Exhibit 99.1
------------
RECENT DEVELOPMENTS
On February 18, 2004, we entered into an agreement to acquire most of the
assets of Weirton Steel Corporation, or Weirton, for approximately $255 million,
which includes the assumption of certain liabilities. The closing is subject to
bankruptcy court approval, anti-trust matters and certain other conditions. The
process of obtaining bankruptcy court approval will include the solicitation by
Weirton of competing offers for its assets and overcoming objections from
certain creditors. Because of this process and the conditions to closing, there
can be no assurance that this transaction will be consummated on the terms
currently contemplated or at all. Should this acquisition close, we anticipate
the cash portion of the purchase price will be approximately $160 million,
subject to adjustment based on working capital.
We have reached agreement with the Independent Steelworkers Union on the
terms of a collective bargaining agreement that would allow us to implement our
lean staffing practices at Weirton. As a result, should we acquire Weirton, we
would be able to operate its facilities in a manner similar to our operation of
our other facilities. In 2002, the Weirton facilities reported about 3.0 million
net tons of raw steel capability and shipped about 2.3 million net tons of
finished product. Based upon reports filed with the SEC, Weirton had net sales
of $1,036.0 million and a net loss of $117.0 million for the year ended December
31, 2002 and net sales of $774.1 million and a net loss of $156.1 million for
the nine months ended September 30, 2003.
On March 11, 2004, we announced that we will restart a continuous caster
and a basic oxygen furnace at our Cleveland West facility. These assets have
been idle since June 2001. We plan to invest approximately $10 million in this
effort, primarily for maintenance and engineering necessary to restart the
assets, and to hire approximately 140 steelworkers to operate the assets. We
expect that the first slabs will be produced in May 2004, and that at full
production, the caster will add 60,000 tons of steel slabs per month.
FINANCIAL DATA
PERIOD FROM INCEPTION
YEAR ENDED (FEBRUARY 22, 2002) TO
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------------
(DOLLARS IN MILLIONS)
EBITDA(1)...................................... $ 79.5 $ 127.6
Ratio of EBITDA to interest and other financing
expense--net(1).............................. 1.6 49.1
Ratio of total debt to EBITDA(1)............... 7.8 0.5
Fixed charge coverage ratio.................... * 39.6
EBITDA per net ton shipped(1).................. $ 7.64 $ 49.04
---------------
* Earnings were less than fixed charges in 2003 by $47.8 million.
(1) EBITDA represents net (loss) income before interest, provision for income
taxes and depreciation and amortization expense. EBITDA is not a measure of
performance under GAAP and has been presented because we believe that
investors use EBITDA to analyze operating performance, which includes our
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 cash flow
statement data prepared in accordance with GAAP. In addition, comparison 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 ability to service and incur indebtedness, which
we believe to be cash provided by (used in) operating activities.
PERIOD FROM INCEPTION
YEAR ENDED (FEBRUARY 22, 2002) TO
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- ----------------------
(DOLLARS IN MILLIONS)
EBITDA..................................... $ 79.5 $ 127.6
Plus (minus)
Interest and other financing expense,
net................................... (50.9) (2.6)
Taxes on income.......................... 23.9 (45.9)
Deferred income taxes.................... 20.5 (5.3)
Other adjustment for items not affecting
operating cash flow................... 16.2 (7.0)
Changes in working capital and other
items(a).............................. 199.7 (178.4)
------- -------
Net cash provided by (used in) operating
activities............................... $ 288.9 $(111.6)
======= =======
---------------
(a) Includes pension and retiree healthcare expense in excess of actual
payments.
LIQUIDITY
We are currently in negotiations with various lenders regarding the
replacement of our senior credit facilities with a new credit facility or
facilities after the completion of this effort to eliminate certain restrictions
imposed on us and modify the amount of security that we provide. However, we
cannot assure you that we will be successful in entering into a new credit
facility or facilities with more favorable terms than the current senior credit
facilities.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of
International Steel Group Inc. as
of March 31, 2004 were as follows:
NAME AGE POSITION
---- --- --------
Xxxxxx X. Xxxx............................ 66 Chairman of the Board of Directors
Xxxxxx X. Xxxx............................ 52 President, Chief Executive Officer and
Director
X. Xxxx Xxxxxxx........................... 60 Chief Operating Officer
Xxxxxxx X. Xxxxxxx........................ 49 Chief Financial Officer and Secretary
Xxxxxx X. Xxxxxx.......................... 58 Vice President, Controller and Chief
Accounting Officer
Xxxxxxx X. Xxxxx, Xx...................... 43 Vice President & General Manager, ISG
Cleveland
Xxxxxx X. Xxxxxxxxx....................... 45 Vice President, Engineering & Services
Xxxxx X. Xxxxx............................ 38 Vice President, Finance and Treasurer
Xxxx X. Xxxxxx............................ 57 Vice President & General Manager, ISG
Sparrows Point
Xxxx X. Xxxx XXX.......................... 51 Vice President & General Manager, ISG
Xxxxx Harbor
Xxxxxx X. Xxxxxx.......................... 43 Vice President, Sales & Marketing
Xxxxxx X. Xxxxxxx......................... 45 Vice President, Business Development
Xxxxx X. Xxxxx............................ 49 Vice President & Corporate Manager Human
Resources
Xxxxxx X. Xxxx............................ 56 Vice President & Corporate Manager Labor
Relations
Xxxx X. Xxxxxxx........................... 72 Director
Xxxxxxx X. Xxxxxxxxxxx.................... 75 Director
Xxxxx X. Xxxxxx........................... 64 Director
Xxxxx X. Xxxxxx........................... 59 Director
Xxxxxx X. Xxxx, Xx. has served as the Chairman of the Board of Directors
and a director of ISG since inception. Xx. Xxxx is the Chairman and Chief
Executive Officer of XX Xxxx & Co. LLC, a merchant banking firm, a position he
has held since April 2000. Xx. Xxxx is also the Chairman and Chief Executive
Officer of WLR Recovery Fund L.P., WLR Recovery Fund II L.P., Asia Recovery
Fund, Asia Recovery Fund Co-Investment, Nippon Investment Partners and Absolute
Recovery Hedge Fund. Xx. Xxxx is also the general partner of WLR Recovery Fund
L.P., WLR Recovery Fund II L.P., Asia Recovery Fund, and Absolute Recovery Hedge
Fund. Xx. Xxxx is also Chairman of Ohizumi Manufacturing Company in Japan, and
Burlington Industries, Core Xxxxx Corporation, and Insuratex, Ltd. in the United
States. Xx. Xxxx is a board member of the Turnaround Management Association,
Nikko Electric Co. in Japan, Xxxx Xxxx Life Insurance Co. in Korea, and of Syms
Corp., Clarent Hospital Corp., 360 Networks Corp. and News Communications Inc.
in the U.S. Xx. Xxxx is also a member of the Business Roundtable. Previously,
Xx. Xxxx served as the Executive Managing Director at Rothschild Inc., an
investment banking firm, from October 1974 to March 2000. Xx. Xxxx was also
formerly Chairman of Smithsonian Institution National Board.
Xxxxxx X. Xxxx has served as our President, Chief Executive Officer and a
director of ISG since April 2002. Xx. Xxxx has over 30 years of management
experience in the metals industry. He served as President and Chief Executive
Officer of Pechiney Rolled Products, an aluminum rolling company and a division
of Pechiney SA from January 2000 to August 2001. From 1987 to 2000 Xx. Xxxx held
various positions with Nucor Corporation, a mini-mill steel producer, including
Vice President/General Manager of Nucor Steel, a division of Nucor Corporation,
at the Blytheville, Arkansas and Berkley, South Carolina facilities. Prior to
joining Nucor, Xx. Xxxx was Superintendent
of Operations at Lone Star Steel from 1986 to 1987. He began his metal
management career at U.S. Steel's Fairless Hills operation, where he held
positions of increasing responsibility during a 14-year career from 1971 to
1986.
X. Xxxx Xxxxxxx has been our Chief Operating Officer since March 2003.
Prior to that, he served as Chairman and Chief Executive Officer of Steel
Consultants from 2000 to February 2003. Xx. Xxxxxxx has 35 years of leadership
experience in the American steel industry including 27 years with U.S. Steel, an
integrated steel producer. During his service with U.S. Steel, Xx. Xxxxxxx held
positions of increasing responsibility including serving as General Manager of
Gary Works from 1987 to 1994, General Manager of Mon Valley Works from 1984 to
1987 and various supervisory and management positions at Fairless Works from
1967 to 1984. After leaving U.S. Steel, Xx. Xxxxxxx assumed the position of
CEO/COO of National Steel from 1994 to 1996. Xx. Xxxxxxx was also the former
President and General Manager of Beta Steel Corp. from 1998 to 2000.
Xxxxxxx X. Xxxxxxx has been our Chief Financial Officer since May 2003. He
has over 25 years of financial management experience. He joined Bethlehem Steel
Corporation, an integrated steel producer, in 1979 and advanced through
increasingly responsible financial management positions. He served as Corporate
Credit Manager from October 1985 to October 1986, Director of Financial Services
from November 1986 to November 1990, Director Risk Management from December 1990
to February 1993, Manager Financial Planning from March 1993 to March 1995,
Assistant Treasurer from March 1995 to March 1998, Vice President and Treasurer
from October 1999 to September 2001 and Senior Vice President Finance and Chief
Financial Officer from October 2001 to May 2003.
Xxxxxx X. Xxxxxx joined ISG in November 2003 and currently serves as our
Vice President, Controller and Chief Accounting Officer. He worked at Bethlehem
from 1984 until October 2003, most recently in a similar capacity. Xx. Xxxxxx
has 35 years of experience in accounting and finance with over 25 years being in
the steel industry.
Xxxxxxx X. Xxxxx, Xx. was appointed Vice President & General Manager of ISG
Cleveland Inc. in January 2004 and previously served as General Manager of ISG
Cleveland Inc. since March 2003. Since April 2002, he was Division Manager Hot
Rolling Operations, Cleveland. Prior to that, he worked for LTV Steel Corp., an
integrated steel producer, where he served as Manager Hot Strip Mill, Cleveland.
Xxxxxx X. Xxxxxxxxx has been our Vice President, Engineering & Services
since April 2002. Prior to joining us, Xx. Xxxxxxxxx served as Vice President of
Steel at Minnesota Iron & Steel, Inc., a steel sheet mini-mill from May 1999 to
April 2002 and Manager, Maintenance & Engineering at Nucor Steel Inc., a
mini-mill steel producer, from June 1995 to May 1999.
Xxxxx X. Xxxxx has been our Vice President, Finance and Treasurer since
January 2004 having previously served as Vice President & Corporate Controller
since May 2003 and Assistant Vice President & Corporate Controller since
November 2002. Prior to joining ISG, Xx. Xxxxx served as the Division Controller
of Nucor Steel Corporation, a mini-mill steel producer, from September 1998 to
April 2002 and as Division Accountant from December 1995 to September 1998.
Xxxx X. Xxxxxx joined ISG in March 2003 and served as a Transition Leader
at Bethlehem Steel Corporation's Sparrows Point facility. In May 2003, he was
named Vice President & General Manager of ISG Sparrows Point. Prior to that
time, Xx. Xxxxxx was the President and Chief Executive Officer of Minnesota Iron
& Steel, Inc., a steel sheet mini-mill, from March 1999 to March 2003. He has
over 36 years in the American steel industry, including service with Gulf State
Steel, an integrated steel mill, where he served as Vice President Manufacturing
from 1986 to 1992, Executive Vice President and General Manager from 1992 to
1993 and President and Chief Executive Officer from 1999 to 2003. Prior to that,
Xx. Xxxxxx was employed with U.S. Steel from 1976 to 1986 in
various management positions, including Chief Industrial Engineer,
Superintendent, Director Strategic Planning and Plant Manager.
Xxxx X. Xxxx XXX has been Vice President & General Manager, ISG Xxxxx
Harbor since May 2003. Prior to that time, Xx. Xxxx was the Vice President &
General Manager, XXX Xxxxxxxxx from April 2002 to May 2003. He has also served
as Director of ISG Cleveland, Inc. and ISG Xxxxxx, Inc. since May 2002 until
January 2004. Previously, he worked at LTV Steel Corp., an integrated steel
producer, where he served as Senior Vice President of Flat Rolled Operations
from February 2001 to March 2002, Vice President and General Manager of
Cleveland from April 1998 to February 2001, and as Vice President of L-S
Electro-Galvanizing Company from August 1999 to March 2002.
Xxxxxx X. Xxxxxx has served as our Vice President, Sales & Marketing since
April 2002. Prior to that, he was employed with Birmingham Steel Corporation, a
mini-mill steel producer, where he served as Vice President, Sales & Marketing
from December 2001 to March 2002 and General Sales Manager from August 2000 to
December 2001. Previously Xx. Xxxxxx was employed with Nucor Steel Corporation,
a mini-mill steel producer, as Sales Manager from November 1992 to August 2000.
Xx. Xxxxxx began his sales career in the metals industry at LTV Steel in July
1983, worked for Bethlehem Steel Corporation from July 1988 to July 1992, and
worked for Armco Advanced Materials from July 1992 to November 1992.
Xxxxxx X. Xxxxxxx has been our Vice President, Business Development since
April 2002. Prior to joining ISG, Xx. Xxxxxxx worked as an independent
consultant serving the steel industry from September 2001 until April 2002.
Prior to that, Xx. Xxxxxxx served as Vice President of Operations at Pechiney
Rolled Products, an aluminum rolling company and a Division of Pechiney S.A.
from March 2000 to September 2001 and Manager, Operations at Nucor Steel, a
mini-mill steel producer, from October 1991 to March 2000.
Xxxxx X. Xxxxx has been our Vice President & Corporate Manager Human
Resources since January 2004 and previously served as Assistant Vice President &
Corporate Manager Human Resources since April 2002. Prior to that, she held
various positions in Human Resources and Benefits at Pechiney Rolled Products,
LLC from October 1992 to March 2002, including Benefits Administrator, Benefits
Manager, and Manager Benefits and Compensation.
Xxxxxx X. Xxxx has been our Vice President & Corporate Manager Labor
Relations since January 2004 and previously served as Assistant Vice President &
Corporate Manager Labor Relations since April 2002. Prior to that, he worked for
LTV Steel Corp., an integrated steel producer, where he served as Manager
Industrial Relations, Cleveland from December 2000 to April 2002 and Manager
Industrial Relations, Indiana Harbor from August 1993 to December 2000.
Xxxx X. Xxxxxxx has served as a director since March 2004. Xx. Xxxxxxx is
the retired chairman and chief executive officer of ITT Corporation, and served
as chairman of the National Security Telecommunications Advisory Committee from
1982 to 1984. For the past five years, Xx. Xxxxxxx has been self-employed as a
private investor. He currently is a member of the boards of Hartford Financial
Services Group, ITT Industries, ITT Educational Services and Rayonier, Inc.
Xxxxxxx X. Xxxxxxxxxxx has served as a director of ISG since April 2002.
Xx. Xxxxxxxxxxx currently serves as Vice Chairman of Xxxxxx Group Holdings,
Inc., an insurance brokerage and financial services company, which he joined on
August 6, 2003. Prior to that time he served as the President of Near North
National Group, an insurance brokerage and financial services company, a
position which he had held for more than five years. Xx. Xxxxxxxxxxx also serves
as the Chairman Emeritus and Chairman of the Executive Committee of the Atlanta
Braves baseball team and as a director of both WMS Industries Inc., a gaming
manufacturer, and Midway Games Inc., a publisher of entertainment software.
Xxxxx X. Xxxxxx has served as a director since March 2004. Xx. Xxxxxx was
President and CEO of the Cleveland Cavaliers and the Gund Arena Company from
1998 to 2002 and has served as the Vice Chairman from 2003 to the present. Xx.
Xxxxxx is also a 34-year veteran of Ernst &
Young, where he served in numerous capacities, including vice chairman and
regional managing partner. He is currently a member of the boards of Invacare
Corporation, The Xxxxxxx-Xxxxxxxx Company and Goodyear Tire & Rubber Company.
Xxxxx X. Xxxxxx has served as a director since March 2004. Xx. Xxxxxx found
Xxxxxx Global Strategies, LLC a consulting firm, in 1998, where he currently
serves as President and Chief Executive Officer. Xx. Xxxxxx has also served as
First Deputy Mayor of the City of New York. Xx. Xxxxxx has also had a 25-year
career as an attorney, certified public accountant and consultant. He is
currently a member of the boards of Fox Entertainment Group and NDS Group, Plc.
On December 29, 2000, LTV and substantially all of its domestic
subsidiaries filed separate petitions for reorganization under Chapter 11 of the
Code in bankruptcy court, and on October 15, 2001, Bethlehem and 22 of its
subsidiaries filed separate petitions for reorganization under Chapter 11 of the
Code in bankruptcy court. As described above, some of our officers were employed
by LTV or Bethlehem at the time those companies filed for bankruptcy.
COMPOSITION OF THE BOARD OF DIRECTORS
Our business, property and affairs are managed by or, are under the
direction of, the board of directors pursuant to the General Corporation Law of
the State of Delaware and our bylaws. Members of the board of directors are kept
informed of XXX's business through discussions with the chairman, the president
and chief executive officer and with key members of management, by reviewing
materials provided to them and by participating in meetings of the board of
directors and its committees.
Our board of directors is currently comprised of six directors. Our board
of directors is divided into three staggered classes, with as nearly equal a
number of directors in each class as possible. Messrs. Xxxx and Xxxx are our
Class I directors, and their terms will expire in 2004. Messrs. Xxxxxxx and
Xxxxxx are our Class II directors, and their terms will expire in 2005. Messrs.
Xxxxxxxxxxx and Xxxxxx are our Class III directors, and their terms will expire
in 2006. Starting with the directors elected in 2004, our directors will serve
three-year terms. At each annual meeting of stockholders, a class of directors
will be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring. Our bylaws provide that no director may stand for
election or re-election after the age of 74. Additionally, to the extent our
chairman of the board is unable to continue serving in such capacity, our bylaws
provide that our chief executive officer will automatically become our chairman
of the board for the remainder of the then current term.
Under our collective bargaining agreement with the USWA, the USWA has the
right to nominate one individual to serve as a member of our board of directors.
The individual must be acceptable to the Chairman of our board of directors,
which acceptance may not be unreasonably withheld. If the size of our board of
directors increases to more than 14 members, the USWA has the right to nominate
one additional director. Any nominated individual who is elected a director will
be subject to all fiduciary responsibilities to us and our stockholders. No
current member of the board of directors is a nominee of the USWA.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has standing audit, compensation, and nominating and
corporate governance committees.
AUDIT COMMITTEE
Our audit committee currently consists of Messrs. Araskog, Xxxxxxxxxxx and
Xxxxxx (Chairman). The Board has determined that all members of the audit
committee satisfy ISG's categorical standards of independence as well as the
applicable independence requirements for
audit committee members under NYSE listing standards and federal securities
laws, and that all members of the audit committee are financially literate as
required by the NYSE listing standards. The Board has also determined that
Messrs. Araskog and Xxxxxx are "audit committee financial experts" as defined by
the SEC and that each has accounting or related financial management expertise
as required by the NYSE listing standards. For more information on the work
experience of Messrs. Xxxxxxx and Xxxxxx, please see "--Directors and Executive
Officers" above. Xx. Xxxxxx currently serves on the audit committees of three
other public companies. The Board has determined, after considering Xx. Xxxxxx'x
extensive experience in accounting and service on public company audit
committees, and taking into account Xx. Xxxxxx'x other work commitments, that
his service on these other audit committees does not undermine his ability to
serve on our audit committee.
The duties of the audit committee include, among other things, the
following:
- review and discuss the auditor's quality control, the independence of the
auditors, and the conduct of the audit;
- set our hiring policies for employees or former employees of the
independent auditors;
- review and discuss our financial statements, disclosures, and earnings
press releases;
- review and discuss internal audit plans, internal audit reports, and the
systems of internal accounting controls;
- meet with the independent auditors to discuss the audit results and the
recommendations of the independent auditors;
- discuss risk management policies; and
- evaluate conformity by us with legal requirements and ISG's code of
ethics, establish "whistleblower" procedures, and discuss with legal
counsel any material legal matters regarding financial statements or
compliance policies.
The committee also has the sole authority to appoint, retain, terminate,
and compensate our independent auditors, and to approve all fees and non-audit
engagements.
COMPENSATION COMMITTEE
Our compensation committee currently consists of Messrs. Xxxxxxx,
Xxxxxxxxxxx (Chairman) and Powers. The compensation committee reviews, approves
and makes recommendations to the board of directors concerning our compensation
practices, policies and procedures for our executive officers. The compensation
committee's duties also include, among other things, establishing executive
compensation policies and programs, reviewing and approving executive officer
compensation, recommending incentive compensation plans and equity-based plans,
administering compensation plans, overseeing regulatory compliance with respect
to compensation matters, reviewing employment and severance agreements with our
executive officers, and reviewing director compensation.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Our nominating and corporate governance committee currently consists of
Messrs. Araskog (Chairman), Xxxxxxxxxxx and Xxxxxx. The duties of the nominating
and corporate governance committee include, among other things, identifying
individuals qualified to become members of our board of directors, recommending
candidates to fill vacancies and newly-created positions on our board of
directors, recommending whether incumbent directors should be nominated for
re-election to our board of directors, and developing and recommending corporate
governance principles applicable to our board of directors and our employees.
DIRECTOR COMPENSATION
We compensate our non-employee directors in the amount of $50,000 per year.
The chairman of each of the audit committee, the compensation committee and the
nominating and corporate governance committee receive an additional $15,000 per
year. Each director of ISG is also reimbursed by ISG for out-of-pocket expenses
incurred in attending board of directors and board of directors committee
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following people served on our compensation committee during various
points in 2003: Xxxxxxx Xxxxxxxxxxx, Xxxx X. Xxxxxx, Xxxxxxx X. Xxxx, and Xxxxxx
X. Xxxx, Xx. None of these people has ever been an officer or employee of ours
or any of our subsidiaries. None of our executive officers serve or have served
as a member of the board of directors, compensation committee or other board
committee performing equivalent functions of any entity that has one or more
executive officers serving as one of our directors or on our compensation
committee.
Our compensation committee customarily has met and discussed matters
relating to the compensation of our key officers. Xx. Xxxx, a former
compensation committee member, currently serves as Chairman and Chief Executive
Officer of WLR, which manages two funds, WLR Recovery Fund L.P. and WLR Recovery
Fund II, L.P., and which currently beneficially owns approximately 32.8% of our
common stock. These two funds subsequently distributed an amount of our shares
equal to approximately 25.7% of our common stock to their unaffiliated limited
partners and an amount equal to 5.1% of our common stock to WLR, Xx. Xxxx or
entities affiliated with them, though the funds will continue to have voting
power over all of the shares until June 9, 2004. Without including those shares
distributed to entities not affiliated with WLR or Xx. Xxxx, Xx. Xxxx
beneficially owns 6,936,688, or 7.1%, of our currently outstanding shares. WLR
acted as our financial advisor in connection with our formation and certain
subsequent asset acquisitions, including our acquisition of certain assets of
Bethlehem. During 2003, we paid WLR a total of $5.9 million for rendering
services to us in its capacity as our financial advisor and for out-of-pocket
expenses. Xx. Xxxxxx, a former director and compensation committee member,
currently serves as the chairman and chief executive officer of Cleveland-Cliffs
Inc, which supplies iron ore pellets to us under a long-term supply agreement.
Xx. Xxxx, also a former director and compensation committee member, is the
Chairman of the Park Corporation, from whom we purchase mill rolls and to whom
we sell steel ingots. For a more detailed description of these matters, see
"Related Party Transactions."
EXECUTIVE COMPENSATION
Annual compensation paid to our named executive officers consists of salary
and cash bonus awards. Unless otherwise indicated, the following table sets
forth the cash compensation, as well as other compensation paid or accrued by
us, since our inception, to our chief executive officer and each of the next
four most highly compensated executive officers, serving as such as of December
31, 2003.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
---------------------------------- ------------------------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS COMP OPTIONS(1) COMPENSATION
------------------------------ ---- -------- -------- ------------ --------------------- ------------
Xxxxxx X. Xxxx(3)....................... 2003 $533,000 $500,000 -- 115,840 --
President and Chief Executive Officer 2002 $333,333 $632,867 $ 52,836(2) 2,968,400 $962,481(9)
X. Xxxx Xxxxxxx(4)...................... 2003 $291,667 $175,000 $ 24,399(2) 144,800 --
Chief Operating Officer
Xxxxxxx X. Xxxxxxx(5)................... 2003 $200,000 $135,000 $ 20,163(2) 144,800 --
Chief Financial Officer
Xxxxxx X. Xxxxxx(6)..................... 2003 $226,000 $150,000 $121,255(2) 72,400 --
Vice President--Sales and Marketing 2002 $165,000 $313,269 $ 77,487(2) 557,480 --
Xxxx X. Xxxx XXX(7)..................... 2003 $237,334 $150,000 $111,236(2) 36,200 --
Vice President--General Manager-- 2002 $150,000 $284,790 -- 296,840 --
ISG Xxxxx Harbor
Xxxxxx X. Xxxxxxx(8).................... 2003 $212,000 $150,000 -- 54,300 --
Vice President--Business 2002 $150,000 $284,790 $ 80,309(2) 742,100 --
Development
---------------
(1) Gives effect to the stock splits that were effective as of November 26,
2003. Stock options granted vest in equal increments over four years.
(2) Represents gross up payment made with respect to taxable relocation
benefits.
(3) Xx. Xxxx'x employment with ISG commenced in April 2002.
(4) Xx. Xxxxxxx'x employment with ISG commenced in March 2003. Xx. Xxxxxxx'x
annual salary rate for 2003 was $350,000.
(5) Xx. Xxxxxxx'x employment with ISG commenced in May 2003. Had Xx. Xxxxxxx'x
employment with us commenced on January 1, 2003, he would have been ISG's
third most highly compensated officer. Xx. Xxxxxxx'x annual salary rate for
2003 was $300,000.
(6) Xx. Xxxxxx'x employment with ISG commenced in April 2002.
(7) Xx. Xxxx'x employment with ISG commenced in April 2002.
(8) Xx. Xxxxxxx'x employment with ISG commenced in April 2002.
(9) Represents a one-time special bonus of $962,481.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options we granted
during the fiscal year ended December 31, 2003 to the named executive officers.
OPTION/SARS GRANTS IN LAST FISCAL YEAR(1)
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
PERCENT OF TOTAL --------------------------- ANNUAL RATES OF
NUMBER OF OPTIONS GRANTED TO STOCK PRICE
SECURITIES EMPLOYEES DURING APPRECIATION FOR
UNDERLYING THE FISCAL YEAR EXERCISE OPTION TERM(4)
OPTIONS ENDED DECEMBER 31, PRICE -----------------------
NAME GRANTED(2) 2003(3) ($/SHARE) EXPIRATION DATE 5% 10%
---- ---------- ------------------ --------- --------------- ---------- ----------
Xxxxxx X. Xxxx........ 115,840 11.14% $25.55 July 1, 2009 $1,006,683 $2,283,821
X. Xxxx Xxxxxxx....... 144,800 13.94% $25.55 July 1, 2009 $1,258,354 $2,854,776
Xxxxxxx X. Xxxxxxx.... 144,800 13.94% $25.55 July 1, 2009 $1,258,354 $2,854,776
Xxxxxx X. Xxxxxx...... 72,400 6.97% $25.55 July 1, 2009 $ 629,176 $1,427,388
Xxxx X. Xxxx XXX...... 36,200 3.48% $25.55 July 1, 2009 $ 314,588 $ 713,694
Xxxxxx X. Xxxxxxx..... 54,300 5.23% $25.55 July 1, 2009 $ 471,883 $1,070,541
---------------
(1) Gives effect to the stock splits that were effective as of November 26,
2003.
(2) Consists of options to acquire common stock, each of which was granted on
July 1, 2003 and which options vest over four years, with one quarter of the
award vesting on each of the first, second, third and fourth anniversaries
of the grant date.
(3) The percentage of total options granted is based on an aggregate of
1,038,940 options granted by us during fiscal year December 31, 2003 to our
employees.
(4) There is no assurance provided to any executive officer or any other holder
of company securities that the actual stock price appreciation over the
option term will be at the assumed 5% or 10% annual rate of compound stock
price appreciation or at any other defined level. Unless the market price of
the common stock appreciates over the option term, no value will be realized
from the option grants made to the executive officers.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to exercises of
options during 2003 by the executive officers named in the Summary Compensation
Table and the values of unexercised options held by them as of December 31,
2003.
AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR-END (#) OPTIONS AT YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
Xxxxxx X. Xxxx....... 36,200 $399,922(1) 1,448,000 1,636,240 $52,399,600 $55,261,588
X. Xxxx Xxxxxxx...... -- -- -- 144,800 -- $ 1,939,960
Xxxxxxx X. Xxxxxxx... -- -- -- 144,800 -- $ 1,939,960
Xxxxxx X. Xxxxxx..... -- -- 139,370 490,510 $ 5,043,462 $16,100,365
Xxxx X. Xxxx XXX..... 36,200 $399,922(1) 38,010 258,830 $ 1,375,490 $ 8,541,429
Xxxxxx X. Xxxxxxx.... -- -- 185,525 610,875 $ 6,713,699 $20,868,581
---------------
(1) Messrs. Mang and Xxxx each exercised options to purchase 36,200 shares of
ISG's common stock on September 10, 2003 and September 15, 2003,
respectively. The value realized is the
product of (A) the difference between the fair market value of the stock on
the date of exercise minus the exercise price multiplied by (B) the number
of options exercised. The exercise price of the options exercised by each of
Messrs. Mang and Xxxx was approximately $2.76 per share. There was no market
in ISG's stock on either of these dates; for the purposes of this
calculation, ISG has assumed that the fair value of its stock on both
September 10, 2003 and September 15, 2003 was approximately $13.81 per
share.
EMPLOYEE BENEFIT PLANS
2002 STOCK OPTION PLAN
In June 2002, our board of directors approved our 2002 Stock Option Plan,
which had been approved by our stockholders on April 11, 2002. The 2002 Stock
Option Plan provides for the grant of incentive stock options and nonqualified
stock options. Incentive stock options will have an exercise price of 100% or
more of the market value of our common stock on the date of grant. Nonqualified
stock options may have an exercise price of more or less than 100% of the market
value of our common stock on the date of grant.
Our employees, directors, consultants and independent contractors and the
employees, directors, consultants and independent contractors of our
subsidiaries may be selected by the board, or a committee thereof, to receive
benefits under the plan. We have reserved a total of 8,134,140 shares of our
common stock for issuance under the 2002 Stock Option Plan. As of December 31,
2003, options to purchase 7,373,940 shares of our common stock under the 2002
Stock Option Plan were outstanding.
The options currently outstanding generally vest in four equal annual
installments and expire six years after the date of grant. However, the vesting
of certain options was accelerated in connection with the completion of our
initial public offering. In addition, the vesting of the options is fully
accelerated upon death, disability, retirement at age 65 or a change in control.
The 2002 Stock Option Plan provides that the number of shares covered by
outstanding awards, certain other provisions contained in outstanding awards,
the number of shares reserved for issuance under the plan and the other share
limits contained in the plan are subject to adjustment in certain situations.
Our compensation committee currently administers and interprets the plan. The
plan may be amended by the board of directors, or a committee thereof, at any
time as it relates to options not yet granted and with the consent of the
affected option holder with respect to any outstanding option. However, any
amendment that would increase the number of shares issuable under options
granted to any individual or change the class of persons to whom options may be
granted shall be subject to the approval of our stockholders within one year of
such amendment.
OFFICER CASH AND STOCK BONUS PLAN
In June 2002, our board of directors approved our Officer Cash and Stock
Bonus Plan, which had been approved by our stockholders on April 11, 2002. The
Officer Cash and Stock Bonus Plan provides for bonuses in the form of cash and
restricted stock. We have not reserved any of our shares of common stock for
issuance under the Officer Cash and Stock Bonus Plan. The Officer Cash and Stock
Bonus Plan was amended and restated effective June 16, 2003 so as to provide
that effective upon consummation of our initial public offering, any shares of
common stock to be issued under this plan must come from purchases in the open
market. The number of shares covered by outstanding awards under the plan are
subject to adjustment in certain situations.
Our compensation committee administers and interprets the plan. Our board
of directors, or a committee thereof, has full power and authority to amend the
plan to the extent that any provision is found not to be in compliance with
applicable law or securities rules, without the necessity of any further
approval by the stockholders. Our board, or a committee thereof, has the
exclusive power to adopt, alter and repeal such administrative rules, guidelines
and practices governing the plan. Our
officers and the officers of our subsidiaries may be selected by our board of
directors, or a committee thereof, to receive benefits under the plan.
Under the plan, each participant will receive a specified percentage of a
distribution pool. The total amount of such pool is determined by a formula
based on our adjusted post-tax net income and capital for each fiscal year. The
percentage that a participant is entitled to receive is based upon the
participant's salary in relation to all participants' salaries and is payable in
cash and, in some cases, restricted stock. The cash bonus payable to an officer
under the plan is limited to two times a participant's base salary. Any bonus
earned in excess of two times a participant's salary will be payable in
restricted stock, although the compensation committee may elect to pay the
entire bonus in cash. The fair market value of any stock bonus is limited to the
participant's base salary. Restricted stock granted under the plan will vest in
cumulative installments of 1/3 of the restricted stock on each anniversary of
the initial issuance date, provided that no less than six months prior to the
date upon which the restricted stock is scheduled to vest, a participant may
direct that such restricted stock shall vest at a later date. Subject to waiver
at the discretion of our board of directors, or its committee, any shares of
restricted stock that are not vested at the time of a participant's termination
of employment, for any reason other than retirement, shall be forfeited. In
addition, if a change in control occurs on or prior to June 28, 2004, all shares
of restricted stock held by those participants whose employment has not
terminated shall vest upon such change in control. As of December 31, 2003, we
have not granted any restricted stock under the plan. The plan terminates on
June 28, 2005, unless extended or earlier terminated by the board of directors.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Xxxxxxx, Xxxxxxx,
Xxxx and Xxxxxx, or the Executives. The agreements for Messrs. Xxxxxxx, Xxxxxxx
and Xxxxxx have an initial term that expires on December 31, 2005 and, following
the initial term, will automatically be extended by one year on each December 31
unless either party to the agreement provides notice of the intent not to renew
the agreement by September 30 of such year. Xx. Xxxx'x agreement has an initial
term that expires on December 31, 2006, and will also be automatically extended
by one year on each December 31 unless either party to the agreement provides
notice of the intent not to renew the agreement by September 30 of such year.
The agreements provide for an annual base salary of $600,000 for Xx. Xxxx,
$300,000 for Xx. Xxxxxxx, $350,000 for Xx. Xxxxxxx, and $242,000 for Xx. Xxxxxx.
In addition to base salary, the agreements also provide that the Executives will
(a) receive an annual bonus in accordance with ISG's Officer Cash and Stock and
Bonus Plan, (b) be eligible to participate in our 401(k) plan, (c) be entitled
to participate in our disability program, (d) be eligible to participate in such
hospitalization, life insurance, and other employee benefit plans and programs,
if any, as may be adopted by us from time to time and (e) be eligible to receive
awards under any stock option plan as in effect from time to time. Xx. Xxxx'x
agreement also provides that he is entitled to receive executive life insurance
in the amount of $1,000,000, and indemnification from ISG in respect of claims
brought against Xx. Xxxx by former employers subject to certain conditions.
The agreements will automatically terminate upon the Executives' death,
disability or retirement. We may terminate the agreements and the Executives'
employment (i) without "cause" (as described in the Executive's agreement) upon
90 days prior written notice and (ii) immediately for "cause." The Executives
may terminate the agreements and their employment with us with 90 days' written
notice to us.
Upon termination of employment (a) by reason of death, disability or by ISG
for "cause," (b) by the Executive other than for "good reason" (as defined in
the Executive's agreement) or (c) upon the expiration of the agreement, each
Executive will be entitled only to the base salary to which the Executive was
entitled through the date of termination, any accrued and unpaid bonus
compensation (calculated on a pro rata basis) due to the Executive with respect
to the calendar year prior to and
the calendar year in which the date of termination occurs, and such other
benefits as may be available through our other benefit plans and policies.
In the case of a termination of employment by us without "cause" or by the
Executive for "good reason," the Executive is entitled to a severance payment
equal to two times his usual base salary and bonus compensation (using the
average bonus over the past three years or if he was employed for less than
three years, such shorter period), or three times his usual base salary and
bonus in the case of Xx. Xxxx. The Executive is also entitled to health care and
major medical coverage for two years, in the case of Messrs. Xxxxxxx, Xxxxxxx,
and Xxxxxx, or for three years, in the case of Xx. Xxxx, following termination.
We have also agreed to make a "gross-up" payment to Xx. Xxxx in the event that
payments made under his agreement trigger excise taxes imposed under Section
4999 of the Internal Revenue Code.
Upon any termination of an Executive's employment, in the case of Messrs.
Xxxxxx and Xxxx, for any reason, and in the case of Messrs. Xxxxxxx and Xxxxxxx,
for any reason other than "cause," or by any Executive for "good reason", any
stock options granted to the Executive prior to the termination date will
automatically vest and be exercisable. Notwithstanding the preceding sentence,
however, if Messrs. Xxxx or Xxxxxx'x employment is terminated by us for "cause"
arising out of the commission by Messrs. Xxxx or Xxxxxx of certain crimes or an
uncured breach by Messrs. Xxxx or Xxxxxx of his obligations under his employment
agreement, only those stock options granted to Messrs. Xxxx or Xxxxxx, as the
case may be, on April 12, 2002 will immediately vest and be exercisable. If an
Executive terminates his employment without "good reason," only those options
that have vested on the date of termination will be exercisable.
Payments made to any Executive upon a termination by us without "cause" or
by the Executive for "good reason" are conditioned on the execution of a mutual
release of any claims arising out of the Executive's employment. The agreements
also include non-competition, non-solicitation and confidentiality obligations
on the part of the Executives.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us regarding
the beneficial ownership of our common stock as of March 31, 2004, for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- each of our executive officers named in the summary compensation table;
and
- all of our directors and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the
SEC. We believe that each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by them.
PERCENT OF
NUMBER OF OUTSTANDING
SHARES OF SHARES OF
COMMON COMMON
NAME AND ADDRESS STOCK(1) STOCK(2)
---------------- ---------- -----------
WLR Recovery Fund, L.P(3)................................ 15,242,010 15.6%
Manhattan Tower, (19th Floor)
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
WLR Recovery Fund II L.P.(4)............................. 16,860,523 17.2%
Manhattan Tower, (19th Floor)
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Cleveland-Cliffs Inc(5).................................. 5,521,839 5.6%
0000 Xxxxxxxx Xxxxxx
Xxxxxxxxx, Xxxx 00000-0000
Georgia Financial, LLC(6)................................ 8,806,198 9.0%
0000 Xxxxxxxxx Xxxxx
Xxxxxxxxx, Xxxx 00000
Xxxxxx Xxxxxx Medical Institute.......................... 8,209,807 8.4%
0000 Xxxxx Xxxxxx Xxxx
Chevy Chase, Maryland
Franklin Mutual Advisors, LLC(7)......................... 16,333,381 16.7%
51 Xxxx X. Xxxxxxx Xxxxxxx
Xxxxx Xxxxx, XX 00000
Mutual Shares Fund....................................... 6,143,191 6.3%
51 Xxxx X. Xxxxxxx Xxxxxxx
Xxxxx Xxxxx, XX 00000
Xxxxxx X. Xxxx, Xx.(8)................................... 32,102,533 32.8%
Xxxxxx X. Xxxx (9)....................................... 1,853,440 1.9%
Xxxx X. Xxxxxxx.......................................... 25,000 *
Xxxxxxx X. Xxxxxxxxxxx(10)............................... 121,337 *
Xxxxx X. Xxxxxx.......................................... -- *
X. Xxxx Xxxxxxx.......................................... -- *
Xxxxxxx X. Xxxxxxx....................................... -- *
Xxxxxx X. Xxxxxxx(11).................................... 371,050 *
Xxxxxx X. Xxxxxx(12)..................................... 278,740 *
Xxxxx X. Xxxxxx.......................................... -- *
All executive officers and directors as a group (19
persons)............................................... 35,365,689 36.2%
---------------
* Less than one percent
(1) Except as otherwise indicated below, beneficial ownership means the sole
power to vote and dispose of shares.
(2) Calculated assuming 97,828,989 outstanding shares, the number of shares of
common stock outstanding as of March 31, 2004. This number excludes the
number of shares of common stock for which any options to purchase common
stock held by directors and executive officers are exercisable.
(3) Immediately after our initial public offering, WLR Recovery Fund, L.P. was
the record owner of 15,242,010 shares of common stock. WLR Recovery Fund,
L.P. subsequently distributed all of these shares to its partners, but
continues to have voting power over the shares and is deemed to
beneficially own the shares. These voting arrangements will cease to be
operative on June 9, 2004, the expiration date of the lockup agreements
entered into by our stockholders, directors and officers in connection with
our initial public offering, at which point WLR Recovery Fund, L.P. will no
longer be considered the beneficial owner of such shares. Of these
distributed shares, 12,415,856 shares, or 12.7% of the total outstanding
shares of ISG, have been distributed to entities that are not affiliated
with WLR or Xx. Xxxx. The remaining 2,826,154 shares, or 2.9% of the total
outstanding shares of ISG, were distributed to WLR, Xx. Xxxx or entities
affiliated with them.
(4) Immediately after our initial public offering, WLR Recovery Fund II, L.P.
was the record owner of 16,860,523 shares of common stock. WLR Recovery
Fund II, L.P. subsequently distributed 14,891,800 of these shares to its
partners, but continues to have voting power over the shares and is deemed
to beneficially own the shares. These voting arrangements will cease to be
operative on June 9, 2004, the expiration date of the lockup agreements
entered into by our stockholders, directors and officers in connection with
our initial public offering, at which point WLR Recovery Fund II, L.P. will
no longer be considered the beneficial owner of such shares. Of these
distributed shares, 12,749,989 shares, or 13.0% of the total outstanding
shares of ISG, have been distributed to entities that are not affiliated
with WLR or Xx. Xxxx. The remaining 2,141,811 shares that were distributed,
or 2.2% of the total outstanding shares of ISG, were distributed to WLR,
Xx. Xxxx or entities affiliated with them.
(5) Represents 5,049,900 shares of common stock held of record by
Cleveland-Cliffs Inc and 471,938 shares of common stock held of record by
Cleveland-Cliffs Inc and Associated Companies Collective Investment Trust.
(6) Georgia Financial, LLC is the wholly-owned subsidiary of Park Corporation,
whose principal executive offices are at 0000 Xxxxxxxxx Xxxxx, Xxxxxxxxx,
Xxxx 00000.
(7) Represents shares beneficially owned by advisory clients of Franklin Mutual
Advisers, LLC, or FMA: 6,143,191 shares of common stock beneficially owned
by Mutual Shares Fund, 2,855,428 shares of common stock beneficially owned
by Mutual Qualified Fund, 3,546,660 shares of common stock beneficially
owned by Mutual Beacon Fund, 2,689,230 shares of common stock beneficially
owned by Mutual Discovery Fund, 639,453 shares of common stock beneficially
owned by Mutual Shares Securities Fund, 128,899 shares of common stock
beneficially owned by Mutual Discovery Securities Fund, and 66,259 shares
of common stock beneficially owned by Mutual Beacon Fund (Canada), all of
which shares are held of record by Bosworth & Co. c/o Franklin Mutual
Advisers, LLC, and 264,260 shares of common stock beneficially owned by
Franklin Mutual Beacon Fund, all of which shares are held of record by Xxxx
& Co. c/o Franklin Mutual Advisers, LLC. Pursuant to advisory contracts
with its clients, FMA has voting and investment discretion over these
securities beneficially owned by its clients. FMA disclaims beneficial
ownership of these shares owned by its advisory clients.
(8) Represents 15,242,010 shares of common stock beneficially owned by WLR
Recovery Fund L.P. and 16,840,523 shares of common stock beneficially owned
by WLR Recovery Fund II L.P. Xx. Xxxx serves as a principal of XX Xxxx &
Co. LLC, which manages WLR Recovery Fund L.P. and WLR Recovery Fund II L.P.
To the extent Xx. Xxxx is deemed to beneficially own these shares as a
result of his position as a principal of XX Xxxx & Co. LLC, Xx. Xxxx
disclaims beneficial ownership of these shares. As described in footnotes 3
and 4 above, a total
of 25,165,845 shares of common stock, or 25.7% of the total outstanding
shares of ISG, were distributed by WLR Recovery Fund, L.P. and WLR Recovery
Fund II, L.P. to entities that are not affiliated with XX Xxxx & Co. LLC or
Xx. Xxxx and that will cease to be beneficially owned by Xx. Xxxx on June
9, 2004, when the voting arrangements governing these shares terminate.
Without including those shares distributed to entities not affiliated with
WLR or Xx. Xxxx, Xx. Xxxx beneficially owns 6,936,688, or 7.1%, of our
currently outstanding shares.
(9) Includes options to purchase 1,448,000 shares of our common stock, which
are currently exercisable.
(10) Represents the 23,597 shares of common stock held of record by Xx.
Xxxxxxxxxxx and 97,740 shares of common stock held of record by Xxxxxxxxxxx
Interest, L.P. Xx. Xxxxxxxxxxx is the general partner in Xxxxxxxxxxx
Interest, L.P. To the extent Xx. Xxxxxxxxxxx is deemed to beneficially own
these shares as a result of his position as general partner of Xxxxxxxxxxx
Interest, L.P., Xx. Xxxxxxxxxxx disclaims beneficial ownership of these
shares.
(11) Represents options to purchase 185,525 shares of our common stock, which
are currently exercisable, and options to purchase an additional 185,525
shares that will become exercisable on April 12, 2004.
(12) Represents options to purchase 139,370 shares of our common stock which are
currently exercisable, and options to purchase an additional 139,370 shares
that will become exercisable on April 12, 2004.
RISKS FACTORS
EXCESS GLOBAL CAPACITY AND THE AVAILABILITY OF COMPETITIVE SUBSTITUTE
MATERIALS HAVE, AT TIMES, RESULTED IN INTENSE COMPETITION AND MAY, IN THE
FUTURE, CAUSE DOWNWARD PRESSURE ON PRICES.
Competition within the steel industry, both domestic and worldwide, is
intense and is expected to remain so. We compete primarily on the basis of
price, quality and the ability to meet customers' product needs and delivery
schedules. Our primary competitors are other integrated steel producers and
mini-xxxxx, some of which are larger than we are and some of which have
substantially greater capital resources than we do. The highly competitive
nature of the steel industry periodically exerts downward pressure on prices for
our products. In the case of certain product applications, we and other steel
manufacturers compete with manufacturers of other materials, including plastic,
aluminum, graphite composites, ceramics, glass, wood and concrete. The global
steel industry is generally characterized by overcapacity, which can have a
negative impact on domestic steel prices. This overcapacity has sometimes
resulted in high levels of steel imports into the United States, exerting
downward pressure on domestic steel prices and resulting in, at times, a
dramatic reduction in, or, in the case of many steel producers, the elimination
of gross margins.
INCREASED IMPORTS OF STEEL INTO THE UNITED STATES COULD ADVERSELY IMPACT
DOMESTIC STEEL PRICES, WHICH COULD ADVERSELY AFFECT OUR SALES, MARGINS AND
PROFITABILITY.
Based on AISI's apparent steel supply (excluding semi-finished products),
imports of steel into the United States constituted 15.8%, 20.4% and 20.2% of
the domestic steel market supply for 2003, 2002 and 2001, respectively.
Significant imports of steel into the United States has at times exerted
downward pressure on domestic steel prices and substantially reduce sales,
margins and profitability. We and other domestic steel producers compete with
many foreign producers. We face strong competition from foreign producers, and
competition has greatly increased in recent years as a result of an excess of
foreign steelmaking capacity. Furthermore, a weakening of certain foreign
economies, particularly in Eastern Europe, Asia and Latin America, has at times
resulted in lower local demand for steel products and greater steel exports to
the United States at depressed prices.
The U.S. government established various protective actions during 2001 and
2002, including the enactment of various steel import quotas and tariffs, which
contributed to a decrease of some steel imports during 2002. However, on
December 4, 2003, these steel import quotas and tariffs were lifted. At this
time it is uncertain what impact the lifting of these measures will have on the
domestic steel industry over time, but there is a risk that the removal of these
measures will lead to a resurgence of steel imports and result in downward
pressure on domestic steel prices and negatively impact our sales, margins and
profitability.
OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE SUFFICIENT TO ENSURE
TIMELY AND RELIABLE EXTERNAL FINANCIAL REPORTS.
Even though we have only been established since February 2002, in a little
over two years, we have become the second-largest integrated steel producer in
North America by acquiring the steelmaking assets of LTV, Acme and Bethlehem.
This rapid growth has placed significant strain on our internal control over
financial reporting. We have recently informed our Audit Committee and
represented to our independent auditors that we have material weaknesses with
respect to our internal control over financial reporting. We have commenced a
process to identify and remedy these weaknesses, but the process is not yet
complete. However, management believes that weaknesses in documentation,
consistency, review, and information systems, among other issues, when taken in
the aggregate, amount to material weaknesses in internal control over financial
reporting.
The term internal control over financial reporting is defined as a process
designed by, or under the supervision of, the issuer's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the issuer's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
(1) Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the issuer;
(2) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance with
authorizations of management and directors of the issuer; and
(3) Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the issuer's
assets that could have a material effect on the financial statements.
Additionally, we must establish a process to facilitate management's
assessment of the design and operating effectiveness of our internal control
over financial reporting to enable us to comply with Section 404 of the
Xxxxxxxx-Xxxxx Act of 2002, and we will be required to attest to the
effectiveness of such internal control over financial reporting at December 31,
2004. Although we are in the process of identifying and implementing corrective
actions where required to correct the weaknesses in our internal control over
financial reporting and taking steps to make sure that we comply with Section
404, we cannot assure you that these actions and any other actions we may take
to achieve such compliance will be successful. Our failure to implement these
actions could adversely affect our ability to record, process, summarize and
report financial data to ensure timely and reliable external financial
reporting.
