of future borrowings.
MANY LAWSUITS HAVE BEEN FILED AGAINST US INVOLVING ASBESTOS-RELATED INJURIES,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION.
We are a defendant in a large number of cases in which approximately 14,000
claimants actively allege injury resulting from exposure to asbestos. Almost all
of these cases involve multiple plaintiffs and multiple defendants. These claims
fall into three major groups: (1) claims made under certain federal and general
maritime laws by employees of the Great Lakes Fleet or Intercoastal Fleet,
former operations of U. S. Steel; (2) claims made by persons who performed work
at U. S. Steel facilities; and (3) claims made by industrial workers allegedly
exposed to an electrical cable product formerly manufactured by U. S. Steel.
These cases allege a variety of respiratory and other diseases based on alleged
exposure to asbestos contained in a U. S. Steel electric cable product or to
asbestos on U. S. Steel's vessels and premises;
S-17
approximately 200 plaintiffs allege they are suffering from mesothelioma. While
U. S. Steel has excess casualty insurance, these policies have multi-million
dollar self insured retentions and, to date, U. S. Steel has not received any
payments under these policies relating to asbestos claims. In most cases, this
excess casualty insurance is the only insurance applicable to asbestos claims.
In 2000, we settled 22 claims for an aggregate total payment of approximately
$80,000; in 2001, we settled approximately 11,000 claims for an aggregate total
payment of approximately $190,000; and, in 2002, we settled approximately 1,100
claims for an aggregate total payment of approximately $700,000. In those three
years, 3,860, 1,679 and 842, respectively, new claims were filed.
On March 28, 2003, a jury in Madison County, Illinois returned a verdict against
U. S. Steel for $50 million in compensatory damages and $200 million in punitive
damages. The plaintiff, an Indiana resident, alleged he was exposed to asbestos
while working as a U. S. Steel employee at our Gary Works in Gary, Indiana from
1950 to 1981 and that he suffers from mesothelioma as a result. U. S. Steel
believes the plaintiff's exclusive remedy was provided by the Indiana workers'
compensation law and that this issue and other errors at trial would have
enabled U. S. Steel to succeed on appeal. However, in order to avoid the delay
and uncertainties of further litigation and having to post an appeal bond equal
to the amount of the verdict and to allow U. S. Steel to actively pursue its
current acquisition activities and other strategic initiatives, U. S. Steel
settled this case and the impact was included in our results for the first
quarter of 2003. While we believe this verdict was aberrational, we cannot
assure you that we will not experience additional large judgments against us in
the future, and we cannot predict whether this jury verdict will have any impact
upon the number of claims filed against us in the future or on the amount of
future settlements.
OUR PARTICIPATION IN CONSOLIDATION OF THE STEEL INDUSTRY COULD ADVERSELY AFFECT
OUR BUSINESS.
We have had and continue to have discussions with several parties regarding
consolidation opportunities. In order to complete possible future acquisitions,
we may incur additional indebtedness, utilize availability under our receivables
sales program or inventory credit facility or otherwise use our liquidity. The
incurrence of additional debt or the utilization of our existing liquidity could
increase our interest expense and otherwise adversely affect our financial
condition, operating results and cash flow.
Possible future acquisitions could result in the incurrence of additional debt
and related interest expense, underfunded pension and other postretirement
obligations, contingent liabilities and amortization expenses related to
intangible assets, all of which could have a material adverse effect on our
financial condition, credit ratings, operating results and cash flow.
Many of the available acquisition targets have incurred operating losses in
recent years and may require significant capital and operating expenditures to
return them to profitability. Financially distressed steel companies typically
do not maintain their assets adequately. Such assets may need significant
repairs and improvements. We may also have to buy sizable amounts of raw
materials, spare parts and other materials for these facilities before they can
resume profitable operation. Many potential acquisition candidates are
financially distressed steel companies that may not have maintained appropriate
environmental programs. These problems may require significant expenditures.
S-18
OUR INTERNATIONAL OPERATIONS EXPOSE US TO UNCERTAINTIES AND RISKS FROM ABROAD,
WHICH COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
USSK, located in the Slovak Republic, constitutes 28% of our total raw steel
capability and accounted for 17% of revenue and other income for 2002. USSK
exports about 80% of its products, with the majority of its sales being to other
European countries. USSK is affected by the worldwide overcapacity in the steel
industry and the cyclical nature of demand for steel products and that demand's
sensitivity to worldwide general economic conditions. In particular, USSK is
subject to economic conditions and political factors in Europe, which if changed
could negatively affect its results of operations and cash flow. Political and
economic factors include, but are not limited to, taxation, nationalization,
inflation, currency fluctuations, increased regulation, export quotas, tariffs
and other protectionist measures. USSK is also subject to foreign currency
exchange risks because its revenues are primarily in euros and its costs are
primarily in Slovak korunas and United States dollars. The Slovak Republic has
been accepted for membership in the European Union and entry is expected to
occur in May 2004. Upon entry to the European Union, the Slovak Republic may be
required to amend its environmental, tax and other laws. Changes in those laws
could adversely impact USSK. Acquisitions of additional international operations
would increase our exposure to these risks and uncertainties. Our acquisition of
Sartid, located in Serbia, is targeted for completion in the third quarter of
2003. In addition, we have submitted an offer to purchase Polskie Huty Stali, a
holding company that owns four steel mills, including the two largest integrated
steel mills, in Poland. Either or both of these acquisitions would increase our
exposure to the factors discussed above.
IMPORTS OF STEEL MAY DEPRESS DOMESTIC PRICE LEVELS AND HAVE AN ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS AND CASH FLOWS.
Steel imports to the United States accounted for an estimated 26% of the
domestic steel market for the year 2002 and 24% for the year 2001. We believe
steel imports into the United States involve widespread dumping and subsidy
abuses and the remedies provided by United States law to private litigants are
insufficient to correct these problems. Imports of steel involving dumping and
subsidy abuses depress domestic price levels and have an adverse effect upon our
revenue, income and cash flows. Over the past six years, the average transaction
prices for our domestic steel products have decreased from a high of $479 per
net ton in 1997 to a low of $427 per net ton in 2001.
THE REMEDIES UNDER SECTION 201 OF THE TRADE ACT, WHICH WILL BE FURTHER REDUCED
IN 2004 AND ARE SET TO EXPIRE IN 2005, HAVE BEEN CHALLENGED BY THE WORLD TRADE
ORGANIZATION.
The trade remedies announced by President Bush, under Section 201 of the Trade
Act of 1974, on March 5, 2002 became effective for imports entering the United
States on and after March 20, 2002 and are intended to provide protection
against imports from certain countries for a period of three years. Slab imports
are subject to a quota of 5.9 million tons until March 2004 on product shipped
from countries other than Canada and Mexico, with excess imports subject to a
tariff of 30%. The annual quota increases to 6.4 million tons in March 2004.
Imports of finished carbon and alloy steel products (hot-rolled, cold-rolled and
coated sheet, as well as plate and tin mill products) from developed countries
are subject to a tariff that decreased from 30% to 24% in March 2003 and will
decrease to 18% in March 2004. Imports of these finished products from
developing countries are subject to an anti-surge mechanism to ensure they do
not substantially increase their shipments from historic levels.
The reduction of tariffs and increase in quotas could have an adverse effect on
our results, particularly if the economy suffers a downturn. Imports of finished
flat-rolled products from
S-19
Canada and Mexico are not subject to the import remedies announced by the
President. Since March 5, 2002 the Department of Commerce and the Office of the
United States Trade Representative have announced the exclusion of 1,022
products from the trade remedies, including 295 products that were excluded in
March 2003. The exclusions granted impact a number of products we produce and
have weakened the protection initially provided by this relief. Various
countries have challenged President Bush's action with the World Trade
Organization and taken other actions responding to the Section 201 remedies. In
May 2003, the World Trade Organization issued a final ruling against the Section
201 remedies. Although President Bush's administration has indicated
preliminarily that it will appeal the ruling, we cannot predict whether the
administration will appeal the ruling or the likelihood of success of any
appeal. In addition, as provided by President Bush when he announced the Section
201 action in March 2002, the U.S. International Trade Commission announced on
March 5, 2003 that it had initiated a mid-term review of the Section 201
remedies and would recommend to the President whether the remedies should remain
in effect. Also, on April 4, 2003, the ITC announced that, at the request of the
House Committee on Ways and Means, it was instituting a general factfinding
investigation under Section 232 of the Tariff Act of 1930 to examine the impact
of the Section 201 tariffs on the domestic steel-consuming industries.
TRADE RESTRICTIONS IMPOSED BY OTHER COUNTRIES AFFECT OUR EXPORTS.
The European Commission recently announced quotas and tariffs in a safeguard
trade action on certain products, including non-alloy hot-rolled coils,
hot-rolled strip, hot-rolled sheet and cold-rolled flat products, which are
produced by USSK. Shipment quotas for these products for the first year of the
measure were set at 10% above the average shipments during the period 1999-2001
and 15% thereafter. Shipments into the European Union in excess of the quotas
would result in the imposition of a tariff of 15.7% for non-alloy hot-rolled
coils (14.1% beginning in March 2004) and 26% for the other three products
expire in March 2005. The safeguard measures and any anti-dumping measures would
terminate upon Slovakia becoming a member of the European Union which is
expected to occur in May 2004.
Safeguard proceedings similar to those pursued by the European Commission were
subsequently commenced by Poland and Hungary. Provisional quota and tariff
measures have been imposed in Poland and Hungary, which measures were replaced
by similar definitive measures on March 8, 2003 (Poland) and March 28, 2003
(Hungary). On April 30, 2003, the Czech Republic's Trade Ministry published its
decision dismissing the safeguard proceedings in that country, based upon its
conclusion that the conditions for the imposition of such measures were not met.
OUR PENSION OBLIGATIONS AND THE INVESTMENT PERFORMANCE OF OUR PENSION PLAN
EQUITY HOLDINGS MAY UNFAVORABLY IMPACT OUR RESULTS OF OPERATIONS, FUTURE
PROFITABILITY AND CASH FLOW.
The investment performance of our pension plan equity holdings over the last
three years will unfavorably impact net periodic pension cost during 2003
through the use of a lower asset base in calculating expected return on plan
assets and may impact future profitability and liquidity, which could affect
debt covenants and borrowing arrangements. At the end of the fourth quarter of
2002, the accumulated benefit obligations of the union pension plan exceeded the
fair value of the plan assets by approximately $540 million. In the fourth
quarter of 2002, we also recorded a pre-tax pension settlement loss of $90
million for the nonunion qualified pension plan.
S-20
Based on preliminary actuarial evaluations as of January 2003, we expected
annual pension costs for 2003 to be $65 million. In 2002, we recorded a credit
of $103 million for pensions (excluding settlements of $100 million). Pension
costs were expected to increase from 2002 primarily because of lower plan
assets, average asset return assumptions that were reduced from 8.8% to 8.2% and
a discount rate that was reduced from 7.0% to 6.25%. The funded status of the
projected pension benefit obligation declined from an over-funded position of
$1.2 billion at year end 2001 to an under-funded position of $0.4 billion at
year end 2002. Based on charges associated with the expected union workforce
reductions in 2003, one-time pension charges of approximately $285 million would
occur. In addition, following the workforce reduction, pension expense would
increase beyond the $65 million previously expected to approximately $145
million, assuming a mid-year valuation of the workforce reductions. In addition,
pension expense will increase due to defined contributions to the Steelworkers
Pension Trust for union employees of National who join U. S. Steel. These
estimates are forward-looking statements. Predictions regarding the return on
plan assets and the resulting pension expenses are subject to substantial
uncertainties such as (among other things) investment performance and interest
rates.
U. S. Steel intends to merge its pension plan for current U. S. Steel union
employees and retirees and its pension plan for nonunion employees and retirees.
Preliminary funding valuations indicate that the merged plan will not require
funding for the 2003 or 2004 plan years. Thereafter, we currently anticipate
annual funding requirements broadly estimated to be approximately $90 million
per year. We may also make voluntary contributions in one or more future periods
in order to mitigate potentially larger required contributions in later years.
The actual level of funding will depend upon various factors such as future
asset performance, the level of interest rates used to measure ERISA minimum
funding levels, the impacts of business acquisitions or sales, union negotiated
changes and future government regulation. Any such funding requirements could
have an unfavorable impact on our debt covenants, borrowing arrangements and
cash flows.
OUR RETIREE EMPLOYEE HEALTH CARE AND RETIREE LIFE INSURANCE COSTS ARE HIGHER
THAN THOSE OF MANY OF OUR COMPETITORS.
We maintain defined benefit retiree health care and life insurance plans
covering substantially all domestic employees upon their retirement. Health care
benefits are provided through comprehensive hospital, surgical and major medical
benefit provisions or through health maintenance organizations, both subject to
various cost-sharing features. Life insurance benefits are provided to nonunion
retiree beneficiaries primarily based on employees' annual base salary at
retirement. For domestic union retirees, benefits are provided for the most part
based on fixed amounts negotiated in labor contracts with the appropriate
unions. In 2002, we recorded a $138 million expense for retiree medical and life
insurance, excluding multiemployer plans. Based on preliminary actuarial
valuations for 2003, we expected annual retiree medical and life insurance
expense to be $203 million, excluding multi-employer plans. The anticipated
increase primarily reflected unfavorable health care claims cost experience in
2002 for union retirees, the use of a discount rate of 6.25% rather than 7.0%
and higher assumed medical cost inflation. For 2003, a 10% annual rate of
increase in the per capita cost of covered health care benefits has been
assumed; this rate was assumed to decrease gradually to 4.75% for 2010 and
remain at that level thereafter. Following the workforce reduction, we expect
annual retiree medical and life insurance expense to decrease from the $203
million previously expected to approximately $190 million, excluding
multiemployer plans, assuming a mid-year valuation of the workforce reductions.
As a result of the above factors and payments made in 2002 from
S-21
benefit plans, our underfunded benefit obligations for retiree medical and life
insurance increased from $1.8 billion at year-end 2001 to $2.6 billion at
year-end 2002. We estimate that our underfunded benefit obligation at year-end
2003 will also be $2.6 billion as the favorable impact of the new labor
agreement is offset by the inclusion of active employees at the National
facilities and payments in 2003 out of the voluntary employee benefit trust we
maintain for union retirees. Despite the decline in overall liabilities, they
remain significantly higher than many of our competitors. In addition, a
one-time charge of approximately $40 million is expected to occur in 2003
following the implementation of the Transition Assistance Program for U. S.
Steel employees, which will result in a reduction in the union workforce. These
estimates are forward-looking statements. Predictions regarding retiree medical
and life insurance costs are subject to substantial uncertainties such as (among
other things) interest rates and medical cost inflation. Mini-mills, foreign
competitors and many producers of products that compete with steel provide
lesser benefits to their employees and retirees and this difference in costs
could adversely impact our competitive position. Companies that emerge from
bankruptcy, or companies that purchase the facilities of bankrupt entities, may
also provide lesser benefits to their employees and retirees.
FUTURE FUNDING FOR RETIREE MEDICAL BENEFITS MAY REQUIRE SUBSTANTIAL PAYMENTS
FROM CURRENT CASH FLOW.
We are obligated to provide medical and other benefits to retirees. Cash
payments of these benefits in 2002 and 2001 totaled $212 million and $183
million, respectively. During 2002 and 2001, substantially all payments on
behalf of union retirees were paid from a VEBA trust established under our
collective bargaining agreements. We expect that all payments on behalf of union
retirees will be paid from the VEBA trust in 2003, but beginning in early 2004,
corporate funds will be used for these payments. Corporate funds used for all
retiree health and life benefits in 2004 and 2005, excluding multiemployer plan
payments, were previously expected to total $195 million and $222 million,
respectively. Cash payments are now expected to exceed the above estimates by
approximately $45 million for 2004 and $25 million for 2005 following the
acquisition of National's assets; the implementation of the Transition
Assistance Program for National and U. S. Steel union employees; the
implementation of the new labor agreement; and the merger of the union pension
plan and the non-union pension plan, which will eliminate the use of pension
assets to pay a portion of retiree medical expenses. These payments will reduce
our cash flow that would otherwise be available for other purposes. These
estimates are forward-looking statements. Predictions regarding estimated cash
payments are subject to substantial uncertainties such as (among other things)
interest rates and medical cost inflation.
RISKS RELATED TO THE NOTES
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE NOTES.
The notes are a new issue of securities. There is no active public trading
market for the notes. We do not intend to apply for listing of the notes on any
domestic securities exchange or NASDAQ. The underwriters have informed us that
they currently intend to make a market in the notes. However, the underwriters
are not obligated to do so and may discontinue any such market-making at any
time. The liquidity of the trading market in the notes, and the market prices
quoted for the notes, may be adversely affected by changes in the overall market
for these types of securities and by changes in our financial performance or
prospects or in the
S-22
prospects for companies in our industry generally. As a consequence, we cannot
assure you that an active trading market will develop for your notes, that you
will be able to sell your notes, or that, even if you can sell your notes, you
will be able to sell them at a price equal to or above the price you paid.
POSSIBLE VOLATILITY OF TRADING PRICES FOR THE NOTES.
Historically, the market for non-investment grade debt securities has been
subject to disruptions that have caused substantial volatility in the prices of
such securities. The market for the notes could be subject to similar
volatility. The trading price of the notes also could fluctuate in response to
such factors as variations in U. S. Steel's operating results, future
acquisitions that we may make, developments in the steel industry and the
automotive industry, general economic conditions and changes in securities
analysts' recommendations regarding our securities.
WE MAY BE UNABLE TO PURCHASE THE NOTES UPON A CHANGE OF CONTROL.
Upon the occurrence of "change of control" events specified in "Description of
the notes--Change of control offer," you may require us to purchase your notes
at 101% of their principal amount, plus accrued interest. In some circumstances,
a change of control could result from events beyond our control. We cannot
assure you that we will have the financial resources to purchase your notes,
particularly if that change of control event triggers a similar repurchase
requirement for, or results in the acceleration of, other indebtedness. Our
outstanding senior notes have a similar repurchase requirement. Our inventory
credit facility provides that certain change of control events (as defined in
the inventory credit facility) will constitute a default and could result in the
acceleration of our indebtedness under the inventory credit facility. Any of our
future debt agreements may contain similar provisions.
S-23
USE OF PROCEEDS
We estimate the net proceeds from our sale of the notes, after deducting
underwriting discounts and estimated expenses of $8 million to be approximately
$342 million. We intend to use the net proceeds of this offering to pay a
portion of the cash purchase price for the National assets.
The following table sets forth the sources and uses of funds to complete the
National transaction:
-------------------------------------------------------------------
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------
USES OF FUNDS
Cash purchase price(1)...................................... $850
Lease payments due at closing............................... 21
Estimated transaction fees and expenses..................... 10
----
Total uses of funds....................................... $881
SOURCES OF FUNDS
Net proceeds from this offering............................. $342
Net proceeds from issuance of 7% Series B Mandatory
Convertible Preferred Shares(2)........................... 242
Proceeds from the sale of accounts receivable under our
receivables sales program................................. 297
----
Total sources of funds................................. $881
-------------------------------------------------------------------
(1) Excludes assumed liabilities, which are primarily operating leases.
(2) On February 10, 2003, we issued 5,000,000 shares of Series B Mandatory
Convertible Preferred Shares at a price of $50.00 per share.
S-24
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization at December 31, 2002, (i) on an actual basis and (ii) on a pro
forma as adjusted basis to give effect to the issuance of 5,000,000 shares of 7%
Series B Mandatory Convertible Preferred Shares, which were issued on February
10, 2003, and to give effect to the National transaction, including the new
labor agreement with the USWA as it relates to National's employees, the sale by
us of the notes as well as the sale of U. S. Steel's coal mining assets.
The financial data at December 31, 2002 in the following table are derived from
our audited financial statements at and for the year ended December 31, 2002.
The following data are qualified in their entirety by our financial statements
and other information contained elsewhere or incorporated by reference in this
prospectus supplement and the accompanying prospectus.
----------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2002
--------------------------
PRO FORMA
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) ACTUAL AS ADJUSTED
----------------------------------------------------------------------------------------
Cash and cash equivalents................................... $ 243 $ 300
==========================
Long-term debt due within one year.......................... 26 28
Long-term debt(1):
Notes offered hereby...................................... -- 350
Senior notes, net of $4 discount.......................... 531 531
Industrial revenue bonds.................................. 471 471
USSK loan facility........................................ 281 281
Senior quarterly income debt securities................... 49 49
Capital leases............................................ 76 78
--------------------------
Total debt............................................. 1,434 1,788
Stockholders' equity:
7% Series B Mandatory Convertible Preferred Shares, no par
value per share, no shares outstanding actual,
5,000,000 shares outstanding as adjusted............... -- 242
Common stock, $1 par value per share, 200,000,000 shares
authorized, 102,485,246 shares outstanding actual, and
as adjusted............................................ 102 102
Other stockholders' equity................................ 1,925 1,867
--------------------------
Total stockholders' equity............................. 2,027 2,211
--------------------------
Total capitalization................................... $3,461 $ 3,999
----------------------------------------------------------------------------------------
(1) As of May 5, 2003, no amounts were outstanding under our inventory credit
facility.
S-25
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet gives effect
to the sale of U. S. Steel's coal mining assets, the acquisition of
substantially all of National's assets, including certain effects of the new
labor agreement with the USWA, as it relates to National's employees (as
described in the notes to these unaudited pro forma condensed combined financial
statements) and the associated financing incurred by U. S. Steel to complete the
acquisition as if these transactions had occurred on December 31, 2002. The
following unaudited pro forma condensed combined statement of operations for the
year ended December 31, 2002 gives effect to the transactions as if they had
occurred on January 1, 2002.
The acquisition of substantially all of National's assets will be accounted for
as a purchase business combination. For a summary of the business combination,
see "National transaction."
The pro forma presentation of the sale of the coal mining assets is based on
agreements that we expect to be executed. The terms of these agreements may
change. For further discussion of the proposed transaction, see "Management's
discussion and analysis of financial condition and results of operations--U. S.
Steel--Outlook--Dispositions."
The unaudited pro forma condensed combined financial statements have been
developed from (a) the audited consolidated financial statements of U. S. Steel
for the year ended December 31, 2002, included elsewhere in this prospectus
supplement, and (b) the audited consolidated financial statements of National
for the year ended December 31, 2002, included elsewhere in this prospectus
supplement.
Under the purchase method of accounting, as set forth in Statement of Financial
Accounting Standards No. 141, Business Combinations ("SFAS 141"), the purchase
price in an acquisition is allocated to the underlying tangible and intangible
assets acquired and liabilities assumed based on their respective fair values,
with any excess in value recorded as goodwill. As of the date of this prospectus
supplement, we have determined the fair value of the current assets to be
acquired and the liabilities to be assumed but have not yet completed the
valuation studies necessary to arrive at the required estimates of the fair
value of National's long-lived assets or intangible assets that are to be
acquired. Accordingly, we have assigned the excess of the purchase price over
the fair value of the current assets acquired and the liabilities assumed to
property, plant and equipment for purposes of this pro forma presentation. Based
on information available to us, we believe the fair value of the property, plant
and equipment exceeds the allocation of the purchase price and, therefore, no
goodwill is expected to be recorded. Once the valuation studies necessary to
finalize the required purchase price allocation have been completed, the pro
forma financial statements will be adjusted. These adjustments will likely
result in changes to the pro forma statement of financial position to reflect
the final allocations of purchase price to long-lived assets and intangibles,
and to the pro forma statements of operations primarily for changes in
depreciation and amortization. These adjustments may be material.
The pro forma financial information herein is based on available information and
certain assumptions that management believes are reasonable and which are
described in the accompanying notes. In the opinion of management, all
adjustments to present fairly the unaudited pro forma condensed combined
financial statements have been made. The unaudited pro forma condensed combined
financial statements are provided for illustrative purposes only and do not
purport to represent what the actual consolidated results of
S-26
operations or the consolidated financial position of U. S. Steel would have been
had these transactions occurred on the dates assumed, nor is it necessarily
indicative of future consolidated results of operations or financial position. A
number of factors may affect our results. See "Forward-looking statements"
included elsewhere in this prospectus supplement. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
separate historical consolidated financial statements and accompanying notes of
U. S. Steel and National that are included elsewhere in this prospectus
supplement.
S-27
U. S. STEEL
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2002
(DOLLARS IN MILLIONS)
-------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS
FOR SALE OF ADJUSTMENTS
U. S. STEEL COAL MINING ADJUSTED NATIONAL TO ADJUSTED
HISTORICAL ASSETS(1) U. S. STEEL HISTORICAL(2) NATIONAL(3) NATIONAL(4)
-------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents... 243 57 (a) 300 1 (1) --
Accounts receivable......... 934 3 (b) 937 223 -- 223
Inventory................... 1,030 (16)(c) 1,014 406 -- 406
Other current assets........ 233 -- 233 46 (39) 7
-----------------------------------------------------------------------------------
Total current assets...... 2,440 44 2,484 676 (40) 636
Property, plant and equipment
(net)....................... 2,978 (14)(c) 2,964 1,257 (3) 1,254
Pension asset................. 1,654 -- 1,654 -- -- --
Intangible pension asset...... 414 -- 414 109 (109) --
Other noncurrent assets....... 491 (11)(c) 515 167 (154) 13
35 (d)
-----------------------------------------------------------------------------------
Total assets.................. 7,977 54 8,031 2,209 (306) 1,903
===================================================================================
LIABILITIES
Current liabilities
Accounts payable............ 767 7 (b) 774 132 (5) 127
Current portion of long-term
debt...................... 26 26 -- -- --
Other current liabilities... 579 7 (d) 596 172 (172) --
10 (e)
===================================================================================
Total current
liabilities............. 1,372 24 1,396 304 (177) 127
Long-term debt................ 1,408 1,408 129 (129) --
Employee benefits............. 2,601 76 (f) 2,677 21 (21) --
Liabilities subject to
compromise.................. -- -- -- 2,646 (2,642) 4
Other long-term liabilities... 569 (14)(c) 581 14 (14) --
26 (e)
-----------------------------------------------------------------------------------
Total liabilities............. 5,950 112 6,062 3,114 (2,983) 131
STOCKHOLDERS' EQUITY
Common stock.................. 102 -- 102 -- -- --
Preferred stock............... -- -- -- -- -- --
Additional paid-in-capital.... 2,689 -- 2,689 492 (492) --
Retained earnings............. 42 (58)(g) (16) (557) 557 --
Accumulated other
comprehensive loss.......... (803) -- (803) (824) 824 --
Other......................... (3) -- (3) (16) 16 --
1,772 1,772
-----------------------------------------------------------------------------------
Total equity.................. 2,027 (58) 1,969 (905) 2,677 1,772
-----------------------------------------------------------------------------------
Total liabilities and
equity...................... 7,977 54 8,031 2,209 (306) 1,903
-------------------------------------------------------------------------------------------------------------------
------------------------------ ------------------------------
PRO FORMA U. S. STEEL
ADJUSTMENTS(5) PRO FORMA
------------------------------ ------------------------------
ASSETS
Current Assets
Cash and cash equivalents... (881)(h) 300
881 (i)
Accounts receivable......... (297)(i) 857
(6)(j)
Inventory................... 159 (k) 1,516
(63)(l)
Other current assets........ 1 (i) 264
23 (m)
------------------------------
Total current assets...... (183) 2,937
Property, plant and equipment
(net)....................... (646)(k) 3,635
63 (l)
Pension asset................. -- 1,654
Intangible pension asset...... -- 414
Other noncurrent assets....... 7 (i) 530
(5)(k)
------------------------------
Total assets.................. (764) 9,170
==============================
LIABILITIES
Current liabilities
Accounts payable............ (6)(j) 895
Current portion of long-term
debt...................... 2 (n) 28
Other current liabilities... 98 (o) 704
10 (p)
==============================
Total current
liabilities............. 104 1,627
Long-term debt................ 350 (i) 1,760
2 (n)
Employee benefits............. 192 (o) 2,869
Liabilities subject to
compromise.................. (4)(n) --
Other long-term liabilities... 23 (m) 703
90 (p)
9 (q)
------------------------------
Total liabilities............. 766 6,959
STOCKHOLDERS' EQUITY
Common stock.................. -- 102
Preferred stock............... 242 (i) 242
Additional paid-in-capital.... -- 2,689
Retained earnings............. -- (16)
Accumulated other
comprehensive loss.......... -- (803)
Other......................... -- (3)
(1,772)(k)
------------------------------
Total equity.................. (1,530) 2,211
------------------------------
Total liabilities and
equity...................... (764) 9,170
------------------------------
See Notes to unaudited pro forma condensed combined balance sheet.
S-28
U. S. STEEL
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
(1) Column reflects adjustments for the sale of U. S. Steel's coal mining assets
based on the asset purchase agreement and other agreements that we expect to
be executed. This sale does not meet the criteria for presentation as a
discontinued operation.
(a) Reflects initial cash proceeds of $50 and an additional estimated
purchase price adjustment related to the sale of inventory of $7.
(b) Reflects the establishment of an intercompany receivable and payable to
U. S. Steel from the coal mining business previously eliminated in
consolidation.
(c) Reflects the removal of the coal mining assets sold and the removal of
accrued reclamation costs assumed by the buyer.
(d) Reflects the deferred tax effect of the sale of the coal mining assets.
(e) Reflects incremental liabilities related to the fair value of various
indemnifications provided by U. S. Steel, for lease expense prepaid by
the buyer, and for certain fee and inventory purchase commitments
through December 31, 2006 by U. S. Steel as part of the sale
transaction.
(f) Reflects the recognition of the present value of a previously
unrecognized obligation for payments to a multiemployer health care
benefit plan created by the Coal Industry Retiree Health Benefit Act of
1992 based on assigned beneficiaries receiving benefits. This obligation
was previously recognized on a 'pay-as-you-go' basis, but must be
recorded on the balance sheet upon consummation of the sale of mining
operations. No adjustments are reflected for any potential incremental
employee obligations that would be required to be recorded should the
buyer have a plan to reduce the workforce. Should we become aware of a
planned reduction upon consummation of the sale, material incremental
increases to employee benefits could be required.
(g) Reflects the loss on the sale of the coal mining assets and the effects
of the incremental liabilities recorded in connection with the sale.
(2) Column reflects a condensed historical balance sheet of National as of
December 31, 2002, and was prepared from the debtor-in-possession balance
sheet of National contained in National's audited financial statements for
the year ended December 31, 2002 included elsewhere in this prospectus
supplement. Certain reclassifications have been made to the
debtor-in-possession balance sheet to conform to the presentation used by
U. S. Steel.
(3) Column reflects the elimination of assets not purchased and liabilities not
assumed from National. The net difference between the assets not purchased
and liabilities not assumed is reflected in stockholders' equity. U. S.
Steel is purchasing accounts receivable; inventories; specifically
identified pre-paid and other current assets that will have value to U. S.
Steel; property, plant and equipment, except for certain assets not related
to their steel business; and National's equity investments in Double G
Coatings, L.P. and Steel Health Resources LLC. U. S. Steel is not purchasing
any other assets of National. U. S. Steel is assuming trade accounts payable
related to the assets to be acquired from National and $4 of capital leases.
U. S. Steel is not assuming any other liabilities of National including any
employee or retiree related liabilities under National's existing benefit
plans or labor agreements.
S-29
(4) Column reflects the historical book values of the assets purchased and
liabilities assumed from National, with the net difference between the
assets purchased and liabilities assumed reflected as stockholders' equity.
(5) Column reflects pro forma adjustments related to the acquisition of
substantially all of National's assets, including the associated financing
to complete the acquisition, as follows:
(h) Reflects the total cash purchase price of $881, including transaction
costs of $10 and certain lease payments due at closing of $21, for the
acquisition of substantially all of National's assets.
(i) The following table reflects the sources of cash to fund the acquisition
of substantially all of National's assets:
Proceeds from the issuance of the $350 of the notes offered
hereby, less issuance costs of $8 that are reflected as
deferred financing costs on the balance sheet ($1 in other
current assets and $7 in other noncurrent assets)......... $ 342
Proceeds from the sale of accounts receivable under the
receivable sales program at the time of the closing of the
acquisition............................................... 297
Proceeds from the issuance of 5 million shares of 7.00%
Series B Mandatory Convertible Preferred Shares at $50 per
share in February 2003, less issuance costs of $8......... 242
------
Cash proceeds............................................... $ 881
======
(j) Reflects the elimination of intercompany receivables and payables
balances between National and U. S. Steel.
(k) The following table reflects the preliminary allocation of the purchase
price:
Book value of the net assets (equity) acquired from
National.................................................. $1,772
Add: Adjustment to increase the book value of inventory
acquired to fair value, determined as replacement cost
less costs to sell........................................ 159
Less: Employee liabilities recorded (see note (o)).......... (290)
Trust liabilities recorded (see note (p)).............. (100)
Environmental liabilities recorded (see note (q))...... (9)
Excess value of net assets acquired over cost (negative
goodwill)................................................. (651)
------
Purchase price.............................................. $ 881
======
As shown in the table above, the book value of the net assets acquired
from National plus the fair value adjustment to inventory exceeds the
total purchase price. SFAS No. 141 requires that the excess of the fair
value of net assets acquired over cost (negative goodwill) in an
acquisition be allocated as a pro rata reduction of the amounts that
would have otherwise been assigned to the acquired assets based on their
relative fair values. This pro rata reduction is applied against
noncurrent assets because the fair value of current assets is assumed to
be their book value. The table
S-30
below reflects the preliminary allocation of negative goodwill to
property, plant and equipment and other noncurrent assets:
Net book value of property, plant and equipment acquired.... $1,254
Pro rata allocation of negative goodwill to property, plant
and equipment............................................. (646)
------
Allocated portion of purchase price to property, plant and
equipment................................................. $ 608
======
Book value of other noncurrent assets acquired from National
(only $11 eligible for pro rata reduction in accordance
with SFAS No. 141)........................................ 13
Pro rata allocation of negative goodwill to other noncurrent
assets.................................................... (5)
------
Allocated portion of purchase price assigned to other
noncurrent assets......................................... $ 8
======
(l) Reflects the removal of supply parts inventory to conform to U. S.
Steel's accounting policy that supply parts are expensed as purchased.
The book value associated with these parts has been reclassified to
property, plant and equipment as part of the preliminary allocation of
the purchase price.
(m) Reflects deferred tax effect as a result of book basis and tax basis
differences on the opening balance sheet.
(n) Reflects the reclassification of capital leases assumed by U. S. Steel
in the acquisition from the liabilities subject to compromise line item
to current portion of long-term debt and long-term debt.
(o) Reflects the estimated fair value of liabilities for pensions and other
postretirement benefit obligations (OPEB) calculated based on the new
labor contract with the USWA as it relates to National's employees.
Amounts reflect an estimated workforce reduction of 20% as part of the
transition assistance program contained in the labor agreement. Also
reflects the estimated fair value of accrued vacations that will be
recorded for active National union employees at the date of acquisition.
(p) Reflects liabilities established relating to estimated future payments,
contingent upon U. S. Steel profitability, to a trust established and
administered by the USWA to assist current National retirees with
healthcare costs in accordance with the new labor agreement.
(q) Reflects environmental remediation liabilities established on the
opening balance sheet pertaining to assets purchased.
S-31
U. S. STEEL
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
-----------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS
FOR SALE OF ADJUSTMENTS
U. S. STEEL COAL MINING ADJUSTED NATIONAL TO ADJUSTED PRO FORMA
HISTORICAL ASSETS(1) U. S. STEEL HISTORICAL(2) NATIONAL(3) NATIONAL(4) ADJUSTMENTS(5)
-----------------------------------------------------------------------------------------------------------------------------------
Revenues and other income.... 7,054 (202)(a) 6,856 2,623 (4) 2,619 (64)(d)
4 (b)
Costs and expenses:
Cost of revenue (excludes
items below)............. 6,158 (157)(a) 6,005 2,476 (159) 2,317 (64)(d)
4 (b) 62 (e)
Selling, general and
administrative expense... 418 (2)(a) 416 117 (3) 114 8 (e)
Depreciation, depletion and
amortization............. 350 (2)(a) 348 161 -- 161 (121)(f)
----------------------------------------------------------------------------------------------------
Total costs and expenses..... 6,926 (157) 6,769 2,754 (162) 2,592 (115)
----------------------------------------------------------------------------------------------------
Income (loss) from operations
before reorganization
items...................... 128 (41) 87 (131) 158 27 51
Reorganization items......... -- -- -- 51 (51) -- --
Net interest and other
financial costs............ 115 -- 115 25 (25) -- 41 (g)
----------------------------------------------------------------------------------------------------
Income (loss) before income
taxes...................... 13 (41) (28) (207) 234 27 10
Income tax provision
(benefit).................. (48) (14)(c) (62) (58) 82 24 4 (h)
----------------------------------------------------------------------------------------------------
Net income (loss)............ 61 (27) 34 (149) 152 3 6
Dividends on 7% Series B
Mandatory Convertible
Preferred Shares........... -- -- -- -- -- -- 18 (i)
----------------------------------------------------------------------------------------------------
Net income (loss) available
to common stockholders..... 61 (27) 34 (149) 152 3 (12)
====================================================================================================
Net Income (loss) per share
--Basic.................... $ 0.62
--Diluted.................. $ 0.62
Weighted average shares
outstanding, in thousands
--Basic.................... 97,426
--Diluted.................. 97,428
-----------------------------------------------------------------------------------------------------------------------------------
----------------------------- -----------
U. S. STEEL
PRO FORMA
----------------------------- -----------
Revenues and other income.... 9,411
Costs and expenses:
Cost of revenue (excludes
items below)............. 8,320
Selling, general and
administrative expense... 538
Depreciation, depletion and
amortization............. 388
-----------
Total costs and expenses..... 9,246
-----------
Income (loss) from operations
before reorganization
items...................... 165
Reorganization items......... --
Net interest and other
financial costs............ 156
-----------
Income (loss) before income
taxes...................... 9
Income tax provision
(benefit).................. (34)
-----------
Net income (loss)............ 43
Dividends on 7% Series B
Mandatory Convertible
Preferred Shares........... 18
-----------
Net income (loss) available
to common stockholders..... 25
===========
Net Income (loss) per share
--Basic.................... $ 0.26
--Diluted.................. $ 0.26
Weighted average shares
outstanding, in thousands
--Basic.................... 97,426
--Diluted.................. 97,428
-----------------------------
See Notes to unaudited pro forma condensed statement of operations.
S-32
U. S. STEEL
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS)
(1) Column reflects the adjustments for the sale of U. S. Steel's coal mining
assets based on the asset purchase and related agreements that we expect to
be executed. The sale does not meet the criteria for presentation as a
discontinued operation.
(a) Reflects adjustment to remove revenues, cost of revenues, selling,
general and administrative expense and depreciation, depletion and
amortization related to the coal mining assets.
(b) Reflects adjustment to reflect U. S. Steel's intercompany revenue and
cost of revenues related to the coal mining assets, which were
historically eliminated in consolidation.
(c) Reflects the income tax effects of the adjustments made at the statutory
rate of 35%.
(2) Column reflects a condensed historical statement of operations of National
for the year ended December 31, 2002 and was derived from National's audited
debtor-in-possession statement of operations for the year ended December 31,
2002 included elsewhere in this prospectus supplement. National's net sales,
equity income of affiliates, other items, and net gain on the disposal of
non-core assets and other related activities have been reclassified to
revenues and other income to conform with U. S. Steel's presentation.
(3) Column reflects the elimination of revenues and other income and expenses
associated with assets not purchased and liabilities not assumed from
National. The following is a description of the significant adjustments
reflected in this column:
- The adjustments to cost of revenues and selling, general and
administrative expenses primarily reflect the elimination of historical
expenses related to pension and other postretirement benefits (OPEB) as a
result of U. S. Steel not assuming any pension or OPEB liabilities under
National's existing employee benefit plans or union contracts.
Approximately $17 relates to assets not purchased by U. S. Steel in the
acquisition.
- The adjustment to reorganization items reflects the removal of expenses
related directly to National's bankruptcy proceedings and expenses incurred
related to debtor-in-possession and other long-term agreements that are not
being assumed by U. S. Steel in the acquisition.
- The adjustment to interest expense reflects the removal of interest
expense associated with debt obligations of National not assumed by U. S.
Steel in the acquisition.
- The adjustment to income tax provision (benefit) reflects the tax effects
of the adjustments in this column at the statutory rate of 35%.
(4) Column reflects the revenues and expenses related to the assets acquired and
liabilities assumed from National.
(5) Column reflects pro forma adjustments associated with the acquisition of
substantially all of National's assets and the associated financing
arrangements, as follows:
(d) Reflects the elimination of revenues and cost of revenues for
transactions between U. S. Steel and National that would be eliminated
in consolidation.
S-33
(e) Reflects the annual pension and OPEB expense associated with National's
employees. The amounts relating to employees represented by the USWA
have been calculated based on the benefits offered under the new labor
contract, assuming no reduction in workforce. U. S. Steel is not
reflecting any wage savings in cost of revenue related to the new labor
agreement. For further discussion of the new labor agreement, see
"Management's discussion and analysis of financial condition and results
of operations--Outlook--USWA agreement."
(f) Reflects adjustments to reduce the historical depreciation, depletion
and amortization recorded by National to reflect the reduced value of
the property, plant and equipment that will be recorded on U. S. Steel's
books. The weighted average useful life of the assets acquired is
approximately 17 years.
(g) Reflects interest expense and other financial costs associated with the
financing of the acquisition of substantially all of National's assets
as follows:
Interest on $350 of the notes, assuming an interest rate of
9.25% offered hereby...................................... $33
Other financial costs on the sale of $297 of receivables
under the receivables sales program at 2.5%............... 7
Amortization of deferred financing costs associated with the
notes offered hereby...................................... 1
---
Pro forma adjustment for interest and other financial
costs..................................................... $41
A 0.125% change in the interest rate on the notes would affect interest
expense by less than $1.
The discount rate on the receivable sales program is based on LIBOR plus
a spread. A 0.125% change in this discount rate would affect net
interest and other financial costs by less than $1.
(h) Reflects the income tax effects of the pro forma adjustments presented
in this column at the statutory tax rate of 35%.
(i) Reflects dividends on the 7.00% Series B Mandatory Convertible Preferred
Shares issued in February 2003.
S-34
NATIONAL STEEL SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical financial information for
National. This information should be read in conjunction with National's audited
financial statements, including the notes thereto, which are located elsewhere
in this prospectus supplement.
-------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA(1):
Net sales................................... $2,609 $ 2,492 $2,979 $2,954 $2,936
Income (loss) from operations............... (135) (455) (114) (3) 102
Reorganization items(1)..................... 51 -- -- -- --
Income (loss) before cumulative effect of
change in accounting principle(2)........ (149) (669) (130) (29) 89
Cumulative effect of accounting change...... -- 17 -- -- --
Net income (loss)(3)........................ (149) (652) (130) (29) 89
PER COMMON SHARE DATA(1):
Income (loss) before cumulative effect of
change in accounting principle-basic and
diluted(2)............................... $(3.60) $(16.21) $(3.14) $(0.69) $ 2.06
Net income (loss)--basic and diluted........ (3.60) (15.79) (3.14) (0.69) 2.06
Dividends paid.............................. -- -- 0.21 0.28 0.28
BALANCE SHEET DATA-AS OF END OF PERIOD(1):
Cash and cash equivalents................... $ 1 $ 1 $ 2 $ 58 $ 138
Working capital (deficit)................... 372 (78) 179 361 333
Total assets................................ 2,209 2,308 2,565 2,749 2,505
Current maturities of long-term
obligations.............................. -- 29 28 31 30
Debtor-in-possession financing(1)........... 129 -- -- -- --
Long-term obligations....................... -- 839 551 587 316
Liabilities subject to compromise(1)........ 2,646 -- -- -- --
Stockholders' equity (deficit).............. (905) (311) 718 853 852
-------------------------------------------------------------------------------------------
(1) National and forty-one of its domestic subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code
on March 6, 2002. Certain majority owned subsidiaries of National were
excluded from the Chapter 11 filings. For more information regarding the
bankruptcy filings and its effect on the comparability of financial
information, see Note 1 to National's audited financial statements located
elsewhere in this prospectus supplement.
(2) National has reclassified the $2 million extraordinary loss recognized on
the extinguishment of debt in 2001 to interest and other financial expense
in accordance with Statement of Financial Accounting Standards (SFAS) No.
145. This reclassification increased the loss before cumulative effect of
change in accounting principle in 2001, previously the loss before
extraordinary item and cumulative effect of change in accounting principle,
by $2 million or $.05 per share. For more information on SFAS No. 145, see
Note 2 to National's audited financial statements located elsewhere in this
prospectus supplement.
(3) National adopted SFAS No. 143 effective January 1, 2003. The following table
reflects pro forma amounts as if SFAS No. 143 had been in effect for the
years presented:
2002 2001 2000
---------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting
principle--adjusted........................................ $ (147) $ (667) $ (131)
Net loss--adjusted.......................................... (147) (650) (131)
Per share amounts--basic and diluted:
Loss before cumulative effect of change in accounting
principle--adjusted...................................... $(3.56) $(16.16) $(3.17)
Net loss--adjusted......................................... (3.56) (15.74) (3.17)
The amount of the asset retirement obligation that would have been recorded
on the balance sheet would have been $5.4 million, $4.9 million and $4.5
million as of December 31, 2002, 2001 and 2000, respectively, and would have
been $4.1 million as of January 1, 2000, had SFAS No. 143 been in effect. For
more information on SFAS No. 143, see Note 2 to National's audited financial
statements located elsewhere in this prospectus supplement.
S-35
U. S. STEEL SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data for U. S. Steel. Prior to
December 31, 2001, the businesses of U. S. Steel comprised an operating unit of
USX Corporation, now named Marathon Oil Corporation ("Marathon"). Marathon had
two outstanding classes of common stock: USX-Marathon Group common stock, which
was intended to reflect the performance of Marathon's energy business, and
USX-U. S. Steel Group common stock ("Steel Stock"), which was intended to
reflect the performance of Marathon's steel business. On December 31, 2001,
U. S. Steel was capitalized through the issuance of 89.2 million shares of
common stock to holders of Steel Stock in exchange for all outstanding shares of
Steel Stock on a one-for-one basis (the "Separation"). Consolidated balance
sheet data as of December 31, 2002 and 2001 and statement of operations data for
the year ended December 31, 2002 reflect U. S. Steel as a separate, stand-alone
entity. All other balance sheet and statement of operations data in the table
below represent a carve-out presentation of the businesses comprising U. S.
Steel, and are not intended to be a complete presentation of the financial
position or results of operations for U. S. Steel on a stand-alone basis. This
information should be read in conjunction with the more detailed information and
consolidated financial statements included elsewhere in this prospectus
supplement and the additional reports and documents incorporated by reference in
the accompanying prospectus.
-------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA(1):
Revenues and other income(2)................. $7,054 $6,375 $6,132 $5,467 $6,477
Income (loss) from operations................ 128 (405) 104 147 579
Net income (loss)(3)......................... 61 (218) (21) 44 364
PER COMMON SHARE DATA:
Net Income (loss)--basic and diluted(4)...... $ 0.62 $(2.45) $(0.24) $ 0.49 $ 4.08
Dividends paid(5)............................ 0.20 0.55 1.00 1.00 1.00
BALANCE SHEET DATA-AS OF END OF PERIOD(1):
Total assets................................. $7,977 $8,337 $8,711 $7,525 $6,749
Capitalization:
Notes payable............................. -- -- 70 -- 13
Long-term debt, including amounts due
within one year......................... 1,434 1,466 2,375 915 476
Preferred stock of subsidiary(6).......... -- -- 66 66 66
Trust preferred securities(7)............. -- -- 183 183 182
Stockholders' equity...................... 2,027 2,506 1,919 2,056 2,093
------------------------------------------
Total capitalization.................... 3,461 3,972 4,613 3,220 2,830
-------------------------------------------------------------------------------------------
(1) For discussion of events affecting the comparability of the amounts
presented, see Note 2, "The Separation" and Note 5, "Business Combinations"
in the notes to our audited financial statements included in our audited
financial statements included elsewhere in this prospectus supplement for a
description of business combinations that occurred in 2000 and 2001. In
addition, certain amounts from the statement of operations for the year 1999
have been restated to reflect the reclassification for extraordinary losses
recognized in 1999 in accordance with Statement of Financial Accounting
Standards (SFAS) No. 145. Revenues and other income and income from
operations have been reduced by $3 million for our share of the
extraordinary loss recorded by an equity investee related to the early
extinguishment of debt. Other amounts on our statement of operations of 1999
were also affected by the reclassification of extraordinary items but are
not presented in this table. For further discussion, see "Summary financial
data." For a more detailed discussion of SFAS 145, see Note 4 to U. S.
Steel's audited financial statements located elsewhere in this prospectus
supplement.
S-36
(2) Consists of revenues, dividend and investee income (loss), net gains
(losses) on disposal of assets, and other income.
(3) U. S. Steel adopted SFAS No. 143 effective January 1, 2003. The following
table reflects pro forma amounts as if SFAS No. 143 had been in effect for
the years presented:
2002 2001 2000
-----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
Net income (loss)--adjusted................................. $56 $ (222) $ (24)
Net income (loss) per share--adjusted--basic and diluted.... $.57 $(2.48) $(.27)
The amount of the asset retirement obligation that would have been recorded
on the balance sheet had SFAS 143 been in effect would have been $29 million,
$26 million and $24 million as of December 31, 2002, 2001 and 2000,
respectively, and would have been $21 million as of January 1, 2000. For more
information on SFAS No. 143, see Note 4 to U. S. Steel's audited financial
statements included elsewhere in this prospectus supplement.
(4) Net income per common share for 2002 is based on the weighted average number
of shares outstanding during the year. Net income (loss) per share for all
other periods presented is based on the 89.2 million outstanding common
shares on December 31, 2001, as a result of the Separation and the initial
capitalization of U. S. Steel on that date.
(5) Dividends paid per common share for all periods presented prior to 2002
represent amounts paid on USX-U. S. Steel Group common stock.
(6) These securities were redeemed by Marathon for cash on December 31, 2001, as
part of the Separation.
(7) These securities were retained and subsequently redeemed by Marathon as part
of the Separation.
S-37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--U. S. STEEL
OVERVIEW
U. S. Steel has five reportable operating segments: Flat-rolled Products
("Flat-rolled"), Tubular Products ("Tubular"), U. S. Steel Kosice ("USSK"),
Straightline Source ("Straightline") and USS Real Estate ("Real Estate").
Prior to December 31, 2001, the businesses of U. S. Steel comprised an operating
unit of USX Corporation, now named Marathon Oil Corporation ("Marathon"). On
December 31, 2001, U. S. Steel was capitalized through the issuance of 89.2
million shares of common stock to holders of USX-U. S. Steel Group common stock
("Steel Stock") in exchange for all outstanding shares of Steel Stock on a
one-for-one basis ("the Separation"). (For additional information on the
Separation, see Note 2 to the Financial Statements.)
Effective with the first quarter of 2002, following the Separation, U. S. Steel
established a new internal financial reporting structure, which resulted in a
change in reportable segments from Domestic Steel and USSK to Flat-rolled,
Tubular and USSK. In addition, U. S. Steel revised the presentation of several
items of income and expense within income (loss) from reportable segments. Net
pension credits, costs related to former businesses and administrative expenses
previously not reported at the segment level are now directly charged or
allocated to the reportable segments and other businesses. Effective with the
fourth quarter of 2002, the Straightline and Real Estate reportable segments,
which were previously reflected in Other Businesses, were added. The
presentation of Straightline and Real Estate as separate segments resulted from
the application of quantitative threshold tests under Statement of Financial
Accounting Standards ("SFAS") No. 131 rather than any fundamental change in the
management or structure of the businesses. The composition of the Flat-rolled,
Tubular and USSK segments remains unchanged from prior periods. Comparative
results for 2001 and 2000 have been conformed to the current year presentation.
The Flat-rolled segment includes the operating results of U. S. Steel's domestic
integrated steel mills and equity investees involved in the production of sheet,
plate and tin mill products. These operations are principally located in the
United States and primarily serve customers in the transportation (including
automotive), appliance, service center, conversion, container, and construction
markets.
The Tubular segment includes the operating results of U. S. Steel's domestic
tubular production facilities and an equity investee involved in the production
of tubular goods. These operations produce and sell both seamless and electric
resistance weld tubular products and primarily serve customers in the oil, gas
and petrochemical markets.
The USSK segment includes the operating results of U. S. Steel's integrated
steel mill located in the Slovak Republic; a production facility in Germany;
operations under facility management and support agreements in Serbia; and
equity investees, primarily located in Central Europe. These operations produce
and sell sheet, plate, tin, tubular, precision tube and specialty steel
products, as well as coke. USSK primarily serves customers in the central and
western European construction, conversion, appliance, transportation, service
center, container, and oil, gas and petrochemical markets.
The Straightline segment includes the operating results of U. S. Steel's
technology-enabled distribution business that serves steel customers primarily
in the eastern and central United
S-38
States. Straightline competes in the steel service center marketplace using a
nontraditional business process to sell, process and deliver flat-rolled steel
products in small to medium sized order quantities primarily to job shops,
contract manufacturers and original equipment manufacturers across an array of
industries.
The Real Estate segment includes the operating results of U. S. Steel's domestic
mineral interests that are not assigned to other operating units; timber
properties; and residential, commercial and industrial real estate that is
managed or developed for sale or lease.
All other U. S. Steel businesses not included in reportable segments are
reflected in Other Businesses. These businesses are involved in the production
and sale of coal, coke and iron-bearing taconite pellets; transportation
services; and engineering and consulting services.
Certain sections of Management's Discussion and Analysis include forward-looking
statements concerning trends or events potentially affecting the businesses of
U. S. Steel. These statements typically contain words such as "anticipates,"
"believes," "estimates," "expects" or similar words indicating that future
outcomes are not known with certainty and are subject to risk factors that could
cause these outcomes to differ significantly from those projected. In accordance
with "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, these statements are accompanied by cautionary language identifying
important factors, though not necessarily all such factors, that could cause
future outcomes to differ materially from those set forth in forward-looking
statements. For additional risk factors affecting the businesses of U. S. Steel,
see "Risk Factors" included elsewhere in this prospectus supplement and the
accompanying prospectus.
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of U. S. Steel's financial condition and
results of operations are based upon U. S. Steel's financial statements, which
have been prepared in accordance with accounting standards generally accepted in
the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
year-end, and the reported amount of revenues and expenses during the year.
Management regularly evaluates these estimates, including those related to the
carrying value of property, plant and equipment, valuation allowances for
receivables, inventories and deferred income tax assets; liabilities for
deferred income taxes, potential tax deficiencies, environmental obligations,
potential litigation claims and settlements; and assets and obligations related
to employee benefits. Management estimates are based on historical experience
and various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Accordingly, actual results may differ materially from current
expectations under different assumptions or conditions.
Management believes that the following are the more significant judgments and
estimates used in the preparation of the financial statements.
Pensions and Other Postretirement Benefits ("OPEB")--The recording of net
periodic benefit costs (credits) for pensions and OPEB are based on, among other
things, assumptions of the expected annual return on plan assets, discount rate,
and escalation of retiree health care costs. Changes in the assumptions or
differences between actual and expected changes in the
S-39
present value of liabilities or assets of U. S. Steel's plans could cause net
periodic benefit costs to increase or decrease materially from year to year as
discussed below:
U. S. Steel bases its estimate of the annual expected return on plan assets on
the historical long-term rate of return experienced by U. S. Steel's plan
assets, the investment mix of plan assets between debt, equities and other
investments, and its view of market returns expected in the future. Based on a
review of these factors at year end 2002, U. S. Steel has decreased the expected
annual return on pension plan assets from 8.8% in 2002 to 8.2% in 2003. This
decrease in the expected return will negatively affect the return on asset
component of net periodic pension costs by approximately $55 million in 2003 as
compared to 2002. The investment performance of pension plan assets over the
last three years will also unfavorably impact net periodic pension cost during
2003 and later years primarily through the use of a lower asset base in
calculating the expected return on plan assets. Since the expected return on
assets component of net periodic benefit cost is based upon a market-related
value that recognizes changes in fair value over three years, net periodic
pension cost will also be progressively higher in 2004 and 2005. Net periodic
pension cost is expected to total $65 million in 2003 as compared to a $103
million credit (before settlement charges) in 2002. A 1/2 percentage point
increase or decrease in the expected return on plan assets for 2003 would have
decreased or increased the net periodic pension cost by $40 million.
At December 31, 2002, U. S. Steel's two main pension plans had a fair market
value of $7.2 billion which was 63% invested in equity securities, 35% in debt
securities and 2% in all other investments.
U. S. Steel determines the discount rate applied to pension and OPEB obligations
at each year end based on a number of external barometers used to measure the
status of high quality bond rates consistent with the expected payout period of
the obligations. Based on this evaluation at December 31, 2002, U. S. Steel
lowered the discount rate used to measure both pension and OPEB obligations from
7.0% to 6.25%. Lower discount rates increase the actuarial losses of the plans
and will unfavorably impact net periodic benefit costs by approximately $31
million for pensions and $10 million for OPEB in 2003 principally due to the
impact of required amortization amounts, which in recent years had not been a
significant component of benefit costs. Total OPEB costs in 2003 are expected to
be approximately $203 million, excluding multiemployer plans. A 1/2 percentage
point increase in the discount rate would have decreased the 2003 net periodic
pension and OPEB costs by approximately $21 million and $9 million,
respectively. A 1/2 percentage point decrease in the discount rate would have
increased the 2003 net periodic pension and OPEB costs by approximately $5
million and $10 million, respectively.
U. S. Steel determines the escalation trend in per capita health care costs
based on historical rate experience under U. S. Steel's insurance plans and
through consultation with health care experts. For measurement purposes, U. S.
Steel has assumed an initial escalation rate of 10% for 2003. This rate is
assumed to decrease gradually to an ultimate rate of 4.75% in 2010 and remain at
that level thereafter. A 1/2 percentage point increase in the escalation trend
would have increased net periodic OPEB costs by approximately $25 million in
2003. A 1/2 percentage point decrease in the escalation trend would have
decreased net periodic OPEB costs by approximately $21 million in 2003.
Changes in the assumptions for expected annual return on plan assets and the
discount rate do not impact the funding calculations used to derive minimum
funding requirements for the pension plans. Based on preliminary funding
valuations, U. S. Steel's main pension plans are
S-40
not expected to require cash funding for the 2003 plan year. However, the lower
returns on plan assets experienced in recent years may have a negative impact on
funding for U. S. Steel's pension plan for union employees in 2004 and later.
The timing and amount of any required future funding cannot be determined at
this time. For further cash flow discussion, see "--Liquidity." This discussion
of Pensions and OPEB does not take into account the impact of the National
transaction or the new labor agreement. See "--Outlook."
Asset Impairments--U. S. Steel evaluates the impairment of its property, plant
and equipment on an individual asset basis or by logical groupings of assets.
Asset impairments are recognized when the carrying value of those productive
assets exceeds their aggregate projected undiscounted cash flows. These
undiscounted cash flows are based on management's long range estimates of market
conditions and the overall performance associated with the individual asset or
asset grouping. If future demand and market conditions are less favorable than
those projected by management, or if the probability of disposition of the
assets differs from that previously estimated by management, additional asset
write-downs may be required.
Taxes--U. S. Steel records a valuation allowance to reduce deferred tax assets
to the amount that is more likely than not to be realized. In the event that U.
S. Steel were to determine that it would be able to realize deferred tax assets
in the future in excess of the net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made. Likewise, should U. S. Steel determine that it would not be able to
realize all or part of its deferred tax assets in the future, an adjustment to
the valuation allowance for deferred tax assets would be charged to income in
the period such determination was made. The amount of deferred tax assets
recorded as of December 31, 2002, was $1,622 million, net of an established
valuation allowance of $30 million. U. S. Steel expects to generate future
taxable income to realize the benefits of these deferred tax assets.
U. S. Steel makes no provision for deferred U.S. and certain foreign income
taxes on the undistributed earnings of USSK and other consolidated foreign
subsidiaries because management intends to permanently reinvest such earnings in
foreign operations. As of December 31, 2002, the amount of undistributed
earnings was approximately $260 million. If circumstances change and it is
determined that earnings will be remitted in the foreseeable future, a charge of
up to $70 million could be required. Any charge taken is contingent upon the
amount of undistributed earnings that U. S. Steel would plan to remit.
U. S. Steel records liabilities for potential tax deficiencies. These
liabilities are based on management's judgment of the risk of loss should those
items be challenged by taxing authorities. In the event that U. S. Steel were to
determine that tax-related items would not be considered deficiencies or that
items previously not considered to be potential deficiencies could be considered
as potential tax deficiencies (as a result of an audit, tax ruling or other
positions or authority) an adjustment to the liability would be recorded through
income in the period such determination was made.
Environmental Remediation--U. S. Steel provides for remediation costs and
penalties when the responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. Remediation liabilities are accrued
based on estimates of known environmental exposures and are discounted in
certain instances. U. S. Steel regularly monitors the progress of environmental
remediation. Should studies indicate that the cost of remediation is to be more
than previously estimated, an additional accrual would be recorded in the period
in which such determination was made. As of December 31, 2002, total accruals
for environmental remediation were $135 million.
S-41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INCOME
The principal drivers of U. S. Steel's financial results are price, volume,
product mix and costs. To the extent that these factors are affected by industry
conditions and the overall economic climate, revenues and income will reflect
such conditions.
REVENUES AND OTHER INCOME for each of the last three years are summarized in the
following table:
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
-------------------------------------------------------------------------------------------
Revenues by product:
Sheet and semi-finished steel.......................... $4,048 $3,163 $3,288
Plate and tin mill products............................ 1,057 1,273 977
Tubular products....................................... 554 755 754
Raw materials (coal, coke and iron ore)................ 502 485 626
Other(1)............................................... 788 610 445
Income (loss) from investees............................. 33 64 (8)
Net gain on disposal of assets........................... 29 22 46
Other income............................................. 43 3 4
------ ------ ------
Total revenues and other income..................... $7,054 $6,375 $6,132
-------------------------------------------------------------------------------------------
(1) Includes revenue from the sale of steel production by-products;
transportation services; steel mill products distribution; the management of
mineral resources; the management and development of real estate; and
engineering and consulting services.
Total revenues and other income in 2002 increased by $679 million from 2001
primarily due to higher shipments and average realized prices for domestic sheet
products; the absence of the $104 million impairment of receivables primarily
from Republic, which was included in 2001; increased Straightline shipments as a
result of a full year of operations; and higher average realized prices for
USSK, which were partially due to foreign exchange effects. These were partially
offset by reduced domestic tubular and plate shipment volumes.
Total revenues and other income increased by $243 million in 2001 from 2000
primarily due to the inclusion of USSK revenues for the full year, the inclusion
of Transtar revenues following the reorganization and higher income from
investees relating to the gain on the Transtar reorganization, partially offset
by lower domestic sheet, tubular and plate shipment volumes, lower average
realized prices for domestic sheet products, and the $104 million impairment of
receivables primarily from Republic.
S-42
INCOME (LOSS) FROM OPERATIONS for U. S. Steel for the years 2002, 2001 and 2000
are set forth in the following table:
------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------------
Flat-rolled................................................. $ (31) $(536) $ 31
Tubular..................................................... 4 88 83
USSK........................................................ 110 123 2
Straightline................................................ (41) (17) --
Real estate................................................. 57 69 72
----- ----- ----
Total income (loss) from reportable segments........... 99 273 188
Other businesses............................................ 38 (17) 67
----- ----- ----
Income (loss) from operations before special items..... 137 (290) 255
Special items:
Pension settlement losses................................. (100) -- --
Asset impairments--receivables............................ (14) (146) (8)
Asset impairments--intangible asset....................... -- (20) --
Costs related to Separation............................... -- (25) --
Costs related to Fairless shutdown........................ (1) (38) --
Insurance recoveries related to USS-POSCO fire(1)......... 39 46 --
Federal excise tax refund................................. 38 -- --
Gain on VSZ share sale.................................... 20 -- --
Reversal of litigation accrual............................ 9 -- --
Gain on Transtar reorganization........................... -- 68 --
Environmental and legal contingencies..................... -- -- (36)
Asset impairments--coal................................... -- -- (71)
Impairments and other costs related to investments in
equity investees in equity investees................... -- -- (36)
----- ----- ----
Total income (loss) from operations.................... $ 128 $(405) $104
===== ===== ====
------------------------------------------------------------------------------------------
(1) In excess of facility repair costs.
SEGMENT RESULTS FOR FLAT-ROLLED
The segment loss for Flat-rolled of $31 million in 2002 reflected an improvement
of $505 million from 2001. The substantially decreased loss was primarily due to
improved operating efficiencies, higher average realized prices and shipment
volumes for sheet products, lower energy costs and cost saving initiatives.
Flat-rolled recorded a segment loss of $536 million in 2001, versus income of
$31 million in 2000, a decrease of $567 million. The decrease was primarily due
to lower sheet prices and reduced shipment volumes for sheet products, which
resulted in less efficient operating rates and higher unit costs, lower results
from tin operations during the phase-out of operations at the Fairless Plant,
higher than anticipated start-up and operating expenses associated with the
March acquisition of East Chicago Tin, and business interruption effects at
USS-POSCO following the cold mill fire in May 2001.
S-43
SEGMENT RESULTS FOR TUBULAR
Tubular segment income for 2002 was $4 million, compared to $88 million in 2001.
The decline was primarily due to lower shipment volumes and lower average
realized prices for tubular products.
Segment income for Tubular in 2001 reflected an improvement of $5 million from
2000 primarily due to higher tubular prices during the first half of 2001.
SEGMENT RESULTS FOR USSK
USSK segment income for 2002 was $110 million, a decrease of $13 million
compared to 2001. The decrease was primarily due to the unfavorable effect of
changes in foreign exchange rates on costs, higher freight costs, losses on
conversion operations at Sartid in Serbia and business development expenses
associated with Sartid and other expansion opportunities in Europe, partially
offset by higher average realized prices, which were in part due to favorable
exchange rate effects. The net currency exchange effect on total year income
from operations was not material.
USSK segment income for the full-year 2001 was $123 million, compared to $2
million in 2000 for the period following U. S. Steel's acquisition of USSK on
November 24, 2000. The increase was primarily due to U. S. Steel's full year of
ownership, changes in commercial strategy, strong customer-focused marketing and
a favorable cost structure.
SEGMENT RESULTS FOR STRAIGHTLINE
Straightline recorded a segment loss of $41 million in 2002, its first full year
of operations, compared with a loss of $17 million in 2001 for the period
following the start-up of operations on October 30, 2001. These results reflect
the early stage costs associated with building a new business, achieving market
penetration, and creating the infrastructure for anticipated future growth.
SEGMENT RESULTS FOR REAL ESTATE
Real Estate segment income for 2002 was $57 million, compared with $69 million
in 2001. The decrease primarily reflected lower mineral interest royalties.
Real Estate segment income for 2001 declined $3 million from 2000 primarily due
to a decline in land sales, partially offset by increases in mineral interest
royalties.
RESULTS FOR OTHER BUSINESSES
Income for Other Businesses for 2002 was $38 million, a significant improvement
from 2001's loss of $17 million. The increase primarily reflected higher income
from taconite pellet and coal operations, partially offset by lower results from
coke operations.
The loss for Other Businesses for 2001 reflected a decline of $84 million from
income of $67 million in 2000 mainly as a result of lower income from taconite
pellet and coke operations, and a decline in income related to Transtar. These
decreases were partially offset by improved results from coal operations due to
improved operating and geological conditions and reduced depreciation following
an impairment of coal assets in 2000.
S-44
NET PERIODIC PENSION CREDIT
Net periodic pension credits, which are primarily noncash and are included in
income (loss) from operations, totaled $3 million in 2002, $120 million in 2001
and $273 million in 2000. The decrease of $117 million from 2001 to 2002 was
primarily due to higher settlement charges, which totaled $100 million in 2002,
compared with $4 million in 2001. The credit in 2002 was also negatively
affected by a lower than expected return on plan assets as a result of lower
market-related values of plan assets in 2002. The credit in 2001 also included
$30 million of termination expense due principally to a non-union voluntary
early retirement program offered in conjunction with the Separation and a
shutdown of a majority of the Fairless Plant. The decrease of $153 million in
the net periodic pension credit from 2000 to 2001 was primarily due to the $69
million effect of the transition asset being fully amortized in 2000, an
unfavorable change in the amortization of actuarial (gains)/losses and $30
million of termination expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $148 million in 2002
as compared to 2001. The increase in 2002 was primarily due to the decrease in
the net periodic pension credit as previously discussed, the impairment of
remaining retiree medical cost reimbursements receivable from Republic,
increased legal and consulting expenses primarily due to the Section 201 trade
cases and potential industry consolidation, and the ongoing expansion of
Straightline. Also contributing to the increase in 2002 were higher retiree
medical costs primarily due to decreases in the discount rate, and higher
escalation rates for medical expenses. The increase in selling, general and
administrative expenses of $286 million in 2001 as compared to 2000 was due to
several factors, including the decrease in the net periodic pension credit
previously discussed. Other contributing factors were the increase in costs in
2001 as a result of the full-year inclusion of USSK costs, the inclusion of
Transtar costs following the reorganization, Separation costs and the impairment
of retiree medical cost reimbursements owed by Republic.
ITEMS NOT ALLOCATED TO SEGMENTS:
PENSION SETTLEMENT LOSSES were related to retirements of personnel covered under
the nonunion qualified pension plan, the non tax-qualified pension plan and the
non tax-qualified executive management supplemental pension program. The
settlements occurred primarily as a result of a voluntary early retirement
program which was completed in June 2002.
ASSET IMPAIRMENTS--RECEIVABLES were for charges related to reserves established
against receivables exposure from financially distressed steel companies,
primarily Republic.
ASSET IMPAIRMENTS--INTANGIBLE ASSET was for the impairment of an intangible
asset in 2001 related to the five-year agreement for LTV to supply U. S. Steel
with pickled hot bands entered into in conjunction with the acquisition of LTV's
tin mill products business. This impairment followed the discontinuation of LTV
operations at East Chicago.
COSTS RELATED TO SEPARATION were for U. S. Steel's share of professional fees
and expenses and certain other costs directly attributable to the Separation in
2001.
COSTS RELATED TO FAIRLESS SHUTDOWN resulted from the permanent shutdown of the
pickling, cold rolling and tin mill facilities at the Fairless Plant in 2001.
S-45
INSURANCE RECOVERIES RELATED TO USS-POSCO FIRE represent U. S. Steel's share of
insurance recoveries in excess of facility repair costs for the cold-rolling
mill fire at USS-POSCO, which occurred in May 2001. The final payment was
received in December 2002.
FEDERAL EXCISE TAX REFUND represents the recovery of black lung excise taxes
that were paid on coal export sales during the period 1993 through 1999. During
2002, U. S. Steel received cash and recognized pre-tax income of $38 million,
which is included in other income on the statement of operations. Of the $38
million received, $11 million represented interest. The refunds resulted from a
1998 federal district court decision that found such taxes to be
unconstitutional.
GAIN ON VSZ SHARE SALE represents the gain recognized in October 2002 when U. S.
Steel granted an option to purchase its shares of VSZ and subsequently sold
these shares.
REVERSAL OF LITIGATION ACCRUAL represents the reversal in the first quarter of
2002 of a prior litigation accrual as a result of a final court ruling in U. S.
Steel's favor.
GAIN ON TRANSTAR REORGANIZATION represents U. S. Steel's share of the gain in
2001. Because this was a transaction with a noncontrolling shareholder, Transtar
recognized a gain by comparing the carrying value of the businesses sold to
their fair value. See Note 5 to the Financial Statements.
ENVIRONMENTAL AND LEGAL CONTINGENCIES relate to certain environmental and legal
accruals.
ASSET IMPAIRMENTS--COAL was for asset impairments at coal mines in Alabama and
West Virginia in 2000 following a reassessment of long-term prospects after
adverse geological conditions were encountered.
IMPAIRMENT AND OTHER COSTS RELATED TO INVESTMENTS IN EQUITY INVESTEES represents
charges to establish reserves against notes from Republic and to record U. S.
Steel's share of Republic special charges which resulted from the completion of
a financial restructuring of Republic.
NET INTEREST AND OTHER FINANCIAL COSTS for each of the last three years are
summarized in the following table:
------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------
Net interest and other financial costs...................... $115 $141 $105
Plus:
Favorable adjustment to interest related to prior years'
taxes.................................................. -- 67 --
---- ---- ----
Net interest and other financial costs adjusted to exclude
above item................................................ $115 $208 $105
------------------------------------------------------------------------------------
Adjusted net interest and other financial costs decreased $93 million in 2002 as
compared with 2001, primarily due to lower average debt levels following the
December 31, 2001 value transfer of $900 million from Marathon. The change from
2001 to 2002 also reflects favorable foreign currency effects. These effects
were primarily due to remeasurement of USSK net monetary assets into the U.S
dollar, which is the functional currency, and resulted in a net gain of $16
million in 2002 compared to a net loss of $1 million in 2001. Adjusted net
interest and other financial costs increased by $103 million in 2001 as compared
with 2000. This increase was largely due to higher average debt levels, which
resulted from negative cash flow and the elective funding for employee benefits
and the acquisition of USSK, both of which occurred in the fourth quarter of
2000.
S-46
The INCOME TAX BENEFIT in 2002 was $48 million, compared with a benefit of $328
million in 2001, and a provision of $20 million in 2000. The tax benefit in 2001
included a $33 million deferred tax benefit associated with the Transtar
reorganization. The decrease in the tax benefit from 2001 to 2002 was primarily
due to reduced pre-tax losses from domestic operations. The change to a tax
benefit in 2001 as compared to a tax provision in 2000 was primarily the result
of losses from domestic operations reported in 2001. The tax benefits in 2002
and 2001 reflected pre-tax losses from domestic operations and pre-tax income
from foreign operations for which virtually no income tax provision was
recorded.
The Slovak Income Tax Act provides an income tax credit which is available to
USSK if certain conditions are met. In order to claim the tax credit in any
year, 60% of USSK's sales must be export sales and USSK must reinvest the tax
credits claimed in qualifying capital expenditures during the five years
following the year in which the tax credit is claimed. The provisions of the
Slovak Income Tax Act permit USSK to claim a tax credit of 100% of USSK's tax
liability for years 2000 through 2004 and 50% for the years 2005 through 2009.
Management believes that USSK fulfilled all of the necessary conditions for
claiming the tax credit for 2000 through 2002. As a result of claiming these tax
credits and certain tax planning strategies to reinvest earnings in foreign
operations, virtually no income tax provision is recorded for USSK income. If
circumstances change and it is determined that earnings will be remitted in the
foreseeable future, a charge would be required to record the deferred tax
liability for the amounts planned to be remitted.
In October 2002, a tax credit limit was negotiated by the Slovak government as
part of an agreement required for the Slovak Republic's entry into the European
Union ("EU"). Effective upon the Slovak Republic's entry into the EU, the
agreement will limit to $500 million the total tax credit to be granted to USSK
during the period 2000 through 2009. The impact of the tax credit limit is
expected to be minimal since Slovak tax laws have been modified and tax rates
have been reduced since the acquisition of USSK. The agreement also places
limits upon total production and export sales to the EU, allowing for modest
growth during the period covered by the investment incentive. Management
believes that the agreement will not have a significant impact on future USSK
production and results of operations.
The issue of certain subsidies or incentives to the steel industry is the
subject of ongoing discussions at the Organization for Economic Cooperation and
Development ("OECD"). It is possible that these discussions could result in the
adoption of an OECD agreement which could negatively impact USSK's tax credit.
NET INCOME in 2002 was $61 million, compared with a net loss of $218 million in
2001 and a net loss of $21 million in 2000. The changes primarily reflected the
factors discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Flat-rolled shipments were 9.9 million tons in 2002, 8.8 million tons in 2001
and 9.6 million tons in 2000. Tubular shipments were 0.8 million tons in 2002,
1.0 million tons in 2001 and 1.1 million tons in 2000. Domestic shipments in
2001 were affected by a weak domestic economy, which reduced demand for sheet,
plate and tubular products. High import levels impacted all three years. Exports
accounted for approximately 5% of U. S. Steel's domestic shipments in 2002, 2001
and 2000.
USSK shipments were 3.9 million net tons in 2002, 3.7 million net tons in 2001
and 0.3 million net tons in 2000 in the short period following the acquisition.
S-47
Domestic raw steel production was 11.5 million tons in 2002, compared with 10.1
million tons in 2001 and 11.4 million tons in 2000. Domestic raw steel
production averaged 90% of capability in 2002, compared with 79% of capability
in 2001 and 89% of capability in 2000. In 2002, domestic raw steel production
was negatively affected by poor market conditions during the first quarter, as
well as the acceleration into the fourth quarter of some blast furnace repair
work that was originally scheduled to occur in 2003. In 2001, domestic raw steel
production was negatively impacted by poor economic conditions and the high
level of imports. In 2000, domestic raw steel production was negatively impacted
by a planned reline at the Gary Works No. 4 blast furnace in July 2000. Because
of market conditions, U. S. Steel limited its domestic production by keeping the
Gary Works No. 4 blast furnace out of service until February 2001. U. S. Steel's
stated annual domestic raw steel production capability was 12.8 million tons in
2002, 2001 and 2000.
USSK raw steel production was 4.4 million tons in 2002 and 4.1 million tons in
2001, or 88% and 81%, respectively, of USSK's stated annual raw steel production
capability of 5.0 million net tons.
The domestic steel industry is restructuring after many years of oversupply and
low prices attributable largely to excess imports, which resulted in significant
capacity closures starting in late 2000 and led to the introduction of Section
201 import tariffs in March 2002. The combination of capacity closures, trade
restrictions and the imposition of tariffs led to a recovery of steel prices
from 20-year lows in late 2001 and early 2002. U. S. Steel benefited in 2002
from reduced domestic supply resulting from the temporary or permanent closure
of steelmaking capacity, as well as the Section 201 remedies announced by
President Bush on March 5, 2002.
Despite the trade remedies, steel imports to the United States accounted for an
estimated 26% of the domestic steel market in 2002, compared to 24% and 26%, for
2001 and 2000, respectively. In 2002, imports of steel pipe and cold-rolled
sheets decreased 16% and 38%, respectively, compared to 2001; and imports of
hot-rolled sheets and galvanized sheets increased 61% and 39%, respectively,
compared to 2001.
Remedies under Section 201 of the Trade Act of 1974 became effective for imports
entering the U.S. on and after March 20, 2002, and are intended to provide
protection against imports from certain countries, but there are products and
countries not covered and imports of these exempt products or of products from
these countries may still have an adverse effect upon U. S. Steel's revenues and
income. Through August 2002, in the first round, the U.S. Department of Commerce
and the Office of the United States Trade Representative had granted exclusions
from the Section 201 remedies for many products. The second round of exclusions
granted were announced on March 31, 2003. The exclusions impact a number of
products produced by U. S. Steel and have weakened the protection initially
provided by this relief. Additionally, as initially imposed, the remedies
decrease each year they are in effect. For flat-rolled products, the tariff
decreased from 30% to 24% in March 2003 and will decrease to 18% in March 2004,
and the quota for slab imports that can enter the United States without
imposition of the Section 201 tariff increases from 5.4 million net tons in the
first year to 5.9 million net tons in the second year and 6.4 million net tons
in the third year, although the quantity of slabs that can actually enter the
country free of tariffs is substantially larger than that amount due to
exemptions of various slab products and exemptions of certain countries that
ship slabs.
S-48
Various countries challenged President Bush's action with the World Trade
Organization ("WTO") and have taken other actions responding to the Section 201
remedies. On May 2, 2003, the WTO Settlement Dispute Panel issued its final
decision on the challenges filed against the Section 201 action, finding that
the Section 201 action was in violation of WTO rules. U. S. Steel expects the
United States to file an appeal with the WTO. In addition, as provided by
President Bush when he announced the Section 201 action in March 2002, the U.S.
International Trade Commission, ("ITC") announced on March 5, 2003 that it had
commenced a mid-term review of the Section 201 action. The ITC will submit to
the President and Congress a report on the condition of the U.S. steel industry
and the progress made by domestic producers to adjust to competition from
imports. The ITC will conduct hearings in July as part of the review. Also, on
April 4, 2003, the ITC announced that, at the request of the House Committee of
Ways and Means, it was instituting a general fact finding investigation under
Section 332 of the Tariff Act of 1930 to examine the impact of the Section 201
tariffs on the domestic steel-consuming industries. The ITC will hold a hearing
on its investigation in June 2003. The ITC will provide the results of the
mid-term review and the Section 332 investigation in the same report. In
September 2003, the President will decide whether to continue, adjust or
terminate the relief. At the same time, the Bush Administration has continued
discussions at the Organization of Economic Cooperation and Development aimed at
the reduction of inefficient steel production capacity and the elimination and
limitation of certain subsidies to the steel industry throughout the world.
On March 31, 2002, the Canadian International Trade Tribunal ("CITT") initiated
a safeguard inquiry to determine whether imports of certain steel goods from
countries, including the U.S., had injured the Canadian steel industry. On July
5, 2002, the CITT announced its determination that the Canadian steel industry
had been injured by reason of imports of certain products including the
following which are made by U. S. Steel: cut-to-length plate, cold-rolled steel
sheet and standard pipe up to 16" o.d. On August 20, 2002, the CITT announced
that it was recommending as a remedy a three-year quota, with tariffs imposed on
tonnages exceeding the quota. This resulted in quota levels for the U.S. which
are lower than 2001 shipments. For shipments exceeding the quota levels, tariffs
would be imposed ranging from 15-25% in the first year, 11-18% in the second
year and 7-12% in the third year. The CITT's remedy recommendations were
forwarded to the Ministry of Finance, but a final decision regarding a remedy
has not yet been made.
On December 20, 2001, the European Commission commenced an anti-dumping
investigation concerning hot-rolled coils imported into the EU from the Slovak
Republic and five other countries. On January 20, 2003, the Commission issued a
final disclosure advising of its determinations relative to the dumping and
injury margins applicable to those imports. The Commission's findings set the
dumping margin applicable to those imports at 25.8% and the injury margin at
18.6%. On March 18, 2003, this case was dismissed upon the rejection by the EU's
General Affairs and External Relations Council of the Commission's proposal to
impose definitive anti-dumping duties. The Council's decision is final and,
accordingly, no anti-dumping duties will be imposed against hot-rolled coils
shipped by USSK into the EU.
Definitive measures were announced on September 27, 2002 in a separate safeguard
trade action commenced by the European Commission. In that proceeding, which is
similar to the U.S. Section 201 proceedings, quota/tariff measures were
announced relative to the import of certain steel products into the EU. USSK is
impacted by the quota/tariff measures on four products: non-alloy hot-rolled
coils, hot-rolled strip, hot-rolled sheet and cold-rolled flat products.
Shipment quotas were set for all four products. The shipment quotas applicable
to
S-49
the first year of the measure were set at 10% above the average shipments during
the period 1999-2001. An additional 5% will be added to the shipment quotas
applicable to the remainder of the safeguard measure period. The shipment quotas
on all products, other than non-alloy hot-rolled coils, are country-specific.
The non-alloy hot-rolled coil quota is a global quota. If the shipment quotas
are exceeded, tariffs will be imposed. The tariffs applicable to shipments into
the EU through March 28, 2003 were set at 17.5% for non-alloy hot-rolled coils
and 26% for the other three products. For the period March 29, 2003 through
March 28, 2004, these tariffs were reduced to 15.7% and 23.4%, respectively. On
March 29, 2004, these tariffs will again be reduced to 14.1% and 21.0%,
respectively. The safeguard measures are scheduled to expire on March 28, 2005.
These measures will be terminated at such time that Slovakia becomes a member of
the EU.
Safeguard proceedings similar to those pursued by the European Commission were
subsequently commenced by Poland and Hungary. Provisional quota/tariff measures
were imposed in Poland and Hungary. To date, the Czech Republic has neither
imposed provisional safeguard measures nor announced definitive measures, which
measures were replaced by similar definitive measures on March 8, 2003 (Poland)
and March 28, 2003 (Hungary). On April 20, 2003, the Czech Republic's Trade
Ministry published its decision dismissing the safeguard proceedings commenced
in that country, based upon its conclusion that the conditions for the
imposition of such measures were not met.
The impact on USSK of these trade actions in the EU and Central Europe cannot be
predicted at this time. However, in light of market opportunities elsewhere, the
recent dismissals of the EU hot-rolled coil anti-dumping case and the Czech
Republic's safeguard proceedings and USSK's experience operating under the
safeguard measures in place in the EU, Poland and Hungary, it appears unlikely
that these matters will have a material adverse effect on USSK's operating
profit in 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, CASH FLOWS AND
LIQUIDITY
FINANCIAL CONDITION
SFAS No. 87 "Employer's Accounting for Pensions" provides that if, at any plan
measurement date, the fair value of plan assets is less than the plan's
accumulated benefit obligation ("ABO"), the sponsor must establish a minimum
liability at least equal to the amount by which the ABO exceeds the fair value
of the plan assets and any pension asset must be removed from the balance sheet.
The sum of the liability and pension asset is offset by the recognition of an
intangible asset and/or as a direct charge to stockholders' equity, net of tax
effects. Such adjustments have no direct impact on earnings per share or cash.
At December 31, 2002, the fair value of plan assets for the pension plan for
union employees ("union plan") was $4.5 billion. Based on asset values as of
December 31, 2002, the ABO for this plan exceeded the fair value of plan assets
by $543 million. Consequently, required minimum liability adjustments were
recorded, resulting in the recognition of an intangible asset of $414 million
and a charge to equity, net of related tax effects, of $748 million at December
31, 2002.
CURRENT ASSETS at year-end 2002 increased $367 million from year-end 2001
primarily due to increased inventory balances related to higher operating rates
and the continuing expansion of Straightline, higher trade receivables resulting
from increased sales volumes in late 2002 as compared to the latter part of
2001, and an increase in cash and cash equivalents. These were
S-50
partially offset by a decline in related party receivables mainly as a result of
lower shipments and changes in the shipment mix to USS-POSCO.
NET PROPERTY, PLANT AND EQUIPMENT at year-end 2002 decreased $106 million from
year-end 2001 primarily due to capital spending that was $92 million lower than
depreciation, depletion and amortization.
The PENSION ASSET at year-end 2002 decreased $1,091 million from year-end 2001
primarily reflecting the elimination of the prepaid pension asset related to the
union plan.
The INTANGIBLE PENSION ASSET of $414 million at December 31, 2002, resulted from
the minimum liability adjustments that were recorded for the union plan.
OTHER NONCURRENT ASSETS of $144 million at year-end 2002 increased $63 million
from year-end 2001 mainly as a result of an increase in restricted cash deposits
primarily used to collateralize letters of credit to provide financial
assurance.
CURRENT LIABILITIES at year-end 2002 increased $114 million from year-end 2001
primarily due to an increase in accounts payable as a result of higher operating
levels in late 2002 as compared to the same period in 2001, and higher accrued
taxes, partially offset by lower accounts payable to related parties primarily
due to payment of a $54 million cash settlement to Marathon in accordance with
the terms of the Separation.
LONG-TERM DEBT at December 31, 2002, was $1,408 million, $26 million lower than
year-end 2001. The decrease in debt was primarily due to a repayment on the USSK
loan in April 2002.
DEFERRED INCOME TAXES at December 31, 2002, reflected a decrease of $509 million
from December 31, 2001. The change primarily resulted from the establishment of
federal and state deferred tax assets related to the adjustment to the minimum
liability for the union plan and the related intangible asset.
EMPLOYEE BENEFITS at December 31, 2002, increased $593 million from year-end
2001 primarily as a result of the $543 million minimum liability recorded for
the union plan.
ADDITIONAL PAID-IN CAPITAL increased by $214 million from December 31, 2001, due
to an equity offering of 10,925,000 common shares that was completed in May
2002, stock sales to the United States Steel Corporation Savings Fund Plan for
Salaried Employees and sales through the Dividend Reinvestment and Stock
Purchase Plan.
ACCUMULATED OTHER COMPREHENSIVE LOSS of $803 million at December 31, 2002,
increased by $754 million from year-end 2001, primarily reflecting the $748
million charge to equity resulting from the minimum liability adjustment for the
union plan.
CASH FLOWS
NET CASH PROVIDED FROM OPERATING ACTIVITIES was $279 million in 2002, a decrease
of $390 million from 2001. Absent the favorable effects of the $819 million
intergroup tax settlements from Marathon in 2001 as described below, net cash
provided from operating activities in 2002 reflected an improvement of $429
million from 2001. This improvement primarily resulted from higher net income,
partially offset by increased working capital requirements primarily as a result
of higher operating levels.
Net cash provided from operating activities was $669 million in 2001, compared
with net cash used in operating activities of $627 million in 2000. The
significant improvement was primarily due to the receipt of favorable intergroup
tax settlements from Marathon totaling $819 million
S-51
in the 2001 period compared to a favorable intergroup settlement of $91 million
in the 2000 period and the absence of $530 million of elective contributions to
a Voluntary Employee Benefit Association ("VEBA") trust and to a non-union
retiree life insurance trust. The $819 million tax settlement is reflected in
net cash provided by operating activities primarily as favorable working capital
changes of $364 million related to the settlement of the income tax receivable
established in 2000 arising from tax attributes primarily generated in the year
2000; increases in net income of $426 million for tax benefits generated by U.
S. Steel in 2001; and net increases in all other items net of $15 million for
state tax benefits generated in 2000. The last two items were included in the
$441 million settlement with Marathon, which occurred in 2001 as a result of the
Separation. Absent these intergroup tax settlements in 2001 and 2000 and the
$530 million of elective contributions in 2000 to a VEBA trust and to a
non-union retiree life insurance trust, net cash used in operating activities
decreased by $38 million. Cash payments of employee benefit liabilities were
lower in 2001 because $152 million was paid from assets held in trust, compared
to $41 million in 2000. This change was primarily the result of approximately
$112 million of funds from the VEBA trust being used to pay retiree medical and
life insurance benefits for USWA retirees in 2001. In addition, working capital
improved. These improvements were partially offset by decreased net income.
Net cash used in operating activities in 2000 was $627 million and reflected the
$500 million elective contribution to a VEBA trust, a $30 million elective
contribution to a non-union retiree life insurance trust and an income tax
receivable from Marathon of $364 million. These unfavorable effects were
partially offset by a $91 million income tax settlement with Marathon received
in 2000 primarily for the year 1999 in accordance with the group tax allocation
policy. The $500 million VEBA trust contribution has provided U. S. Steel with
the flexibility to pay ongoing costs of providing USWA retiree health care and
life insurance benefits from the VEBA trust instead of from corporate cash flow.
At December 31, 2002, the Company had $195 million of the $500 million
contribution remaining to offset future benefit payments and required VEBA
contributions. U. S. Steel expects to use approximately $180 million of the
remaining amount in 2003.
CAPITAL EXPENDITURES in 2002 were $258 million, including $97 million for USSK.
Major projects in 2002 included the quench and temper line project at Lorain
Tubular and various projects at USSK, including continued work on the new
tinning and continuous annealing lines and the sinter plant dedusting project,
completion of the scrap management and hot strip mill reheat furnace upgrade
projects, commencement of work on a new dynamo line and installation of a vacuum
degassing facility.
Capital expenditures of $287 million in 2001 included exercising a buyout option
of a lease for half of the Gary Works No. 2 Slab Caster; repairs to the No. 3
blast furnace at the Mon Valley Works; work on the No. 2 stove at the No. 6
blast furnace at Gary Works; the completion of the replacement coke battery
thruwalls at Gary Works; the completion of an upgrade to the Mon Valley Works
cold reduction mill; systems development projects; and projects at USSK,
including the tin mill expansion and the vacuum degasser project.
Capital expenditures of $244 million in 2000 included exercising an early buyout
option of a lease for half of the Gary Works No. 2 Slab Caster; the continued
replacement of coke battery thruwalls at Gary Works; installation of the
remaining two coilers at the Gary Works hot strip mill; a blast furnace stove
replacement at Gary Works; and the continuation of an upgrade to the Mon Valley
Works cold reduction mill.
S-52
U. S. Steel's domestic contract commitments to acquire property, plant and
equipment at December 31, 2002, totaled $24 million compared with $28 million at
December 31, 2001.
USSK has a commitment to the Slovak government for a capital improvements
program of $700 million, subject to certain conditions, over a period commencing
with the acquisition date of November 24, 2000, and ending on December 31, 2010.
The remaining commitments under this capital improvements program as of December
31, 2002, and December 31, 2001, were $541 million and $634 million,
respectively.
Capital expenditures for 2003 are expected to be approximately $350 million,
including approximately $100 million for USSK and $25 million for National. We
are evaluating whether to advance approximately $20 million of capital spending
for USSK currently planned for 2004. Major expenditures include completion of
the installation of a new quench and temper line at Lorain Tubular; replacing
the top stack on the Gary No. 8 blast furnace; and projects at USSK, including
completion of the new tin and continuous annealing lines and the sinter plant
dedusting project, and continued work on the new dynamo line, which is scheduled
to start up in 2004. The amounts set forth above do not include capital
expenditures that may be made in connection with the proposed acquisition of
Sartid. For additional information, see "Outlook."
The preceding statement concerning expected 2003 capital expenditures is a
forward-looking statement. This forward-looking statement is based on
assumptions, which can be affected by (among other things) levels of cash flow
from operations, general economic conditions, business conditions, availability
of capital, whether or not assets are purchased or financed by operating leases,
and unforeseen hazards such as weather conditions, explosions or fires, which
could delay the timing of completion of particular capital projects.
Accordingly, actual results may differ materially from current expectations in
the forward-looking statement.
The ACQUISITION OF U. S. STEEL KOSICE consisted of cash payments of $38 million
in 2002, $14 million in 2001 and net cash payments of $10 million in 2000, which
reflected $69 million of cash payments less $59 million of cash acquired in the
transaction. An additional payment of $38 million is to be made to VSZ in 2003
related to the purchase. The first quarter 2001 acquisition of East Chicago Tin
and reorganization of Transtar were noncash transactions.
DISPOSAL OF ASSETS in 2002 consisted mainly of proceeds from the sale of U. S.
Steel's investment in stock of VSZ which was previously discussed, and the
sale/leaseback of certain assets.
RESTRICTED CASH--DEPOSITS of $72 million in 2002 were mainly used to
collateralize letters of credit to meet financial assurance requirements.
INVESTEES--RETURN OF CAPITAL in 2001 of $13 million reflected a return of
capital on the investment in stock of VSZ.
NET CHANGE IN ATTRIBUTED PORTION OF MARATHON CONSOLIDATED DEBT AND OTHER
FINANCIAL OBLIGATIONS was a decrease of $74 million in 2001 compared to an
increase of $1,208 million in 2000. The decrease in 2001 primarily reflected the
net effects of cash provided from operating activities less cash used for
investing activities and dividend payments. The increase in 2000 primarily
reflected the net effects of cash used in operating activities, including a
contribution to a VEBA trust, cash used in investing activities, dividend
payments and preferred stock repurchases.
REPAYMENT OF SPECIFICALLY ATTRIBUTED DEBT in 2001 of $370 million was primarily
due to the termination and repayment of the accounts receivable facility, which
was accounted for as secured borrowing and specifically attributed to U. S.
Steel prior to the Separation.
S-53
SETTLEMENT WITH MARATHON of $54 million in 2002 reflected a cash payment made
during the first quarter in accordance with the terms of the Separation.
REPAYMENT OF LONG-TERM DEBT in 2002 was mainly on the USSK loan.
COMMON STOCK ISSUED in 2002 reflected $192 million of net proceeds from U. S.
Steel's equity offering completed in May 2002, proceeds from stock sales to the
United States Steel Corporation Savings Fund Plan for Salaried Employees and
sales through the Dividend Reinvestment and Stock Purchase Plan.
DIVIDENDS PAID in 2002 were $19 million, compared with $57 million in 2001 and
$97 million in 2000. Dividends paid in 2002 reflected the quarterly dividend
rate of $0.05 per share established by U. S. Steel after the Separation, and
effective with the March 2002 payment. Dividends paid in 2001 decreased $40
million from year 2000 due to a decrease in the quarterly dividend rate from
$0.25 to $0.10 per share paid to USX-U. S. Steel Group common stockholders,
effective with the June 2001 payment. Dividends paid in 2001 and 2000 also
included quarterly dividends on the 6.50% Cumulative Convertible Preferred Stock
that was retained and repaid by Marathon as part of the Separation.
For discussion of restrictions on future dividend payments, see "Liquidity."
DEBT RATINGS
On January 9, 2003, Standard & Poor's Ratings Services placed its credit ratings
for U. S. Steel on credit watch with negative implications. On the same day,
Moody's Investors Service placed its ratings for U. S. Steel under review for
possible downgrade and Fitch Ratings placed its ratings for U. S. Steel on
rating watch negative. These actions followed U. S. Steel's announced bid for
certain assets of National. For further discussion about the bid, see "Outlook."
As of January 9, 2003, Standard & Poor's, Moody's and Fitch Ratings have
assigned BB, Ba3 and BB ratings, respectively, to U. S. Steel's senior unsecured
debt.
LIQUIDITY
We intend to use the proceeds from this offering, the net proceeds from the
offering of 7.00% Series B Mandatory Convertible Preferred Shares issued in
February 2003 and sales of approximately $300 million of accounts receivable
under our receivable sales program to finance the acquisition of substantially
all of the assets of National.
In November 2001, U. S. Steel entered into a five-year Receivables Purchase
Agreement with financial institutions. U. S. Steel established a wholly owned
subsidiary, U. S. Steel Receivables LLC ("USSR"), which is a consolidated
special-purpose, bankruptcy-remote entity that acquires, on a daily basis,
eligible trade receivables generated by U. S. Steel and certain of its
subsidiaries. USSR can sell an undivided interest in these receivables to
certain commercial paper conduits. USSR pays the conduits a discount based on
the conduits' borrowing costs plus incremental fees, certain of which are
determined by credit ratings of U. S. Steel.
Fundings under the facility are limited to the lesser of eligible receivables or
$400 million. We expect to enter into an amendment to the receivables sales
program, which would increase fundings under the facility to the lesser of
eligible receivables or $500 million effective upon the closing of the National
transaction. Eligible receivables exclude certain obligors, amounts in excess of
defined percentages for certain obligors, and amounts past due or due beyond a
defined period. In addition, eligible receivables are calculated by deducting
certain reserves,
S-54
which are based on various determinants including concentration, dilution and
loss percentages, as well as the credit ratings of U. S. Steel. As of December
31, 2002, U. S. Steel had $343 million of eligible receivables, none of which
were sold.
While the term of the Receivables Purchase Agreement is five years, the facility
also terminates on the occurrence and failure to cure certain events, including,
among others, certain defaults with respect to the inventory facility described
below and other debt obligations, any failure of USSR to maintain certain ratios
related to the collectability of the receivables, and failure to extend the
commitments of the commercial paper conduits' liquidity providers, which
currently terminate on November 26, 2003.
In addition, U. S. Steel entered into a three-year revolving credit facility
expiring December 31, 2004, that provides for borrowings of up to $400 million
secured by all domestic inventory and related assets, including receivables
other than those sold under the Receivables Purchase Agreement. The amount
outstanding under the inventory facility cannot exceed the permitted "borrowing
base," calculated on percentages of the value of eligible inventory. Borrowings
under the facility bear interest at a rate equal to LIBOR or the prime rate plus
an applicable margin determined by credit ratings of U. S. Steel. As of December
31, 2002, $397 million was available to U. S. Steel under the inventory
facility. Effective upon the closing of the National transaction we will enter
into a new revolving inventory credit facility, which provides for borrowings of
up to $600 million. This facility expires in May 2007.
USSK has a $10 million short-term credit facility and a $40 million long-term
credit facility. At December 31, 2002, $48 million was available under these
facilities.
In July 2001, we issued $385 million of 10 3/4% senior notes due August 1, 2008
(the "Senior Notes"), and in September 2001, we issued an additional $150
million of Senior Notes. As of December 31, 2002, the aggregate principal amount
of Senior Notes outstanding was $535 million.
The Senior Notes impose limitations on U. S. Steel's ability to make restricted
payments. Restricted payments under the indenture include the declaration or
payment of dividends on capital stock; the purchase, redemption or other
acquisition or retirement for value of capital stock; the retirement of any
subordinated obligations prior to their scheduled maturity; and the making of
any investments other than those specifically permitted under the indenture. In
order to make restricted payments, U. S. Steel must satisfy certain requirements
which include a consolidated coverage ratio based on EBITDA and consolidated
interest expense for the four most recent quarters. In addition, the total of
all restricted payments made since the Senior Notes were issued, excluding up to
$50 million of dividends paid on common stock through the end of 2003, cannot
exceed the cumulative cash proceeds from the sale of capital stock and certain
investments plus 50% of consolidated net income from October 1, 2001, through
the most recent quarter-end treated as one accounting period, or, if there is a
consolidated net loss for the period, less 100% of such consolidated net loss. A
complete description of the requirements and defined terms such as restricted
payments, EBITDA and consolidated net income can be found in the indenture for
the Senior Notes that was filed as Exhibit 4(f) to U. S. Steel's Annual Report
on Form 10-K for the year ended December 31, 2001.
As of December 31, 2002, U. S. Steel met the consolidated coverage ratio and had
in excess of $90 million of availability to make restricted payments under the
calculation described in the preceding paragraph. Also, exclusive of any
limitations imposed, U. S. Steel can make aggregate dividend payments of up to
$50 million on common stock from the third quarter of 2001 through the end of
2003, of which U. S. Steel has paid $38 million as of December 31,
S-55
2002. In addition to the remaining $12 million available through the end of
2003, U. S. Steel has the ability to make other restricted payments of up to $28
million as of December 31, 2002, which could also be used for dividend payments.
U. S. Steel's ability to declare and pay dividends or make other restricted
payments in the future is subject to U. S. Steel's ability to continue to meet
the consolidated coverage ratio and have amounts available under the calculation
or one of the exclusions just discussed.
The Senior Notes also impose other significant restrictions on U. S. Steel such
as the following: limits on additional borrowings, including limiting the amount
of borrowings secured by inventories or accounts receivable; limits on
sale/leasebacks; limits on the use of funds from asset sales and sale of the
stock of subsidiaries; and restrictions on our ability to invest in joint
ventures or make certain acquisitions. The new inventory credit facility
includes a fixed charge coverage ratio, calculated as the ratio of operating
cash flow to cash charges as defined in the agreement, of not less than 1.25
times on the last day of any fiscal quarter. This coverage ratio must be met if
availability, as defined in the agreement, is less than $100 million.
If these covenants are breached or if U. S. Steel fails to make payments under
our material debt obligations or the Receivables Purchase Agreement, creditors
would be able to terminate their commitments to make further loans, declare
their outstanding obligations immediately due and payable and foreclose on any
collateral, and it may also cause termination events to occur under the
Receivables Purchase Agreement and a default under the Senior Notes. Additional
indebtedness that U. S. Steel may incur in the future may also contain similar
covenants, as well as other restrictive provisions. Cross-default and
cross-acceleration clauses in the Receivables Purchase Agreement, the Inventory
Facility, the Senior Notes and any future additional indebtedness could have an
adverse effect upon our financial position and liquidity.
U. S. Steel was in compliance with all of its debt covenants at March 31, 2003.
On February 10, 2003, U. S. Steel sold 5 million shares of 7.00% Series B
Mandatory Convertible Preferred Shares. The Series B Preferred were issued under
outstanding universal shelf registration statements. Proceeds from the offering
will be used to pay a portion of the purchase price of the National transaction.
Dividend payments related to the 5 million shares of Series B Preferred will be
approximately $18 million per year. These dividends will be considered
restricted payments under the Senior Note covenants described above; however,
the amount U. S. Steel has available to make restricted payments increased by
the $242 million of net proceeds received from the sale of the Series B
Preferred. The number of common shares that could be issued upon conversion of
the 5 million shares of Series B Preferred ranges from approximately 16.0
million shares to 19.2 million shares, based upon the timing of the conversion
and the market price of U. S. Steel's common stock.
U. S. Steel has utilized surety bonds, trusts and letters of credit to provide
financial assurance for certain transactions and business activities. The total
amount of active surety bonds, trusts and letters of credit currently being used
for financial assurance purposes is approximately $147 million. Events over the
last two years have caused major changes in the surety bond market including
significant increases in surety bond premiums and reduced market capacity. These
factors, together with our non-investment grade credit rating, have caused U. S.
Steel to replace some surety bonds with other forms of financial assurance. The
use of other forms of financial assurance and collateral have a negative impact
on liquidity. During 2002, U. S. Steel used $65 million of liquidity sources to
provide financial assurance and expects to use $25 to $60 million of additional
liquidity sources for these purposes in 2003, depending on the requirements of
the various authorities involved. These amounts do not reflect any additional
S-56
requirements for the acquired National facilities, which we currently expect to
approximate $10 million.
The very high property taxes at U. S. Steel's Gary Works facility in Indiana
continue to be detrimental to Gary Works' competitive position, both when
compared to competitors in Indiana and with other steel facilities in the United
States and abroad. U. S. Steel is a party to several property tax disputes
involving Gary Works, including claims for refunds of approximately $65 million
pertaining to tax years 1994-96 and 1999 and assessments of approximately $110
million in excess of amounts paid for the 2000 and 2001 tax years. In addition,
interest may be imposed upon any final assessment. The disputes involve property
values and tax rates and are in various stages of administrative appeals. U. S.
Steel is vigorously defending against the assessments and pursuing its claims
for refunds.
U. S. Steel was contingently liable for debt and other obligations of Marathon
in the amount of $168 million as of December 31, 2002. In the event of the
bankruptcy of Marathon, these obligations for which U. S. Steel is contingently
liable, as well as obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes in the amount of $471 million that
were assumed by U. S. Steel from Marathon, may be declared immediately due and
payable. If that occurs, U. S. Steel may not be able to satisfy such
obligations. In addition, if Marathon loses its investment grade ratings,
certain of these obligations will be considered indebtedness under the Senior
Notes indenture and for covenant calculations under the Inventory Facility. This
occurrence could prevent U. S. Steel from incurring additional indebtedness
under the Senior Notes or may cause a default under the inventory facility.
The following table summarizes U. S. Steel's liquidity as of December 31, 2002:
--------------------------------------------------------------------
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------
Cash and cash equivalents................................. $ 243
Amount available under receivables purchase agreement..... 343
Amount available under inventory facility................. 397
Amounts available under USSK credit facilities............ 48
------
Total estimated liquidity.............................. $1,031
--------------------------------------------------------------------
The following table summarizes U. S. Steel's pro forma liquidity as of December
31, 2002, after giving effect to the closing of the National transaction, the
increase in the receivables sales program, the new inventory credit facility,
and the issuance of 5,000,000 shares of Mandatory Convertible Preferred Shares,
which were issued on February 10, 2003. This table does not reflect cash
expended since December 31, 2002. The amounts available represent our estimates
based on information currently available.
--------------------------------------------------------------------
(DOLLARS IN MILLIONS)
--------------------------------------------------------------------
Cash and cash equivalents................................. $ 243
Amount available under receivables purchase agreement..... 203
Amount available under new inventory facility............. 597
Amounts available under USSK credit facilities............ 48
------
Total estimated pro forma liquidity.................... $1,091
--------------------------------------------------------------------
S-57
The following table summarizes U. S. Steel's contractual obligations at December
31, 2002, and the effect such obligations are expected to have on its liquidity
and cash flow in future periods.
-------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-------------------------------------------
2004 2006
THROUGH THROUGH BEYOND
CONTRACTUAL OBLIGATIONS TOTAL 2003 2005 2007 2007
-------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Long-term debt and capital leases(a).......... $1,438 $ 26 $ 50 $ 61 $1,301
Operating leases(b)........................... 499 82 165 86 166
Capital commitments(c)........................ 565 14 10 241 300
Environmental commitments(c).................. 135 28 -- -- 107(d)
Usher Separation bonus(c)..................... 3 -- 3 --
Additional consideration for USSK
purchase(e)................................. 38 38 -- -- --
Other post-retirement benefits................ (f) 40 435 520 (f)
-------------------------------------------
Total contractual obligations............ (g) $228 $663 $908 (g)
-------------------------------------------------------------------------------------------
(a) See Note 11 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(b) See Note 17 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(c) See Note 25 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(d) Timing of potential cash outflows is not determinable.
(e) See Note 14 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(f) U. S. Steel accrues an annual cost for these benefit obligations under plans
covering its active and retiree populations in accordance with generally
accepted accounting principles. These obligations will require corporate
cash in future years to the extent that trust assets are restricted or
insufficient and to the extent that company contributions are required by
law or union labor agreement. Amounts in the year 2003 through 2007 reflect
our current estimate of corporate cash outflows and are net of the use of
funds available from a VEBA trust. The accuracy of this forecast of future
cash flows depends on various factors such as actual asset returns, the mix
of assets within the asset trusts, medical escalation and discount rates
used to calculate obligations, the availability of surplus pension assets
allowable for transfer to pay retiree medical claims and company decisions
or VEBA restrictions that impact the timing of the use of trust assets.
Also, as such, the amounts shown could differ significantly from what is
actually expended and, at this time, it is impossible to make an accurate
prediction of cash requirements beyond five years.
(g) Amount of contractual cash obligations is not determinable because other
post-retirement benefit cash obligations are not estimable beyond five
years, as discussed in (f) above.
Contingent lease payments have been excluded from the above table. Contingent
lease payments relate to operating lease agreements that include a floating
rental charge, which is associated to a variable component. Future contingent
lease payments are not determinable to any degree of certainty. Additionally,
recorded liabilities related to deferred income taxes and other liabilities that
may have an impact on liquidity and cash flow in future periods are excluded
from the above table.
The following table summarizes contractual obligations of U. S. Steel in respect
of leased assets related to the National transaction.
--------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
---------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Capital leases............................... $ 4 $ 2 $ 2 -- -- $--
Operating leases............................. 136 30 37 $33 $33 28
--------------------------------------------------------------------------------------------
S-58
Pension obligations have been excluded from the above table. With the
ratification of the new labor agreement and the purchase of National's assets,
U. S. Steel intends to merge its pension plan for union employees and its
pension plan for nonunion employees. After the merger, U. S. Steel does not
anticipate that it will be able to transfer surplus plan assets to reimburse
retiree medical expenses as it has done for several years from its nonunion
pension plan. In 2002, this transfer totaled $18 million. Preliminary funding
valuations indicate that the merged plan will not require cash funding for the
2003 or 2004 plan years. Thereafter, we broadly estimate annual funding
requirements of approximately $90 million per year. We may also make voluntary
contributions in one or more future periods in order to mitigate potentially
larger required contributions in later years. The actual level of funding will
depend upon various factors such as future asset performance, the level of
interest rates used to measure ERISA minimum funding levels, the impacts of
business acquisitions or sales, union negotiated changes, the impact of the
expected downsizing of the workforce and future government regulation. Any such
funding requirements could have an unfavorable impact on U. S. Steel's debt
covenants, borrowing arrangements and cash flows.
The following table summarizes U. S. Steel's commercial commitments at December
31, 2002, and the effect such commitments could have on its liquidity and cash
flow in future periods.
-------------------------------------------------------------------------------------------
SCHEDULED REDUCTIONS BY PERIOD
------------------------------------------
2004 2006
THROUGH THROUGH BEYOND
COMMERCIAL COMMITMENTS TOTAL 2003 2005 2007 2007
-------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Standby letters of credit(a)................... $ 64 $ 50 $ 9 $ -- $ 5(c)
Surety bonds(a)................................ 73 46 -- -- 27(c)
Funded trusts(a)............................... 7 7 -- -- --
Clairton 1314B partnership(a)(b)(d)............ 150 -- -- -- 150(c)
Guarantees of indebtedness of unconsolidated
entities(a)(d)............................... 27 3 9 6 9
Contingent liabilities:
--Marathon obligations(a)(d)................. 168 29 39 41 59
--Unconditional purchase obligations(e)...... 717 170 368 141 38
------------------------------------------
Total commercial commitments.............. $1,206 $305 $ 425 $ 188 $ 288
-------------------------------------------------------------------------------------------
(a) Reflects a commitment or guarantee for which future cash outflow is not
considered likely.
(b) See Note 15 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(c) Timing of potential cash outflows is not determinable.
(d) See Note 25 to U. S. Steel's financial statements included elsewhere in this
prospectus.
(e) Reflects contractual purchase commitments ("take or pay" arrangements)
primarily for purchases of substrate and certain energy sources.
Following the acquisition of National, we may also have commitments for surety
bonds and similar obligations related to the acquired business. In addition, we
expect to enter into an agreement with the owner of a coke-making facility
located at one of National's plants to purchase coke made at that facility.
National purchased approximately $100 million of coke from that facility in 2002
under a contract that we did not assume.
In October 2002, U. S. Steel granted an option to purchase its shares of VSZ. U.
S. Steel subsequently sold these shares. Cash proceeds of $31 million were
received in consideration for
S-59
the option and the sale of the shares, which resulted in a pre-tax gain of $20
million in the fourth quarter. U. S. Steel previously accounted for its
investment in VSZ under the cost method.
U. S. Steel management believes that U. S. Steel's liquidity will be adequate to
satisfy its obligations for the foreseeable future, including obligations to
complete currently authorized capital spending programs. Future requirements for
U. S. Steel's business needs, including the funding of capital expenditures,
debt service for outstanding financings, and any amounts that may ultimately be
paid in connection with contingencies, are expected to be financed by a
combination of internally generated funds (including asset sales), proceeds from
the sale of stock, borrowings and other external financing sources. However,
there is no assurance that our business will generate sufficient operating cash
flow or that external financing sources will be available in an amount
sufficient to enable us to service or refinance our indebtedness or to fund
other liquidity needs. If there is a prolonged delay in the recovery of the
manufacturing sector of the U.S. economy, U. S. Steel believes that it can
maintain adequate liquidity through a combination of deferral of nonessential
capital spending, sales of non-strategic assets and other cash conservation
measures.
U. S. Steel management's opinion concerning liquidity and U. S. Steel's ability
to avail itself in the future of the financing options mentioned in the above
forward-looking statements are based on currently available information. To the
extent that this information proves to be inaccurate, future availability of
financing may be adversely affected. Factors that could affect the availability
of financing include the performance of U. S. Steel (as measured by various
factors including cash provided from operating activities), levels of
inventories and accounts receivable, the state of worldwide debt and equity
markets, investor perceptions and expectations of past and future performance,
the overall U.S. financial climate, and, in particular, with respect to
borrowings, the level of U. S. Steel's outstanding debt and credit ratings by
rating agencies.
Derivative instruments
See "--Quantitative and qualitative disclosures about market risk" for
discussion of derivative instruments and associated market risk for U. S. Steel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ENVIRONMENTAL MATTERS, LITIGATION AND
CONTINGENCIES
U. S. Steel has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of U. S. Steel's products and services, operating results will be
adversely affected. U. S. Steel believes that its major domestic integrated
steel competitors are confronted by substantially similar conditions and thus
does not believe that its relative position with regard to such competitors is
materially affected by the impact of environmental laws and regulations.
However, the costs and operating restrictions necessary for compliance with
environmental laws and regulations may have an adverse effect on U. S. Steel's
competitive position with regard to domestic mini-mills and some foreign steel
producers and producers of materials which compete with steel, which may not be
required to undertake equivalent costs in their operations. In addition, the
specific impact on each competitor may vary depending on a
S-60
number of factors, including the age and location of its operating facilities
and its production methods.
USSK is subject to the laws of the Slovak Republic. The environmental laws of
the Slovak Republic generally follow the requirements of the EU, which are
comparable to domestic standards. USSK has also entered into an agreement with
the Slovak government to bring, over time, its facilities into EU environmental
compliance.
U. S. Steel's environmental expenditures for the last three years were (a):
----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------
Domestic:
Capital................................................... $ 4 $ 5 $ 18
Compliance
Operating & maintenance................................ 171 184 194
Remediation(b)......................................... 36 26 18
--------------------
Total Domestic....................................... $211 $215 $230
USSK:
Capital................................................... $ 10 $ 10 $ --
Compliance
Operating & maintenance................................ 8 6 --
Remediation............................................ 1 -- --
--------------------
Total Domestic and USSK.............................. $230 $231 $230
----------------------------------------------------------------------------------
(a) Based on previously established U.S. Department of Commerce survey
guidelines.
(b) These amounts include spending charged against remediation reserves, net of
recoveries where permissible, but do not include noncash provisions recorded
for environmental remediation.
U. S. Steel's environmental capital expenditures accounted for 5% of total
capital expenditures in 2002 and 2001, and 7% in 2000.
Compliance expenditures represented 3% of U. S. Steel's total costs and expenses
in 2002 and 2001, and 4% of U. S. Steel's total costs and expenses in 2000.
Remediation spending during 2000 to 2002 was mainly related to remediation
activities at former and present operating locations. These projects include
remediation of contaminated sediments in a river that receives discharges from
Gary Works and the closure of permitted hazardous and non-hazardous waste
landfills.
The Resource Conservation and Recovery Act ("RCRA") establishes standards for
the management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
storage tanks.
U. S. Steel is in the study phase of RCRA corrective action programs at its
Fairless Plant and its former Geneva Works. A RCRA corrective action program has
been initiated at Gary Works and Fairfield Works. Until the studies are
completed at these facilities, U. S. Steel is unable to estimate the total cost
of remediation activities that will be required.
On October 23, 1998, a final Administrative Order on Consent was issued by the
U.S. Environmental Protection Agency ("EPA") addressing Corrective Action for
Solid Waste Management Units throughout Gary Works. This order requires U. S.
Steel to perform a RCRA Facility Investigation ("RFI") and a Corrective Measure
Study ("CMS") at Gary Works. The Current Conditions Report, U. S. Steel's first
deliverable, was submitted to the EPA in January
S-61
1997 and was approved by the EPA in 1998. Phase I RFI work plans have been
approved for the Coke Plant, the Process Sewers, and Background Soils at the
site, along with the approval of one self-implementing interim stabilization
measure. Another eight Phase I RFI work plans have been submitted for EPA
approval, thereby completing the Phase I requirement, along with two Phase II
RFI work plans and one further self-implementing interim stabilization measure.
The costs of these studies are estimated to be $5.8 million. Until they are
completed, it is impossible to assess what additional expenditures will be
necessary.
At Gary Works, U. S. Steel has agreed to close three hazardous waste disposal
sites located on plant property. The D2 disposal site and a nearby refuse area
will be closed collectively. A Corrective Action Management Unit ("CAMU") for
the West End Maintenance Area of Gary Works has been proposed that will include
wastes from the D5 and T2 disposal sites. Total costs to close D2, D5, T2 and
the refuse area are estimated to be $18.8 million.
In January 1992, U. S. Steel commenced negotiations with the EPA regarding the
terms of an Administrative Order on consent, pursuant to the RCRA, under which
U. S. Steel would perform a RFI and a CMS at its Fairless Plant. A Phase I RFI
report was submitted during the third quarter of 1997. A Phase II/III RFI will
be submitted following EPA approval of the Phase I report. The RFI/CMS will
determine whether there is a need for, and the scope of, any remedial activities
at the Fairless Plant.
In December 1995, U. S. Steel reached an agreement in principle with the EPA and
the U.S. Department of Justice ("DOJ") with respect to alleged RCRA violations
at Fairfield Works. A consent decree was signed by U. S. Steel, the EPA and the
DOJ and filed with the United States District Court for the Northern District of
Alabama (United States of America v. USX Corporation) on December 11, 1997,
under which U. S. Steel will pay a civil penalty of $1 million, implement two
Supplemental Environmental Projects ("SEPs") costing a total of $1.75 million
and implement a RCRA corrective action at the facility. One SEP was completed
during 1998 at a cost of $250,000. The second SEP is under way. As of February
22, 2000, the Alabama Department of Environmental Management assumed primary
responsibility for regulation and oversight of the RCRA corrective action
program at Fairfield Works, with the approval of the EPA. The first Phase I RFI
work plan was approved for the site on September 16, 2002. Field sampling for
the work plan commenced immediately after approval and will continue through the
end of 2003. The cost to complete this study is estimated to be $657,000.
U. S. Steel has been notified that it is a potentially responsible party ("PRP")
at 21 waste sites under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") as of December 31, 2002. In addition, there are 13
sites related to U. S. Steel where it has received information requests or other
indications that it may be a PRP under CERCLA but where sufficient information
is not presently available to confirm the existence of liability or make any
judgment as to the amount thereof. There are also 37 additional sites related to
U. S. Steel where remediation is being sought under other environmental
statutes, both federal and state, or where private parties are seeking
remediation through discussions or litigation. At many of these sites, U. S.
Steel is one of a number of parties involved and the total cost of remediation,
as well as U. S. Steel's share thereof, is frequently dependent upon the outcome
of investigations and remedial studies. U. S. Steel accrues for environmental
remediation activities when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate
S-62
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
In October 1996, U. S. Steel was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The public trustees
completed a pre-assessment screen pursuant to federal regulations and have
determined to perform a Natural Resource Damages Assessment. U. S. Steel was
identified as a PRP along with 15 other companies owning property along the
river and harbor canal. U. S. Steel and eight other PRPs have formed a joint
defense group. The trustees notified the public of their plan for assessment and
later adopted the plan. In 2000, the trustees concluded their assessment of
sediment injuries, which included a technical review of environmental
conditions. The PRP joint defense group has proposed terms for the settlement of
this claim, which have been endorsed by representatives of the trustees and the
EPA to be included in a consent decree that U. S. Steel expects will resolve
this claim. U. S. Steel agreed to pay to the public trustees $20.5 million over
a five-year period for restoration costs, plus $1.0 million in assessment costs,
and obtained an 8-acre parcel of land that has been transferred to the Indiana
Department of Natural Resources for addition to the Indiana Dunes National
Lakeshore Park owned by the National Park Service. No formal legal proceedings
have been filed in this matter.
On January 26, 1998, pursuant to an action filed by the EPA in the United States
District Court for the Northern District of Indiana titled United States of
America v. USX Corporation, U. S. Steel entered into a consent decree with the
EPA which resolved alleged violations of the Clean Water Act National Pollution
Discharge Elimination System ("NPDES") permit at Gary Works and provides for a
sediment remediation project for a section of the Grand Calumet River that runs
through Gary Works. Contemporaneously, U. S. Steel entered into a consent decree
with the public trustees, which resolves potential liability for natural
resource damages on the same section of the Grand Calumet River. In 1999, U. S.
Steel paid civil penalties of $2.9 million for the alleged water act violations
and $0.5 million in natural resource damages assessment costs. In addition, U.
S. Steel will pay the public trustees $1.0 million at the end of the remediation
project for future monitoring costs and U. S. Steel is obligated to purchase and
restore several parcels of property that have been or will be conveyed to the
trustees. During the negotiations leading up to the settlement with the EPA,
capital improvements were made to upgrade plant systems to comply with the NPDES
requirements. As of December 31, 2002, the sediment remediation project is an
approved final interim measure under the corrective action program for Gary
Works. As of December 31, 2002, project costs have amounted to $29.1 million
with another $14.2 million presently projected to complete the project, over the
next 12 months. Construction began in January 2002 on a CAMU to contain the
dredged material. The Toxic Substances Control Act unit within the CAMU is
complete; the remaining construction was completed in February 2003. Phase 1
removal of PCB-contaminated sediment was conducted in December 2002. Dredging
resumed in February 2003 and will continue until dredging on the river is
concluded, which is expected to occur in October 2003. Closure costs for the
CAMU are estimated to be an additional $4.9 million.
At the former Duluth Works in Minnesota, U. S. Steel spent a total of
approximately $12.1 million through 2002. The Duluth Works was listed by the
Minnesota Pollution Control Agency under the Minnesota Environmental Response
and Liability Act on its Permanent List of Priorities. The EPA has consolidated
and included the Duluth Works site with the other sites on
S-63
the EPA's National Priorities List. The Duluth Works cleanup has proceeded since
1989. U. S. Steel is conducting an engineering study of the estuary sediments.
Depending upon the method and extent of remediation at this site, future costs
are presently unknown and indeterminable. Additional study and oversight costs
through 2003 are estimated at $765,000.
In 1997, USS/Kobe, a joint venture between U. S. Steel and Kobe Steel, Ltd.
("Kobe"), was the subject of a multi-media audit by the EPA that included an
air, water and hazardous waste compliance review. USS/Kobe and the EPA entered
into a tolling agreement pending issuance of the final audit and commenced
settlement negotiations in July 1999. In August 1999, the steelmaking and bar
producing operations of USS/Kobe were combined with companies controlled by
Blackstone Capital Partners II to form Republic. The tubular operations of USS/
Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC
("Lorain Tubular"), which operated as a joint venture between U. S. Steel and
Kobe until December 31, 1999, when U. S. Steel purchased all of Kobe's interest
in Lorain Tubular. Republic and U. S. Steel are continuing negotiations with the
EPA. Most of the matters raised by the EPA relate to Republic's facilities;
however, air discharges from U. S. Steel's No. 3 seamless pipe mill have also
been cited. U. S. Steel will be responsible for matters relating to its
facilities. The final report and citations from the EPA have not been issued.
On February 12, 1987, U. S. Steel and the Pennsylvania Department of
Environmental Resources ("PADER") entered into a Consent Order to resolve an
incident in January 1985 involving the alleged unauthorized discharge of benzene
and other organic pollutants from Clairton Works in Clairton, Pennsylvania. That
Consent Order required U. S. Steel to pay a penalty of $50,000 and a monthly
payment of $2,500 for five years. In 1990, U. S. Steel and the PADER reached
agreement to amend the Consent Order. Under the amended Order, U. S. Steel
agreed to remediate the Peters Creek Lagoon, a former coke plant waste disposal
site; to pay a penalty of $300,000; and to pay a monthly penalty of up to $1,500
each month until the former disposal site is closed. Remediation costs have
amounted to $10.2 million with another $1.4 million presently projected to
complete the project.
In 1988, U. S. Steel and two other PRPs (Bethlehem Steel Corporation and William
Fiore) agreed to the issuance of an administrative order by the EPA to undertake
emergency removal work at the Municipal & Industrial Disposal Co. site in
Elizabeth Township, Pennsylvania. The cost of such removal, which has been
completed, was approximately $4.2 million, of which U. S. Steel paid $3.4
million. The EPA indicated that further remediation of this site would be
required. In October 1991, the PADER placed the site on the Pennsylvania State
Superfund list and began a Remedial Investigation, which was issued in 1997.
After a feasibility study by the Pennsylvania Department of Environmental
Protection ("PADEP") and submission of a conceptual remediation plan in 2001 by
U. S. Steel, U. S. Steel submitted a revised conceptual remedial action plan on
May 31, 2002. U. S. Steel and PADEP signed a consent decree on August 30, 2002,
under which U. S. Steel is responsible for remediation of this site. This
consent decree has been noticed for public comments. U. S. Steel estimates its
future liability at the site to be $6.8 million.
In September 2001, U. S. Steel agreed to an Administrative Order on Consent with
the State of North Carolina for the assessment and cleanup of a Greensboro,
North Carolina fertilizer manufacturing site. The site was owned by Armour
Agriculture Chemical Company (now named Viad) from 1912 to 1968. U. S. Steel
owned the site from 1968 to 1986 and sold the site to LaRoche Industries in
1986. The agreed order allocated responsibility for assessment and cleanup costs
as follows: Viad--48%, U. S. Steel--26% and LaRoche--26%; and LaRoche was
S-64
appointed to be the lead party responsible for conducting the cleanup. In March
2001, U. S. Steel was notified that LaRoche had filed for protection under the
bankruptcy law. On August 23, 2001, the allocation of responsibility for this
site assessment and cleanup and the cost allocation was approved by the
bankruptcy court in the LaRoche bankruptcy. The estimated remediation costs are
$4.4 million to $5.7 million. U. S. Steel's estimated share of these costs is
$1.6 million.
New or expanded environmental requirements, which could increase U. S. Steel's
environmental costs, may arise in the future. U. S. Steel intends to comply with
all legal requirements regarding the environment, but since many of them are not
fixed or presently determinable (even under existing legislation) and may be
affected by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may be incurred
and penalties which may be imposed. However, based on presently available
information, and existing laws and regulations as currently implemented, U. S.
Steel does not anticipate that environmental compliance expenditures (including
operating and maintenance and remediation) will materially increase in 2003. U.
S. Steel's environmental capital expenditures are expected to be approximately
$28 million in 2003 primarily related to projects at USSK (approximately $16
million), Gary Works and Fairfield Works. Predictions beyond 2003 can only be
broad-based estimates, which have varied, and will continue to vary, due to the
ongoing evolution of specific regulatory requirements, the possible imposition
of more stringent requirements and the availability of new technologies to
remediate sites, among other matters. Based upon currently identified projects,
U. S. Steel anticipates that environmental capital expenditures will be
approximately $68 million in 2004 including $55 million for USSK; however,
actual expenditures may vary as the number and scope of environmental projects
are revised as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are identified or
additional requirements are imposed.
We are a defendant in a large number of cases in which approximately 14,000
claimants actively allege injury resulting from exposure to asbestos. Almost all
of these cases involve multiple plaintiffs and multiple defendants. These claims
fall into three major groups: (1) claims made under certain federal and general
maritime laws by employees of the Great Lakes Fleet or Intercoastal Fleet,
former operations of U. S. Steel; (2) claims made by persons who performed work
at U. S. Steel facilities (referred to as "premises claims"); and (3) claims
made by industrial workers allegedly exposed to an electrical cable product
formerly manufactured by U. S. Steel. While U. S. Steel has excess casualty
insurance, these policies have multi-million dollar self insured retentions and,
to date, U. S. Steel has not received any payments under these policies relating
to asbestos claims. In most cases, this excess casualty insurance is the only
insurance applicable to asbestos claims.
These cases allege a variety of respiratory and other diseases based on alleged
exposure to asbestos contained in a U. S. Steel electric cable product or to
asbestos on U. S. Steel's premises; approximately 200 plaintiffs allege they are
suffering from mesothelioma. Virtually all asbestos cases seek money damages
from multiple defendants. U. S. Steel is unable to provide meaningful disclosure
about the total amount of such damages alleged in these cases for the following
reasons: (1) many cases do not claim a specific demand for damages, or contain a
demand that is stated only as being in excess of the minimum jurisdictional
limit of the relevant court; (2) even where there are specific demands for
damages, there is no meaningful way to determine what amount of the damages
would or could be assessed against any particular defendant; (3) plaintiffs'
lawyers often allege the same amount of damages irrespective of the specific
harm that has been alleged, even though the ultimate outcome of
S-65
any claim may depend upon the actual disease, if any, that the plaintiff is able
to prove and the actual exposure, if any, to the U. S. Steel product or the
duration of exposure, if any, on U. S. Steel's premises. U. S. Steel believes
the amount of any damages alleged in the complaints initially filed in these
cases is not relevant in assessing our potential liability.
U. S. Steel aggressively pursues grounds for the dismissal of U. S. Steel from
pending cases and we make efforts to settle appropriate cases for reasonable,
and frequently nominal, amounts. For example, in 2000, we settled 22 claims for
an aggregate total payment of approximately $80,000; in 2001, we settled
approximately 11,000 claims for an aggregate total payment of approximately
$190,000; and, in 2002, we settled approximately 1,100 claims for an aggregate
total payment of approximately $700,000. In those three years, 3,860, 1,679 and
842, respectively, new claims were filed.
We also litigate cases to verdict where we believe that litigation is
appropriate. Until March 2003, we were successful in all asbestos cases that we
tried to final judgment. On March 28, 2003, a jury in Madison County, Illinois
returned a verdict against U. S. Steel for $50 million in compensatory damages
and $200 million in punitive damages. The plaintiff, an Indiana resident,
alleged he was exposed to asbestos while working as a U. S. Steel employee at
our Gary Works in Gary, Indiana from 1950 to 1981 and that he suffers from
mesothelioma as a result. U. S. Steel believes the plaintiff's exclusive remedy
was provided by the Indiana workers' compensation law and that this issue and
other errors at trial would have enabled U. S. Steel to succeed on appeal.
However, in order to avoid the delay and uncertainties of further litigation and
having to post an appeal bond equal to the amount of the verdict and to allow U.
S. Steel to actively pursue its current acquisition activities and other
strategic initiatives, U. S. Steel settled this case and the settlement was
reflected in financial results for the first quarter of 2003.
Management views the Madison County verdict as aberrational and continues to
believe that it is unlikely that the resolution of the pending asbestos actions
against us would have a material adverse effect on our financial condition.
Among the factors considered in reaching this conclusion were: (1) that U. S.
Steel had been subject to a total of approximately 34,000 asbestos claims over
the last 12 years that had been administratively dismissed or were inactive due
to the failure of the claimants to present any medical evidence supporting their
claims; (2) that over the last several years, the total number of pending claims
had remained steady; (3) that it had been many years since U. S. Steel employed
maritime workers or manufactured electrical cable; and (4) U. S. Steel's history
of trial outcomes, settlements and dismissals, including such matters since the
March 28 jury decision. Management concluded the recent verdict in Madison
County, Illinois was an aberration and that the likelihood of similar results is
remote, although not impossible.
This statement of belief is a forward-looking statement. Predictions as to the
outcome of pending litigation are subject to substantial uncertainties with
respect to (among other things) factual and judicial determinations, and actual
results could differ materially from those expressed in this forward-looking
statement. We do not know whether the jury verdict described above will have any
impact upon the number of claims filed against us in the future or on the amount
of future settlements.
U. S. Steel is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material to the U. S. Steel Financial Statements. However, management
S-66
believes that U. S. Steel will remain a viable and competitive enterprise even
though it is possible that these contingencies could be resolved unfavorably to
U. S. Steel.
OUTLOOK
Looking ahead, even though U. S. Steel is experiencing a softening of the order
book that is expected to have an impact late in the second quarter, shipments
for the Flat-rolled segment are expected to improve somewhat from first quarter
levels. Second quarter average realized prices are expected to decline slightly
primarily due to weakening spot markets. Second quarter natural gas prices,
while significantly higher than in last year's second quarter, are expected to
decline from the first quarter of 2003. Costs in the second quarter will be
negatively impacted by approximately $40 million for scheduled repair outages
for U. S. Steel's largest blast furnace, the hot strip mill and other major
units at Gary Works. For full-year 2003, Flat-rolled shipments are expected to
approximate 10.0 million net tons.
For the Tubular segment, second quarter shipments are projected to be up
moderately from the first quarter, and the average realized price is expected to
be slightly lower than in the first quarter. Shipments for full-year 2003 are
expected to be approximately 1.0 million net tons. The new quench and temper
line at Lorain Tubular will commence start-up in May with full facility
availability expected in July.
USSK second quarter shipments are expected to be about equal to shipments in the
first quarter 2003. Shipments for the full year are projected to be
approximately 4.4 million net tons. USSK's second quarter average realized price
is expected to increase compared to first quarter 2003 due to an April 1, 2003,
price increase of 20 euros per metric ton for all products. This increase will
be partially offset by an unfavorable change in product mix projected for the
second quarter. A new continuous annealing line is currently being commissioned
and will be fully operational by the end of the second quarter. It is expected
to reach full production during the third quarter when a new electrolytic
tinning line commences operation.
NATIONAL STEEL
Based on a preliminary assessment, U. S. Steel expects annual acquisition
synergies of at least $200 million within two years of completing the
transaction. These synergies do not include the effect of the elimination of
costs related to National's pension and retiree medical and life insurance
plans, which have not been assumed by U. S. Steel, the reduction in depreciation
as a result of a reduced basis in the assets acquired from National, or savings
related to application of the new labor contract to existing U. S. Steel
facilities. These synergies are expected to result from a number of actions
including increased scheduling and operating efficiencies, the elimination of
redundant overhead costs, the reduction of freight costs and the effects of the
new labor contract as it relates to active employees at the acquired National
facilities. For further discussion of the new labor contract, see "--USWA
agreement."
SARTID
Beginning in March 2002 and continuing throughout the year, USSK entered into
various commercial arrangements with Sartid, an integrated steel company with
facilities located in Smederevo and Sabac in the Republic of Serbia. Tolling
agreements provide for the conversion of cold-rolled full hard into tin-coated
products, and raw materials into hot-rolled bands and other finished products.
USSK retains ownership of these materials and markets all of the
S-67
finished products. A facility management agreement requires USSK to provide
management oversight of Sartid's tin processing facilities in Sabac.
On July 30, 2002, Sartid was placed into bankruptcy and shortly thereafter the
bankruptcy administrator affirmed USSK's agreements with Sartid. At the request
of the bankruptcy administrator, a Commercial and Technical Support Agreement
was entered into on November 8, 2002, between USSK and the bankruptcy
administrator, under which USSK has been retained to provide commercial,
technical and financial support as necessary to assist the bankruptcy
administrator in the operation of the Smederevo Facility.
On March 31, 2003, U. S. Steel Balkan, a wholly-owned U. S. Steel subsidiary,
agreed to purchase out of bankruptcy Sartid a.d. and six of its subsidiaries for
a total purchase price of $23 million. This transaction, which is targeted for
completion during the third quarter of 2003, is subject to several conditions,
including the successful completion of anti-monopoly review by competition
authorities in several countries.
In a related agreement, which will become effective upon the completion of the
acquisition, U. S. Steel Balkan will commit to future spending of up to $150
million over five years for working capital and the repair, rehabilitation,
improvement, modification and upgrade of the facilities. A portion of this
spending is subject to certain conditions related to Sartid's commercial
operations, cash flow and viability. In addition, U. S. Steel Balkan has agreed
to refrain from layoffs for a period of three years. Sartid has approximately
9,000 employees. The agreement requires U. S. Steel Balkan to obtain the consent
of the Serbian government prior to a transfer of a controlling interest of
Sartid within five years of the closing date. U. S. Steel Balkan will conduct
economic development activities over the course of three years and spend no less
than $1.5 million on these efforts U. S. Steel Balkan and has agreed to support
community, charitable and sport activities in a total amount of not less than $5
million during the three-year period following closing of the transaction.
Sartid's production facilities include an integrated mill with annual raw steel
design production capability of 2.4 million net tons, although Sartid is
currently operating at less than half of capacity. Sartid's steel production has
averaged 500,000 tons per year during the past two years, which is substantially
below design capacity due to Sartid's financial difficulties. U. S. Steel
believes that with needed rehabilitation and investments, Sartid's long-term raw
steelmaking capability could be increased to slightly more than 2 million tons
per year. Sartid primarily produces sheet products and its tinning facility has
an annual capability of 130,000 tons.
POLSKIE HUTY STALI
On April 22, 2003, U. S. Steel submitted a confidential offer to the Government
of Poland for the purchase of Polskie Huty Stali S.A. ("PHS"), the
government-owned steel Company. PHS operates four facilities including the two
largest integrated steel mills in Poland, which currently have annual raw steel
production capability of approximately 9.0 million tons. PHS's steelmaking
capability is expected to be reduced as a result of negotiations related to
Poland's accession into the European Union. PHS primarily produces blooms,
rails, wire and other long products, as well as sheet products. PHS has debts of
approximately $1.4 billion, much of which is owed to other government entities.
A senior Polish official has stated that the Polish government is seeking an
investor to (i) restructure PHS debt which is expected to be in an amount
between $350 million and $600 million, (ii) make a capital infusion of
approximately $150 million, and (iii) honor the commitments made by the Polish
government to the European
S-68
Union concerning PHS, the most significant of which include capability
reductions to approximately 8 million tons, personnel reductions, and making
certain specified capital investments. U. S. Steel broadly estimates the cost of
required capital projects required under the European Union agreement to be
between $300 million and $350 million through 2006. The Polish government has
announced that two final bids have been submitted and that it will commence
further discussions with one or more bidders in May 2003. U. S. Steel expects
that such discussions will be substantial but cannot predict whether the Polish
government will engage in discussions with U. S. Steel, the timing of such
negotiations, and the final terms of any agreement. We do not know whether
additional bidders will emerge.
DISPOSITIONS
U. S. Steel is negotiating an asset purchase agreement to sell all of the coal
and related assets associated with U. S. Steel Mining Company's West Virginia
and Alabama mines for approximately $57 million. U. S. Steel anticipates that
this sale will result in a pre-tax loss of approximately $9 million. The loss
reflects approximately $36 million of other obligations related to lease expense
prepaid by the buyer and certain fee and inventory purchase commitments, and
indemnification provided by U. S. Steel. In addition, U. S. Steel remains
secondarily liable for the withdrawal fee in the event the purchaser withdraws
from the multiemployer pension plan covering employees of the mining business
within five years of the closing date. The withdrawal fee is currently broadly
appraised at approximately $80 million. Furthermore, potential material
incremental employee liabilities could be required to be recorded should the
buyer have a plan to reduce the workforce which would increase the loss on sale.
In addition to the loss on the sale of these assets, we will recognize the
present value of obligations related to a multiemployer health care benefit plan
created by the Coal Industry Retiree Health Benefit Act of 1992. These
obligations, which were broadly estimated to be $76 million at December 31, 2002
and would result in an extraordinary loss of approximately $50 million on an
after-tax basis, will be recognized when the sale is consummated. U. S. Steel
Mining recorded income from operations in 2002 of $42 million, which included
$38 million resulting from a federal excise tax refund. U. S. Steel Mining
recorded operating losses in each of the four years prior to 2002.
On April 25, 2003, U. S. Steel sold certain coal seam gas interests in Alabama
for net proceeds of approximately $34 million, all of which will be reflected in
revenues and other income. These interests generated revenues and pre-tax income
of approximately $8 million in 2002. U. S. Steel also has a non-binding letter
of intent to sell most of our remaining mineral interests for net proceeds of
approximately $75 million.
On October 16, 2002, U. S. Steel announced that it had signed a letter of intent
to sell its raw materials and transportation businesses to an entity to be
formed by affiliates of Apollo Management, L.P. In connection with a new labor
agreement with the USWA, U. S. Steel has agreed not to pursue the sale of these
businesses and on April 30, 2003 the letter of intent expired.
In line with U. S. Steel's strategy to monetize non-strategic assets, management
is also considering conveying certain timber properties to one or more employee
benefit plans.
USWA AGREEMENT
The new labor agreement reached by U. S. Steel and the USWA, which expires in
2008, provides for a workforce restructuring through which U. S. Steel expects
to achieve productivity
S-69
improvements of at least 20% at both U. S. Steel and National facilities. U. S.
Steel will record liabilities, as part of the purchase price of the National
transaction related to current active National employees primarily for future
retiree medical costs, subject to certain eligibility requirements. These
liabilities are broadly estimated at $290 million, of which at least $35 million
for early retirement incentives and lump sum payments to the Steelworkers
Pension Trust is expected to have a cash impact in 2003. The Steelworkers
Pension Trust is a multi-employer pension plan to which U. S. Steel will make
defined contributions per hour worked for all National union employees who join
U. S. Steel and, in the future, for all new employees represented by the USWA.
Implementation of the new labor agreement and related actions for U. S. Steel
employees and retirees will result in charges broadly estimated to be $440
million, of which approximately $115 million for early retirement incentives is
expected to have a cash impact in 2003. The balance mainly relates to the
recognition of deferred actuarial losses as a result of an expected 2003 pension
plan curtailment triggered by the anticipated early retirements. The agreement
also enables U. S. Steel to significantly reduce its employee and retiree
healthcare expenses through the introduction of variable cost sharing
mechanisms. U. S. Steel also anticipates realigning its non-represented staff in
the near-term so as to achieve significant productivity gains, the effects of
which are not reflected in the foregoing amounts.
PENSION AND OPEB
Based on preliminary actuarial evaluations as of January 2003, the company
expected annual net periodic pension costs for 2003 to be $65 million and annual
retiree medical and life insurance costs for 2003 to be $203 million, excluding
multiemployer plans. Since the expected return on assets component of net
periodic cost is based upon a market-related value that recognizes changes in
fair value over three years, net periodic pension costs will also be
progressively higher in 2004 and 2005. In 2002, U. S. Steel recorded a credit of
$103 million for pensions (excluding settlement charges of $100 million) and a
$138 million expense for retiree medical and life insurance (excluding
multiemployer plans). Pension costs are expected to increase from 2002 primarily
because of lower plan assets, average asset return assumptions that have been
reduced from 8.8 percent to 8.2 percent, and a discount rate that has been
reduced from 7.0 percent to 6.25 percent. The anticipated increase in retiree
medical and life insurance costs primarily reflects unfavorable health care
claims cost experience in 2002 for union retirees, the use of the lower discount
rate and higher assumed medical cost inflation. For 2003, a 10% annual rate of
increase in the per capita cost of covered health care benefits has been
assumed. This rate is assumed to decrease gradually to an ultimate rate of 4.75%
for 2010 and remain at that level thereafter. As a result of the above factors
and payments made in 2002 from benefit plans, U. S. Steel's underfunded benefit
obligations for retiree medical and life insurance increased from $1.8 billion
at year-end 2001 to $2.6 billion at year-end 2002. We estimate that our unfunded
benefit obligation at year-end 2003 will also be $2.6 billion as the favorable
impact of the new labor agreement is offset by the inclusion of active employees
at the National facilities and payments in 2003 out of the voluntary employee
benefit trust we maintain for union retirees. Also, the funded status of the
projected pension benefit obligation declined from an overfunded position of
$1.2 billion at year-end 2001 to an underfunded position of $0.4 billion at
year-end 2002. With the expected workforce reduction and certain retirement rate
assumption changes, the merged plan is expected to have a year-end 2003
underfunded position of approximately $0.9 billion. Pension costs are expected
to increase to approximately $145 million, assuming the workforce reduction
occurs mid-year. This amount
S-70
does not include expenses for defined contribution payments to the Steelworkers
Pension Trust for National union employees. In addition to the increase in net
periodic pension expense, one-time charges of approximately $285 million,
associated with the workforce reduction, are expected. No required minimum
funding of the pensions are expected for 2003 or 2004, although voluntary
contributions are a possibility.
U. S. Steel intends to merge its two major pension plans covering benefits for
most domestic U. S. Steel employees and retirees. Due to the plan merger,
pension accounting rules may require that U. S. Steel record an additional
minimum liability, which would result in a non-cash net charge against equity
currently estimated in a range of $750 to $800 million. However, because of
uncertainties regarding the funded status of these plans at the merger date, it
is also possible that no additional minimum liability entries will be recorded
and, if this occurs, U. S. Steel will reverse the $748 million net charge
against equity that was recorded in the fourth quarter of 2002. These entries
will have no impact on income.
PROPERTY TAXES
Legislation enacted in Indiana in April 2003 permits certain steel companies and
refinery operations to claim additional depreciation on older facilities for
Indiana property tax reporting. As a result of this legislation, U. S. Steel is
projected to realize a reduction in Gary Works property tax expenses of
approximately $11 million in 2003 compared with 2002.
This discussion of our outlook for 2003 contains forward-looking statements with
respect to market conditions, operating costs, shipments and prices, potential
asset dispositions and potential acquisitions. Some factors, among others, that
could affect 2003 market conditions, costs, shipments and prices for both
domestic operations and USSK include product demand, prices and mix, global and
company steel production levels, plant operating performance, the timing and
completion of facility projects, natural gas prices and usage, changes in
environmental, tax and other laws, the resumption of operation of steel
facilities sold under the bankruptcy laws, and U.S. and European economic
performance and political developments. Domestic steel shipments and prices
could be affected by import levels and actions taken by the U.S. Government and
its agencies. Additional factors that may affect USSK's results are foreign
currency fluctuations and political factors in Europe that include, but are not
limited to, taxation, nationalization, inflation, currency fluctuations,
increased regulation, export quotas, tariffs, and other protectionist measures.
Whether any of the acquisitions described above will be consummated and the
timing of such consummation will depend upon a number of factors, many of which
are beyond the control of U. S. Steel. Factors that may impact the occurrence
and timing of the acquisition of Sartid include the successful completion of
anti-monopoly review by competition authorities in several countries. Factors
that may impact the occurrence and timing of the acquisition of PHS include
actions and decisions of the Polish government, anti-monopoly review in several
countries and negotiation of definitive documentation. Consummation of the sale
of the mining assets will depend upon a number of factors including regulatory
approvals and the ability of the purchasers to arrange financing.
ACCOUNTING STANDARDS
On January 1, 2002, U. S. Steel adopted SFAS No. 141 "Business Combinations,"
No. 142 "Goodwill and Other Intangible Assets" and No. 144 "Accounting for
Impairment or Disposal of Long-Lived Assets." There was no financial statement
implication related to the initial adoption of these Statements. For more
information see Note 4 to the Financial Statements.
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and
S-71
Technical Corrections." Generally, SFAS No. 145 is effective for transactions
occurring after May 15, 2002. There was no financial statement implication
related to the adoption of this Statement. For more information see Note 4 to
the Financial Statements.
The adoption of these Statements has not affected U. S. Steel's critical
accounting estimates.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 establishes a new accounting model for the
recognition and measurement of retirement obligations associated with tangible
long-lived assets. SFAS No. 143 requires that an asset retirement obligation
should be capitalized as part of the cost of the related long-lived asset and
subsequently allocated to expense using a systematic and rational method. U. S.
Steel adopted this Statement effective January 1, 2003. The transition
adjustment of less than $15 million, net of tax, resulting from the adoption of
SFAS No. 143 will be reported as a cumulative effect of a change in accounting
principle in the first quarter of 2003.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
was issued in July 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities. The scope of SFAS
No. 146 includes (1) costs to terminate contracts that are not capital leases;
(2) costs to consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. The provisions of this Statement
will be effective for exit or disposal activities initiated after December 31,
2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation elaborates on the disclosure to be
made by a guarantor about obligations under certain guarantees that it has
issued. It also clarifies that at the inception of a guarantee, the company must
recognize liability for the fair value of the obligation undertaken in issuing
the guarantee. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements have been adopted for the 2002 annual financial
statements. U. S. Steel will apply the remaining provisions of the
Interpretation prospectively as required.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The Company has adopted the
annual disclosure provisions of SFAS No. 148 and will adopt the interim
provisions effective with the first quarter of 2003. The Company is not changing
to the fair value based method of accounting for stock-based employee
compensation; therefore, the transition provisions are not applicable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MANAGEMENT OPINION CONCERNING DERIVATIVE INSTRUMENTS
U. S. Steel uses commodity-based and foreign currency derivative instruments to
manage its price risk. Management has authorized the use of futures, forwards,
swaps and options to manage exposure to price fluctuations related to the
purchase of natural gas, heating oil and nonferrous metals and also certain
business transactions denominated in foreign currencies.
S-72
Derivative instruments used for trading and other activities are
marked-to-market and the resulting gains or losses are recognized in the current
period in income from operations. While U. S. Steel's risk management activities
generally reduce market risk exposure due to unfavorable commodity price changes
for raw material purchases and products sold, such activities can also encompass
strategies that assume price risk.
Management believes that the use of derivative instruments, along with risk
assessment procedures and internal controls, does not expose U. S. Steel to
material risk. The use of derivative instruments could materially affect U. S.
Steel's results of operations in particular quarterly or annual periods;
however, management believes that use of these instruments will not have a
material adverse effect on financial position or liquidity. For a summary of
accounting policies related to derivative instruments, see Note 3 to the
Financial Statements.
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of its business, U. S. Steel is exposed to market risk or
price fluctuations related to the purchase, production or sale of steel
products. To a lesser extent, U. S. Steel is exposed to price risk related to
the purchase, production or sale of coal and coke and the purchase of natural
gas, steel scrap, iron ore and pellets, and certain nonferrous metals used as
raw materials.
U. S. Steel's market risk strategy has generally been to obtain competitive
prices for its products and services and allow operating results to reflect
market price movements dictated by supply and demand; however, U. S. Steel uses
derivative commodity instruments (primarily over-the-counter commodity swaps) to
manage exposure to fluctuations in the purchase price of natural gas and certain
nonferrous metals. The use of these instruments has not been significant in
relation to U. S. Steel's overall business activity.
Sensitivity analyses of the incremental effects on pre-tax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of December 31, 2002, and December 31, 2001, are
provided in the following table:
----------------------------------------------------------------------------------------------
INCREMENTAL
DECREASE IN
PRETAX INCOME
ASSUMING A
HYPOTHETICAL PRICE
DECREASE OF(A)
------------------
2002 2001
--------------- ------------------
COMMODITY-BASED DERIVATIVE INSTRUMENTS 10% 25% 10% 25%
----------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Zinc................................................ $2.8 $7.0 $3.5 $8.9
Tin................................................. 0.5 1.2 0.2 0.6
----------------------------------------------------------------------------------------------
(a) With the adoption of SFAS No. 133, the definition of a derivative instrument
has been expanded to include certain fixed price physical commodity
contracts. Such instruments are included in the above table. Amounts reflect
the estimated incremental effect on pre-tax income of hypothetical 10% and
25% decreases in closing commodity prices for each open contract position at
December 31, 2002, and December 31, 2001. Management evaluates the portfolio
of derivative commodity instruments on an ongoing basis and adjusts
strategies to reflect anticipated market conditions, changes in risk
profiles and overall business objectives. Changes to the portfolio
subsequent to December 31, 2002, may cause future pre-tax income effects to
differ from those presented in the table.
U. S. Steel recorded net pre-tax losses on other than trading activity of $6
million in 2002, losses of $13 million in 2001 and gains of $2 million in 2000.
These gains and losses were offset by changes in the realized prices of the
underlying hedged commodities.
S-73
INTEREST RATE RISK
U. S. Steel is subject to the effects of interest rate fluctuations on certain
of its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in year-end 2002 and
2001 interest rates on the fair value of U. S. Steel's non-derivative financial
instruments is provided in the following table:
---------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
-------------------------------------------------------
2002 2001
-------------------------- --------------------------
INCREMENTAL INCREMENTAL
INCREASE IN INCREASE IN
NON-DERIVATIVE FINANCIAL INSTRUMENTS(A) FAIR VALUE FAIR VALUE(B) FAIR VALUE FAIR VALUE(B)
---------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Financial assets:
Investments and long-term receivables... $ 45 $-- $ 42 $--
Financial liabilities:
Long-term debt(c)(d).................... $1,165 $72 $1,122 $79
---------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes payable,
accounts payable and accrued interest approximate carrying value and are
relatively insensitive to changes in interest rates due to the short-term
maturity of the instruments. Accordingly, these instruments are excluded
from the table.
(b) Reflects, by class of financial instrument, the estimated incremental effect
of a hypothetical 10% decrease in interest rates at December 31, 2002, and
December 31, 2001, on the fair value of U. S. Steel's non-derivative
financial instruments. For financial liabilities, this assumes a 10%
decrease in the weighted average yield to maturity of U. S. Steel's
long-term debt at December 31, 2002, and December 31, 2001.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities.
At December 31, 2002, U. S. Steel's portfolio of long-term debt was comprised
primarily of fixed-rate instruments. Therefore, the fair value of the portfolio
is relatively sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $72 million increase in the fair value of
long-term debt assuming a hypothetical 10% decrease in interest rates. However,
U. S. Steel's sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect U. S. Steel's
results and cash flows only to the extent that U. S. Steel elected to repurchase
or otherwise retire all or a portion of its fixed-rate debt portfolio at prices
above carrying value.
FOREIGN CURRENCY EXCHANGE RATE RISK
U. S. Steel, primarily through USSK, is subject to the risk of price
fluctuations due to the effects of exchange rates on revenues and operating
costs, firm commitments for capital expenditures and existing assets or
liabilities denominated in currencies other than U.S. dollars, in particular the
euro and Slovak koruna. U. S. Steel has not generally used derivative
instruments to manage this risk. However, U. S. Steel has made limited use of
forward currency contracts to manage exposure to certain currency price
fluctuations. At December 31, 2002, U. S. Steel had open euro forward sale
contracts for both U.S. dollar (total notional value of approximately $15.0
million) and Slovak koruna (total notional value of approximately $26.6
million). A 10% increase in the December 31, 2002 euro forward rates would
result in an additional $4.2 million charge to income.
S-74
EQUITY PRICE RISK
On October 9, 2002, U. S. Steel sold its investment in VSZ. Prior to that time,
U. S. Steel was subject to equity price risk and market liquidity risk related
to that investment.
SAFE HARBOR
U. S. Steel's quantitative and qualitative disclosures about market risk include
forward-looking statements with respect to management's opinion about risks
associated with U. S. Steel's use of derivative instruments. These statements
are based on certain assumptions with respect to market prices and industry
supply of and demand for steel products and certain raw materials. To the extent
that these assumptions prove to be inaccurate, future outcomes with respect to
U. S. Steel's hedging programs may differ materially from those discussed in the
forward-looking statements.
S-75
BUSINESS--U. S. STEEL
U. S. Steel owns and operates the former steel businesses of USX Corporation,
now named Marathon Oil Corporation. Prior to December 31, 2001, the businesses
of U. S. Steel comprised an operating unit of Marathon. Marathon had two
outstanding classes of common stock: USX-Marathon Group common stock, which was
intended to reflect the performance of Marathon's energy business, and USX-U. S.
Steel Group common stock ("Steel Stock"), which was intended to reflect the
performance of Marathon's steel business. On December 31, 2001, U. S. Steel was
capitalized through the issuance of 89.2 million shares of common stock to the
holders of Steel Stock in exchange for all outstanding shares of Steel Stock on
a one-for-one basis.
The following table sets forth the total revenues of U. S. Steel for each of the
last three years.
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
REVENUES AND OTHER INCOME 2002 2001 2000
--------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Revenues by product:
Sheet and semi-finished steel products.................... $4,048 $3,163 $3,288
Tubular products.......................................... 554 755 754
Plate and tin mill products............................... 1,057 1,273 977
Raw materials (coal, coke and iron ore)................... 502 485 626
Other(a).................................................. 788 610 445
Income (loss) from investees................................ 33 64 (8)
Net gains on disposal of assets............................. 29 22 46
Other income................................................ 43 3 4
------------------------
Total revenues and other income........................... $7,054 $6,375 $6,132
--------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production by-products,
transportation services; steel mill products distribution; the management of
mineral resources; the management and development of real estate; and
engineering and consulting services.
STEEL INDUSTRY BACKGROUND AND COMPETITION
The steel industry is cyclical and highly competitive and is affected by excess
global capacity, which has restricted price increases during periods of economic
growth and led to price decreases during periods of economic contraction. In
addition, the steel industry faces competition in many markets from producers of
materials such as aluminum, cement, composites, glass, plastics and wood.
U. S. Steel is the largest integrated steel producer in North America and,
through its subsidiary USSK, the largest integrated flat-rolled producer in
Central Europe. U. S. Steel competes with many domestic and foreign steel
producers. Competitors include integrated producers which, like U. S. Steel, use
iron ore and coke as primary raw materials for steel production, and mini-
mills, which primarily use steel scrap and, increasingly, iron bearing
feedstocks as raw materials. Mini-mills generally produce a narrower range of
steel products than integrated producers, but typically enjoy certain
competitive advantages in the markets in which they compete through lower
capital expenditures for construction of facilities and non-unionized work
forces with lower total employment costs and more flexible work rules.
Mini-mills utilize thin slab casting technology to produce flat-rolled products
and are increasingly able to compete directly with integrated producers of
flat-rolled products. Depending on market conditions, the production
S-76
generated by flat-rolled mini-mills could have an adverse effect on U. S.
Steel's selling prices and shipment levels.
The domestic steel industry is restructuring after many years of oversupply and
low prices attributable largely to excess imports, which resulted in significant
capacity closures starting in late 2000 and led to the introduction of Section
201 import tariffs in March 2002. The combination of capacity closures, trade
restrictions and the imposition of tariffs led to a recovery of steel prices
from 20-year lows in late 2001 and early 2002. U. S. Steel benefited in 2002
from reduced domestic supply resulting from the temporary or permanent closure
of steelmaking capacity, as well as the Section 201 remedies announced by
President Bush on March 5, 2002.
Despite the trade remedies, steel imports to the United States accounted for an
estimated 26% of the domestic steel market in 2002, compared to 24% and 26%, for
2001 and 2000, respectively. In 2002, imports of steel pipe and cold-rolled
sheets decreased 16% and 38%, respectively, compared to 2001; and imports of hot
rolled sheets and galvanized sheets increased 61% and 39%, respectively,
compared to 2001.
Remedies under Section 201 of the Trade Act of 1974 became effective for imports
entering the U.S. on and after March 20, 2002, and are intended to provide
relief to the U.S. steel industry that would remedy the injury caused by
increased imports, but there are products and countries not covered, and imports
of these exempt products or of products from these countries may still have an
adverse effect upon U. S. Steel's revenues and income. Through August 2002, in
the first round, the U.S. Department of Commerce and the Office of the United
States Trade Representative had granted exclusions from the Section 201 remedies
for many products. The second round of exclusions granted were announced on
March 21, 2003. The Office of the United States Trade Representative has stated
that these will be the only exclusions granted in 2003. Processing requests for
exclusions is in process. The exclusions impact a number of products produced by
U. S. Steel and have weakened the relief. Additionally, as initially imposed,
the remedies decrease each year they are in effect. For flat-rolled products,
the tariff decreases from 30% in the first year to 24% in the second year and
16% in the third year, and the quota for slab imports that can enter the United
States without imposition of the Section 201 tariff increases from 5.4 million
net tons in the first year to 5.9 million net tons in the second year and 6.4
million net tons in the third year, although the quantity of slabs that can
actually enter the country free of tariffs is substantially larger than that
amount due to exemptions of various slab products and exemptions of certain
countries that ship slabs.
Various countries challenged President Bush's action with the World Trade
Organization ("WTO") and have taken other actions responding to the Section 201
remedies. On May 2, 2003, the WTO Settlement Dispute Panel issued its final
decision on the challenges filed against the Section 201 action, finding that
the Section 201 action was in violation of WTO rules. U. S. Steel expects the
United States to file an appeal with the WTO. In addition, as provided by
President Bush when he announced the Section 201 action in March 2002, the U.S.
International Trade Commission announced on March 5, 2003 that it had initiated
a mid-term review of the Section 201 action. The ITC will submit to the
President and Congress a report on the condition of the U.S. steel industry and
the progress made by domestic producers to adjust to competition from imports.
The ITC will conduct hearings in July as part of the review. Also, on April 4,
2003, the ITC announced that, at the request of the House Committee on Ways and
Means, it was instituting a general factfinding investigation under Section 332
of
S-77
the Tariff Act of 1930 to examine the impact of the Section 201 tariffs on the
domestic steel-consuming industries. The ITC will hold a hearing on its
investigation in June 2003. The ITC will provide the results of the mid-term
review and the Section 332 investigation in the same report. In September 2003,
the President will decide whether to continue, adjust or terminate the relief.
At the same time, the Bush Administration has continued discussions at the
Organization of Economic Cooperation and Development aimed at the reduction of
inefficient steel production capacity and the elimination and limitation of
certain subsidies to the steel industry throughout the world.
On March 31, 2002, the Canadian International Trade Tribunal ("CITT") initiated
a safeguard inquiry to determine whether imports of certain steel goods from
countries, including the United States, had injured the Canadian steel industry.
On July 5, 2002, the CITT announced its determination that the Canadian steel
industry had been injured by reason of imports of certain products including the
following which are made by U. S. Steel: cut-to-length plate, cold-rolled steel
sheet and standard pipe up to 16" o.d. On August 20, 2002, the CITT announced
that it was recommending as a remedy a three-year quota, with tariffs imposed on
tonnages exceeding the quota. This resulted in quota levels for the United
States which are lower than 2001 shipments. For shipments exceeding the quota
levels, tariffs would be imposed ranging from 15-25% in the first year, 11-18%
in the second year and 7-12% in the third year. The CITT's remedy
recommendations were forwarded to the Ministry of Finance, but a final decision
regarding a remedy has not yet been made.
U. S. Steel's domestic businesses are subject to numerous federal, state and
local laws and regulations relating to the storage, handling, emission and
discharge of environmentally sensitive materials. U. S. Steel believes that its
major domestic integrated steel competitors are confronted by substantially
similar conditions and thus does not believe that its relative position with
regard to such competitors is materially affected by the impact of environmental
laws and regulations. However, the costs and operating restrictions necessary
for compliance with environmental laws and regulations may have an adverse
effect on U. S. Steel's competitive position with regard to domestic mini-mills
and some foreign steel producers and producers of materials which compete with
steel, which may not be required to undertake equivalent costs in their
operations. In addition, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities and its production methods. For further information, see
"Business--Legal proceedings--Environmental proceedings" and "Management's
discussion and analysis of financial condition and results of
operations--Management's discussion and analysis of environmental matters,
litigation and contingencies."
USSK does business primarily in Central and Western Europe and is subject to
market conditions in those areas which are influenced by many of the same
factors which affect domestic markets, as well as matters peculiar to
international markets such as quotas and tariffs. USSK is affected by the
worldwide overcapacity in the steel industry and the cyclical nature of demand
for steel products and the sensitivity of that demand to worldwide general
economic conditions. In particular, USSK is subject to economic conditions and
political factors in Europe, which if changed could negatively affect its
results of operations and cash flow. Political factors include, but are not
limited to, taxation, nationalization, inflation, currency fluctuations,
increased regulation, and quotas, tariffs and other protectionist measures. USSK
is also subject to foreign currency exchange risks because its revenues are
primarily in euros and its costs are primarily in Slovak koruna and U.S.
dollars.
S-78
On December 20, 2001, the European Commission commenced an anti-dumping
investigation concerning hot-rolled coils imported into the European Union
("EU") from the Slovak Republic and five other countries. On January 20, 2003,
the Commission issued a final disclosure advising of its determinations relative
to the dumping and injury margins applicable to those imports. The Commission's
findings set the dumping margin applicable to those imports at 25.8% and the
injury margin at 18.6%. On March 18, 2003, this case was dismissed upon the
rejection by the EU's General Affairs and External Relations Council of the
Commission's proposal to impose definitive anti-dumping duties. The Council's
decision is final and, accordingly, no anti-dumping duties will be imposed
against hot-rolled coils shipped by USSK into the EU.
Definitive measures were announced on September 27, 2002 in a separate safeguard
trade action commenced by the European Commission. In that proceeding, which is
similar to the U.S. Section 201 proceedings, quota/tariff measures were
announced relative to the import of certain steel products into the EU. USSK is
impacted by the quota/tariff measures on four products: non-alloy hot-rolled
coils, hot-rolled strip, hot-rolled sheet and cold-rolled flat products.
Shipment quotas were set for all four products. The shipment quotas applicable
to the first year of the measure were set at 10% above the average shipments
during the period 1999-2001. An additional 5% will be added to the shipment
quotas applicable to the remainder of the safeguard measure period. The shipment
quotas on all products, other than non-alloy hot-rolled coils, are
country-specific. The non-alloy hot-rolled coil quota is a global quota. If the
shipment quotas are exceeded, tariffs will be imposed. The tariffs applicable to
shipments into the EU through March 28, 2003, were set at 17.5% for non-alloy
hot-rolled coils and 26% for the other three products. For the period March 29,
2003 through March 28, 2004, these tariffs were reduced to 15.7% and 23.4%,
respectively. On March 29, 2004, these tariffs will again be reduced to 14.1%
and 21.0%, respectively. The safeguard measures are scheduled to expire on March
28, 2005. These measures will be terminated at such time that Slovakia becomes a
member of the EU.
Safeguard proceedings similar to those pursued by the European Commission were
subsequently commenced by Poland and Hungary. Provisional quota/tariff measures
were imposed in Poland and Hungary, which measures were replaced by similar
definitive measures on March 8, 2003 (Poland) and March 28, 2003 (Hungary). On
April 30, 2003, the Czech Republic's Trade Ministry published its decision
dismissing the safeguard proceedings commenced in that country, based upon its
conclusion that the conditions for the imposition of such measures were not met.
The impact on USSK of these trade actions in the EU and Central Europe cannot be
predicted at this time. However, in light of market opportunities elsewhere,
recent developments in the EU hot-rolled coil anti-dumping case, the dismissal
of the Czech Republic's safeguard proceedings and USSK's experience operating
under the safeguard measures in place in the EU, Poland and Hungary, it appears
unlikely that these matters will have a material adverse affect on USSK's
operating profit in 2003.
BUSINESS STRATEGY
U. S. Steel's business strategy is to grow its investment in high-end finishing
assets, to expand globally and to continually reduce costs. In North America, U.
S. Steel is focused on providing value-added steel products to its target
markets where management believes that U. S. Steel's leadership position,
production and processing capabilities and technical service provide a
competitive advantage. These products include advanced high strength steel and
coated sheets
S-79
for the automotive and appliance industries, sheets for the manufacture of
motors and electrical equipment, higher strength plate products, improved tin
mill products for the container industry and oil country tubular goods. U. S.
Steel continues to enhance its value-added businesses through the upgrading and
modernization of its key production facilities. Recent modernization projects
include, for the automotive industry--the vacuum degassing facilities at Mon
Valley Works and USSK, the second hot-dip galvanizing line at PRO-TEC Coating
Company, the Fairless Plant galvanizing line upgrade, the cold reduction mill
upgrades at Gary Works and Mon Valley Works and construction of an automotive
technical center in Detroit, Michigan; for the construction industry--the dual
coating lines at Fairfield Works and Mon Valley Works; for the tubular
market--the Fairfield Works pipemill upgrade, acquiring full ownership of Lorain
Tubular and the construction of a quench and temper line at Lorain Tubular,
which is expected to be completed late in the third quarter of 2003; and for the
plate market--the heat treat facility at the Gary Works plate mill. Also, a new
pickle line was built at the Mon Valley Works to replace three older and less
efficient facilities.
U. S. Steel continues to be interested in participating in consolidation of the
domestic steel industry as part of its focus on growing its investment in
high-end finishing assets, if it would be beneficial to customers, shareholders,
creditors and employees. Among the factors that would impact U. S. Steel's
participation in consolidation are the nature and extent of relief from the
burden of obligations related to existing retirees from other domestic steel
companies, which may come through the bankruptcy process or otherwise, the terms
of a new labor agreement and progress in President Bush's program to address
worldwide steel overcapacity.
Through its November 2000 purchase of USSK, which owns the steel producing
operations and related assets formerly held by VSZ, a.s. in the Slovak Republic,
U. S. Steel initiated a major offshore expansion and followed many of its
customers into the European market. U. S. Steel's objective is to use USSK as a
base for expansion in growing central and western European markets. U. S. Steel
continues to explore additional opportunities for investment in Central and
Western Europe to serve those customers who are seeking worldwide supply
arrangements. U. S. Steel has a long range strategy to operate a global company,
integrating its European and domestic operations to best serve customers.
U. S. Steel has a commitment to continuously reduce costs and previously
announced a plan to reduce domestic costs by $30 per ton over a three-year
period beginning with 2002. Currently, domestic operations are ahead of this
plan, which should ultimately result in annual operating savings of over $300
million, from 2001 levels, by the end of 2004. USSK also has a cost reduction
program that has reduced costs by more than $30 per ton since USSK's acquisition
in November 2000.
U. S. Steel has also entered into a number of joint ventures with domestic and
foreign partners to take advantage of market or manufacturing opportunities in
the sheet, tin mill, tubular and plate consuming industries.
S-80
The following table lists products and services by facility or business unit:
---------------------------------------------------------------------------------------------
DOMESTIC OPERATIONS
Gary Works................................. Sheets; Tin Mill; Plates; Coke
Mon Valley Works........................... Sheets
Fairfield Works............................ Sheets; Tubular
USS-POSCO Industries(a).................... Sheets; Tin Mill
East Chicago Tin........................... Tin Mill
PRO-TEC Coating Company(a)................. Galvanized Sheets
Worthington Specialty Processing(a)........ Steel processing
Double Eagle Steel Coating Company(a)...... Electrogalvanized Sheets
Olympic Laser Processing(a)................ Steel processing
Acero Prime, S.R.L. de CV(a)............... Steel processing; Warehousing
Lorain Tubular............................. Tubular
Delta Tubular Processing(a)................ Tubular processing
USS Real Estate............................ Administration of mineral interests and
timber properties; Real estate development,
sales, leasing and management
Straightline Source........................ Steel mill products distribution
Clairton................................... Coke
Clairton 1314B Partnership(a).............. Coke
Transtar Inc. ............................. Transportation
Minntac.................................... Taconite Pellets
USS Mining................................. Coal
UEC Technologies LLC....................... Engineering and consulting services
INTERNATIONAL OPERATIONS
U. S. Steel Kosice......................... Sheets; Tin Mill; Plates; Coke
Walzwerk Finow............................. Precision steel tubes; specialty shaped
sections
Rannila Kosice(a).......................... Color coated profile and construction
products
---------------------------------------------------------------------------------------------
(a) Equity investee
During 2003, U. S. Steel took several significant actions to implement its
business strategy.
On April 21, 2003, we signed an asset purchase agreement with National, which
filed for bankruptcy protection on March 6, 2002, to acquire substantially all
of National's assets for $850 million in cash and the assumption of
approximately $200 million of liabilities. The Bankruptcy Court for the Northern
District of Illinois, Eastern Division, approved the agreement on April 21,
2003. We expect to complete the acquisition of National's assets in May 2003.
The assets of National we will acquire include: facilities at National's two
integrated steel plants, Great Lakes Steel, in Ecorse and River Rouge, Michigan,
and Granite City Division in Granite City, Illinois; the Midwest finishing
facility in Portage, Indiana; ProCoil, a steel-processing facility, in Canton,
Michigan; National Steel Pellet Company, which produces iron ore pellets; and
various other subsidiaries and joint-venture interests, including National's
interest in
S-81
Double G Coatings, a hot-dip galvanizing and Galvalume(R) steel facility near
Jackson, Mississippi. National's facilities have annual steelmaking capacity of
6.6 million tons.
In March 2003 we entered into agreements to purchase out of bankruptcy Sartid
a.d., a steel producer located in Serbia, for a purchase price of $23 million,
in addition to certain other commitments. Sartid's production facilities include
an integrated mill with annual raw steel design production capability of 2.4
million net tons, although Sartid is currently operating at less than half of
capacity. Sartid primarily produces sheet products and its tinning facility has
an annual production capability of 130,000 tons. In April 2003 we submitted an
offer to purchase Polskie Huty Stali, a holding company that owns four steel
mills, including the two largest integrated steel mills, in Poland.
DOMESTIC OPERATIONS
Our domestic operations include plants that produce steel products in a variety
of forms and grades. Raw steel production was 11.5 million tons in 2002,
compared with 10.1 million tons in 2001 and 11.4 million tons in 2000. Raw steel
production averaged 90% of capability in 2002, compared with 79% of capability
in 2001 and 89% of capability in 2000. U. S. Steel's stated annual raw steel
production capability for domestic operations was 12.8 millions tons for 2002,
2001 and 2000 (7.5 million at Gary Works, 2.9 million at Mon Valley Works, and
2.4 million at Fairfield Works).
Flat-rolled shipments were 9.9 million tons in 2002, 8.8 million tons in 2001
and 9.6 million tons in 2000. Tubular shipments were 0.8 million tons in 2002,
1.0 million tons in 2001 and 1.1 million tons in 2000. Exports accounted for
approximately 5% of U. S. Steel's domestic shipments in 2002, 2001 and 2000.
S-82
The following tables set forth steel shipment data for U. S. Steel domestic
operations by major markets and products for each of the last three years. Such
data does not include shipments by joint ventures and other investees of U. S.
Steel accounted for by the equity method, or shipments by Straightline.
STEEL SHIPMENTS BY MARKET AND PRODUCT (DOMESTIC PRODUCTION ONLY)
--------------------------------------------------------------------------------------------------
SHEETS & PLATE &
SEMI-FINISHED TIN MILL TUBULAR
(THOUSANDS OF NET TONS) STEEL PRODUCTS PRODUCTS TOTAL
--------------------------------------------------------------------------------------------------
MAJOR MARKET--2002
Steel service centers............................... 2,038 624 11 2,673
Further conversion:
Trade customers................................... 812 464 35 1,311
Joint ventures.................................... 1,550 -- -- 1,550
Transportation (including automotive)............... 1,057 160 5 1,222
Containers.......................................... 186 677 -- 863
Construction and construction products.............. 737 143 -- 880
Oil, gas and petrochemicals......................... -- 58 589 647
Export.............................................. 359 10 132 501
All other........................................... 943 82 1 1,026
--------------------------------------------
Total.......................................... 7,682 2,218 773 10,673
--------------------------------------------
MAJOR MARKET--2001
Steel service centers............................... 1,649 761 11 2,421
Further conversion:
Trade customers................................... 718 429 6 1,153
Joint ventures.................................... 1,328 -- -- 1,328
Transportation (including automotive)............... 964 176 3 1,143
Containers.......................................... 154 625 -- 779
Construction and construction products.............. 626 168 -- 794
Oil, gas and petrochemicals......................... -- 65 830 895
Export.............................................. 316 35 171 522
All other........................................... 656 109 1 766
--------------------------------------------
Total............................................. 6,411 2,368 1,022 9,801
--------------------------------------------
MAJOR MARKET--2000
Steel service centers............................... 1,636 646 33 2,315
Further conversion:
Trade customers................................... 742 428 4 1,174
Joint ventures.................................... 1,771 -- -- 1,771
Transportation (including automotive)............... 1,206 248 12 1,466
Containers.......................................... 182 520 -- 702
Construction and construction products.............. 778 158 -- 936
Oil, gas and petrochemicals......................... -- 35 938 973
Export.............................................. 346 41 157 544
All other........................................... 748 126 1 875
--------------------------------------------
Total............................................. 7,409 2,202 1,145 10,756
--------------------------------------------------------------------------------------------------
S-83
FLAT-ROLLED
Flat-rolled produces sheet, plate and tin mill products; sheet products include
hot-rolled, cold-rolled and coated. Value-added cold-rolled and coated products
comprised 64% of Flat-rolled's sheet shipments in 2002. Flat-rolled's sheet
customer base includes automotive, appliance, service center, conversion and
construction customers. U. S. Steel has long standing relationships with many of
its customers, as do its joint ventures.
In recent years, U. S. Steel has made a number of key investments directed
toward the automotive industry, including upgrades to its steelmaking facilities
to increase its capacity for both high strength and highly formable steels,
upgrades to the Fairless galvanizing line to produce automotive quality product
and construction of an automotive technical center in Michigan to enhance its
product development capability. In addition, a number of U. S. Steel's joint
ventures expanded their automotive supply capability, most notably PRO-TEC,
which now has annual hot-dipped galvanizing capability of 1.0 million tons per
year. U. S. Steel's development in advanced high strength steel has been
described as the best and broadest portfolio in North America.
The plate and tin mill products businesses complement the larger steel sheet
business by producing specialized products for specific markets.
U. S. Steel's plate business is located within the Gary Works complex and is a
major supplier to the transportation, industrial, agricultural, and construction
equipment markets. Its modern plate heat-treating facilities provide customers
with specialized plates for critical applications.
U. S. Steel supplies a full line of tin plate and tin-free steel products,
primarily used in the container industry. U. S. Steel's acquisition of East
Chicago Tin in 2001 has provided operating synergies and the opportunity to
better serve customers. Coupled with USSK's tin capability, U. S. Steel
anticipates being in a prime position to service customers who have a global
presence.
U. S. Steel participates directly and through subsidiaries in a number of joint
ventures which are included in Flat-rolled. All such joint ventures are
accounted for under the equity method. Certain of the joint ventures and other
investments are described below, all of which are 50% owned except Acero Prime,
S.R.L. de CV, in which U. S. Steel holds a 44% interest.
U. S. Steel and Pohang Iron & Steel Co., Ltd. of South Korea participate in a
joint venture, USS-POSCO Industries, which owns and operates the former U. S.
Steel plant in Pittsburg, California. The joint venture markets high quality
sheet and tin mill products, principally in the western United States. USS-POSCO
produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel
from hot bands principally provided by U. S. Steel and POSCO. On May 31, 2001, a
fire damaged USS-POSCO's facilities. The start-up in the first quarter of 2002
included the commissioning and subsequent operation of a rebuilt pickle line and
cold mill unit. Total shipments by USS-POSCO were 1.2 million tons in 2002.
U. S. Steel and Kobe Steel, Ltd. participate in a joint venture, PRO-TEC, which
owns and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first
galvanizing line commenced operations in early 1993. In November 1998,
operations commenced on a second hot-dip galvanizing line which expanded
PRO-TEC's capability nearly 400,000 tons a year to 1.0 million tons annually.
Total shipments by PRO-TEC were 1.1 million tons in 2002.
U. S. Steel and Worthington Industries, Inc. participate in a joint venture
known as Worthington Specialty Processing, which operates a steel processing
facility in Jackson,
S-84
Michigan. The plant is operated by Worthington Industries, Inc. The facility
contains state-of-the-art technology capable of processing master steel coils
into both slit coils and sheared first operation blanks including rectangles,
trapezoids, parallelograms and chevrons. It is designed to meet specifications
for the automotive, appliance, furniture and metal door industries. In 2002,
Worthington Specialty Processing shipments were 250,000 tons.
U. S. Steel and Rouge Steel Company participate in Double Eagle Steel Coating
Company, a joint venture which operates an electrogalvanizing facility located
in Dearborn, Michigan. This facility enables U. S. Steel to supply the
automotive demand for steel with corrosion resistant properties. The facility
can coat both sides of sheet steel with free zinc or zinc alloy coatings.
Availability of the facility is shared equally by the partners. On December 15,
2001, production at DESCO was halted due to a fire. The facility restarted
operations on September 10, 2002, with full operating levels achieved by
December 2002. In 2002, DESCO produced 163,000 tons of electrogalvanized steel.
U. S. Steel and Olympic Steel, Inc. participate in a 50-50 joint venture to
process laser welded sheet steel blanks at a facility in Van Buren, Michigan.
The joint venture conducts business as Olympic Laser Processing. Laser welded
blanks are used in the automotive industry for an increasing number of body
fabrication applications. U. S. Steel is the venture's primary customer and is
responsible for marketing the laser-welded blanks. In 2002, Olympic Laser
Processing shipped 1.7 million parts.
U. S. Steel, through its wholly owned subsidiary, U. S. Steel Export Company de
Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de Mexico, S.A.
de C.V., participate in a joint venture, Acero Prime, which operates slitting
and warehousing facilities in San Luis Potosi, Mexico. In 2001, an expansion
project was completed which involved the construction of a 60,000 square-foot
addition that doubled the facility's size and total warehousing capacity. A
second slitting line was installed as part of the project. Also, a new 70,000
square-foot, in-bond warehouse facility was built in Coahuilla state in Ramos
Arizpe. The warehouse stores and manages coil inventories.
TUBULAR
U. S. Steel's tubular production facilities are located at Fairfield, Alabama;
Lorain, Ohio; and McKeesport, Pennsylvania and produce both seamless and
electric resistance weld tubular products. U. S. Steel supplies over 50% of the
domestic market for seamless standard and line pipe and 25% of the domestic
market for oil country tubular goods. With the successful conversion in 1999 of
the Fairfield piercing mill to process rounds plus the acquisition of the
remaining 50% interest in Lorain Tubular, U. S. Steel has the capability to
produce 1.6 million tons of tubular products in the 5 million ton tubular
markets it serves. A quench and temper line is currently under construction at
Lorain Tubular and commissioning is expected to occur late in the third quarter
of 2003.
U. S. Steel, through a wholly owned subsidiary, USS Tubular Processing, Inc.,
and Camp Hill Tubular Processing Corporation participate in a 50-50 joint
venture partnership known as Delta Tubular Processing. The partnership was
established in 1989 and is located in Houston, Texas. The facility is capable of
forging (upsetting), heat treating, and threading tubular product to serve the
oil country tubular market.
S-85
STRAIGHTLINE
Straightline specializes in the distribution of processed, flat-rolled steel
products to companies of all sizes that do not typically buy steel products
directly from steel producers. Through its integrated systems and its network of
processors, steel suppliers and transportation carriers, Straightline operates
in 34 states from Maine to Florida in the East, and through Minnesota to Texas
in the central United States. This network allows Straightline to hold inventory
and perform processing close to the customers' operations. U. S. Steel believes
this approach provides the opportunity to lower the total cost of procurement
for job shops, contract manufacturers and original equipment manufacturers
across an array of industries.
REAL ESTATE
Real Estate manages U. S. Steel's mineral interests that are not assigned to USS
Mining or to Minntac, timber properties and real estate assets. These assets and
properties include approximately 300,000 acres of surface rights and 1,500,000
acres of mineral rights in 14 states. Income is derived primarily from mineral
royalties, the sale of developed and undeveloped land, and real estate leases.
The primary sources of mineral royalties are from leases to produce coal and
coal seam gas in Alabama. Real estate development and sales occur over
approximately 20,000 acres of residential, commercial and industrial development
and brownfield industrial redevelopment principally in Alabama, Pennsylvania and
Maryland. Undeveloped land sales occur primarily in Alabama, Michigan, Minnesota
and Wisconsin. Real estate lease income is derived from various leases primarily
in Pennsylvania and Alabama.
OTHER BUSINESSES
U. S. Steel and its wholly owned subsidiary, USS Mining, have domestic coal
properties with proven and probable bituminous coal reserves of approximately
775 million short tons at year-end 2002. The reserves are of metallurgical and
steam quality in approximately equal proportions. They are located in Alabama,
Illinois, Indiana, Pennsylvania, Tennessee and West Virginia. Approximately 94%
of the reserves are owned, and the balance are leased. The leased properties are
covered by leases which expire in 2005 and 2012. USS Mining's coal production
was 5.5 million tons in 2002, compared with 4.8 million tons in 2001 and 5.1
million tons in 2000.
U. S. Steel has coke production facilities at Clairton Works and Gary Works.
Clairton is comprised of nine coke batteries owned and operated by U. S. Steel
and an additional three coke batteries that are operated for the Clairton 1314B
Partnership, L.P. ("1314B Partnership"), which is discussed below. Clairton
(including the 1314B Partnership) produces coke for the domestic steel industry
and produced 4.5 million tons of coke in 2002, 4.3 million tons in 2001 and 4.5
million tons in 2000. Approximately 30 percent of annual production is consumed
by U. S. Steel facilities and the remainder is sold to other domestic steel
producers. Some of the coke oven gas produced at the batteries is consumed by U.
S. Steel's Mon Valley Works and coke by-products are sold to the chemicals and
raw materials industries. Gary Works has four operating coke batteries which
produced 2.1 million tons in 2002, and 2.0 million tons in 2001 and 2000. All of
the coke produced at Gary Works is consumed internally. Gary Works also consumes
a portion of the coke oven gas it produces and sells coke by-products.
U. S. Steel controls domestic iron ore properties having proven and probable
iron ore reserves in grades subject to beneficiation processes in commercial use
by U. S. Steel domestic operations of approximately 764 million short tons at
year-end 2002, substantially all of which
S-86
are iron ore concentrate equivalents available from low-grade iron-bearing
materials. All reserves are located in Minnesota. Approximately 38 percent of
these reserves are owned and the remaining 62 percent are leased. Most of the
leased reserves are covered by a lease expiring in 2058 and the remaining leases
have expiration dates ranging from 2021 to 2026. U. S. Steel's iron ore
operations at Minntac produced 16.4 million net tons of taconite pellets in
2002, 14.2 million net tons in 2001 and 16.2 million net tons in 2000. Taconite
pellet shipments were 16.2 million tons in 2002, compared with 14.9 million tons
in 2001 and 15.0 million tons in 2000.
U. S. Steel owns 100% of Transtar, Inc. Transtar and its subsidiaries (the EJ&E
Railroad in Illinois; Lake Terminal Railroad in Ohio; Union Railroad and
McKeesport Connecting Railroad in Pennsylvania; and the Birmingham Southern
Railroad, Fairfield Southern Railroad, Mobile River Terminal, and Warrior and
Gulf Navigation all located in Alabama) comprise U. S. Steel's transportation
business. Transtar provides rail and barge transportation services to a number
of U. S. Steel's domestic facilities as well as other domestic customers in the
steel, coal, chemicals, oil refining and forest production industries.
UEC Technologies LLC, a wholly owned subsidiary of U. S. Steel, sells technical
services worldwide to the steel, mining, chemical and related industries.
Together with its subsidiary companies, it provides engineering and consulting
services for facility expansions and modernizations, operating improvement
projects, integrated computer systems, coal and lubrication testing and
environmental projects.
U. S. Steel is the sole general partner of and owns an equity interest in the
1314B Partnership. As general partner, U. S. Steel is responsible for operating
and selling coke and by-products from the partnership's three coke batteries
located at U. S. Steel's Clairton Works. U. S. Steel's share of profits and
losses during 2002 was 1.75%, except for its share of depreciation and
amortization, which increased to 45.75% in April of 2002. On January 1, 2003, U.
S. Steel's share of all profit and losses increased to 45.75%. The partnership
at times had operating cash shortfalls in 2002 and 2001 that were funded with
loans from U. S. Steel. There were no outstanding loans with the partnership at
December 31, 2002, and $3 million was outstanding at December 31, 2001. U. S.
Steel may dissolve the partnership under certain circumstances including if it
is required to make equity investments or loans in excess of $150 million to
fund such shortfalls.
U. S. Steel owns a 16% investment in Republic Technologies International, LLC
("Republic"). On April 2, 2001, Republic filed to reorganize under Chapter 11 of
the U.S. Bankruptcy Code. Republic was a major purchaser of raw materials from
U. S. Steel and the primary supplier of rounds for Lorain Tubular. Republic
continued to supply Lorain Tubular since filing for bankruptcy until August 2002
when it sold substantially all of its assets to Republic Engineered Products LLC
(the "New Company"). U. S. Steel does not have an ownership interest in the New
Company, which continues as a major purchaser of raw materials and as the
primary supplier of rounds for Lorain Tubular. At December 31, 2002, U. S. Steel
had no remaining financial exposure to Republic.
U. S. Steel is negotiating an asset purchase agreement to sell all of the coal
and related assets associated with USS Mining's West Virginia and Alabama mines.
The coal and related assets to be sold include approximately 17% of U. S.
Steel's recoverable coal reserves. For further discussion of the proposed
transaction, see "Management's discussion and analysis of financial condition
and results of operations--U. S. Steel--Outlook--Dispositions."
S-87
INTERNATIONAL OPERATIONS
USSK
In November 2000, U. S. Steel acquired USSK, headquartered in Kosice in the
Slovak Republic, which owns the steelmaking operations and related assets
formerly held by VSZ, a.s., making U. S. Steel the largest flat-rolled producer
in Central Europe. Currently, USSK has annual steelmaking capability of 5.0
million net tons and produces and sells sheet, plate, tin, tubular, precision
tube and specialty steel products, as well as coke. USSK's strategy is to serve
existing U. S. Steel customers in Central and Western Europe, grow its customer
base in these regions, and advance USSK to be a leading European steel producer
and the prime supplier of flat-rolled steel to growing central and western
European markets.
USSK produces steel products in a variety of forms and grades. In 2002, USSK raw
steel production was 4.4 million tons. USSK has three blast furnaces, two steel
shops with two vessels each, a dual strand caster attached to each steel shop, a
hot strip mill, a cold rolling mill, two pickling lines, two galvanizing lines,
a tin coating line, two dynamo lines, a color coating line and two coke
batteries. During 2002, USSK started up a vacuum degassing facility to increase
its capability to produce steel grades required for high-value applications, and
is currently installing a continuous annealing line and a second tin coating
line to expand its supply of tin mill products. Construction of a third dynamo
line has begun, with start-up scheduled to occur in 2004. USSK's steel shipments
totaled 3.9 million net tons in 2002.
In addition, USSK owns 100% of Walzwerk Finow GmbH, located in eastern Germany,
which produces and ships about 90,000 tons per year of welded precision steel
tubes and cold-rolled specialty shaped sections from both cold-rolled and
hot-rolled product supplied primarily by USSK. USSK also has facilities for
manufacturing heating radiators and spiral weld pipe.
A majority of product sales by USSK are denominated in euros while only a small
percentage of expenditures are in euros. In addition, most interest and debt
payments are in U.S. dollars and the majority of other spending is in U.S.
dollars and Slovak koruna. This results in exposure to currency fluctuations. U.
S. Steel continually evaluates the currency mix of USSK's cash flows.
Significant changes in currency mix, such as Slovakia's admission to the EU and
adoption of euro currency, could result in a change in the functional currency
from U.S. dollars to euros in the future.
Rannila Kosice, s.r.o., which is 49% owned by USSK and 51% owned by Rautaruukki
Oyj, processes coated sheets, both galvanized and painted, into various forms
which are primarily used in the construction industry. USSK supplies most of
Rannila Kosice's raw materials; however, Rannila Kosice markets its own finished
products.
SARTID
Beginning in March 2002 and continuing throughout the year, USSK entered into
various commercial arrangements with Sartid, an integrated steel company with
facilities located in Smederevo and Sabac in the Republic of Serbia. Tolling
agreements provide for the conversion of cold-rolled full hard into tin-coated
products, and raw materials into hot-rolled bands and other finished products.
USSK retains ownership of these materials and markets all of the finished
products. A facility management agreement requires USSK to provide management
oversight of Sartid's tin processing facilities in Sabac.
On July 30, 2002, Sartid was placed into bankruptcy and shortly thereafter the
bankruptcy administrator affirmed USSK's agreements with Sartid. At the request
of the bankruptcy
S-88
administrator, a Commercial and Technical Support Agreement was entered into on
November 8, 2002, between USSK and the bankruptcy administrator, under which
USSK has been retained to provide commercial, technical and financial support as
necessary to assist the bankruptcy administrator in the operation of the
Smederevo Facility.
On March 31, 2003, U. S. Steel Balkan, a wholly-owned U. S. Steel subsidiary,
agreed to purchase out of bankruptcy Sartid a.d. and six of its subsidiaries for
a total purchase price of $23 million. This transaction, which is targeted for
completion during the third quarter of 2003, is subject to several conditions,
including the successful completion of anti-monopoly review by competition
authorities in several countries.
In a related agreement, which will become effective upon the completion of the
acquisition, U. S. Steel Balkan will commit to future spending of up to $150
million over five years for working capital and the repair, rehabilitation,
improvement, modification and upgrade of the facilities. A portion of this
spending is subject to certain conditions related to Sartid's commercial
operations, cash flow and viability. In addition, U. S. Steel Balkan has agreed
to refrain from layoffs for a period of three years. The agreement requires U.
S. Steel Balkan to obtain the consent of the Serbian government prior to a
transfer of a controlling interest of Sartid within five years of the closing
date. U. S. Steel Balkan will conduct economic development activities over the
course of three years and spend no less than $1.5 million on these efforts U. S.
Steel Balkan and has agreed to support community, charitable and sport
activities in a total amount of not less than $5 million during the three-year
period following closing of the transaction.
Sartid's production facilities include an integrated mill with annual raw steel
design production capability of 2.4 million net tons. Sartid's steel production
has averaged 500,000 tons per year during the past two years, which is
substantially below design capacity due to Sartid's financial difficulties. U.
S. Steel believes that with needed rehabilitation and investments, Sartid's
long-term raw steelmaking capability could be increased to slightly more than 2
million tons per year. Sartid primarily produces sheet products and its tinning
facility has an annual capability of 130,000 tons.
S-89
The following tables set forth steel shipment data for USSK by major markets and
products for 2002, 2001 and the period following the acquisition in November
2000.
STEEL SHIPMENTS BY MARKET AND PRODUCT (USSK PRODUCTION ONLY--EXCLUDES RANNILA
KOSICE)
----------------------------------------------------------------------------------------------
SHEETS & PLATE &
SEMI-FINISHED TIN MILL TUBULAR
(THOUSANDS OF NET TONS) STEEL PRODUCTS PRODUCTS TOTAL
----------------------------------------------------------------------------------------------
MAJOR MARKET--2002
Steel service centers........................... 528 85 -- 613
Further conversion:
Trade customers............................... 942 114 -- 1,056
Joint ventures................................ -- 20 -- 20
Transportation (including automotive)........... 198 34 31 263
Containers...................................... 134 155 -- 289
Construction and construction products.......... 936 12 68 1,016
Oil, gas and petrochemicals..................... -- -- 32 32
All other....................................... 469 184 7 660
--------------------------------------------
Total...................................... 3,207 604 138 3,949
--------------------------------------------
MAJOR MARKET--2001
Steel service centers........................... 398 94 -- 492
Further conversion:
Trade customers............................... 944 14 -- 958
Joint ventures................................ -- 30 -- 30
Transportation (including automotive)........... 165 -- 29 194
Containers...................................... 93 141 -- 234
Construction and construction products.......... 904 59 71 1,034
Oil, gas and petrochemicals..................... 1 134 33 168
All other....................................... 432 167 5 604
--------------------------------------------
Total...................................... 2,937 639 138 3,714
--------------------------------------------
MAJOR MARKET--2000 (FROM NOVEMBER 24, 2000)
Steel service centers........................... 33 20 -- 53
Further conversion:
Trade customers............................... 64 6 -- 70
Joint ventures................................ -- 2 -- 2
Transportation (including automotive)........... 10 -- 3 13
Containers...................................... 6 11 -- 17
Construction and construction products.......... 66 10 6 82
Oil, gas and petrochemicals..................... -- 22 2 24
All other....................................... 27 28 1 56
--------------------------------------------
Total...................................... 206 99 12 317
----------------------------------------------------------------------------------------------
S-90
EMPLOYEES
The average number of active U. S. Steel domestic employees during 2002 was
20,351. The average number of active USSK employees during 2002 was 15,900.
Currently, substantially all domestic hourly employees of our steel, coke and
taconite pellet facilities are covered by a collective bargaining agreement with
the USWA which expires in August 2004, and includes a no-strike provision. As
previously discussed U. S. Steel has reached a new labor contract, covering
facilities now owned by bankrupt National, as well as the USWA-represented
plants of U. S. Steel. The agreement is before the union membership for
ratification. Other domestic hourly employees (for example, those engaged in
coal mining and transportation activities) are represented by the United Mine
Workers of America, USWA and other unions. In addition, most employees of USSK
are represented by the union OZ Metalurg under a collective bargaining agreement
expiring February 2004, which is subject to annual wage negotiations.
ENVIRONMENTAL MATTERS
U. S. Steel maintains a comprehensive environmental policy overseen by the
Corporate Governance and Public Policy Committee of the U. S. Steel Board of
Directors. The Environmental Affairs organization has the responsibility to
ensure that U. S. Steel's operating organizations maintain environmental
compliance systems that are in accordance with applicable laws and regulations.
The Executive Environmental Committee, which is comprised of officers of U. S.
Steel, is charged with reviewing its overall performance with various
environmental compliance programs. Also, U. S. Steel, largely through the
American Iron and Steel Institute, continues its involvement in the development
of various air, water, and waste regulations with federal, state and local
governments concerning the implementation of cost effective pollution reduction
strategies.
The domestic businesses of U. S. Steel are subject to numerous federal, state
and local laws and regulations relating to the protection of the environment.
These environmental laws and regulations include the Clean Air Act ("CAA") with
respect to air emissions; the Clean Water Act ("CWA") with respect to water
discharges; the Resource Conservation and Recovery Act ("RCRA") with respect to
solid and hazardous waste treatment, storage and disposal; and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with respect
to releases and remediation of hazardous substances. In addition, all states
where U. S. Steel operates have similar laws dealing with the same matters.
These laws are constantly evolving and becoming increasingly stringent. The
ultimate impact of complying with existing laws and regulations is not always
clearly known or determinable due in part to the fact that certain implementing
regulations for laws such as RCRA and the CAA have not yet been promulgated or
in certain instances are undergoing revision. These environmental laws and
regulations, particularly the CAA, could result in substantially increased
capital, operating and compliance costs.
For a discussion of environmental capital expenditures and the cost of
compliance for air, water, solid waste and remediation, see "Management's
discussion and analysis of financial condition and results of
operations--Management's discussion and analysis of environmental matters,
litigation and contingencies" and "--Legal proceedings--Environmental
proceedings."
U. S. Steel has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet CAA
S-91
obligations, although ongoing compliance costs have also been significant. To
the extent these expenditures, as with all costs, are not ultimately reflected
in the prices of U. S. Steel's products and services, operating results will be
adversely affected. U. S. Steel believes that its major domestic integrated
steel competitors are confronted by substantially similar conditions and thus
does not believe that its relative position with regard to such competitors is
materially affected by the impact of environmental laws and regulations.
However, the costs and operating restrictions necessary for compliance with
environmental laws and regulations may have an adverse effect on U. S. Steel's
competitive position with regard to domestic mini-mills and some foreign steel
producers and producers of materials which compete with steel, which may not be
required to undertake equivalent costs in their operations. In addition, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities and its production
methods.
Slovak standards relative to air, water and solid waste pollution are set by
statute and these standards are similar to those in the United States and the
EU. USSK is in material compliance with these standards. USSK's environmental
expenses in 2002 included usage fees, permit fees and/or penalties totaling
approximately $5 million. There are no legal proceedings pending against USSK
involving environmental matters. USSK's capital spending commitment to the
Slovak government includes expenditures sufficient to bring USSK into compliance
with all EU environmental standards by 2005.
The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol") produced by
the United Nations Convention on Climate Change, if ratified by the U.S. Senate,
would require restrictions on greenhouse gas emissions in the United States.
Options that could be considered by federal regulators to force the reductions
necessary to meet these restrictions could escalate energy costs and thereby
increase steel production costs. Until action is taken by the U.S. Senate to
ratify the Kyoto Protocol or to implement some other program to address
greenhouse gas emissions, it is not possible to estimate the effect this may
have on U. S. Steel.
AIR
The CAA imposed more stringent limits on air emissions, established a federally
mandated operating permit program and allowed for enhanced civil and criminal
enforcement sanctions. The principal impact of the CAA on U. S. Steel is on the
cokemaking and primary steelmaking operations of U. S. Steel, as described in
this section. The coal mining operations and sales of USS Mining may also be
affected.
The CAA requires the regulation of hazardous air pollutants and development and
promulgation of Maximum Achievable Control Technology ("MACT") Standards. It was
determined in 1995 that the Chrome Electroplating MACT did not apply to steel
mill sources; however, the U.S. Environmental Protection Agency ("EPA") stated
that MACT standards applicable to these sources would be forthcoming. To date,
there has been no action taken. Potentially affected U. S. Steel facilities are
the electrolytic tinning lines at Gary Works and the tin free steel line at East
Chicago Tin. The EPA is also promulgating MACT standards for integrated iron and
steel plants and taconite iron ore processing which are expected to be finalized
in 2003. The impact of these new standards could be significant to U. S. Steel,
but the cost cannot be reasonably estimated until the rules are finalized.
The CAA specifically addressed the regulation and control of coke oven
batteries. The National Emission Standard for Hazardous Air Pollutants for coke
oven batteries was finalized in October 1993, setting forth the MACT standard
and, as an alternative, a Lowest Achievable
S-92
Emission Rate ("LAER") standard. Effective January 1998, U. S. Steel elected to
comply with the LAER standards. U. S. Steel believes it will be able to meet the
current LAER standards. The LAER standards will be further revised in 2010 and
additional health risk-based standards are expected to be adopted in 2020. The
EPA is in the process of developing the Phase II Coke MACT for pushing,
quenching and battery stacks which is scheduled to be finalized in 2003. This
MACT will impact U. S. Steel, but the cost cannot be reasonably estimated at
this time.
In September 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and particulate matter which are significantly more
stringent than prior standards. The EPA is also developing regulations to
address Regional Haze. The impact of these revised standards could be
significant to U. S. Steel, but the cost cannot be reasonably estimated until
the final regulations are promulgated and, more importantly, the states
implement their State Implementation Plans covering their standards.
In 2002, all of the coal production of USS Mining was metallurgical coal, which
is primarily used in coke production. While U. S. Steel believes that the new
environmental requirements for coke ovens will not have an immediate effect on
USS Mining, the requirements may encourage development of steelmaking processes
that reduce the usage of coke. The new ozone and particulate matter standards
could be significant to USS Mining, but the cost cannot be reasonably estimated
until rules are proposed or finalized.
WATER
U. S. Steel maintains the necessary discharge permits as required under the
National Pollutant Discharge Elimination System ("NPDES") program of the CWA,
and it is in compliance with such permits. On January 26, 1998, pursuant to an
action filed by the EPA in the United States District Court for the Northern
District of Indiana titled United States of America v. USX Corporation, U. S.
Steel entered into a consent decree with the EPA which resolved alleged
violations of the Clean Water Act NPDES permit at Gary Works and provides for a
sediment remediation project for a section of the Grand Calumet River that runs
through Gary Works. Contemporaneously, U. S. Steel entered into a consent decree
with the public trustees which resolves potential liability for natural resource
damages on the same section of the Grand Calumet River. In 1999, U. S. Steel
paid civil penalties of $2.9 million for the alleged water act violations and
$0.5 million in natural resource damages assessment costs. In addition, U. S.
Steel will pay the public trustees $1.0 million at the end of the remediation
project for future monitoring costs and U. S. Steel is obligated to purchase and
restore several parcels of property that have been or will be conveyed to the
trustees. During the negotiations leading up to the settlement with the EPA,
capital improvements were made to upgrade plant systems to comply with the NPDES
requirements. As of December 31, 2002, the sediment remediation project is an
approved final interim measure under the corrective action program for Gary
Works. As of December 31, 2002, project costs have amounted to $29.1 million
with another $14.2 million presently projected to complete the project, over the
next 12 months. Construction began in January 2002 on a CAMU to contain the
dredged material. The Toxic Substances Control Act unit within the CAMU is
complete; the remaining construction was completed in February 2003. Phase 1
removal of PCB-contaminated sediment was conducted in December 2002. Dredging
resumed in February 2003 and will continue until dredging on the river is
concluded, which is expected to occur in October 2003. Closure costs for the
CAMU are estimated to be an additional $4.9 million. Estimated remediation,
monitoring and closure costs for this project have been accrued.
S-93
In addition, in October 1996, U. S. Steel was notified by the Indiana Department
of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the
U.S. Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The public trustees
completed a pre-assessment screen pursuant to federal regulations and have
determined to perform a Natural Resource Damages Assessment. U. S. Steel was
identified as a PRP along with 15 other companies owning property along the
river and harbor canal. U. S. Steel and eight other PRPs have formed a joint
defense group. The trustees notified the public of their plan for assessment and
later adopted the plan. In 2000, the trustees concluded their assessment of
sediment injuries, which included a technical review of environmental
conditions. The PRP joint defense group has proposed terms for the settlement of
this claim, which have been endorsed by representatives of the trustees and the
EPA to be included in a consent decree that U. S. Steel expects will resolve
this claim. U. S. Steel agreed to pay to the public trustees $20.5 million over
a five-year period for restoration costs, plus $1.0 million in assessment costs,
and obtained an 8-acre parcel of land that has been transferred to the Indiana
Department of Natural Resources for addition to the Indiana Dunes National
Lakeshore Park owned by the National Park Service. No formal legal proceedings
have been filed in this matter.
SOLID WASTE
U. S. Steel continues to seek methods to minimize the generation of hazardous
wastes in its operations. RCRA establishes standards for the management of solid
and hazardous wastes. Besides affecting current waste disposal practices, RCRA
also addresses the environmental effects of certain past waste disposal
operations, the recycling of wastes and the regulation of storage tanks.
Corrective action under RCRA related to past waste disposal activities is
discussed below under "Remediation."
REMEDIATION
A significant portion of U. S. Steel's currently identified environmental
remediation projects relate to the remediation of former and present operating
locations. These projects include the remediation of the Grand Calumet River
(discussed above), and the closure and remediation of permitted hazardous and
non-hazardous waste landfills.
U. S. Steel is also involved in a number of remedial actions under CERCLA, RCRA
and other federal and state statutes, and it is possible that additional matters
may come to its attention which may require remediation. For a discussion of
remedial actions related to U. S. Steel, see "--Legal proceedings--Environmental
proceedings."
PROPERTIES
U. S. Steel or its predecessors have owned the vast majority of its domestic
properties for at least 30 years with no material adverse claims asserted. In
the case of the real property and buildings of USSK, certified copies of the
property registrations were obtained and examined by local counsel prior to the
acquisition.
Several steel production facilities are leased. The caster facility at
Fairfield, Alabama is subject to a lease expiring in 2012 with an option to
purchase or to extend the lease. A coke battery at Clairton, Pennsylvania, which
is subleased to the Clairton 1314B Partnership until July 2,
S-94
2004, is subject to a lease and U. S. Steel exercised an option to renew this
lease through July 2, 2012, at a fair market rental. The headquarters office
space in Pittsburgh, Pennsylvania used by U. S. Steel is leased through 2018.
For property, plant and equipment additions, including capital leases, see
"Management's discussion and analysis of financial condition and results of
operations."
LEGAL PROCEEDINGS
U. S. Steel is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of these
matters are included below in this discussion. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
financial statements. However, management believes that U. S. Steel will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
ASBESTOS LITIGATION
We are a defendant in a large number of cases in which approximately 14,000
claimants actively allege injury resulting from exposure to asbestos. Almost all
of these cases involve multiple plaintiffs and multiple defendants. These claims
fall into three major groups: (1) claims made under certain federal and general
maritime laws by employees of the Great Lakes Fleet or Intercoastal Fleet,
former operations of U. S. Steel; (2) claims made by persons who performed work
at U. S. Steel facilities (referred to as "premises claims"); and (3) claims
made by industrial workers allegedly exposed to an electrical cable product
formerly manufactured by U. S. Steel. While U. S. Steel has excess casualty
insurance, these policies have multi-million dollar self insured retentions and,
to date, U. S. Steel has not received any payments under these policies relating
to asbestos claims. In most cases, this excess casualty insurance is the only
insurance applicable to asbestos claims.
These cases allege a variety of respiratory and other diseases based on alleged
exposure to asbestos contained in a U. S. Steel electric cable product or to
asbestos on U. S. Steel's premises; approximately 200 plaintiffs allege they are
suffering from mesothelioma. Virtually all asbestos cases seek money damages
from multiple defendants. U. S. Steel is unable to provide meaningful disclosure
about the total amount of such damages alleged in these cases for the following
reasons: (1) many cases do not claim a specific demand for damages, or contain a
demand that is stated only as being in excess of the minimum jurisdictional
limit of the relevant court; (2) even where there are specific demands for
damages, there is no meaningful way to determine what amount of the damages
would or could be assessed against any particular defendant; (3) plaintiffs'
lawyers often allege the same amount of damages irrespective of the specific
harm that has been alleged, even though the ultimate outcome of any claim may
depend upon the actual disease, if any, that the plaintiff is able to prove and
the actual exposure, if any, to the U. S. Steel product or the duration of
exposure, if any, on U. S. Steel's premises. U. S. Steel believes the amount of
any damages alleged in the complaints initially filed in these cases is not
relevant in assessing our potential liability.
U. S. Steel aggressively pursues grounds for the dismissal of U. S. Steel from
pending cases and we make efforts to settle appropriate cases for reasonable,
and frequently nominal, amounts. For example, in 2000, we settled 22 claims for
an aggregate total payment of approximately $80,000; in 2001, we settled
approximately 11,000 claims for an aggregate total payment of
S-95
approximately $190,000; and, in 2002, we settled approximately 1,100 claims for
an aggregate total payment of approximately $700,000. In those three years,
3,860, 1,679 and 842, respectively, new claims were filed.
We also litigate cases to verdict where we believe that litigation is
appropriate. Until March 2003, we were successful in all asbestos cases that we
tried to final judgment. On March 28, 2003, a jury in Madison County, Illinois
returned a verdict against U. S. Steel for $50 million in compensatory damages
and $200 million in punitive damages. The plaintiff, an Indiana resident,
alleged he was exposed to asbestos while working as a U. S. Steel employee at
our Gary Works in Gary, Indiana from 1950 to 1981 and that he suffers from
mesothelioma as a result. U. S. Steel believes the plaintiff's exclusive remedy
was provided by the Indiana workers' compensation law and that this issue and
other errors at trial would have enabled U. S. Steel to succeed on appeal.
However, in order to avoid the delay and uncertainties of further litigation and
having to post an appeal bond equal to the amount of the verdict and to allow U.
S. Steel to actively pursue its current acquisition activities and other
strategic initiatives, U. S. Steel settled this case and the impact was recorded
in operating results for the first quarter of 2003.
Management views the Madison County verdict as aberrational and continues to
believe that it is unlikely that the resolution of the pending asbestos actions
against us would have a material adverse effect on our financial condition.
Among the factors considered in reaching this conclusion were: (1) that U. S.
Steel had been subject to a total of approximately 34,000 asbestos claims over
the last 12 years that had been administratively dismissed or were inactive due
to the failure of the claimants to present any medical evidence supporting their
claims; (2) that over the last several years, the total number of pending claims
had remained steady; (3) that it had been many years since U. S. Steel employed
maritime workers or manufactured electrical cable; and (4) U. S. Steel's history
of trial outcomes, settlements and dismissals, including such matters since the
March 28 jury decision. Management concluded the recent verdict in Madison
County, Illinois was an aberration and that the likelihood of similar results is
remote, although not impossible.
This statement of belief is a forward-looking statement. Predictions as to the
outcome of pending litigation are subject to substantial uncertainties with
respect to (among other things) factual and judicial determinations, and actual
results could differ materially from those expressed in this forward-looking
statement. We do not know whether the jury verdict described above will have any
impact upon the number of claims filed against us in the future or the amount of
future settlements.
ENVIRONMENTAL PROCEEDINGS
The following is a summary of the proceedings of U. S. Steel that were pending
or contemplated as of December 31, 2002, under federal and state environmental
laws. Except as described herein, it is not possible to accurately predict the
ultimate outcome of these matters. Claims under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and related state acts have
been raised with respect to the cleanup of various waste disposal and other
sites. CERCLA is intended to expedite the cleanup of hazardous substances
without regard to fault. Potentially responsible parties ("PRPs") for each site
include present and former owners and operators of, transporters to and
generators of the substances at the site. Liability is strict and can be joint
and several. Because of various factors including the ambiguity of the
regulations, the difficulty of identifying the responsible parties for any
particular site, the complexity of determining the relative liability among
them, the uncertainty
S-96
as to the most desirable remediation techniques and the amount of damages and
cleanup costs and the time period during which such costs may be incurred, it is
impossible to reasonably estimate U. S. Steel's ultimate cost of compliance with
CERCLA.
CERCLA REMEDIATION SITES
Projections, provided in the following paragraphs, of spending for and/or timing
of completion of specific projects are forward-looking statements. These
forward-looking statements are based on certain assumptions including, but not
limited to, the factors provided in the preceding paragraph. To the extent that
these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from what was stated
in forward-looking statements.
At December 31, 2002, U. S. Steel had been identified as a PRP at a total of 21
CERCLA sites. Based on currently available information, which is in many cases
preliminary and incomplete, management believes that U. S. Steel's liability for
cleanup and remediation costs in connection with 5 of these sites will be
between $100,000 and $1 million per site, and for 12 of these sites will be
under $100,000.
At the remaining 4 sites, management expects that U. S. Steel's share in the
remaining cleanup costs at any single site will not exceed $5 million, although
it is not possible to accurately predict the amount of sharing in any final
allocation of such costs. The following is a summary of the status of these
sites:
-- At the former Duluth Works in Minnesota, U. S. Steel spent a total
of approximately $12.1 million for cleanup through 2002. The Duluth Works
was listed by the Minnesota Pollution Control Agency under the Minnesota
Environmental Response and Liability Act on its Permanent List of
Priorities. The U.S. Environmental Protection Agency ("EPA") has
consolidated and included the Duluth Works site with the St. Louis River
and Interlake sites on the EPA's National Priorities List. The Duluth
Works cleanup has proceeded since 1989. U. S. Steel is conducting an
engineering study of the estuary sediments. Depending upon the method and
extent of remediation at this site, future costs are presently unknown
and indeterminable. Additional study and oversight costs through 2003 are
estimated at $765,000.
-- The D'Imperio and Ewan sites in New Jersey are two waste disposal
sites where a former subsidiary allegedly disposed of used paint and
solvent wastes. U. S. Steel has entered into a settlement agreement with
the major PRPs at the sites which fixes U. S. Steel's share of liability
at approximately $1.2 million, $655,000 of which had been paid as of
December 31, 2002. The balance, which is expected to be paid over the
next several years, has been accrued.
-- In 1988, U. S. Steel and two other PRPs (Bethlehem Steel Corporation
and William Fiore) agreed to the issuance of an administrative order by
the EPA to undertake emergency removal work at the Municipal & Industrial
Disposal Co. site in Elizabeth, Pennsylvania. The cost of such removal,
which has been completed, was approximately $4.2 million, of which U. S.
Steel paid $3.4 million. The EPA indicated that further remediation of
this site would be required. In October 1991, the Pennsylvania Department
of Environmental Resources ("PADER") placed the site on the Pennsylvania
State Superfund list and began a Remedial Investigation, which was issued
in 1997. After a feasibility study by Pennsylvania Department of
Environmental Protection ("PADEP") and submission of a conceptual
remediation plan in 2001 by U. S. Steel,
S-97
U. S. Steel submitted a revised conceptual remedial action plan on May
31, 2002. U. S. Steel and PADEP signed a consent decree on August 30,
2002, under which U. S. Steel is responsible for remediation of this
site. This consent decree has been noticed for public comments. U. S.
Steel estimates its future liability at the site to be $6.8 million.
In addition, there are 13 sites related to U. S. Steel where information
requests have been received or there are other indications that U. S. Steel may
be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability or make any judgment as to the
amount thereof.
OTHER REMEDIATION ACTIVITIES
The following is a discussion of other remediation activities at the major
domestic U. S. Steel facilities:
There are 37 additional sites related to U. S. Steel where remediation is being
sought under other environmental statutes, both federal and state, or where
private parties are seeking remediation through discussions or litigation. Based
on currently available information, which is in many cases preliminary and
incomplete, management believes that liability for cleanup and remediation costs
in connection with 6 of these sites will be under $100,000 per site, another 5
sites have potential costs between $100,000 and $1 million per site, and 7 sites
may involve remediation costs between $1 million and $5 million. Another 4
sites, including the Grand Calumet River remediation at Gary Works, the Peters
Creek Lagoon remediation at Clairton Works, the closure of hazardous waste sites
at Gary Works, and the potential claim for investigation, restoration and
compensation of injuries to sediments in the east branch of the Grand Calumet
River near Gary Works, have or are expected to have costs for remediation,
investigation, restoration or compensation in excess of $5 million. Potential
costs associated with remediation at the remaining 15 sites are not presently
determinable.
GARY WORKS
On January 26, 1998, pursuant to an action filed by the EPA in the United States
District Court for the Northern District of Indiana titled United States of
America v. USX, U. S. Steel entered into a consent decree with the EPA which
resolved alleged violations of the Clean Water Act NPDES permit at Gary Works
and provides for a sediment remediation project for a section of the Grand
Calumet River that runs through Gary Works. Contemporaneously, U. S. Steel
entered into a consent decree with the public trustees, which resolves potential
liability for natural resource damages on the same section of the Grand Calumet
River. In 1999, U. S. Steel paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages assessment
costs. In addition, U. S. Steel will pay the public trustees $1.0 million at the
end of the remediation project for future monitoring costs, and U. S. Steel is
obligated to purchase and restore several parcels of property that have been or
will be conveyed to the trustees. During the negotiations leading up to the
settlement with the EPA, capital improvements were made to upgrade plant systems
to comply with the NPDES requirements. As of December 31, 2002, the sediment
remediation project is an approved final interim measure under the corrective
action program for Gary Works. As of December 31, 2002, project costs have
amounted to $29.1 million with another $14.2 million presently projected to
complete the project, over the next 12 months. Construction began in January
2002 on a Corrective Action Management Unit ("CAMU") to contain the dredged
material. The Toxic Substances Control Act unit within the CAMU is complete; the
remaining construction was
S-98
completed in February 2003. Phase 1 removal of PCB-contaminated sediment was
conducted in December 2002. Dredging resumed in February 2003 and will continue
until dredging on the river is concluded, which is expected to occur in October
2003. Closure costs for the CAMU are estimated to be an additional $4.9 million.
At Gary Works, U. S. Steel has agreed to close three hazardous waste disposal
sites located on plant property. The D2 disposal site and a nearby refuse area
will be closed collectively. A CAMU for the West End Maintenance Area of Gary
Works has been proposed that will include wastes from the D5 and T2 disposal
sites. Total costs to close D2, D5, T2 and the refuse area are estimated to be
$18.8 million.
In October 1996, U. S. Steel was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The public trustees
completed a preassessment screen pursuant to federal regulations and have
determined to perform a Natural Resources Damages Assessment. U. S. Steel was
identified as a PRP along with 15 other companies owning property along the
river and harbor canal. U. S. Steel and eight other PRPs have formed a joint
defense group. The trustees notified the public of their plan for assessment and
later adopted the plan. In 2000, the trustees concluded their assessment of
sediment injuries, which included a technical review of environmental
conditions. The PRP joint defense group has proposed terms for the settlement of
this claim which have been endorsed by representatives of the trustees and the
EPA to be included in a consent decree that U. S. Steel expects will resolve
this claim. U. S. Steel agreed to pay to the public trustees $20.5 million over
a five-year period for restoration costs, plus $1.0 million in assessment costs,
and obtained an 8-acre parcel of land that has been transferred to the Indiana
Department of Natural Resources for addition to the Indiana Dunes National
Lakeshore Park owned by the National Park Service. No formal legal proceedings
have been filed in this matter.
On October 23, 1998, a final Administrative Order on Consent was issued by the
EPA addressing Corrective Action for Solid Waste Management Units throughout
Gary Works. This order requires U. S. Steel to perform a Resource Conservation
and Recovery Act ("RCRA") Facility Investigation ("RFI") and a Corrective
Measure Study ("CMS") at Gary Works. The Current Conditions Report, U. S.
Steel's first deliverable, was submitted to the EPA in January 1997 and was
approved by the EPA in 1998. Phase I RFI work plans have been approved for the
Coke Plant, the Process Sewers, and Background Soils at the site, along with the
approval of one self-implementing interim stabilization measure. Another eight
Phase I RFI work plans have been submitted for EPA approval, thereby completing
the Phase I requirement, along with two Phase II RFI work plans and one further
self-implementing interim stabilization measure. The costs of these studies are
estimated to be $5.8 million. Until they are completed, it is impossible to
assess what additional expenditures will be necessary.
On October 21, 1994, and again on December 30, 1994, IDEM issued notices of
violation ("NOVs") relating to Gary Works alleging various violations of air
pollution requirements. In early 1996, U. S. Steel paid a $6 million penalty and
agreed to install additional pollution control equipment and to implement
environmental protection programs over a period of several years. A substantial
portion of these programs has been implemented, with expenditures through 2002
of approximately $103 million. The cost to complete these programs is
S-99
presently indeterminable. On March 8, 1999, U. S. Steel entered into an agreed
order with IDEM to resolve outstanding air issues. U. S. Steel paid a penalty of
$207,400 and installed equipment at the No. 8 Blast Furnace and the No. 1 BOP to
reduce air emissions.
On November 30, 1999, IDEM issued an NOV alleging various air violations at Gary
Works, including opacity violations at the No. 1 BOP and pushing violations at
the four Coke Batteries. On August 21, 2002, IDEM issued a revised NOV which
supercedes the 1999 NOV and includes alleged violations at the blast furnaces,
steel shops and coke batteries from 1998 to present. Because IDEM has not yet
determined the merits of the defenses raised by U. S. Steel, the cost of the
settlement of this matter is currently indeterminable. An agreed order is being
negotiated.
CLAIRTON
On February 12, 1987, U. S. Steel and the PADER entered into a Consent Order to
resolve an incident in January 1985 involving the alleged unauthorized discharge
of benzene and other organic pollutants from Clairton Works in Clairton,
Pennsylvania. That Consent Order required U. S. Steel to pay a penalty of
$50,000 and a monthly payment of $2,500 for five years. In 1990, U. S. Steel and
the PADER reached agreement to amend the Consent Order. Under the amended Order,
U. S. Steel agreed to remediate the Peters Creek Lagoon, a former coke plant
waste disposal site; to pay a penalty of $300,000; and to pay a monthly penalty
of up to $1,500 each month until the former disposal site is closed. Remediation
costs have amounted to $10.2 million with another $1.4 million presently
projected to complete the project.
FAIRLESS PLANT
In January 1992, U. S. Steel commenced negotiations with the EPA regarding the
terms of an Administrative Order on consent, pursuant to the RCRA, under which
U. S. Steel would perform a RFI and a CMS at its Fairless Plant. A Phase I RFI
report was submitted during the third quarter of 1997. A Phase II/III RFI will
be submitted following EPA approval of the Phase I report. The RFI/CMS will
determine whether there is a need for, and the scope of, any remedial activities
at the Fairless Plant.
FAIRFIELD WORKS
In December 1995, U. S. Steel reached an agreement in principle with the EPA and
the U.S. Department of Justice ("DOJ") with respect to alleged RCRA violations
at Fairfield Works. A consent decree was signed by U. S. Steel, the EPA and the
DOJ and filed with the United States District Court for the Northern District of
Alabama (United States of America v. USX Corporation) on December 11, 1997,
under which U. S. Steel will pay a civil penalty of $1 million, implement two
Supplemental Environmental Projects ("SEPs") costing a total of $1.75 million
and implement a RCRA corrective action at the facility. One SEP was completed
during 1998 at a cost of $250,000. The second SEP is under way. As of February
22, 2000, the Alabama Department of Environmental Management assumed primary
responsibility for regulation and oversight of the RCRA corrective action
program at Fairfield Works, with the approval of the EPA. The first Phase I RFI
work plan was approved for the site on September 16, 2002. Field sampling for
the work plan commenced immediately after approval and will continue through the
end of 2003. The cost to complete this study is estimated to be $657,000.
S-100
BUSINESS--NATIONAL STEEL
National is one of the largest integrated steel producers 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. National targets high value-added applications of flat
rolled carbon steel for sale primarily to the automotive, construction and
container markets. Its principal executive offices are located in Mishawaka,
Indiana. On March 6, 2002, National filed voluntary petitions for relief under
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Illinois (Eastern Division). National continues to operate
its business as a debtor-in-possession.
NATIONAL'S CUSTOMERS
Automotive. National supplies hot and cold-rolled steel and higher value-added
galvanized coils to the automotive industry. National's products have been used
in a variety of automotive applications, including exposed and unexposed panels,
wheels and bumpers.
Construction. National is also a supplier of steel to the construction market.
Roof and building panels are the principal applications for galvanized and
Galvalume(R) steel in this market.
Container. National produces chrome and tin plated steels which are used to
produce a wide variety of food and non-food containers.
Pipe and Tube. National supplies the pipe and tube market with hot-rolled,
cold-rolled and coated sheet. National is a supplier to transmission pipeline,
downhole casing and structural pipe producers.
Service Centers. National supplies the service center market with hot-rolled,
cold-rolled and coated sheet. Service centers generally purchase steel coils and
may process them further or sell them directly to third parties without further
processing.
NATIONAL'S OPERATIONS
National operates three principal facilities: two integrated steel plants,
Great Lakes in Ecorse and River Rouge, Michigan, near Detroit, and the Granite
City Division in Granite City, Illinois, near St. Louis and a finishing
facility, Midwest in Portage, Indiana, near Chicago.
GRANITE CITY
Granite City, located in Granite City, Illinois, has an annual hot-rolled band
production capacity of approximately 3.2 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 hot-rolled
coil processing line, a continuous pickler, a tandem mill and two hot dip
galvanizing lines. In 2002, Granite City shipped approximately 15% of its total
production to Midwest for finishing. Principal products of the Granite City
Division include hot-rolled, hot-dipped galvanized and Galvalume(R) steel, grain
bin and high strength, low alloy steels.
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
S-101
production capacity of approximately 3.7 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 high speed pickle line,
a tandem mill, a batch annealing station, a temper mill, one customer service
line and an electrolytic galvanizing line. Additionally, a new automotive hot
dip galvanizing line began production during the second quarter of 2000.
Principal products include hot-rolled, cold-rolled, electrolytic galvanized, hot
dip galvanized, and high strength, low alloy steels.
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. Midwest facilities include a continuous pickling line,
two cold reduction mills and three continuous galvanizing lines (a 48-inch wide
line which can produce galvanized or Galvalume(R) steel products and which
services the construction market, a 72-inch wide line which services the
automotive market and a Galvalume(R) line which services the construction
market). In addition, Midwest has finishing facilities for cold-rolled products,
consisting of a batch annealing station, a sheet temper mill and a continuous
stretcher leveling line. The facility also includes an electrolytic cleaning
line, a continuous annealing line, two tin temper mills, two tin recoil lines,
an electrolytic tinning line and a chrome line, all of which service the
container market. Principal products include tin mill products, hot-dipped
galvanized and Galvalume(R) steel, cold-rolled and electrical lamination steels.
NATIONAL STEEL PELLET COMPANY
National Steel Pellet Company, located on the western end of the Mesabi Iron Ore
Range in Keewatin, Minnesota, 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. This facility has annual effective iron ore pellet capacity of over
five million gross tons and has a combination of rail and vessel access to
National's integrated steel mills.
PROCOIL
ProCoil, located in Canton, Michigan, operates a steel processing facility,
which began operations in 1988 and a warehousing facility, which began
operations in 1993. ProCoil blanks, slits and cuts steel coils to desired
specifications to service automotive market customers and also provides laser
welding services. In addition, ProCoil warehouses material to assist in
providing just-in-time inventory to automotive customers.
DOUBLE G COATINGS
We will acquire National's 50% equity interest in Double G, which is a 300,000
ton per year hot dip galvanizing and Galvalume(R) steel facility near Jackson,
Mississippi. The facility is capable of coating 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 joint venture commenced production in the second quarter of 1994 and
reached full operating capacity in 1995.
S-102
ENVIRONMENTAL MATTERS
National's business is subject to numerous federal, state and local laws and
regulations relating to the protection of the environment. These environmental
laws and regulations include the Clean Air Act with respect to air emissions,
the Clean Water Act with respect to water discharges, the Resource Conservation
and Recovery Act with respect to solid and hazardous waste treatment, storage
and disposal and the Comprehensive Environmental Response, Compensation and
Liability Act with respect to releases and remediation of hazardous substances.
In addition, all states where National operates have similar laws dealing with
the same matters. These laws are constantly evolving and becoming increasingly
stringent. The ultimate impact of complying with existing laws and regulations
is not always clearly known or determinable due in part to the fact that certain
implementing regulations for laws such as RCRA and the CAA have not yet been
promulgated or in certain instances are undergoing revision. These environmental
laws and regulations, particularly the CAA, could result in substantially
increased capital, operating and compliance costs.
S-103
NATIONAL STEEL TRANSACTION
On April 21, 2003 we entered into, and the Bankruptcy Court for the Northern
District of Illinois, Eastern Division, approved, an asset purchase agreement
with National Steel Corporation to purchase substantially all of National's
assets for $850 million in cash plus the assumption of certain liabilities,
which are primarily operating leases, including leases for the continuous caster
and continuous electrolytic galvanizing line at the Great Lakes Division and a
coke battery at the Granite City Division.
THE PURCHASE AGREEMENT
The following is a brief summary of material provisions of the purchase
agreement. This summary is qualified in its entirety by reference to the
purchase agreement.
STRUCTURE
U. S. Steel will acquire the assets free and clear of all liens (other than
customary permitted liens, as specified in the purchase agreement), claims and
encumbrances, other than the assumed liabilities. The acquired assets include
all assets of National used or held for use in the production, sale and
transportation of coke and steel products and the production of iron ore pellets
(excluding the mining of coal and ore), except for certain assets specified in
the purchase agreement. The assumed liabilities include accounts payable,
obligations arising after the closing date under assumed contracts and
obligations of National associated with the Double G joint venture. U. S. Steel
is not assuming National's existing indebtedness or National's pension and
benefit obligations to its retirees.
CLOSING
The National transaction will close not later than the second business day after
satisfaction or waiver of the conditions to the National transaction provided
for in the purchase agreement, unless we and National agree to another date. We
expect the transaction to close in May 2003.
PURCHASE PRICE
At the closing of the National transaction, we will pay National $850 million in
cash.
The purchase price will be decreased on a dollar-for-dollar basis in the event
National's net working capital (accounts receivable plus inventory minus
accounts payable) is less than $450 million as of the closing date.
In addition, the purchase price will be increased in respect of certain
operating lease payments made by National after January 1, 2003. The purchase
price will be increased by $1.00 for each $1.00 of specified operating lease
payments made by National prior to the closing, up to $2 million and by $0.75
for each $1.00 of operating lease payments made by National prior to the
closing, in excess of $2 million. We expect to pay National approximately $4
million in additional purchase price in respect of operating lease payments made
by National and we expect to make additional payments related to operating
leases at closing of $17 million.
REPRESENTATIONS AND WARRANTIES
In the purchase agreement, National made customary representations and
warranties to U. S. Steel concerning, among other things: corporate
organization, qualification and good standing; authorization and enforceability
of the purchase agreement and the other documents to be
S-104
delivered in connection with the National transaction; compliance with the
provisions of the sellers' organizational documents, debt instruments and other
contracts and applicable laws; consents required from governmental authorities;
title to and sufficiency and condition of assets; intellectual property matters;
real property matters; obligations to pay brokers or finders in connection with
the National transaction; tax matters; labor matters; ERISA and other employee
benefit matters; litigation; customers and suppliers; accounts receivable;
inventory; financial statements and SEC filings; material contracts; permits;
environmental matters; capital expenditures; and securities law matters.
In the purchase agreement, U. S. Steel made customary representations and
warranties to National concerning, among other things: corporate organization,
qualification and good standing; authorization and enforceability of the
purchase agreement and the other documents to be delivered in connection with
the National transaction; compliance with the provisions of U. S. Steel's
organizational documents, debt instruments and other contracts and applicable
laws; obligations to pay brokers or finders in connection with the National
transaction; financial statements and SEC filings; and litigation.
The representations and warranties do not survive the closing date.
COVENANTS
During the period from the date of the purchase agreement to the closing date,
National has agreed to operate its business in the ordinary course and to use
commercially reasonable efforts to preserve its business intact and preserve its
relationships with customers, suppliers, employees and others doing business
with National. In furtherance of this covenant, from the date of the purchase
agreement until the closing date, National has agreed not to take certain
actions, as specified in the purchase agreement, without our prior written
consent.
The purchase agreement also includes customary covenants relating to, among
other things, notification of certain matters, access to information, public
announcements, proration of taxes, utilities and other charges as of the closing
date, and negotiation of a transition services agreement.
CLOSING CONDITIONS
Each party's obligation to consummate the National transaction is subject to the
satisfaction of certain closing conditions.
U. S. Steel's obligation to close is subject to: the accuracy of National's
representations and warranties as of the closing date, except where the failure
to be accurate has not and would not reasonably be expected to have a Material
Adverse Effect (as defined in the purchase agreement); the performance by
National of its obligations and agreements in the purchase agreement; the
approval of the National transaction by the bankruptcy court; all material
assumed contracts being in full force and effect and all breaches and defaults
of National thereunder having been cured; the absence of a material adverse
change in the business of National since September 30, 2002; the absence of
National intercompany indebtedness and the absence of liens against the assets
of Delray Connecting Railroad Company (other than permitted liens); no
violations of law; and the expiration of the waiting period under the HSR Act
and the obtaining of all necessary approvals under antitrust laws.
National's obligation to close is subject to: the accuracy of U. S. Steel's
representations and warranties as of the closing date, except where the failure
to be accurate has not and would
S-105
not reasonably be expected to have a Material Adverse Effect (as defined in the
purchase agreement); the performance by U. S. Steel of its obligations and
agreements in the purchase agreement; the approval of the National transaction
by the bankruptcy court; and the expiration of the waiting period under the HSR
Act and the obtaining of all necessary approvals under antitrust laws.
INDEMNIFICATION
U. S. Steel has agreed to indemnify National for damages resulting from (i)
inaccuracies of U. S. Steel's representations and warranties, (ii) the failure
of U. S. Steel to perform its obligations under the purchase agreement, (iii)
the assumed liabilities, and (iv) the ownership, use and operation of the
acquired assets after the closing. U. S. Steel's indemnification obligation is
limited to $25 million.
National is not obligated to indemnify U. S. Steel under the agreement.
National's liability for breach of the agreement is limited to $25 million.
FINANCING OF THE NATIONAL TRANSACTION
We intend to fund the cash portion of the purchase price of the National
transaction with (i) the proceeds of this offering, (ii) the net proceeds of the
sale of our 7.00% Series B Mandatory Convertible Preferred Shares, which were
issued on February 10, 2003 and (iii) sales of receivables under our receivables
sales program.
S-106
MANAGEMENT
The following table contains information regarding our executive officers and
directors as of May 1, 2003.
-----------------------------------------------------------------------------------------
NAME AGE TITLE
-----------------------------------------------------------------------------------------
Charles G. Carson 61 Vice President--Environmental Affairs
III
Roy G. Dorrance 57 Vice Chairman and Chief Operating Officer
James D. Garraux 50 Vice President--Employee Relations
Charles C. Gedeon 62 Executive Vice President--Raw Materials and Transportation
John H. Goodish 54 Executive Vice President--International and Diversified
Businesses
Gretchen R. Haggerty 47 Executive Vice President, Treasurer and Chief Financial
Officer
J. Paul Kadlic 62 Executive Vice President--Sheet & Tin Products
Dan D. Sandman 55 Vice Chairman, Chief Legal & Administrative Officer, General
Counsel and Secretary
Larry G. Schultz 53 Vice President and Controller
Terrence D. Straub 57 Senior Vice President--Public Policy and Governmental
Affairs
John P. Surma, Jr. 48 President
Stephan K. Todd 57 Vice President--Law
Thomas J. Usher 60 Chairman and Chief Executive Officer
J. Gary Cooper 66 Director
Robert J. Darnall 65 Director
John G. Drosdick 59 Director
Shirley Ann Jackson 56 Director
Charles R. Lee 63 Director
Frank J. Lucchino 64 Director
Seth E. Schofield 63 Director
Douglas C. Yearley 67 Director
-----------------------------------------------------------------------------------------
With the exception of Mr. Surma, all of the executive officers mentioned above
have held responsible management or professional positions with U. S. Steel or
its subsidiaries for more than the past five years. Mr. Surma was Assistant to
the Chairman of USX Corporation effective September 1, 2001 and had been the
President of Marathon Ashland Petroleum LLC ("MAP") since January 2001. Prior to
that, Mr. Surma served as the Senior Vice President, Supply & Transportation for
MAP, the President of Speedway SuperAmerica LLC, and was named Senior Vice
President, Finance & Accounting for Marathon Oil Company in 1997. Immediately
prior to joining Marathon Oil Company, he was a partner with Price Waterhouse
LLP.
J. Gary Cooper has been a director of U. S. Steel since December 31, 2001 and is
currently the Chairman and Chief Executive Officer of the Commonwealth National
Bank. He was the United States Ambassador to Jamaica from 1994 to 1997.
Ambassador Cooper is a director of GenCorp Inc. and Protective Life Corporation.
Robert J. Darnall has been a director of U. S. Steel since December 31, 2001 and
is the retired Chairman and Chief Executive Officer of Inland Steel Industries.
Mr. Darnall retired as Chairman
S-107
and Chief Executive Officer of Inland Steel Industries in 1998 and immediately
joined Ispat International N.V., which acquired Inland Steel Industries, as head
of their North American operations. Mr. Darnall left Ispat in 2000 and soon
thereafter became Chairman and Interim CEO of Prime Advantage Corporation, a
procurement services startup. He left Prime Advantage in January 2002. Mr.
Darnall is a director of Cummins, Inc., Household International, Inc., Pactiv
Corp. and Sunoco, Inc. He is Chairman of the Federal Reserve Bank of Chicago.
John G. Drosdick has been a director of U. S. Steel since March 2003 and is
currently the Chairman, President and Chief Operating Officer of Sunoco, Inc.
Mr. Drosdick became President and Chief Operating Officer of Sunoco in 1996 and
was elected Chairman in May 2000. He is a director of Lincoln National
Corporation and Sunoco Logistic Partners L.P. He is chairman of the Board of
Trustees of Villanova University and serves on the Board of Trustees of the
Philadelphia Museum of Art and Kimmel Center for the Performing Arts.
Shirley Ann Jackson, Ph.D. has been a director of U. S. Steel since December 31,
2001 and is currently the President of Rensselaer Polytechnic Institute. Dr.
Jackson was appointed President of Rensselaer Polytechnic Institute in 1999 and
was Chairman of the U.S. Nuclear Regulatory Commission from 1995 to 1999. Dr.
Jackson is a director of Marathon Oil Corporation (formerly USX), Federal
Express Corporation, AT&T, Medtronic, Inc. and Public Service Enterprise Group.
Charles R. Lee has been a director of U. S. Steel since December 31, 2001 and is
currently the Chairman and Co-Chief Executive Officer of Verizon Communications.
Mr. Lee was elected Chairman and Chief Executive Officer of GTE (which merged
with Bell Atlantic Corporation to form Verizon Communications in 2000) in May
1992. He was elected to his present position with Verizon Communications on June
30, 2000. Mr. Lee is a director of Marathon Oil Corporation (formerly USX), The
Procter & Gamble Company, United Technologies Corporation, the Stamford Hospital
Foundation, and the New American Schools Development Corporation.
Frank J. Lucchino has been a director of U. S. Steel since January 2003. Mr.
Lucchino currently serves as a judge in the Orphans' Court Division of the Court
of Common Pleas in Allegheny County, Pennsylvania. Prior to being elected to the
Court, he was a senior partner at the Pittsburgh law firm of Grogan, Graffam,
McGinley and Lucchino. He has also served five, four-year terms as Allegheny
County (Pennsylvania) Controller.
Seth E. Schofield has been a director of U. S. Steel since December 31, 2001 and
is the retired Chairman and Chief Executive Officer of USAir Group. Mr.
Schofield retired as Chairman and Chief Executive Officer in 1996, after having
served in such position since 1992. Mr. Schofield is a director of Marathon Oil
Corporation (formerly USX), Calgon Carbon Corp., and Candlewood Hotel Company,
Inc.
Douglas C. Yearley has been a director of U. S. Steel since December 31, 2001
and is the Chairman Emeritus of Phelps Dodge Corporation. Mr. Yearley retired in
2000 from Phelps Dodge Corporation. He is a director of Marathon Oil Corporation
(formerly USX) and Lockheed Martin Corporation.
S-108
DESCRIPTION OF OTHER INDEBTEDNESS AND
RECEIVABLES SALES PROGRAM
INVENTORY CREDIT FACILITY
Our revolving inventory credit facility to be in effect at the time of the
closing of the National transaction provides for borrowings of up to $600
million. The facility, which expires in May 2007, is secured by all domestic
inventory and related assets, including receivables other than those sold under
the receivables sales program. The amount outstanding under the inventory credit
facility cannot exceed the permitted "borrowing base," calculated on percentages
of the value of eligible inventory. Borrowings under the facility bear interest
at a rate equal to LIBOR or the prime rate plus an applicable margin.
The inventory credit facility includes a fixed charge coverage ratio, calculated
as the ratio of operating cash flow to cash charges, as defined in the
agreement, of not less than 1.25 times on the last day of any fiscal quarter.
This coverage ratio must be met if availability, as defined in the agreement, is
less than $100 million. The inventory credit facility also imposes limitations
on our capital expenditures and restrictions on our investments.
If we breach the covenants of the inventory credit facility or fail to make
payments under our material debt obligations or the receivables sales program,
creditors would be able to terminate their commitments to make further loans,
declare the outstanding amounts immediately due and payable and foreclose on any
collateral and may also cause termination events to occur under the receivables
sales program and a default under the existing senior notes. In addition, upon
the occurrence of "change of control" events specified in the inventory credit
facility, we may be required to repay the amounts outstanding.
EXISTING SENIOR NOTES
In July 2001 we issued $385 million of 10 3/4% senior notes due August 1, 2008
and in September 2001 we issued an additional $150 million of these existing
senior notes. As of December 31, 2002, the aggregate principal amount of
existing senior notes outstanding was $535 million.
The existing senior notes are unsecured senior obligations of the Company and
rank equally in right of payment with all existing and future senior
indebtedness of U. S. Steel, including the notes, and are senior in right of
payment to any future subordinated obligations of the Company. The existing
senior notes will mature on August 1, 2008. Interest on the existing senior
notes will accrue at the rate of 10.75% per annum. Interest is payable
semiannually in arrears on August 1 and February 1. Interest payments commenced
on August 1, 2002. We will pay interest on overdue principal at 1% per annum in
excess of the above rate.
Before August 1, 2004 we may, at our option, redeem the existing senior notes,
with the net cash proceeds from one or more public equity offerings, in an
aggregate principal amount not to exceed 35% of the aggregate principal amount
of the existing senior notes originally issued. If we elect to redeem the
existing senior notes, the redemption price would equal 110.75% of the principal
amount of the notes redeemed, plus accrued and unpaid interest to the redemption
date. We may only redeem the existing senior notes if the redemption occurs
within 60 days of the related public equity offering and if, after giving effect
to the redemption, at least 65% of the aggregate principal amount of the
originally issued existing
S-109
senior notes remain outstanding (other than existing senior notes held, directly
or indirectly, by U. S. Steel or its affiliates).
We are not required to make any mandatory redemption or sinking fund payments
with respect to the existing senior notes. However, under certain circumstances,
we may be required to offer to purchase the existing senior notes as a result of
a change of control or as a result of our breach of certain covenants. We may at
any time and from time to time purchase existing senior notes in the open market
or otherwise.
Upon a change of control, each holder of the existing senior notes has the right
to require us to repurchase such holder's existing senior notes at a purchase
price in cash equal to 101% of the principal amount thereof on the date of
purchase, plus accrued and unpaid interest, if any, to the date of purchase.
The existing senior notes impose certain restrictions that limit our ability to,
among other things: incur debt, restrict dividend or other payments from our
subsidiaries; issue and sell capital stock of our subsidiaries; engage in
transactions with affiliates; create liens on our assets to secure indebtedness;
transfer or sell assets; and consolidate, merge or transfer all or substantially
all of our assets and the assets of our subsidiaries.
Simultaneously with this offering, we are soliciting the consent of the holders
of our existing senior notes to modify certain terms of the existing senior
notes to conform to the terms of the notes. Those conforming changes modify the
definitions of Consolidated Net Income and EBITDA, permit dividend payments on
our 7.00% Series B Mandatory Convertible Preferred Shares and expand permitted
investments to include loans made for the purpose of facilitating like-kind
exchange transactions.
SENIOR QUARTERLY INCOME DEBT SECURITIES
In December 2001, we issued our 10% Quarterly Income Debt Securities, due
December 31, 2031, in exchange for preferred securities of Marathon Oil
Corporation. As of December 31, 2002, the aggregate principal amount of
outstanding quarterly income debt securities was $49 million.
Interest on the quarterly income debt securities is payable in cash on March 31,
June 30, September 30 and December 31 of each year. The quarterly income debt
securities are redeemable at our option, in whole or in part, at any time on or
after December 31, 2006, upon not less than 30 nor more than 60 days' notice, at
a redemption price equal to 100% of the principal amount redeemed plus accrued
and unpaid interest to the redemption date. The quarterly income debt securities
are unsecured obligations and rank equally in right of payment with all of the
existing and future senior indebtedness of U. S. Steel, including the notes, and
will rank senior in right of payment to all of its existing and future
subordinated indebtedness.
Upon a change of control, we will be required to make an offer to purchase the
quarterly debt securities at a purchase price of 100% of the principal amount of
the quarterly income debt securities, together with accrued but unpaid interest.
INDUSTRIAL REVENUE BONDS
As of December 31, 2002, $471 million was outstanding under industrial revenue
bonds related to environmental projects for current and former U. S. Steel
facilities, having interest rates ranging from 4.75% to 6.875% and maturities
from 2009 to 2033. Under the Financial Matters Agreement that we entered into
with Marathon at the time of the Separation we assumed and
S-110
agreed to discharge all principal, interest and other duties of Marathon under
these obligations, including any amounts due upon any defaults or accelerations
of any of the obligations (other than defaults or accelerations caused by the
actions of Marathon). We are required to discharge Marathon from any remaining
liability under the assumed industrial revenue bonds on or prior to December 31,
2011.
USSK LOAN
As of December 31, 2002, $301 million was outstanding under USSK's loan
facility. The loan, which is non-recourse to U. S. Steel, bears interest at a
fixed rate of 8.5% per year and is subject to annual repayments of $20 million
beginning in November 2003, with the balance due in 2010. Additional mandatory
prepayments may be required based upon a cash flow formula or a change in
control of U. S. Steel.
USSK CREDIT FACILITIES
USSK is the sole obligor on a $40 million credit facility that expires in
December 2004. The facility bears interest at prevailing market rates plus
0.90%. USSK is obligated to pay a 0.25% commitment fee on undrawn amounts. USSK
is also the sole obligor on a short-term $10 million credit facility that
expires November 26, 2003. The facility bears interest at prevailing short-term
rates plus 1%. USSK is obligated to pay a 0.25% commitment fee on undrawn
amounts. There were no borrowings under these facilities at December 31, 2002
and availability was $48 million, as a result of customs guarantees issued
against these facilities.
CAPITAL LEASES
We are the sublessee of a slab caster at the Fairfield Works facility in Alabama
with a term through 2012. This sublease is accounted for as a capital lease.
Marathon is the primary obligor under the lease and under our financial matters
agreement with Marathon, we assumed and will discharge all obligations under
this lease. As of December 31, 2002, the aggregate amount of our obligation
under this lease was $80 million. This lease has a final maturity of 2012,
subject to additional extensions. As of December 31, 2002, the aggregate amount
of our obligations under other capital leases was $2 million. In addition, we
will assume $4 million of capital leases from National.
RECEIVABLES SALES PROGRAM
In November 2001, we entered into a five-year receivables sales program with
financial institutions. We established a consolidated wholly-owned subsidiary,
USSR, which is a consolidated special-purpose, bankruptcy-remote entity that
acquires, on a daily basis, eligible trade receivables generated by us and
certain of our subsidiaries. USSR can sell an undivided interest in these
receivables to certain commercial paper conduits. Effective upon the closing of
the National transaction, we expect to enter into an amendment to the
receivables sales program, which increased fundings under the facility to the
lesser of eligible receivables or $500 million. Eligible receivables exclude
certain obligors, amounts in excess of specified percentages for certain
obligors and amounts past due or due beyond a specified period. In addition,
eligible receivables are calculated by deducting certain reserves, which are
based on factors such as concentration, dilution and loss percentages, as well
as the credit ratings of U. S. Steel. The reserves would increase by
approximately $60 to $75 million if U. S. Steel's credit ratings were downgraded
to B2 by Standard & Poor's or B by Moody's. The reserves would increase by an
additional $60 to $75 million if the ratings were lower. The receivables
S-111
sales program also imposes certain restrictions that limit our ability to, among
other things, create liens on our receivables.
While the term of the receivables sales program is five years, the facility also
terminates on the occurrence and failure to cure certain events, including,
among others, certain defaults with respect to the inventory credit facility and
other debt obligations, any failure of USSR to maintain certain ratios related
to the collectability of the receivables, and failure to extend the commitments
of the commercial paper conduits' liquidity providers, which currently terminate
on November 26, 2003. In addition, upon the occurrence of "change in control"
events specified in the receivables sales program, we may be required to
repurchase the receivables.
S-112
DESCRIPTION OF THE NOTES
We will issue the notes under an Indenture (the "Indenture") between the Company
and The Bank of New York, as trustee (the "Trustee"). The terms of the notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act").
Certain terms used in this description are defined under the subheading
"--Certain Definitions." In this description, the words "We," "our," "us" and
"Company" refer only to United States Steel Corporation, and not to any of its
subsidiaries.
The following description is only a summary of the material provisions of the
Indenture. We urge you to read the Indenture because it, not this description,
defines your rights as holders of these notes. You may request copies of this
agreement at our address set forth under the heading "Where you can find more
information."
BRIEF DESCRIPTION OF THE NOTES
These notes:
-- are unsecured senior obligations of the Company;
-- are equal in right of payment with all of the existing and future
senior unsecured indebtedness of the Company;
-- are senior in right of payment to any future Subordinated
Obligations of the Company; and
-- are effectively junior to any of our secured debt and any
indebtedness of our subsidiaries.
As of March 31, 2003, we had $1.05 billion of senior unsecured indebtedness, no
subordinated indebtedness and $383 million of secured debt and indebtedness of
USSK.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the notes initially with a maximum aggregate principal
amount of $350 million. The notes will mature on , 2010. Subject to our
compliance with the covenant described under the subheading "--Certain
covenants--Limitation on Indebtedness," we are permitted to issue more notes
under the Indenture (the "Additional Notes"). The notes and the Additional
Notes, if any, will be treated as a single class for all purposes under the
Indenture, including waivers, amendments, redemptions and offers to purchase.
Unless the context otherwise requires, for all purposes of the Indenture and
this "Description of the notes," references to the notes include any Additional
Notes actually issued.
The Company will issue the notes in denominations of $1,000 and any integral
multiple of $1,000.
Interest on the notes will accrue at the rate of % per annum. Interest will
be payable semiannually in arrears on and , commencing on ,
2003. We will make each interest payment to the holders of record of these notes
on the immediately preceding
and . We will pay interest on overdue principal at 1% per annum in excess
of the above rate and will pay interest on overdue installments of interest at
such higher rate to the extent lawful.
S-113
Interest on these notes will accrue from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
OPTIONAL REDEMPTION
Except as follows, we will not be able to redeem the notes at our option prior
to maturity.
Before , 2006, we may at our option on one or more occasions, upon not less
than 30 nor more than 60 days' notice, redeem the notes in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of the
notes originally issued at a redemption price (expressed as a percentage of
principal amount) of %, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds from one or more Public Equity Offerings;
provided that
(1) at least 65% of such aggregate principal amount originally issued of
the notes remains outstanding immediately after the occurrence of each such
redemption (other than notes held, directly or indirectly, by the Company
or its Affiliates); and
(2) each such redemption occurs within 60 days after the date of the
related Public Equity Offering.
On and after , 2007, we will be entitled at our option to redeem all
or a portion of the notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed in percentages of principal amount), plus
accrued interest to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
of the years set forth below:
------------------------------------------------------------------------
REDEMPTION
PERIOD PRICE
------------------------------------------------------------------------
2007........................................................
2008........................................................
2009........................................................
2010 and thereafter......................................... 100.00%
------------------------------------------------------------------------
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the notes at any time, the Trustee will select
notes on a pro rata basis, by lot or by such other method as the Trustee in its
sole discretion shall deem to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will cause
notices of redemption to be mailed by first-class mail at least 30 but not more
than 60 days before the redemption date to each holder of notes to be redeemed
at its registered address.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount thereof to
be redeemed. We will issue a new note in a principal amount equal to the
unredeemed portion of the original note in the name of the holder upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
So long as the book-entry system is used for determining beneficial ownership of
the notes, the notice of redemption for any of the notes will be given to Cede &
Co., as nominee for The
S-114
Depository Trust Company ("DTC") and registered owner of the notes. Neither
failure to receive such notice nor any defect in any notice so given shall
affect the sufficiency of the proceedings for the redemption of any such notes.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund payments
with respect to the notes. However, under certain circumstances, we may be
required to offer to purchase notes as described under the captions "--Change of
control" and "--Certain covenants--Limitation on sales of assets and subsidiary
stock." We may at any time and from time to time purchase notes in the open
market or otherwise.
RANKING
SENIOR INDEBTEDNESS VERSUS THE NOTES
The indebtedness evidenced by these notes will rank pari passu in right of
payment to all senior Indebtedness of United States Steel. The notes are
unsecured obligations of the Company. Secured debt and other secured obligations
of United States Steel (including obligations with respect to our $600 million
revolving credit facility) will be effectively senior to the notes to the extent
of the value of the assets securing such debt or other obligations.
LIABILITIES OF SUBSIDIARIES VERSUS THE NOTES
A portion of our operations are conducted through USSK and other subsidiaries.
Claims of creditors of such subsidiaries, including trade creditors and
creditors holding indebtedness or guarantees issued by such subsidiaries, and
claims of preferred stockholders of such subsidiaries generally will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of our creditors, including holders of the notes. Accordingly, the notes
will be effectively subordinated to creditors (including trade creditors) and
preferred stockholders, if any, of our subsidiaries.
Although the Indenture limits the incurrence of Indebtedness and preferred stock
of certain of our subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indenture. See "--Certain
covenants--Limitation on Indebtedness."
BOOK-ENTRY, DELIVERY AND FORM
We will initially issue the notes in the form of one or more global notes (the
"Global Notes"). The Global Notes will be deposited with, or on behalf of, DTC
and registered in the name of DTC or its nominee. Except as set forth below, the
Global Notes may be transferred, in whole and not in part, only to DTC or
another nominee of DTC. You may hold your beneficial interests in the Global
Note directly through DTC if you have an account with DTC or indirectly through
organizations which have accounts with DTC.
DTC has advised the Company as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and "a clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities of
S-115
institutions that have accounts with DTC ("participants") and to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book- entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC's participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's book-entry system is also available to others such as banks, brokers,
dealers and trust companies (collectively, the "indirect participants") that
clear through or maintain a custodial relationship with a participant, whether
directly or indirectly.
We expect that pursuant to procedures established by DTC, upon the deposit of
the Global Notes with DTC, DTC will credit, on its book-entry registration and
transfer system, the principal amount of notes represented by such Global Notes
to the accounts of participants. Ownership of book-entry interests is limited to
participants or indirect participants, banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with DTC,
either directly or indirectly. Indirect participants also include persons that
hold through such indirect participants. The book-entry interests will not be
held in definitive form. Ownership of beneficial interests in the Global Notes
will be shown on, and the transfer of those ownership interests will be effected
only through, records maintained by DTC (with respect to participants'
interests), the participants and the indirect participants (with respect to the
owners of beneficial interests in the Global Notes other than participants). The
laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
laws may impair the ability to transfer or pledge beneficial interests in the
Global Notes.
So long as DTC, or its nominee, is the registered holder and owner of the Global
Notes, DTC or such nominee, as the case may be, will be considered the sole
legal owner and holder of any related notes evidenced by the Global Note for all
purposes of such notes and the Indenture. Except as set forth below, as an owner
of a beneficial interest in the Global Note, you will not be entitled to have
the notes represented by the Global Note registered in your name, will not
receive or be entitled to receive physical delivery of certificated notes and
will not be considered to be the owner or holder of any notes under the Global
Notes. We understand that under existing industry practice, in the event an
owner of a beneficial interest in the Global Note desires to take any action
that DTC, as the holder of the Global Note, is entitled to take, DTC would
authorize the participants to take such action, and the participants would
authorize beneficial owners owning through such participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
We will make payments of principal of, premium, if any, and interest on notes
represented by the Global Note registered in the name of and held by DTC or its
nominee to DTC or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
We expect that DTC or its nominee, upon receipt of any payment of principal of,
premium, if any, or interest on the Global Note will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
DTC or its nominee. We also expect that payments by participants or indirect
participants to owners of beneficial interests in the Global Note held through
such participants or indirect participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants or indirect participants. We will not have any responsibility or
liability for any aspect of the records relating to, or payments made on account
of, beneficial ownership interests in the Global Note for any note
S-116
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship
between DTC and its participants or indirect participants or the relationship
between such participants or indirect participants and the owners of beneficial
interests in the Global Note owning through such participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Trustee nor the Company
will have any responsibility or liability for the performance by DTC or their
respective participants or indirect participants of its obligations under the
rules and procedures governing its operations.
CERTIFICATED NOTES
Subject to certain conditions, the notes represented by the Global Notes are
exchangeable for certificated notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if
(1) DTC notifies us that it is unwilling or unable to continue as
Depository for the Global Notes or DTC ceases to be a clearing agency
registered under the Exchange Act and, in either case, we are unable to
locate a qualified successor within 90 days;
(2) we in our discretion at any time determine not to have all the notes
represented by Global Notes; or
(3) a default entitling the holders of the notes to accelerate the maturity
thereof has occurred and is continuing.
Any note that is exchangeable as above is exchangeable for certificated notes
issuable in authorized denominations and registered in such names as DTC shall
direct. Subject to the foregoing, the Global Notes are not exchangeable, except
for Global Notes of the same aggregate denomination to be registered in the name
of DTC or its nominee.
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address.
CHANGE OF CONTROL OFFER
Upon the occurrence of any of the following events (each a "Change of Control"),
each Holder shall have the right to require that the Company repurchase such
Holder's notes at a purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
A "Change of Control" shall occur if:
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that for purposes of this
clause (1) such person shall be deemed to
S-117
have "beneficial ownership" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company;
(2) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors of the Company then still in
office who were either directors on the Issue Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or dissolution of
the Company; or
(4) the merger or consolidation of the Company with or into another Person
or the merger of another Person with or into the Company, or the sale of
all or substantially all the assets of the Company (determined on a
consolidated basis) to another Person, other than a merger or consolidation
transaction in which holders of securities that represented 100% of the
Voting Stock of the Company immediately prior to such transaction (or other
securities into which such securities are converted as part of such merger
or consolidation transaction) own directly or indirectly at least a
majority of the voting power of the Voting Stock of the surviving Person in
such merger or consolidation transaction immediately after such transaction
and in substantially the same proportion as before the transaction.
Within 30 days following any Change of Control, we will mail a notice to each
Holder with a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase (subject
to the right of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of Control
(including information with respect to pro forma historical income, cash
flow and capitalization, in each case after giving effect to such Change of
Control);
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the covenant
described hereunder, that a Holder must follow in order to have its notes
purchased.
We will not be required to make a Change of Control Offer following a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by us and purchases all
notes validly tendered and not withdrawn under such Change of Control Offer.
We will comply, to the extent applicable, with the requirements of Section 14(e)
of the Exchange Act and any other securities laws or regulations in connection
with the repurchase of notes as a result of a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
S-118
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the notes may in certain circumstances
make more difficult or discourage a sale or takeover of the Company and, thus,
the removal of incumbent management. The Change of Control purchase feature was
a result of negotiations between the Company and the initial purchasers of the
notes. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "--Certain covenants--Limitation on Indebtedness,"
"--Limitation on liens" and "--Limitation on Sale/Leaseback Transactions." Such
restrictions can only be waived with respect to any series of notes with the
consent of the holders of a majority in principal amount of that series of notes
then outstanding. Except for the limitations contained in such covenants,
however, the Indenture will not contain any covenants or provisions that may
afford holders of the notes protection in the event of a highly leveraged
transaction.
Certain of our outstanding indebtedness requires us to repay all the amounts
outstanding upon a change in control (as defined therein). In addition to this,
borrowings under our inventory credit facility are limited by the amounts of
available inventory and other factors. It is possible, therefore, we would be
unable to use our revolving credit facility to finance the purchase of a
significant amount of notes following a change of control without the consent of
the lenders under that facility. If we are unable to obtain that consent or
obtain other financing to purchase the notes it would be a default under the
Indenture. Such a default under the Indenture would also constitute a default
under our revolving credit facility and a termination event under our accounts
receivable purchase program.
Future indebtedness that we may incur may contain prohibitions on the occurrence
of certain events that would constitute a Change of Control or require the
repurchase of such indebtedness upon a Change of Control. Moreover, the exercise
by the holders of their right to require us to repurchase the notes could cause
a default under such indebtedness, even if the Change of Control itself does
not, due to the financial effect of such repurchase on us. Finally, our ability
to pay cash to the holders of notes following the occurrence of a Change of
Control may be limited by our then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
The provisions under the Indenture relative to our obligation to make an offer
to repurchase the notes as a result of a Change of Control may be waived or
modified with respect to any series of notes with the written consent of the
holders of a majority in principal amount of that series of notes.
S-119
CERTAIN COVENANTS
The Indenture contains covenants including, among others, those described below.
INVESTMENT GRADE RATING FALL-AWAY COVENANTS
Following the first day:
(a) the notes have an Investment Grade Rating from both of the Rating
Agencies, and
(b) no Default has occurred and is continuing under the Indenture,
the Company and its Restricted Subsidiaries will not be subject to the
provisions of the Indenture summarized under the subheadings below:
-- "Limitation on indebtedness,"
-- "Limitation on restricted payments,"
-- "Limitation on restrictions on distributions from restricted subsidiaries,"
-- "Limitation on sales of assets and subsidiary stock,"
-- "Limitation on affiliate transactions,"
-- "Limitation on the sale or issuance of capital stock of restricted
subsidiaries," and
-- Clause (3) of "Merger and consolidation"
(collectively, the "Suspended Covenants"). If the Company and its Restricted
Subsidiaries are not subject to the Suspended Covenants for any period of time
as a result of the preceding sentence, and subsequently one or both of the
Rating Agencies withdraws its rating or downgrades the rating assigned to the
notes below an Investment Grade Rating, then the Company and the Restricted
Subsidiaries will thereafter again be subject to the Suspended Covenants, and
compliance with the Suspended Covenants with respect to Restricted Payments made
after the time of such withdrawal or downgrade will be calculated in accordance
with the terms of the covenant described below under "Limitation on Restricted
Payments" as though such covenant had been in effect since the date the notes
were originally issued.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company will be entitled to Incur Indebtedness if, on the date of such
Incurrence and after giving effect thereto on a pro forma basis no Default has
occurred and is continuing and the Consolidated Coverage Ratio exceeds 2.0 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the Restricted
Subsidiaries will be entitled to Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred by the Company, any Financing Entity and any
Foreign Restricted Subsidiary pursuant to any Credit Facilities, provided,
however, that, immediately after giving effect to any such Incurrence, the
aggregate principal amount of all Indebtedness Incurred under this clause
(1) and then outstanding does not exceed the greater of (A) $750 million
less the sum of all principal payments with respect to such Indebtedness
pursuant to paragraph (b)(3)(A) of the covenant described under
"--Limitation on sales of assets and subsidiary stock," and (B) the sum of
(x) 60% of the book value of the inventory
S-120
of the Company and its Restricted Subsidiaries and (y) 85% of the book
value of the accounts receivable of the Company and its Restricted
Subsidiaries.
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the obligor thereon and (B) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all obligations with respect to the notes;
(3) the notes (other than any Additional Notes) and any other Indebtedness
of the Company or any Restricted Subsidiary outstanding on the Issue Date;
(4) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness Incurred in connection with, or to provide all or
any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Company); provided,
however, that on the date of such acquisition and after giving pro forma
effect thereto, the Company would have been able to Incur at least $1.00 of
additional Indebtedness pursuant to paragraph (a) of this covenant;
(5) Industrial Revenue Bond Obligations, so long as the aggregate principal
amount of all Industrial Revenue Bond Obligations (inclusive of any in
respect of which the Company becomes directly or indirectly liable pursuant
to the Financial Matters Agreement) does not exceed $600 million;
(6) Indebtedness to Marathon Incurred pursuant to the Financial Matters
Agreement in respect of Capital Lease Obligations, in an aggregate
principal amount not to exceed $92 million;
(7) Indebtedness to Marathon Incurred pursuant to the Financial Matters
Agreement in respect of Guarantees of Marathon, in an aggregate principal
amount not to exceed $145 million;
(8) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3), (4), (6) or this clause (8);
provided, however, that to the extent such Refinancing Indebtedness
directly or indirectly Refinances Indebtedness of a Subsidiary Incurred
pursuant to clause (4), such Refinancing Indebtedness shall be Incurred
only by such Subsidiary or by the Company;
(9) Hedging Obligations directly related to Indebtedness permitted to be
Incurred by the Company pursuant to the Indenture or to mitigate currency
or business risk;
(10) Obligations in respect of performance, bid and surety bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;
(11) Indebtedness arising from overdraft conditions honored by a bank or
other financial institution in the ordinary course of business; provided,
however, that such Indebtedness is extinguished within two Business Days of
its Incurrence;
S-121
(12) Guarantees by the Company of obligations of any of its joint ventures
in an aggregate amount not to exceed $100 million;
(13) Subordinated Obligations not to exceed $200 million which (x) are
convertible into equity securities of the Company, (y) have a Stated
Maturity after the first anniversary of the Stated Maturity of any series
of notes then outstanding and (z) have an Average Life that is greater than
the Average Life of any series of notes then outstanding;
(14) Attributable Debt related to Sale/Leaseback Transactions in an amount
not to exceed $150 million;
(15) Purchase Money Indebtedness and Capital Lease Obligations Incurred to
acquire property in the ordinary course of business in an aggregate amount
not to exceed $75 million for the year ending July 27, 2003, $75 million
for the year ending July 27, 2004 and $50 million in each of the years
thereafter; and
(16) Indebtedness of the Company and its Restricted Subsidiaries in an
aggregate principal amount which, when taken together with all other
Indebtedness of the Company and its Restricted Subsidiaries outstanding on
the date of such Incurrence (other than Indebtedness permitted by clauses
(1) through (15) above or paragraph (a)) does not exceed $150 million.
(c) Notwithstanding the foregoing, the Company will not incur any Indebtedness
pursuant to the foregoing paragraph (b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations of the Company
unless such Indebtedness shall be subordinated to the notes to at least the same
extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, if an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described above, the Company, in its sole discretion, (1) will classify such
item of Indebtedness at the time of Incurrence and will be entitled to either
include the amount and type of such Indebtedness in only one of the above
clauses or divide and classify such item of Indebtedness in more than one of the
types of Indebtedness described above and (2) will be entitled from time to time
to reclassify all or a portion of such item of Indebtedness classified in one of
the clauses in paragraph (b) above into another clause in paragraph (b) that it
meets the criteria of.
(e) For purposes of determining compliance with any U.S. dollar restriction on
the Incurrence of Indebtedness where the Indebtedness Incurred is denominated in
a different currency, the amount of such Indebtedness will be the U.S. Dollar
Equivalent determined on the date of the Incurrence of such Indebtedness,
provided, however, that if any such Indebtedness denominated in a different
currency is subject to a Currency Agreement with respect to U.S. dollars
covering all principal, premium, if any, and interest payable on such
Indebtedness, the amount of such Indebtedness expressed in U.S. dollars will be
as provided in such Currency Agreement. The principal amount of any Refinancing
Indebtedness Incurred in the same currency as the Indebtedness being Refinanced
will be the U.S. Dollar Equivalent, as appropriate, of the Indebtedness
Refinanced, except to the extent that (i) such U.S. Dollar Equivalent was
determined based on a Currency Agreement, in which case the Refinancing
Indebtedness will be determined in accordance with the preceding sentence, and
(ii) the principal amount of the Refinancing Indebtedness exceeds the principal
amount of the Indebtedness being Refinanced, in which case the U.S. Dollar
Equivalent of such excess will be determined on the date such Refinancing
Indebtedness is Incurred.
S-122
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since July 27, 2001 (other than dividends on common
stock paid prior to the Issue Date of the notes) would exceed the sum of
(without duplication);
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which July 27,
2001 occurs to the end of the most recent fiscal quarter for which
financial results are publicly available prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company from
the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to July 27, 2001 (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees) and 100%
of any cash capital contribution received by the Company from its
shareholders subsequent to July 27, 2001; plus
(C) the amount by which Indebtedness of the Company (other than
Subordinated Obligations) is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Subsidiary of the Company)
subsequent to July 27, 2001 of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash, or the fair value of
any other property, distributed by the Company upon such conversion or
exchange); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company or
any Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person, proceeds
realized on the sale of such Investment and proceeds representing the
return of capital (excluding dividends and distributions), in each case
received by the Company or any Restricted Subsidiary, and (y) to the
extent such Person is an Unrestricted Subsidiary, the portion
(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed,
in the case of any such Person or Unrestricted Subsidiary, the amount of
Investments (excluding Permitted Investments) previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
S-123
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock of
the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) or a substantially
concurrent cash capital contribution received by the Company from its
shareholders; provided, however, that (A) such Restricted Payment shall be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale or such cash capital contribution (to
the extent so used for such Restricted Payment) shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
Indebtedness which is permitted to be Incurred pursuant to the covenant
described under "--Limitation on Indebtedness"; provided, however, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the amount of
Restricted Payments;
(3) dividends paid within 60 days after the date of declaration thereof if
at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend,
no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the repurchase or
other acquisition of shares of Capital Stock of the Company or any of its
Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans(or amendments thereto) approved by the Board of
Directors under which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such Capital Stock; provided,
however, that the aggregate amount of such repurchases and other
acquisitions (other than any acquisition of shares of common stock of the
Company that are used as payment for the exercise price of outstanding
options) shall not exceed $5.0 million in any calendar year; provided
further, however, that such repurchases and other acquisitions shall be
excluded in the calculation of the amount of Restricted Payments;
(5) so long as no Default has occurred and is continuing, the declaration
and payment of one or more dividends on the common stock of the Company
with respect to the period ending on December 31, 2003 in an aggregate
amount not to exceed $14.0 million; provided that such dividends shall be
excluded in the calculation of the amount of Restricted Payments;
(6) so long as no Default has occurred and is continuing, any Restricted
Payment which, together with all other Restricted Payments made pursuant to
this clause (6) on or after July 27, 2001, does not exceed $30 million;
provided, however, that such Restricted Payments shall be included in the
calculation of the amount of Restricted Payments; and
S-124
(7) so long as no Default has occurred and is continuing, the declaration
and payment of dividends on the Company's 7.00% Series B Mandatory
Convertible Preferred Shares pursuant to their terms; provided that such
dividends shall be excluded in the calculation of the amount of Restricted
Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clause (a), (b) and (c),
(i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which
such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by
the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement referred
to in clause (i) or (ii) of clause (1) of this covenant or this clause
(iii) or contained in any amendment to an agreement referred to in
clause (i) or (ii) of clause (1) of this covenant or this clause (iii);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the Noteholders than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements; and
(2) with respect to clause (c) only,
(i) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder;
(ii) restrictions contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such restrictions
restrict the transfer of the property subject to such security
agreements or mortgages; and
(iii) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition.
S-125
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, sell, transfer or otherwise dispose of (collectively, a
"disposition") any Capital Stock of any Person that owns, directly or
indirectly, all or a significant portion of the Tubular Business, unless:
(1) the Company or such Restricted Subsidiary receives consideration at the
time of such disposition at least equal to the fair market value (including
as to the value of all non-cash consideration), as determined in good faith
by the Board of Directors, of the Capital Stock subject to such
disposition;
(2) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash equivalents; and
(3) an amount equal to 75% of the Net Available Cash from such disposition
(after giving effect to the consummation of offers to repurchase required
under the 10 3/4 Indenture) is applied by the Company (or such Restricted
Subsidiary, as the case may be) to make an offer to the holders of the
notes to purchase notes pursuant to and subject to the conditions contained
in the Indenture within 30 days from the later of the date of such
disposition or the receipt of such Net Available Cash; provided, however,
that the Company or such Restricted Subsidiary shall permanently retire
such notes. Pending application of Net Available Cash pursuant to this
paragraph (a), such Net Available Cash shall be invested in Temporary Cash
Investments or applied to temporarily reduce indebtedness under Credit
Facilities.
(b) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any other Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined in
good faith by the Board of Directors, of the shares and assets subject to
such Asset Disposition;
(2) with respect to Asset Dispositions other than Like-Kind Exchanges or
Excluded Real Property Sales, at least 75% of the consideration thereof
received by the Company or such Restricted Subsidiary is in the form of
cash or cash equivalents; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be):
(A) first, to the extent the Company elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness of the Company or Indebtedness (other than any Disqualified
Stock) of a Wholly Owned Subsidiary (in each case other than
Indebtedness owed to the Company or an Affiliate of the Company) within
one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash; and
S-126
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to
the holders of the notes (and to holders of other Senior Indebtedness of
the Company) designated by the Company to purchase notes (and such other
Senior Indebtedness of the Company) pursuant to and subject to the
conditions contained in the Indenture;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the
Company or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this paragraph (b), the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this paragraph (b) except to the extent that the aggregate
Net Available Cash from all Asset Dispositions which are not applied in
accordance with this paragraph (b) exceeds $25 million. Pending application of
Net Available Cash pursuant to this paragraph (b), such Net Available Cash shall
be invested in Temporary Cash Investments or applied to temporarily reduce
indebtedness under Credit Facilities.
(c) For the purposes of paragraphs (a) and (b) of this covenant, the following
are deemed to be cash or cash equivalents:
(1) the assumption of Senior Indebtedness of the Company, or Indebtedness
of any Restricted Subsidiary, and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition;
(2) securities received by the Company or any Restricted Subsidiary from
the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash; and
(3) any reduction of Indebtedness of the Company in connection with such
Asset Disposition.
(d) In the event of an Asset Disposition that requires the purchase of notes
(and other Senior Indebtedness) pursuant to clause (a)(3) or (b)(3)(C) above,
the Company will purchase notes tendered pursuant to an offer by the Company for
the notes (and such other Senior Indebtedness) at a purchase price of 100% of
their principal amount (or, if such other Senior Indebtedness was issued with
significant original issue discount, 100% of the accreted value thereof),
without premium, plus accrued but unpaid interest (or, in respect of such other
Senior Indebtedness, such lesser price, if any, as may be provided for by the
terms of such Senior Indebtedness) in accordance with the procedures (including
prorating in the event of over subscription) set forth in the Indenture. If the
aggregate purchase price of the securities tendered exceeds the Net Available
Cash allotted to their purchase, the Company will select the securities to be
purchased on a pro rata basis but in round denominations, which in the case of
the notes will be denominations of $1,000 principal amount or multiples thereof.
The Company shall not be required to make such an offer to purchase notes (and
other Senior Indebtedness) pursuant to paragraph (b) of this covenant if the Net
Available Cash available therefor is less than $25 million (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(e) The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the
S-127
repurchase of notes pursuant to this covenant. To the extent that the provisions
of any securities laws or regulations conflict with provisions of this covenant,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this clause by virtue
of its compliance with such securities laws or regulations.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into, permit to exist, renew or extend any transaction (including the
purchase, sale, lease or exchange of any property, employee compensation
arrangements or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary than those that could be obtained at
the time of the Affiliate Transaction in arm's-length dealings with a
Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $10
million, the terms of the Affiliate Transaction are set forth in writing
and a majority of the non-employee Directors of the Company disinterested
with respect to such Affiliate Transactions have determined in good faith
that the criteria set forth in clause (1) are satisfied and have approved
the relevant Affiliate Transaction as evidenced by a Board resolution; and
(3) if such Affiliate Transaction involves an amount in excess of $25
million, the Board of Directors shall also have received a written opinion
from an Independent Qualified Party to the effect that such Affiliate
Transaction is fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries or not less favorable to the Company and its
Restricted Subsidiaries than could reasonably be expected to be obtained at
the time in an arm's-length transaction with a Person who was not an
Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other Restricted
Payment, in each case permitted to be made pursuant to the covenant
described under "--Limitation on restricted payments;"
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board
of Directors;
(3) loans or advances to employees in the ordinary course of business in
accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $5.0 million in the aggregate
outstanding at any one time;
(4) the payment of reasonable fees to Directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(5) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in
or otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
(6) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company; and
S-128
(7) any transaction pursuant to any contract or agreement in effect on the
Issue Date, in each case as amended, modified or replaced from time to time
so long as the amended, modified or new agreement, taken as a whole, is no
less favorable to the Company and its Restricted Subsidiaries than that in
effect on the Issue Date.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company
(1) will not, and will not permit any Restricted Subsidiary to, sell,
transfer or otherwise dispose of any Capital Stock of any other Restricted
Subsidiary to any Person (other than the Company or a Wholly Owned
Subsidiary); and
(2) will not permit any Restricted Subsidiary to issue any of its Capital
Stock (other than, if necessary, shares of its Capital Stock constituting
directors' or other legally required qualifying shares) to any Person
(other than to the Company or a Wholly Owned Subsidiary);
unless
(A) the Company complies with the covenant described under "--Limitation
Sale of Assets and Subsidiary Stock" with respect to any such sale,
transfer or other disposition; and
(B) immediately after giving effect to such issuance, sale, transfer or
other disposition, (x) such Restricted Subsidiary remains a Restricted
Subsidiary or (y) such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto is treated as a new Investment by the Company and
such Investment would be permitted to be made under the covenant described
under "--Limitation on Restricted Payments" if made on the date of such
issuance, sale, transfer or other disposition.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, Incur or permit to exist any Lien (the "Initial Lien") of any
nature whatsoever on any of its properties (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired,
securing any Indebtedness, other than Permitted Liens, without effectively
providing that the notes shall be secured equally and ratably with (or prior to)
the obligations so secured for so long as such obligations are so secured.
Any Lien created for the benefit of the Holders of the notes pursuant to the
preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the Initial Lien.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to, enter
into, Guarantee or otherwise become liable with respect to any Sale/Leaseback
Transaction with respect to any property unless:
(1) the Company or such Restricted Subsidiary would be entitled to (A)
Incur Indebtedness in an amount equal to the Attributable Debt with respect
to such Sale/Leaseback Transaction pursuant to the covenant described under
"--Limitation on Indebtedness" and (B) create a Lien on such property
securing such Attributable Debt without equally and
S-129
ratably securing the notes pursuant to the covenant described under
"--Limitation on liens";
(2) the net proceeds received by the Company or any Restricted Subsidiary
in connection with such Sale/Leaseback Transaction are at least equal to
the fair value (as determined by the Board of Directors) of such property;
and
(3) the Company applies the proceeds of such transaction to the extent
required by the covenant described under "--Limitation on Sale of Assets
and Subsidiary Stock."
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey, transfer
or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor Company")
shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness;"
(4) immediately after giving pro forma effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction;
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture; and
(6) the Company shall have delivered to the Trustee an Opinion of Counsel
to the effect that the Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such transaction and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred;
provided, however, that clauses (3) and (4) will not be applicable to (A) a
Restricted Subsidiary consolidating with, merging into or transferring all or
part of its properties and assets to the Company or (B) the Company merging with
an Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
The Successor Company will be the successor to the Company and shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under the Indenture,
S-130
and the predecessor Company, except in the case of a lease, shall be released
from the obligation to pay the principal of and interest on the notes.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the notes when due, continued
for 30 days;
(2) a default in the payment of principal of any note when due at its
Stated Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under
"--Certain Covenants--Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice with any
of its other obligations in the covenants described above under "--Certain
Covenants" above;
(5) the failure by the Company to comply for 60 days after notice with its
other agreements contained in the Indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $50 million (the
"cross-acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary (the "bankruptcy provisions"); or
(8) any judgment or decree for the payment of money in excess of $50
million is entered against the Company or a Significant Subsidiary, remains
outstanding for a period of 60 consecutive days following such judgment and
is not discharged, waived or stayed within 10 days after notice which would
include any such judgments entered in connection with the various
litigation matters described in the documents incorporated by reference
(the "judgment default provision").
However, a default under clauses (4) and (5) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
notes may rescind any such acceleration with respect to the notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise
S-131
any of the rights or powers under the Indenture at the request or direction of
any of the holders of the notes unless such holders have offered to the Trustee
reasonable indemnity or security against any loss, liability or expense. Except
to enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder of a note may pursue any remedy with respect to the
Indenture or the notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding notes have
not given the Trustee a direction inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee must
mail to each holder of the notes notice of the Default within 90 days after it
occurs. Except in the case of a Default in the payment of principal of or
interest on any note, the Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with respect to any
series of notes with the consent of the holders of a majority in principal
amount of that series of notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the notes) and any past default
or compliance with any provisions may also be waived with the consent of the
holders of a majority in principal amount of that series of notes then
outstanding. However, without the consent of each holder of an outstanding note
affected thereby, an amendment or waiver may not, among other things:
(1) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on any
note;
(3) reduce the principal of or extend the Stated Maturity of any note;
S-132
(4) reduce the amount payable upon the redemption of any note or change the
time at which any note may be redeemed as described under "--Optional
Redemption;"
(5) make any note payable in currency other than that stated in the note;
(6) impair the right of any holder of the notes to receive payment of
principal of and interest on such holder's notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's notes;
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions; or
(8) make any change in the ranking or priority of any note that would
adversely affect the Noteholders.
Notwithstanding the preceding, without the consent of any holder of the notes,
the Company and Trustee may amend the Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes (provided that the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add guarantees with respect to the notes, or to secure the notes;
(5) to add to the covenants of the Company for the benefit of the holders
of the notes or to surrender any right or power conferred upon the Company;
(6) to make any change that does not materially and adversely affect the
rights of any holder of the notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders of the notes is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required to
mail to holders of the notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
Initially all the notes are held through DTC. DTC's records reflect only the
identity of the Direct Participants to whose accounts the notes are credited.
The Participants will remain responsible for keeping account of their holdings
on behalf of their customers. The notes will be issued in registered form and
will be transferable only upon the surrender of the notes being transferred for
registration of transfer. We may require payment of a sum sufficient to cover
S-133
any tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under any series of notes and
the relevant Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes and to maintain a registrar and paying agent in respect of the
notes.
In addition, at any time we may terminate our obligations under "--Change of
Control" and under the covenants described under "--Certain covenants" (other
than the covenant described under "--Merger and consolidation"), the operation
of the cross-acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"--Defaults" above and the limitations contained in clauses (3) and (4) under
"-- Certain covenants--Merger and consolidation" above ("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior exercise
of our covenant defeasance option. If we exercise our legal defeasance option,
payment of the notes may not be accelerated because of an Event of Default with
respect thereto. If we exercise our covenant defeasance option, payment of the
notes may not be accelerated because of an Event of Default specified in clause
(4), (6), (7) (with respect only to Significant Subsidiaries) or (8) under
'--Defaults" above or because of the failure of the Company to comply with
clause (3) or (4) of the first paragraph under "--Certain covenants--Merger and
consolidation" above.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture.
The Indenture contains certain limitations on the rights of the Trustee, should
it become a creditor of the Company, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the outstanding notes will have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain exceptions.
If an Event of Default occurs (and is not cured), the Trustee will be required,
in the exercise of its power, to use the degree of care of a
S-134
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company will
have any liability for any obligations of the Company under the notes or the
Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. Such waiver and release may not be
effective to waive liabilities under the U.S. federal securities laws, and it is
the view of the SEC that such a waiver is against public policy.
GOVERNING LAW
The Indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or another
Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "--Certain covenants--Limitation on
Restricted Payments," "--Certain covenants--Limitation on Affiliate
Transactions" and "--Certain covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a Like-Kind
Exchange, an Excluded Real Property Sale or a merger,
S-135
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of business
of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted
Subsidiary.
Notwithstanding the foregoing, an "Asset Disposition" shall not include:
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "--Certain
covenants--Limitation on Sales of Assets and Subsidiary Stock" only, (x)
a disposition that constitutes a Restricted Payment permitted by the
covenant described under "--Certain covenants--Limitation on Restricted
Payments" or a Permitted Investment and (y) a disposition of all or
substantially all the assets of the Company in accordance with the
covenant described under "--Certain covenants--Merger and
Consolidation;"
(C) a disposition of assets if Additional Assets were acquired within
one year prior to such disposition for the purpose of replacing the
assets disposed of; and
(D) a disposition of assets with a fair market value of less than
$10,000,000.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the
time of determination, the present value (discounted at the interest rate borne
by the notes, compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended); provided, however, that if such Sale/Leaseback Transaction results in
a Capital Lease Obligation, the amount of Indebtedness represented thereby shall
be determined in accordance with the definition of "Capital Lease Obligation."
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means any day except a Saturday, Sunday or any other day on which
commercial banks in New York City are authorized or required by law to close.
"Capital Lease Obligation" means an obligation that is required to be classified
and accounted for as a capital lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of
S-136
such obligation determined in accordance with GAAP; and the Stated Maturity
thereof shall be the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease may be terminated
by the lessee without payment of a penalty. For purposes of the covenant
described under "--Certain Covenants--Limitations on Liens," a Capital Lease
Obligation will be deemed to be secured by a Lien on the property being leased.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including, without limitation,
membership interests in limited liability companies and any Preferred Stock, but
excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the ratio of
(x) the aggregate amount of EBITDA for the period of the most recent four
consecutive fiscal quarters for which financial results are publicly available
to (y) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of
such period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged (in each case other than Indebtedness Incurred
under any revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio, EBITDA and Consolidated Interest Expense for such period shall be
calculated on a pro forma basis as if such discharge had occurred on the
first day of such period and as if the Company or such Restricted
Subsidiary has not earned the interest income actually earned during such
period in respect of cash or Temporary Cash Investments used to repay,
repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition
for such period, or increased by an amount equal to EBITDA (if negative),
directly attributable thereto for such period and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
S-137
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring
in connection with a transaction requiring a calculation to be made
hereunder, which constitutes all or substantially all of an operating unit
of a business, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or
any Restricted Subsidiary since the beginning of such period) shall have
made any Asset Disposition, any Investment or acquisition of assets that
would have required an adjustment pursuant to clause (3) or (4) above if
made by the Company or a Restricted Subsidiary during such period, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries plus, to the
extent not included in such total interest expense, and to the extent incurred
by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations in respect of
Indebtedness;
(7) Preferred Stock dividends in respect of all Preferred Stock held by
Persons other than the Company or a Wholly Owned Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the issuer of such Preferred Stock);
(8) interest incurred in connection with Investments in discontinued
operations;
S-138
(9) interest accruing on any Indebtedness of any other Person to the extent
such Indebtedness is Guaranteed by (or secured by the assets of) the
Company or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any Person (other than the Company) in connection
with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income of the Company
and its consolidated Restricted Subsidiaries determined in accordance with GAAP;
provided, however, that there shall not be included in such Consolidated Net
Income:
(1) any net income of any Person (other than the Company) if such Person is
not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period to
the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
amount of cash actually distributed by such Restricted Subsidiary during
such period to the Company or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted Subsidiary
for such period shall be included in determining such Consolidated Net
Income;
(4) any gain (but not loss) realized upon the sale or other disposition of
any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and
any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person;
(5) extraordinary gains or losses;
(6) the cumulative effect of a change in accounting principles; and
S-139
(7) one-time benefit charges incurred in connection with the Company's
workforce reduction activities announced in 2003 and charges incurred in
connection with any merger of the Company's pension plans in 2003, in each
case, including, without limitation, any curtailment or re-measurement
charges triggered by such activities.
Notwithstanding the foregoing, for the purposes of the covenant described under
"--Certain Covenants--Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the Company
plus
(2) paid-in capital or capital surplus relating to such Capital Stock plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Facility" means any senior credit facility to be entered into by and
among one or more of the Company and certain of its Foreign Restricted
Subsidiaries and the lenders referred to therein, together with the related
documents thereto (including the revolving loans thereunder, any guarantees and
security documents), as amended, extended, renewed, restated, supplemented or
otherwise modified (in whole or in part, and without limitation as to amount,
terms, conditions, covenants and other provisions) from time to time, and any
agreement (and related document) governing Indebtedness incurred to Refinance,
in whole or in part, the borrowings and commitments then outstanding or
permitted to be outstanding under such Credit Facility or a successor Credit
Facility, whether by the same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange contract,
currency swap agreement or other similar agreement designed to protect such
Person against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
"Directors" means the persons who are members of the Board of Directors of the
Company.
"Disqualified Stock" means, with respect to any Person, any Capital Stock which
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder) or upon the happening
of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
S-140
(3) is mandatorily redeemable or must be purchased upon the occurrence of
certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of any
series of notes then outstanding; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to purchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of any series of
notes then outstanding shall not constitute Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to such
Capital Stock are not more favorable to the holders of such Capital Stock
than the terms applicable to the notes and described under "--Certain
covenants--Limitation on Sales of Assets and Subsidiary Stock" and
"--Certain covenants--Change of Control;" and
(2) any such requirement only becomes operative after compliance with such
terms applicable to the notes, including the purchase of any notes tendered
pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income (but without
giving effect to any gains or losses from Asset Dispositions), minus (i) non
cash net pension credits to the extent included in calculating such Consolidated
Net Income and (ii) the sum of (x) payments made by the Company for pensions and
other post retirement benefits that are not reimbursed by plan assets and (y)
any funding by the Company to plan trusts and plus the following to the extent
deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated Restricted
Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation, depletion and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period);
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period); and
(5) net periodic benefit cost recorded for pensions and other
postretirement benefits.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be
S-141
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Real Property Sales" means sales of real property either: (a) in the
ordinary course of the business of the Company or a Restricted Subsidiary or (b)
of real property that has not been used by the Company or a Restricted
Subsidiary in the production of steel or steel products at any time within 90
days prior to the date of sale.
"Financial Matters Agreement" means the Financial Matters Agreement dated
December 31, 2001 between Marathon and the Company.
"Financing Entity" means any Wholly Owned Subsidiary formed for the purpose of
effecting a receivables or inventory financing program so long as such entity
has no obligations that are either Guaranteed by, or recourse to, any other
Restricted Subsidiary.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary of the Company
that is organized in a jurisdiction outside the United States of America.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of July 27, 2001, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards
Board;
(3) such other statements by such other entity as approved by a significant
segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services, to
take-or-pay or to maintain financial statement conditions or otherwise) but
shall not include take-or-pay arrangements or other agreements to purchase
goods or services that are not entered into for the purpose of purchasing
or paying such Indebtedness of such Person; or
S-142
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a note is registered on
the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable for;
provided, however, that any Indebtedness or Capital Stock of a Person existing
at the time such Person becomes a Restricted Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Person at the time it becomes a Restricted Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. Solely for purposes of
determining compliance with "--Certain Covenants--Limitation on Indebtedness,"
(1) amortization of debt discount or the accretion of principal with respect to
a non-interest bearing or other discount security and (2) the payment of
regularly scheduled interest in the form of additional Indebtedness of the same
instrument or the payment of regularly scheduled dividends on Capital Stock in
the form of additional Capital Stock of the same clause and with the same terms
will not be deemed to be the Incurrence of Indebtedness. For purposes of this
definition, the Company (i) shall be deemed to Incur any Indebtedness of other
Persons of the type referred to in clause (6) of the definition of
"Indebtedness" at such time it becomes responsible or liable, directly or
indirectly, for its payment pursuant to the terms of the Financial Matters
Agreement and (ii) shall not be deemed to Incur any Indebtedness for which it is
indemnified by Marathon pursuant to the terms of the Financial Matters Agreement
at the time that such Indebtedness is deemed to become Indebtedness of the
Company as a result of Marathon no longer having an Investment Grade Rating from
both Rating Agencies.
"Indebtedness" means, with respect to any Person on any date of determination
(without duplication):
(1) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable Debt
in respect of Sale/ Leaseback Transactions entered into by such Person;
(3) all Purchase Money Indebtedness of such Person;
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through (3)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such
S-143
drawing is reimbursed no later than the tenth Business Day following
payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Subsidiary of such
Person, the principal amount of such Preferred Stock to be determined in
accordance with the Indenture (but excluding, in each case, any accrued
dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of which,
in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee or pursuant to the terms of the Financial Matters Agreement;
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property
or assets and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, any financing
of accounts receivable or inventory of such Person; and
(9) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the Company or
any Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; provided,
however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter (or, in the case of the
acquisition of USSK, when due).
Notwithstanding the foregoing, the term "Indebtedness" will exclude (x) any
indebtedness for which Marathon indemnifies the Company pursuant to the terms of
the Financial Matters Agreement, so long as such indebtedness (i) has not been
Refinanced and (ii) Marathon has an Investment Grade Rating from both of the
Rating Agencies and (y) Industrial Revenue Bond Obligations to the extent the
Company (i) has delivered to the holders of such obligations an irrevocable
notice of redemption or directed delivery of such a notice and (ii) has set
aside cash or U.S. Government Obligations, pursuant to a defeasance mechanism or
otherwise, sufficient to redeem such obligations.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date; provided, however, that
in the case of Indebtedness sold at a discount, the amount of such Indebtedness
at any time will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting firm
or appraisal firm of national standing; provided, however, that such firm is not
an Affiliate of the Company.
S-144
"Industrial Revenue Bond Obligations" means an obligation to a state or local
government unit that secures the payment of bonds issued by a state or local
government unit or any obligation under the Financial Matters Agreement relating
to Industrial Revenue Bond Obligations or any Indebtedness incurred to
Refinance, in whole or in part, such obligations.
"Interest Rate Agreement" means in respect of a Person any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. Except as otherwise provided for herein, the
amount of an Investment shall be its fair value at the time the Investment is
made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment" and the covenant described under "--Certain Covenants--
Limitation on Restricted Payments:"
(1) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company
shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to (A) the
Company's "Investment" in such Subsidiary at the time of such redesignation
less (B) the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case
as determined in good faith by the Board of Directors.
"Investment Grade Rating" means a rating equal to or higher than Baa3 (or the
equivalent) by Moody's Investors Service, Inc. and BBB- (or the equivalent) by
Standard & Poor's Ratings Services.
"Issue Date" means the date the notes are first issued.
"Lenders" has the meaning specified in the Credit Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Like-Kind Exchange" means (i) the disposition of property in exchange for
similar property or for cash proceeds where the proceeds are deposited in a
trust and employed to acquire similar property in a transaction qualifying as a
like-kind exchange pursuant to Section 1031 of the Internal Revenue Code of 1986
(or any successor provision) or (ii) the acquisition of property
S-145
from a Person with the proceeds of the disposition of similar property in such a
qualifying transaction.
"Marathon" means Marathon Oil Corporation.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to
such Asset Disposition, or by applicable law, be repaid out of the proceeds
from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries as a result of such Asset
Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(3) cash and Temporary Cash Investments;
S-146
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business;
(6) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "--Certain Covenants--Limitation
on Sales of Assets and Subsidiary Stock;"
(9) any Person where such Investment was acquired by the Company or any of
its Restricted Subsidiaries (a) in exchange for any other Investment or
accounts receivable held by the Company or any such Restricted Subsidiary
in connection with or as a result of a bankruptcy, workout, reorganization
or recapitalization of the issuer of such other Investment or accounts
receivable or (b) as a result of a foreclosure by the Company or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default;
(10) so long as no Default has occurred and is continuing, an Unrestricted
Subsidiary the assets of which shall primarily be located outside the
United States of America, which Investment is made on or prior to December
31, 2003 and does not exceed $50 million; provided that such Unrestricted
Subsidiary shall be treated as a Restricted Subsidiary as of the first date
the Board of Directors would be permitted to designate it as such under the
definition of "Unrestricted Subsidiary;" and
(11) any loan made to a Person in connection with a Like-Kind Exchange,
provided such loan is repaid in full within 180 days.
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to
secure public or statutory obligations of such Person or deposits of cash
or United States government bonds to secure surety or appeal bonds to which
such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case Incurred in the
ordinary course of business;
(2) Liens imposed by law, such as carriers', warehousemen's and mechanics'
Liens, in each case for sums not yet due or being contested in good faith
by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review and Liens arising
solely by virtue of any statutory or common law provision relating to
banker's
S-147
Liens, rights of set-off or similar rights and remedies as to deposit
accounts or other funds maintained with a creditor depository institution;
provided, however, that (A) such deposit account is not a dedicated cash
collateral account and is not subject to restrictions against access by the
Company in excess of those set forth by regulations promulgated by the
Federal Reserve Board and (B) such deposit account is not intended by the
Company or any Restricted Subsidiary to provide collateral to DTC;
(3) Liens for property taxes not yet subject to penalties for non-payment
or which are being contested in good faith by appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit issued
pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of
credit do not constitute Indebtedness;
(5) minor survey exceptions, minor encumbrances, easements or reservations
of, or rights of others for, licenses, rights-of-way, sewers, electric
lines, telegraph and telephone lines and other similar purposes, or zoning
or other restrictions as to the use of real property or Liens incidental to
the conduct of the business of such Person or to the ownership of its
properties which were not Incurred in connection with Indebtedness and
which do not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the business
of such Person;
(6) Liens securing Indebtedness Incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property,
plant or equipment of such Person; provided, however, that the Lien may not
extend to any other property owned by such Person or any of its Restricted
Subsidiaries at the time the Lien is Incurred (other than assets and
property affixed or appurtenant thereto), and the Indebtedness (other than
any interest thereon) secured by the Lien may not be Incurred more than 180
days after the later of the acquisition, completion of construction,
repair, improvement, addition or commencement of full operation of the
property subject to the Lien;
(7) Liens existing on the Issue Date;
(8) Liens on property or shares of Capital Stock of another Person at the
time such other Person becomes a Subsidiary of such Person; provided,
however, that the Liens may not extend to any other property owned by such
Person or any of its Restricted Subsidiaries (other than assets and
property affixed or appurtenant thereto);
(9) Liens on the inventory or accounts receivable of the Company or any
Restricted Subsidiary securing Indebtedness permitted under the provisions
described in clause (b)(1) under "--Certain Covenants--Limitation on
Indebtedness;"
(10) Liens securing industrial revenue or pollution control bonds issued
pursuant to agreements with the Company, or prior to Separation, by USX
Corporation (now named Marathon Oil Corporation); provided, however, that
such Liens relate solely to the project being financed and are removed
within 90 days following completion of the project being financed;
(11) Liens on property at the time such Person or any of its Subsidiaries
acquires the property, including any acquisition by means of a merger or
consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that the Liens may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries (other than
assets and property affixed or appurtenant thereto);
S-148
(12) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a wholly owned Subsidiary of such
Person;
(13) Liens securing Hedging Obligations so long as such Hedging Obligations
relate to Indebtedness that is, and is permitted to be under the Indenture,
secured by a Lien on the same property securing such Hedging Obligations;
(14) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in
the foregoing clause (6), (8), (9) or (10); provided, however, that:
(A) such new Lien shall be limited to all or part of the same property
and assets that secured or, under the written agreements pursuant to
which the original Lien arose, could secure the original Lien (plus
improvements and accessions to, such property or proceeds or
distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not increased
to any amount greater than the sum of (x) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described
under clause (6), (8), (9) or (10) at the time the original Lien became
a Permitted Lien and (y) an amount necessary to pay any fees and
expenses, including premiums, related to such refinancing, refunding,
extension, renewal or replacement; and
(15) Liens on assets subject to a Sale/Leaseback Transaction securing
Attributable Debt permitted to be Incurred pursuant to the covenant
described under "Certain Covenants--Limitation on Indebtedness".
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clauses (6), (9) or (10) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under "--Certain Covenants--Limitation on
Sale of Assets and Subsidiary Stock."
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means Capital
Stock of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"Principal" of a note means the principal of the note plus the premium, if any,
payable on the note which is due or overdue or is to become due at the relevant
time.
"Prospectus" means the prospectus of the Company relating to the notes.
"Public Equity Offering" means an underwritten primary public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
S-149
"Purchase Money Indebtedness" means Indebtedness Incurred or assumed as the
deferred purchase price of property acquired by such Person (excluding accounts
payable arising in the ordinary course of business but including all liabilities
created or arising under any conditional sale or other title retention agreement
with respect to any such property).
"Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the notes publicly
available, a nationally recognized statistical rating agency or agencies, as the
case may be, selected by the Company (as certified by a resolution of the Board
of Directors) which shall be substituted for Standard & Poor's Ratings Group,
Inc. or Moody's Investors Service, Inc. or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness
in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness
of the Company or any Restricted Subsidiary existing on the Issue Date or
Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance
costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business in which the Company was engaged on the
Issue Date and any business related, ancillary or complementary to any business
of the Company in which the Company was engaged on the Issue Date.
"Representative" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than dividends or distributions payable solely in its Capital Stock
(other than Disqualified Stock) and dividends or distributions payable
solely to the Company or a Restricted Subsidiary, and other than pro rata
dividends or other distributions made by a Subsidiary that is not a Wholly
Owned Subsidiary to minority
S-150
stockholders (or owners of an equivalent interest in the case of a
Subsidiary that is an entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for value
of any Capital Stock of the Company held by any Person or of any Capital
Stock of a Restricted Subsidiary held by any Affiliate of the Company
(other than a Restricted Subsidiary), including the exercise of any option
to exchange any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled repayment
or scheduled sinking fund payment of any Subordinated Obligations of such
Person (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of such purchase, repurchase or other
acquisition); or
(4) the making of any Investment (other than a Permitted Investment) in any
Person;
provided, however, that any purchase or other acquisition for value of common
stock of the Company with (x) funds provided by the participants of the
Company's dividend reinvestment plan or (y) cash dividends permitted to be paid
under the covenant "--Limitation on Restricted Payments" pursuant to the
Company's dividend reinvestment plan shall not, in either case, be a "Restricted
Payment."
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property owned by
the Company or a Restricted Subsidiary on the Issue Date or thereafter acquired
by the Company or a Restricted Subsidiary whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date or
thereafter Incurred; and
(2) accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to
such Person whether or not post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate in right of payment to the notes or the
Guarantee of such Person, as the case may be; provided, however, that Senior
Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or owing by
such Person;
(3) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
S-151
(4) any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in any respect to any other
Indebtedness or other obligation of such Person; or
(5) that portion of any Indebtedness that at the time of Incurrence is
Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness of
such Person (whether outstanding on the Issue Date or thereafter Incurred) that
is subordinate or junior in right of payment to the notes or a Guaranty of such
Person, as the case may be, pursuant to a written agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Voting Stock is at the time owned or controlled, directly or
indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country
recognized by the United States of America, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A"(or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate
of the Company) organized and in existence under the laws of the United
States of America or any foreign country
S-152
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard
and Poor's Ratings Services;
(5) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Services or "A" by Moody's Investors Service,
Inc.;
(6) overnight investments with banks rated "B" or better by Fitch, Inc.;
(7) in the case of a Foreign Restricted Subsidiary, investments of the type
and maturity described in clauses (1) through (6) above of foreign
obligors, which investments or obligors (or the parents of such obligors)
have ratings described in such clauses or equivalent ratings from
comparable foreign rating agencies; and
(8) deposits in Slovak financial institutions that do not at any time
exceed $5 million in the aggregate.
"10 3/4% Notes Indenture" means the Indenture between the Company and the
Trustee governing the Company's 10 3/4% Senior Notes due 2008.
"Tubular Business" means the assets and liabilities of the Company or any of its
Subsidiaries primarily related to its tubular products business.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness" and (B) no Default shall have occurred
and be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Dollar Equivalent" means with respect to any monetary amount in a currency
other than U.S. dollars, at any time for determination thereof, the amount of
U.S. dollars obtained by converting such foreign currency involved in such
computation into U.S. dollars at the spot rate for the purchase of U.S. dollars
with the applicable foreign currency as published in The Wall
S-153
Street Journal in the "Exchange Rates" column under the heading "Currency
Trading" on the date two Business Days prior to such determination.
Except as described under "--Certain Covenants--Limitation on Indebtedness,"
whenever it is necessary to determine whether the Company has complied with any
covenant in the Indenture or a Default has occurred and an amount is expressed
in a currency other than U.S. dollars, such amount will be treated as the U.S.
Dollar Equivalent determined as of the date such amount is initially determined
in such currency.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Power" as applied to the stock of any Person means the total voting
power represented by all outstanding Voting Stock of such corporation. "Voting
Stock" of a Person means all classes of Capital Stock or other interests
(including partnership interests) of such Person then outstanding and normally
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or one
or more Wholly Owned Subsidiaries.
S-154
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
In this section, we summarize certain of the material U.S. federal income tax
consequences of purchasing, holding, and selling the notes. This summary is
based on (i) the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
income tax regulations (proposed and final) issued under the Code ("U.S.
Treasury regulations"), and (iii) associated administrative and judicial
interpretations, all as they currently exist as of the date of this prospectus.
These income tax laws and regulations, however, may change at any time and any
change could be retroactive to the issuance date of the notes.
This summary applies only to those persons who are the initial holders of the
notes and who hold the notes as capital assets. This summary assumes that the
notes will be issued with no more than a statutorily defined de minimis amount
of original issue discount, if any. This summary does not address the tax
consequences to taxpayers who are subject to special rules (such as dealers in
securities or currencies, banks and other financial institutions, real estate
investment trusts, regulated investment companies, persons liable for the
alternative minimum tax, tax-exempt organizations, insurance companies, traders
in securities that elect to use a mark-to-market method of accounting for their
securities holdings, persons that own securities in a hedging transaction,
"straddle," "conversion transaction," "integrated" or constructive sale
transaction, or other risk reduction transaction, holders through a partnership
or other similar pass-through entity, U.S. expatriates, and U.S. Holders (as
defined below) of the notes whose "functional currency" for tax purposes is not
the U.S. dollar) or aspects of federal income taxation that may be relevant to a
prospective investor based upon such investor's particular tax situation. If a
partnership holds the notes, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership.
Purchasers of the notes should consult their own tax advisors with respect to
the particular tax consequences to them of the purchase, ownership, and
disposition of the notes, including the applicability of any state, local or
foreign tax laws to which they may be subject, as well as with respect to the
possible effects of changes in federal and other tax laws.
U.S. HOLDERS
The following summary applies to those holders that are U.S. Holders of the
notes. The term "U.S. Holder" means a person who is (i) a citizen or resident of
the U.S., (ii) a corporation organized in or under the laws of the U.S. or any
political subdivision thereof, (iii) an estate, if U.S. federal income taxation
is applicable to the income of such estate regardless of its source, (iv)
otherwise subject to U.S. federal income tax on your worldwide income on a net
income basis, (v) a trust if (A) a U.S. court is able to exercise primary
supervision over the trust's administration and (B) one or more U.S. persons
have the authority to control all of the trust's substantial decisions, or (vi)
a trust that has a valid election in effect under applicable U.S. treasury
regulations to be treated as a U.S. person. The term "Non-U.S. Holder" means a
holder that is not a U.S. Holder.
INTEREST
Interest payments on the notes generally will be taxable to a U.S. Holder as
ordinary income when received or accrued in accordance with a U.S. Holder's
regular method of accounting for federal income tax purposes.
S-155
DISPOSITION OF NOTES
A U.S. Holder of a note generally will recognize gain or loss on the sale,
exchange, redemption, retirement, or other disposition of the note in an amount
equal to the difference between the amount realized from the disposition (in
cash or other property valued at fair market value) of the note (not including
any amounts attributable to accrued and unpaid interest) and the holder's
adjusted tax basis in the note. A U.S. Holder's adjusted tax basis in a note
generally will be equal to the initial purchase price the holder paid for the
note.
Gain or loss recognized by a U.S. Holder on the sale, exchange, retirement, or
other taxable disposition of the notes generally will be long term capital gain
or loss if the notes were held for more than one year. Long term capital gains
of a U.S. Holder other than a corporation generally are taxed at a maximum rate
of 20% (18% if the notes are held for more than five years). Payments
attributable to accrued but unpaid interest which you have not yet included in
income will be taxed as ordinary interest income. The deductibility of capital
losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments of
principal and interest and to the proceeds of a sale of a note paid to a U.S.
Holder. Backup withholding (at a rate of 30% for 2003, 29% for 2004 and 2005,
28% for 2006 through 2010 and 31% after 2010) may apply when you receive
interest payments on the notes or proceeds upon the sale or other disposition of
the notes. Certain holders, including among others, corporations, financial
institutions and certain tax-exempt organizations, are generally not subject to
backup withholding or information reporting. In addition, backup withholding
will not apply to you if you provide your social security number or other
taxpayer identification number in the prescribed manner unless:
-- the IRS notifies us or our agent that the taxpayer identification
number provided is incorrect;
-- you fail to report interest and dividend payments that you receive
on your tax return and the IRS notifies us or our agent that backup
withholding is required;
-- you fail to certify under penalties of perjury that backup
withholding does not apply to you; or
-- you fail to certify under penalties of perjury that you are a U.S.
citizen or U.S. resident alien.
NON-U.S. HOLDERS
WITHHOLDING TAXES
Generally, payments of principal and interest on the notes will not be subject
to U.S. withholding taxes provided that the interest is not effectively
connected with your conduct of a trade or business within the U.S., and:
-- the Non-U.S. Holder does not actually, indirectly, or constructively
own 10 percent or more of the total combined voting power of all classes
of our stock entitled to vote;
-- the Non-U.S. Holder is not a controlled foreign corporation that is
related to us through its stock ownership within the meaning of Section
864(d)(4) of the Code;
S-156
-- the Non-U.S. Holder is not a bank described in Section 881(c)(3)(A)
of the Code; and
-- either (A) the Non-U.S. Holder provides its name and address on an
IRS Form W-8BEN (or substitute form) and certifies, under penalties of
perjury, that it is not a U.S. Holder or (B) it holds its notes through
certain foreign intermediaries and it satisfies the certification
requirements of applicable U.S. Treasury regulations. Special
certification rules apply to foreign partnerships, estates and trusts,
and in certain circumstances certifications as to foreign status of
partners, trust owners or beneficiaries may have to be provided to us or
our paying agent.
If a Non-U.S. Holder cannot satisfy the requirements described above, interest
payments made to the Non-U.S. Holder will be subject to U.S. federal withholding
tax, unless the Non-U.S. Holder provides a properly executed (1) IRS Form W-8BEN
(or substitute form) claiming an exemption from or a reduction in the rate of
withholding under the benefit of an applicable tax treaty or (2) IRS Form W-8ECI
(or successor form) stating that interest paid on the notes is not subject to
withholding because it is effectively connected with the conduct of the Non-U.S.
Holder's trade or business in the U.S.
SALE OR REDEMPTION OF NOTES
If a Non-U.S. Holder sells a note or it is redeemed or otherwise disposed of,
the Non-U.S. Holder generally will not be subject to federal income tax on any
amount which represents capital gain unless one of the following applies:
-- the gain is connected with a trade or business that the Non-U.S.
Holder conducts in the U.S.;
-- the Non-U.S. Holder is an individual, is present in the U.S. for at
least 183 days during the year in which the holder disposes of the notes
and certain other conditions are satisfied; or
-- the gain represents accrued interest, in which case the rules for
interest would apply.
U.S. TRADE OR BUSINESS
If a Non-U.S. Holder holds a note in connection with a trade or business that it
is conducting in the U.S.:
-- any interest on the note, and any gain from disposing of the note,
generally will be subject to income tax on a net income basis at the rate
generally applicable to U.S. Holders; and
-- if the Non-U.S. Holder is a corporation, it may be subject to a
"branch profits tax" on its earnings that are connected with the holder's
U.S. trade or business, including earnings from the note. This tax is
30%, but may be reduced or eliminated by an applicable tax treaty.
S-157
INFORMATION REPORTING AND BACKUP WITHHOLDING
Interest payments made to the Non-U.S. Holder will generally be reported to the
IRS and to the Non-U.S. Holder on Form 1042-S. However, this reporting does not
apply if one of the following conditions applies:
-- the Non-U.S. Holder holds its notes directly through a qualified
intermediary and complies with applicable procedures; or
-- the Non-U.S. Holder files form W-8ECI.
Information reporting and backup withholding will apply to Non-U.S. Holders as
follows:
-- principal and interest payments received will generally be exempt
from the information reporting and backup withholding if the holder is a
Non-U.S. Holder exempt from withholding on interest, as described above.
The exemption does not apply if the withholding agent or an intermediary
knows or has reason to know that the holder should be subject to the
usual information reporting or backup withholding rules. In addition, as
described above, interest payments made to a Non-U.S. Holder may be
reported to the IRS on Form 1042-S.
In general, a Non-U.S. Holder will not be subject to information reporting and
backup withholding on the sale proceeds received on the sale of a note. However,
sale proceeds received on a sale of a Non-U.S. Holder's notes through a broker
may be subject to information reporting and/or backup withholding. If the
Non-U.S. Holder uses the U.S. office of a broker, payments of the proceeds of
any sale of the note will be subject to information reporting and backup
withholding, unless the beneficial owner of the note provides the certification
described in "Non-U.S. Holders--Withholding taxes" or otherwise establishes an
exemption. Information reporting but not backup withholding will apply to
payments to a Non-U.S. Holder who uses the foreign office of a broker that has
certain connections to the United States, unless such broker does not have
actual knowledge or reason to know that the beneficial owner is a U.S. Holder
and has documentary evidence that the beneficial owner is a Non-U.S. Holder, and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption. A broker will be considered to have a connection to the United
States if it: (i) is a U.S. person, as defined in the Code; (ii) is a foreign
person and it derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the U.S.; (iii) is a controlled foreign
corporation for U.S. federal income tax purposes; or (iv) is a foreign
partnership that, at any time during its taxable year, has more than 50% of its
income or capital interests owned by U.S. persons or is engaged in the conduct
of a U.S. trade or business.
S-158
CERTAIN ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
purchase and/or holding of the notes by employee benefit plans that are subject
to Title I of the U.S. Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), plans, individual retirement accounts and other arrangements
that are subject to Section 4975 of the Code or provisions under any federal,
state, local, non-U.S. or other laws or regulations that are similar to such
provisions of the Code or ERISA (collectively, "Similar Laws"), and entities
whose underlying assets are considered to include "plan assets" of such plans,
accounts and arrangements (each, a "Plan").
GENERAL FIDUCIARY MATTERS
Generally, ERISA and/or the Code impose duties on persons who are fiduciaries
with respect to Plans and prohibit certain transactions involving the assets of
such Plans and their fiduciaries and other interested parties. Under ERISA and
the Code, any person who exercises any discretionary authority or control over
the administration of a covered Plan or the management or disposition of its
assets, or who renders investment advice to such Plan for a fee or other
compensation, is generally considered to be a fiduciary with respect to the
Plan.
In considering an investment in the notes of a portion of the assets of any
Plan, a fiduciary should determine whether the investment is in accordance with
the documents and instruments governing the Plan and the applicable provisions
of ERISA, the Code and/or any Similar Law relating to a fiduciary's duties to
the Plan including, without limitation, prudence, diversification, and
compliance with the prohibited transaction provisions of ERISA, the Code and any
other applicable Similar Laws
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit certain Plans from
engaging in specified transactions involving plan assets with persons or
entities who are "parties in interest," within the meaning Section 3(14) of
ERISA, or "disqualified persons," within the meaning of Section 4975 of the
Code, unless a prohibited transaction exemption is available. A party in
interest or disqualified person (including a Plan fiduciary) who engages in a
non-exempt prohibited transaction may be subject to excise taxes and other
penalties and liabilities under ERISA and/or the Code.
The acquisition and/or holding of notes by a Plan where the Issuer or the
Underwriter is considered a party in interest or a disqualified person with
respect to the Plan may constitute or result in a direct or indirect prohibited
transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless
the investment is acquired and is held in accordance with an applicable
statutory, class or individual prohibited transaction exemption. In this regard,
the U.S. Department of Labor (the "DOL") has issued prohibited transaction class
exemptions, or "PTCEs," that may apply to the acquisition and holding of the
notes. These class exemptions include, without limitation, PTCE 84-14 relating
to transactions determined by an independent qualified professional asset
managers, PTCE 90-1 relating to transactions conducted by insurance company
pooled separate accounts, PTCE 91-38 relating to transactions conducted by bank
collective investment funds, PTCE 95-60 relating to transactions conducted by
life insurance company general accounts and PTCE 96-23 relating to transactions
conducted by in-house asset managers, although there can be no assurance that
all of the conditions of any such exemption will be satisfied.
S-159
Because of the foregoing, the notes should not be purchased or held by any
person investing "plan assets" of any Plan, unless such purchase and holding
will not constitute a non-exempt prohibited transaction under ERISA and the Code
or similar violation of any applicable Similar Laws.
REPRESENTATION
Accordingly, by acceptance of a note, each purchaser and subsequent transferee
of a note will be deemed to have represented and warranted that either (i) no
portion of the assets used by such purchaser or transferee to acquire and hold
the notes constitutes assets of any Plan or (ii) the purchase and holding of the
notes by such purchaser or transferee will not constitute a non-exempt
prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or
similar violation under any applicable Similar Laws.
The foregoing discussion is general in nature and is not intended to be all
inclusive. Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries, or other persons considering purchasing
the notes on behalf of, or with the assets of, any Plan, consult with their
counsel regarding the potential applicability of ERISA, Section 4975 of the Code
and any Similar Laws to such investment and whether an exemption would be
applicable to the purchase and holding of the notes.
S-160
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement between us and
the underwriters, we have agreed to sell to each underwriter, and each
underwriter has severally agreed to purchase from us, the principal amount of
notes that appears opposite its name in the table below:
-------------------------------------------------------------------------------
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
-------------------------------------------------------------------------------
J.P. Morgan Securities Inc. ................................ $
Goldman, Sachs & Co. .......................................
Lehman Brothers Inc. .......................................
Scotia Capital (USA) Inc. ..................................
BNY Capital Markets, Inc. ..................................
NatCity Investments, Inc. ..................................
PNC Capital Markets, Inc. ..................................
--------
Total....................................................... $
========
-------------------------------------------------------------------------------
The underwriting agreement provides that the underwriters will purchase all of
the notes if any of them are purchased.
The underwriters initially propose to offer the notes to the public at the
public offering price that appears on the cover page of this prospectus. The
underwriters may offer the notes to selected dealers at the public offering
price minus a concession of up to % of the principal amount of the notes.
In addition, the underwriters may allow, and those selected dealers may reallow,
a concession of up to % of the principal amount of the notes to certain
other dealers. After the initial offering, the underwriters may change the
public offering price and any other selling terms.
In the underwriting agreement, we have agreed that:
-- We will not offer or sell any of our debt securities (other than the
notes) for a period of 90 days after the date of this prospectus
supplement without the prior consent of J.P. Morgan Securities Inc.
-- We will pay our expenses related to the offering, which we estimate
will be $1,000,000.
-- We will indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
The notes are a new issue of securities, and there is currently no established
trading market for the notes. We do not intend to apply for the notes to be
listed on any securities exchange or to arrange for the notes to be quoted on
any quotation system. The underwriters have advised us that they intend to make
a market in the notes, but they are not obligated to do so. The underwriters may
discontinue any market making in the notes at any time in their sole discretion.
Accordingly, we cannot assure you that a liquid trading market will develop for
the notes.
The underwriting agreement provides that the closing will occur on May , 2003,
which is four business days after the date of this prospectus supplement (this
settlement cycle being referred to as "T + 4"). Rule 15c6-1 under the Securities
Exchange Act of 1934, as amended, generally requires that securities trades in
the secondary market settle in three business days, unless the
S-161
parties to a trade expressly agree otherwise. Accordingly, purchasers who wish
to trade the notes on the date of this prospectus supplement or the next
succeeding business day will be required, by virtue of the fact that the notes
initially will settle in T + 4, to specify an alternate settlement cycle at the
time of any such trade to prevent a failed settlement. Purchasers of notes who
wish to trade notes on the date hereof or the next two succeeding business days
should consult their own advisor.
In connection with the offering of the notes, the underwriters may engage in
overallotment, stabilizing transactions and syndicate covering transactions.
Overallotment involves sales in excess of the offering size, which creates a
short position for the underwriters. Stabilizing transactions involve bids to
purchase the notes in the open market for the purpose of pegging, fixing or
maintaining the price of the notes. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution has been
completed in order to cover short positions. Stabilizing transactions and
syndicate covering transactions may cause the price of the notes to be higher
than it would otherwise be in the absence of those transactions. If the
underwriters engage in stabilizing or syndicate covering transactions, they may
discontinue them at any time.
Certain of the underwriters and their affiliates perform various financial
advisory, investment banking and commercial banking services from time to time
for us and our affiliates. J.P. Morgan Securities Inc. acted as our financial
advisor in connection with the National transaction. J.P. Morgan Securities Inc.
is an affiliate of JPMorgan Chase Bank, which will be a lender and agent under
our new inventory credit facility. In addition, we expect BNY Capital Markets,
Inc., Goldman, Sachs & Co., Lehman Brothers Inc., NatCity Investments, Inc., PNC
Capital Markets, Inc., Scotia Capital (USA) Inc. or their affiliates to be
lenders under our new inventory credit facility. An affiliate of BNY Capital
Markets, Inc. is Trustee under the notes. Lehman Brothers Inc. acted as an
advisor in connection with certain bankruptcy issues related to the National
transaction.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon for us by
Morgan, Lewis & Bockius LLP, Pittsburgh, Pennsylvania. Simpson Thacher &
Bartlett, New York, New York, will pass upon certain legal matters for the
underwriters in connection with the issuance of the notes.
S-162
INDEX TO FINANCIAL STATEMENTS
UNITED STATES STEEL CORPORATION
Management's Report......................................... F-2
Report of Independent Accountants........................... F-3
Statement of Operations..................................... F-4
Balance Sheet............................................... F-5
Statement of Cash Flows..................................... F-6
Statement of Stockholders' Equity........................... F-7
Notes to Financial Statements............................... F-8
NATIONAL STEEL CORPORATION
Report of Independent Auditors.............................. F-56
Statements of Operations.................................... F-57
Consolidated Balance Sheets................................. F-58
Statements of Cash Flows.................................... F-59
Statements of Changes in Stockholders' Equity (Deficit)..... F-60
Notes to Financial Statements............................... F-61
F-1
MANAGEMENT'S REPORT
The accompanying consolidated financial statements of United States Steel
Corporation are the responsibility of and have been prepared by United States
Steel Corporation in conformity with accounting principles generally accepted in
the United States of America. They necessarily include some amounts that are
based on best judgments and estimates. United States Steel Corporation financial
information displayed in other sections of this report is consistent with these
financial statements.
United States Steel Corporation seeks to assure the objectivity and integrity of
its financial records by careful selection of its managers, by organizational
arrangements that provide an appropriate division of responsibility and by
communications programs aimed at assuring that its policies and methods are
understood throughout the organization.
United States Steel Corporation has a comprehensive formalized system of
disclosure controls and procedures designed to provide reasonable assurance that
assets are safeguarded, that financial records are reliable and that information
required to be disclosed in reports filed with or submitted to the Securities
and Exchange Commission is recorded, processed, summarized and reported within
the required time limits. Appropriate management monitors the system for
compliance and evaluates it for effectiveness, and the internal auditors
independently measure its effectiveness and recommend possible improvements
thereto. In addition, as part of their audit of the financial statements, United
States Steel Corporation's independent accountants review disclosure controls
and procedures selectively to establish a basis of reliance thereon in
determining the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and disclosure controls and procedures through its Audit & Finance
Committee. This Committee, composed solely of nonmanagement directors, regularly
meets (jointly and/or separately) with the independent accountants, management,
internal auditors and members of the disclosure committee to monitor the proper
discharge by each of their responsibilities relative to disclosure controls and
procedures and the Corporation's financial statements.
/s/ THOMAS J. USHER /s/ JOHN P. SURMA
Thomas J. Usher John P. Surma
Chairman of the Board of Directors President
and Chief Executive Officer
/s/ GRETCHEN R. HAGGERTY /s/ LARRY G. SCHULTZ
Gretchen R. Haggerty Larry G. Schultz
Executive Vice President, Vice President and
Treasurer and Chief Financial Officer Controller
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS OF UNITED STATES STEEL CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of United
States Steel Corporation and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of United States Steel Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 25, 2003
F-3
STATEMENT OF OPERATIONS
----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues.................................................. $6,031 $5,464 $5,125
Revenues from related parties (Note 14)................... 918 822 965
Income (loss) from investees (Note 5)..................... 33 64 (8)
Net gains on disposal of assets (Note 15)................. 29 22 46
Other income (Note 7)..................................... 43 3 4
--------------------------
Total revenues and other income........................ 7,054 6,375 6,132
--------------------------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below)............. 6,158 6,166 5,684
Selling, general and administrative expenses (credits).... 418 270 (16)
Depreciation, depletion and amortization.................. 350 344 360
--------------------------
Total costs and expenses............................... 6,926 6,780 6,028
--------------------------
INCOME (LOSS) FROM OPERATIONS............................... 128 (405) 104
Net interest and other financial costs (Note 6)............. 115 141 105
--------------------------
INCOME (LOSS) BEFORE INCOME TAXES........................... 13 (546) (1)
Income tax provision (benefit) (Note 13).................... (48) (328) 20
--------------------------
NET INCOME (LOSS)........................................... $ 61 $ (218) $ (21)
----------------------------------------------------------------------------------------
INCOME PER COMMON SHARE (NOTE 18)
---------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------------------
BASIC AND DILUTED........................................... $.62 $(2.45) $(.24)
---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-4
BALANCE SHEET
------------------------------------------------------------------------------
DECEMBER 31,
----------------
(DOLLARS IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 243 $ 147
Receivables, less allowance of $57 and $58 (Note 21)...... 805 671
Receivables from related parties, less allowance of $--
and $107 (Note 14)...................................... 129 159
Inventories (Note 22)..................................... 1,030 870
Deferred income tax benefits (Note 13).................... 217 216
Other current assets...................................... 16 10
----------------
Total current assets.................................... 2,440 2,073
Investments and long-term receivables, less allowance of $2
and $39 (Note 15)......................................... 341 340
Long-term receivables from related parties, less allowance
of $-- and $36 (Note 14).................................. 6 14
Property, plant and equipment--net (Note 20)................ 2,978 3,084
Pension asset (Note 12)..................................... 1,654 2,745
Intangible pension asset (Note 12).......................... 414 --
Other noncurrent assets..................................... 144 81
----------------
Total assets............................................ $7,977 $8,337
----------------
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 677 $ 551
Accounts payable to related parties (Note 14)............. 90 143
Payroll and benefits payable.............................. 254 239
Accrued taxes............................................. 281 248
Accrued interest.......................................... 44 45
Long-term debt due within one year (Note 11).............. 26 32
----------------
Total current liabilities............................... 1,372 1,258
Long-term debt (Note 11).................................... 1,408 1,434
Deferred income taxes (Note 13)............................. 223 732
Employee benefits (Note 12)................................. 2,601 2,008
Long-term payable to related parties (Note 14).............. -- 33
Deferred credits and other liabilities...................... 346 366
----------------
Total liabilities....................................... 5,950 5,831
----------------
Contingencies and commitments (Note 25)..................... -- --
STOCKHOLDERS' EQUITY (DETAILS ON PAGE F-6)
Common stock--
Issued--102,485,246 shares and 89,197,740 shares (par
value $1 per share, authorized 200,000,000 shares)...... 102 89
Additional paid-in capital.................................. 2,689 2,475
Retained earnings........................................... 42 --
Accumulated other comprehensive loss........................ (803) (49)
Deferred compensation....................................... (3) (9)
----------------
Total stockholders' equity.............................. 2,027 2,506
----------------
Total liabilities and stockholders' equity.............. $7,977 $8,337
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
F-5
STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
-------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 61 $ (218) $ (21)
Adjustments to reconcile to net cash provided from (used in)
operating activities:
Depreciation, depletion and amortization.................. 350 344 360
Pensions and other postretirement benefits................ 87 (57) (847)
Deferred income taxes..................................... (39) 18 389
Net gains on disposal of assets........................... (29) (22) (46)
(Income) loss from equity investees, net of
distributions........................................... (9) (47) 18
Changes in:
Current receivables
--sold.................................................. 320 -- --
--repurchased........................................... (320) -- --
--operating turnover.................................... (134) 116 (43)
--income taxes.......................................... -- 336 (267)
--provision for doubtful accounts....................... 29 108 47
Inventories............................................. (160) 104 (63)
Current accounts payable and accrued expenses........... 196 (87) (262)
All other--net.............................................. (73) 74 108
--------------------------
Net cash provided from (used in) operating activities... 279 669 (627)
--------------------------
INVESTING ACTIVITIES:
Capital expenditures........................................ (258) (287) (244)
Acquisition of U. S. Steel Kosice, net of cash acquired in
2000 of $59............................................... (38) (14) (10)
Disposal of assets.......................................... 67 44 21
Restricted cash--withdrawals................................ 5 5 2
--deposits................................... (72) (4) (2)
Investees--investments...................................... (18) (3) (35)
--return of capital................................ -- 13 --
--loans and advances............................... (3) (3) (10)
--repayments of loans and advances................. 8 -- --
All other--net.............................................. -- 10 8
--------------------------
Net cash used in investing activities................... (309) (239) (270)
--------------------------
FINANCING ACTIVITIES:
Net change in attributed portion of Marathon consolidated
debt and other financial obligations...................... -- (74) 1,208
Repayment of specifically attributed debt................... -- (370) (6)
Revolving credit facility--borrowings....................... 40 -- --
--repayments........................ (40) -- --
Settlement with Marathon.................................... (54) -- --
Repayment of long-term debt................................. (32) -- --
Common stock issued......................................... 227 -- --
Preferred stock repurchased................................. -- -- (12)
Dividends paid.............................................. (19) (57) (97)
--------------------------
Net cash provided from (used in) financing activities... 122 (501) 1,093
--------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 4 (1) 1
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 96 (72) 197
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 147 219 22
--------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 243 $ 147 $ 219
--------------------------
CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES INCLUDED:
Interest and other financial costs paid (net of amount
capitalized)............................................ $(124) $ (182) $ (71)
Income taxes refunded from (paid to) taxing authorities... (4) 9 (10)
Income tax settlements received from Marathon............. 7 819 91
-------------------------------------------------------------------------------------------
See Note 9, for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
F-6
STATEMENT OF STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS SHARES IN THOUSANDS
---------------------------------------------------
(IN MILLIONS, EXCEPT SHARE DATA) 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year.............................. $ 89 $ -- $ -- 89,198 -- --
Common stock issued:
Public offering......................................... 11 -- -- 10,925 -- --
Employee stock plans.................................... 1 -- -- 1,397 -- --
Dividend Reinvestment Plan.............................. 1 -- -- 965 -- --
Separation.............................................. -- 89 -- -- 89,198 --
---------------------------------------------------
Balance at end of year.................................... $ 102 $ 89 $ -- 102,485 89,198 --
---------------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year.............................. $ 2,475 $ -- $ --
Common stock issued....................................... 214 -- --
Common stock issued in Separation......................... -- 2,475 --
-------------------------
Balance at end of year.................................... $ 2,689 $2,475 $ --
---------------------------------------------------
COMPREHENSIVE INCOME
-----------------------
-----------------------
2002 2001 2000
-----------------------
RETAINED EARNINGS:
Balance at beginning of year.............................. $ -- $ -- $ --
Net income................................................ 61 -- -- $ 61
Dividends on common stock (per share $.20)................ (19) -- --
-------------------------
Balance at end of year.................................... $ 42 $ -- $ --
-------------------------
MARATHON NET INVESTMENT (Note 1):
Balance at beginning of year.............................. $ -- $1,952 $2,076
Net loss.................................................. -- (218) (21) $ (218) $(21)
Repurchase of 6.50% preferred stock....................... -- -- (12)
Common stock issued....................................... -- 8 6
Dividends on preferred stock.............................. -- (8) (8)
Dividends on common stock (per share $.55 in 2001 and
$1.00 in 2000).......................................... -- (49) (89)
Excess redemption value over carrying value of preferred
securities.............................................. -- (14) --
Preferred stock retained by Marathon in Separation........ -- (120) --
Capital contributions by Marathon (Note 2)................ -- 1,013 --
Transfer to common stockholders' equity at Separation..... -- (2,564) --
-------------------------
Balance at end of year.................................... $ -- $ -- $1,952
-------------------------
DEFERRED COMPENSATION:
Balance at beginning of year.............................. $ (9) $ (3) $ --
Changes during year, net of taxes......................... 6 (6) (3)
-------------------------
Balance at end of year.................................... $ (3) $ (9) $ (3)
-------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Minimum pension liability adjustments (Note 12):
Balance at beginning of year............................ $ (20) $ (4) $ (7)
Changes during year, net of taxes(a).................... (756) (16) 3 (756) (16) 3
-------------------------
Balance at end of year.................................. (776) (20) (4)
-------------------------
Foreign currency translation adjustments:
Balance at beginning of year............................ $ (29) $ (26) $ (13)
Changes during year, net of taxes(a).................... 2 (3) (13) 2 (3) (13)
-------------------------
Balance at end of year.................................. (27) (29) (26)
-------------------------
Total balances at end of year......................... $ 803) $ (49) $ (30)
---------------------------------------------------
TOTAL COMPREHENSIVE LOSS................................ $ (693) $ (237) $(31)
---------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY.................................. $ 2,027 $2,506 $1,919
-----------------------------------------------------------------------------------------------------------------
(a) Related income tax (provision) benefit:
Minimum pension liability adjustment..................... $ 475 $ 9 $ (1)
Foreign currency translation adjustments................. -- -- (5)
The accompanying notes are an integral part of these financial statements.
F-7
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
United States Steel Corporation (U. S. Steel) owns and operates the former steel
businesses of USX Corporation, now named and referred to herein as Marathon Oil
Corporation (Marathon). U. S. Steel is engaged domestically in the production,
sale and transportation of steel mill products, coal, coke, and taconite pellets
(iron ore); steel mill products distribution; the management of mineral
resources; the management and development of real estate; and engineering and
consulting services and, through U. S. Steel Kosice (USSK) in the Slovak
Republic, in the production and sale of steel mill products and coke primarily
for the central and western European markets.
Prior to December 31, 2001, the businesses of U. S. Steel comprised an operating
unit of Marathon. Marathon had two outstanding classes of common stock:
USX-Marathon Group common stock, which was intended to reflect the performance
of Marathon's energy business, and USX-U. S. Steel Group common stock (Steel
Stock), which was intended to reflect the performance of Marathon's steel
business. As described further in Note 2, on December 31, 2001, U. S. Steel was
capitalized through the issuance of 89.2 million shares of common stock to
holders of Steel Stock in exchange for all outstanding shares of Steel Stock on
a one-for-one basis.
The accompanying consolidated balance sheets as of December 31, 2002 and 2001,
and statements of operations and cash flows for the year ended December 31,
2002, reflect the financial position, results of operations and cash flows of U.
S. Steel as a separate, stand-alone entity. Combined statements of operations
and of cash flows for each of the two years in the period ended December 31,
2001, represent a carve-out presentation of the businesses comprising U. S.
Steel, and are not intended to be a complete presentation of the results of
operations and cash flows of U. S. Steel on a stand-alone basis. Marathon's net
investment in U. S. Steel represented the combined net assets of the businesses
comprising U. S. Steel and was presented in lieu of common stockholders' equity.
The allocations and estimates included in these combined financial statements
for the years 2001 and 2000 were determined using the methodologies described
below:
Financial activities--As a matter of policy, Marathon historically managed most
financial activities on a centralized, consolidated basis. Transactions related
primarily to invested cash, short-term and long-term debt (including convertible
debt), related net interest and other financial costs, and preferred stock and
related dividends were attributed to U. S. Steel based upon its cash flows for
each of the periods presented and its initial capital structure. However,
transactions such as leases, certain collateralized financings, certain indexed
debt instruments and transactions related to securities convertible solely into
Steel Stock were specifically attributed to U. S. Steel.
Corporate general and administrative costs--Corporate general and administrative
costs were allocated to U. S. Steel based upon utilization or other methods
management believed to be reasonable and which considered certain measures of
business activities, such as employment, investments and revenues.
Income taxes--The results from the businesses comprising U. S. Steel were
included in the consolidated federal income tax returns of Marathon through
2001. The consolidated provision and the related tax payments or refunds were
reflected in U. S. Steel's combined financial statements in accordance with
Marathon's tax allocation policy. In general, such policy provided
F-8
that the consolidated tax provision and related tax payments or refunds were
allocated to U. S. Steel, based principally upon the financial income, taxable
income, credits, preferences and other amounts directly related to U. S. Steel.
For tax provision and settlement purposes, tax benefits resulting from
attributes (principally net operating losses and various tax credits), which
could not be utilized by U. S. Steel on a separate return basis but which could
be utilized on a consolidated basis in that year or in a carryback year, were
allocated to U. S. Steel if it generated the attributes. As a result, the
allocated group amounts of taxes payable or refundable were not necessarily
comparable to those that would have resulted if U. S. Steel had filed its own
separate tax returns.
In connection with the Separation discussed in Note 2, U. S. Steel and Marathon
entered into a tax sharing agreement, which is discussed in Notes 13 and 25.
2. THE SEPARATION
On December 31, 2001, in accordance with the Agreement and Plan of
Reorganization approved by the shareholders of Marathon, Marathon converted each
share of Steel Stock into the right to receive one share of U. S. Steel common
stock (the Separation).
In connection with the Separation, U. S. Steel was required to repay or replace
certain indebtedness and other obligations of Marathon so that the amount of
indebtedness and other obligations for which U. S. Steel was responsible
immediately following the Separation would be $900 million less than the net
amounts attributed to U. S. Steel immediately prior to the Separation (Value
Transfer). Any difference between the two amounts, adjusted for the Value
Transfer, was to be settled in cash (Cash Settlement). During the last six
months of 2001, U. S. Steel completed a number of financings in order to repay
or replace certain indebtedness and other obligations of Marathon.
At December 31, 2001, the net debt and other obligations of U. S. Steel was $54
million less than the net debt and other obligations attributed to U. S. Steel,
adjusted for the Value Transfer. As a result, U. S. Steel recorded a $54 million
payable to Marathon for the Cash Settlement. In accordance with the terms of the
Separation, U. S. Steel paid Marathon $54 million, plus applicable interest, on
February 6, 2002.
The net assets of U. S. Steel at Separation were approximately the same as the
net assets attributed to U. S. Steel immediately prior to the Separation, except
for the Value Transfer and the impacts of certain other transactions directly
related to the Separation. The following table reconciles the net assets
attributed to U. S. Steel immediately prior to the Separation with the net
assets of U. S. Steel immediately following the Separation:
---------------------------------------------------------------------------
(IN MILLIONS)
---------------------------------------------------------------------------
Net assets of U. S. Steel prior to Separation............... $1,551
Value Transfer.............................................. $900
Separation costs funded by Marathon......................... 62
Other Separation adjustments................................ 51
----
Increase in net assets related to Separation............. 1,013
------
Net assets of U. S. Steel................................... $2,564
---------------------------------------------------------------------------
F-9
In connection with the Separation, U. S. Steel and Marathon entered into the
following Agreements:
Financial Matters Agreement--This agreement establishes the responsibilities of
U. S. Steel and Marathon relating to certain corporate obligations of Marathon
at the time of Separation as follows:
-- The assumption by U. S. Steel of certain industrial revenue bonds and
certain other financial obligations of Marathon. See Notes 11 and 25 for
details.
-- Obligations for which Marathon is solely responsible.
-- Obligations of Marathon for which U. S. Steel remains contingently liable.
See Note 25 for details.
-- Obligations of U. S. Steel for which Marathon remains contingently liable.
Tax Sharing Agreement--See Notes 13 and 25, for a discussion of this agreement.
Transition Services Agreement--This agreement provided that, to the extent that
one company or the other was not able to immediately service its own needs
relating to services formerly managed on a corporate-wide basis, U. S. Steel and
Marathon would enter into a transition services agreement whereby one company
would provide such services to the other to the extent requested if the
providing company was able to do so. Such agreements would be for a term of up
to twelve months and be on a cost reimbursement basis. This agreement expired at
December 31, 2002.
License Agreement--This agreement granted to U. S. Steel a non-exclusive license
to use the USX name rights and certain intellectual property with the right to
sublicense.
Insurance Assistance Agreement--This agreement provides for the division of
responsibility for joint insurance arrangements and the associated payment of
insurance claims and deductibles following the Separation for claims associated
with pre-Separation periods.
For other activities between U. S. Steel and Marathon, see Note 14.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Principles applied in consolidation--These financial statements include the
accounts of U. S. Steel and its majority-owned subsidiaries. Intercompany
accounts, transactions and profits have been eliminated in consolidation.
The accounts of businesses acquired have been included in the consolidated
financial statements from the dates of acquisition. See Note 5 for further
discussion of businesses acquired.
Investments in entities over which U. S. Steel has significant influence are
accounted for using the equity method of accounting and are carried at U. S.
Steel's share of net assets plus loans and advances. Differences in the basis of
the investment and the underlying net asset value of the investee, if any, are
amortized into earnings over the remaining useful life of the associated assets.
Investments in companies whose stock is publicly traded are carried generally at
market value. The difference between the cost of these investments and market
value is recorded in other
F-10
comprehensive income (net of tax). Investments in companies whose stock has no
readily determinable fair value are carried at cost and are periodically
reviewed for impairment.
Income (loss) from investees includes U. S. Steel's proportionate share of
income (loss) from equity method investments. Also, gains or losses from changes
in ownership of unconsolidated investees are recognized in the period of change.
Unrealized profits and losses on transactions with equity investees have been
eliminated in consolidation.
Use of estimates--Generally accepted accounting principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying value of
property, plant and equipment; valuation allowances for receivables, inventories
and deferred income tax assets; environmental liabilities; liabilities for
potential tax deficiencies and potential litigation claims and settlements; and
assets and obligations related to employee benefits. Actual results could differ
from the estimates and assumptions used.
Revenue recognition--Revenues are primarily recognized when products are
shipped, properties are sold or services are provided to customers, the sales
price is fixed and determinable, collectibility is reasonably assured, and title
and risks of ownership have passed to the buyer. Revenues for mineral interest
royalties are generally recorded when the cash is received, which approximates
the accrual method. Shipping and other transportation costs charged to buyers
are recorded in both revenues and cost of revenues.
Cash and cash equivalents--Cash and cash equivalents include cash on hand and on
deposit and investments in highly liquid debt instruments with maturities
generally of three months or less.
Inventories--Inventories are carried at lower of cost or market on a worldwide
basis. Cost of inventories is determined primarily under the last-in, first-out
(LIFO) method.
Derivative instruments--U. S. Steel uses commodity-based and foreign currency
derivative instruments to manage its exposure to price risk. Futures, forwards,
swaps and options are used to reduce the effects of fluctuations in the purchase
price of natural gas and nonferrous metals and also certain business
transactions denominated in foreign currencies. U. S. Steel has not elected to
designate derivative instruments as qualifying for hedge accounting treatment.
As a result, the changes in fair value of all derivatives are recognized
immediately in results of operations.
Property, plant and equipment--U. S. Steel records depreciation on a modified
straight-line or straight-line method utilizing a composite or group asset
approach based upon estimated lives of assets. The modified straight-line method
is utilized for domestic steel producing assets and is based upon production
levels. The modification factors applied to straight-line calculations range
from a minimum of 85% at a production level below 81% of capability, to a
maximum of 105% for a 100% production level. No modification is made at the 95%
production level, considered the normal long-range level.
Depletion of mineral properties is based on rates which are expected to amortize
cost over the estimated tonnage of minerals to be removed.
U. S. Steel evaluates impairment of its property, plant and equipment on an
individual asset basis or by logical groupings of assets whenever circumstances
indicate that the carrying value
F-11
may not be recoverable. Assets deemed to be impaired are written down to their
fair value, including any related goodwill, using discounted future cash flows
and, if available, comparable market values.
When property, plant and equipment depreciated on an individual basis are sold
or otherwise disposed of, any gains or losses are reflected in income. Gains on
disposal of long-lived assets are recognized when earned, which is generally at
the time of closing. If a loss on disposal is expected, such losses are
recognized when the assets are reclassified as assets held for sale. Proceeds
from the disposal of property, plant and equipment depreciated on a group basis
are credited to accumulated depreciation, depletion and amortization with no
immediate effect on income.
Major maintenance activities--U. S. Steel incurs planned major maintenance costs
primarily for blast furnace relines. Costs that extend the life of the asset are
separately capitalized in property, plant and equipment and are amortized over
their estimated useful life, which is generally the period until the next
scheduled reline. All other repair and maintenance costs are expensed as
incurred.
Environmental remediation--Environmental expenditures are capitalized if the
costs mitigate or prevent future contamination or if the costs improve existing
assets' environmental safety or efficiency. U. S. Steel provides for remediation
costs and penalties when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. Generally, the timing of
remediation accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are accrued based
on estimates of known environmental exposure and are discounted if the amount
and timing of the cash disbursements are readily determinable.
Pensions, other postretirement and postemployment benefits--U. S. Steel has
noncontributory defined benefit pension plans and defined benefit retiree health
care and life insurance plans (other postretirement benefits) that cover most of
its domestic employees on their retirement. The net pension and other
postretirement benefits obligations recorded and the related periodic costs are
based on, among other things, assumptions of the discount rate, estimated return
on plan assets, salary increases, the mortality of participants and the current
level and escalation of health care costs in the future. Additionally, U. S.
Steel recognizes an obligation to provide postemployment benefits, primarily for
disability-related claims covering indemnity and medical payments for certain
domestic employees. The obligation for these claims and the related periodic
costs are measured using actuarial techniques and assumptions. Actuarial gains
and losses are deferred and amortized over future periods.
Concentration of credit and business risks--U. S. Steel is exposed to credit
risk in the event of nonpayment by customers principally within the automotive,
steel, container and construction industries. Changes in these industries may
significantly affect management's estimates and U. S. Steel's financial
performance. U. S. Steel mitigates its exposure to credit risk by performing
ongoing credit evaluations and, when deemed necessary, requiring letters of
credit, guarantees or collateral. USSK mitigates credit risk for approximately
75% of its revenues by requiring bank guarantees, letters of credit, credit
insurance, prepayment or other collateral.
The majority of U. S. Steel's customers are located in the United States and
Central and Western Europe. No single customer accounts for more than 5% of
gross annual revenues.
Foreign currency risk--U. S. Steel, primarily through USSK, is subject to the
risk of price fluctuations due to the effects of exchange rates on revenues and
operating costs, firm
F-12
commitments for capital expenditures and existing assets or liabilities
denominated in currencies other than the U.S. dollar.
Stock-based compensation--U. S. Steel has various stock-based employee
compensation plans, which are described more fully in Note 19. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
income for the stock options or stock appreciation rights (SARs) at the date of
grant, as all options and SARs granted had an exercise price equal to the market
value of the underlying common stock. When the stock price exceeds the grant
price, SARs are adjusted for changes in the market value and compensation
expense is recorded. Deferred compensation for restricted stock under the United
States Steel Corporation 2002 Stock Plan (2002 Stock Plan) and the USX
Corporation 1990 Stock Plan (1990 Stock Plan) is charged to equity when the
restricted stock is granted and subsequently adjusted for changes in the market
value of the underlying stock. The deferred compensation is then expensed over
the vesting period and adjusted if conditions of the restricted stock grant are
not met. Deferred compensation for the restricted stock plan for certain
salaried employees who are not officers of the Corporation is charged to equity
when the restricted stock is granted and subsequently expensed over the vesting
period.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
------------------------------------------------------------------------------------
Net income (loss), as reported............................. $61 $ (218) $ (21)
Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects... 3 2 1
Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards, net
of related tax effects................................... (7) (5) (3)
-----------------------
Pro forma net income (loss)................................ $57 $ (221) $ (23)
=======================
Basic and diluted net income (loss) per share
--As reported............................................ $.62 $(2.45) $(.24)
--Pro forma.............................................. .58 (2.48) (.26)
------------------------------------------------------------------------------------
F-13
The above pro forma amounts were based on a Black-Scholes option-pricing model,
which included the following information and assumptions:
-----------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------
Weighted average grant date exercise price per share... $20.42 $19.89 $23.00
Expected annual dividends per share.................... $ .20 $ .20 $ 1.00
Expected life in years................................. 5 5 5
Expected volatility.................................... 43% 40% 37%
Risk-free interest rate................................ 4.4% 4.9% 6.5%
--------------------------
Weighted-average grant date fair value of options
granted during the year, as calculated from above.... $ 8.29 $ 7.69 $ 6.63
-----------------------------------------------------------------------------------
Deferred taxes--Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The realization of deferred tax assets is assessed
periodically based on several interrelated factors. These factors include U. S.
Steel's expectation to generate sufficient future taxable income and
management's intent regarding the permanent reinvestment of the earnings from
certain foreign subsidiaries. Deferred tax liabilities have not been recognized
for the undistributed earnings of certain foreign subsidiaries, primarily USSK,
because management intends to permanently reinvest such earnings in those
foreign operations. U. S. Steel records a valuation allowance to reduce deferred
tax assets to the amount that is more likely than not to be realized.
Insurance--U. S. Steel is insured for catastrophic casualty and certain property
and business interruption exposures, as well as those risks required to be
insured by law or contract. Costs resulting from noninsured losses are charged
against income upon occurrence.
Reclassifications--Effective January 1, 2002, net pension and other
postretirement costs associated with active employees at our operating locations
are reflected in cost of revenues. Net costs and credits associated with
corporate headquarters personnel and all retirees are reflected in selling,
general and administrative expenses. Prior year data has been reclassified to
conform to the current year presentation, which resulted in a decrease in cost
of revenues and an increase in selling, general and administrative expenses of
$162 million and $190 million for the years ended December 31, 2001 and 2000,
respectively. Certain other reclassifications of prior years' data have been
made to conform to 2002 classifications.
4. NEW ACCOUNTING STANDARDS
On January 1, 2002, U. S. Steel adopted Statement of Financial Accounting
Standards (SFAS) No. 141 "Business Combinations." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method of accounting
and established specific criteria for the recognition of intangible assets
separately from goodwill. This Statement also requires that if any excess of
fair value of acquired assets over cost in a business combination remains after
reducing to zero amounts that would have otherwise been assigned to the acquired
assets, that remaining excess shall be recognized immediately as an
extraordinary gain, rather than being deferred and amortized. There was no
financial statement impact related to the initial adoption of SFAS No. 141 and
the guidance will be applied on a prospective basis.
F-14
On January 1, 2002, U. S. Steel adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" which addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made by
SFAS No. 142 are that 1) goodwill and intangible assets with indefinite lives
will no longer be amortized, but must be tested for impairment at least
annually; and 2) the amortization period for intangible assets with finite lives
will no longer be limited to forty years. SFAS No. 142 requires transitional
disclosure of what reported net income and the associated per share amount would
have been in all periods presented had SFAS No. 142 been in effect. There was no
impact to net income or the related per share amount for any period presented in
the financial statements.
Also adopted on January 1, 2002, was SFAS No. 144 "Accounting for Impairment or
Disposal of Long-Lived Assets." This Statement establishes a single accounting
model for long-lived assets to be disposed of by sale and provides additional
guidance on assets to be held and used and assets to be disposed of other than
by sale. There was no financial statement impact related to the initial adoption
of this Statement.
On April 30, 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from the Extinguishment of Debt," and the criteria
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" will
now be used to classify gains and losses on the extinguishment of debt. SFAS No.
64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements" amended
SFAS No. 4 and is no longer necessary because SFAS No. 4 has been rescinded.
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" did not apply
to U. S. Steel. SFAS No. 13, "Accounting for Leases" is amended to require
certain lease modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-leaseback
transactions. SFAS No. 145 also makes technical corrections to existing
pronouncements. While these corrections are not substantive in nature, in some
instances, they may change accounting practice. Generally, SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, except for certain
provisions related to SFAS No. 13 that are effective for transactions occurring
after May 15, 2002. The provisions of SFAS No. 145 related to the rescission of
SFAS No. 4 will have no impact on net income or the related per share amount for
any period presented in the financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 establishes a new accounting model for the
recognition and measurement of retirement obligations associated with tangible
long-lived assets. SFAS No. 143 requires that an asset retirement obligation be
capitalized as part of the cost of the related long-lived asset and subsequently
allocated to expense using a systematic and rational method. SFAS No. 143
requires proforma disclosure of the amount of the liability for obligations as
if the statement had been applied during all periods affected, using current
information, current assumptions and current interest rates. In addition, the
effect of adopting a new accounting principle on net income and on the related
per share amounts is required to be shown on the face of the income statements
for all periods presented under APB Opinion No. 20. U. S. Steel adopted this
Statement effective January 1, 2003. The transition adjustment of less than $15
million, net of tax, resulting from the adoption of SFAS No. 143 will be
reported as a cumulative effect of a change in accounting principle in the first
quarter of 2003. U. S. Steel will comply with the proforma disclosure
requirements.
F-15
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
was issued in July 2002. SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities, including restructuring activities. The scope of SFAS
No. 146 includes (1) costs to terminate contracts that are not capital leases;
(2) costs to consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. The provisions of this Statement
will be effective for exit or disposal activities initiated after December 31,
2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The Interpretation elaborates on the disclosure to be
made by a guarantor about obligations under certain guarantees that it has
issued. It also clarifies that at the inception of a guarantee, the company must
recognize liability for the fair value of the obligation undertaken in issuing
the guarantee. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements have been adopted for the 2002 annual financial
statements (see Note 25). U. S. Steel will apply the remaining provisions of the
Interpretation prospectively as required.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which amends SFAS No. 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. The Company has adopted the
annual disclosure provisions and will adopt the interim disclosure provisions of
SFAS No. 148 effective with the first quarter of 2003. The Company is not
changing to the fair value based method of accounting for stock-based employee
compensation; therefore, the transition provisions are not applicable.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," was
issued in January 2003 and addresses consolidation by business enterprises of
variable interest entities that do not have sufficient equity investment to
permit the entity to finance its activities without additional subordinated
financial support from other parties or whose equity investors lack the
characteristics of a controlling financial interest. This Interpretation
requires consolidation of a variable interest entity by the primary beneficiary
and requires certain disclosures by the primary and other significant
beneficiaries. The provisions of this Interpretation apply immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which a company obtains an interest after that date. It
applies for the interim period beginning after June 15, 2003, for variable
interest entities in which a company holds a variable interest that it acquired
before February 1, 2003. The Interpretation may be applied prospectively with a
cumulative effect adjustment as of the date of first application or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. If
it is reasonably possible that an enterprise will consolidate or disclose
information about a variable interest entity when this Interpretation becomes
effective, the company must make certain disclosures in all financial statements
initially issued after January 31, 2003, regardless of the date on which the
variable
F-16
interest entity was created. U. S. Steel is in the process of assessing the
appropriate application of this Interpretation.
5. BUSINESS COMBINATIONS
On November 24, 2000, U. S. Steel acquired USSK. USSK was formed in June 2000 to
hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified
Slovak corporation. The purchase price for USSK consisted of cash payments of
$69 million in 2000, $14 million in 2001 and additional consideration of not
less than $25 million and up to $75 million was contingent upon the performance
of USSK in 2001. Based on this performance, the maximum contingent consideration
was accrued, resulting in total cash consideration of $158 million. In July
2002, the first installment of the contingent consideration of $37.5 million was
paid. The remaining payment of $37.5 million is due in July 2003. Additionally,
$325 million of debt and $226 million of other liabilities were included with
the acquisition. The acquisition was accounted for under the purchase method of
accounting. The 2000 results of operations included the operations of USSK from
the date of acquisition. Prior to this transaction, U. S. Steel and VSZ were
equal partners in VSZ U. S. Steel, s.r.o. (VSZUSS), a tin mill products
manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The
acquisition of the remaining interest in VSZUSS was accounted for under the
purchase method of accounting. Prior to the acquisition, U. S. Steel had
accounted for its investment in VSZUSS under the equity method of accounting.
On March 1, 2001, U. S. Steel completed the purchase of the tin mill products
business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In
this noncash transaction, U. S. Steel assumed approximately $66 million of
employee related obligations from LTV. The acquisition was accounted for using
the purchase method of accounting. Results of operations for the year 2001
include the operations of East Chicago Tin from the date of acquisition. In the
fourth quarter of 2001, U. S. Steel recorded an intangible asset impairment of
$20 million, related to the five-year agreement for LTV to supply U. S. Steel
with pickled hot bands entered into in conjunction with the acquisition of LTV's
tin mill products business. This impairment was recorded during the quarter that
LTV discontinued operations at East Chicago pursuant to a bankruptcy court
order.
On March 23, 2001, Transtar, Inc. (Transtar) completed a reorganization with its
two voting shareholders, U. S. Steel and Transtar Holdings, L.P. (Holdings), an
affiliate of Blackstone Capital Partners L.P. As a result of this transaction,
U. S. Steel became sole owner of Transtar and certain of its subsidiaries.
Holdings became owner of the other subsidiaries of Transtar. Because the
reorganization involved the sale of certain subsidiaries to Holdings, a
noncontrolling shareholder, Transtar recorded a gain by comparing the carrying
value of the businesses sold to their fair value. U. S. Steel's share of the
gain recognized by Transtar was $68 million, which is included in income (loss)
from investees. Concurrently, U. S. Steel accounted for the change in ownership
of Transtar using the step-acquisition purchase method of accounting. Also, in
connection with this transaction, U. S. Steel recognized a favorable deferred
tax adjustment of $33 million related to its investment in the stock of Transtar
that was no longer required when U. S. Steel acquired 100 percent of Transtar.
U. S. Steel previously accounted for its investment in Transtar under the equity
method of accounting.
The following unaudited pro forma data for U. S. Steel includes the results of
operations of the above acquisitions giving effect to them as if they had been
consummated at the beginning of the years presented. Pro forma results for 2001
exclude the $68 million gain and the
F-17
$33 million tax benefit recorded as a result of the Transtar transaction. In
addition, VSZ did not provide historical carve-out financial information for its
steel activities prepared in accordance with generally accepted accounting
principles in the United States of America. Therefore, U. S. Steel made certain
estimates and assumptions regarding revenues and costs used in the preparation
of the unaudited pro forma data relating to USSK for the year 2000.
The following unaudited pro forma data is based on historical information and
does not necessarily reflect the actual results that would have occurred nor is
it necessarily indicative of future results of operations.
------------------------------------------------------------------------------
(IN MILLIONS) (UNAUDITED) 2001 2000
------------------------------------------------------------------------------
Revenues and other income................................... $6,353 $7,355
Net income (loss)........................................... (321) 58
Per share--basic and diluted................................ (3.60) .65
------------------------------------------------------------------------------
6. NET INTEREST AND OTHER FINANCIAL COSTS
---------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
---------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL INCOME:
Interest income......................................... $ 5 $ 13 $ 3
Foreign currency remeasurement gains (losses)........... 16 (1) 7
--------------------
Total................................................ 21 12 10
--------------------
INTEREST AND OTHER FINANCIAL COSTS:
Interest incurred....................................... 129 186 88
Less interest capitalized............................... 5 1 3
--------------------
Net interest......................................... 124 185 85
Interest on tax issues.................................. 4 (58)(a) 11
Financial costs on:
Sale of receivables.................................. 3 -- --
Inventory facility................................... 2 -- --
Trust preferred securities........................... -- 13 13
Preferred stock of subsidiary........................ -- 11 5
Amortization of discounts and deferred financing
costs................................................ 3 2 1
--------------------
Total................................................ 136 153 115
--------------------
NET INTEREST AND OTHER FINANCIAL COSTS..................... $115 $141 $105
---------------------------------------------------------------------------------
(a) Includes a favorable adjustment of $67 million related to prior
years' taxes.
7. RECOVERY OF EXCISE TAXES
In 2002, U. S. Steel recognized pretax income of $38 million associated with the
recovery of black lung excise taxes that were paid on coal export sales during
the period 1993 through 1999. This income is included in other income in the
statement of operations and resulted from a 1998 federal district court decision
that found such taxes to be unconstitutional. Of the $38 million of cash
received, $11 million represented interest.
F-18
8. SEGMENT INFORMATION
During the first quarter of 2002, following the Separation, U. S. Steel
established a new internal financial reporting structure. This resulted in a
change in reportable segments from Domestic Steel and USSK to Flat-rolled
Products (Flat-rolled), Tubular Products (Tubular) and USSK. In addition, U. S.
Steel revised the presentation of several items of income and expense within
income (loss) from reportable segments. Net pension credits, costs related to
former businesses and administrative expenses previously not reported at the
segment level are now directly charged or allocated to the reportable segments
and other businesses. In the fourth quarter of 2002, certain quantitative
threshold tests under SFAS No. 131 were met by two operating units previously
included in the Other Businesses category requiring those operating units to be
reflected as reportable segments. As of the end of 2002, U. S. Steel had five
reportable segments: Flat-rolled, Tubular, USSK, Straightline Source
(Straightline) and USS Real Estate (Real Estate). Prior year segment data has
been conformed to the current year presentation.
The Flat-rolled segment includes the operating results of U. S. Steel's domestic
integrated steel mills and equity investees involved in the production of sheet,
plate and tin mill products. These operations are principally located in the
United States and primarily serve customers in the transportation (including
automotive), appliance, service center, conversion, container and construction
markets.
The Tubular segment includes the operating results of U. S. Steel's domestic
tubular production facilities and an equity investee involved in the production
of tubular goods. These operations produce and sell both seamless and electric
resistance weld tubular products and primarily serve customers in the oil, gas
and petrochemical markets.
The USSK segment includes the operating results of U. S. Steel's integrated
steel mill located in the Slovak Republic; a production facility in Germany;
operations under facility management and support agreements in Serbia; and
equity investees, primarily located in Central Europe. These operations produce
and sell sheet, plate, tin, tubular, precision tube and specialty steel
products, as well as coke. USSK primarily serves customers in the central and
western European construction, conversion, appliance, transportation, service
center, container, and oil, gas and petrochemical markets.
The Straightline segment includes the operating results of U. S. Steel's
technology-enabled distribution business that serves steel customers primarily
in the eastern and central United States. Straightline competes in the steel
service center marketplace using a nontraditional business process to sell,
process and deliver flat-rolled steel products in small to medium sized order
quantities primarily to job shops, contract manufacturers and original equipment
manufacturers across an array of industries.
The Real Estate segment manages U. S. Steel's domestic mineral interests that
are not assigned to other operating units; timber properties; and residential,
commercial and industrial real estate that is managed or developed for sale or
lease.
All other U. S. Steel businesses not included in U. S. Steel's reportable
segments are reflected in Other Businesses. These businesses are involved in the
production and sale of coal, coke and taconite pellets (iron ore);
transportation services; and engineering and consulting services.
The chief operating decision maker evaluates performance and determines resource
allocations based on a number of factors, the primary measure being income
(loss) from operations. Income (loss) from operations for reportable segments
and other businesses does not include
F-19
net interest and other financial costs, the income tax provision (benefit), or
special items. Information on segment assets is not disclosed as it is not
reviewed by the chief operating decision maker.
The accounting principles applied at the operating segment level in determining
income (loss) from operations are generally the same as those applied at the
consolidated financial statement level. Intersegment sales and transfers for
some operations are accounted for at cost, while others are accounted for at
market-based prices, and are eliminated at the corporate consolidation level.
All corporate-level selling, general and administrative expenses and costs
related to certain former businesses are allocated to the reportable segments
and other businesses based on measures of activity that management believes are
reasonable.
F-20
The results of segment operations are as follows:
---------------------------------------------------------------------------------------------------------------------------------
TOTAL TOTAL
FLAT- STRAIGHT- REAL REPORTABLE OTHER RECONCILING U. S.
(IN MILLIONS) ROLLED TUBULAR USSK LINE ESTATE SEGMENTS BUSINESSES ITEMS STEEL
---------------------------------------------------------------------------------------------------------------------------------
2002
Revenues and other income:
Customer................. $4,086 $ 519 $1,168 $ 73 $ 87 $ 5,933 $ 1,016 $ - $ 6,949
Intersegment............. 191 - 11 - 8 210 916 (1,126) -
Equity income
(loss)(a).............. 1 - 2 - - 3 (9) 39 33
Other.................... 1 - 4 - 6 11 3 58 72
----------------------------------------------------------------------------------------------------
Total.................. $4,279 $ 519 $1,185 $ 73 $ 101 $ 6,157 $ 1,926 $ (1,029) $ 7,054
----------------------------------------------------------------------------------------------------
Income (loss) from
operations............... $ (31) $ 4 $ 110 $ (41) $ 57 $ 99 $ 38 $ (9) $ 128
Depreciation, depletion and
amortization............. 204 10 41 4 1 260 90 - 350
Capital expenditures....... 42 52 97 8 1 200 58 - 258
----------------------------------------------------------------------------------------------------
2001
Revenues and other income:
Customer................. $3,662 $ 714 $1,060 $ 2 $ 96 $ 5,534 $ 856 $ (104) $ 6,286
Intersegment............. 229 - - - 12 241 756 (997) -
Equity income
(loss)(a).............. (37) 1 1 - - (35) (15) 114 64
Other.................... - - 3 - 16 19 6 - 25
----------------------------------------------------------------------------------------------------
Total.................. $3,854 $ 715 $1,064 $ 2 $ 124 $ 5,759 $ 1,603 $ (987) $ 6,375
----------------------------------------------------------------------------------------------------
Income (loss) from
operations............... $ (536) $ 88 $ 123 $ (17) $ 69 $ (273) $ (17) $ (115) $ (405)
Depreciation, depletion and
amortization............. 180 11 38 1 1 231 75 38 344
Capital expenditures....... 129 5 61 19 2 216 71 - 287
----------------------------------------------------------------------------------------------------
2000
Revenues and other income:
Customer................. $4,324 $ 739 $ 92 $ - $ 102 $ 5,257 $ 841 $ (8) $ 6,090
Intersegment............. 202 - - - 14 216 710 (926) -
Equity income
(loss)(a).............. 25 2 - - - 27 1 (36) (8)
Other.................... 1 - - - 20 21 29 - 50
----------------------------------------------------------------------------------------------------
Total.................. $4,552 $ 741 $ 92 $ - $ 136 $ 5,521 $ 1,581 $ (970) $ 6,132
----------------------------------------------------------------------------------------------------
Income (loss) from
operations............... $ 31 $ 83 $ 2 $ - $ 72 $ 188 $ 67 $ (151) $ 104
Depreciation, depletion and
amortization............. 191 13 4 - 6 214 75 71 360
Capital expenditures....... 163 2 5 - 2 172 72 - 244
---------------------------------------------------------------------------------------------------------------------------------
(a) Represents equity in earnings (losses) of unconsolidated investees.
F-21
The following are schedules of reconciling items:
------------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Elimination of intersegment revenues................. $(1,126) $ (997) $ (926)
Insurance recoveries related to USS-POSCO fire....... 39 46 --
Federal excise tax refund............................ 38 -- --
Gain on VSZ share sale............................... 20 -- --
Asset impairment--trade receivables.................. -- (104) (8)
Gain on Transtar reorganization...................... -- 68 --
Impairment and other costs related to investments in
equity investees.................................. -- -- (36)
---------------------------
Total............................................. $(1,029) $ (987) $ (970)
---------------------------
INCOME (LOSS) FROM OPERATIONS:
Insurance recoveries related to USS-POSCO fire....... $ 39 $ 46 $ --
Federal excise tax refund............................ 38 -- --
Gain on VSZ share sale............................... 20 -- --
Pension settlement losses............................ (100) -- --
Asset impairments--trade and other receivables....... (14) (146) (8)
Environmental and legal contingencies................ 9 -- (36)
Costs related to Fairless shutdown................... (1) (38) --
Costs related to Separation.......................... -- (25) --
Gain on Transtar reorganization...................... -- 68 --
Asset impairments--intangible assets................. -- (20) --
--coal.......................... -- -- (71)
Impairment and other costs related to investment in
equity investees.................................. -- -- (36)
---------------------------
Total............................................. $ (9) $ (115) $ (151)
---------------------------
DEPRECIATION, DEPLETION AND AMORTIZATION:
Asset impairments--intangible assets................. $ -- $ 20 $ --
--coal.......................... -- -- 71
Depreciation costs related to Fairless shutdown...... -- 18 --
---------------------------
Total............................................. $ -- $ 38 $ 71
---------------------------
REVENUES BY PRODUCT:
Sheet and semi-finished steel products............... $ 4,048 $3,163 $3,288
Plate and tin mill products.......................... 1,057 1,273 977
Tubular products..................................... 554 755 754
Raw materials (coal, coke and iron ore).............. 502 485 626
Other(a)............................................. 788 610 445
---------------------------
Total............................................. $ 6,949 $6,286 $6,090
------------------------------------------------------------------------------------
(a) Includes revenue from the sale of steel production by-products;
transportation services; steel mill products distribution; the
management of mineral resources; the management and development of
real estate; and engineering and consulting services.
F-22
GEOGRAPHIC AREA:
The information below summarizes revenues and other income and property, plant
and equipment and investments (assets) based on the location of the
manufacturing facilities to which they relate.
------------------------------------------------------------------------------------
REVENUES
AND
(IN MILLIONS) YEAR OTHER INCOME ASSETS
------------------------------------------------------------------------------------
United States....................................... 2002 $ 5,864 $2,764
2001 5,302 2,927
2000 6,027 2,745
Slovak Republic..................................... 2002 1,131 488
2001 1,030 429
2000 95 376
Other Foreign Countries............................. 2002 59 10
2001 43 11
2000 10 10
Total............................................... 2002 $ 7,054 $3,262
2001 6,375 3,367
2000 6,132 3,131
------------------------------------------------------------------------------------
F-23
9. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for employee stock plans:
U. S. Steel common stock............................... $ 14 $ -- $ --
Steel Stock............................................ -- 9 5
Assets acquired through capital leases.................... -- 7 --
Disposal of assets--notes or common stock received........ -- 4 14
Business combinations:
Acquisition of East Chicago Tin--liabilities assumed... -- 66 --
Acquisition of Transtar:
Liabilities assumed.................................. -- 114 --
Investee liabilities consolidated in step
acquisition......................................... -- 145 --
Acquisition of USSK:
Liabilities assumed.................................. -- -- 568
Accrual of contingent consideration at present
value............................................... -- 45 21
Investee liabilities consolidated in step
acquisition......................................... -- -- 3
Separation activities (see Note 2):
Marathon obligations historically attributed to U. S.
Steel retained by Marathon in the Separation (Value
Transfer)............................................. -- 900 --
Separation costs funded by Marathon.................... -- 62 --
Other Separation adjustments........................... -- 51 --
----------------------------------------------------------------------------------
10. SHORT-TERM DEBT
USSK is the sole obligor on a short-term $10 million credit facility that
expires on November 26, 2003. The facility bears interest on prevailing
short-term market rates plus 1%. USSK is obligated to pay a .25% commitment fee
on undrawn amounts. At December 31, 2002, there were no borrowings against this
facility. However, availability was reduced by $2 million to $8 million as a
result of customs guarantees issued against the facility.
F-24
11. LONG-TERM DEBT
-------------------------------------------------------------------------------------------
DECEMBER 31,
INTEREST ----------------
(IN MILLIONS) RATES --% MATURITY 2002 2001
-------------------------------------------------------------------------------------------
Senior Notes................................... 10 3/4 2008 $ 535 $ 535
Senior Quarterly Income Debt Securities........ 10 2031 49 49
Obligations relating to Industrial Development
and Environmental Improvement Bonds and
Notes........................................ 4 3/4-6 7/8 2009-2033 471 471
Inventory Facility............................. 2004 -- --
Fairfield Caster Lease......................... 2003-2012 80 84
All other obligations, including other capital
leases....................................... 2003-2005 2 6
USSK loan...................................... 8 1/2 2003-2010 301 325
USSK credit facility........................... 2004 -- --
----------------
Total..................................... 1,438 1,470
Less unamortized discount...................... 4 4
Less amount due within one year................ 26 32
----------------
Long-term debt due after one year......... $1,408 $1,434
-------------------------------------------------------------------------------------------
Senior Notes--$385 million and $150 million of Senior Notes (Notes) were issued
on July 27, 2001, and September 11, 2001, respectively. Interest is payable
semi-annually in February and August. Up to 35% of the aggregate principal
amount of the Notes may be redeemed at any time prior to August 1, 2004, with
the proceeds of public offerings of certain capital stock at a redemption price
of 110.75% of the principal amount plus accrued interest.
Senior Quarterly Income Debt Securities (Quarterly Debt Securities)--On December
19, 2001, the Quarterly Debt Securities were issued in an exchange for certain
preferred securities of Marathon. Interest is payable quarterly. The Quarterly
Debt Securities will be redeemable at the option of U. S. Steel, in whole or in
part, on or after December 31, 2006, at 100% of the principal amount redeemed
together with accrued but unpaid interest to the redemption date.
Obligations relating to Industrial Development and Environmental Improvement
Bonds and Notes--Under the Financial Matters Agreement (see Note 2), U. S. Steel
assumed and will discharge all principal, interest and other duties of Marathon
under these obligations, including any amounts due upon any defaults or
accelerations of any of the obligations, other than defaults or accelerations
caused by any action of Marathon. The agreement also provides that on or before
the tenth anniversary of the Separation, U. S. Steel will provide for the
discharge of Marathon from any remaining liability under any of these
obligations.
Inventory Facility--On November 30, 2001, U. S. Steel entered into a revolving
credit facility that provides for borrowings of up to $400 million and expires
on December 31, 2004. The facility is secured by all domestic inventory and
related assets, including receivables other than those sold under the
Receivables Purchase Agreement (see Note 21). The amount outstanding under the
facility will not exceed the permitted "borrowing base" calculated on
percentages of the values of eligible inventory.
F-25
Interest on borrowings is calculated based on either LIBOR or J. P. Morgan
Chase's prime rate using spreads determined by U. S. Steel's credit ratings.
Although there were no amounts drawn against this facility at December 31, 2002,
availability was reduced to $397 million due to a letter of credit issued
against the facility.
Fairfield Caster Lease--U. S. Steel is the sublessee of a slab caster at the
Fairfield Works facility in Alabama. The sublease is accounted for as a capital
lease. Marathon is the primary obligor under the lease. Under the Financial
Matters Agreement, U. S. Steel assumed and will discharge all obligations under
this lease, which has a final maturity of 2012, subject to additional
extensions.
USSK loan--USSK has a loan with a group of financial institutions whose recourse
is limited to USSK. The loan is subject to annual repayments of $20 million
beginning in November of 2003, with the balance due in 2010. Mandatory
prepayments of the loan may be required based upon a cash flow formula or a
change in control of U. S. Steel. A mandatory prepayment of $24 million was made
in April of 2002, but no such mandatory prepayment will be required in 2003.
USSK credit facility--USSK is the sole obligor on a $40 million credit facility
that expires in December 2004. The facility bears interest on prevailing market
rates plus .90%. USSK is obligated to pay a .25% commitment fee on undrawn
amounts.
Covenants--The Notes, Quarterly Debt Securities, USSK loan, USSK credit facility
and the Inventory Facility may be declared immediately due and payable in the
event of a change in control of U. S. Steel, as defined in the related
agreements. In such event, U. S. Steel may also be required to either repurchase
the leased Fairfield Caster for $91 million or provide a letter of credit to
secure the remaining obligation. Additionally, the Notes contain various other
restrictive covenants, the majority of which will not apply upon the attainment
of an investment grade rating, including restrictions on the payment of
dividends, limits on additional borrowings, including limiting the amount of
borrowings secured by inventories and the accounts receivable securitization,
limits on sale/leasebacks, limits on the use of funds from asset sales and sale
of the stock of subsidiaries, and restrictions on our ability to make
investments in joint ventures or make certain acquisitions. The Inventory
Facility imposes additional restrictions including financial covenants that
require U. S. Steel to meet interest expense coverage and leverage ratios,
limitations on capital expenditures and restrictions on investments. If these
covenants are breached, creditors would be able to declare their obligations
immediately due and payable and foreclose on any collateral.
Liquidity--U. S. Steel management believes that U. S. Steel's liquidity will be
adequate to satisfy its obligations for the foreseeable future, including
obligations to complete currently authorized capital spending programs. Further
requirements for U. S. Steel's business needs, including the funding of capital
expenditures, debt service for outstanding financings, and any amounts that may
ultimately be paid in connection with contingencies, are expected to be financed
by a combination of internally generated funds (including asset sales), proceeds
from the sale of stock, borrowings and other external financing sources.
However, there is no assurance that our business will generate sufficient
operating cash flow or that external financing sources will be available in an
amount sufficient to enable us to service or refinance our indebtedness or to
fund other liquidity needs. If there is a prolonged delay in the recovery of the
manufacturing sector of the U. S. economy, U. S. Steel believes that it can
maintain adequate liquidity through a combination of the deferral of
nonessential capital spending, sales of non-strategic assets and other cash
conservation measures.
F-26
Debt Maturities--Aggregate maturities of long-term debt are as follows (In
millions):
-------------------------------------------------
YEAR ENDING DECEMBER 31,
2003 2004 2005 2006 2007 LATER YEARS TOTAL
-------------------------------------------------
$26.. $25 $25 $26 $35 $1,301 $1,438
-------------------------------------------------
12. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
U. S. Steel has noncontributory defined benefit pension plans covering
substantially all domestic employees. Benefits under these plans are based upon
years of service and final average pensionable earnings, or a minimum benefit
based upon years of service, whichever is greater. In addition, pension benefits
are also provided to most domestic salaried employees based upon a percent of
total career pensionable earnings. U. S. Steel also participates in
multiemployer plans, most of which are defined benefit plans associated with
coal operations.
F-27
U. S. Steel also has defined benefit retiree health care and life insurance
plans (other benefits) covering most domestic employees upon their retirement.
Health care benefits are provided through comprehensive hospital, surgical and
major medical benefit provisions or through health maintenance organizations,
both subject to various cost sharing features. Life insurance benefits are
provided to nonunion retiree beneficiaries primarily based on employees' annual
base salary at retirement. For domestic union retirees, life insurance benefits
are provided primarily based on fixed amounts negotiated in labor contracts with
the appropriate unions.
--------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
----------------- ------------------
(IN MILLIONS) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1................... $ 7,358 $6,921 $ 2,555 $ 2,149
Service cost....................................... 96 89 18 15
Interest cost...................................... 485 496 172 161
Plan amendments.................................... -- 4 -- --
Actuarial losses................................... 602 469 638 261
Plan merger and acquisition(a)..................... -- 106 -- 152
Settlements, curtailments and termination
benefits(b)...................................... (215) 21 -- --
Benefits paid...................................... (688) (748) (212) (183)
---------------------------------------
Benefit obligations at December 31................. $ 7,638 $7,358 $ 3,171 $ 2,555
---------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1............. $ 8,583 $9,312 $ 728 $ 842
Actual return on plan assets....................... (434) (26) (21) 21
Acquisition........................................ 1 62 -- --
Employer contributions............................. -- -- 17 17
Trustee distributions(c)........................... (18) (17) -- --
Settlements paid from plan assets.................. (197) -- -- --
Benefits paid from plan assets..................... (688) (748) (180) (152)
---------------------------------------
Fair value of plan assets at December 31........... $ 7,247 $8,583 $ 544 $ 728
---------------------------------------
FUNDED STATUS OF PLANS AT DECEMBER 31.............. $ (391)(d) $1,225(d) $(2,627) $(1,827)
Unrecognized transition asset...................... (1) (1) -- --
Unrecognized prior service cost.................... 532 629 6 7
Unrecognized actuarial losses...................... 2,581 866 770 57
Additional minimum liability(e).................... (1,663) (32) -- --
---------------------------------------
Prepaid (accrued) benefit cost..................... $ 1,058 $2,687 $(1,851) $(1,763)
---------------------------------------
Prepaid (accrued) benefit cost is reflected in the
balance sheet as follows:
Pension asset.................................... $ 1,654 $2,745 $ -- $ --
Payroll and benefits payable..................... (5) (20) (56) (27)
Employee benefits................................ (591) (38) (1,795) (1,736)
--------------------------------------------------------------------------------------------
F-28
(a) Reflects merger of Transtar benefit plans and LTV's tin mill employee
obligations into the main U. S. Steel insurance plan upon acquisition of
these businesses. Amount also reflects the recognition of an obligation
associated with retiree medical benefits for pre-1989 Lorain Works' retirees
which had been assumed by Republic Technologies Holdings, LLC (Republic).
This obligation was recorded in 2001 as a result of Republic's bankruptcy
proceedings (see Note 15).
(b) Reflects pension settlements in 2002 as a result of increased lump sum
payouts during 2002 primarily due to the completion in June 2002 of the
voluntary early retirement program for nonunion employees related to the
Separation. Reflects an increase in obligations in 2001 due principally to a
nonunion voluntary early retirement program offered in conjunction with the
Separation and a shutdown of the majority of the Fairless Works.
(c) Represents transfers of excess pension assets to fund retiree health care
benefits accounts under Section 420 of the Internal Revenue Code.
(d) Includes plans that have accumulated benefit obligations in excess of plan
assets:
----------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------
Aggregate accumulated benefit obligations................... $(5,075) $(58)
Aggregate projected benefit obligations (PBO)............... (5,227) (69)
Aggregate plan assets....................................... 4,479 --
----------------------------------------------------------------------------
Of the PBO total, $6 million and $8 million represent the portions of pension
benefits applicable to Marathon employees' corporate service with USX
Corporation at December 31, 2002 and 2001, respectively. Such amounts will be
reimbursed by Marathon and are reflected as long-term receivables from related
parties on the balance sheet. The aggregate accumulated benefit obligations in
excess of plan assets reflected above are included in the payroll and benefits
payable and employee benefits lines on the balance sheet.
(e) Additional minimum liability recorded was offset by the following:
---------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------
Intangible asset............................................ $ 414 $ --
-------------
Accumulated other comprehensive income (losses):
Beginning of year.......................................... $ (20) $ (4)
Change during year (net of tax)............................ (742) (16)
Change during the year (equity investees)(1)............... (14) --
-------------
Balance at end of year..................................... $(776) $ (20)
---------------------------------------------------------------------------
(1) Amount reflects U. S. Steel's portion of the additional minimum
pension liability recorded by USS-POSCO Industries, an equity
investee.
------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
----------------------- --------------------
(IN MILLIONS) 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
(CREDIT)
Service cost............................. $ 96 $ 89 $ 76 $ 18 $ 15 $ 12
Interest cost............................ 485 496 505 172 161 147
Expected return on plans assets.......... (788) (837) (841) (54) (60) (24)
Amortization--net transition gain........ -- (1) (67) -- -- --
--prior service costs..... 96 97 98 2 4 4
--actuarial (gains)
losses....................... 8 2 (44) -- (3) (29)
Multiemployer plans(a)................... -- -- -- 12 12 9
Settlement and termination losses(b)..... 100 34 -- -- -- --
-----------------------------------------------
Net periodic benefit cost (credit)....... $ (3) $(120) $(273) $150 $129 $119
------------------------------------------------------------------------------------------
(a) Primarily consists of payments to a multiemployer health care benefit plan
created by the Coal Industry Retiree Health Benefit Act of 1992 based on
assigned beneficiaries receiving benefits. The present value of this
unrecognized obligation is
F-29
broadly estimated to be $76 million, including the effects of future medical
inflation, and this amount could increase if additional costs are assigned.
(b) Relates primarily to voluntary early retirement programs.
--------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
2002 2001 2002 2001
--------------------------------------------------------------------------------
Weighted-average actuarial assumptions
at December 31:
Discount rate........................... 6.25% 7.00% 6.25% 7.00%
Increase in compensation rate........... 4.00% 4.00% 4.00% 4.00%
For the year ended December 31:
Expected annual return on plan assets... 8.80% 8.90% 8.00% 8.00%
--------------------------------------------------------------------------------
For measurement purposes, a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2003. This rate was assumed to
decrease gradually to 4.75% for 2010 and remain at that level thereafter. The
expected annual return on plan asset assumption, used in the determination of
the net periodic benefit cost (credit), will be reduced to 8.2% for 2003.
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
------------------------------------------------------------------------------------
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
(IN MILLIONS) INCREASE DECREASE
------------------------------------------------------------------------------------
Effect on total of service and interest cost
components....................................... $ 24 $ (20)
Effect on other postretirement benefit
obligations...................................... 300 (253)
------------------------------------------------------------------------------------
Selling, general and administrative expenses for 2002 included a pretax
settlement loss of $10 million related to retirements of personnel covered under
the non tax-qualified pension plan and the executive management supplemental
pension program, and a pretax pension settlement loss of $90 million for the
nonunion qualified plan.
SFAS No. 87 "Employer's Accounting for Pensions" provides that if at any plan
measurement date, the fair value of plan assets is less than the plan's
accumulated benefit obligation (ABO), the sponsor must establish a minimum
liability at least equal to the amount by which the ABO exceeds the fair value
of the plan assets and any pension asset must be removed from the balance sheet.
The sum of the liability and pension asset is offset by the recognition of an
intangible asset and/or as a direct charge to stockholders' equity, net of tax
effects. Such adjustments have no direct impact on earnings per share or cash.
As of December 31, 2002, the fair value of plan assets for the U. S. Steel
pension plan for union employees was $4,479 million. Based on asset values as of
December 31, 2002, the ABO for this plan exceeded the fair value of plan assets
by $543 million. Consequently, required minimum liability adjustments were
recorded resulting in the recognition of an intangible asset of $414 million and
a charge to equity (net of tax) of $748 million at December 31, 2002.
U. S. Steel also contributes to several defined contribution plans for its
salaried employees and a small number of wage employees. Company contributions
to these plans, which for the most part are based on a percentage of the
employees' salary depending on years of service, totaled $14 million in 2002,
$13 million in 2001 and $11 million in 2000. Most union employees are
F-30
eligible to participate in a defined contribution plan where there is no company
match on savings. U. S. Steel also maintains a supplemental thrift plan to
provide benefits which are otherwise limited by the Internal Revenue Service for
qualified plans; company costs under these plans totaled less than $1 million in
2002, 2001 and 2000.
13. INCOME TAXES
Provisions (credits) for income taxes were:
-----------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- --------------------------
(IN MILLIONS) CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
-----------------------------------------------------------------------------------------------------------
Federal.............. $ (12) $ (28) $(40) $ (326) $ 38 $(288) $ (357) $ 340 $ (17)
State and local...... -- (6) (6) (23) (13) (36) (12) 49 37
Foreign.............. 3 (5) (2) 3 (7) (4) -- -- --
------------------------------------------------------------------------------------
Total............. $ (9) $ (39) $(48) $ (346) $ 18 $(328) $ (369) $ 389 $ 20
-----------------------------------------------------------------------------------------------------------
A reconciliation of the federal statutory tax rate of 35% to total provisions
(benefits) follows:
-----------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
-----------------------------------------------------------------------------------
Statutory rate applied to income (loss) before income
taxes.................................................... $ 4 $(191) $ --
Excess percentage depletion................................. (1) (1) (3)
Effects of foreign operations, including foreign tax
credits.................................................. (39) (38) (5)
State and local income taxes after federal income tax
effects.................................................. (4) (23) 24
Nontaxable gain from ownership change....................... -- (24) --
Adjustments of prior years' federal income taxes............ (8) (18) 5
Dispositions of investments................................. -- (33) --
Other....................................................... -- -- (1)
---------------------
Total provisions (benefits)................................. $(48) $(328) $ 20
-----------------------------------------------------------------------------------
F-31
Deferred tax assets and liabilities resulted from the following:
------------------------------------------------------------------------------
DECEMBER 31
----------------
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
Deferred tax assets:
Federal tax loss carryforwards (expiring in 2022)........ $ 27 $ --
Minimum tax credit carryforwards (no expiration)......... 4 3
State tax loss carryforwards (expiring in 2004 through
2022).................................................. 14 2
Foreign tax loss carryforwards (no expiration)........... 23 20
Employee benefits........................................ 1,412 875
Receivables, payables and debt........................... 57 99
Expected federal benefit for deducting state deferred
income taxes........................................... 25 27
Contingencies and accrued liabilities.................... 70 98
Other deductible assets.................................. 20 20
Valuation allowances:
Foreign............................................... (23) (20)
State................................................. (7) (9)
----------------
Total deferred tax assets(a)....................... 1,622 1,115
----------------
Deferred tax liabilities:
Property, plant and equipment............................ 365 359
Pension asset............................................ 1,129 1,095
Inventory................................................ 45 34
Investments in subsidiaries and equity investees......... 56 67
Other liabilities........................................ 36 74
----------------
Total deferred tax liabilities........................ 1,631 1,629
----------------
Net deferred tax liabilities....................... $ 9 $ 514
------------------------------------------------------------------------------
(a) U. S. Steel expects to generate sufficient future taxable income to
realize the benefit of its deferred tax assets.
The consolidated tax returns of Marathon for the years 1992 through 2001 are
under various stages of audit and administrative review by the IRS. U. S. Steel
believes it has made adequate provision for income taxes and interest which may
become payable for years not yet settled.
Pretax income in 2002, 2001 and 2000 included $106 million, $103 million and $8
million of income, respectively, attributable to foreign sources.
Undistributed earnings of certain consolidated foreign subsidiaries at December
31, 2002, amounted to approximately $260 million. No provision for deferred
income taxes has been made for these subsidiaries because U. S. Steel intends to
permanently reinvest such earnings in foreign operations. If such earnings were
not permanently reinvested, a U.S. deferred tax liability of approximately $70
million would have been required.
The Slovak Income Tax Act provides an income tax credit which is available to
USSK if certain conditions are met. In order to claim the tax credit in any
year, 60% of USSR's sales must be export sales and USSK must reinvest the tax
credits claimed in qualifying capital expenditures during the five years
following the year in which the tax credit is claimed. The provisions of the
Slovak Income Tax Act permit USSK to claim a tax credit of 100% of USSK's tax
liability for
F-32
years 2000 through 2004 and 50% for the years 2005 through 2009. Management
believes that USSK has fulfilled all of the necessary conditions for claiming
the tax credit for 2000 through 2002.
U. S. Steel and Marathon entered into a Tax Sharing Agreement that reflects each
party's rights and obligations relating to payments and refunds of income,
sales, transfer and other taxes that are attributable to periods beginning prior
to and including the Separation Date and taxes resulting from transactions
effected in connection with the Separation.
The Tax Sharing Agreement incorporates the general tax sharing principles of the
former tax allocation policy. In general, U. S. Steel and Marathon will make
payments between them such that, with respect to any consolidated, combined or
unitary tax returns for any taxable period or portion thereof ending on or
before the Separation Date, the amount of taxes to be paid by each of U. S.
Steel and Marathon will be determined, subject to certain adjustments, as if the
former groups each filed their own consolidated, combined or unitary tax return.
The Tax Sharing Agreement also provides for payments between U. S. Steel and
Marathon for certain tax adjustments which may be made after the Separation.
Other provisions address, but are not limited to, the handling of tax audits,
settlements and return filing in cases where both U. S. Steel and Marathon have
an interest in the results of these activities.
A preliminary settlement of $441 million for the calendar year 2001 income
taxes, which would have been made in March 2002 under the former tax allocation
policy, was made by Marathon to U. S. Steel immediately prior to the Separation
in 2001 at a discounted amount to reflect the time value of money. A final
settlement for the calendar year 2001 income taxes of $7 million was received in
December 2002. The tax allocation policy provides that U. S. Steel receive the
benefit of tax attributes (principally net operating losses and various tax
credits) that arose out of its business and which were used on a consolidated
tax return.
Additionally, pursuant to the Tax Sharing Agreement, U. S. Steel and Marathon
have agreed through various representations and covenants to protect the
tax-free status of the Separation. To the extent that a breach of a
representation or covenant results in corporate tax being imposed, the breaching
party, either U. S. Steel or Marathon, will be responsible for the payment of
the corporate tax. See further discussion in Note 25.
14. TRANSACTIONS WITH RELATED PARTIES
Revenues from related parties and receivables from related parties primarily
reflect sales of steel products, raw materials, transportation services and fees
for providing various management and other support services to equity and
certain other investees. Generally, transactions are conducted under long-term
market-based contractual arrangements. Total revenues generated by sales and
service transactions with equity investees were $905 million, $815 million and
$948 million in 2002, 2001 and 2000, respectively. Revenues from related parties
and receivables from related parties also include amounts related to the sale of
materials, primarily coke by-products, to Marathon. These sales were conducted
under terms comparable to those with unrelated parties and amounted to $13
million, $7 million and $17 million in 2002, 2001 and 2000, respectively.
Receivables from related parties at December 31, 2002 and 2001, also included
$28 million due from Marathon for tax settlements in accordance with the Tax
Sharing Agreement.
Long-term receivables from related parties at December 31, 2002, reflect amounts
due from Marathon related to contractual reimbursements for the retirement of
participants in the non-
F-33
qualified employee benefit plans. These amounts will be paid by Marathon as
participants retire. At December 31, 2001, long-term receivables from related
parties also included certain unreserved retiree medical cost reimbursements
from Republic. These receivables were fully reserved and subsequently written
off in 2002, as discussed in Note 15.
Accounts payable to related parties reflect the purchase of semi-finished steel
products and outside processing services from equity and certain other investees
in 2002, and for the first quarter of 2001 and the year 2000 included the
purchase of transportation services from Transtar. Purchases from these
investees totaled $181 million, $261 million and $566 million in 2002, 2001 and
2000, respectively. U. S. Steel also purchased natural gas and gasoline from
Marathon under terms comparable to those with unrelated parties. Total purchases
from Marathon were $15 million, $30 million and $60 million in 2002, 2001 and
2000, respectively.
Accounts payable to related parties at December 31, 2002, also included the net
present value of the second and final $37.5 million installment of contingent
consideration payable to VSZ in July 2003 related to the acquisition of USSK.
This payable was reflected as a long-term payable to related parties at December
31, 2001. Accounts payable to related parties at December 31,2001, also included
the net present value of the first $37.5 million installment of contingent
consideration paid to VSZ in July 2002 related to the acquisition of USSK, and
$54 million due to Marathon that was paid in the first quarter of 2002 in
accordance with the terms of the Separation.
The related party activity above includes transactions and related balances with
Republic through August 2002, when Republic's operating assets were sold through
a bankruptcy proceeding to an unrelated party, and with VSZ through October
2002, when U. S. Steel sold its investment in VSZ. The contingent consideration
payable to VSZ related to the acquisition of USSK will remain classified as a
related party balance until it is paid.
Under an agreement with PRO-TEC Coating Company (PRO-TEC), U. S. Steel provides
exclusive marketing, selling and customer service functions, including invoicing
and receivables collection, for substantially all of the products produced by
PRO-TEC. U. S. Steel, as PRO-TEC's exclusive sales agent, is responsible for
credit risk related to those receivables. Accounts payable to related parties
include $42 million and $37 million at December 31, 2002, and December 31, 2001,
respectively, related to this agreement with PRO-TEC.
15. INVESTMENTS AND LONG-TERM RECEIVABLES
---------------------------------------------------------------------------
DECEMBER 31,
-------------
(IN MILLIONS) 2002 2001
---------------------------------------------------------------------------
Equity method investments................................... $244 $233
Other investments........................................... 38 49
Receivables due after one year.............................. 4 2
Mortgages................................................... 19 17
Split dollar life insurance................................. 28 23
Other....................................................... 8 16
---- ----
Total.................................................... $341 $340
---------------------------------------------------------------------------
F-34
Summarized financial information of PRO-TEC, which is accounted for by the
equity method of accounting follows:
--------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------
Income data--year:
Revenues and other income................................. $615 $506 $538
Operating income.......................................... 93 60 76
Net income................................................ 51 16 31
--------------------------------------------------------------------------------
Balance sheet data--December 31:
Current assets............................................ $126 $103
Noncurrent assets......................................... 209 231
Current liabilities....................................... 52 52
Noncurrent liabilities.................................... 96 106
--------------------------------------------------------------------------------
Summarized financial information of USS-POSCO Industries, which is accounted for
by the equity method of accounting follows:
----------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------
Income data--year:
Revenues and other income................................ $581 $412 $750
Operating income (loss).................................. 38 (4) 10
Net income (loss)........................................ 36 (13) 1
----------------------------------------------------------------------------------
Balance sheet data--December 31:
Current assets........................................... $178 $165
Noncurrent assets........................................ 301 306
Current liabilities...................................... 175 278
Noncurrent liabilities................................... 104 9
----------------------------------------------------------------------------------
Summarized financial information of other investees accounted for by the equity
method of accounting follows:
------------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------
Income data--year:
Revenues and other income.............................. $299 $1,326 $2,196
Operating income (loss)................................ (110) (153) 26
Net loss............................................... (115) (211) (198)
------------------------------------------------------------------------------------
Balance sheet data--December 31:
Current assets......................................... $ 63 $ 437
Noncurrent assets...................................... 200 1,067
Current liabilities.................................... 51 531
Noncurrent liabilities................................. 27 1,225
------------------------------------------------------------------------------------
U. S. Steel acquired a 25% interest in VSZ during 2000. VSZ did not provide
financial statements prepared in accordance with accounting principles generally
accepted in the United States (USGAAP). Although shares of VSZ are traded on the
Bratislava Stock Exchange, those
F-35
securities do not have a readily determinable fair value as defined under USGAAP
Accordingly, U. S. Steel accounted for its investment in VSZ under the cost
method of accounting. In October 2002, U. S. Steel granted an option to purchase
its shares of VSZ and the shares were subsequently sold. Cash proceeds of $31
million were received in consideration for the option and the sale of the
shares, resulting in a pretax gain of $20 million, which is included in net
gains on disposal of assets.
U. S. Steel has a 16% investment in Republic which was accounted for under the
equity method of accounting until the first quarter of 2001, when investments in
and advances to Republic were reduced to zero. Republic filed a voluntary
petition for bankruptcy in April 2001 to reorganize under Chapter 11 of the U.S.
Bankruptcy Code. Due to Republic's filing for bankruptcy, further deterioration
of Republic's financial position and progression in the bankruptcy proceedings,
U. S. Steel recorded pretax charges reflected as reductions in revenues of $100
million in 2001 to impair trade accounts receivable from Republic. Additional
pretax charges of $42 million in 2001 and $14 million in 2002 were recorded to
impair retiree medical claim reimbursements owed by Republic. These charges are
reflected in selling, general and administrative expenses. The operating assets
of Republic were sold in July 2002 through a bankruptcy court administered
auction process. The remaining assets of Republic will be liquidated through
Chapter 11 liquidation proceedings. U. S. Steel received no proceeds from the
initial sale of assets and does not expect to receive any proceeds from the
liquidation. As a result, U. S. Steel wrote off all receivables from Republic
against the associated reserves in the fourth quarter of 2002.
U. S. Steel operates and sells coke and by-products through the Clairton 1314B
Partnership, L.P in which it is the sole general partner. U. S. Steel is
responsible for purchasing, operations and product sales and accounts for its
27% interest in the partnership under the equity method of accounting. U. S.
Steel's share of profits and losses was 1.75% for the years ended December 31,
2001 and 2000, and through April 16, 2002. U. S. Steel's share of profits and
losses was 1.75%, except for its share of depreciation and amortization expense
which was 45.75%, from April 17, to December 31, 2002. U. S. Steel's share of
all profits and losses increased to 45.75% on January 1, 2003. The partnership
at times had operating cash shortfalls in 2002 and in 2001 that were funded with
loans from U. S. Steel. There were no outstanding loans with the partnership at
December 31, 2002, and $3 million was outstanding at December 31, 2001. An
unamortized deferred gain from the formation of the partnership of $150 million
is included in deferred credits and other liabilities in the balance sheet. The
gain will not be recognized in income as long as U. S. Steel has a commitment to
fund cash shortfalls of the partnership. See further discussion in Note 25.
Dividends and partnership distributions received from equity investees were $24
million in 2002, $17 million in 2001 and $10 million in 2000.
For discussion of transactions and related receivables and payable balances
between U. S. Steel and its investees, see Note 14.
16. STOCKHOLDER RIGHTS PLAN
On December 31, 2001, U. S. Steel adopted a Stockholder Rights Plan and declared
a dividend distribution of one right for each share of common stock issued
pursuant to the Plan of Reorganization in connection with the Separation. Each
right becomes exercisable, at a price of $110, after any person or group has
acquired, obtained the right to acquire or made a tender or exchange offer for
15% or more of the outstanding voting power represented by the
F-36
outstanding Voting Stock, except pursuant to a qualifying all-cash tender offer
for all outstanding shares of Voting Stock which results in the offerer owning
shares of Voting Stock representing a majority of the voting power (other
than Voting Stock beneficially owned by the offerer immediately prior to the
offer). If the rights become exercisable, each right will entitle the holder,
other than the acquiring person or group, to purchase one one-hundredth of a
share of Series A Junior Preferred Stock or, upon the acquisition by any person
of 15% or more of the outstanding voting power represented by the outstanding
Voting Stock (or, in certain circumstances, other property), common stock having
a market value of twice the exercise price. After a person or group acquires 15%
or more of the outstanding voting power, if U. S. Steel engages in a merger or
other business combination where it is not the surviving corporation or where it
is the surviving corporation and the Voting Stock is changed or exchanged, or if
50% or more of U. S. Steel's assets, earnings power or cash flow are sold or
transferred, each right will entitle the holder to purchase common stock of the
acquiring entity having a market value of twice the exercise price. The rights
and the exercise price are subject to adjustment. The rights will expire on
December 31, 2011, unless such date is extended or the rights are earlier
redeemed by U. S. Steel before they become exercisable. Under certain
circumstances, the Board of Directors has the option to exchange one share of
the respective class of Voting Stock for each exercisable right.
17. LEASES
Future minimum commitments for capital leases (including sale-leasebacks
accounted for as financings) and for operating leases having remaining
noncancelable lease terms in excess of one year are as follows:
---------------------------------------------------------------------------------
CAPITAL OPERATING
(IN MILLIONS) LEASES LEASES
---------------------------------------------------------------------------------
2003........................................................ $ 13 $ 101
2004........................................................ 11 108
2005........................................................ 11 82
2006........................................................ 11 55
2007........................................................ 20 42
Later years................................................. 54 190
Sublease rentals............................................ - (79)
-------------------
Total minimum lease payments............................. 120 $ 499
=========
Less imputed interest costs................................. 38
-------
Present value of net minimum lease payments included in
long-term debt (see Note 11).......................... $ 82
---------------------------------------------------------------------------------
F-37
Operating lease rental expense:
----------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------
Minimum rental.............................................. $109 $133 $132
Contingent rental........................................... 12 18 17
Sublease rentals............................................ (18) (17) (6)
--------------------
Net rental expense....................................... $103 $134 $143
----------------------------------------------------------------------------------
U. S. Steel leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include renewal
options and, in certain leases, purchase options. See discussion of residual
value guarantees in Note 25.
18. INCOME PER COMMON SHARE
Net income per common share for 2002 is based on the weighted average number of
common shares outstanding during the year. Diluted net income per common share
in 2002 assumes the exercise of stock options, provided the effect is dilutive.
Prior to December 31, 2001, the businesses comprising U. S. Steel were an
operating unit of Marathon and did not have any public equity securities
outstanding. In connection with the Separation, U. S. Steel was capitalized
through the issuance of 89.2 million shares of common stock. Basic and diluted
net income (loss) per share for 2001 and 2000 are calculated by dividing net
income (loss) for the period by the number of outstanding common shares at
December 31, 2001, the date of the Separation.
Potential common stock related to employee options to purchase 5,024,873 shares
of common stock have been excluded from the computation of diluted net income
(loss) per share for 2002, and 3,520,000 shares have been excluded for 2001 and
2000 because their effect was antidilutive.
-----------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------
COMPUTATION OF INCOME PER SHARE
Net income (loss) (in millions)..................... $ 61 $ (218) $ (21)
Weighted average shares outstanding (in thousands):
Basic............................................. 97,426 89,223 89,223
Diluted........................................... 97,428 89,223 89,223
Per share--basic and diluted........................ $ .62 $ (2.45) $ (.24)
-----------------------------------------------------------------------------------
19. STOCK-BASED COMPENSATION PLANS
The 2002 Stock Plan, which became effective January 1, 2002, replaced the 1990
Stock Plan as a stock-based compensation plan for key management employees of U.
S. Steel. The 2002 Stock Plan authorizes the Compensation and Organization
Committee of the board of directors to grant restricted stock, stock options and
stock appreciation rights to key management employees. Up to 10 million shares
are available for grants during the five-year term of the plan. In addition,
awarded shares that do not result in shares being issued are available for
F-38
subsequent grant, and any ungranted shares from prior years' annual allocations
are available for subsequent grants during the years the 2002 Stock Plan is in
effect.
Stock options represent the right to purchase shares of stock at the market
value of the stock at date of grant. Certain options contain the right to
receive cash and/or common stock equal to the excess of the fair market value of
shares of common stock, as determined in accordance with the plan, over the
option price of shares. Under the 2002 Stock Plan, no stock options may be
exercised prior to one year or after eight years from the date of grant. Under
the 1990 Stock Plan, stock options expired ten years from the date they were
granted.
In connection with the Separation, all options to purchase Steel Stock were
converted into options to purchase U. S. Steel common stock with identical
terms; the remaining vesting periods and term of the options were continued.
The following is a summary of stock option activity under the former 1990 Stock
Plan for 2000 and 2001 and the 2002 Stock Plan for 2002:
-----------------------------------------------------------------------------------
SHARES PRICE(A)
-----------------------------------------------------------------------------------
Balance December 31, 1999................................... 2,626,385 $33.67
Granted................................................... 915,470 23.00
Exercised................................................. (400) 24.30
Canceled.................................................. (62,955) 38.19
---------
Balance December 31, 2000................................... 3,478,500 30.78
Granted................................................... 1,089,555 19.89
Exercised................................................. -- --
Canceled.................................................. (89,520) 32.56
---------
Balance December 31, 2001................................... 4,478,535 28.09
Granted................................................... 1,825,200 20.42
Exercised................................................. -- --
Canceled.................................................. (138,465) 27.31
---------
Balance December 31, 2002................................... 6,165,270 25.84
-----------------------------------------------------------------------------------
(a) Weighted-average exercise price.
The following table represents outstanding stock options issued under the 2002
Stock Plan and 1990 Stock Plan at December 31, 2002:
--------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
------------------------------------------------ -----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED
RANGE OF OF SHARES REMAINING AVERAGE OF SHARES AVERAGE
EXERCISE PRICES UNDER OPTION CONTRACTUAL LIFE EXERCISE PRICE UNDER OPTION EXERCISE PRICE
--------------------------------------------------------------------------------------------------
$19.89-28.22.... 4,404,230 7.5 years $21.96 2,580,530 $23.06
31.69-34.44.... 959,595 3.3 32.53 959,595 32.53
37.28-44.19.... 801,445 4.1 39.12 801,445 39.12
------------ ------------
Total........... 6,165,270 6.4 25.84 4,341,570 28.12
--------------------------------------------------------------------------------------------------
Restricted stock represents stock granted for such consideration, if any, as
determined by the Compensation and Organization Committee, subject to forfeiture
provisions and restrictions on transfer. Those restrictions may be removed as
conditions such as performance, continuous
F-39
service and other criteria are met. Restricted stock is issued at the market
price per share at the date of grant and vests over service periods that range
from one to five years.
The following table presents information on restricted stock grants made under
the 2002 Stock Plan for 2002 and the 1990 Stock Plan for 2001 and 2000:
-----------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------
Number of shares granted............................. 221,960 54,372 305,725
Weighted-average grant-date fair value per share..... $ 20.42 $19.89 $ 23.00
-----------------------------------------------------------------------------------
U. S. Steel also has a restricted stock plan for certain salaried employees who
are not officers of the Corporation. Participants in the plan are awarded
restricted stock by the Salary and Benefits Committee based on their performance
within certain guidelines. 50% of the awarded stock vests at the end of two
years from the date of grant and the remaining 50% vests in four years from the
date of grant. Prior to vesting, the employee has the right to vote such stock
and receive dividends thereon. The nonvested shares are not transferable and are
retained by the Corporation until they vest.
The following table presents information on restricted stock grants under the
nonofficer plan:
------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------
Number of shares granted.................................... -- 390,119
Weighted-average grant-date fair value per share............ $ -- $ 18.97
------------------------------------------------------------------------------
U. S. Steel has a deferred compensation plan for non-employee directors of its
Board of Directors. The plan permits participants to defer up to 100% of their
annual retainers in the form of common stock units, and it requires non-employee
directors to defer at least half of their annual retainers in the form of common
stock units. Common stock units are book entry units equal in value to a share
of stock. During 2002, 16,993 units were issued; during 2001, 5,235 units were
issued; and during 2000, 4,872 units were issued.
Total stock-based compensation expense was $5 million in 2002, $6 million in
2001 and $1 million in 2000.
20. PROPERTY, PLANT AND EQUIPMENT
---------------------------------------------------------------------------------------------
DECEMBER 31
-----------------
(IN MILLIONS) USEFUL LIVES 2002 2001
---------------------------------------------------------------------------------------------
Land and depletable property.............................. -- $ 184 $ 193
Buildings................................................. 35 years 591 572
Machinery and equipment................................... 4-22 years 9,195 9,080
Leased assets............................................. 3-25 years 103 105
-----------------
Total................................................ 10,073 9,950
Less accumulated depreciation, depletion and
amortization............................................ 7,095 6,866
-----------------
Net.................................................. $ 2,978 $3,084
---------------------------------------------------------------------------------------------
F-40
Amounts in accumulated depreciation, depletion and amortization for assets
acquired under capital leases (including sale-leasebacks accounted for as
financings) were $95 million and $88 million at December 31, 2002 and 2001,
respectively.
On August 14, 2001, U. S. Steel announced its intention to permanently close the
pickling, cold rolling and tin mill operations at its Fairless Works. In 2001, a
pretax charge of $38 million was recorded related to the shutdown of these
operations, of which $18 million is included in depreciation, depletion and
amortization, and $20 million is included in cost of revenues. An additional $1
million was recorded in 2002, which is included in cost of sales.
During 2000, U. S. Steel recorded $71 million of impairments relating to coal
assets located in West Virginia and Alabama. The impairment was recorded as a
result of a reassessment of long-term prospects after adverse geological
conditions were encountered. The charge is included in depreciation, depletion
and amortization.
21. SALE OF ACCOUNTS RECEIVABLE
On November 28, 2001, U. S. Steel entered into a five-year Receivables Purchase
Agreement to sell a revolving interest in eligible trade receivables generated
by U. S. Steel and certain of its subsidiaries through a commercial paper
conduit program. Qualifying accounts receivables are sold, on a daily basis,
without recourse, to U. S. Steel Receivables LLC (USSR), a consolidated wholly
owned special purpose entity. USSR then sells an undivided interest in these
receivables to certain conduits. The conduits issue commercial paper to finance
the purchase of their interest in the receivables. U. S. Steel has agreed to
continue servicing the sold receivables at market rates. Because U. S. Steel
receives adequate compensation for these services, no servicing asset or
liability has been recorded.
Sales of accounts receivable are reflected as a reduction of receivables in the
balance sheet and the proceeds received are included in cash flows from
operating activities in the statement of cash flows. Under the facility, USSR
may sell interests in the receivables up to the lesser of a funding base,
comprised of eligible receivables, or $400 million. Generally, the facility
provides that as payments are collected from the sold accounts receivables, USSR
may elect to have the conduits reinvest the proceeds in new eligible accounts
receivable.
During 2002, USSR sold to conduits and subsequently repurchased $320 million of
revolving interest in accounts receivable. No sales occurred in 2001. As of
December 31, 2002, $343 million was available to be sold under this facility.
The net book value of U. S. Steel's retained interest in the receivables
represents the best estimate of the fair market value due to the short-term
nature of the receivables.
USSR pays the conduits a discount based on the conduits' borrowing costs plus
incremental fees. During 2002, U. S. Steel incurred costs of $3 million on the
sale of its receivables, while such costs were less than $1 million in 2001.
These costs are included in net interest and other financial costs in the
statement of operations.
F-41
The table below summarizes cash flows from and paid to USSR:
------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
Proceeds from:
Collections reinvested.................................... $5,114 $415
Securitizations........................................... -- --
Servicing fee............................................. 6 1
------------------------------------------------------------------------------
The table below summarizes the trade receivables for USSR:
------------------------------------------------------------------------------
DECEMBER 31,
--------------
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
Balance of accounts receivable, net, purchased by USSR...... $451 $393
Revolving interest sold to conduits....................... -- --
--------------
Accounts receivable--net, included in the balance sheet of
U. S. Steel............................................ $451 $393
------------------------------------------------------------------------------
While the term of the facility is five years, the facility also terminates on
the occurrence and failure to cure certain events, including, among others,
certain defaults with respect to the Inventory Facility and other debt
obligations, any failure of USSR to maintain certain ratios related to the
collectability of the receivables, and failure to extend the commitments of the
commercial paper conduits' liquidity providers which currently terminate on
November 26, 2003.
22. INVENTORIES
------------------------------------------------------------------------------
DECEMBER 31,
--------------
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
Raw materials............................................... $ 228 $184
Semi-finished products...................................... 472 408
Finished products........................................... 271 210
Supplies and sundry items................................... 59 68
--------------
Total.................................................. $1,030 $870
------------------------------------------------------------------------------
At December 31, 2002 and 2001, the LIFO method accounted for 92% and 91%,
respectively, of total inventory value. Current acquisition costs were estimated
to exceed the above inventory values at December 31 by approximately $310
million in 2002 and $410 million in 2001. Cost of revenues were reduced and
income (loss) from operations was improved by $24 million in 2001 and $3 million
in 2000 as a result of liquidations of LIFO inventories. The effect of
liquidations of LIFO inventories in 2002 was less than $1 million.
Supplies and sundry items inventory in the table above includes $43 million and
$45 million of land held for residential/commercial development by U. S. Steel's
Real Estate segment as of December 31, 2002 and 2001, respectively.
F-42
23. DERIVATIVE INSTRUMENTS
The following table sets forth quantitative information by class of derivative
instrument at December 31, 2002 and 2001:
------------------------------------------------------------------------------------------
CARRYING
FAIR VALUE AMOUNT
ASSETS ASSETS
(IN MILLIONS) (LIABILITIES)(A) (LIABILITIES)
------------------------------------------------------------------------------------------
NON-HEDGE DESIGNATION:
OTC commodity swaps(b):
December 31, 2002.................................. $(2) $(2)
December 31, 2001.................................. (5) (5)
------------------------------------------------------------------------------------------
(a) The fair value amounts are based on exchange-traded index prices and
dealer quotes.
(b) The OTC swap arrangements vary in duration with certain contracts
extending into 2004.
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments, excluding derivative
financial instruments disclosed in Note 23, by individual balance sheet account.
U. S. Steel's financial instruments at December 31, 2002 and 2001, were:
-------------------------------------------------------------------------------------
DECEMBER 31
-------------------------------------
2002 2001
FAIR CARRYING FAIR CARRYING
(IN MILLIONS) VALUE AMOUNT VALUE AMOUNT
-------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents.................. $ 243 $ 243 $ 147 $ 147
Receivables................................ 805 805 671 671
Receivables from related parties........... 129 129 159 159
Investments and long-term receivables...... 45 44 42 41
-------------------------------------
Total financial assets.................. $1,222 $1,221 $1,109 $1,018
-------------------------------------
FINANCIAL LIABILITIES:
Accounts payable........................... $ 677 $ 677 $ 551 $ 551
Accounts payable to related parties........ 90 90 143 143
Accrued interest........................... 44 44 45 45
Long-term debt (including amounts due
within one year)........................ 1,165 1,352 1,122 1,375
-------------------------------------
Total financial liabilities............. $1,976 $2,163 $1,861 $2,114
-------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities
approximates carrying value due to the short-term maturity of the instruments.
Fair value of investments and long-term receivables was based on discounted cash
flows or other specific instrument analysis. The cost method investment in VSZ
at December 31, 2001, was excluded from investments and
F-43
long-term receivables because the fair value was not readily determinable. U. S.
Steel is subject to market risk and liquidity risk related to its investments;
however, these risks are not readily quantifiable. Fair value of long-term debt
instruments was based on market prices where available or current borrowing
rates available for financings with similar terms and maturities.
Financial guarantees are U. S. Steel's only unrecognized financial instrument.
For details relating to financial guarantees, see Note 25.
25. CONTINGENCIES AND COMMITMENTS
U. S. Steel is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of these
matters are discussed below. The ultimate resolution of these contingencies
could, individually or in the aggregate, be material to the consolidated
financial statements. However, management believes that U. S. Steel will remain
a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably.
Property taxes--U. S. Steel is a party to several property tax disputes
involving its Gary Works property in Indiana, including claims for refunds of
approximately $65 million pertaining to tax years 1994-96 and 1999, and
assessments of approximately $110 million in excess of amounts paid for the 2000
and 2001 tax years. In addition, interest may be imposed upon any final
assessment. The disputes involve property values and tax rates and are in
various stages of administrative appeals. U. S. Steel is vigorously defending
against the assessments and pursuing its claims for refunds.
Environmental matters--U. S. Steel is subject to federal, state, local and
foreign laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. Accrued liabilities for remediation
totaled $135 million and $138 million at December 31, 2002 and 2001,
respectively. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed.
For a number of years, U. S. Steel has made substantial capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In 2002 and 2001, such capital expenditures totaled $14 million and
$15 million, respectively. U. S. Steel anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
Throughout its history, U. S. Steel has sold numerous properties and businesses
and has provided various indemnifications with respect to many of the assets
that were sold. These indemnifications have been associated with the condition
of the property, the approved use, certain representations and warranties,
matters of title and environmental matters. While the vast majority of
indemnifications have not covered environmental issues, there have been a few
transactions in which U. S. Steel indemnified the buyer for non-compliance with
past, current and future environmental laws related to existing conditions;
however, most recent indemnifications are of a limited nature only applying to
non-compliance with past and/or current laws. Some indemnifications only run for
a specified period of time after the transactions close and others run
indefinitely. The amount of potential liability associated with
F-44
these transactions is not estimable due to the nature and extent of the unknown
conditions related to the properties sold. Aside from approximately $14 million
of liabilities already recorded as a result of these indemnifications due to
specific environmental remediation cases (included in the $135 million of
accrued liabilities for remediation discussed above), there are no other known
liabilities related to these indemnifications.
Guarantees--Guarantees of the liabilities of unconsolidated entities of U. S.
Steel totaled $27 million at December 31, 2002, and $32 million at December 31,
2001. In the event that any defaults of guaranteed liabilities occur, U. S.
Steel has access to its interest in the assets of the investees to reduce
potential losses resulting from these guarantees. As of December 31, 2002, the
largest guarantee for a single such entity was $18 million, which represents the
maximum exposure to loss under a guarantee of debt service payments of an equity
investee. No liability has been recorded for these guarantees as management
believes the likelihood of occurrence is remote.
Contingencies related to Separation from Marathon--U. S. Steel was contingently
liable for debt and other obligations of Marathon in the amount of approximately
$168 million as of December 31, 2002, compared to $359 million at December 31,
2001. In the event of the bankruptcy of Marathon, these obligations for which U.
S. Steel is contingently liable may be declared immediately due and payable. If
such event occurs, U. S. Steel may not be able to satisfy such obligations. No
liability has been recorded for these contingencies as management believes the
likelihood of occurrence is remote.
If the Separation is determined to be a taxable distribution of the stock of U.
S. Steel, but there is no breach of a representation or covenant by either U. S.
Steel or Marathon, U. S. Steel would be liable for any resulting taxes
(Separation No-Fault Taxes) incurred by Marathon. U. S. Steel's indemnity
obligation for Separation No-Fault Taxes survives until the expiration of the
applicable statute of limitations. The maximum potential amount of U. S. Steel's
indemnity obligation for Separation No-Fault Taxes at December 31, 2002, is
estimated to be approximately $90 million. No liability has been recorded for
this indemnity obligation as management believes that the likelihood of the
Separation being determined to be a taxable distribution of the stock of U. S.
Steel is remote.
Other contingencies--U. S. Steel is contingently liable to its Chairman and
Chief Executive Officer for a $3 million retention bonus. The bonus is payable
upon the earlier of his retirement from active employment or December 31, 2004,
and is subject to certain performance measures.
U. S. Steel has the option, under certain operating lease agreements covering
various equipment, to renew the leases or to purchase the equipment during or at
the end of the terms of the leases. If U. S. Steel does not exercise the
purchase options by the end of the terms of the leases, U. S. Steel guarantees a
residual value of the equipment as determined at the lease inception date of
each agreement (approximately $51 million at December 31, 2002). No liability
has been recorded for these guarantees as either management believes that the
potential recovery of value from the equipment when sold is greater than the
residual value guarantee, or the potential loss is not probable and/or
estimable.
Transtar reorganization--The 2001 reorganization of Transtar was intended to be
tax-free for federal income tax purposes, with U. S. Steel and Holdings agreeing
through various representations and covenants to protect the reorganization's
tax-free status. If the reorganization is determined to be taxable, but there is
no breach of a representation or covenant by either U. S. Steel or Holdings, U.
S. Steel is liable for 44% of any resulting Holdings taxes
F-45
(Transtar No-Fault Taxes), and Holdings is responsible for 56% of any resulting
U. S. Steel taxes. U. S. Steel's indemnity obligation for Transtar No-Fault
Taxes survives until 30 days after the expiration of the applicable statute of
limitations. The maximum potential amount of U. S. Steel's indemnity obligation
for Transtar No-Fault Taxes at December 31, 2002, is estimated to be
approximately $70 million. No liability has been recorded for this indemnity
obligation as management believes that the likelihood of the reorganization
being determined to be taxable is remote. U. S. Steel can recover all or a
portion of any indemnified Transtar No-Fault Taxes if Holdings receives a future
tax benefit as a result of the Transtar reorganization being taxable.
Clairton 1314B partnership--See description of the partnership in Note 15. U. S.
Steel has a commitment to fund operating cash shortfalls of the partnership of
up to $150 million. Additionally, U. S. Steel, under certain circumstances, is
required to indemnify the limited partners if the partnership product sales fail
to qualify for the credit under Section 29 of the Internal Revenue Code. This
indemnity will effectively survive until the expiration of the applicable
statute of limitations. The maximum potential amount of this indemnity
obligation at December 31, 2002, including interest and tax gross-up, is
approximately $600 million. Furthermore, U. S. Steel under certain circumstances
has indemnified the partnership for environmental obligations. See discussion of
environmental matters above. The maximum potential amount of this indemnity
obligation is not estimable. Management believes that the $150 million deferred
gain related to the partnership, which is recorded in deferred credits and other
liabilities, is more than sufficient to cover any probable exposure under these
commitments and indemnifications.
Self-insurance--U. S. Steel is self-insured for certain liabilities including
workers' compensation, auto liability and general liability, within specified
deductible and retainage levels. Certain equipment that is leased by U. S. Steel
is also self-insured within specified deductible and retainage levels.
Liabilities are recorded for workers' compensation and personal injury
obligations. Other costs resulting from self-insured losses are charged against
income upon occurrence.
U. S. Steel uses surety bonds, trusts and letters of credit to provide whole or
partial financial assurance for certain obligations such as workers'
compensation. The total amount of active surety bonds, trusts and letters of
credit being used for financial assurance purposes is approximately $144 million
as of December 31, 2002, which reflects our maximum exposure under these
financial guarantees, but not our total exposure for the underlying obligations.
Most of the trust arrangements and letters of credit are collateralized by
restricted cash that is recorded in other noncurrent assets.
Commitments--At December 31, 2002 and 2001, U. S. Steel's domestic contract
commitments to acquire property, plant and equipment totaled $24 million and $28
million, respectively.
USSK has a commitment to the Slovak government for a capital improvements
program of $700 million, subject to certain conditions, over a period commencing
with the acquisition date of November 24, 2000, and ending on December 31, 2010.
The remaining commitments under this capital improvements program as of December
31, 2002 and 2001, were $541 million and $634 million, respectively.
U. S. Steel entered into a 15-year take-or-pay arrangement in 1993, which
requires U. S. Steel to accept pulverized coal each month or pay a minimum
monthly charge of approximately $1 million. Charges for deliveries of pulverized
coal totaled $23 million in 2002, 2001 and 2000. If U. S. Steel elects to
terminate the contract early, a maximum termination payment of
F-46
$82 million as of December 31, 2002, which declines over the duration of the
agreement, may be required.
26. SUBSEQUENT EVENTS
On January 9, 2003, U. S. Steel announced that it had signed an Asset Purchase
Agreement with National Steel Corporation (National) to acquire substantially
all of National's steelmaking and finishing assets for approximately $950
million, which includes the assumption of liabilities of approximately $200
million. The closing of the agreement with National was contingent on, among
other things, the approval of the U.S. Bankruptcy Court for the Northern
District of Illinois, Eastern Division, and the execution and ratification of a
new labor agreement with the United Steelworkers of America (USWA) with respect
to the steelworkers at the National facilities to be acquired.
On January 30, 2003, National announced that it had signed an agreement with
another party, under which National would sell substantially all of its assets,
including its pellet-making facility, for $1,125 million, consisting of cash and
the assumption of approximately $200 million of liabilities. The closing of the
agreement between National and the other party is contingent on, among other
things, the approval of the U.S. Bankruptcy Court and the execution and
ratification of a new labor agreement with the USWA with respect to the
steelworkers at the National facilities to be acquired. The U.S. Bankruptcy
Court in Chicago established an auction period for National's assets that began
on February 6, 2003, and will end on April 7, 2003.
On February 10, 2003, U. S. Steel announced that it would immediately begin
bargaining with the USWA to reach a new, progressive labor contract covering
facilities now owned by bankrupt National as well as the USWA-represented plants
of U. S. Steel. U. S. Steel remains interested in acquiring the assets of
National if U. S. Steel is able to reach a new labor agreement with the USWA for
the steelworkers at the National facilities and acquire the assets at a price
that U. S. Steel views to be appropriate in light of conditions in the steel and
financial markets at the time of the auction. Management cannot assure that U.
S. Steel will participate in or prevail at the auction for National's assets.
In February 2003, U. S. Steel sold 5 million shares of 7% Series B Mandatory
Convertible Preferred Shares (liquidation preference $50 per share) (Series B
Preferred) for net proceeds of $242 million. U. S. Steel also granted the
underwriters an over-allotment option to purchase up to an additional 750,000 of
Series B Preferred. The Series B Preferred have a dividend yield of 7%, a 20%
conversion premium (for an equivalent conversion price of $15.66 common share)
and will mandatorily convert into U. S. Steel common shares on June 15, 2006.
The net proceeds of the offering will be used for general corporate purposes,
including funding working capital, financing potential acquisitions, debt
reduction and voluntary contributions to employee benefit plans. The number of
common shares that could be issued upon conversion of the 5 million shares of
Series B Preferred ranges from approximately 16.0 million shares to 19.2 million
shares, based upon the timing of the conversion and the market price of U. S.
Steel's common stock.
F-47
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- -----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 4TH QTR.(A) 3RD QTR. 2ND QTR. 1ST QTR. 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR.
------------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues......................... $ 1,852 $ 1,905 $ 1,761 $1,431 $ 1,398 $ 1,645 $ 1,733 $1,510
Other income..................... 47 9 46 3 16 15 4 54
----------------------------------------------------------------------------------------
Total.......................... 1,899 1,914 1,807 1,434 1,414 1,660 1,737 1,564
Income (loss) from operations...... 2 140 47 (61) (252) (25) (27) (101)
Net income (loss).................. 11 106 27 (83) (174) (23) (30) 9
----------------------------------------------------------------------------------------
Common stock data(b):
Net income (loss)--per share(c)
--Basic and diluted............ $ .10 $ 1.04 $ .28 $ (.93) $ (1.95) $ (.26) $ (.34) $ .10
Dividends paid per share........... .05 .05 .05 .05 .10 .10 .10 .25
Price range of common stock(d)
--Low.......................... 10.87 10.66 17.22 16.36 13.00 13.08 13.72 14.00
--High......................... 14.90 19.98 22.00 19.98 18.75 21.70 22.00 18.00
------------------------------------------------------------------------------------------------------------------------------
(a) Income from operations and net income were adjusted by $(3) million and $(1)
million, respectively, from amounts reported in our January 28, 2003
earnings release primarily due to the subsequent settlement of a legal
contingency. Consequently, basic and diluted net income per share were
reduced by $.02.
(b) Dividends and price range information represent Steel Stock in 2001. See
Note 1 of the Notes to Financial Statements.
(c) Earnings per share for 2002 is based on the weighted average shares
outstanding and for 2001, is based on the initial capitalization of U. S.
Steel of 89.2 million shares. See Note 18 of the Notes to Financial
Statements.
(d) Composite tape.
F-48
PRINCIPAL UNCONSOLIDATED INVESTEES (UNAUDITED)
--------------------------------------------------------------------------------------------
DECEMBER 31,
2002
INVESTEE COUNTRY OWNERSHIP ACTIVITY
--------------------------------------------------------------------------------------------
Acero Prime. S. R. L de CV......... Mexico 44% Steel Processing
Chrome Deposit Corporation......... United States 50% Chrome Coating Services
Clairton 1314B Partnership,
L.P. ............................ United States 27%(a) Coke & Coke By-Products
Delta Tubular Processing........... United States 50% Steel Processing
Double Eagle Steel Coating
Company.......................... United States 50% Steel Processing
Feralloy Processing Company........ United States 49% Steel Processing
Olympic Laser Processing........... United States 50% Steel Processing
PRO-TEC Coating Company............ United States 50% Steel Processing
USS-POSCO Industries............... United States 50% Steel Processing
Worthington Specialty Processing... United States 50% Steel Processing
--------------------------------------------------------------------------------------------
(a) Interest in profits and losses was 1.75% through April 16, 2002. From April
17, through December 31, 2002, interest in profits and losses was 1.75%
except for depreciation and amortization expense which was 45.75%. The
interest in all profits and losses increased to 45.75% on January 1, 2003.
See Note 15 of the Notes to Financial Statements.
F-49
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES
OTHER THAN OIL AND GAS
(UNAUDITED)
MINERAL RESERVES
U. S. Steel operates two underground coal mining complexes, the #50 Mine and
Pinnacle Preparation Plant in West Virginia, and the Oak Grove Mine and Concord
Preparation Plant in Alabama. U. S. Steel also operates one iron ore surface
mining complex consisting of the open pit Minntac Mine and Pellet Plant in
Minnesota.
PRODUCTION HISTORY
The following table provides a summary, by mining complex, of minerals
production in millions of tons for each of the last three years:
--------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------
COAL:
#50 Mine/Pinnacle Preparation Plant......................... 3.5 3.0 3.1
Oak Grove Mine/Concord Preparation Plant.................... 2.0 1.8 2.0
------------------
Total coal production....................................... 5.5 4.8 5.1
------------------
IRON ORE PELLETS:
Minntac Mine and Pellet Plant............................... 16.4 14.2 16.2
--------------------------------------------------------------------------------
Adverse mining conditions in the form of unforeseen geologic conditions
encountered at both coal mining operations in the year 2000 resulted in changes
to the mining plans in 2001. Coal production was diminished and mining costs
were elevated. Force majeure conditions were declared with respect to contracted
coal deliveries in 2000 with certain contracts fulfilled by purchased
substitutes and other contracts fulfilled by extension of delivery time into
2001. These adverse mining conditions did not affect reserves reported as of
December 31, 2001.
No recent adverse events affected iron ore pellet production other than
fluctuations in market demand.
COAL RESERVES
U. S. Steel had 774.6 million and 774.8 million short tons of recoverable coal
reserves classified as proven and probable at December 31, 2002 and 2001,
respectively. Proven and probable reserves are defined by sites for inspection,
sampling and measurement generally less than one mile apart, such that
continuity between points and subsequent economic evaluation can be assured. In
2002, reserves decreased due to production, the sale and lease of reserves to
others and engineering revisions.
Independent outside entities have reviewed U. S. Steel's coal reserve estimates
on properties comprising approximately 70% of the stated coal reserves.
F-50
The following table summarizes our proven and probable coal reserves as of
December 31, 2002, the status of the reserves as assigned or unassigned, our
property interest in the reserves and certain characteristics of the reserves:
------------------------------------------------------------------------------------------------------------------------------
PROVEN AND RESERVE CONTROL COAL CHARACTERISTICS AS
PROBABLE ---------------- --------------------------- AS RECEIVED(C) RECEIVED(C)
LOCATION RESERVES(A)(B) OWNED LEASED GRADE VOLATILITY BTU PER POUND % SULFUR
------------------------------------------------------------------------------------------------------------------------------
ASSIGNED RESERVES(D):
Oak Grove Mine, AL........... 46.1 46.1 -- Metallurgical Low >12,000 <1.0%
#50 Mine, WV................. 81.8 70.2 11.6 Metallurgical Low >12,000 <1.0%
-------------- ----- ------
Total assigned............. 127.9 116.3 11.6
-------------- ----- ------
UNASSIGNED RESERVES(E):
Alabama...................... 126.4 126.4 -- Metallurgical Low to High >12,000 <1.0%
Alabama(b)(f)................ 49.2 49.2 -- Steam Low to High >12,000 0.7%-2.5%
Alabama...................... 31.9 -- 31.9 Metallurgical Medium >12,000 <1.0%
Illinois(f).................. 374.8 374.8 -- Steam High 11,600 2.3%
Indiana, Pennsylvania, Metallurgical/
Tennessee, West
Virginia(f).............. 64.4 64.4 -- Steam Low to High 11,600-13,000 1.0%-3.0%
-------------- ----- ------
Total unassigned........... 646.7 614.8 31.9
-------------- ----- ------
TOTAL PROVEN AND PROBABLE...... 774.6 731.1 43.5
------------------------------------------------------------------------------------------------------------------------------
(a) The amounts in this column reflect recoverable tons. Recoverable tons
represent the amount of product that could be used internally or delivered
to a customer after considering mining and preparation losses. Neither
inferred reserves nor resources which exist in addition to proven and
probable reserves were included in these figures.
(b) All of U. S. Steel's recoverable reserves would be recovered utilizing
underground mining methods, with the exception of 19.2 million short tons of
owned, unassigned, recoverable, steam grade reserves in Alabama which would
be recovered utilizing surface mining methods.
(c) "As received" means the quality parameters stated are within the expected
product moisture content and quality values that a customer can reasonably
expect to receive upon delivery.
(d) Assigned Reserves means recoverable coal reserves which have been committed
by U. S. Steel to our operating mines and plant facilities.
(e) Unassigned Reserves represent coal which has not been committed, and which
would require new mines and/or plant facilities before operations could
begin on the property.
(f) Represents non-compliance steam coal as defined by Phase II of the Clean Air
Act, having sulfur content in excess of 1.2 pounds per million Btu's.
IRON ORE RESERVES
U. S. Steel had 764.3 million and 695.4 million short tons of recoverable iron
ore reserves classified as proven and probable at December 31, 2002 and 2001,
respectively. Proven and probable reserves are defined by sites for inspection,
sampling and measurement generally less than 1,000 feet apart, such that
continuity between points and subsequent economic evaluation can be assured.
Recoverable tons mean the tons of product that can be used internally or
delivered to a customer after considering mining and benefication or preparation
losses. Neither inferred reserves nor resources which exist in addition to
proven and probable reserves were included in these figures. In 2002, reserves
increased as reserves acquired through property trades and leases exceeded
production.
All 764.3 million tons of proven and probable reserves are assigned, which means
that they have been committed by U. S. Steel to its one operating mine, and are
of blast furnace pellet grade. U. S. Steel owns 290.8 million of these tons and
leases the remaining 473.5 million tons. U. S. Steel does not own, or control by
lease, any unassigned iron ore reserves.
Independent outside entities, including lessors, have reviewed U. S. Steel's
estimates on approximately 75% of the stated iron ore reserves.
F-51
FIVE-YEAR OPERATING SUMMARY
--------------------------------------------------------------------------------------------
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
RAW STEEL PRODUCTION
Gary, IN...................................... 6,669 6,114 6,610 7,102 6,468
Mon Valley, PA................................ 2,649 1,951 2,683 2,821 2,594
Fairfield, AL................................. 2,217 2,028 2,069 2,109 2,152
------------------------------------------
Domestic Facilities........................... 11,535 10,093 11,362 12,032 11,214
Kosice, Slovak Republic....................... 4,394 4,051 382 -- --
------------------------------------------
TOTAL...................................... 15,929 14,144 11,744 12,032 11,214
------------------------------------------
RAW STEEL CAPABILITY
Domestic Facilities........................... 12,800 12,800 12,800 12,800 12,800
U. S. Steel Kosice(a)......................... 5,000 5,000 467 -- --
------------------------------------------
TOTAL...................................... 17,800 17,800 13,267 12,800 12,800
Production as % of total capability
--Domestic................................. 90.1 78.9 88.8 94.0 87.6
--U. S. Steel Kosice....................... 87.9 81.0 81.8 -- --
------------------------------------------
COKE PRODUCTION
Domestic................................... 5,104 4,647 5,003 4,619 4,835
U. S. Steel Kosice......................... 1,653 1,555 188 -- --
------------------------------------------
TOTAL...................................... 6,757 6,202 5,191 4,619 4,835
------------------------------------------
COKE SHIPMENTS--DOMESTIC
Trade......................................... 1,698 2,070 2,069 1,694 2,562
Intercompany.................................. 3,487 2,661 2,941 2,982 2,228
------------------------------------------
TOTAL...................................... 5,185 4,731 5,010 4,676 4,790
------------------------------------------
IRON ORE PELLET SHIPMENTS
Trade......................................... 3,335 2,985 3,336 3,017 4,115
Intercompany.................................. 12,904 11,928 11,684 12,008 11,331
------------------------------------------
TOTAL...................................... 16,239 14,913 15,020 15,025 15,446
------------------------------------------
COAL SHIPMENTS
Trade......................................... 5,140 4,561 5,741 4,891 6,056
Intercompany.................................. 1,816 1,975 1,980 2,033 1,614
------------------------------------------
TOTAL...................................... 6,956 6,536 7,721 6,924 7,670
------------------------------------------
STEEL SHIPMENTS BY PRODUCT--DOMESTIC FACILITIES
Sheet and semi-finished steel products........ 7,682 6,411 7,409 8,114 7,608
Plate and tin mill products................... 2,218 2,368 2,202 2,105 2,475
Tubular products.............................. 773 1,022 1,145 410 603
------------------------------------------
TOTAL...................................... 10,673 9,801 10,756 10,629 10,686
Total as % of domestic steel industry...... 10.8 9.9 9.9 10.0 10.5
------------------------------------------
STEEL SHIPMENTS BY PRODUCT--U. S. STEEL KOSICE
Sheet and semi-finished steel products........ 3,207 2,937 206 -- --
Plate and tin mill products................... 604 639 99 -- --
Tubular products.............................. 138 138 12 -- --
------------------------------------------
TOTAL...................................... 3,949 3,714 317 -- --
--------------------------------------------------------------------------------------------
(a) Represents the operations of U. S. Steel Kosice, s.r.o., following the
acquisition of the steelmaking operations and related assets of VSZ a.s. on
November 24, 2000.
F-52
FIVE-YEAR OPERATING SUMMARY (CONTINUED)
--------------------------------------------------------------------------------------------
(THOUSANDS OF NET TONS, UNLESS OTHERWISE NOTED) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
STEEL SHIPMENTS BY MARKET--DOMESTIC FACILITIES
Steel service centers......................... 2,673 2,421 2,315 2,456 2,563
Transportation................................ 1,222 1,143 1,466 1,505 1,785
Further conversion:
Joint ventures............................. 1,550 1,328 1,771 1,818 1,473
Trade customers............................ 1,311 1,153 1,174 1,633 1,140
Containers.................................... 863 779 702 738 794
Construction.................................. 880 794 936 844 987
Oil, gas and petrochemicals................... 647 895 973 363 509
Export........................................ 501 522 544 321 382
All other..................................... 1,026 766 875 951 1,053
------------------------------------------
TOTAL...................................... 10,673 9,801 10,756 10,629 10,686
------------------------------------------
STEEL SHIPMENTS BY MARKET--U. S. STEEL KOSICE
Steel service centers......................... 613 492 53 -- --
Transportation................................ 263 194 13 -- --
Further conversion:
Joint ventures............................. 20 30 2 -- --
Trade customers............................ 1,056 958 70 -- --
Containers.................................... 289 234 17 -- --
Construction.................................. 1,016 1,034 82 -- --
Oil, gas and petrochemicals................... 32 168 24 -- --
All other..................................... 660 604 56 -- --
------------------------------------------
TOTAL...................................... 3,949 3,714 317 -- --
------------------------------------------
AVERAGE STEEL PRICE PER TON
Flat-rolled Products.......................... $ 410 $ 397 $ 427 $ 415 $ 460
Tubular Products.............................. 651 685 642 529 621
U. S. Steel Kosice............................ 276 260 269 -- --
--------------------------------------------------------------------------------------------
F-53
FIVE-YEAR FINANCIAL SUMMARY(A)
--------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT AS NOTED) 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
REVENUES AND OTHER INCOME
Revenues by product:
Sheet & semi-finished steel products..... $ 4,048 $ 3,163 $ 3,288 $ 3,433 $ 3,598
Plate & tin mill products................ 1,057 1,273 977 919 1,164
Tubular products......................... 554 755 754 221 382
Raw materials (coal, coke & iron ore).... 502 485 626 549 744
Other(b)................................. 788 610 445 414 490
Income (loss) from investees............... 33 64 (8) (89) 46
Net gains on disposal of assets............ 29 22 46 21 54
Other income (loss)........................ 43 3 4 2 (1)
-----------------------------------------------
Total revenues and other income....... $ 7,054 $ 6,375 $ 6,132 $ 5,470 $ 6,477
--------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Segment income (loss):
Flat-rolled........................... $ (31) $ (536) $ 31 $ 161 $ 311
Tubular............................... 4 88 83 (57) 10
USSK.................................. 110 123 2 -- --
Straightline.......................... (41) (17) -- -- --
Real Estate........................... 57 69 72 54 68
-----------------------------------------------
TOTAL REPORTABLE SEGMENTS........... 99 (273) 188 158 389
Other Businesses......................... 38 (17) 67 50 170
Special items............................ (9) (115) (151) (58) 20
-----------------------------------------------
TOTAL INCOME (LOSS) FROM
OPERATIONS....................... 128 (405) 104 150 579
Net interest and other financial costs... 115 141 105 74 42
Income tax provision (benefit)........... (48) (328) 20 25 173
--------------------------------------------------------------------------------------------
NET INCOME (LOSS)(C)....................... 61 (218) (21) 44 364
Per common share--basic & diluted........ .62 (2.45) (.24) .49 4.08
--------------------------------------------------------------------------------------------
BALANCE SHEET POSITION AT YEAR-END
Current assets........................... $ 2,440 $ 2,073 $ 2,717 $ 1,981 $ 1,275
Net property, plant & equipment.......... 2,978 3,084 2,739 2,516 2,500
Total assets............................. 7,977 8,337 8,711 7,525 6,749
Short-term debt.......................... 26 32 209 13 25
Other current liabilities................ 1,346 1,226 1,182 1,271 991
Long-term debt........................... 1,408 1,434(d) 2,236 902 464
Employee benefits........................ 2,601 2,008 1,767 2,245 2,315
Preferred securities..................... -- -- 249 249 248
Stockholders' equity(e).................. 2,027 2,506 1,919 2,056 2,093
--------------------------------------------------------------------------------------------
CASH FLOW DATA
Net cash from operating activities....... $ 279 $ 669(f) $ (627) $ (80) $ 380
Capital expenditures..................... 258 287 244 287 310
Dividends paid(g)........................ 19 57 97 97 96
--------------------------------------------------------------------------------------------
EMPLOYEE DATA
Total employment costs................... $ 1,744 $ 1,581(h) $ 1,197(i) $ 1,148 $ 1,305
Average domestic employment costs
(dollars per hour).................... 37.90 33.88 28.70 28.35 30.42
Average number of domestic employees..... 20,351 21,078 19,353 19,266 20,267
Average number of USSK employees......... 15,900 16,083 16,256(j) -- --
Number of pensioners at year-end......... 88,030 91,003 94,339 97,102(k) 92,051
--------------------------------------------------------------------------------------------
STOCKHOLDER DATA AT YEAR-END(L)
Common shares outstanding (millions)..... 102.5 89.2 88.8 88.4 88.3
Registered shareholders (in thousands)... 50.0 52.4 50.3 55.6 60.2
Market price of common stock............. $ 13.12 $ 18.11 $ 18.00 $ 33.00 $ 23.00
--------------------------------------------------------------------------------------------
(a) See Notes 1 and 2 of the Notes to Financial Statements for discussion of the
basis of presentation and the December 31, 2001 Separation from Marathon.
F-54
FIVE-YEAR FINANCIAL SUMMARY (CONTINUED)
(b) Includes revenue from the sale of steel production by-products;
transportation services; steel mill products distribution; the management of
mineral resources; the management and development of real estate; and
engineering and consulting services.
(c) See Note 18 of the Notes to Financial Statements for the basis of
calculating earnings per share.
(d) Reflects the $900 million Value Transfer. See Note 2 of the Notes to
Financial Statements.
(e) For periods prior to 2001, amounts represent Marathon's net investment in U.
S. Steel.
(f) Reflects $819 million of tax settlements with Marathon. See the statement of
cash flows.
(g) Data for periods prior to 2002 pertains to USX-U. S. Steel Group common
stock.
(h) Includes LTV Corporation's tin mill products business and Transtar, Inc.
subsidiaries from dates of acquisition, March 1, 2001 and March 23, 2001,
respectively.
(i) Includes USSK from date of acquisition on November 24, 2000.
(j) Represents average head count from the date of acquisition.
(k) Includes approximately 8,000 surviving spouse beneficiaries added to the U.
S. Steel pension plan in 1999.
(l) Stockholder data prior to December 31, 2001, pertains to USX-U. S. Steel
Group common stock.
F-55
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 "Debtor-in-Possession" or the "Company") as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, cash flows, and changes in stockholders' equity (deficit) for each
of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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
(Debtor-in-Possession) at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 9 to the consolidated financial statements, in 2001 the
Company changed its method for reporting realized and unrealized gains and
losses on plan assets in the determination of pension expense.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, on March 6, 2002, the Company filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
The Company is currently operating its business under the jurisdiction of
Chapter 11 and the United States Bankruptcy Court in Chicago, Illinois (the
"Bankruptcy Court"), and continuation of the Company as a going concern is
dependent upon, among other things, the ability to formulate a plan of
reorganization which will be approved by the requisite parties under the United
States Bankruptcy Code and be confirmed by the Bankruptcy Court, comply with its
debtor-in-possession financing facility, obtain adequate financing sources, and
generate sufficient cash flows from operations to meet its future obligations.
In addition, the Company has experienced operating losses in 2002, 2001 and
2000. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of these uncertainties.
Ernst & Young LLP
Indianapolis, Indiana
February 5, 2003 except for Notes 1 and 10,
as to which the date is March 25, 2003
F-56
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
--------------------------------------------------------------------------------------------
NET SALES................................................. $2,609.4 $2,492.3 $2,978.9
Cost of products sold................................... 2,476.2 2,648.7 2,792.2
Selling, general and administrative expense............. 117.1 148.8 150.9
Depreciation............................................ 160.7 167.9 153.0
Equity income of affiliates............................. (3.2) (2.7) (2.8)
Other items............................................. (6.9) (15.9) --
--------------------------------
LOSS FROM OPERATIONS BEFORE REORGANIZATION ITEMS.......... (134.5) (454.5) (114.4)
Reorganization items...................................... 50.6 -- --
Other (income) expense
Interest and other financial income..................... (0.6) (1.2) (4.0)
Interest and other financial expense (contractual
interest for 2002 was $66.9)......................... 25.4 68.2 41.3
Net gain on disposal of non-core assets and other
related activities................................... (3.3) (3.0) (15.1)
--------------------------------
LOSS BEFORE INCOME TAXES.................................. (206.6) (518.5) (136.6)
Income taxes (credit)................................... (57.9) 148.8 (6.8)
--------------------------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.......................... (148.7) (667.3) (129.8)
Extraordinary item...................................... -- (2.0) --
Cumulative effect of change in accounting principle..... -- 17.2 --
--------------------------------
NET LOSS.................................................. $ (148.7) $ (652.1) $ (129.8)
--------------------------------
BASIC AND DILUTED EARNINGS PER SHARE:
Loss Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle....................... $ (3.60) $ (16.16) $ (3.14)
Extraordinary item...................................... -- (0.05) --
Cumulative effect of change in accounting principle..... -- 0.42 --
--------------------------------
NET LOSS.................................................. $ (3.60) $ (15.79) $ (3.14)
--------------------------------
Weighted average shares outstanding (in thousands)...... 41,288 41,288 41,288
DIVIDENDS PAID PER COMMON SHARE........................... $ -- $ -- $ 0.21
--------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-57
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
DECEMBER 31,
--------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001
----------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 1.5 $ 1.4
Restricted cash........................................... -- 2.4
Receivables, net.......................................... 222.5 224.2
Inventories............................................... 405.7 390.4
Deferred tax assets....................................... 4.7 3.2
Other..................................................... 41.3 15.5
--------------------
TOTAL CURRENT ASSETS.................................... 675.7 637.1
Investments in affiliated companies......................... 13.7 16.3
Property, plant and equipment, net.......................... 1,256.5 1,385.3
Deferred tax assets......................................... 43.3 44.5
Intangible pension asset.................................... 108.8 126.0
Other assets................................................ 110.7 98.4
--------------------
$2,208.7 $2,307.6
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 131.8 $ 165.6
Current portion of long-term obligations.................. -- 29.3
Short-term borrowings..................................... -- 100.0
Salaries, wages, benefits and related taxes............... 90.6 119.0
Pension................................................... -- 169.8
Property taxes............................................ 24.2 40.3
Income taxes.............................................. 0.2 6.5
Other accrued liabilities................................. 57.1 84.1
--------------------
TOTAL CURRENT LIABILITIES............................... 303.9 714.6
Debtor-in-possession financing.............................. 128.5 --
Long-term obligations....................................... -- 809.7
Long-term pension liabilities............................... -- 4.7
Minimum pension liabilities................................. -- 502.3
Postretirement benefits other than pensions................. 21.3 476.1
Other long-term liabilities................................. 13.4 110.9
Liabilities subject to compromise........................... 2,646.4 --
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock par value $.01:
Class A--authorized 30,000,000 shares; issued and
outstanding 22,100,000 shares in 2002 and 2001.......... 0.2 0.2
Class B--authorized 65,000,000 shares; issued 21,188,240
shares in 2002 and 2001................................. 0.2 0.2
Additional paid-in capital.................................. 491.8 491.8
Retained earnings (deficit)................................. (556.7) (408.0)
Treasury stock, at cost: 2,000,000 shares in 2002 and
2001...................................................... (16.3) (16.3)
Accumulated other comprehensive loss:
Unrealized loss on derivative instruments................... -- (2.3)
Minimum pension liability................................... (824.0) (376.3)
--------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................... (904.8) (310.7)
--------------------
$2,208.7 $2,307.6
----------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-58
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
-------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(148.7) $(652.1) $(129.8)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation.............................................. 160.7 167.9 153.0
Reorganization items...................................... 50.6 -- --
Other items............................................... (6.9) 12.1 --
Net gain on disposal of non-core assets................... (3.3) (3.0) (15.1)
Extraordinary item........................................ -- 2.0 --
Cumulative effect of change in accounting principle....... -- (17.2) --
Deferred income taxes..................................... (0.3) 148.2 10.3
Changes in assets and liabilities:
Receivables--trade........................................ 5.1 44.1 25.8
Receivables--allowance.................................... (3.4) 17.3 11.4
Receivables sold.......................................... -- (95.0) 95.0
Inventories............................................... (15.3) 134.1 (3.6)
Accounts payable.......................................... 118.6 (66.1) (14.4)
Pension liability (net of change in intangible pension
asset).................................................. 38.6 31.8 (44.5)
Postretirement benefits................................... 26.2 26.5 19.4
Accrued liabilities....................................... 45.6 2.0 0.8
Other..................................................... (19.0) 6.1 1.8
-----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
BEFORE REORGANIZATION ITEMS........................... 248.5 (241.3) 110.1
Reorganization items (excluding non-cash charges of $32.6
million).................................................. (18.0) -- --
-----------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..... 230.5 (241.3) 110.1
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (38.5) (48.8) (217.3)
Net proceeds from settlement.............................. 5.5 -- --
Net proceeds from disposal of non-core assets............. 7.1 2.5 16.9
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES................... (25.9) (46.3) (200.4)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repayments........................................... (13.8) (28.9) (43.5)
Borrowings -- net......................................... (185.1) 327.1 86.5
Dividend payments on common stock......................... -- -- (8.7)
Debt issuance costs....................................... (5.6) (10.8) (0.8)
-----------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... (204.5) 287.4 33.5
-----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 0.1 (0.2) (56.8)
Cash and cash equivalents, at beginning of the year......... 1.4 1.6 58.4
-----------------------------
CASH AND CASH EQUIVALENTS, AT END OF THE YEAR............... $ 1.5 $ 1.4 $ 1.6
-----------------------------
SUPPLEMENTAL CASH PAYMENT (RECEIPT) INFORMATION
Cash paid (received) during the year for:
Interest and other financing costs........................ $ 18.7 $ 65.4 $ 55.0
Income taxes, net......................................... (53.2) (18.0) (4.0)
NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase of equipment through capital leases.............. $ -- $ 3.1 $ 7.9
-------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-59
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------------------------------------------
ACCUMULATED TOTAL
COMMON COMMON ADDITIONAL RETAINED OTHER STOCKHOLDERS'
STOCK-- STOCK-- PAID-IN EARNINGS TREASURY COMPREHENSIVE EQUITY
(DOLLARS IN MILLIONS) CLASS A CLASS B CAPITAL (DEFICIT) STOCK INCOME (LOSS) (DEFICIT)
------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2000....... 0.2 0.2 491.8 382.6 (16.3) (5.5) 853.0
Comprehensive loss:
Net loss....................... (129.8) (129.8)
Other comprehensive income:
Minimum pension liability.... 3.2 3.2
---------
Comprehensive loss............... (126.6)
Dividends on common stock........ (8.7) (8.7)
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000..... 0.2 0.2 491.8 244.1 (16.3) (2.3) 717.7
Comprehensive loss:
Net loss....................... (652.1) (652.1)
Other comprehensive income
(loss):
Minimum pension liability.... (374.0) (374.0)
Cumulative effect of the
adoption of SFAS 133....... 23.8 23.8
Net activity relating to
derivative instruments..... (26.1) (26.1)
---------
Comprehensive loss............... (1,028.4)
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001..... $0.2 $0.2 $491.8 $(408.0) $(16.3) $(378.6) $ (310.7)
Comprehensive loss:
Net loss....................... (148.7) (148.7)
Other comprehensive income
(loss):
Minimum pension liability.... (447.7) (447.7)
Net activity relating to
derivative instruments..... 2.3 2.3
---------
Comprehensive loss............... (594.1)
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002..... $0.2 $0.2 $491.8 $(556.7) $(16.3) $(824.0) $ (904.8)
------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-60
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION AS OF MARCH 6, 2002
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1. REORGANIZATION UNDER CHAPTER 11 BANKRUPTCY CODE
On March 6, 2002, National Steel Corporation and forty-one of its domestic
subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of Title 11 of the United States Code in the Bankruptcy Court.
Certain majority owned subsidiaries of National Steel Corporation and
subsidiaries (the "Company") have been excluded from the Chapter 11 filings. The
case was assigned to the Hon. John H. Squires and is being jointly administered
under case number 02-08699. The Company continues to manage its properties and
operate its businesses under Sections 1107(a) and 1108 of the Code as a
debtor-in-possession. Due to material uncertainties, it is not possible to
predict the length of time the Debtors will operate under Chapter 11 protection,
the outcome of the proceedings in general, whether it will continue to operate
under our current organizational structure, the effect of the proceedings on its
businesses or the recovery by its creditors and equity holders.
The Company is pursuing various strategic alternatives including, among other
things, possible consolidation opportunities, a stand-alone plan of
reorganization and liquidation of part or all of its assets. After further
consideration of such alternatives and negotiations with various parties in
interest, the Debtors expect to present a Chapter 11 plan, which will likely
cause a material change to the carrying amount of assets and liabilities in the
financial statements. The accompanying consolidated financial statements do not
reflect (a) the realizable value of assets on a liquidation basis or their
availability to satisfy liabilities, (b) aggregate pre-petition liability
amounts that may be allowed for claims or contingencies, or their status or
priority, (c) the effect of any changes to the Company's capital structure or in
its business operations as the result of an approved plan of reorganization, or
(d) adjustments to the carrying value of asset or liability amounts that may be
necessary as the result of actions by the Bankruptcy Court.
Under bankruptcy law, actions by creditors to collect amounts owed by us at the
filing date are stayed and other pre-petition contractual obligations may not be
enforced against us, without approval by the Bankruptcy Court to settle these
claims. The Debtors received approval from the Bankruptcy Court to pay certain
of its prepetition claims, including employee wages and certain employee
benefits. In addition, the Debtors have the right, subject to Bankruptcy Court
approval and other conditions, to assume or reject any pre-petition executory
contracts and unexpired leases. The Debtors have submitted the schedules setting
forth all of its assets and liabilities as of the date of the petition as
reflected in its accounting records. The amounts of claims filed by creditors
could be significantly different from the recorded amounts. The last date for
filing claims by creditors other than governmental units was August 15, 2002 and
for governmental units was September 6, 2002. On November 5, 2002, the
Bankruptcy Court entered an order that extended the exclusive period within
which only the debtor can file a plan of reorganization through April 7, 2003.
On January 9, 2003, the Company entered into an Asset Purchase Agreement with US
Steel for the sale of substantially all of the Company's steel making and
finishing assets. This transaction was valued at approximately $950 million,
consisting primarily of cash, but including up to $100 million of US Steel
common stock and the assumption of certain liabilities approximating
F-61
$200 million. This transaction was subject to a number of conditions, including
approval of the Bankruptcy Court, and the execution and ratification of a new
collective bargaining agreement by the United Steelworkers of America
satisfactory to US Steel for the National Steel employees who would become
employees of US Steel. A motion to approve procedures related to this
transaction was scheduled to be held in the Bankruptcy Court on January 30,
2003. Prior to that hearing, the Company received a competing bid from AK Steel.
Following further negotiations among the parties, on January 30, 2003, the
Company entered into an Asset Purchase Agreement with AK Steel for the sale of
substantially all of the Company's steelmaking and finishing assets, as well as
National Steel Pellet Company, the Company's iron ore pellet operations in
Keewatin, Minnesota. This transaction is valued at approximately $1.125 billion,
consisting of $925 million of cash and the assumption of certain liabilities
approximating $200 million. The transaction is subject to a number of
conditions, including approval of the Bankruptcy Court, termination or
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act, and the execution and ratification of a new collective
bargaining agreement by the United Steelworkers of America satisfactory to AK
Steel for the National Steel employees who would become employees of AK Steel.
The U.S. Bankruptcy Court for the Northern District of Illinois on February 6,
2003 approved the break up fee of approximately $15 million and bidding
procedures related to the Asset Purchase Agreement with AK Steel. The court's
ruling gives AK Steel "stalking horse", or priority status, which generally
allows AK Steel to collect a break up fee should National agree to sell its
assets to another party prior to termination of the Asset Purchase Agreement
with AK Steel. The Asset Purchase Agreement is also subject to higher and better
offers submitted in accordance with the bidding procedures approved by the
Bankruptcy Court under Sections 363 and 365 of the Bankruptcy Code on February
6, 2003, as modified by the Bankruptcy Court on March 25, 2003. Under these
bidding procedures, bids must be submitted no later than April 10, 2003, and if
one or more bids are determined to be Qualified bids under the bidding
procedures an auction is expected to be conducted on April 16, 2003. On February
26, 2003, the Company was notified that the Justice Department was terminating
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act for
the AK Steel transaction.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business and do
not reflect adjustments that might result if the Company is unable to continue
as a going concern. As a result of its Chapter 11 filings, however, such matters
are subject to significant uncertainty. Continuing on a going concern basis is
dependent upon, among other things, the Company's formulation of an acceptable
plan of reorganization, the success of future business operations, and the
generation of sufficient cash from operations and financing sources to meet its
obligations.
The Company has applied the provisions of AICPA's Statement of Position No.
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code, issued November 19, 1990 ("SOP 90-7"). SOP 90-7 requires a segregation of
liabilities subject to compromise by the Court as of the filing date and
identification of all transactions which impact the statement of operations that
are directly associated with the reorganization of the Company. Prior year's
comparative balances have not been reclassified to conform to current year
balances stated under SOP 90-7.
F-62
Liabilities Subject To Compromise
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Court action, further
developments with respect to disputed claims, or other events. Additional claims
may arise resulting from rejection of additional executory contracts or
unexpired leases by the Company. Under an approved final plan of reorganization,
these claims may be settled at amounts substantially less than their allowed
amounts.
Recorded liabilities subject to compromise under the Chapter 11 proceedings
consisted of the following at December 31, 2002:
----------------------------------------------------------------------
(DOLLARS IN MILLIONS)
----------------------------------------------------------------------
Accounts payable............................................ $ 154.3
Short-term borrowings....................................... 100.0
Salaries, wages, benefits and related taxes................. 112.0
Pension liabilities, including minimum pension
liabilities............................................... 1,156.6
Property taxes.............................................. 46.3
Income taxes................................................ 1.8
Other accrued liabilities................................... 65.1
Long-term obligations....................................... 511.6
Postretirement benefits other than pensions................. 403.8
Other long-term liabilities................................. 94.9
--------
$2,646.4
----------------------------------------------------------------------
Reorganization Items
Reorganization items are comprised of items of income, expense and loss that
were realized or incurred by the Company as a result of its decision to
reorganize under Chapter 11 of the Bankruptcy Code. The following summarizes the
reorganization charges recorded by the Company during the year ended December
31, 2002:
--------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
(DOLLARS IN MILLIONS) 2002
--------------------------------------------------------------------------
Professional and other fees................................. $20.7
Write-down of deferred financing costs...................... 2.3
Provision for rejected derivative contract.................. 1.3
Provision for potential additional costs on long-term
agreements................................................ 26.1
Gain on sale of equity interest in DNN Galvanizing Limited
Partnership............................................... (0.3)
Vendor settlement........................................... (2.7)
Other....................................................... 3.2
------------
$50.6
--------------------------------------------------------------------------
F-63
Interest Expense
Interest at the stated contractual amount on unsecured debt that was not charged
to earnings for the year ended December 31, 2002 was approximately $41.5
million.
NOTE 2. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
National Steel Corporation 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 83% of the Company's employees. The Company entered
into five-year agreements with these labor organizations in 1999. Additionally,
these 1999 agreements contain a no-strike clause also effective through the term
of the agreements.
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
The Company applies the provisions of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), to recognize revenue. As such, all revenue is recognized when
products are shipped to customers or when all provisions of SAB 101 have been
met.
Repair and Maintenance Costs
All costs for repair and maintenance projects, including materials, internal
labor and external contract labor, are expensed as incurred.
Shipping and Handling Costs
The cost to deliver products to customers is recorded as part of cost of
products sold.
Cash and 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.
F-64
Restricted Cash
As of December 31, 2002 there were no restricted uses of cash or cash
equivalents. At December 31, 2001, cash and cash equivalents in the amount of
$2.4 million were restricted for use primarily in connection with zinc swap
contracts and certain credit arrangements.
Receivables
Receivables consist of trade and notes receivable and other miscellaneous
receivables including refundable income taxes. Concentration of credit risk
related to trade receivables is limited due to the large number of customers in
differing industries and geographic areas and management's credit practices.
Receivables are shown net of allowances and estimated claims of $44.9 million
and $48.3 million at December 31, 2002 and 2001, respectively. Activity relating
to the allowance was as follows:
-----------------------------------------------------------------------------------
(DOLLARS IN MILLION) 2002 2001 2000
-----------------------------------------------------------------------------------
Balance, January 1.......................................... $48.3 $31.0 $19.6
Provision for doubtful accounts............................. 7.9 22.1 7.7
Doubtful accounts written off, net of recoveries............ (9.5) (0.4) (0.6)
Other, net.................................................. (1.8) (4.4) 4.3
---------------------
BALANCE, DECEMBER 31........................................ $44.9 $48.3 $31.0
-----------------------------------------------------------------------------------
The Company evaluates the collectibility of its accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filings, substantial down-grading of credit scores), the Company
records a specific reserve for bad debts against outstanding amounts to reduce
the net recognized receivable to the amount reasonably believed to be
collectible. For customers that are highly leveraged (those customers whose
value of debt exceeds equity by a predetermined ratio) and exceed a minimal risk
threshold, the Company records a reserve representing its best estimate of
potential losses from these customers in the aggregate. For all other customers,
the Company recognizes reserves for bad debts based on the general status of the
economy and, specifically, the steel industry and past collections experience.
The bankruptcy filing of the LTV Steel Company, Inc. (described in Note 12 to
the consolidated financial statements) and other customers and current economic
conditions within the United States, especially within the steel industry, have
caused the Company to record a provision for doubtful accounts receivable of
$7.9 million, $22.1 million, and $7.7 million during 2002, 2001, and 2000,
respectively. If circumstances change (i.e., higher than expected defaults or an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to us), the Company's estimates of the recoverability of
amounts due could be reduced by a material amount.
Derivative Instruments
In the normal course of business, the Company's operations are exposed to
continuing fluctuations in commodity prices 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 may include the purchase of commodity
purchase swap contracts from global financial institutions. 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
F-65
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 transaction for speculative purposes. The Company has adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), as
amended and interpreted. (See Note 13 to the Consolidated Financial Statements.)
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 $173.8
million and $180.0 million higher than reported at December 31, 2002 and 2001,
respectively. During 2001 certain inventory quantity reductions caused
liquidations of LIFO inventory values that had the effect of reducing the net
loss by $2.1 million or $0.05 per share (basic and diluted). During 2002 and
2000 certain inventory quantity reductions caused liquidations of LIFO inventory
values that did not have a material effect on the net loss.
Inventories as of December 31, are as follows:
-------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------
INVENTORIES
Finished and semi-finished.................................. $ 352.8 $ 339.0
Raw materials and supplies.................................. 178.7 176.9
-----------------
531.5 515.9
Less LIFO reserve........................................... (125.8) (125.5)
-----------------
$ 405.7 $ 390.4
-------------------------------------------------------------------------------
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 and/or
losses since acquisition. Undistributed deficit of affiliated companies at
December 31, 2002 and 2001 amounted to $10.2 million and $7.6 million,
respectively.
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. No interest was capitalized during 2002 and
2001. Capitalized interest amounted to $15.3 million in 2000. Depreciation of
capitalized interest amounted to $4.9 million in 2002, $5.1 million in 2001 and
$4.5 million in 2000.
F-66
Property, plant and equipment as of December 31, are as follows:
---------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001
---------------------------------------------------------------------------------
Land and land improvements.................................. $ 175.0 $ 175.6
Buildings................................................... 362.1 361.6
Machinery and equipment..................................... 3,346.6 3,336.3
-------------------
Total property, plant and equipment......................... 3,883.7 3,873.5
Less accumulated depreciation............................... 2,627.2 2,488.2
-------------------
Net property, plant and equipment........................... $1,256.5 $1,385.3
---------------------------------------------------------------------------------
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"), the Company periodically evaluates its
long-lived assets for impairment whenever indicators of impairment exist. A
long-lived asset is considered impaired when the anticipated undiscounted future
cash flows from a logical grouping of assets over the remaining service life of
the asset grouping is less than its carrying value. Generally, the Company
groups its assets at the facility level, which is the lowest level of the
organization for which identifiable cash flows are independent of the cash flows
of other assets and liabilities of the Company, for impairment testing.
Based on the Company's filing under Chapter 11 of Title 11 of the United States
Code in the Bankruptcy Court, impairment indicators were present at December 31,
2002 for all of the Company's long-lived assets. As such, the Company compared
the estimated undiscounted future cash flows to the carrying value of the
attributable long-lived assets. As the Company's average long-lived assets are
already two-thirds depreciated, the levels of cash flows necessary for
recoverability were greatly reduced.
The Company's recoverability estimates are based essentially on static volume
while pricing levels continue to grow at approximately 1-2% per annum through
2006 and then remain constant over the remaining average useful life of the
long-lived assets. The highest annual average selling price per ton in this
impairment model is approximately 2% lower than the average price per ton
experienced before the high levels of low-priced imported steel began to flood
the market in 1998. The Company further assumes that cost reduction activities
and improved efficiencies will reduce cost per ton by approximately 4% through
2003 and hold constant for the remainder of the assets' average useful lives.
Based on the impairment model utilized by the Company, in accordance with SFAS
144, the estimated undiscounted future cash flows exceed the carrying value of
the attributable long-lived assets, and therefore, no impairment charge was
recorded in 2002. There can be no assurances that the Company will successfully
attain the shipping volumes, average selling prices or cost reductions included
in its recoverability estimates. Should future actual results or assumptions
change, the Company may be required to record an impairment charge in a future
period. Additionally, the impairment analysis does not contemplate the asset
purchase agreement with AK Steel or related fair value of long-lived assets
which may be derived therefrom.
Depreciation
Depreciation of production facilities, equipment and capitalized lease
obligations is generally computed by the straight-line method over their
estimated useful lives or, if applicable,
F-67
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 is computed on the basis of tonnage produced
in relation to estimated total production to be obtained from such facilities.
Pensions
The Company accounts for its defined benefit pension plans in accordance with
SFAS No. 87, Employers' Accounting for Pensions ("SFAS 87"), which requires that
amounts recognized in financial statements be determined on an actuarial basis.
SFAS 87 and the policies the Company uses, including the delayed recognition of
gains and losses and the use of a calculated value of plan assets, generally
reduce the volatility of pension expense due to changes in pension liability
assumptions, demographic experience, and the market performance of the pension
plan's assets. (See Notes 6 and 9 to the Consolidated Financial Statements.)
Other Postretirement Benefits
The Company provides retiree health care benefits for certain salaried and
represented employees that retire under its pension plans. The Company's retiree
health care plans provide health care benefits to approximately 23,000 of its
former employees and their dependents. The Company accounts for its other
postretirement benefit plans in accordance with SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other than Pensions ("SFAS 106"), which
requires that amounts recognized in financial statements be determined on an
actuarial basis. SFAS 106 and the policies the Company uses, including the
delayed recognition of gains and losses, generally reduce the volatility of
retiree health care expense due to changes in assumptions, claims experience,
demographic experience, and the market performance of the plan's assets. (See
Note 6 to the Consolidated Financial Statements.)
Research and Development
Research and development costs are expensed when incurred as a component of cost
of products sold. Expenses for 2002, 2001 and 2000 were $6.8 million, $8.6
million and $9.6 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, 2002.
The carrying value of long-term obligations (excluding capitalized lease
obligations) exceeded the fair value by approximately $210 million at December
31, 2002. The fair value is based on quoted market prices or 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
F-68
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. If a net loss is incurred,
dilutive stock options are considered antidilutive and are excluded from the
dilutive EPS calculation. As a result of the reported net loss for each of the
three years ended December 31, 2002, 2001 and 2000, the denominator for both
basic and diluted earnings per share were the same.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock Based Compensation ("SFAS 123"), the Company has elected to
continue to apply 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 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 SFAS 123 and SFAS No. 148, Accounting
for Stock-Based Compensation -- Transition and Disclosure ("SFAS 148"). (See
Note 14 to the Consolidated Financial Statements.)
Had compensation cost for the option plans been determined based on the fair
value at the grant date for awards in 2002, 2001, and 2000 consistent with the
provisions of SFAS 148 and 123, the Company's net loss and earnings per share
would have been adjusted to the pro forma amounts indicated below:
------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT EPS) 2002 2001 2000
------------------------------------------------------------------------------------
Net loss as reported................................... $(148.7) $(652.1) $(129.8)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects................... 0.4 1.0 0.7
---------------------------
Pro-forma net loss..................................... $(149.1) $(653.1) $(130.5)
---------------------------
Earnings per share:
Basic EPS -- As reported............................... $ (3.60) $(15.79) $ (3.14)
---------------------------
Basic EPS -- Pro-forma................................. $ (3.61) $(15.82) $ (3.16)
---------------------------
Diluted EPS -- As reported............................. $ (3.60) $(15.79) $ (3.14)
---------------------------
Diluted EPS -- Pro-forma............................... $ (3.61) $(15.82) $ (3.16)
------------------------------------------------------------------------------------
F-69
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:
-----------------------------------------------------------------------------------
2002* 2001 2000
-----------------------------------------------------------------------------------
Dividend yield.............................................. N/A 0.0% 2.8%
Expected volatility......................................... N/A 74.5% 58.5%
Risk-free interest rate..................................... N/A 5.0% 6.6%
Expected term (in years).................................... N/A 7.0 7.0
-----------------------------------------------------------------------------------
---------------
* There were no options granted in 2002.
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
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 applies to legal obligations associated with
the retirement of certain long-lived assets. It requires companies to record the
fair value of the liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the company
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, the company either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement. The
Company adopted SFAS 143, as required, in its fiscal year beginning on January
1, 2003. The transition adjustment of less than $3 million, net of tax,
resulting from the adoption of SFAS 143 will be reported as a cumulative effect
of a change in accounting principle in the first quarter of 2003.
In April 2002, the FASB issued SFAS No. 145, Recession of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), which will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. SFAS 145 also amends
SFAS 13 to require certain modifications to capital leases be treated as a
sales-leaseback. We adopted SFAS 145 effective January 1, 2003 and it did not
have a material impact on our earnings or financial position. Adoption will
require the extraordinary gain in 2001 to be reclassified.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"), which changes financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146
requires that a liability for costs associated
F-70
with an exit or disposal activity be recognized as incurred rather than at the
date a company commits to an exit plan as currently required. SFAS 146 also
establishes that fair value is the objective for initial measurement of the
liability. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS 146 did not have an effect
on the Company's earnings or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure ("SFAS 148") an amendment of SFAS No.
123 Accounting for Stock-Based Compensation ("SFAS 123), which provides
alternative transition methods for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also
amended the disclosure provisions, which now require the method of accounting
for stock-based employee compensation to be provided and the effect of the
method used on reported results. 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 provision of APB 25. The adoption of this
statement in December 2002 had no impact on the Company's earnings or financial
position, and the disclosure requirements have been met.
NOTE 3. CAPITAL STRUCTURE
At December 31, 2002, the Company's capital structure was as follows.
CLASS A COMMON STOCK: 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. No dividends were paid in 2002 and 2001. Dividends of $0.21 per share
were paid in 2000. As a result of its ownership of the Class A Common Stock, NKK
U.S.A. Corporation controls approximately 69.7% of the voting power of the
Company.
CLASS B COMMON STOCK: The Company had 65,000,000 shares of $0.01 par value Class
B Common Stock authorized, 21,188,240 shares issued, and 19,188,240 outstanding
net of 2,000,000 shares of Treasury Stock. No dividends were paid in 2002 and
2001. Dividends of $0.21 per share were paid in 2000. All of the issued and
outstanding shares of Class B Common Stock are publicly traded and are entitled
to one vote.
NOTE 4. SEGMENT INFORMATION
The Company has one reportable segment: Steel. The Steel segment consists of two
operating divisions, 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 divisions are primarily organized and managed
by geographic location. A third operating division, National Steel Pellet
Company, has been combined with "All Other" as it does not meet the quantitative
thresholds for determining reportable segments. "All Other" also includes the
Company's transportation divisions, administrative office and certain steel
processing and warehousing operations. "All Other" revenues from external
customers are attributable primarily to steel processing, warehousing and
transportation services.
The Company evaluates performance and allocates resources based on income(loss)
from operations before reorganization items. The accounting policies of the
Steel segment are the same as described in Note 2 to the consolidated financial
statements. Intersegment sales and transfers are accounted for at market prices
and are eliminated in consolidation.
F-71
-----------------------------------------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
(DOLLARS IN MILLIONS) STEEL ALL OTHER TOTAL STEEL ALL OTHER TOTAL
-----------------------------------------------------------------------------------------------
Revenues from external
customers................. $2,589.4 $ 20.0 $2,609.4 $2,475.0 $ 17.3 $2,492.3
Intersegment revenues....... 457.8 250.6 708.4 464.2 1,754.7 2,218.9
Depreciation expense........ 122.9 37.8 160.7 126.0 41.9 167.9
Other items................. -- 6.9 6.9 28.7 (12.8) 15.9
Segment income (loss) from
operations before
reorganization items...... 10.9 (145.4) (134.5) (223.2) (231.3) (454.5)
Extraordinary item.......... -- -- -- -- (2.0) (2.0)
Cumulative effect of change
in accounting principle... -- -- -- 23.1 (5.9) 17.2
Segment assets.............. 1,451.6 757.1 2,208.7 1,516.0 791.6 2,307.6
Expenditures for long-lived
assets.................... 32.6 5.9 38.5 38.6 13.3 51.9
-----------------------------------------------------------------------------------------------
Included in "All Other" intersegment revenues in 2001 is $1,524.0 million of
qualified trade receivables sold to National Steel Funding Corporation ("NSFC"),
a wholly-owned subsidiary. On September 28, 2001, the Company replaced the
Receivables Purchase Agreement with a new credit facility as described in Note 5
to the consolidated financial statements. As a result, no qualified trade
receivables were sold to NSFC subsequent to September 28, 2001.
The following table sets forth the percentage of the Company's revenues from
various markets for 2002, 2001 and 2000:
-----------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------
Automotive.................................................. 36.5% 26.5% 29.0%
Construction................................................ 24.6 27.0 24.8
Containers.................................................. 13.4 13.1 12.0
Pipe and Tube............................................... 5.3 7.0 6.9
Service Centers............................................. 16.5 21.5 22.0
All Other................................................... 3.7 4.9 5.3
---------------------
100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------
In 2002, one customer, within the automotive market, accounted for $267.0
million or 10.2% of net sales. No single customer accounted for more than 10% of
net sales in 2001 or 2000. Export sales accounted for approximately 3.8% of
revenues in 2002, 3.4% in 2001 and 3.6% in 2000. The Company has no long-lived
assets that are maintained outside of the United States.
F-72
NOTE 5. LONG-TERM OBLIGATIONS
Long-term obligations were as follows:
------------------------------------------------------------------------------
DECEMBER 31,
----------------
(DOLLARS IN MILLIONS) 2002 2001
------------------------------------------------------------------------------
DIP Credit Facility......................................... $ 128.5 $ --
First Mortgage Bonds, 9.875% Series due March 1, 2009, with
general first liens on principal plants, properties and
certain subsidiaries...................................... 300.0 300.0
First Mortgage Bonds, 8.375% Series due August 1, 2006, with
general first liens on principal plants, properties and
certain subsidiaries...................................... 60.5 60.5
Credit Facility, 5.7% effective in December 2001 due
September 2004, secured by both accounts receivable and
inventory................................................. -- 313.6
Continuous Caster Facility Loan, 7.477% effective in
December 2000 (the rate was 10.057% prior to being reset
in November 2000). Equal semi-annual payments due through
2007, with a first mortgage in favor of the lenders....... 76.0 76.0
Pickle Line Loan, 7.726% fixed rate due in equal semi-annual
installments through 2007, with a first mortgage in favor
of the lender............................................. 52.5 55.9
Adequate protection payments required by bankruptcy court
order for First Mortgage Bond and Caster Facility Loan.... (6.0) --
ProCoil, various rates and due dates........................ 2.2 2.2
Capitalized lease obligations, various rates and due
dates..................................................... 8.8 13.2
Other....................................................... 17.6 17.6
----------------
Total long-term obligations................................. 640.1 839.0
Less amounts subject to compromise.......................... (511.6) --
Less long-term obligations due within one year.............. -- (29.3)
----------------
LONG-TERM OBLIGATIONS....................................... $ 128.5 $809.7
------------------------------------------------------------------------------
F-73
Under the Bankruptcy Code we may assume or reject executory contracts, including
lease obligations. Therefore, the commitments shown below may not reflect actual
cash outlays in the future periods. See Note 1 to consolidated financial
statements. Future minimum payments for all long-term obligations and leases as
of December 31, 2002 are as follows:
-----------------------------------------------------------------------------------------------
OTHER
CAPITALIZED OPERATING LONG-TERM
(DOLLARS IN MILLIONS) LEASES LEASES OBLIGATIONS
-----------------------------------------------------------------------------------------------
2003.................................................... $ 5.8 $ 64.4 $ 49.3
2004.................................................... 3.6 58.9 30.7
2005.................................................... -- 24.6 157.6
2006.................................................... -- 0.3 57.2
2007.................................................... -- 0.2 25.2
Thereafter.............................................. -- -- 311.3
-------------------------------------
Total payments.......................................... 9.4 $148.4 $631.3
-----------------------
Less amount representing interest....................... 0.6
Less current portion of obligations under capitalized
leases................................................ 5.4
-----------
LONG-TERM OBLIGATIONS UNDER CAPITALIZED LEASES.......... $ 3.4
-----------
ASSETS UNDER CAPITALIZED LEASES:
Machinery and equipment............................... $ 24.3
Less accumulated depreciation......................... (14.2)
-----------
$ 10.1
-----------------------------------------------------------------------------------------------
Operating leases include a coke battery facility which services Granite City and
expires in 2004, an electrolytic galvanizing facility which services Great Lakes
and expires in 2005, and a continuous caster and the related ladle metallurgy
facility which services Great Lakes and expires in 2008. Upon expiration, the
Company has the option to extend the leases, purchase the equipment at fair
market value, or return the facility to the third party owner. 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 $70.4 million in 2002, $65.4
million in 2001, and $70.8 million in 2000. During 2002, the Company recorded
$26.1 million in estimated penalties related to leases as a reorganization item.
Credit Arrangements
On March 6, 2002, the Company received commitments for up to a $450 million
Secured Super Priority Debtor in Possession ("DIP") financing from the lenders
under the Credit Facility. The term of the DIP runs from the closing date to the
earlier of (i) the second anniversary of the closing date, (ii) the effective
date of a Plan of Reorganization in the Company's Chapter 11 case and (iii)
acceleration of the Company's obligations under the DIP as a result of certain
specified events, including a change of control transaction.
F-74
Availability under the DIP is subject to a borrowing base calculated by applying
advance rates to eligible accounts receivable and eligible inventory.
Availability under the DIP is also subject to: (i) certain eligibility reserves
and availability reserves, (ii) a reserve for certain professional and
bankruptcy court expenses related to the Company's Chapter 11 cases and (iii) a
liquidity reserve of $35 million. At December 31, 2002, the maximum amount
available after adjusting for these items, and after reduction for letters of
credit and outstanding borrowings was $220 million.
Proceeds of loans under the DIP will be used solely to pay certain pre-petition
claims approved by the Court, for post-petition operating expenses incurred in
the ordinary course of business and certain other costs and expenses of
administration of the cases as will be specified and as approved by the Court.
Except for certain specified circumstances, all cash received by the Company or
any of its subsidiaries shall be applied to outstanding claims under the Credit
Agreement and after all such claims have been paid, to outstanding obligations
under the DIP. At December 31, 2002, all outstanding claims under the Credit
Agreement were paid.
All amounts owing by the Company under the DIP at all times will constitute
allowed super-priority administrative expense claims in its Chapter 11 cases,
generally having priority over all the Company's administrative expenses. In
addition, all amounts owing by the Company under the DIP will be secured by
valid and perfected security interests in, and liens on substantially all of its
assets.
On December 31, 2002, there was $128.5 million outstanding under the DIP
Agreement. These borrowings bear interest at a bank prime rate or at an adjusted
Eurodollar rate plus an applicable margin that varies, depending upon the type
of loan the Company executes. At December 31, 2002, the outstanding borrowings
under the DIP Agreement had an average annual interest rate of 6.3%.
During 2001, the Company closed on a new $465 million Credit Agreement secured
by both accounts receivable and inventory. The Credit Agreement replaced a
Receivables Purchase Agreement that was to expire in September 2002 and a
Inventory Facility that was to expire in November 2004.
Prior to the closing of the Credit Agreement, the Company had utilized the
Receivables Purchase Agreement to sell $110 million of trade accounts receivable
and had borrowed $128.6 million under the Inventory Facility. Upon the closing
of the Credit Agreement, the Company purchased the previously sold trade
accounts receivable and repaid the outstanding Inventory Facility borrowings.
On December 31, 2001, there was $313.6 million outstanding under the Credit
Agreement. These borrowings bore interest at a bank prime rate or at an adjusted
Eurodollar rate plus an applicable margin that varies, depending upon the type
of loan the Company executed. At December 31, 2001, the outstanding borrowings
under the Credit Agreement had an average annual interest rate of 5.7%.
Under the Credit Agreement, the maximum amount available from time to time was
subject to change based on the level of eligible receivables and inventory and
restrictions on concentrations of certain receivables. At December 31, 2001, the
maximum amount available, after reduction for letters of credit and outstanding
borrowings, was $105.3 million subject to a minimum liquidity requirement of $75
million.
During March 2001, the Company closed on a new $100.0 million subordinated
revolving credit facility with NUF LLC, a wholly-owned subsidiary of NKK
Corporation, the Company's principal
F-75
stockholder (the "NUF Facility") that expired in February 2002. On December 31,
2002, there was $100.0 million outstanding under the NUF Facility. These
borrowings also bear interest at a bank prime rate or at an adjusted Eurodollar
rate plus an applicable margin that varies, depending upon the type of loan the
Company executed. At December 31, 2001, the outstanding borrowings under the NUF
Facility had an average annual interest rate of 5.9%.
Due to the proceedings under Chapter 11, we are in default on our debt
agreements, with the exception of the DIP Credit Facility. While operating under
Chapter 11, we are prohibited from paying interest on unsecured debts. We ceased
accruing interest on all unsecured long-term debt subject to compromise in
accordance with SOP 90-7 beginning March 6, 2002. If we were not in Chapter 11,
$41.5 million of interest would have been accrued on the long-term debt subject
to compromise during the year ended December 31, 2002.
F-76
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 and retirees.
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, 2002 and 2001, and the plans funded status at September 30 reconciled to the
amounts recognized on the balance sheet on December 31, 2002 and 2001:
-----------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- ---------------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
RECONCILIATION OF BENEFIT OBLIGATION
Benefit obligation, October 1 Prior Year....... $ 2,289.8 $2,137.0 $ 992.8 $ 817.0
Service cost................................... 31.4 29.4 14.1 12.7
Interest cost.................................. 167.7 165.6 70.8 63.2
Participant contributions...................... -- -- 13.0 9.4
Other contributions............................ -- 1.9 -- --
Plan amendments................................ -- 0.2 -- --
Actuarial loss................................. 188.2 133.7 190.8 161.0
Benefits paid.................................. (185.6) (178.6) (92.7) (70.5)
Settlement..................................... (0.7) -- -- --
Special termination benefits................... -- 0.6 -- --
--------------------------------------------
Benefit obligation, September 30............... $ 2,490.8 $2,289.8 $ 1,188.8 $ 992.8
--------------------------------------------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS
Fair value of plan assets, October 1 Prior
Year........................................ $ 1,549.4 $2,093.7 $ 90.5 $ 116.0
Actual return on plan assets................... (88.5) (367.8) (20.1) (25.5)
Company contributions.......................... -- 0.2 79.7 61.1
Participant contributions...................... -- -- 13.0 9.4
Other contributions............................ -- 1.9 -- --
Benefits paid.................................. (185.6) (178.6) (92.7) (70.5)
--------------------------------------------
Fair value of plan assets, September 30........ $ 1,275.3 $1,549.4 $ 70.4 $ 90.5
--------------------------------------------
FUNDED STATUS
Funded status, September 30.................... $(1,215.5) $ (740.4) $(1,118.5) $(902.3)
Unrecognized actuarial loss.................... 947.0 493.3 323.2 106.0
Unamortized prior service cost................. 109.3 126.4 3.1 3.4
Unrecognized net transition obligation......... -- 0.3 264.1 291.4
Fourth quarter contributions................... -- -- 23.0 22.6
--------------------------------------------
Net amount recognized, December 31............. $ (159.2) $ (120.4) $ (505.1) $(478.9)
-----------------------------------------------------------------------------------------------
Pursuant to the terms of the 1993 Settlement Agreement between the Company and
the United Steelworkers of America ("USWA"), a VEBA Trust was established for
the purpose of pre-funding a portion of future retiree health care benefits.
Under the terms of the agreement, the Company agreed to contribute a minimum of
$10.0 million annually to the
F-77
VEBA Trust. Effective August 1, 1999, a new five-year agreement was ratified
between the Company and the USWA and the requirement for mandatory contributions
to the VEBA Trust was eliminated over the term of the agreement.
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 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
----------------- -----------------
(DOLLARS IN MILLIONS) 2002 2001 2002 2001
-------------------------------------------------------------------------------------
Prepaid benefit cost.......................... $ 64.6 $ 54.1 $ N/A $ N/A
Accrued benefit liability..................... (223.8) (174.5) (505.1) (478.9)
Additional minimum liability.................. (932.8) (502.3) N/A N/A
Intangible asset.............................. 108.8 126.0 N/A N/A
Accumulated other comprehensive income........ 824.0 376.3 N/A N/A
-------------------------------------
Recognized amount............................. $(159.2) $(120.4) $(505.1) $(478.9)
-------------------------------------------------------------------------------------
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 $2,489.9 million, $2,366.3 million and $1,274.2 million, respectively, as
of September 30, 2002 and $2,289.0 million, $2,170.9 million and $1,548.2
million, respectively, as of September 30, 2001.
The following table provides the components of net periodic benefit cost for the
plans for fiscal years 2002, 2001 and 2000.
---------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
--------------------------- ------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000 2002 2001 2000
---------------------------------------------------------------------------------------------
Service cost......................... $ 31.4 $ 29.4 $ 31.4 $ 14.1 $ 12.7 $ 11.3
Interest cost........................ 167.7 165.6 161.8 70.8 63.2 55.3
Expected return on assets............ (177.7) (189.2) (186.0) (8.6) (11.0) (10.6)
Prior service cost amortization...... 17.1 17.7 18.5 0.3 0.3 0.3
Actuarial (gain)/loss amortization... 0.5 (0.8) 0.4 2.3 (1.5) (8.0)
Transition amount amortization....... 0.2 8.8 8.8 27.3 27.3 27.3
Settlement (gain)/loss............... (0.4) -- -- -- -- --
------------------------------------------------------
Net periodic benefit cost............ $ 38.8 $ 31.5 $ 34.9 $106.2 $ 91.0 $ 75.6
---------------------------------------------------------------------------------------------
F-78
The Company generally uses a September 30 measurement date. The assumptions used
in the measuring of the Company's benefit obligations and costs are shown in the
following table:
----------------------------------------------------------------------------------
WEIGHTED-AVERAGE
ASSUMPTIONS,
SEPTEMBER 30,
--------------------
2002 2001 2000
----------------------------------------------------------------------------------
Discount rate............................................... 6.75% 7.50% 8.00%
Expected return on plan assets -- Pension................... 9.75% 9.75% 9.75%
Expected return on plan assets -- Retiree Welfare........... 9.75% 9.75% 9.75%
Rate of compensation increase............................... 4.20% 4.20% 4.19%
----------------------------------------------------------------------------------
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 2002 service
and interest cost and the accumulated postretirement benefit obligation at
September 30, 2002:
------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1% INCREASE 1% DECREASE
------------------------------------------------------------------------------------
Effect on total of service and interest cost components
of net periodic postretirement health care benefit
cost................................................... $ 9.1 $ (8.3)
Effect on the health care component of the accumulated
postretirement benefit obligation...................... 109.1 (99.1)
------------------------------------------------------------------------------------
The Company has assumed a 10.0% healthcare cost trend rate at September 30,
2002, reducing 1.0% a year over five years and reaching an ultimate trend rate
of 5.0% in 2008.
The Company also sponsors a defined contribution Retirement Savings Plan for
non-represented salaried employees and a defined contribution Represented
Employee Retirement Savings Plan that covers substantially all employees of the
Company employed on a full time basis who are covered by a collective bargaining
agreement. Eligible employees of these plans may contribute between 1% and 18%
of their annual compensation on a before-tax basis, up to a maximum limit
imposed by law. The Retirement Savings Plan for non-represented employees
provides for a Company match on the first 5% of an eligible employee's
contributions based upon the Company's profitability in the prior year. During
2002, 2001 and 2000, the Company provided a match of 50%, 50% and 57.5%,
respectively. Non-represented salaried employees become vested in Company
contributions immediately. Contributions by the Company for 2002, 2001 and 2000
were $2.1 million, $2.2 million and $2.7 million, respectively.
The Company terminated the nonqualified ERISA Parity Plan and Supplemental
Retirement Program, effective December 31, 2002. While National Steel
Corporation uses an early measurement date, recognition of a SFAS 88 gain or
loss resulting from a plan termination does not receive delayed measurement. As
a result, $0.4 million of SFAS 88-curtailment and settlement gains associated
with the plan terminations were recognized during the fourth quarter of fiscal
2002.
During December 2002, the Pension Benefit Guaranty Corporation ("PBGC") informed
the Company that it would involuntarily terminate all of its qualified pension
plans, other than American Steel, effective December 6, 2002. The PBGC's
decision effectively eliminates the accrual of qualified defined benefits for
all National Steel Corporation employees, which triggers curtailment accounting
under SFAS 88. Since the event is probable, its effects are reasonably
estimable, and it produces a loss, a curtailment occurred on December 6, 2002.
F-79
Under curtailment, unamortized prior service cost is recognized. As the Company
reports pension cost with a delayed measurement date, three months in arrears,
we will recognize a SFAS 88-curtailment loss on March 6, 2003 which is estimated
to be approximately $106.0 million.
If the courts uphold the PBGC's decision to involuntarily terminate these
pension plans, SFAS 88-settlement accounting would also be triggered.
Recognition of a SFAS 88 gain or loss resulting from a plan termination is
reflected in earnings when incurred with no delayed measurement. While the
timing of the courts' decision would impact the exact amount of the FAS
88-settlement gain to be recognized, it is expected to fall between $280.0 and
$320.0 million. Under these circumstances, the PBGC will concurrently submit
claims against the Company for the unfunded pension benefit obligations assumed.
The bankruptcy court is projected to place a value on the PBGC's total claims in
the range of $760.0 million to $1.6 billion. This would result in a net
settlement loss ranging from $440 million to $1.32 billion. Upon termination of
the Plans, the Company expects that the vast majority of claims asserted by the
PBGC will be unsecured claims, and will be subject to a plan of reorganization.
NOTE 7. OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31 consisted of the following:
-----------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001
-----------------------------------------------------------------------------
Deferred gain on sale leasebacks............................ $ 6.0 $ 7.3
Insurance and employee benefits (excluding pensions and
OPEBs).................................................... 62.9 58.7
Shutdown mines and coal properties.......................... 24.8 28.3
Other....................................................... 14.6 16.6
---------------
108.3 110.9
Less amounts subject to compromise.......................... (94.9) --
---------------
Total Other Long-Term Liabilities........................... $ 13.4 $110.9
-----------------------------------------------------------------------------
F-80
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:
-----------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001
-----------------------------------------------------------------------------
Deferred tax assets
Accrued liabilities....................................... $137.0 $112.4
Employee benefits......................................... 266.2 239.9
Net operating loss ("NOL") carryforwards.................. 347.3 280.2
Federal tax credits....................................... 20.1 73.3
Other..................................................... 17.2 17.6
---------------
Total deferred tax assets................................... 787.8 723.4
Valuation allowance....................................... (479.1) (441.7)
---------------
Deferred tax assets net of valuation allowance............ 308.7 281.7
Deferred tax liabilities
Book basis of property in excess of tax basis............. (215.6) (198.0)
Excess tax LIFO over book................................. (36.5) (30.5)
Other..................................................... (8.6) (5.5)
---------------
Total deferred tax liabilities.............................. (260.7) (234.0)
---------------
Net deferred tax assets after valuation allowance........... $ 48.0 $ 47.7
-----------------------------------------------------------------------------
In 2002 and 2001, the Company determined that it was more likely than not that
approximately $124.4 million and $123.5 million, respectively, of future taxable
income could be generated from operations or tax planning strategies to justify
the net deferred tax assets after the valuation allowance.
Significant components of income taxes (credit) are as follows:
-----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
-----------------------------------------------------------------------------------
Current taxes payable (refundable):
Federal tax............................................ $(58.0) $ -- $(17.8)
State and foreign...................................... 0.4 0.6 0.7
Deferred tax (credit).................................... (0.3) 148.2 10.3
------------------------
INCOME TAXES (CREDIT).................................... $(57.9) $148.8 $ (6.8)
-----------------------------------------------------------------------------------
F-81
The reconciliation of income tax computed at the federal statutory tax rates to
the recorded income taxes (credit) is as follows:
-----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
-----------------------------------------------------------------------------------
Tax at federal statutory rates.......................... $(73.5) $(178.0) $(47.3)
State income taxes, net................................. (8.3) (12.6) (6.6)
Change in valuation allowance........................... 37.4 338.6 53.0
Depletion............................................... (5.8) -- (3.6)
Other, net.............................................. (7.7) 0.8 (2.3)
-------------------------
INCOME TAXES (CREDIT)................................... $(57.9) $ 148.8 $ (6.8)
-----------------------------------------------------------------------------------
At December 31, 2002, the Company had unused NOL carryforwards of approximately
$906.6 million, which expire in 2020 through 2022 and had unused alternative
minimum tax credit and other tax credit carryforwards of approximately $20.1
million which may be applied to offset its future regular federal income tax
liabilities. These tax credits may be carried forward indefinitely.
On March 9, 2002, President Bush signed the Job Creation and Worker Assistance
Act of 2002 (the "Act"). This new Act, among other provisions, provides for an
expansion of the carryback of net operating losses ("NOLs") from two years to
five years for NOLs arising in 2001 and 2002. The Company was able to carryback
the loss recorded during 2001 to the 1996 through 1998 tax years when it paid an
alternative minimum tax. As a result of this change in the tax law, the Company
received a refund of $53.2 million in 2002. This carryback allowed the Company
to recover the entire amount of alternative minimum taxes paid during those
prior taxable years.
NOTE 9. NON-OPERATIONAL ACTIVITIES
A number of non-operational activities are reflected in the consolidated
statement of operations in each of the three years ended December 31, 2002. A
discussion of these items follows.
Other Items
In 2002, we received $6.9 million from the conversion of Prudential Insurance
Company from a mutual company owned by its policyholders to a publicly held
company, all of which was recognized as a gain.
During 2001, the Company recognized income (loss) from other items consisting of
the following items:
--------------------------------------------------------------------
Gain on sale of natural gas derivative contract (see Note
13)....................................................... $ 26.2
Property tax settlements.................................... 3.0
Expense related to Staff Retirement Incentive Program for
Salaried Non-Represented Employees........................ (1.2)
Write-off of computer system costs.......................... (12.1)
------
Other items................................................. $ 15.9
--------------------------------------------------------------------
F-82
During 2001, the Company completed an evaluation of certain of its computer
system software that was in the process of installation. As a result of this
evaluation and a reduction in the Company's capital spending plan, it was
determined that certain aspects of projects in process will not be completed or
will be delayed indefinitely. This evaluation resulted in a write-off of
previously capitalized computer software installation costs of $12.1 million.
During the second quarter of 2001, the Company recorded a credit of $3.0 million
for the settlement of property tax issues at the Company's Midwest and Great
Lakes operations relating to prior tax years.
Additionally, the Company offered a Staff Retirement Incentive Program for
certain salaried nonrepresented employees. The voluntary program, available
between March 1, 2001 and May 1, 2001, was offered to support the Company's
efforts to reduce the salaried workforce. The expense results from the
additional pension, other postretirement employee benefits and severance
liabilities incurred as a result of the employees who accepted the program.
Net Gain on the Disposal of Non-Core Assets and Other Related Activities
In 2002, 2001 and 2000, 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 operations. During 2002, we sold undeveloped land
located in Corpus Christi, Texas. The net gain that we recognized in 2002 was
$3.3 million. The $3.0 million net gain on disposal of non-core assets in 2001
resulted from the sale of property and certain assets related to an idled
pickling operation, the sale of property and certain assets, including
trademarks, related to the Granite City Division building products line, and a
final payment related to the sale of our equity interest in Presque Isle
Corporation ("Presque Isle") in 2000. The $15.1 million net gain on disposal of
non-core assets in 2000 resulted from the sale of our 30% equity interest in the
Presque Isle Corporation, a limestone quarry.
Extraordinary Item
During 2001, the Company closed on a new $465 million Credit Agreement secured
by both accounts receivable and inventory which was scheduled to expire in
September 2004. This Credit Agreement replaced the old $200 million Receivables
Purchase Agreement with an expiration date of September 2002 and the $200
million revolving credit facility secured by the Company's inventories (the
"Inventory Facility") with an expiration date of November 2004. As a result, the
Company recorded an extraordinary charge of $2.0 million with respect to the
write-off of unamortized debt issuance costs in connection with the
extinguishment of debt.
Change in Accounting Principle
Effective January 1, 2001, the Company changed its method of accounting for
investment gains and losses on pension assets for the calculation of net
periodic pension cost. Previously, the Company's actuary used a method that
recognized all realized gains and losses immediately and deferred and amortized
all unrealized gains and losses over five years. The Company has decided to
change its actuarial method to treat realized and unrealized gains and losses in
the same manner. Under the new accounting method, the market value of plan
assets will reflect gains and losses at the actuarial expected rate of return.
In addition, the difference between actual gains and losses and the amount
recognized based on the expected rate of return will be amortized in the market
value of plan assets over three years. In management's opinion,
F-83
this method of accounting, which is consistent with the practices of many other
companies with significant pension assets, will result in improved reporting
because the new method more closely reflects the fair value of its pension
assets.
The cumulative effect of this change was a credit of $17.2 million recognized in
income as of January 1, 2001. There was no income tax expense on the cumulative
effect of the change in accounting method. Pension cost and the net loss for the
year ended December 31, 2001 was $6.7 million or $0.16 per share less as a
result of the change in accounting. The pro forma effect of this change as if it
had been made retroactively for the year ended December 31, 2000 would have been
to increase pension cost by $1.9 million and decrease net income by $1.8 million
or $0.04 per share.
NOTE 10. RELATED PARTY TRANSACTIONS
Summarized below are transactions between the Company and NKK (the Company's
principal stockholder) and other affiliates.
NKK Transactions
During 1998, the Company entered into a Turnkey Engineering and Construction
Contract with NKK Steel Engineering, Inc. ("NKK SE"), a subsidiary of NKK, to
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 $150 million. During 2002, 2001, 2000, 1999 and 1998,
$0.2, $4.0, $32.2, $98.4, and $15.2 million, respectively, was paid to NKK SE
relating to the above mentioned contract. In March of 2002, the Company received
$5.5 million from NKK SE in settlement of the Company's claims for liquidated
damages for late startup and other performance issues. All claims between the
parties pursuant to the Construction Contract have now been resolved and all
letters of credit previously held by the Company as security for NKK SE's
performance have been returned to NKK SE.
During 2002, the Company did not purchase any finished-coated steel produced by
NKK. During 2001, the Company purchased from a trading company in arms' length
transactions at competitively bid prices, approximately $0.1 million, of
finished-coated steel produced by NKK.
Effective as of February 16, 2000, the Company entered into a Steel Slab
Products Supply Agreement with NKK, the initial term of which extended through
December 31, 2000 and continues on a year-to-year basis thereafter until
terminated by either party on six months notice. Pursuant to the terms of this
Agreement, the Company will purchase steel slabs produced by NKK at a price
determined in accordance with a formula set forth in the Agreement that
approximates current market price. The quantity of slabs to be purchased is
negotiated on a quarterly basis. The Company purchased $1.9 million and $28.9
million of slabs under this agreement during 2002 and 2001. The Company
currently has no commitments to purchase slabs produced by NKK during 2003.
Effective May 1, 1995, the Company entered into an Agreement for the Transfer of
Employees with NKK, the term of which has been extended through June 30, 2003.
Pursuant to the terms of this Transfer Agreement, technical and business advice
is provided through NKK employees who are transferred to the employ of the
Company. 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 $7.0 million during each of 2001 and 2000 and
was $6.0 million in 2002. The cap for 2003 will be $1.5 million. The Company
incurred
F-84
expenditures of approximately $4.5 million, $5.0 million and $6.7 million under
this agreement during 2002, 2001 and 2000, respectively. In addition, the
Company utilized various other engineering services provided by NKK and incurred
expenditures of approximately $0.3 million, $1.7 million and $0.2 million for
these services during 2002, 2001 and 2000, respectively.
During March 2001, the Company entered into a Subordinated Credit Agreement with
NUF LLC ("NUF"), a wholly owned subsidiary of NKK, pursuant to which NUF agreed
to provide a $100 million revolving credit facility to the Company. This loan is
secured by a junior lien on the Company's inventory and certain unsold
receivables and had a scheduled termination date of February 25, 2002. (See Note
5 to the Consolidated Financial Statements.)
On May 25, 2000, the Company entered into a Cooperation Agreement on Research
and Development and Technical Assistance with NKK Corporation with an initial
term of five years. The Cooperation Agreement allows for either party to make
available to the other party technical assistance and consulting services
relating to research and development on existing and future steel products and
relevant technology. No amounts were paid or received pursuant to the
Cooperation Agreement during 2002, 2001 and 2000.
On August 13, 2002, the Company sold its 10% ownership interest in DNN
Galvanizing Limited Partnership to an affiliate of NKK, National's majority
shareholder, and the Company received proceeds of $3.8 million.
All of the transactions between the Company and NKK and its affiliates which are
described above were unanimously approved by all directors of the Company who
were not then, and never have been, employees of NKK.
In 2002 and 2001 no dividends were paid. In 2000, cash dividends of $0.21 per
share, or approximately $4.6 million, were paid on 22,100,000 shares of Class A
Common Stock owned by NKK. (See Note 3 to the Consolidated Financial
Statements.)
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 $30.0 million in 2002, $36.0
million in 2001 and $37.6 million in 2000. Additional expenses were incurred in
connection with the operation of a joint venture agreement. (See Note 12 to the
Consolidated Financial Statements.) Accounts payable at December 31, 2002 and
2001 included amounts with affiliated companies accounted for by the equity
method of $1.7 million and $1.3 million, respectively.
The Company sold various prime and non-prime steel products and services to
affiliated companies at prices that approximate market price. Sales totaled
approximately $27.8 million in 2002, $36.7 million in 2001 and $65.3 million in
2000. Accounts receivable at December 31, 2002 and 2001 included amounts with
affiliated companies of $9.2 million and $13.2 million, respectively.
Tinplate Partners International, Inc. ("TPI") filed for bankruptcy in 2002 and
subsequently sold all of its assets. The Company holds a 42% equity interest in
Tin Plate Holdings, Inc. which owns all of the outstanding stock of TPI. The
Company's equity investment in Tin Plate Holdings, Inc. was valued at zero in
2001.
F-85
On February 28, 2003, the Company entered into an agreement to sell its equity
interest in National Robinson, L.L.C. to Robinson Steel Co., Inc. for
approximately $3.5 million of cash, which results in a gain of $0.9 million.
NOTE 11. 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 $6.5 million and $6.6 million as of
December 31, 2002 and 2001, 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 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") in 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 $6.9 million and $9.0 million as of December
31, 2002 and 2001, 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 $0.8 and $2.0 million, respectively at December 31, 2002 and 2001,
relating to these properties.
Since the Company has been conducting steel manufacturing and related operations
at numerous locations for over seventy 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
F-86
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 12. OTHER COMMITMENTS AND CONTINGENCIES
In conjunction with the sale of our interest in DNN, the Company entered into a
Line Access Agreement for use of the galvanizing line. The agreement makes
available to the Company on a declining basis line-time for coating of the
Company's products through December 31, 2003. The Company is required to commit
to actual line-time usage 67 days prior to the start of a month. The company is
then committed to utilize and pay a tolling fee in connection with this
"committed line time".
The Company has a 50% interest in a joint venture with Bethlehem Steel
Corporation ("Bethlehem"), which commenced production in May 1994. The joint
venture, Double G Coatings Company, L.P. ("Double G"), constructed a 300,000 ton
per year coating facility near Jackson, Mississippi which produces galvanized
and Galvalume 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 $6.1 million of Double G's debt as of December 31, 2002.
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 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 10 years. In 2003 and 2004
the Company has commitments with "take or pay" or other similar commitment
provisions for approximately $83.8 million and $83.1 million, respectively.
Under the Bankruptcy Code, we may assume or reject executory contracts. In 2002,
the Company rejected some of these "take or pay" commitments. In 2002, we
purchased $132.5 million under the remaining contracts. The Company fully
utilized all such "take or pay" requirements in 2001 and 2000 and purchased
$281.4 million and $405.9 million, respectively, under these contracts. 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 prices in the
contracts are such that the products or services will approximate the market
price over the lives of the contracts. Under the Bankruptcy Code, we may assume
or reject executory contracts. Therefore the amounts actually paid under these
commitments could differ from these amounts.
The Company is jointly liable with LTV Steel Company, Inc. ("LTV") for
environmental clean-up and certain retiree benefit costs related to the closed
Donner Hanna Coke plant. On December 31, 2000, LTV filed for Chapter 11
protection under U.S. bankruptcy laws. During the fourth quarter of 2001, LTV
announced their intentions to initiate an orderly liquidation in accordance with
bankruptcy laws. As a result, the Company recorded 100% of the obligation for
the retiree benefit costs and recorded a charge of $3.6 million in 2001.
The Company has a 50% interest in Double G with Bethlehem and a 13% interest in
a joint venture family health care facility with Bethlehem and another steel
company. On March 13,
F-87
2003, Bethlehem Steel Corporation announced that it had signed an asset purchase
agreement to sell substantially all of its assets including its interest in
joint ventures. We are uncertain what effect, if any, this will have on our
future earnings and financial position.
Letters of Credit
The Company utilizes third-party standby letters of credit to provide financial
assurance for certain insurance activities, employee benefit payments and other
activities in the normal course of business. These letters of credit are
irrevocable and generally have one-year renewable terms. Outstanding standby
letters of credit as of December 31, 2002 and 2001 were $38.9 million and $24.7
million, respectively. The contract amounts of these letters of credit
approximate their fair value.
NOTE 13. DERIVATIVE INSTRUMENTS
In order to reduce the uncertainty of price movements with respect to the
purchase of zinc, the Company has entered into financial derivative instruments
in the form of swap contracts with global financial institutions. These
contracts, which typically mature within one year, have been designated as cash
flow hedges. Therefore, these contracts are recorded at their fair value on the
balance sheet and any changes in their fair value, to the extent they have been
effective as hedges, will be reclassified into earnings in the period during
which the hedged forecasted transaction affects earnings. The fair value of
commodity purchase swap contracts are calculated using pricing models used
widely in financial markets. Additionally, the Company had one forward contract
for the purchase of natural gas that upon adoption of SFAS 133 was classified as
a derivative instrument. This contract was sold in January 2001 for $26.2
million. Upon the sale of the contract, the resulting gain was recognized as an
unusual item in the income statement.
The estimated fair value of derivative financial instruments used to hedge the
Company's risks will fluctuate over time. At December 31, 2002, the Company had
no outstanding derivative instruments. At December 31, 2001, the Company had
recorded a liability of $2.3 million with an offset to accumulated other
comprehensive income.
NOTE 14. 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. No stock based employee compensation cost is reflected
in net income as the exercise price 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. Options generally vest and become fully exercisable ratably over 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 2,031,795 and 1,757,837 options available for granting under the
stock option plans as of December 31, 2002 and 2001, respectively. There were no
options granted in 2002.
F-88
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, 2000.............. 1,069,993 $ 11.15
Granted............................................. 501,500 6.72
Forfeited........................................... (319,581) 12.65
------------------------------
Balance outstanding at December 31, 2000............ 1,251,912 8.99
Granted............................................. 775,000 2.05
Forfeited........................................... (326,889) 7.35
------------------------------
Balance outstanding at December 31, 2001............ 1,700,023 6.14
Granted............................................. -- --
Forfeited........................................... (273,958) 5.79
------------------------------
Balance outstanding at December 31, 2002............ 1,426,065 $ 6.21
------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2002:
--------------------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT LIFE EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/02 (IN YEARS) PRICE 12/31/02 PRICE
--------------------------------------------------------------------------------------
$1 1/10 to $4........... 606,126 7.6 $2.07 210,648 $2.09
$4 to $8................ 372,889 6.1 7.04 265,213 7.05
$8 to $12............... 277,416 3.9 8.75 277,416 8.75
$12 to $19.............. 169,634 2.8 14.99 169,634 14.99
----------- -----------
Total................... 1,426,065 5.9 $6.21 922,911 $7.89
--------------------------------------------------------------------------------------
There were 674,130 exercisable stock options with a weighted average exercise
price of $9.91 as of December 31, 2001.
F-89
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following are the unaudited quarterly results of operations for the years 2002
and 2001.
------------------------------------------------------------------------------------------------
2002
-----------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------------------------------------------
Net sales.................................... $604.0 $658.1 $694.2 $653.1
Gross margin................................. (48.2) 5.3 34.4 (19.0)
Other items.................................. -- -- -- (6.9)
Reorganization items......................... 7.2 6.4 4.5 32.5
Net income (loss)............................ (53.2) (34.0) 3.5 (65.0)
BASIC AND DILUTED EARNINGS PER SHARE:
Net income (loss)............................ $(1.29) $(0.82) $0.08 $(1.57)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
2001
-----------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------------------------------------------
Net sales.................................... $589.4 $673.2 $637.0 $592.7
Gross margin................................. (76.7) (51.1) (75.5) (121.0)
Other items.................................. (26.0) (2.0) 10.9 1.2
Extraordinary item........................... -- -- (2.0) --
Cumulative effect of change in accounting
principal.................................. 17.2 -- -- --
Net loss..................................... (108.7) (110.3) (152.8) (280.3)
BASIC AND DILUTED EARNINGS PER SHARE:
Net loss..................................... $(2.63) $(2.67) $(3.70) $(6.79)
------------------------------------------------------------------------------------------------
F-90
PROSPECTUS
[BLACK US STEEL LOGO]
UNITED STATES STEEL CORPORATION
DEBT SECURITIES PREFERRED STOCK AND DEPOSITARY SHARES
COMMON STOCK WARRANTS
STOCK PURCHASE UNITS STOCK PURCHASE CONTRACTS
We may issue and offer any of the following from time to time:
-- Debt securities.
-- Shares of or interests in preferred stock.
-- Shares of common stock.
-- Warrants to buy any of the foregoing.
-- Stock Purchase Contracts.
-- Stock Purchase Units.
or any combination of these securities.
The maximum total public offering price of all the securities offered will not
exceed $797,887,500.
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any prospectus supplement
carefully before you invest.
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 2 OF THIS PROSPECTUS AND ANY IN THE
PROSPECTUS SUPPLEMENT CAREFULLY.
We produce, transport and sell steel mill products, coke, taconite pellets (iron
ore) and coal in the United States and, through our subsidiary U. S. Steel
Kosice, produce and sell steel mill products in Central Europe.
We may sell these securities through underwriters, agents or directly to other
purchasers.
COMMON STOCK SYMBOL: X
Our common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Exchange.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please refer to the prospectus supplement for more complete information. Neither
this prospectus nor any prospectus supplement is an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
The date of this Prospectus is October 22, 2002.
TABLE OF CONTENTS
Where you can find more information.... ii
Our company............................ 1
Risk factors........................... 2
Summary consolidated financial
information.......................... 16
Ratio of earnings to fixed charges..... 19
Use of proceeds........................ 19
Description of the debt securities..... 19
Description of capital stock........... 30
Description of depositary shares....... 37
Description of warrants................ 40
Description of convertible or
exchangeable securities.............. 41
Description of stock purchase contracts
and stock purchase units............. 41
Plan of distribution................... 41
Validity of securities................. 43
Experts................................ 44
You should rely only on the information contained in this prospectus, the
prospectus supplement or in documents we have referred you to. We have not
authorized anyone to provide you with information that is different.
i
WHERE YOU CAN FIND MORE INFORMATION
USS files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. Our SEC filings are also accessible
through the Internet at the SEC's website at http://www.sec.gov. Many of our SEC
filings are also accessible on our website at http://www.ussteel.com.
The SEC allows us to "incorporate by reference" into this prospectus the
information in documents we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus, and later information that we file with the SEC will update and
supersede this information. We incorporate by reference the following documents
and any future filings we make with the SEC under Section 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934 until all the offered securities
are sold:
(a) USS' Annual Report on Form 10-K for the year ended December 31, 2001;
(b) USS' Proxy Statement on Form 14A dated March 11, 2002;
(c) USS' Quarterly Reports on Form 10-Q for the quarters ended March 31 and June
30, 2002, and
(d) USS' Current Reports on Form 8-K dated February 8, March 1, May 14, May 17,
June 4, June 28, October 16, and October 21, 2002.
We also incorporate by reference the consolidated/combined financial statements
and supplemental schedule included in Item 8 of the Annual Report on Form 10-K
of Republic Technologies International Holdings, LLC ("Republic") for the year
ended December 31, 2001, the unaudited consolidated financial statements
included in Part I, Item I of the Quarterly Report on Form 10-Q of Republic for
the three month period ended March 31, 2002 and Republic's Current Report on
Form 8-K dated August 19, 2002.
Any statement contained in a document incorporated by reference to this
prospectus will be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any such statement so modified or superseded will not
be deemed to constitute a part of this prospectus except as so modified or
superseded.
We will provide, upon written or oral request, to each person to whom a
prospectus is delivered, including any beneficial owner, a copy of any or all of
the information that has been incorporated by reference in the prospectus but
not delivered with the prospectus. You may request a copy of these filings at no
cost.
Requests for documents should be directed to:
UNITED STATES STEEL CORPORATION
Shareholder Services
600 Grant Street, Room 611
Pittsburgh, Pennsylvania 15219-2800
(412) 433-4801
(866) 433-4801 (toll free)
(412) 433-4818 (fax)
ii
OUR COMPANY
We are the largest integrated steel producer in North America. Integrated steel
producers make steel from iron ore, unlike mini-mills that mostly melt scrap to
make steel products. We have a broad product mix with particular focus on
value-added products and serve customers in the automotive, appliance,
distribution and service center, container, industrial machinery, construction
and oil and petrochemical markets. We currently have annual steel-making
capability of 17.8 million tons through our four integrated steel mills. In
addition, we have a diversified mix of assets that provide us with a varied
stream of revenues.
We operate three integrated steel mills and six finishing facilities in North
America and produce, transport and sell a variety of sheet, tin, plate and
tubular products, as well as coke, iron ore and coal. We participate in several
joint ventures engaged in steel processing and finishing. We also participate in
the real estate, resource management, and engineering and consulting services
businesses. We have a significant market presence in each of our major product
areas and have long-term relationships with many of our major customers. We have
annual steel-making capability in the U.S. of 12.8 million tons through Gary
Works in Indiana, Mon Valley Works in Pennsylvania, and Fairfield Works in
Alabama. We operate finishing facilities in those three states and Ohio. We are
the largest domestic producer of seamless oil country tubular goods and one of
the two largest producers of tin mill products in North America. We produce most
of the iron ore and coke and a portion of the coal we use as raw materials in
our steel-making process.
In November 2000, we acquired U. S. Steel Kosice, s.r.o. ("USSK"), headquartered
in Kosice in the Slovak Republic, the largest flat-rolled producer in Central
Europe. USSK has annual steel-making capability of 5.0 million tons and produces
and sells sheet, tin, tubular and specialty products, as well as coke. The
acquisition of USSK has enabled us to establish a low-cost manufacturing base in
Europe and better positioned us to serve our global customers.
Before December 31, 2001 our businesses were owned by USX Corporation. USX had
two outstanding classes of common stock: USX-Marathon Group common stock, that
was intended to reflect the performance of USX's energy business, and USX-U. S.
Steel Group common stock ("Steel Stock"), that was intended to reflect the
performance of USX's steel business. On December 31, 2001, in a series of
transactions that we call the Separation, each share of USX-U. S. Steel Group
common stock was converted into the right to receive one share of our stock and
USX changed its name to Marathon Oil Corporation ("Marathon"). As a consequence
of the Separation, we became a separate publicly owned corporation.
The net assets of United States Steel Corporation after Separation were
approximately the same as the net assets attributed to Steel Stock at the time
of the Separation, except for a $900 million value transfer (the "Value
Transfer") in the form of additional net debt and other obligations retained by
Marathon.
In connection with the Separation, we entered into a series of agreements with
Marathon governing our relationship after the Separation and providing the
allocation of tax and certain other liabilities and obligations arising from
periods prior to the Separation. These agreements included a financial matters
agreement under which we assumed obligations relating to industrial development
bonds, leases and guarantee obligations and a tax sharing agreement that deals
with tax matters and sharing of taxes arising prior to Separation.
United States Steel Corporation is a Delaware corporation. Our principal offices
are at 600 Grant Street, Pittsburgh PA 15219-2800 and our telephone number is
(412) 433-1121. References in this prospectus to the "Company," "United States
Steel," "USS," "we," "us" and "our" are to United States Steel Corporation and
its subsidiaries.
1
RISK FACTORS
You should carefully consider the following risk factors and the other
information contained elsewhere or incorporated by reference in this prospectus
and the prospectus supplement before making an investment decision.
RISKS RELATED TO OUR BUSINESS
OVERCAPACITY IN THE STEEL INDUSTRY MAY NEGATIVELY AFFECT OUR PRODUCTION LEVELS
AND SHIPMENTS.
There is an excess of global steel-making capacity over global consumption of
steel products. This has caused shipment and production levels for our domestic
operations to vary from year to year and quarter to quarter, affecting our
results of operations and cash flows. Over the past five years, our domestic
steel shipments have varied from a high of 11.6 million net tons in 1997 to a
low of 9.8 million net tons in 2001. Production levels as a percentage of
capacity have ranged from a high of 96.5% in 1997 to a low of 78.9% in 2001.
Many factors influence these results, including demand in the domestic market,
international currency conversion rates and domestic and international
government actions.
OUR BUSINESS IS CYCLICAL. FUTURE ECONOMIC DOWNTURNS, A STAGNANT ECONOMY OR
CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Demand for most of our products is cyclical in nature and sensitive to general
economic conditions. Our business supports cyclical industries such as the
automotive, appliance, construction and energy industries. As a result, future
downturns in the U.S. or European economy or any of these industries could
adversely affect our results of operations and cash flows.
Because we and other integrated steel producers generally have high fixed costs,
reduced volumes result in operating inefficiencies, such as those experienced in
2001. Over the past five years, our net income has varied from a high of $452
million in 1997 to a loss of $218 million in 2001 as our domestic steel
shipments have varied from a high of 11.6 million net tons in 1997 to a low of
9.8 million net tons in 2001. Future economic downturns, a stagnant economy or
currency fluctuations may adversely affect our business, results of operations
and financial condition.
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS AND OTHER OBLIGATIONS, WHICH COULD
LIMIT OUR OPERATING FLEXIBILITY AND OTHERWISE ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
As of June 30, 2002, we were liable for indebtedness of approximately $1.4
billion. This does not include obligations of Marathon for which we are
contingently liable and that are not recorded on our balance sheet. As of June
30, 2002, such obligations of Marathon were $334 million. Marathon paid a
portion of this debt in July 2002 leaving USS contingently liable for debt and
other obligations of Marathon in the amount of $175 million as of July 31, 2002.
We may incur other obligations for working capital, refinancing of a portion of
the $1.4 billion referred to above or for other purposes. This substantial
amount of indebtedness and related covenants could limit our operating
flexibility and could otherwise adversely affect our financial condition.
2
Our high degree of leverage could have important consequences to you, including
the following:
-- our ability to satisfy our obligations with respect to any other debt
securities or preferred stock may be impaired in the future;
-- it may become difficult for us to obtain additional financing for working
capital, capital expenditures, debt service requirements, acquisitions or
general corporate or other purposes in the future;
-- a substantial portion of our cash flow from operations must be dedicated to
the payment of principal and interest on our indebtedness, thereby reducing the
funds available to us for other purposes;
-- some of our borrowings are and are expected to be at variable rates of
interest (including borrowings under our inventory credit facility), which will
expose us to the risk of increased interest rates;
-- the sale prices, costs of selling receivables and amounts available under
our accounts receivable program fluctuate due to factors that include the amount
of eligible receivables available, the costs of the commercial paper funding and
our long-term debt ratings; and
-- our substantial leverage may limit our flexibility to adjust to changing
economic or market conditions, reduce our ability to withstand competitive
pressures and make us more vulnerable to a downturn in general economic
conditions.
OUR BUSINESS REQUIRES SUBSTANTIAL DEBT SERVICE, CAPITAL INVESTMENT, OPERATING
LEASE, CAPITAL COMMITMENTS AND MAINTENANCE EXPENDITURES THAT WE MAY BE UNABLE TO
FULFILL.
With approximately $1.4 billion of debt outstanding as of June 30, 2002, we have
substantial debt service requirements. Based on this outstanding debt, our
combined principal and interest payments will average approximately $150 million
annually over the next five years. At June 30, 2002, USS had approximately $94
million of variable rate debt outstanding, therefore, a 1% annualized increase
in interest rates would increase annual debt service requirements by
approximately $900,000. We made a payment of $37.5 million to VSZ in July 2002
and are required to make another $37.5 million payment in July of 2003 in
connection with our acquisition of USSK. Our operations are capital intensive.
For the five-year period ended December 31, 2001, total capital expenditures
were $1.4 billion, and through June 30, 2002, capital expenditures totaled $104
million. As of December 31, 2001, we were obligated to make aggregate lease
payments of $325 million under operating leases over the next five years. Our
business also requires substantial expenditures for routine maintenance.
Some of our operating lease agreements include contingent rental charges that
are not determinable to any degree of certainty. These charges are primarily
based on utilization of the power generation facility at our Gary Works location
and operating expenses incurred related to our headquarters' office space.
USSK has a commitment to the Slovak government for a capital improvements
program over a period commencing with the acquisition date and ending on
December 31, 2010, and, as of June 30, 2002, the remaining commitment under this
program was $600 million. At June 30, 2002, our domestic contract commitments to
acquire property, plant and equipment totaled $18 million.
3
As of June 30, 2002 we had contingent obligations consisting of indemnity
obligations under active surety bonds totaling approximately $134 million,
guarantees of approximately $31 million of indebtedness for unconsolidated
entities and commitments under take or pay arrangements of approximately $764
million. As the general partner of the Clairton 1314B Partnership, L.P., we are
obligated to fund cash shortfalls incurred by that partnership but may withdraw
as the general partner if we are required to fund in excess of $150 million in
operating cash shortfalls. As of June 30, 2002, we were also contingently liable
for $334 million of debt and other obligations of Marathon. In July 2002,
Marathon paid a portion of this debt leaving USS contingently liable for $175
million of debt and other obligations as of July 31, 2002.
Our business may not generate sufficient operating cash flow or external
financing sources may not be available in an amount sufficient to enable us to
service or refinance our indebtedness or to fund other liquidity needs.
WE HAVE INCURRED OPERATING AND CASH LOSSES AND WILL HAVE FEWER SOURCES OF CASH,
INCLUDING CASH FROM MARATHON TAX SETTLEMENTS.
For the six months ended June 30, 2002, we had a loss from operations of $14
million and net cash used in operating activities was $107 million.
For the year ended December 31, 2001, we had a loss from operations of $405
million and net cash used in operating activities was $150 million excluding the
income tax settlements received from Marathon.
Prior to the Separation, we funded our negative operating cash flow through an
increase in USX debt attributable to the U. S. Steel Group. Before the
Separation, the USX tax allocation policy required the U. S. Steel Group and the
Marathon Group to pay the other for tax benefits resulting from tax attributes
that could not be utilized by the group to which those tax attributes were
attributable on a stand-alone basis but which could be used on a consolidated,
combined or unitary basis. The net amount of cash settlements made by Marathon
to USS for prior years, subject to adjustment, was $819 million, $91 million and
$(2) million in 2001, 2000 and 1999, respectively. These payments allowed USS to
realize the cash value of its tax benefits on a current basis. Now if USS
generates losses or other tax attributes we can generally realize the cash value
from them only if and when we generate enough taxable income in future years to
use those tax losses or other tax attributes on a stand-alone basis. This delay
in realizing tax benefits may adversely affect our cash flow.
Because we are no longer owned by USX, we are not able to rely on USX for
financial support or benefit from a relationship with USX to obtain credit. Our
lower credit ratings have resulted in higher borrowing costs and make obtaining
necessary capital more difficult.
THE TIGHT SURETY BOND MARKET MAY ADVERSELY IMPACT OUR LIQUIDITY.
We use surety bonds to provide financial assurance for certain transactions and
business activities. The total amount of active surety bonds currently being
used for financial assurance purposes is approximately $134 million, $70 million
of which is expected to be terminated in the third quarter of 2002. Recent
events have caused major changes in the surety bond market including significant
increases in surety bond premiums and reduced market capacity. These factors,
together with our non-investment grade credit rating, have caused us to replace
some surety bonds with other forms of financial assurance. The use of other
forms of financial assurance and collateral have a negative impact on liquidity.
During the first six months of
4
2002, USS used $54 million of liquidity sources to provide financial assurance
and expects to use an additional amount of approximately $6 million during the
second half of 2002 and approximately $70 million in 2003.
IMPORTS OF STEEL MAY DEPRESS DOMESTIC PRICE LEVELS AND HAVE AN ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS AND CASH FLOWS.
Steel imports to the United States accounted for an estimated 24% of the
domestic steel market in the first six months of 2002 and for the year 2001, and
27% for the year 2000. We believe that steel imports into the United States
involve widespread dumping and subsidy abuses, and that the remedies provided by
United States law to private litigants are insufficient to correct the root
causes of these problems. Imports of steel involving dumping and subsidy abuses
depress domestic price levels, and have an adverse effect upon our revenue,
income and cash flows. Over the past five years, the average transaction prices
for our domestic steel products have decreased from a high of $479 per net ton
in 1997 to a low of $427 per net ton in 2001.
The trade remedies announced by President Bush, under Section 201 of the Trade
Act of 1974, on March 5, 2002 became effective for imports entering the U.S. on
and after March 20, 2002 and are intended to provide protection against imports
from certain countries, but there are products and countries not covered and
imports of these exempt products or of products from these countries may still
have an adverse effect upon our revenues and income. Since March 5, 2002 the
Department of Commerce and the Office of the United States Trade Representative
have announced the exclusion of 727 products from the trade remedies. When
announcing the seventh set of exclusions on August 22, 2002 they also announced
that no further exclusions will be granted this year and that beginning in
November, 2002 there will be another opportunity for parties to submit exclusion
requests for consideration by March 2003. The exclusions granted impact a number
of products we produce and have weakened the protection initially provided by
this relief. Various countries have challenged President Bush's action with the
World Trade Organization and taken other actions responding to the Section 201
remedies.
On September 28, 2001, United States Steel Corporation and other domestic
producers filed anti-dumping and counterveiling duty petitions against cold
rolled carbon steel flat products from 20 countries. The U.S. Department of
Commerce ("Commerce") found preliminary margins against all the countries and,
to date, has made final determinations with respect to five of the countries. On
August 27, 2002, the U.S. International Trade Commission ("ITC") made negative
injury findings with respect to the five countries. This terminates the
proceedings with respect to those five countries without granting relief to the
domestic industry. The ITC will vote regarding the remaining countries after
Commerce makes its final determinations in those investigations.
Although we believe the relief provided to the domestic industry is inadequate,
it is possible even that level of relief will not be continued.
On December 20, 2001, the European Commission commenced an anti-dumping
investigation concerning the import of hot-rolled coils and hot-rolled pickled
and oiled coils from Slovakia and five other countries. In mid-February, USSK
submitted a response to the anti-dumping questionnaire and an injury submission.
By law the investigation should be concluded within one year from the date of
initiation, but provisional measures have already been imposed.
5
On March 21, 2002, the Canadian International Trade Tribunal ("CITT") initiated
a safeguard inquiry to determine whether imports of certain steel goods from
countries, including the U.S., had injured the Canadian steel industry. On July
5, 2002, the CITT announced its determination that the Canadian steel industry
had been injured by reason of imports of certain products including the
following which are made by USS: cut-to-length plate, cold-rolled steel sheet
and standard pipe up to 16" o.d. On August 20, 2002, the CITT announced that it
was recommending as a remedy a three-year quota, with tariffs imposed on
tonnages exceeding the quota. This resulted in quota levels for the U.S. which
are lower than 2001 shipments. For shipments exceeding the quota levels, tariffs
will be imposed ranging from 15-25% in the first year, 11-18% in the second year
and 7-12% in the third year. The CITT's remedy recommendations will be forwarded
to the Ministry of Finance and the final remedy decision will be made by the
Prime Minister.
MANY OF OUR INTERNATIONAL COMPETITORS ARE LARGER AND HAVE HIGHER CREDIT RATINGS.
Based on International Iron and Steel Institute statistics, we rank as the
largest domestic integrated steel producer but, in 2001, were only the eleventh
largest steel producer in the world. Many of our larger competitors have
investment grade credit ratings, and, because of their larger size and superior
credit ratings, we may be at a disadvantage in competing with them. Terms of our
indebtedness contain covenants that may also limit our ability to participate in
consolidations.
COMPETITION FROM MINI-MILL PRODUCERS HAS CONTRIBUTED TO LOST MARKET SHARE AND
COULD HAVE AN ADVERSE EFFECT ON OUR SELLING PRICES AND SHIPMENT LEVELS.
Domestic integrated producers, such as USS, have lost market share in recent
years to domestic mini-mill producers. Mini-mills produce steel by melting scrap
in electric furnaces. Although mini-mills generally produce a narrower range of
steel products than integrated producers, they typically enjoy competitive
advantages such as lower capital expenditures for construction of facilities,
lower raw material costs and non-unionized work forces with lower employment
costs and more flexible work rules. An increasing number of mini-mills utilize
thin slab casting technology to produce flat-rolled products. Through the use of
thin slab casting, mini-mill competitors are increasingly able to compete
directly with integrated producers of flat-rolled products, especially
hot-rolled and plate products. Depending on market conditions, the additional
production generated by flat-rolled mini-mills could have an adverse effect on
our selling prices and shipment levels. Mini-mills entered the flat-rolled
product market around 1990. Although we cannot determine how much competition
from mini-mills has affected our market share, based on statistics supplied by
the American Iron and Steel Institute, we believe our domestic flat-rolled
market share has dropped from 19.4% in 1990 to 13.3% in 2001.
COMPETITION FROM OTHER MATERIALS MAY NEGATIVELY AFFECT OUR RESULTS OF
OPERATIONS.
In many applications, steel competes with other materials, such as aluminum,
cement, composites, glass, plastic and wood. Additional substitutes for steel
products could adversely affect future market prices and demand for steel
products.
HIGH ENERGY COSTS ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Our operations consume large amounts of energy and we consume significant
amounts of natural gas. Domestic natural gas prices increased from an average of
$2.27 per million BTU in 1999 to an average of $4.96 per million BTU in 2001. At
normal annual consumption levels, a
6
$1.00 per million BTU change in domestic natural gas prices would result in an
estimated $50 million change in our annual domestic pretax operating costs.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION COULD RESULT IN SUBSTANTIALLY INCREASED
CAPITAL REQUIREMENTS AND OPERATING COSTS.
Our domestic businesses are subject to numerous federal, state and local laws
and regulations relating to the protection of the environment. These laws are
constantly evolving and becoming increasingly stringent. The ultimate impact of
complying with existing laws and regulations is not always clearly known or
determinable because regulations under some of these laws have not yet been
promulgated or are undergoing revision. These environmental laws and
regulations, particularly the Clean Air Act, could result in substantially
increased capital, operating and compliance costs. We are also involved in a
number of environmental remediation projects at both former and present
operating locations and are involved in a number of other remedial actions under
federal and state law. Our worldwide environmental expenditures were $231
million in 2001, $230 million in 2000 and $253 million in 1999. For more
information see "Management's Discussion and Analysis of Environmental Matters,
Litigation and Contingencies" in our Annual Report on Form 10-K for the year
ended December 31, 2001, our Report on Form 10-Q for the quarter ended June 30,
2002 and subsequent filings.
We believe all of our domestic steel competitors are subject to similar
environmental laws and regulations. The specific impact on each competitor may
vary, however, depending upon a number of factors, including the age and
location of operating facilities, production processes (such as a mini-mill
versus an integrated producer) and the specific products and services it
provides. To the extent that competitors, particularly foreign steel producers
and manufacturers of competitive products, are not required to undertake
equivalent costs, our competitive position could be adversely impacted.
USSK is subject to the laws of the Slovak Republic. The environmental laws of
the Slovak Republic generally follow the requirements of the European Union,
which are comparable to domestic standards.
OUR RETIREE EMPLOYEE HEALTH CARE AND RETIREE LIFE INSURANCE COSTS ARE HIGHER
THAN THOSE OF MANY OF OUR COMPETITORS.
We maintain defined benefit retiree health care and life insurance plans
covering substantially all domestic employees upon their retirement. Health care
benefits are provided through comprehensive hospital, surgical and major medical
benefit provisions or through health maintenance organizations, both subject to
various cost-sharing features. Life insurance benefits are provided to nonunion
retiree beneficiaries primarily based on employees' annual base salary at
retirement. For domestic union retirees, benefits are provided for the most part
based on fixed amounts negotiated in labor contracts with the appropriate
unions. As of December 31, 2001, United States Steel reported an unfunded
obligation for these benefit obligations in the amount of $1.8 billion and
recorded $129 million in related costs during the year. Mini-mills, foreign
competitors and many producers of products that compete with steel provide
lesser benefits to their employees and retirees and this difference in costs
could adversely impact our competitive position.
7
DECLINES IN THE VALUE OF INVESTMENTS OF OUR MAJOR PENSION TRUSTS COULD
MATERIALLY REDUCE OUR STOCKHOLDERS' EQUITY.
Based on current conditions, we broadly estimate that a charge to equity of
approximately $750 million (net of tax) may be required at December 31, 2002.
Under accounting principles generally accepted in the United States changes in
the market value of the assets held in trust for pension purposes can result in
significant changes in the sponsor's balance sheet. The accounting rules provide
that if at any plan measurement date (which in our case is December 31 of each
year or an earlier date if certain significant plan events occur) the fair value
of plan assets is less than the plan's accumulated benefit obligation ("ABO"),
the sponsor must establish a liability at least equal to the amount by which the
ABO exceeds the fair value of the plan assets and any prepaid pension assets
must be removed from the balance sheet. The sum of the liability and prepaid
pension assets must be offset by the recognition of an intangible asset and/or
as a direct charge against stockholders' equity, net of tax effects. Such
adjustments will have no direct impact on earnings per share or cash. As of
September 30, 2002, the fair value of plan assets for the USS pension plan for
union employees was $4.4 billion. Assuming no further changes in value prior to
year-end, we estimate the ABO for this plan at the year-end measurement date
would exceed the fair value of plan assets by approximately $500 million. The
resulting required minimum liability entries would include a charge to equity of
approximately $750 million at December 31, 2002.
Any such reduction in stockholders' equity is not expected to affect any of our
debt covenants or borrowing arrangements or result in any requirements for
pension plan cash funding in 2002 or 2003. The foregoing estimates are
forward-looking statements. Predictions as to the value of and return on plan
assets and the resulting impact on equity are subject to substantial
uncertainties such as (among other things) investment performance and interest
rates.
THE RECENT INVESTMENT PERFORMANCE OF PENSION PLAN EQUITY HOLDINGS WILL
UNFAVORABLY IMPACT OUR RESULTS OF OPERATIONS AND COULD AFFECT FUTURE
PROFITABILITY AND CASH FLOW.
The investment performance of pension plan equity holdings over the last three
years will unfavorably impact net periodic pension cost during 2003 through the
use of a lower asset base in calculating expected return on plan assets and may
impact future profitability and liquidity, which could affect debt covenants and
borrowing arrangements. Holding all other assumptions constant and based on
market values at September 2002 projected to the end of the year, we estimate an
unfavorable impact on 2003 net periodic pension cost of $110 million.
Our expected annual return on pension plan assets of 8.9% for the 2002 plan year
is consistent with the 2001 plan year and is based on the historical long-term
rate of return on our investments and our investment mix. In light of recent
developments in the market, this expected annual return rate might be changed at
the next measurement date. We currently estimate this may result in a reduction
of up to one percentage point in our expected annual return on pension plan
assets for 2003. A one percentage point decline in the expected annual rate of
return for our two main pension plans for the 2003 plan year would increase our
annual pension expense by approximately $80 million which would be in addition
to the $110 million increase for the reduced asset value previously discussed.
These estimates are forward-looking statements. Predictions regarding the return
on plan assets and the resulting pension expenses are subject to substantial
uncertainties such as (among other things) investment performance and interest
rates.
8
BANKRUPTCIES OF DOMESTIC COMPETITORS HAVE LOWERED THEIR OPERATING COSTS.
Since 1998, more than 30 domestic steel companies have sought protection under
Chapter 11 of the United States Bankruptcy Code. Many of these companies have
continued to operate. Some have reduced prices to maintain volumes and cash flow
and obtained concessions from their labor unions and suppliers. In some cases,
they have even expanded and modernized while in bankruptcy. Upon emergence from
bankruptcy, these companies, or new entities that purchase their facilities
through the bankruptcy process, may be relieved of many environmental, employee,
retiree and other obligations. As a result, they are able to operate with lower
costs.
MANY LAWSUITS HAVE BEEN FILED AGAINST US INVOLVING ASBESTOS-RELATED INJURIES
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION.
We are a defendant in a large number of cases in which approximately 18,000
claimants allege injury resulting from exposure to asbestos. Nearly all of these
cases involve multiple defendants. These claims fall into three major groups:
(1) claims made under certain federal and general maritime law by employees of
the Great Lakes Fleet or Intercoastal Fleet, former operations of USS; (2)
claims made by persons who performed work at USS facilities; and (3) claims made
by industrial workers allegedly exposed to an electrical cable product formerly
manufactured by USS. To date all actions resolved have been either dismissed or
resolved for immaterial amounts. In 2001, we disposed of claims from
approximately 11,300 claimants with aggregate total payments of less than
$200,000 and approximately 10,000 new claims were filed. The factual issues with
respect to each claimant vary considerably due to the nature and duration of the
alleged exposure of each individual claimant to USS products or premises, the
exposure of each individual claimant to products or premises of other
defendants, the nature and seriousness of the alleged injuries asserted by each
claimant and the other possible causes of any such injuries (such as the use of
tobacco products or exposure to other substances). In addition, because most
claimants assert their claims against multiple defendants, fail to allege
specific damage amounts in their complaints, fail to allocate the alleged
liability among the various defendants, and frequently amend their complaints
including any allegations of amounts sought, it is not possible to reasonably
estimate the amount claimed by any given claimant or the claimants as a whole in
pending cases. In the cases where the claimants have asserted specific dollar
damages against USS, the amounts claimed are not material either individually or
in the aggregate. It is also not possible to predict with certainty the outcome
of these matters; however, based upon present knowledge, management believes
that it is unlikely that the resolution of the pending actions will in the
aggregate have a material adverse effect on our financial condition. Among the
factors that management considered in reaching this conclusion are: (1) that USS
has been subject to a total of approximately 32,000 asbestos claims over the
last twelve years that have been administratively dismissed due to the failure
of the claimants to present any medical evidence supporting their claims, (2)
that over the last several years the total number of pending claims has remained
steady, (3) that it has been many years since USS employed maritime workers or
manufactured electrical cable and (4) USS's history of trial outcomes,
settlements and dismissals. For more information see our Report on Form 10-Q for
the quarter ended June 30, 2002. This statement of belief is a forward-looking
statement. Predictions as to the outcome of pending litigation are subject to
substantial uncertainties with respect to (among other things) factual and
judicial determinations, and actual results could differ materially from those
expressed in this forward-looking statement.
9
OUR INTERNATIONAL OPERATIONS EXPOSE US TO UNCERTAINTIES AND RISKS FROM ABROAD,
WHICH COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
USSK, located in the Slovak Republic, constitutes 28% of our total raw steel
capability and accounted for 17% of revenue for 2001. USSK exports about 80% of
its products, with the majority of its sales being to other European countries.
USSK is affected by the worldwide overcapacity in the steel industry and the
cyclical nature of demand for steel products and that demand's sensitivity to
worldwide general economic conditions. In particular, USSK is subject to
economic conditions and political factors in Europe, which if changed could
negatively affect its results of operations and cash flow. Political factors
include, but are not limited to, taxation, nationalization, inflation, currency
fluctuations, increased regulation and protectionist measures. USSK is also
subject to foreign currency exchange risks because its revenues are primarily in
euros and its costs are primarily in Slovak korunas and United States dollars.
The Slovak Republic has applied for membership in the European Union and may be
required to amend its environmental, tax and other laws to secure that
membership. Changes in those laws could adversely impact USSK.
THE TERMS OF OUR INDEBTEDNESS RESTRICT OUR ABILITY TO PAY DIVIDENDS.
Under the terms of our 10 3/4% Senior Notes due 2008 (the "Senior Notes"), we
may not be able to pay dividends on capital stock unless we can meet certain
restricted payment tests, including a 2 to 1 interest coverage test for the
preceding 12 month period except we may pay common stock dividends through
December 31, 2003 in an aggregate amount up to $50 million. We may also be
unable to pay dividends due to inadequate cash flow and borrowing capacity.
THE TERMS OF OUR INDEBTEDNESS AND OUR ACCOUNTS RECEIVABLE PROGRAM CONTAIN
RESTRICTIVE COVENANTS, CROSS-DEFAULT, CROSS ACCELERATION AND OTHER PROVISIONS
THAT MAY LIMIT OUR OPERATING FLEXIBILITY.
We currently have Senior Notes outstanding in the aggregate principal amount of
$535 million. The Senior Notes impose significant restrictions on us such as the
following:
-- Limits on additional borrowings, including limits on the amount of
borrowings secured by inventories or accounts receivable;
-- Limits on sale/leasebacks;
-- Limits on the use of funds from asset sales and sale of the stock of
subsidiaries; and
-- Restrictions on our ability to invest in joint ventures or make certain
acquisitions.
We also have a revolving credit agreement secured by inventory that imposes
additional restrictions on us including the following:
-- Effective September 30, 2002, we must meet an interest coverage ratio of at
least 2 to 1, and effective March 31, 2003, that ratio must be at least 2.5 to
1;
-- We must meet leverage ratios (total debt to operating cash flow) of no more
than 6 to 1 beginning on September 30, 2002 through December 30, 2002, 5.5 to 1
through March 30, 2003, 5 to 1 through June 29, 2003, 4.5 to 1 through September
29, 2003, 4 to 1 through March 30, 2004 and 3.75 to 1 thereafter;
-- Limitations on capital expenditures; and
-- Restrictions on investments.
10
The accounts receivable program terminates on the occurrence and failure to cure
certain events, including, among others:
-- certain defaults with respect to the inventory facility and other debt
obligations;
-- failure to maintain certain ratios related to the collectability of
receivables; and
-- failure of the commercial paper conduits' liquidity providers to extend
their commitments that currently expire on November 27, 2002.
If these covenants are breached or if we fail to make payments under our
material debt obligations or our receivables purchase agreement, creditors would
be able to terminate their commitments to make further loans, declare their
outstanding obligations immediately due and payable and foreclose on any
collateral, and it may also cause a default under the Senior Notes. Additional
indebtedness that USS may incur in the future may also contain similar
covenants, as well as other restrictive provisions. Cross-default and
cross-acceleration clauses in our revolving credit facility, the Senior Notes,
the accounts receivable program and any future additional indebtedness could
have an adverse effect upon our financial position and liquidity. Such defaults
include provisions applicable to failure to make payments when due, failure to
comply with the covenants described above and failure to pay judgments entered
against USS (which may include any judgments resulting from the environmental
and asbestos litigation matters described in this prospectus and the documents
incorporated by reference).
The sale prices, costs of selling receivables and amounts available under our
accounts receivable program fluctuate due to factors that include the amount of
eligible receivables available, costs of commercial paper funding and our
long-term debt ratings. The amount available under our secured inventory
facility fluctuates based on our eligible inventory levels.
We are currently in compliance with all terms of our outstanding indebtedness.
Under the terms of the Senior Notes, additional debt of approximately $1.7
billion could have been incurred as of June 30, 2002. Of this amount, $200
million would be subordinate to the Senior Notes and the remainder would rank
equal to the Senior Notes.
"CHANGE IN CONTROL" CLAUSES REQUIRE US TO IMMEDIATELY PURCHASE OR REPAY DEBT.
Upon the occurrence of "change in control" events specified in our Senior Notes,
inventory facility and various other loan documents, the holders of our
indebtedness may require us to immediately purchase or repay that debt on less
than favorable terms. We may not have the financial resources to make these
purchases and repayments, and a failure to purchase or repay such indebtedness
would trigger cross-acceleration clauses under the Senior Notes and other
indebtedness.
OUR OPERATIONS ARE SUBJECT TO BUSINESS INTERRUPTIONS AND CASUALTY LOSSES THAT
MAY ADVERSELY AFFECT OUR CASH FLOWS.
Steel-making, product marketing and raw material operations are subject to
unplanned events such as explosions, fires, inclement weather, accidents and
transportation interruptions. To the extent these events are not covered by
insurance, our cash flows may be adversely impacted by such events.
11
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY
IMPACTED BY STRIKES OR WORK STOPPAGES BY OUR UNIONIZED EMPLOYEES.
Substantially all hourly employees of our domestic steel, coke and taconite
pellet facilities are covered by a collective bargaining agreement with the
United Steelworkers of America that expires in August 2004 and includes a
no-strike provision. Other hourly employees (for example, those engaged in coal
mining and transportation activities) are represented by the United Mine Workers
of America, United Steelworkers of America and other unions. The majority of
USSK employees are represented by a union and are covered by a collective
bargaining agreement that expires in February 2004, and is subject to annual
wage negotiations. Any potential strikes or work stoppages and the resulting
adverse impact on our relationships with our customers could have a material
adverse effect on our business, financial condition or results of operations. In
addition, mini-mill producers and certain foreign competitors and producers of
comparable products do not have unionized work forces. This may place us at a
competitive disadvantage.
PROVISIONS OF DELAWARE LAW, OUR GOVERNING DOCUMENTS AND OUR RIGHTS PLAN MAY MAKE
A TAKEOVER OF USS MORE DIFFICULT.
Certain provisions of Delaware law, our certificate of incorporation and by-laws
and our rights plan could make more difficult or delay our acquisition by means
of a tender offer, a proxy contest or otherwise and the removal of incumbent
directors. These provisions are intended to discourage certain types of coercive
takeover practices and inadequate takeover bids, even though such a transaction
may offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price.
RISKS RELATED TO PROPOSED CONSOLIDATION
On December 4, 2001, we announced our support for significant consolidation in
the domestic integrated steel industry and we continue to be interested in
participating in consolidation of the domestic steel industry. We have had and
continue to have discussions with several parties regarding consolidation
opportunities. Among the factors that would impact our participation in
consolidation are the nature and extent of relief from the burden of retiree
obligations relating to existing retirees from other domestic steel companies,
which may come through the bankruptcy process or otherwise, the terms of a new
labor agreement and progress in President Bush's program to address
overcapacity. We may also make additional investments in Central Europe to
expand our business and to better serve our customers who are seeking worldwide
supply arrangements.
On March 5, 2002, President Bush imposed tariffs of 8% to 30% on most steel
imports, but did not express support for a government-sponsored program to
provide relief from the industry's retiree legacy costs. No legislation had been
enacted and two proposals to amend pending legislation to address retiree legacy
costs failed to obtain sufficient votes. Although we will continue to explore
attractive acquisitions, joint ventures and other growth opportunities in the
U.S. and Central Europe, the extent of any significant consolidation in the
domestic or European steel industries remains unclear.
12
CONSOLIDATIONS MAY NOT OCCUR OR MAY BE DELAYED AND THE ANTICIPATED COST SAVINGS
FROM CONSOLIDATION MAY NOT MATERIALIZE.
We will not participate in steel industry consolidation unless it is in the best
interest of our customers, shareholders, creditors, employees and other
constituencies. The conditions precedent to any consolidation are beyond our
control, and may not be satisfied.
The benefits of any consolidation in large measure flow from anticipated cost
savings. We may not be able to achieve all of these savings or may not achieve
them as quickly as we expect. In addition, any rationalization of steel
facilities may result in environmental, post-employment, and other shut-down
costs.
ACQUIRED COMPANIES AND ASSETS MAY INCREASE OUR INDEBTEDNESS AND OTHER
OBLIGATIONS AND REQUIRE SIGNIFICANT EXPENDITURES.
Possible future acquisitions could result in the incurrence of additional debt
and related interest expense, underfunded pension and other post-retirement
obligations, contingent liabilities and amortization expenses related to
intangible assets, all of which could have a material adverse effect on our
financial condition, operating results and cash flow.
Many of the available domestic acquisition targets may require significant
capital and operating expenditures to return them to profitability. Financially
distressed steel companies typically do not maintain their assets adequately.
Such assets may need significant repairs and improvements. We may also have to
buy sizable amounts of raw materials, spare parts and other materials for these
facilities before they can resume profitable operation.
Many potential acquisition candidates are financially distressed steel companies
that may not have maintained appropriate environmental programs. These problems
may require significant expenditures.
WE MAY HAVE DIFFICULTY OR MAY NOT BE ABLE TO OBTAIN FINANCING NECESSARY TO
PURSUE CONSOLIDATIONS.
We may not be able to obtain financing for acquisitions of other companies or
their assets on favorable terms or at all.
CUSTOMERS MAY PURCHASE LESS FROM A CONSOLIDATED COMPANY THAN THEY DID FROM THE
INDIVIDUAL PRODUCERS AND MAY INSIST ON PRICE CONCESSIONS.
Customers may not buy as much steel from us after consolidation as they
previously bought from the separate companies in order to diversify their
suppliers. They may also insist upon significant price concessions.
INTERNATIONAL ACQUISITIONS MAY EXPOSE US TO ADDITIONAL RISKS.
If we acquire companies or facilities outside the United States, we may be
exposed to increased risks including the following:
-- economic and political conditions in the countries where the facilities are
located and where the products made at those facilities are marketed;
-- currency fluctuations;
-- uncertain sources of raw materials;
13
-- economic disruptions in less developed economies where many potential
acquisition candidates have facilities or market products;
-- expenditures necessary to bring such facilities to profitable operation;
-- foreign tax risks; and
-- expenditures required to comply with potential new environmental
requirements.
RISKS RELATED TO THE SEPARATION
Prior to December 31, 2001, our businesses were owned by USX Corporation, now
named Marathon Oil Corporation.
USS IS SUBJECT TO CERTAIN CONTINUING CONTINGENT LIABILITIES OF MARATHON THAT
COULD ADVERSELY AFFECT OUR CASH FLOW AND OUR ABILITY TO INCUR ADDITIONAL
INDEBTEDNESS AND COULD CAUSE A DEFAULT UNDER OUR BORROWING FACILITIES.
USS is contingently liable for debt and other obligations of Marathon in the
amount of $334 million as of June 30, 2002. In July 2002, Marathon paid a
portion of this debt leaving USS contingently liable for $175 million of debt
and other obligations as of July 31, 2002. Marathon is not limited by agreement
with USS as to the amount of indebtedness that it may incur. In the event of the
bankruptcy of Marathon, these obligations for which USS is contingently liable,
as well as obligations relating to industrial development and environmental
improvement bonds and notes that were assumed by USS from Marathon, may be
declared immediately due and payable. If that occurs USS may not be able to
satisfy those obligations. In addition, if Marathon loses its investment grade
ratings, certain of these obligations will be considered indebtedness under our
indentures and for covenant calculations under our revolving credit facility.
This occurrence could prevent USS from incurring additional indebtedness under
our indentures or may cause a default under our revolving credit facility.
Under the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder, USS and each subsidiary of USS that was a
member of the Marathon consolidated group during any taxable period or portion
thereof ending on or before the effective time of the Separation is jointly and
severally liable for the federal income tax liability of the entire Marathon
consolidated group for that taxable period. Other provisions of federal law
establish similar liability for other matters, including laws governing tax
qualified pension plans as well as other contingent liabilities.
THE SEPARATION MAY BE CHALLENGED BY CREDITORS AS A FRAUDULENT TRANSFER OR
CONVEYANCE THAT COULD PERMIT UNPAID CREDITORS OF MARATHON TO SEEK RECOVERY FROM
US.
If a court in a suit by an unpaid creditor or representative of creditors of
Marathon, such as a trustee in bankruptcy, or Marathon, as debtor-in-possession,
in a reorganization case under the United States Bankruptcy Code, were to find
that:
-- the Separation and the related transactions were undertaken for the purpose
of hindering, delaying or defrauding creditors, or
-- Marathon received less than reasonably equivalent value or fair
consideration in connection with the Separation and the transactions related
thereto and (1) Marathon was insolvent at the effective time of the Separation
and after giving effect thereto, (2) or Marathon as of the effective time of the
Separation and after giving effect thereto, intended or believed that it
14
would be unable to pay its debts as they became due, or (3) the capital of
Marathon, at the effective time of the Separation and after giving effect
thereto, was inadequate to conduct its business,
then the court could determine that the Separation and the related transactions
violated applicable provisions of the United States Bankruptcy Code and/or
applicable state fraudulent transfer or conveyance laws. Such a determination
would permit the bankruptcy trustee or debtor-in-possession or unpaid creditors
to rescind the Separation and permit unpaid creditors of Marathon to seek
recovery from us.
The measure of insolvency for purposes of the foregoing considerations will vary
depending upon the law of the jurisdiction that is being applied. Generally, an
entity is considered insolvent if either:
-- the sum of its liabilities, including contingent liabilities, is greater
than its assets, at a fair valuation; or
-- the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities, including contingent liabilities, as they become absolute and
matured.
THE SEPARATION MAY BECOME TAXABLE UNDER SECTION 355(e) OF THE INTERNAL REVENUE
CODE IF 50% OR MORE OF USS'S SHARES OR MARATHON OIL CORPORATION'S SHARES ARE
ACQUIRED AS PART OF A PLAN WHICH WOULD MATERIALLY AFFECT OUR FINANCIAL
CONDITION.
The Separation may become taxable to Marathon pursuant to section 355(e) of the
Internal Revenue Code if 50% or more of either Marathon's shares or our shares
are acquired, directly or indirectly, as part of a plan or series of related
transactions that include the Separation. If section 355(e) applies, Marathon
would be required to pay a corporate tax based on the excess of the fair market
value of the shares distributed over Marathon's tax basis for such shares. The
amount of this tax would be materially greater if the Separation were deemed to
be a distribution of Marathon's shares. If an acquisition occurs that results in
the Separation being taxable under section 355(e), a Tax Sharing Agreement
between USS and Marathon provides that the resulting corporate tax liability
will be borne by the entity, either USS or Marathon, that is deemed to have been
acquired.
WE MAY BE RESPONSIBLE FOR A CORPORATE TAX IF THE SEPARATION FAILS TO QUALIFY AS
A TAX-FREE TRANSACTION, WHICH WOULD HAVE AN ADVERSE AFFECT ON OUR FINANCIAL
CONDITION.
Based on representations made by USX Corporation prior to the Separation, the
Internal Revenue Service issued a private letter ruling that the Separation was
tax-free to Marathon and its shareholders. To the extent a breach of one of
those representations results in a corporate tax being imposed on Marathon, the
breaching party, either USS or Marathon, will be responsible for payment of the
corporate tax. If the Separation fails to qualify as a tax-free transaction
through no fault of either USS or Marathon, the resulting tax liability, if any,
is likely to be borne by us under the tax sharing agreement.
15
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Prior to December 31, 2001, the businesses of USS comprised an operating unit of
Marathon. Marathon had two outstanding classes of common stock: USX-Marathon
Group common stock, which was intended to reflect the performance of Marathon's
energy business, and USX-U. S. Steel Group common stock ("Steel Stock"), which
was intended to reflect the performance of Marathon's steel business. On
December 31, 2001, in a series of transactions we call the separation, USS was
capitalized through the issuance of 89.2 million shares of common stock to
holders of Steel Stock in exchange for all outstanding shares of Steel Stock on
a one-for-one basis. On May 20, 2002, we issued an additional 10,925,000 shares
of common stock in an underwritten public offering.
The following table sets forth summary financial data for USS. Consolidated
balance sheet data as of December 31, 2001 and June 30, 2002 and statement of
operations data for the six months ended June 30, 2002 reflect USS as a
separate, stand-alone entity. All other balance sheet and statement of
operations data in the table below represent a carve-out presentation of the
businesses comprising United States Steel, and are not intended to be a complete
presentation of the financial position or results of operations for USS on a
stand-alone basis. This information should be read in conjunction with the more
detailed information and consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001, our Current
Report on Form 8-K dated June 4, 2002, our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 and the additional reports and documents
incorporated by reference in this prospectus.
16
------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
(IN MILLIONS) 2002 2001 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues and other income(1)................ $3,241 $3,301 $6,375 $6,132 $5,470 $6,477 $7,156
Income (loss) from operations............... (14) (128) (405) 104 150 579 773
Income (loss) before extraordinary
losses(2)................................. (56) (21) (218) (21) 51 364 452
Net income (loss)........................... (56) (21) (218) (21) 44 364 452
PER COMMON SHARE DATA -- BASIC AND DILUTED:
Income (loss) before extraordinary
losses(3)................................. $(0.60) $(0.24) $(2.45) $(0.24) $ 0.57 $ 4.08 $ 5.07
Net income (loss)(3)........................ (0.60) (0.24) (2.45) (0.24) 0.49 4.08 5.07
Dividends paid(4)........................... 0.10 0.35 0.55 1.00 1.00 1.00 1.00
ADJUSTED STATEMENT OF OPERATIONS DATA(5):
Income (loss) before extraordinary loss..... $ (56) $ (21) $ (218) $ (21) $ 51
Add back: Excess over cost amortization..... -- -- -- 1 1
------------------------------------------
Adjusted income (loss) before extraordinary
loss...................................... $ (56) $ (21) $ (218) $ (20) $ 52
Net income (loss)........................... $ (56) $ (21) $ (218) $ (21) $ 44
Add back: Excess over cost amortization... -- -- -- 1 1
------------------------------------------
Adjusted net income (loss).................. $ (56) $ (21) $ (218) $ (20) $ 45
ADJUSTED PER COMMON SHARE DATA -- BASIC AND
DILUTED(3)(5):
Income (loss) before extraordinary loss..... $(0.60) $(0.24) $(2.45) $(0.24) $ 0.57
Add back: Excess over cost amortization... -- -- -- 0.01 0.02
------------------------------------------
Adjusted income (loss) before extraordinary
loss...................................... $(0.60) $(0.24) $(2.45) $(0.23) $ 0.59
Net income (loss)........................... $(0.60) $(0.24) $(2.45) $(0.24) $ 0.49
Add back: Excess over cost amortization... -- -- -- 0.01 0.02
------------------------------------------
Adjusted net income (loss).................. $(0.60) $(0.24) $(2.45) $(0.23) $ 0.51
BALANCE SHEET DATA -- AS OF PERIOD END
Total assets................................ $8,614 $8,954 $8,337 $8,711 $7,525 $6,749 $6,694
Capitalization:
Notes payable............................. $ -- $ 123 $ -- $ 70 $ -- $ 13 $ 13
Long-term debt, including amount due
within one year(6)...................... 1,446 2,309 1,466 2,375 915 476 510
Preferred stock of subsidiary............. -- 66 -- 66 66 66 66
Trust preferred securities................ -- 183 -- 183 183 182 182
Equity.................................... 2,670 1,860 2,506 1,919 2,056 2,093 1,782
------------------------------------------------------------
Total capitalization.................... $4,116 $4,541 $3,972 $4,613 $3,220 $2,830 $2,553
------------------------------------------------------------------------------------------------------------
(1) Consists of revenues, dividend and investee income (loss), net gains on
disposal of assets, gain on investee stock offering and other income (loss).
(2) SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections, rescinds previous
accounting guidance which required all gains and losses from extinguishment
of debt to be classified as an extraordinary item in the statement of
operations. As a result, the criteria contained in Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, will be used to classify
these gains
17
and losses. This provision of SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002 and will be adopted by USS on January 1, 2003.
(3) Per common share data for the six months ended June 30, 2002 is based on the
weighted average outstanding common shares during the period. Per common
share data for all other periods presented is based on the outstanding
common shares at December 31, 2001 as a result of the Separation and the
initial capitalization of USS on that date.
(4) Dividends paid per share for all periods presented, except for the six
months ended June 30, 2002, represents amounts paid on USX-U. S. Steel Group
common stock.
(5) Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill
and Other Intangible Assets, addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made by
SFAS No. 142 are 1) goodwill and intangible assets with indefinite lives
will no longer be amortized; 2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and 3) the
amortization period for the intangible assets with finite lives will no
longer be limited to forty years. Paragraph 61 of SFAS No. 142, requires
disclosure of what reported income before extraordinary items and net income
would have been in all periods presented exclusive of amortization expense
(including any related tax effects) recognized in those periods related to
goodwill, intangible assets that are no longer being amortized, any deferred
credit to an excess over cost, equity method goodwill, and changes in
amortization periods for intangible assets that will continue to be
amortized (including any related tax effects). Similarly adjusted per share
amounts are also required to be disclosed for all periods presented. USS
initially applied this Statement on January 1, 2002, and there was no
financial statement implication related to the adoption of this standard.
(6) The increase in equity and the decrease in long-term debt, preferred stock
of subsidiary and trust preferred securities from December 31, 2000 to 2001
and from June 30, 2001 to 2002 were primarily due to transactions related to
the Separation, including the $900 million value transfer. The increase in
long-term debt from December 31, 1999 to 2000 was primarily due to cash used
in operating activities of $627 million (including $500 million in elective
funding to a voluntary employee benefit trust) and the $325 million of debt
included in the acquisition of USSK.
18
RATIO OF EARNINGS TO FIXED CHARGES
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(UNAUDITED)
CONTINUING OPERATIONS
---------------------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31,
------------- -------------------------------------
2002 2001 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------
Ratio of earnings to fixed
charges(a)......................... -- -- -- 1.13 2.33 5.89 5.39
Ratio of earnings to combined fixed
charges and preferred stock
dividends(a)....................... -- -- -- 1.05 2.10 5.15 4.72
---------------------------------------------------------------------------------------------
(a) For the purposes of calculating the ratio of earnings to fixed charges and
the ratio of earnings to combined fixed charges and preferred stock
dividends, "earnings" are defined as income before income taxes and
extraordinary items adjusted for minority interests in consolidated
subsidiaries, income (loss) from equity investees, and capitalized interest,
plus fixed charges, amortization of capitalized interest and distributions
from equity investees. "Fixed charges" consist of interest, whether expensed
or capitalized, on all indebtedness, amortization of premiums, discounts and
capitalized expenses related to indebtedness, and an interest component
equal to one-third of rental expense, representing the portion of rental
expense that management believes is attributable to interest. "Preferred
dividends" consists of pretax earnings required to cover preferred stock
dividends associated with the 6.50% Preferred Stock attributed to USS by
Marathon prior to the Separation which was retained and subsequently repaid
by Marathon in connection with the Separation. Earnings were deficient in
covering fixed charges by $66 million and $196 million for the six months
ended June 30, 2002 and 2001, respectively and by $586 million for the year
ended December 31, 2001. Earnings were deficient in covering combined fixed
charges and preferred stock dividends by $66 million for the six months
ended June 30, 2002, $202 million for the six months ended June 30, 2001 and
by $598 million for the year ended December 31, 2001.
USE OF PROCEEDS
The net proceeds from the sale of the offered securities will be used for
general corporate purposes unless we specify otherwise in the prospectus
supplement applicable to a particular offering. We may use those funds to repay
debt, to finance acquisitions, for stock repurchases, for capital expenditures,
for investments in subsidiaries and joint ventures, and for working capital.
DESCRIPTION OF THE DEBT SECURITIES
The following is a general description of the debt securities (the "Debt
Securities") that we may offer from time to time. The particular terms of the
Debt Securities offered by any prospectus supplement and the extent, if any, to
which the general provisions described below may apply will be described in the
applicable prospectus supplement.
The Debt Securities will be either senior Debt Securities or subordinated Debt
Securities. We will issue the senior Debt Securities under the senior indenture
between The Bank of New York, or any successor trustee, and USS. We will issue
the subordinated Debt Securities under a subordinated indenture between The Bank
of New York, or any successor trustee, and USS. The senior indenture and the
subordinated indenture are collectively referred to in this prospectus as the
indentures, and each of the trustee under the senior indenture and the trustee
under the subordinated indenture are referred to in this prospectus as trustee.
19
The following description is only a summary of the material provisions of the
indentures. We urge you to read the appropriate indenture because it, and not
this description, defines your rights as holders of the notes or bonds. See the
information under the heading "Where You Can Find More Information" to contact
us for a copy of the appropriate indenture.
GENERAL
The senior Debt Securities are unsubordinated obligations, will rank on par with
all other debt obligations of USS and, unless otherwise indicated in the related
Prospectus Supplement, will be unsecured. The subordinated Debt Securities will
be subordinate, in right of payment to Senior Debt. A description of the
subordinated Debt Securities is provided below under " -- Subordinated debt
securities." The specific terms of any subordinated Debt Securities will be
provided in the related Prospectus Supplement. For a complete understanding of
the provisions pertaining to the subordinated Debt Securities, you should refer
to the subordinated indenture attached as an exhibit to the Registration
Statement.
TERMS
The indentures do not limit the principal amount of debt we may issue.
We may issue notes or bonds in traditional paper form, or we may issue a global
security. The Debt Securities of any series may be issued in definitive form or,
if provided in the related prospectus supplement, may be represented in whole or
in part by a Global Security or Securities, registered in the name of a
depositary designated by USS. Each Debt Security represented by a Global
Security is referred to as a "Book-Entry Security."
Debt Securities may be issued from time to time pursuant to this prospectus, and
will be offered on terms determined by market conditions at the time of sale.
Debt Securities may be issued in one or more series with the same or various
maturities and may be sold at par, a premium or an original issue discount. Debt
Securities sold at an original issue discount may bear no interest or interest
at a rate that is below market rates. Unless otherwise provided in the
prospectus supplement, Debt Securities denominated in U.S. dollars will be
issued in denominations of $1,000 and integral multiples thereof.
Please refer to the prospectus supplement for the specific terms of the Debt
Securities offered including the following:
1. Designation of an aggregate principal amount, purchase price and
denomination;
2. Date of maturity;
3. If other than U.S. currency, the currency for which the Debt Securities may
be purchased;
4. The interest rate or rates and the method of calculating interest;
5. The times at which any premium and interest will be payable;
6. The place or places where principal, any premium and interest will be
payable;
7. Any redemption or sinking fund provisions or other repayment obligations;
8. Any index used to determine the amount of payment of principal of and any
premium and interest on the Debt Securities;
9. The application, if any of the defeasance provisions to the Debt Securities;
20
10. If other than the entire principal amount, the portion of the Debt
Securities that would be payable upon acceleration of the maturity thereof;
11. If other than the entire principal amount plus accrued interest, the portion
of the Change of Control purchase price or prices applicable to purchases of
Debt Securities upon a Change of Control;
12. Whether the Debt Securities will be issued in whole or in part in the form
of one or more global securities, and in such case, the depositary for the
global securities;
13. Any additional covenants applicable to the Debt Securities being offered;
14. Any additional events of default applicable to the Debt Securities being
offered;
15. The terms of subordination, if applicable;
16. The terms of conversion, if applicable; and
17. Any other specific terms including any terms that may be required by or
advisable under applicable law.
Except with respect to Book-Entry Securities, Debt Securities may be presented
for exchange or registration of transfer, in the manner, at the places and
subject to the restrictions set forth in the Debt Securities and the prospectus
supplement. Such services will be provided without charge, other than any tax or
other governmental charge payable in connection therewith, but subject to the
limitations provided in the indentures.
CERTAIN COVENANTS OF USS IN THE INDENTURES
PAYMENT
USS will pay principal of and premium, if any, and interest on the Debt
Securities at the place and time described in the Debt Securities. (Section
1001) Unless otherwise provided in the prospectus supplement, USS will pay
interest on any Debt Security to the person in whose name that security is
registered at the close of business on the regular record date for that interest
payment. (Section 307)
Any money deposited with the trustee or any paying agent for the payment of
principal of or any premium or interest on any Debt Security that remains
unclaimed for two years after that amount has become due and payable will be
paid to USS at its request. After this occurs, the holder of that security must
look only to USS for payment of that amount and not to the trustee or paying
agent. (Section 1003)
LIENS
If USS or any subsidiary of USS mortgages, pledges, encumbers or subjects to a
lien (a "Mortgage") as security for money borrowed any blast furnace facility or
steel producing facility, or casters that are part of a plant that includes such
a facility, having a net book value in excess of 1% of Consolidated Net Tangible
Assets at the time of determination (each, a "Principal Property") or any shares
of stock or other equity interests in any of USS' subsidiaries that own one or
more Principal Properties, USS will secure or will cause such subsidiary to
secure the Debt Securities equally and ratably with all indebtedness or
obligations secured by the Mortgage then being given and with any other
indebtedness of USS or the subsidiary of USS then entitled thereto; provided,
however, that this covenant shall not apply in the case of:
21
(a) any Mortgage existing on the date of the indentures (whether or not such
Mortgage includes an after-acquired property provision); (b) any Mortgage,
including a purchase money Mortgage, incurred in connection with the acquisition
of any Principal Property, the assumption of any Mortgage previously existing on
such acquired Principal Property or any Mortgage existing on the property of any
corporation when it becomes a subsidiary of USS; (c) any Mortgage on such
Principal Property in favor of the United States, or any State, or
instrumentality of either, to secure partial, progress or advance payments to
USS or any subsidiary of USS under any contract or statute; (d) any Mortgage in
favor of the United States, any State, or instrumentality of either, to secure
borrowings for the purchase or construction of the Principal Property mortgaged;
(e) any Mortgage on any Principal Property arising in connection with or to
secure all or any part of the cost of the repair, construction, improvement,
alteration or development of the Principal Property or any portion thereof; or
(f) any renewal of or substitution for any Mortgage permitted under the
preceding clauses.
USS may and may permit its subsidiaries to (1) grant Mortgages or incur liens on
Principal Property (or on equity interests in subsidiaries that own Principal
Property) covered by the restriction described above and (2) sell or transfer
any Principal Property with the intention of taking back a lease on that
Principal Property so long as the net book value of the Principal Property (or
equity interests) so encumbered or transferred, together with all property then
permitted to be encumbered or subject to a sale-leaseback under this clause,
does not at the time such Mortgage or lien is granted or such property is
transferred exceed 10% of Consolidated Net Tangible Assets. (Section 1005)
"Consolidated Net Tangible Assets" means the aggregate value of all assets of
USS and its subsidiaries after deducting (a) all current liabilities (excluding
all long-term debt due within one year), (b) all investments in unconsolidated
subsidiaries and all investments accounted for on the equity basis and (c) all
goodwill, patent and trademarks, unamortized debt discount and other similar
intangibles (all determined in conformity with generally accepted accounting
principles and calculated on a basis consistent with USS' most recent audited
consolidated financial statements). (Section 101)
LIMITATIONS ON CERTAIN SALE AND LEASEBACKS
USS will not, nor will it permit any subsidiary to, sell or transfer any
Principal Property with the intention of taking back a lease thereof, provided,
however, this covenant shall not apply if (a) the lease is to a subsidiary of
USS (or to USS in the case of a subsidiary of USS); (b) the lease is for a
temporary period by the end of which it is intended that the use of the
Principal Property by the lessee will be discontinued; (c) USS or a subsidiary
of USS could, as described under the caption "Liens" above, Mortgage such
property without equally and ratably securing the Debt Securities; or (d) USS
promptly informs the trustee of such sale, the net proceeds of such sale are at
least equal to the fair value (as determined by resolution adopted by the Board
of Directors of USS) of such Principal Property and USS within 180 days after
such sale applies an amount equal to such net proceeds (subject to reduction by
reason of credits to which USS is entitled, under the conditions specified in
the indentures) to the retirement or in substance defeasance of funded debt of
USS or a subsidiary of USS. This covenant does not apply to sales and leases
solely among USS and its subsidiaries. (Section 1006)
MERGER AND CONSOLIDATION
USS will not merge or consolidate with any other entity or sell or convey all or
substantially all of its assets to any person, firm, corporation or other
entity, except that USS may merge or
22
consolidate with, or sell or convey all or substantially all of its assets to,
any other entity if (i) USS is the continuing entity or the successor entity (if
other than USS) is organized and existing under the laws of the United States of
America or a State thereof and such entity expressly assumes payment of the
principal and interest on all the Debt Securities, and the performance and
observance of all of the covenants and conditions of the applicable indenture to
be performed by USS and (ii) there is no default under the applicable indenture.
Upon such a succession, USS will be relieved from any further obligations under
the applicable indenture. For purposes of this paragraph, "substantially all of
its assets" means, at any date, a portion of the non-current assets reflected in
USS' consolidated balance sheet as of the end of the most recent quarterly
period that represents at least 66 2/3% of the total reported value of such
assets. (Section 801)
WAIVER OF CERTAIN COVENANTS
Unless otherwise provided in the prospectus supplement, USS may, with respect to
the Debt Securities of any series, omit to comply with any provision of the
covenants described under "-- Liens" and "-- Limitations on certain sale and
leasebacks" above or under "Purchase of debt securities upon a change of
control" or in any covenant provided in the terms of those Debt Securities if,
before the time for such compliance, holders of at least a majority in principal
amount of the outstanding Debt Securities of that series waive such compliance
in that instance or generally.
PURCHASE OF DEBT SECURITIES UPON A CHANGE IN CONTROL
If any Change in Control (hereinafter defined) of USS occurs, each holder of
Debt Securities will have the right, at that holder's option, subject to the
terms and conditions of the indentures, to require USS to become obligated to
purchase all of that holder's Debt Securities on the date that is 35 Business
Days after the occurrence of such Change in Control (the "Change in Control
Purchase Date") at a cash price equal to (i) unless otherwise specified in the
terms of such Debt Securities, 100% of the principal amount thereof, together
with accrued interest to such Change in Control Purchase Date (except that
interest installments due prior to such Change in Control Purchase Date will be
payable to the holders of such Debt Securities of record at the close of
business on the relevant record dates according to their terms and the
provisions of the indentures), or (ii) such other price or prices as may be
specified in the terms of such Debt Securities (the "Change in Control Purchase
Prices"). (Section 1007)
Under the indentures, a "Change in Control" of USS occurs if (i) any "person" or
"group" of persons (excluding USS, any subsidiary, any employee stock ownership
plan, any other employee benefit plan of USS or any person holding Voting Stock
for any employee benefit plan of USS) acquires "beneficial ownership" (within
the meaning of Section 13(d) or 14(d) of the Exchange Act) of shares of Voting
Stock representing at least 35% of the outstanding Voting Power of USS, (ii)
during any period of twenty-five consecutive months, commencing before or after
the date of the indentures, individuals who at the beginning of such 25-month
period were directors of USS (together with any replacement or additional
directors whose election was recommended by incumbent management of USS or who
were elected by a majority of directors then in office) cease to constitute a
majority of the board of directors of USS, or (iii) any person or group of
related persons shall acquire all or substantially all of the assets of USS;
provided, a Change in Control shall not have occurred if USS has merged or
consolidated with or transferred all or substantially all of its assets to
another entity in compliance with the provisions of Section 801 of the
indentures (relating to when USS may
23
merge or transfer assets) and the surviving or successor or transferee entity is
no more leveraged than was USS immediately prior to such event. The term
"leveraged" means the percentage represented by the total assets of that entity
divided by its stockholders' or member's equity, as would be shown on a
consolidated balance sheet of that entity prepared in accordance with generally
accepted accounting principles in the United States of America. The term
"substantially all of its assets" used above means, at any date, a portion of
the non-current assets reflected in USS' consolidated balance sheet as of the
end of the most recent quarterly period that represents at least 66 2/3% of the
total reported value of such assets.
"Voting Stock" means stock of USS having ordinary voting power for the election
of the directors of USS, other than stock having such power only by reason of
the happening of a contingency. "Voting Power" means the total voting power
represented by all outstanding shares of all classes of Voting Stock. (Section
101)
To exercise this right to require USS to purchase a holder's Debt Securities
after a Change of Control, the holder must deliver, at any time prior to the
Change of Control purchase date specified in a notice delivered by USS after
that Change of Control, a written notice of purchase to the paying agent
specified in USS' notice. The holder's notice must state the numbers of the
certificates of any Debt Securities that the holder will deliver to be purchased
and that those Debt Securities are to be purchased under the terms and
conditions specified in the indentures and USS' notice.
If a Change in Control occurs, USS intends to comply with any applicable
securities laws or regulations, including any applicable requirements of Rule
14e-1 under the Exchange Act. The Change in Control purchase feature of the Debt
Securities may in certain circumstances make more difficult or discourage a
takeover of USS. The Change in Control purchase feature, however, is not the
result of management's knowledge of any specific effort to accumulate shares of
Common Stock or to obtain control of USS by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. The Change in Control purchase feature is similar to
that contained in other debt of USS as a result of negotiations between USS and
the underwriters or holders of that debt.
Except as discussed, the Change in Control purchase feature does not afford
holders of the Debt Securities protection against possible adverse effects of a
reorganization, restructuring, merger or similar transaction involving USS.
Our ability to purchase Debt Securities in the future may be limited by the
terms of any then existing borrowing arrangements and by our financial
resources.
EVENTS OF DEFAULT
An Event of Default occurs with respect to any series of Debt Securities when:
(i) USS defaults in paying principal of or premium, if any, on any of the Debt
Securities of such series when due; (ii) USS defaults in paying interest on the
Debt Securities of such series when due, continuing for 30 days; (iii) USS
defaults in paying the Change in Control Purchase Price of any of the Debt
Securities of such series as and when the same shall become due and payable;
(iv) USS defaults in making deposits into any sinking fund payment with respect
to any Debt Security of such series when due; (v) failure by USS in the
performance of any other covenant or warranty in the Debt Securities of such
series or in the applicable indenture continued for a period of 90 days after
notice of such failure as provided in that indenture; (vi) certain events
24
of bankruptcy, insolvency, or reorganization occur; or (vii) any other Event of
Default provided with respect to Debt Securities of that series. (Section 501)
USS is required annually to deliver to the trustee officers' certificates
stating whether or not the signers have any knowledge of any default in the
performance by USS of certain covenants. (Section 1004)
If an Event of Default shall occur and be continuing with respect to any series,
the trustee or the holders of not less than 25% in principal amount of the Debt
Securities of such series then outstanding may declare the Debt Securities of
such series to be due and payable. If an Event of Default described in clause
(vi) of the first paragraph under "Events of Default" occurs with respect to any
series of Debt Securities, the principal amount of all Debt Securities of that
series (or, if any securities of that series are original issue discount
securities, the portion of the principal amount of such securities as may be
specified by the terms thereof) will automatically become due and payable
without any declaration by the trustee or the holders. (Section 502) The trustee
is required to give holders of the Debt Securities of any series written notice
of a default with respect to such series as and to the extent provided by the
Trust Indenture Act, except that the trustee may not give such notice of a
default described in clause (v) of the first paragraph under "Events of Default"
until at least 60 days after the default. As used in this paragraph, a "default"
means an event described in the first paragraph under "Events of Default"
without including any applicable grace period. (Section 602)
If at any time after the Debt Securities of such series have been declared due
and payable, and before any judgment or decree for the moneys due has been
obtained or entered, USS shall pay or deposit with the trustee amounts
sufficient to pay all matured installments of interest upon the Debt Securities
of such series and the principal of all Debt Securities of such series which
shall have become due, otherwise than by acceleration, together with interest on
such principal and, to the extent legally enforceable, on such overdue
installments of interest and all other amounts due under the applicable
indenture shall have been paid, and any and all defaults with respect to such
series under that indenture shall have been remedied, then the holders of a
majority in aggregate principal amount of the Debt Securities of such series
then outstanding, by written notice to USS and the trustee, may rescind and
annul the declaration that the Debt Securities of such series are due and
payable. (Section 502) In addition, the holders of a majority in aggregate
principal amount of the Debt Securities of such series may waive any past
default and its consequences with respect to such series, except a default in
the payment of the principal of or any premium or interest on any Debt
Securities of such series or a default in the performance of a covenant that
cannot be modified under the indentures without the consent of the holder of
each affected Debt Security. (Section 513)
The trustee is under no obligation to exercise any of the rights or powers under
the indentures at the request, order or direction of any of the holders of Debt
Securities, unless such holders shall have offered to the trustee reasonable
security or indemnity. (Section 603) Subject to such provisions for the
indemnification of the trustee and certain limitations contained in the
indentures, the holders of a majority in aggregate principal amount of the Debt
Securities of each series at the time outstanding shall have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee, or exercising any trust or power conferred on the trustee, with
respect to the Debt Securities of such series. (Section 512)
25
No holder of Debt Securities will have any right to institute any proceeding,
judicial or otherwise, with respect to the indentures, for the appointment of a
receiver or trustee or for any other remedy under the indentures unless:
-- the holder has previously given written notice to the trustee of a
continuing Event of Default with respect to the Debt Securities of that series;
and
-- the holders of at least 25% in principal amount of the outstanding Debt
Securities of that series have made a written request to the trustee, and
offered reasonable indemnity, to the trustee to institute proceedings as
trustee, the trustee has failed to institute the proceedings within 60 days and
the trustee has not received from the holders of a majority in principal amount
of the Debt Securities of that series a direction inconsistent with that
request. (Section 507)
Notwithstanding the foregoing, the holder of any Debt Security will have an
absolute and unconditional right to receive payment of the principal of and any
premium and, subject to the provisions of the applicable indenture regarding the
payment of default interest, interest on that Debt Security on the due dates
expressed in that security and to institute suit for the enforcement of payment.
(Section 508)
MODIFICATION OF THE INDENTURES
Each indenture contains provisions permitting USS and the trustee to modify that
indenture or enter into or modify any supplemental indenture without the consent
of the holders of the Debt Securities in regard to matters as shall not
adversely affect the interests of the holders of the Debt Securities, including,
without limitation, the following: (a) to evidence the succession of another
corporation to USS; (b) to add to the covenants of USS further covenants for the
benefit or protection of the holders of any or all series of Debt Securities or
to surrender any right or power conferred upon USS by that indenture; (c) to add
any additional events of default with respect to all or any series of Debt
Securities; (d) to add to or change any of the provisions of that indenture to
facilitate the issuance of Debt Securities in bearer form with or without
coupons, or to permit or facilitate the issuance of Debt Securities in
uncertificated form; (e) to add to, change or eliminate any of the provisions of
that indenture in respect of one or more series of Debt Securities thereunder,
under certain conditions designed to protect the rights of any existing holder
of those Debt Securities; (f) to secure all or any series of Debt Securities;
(g) to establish the forms or terms of the Debt Securities of any series; (h) to
evidence the appointment of a successor trustee and to add to or change
provisions of that indenture necessary to provide for or facilitate the
administration of the trusts under that indenture by more than one trustee; (i)
to cure any ambiguity, to correct or supplement any provision of that indenture
which may be defective or inconsistent with another provision of that indenture;
(j) to make other amendments that do not adversely affect the interests of the
holders of any series of Debt Securities in any material respect; and (k) to add
or change or eliminate any provision of that indenture as shall be necessary or
desirable in accordance with any amendments to the Trust Indenture Act. (Section
901)
USS and the trustee may otherwise modify each indenture or any supplemental
indenture with the consent of the holders of not less than a majority in
aggregate principal amount of each series of Debt Securities affected thereby at
the time outstanding, except that no such modifications shall (i) extend the
fixed maturity of any Debt Securities or any installment of interest or premium
on any Debt Securities, or reduce the principal amount thereof or reduce the
rate of interest or premium payable upon redemption, or reduce the amount of
principal
26
of an original issue discount Debt Security or any other Debt Security that
would be due and payable upon a declaration of acceleration of the maturity
thereof, or change the currency in which the Debt Securities are payable or
impair the right to institute suit for the enforcement of any payment after the
stated maturity thereof or the redemption date, if applicable, or adversely
affect any right of the holder of any Debt Security to require USS to repurchase
that security, without the consent of the holder of each Debt Security so
affected, (ii) reduce the percentage of Debt Securities of any series, the
consent of the holders of which is required for any waiver or supplemental
indenture, without the consent of the holders of all Debt Securities affected
thereby then outstanding or (iii) modify the provisions of that indenture
relating to the waiver of past defaults or the waiver or certain covenants or
the provisions described under "Modification of the indentures," except to
increase any percentage set forth in those provisions or to provide that other
provisions of that indenture may not be modified without the consent of the
holder of each Debt Security affected thereby, without the consent of the holder
of each Debt Security affected thereby. (Section 902)
SATISFACTION AND DISCHARGE; DEFEASANCE AND COVENANT DEFEASANCE
Each indenture shall be satisfied and discharged if (i) USS shall deliver to the
trustee all Debt Securities then outstanding for cancellation or (ii) all Debt
Securities not delivered to the trustee for cancellation shall have become due
and payable, are to become due and payable within one year or are to be called
for redemption within one year and USS shall deposit an amount sufficient to pay
the principal, premium, if any, and interest to the date of maturity, redemption
or deposit (in the case of Debt Securities that have become due and payable),
provided that in either case USS shall have paid all other sums payable under
that indenture. (Section 401)
Each indenture provides, if such provision is made applicable to the Debt
Securities of a series, that USS may elect either (A) to defease and be
discharged from any and all obligations with respect to any Debt Security of
such series (except for the obligations to register the transfer or exchange of
such Debt Security, to replace temporary or mutilated, destroyed, lost or stolen
Debt Securities, to maintain an office or agency in respect of the Debt
Securities and to hold moneys for payment in trust) ("defeasance") or (B) to be
released from its obligations with respect to such Debt Security under Sections
801, 803, 1005, 1006, 1007 and 1009 of that indenture (being the restrictions
described above under "Certain Covenants of USS in the indentures" and USS'
obligations described under "Purchase of Debt Securities upon a Change in
Control") together with additional covenants that may be included for a
particular series and (ii) that Sections 501(4), 501(5) (as to Sections 801,
803, 1005, 1006, 1007 and 1009) and 501(8), as described in clauses (iv), (v)
and (vii) under "Events of Default," shall not be Events of Default under that
indenture with respect to such series ("covenant defeasance"), upon the deposit
with the trustee (or other qualifying trustee), in trust for such purpose, of
money certain U.S. government obligations and/or, in the case of Debt Securities
denominated in U.S. dollars, certain state and local government obligations
which through the payment of principal and interest in accordance with their
terms will provide money, in an amount sufficient to pay the principal of (and
premium, if any) and interest on such Debt Security, on the scheduled due dates.
In the case of defeasance, the holders of such Debt Securities are entitled to
receive payments in respect of such Debt Securities solely from such trust. Such
a trust may only be established if, among other things, USS has delivered to the
trustee an Opinion of Counsel (as specified in the indentures) to the effect
that the holders of the Debt Securities affected thereby will not recognize
income, gain or loss for Federal income tax purposes as a result of
27
such defeasance or covenant defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such defeasance or covenant defeasance had not occurred. Such
Opinion of Counsel, in the case of defeasance under clause (A) above, must refer
to and be based upon a ruling of the Internal Revenue Service or a change in
applicable Federal income tax law occurring after the date of the indentures.
(Section 1304)
RECORD DATES
The indentures provide that in certain circumstances USS may establish a record
date for determining the holders of outstanding Debt Securities of a Series
entitled to join in the giving of notice or the taking of other action under the
applicable indenture by the holders of the Debt Securities of such Series.
SUBORDINATED DEBT SECURITIES
Although the senior indenture and the subordinated indenture are generally
similar and many of the provisions discussed above pertain to both senior and
subordinated Debt Securities, there are many substantive differences between the
two. This section discusses some of those differences.
Subordination
Subordinated Debt Securities will be subordinate, in right of payment, to all
Senior Debt. "Senior Debt" is defined to mean, with respect to USS, the
principal, premium, if any, and interest on
(1) all indebtedness of USS, whether outstanding on the date hereof or hereafter
created, incurred or assumed, which is for money borrowed, or evidenced by a
note or similar instrument given in connection with the acquisition of any
business, properties or assets, including securities,
(2) any indebtedness of others of the kinds described in the preceding clause
(1) for the payment of which USS is responsible or liable (directly or
indirectly, contingently or otherwise) as guarantor or otherwise and
(3) amendments, renewals, extensions and refundings of any indebtedness
described in the preceding clauses (1) or (2), unless in any instrument or
instruments evidencing or securing such indebtedness or pursuant to which the
same is outstanding, or in any such amendment, renewal, extension or refunding,
it is expressly provided that such indebtedness is not superior in right of
payment to the Debt Securities of any series.
Difference between subordinated debt security covenants and debt security
covenants and events of default
Subordinated Debt Securities may not have the advantage of all of the covenants
and Events of Default provided in the senior indenture. For example, relating to
Liens, Limitations on Certain Sale and Leasebacks and Purchase of senior Debt
Securities upon a Change in Control as discussed above are not applicable to
securities issued pursuant to the subordinated indenture. Also, the event of
default for failure to pay the Change of Control Purchase Price when due is not
available to subordinated Debt Securities.
28
Terms of subordinated debt securities may contain conversion or exchange
provisions
The Prospectus Supplement for a particular series of subordinated Debt
Securities will describe the specific terms discussed above that apply to the
subordinated Debt Securities being offered thereby as well as any applicable
conversion or exchange provisions.
Modification of the indenture relating to subordinated debt securities
The subordinated indenture may be modified by USS and the trustee without the
consent of the Holders of the subordinated Debt Securities for one or more of
the purposes discussed above under "--Modification of the indentures." USS and
the trustee may also modify the subordinated indenture to make provision with
respect to any conversion or exchange rights for a given issue of subordinated
Debt Securities.
GOVERNING LAW
The laws of the State of New York govern each indenture and will govern the Debt
Securities. (Section 112)
BOOK-ENTRY SECURITIES
The following description of book-entry securities will apply to any series of
Debt Securities issued in whole or in part in the form of one or more global
securities except as otherwise described in the prospectus supplement.
Book-entry securities of like tenor and having the same date will be represented
by one or more global securities deposited with and registered in the name of a
depositary that is a clearing agent registered under the Exchange Act.
Beneficial interests in book-entry securities will be limited to institutions
that have accounts with the depositary ("participants") or persons that may hold
interests through participants. Ownership of beneficial interests by
participants will only be evidenced by, and the transfer of that ownership
interest will only be effected through, records maintained by the depositary.
Ownership of beneficial interests by persons that hold through participants will
only be evidenced by, and the transfer of that ownership interest within such
participant will only be effected through, records maintained by the
participants. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in a global
security.
Payment of principal of and any premium and interest on book-entry securities
represented by a global security registered in the name of or held by a
depositary will be made to the depositary, as the registered owner of the global
security. Neither USS, the trustee nor any agent of USS or the trustee will have
any responsibility or liability for any aspect of the depositary's records or
any participant's records relating to or payments made on account of beneficial
ownership interests in a global security or for maintaining, supervising or
reviewing any of the depositary's records or any participant's records relating
to the beneficial ownership interests. Payments by participants to owners of
beneficial interests in a global security held through such participants will be
governed by the depositary's procedures, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the sole
responsibility of such participants.
29
A global security representing a book-entry security is exchangeable for
definitive Debt Securities in registered form, of like tenor and of an equal
aggregate principal amount registered in the name of, or is transferrable in
whole or in part to, a person other than the depositary for that global
security, only if (a) the depositary notifies USS that it is unwilling or unable
to continue as depositary for that global security or the depositary ceases to
be a clearing agency registered under the Exchange Act, (b) there shall have
occurred and be continuing an Event of Default with respect to the Debt
Securities of that Series or (c) other circumstances exist that have been
specified in the terms of the Debt Securities of that Series. Any Global
Security that is exchangeable pursuant to the preceding sentence shall be
registered in the name or names of such person or persons as the depositary
shall instruct the trustee. It is expected that such instructions may be based
upon directions received by the depositary from its participants with respect to
ownership of beneficial interests in such global security.
Except as provided above, owners of beneficial interests in a global security
will not be entitled to receive physical delivery of Debt Securities in
definitive form and will not be considered the holders thereof for any purpose
under the indentures, and no global security shall be exchangeable, except for a
security registered in the name of the depositary. This means each person owning
a beneficial interest in such global security must rely on the procedures of the
depositary and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the indentures. USS understands that under existing industry
practices, if USS requests any action of holders or an owner of a beneficial
interest in such global security desires to give or take any action that a
holder is entitled to give or take under the indentures, the depositary would
authorize the participants holding the relevant beneficial interests to give or
take such action, and such participants would authorize beneficial owners owning
through such participant to give or take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
CONCERNING THE TRUSTEE
The Bank of New York is also trustee for our 10 3/4% Senior Notes due August 1,
2008, for our Senior Quarterly Income Debt Securities, for a leverage lease in
which USS is the lessor and for several series of obligations issued by various
governmental authorities relating to environmental projects at various USS
facilities. The Bank of New York is a lender under our revolving credit
facility. USS and its subsidiaries also maintain ordinary banking relationships,
including loans and deposit accounts, with The Bank of New York and anticipate
that they will continue to do so.
DESCRIPTION OF CAPITAL STOCK
The following is a description of the material terms of the capital stock of USS
included in its certificate of incorporation. This description is qualified by
reference to the certificate of incorporation, and the Rights Agreement (the
"Rights Agreement") between USS and Mellon Bank, N.A., as Rights Agent (the
"Rights Agent"), that have been filed as exhibits to the registration statement
of which this prospectus is a part.
30
GENERAL
The authorized capital stock of USS consists of 14 million shares of preferred
stock, without par value, and 200 million shares of common stock with a par
value of $1.00 per share. As of July 31, 2002, there were no shares of preferred
stock outstanding and 101,827,613 shares of common stock outstanding.
PREFERRED STOCK
The preferred stock may be issued without the approval of the holders of common
stock in one or more series, from time to time. The designation, powers,
preferences and relative participating, optional or other special rights, and
qualifications, limitations or restrictions of any preferred stock will be
stated in a resolution providing for the issue of that series adopted by our
board of directors and will be described in the appropriate prospectus
supplement (if any), including the following:
1. When to issue the preferred stock, whether in one or more series so long as
the total number of shares does not exceed 14 million;
2. The powers, preferences and relative participation, optional or other special
rights, and qualifications, limits or restrictions on preferred stock;
3. The dividend rate of each series, the terms of payment, the priority of
payment versus any other class of stock and whether the dividends will be
cumulative;
4. Terms of redemption;
5. Any convertible features;
6. Any voting rights;
7. Liquidation preferences; and
8. Any other terms.
Holders of preferred stock will be entitled to receive dividends (other than
dividends of common stock) before any dividends are payable to holders of common
stock.
The future issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of USS.
COMMON STOCK
The holders of common stock will be entitled to receive dividends when, as and
if declared by the USS board of directors out of funds legally available
therefor, subject to the rights of any shares of preferred stock at the time
outstanding. The holders of common stock will be entitled to one vote for each
share on all matters voted on generally by stockholders under our certificate of
incorporation, including the election of directors. Holders of common stock do
not have any cumulative voting, conversion, redemption or preemptive rights. In
the event of dissolution, liquidation or winding up of USS, holders of the
common stock will be entitled to share ratably in any assets remaining after the
satisfaction in full of the prior rights of creditors, including holders of any
then outstanding indebtedness, and subject to the aggregate liquidation
preference and participation rights of any preferred stock then outstanding. The
issuance of additional shares of authorized stock by USS may occur at such
31
times and under such circumstances as to have a dilutive effect on earnings per
share and on the equity ownership of the holders of common stock.
STOCK TRANSFER AGENT AND REGISTRAR
USS maintains its own stock transfer department at the following address: United
States Steel Corporation, Shareholders Services Department, 600 Grant Street,
Room 611, Pittsburgh, PA 15219-2800. Certificates representing shares can also
be presented for registration of transfer at Mellon Shareholder Services, 120
Broadway, 13th Floor, New York, NY 10021.
Mellon Investor Services LLC, 500 Grant Street, Pittsburgh, PA 15219 is the
Registrar for all the Common Stock.
RIGHTS PLAN
The following is a brief description of the terms of the stockholders rights
plan set forth in the Rights Agreement between USS and Mellon Investor Services
LLC, as Rights Agent.
The purpose of the Rights Agreement is to:
-- give our board of directors the opportunity to negotiate with any persons
seeking to obtain control of USS;
-- deter acquisitions of voting control of USS without assurance of fair and
equal treatment of all USS stockholders; and
-- prevent a person from acquiring in the market a sufficient amount of voting
power to be in a position to block an action sought to be taken by our
stockholders.
The exercise of the Rights would cause substantial dilution to a person
attempting to acquire USS on terms not approved by our board of directors and
would therefore significantly increase the price that person would have to pay
to complete the acquisition. The Rights Agreement may deter a potential
acquisition or tender offer.
Under the Rights Agreement, the Right to purchase from USS one-hundredth of a
share of Series A Junior Preferred Stock, no par value (the "Junior Preferred
Stock"), at a purchase price of $110 in cash, subject to adjustment, is attached
to each share of common stock.
The Rights will expire at the close of business on December 31, 2011, unless
that date is extended or the rights are earlier redeemed or exchanged by USS as
described below.
Until the Rights are distributed, they will:
-- not be exercisable;
-- be represented by the same certificates that represent the common stock;
and
-- trade together with the common stock.
If the Rights are distributed, they will become exercisable, and USS would issue
separate certificates representing the Rights, which would trade separately from
USS' common stock.
The Rights would be distributed upon the earlier of
-- 10 business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired (except
pursuant to a Qualifying Offer (defined in the Rights Agreement as an all-cash
tender offer for all outstanding shares of
32
common stock meeting certain prescribed requirements)), or obtained the right to
acquire, beneficial ownership of common stock representing 15% or more of the
total voting power of all outstanding shares of common stock (the "Stock
Acquisition Date"), or
-- 10 business days (or upon such later date as may be determined by the board
of directors) following the commencement of a tender offer or exchange offer
(other than a Qualifying Offer) that would result in a person or a group
beneficially owning common stock representing 15% or more of the total voting
power of all outstanding shares of common stock.
However, an "Acquiring Person" will not include USS, any of its subsidiaries,
any of its employee benefit plans or any person organized pursuant to those
employee benefit plans or a person acquiring pursuant to a Qualifying Offer. The
Rights Agreement also contains provisions designed to prevent the inadvertent
triggering of the Rights by institutional or certain other stockholders.
If a person or group becomes the beneficial owner of common stock representing
15% or more of the total voting power of all outstanding shares of common stock
(except pursuant to a Qualifying Offer), the Rights "flip-in" and entitle each
holder of a Right (other than the Acquiring Person and certain related parties)
to receive, upon exercise, common stock (or in certain circumstances, cash,
property, or other securities of USS), having a value equal to two times the
exercise price of the Right. However, Rights are not exercisable until such time
as the Rights are no longer redeemable by USS as set forth below.
If at any time following the Stock Acquisition Date, (i) USS consolidates with,
or merges with and into, any other person in a transaction in which USS is not
the surviving corporation (other than a merger that follows a Qualifying Offer)
or another person consolidates with, or merges with or into, USS and USS' common
stock is changed into or exchanged for securities of another person or cash or
other property, or (ii) 50% or more of USS' assets, earning power or cash flow
is sold or transferred, the Rights "flip-over" and entitle each holder of a
Right (other than an Acquiring Person and certain related parties) to receive,
upon exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the Right.
USS reserves the right, before the occurrence of an event described in the two
preceding paragraphs, to require that upon an exercise of Rights, a number of
Rights be exercised so that only whole shares of Junior Preferred Stock would be
issued.
At any time until the earlier of 10 business days following the Stock
Acquisition Date and December 31, 2011 (subject to extension), USS may redeem
the Rights in whole, but not in part, at a price of $.01 per whole Right payable
in stock or cash or any other form of consideration deemed appropriate by its
board of directors (the "Redemption Price"). Immediately upon the action of the
Board of Directors ordering redemption of the Rights, the Rights will terminate
and the only right of the holders of the Rights will be to receive the
Redemption Price.
The board of directors may, at its option, at any time after any person becomes
an Acquiring Person, exchange all or part of the outstanding and exercisable
Rights (other than Rights held by the Acquiring Person and certain related
parties) for shares of common stock at an exchange ratio of one share of common
stock for each Right (subject to certain anti-dilution adjustments). However,
the board of directors may not effect such an exchange at any time any person or
group beneficially owns common stock representing 50% or more of the total
voting power of the common stock then outstanding. Immediately after the board
of directors
33
orders such an exchange, the right to exercise the Rights will terminate, and
the only right of the holders of the Rights will be to receive shares of common
stock at the exchange ratio.
As long as the Rights are attached to shares of common stock, USS will issue
Rights on each share of common stock issued prior to the earlier of the rights
distribution date and the expiration date of the Rights so that all such shares
will have attached Rights.
A holder of Rights will not, as such, have any rights as a shareholder of USS,
including rights to vote or receive dividends.
The purchase price payable upon exercise of the Rights is subject to adjustment
from time to time to prevent dilution, subject to the qualifications set forth
in the rights agreement:
-- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Junior Preferred Stock;
-- if holders of Junior Preferred Stock are granted certain rights or warrants
to subscribe for Junior Preferred Stock or securities convertible into Junior
Preferred Stock at less than the market price of the Junior Preferred Stock; or
-- upon the distribution to holders of the Junior Preferred Stock of evidences
of indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
At any time prior to the distribution of the Rights, the board of directors may
amend any provision of the Rights Agreement. After the distribution of the
Rights, the board of directors may amend the provisions of the Rights Agreement
in order to:
-- cure any ambiguity;
-- correct any defective or inconsistent provision;
-- shorten or lengthen any time period under the Rights Agreement, subject to
the limitations specified in the rights agreement; or
-- make changes that will not adversely affect the interests of the holders of
Rights (other than an Acquiring Person and certain related parties);
provided, that no amendment may be made when the Rights are not redeemable.
The distribution of the Rights will not be taxable to USS or its stockholders. A
stockholder may recognize taxable income in the event that the Rights become
exercisable for common stock (or other consideration) of USS or common stock of
an acquiring company.
This description is only a summary of the material provisions of the rights
agreement. We urge you to read the Rights Agreement because it, and not this
description, defines your rights as holders of Rights. A copy of the Rights
Agreement is available free of charge from the Rights Agent by writing to Mellon
Investor Services, LLC at 500 Grant Street, Room 2122, Pittsburgh, Pennsylvania
15219 or from USS. (See "Where You Can Find More Information.")
DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BY-LAWS CONTAIN PROVISIONS
THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
Certain provisions of Delaware law and our certificate of incorporation could
make more difficult or delay a change in control of USS by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent directors.
These provisions are intended to discourage
34
certain types of coercive takeover practices and inadequate takeover bids, even
though such a transaction may offer our stockholders the opportunity to sell
their stock at a price above the prevailing market price. Our board of directors
believes that these provisions are appropriate to protect the interests of USS
and of its stockholders.
Delaware law. We are governed by the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
-- before the business combination, the corporation's board of directors
approved either the business combination or the transaction that resulted in the
stockholder's becoming an interested stockholder;
-- upon consummation of the transaction which resulted in the stockholder's
becoming an interested stockholder, the stockholder owned at least 85% of the
outstanding voting stock of the corporation at the time the transaction
commenced, excluding for the purpose of determining the number of shares
outstanding those shares owned by the corporation's officers and directors and
by employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
-- at or subsequent to the time, the business combination is approved by the
corporation's board of directors and authorized at an annual or special meeting
of its stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of its outstanding voting stock that is not owned by the
interested stockholder.
A "business combination" includes mergers, asset sales or other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years did own) 15% or more of the corporation's voting stock.
Certificate of incorporation and by-laws. Our certificate of incorporation
provides that our board of directors is classified into three classes of
directors, each class consisting of approximately one-third of the directors.
Directors serve a three-year term, with a different class of directors up for
election each year. Under Delaware law, directors of a corporation with a
classified board may be removed only for cause unless the corporation's
certificate of incorporation provides otherwise. Our certificate of
incorporation does not provide otherwise. Board classification could prevent a
party who acquires control of a majority of USS' outstanding voting stock from
obtaining control of its board of directors until the second annual
stockholders' meeting following the date that party obtains that control.
Our certificate of incorporation also provides that any action required or
permitted to be taken by its stockholders must be effected at a duly called
annual or special meeting and may not be taken by written consent.
Our by-laws provide that special meetings of stockholders may be called only by
the board of directors and not by the stockholders. Our by-laws include advance
notice and informational requirements and time limitations on any director
nomination or any new proposal that a stockholder wishes to make at a meeting of
stockholders. In general, a stockholder's notice of a director nomination or
proposal will be timely if delivered or mailed to our Secretary at our principal
executive offices not less than 45 days and, in certain situations, 90 days,
before the
35
annual meeting or within 10 days following the announcement of the date of the
meeting. These provisions may preclude stockholders from bringing matters before
a meeting or from making nominations for directors at these meetings.
Our certificate of incorporation and by-laws do not include a provision for
cumulative voting for directors. Under cumulative voting, a minority stockholder
holding a sufficient percentage of a class of shares may be able to ensure the
election of one or more directors.
Our certificate of incorporation provides for the issuance of preferred stock,
at the discretion of our board of directors, from time to time, in one or more
series, without further action by our stockholders, unless approval of our
stockholders is deemed advisable by our board of directors or required by
applicable law, regulation or stock exchange listing requirements. In addition,
our authorized but unissued shares of our common stock will be available for
issuance from time to time at the discretion of our board of directors without
the approval of our stockholders, unless such approval is deemed advisable by
our board of directors or required by applicable law, regulation or stock
exchange listing requirements. One of the effects of the existence of
authorized, unissued and unreserved shares of our common stock and preferred
stock could be to enable our board of directors to issue shares to persons
friendly to current management that could render more difficult or discourage an
attempt to obtain control of USS by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of our management. Such
additional shares also could be used to dilute the stock ownership of persons
seeking to obtain control of USS.
Our certificate of incorporation provides that vacancies in our board of
directors may be filled only by the affirmative vote of a majority of the
remaining directors. The certificate of incorporation also provides that
directors may be removed from office only with cause and only by the affirmative
vote of holders of a majority of the shares then entitled to vote at an election
of directors. These provisions preclude stockholders from removing directors
without cause and filling vacancies with their own nominees.
Our Rights will permit disinterested stockholders to acquire additional shares
of USS, or of an acquiring company, at a substantial discount in the event of
certain changes in control. See "Description of capital stock -- Rights plan."
Certain provisions described above may have the effect of delaying stockholder
actions with respect to certain business combinations. As such, the provisions
could have the effect of discouraging open market purchases of our shares of
common stock because such provisions may be considered disadvantageous by a
stockholder who desires to participate in a business combination.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that a director is not personally
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty as a director, except (1) for breach of the director's duty of
loyalty to us and our stockholders, (2) for acts and omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (3) under
Section 174 of the Delaware General Corporation Law or (4) for any transaction
from which the director derived an improper personal benefit. These provisions
of our certificate of incorporation are intended to afford directors protection,
and limit their potential liability, to the fullest extent permitted by Delaware
law. Because of these provisions, stockholders may be unable to recover monetary
damages against directors for actions taken
36
by them that constitute negligence or gross negligence or that are in violation
of some of their fiduciary duties. These provisions do not affect a director's
responsibilities under any other laws, such as the federal securities laws.
In addition, our By-Laws provide that we will indemnify our directors and
officers to the fullest extent permitted by law.
We have obtained directors' and officers' insurance for our directors and
officers for specified liabilities.
DESCRIPTION OF DEPOSITARY SHARES
The following briefly summarizes the material provisions of the deposit
agreement and of the depositary shares and depositary receipts, other than
pricing and related terms disclosed for a particular issuance in an accompanying
prospectus supplement. You should read the particular terms of any depositary
shares and any depositary receipts that we offer and any deposit agreement
relating to a particular series of preferred stock which will be described in
more detail in a prospectus supplement. The prospectus supplement will also
state whether any of the generalized provisions summarized below do not apply to
the depositary shares or depositary receipts being offered. A copy of the form
of deposit agreement, including the form of depositary receipt, is incorporated
by reference as an exhibit in the registration statement of which this
prospectus forms a part. You can obtain copies of these documents by following
the directions on page ii. You should read the more detailed provisions of the
deposit agreement and the form of depositary receipt for provisions that may be
important to you.
GENERAL
USS may, at its option, elect to offer fractional shares of preferred stock,
rather than full shares of preferred stock. In such event, we will issue
receipts for depositary shares, each of which will represent a fraction of a
share of a particular series of preferred stock.
The shares of any series of preferred stock represented by depositary shares
will be deposited under a deposit agreement between USS and a bank or trust
company selected by USS having its principal office in the United States and
having a combined capital and surplus of at least $50 million, as preferred
stock depositary. Each owner of a depositary share will be entitled to all the
rights and preferences of the underlying preferred stock, including dividend,
voting, redemption, conversion and liquidation rights, in proportion to the
applicable fraction of a share of preferred stock represented by such depositary
share.
The depositary shares will be evidenced by depositary receipts issued pursuant
to the deposit agreement. Depositary receipts will be distributed to those
persons purchasing the fractional shares of preferred stock in accordance with
the terms of the applicable prospectus supplement.
DIVIDENDS AND OTHER DISTRIBUTIONS
The preferred stock depositary will distribute all cash dividends or other cash
distributions received in respect of the deposited preferred stock to the record
holders of depositary shares relating to such preferred stock in proportion to
the number of such depositary shares owned by such holders.
37
The preferred stock depositary will distribute any property received by it other
than cash to the record holders of depositary shares entitled thereto. If the
preferred stock depositary determines that it is not feasible to make such
distribution, it may, with the approval of USS, sell such property and
distribute the net proceeds from such sale to such holders.
REDEMPTION OF PREFERRED STOCK
If a series of preferred stock represented by depositary shares is to be
redeemed, the depositary shares will be redeemed from the proceeds received by
the preferred stock depositary resulting from the redemption, in whole or in
part, of such series of preferred stock. The depositary shares will be redeemed
by the preferred stock depositary at a price per depositary share equal to the
applicable fraction of the redemption price per share payable in respect of the
shares of preferred stock so redeemed.
Whenever USS redeems shares of preferred stock held by the preferred stock
depositary, the preferred stock depositary will redeem as of the same date the
number of depositary shares representing shares of preferred stock so redeemed.
If fewer than all the depositary shares are to be redeemed, the depositary
shares to be redeemed will be selected by the preferred stock depositary by lot
or ratably as the preferred stock depositary may decide.
VOTING DEPOSITED PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of any series of
deposited preferred stock are entitled to vote, the preferred stock depositary
will mail the information contained in such notice of meeting to the record
holders of the depositary shares relating to such series of preferred stock.
Each record holder of such depositary shares on the record date will be entitled
to instruct the preferred stock depositary to vote the amount of the preferred
stock represented by such holder's depositary shares. The preferred stock
depositary will try to vote the amount of such series of preferred stock
represented by such depositary shares in accordance with such instructions.
USS will agree to take all actions that the preferred stock depositary
determines are necessary to enable the preferred stock depositary to vote as
instructed. The preferred stock depositary will abstain from voting shares of
any series of preferred stock held by it for which it does not receive specific
instructions from the holders of depositary shares representing such shares.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of depositary receipt evidencing the depositary shares and any
provision of the deposit agreement may at any time be amended by agreement
between USS and the preferred stock depositary. However, any amendment that
materially and adversely alters any existing right of the holders of depositary
shares (other than certain changes in the fees of the preferred stock
depositary) will not be effective unless such amendment has been approved by the
holders of at least a majority of the depositary shares then outstanding. Every
holder of an outstanding depositary receipt at the time any such amendment
becomes effective shall be deemed, by continuing to hold such depositary
receipt, to consent and agree to such
38
amendment and to be bound by the deposit agreement, as amended thereby. The
deposit agreement may be terminated only if:
-- all outstanding depositary shares have been redeemed; or
-- a final distribution in respect of the preferred stock has been made to the
holders of depositary shares in connection with any liquidation, dissolution or
winding up of USS.
CHARGES OF PREFERRED STOCK DEPOSITARY, TAXES AND OTHER GOVERNMENT CHARGES
USS will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. USS also will pay
charges of the depositary in connection with the initial deposit of preferred
stock and any redemption of preferred stock. Holders of depositary receipts will
pay other transfer and other taxes and governmental charges and such other
charges, including a fee for the withdrawal of shares of preferred stock upon
surrender of depositary receipts, as are expressly provided in the deposit
agreement to be for their accounts.
APPOINTMENT, RESIGNATION AND REMOVAL OF DEPOSITARY
The preferred stock depository will be appointed by USS. The preferred stock
depositary may resign at any time by delivering to USS notice of its intent to
do so and USS may at any time remove the preferred stock depositary, any such
resignation or removal to take effect upon the appointment of a successor
preferred stock depositary and its acceptance of such appointment. Such
successor preferred stock depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50 million.
MISCELLANEOUS
USS will transmit to the record holders of depositary shares all notices and
reports that USS is required to furnish to the holders of the depositary shares.
Neither the preferred stock depositary nor USS will be liable under the deposit
agreement other than for its negligence or willful misconduct. The preferred
stock depositary and USS will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary shares, depositary receipts or shares of
preferred stock unless satisfactory indemnity is furnished. USS and the
preferred stock depositary may rely upon written advice of counsel or
accountants, or upon information provided by holders of depositary receipts or
other persons believed to be competent and on documents believed to be genuine.
The preferred stock depositary will not be responsible for any failure to carry
out any instruction to vote any shares of preferred stock, as long as that
action or non-action is in good faith.
39
DESCRIPTION OF WARRANTS
USS may issue Warrants for the purchase of Debt Securities, preferred stock or
common stock (each a "USS Security," and together the "USS Securities").
Warrants may be issued independently or together with any USS Security offered
by any prospectus supplement and may be attached to or separate from any such
USS Security. Each series of Warrants will be issued under a separate warrant
agreement (a "Warrant Agreement") to be entered into between USS and a bank or
trust company, as warrant agent (the "Warrant Agent"). The Warrant Agent will
act solely as an agent of USS in connection with the Warrants and will not
assume any obligation or relationship of agency or trust for or with any holders
or beneficial owners of Warrants. The following summary of certain provisions of
the Warrants does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Warrant Agreement that will
be filed with the SEC in connection with the offering of such Warrants.
DEBT WARRANTS
The prospectus supplement relating to a particular issue of Warrants to issue
Debt Securities ("Debt Warrants") will describe the terms of such Debt Warrants,
including the following (if applicable): (a) the title of such Debt Warrants;
(b) the offering price for such Debt Warrants; (c) the aggregate number of such
Debt Warrants; (d) the designation and terms of the Debt Securities purchasable
upon exercise of such Debt Warrants; (e) the designation and terms of the Debt
Securities with which such Debt Warrants are issued and the number of such Debt
Warrants issued with each such Debt Security; (f) the date from and after which
such Debt Warrants and any Debt Securities issued therewith will be separately
transferable; (g) the principal amount of Debt Securities purchasable upon
exercise of a Debt Warrant and the price at which such principal amount of Debt
Securities may be purchased upon exercise (which price may be payable in cash,
securities, or other property); (h) the date on which the right to exercise such
Debt Warrants shall commence and the date on which such right shall expire; (i)
the minimum or maximum amount of such Debt Warrants that may be exercised at any
one time; (j) whether the Debt Warrants represented by the Debt Warrant
certificates, or Debt Securities that may be issued upon exercise of the Debt
Warrants, will be issued in registered or bearer form; (k) information with
respect to book-entry procedures; (l) the currency or currency units in which
the offering price and the exercise price are payable; (m) a discussion of
material United States federal income tax considerations; (n) the redemption or
call provisions applicable to such Debt Warrants; and (o) any additional terms
of the Debt Warrants, including terms, procedures, and limitations relating to
the exchange and exercise of such Debt Warrants.
STOCK WARRANTS
The prospectus supplement relating to any particular issue of Warrants to issue
preferred stock, depositary shares representing fractional shares of preferred
stock or common stock will describe the terms of such Warrants, including the
following (if applicable): (a) the title of such Warrants; (b) the offering
price for such Warrants; (c) the aggregate number of such Warrants; (d) the
designation and terms of the preferred stock or common stock purchasable upon
exercise of such Warrants; (e) the designation and terms of the USS Securities
with which such Warrants are issued and the number of such Warrants issued with
each such USS Security; (f) the date from and after which such Warrants and any
USS Securities issued therewith will be separately transferable; (g) the number
of shares of preferred stock or common stock
40
purchasable upon exercise of a Warrant and the price at which such shares may be
purchased upon exercise; (h) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (i) the
minimum or maximum amount of such Warrants that may be exercised at any one
time; (j) the currency or currency units in which the offering price and the
exercise price are payable; (k) a discussion of material United States federal
income tax considerations; (l) the antidilution provisions of such Warrants; (m)
the redemption or call provisions applicable to such Warrants; and (n) any
additional terms of the Warrants, including terms, procedures, and limitations
relating to the exchange and exercise of such Warrants.
DESCRIPTION OF CONVERTIBLE OR EXCHANGEABLE SECURITIES
If any Debt Security, Preferred Stock, depositary shares representing fractional
shares of preferred stock or Warrant is converted or exchanged into any other
security the conversion or exchange terms thereof will be set forth in the
Prospectus Supplement issued for the sale of such convertible or exchangeable
security. These terms will include some or all of the terms described for
Warrants.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND
STOCK PURCHASE UNITS
USS may issue stock purchase contracts, including contracts obligating holders
to purchase from us, and us to sell to holders, a specified number of shares of
common stock at a future date or dates. The consideration per share of common
stock may be fixed at the time the stock purchase contracts are issued or may be
determined by reference to a specific formula described in the stock purchase
contracts. USS may issue the stock purchase contracts separately or as a part of
stock purchase units consisting of a stock purchase contract and one or more
shares of our preferred stock or debt securities or debt obligations of third
parties (including U.S. Treasury securities) securing the holders' obligations
to purchase the shares of common stock under the stock purchase contracts. The
stock purchase contracts may require us to make periodic payments to the holders
of stock purchase units or vice-versa. These payments may be unsecured or
prefunded on some basis. The stock purchase contracts may require holders to
secure their obligations in a specified manner. The applicable prospectus
supplement will describe the specific terms of any stock purchase contracts or
stock purchase units.
PLAN OF DISTRIBUTION
We may offer the offered securities in one or more of the following ways from
time to time:
-- to or through underwriting syndicates represented by managing underwriters;
-- through one or more underwriters without a syndicate for them to offer and
sell to the public;
-- through dealers or agents;
-- to investors directly in negotiated sales or in competitively bid
transactions; or
-- to holders of other securities in exchanges in connection with
acquisitions;
41
The prospectus supplement for each series of securities we sell will describe
the offering, including:
-- the name or names of any underwriters;
-- the purchase price and the proceeds to us from that sale;
-- any underwriting discounts and other items constituting underwriters'
compensation, which in the aggregate will not exceed eight percent of the gross
proceeds of the offering;
-- any commissions paid to agents;
-- the initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers; and
-- any securities exchanges on which the securities may be listed.
UNDERWRITERS
If underwriters are used in a sale, we will execute an underwriting agreement
with them regarding those securities. Unless otherwise described in the
prospectus supplement, the obligations of the underwriters to purchase these
securities will be subject to conditions, and the underwriters must purchase all
of these securities if any are purchased.
The securities subject to the underwriting agreement may be acquired by the
underwriters for their own account and may be resold by them from time to time
in one or more transactions, including negotiated transactions, at a fixed
offering price or at varying prices determined at the time of sale. Underwriters
may be deemed to have received compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from the purchasers of
these securities for whom they may act as agent. Underwriters may sell these
securities to or through dealers. These dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any initial
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
We may authorize underwriters to solicit offers by institutions to purchase the
securities subject to the underwriting agreement from us, at the public offering
price stated in the prospectus supplement under delayed delivery contracts
providing for payment and delivery on a specified date in the future. If we sell
securities under these delayed delivery contracts, the prospectus supplement
will state that this is the case and will describe the conditions to which these
delayed delivery contracts will be subject and the commissions payable for that
solicitation.
In connection with underwritten offerings of the securities, the underwriters
may engage in over-allotment, stabilizing transactions, covering transactions
and penalty bids in accordance with Regulation M under the Securities Exchange
Act of 1934, as follows:
-- Over-allotment involves sales in excess of the offering size, which creates
a short position for the underwriters.
-- Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified maximum.
-- Covering transactions involve purchases of the securities in the open
market after the distribution has been completed in order to cover short
positions.
42
-- Penalty bids permit the underwriters to reclaim a selling concession from a
broker/dealer when the securities originally sold by that broker/dealer are
repurchased in a covering transaction to cover short positions.
These stabilizing transactions, covering transactions and penalty bids may cause
the price of the securities to be higher than it would otherwise be in the
absence of these transactions. If these transactions occur, they may be
discontinued at any time.
AGENTS
We may also sell any of the securities through agents designated by us from time
to time. We will name any agent involved in the offer or sale of these
securities and will list commissions payable by us to these agents in the
prospectus supplement. These agents will be acting on a best efforts basis to
solicit purchases for the period of its appointment, unless we state otherwise
in the prospectus supplement.
DIRECT SALES
We may sell any of the securities directly to purchasers. In this case, we will
not engage underwriters or agents in the offer and sale of these securities.
In addition, debt securities or shares of common stock or preferred stock may be
issued upon the exercise of warrants.
INDEMNIFICATION
We may indemnify underwriters, dealers or agents who participate in the
distribution of securities against certain liabilities, including liabilities
under the Securities Act of 1933, and may agree to contribute to payments that
these underwriters, dealers or agents may be required to make.
NO ASSURANCE OF LIQUIDITY
The securities we offer may be a new issue of securities with no established
trading market. Any underwriters that purchase securities from us may make a
market in these securities. The underwriters will not be obligated, however, to
make a market and may discontinue market-making at any time without notice to
holders of the securities. We cannot assure you that there will be liquidity in
the trading market for any securities of any series.
VALIDITY OF SECURITIES
The validity of the issuance of the Offered Securities will be passed upon for
USS by D. D. Sandman, Esq., Vice Chairman, Chief Legal Officer and Chief
Administrative Officer of USS or by R.M. Stanton, Esq., Assistant General
Counsel -- Corporate and Assistant Secretary of USS. Messrs. Sandman and
Stanton, in their respective capacities as set forth above, are paid salaries by
USS, participate in various employee benefit plans offered by USS and own common
stock of USS.
43
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to United States Steel Corporation's Current Report on Form 8-K dated
June 4, 2002 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated/combined financial statements and supplemental schedule
incorporated in this prospectus by reference from Republic Technologies
International Holdings, LLC's Annual Report on Form 10-K for the year ended
December 31, 2001 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report (which report expresses an unqualified
opinion and includes explanatory paragraphs relating to the uncertainties about
the consequences of the bankruptcy proceedings and the ability to continue as a
going concern), which is incorporated herein by reference, and has been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
44
[US STEEL CORPORATION LOGO]