As filed with the Securities and Exchange Commission on November 1, 2001
Registration No. 333-71454
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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UNITED STATES STEEL LLC USX CORPORATION
to be converted into (Exact Name of Registrant as
UNITED STATES STEEL CORPORATION Specified in its Certificate of
(Exact Name of Registrant as Specified in Incorporation)
its Certificate of Formation)
Delaware Delaware
(State or Other Jurisdiction of (State or Other Jurisdiction of
Incorporation or Organization) Incorporation or Organization)
25-0996816 25-0996816
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
3312 2911
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
(412) 433-1121
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrants' Principal Executive Offices)
-----------
Dan D. Sandman, Esq.
General Counsel, Secretary and
Senior Vice President -- Human Resources & Public Affairs
USX Corporation
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
(412) 433-1121
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
-----------
Copy to:
Robert B. Pincus, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
One Rodney Square
Wilmington, Delaware 19801
(302) 651-3000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the exchange offers described herein (the "Exchange Offers") have
been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-----------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated November , 2001
$365,000,000
United States Steel LLC
to be converted into
United States Steel Corporation
Offers to Exchange
% Senior Quarterly Income Debt Securities due 2031 (SQUIDSSM)
For the Following Securities (the "Outstanding Securities")
6.50% Cumulative Convertible Preferred Stock of USX Corporation
(Cusip No. 902905 1819)
6.75% Convertible Quarterly Income Preferred Securities (QUIPSSM) of USX
Capital Trust I
(Cusip No. 903339 E201)
8.75% Cumulative Monthly Income Preferred Shares, Series A (MIPS(R)) of USX
Capital LLC
(Cusip No. P96460 1031)
EACH OF THE EXCHANGE OFFERS AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 2001, UNLESS EARLIER TERMINATED OR EXTENDED BY US.
United States Steel LLC, a Delaware limited liability company ("United States
Steel"), which is currently a wholly owned subsidiary of USX Corporation, a
Delaware corporation, hereby offers, upon the terms and subject to the
conditions set forth in this prospectus and the accompanying letters of
transmittal, to exchange:
. $50 principal amount of % Senior Quarterly Income Debt Securities due
2031 ("SQUIDS"), for each validly tendered and accepted share of 6.50%
Cumulative Convertible Preferred Stock of USX Corporation ("6.50%
Preferred Stock"), plus a cash payment for accrued but unpaid dividends;
. $50 principal amount of SQUIDS, for each validly tendered and accepted
6.75% Convertible Quarterly Income Preferred Security of USX Capital
Trust I ("6.75% QUIPS"), plus a cash payment for accrued but unpaid
distributions; and
. $25 principal amount of SQUIDS, for each validly tendered and accepted
8.75% Cumulative Monthly Income Preferred Share, Series A, of USX
Capital LLC ("8.75% MIPS"), plus a cash payment for accrued but unpaid
dividends.
The exchange offers are subject to the conditions described in this
prospectus, including the minimum condition that at least $150 million
principal amount of SQUIDS, in the aggregate, are issued in the exchange
offers. We will accept up to a maximum face amount of (i) $ million of 6.50%
Preferred Stock, (ii) $ million of 6.75% QUIPS and (iii) $ million of 8.75%
of MIPS in the exchange offers. If we receive tenders for more than the face
amount of any series of Outstanding Securities than are set forth above, we
will prorate the number of validly tendered Outstanding Securities in such
series that we will exchange from each tendering holder.
The SQUIDS will mature on December 31, 2031. Interest on the SQUIDS will
begin to accrue on the Exchange Date and will be payable quarterly on each
March 31, June 30, September 30 and December 31, commencing March 31, 2002. The
SQUIDS will be redeemable at the option of United States 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. If the USX
board of directors determines not to proceed with the Separation, we will have
the option to redeem the SQUIDS, in whole or in part, on or prior to December
31, 2002, at 100% of the principal amount redeemed, together with accrued but
unpaid interest through the redemption date. Application has been made for
listing of the SQUIDS on the New York Stock Exchange.
The USX board of directors has approved a reorganization, pursuant to which
USX will distribute all of the equity securities of United States Steel
Corporation to the holders of USX's U. S. Steel Group common stock (the
"Separation"). Following the Separation, we will be an independent, publicly
owned company and we will no longer be a subsidiary of USX. As part of the
Separation, which is expected to be completed on or about December 31, 2001,
United States Steel LLC will convert into United States Steel Corporation, a
Delaware corporation, and USX will change its name to Marathon Oil Corporation.
The Separation is subject to the satisfaction or waiver of a number of
conditions. The issuance of the SQUIDS is not subject to completion of the
Separation.
If the Separation occurs, the then outstanding 6.50% Preferred Stock will be
converted into the right to receive, in cash, $50 per share plus accrued but
unpaid dividends, the then outstanding 6.75% QUIPS will be redeemed for a cash
payment of $50 plus accrued but unpaid distributions, and the then outstanding
8.75% MIPS will remain outstanding as an obligation of Marathon Oil
Corporation, subject to their redemption provisions.
Until the completion of the Separation, USX will fully and unconditionally
guarantee the SQUIDS. Following the Separation, USX will no longer guarantee
the SQUIDS and the sole obligor of the SQUIDS will be United States Steel
Corporation which, after the Separation, will have a substantial amount of
indebtedness and other obligations and will have a credit rating below
"investment grade", which will be lower than the credit ratings of USX and its
successor, Marathon Oil Corporation.
For a discussion of the risks that you should consider in evaluating the
exchange offers, see "Risk Factors" beginning on page 22.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities being offered in the
exchange offers or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
None of United States Steel LLC, USX, the Exchange Agent, the Information
Agent, or the Dealer Managers makes any recommendation as to whether or not
holders of Outstanding Securities should exchange their securities in the
exchange offers.
SQUIDS(SM) and QUIPS(SM) are service marks and MIPS(R) is a registered
trademark of Goldman, Sachs & Co.
The Dealer Managers for the exchange offers are:
Goldman, Sachs & Co.
The date of this prospectus is , 2001.
TABLE OF CONTENTS
Page
----
Where You Can Find More
Information....................... ii
Definitions........................ iii
Special Note Regarding Forward-
Looking Statements................ iv
Summary............................ 1
Risk Factors....................... 22
The Exchange Offers................ 36
Information about the Outstanding
Securities........................ 46
Use of Proceeds.................... 47
Capitalization..................... 49
Unaudited Pro Forma Condensed
Combined Financial Statements..... 50
Selected Historical Financial
Information....................... 72
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 76
Business of United States Steel.... 93
Page
----
Management of United States Steel.. 110
The Proposed Separation............ 122
Relationship Between United States
Steel Corporation and Marathon Oil
Corporation After the Separation.. 124
Description of Other Indebtedness.. 128
Description of the SQUIDS.......... 133
Comparison of the Outstanding
Securities and the SQUIDS......... 148
Certain Federal Income Tax
Considerations.................... 156
Certain ERISA Considerations....... 162
Security Ownership of Certain
Beneficial Owners................. 163
Security Ownership of Directors and
Executive Officers................ 163
Legal Matters...................... 164
Experts............................ 164
Index to Financial Statements...... F-1
Supplemental Financial
Information....................... U-1
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by this
prospectus in any jurisdiction to or from any person to whom or from whom it is
unlawful to make such offer or solicitation of an offer in such jurisdiction.
Neither the delivery of this prospectus nor any distribution of securities
pursuant to this prospectus shall, under any circumstances, create any
implication that there has been no change in the information set forth or
incorporated into this prospectus by reference or in our affairs since the date
of this prospectus.
i
WHERE YOU CAN FIND MORE INFORMATION
USX Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files annual, quarterly and special reports, proxy statements and
information statements and other information with the Securities and Exchange
Commission under the Exchange Act. United States Steel LLC has not been subject
to the informational requirements of the Exchange Act. Upon the earlier of (1)
the completion of the Separation and (2) the effectiveness under the Securities
Act of 1933 of a registration statement with respect to our 10 3/4% Senior
Notes due August 1, 2008, we will become subject to the informational
requirements of the Exchange Act.
This document incorporates important business and financial information
about USX that is not included in or delivered with this prospectus. The
following documents filed with the SEC are incorporated by reference into the
registration statement of which this prospectus forms a part:
(i) USX Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000, as amended by Form 10-K/A filed on September 14,
2001 and Form 10-K/A filed on October 11, 2001;
(ii) USX Corporation's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2001 and June 30, 2001;
(iii) USX Corporation's Current Reports on Form 8-K dated April 24,
2001, June 15, 2001, July 2, 2001, July 31, 2001, August 1, 2001,
August 2, 2001, August 6, 2001, October 12, 2001, October 22,
2001 (as amended) and October 25, 2001; and
(iv) USX Corporation's Proxy Statement/Prospectus on Schedule 14A filed
on September 20, 2001.
USX incorporates by reference additional documents that it may file with the
SEC between the date of this prospectus and the Exchange Date. These documents
include periodic reports, such as Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
Any statement contained in a document incorporated by reference herein 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.
The documents incorporated by reference into this prospectus are available
from us upon request. We will provide a copy of any and all of the information
that is incorporated by reference in this prospectus to any person by first-
class mail, without charge, upon written or oral request. Any request for
documents should be made by , 2001 to ensure timely delivery of the
documents prior to the expiration date of the exchange offers.
Requests for documents should be directed to:
USX Corporation
Shareholder Services
600 Grant Street, Room 611
Pittsburgh, Pennsylvania 15219-4776
(412) 433-4801
(866) 433-4801 (toll free)
(412) 433-4818 (fax)
ii
Any reports and information statements and other information filed by USX or
United States Steel LLC with the SEC may be read and copied at the following
location of the SEC:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
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.
You can also inspect reports, proxy statements and other information about
USX at the offices of the National Association of Securities Dealers, Inc.,
9513 Key West Avenue, Rockville, Maryland 20850.
The SEC also maintains an Internet worldwide web site that contains reports,
proxy statements and other information about issuers, like USX, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
DEFINITIONS
In this prospectus, the terms "United States Steel," the "Company," "we,"
"our," "ours" and "us" refer:
. until the completion of the Separation, to the U. S. Steel Group of USX
Corporation, including United States Steel LLC and its direct and
indirect subsidiaries; and
. following the Separation, to United States Steel Corporation and its
direct and indirect subsidiaries,
in each case, unless the context otherwise requires.
In this prospectus, the terms "Marathon Oil" and "Marathon" refer:
. until the completion of the Separation, to the Marathon Group of USX
Corporation, including Marathon Oil Company and its direct and indirect
subsidiaries; and
. following the Separation, to USX Corporation, which will be renamed
Marathon Oil Corporation, and its direct and indirect subsidiaries,
in each case, unless the context otherwise requires.
In this prospectus, the term "USX" refers to USX Corporation and its direct
and indirect subsidiaries, unless the context otherwise requires.
In this prospectus, the term "face amount" with respect to any Outstanding
Security refers to its liquidation preference.
iii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" which are identified
by the use of forward-looking words or phrases, including, but not limited to,
"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 such 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 such
statements. All statements other than statements of historical factors included
in this prospectus, including those regarding the financial position, results
of operations, cash flows, business strategy, projected costs, growth
opportunities, strategic and other benefits of the Separation, and plans
regarding financing in connection with the Separation, are forward-looking
statements. Although we believe that our expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations ("Cautionary
Statements") include prices of oil and natural gas; refined product margins;
prices and volumes of sale of steel products; levels of imports of steel
products into the United States; prevailing interest rates; and general
economic and financial market conditions, as well as those factors disclosed
under "Risk Factors" beginning on page 22 and elsewhere in this prospectus and
in our SEC filings listed under "Where You Can Find More Information" on
page (ii). These forward-looking statements represent our judgment as of the
date of this prospectus. All subsequent written and oral forward-looking
statements are expressly qualified in their entirety by the Cautionary
Statements. Unless otherwise required by law, we disclaim any intent or
obligation to update the respective forward-looking statements.
iv
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information appearing elsewhere in this
prospectus and the information contained in documents incorporated by reference
in the registration statement of which this prospectus forms a part. Reference
is made to "Risk Factors" beginning on page 22 for a discussion of certain
issues that should be considered in evaluating an investment in the SQUIDS.
Questions and Answers About the Exchange Offers
Q1: Why is United States Steel making the exchange offers?
A1: We are making the exchange offers in connection with the Separation, and
the related financing described on page 122 of this prospectus.
Q2: What securities are subject to the exchange offers?
A2: The securities that are subject to the exchange offers are:
. 6.50% Cumulative Convertible Preferred Stock of USX ("6.50% Preferred
Stock");
. 6.75% Convertible Quarterly Income Preferred Securities of USX Capital
Trust I ("6.75% QUIPS"); and
. 8.75% Cumulative Monthly Income Preferred Shares, Series A, of USX
Capital LLC ("8.75% MIPS").
In this prospectus, the 6.50% Preferred Stock, 6.75% QUIPS and 8.75% MIPS
are collectively referred to as the "Outstanding Securities".
Q3: What will I receive if I tender in the exchange offers?
A3: For each of your Outstanding Securities validly tendered and accepted in
the exchange offers, you will receive SQUIDS in the principal amount set
forth in the table below, as well as a cash payment equal to accrued but
unpaid dividends or distributions to the Exchange Date:
Face
Amount of Principal Accrued But
Outstanding Amount of Unpaid
Security SQUIDS Dividends or
Tendered Received Distributions*
----------- ---------- --------------
6.50% Preferred Stock $50 $50 $
6.75% QUIPS $50 $50 $
8.75% MIPS $25 $25 $
--------------------
* This column assumes an Exchange Date of , 2001. However, the
Exchange Date may occur after , 2001. Please see the answer to
Question 15 for an explanation of when the Exchange Date will occur. The
amount of accrued but unpaid dividends or distributions set forth above
will change if the Exchange Date is extended pursuant to the terms of
the exchange offers.
If you wish to tender your Outstanding Securities in the exchange offers,
you must tender all Outstanding Securities that you own. Partial tenders
will not be permitted.
Q4: How will the credit ratings of the SQUIDS compare to those of the
Outstanding Securities?
A4: We expect the credit ratings of the SQUIDS to be below "investment grade",
which will be lower than the credit ratings of USX and its successor,
Marathon Oil Corporation. A rating below investment grade indicates a
greater risk that the issuer of the security will not be able to pay
principal and interest on the securities when due, and also makes the
issuer's ability to raise capital more difficult and increases its
borrowing costs.
Q5: What will happen if I do not tender my Outstanding Securities?
A5: If you do not tender your 6.50% Preferred Stock in the exchange offers: you
will not receive any SQUIDS, and each share of 6.50% Preferred Stock held
at the effective time of the Separation will be converted into the right to
receive, in cash, $50 plus accrued but unpaid dividends thereon through the
effective
1
time of the Separation. If the Separation does not occur, the shares of
6.50% Preferred Stock not accepted in the exchange offers will remain
outstanding, subject to their redemption provisions, but there will be
fewer shares outstanding, resulting in a more limited market for the 6.50%
Preferred Stock, which might adversely affect its liquidity, market price
and price volatility.
If you do not tender your 6.75% QUIPS in the exchange offers: you will not
receive any SQUIDS and each 6.75% QUIPS held at the effective time of the
Separation will be redeemed for a cash payment of $50 plus accrued but
unpaid distributions thereon through the redemption date. If the Separation
does not occur, the 6.75% QUIPS not accepted in the exchange offers will
remain outstanding, subject to their redemption provisions, but there will
be fewer 6.75% QUIPS outstanding, resulting in a more limited market for
the 6.75% QUIPS, which might adversely affect their liquidity, market price
and price volatility.
If you do not tender your 8.75% MIPS in the exchange offers: you will not
receive any SQUIDS, and if you continue to hold such 8.75% MIPS following
the effective time of the Separation, the 8.75% MIPS will continue as an
obligation of USX, subject to their redemption provisions, and USX will
change its name to Marathon Oil Corporation and will own and operate only
the energy business currently owned and operated by the Marathon Group of
USX. Whether or not the Separation occurs, there will be fewer 8.75% MIPS
outstanding following the exchange offers, resulting in a more limited
market for the 8.75% MIPS, which might adversely affect their liquidity,
market price and price volatility.
Q6: Are the exchange offers subject to any conditions?
A6: Yes. The exchange offers are subject to the conditions described on page
36 of this prospectus. The conditions to the exchange offers include: at
least $150 million principal amount of SQUIDS, in the aggregate, are
issued in the exchange offers.
We refer to this minimum dollar amount of SQUIDS that must be issued as the
"minimum condition."
Promptly after the exchange offers expire, we will make an announcement
relating to the satisfaction of the conditions precedent. We may waive any
or all of the conditions to the exchange offers, including the minimum
condition, and in the event any such waiver results in a material change to
the terms of the exchange offers, we will extend the expiration date so
that the exchange offers remain open for any additional period required by
law.
Q7: What happens if the minimum condition is not satisfied?
A7: If less than $150 million principal amount of SQUIDS, in the aggregate,
are issued in the exchange offers, we may choose not to complete the
exchange offers or we could choose to waive the minimum condition for any
reason. If we choose not to complete the exchange offers, we will return
any Outstanding Securities that have been tendered.
Q8: Will United States Steel accept all Outstanding Securities that are
tendered?
A8: If the conditions for the exchange offers are satisfied or waived, we will
accept all tenders of Outstanding Securities that are properly tendered
and not validly withdrawn, up to the maximum amount of each series of
Outstanding Securities set forth below. We cannot issue more than an
aggregate of $365 million principal amount of SQUIDS because of
restrictions contained in our indenture for our 10 3/4% Senior Notes due
August 1, 2008.
2
We will accept up to: a maximum face amount of (i) $ million of 6.50%
Preferred Stock, (ii) $ million of 6.75% QUIPS and (iii) $ million of
8.75% MIPS.
If we receive tenders for more than the maximum face amount of any series
of Outstanding Securities, we will prorate the number of validly tendered
Outstanding Securities of such series that we will accept from each
tendering holder, as described on page 38 of this prospectus. Any
Outstanding Securities that are not accepted because of proration will be
returned.
Q9: Will the SQUIDS be listed on the New York Stock Exchange?
A9: We have applied for listing of the SQUIDS on the NYSE. Upon completion of
the exchange offers, there will be between $150 million and $365 million
principal amount of SQUIDS outstanding, unless we waive the minimum
condition. The SQUIDS may provide for a greater degree of liquidity than
will be experienced by holders of some of the Outstanding Securities
following the exchange offers.
Q10: What are the U.S. federal income tax consequences to U.S. holders that
tender in the exchange offers?
A10: If you tender 6.50% Preferred Stock in the exchange offers, the exchange
will be a taxable event. If you tender 6.75% QUIPS in the exchange
offers, the exchange should be a tax-free recapitalization. If you tender
8.75% MIPS in the exchange offers, the exchange should be a taxable
event. For a detailed discussion regarding the tax consequences of the
exchange offers, see "Certain Federal Income Tax Considerations" on page
156.
Q11: What is the USX board of directors' position with respect to the exchange
offers?
A11: Neither USX nor United States Steel, nor any of their respective
directors, makes any recommendation to any holder of Outstanding
Securities as to whether to tender or refrain from tendering Outstanding
Securities in the exchange offers.
Q12: What does USX intend to do with the Outstanding Securities that are
tendered in the exchange offers?
A12: We intend to cancel and retire all Outstanding Securities accepted in the
exchange offers.
Q13: Will there be any cash proceeds from the exchange offers?
A13: No. We will not receive any cash proceeds from the exchange offers.
Q14: When do the exchange offers expire?
A14: The exchange offers expire at 5:00 p.m., New York City time, on ,
2001. However, we may at any time prior to acceptance of Outstanding
Securities in the exchange offers, in our sole discretion, extend the
expiration of the exchange offers or amend or withdraw the exchange
offers. References in this prospectus to the expiration date of the
exchange offers mean , 2001 or, if later, the last date to which we
extend the exchange offers.
Q15: When will I receive my SQUIDS?
A15: You will not receive physical delivery of certificates representing your
SQUIDS, but your ownership of SQUIDS will be recorded in book-entry form
on the Exchange Date (as described below), if all conditions to the
exchange offers are satisfied or waived, provided we have timely received
your properly completed and executed letter of transmittal, an "agent's
message", as described on page 40, or properly completed and executed
notice of guaranteed delivery, and you have not withdrawn your tender
prior to the expiration of the exchange offers. As used in this
prospectus, the "Exchange
3
Date" means the third business day following the expiration date of the
exchange offers, which is , 2001, subject to our right to extend the
expiration of the exchange offers. However, if we need to prorate, the
Exchange Date will occur on or prior to the seventh business day following
the expiration date.
Q16: What happens if I change my mind after tendering in the exchange offers?
A16: You may withdraw your tender any time before 5:00 p.m., New York City
time, on the expiration date. However, if we extend the exchange offers
and the extended offers contain material changes to the terms of the
exchange offers, you will have additional time to withdraw your tender
under the conditions described in the extension. If you decide to withdraw
your tender, you must withdraw all Outstanding Securities previously
tendered by you; partial withdrawals will not be permitted.
Q17: How do I tender in the exchange offers if I hold a stock certificate
representing shares of 6.50% Preferred Stock?
A17: You should properly complete and sign the yellow letter of transmittal and
deliver it, together with your stock certificate, to the Exchange Agent at
the address set forth on the back cover of this prospectus. You may also
tender your shares of 6.50% Preferred Stock by contacting your broker, or
setting up an account with a broker, and instructing such broker to tender
your shares of 6.50% Preferred Stock by book-entry transfer to the account
of the Exchange Agent through the Automated Tender Offer Program of the
Depository Trust Company ("DTC"), as described on page 40. In either case,
such delivery must be received by the Exchange Agent prior to the
expiration of the exchange offers.
Q18: How do I exchange my Outstanding Securities if I am the beneficial owner
of Outstanding Securities held by a custodian bank, commercial bank,
depository institution, broker, dealer, trust company, or other holder?
A18: First, you should promptly contact that holder and instruct it to send the
Exchange Agent an "agent's message" on your behalf or to complete and
deliver to the Exchange Agent a letter of transmittal by facsimile or hand
delivery at the facsimile number or address on the back cover of this
prospectus. If an "agent's message" is sent on your behalf, there is no
need to also send a letter of transmittal to the Exchange Agent.
Second, you must also instruct that holder to tender your Outstanding
Securities by effecting a book-entry transfer of the Outstanding Securities
into the account of the Exchange Agent through the Automated Tender Offer
Program of DTC.
Q19: What if I cannot complete book-entry transfer of my Outstanding Securities
or deliver 6.50% Preferred Stock certificates, together with an "agent's
message" or a letter of transmittal, to the Exchange Agent prior to the
expiration date of the exchange offers?
A19: You may follow the guaranteed delivery procedures described in "The
Exchange Offers--Procedures for Tendering--Guaranteed Delivery" on page 39
of this prospectus.
Q20: How should a soliciting dealer ensure they are designated to be paid their
soliciting dealer fee?
A20: In order to receive a soliciting dealer fee, a soliciting dealer must
follow the steps that are set forth in the Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees, which each soliciting
dealer will receive with the
4
Prospectus. Please note that a soliciting dealer will not receive a
soliciting dealer fee unless these steps are followed.
Q21: To whom should I address questions?
A21: You should direct questions about the terms of the exchange offers to the
Dealer Managers. The Dealer Managers may be reached by telephone at 800-
828-3182.
However, if you have questions about tender procedures or if you need
additional copies of this prospectus or the letters of transmittal, you
should contact the Information Agent. The Information Agent may be reached
by telephone at 800-756-3353.
The addresses of the Dealer Managers and the Information Agent are on the
back cover of this prospectus.
5
Summary of the Terms of the SQUIDS and the USX Guarantee
The following summary contains basic information about the SQUIDS and the
USX Guarantee. The summary is not intended to be complete. You should read the
full text and more specific details contained elsewhere in this prospectus. For
a more detailed description of the SQUIDS, see "Description of the SQUIDS" on
page 133.
Issuer...................... United States Steel LLC. At the Separation,
United States Steel LLC will be converted
into United States Steel Corporation.
Securities Offered..........
Up to $365 million aggregate principal amount
of % Senior Quarterly Income Debt
Securities due 2031 (the "SQUIDS"). The
exchange offers are conditioned upon, among
other things, at least $150 million principal
amount of SQUIDS, in the aggregate, being
issued in the exchange offers. We will accept
up to a maximum face amount of (i) $ million
of 6.50% Preferred Stock, (ii) $ million of
6.75% QUIPS and (iii) $ million of 8.75%
MIPS in the exchange offers.
Maturity.................... December 31, 2031.
Interest Rate............... Interest will be payable on the SQUIDS at a
rate of %.
Interest Payment Dates...... Interest will accrue from the Exchange Date
and will be payable in cash on March 31, June
30, September 30 and December 31 of each
year, beginning on March 31, 2002.
Optional Redemption......... The SQUIDS will be 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.
In addition, at any time before December 31,
2002, we may, at our option, give written
notice to redeem the SQUIDS, which notice
will be not less than 30 nor more than 60
days before the redemption date, in whole or
in part, at a redemption price of 100% of the
principal amount of the SQUIDS being
redeemed, plus accrued and unpaid interest to
the redemption date. However, we may redeem
SQUIDS as provided in this paragraph only if:
. the USX board of directors has determined
not to proceed with the Separation, in
which case the USX guarantee will stay in
effect until the SQUIDS are fully paid;
and
6
. in connection with any partial redemption,
at least the minimum aggregate principal
amount of SQUIDS required to maintain
listing of the SQUIDS on the NYSE, under
the rules and regulations thereof, must
remain outstanding following such partial
redemption.
Ranking..................... The SQUIDS are unsecured obligations and will
rank equally in right of payment with all of
the existing and future senior indebtedness
of United States Steel and will rank senior
in right of payment to all of its existing
and future subordinated indebtedness.
USX Guarantee...............
USX Corporation, our parent company, will
initially guarantee the SQUIDS. USX will be
released from the guarantee when the
Separation occurs, provided the Separation
occurs on or before December 31, 2002. The
guarantee will rank equally in right of
payment with the other senior unsecured
indebtedness of USX and senior in right of
payment to all subordinated indebtedness of
USX.
Change of Control Offer..... Upon a change of control (as defined under
"Description of the SQUIDS" on page 133), we will
be required to make an offer to purchase the
SQUIDS at a purchase price of 100% of the
principal amount of the SQUIDS, together with
accrued but unpaid interest.
Amendments and Waivers...... Except for specific amendments, the indenture may
be amended with the consent of the holders of a
majority of the principal amount of the SQUIDS
then outstanding.
The indenture governing the SQUIDS will contain
Conditions to the several conditions to the completion of the
Separation.................. Separation, including:
. USX must have received a private letter
ruling from the IRS that the Separation
will qualify as a tax-free transaction
within the meaning of Section 355 of the
Internal Revenue Code of 1986, as amended
(the "Code");
. the transactions that give effect to the
Value Transfer must have occurred;
. USX must not have amended:
. the definition of U. S. Steel Group in its
certificate of incorporation or by-laws;
or
. its Management and Allocation
Policies,
in either case, in any manner adverse to
the holders of the SQUIDS;
. immediately following the Separation,
. United States Steel must have at least
$400 million available in undrawn credit
facilities and cash, of
7
which at least $300 million must be
available under facilities with terms
extending at least three years after the
date such facilities are put in place, and
. no default under the SQUIDS must have
occurred and be continuing, and
. any differences between the operative
documents relating to the Separation as
executed and delivered and as described
herein do not have a material adverse
effect on the holders of the SQUIDS.
The issuance of SQUIDS is not conditioned
upon the completion of the Separation.
Use of Proceeds............
We will not receive any cash proceeds from the
exchange offers. Indebtedness represented by the
SQUIDS will replace a portion of the debt and
other obligations attributed to United States
Steel by USX prior to the Separation. See "Use of
Proceeds."
8
The following chart sets forth a summary comparison of the terms of the
SQUIDS and the Outstanding Securities, and the effects on holders of SQUIDS of
the Outstanding Securities if the Separation occurs, and if the Separation does
not occur. For a more complete comparison of the terms of the SQUIDS and the
Outstanding Securities, see page 148.
6.50%
PREFERRED
SQUIDS(SM) STOCK 6.75% QUIPS(SM) 8.75% MIPS(R)
----------------------- ---------------------- ---------------------- -------------------
Issuer ................. United States USX Corporation USX Capital USX Capital LLC
Steel LLC Trust I
Face Amount
Outstanding
(aggregate)............ Up to $365 million $121 million $197 million $250 million
Maximum face amount that
will be accepted for
exchange............... $ $ $
Coupon Rate............. % 6.50% 6.75% 8.75%
Payment Frequency ...... Quarterly Quarterly Quarterly Monthly
Maturity................ 2031 Perpetual 2037 2044
Face Amount (per
security).............. $25 $50 $50 $25
-------------------------------------------------------------------------------------------------------------------
If the Separation Occurs
-------------------------------------------------------------------------------------------------------------------
Obligor Following
Separation............. United States Will not be Will not be Marathon Oil
Steel Corporation outstanding outstanding Corporation
following following (through USX
Separation Separation Capital LLC)
What Will Holders
Receive in the
Separation? (per
security).............. Not applicable $50 in cash plus $50 in cash Not applicable
(remains accrued but unpaid plus accrued (remains
outstanding) dividends but unpaid outstanding,
distributions subject to call
(to be redeemed provisions)
in connection with
the Separation)
Will Holders Have to
Reinvest following the
Separation?............
No Yes Yes No, unless call
provisions are
exercised
Call Provisions......... Callable at Will not be Will not be Callable at face
principal amount outstanding outstanding amount at any time
plus accrued but following following
unpaid interest after Separation Separation
December 31,
2006
Marathon Guarantee...... No -- -- Yes
-------------------------------------------------------------------------------------------------------------------
If the Separation Does Not Occur
-------------------------------------------------------------------------------------------------------------------
Call Provisions......... Callable at principal Callable at a Callable at a Callable at face
amount plus accrued scheduled scheduled amount
but unpaid interest redemption price redemption price
until December 31, which, through which, through
2002. Also callable at December 31, 2001, December 31, 2001,
principal amount plus is $50.65 per security is $50.65 per security
accrued but unpaid
interest after December
31, 2006
USX Obligation if
Separation does not
occur.................. Guaranteed by USX Remains USX USX obligation to USX obligation to
Preferred Stock USX Capital Trust I USX Capital LLC
remains remains
9
Illustration for Participants in the Exchange Offers
(Based on a $5000 Face Amount of Outstanding Securities)
6.50%
Preferred 6.75% 8.75%
SQUIDS Stock QUIPS MIPS
-------- --------- -------- --------
Principal Amount Represented.......... $5000.00 $5000.00 $5000.00 $5000.00
Securities Represented................ -- 100 100 200
Annual Income Derived................. $ $ 325.00 $ 337.50 $ 437.50
Increase in Annual Income from
Exchange Offers...................... n/a $ $ $
Percentage Increase in Annual Income
from
Exchange Offers...................... n/a % % %
10
Our Company
We are the largest integrated steel producer in North America and the
eleventh largest in the world. We have a broad product mix with particular
focus on value-added products and serve customers in the automotive, appliance,
distribution and service center, industrial machinery and construction
industries. 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 in North America and produce and
sell a variety of sheet, tin, plate and tubular products, as well as coke, iron
ore and coal. 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 five 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, which owns the steel-making
operations and related assets formerly held by VSZ, a.s., making us the largest
flat-rolled producer in Central Europe. Currently, USSK has annual steel-making
capability of 5.0 million tons and produces and sells sheet, tin, tubular,
precision tube and specialty products, as well as coke. The acquisition of USSK
has enabled us to establish a low-cost manufacturing base in Europe and
positioned us to serve our global customers.
Outlook of United States Steel
While over the last few months domestic orders for steel had strengthened
and prices had stabilized, our order rate for the fourth quarter is currently
running lower than our third quarter rate. In the third quarter, Domestic Steel
shipments totaled 2.6 million net tons and average realized prices were lower
than the second quarter primarily due to changes in mix, including decreased
sales of tubular and plate products. In the fourth quarter, we expect Domestic
Steel shipments to be approximately 2.3 million net tons and average realized
prices to be about flat compared to the third quarter. In light of expected
slow market conditions in the fourth quarter, we plan to advance the schedule
for a maintenance outage on the Gary Works No. 6 blast furnace.
On May 31, 2001, a major fire damaged the cold-rolling mill at USS-POSCO,
which is fifty percent owned by United States Steel. Damage was predominantly
limited to the cold-rolling mill area of the plant. USS-POSCO maintains
insurance coverage against such losses, including coverage for business
interruption. The mill is expected to resume production in the first quarter of
2002, although full production may not be achieved until mid-2002. Until such
time, the plant will continue customer shipments using cold-rolled coils from
United States Steel and POSCO as substitute feedstock.
For USSK, third quarter shipments totaled approximately 1.0 million net
tons, down slightly from shipments of 1.1 million net tons in the second
quarter, and average realized prices were higher than in the second quarter. In
the fourth quarter, we expect shipments to be slightly lower than in the third
quarter and average realized prices to be comparable to the third quarter.
Based on continued improvement in production performance since acquisition,
USSK raw steel production capability for
11
the second half of 2001 has been increased to 2.5 million net tons, for an
annualized rate of 5.0 million net tons.
For the full year 2001, total shipments are expected to be approximately
13.5 to 13.8 million net tons with Domestic Steel shipments of approximately 10
million net tons and USSK shipments of approximately 3.5 to 3.8 million net
tons.
For the longer term, domestic shipment levels and realized prices will be
influenced by the strength and timing of a recovery in the manufacturing sector
of the domestic economy, levels of imported steel and production capability
changes by domestic competitors. Many factors, including developments flowing
from the events of September 11, will determine the strength and timing of such
recovery and the other factors. For USSK, economic and political developments
in Europe and elsewhere will impact USSK's results of operations in 2002 and
thereafter.
United States Steel owns a 16% equity method investment in Republic
Technologies International, LLC ("Republic") through USX's ownership in
Republic Technologies International Holdings, LLC, which is the sole owner of
Republic. Republic is a major purchaser of raw materials from United States
Steel and the primary supplier of rounds for Lorain Tubular. On April 2, 2001,
Republic filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code.
Republic has continued to supply the Lorain mill since filing for bankruptcy
and no supply interruptions are anticipated. United States Steel's carrying
value of this investment in Republic has been reduced to zero. Upon Republic's
filing for bankruptcy, United States Steel accrued a charge for a substantial
portion of the receivables due from Republic. At June 30, 2001, United States
Steel's remaining pre-petition financial exposure to Republic, after recording
various losses and reserves, totaled approximately $30 million.
The above discussion includes forward-looking statements concerning
shipments, pricing, and equity investee performance. These statements are based
on assumptions as to future product demand, prices and mix, and production.
Steel shipments and prices can be affected by imports and actions of the U.S.
Government and its agencies pertaining to trade, domestic and international
economies, domestic production capacity, and customer demand. Factors which may
affect USSK results are similar to domestic factors, including excess world
supply and foreign currency fluctuations, and also can be influenced by matters
peculiar to international marketing such as tariffs. In the event these
assumptions prove to be inaccurate, actual results may differ significantly
from those presently anticipated.
Recent Developments
Fairless Works Shutdown
On August 14, 2001, we announced our intention to permanently close the cold
rolling and tin mill operations at Fairless Works, with a combined annual
finishing capability of 1.5 million tons, on or after November 12, 2001. Under
our labor agreement, we are required to discuss the proposed shutdown with the
United Steelworkers of America before making a final decision. We also
announced that, subject to market conditions, we currently intend to continue
operating the hot dip galvanizing line at Fairless Works. The anticipated
financial impact of the shutdown will be recorded in the second half of 2001
and is estimated to be a pretax charge of $35 million to $40 million. The near-
term cash impact will be minimal since about half of the charge is for
depreciation or impairment of fixed assets and the balance is related to
employee benefits that will be paid from trust funds which will be funded over
a period of years if required.
12
Voluntary Early Retirement Program
On August 14, 2001, USX and United States Steel LLC informed their
headquarters employees that in connection with the Separation a voluntary early
retirement program will be offered to employees of most USX headquarters
departments and to designated groups of United States Steel LLC employees whose
work is functionally related to USX. The financial impact of this program is
being treated as a Separation cost and an estimate of these costs has been
included in the Separation costs set forth in the pro forma financial
information included elsewhere in this prospectus.
Third Quarter 2001 Results
On October 22, 2001, USX announced that United States Steel reported an
adjusted third quarter 2001 net loss of $18 million, compared with adjusted net
income of $25 million in the third quarter 2000.
United States Steel recorded a third quarter 2001 net loss of $23 million.
Included was the net effect of special items related to the Fairless facility
shutdowns and USS-POSCO insurance recoveries, which together reduced net income
by $5 million. Third quarter 2000 net income of $19 million included after-tax
charges of $6 million related to USX's share of restructuring and impairment
charges at Republic Technologies International, LLC.
In third quarter 2001, United States Steel recorded a loss from reportable
segments of $8 million, or $2 per ton, on steel shipments of 3.6 million tons.
United States Steel's Domestic Steel segment recorded a loss from operations
of $47 million, or $18 per ton, which included $21 million income from United
States Steel's share of insurance recoveries in excess of facility repair costs
for the cold mill fire at USS-POSCO on May 31, 2001. Aside from the insurance
recoveries, United States Steel's share of USS-POSCO's operating results was
adversely impacted by the higher cost of operations following the fire. Claims
for reimbursement for such higher costs and lost volumes under USS-POSCO's
business interruption insurance coverage are pending and will be reflected in
income as received in future periods. The cold mill is expected to resume
production during first quarter 2002, although full production may not be
achieved until mid-year.
Domestic Steel shipments in third quarter 2001 were 2.6 million net tons,
about the same as third quarter 2000. The average realized domestic steel price
was $420 per ton in third quarter 2001 compared with $454 per ton in the third
quarter 2000 and $429 per ton in the second quarter 2001. The reduction from
the second quarter 2001 was primarily related to product mix.
U. S. Steel Kosice, s.r.o. (USSK), the Slovak Republic steel operation
acquired during the fourth quarter 2000, reported third quarter 2001 segment
income of $39 million, or $39 per ton.
Total USSK shipments in third quarter 2001 were 1.0 million net tons, down
from 1.1 million tons in second quarter 2001, as shipments of low value-added
products declined. The average USSK realized steel price in the third quarter
was $256 per ton, up from $249 per ton in second quarter 2001, with the
increase primarily related to improved product mix and hot rolled pricing.
For third quarter operating results and preliminary operating statistics,
see "Supplemental Financial Information" beginning on page U-1.
13
Marathon Business Description
Set forth below is a summary description of the business of Marathon, which
is included to provide holders of Outstanding Securities with information
regarding the business of Marathon. Following the Separation, Marathon will be
an independent company, separate from United States Steel, the issuer of the
SQUIDS. The 8.75% MIPS will continue to be obligations of Marathon following
the Separation. A more complete description of the business of Marathon is
incorporated by reference from the USX Annual Report on Form 10-K in the
registration statement of which this prospectus forms a part. See "Where You
Can Find More Information" on page (ii).
Marathon is comprised of Marathon Oil Company and certain other subsidiaries
of USX which are engaged in worldwide exploration and production of crude oil
and natural gas; domestic refining, marketing and transportation of petroleum
products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62
percent by Marathon Oil Company; and other energy related businesses. Marathon
Group revenues as a percentage of total USX consolidated revenues were 85
percent in 2000, 81 percent in 1999 and 77 percent in 1998.
Marathon is currently conducting exploration and development activities in
11 countries. Principal exploration activities are in the United States, United
Kingdom, Angola, Canada, Denmark, Ireland, the Netherlands and Norway.
Principal development activities are in the United States, United Kingdom,
Canada, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing
opportunities in North and West Africa, the Middle East and Southeast Asia.
Refining, Marketing and Transportation operations are primarily conducted by
MAP and its subsidiaries, including its wholly owned subsidiaries, Speedway
SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a 62
percent interest in MAP and Ashland Inc. holds the remaining 38 percent
interest.
Outlook of Marathon
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. The recent terrorist acts in the U.S. and the response to those
acts could have a significant effect on the volatility of price and supply of
liquid hydrocarbons and natural gas. Prices have historically been volatile and
have frequently been affected by unpredictable changes in supply and demand
resulting from fluctuations in worldwide economic activity and political
developments in the world's major oil and gas producing and consuming areas.
Any significant decline in prices could have a material adverse effect on the
Marathon Group's results of operations. A prolonged decline in such prices
could also adversely affect the quantity of crude oil and natural gas reserves
that can be economically produced and the amount of capital available for
exploration and development.
On August 23, 2001, Marathon announced plans to develop a strategic alliance
with Yukos Oil Company, the second largest oil company in Russia. As part of
the alliance, a joint business development group is planned to be located in
London to evaluate international investment opportunities. USX anticipates that
this relationship could lead to investment by Marathon in energy opportunities
in Russia. On August 29, 2001, Marathon announced agreements with Statoil,
Norsk Hydro and TotalFinaElf, to acquire varied interests in five licenses in
the Norwegian Sector of the North Sea. The portfolio additions include several
undeveloped discoveries close to Marathon's existing infrastructure positions
in the Heimdal and Brae areas of the North Sea. The transactions are subject to
necessary approvals from the Norwegian authorities.
14
Marathon's third quarter and full year 2001 production is expected to be
approximately 392 and 420 thousand barrels of oil equivalent per day,
respectively. The full year estimate reflects a higher than expected level of
asset sales and delays in new project start-ups. With respect to asset sales, a
pretax loss of approximately $220 million on Canadian assets held for sale will
be recorded in the third quarter.
Marathon's high impact drilling program in the Gulf of Mexico will be
delayed due to the cancellation of the contract for the Cajun Express rig. With
the Cajun Express rig, Marathon expected to drill two deepwater Gulf of Mexico
wells before year-end 2001. Marathon has contracted the Max Smith rig, which is
on location, to drill the Deep Ozona prospect with the Paris Carver prospect
expected to follow in the fourth quarter of 2001.
For the longer term, Marathon has targeted a 3% annual production growth
rate at a time when we see worldwide production growth rates of 1% to 2%.
Marathon plans to continue their program of exploration and business
development to meet their target. Their exploration program is targeted on high
impact projects and their business development team is pursuing growth
opportunities through purchases, exchanges and joint ventures. Marathon also
anticipates that at some point they will exceed the 3% annual growth rate which
could present Marathon with the opportunity of selling less attractive reserves
and production thereby improving the production profile.
The above discussion includes forward-looking statements with respect to the
expected levels of Marathon's worldwide liquid hydrocarbon and natural gas
production and the drilling program. Some factors that could potentially affect
worldwide liquid hydrocarbon and natural gas production include acts of war or
terrorist acts and the governmental or military response thereto, pricing,
supply and demand for petroleum products, amount of capital available for
exploration and development, regulatory constraints, timing of commencing
production from new wells, and other geological, operating and economic
considerations. Some factors that affect the drilling program include the
timing and results of future development drilling and drilling rig
availability.
Downstream income of the Marathon Group is largely dependent upon the
refining and wholesale marketing margin for refined products and the retail
gross margin for gasoline and distillates. The refining and wholesale marketing
margin reflects the difference between the wholesale selling prices of refined
products and the cost of raw materials refined, purchased product costs and
manufacturing expenses. Refining and wholesale marketing margins have been
historically volatile and vary with the level of economic activity in the
various marketing areas, the regulatory climate, the seasonal pattern of
certain product sales, crude oil costs, manufacturing costs, the available
supply of crude oil and refined products, and logistical constraints. The
retail gross margin for gasoline and distillates reflects the difference
between the retail selling prices of these products and their wholesale cost.
Retail gasoline and distillate margins have also been historically volatile,
but tend to be countercyclical to the refining and wholesale marketing margin.
Factors affecting the retail gasoline and distillate margin include seasonal
demand fluctuations, the available wholesale supply, the level of economic
activity in the marketing areas and weather situations which impact driving
conditions.
In June 2001, MAP acquired an interest in approximately 50 convenience
stores located in Indiana and Michigan from Welsh, Inc. The acquisition of
these retail outlets increases MAP's presence in these markets and should
provide more than 80 million gallons of new annual gasoline sales.
On September 1, 2001, MAP and Pilot Corporation commenced operation of their
previously announced transaction to form Pilot Travel Centers LLC. MAP and
Pilot each have a 50 percent
15
interest in Pilot Travel Centers LLC, in what is the largest travel center
network in the nation with more than 235 locations. The new venture, based in
Knoxville, Tennessee, has approximately 11,000 employees.
MAP is also working to improve its logistics network and has been designated
operator of the Centennial Pipeline, owned jointly by Panhandle Eastern Pipe
Line Company, a subsidiary of CMS Energy Corporation, MAP, and TE Products Pipe
Line Company, Limited Partnership. All of the permits and rights-of-way have
been obtained for the new pipeline, which will connect the Gulf Coast refiners
with the Midwest market. The Centennial Pipeline system is expected to be
operational in first quarter 2002.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier
pipeline company and the pipeline will be an interstate common carrier
pipeline. The pipeline will be named Cardinal Pipeline and is expected to
initially move about 50,000 barrels per day of refined petroleum into the
central Ohio region. MAP has secured over 95 percent of the rights-of-way
required to build the pipeline and negotiations are continuing with most of the
remaining landowners. Eminent domain proceedings are in progress in several
cases as well. Permitting issues have been encountered which could delay the
start-up of this pipeline until the first quarter of 2003. MAP continues to
vigorously pursue the permits and remaining rights-of-way required to complete
this project.
The Garyville, Louisiana coker project is nearing completion and is
anticipated to be at full production during the fourth quarter of this year.
The total cost of this major improvement program is approximately $280 million.
In connection with the proposed Separation, described beginning on page 122,
Standard & Poor's reported that they had assigned a BBB+ corporate credit
rating, which is investment grade, to Marathon Oil Corporation with a stable
outlook, assuming the proposed Separation is completed.
The above discussion includes forward-looking statements with respect to the
expected completion of the Centennial Pipeline system, the expected completion
of the Cardinal Pipeline, and the coker project. Some factors which could
impact the Centennial Pipeline system include delivery of equipment and
materials, contractor performance and unforeseen hazards such as weather
conditions. Some factors which could impact the Cardinal Pipeline include
obtaining the necessary permits and remaining rights-of-way, and completion of
construction. Some factors which could impact the coker project include
unforeseen hazards such as weather conditions, and unanticipated commissioning
and start-up issues. These factors (among others) could cause actual results to
differ materially from those set forth in the forward-looking statements.
16
The Proposed Separation
USX currently has two classes of "targeted" stock outstanding--USX--U. S.
Steel Group Common Stock, which is intended to reflect the performance of the
U. S. Steel Group, and USX--Marathon Group Common Stock, which is intended to
reflect the performance of the Marathon Group, its energy business. On July 31,
2001, the board of directors of USX approved a Plan of Reorganization pursuant
to which these businesses would be separated by means of a tax-free
distribution of all of the shares of United States Steel Corporation common
stock to the holders of the USX--U. S. Steel Group common stock. The Separation
was approved by USX's stockholders at a special meeting held on October 25,
2001. After the Separation, which is expected to occur on or about December 31,
2001, USX, which will change its name to Marathon Oil Corporation, and United
States Steel Corporation will each be independent, publicly owned companies.
USX currently manages most of its financial activities on a centralized,
consolidated basis. Although indebtedness and other obligations are attributed
to the Marathon Group and the U. S. Steel Group (neither of which is a separate
legal entity) based upon the cash flows of each group, these are attributions
for accounting purposes only and do not reflect the legal obligation to pay and
discharge such obligations. Subject to a limited number of exceptions, USX is
the legal obligor of the long-term debt and other financial instruments
attributed to United States Steel, including many--such as guarantees and
operating leases--that are not reflected as liabilities on the consolidated or
group balance sheets.
Immediately after the Separation, United States Steel Corporation will have
indebtedness and other obligations in an amount equal to $900 million less than
the net amounts attributed to United States Steel immediately prior to the
Separation (the "Value Transfer"). Following the Separation, Marathon Oil
Corporation will remain legally obligated for substantially all of the existing
obligations of USX. Accordingly, United States Steel will be required to incur
new indebtedness, including the SQUIDS, to repay or otherwise discharge a
substantial amount of USX obligations in connection with the Separation. Such
repayments or discharges will be effected pursuant to a Financial Matters
Agreement. The indebtedness and other obligations to be incurred in connection
with the Separation are referred to herein as the "Financing."
After giving effect to the Financing required to complete the Separation,
and assuming the Separation had occurred on June 30, 2001, United States Steel
Corporation and its subsidiaries:
. would have continued to be the direct obligor of $325 million of debt
under the USSK loan facility;
. would have assumed $569 million of debt and capital leases of USX
attributed to United States Steel and $133 million of certain guarantee
and operating lease obligations (which guarantee and lease obligations
are not reflected in the financial statements of USX or United States
Steel); and
. would have incurred new indebtedness in the amount of approximately $899
million (including an aggregate of up to $365 million underlying the
SQUIDS) and, assuming the issuance of $365 million principal amount of
SQUIDS in the exchange offers, would have paid $505 million of the net
proceeds thereof to Marathon Oil Corporation to be used to repay a
portion of the debt and other obligations attributed to United States
Steel by USX prior to the Separation, which may include, without
limitation, the redemption of the 8.75% MIPS outstanding after the
exchange offers, although no decision has been made with respect to such
redemption. In the event that less than $365 million principal amount of
SQUIDS are issued in the exchange offers, the amount of the payment to
Marathon Oil Corporation will be increased by the difference between
$365 million and the amount of SQUIDS actually issued.
17
The Separation is subject to the satisfaction or waiver of a number of
conditions, including that United States Steel would be required to have
available liquidity through cash and undrawn credit facilities of at least $400
million and other conditions set forth in the indenture governing the SQUIDS,
and the receipt of a private letter ruling from the Internal Revenue Service.
There can be no assurance that these conditions will be satisfied. The issuance
of the SQUIDS is not subject to completion of the Separation. If the board of
directors of USX Corporation decides not to proceed with the Separation or the
Separation does not occur on or before December 31, 2002, USX will continue to
guarantee the SQUIDS until they are fully paid.
18
The organization of USX before and after the Separation is illustrated below:
[CHART]
19
United States Steel LLC
United States Steel LLC is a Delaware limited liability company that was
formed recently in connection with a corporate reorganization of USX. In this
reorganization, which occurred on July 2, 2001, United States Steel LLC became
the owner and operator of the businesses comprising the U. S. Steel Group and
USX became the parent holding company of United States Steel LLC, in addition
to Marathon Oil Company, which owns and operates the businesses comprising the
Marathon Group. Upon Separation, United States Steel LLC will be converted into
United States Steel Corporation.
Our principal executive offices are located at 600 Grant Street, Pittsburgh,
PA 15219-4776. Our telephone number is 412-433-1121.
20
Summary Financial Data of United States Steel
The following table sets forth summary financial data for United States
Steel. The summary historical information is not intended to be a complete
presentation of the financial position or the results of operations of United
States Steel on a stand-alone basis. For financial information for United
States Steel Corporation which gives effect to the Separation and related
transactions, see "Unaudited Pro Forma Condensed Combined Financial Statements"
beginning on page 50. This information should be read in conjunction with
United States Steel's combined financial statements and USX Corporation's
consolidated financial statements, including the notes thereto, which appear
elsewhere in this prospectus or are incorporated by reference in the
registration statement of which this prospectus forms a part.
Six Months Year Ended
Ended June 30, December 31,
---------------- --------------------------------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------ ------ ------ ------ ------
(Dollars in millions)
Statement of Operations
Data:
Revenues and other
income(/1/)............ $ 3,301 $ 3,244 $6,132 $5,470 $6,477 $7,156 $6,872
Costs and expenses...... 3,429 3,041 6,028 5,320 5,898 6,383 6,389
------- ------- ------ ------ ------ ------ ------
Income (loss) from
operations............. (128) 203 104 150 579 773 483
Net interest and other
financial costs
(income)............... 36 48 105 74 42 87 116
------- ------- ------ ------ ------ ------ ------
Income (loss) before
income taxes and
extraordinary losses... (164) 155 (1) 76 537 686 367
Provision (credit) for
income taxes........... (143) 56 20 25 173 234 92
------- ------- ------ ------ ------ ------ ------
Income (loss) before
extraordinary losses... (21) 99 (21) 51 364 452 275
Extraordinary losses.... -- -- -- 7 -- -- 2
------- ------- ------ ------ ------ ------ ------
Net income (loss)....... $ (21) $ 99 $ (21) $ 44 $ 364 $ 452 $ 273
======= ======= ====== ====== ====== ====== ======
Balance Sheet Data--as
of end of period:
Property, plant and
equipment - net........ $ 3,098 $ 2,444 $2,739 $2,516 $2,500 $2,496 $2,551
Prepaid pensions........ 2,711 2,543 2,672 2,404 2,172 1,957 1,734
Total assets............ 8,954 7,606 8,711 7,525 6,749 6,694 6,580
Total debt and other
financial
obligations(/2/)....... 2,681 1,198 2,694 1,164 737 771 1,169
Long-term employee
benefit obligations.... 1,916 2,212 1,767 2,245 2,315 2,338 2,430
Equity.................. 1,860 2,094 1,919 2,056 2,093 1,782 1,566
Other Data:
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(/3/)......... -- 2.83x 1.05x 2.10x 5.15x 4.72x 2.41x
Ratio of earnings to
fixed charges(/3/)..... -- 3.06x 1.13x 2.33x 5.89x 5.39x 2.91x
Operating Data:
Steel shipments
(thousands of net tons)
--Domestic Steel....... 5,043 5,884 10,756 10,629 10,686 11,643 11,372
--USSK................. 1,818 -- 317 -- -- -- --
--------------------
(1) Consists of revenues, dividends and investee income (loss), net gains on
disposal of assets, gain on investee stock offering and other income
(loss).
(2) Consists of notes payable, long-term debt (including current portion),
trust preferred securities, and preferred stock of subsidiary.
(3) For purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends and the ratio of earnings to fixed
charges, "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
that portion of interest expense that management believes is attributable
to interest. "Preferred Dividends" consists of pretax earnings required to
cover preferred stock dividend requirements. Earnings were deficient in
covering fixed charges and preferred stock dividends by $202 million for
the six months ended June 30, 2001. Earnings were deficient in covering
fixed charges by $196 million for the six months ended June 30, 2001.
21
RISK FACTORS
In addition to the information contained elsewhere in this prospectus or
incorporated by reference in the registration statement of which this
prospectus forms a part, the following risk factors should be carefully
considered by each prospective investor in evaluating an investment in the
SQUIDS.
Risks Related to Holders Tendering in the Exchange Offers
Following the Separation, United States Steel Corporation will be the sole
obligor of the SQUIDS and will not have access to the financial and other
resources of USX Corporation
Although the SQUIDS will initially be guaranteed by USX Corporation,
following the Separation, United States Steel Corporation will be the sole
obligor of the SQUIDS, which will no longer be guaranteed by USX. The
Outstanding Securities being exchanged for the SQUIDS in the exchange offers
are issued by USX and its wholly owned subsidiaries. Thus, by tendering your
Outstanding Securities in the exchange offers, you will be exchanging a USX
security for a security that, following the Separation, will be a United States
Steel security. Following the Separation, United States Steel Corporation will
have a substantial amount of indebtedness and other obligations and will have a
credit rating below "investment grade", which will be lower than the credit
ratings of USX and its successor, Marathon Oil Corporation. See "Following the
Separation, we will have a substantial amount of indebtedness and other
obligations, which could limit our operating flexibility and otherwise
adversely affect our financial condition."
Furthermore, following the Separation, United States Steel Corporation will
not be able to rely on USX for financial support or benefit from a relationship
with USX to obtain credit. United States Steel Corporation's lower credit
ratings will result in higher borrowing costs and make obtaining necessary
capital more difficult. Following the Separation, the annual weighted average
interest rate of United States Steel Corporation's debt and other obligations,
including the SQUIDS, is estimated to be approximately 8.50%. During the six
months ended June 30, 2001, the annual weighted average interest rate of USX's
debt and other obligations was 7.11%.
The SQUIDS do not have the protection of cross-acceleration provisions
Because the terms of the SQUIDS do not include any cross-acceleration
provisions, holders of SQUIDS will not be able to accelerate payment of the
SQUIDS if we are in default under the Senior Notes or any of our other
outstanding indebtedness, and the holders of that indebtedness accelerate
payment. In that case, we will have to repay all indebtedness that has been
accelerated, including other indebtedness that may have cross-default or cross-
acceleration provisions, before any of the SQUIDS are repaid. As a result, we
may not have sufficient funds to repay any or all of the SQUIDS if we default
under the SQUIDS or at such time as they become payable.
We cannot assure you that an active trading market will develop for the SQUIDS
The SQUIDS are a new issue of securities. There is no active public trading
market for the SQUIDS. Although we have applied to the NYSE for approval of
listing of the SQUIDS, there can be no assurance that an active trading market
for the SQUIDS offered under this prospectus will develop or, if such a market
develops, as to the liquidity or sustainability of any such market. The
liquidity of the trading market in the SQUIDS, and the market prices of the
SQUIDS, 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 prospects for companies in our industry generally. As a consequence, we
cannot assure you that you will be able to sell your SQUIDS, or that, even if
you can sell your SQUIDS, you will be able to sell them at a price equal to or
above their principal amount.
22
Possible volatility of trading prices for the SQUIDS
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 SQUIDS could be subject to similar
volatility. The trading price of the SQUIDS also could fluctuate in response to
such factors as variations in United State Steel's operating results,
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 SQUIDS upon a change of control
Upon the occurrence of "change of control" events specified in "Description
of the SQUIDS" on page 137, holders of SQUIDS may require us to purchase their
SQUIDS at 100% of their principal amount, plus accrued but unpaid 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 SQUIDS, particularly if that change of control event triggers a
similar repurchase requirement for, or results in the acceleration of, other
indebtedness. The indenture governing our Senior Notes provides that the
holders of Senior Notes may require us to purchase their Senior Notes upon
certain change of control events, including events that will not constitute a
change of control under the indenture for the SQUIDS. In addition, our expected
asset-based revolving credit facility may provide that certain change of
control events (as defined in the revolving credit facility) will constitute a
default and could result in the acceleration of our indebtedness under the
revolving credit facility. Any of our future debt agreements may contain
similar provisions.
Risks Related to Holders Not Tendering in the Exchange Offers
Reduced liquidity of the Outstanding Securities
USX believes there currently exists a limited trading market for the
Outstanding Securities. Following completion of the exchange offers, the
trading market for unexchanged Outstanding Securities will become more limited
due to the reduction in the outstanding amount of the Outstanding Securities as
a result of the exchange offers. Although holders of the 6.50% Preferred Stock
and the 6.75% QUIPS will become entitled to receive a cash payment for such
securities in connection with the Separation, until such time, and following
the Separation with respect to 8.75% MIPS, holders of unexchanged Outstanding
Securities will be subject to this more limited market. If the Separation does
not occur, holders of all unexchanged Outstanding Securities will continue to
be subject to this more limited market. A more limited trading market might
adversely affect the liquidity, market price and price volatility of the
Outstanding Securities. If a market for unexchanged Outstanding Securities
exists or develops, such securities may trade at a discount to the price at
which the securities would trade if the amount outstanding were not reduced,
depending on prevailing interest rates, the market for similar securities and
other factors. However, there can be no assurance that an active market in the
unexchanged Outstanding Securities will exist, develop or be maintained or as
to the prices at which the unexchanged Outstanding Securities may be traded.
The Outstanding Securities may be redeemed by USX or Marathon
Prior to the Separation, USX and, with respect to the 8.75% MIPS, following
the Separation, Marathon will have the option to redeem unexchanged Outstanding
Securities at any time, including following completion of the exchange offers.
As a holder of unexchanged Outstanding Securities, you will be entitled to a
cash payment upon redemption. Although the 6.50% Preferred Stock and 6.75%
QUIPS are redeemable at a premium over their respective face amounts, the 8.75%
MIPS are redeemable at their face amount. No decision has been made with
respect to any redemption of the 8.75% MIPS following Separation.
23
Risks Related to the Separation
United States Steel Corporation will be subject to continuing contingent
liabilities of Marathon Oil Corporation following the Separation
After the Separation, there will be several significant areas where the
liabilities of Marathon Oil may become an obligation of United States Steel
Corporation.
Under the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder (the "Code"), each corporation that was a
member of the USX 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 USX
consolidated group for such taxable period. See "Relationship Between United
States Steel Corporation and Marathon Oil Corporation After the Separation--Tax
Sharing Agreement" on page 124. Other provisions of federal law establish
similar liability for other matters, including laws governing tax qualified
pension plans as well as other contingent liabilities.
In addition, following the Separation, we will remain contingently liable
for debt, available revolving credit and other obligations of Marathon Oil
Corporation in the amount of approximately $1.0 billion as of June 30, 2001.
Pursuant to the Financial Matters Agreement, Marathon Oil Corporation will
indemnify United States Steel Corporation for any payments it would be required
to make in respect of these obligations.
The Separation may be challenged by creditors as a fraudulent transfer or
conveyance
If a court in a suit by an unpaid creditor or representative of creditors of
either United States Steel Corporation or Marathon Oil Corporation, such as a
trustee in bankruptcy, or United States Steel Corporation or Marathon Oil
Corporation, as debtor-in-possession, in a reorganization case under title 11
of the United States Code, were to find that:
. the Separation and the related transactions were undertaken for the
purpose of hindering, delaying or defrauding creditors; or
. Marathon Oil Corporation or United States Steel Corporation received
less than reasonably equivalent value or fair consideration in
connection with the Separation and the transactions related thereto and
(1) USX was insolvent immediately prior to, or Marathon Oil Corporation
or United States Steel Corporation was insolvent at the effective time
of the Separation and after giving effect thereto, (2) USX immediately
prior to, or Marathon Oil Corporation or United States Steel Corporation
as of the effective time of the Separation and after giving effect
thereto, intended or believed that it would be unable to pay its debts
as they became due, or (3) the capital of USX immediately prior to, or
Marathon Oil Corporation or United States Steel Corporation, at the
effective time of the Separation and after giving effect thereto, was
inadequate to conduct its business,
then such 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.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied.
Generally, however, an entity would be considered insolvent if, either:
. the sum of its liabilities, including contingent liabilities, is greater
than its assets, at a fair valuation; or
24
. 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.
United States Steel Corporation may be unable to achieve all of the benefits
sought by the Separation
The full strategic and financial benefit of the Separation may be delayed or
may never occur at all. The following are factors that may prevent United
States Steel Corporation from realizing these benefits:
. competitors in the steel industry may have greater financial resources
to make such investments or participate in such consolidations on more
attractive terms;
. substantial indebtedness may impede us from participating in certain
investment or consolidation transactions; and/or
. domestic and international economic conditions may make such investments
and consolidations more costly.
Additionally, many factors may affect our future results. See "Special Note
Regarding Forward-Looking Statements" on page (iv).
The terms of the Separation, the Financing and related transactions, as
described in this prospectus, may change in ways that adversely affect you as a
holder of SQUIDS
The proposed terms of the Separation and the various agreements relating to
the ongoing relationship between United States Steel and Marathon Oil following
the Separation are not final and may be changed to satisfy any conditions
established by the Internal Revenue Service in connection with its issuance of
a private letter ruling, by other creditors in connection with the Financing,
our board of directors or management or others. We cannot assure that any such
changes will not have an adverse effect upon you as a holder of SQUIDS.
The terms of the Financing, including maturities or amortization schedules
for payments of principal, interest rates, covenants or security, have not yet
been determined and no commitments for any Financing facilities are in place.
The Financing will be subject to market conditions and we cannot assure you
that such Financing will be available on commercially reasonable terms.
Completion of the Financing on terms satisfactory to the USX board of directors
is a condition to the Separation.
Following the Separation, United States Steel Corporation and Marathon Oil
Corporation will not be consolidated for tax purposes and United States Steel
Corporation's recognition of the benefits of any tax losses may be delayed
Prior to the Separation, USX filed consolidated, combined and unitary tax
returns for federal and many states' income taxes, which included the results
of operations of the U. S. Steel Group and the Marathon Group. As a result of
the Separation, United States Steel Corporation will not be able to join with
Marathon Oil Corporation in any consolidated, combined, or unitary tax returns
for taxable periods ending after the effective time of the Separation.
Consequently, for federal and state income tax purposes, taxable income or
losses, and other tax attributes of United States Steel Corporation for taxable
periods ending after the effective time of the Separation generally cannot
offset, or be offset by, taxable income or losses and other tax attributes of
Marathon Oil Corporation.
Additionally, the present USX tax allocation policy requires the U. S. Steel
Group and the Marathon Group to pay the other for tax benefits resulting from
tax attributes which cannot be utilized
25
currently by the group to which such attributes are attributable on a stand-
alone basis but which can be utilized on a consolidated, combined, or unitary
basis. The net amount of cash payments paid by Marathon to United States Steel
under the tax allocation policy for prior tax years, subject to adjustment, was
$21 million, $(2) million, $91 million and $379 million during the years 1998,
1999, 2000 and the first six months of 2001, respectively. Such payments
allowed United States Steel to currently realize the tax benefits. After the
Separation, if we generate losses or other tax attributes, generally, we would
benefit from those losses or other tax attributes only if and when we generated
sufficient taxable income in future years to utilize those losses or other tax
attributes on a stand-alone basis. Such a delay will affect cash flows, which
may require reduction or postponement of capital expenditures or acquisitions.
The Separation may become taxable under section 355(e) of the code if 50% or
more of United States Steel Corporation's shares or Marathon Oil Corporation's
shares are acquired as part of a plan
The Separation may become taxable to USX pursuant to section 355(e) of the
Code if 50% or more of either Marathon Oil Corporation's shares or United
States Steel Corporation's 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, USX would be required to pay a corporate tax based on
the excess of the fair market value of the shares distributed over USX's tax
basis for such shares. The amount of such tax would be materially greater if
the Separation were deemed to be a distribution of Marathon Oil Corporation's
shares. If an acquisition occurs which results in the Separation being taxable
under section 355(e), the Tax Sharing Agreement provides that the resulting
corporate tax liability will be borne by the entity, either United States Steel
Corporation or Marathon Oil Corporation, with respect to which the acquisition
has occurred.
United States Steel may become responsible for a corporate tax if the
Separation fails to qualify as a tax-free transaction
To the extent that a breach of a representation or covenant results in
corporate tax being imposed on USX, the breaching party, either United States
Steel Corporation or Marathon Oil Corporation, will be responsible for the
payment of the corporate tax. In the event that the Separation fails to qualify
as a tax-free transaction through no fault of either United States Steel
Corporation or Marathon Oil Corporation, the resulting corporate tax liability,
if any, likely will be borne by United States Steel Corporation pursuant to the
Tax Sharing Agreement. See the discussion in "Relationship Between United
States Steel Corporation and Marathon Oil Corporation After the Separation--Tax
Sharing Agreement" on page 124.
Certain obligations to be assumed by United States Steel Corporation in the
Separation may be accelerated in the event of the bankruptcy of Marathon Oil
Corporation
Pursuant to the Financial Matters Agreement, upon the Separation, United
States Steel Corporation will become responsible for certain industrial revenue
bonds and certain guarantee and lease obligations (which on June 30, 2001
totaled approximately $702 million). Additionally, we are contingently liable
for debt, available revolving credit and other obligations of Marathon Oil
Corporation in the amount of approximately $1.0 billion as of June 30, 2001.
Marathon Oil is not limited by agreement with us as to the amount of
indebtedness that it may incur and, in the event of the bankruptcy of Marathon
Oil Corporation, the holders of the industrial revenue bonds and such other
obligations may declare them immediately due and payable. If such event occurs,
we may not be able to satisfy such obligations. See "--Following the
Separation, United States Steel Corporation Will Not Have Access to the
Financial and Other Resources of USX Corporation" on page 22.
26
Risks Related to Our Business
Overcapacity in the steel industry may negatively affect our results of
operations
On a global basis, there is an excess of steel-making capacity over global
consumption of steel products, including sheet, plate, tin mill and tubular
products. Under these conditions, shipment and production levels for our
domestic operations have varied from year to year and quarter to quarter,
affecting our results of operations and cash flows. Many factors influence
these results, including demand in the domestic market, international currency
conversion rates and government actions, both domestic and international. In
addition, in many applications, steel competes with many materials, including
aluminum, cement, composites, glass, plastic and wood. The emergence of
additional substitutes for steel products could adversely affect future market
prices and demand for steel products.
Imports of steel may negatively affect our results of operations
Imports of steel into the United States constituted 23%, 27%, 26% and 30% of
the domestic steel market demand for the first six months of 2001, and the
years 2000, 1999 and 1998, respectively. 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 these problems. Imports of steel involving dumping and subsidy abuses
depress domestic price levels, which has an adverse effect upon our revenue and
income. See "Business--Legal Proceedings" on page 105.
Our business is cyclical
Demand for most of our products is cyclical in nature and sensitive to
general economic conditions. Our financial condition and results of operations
are significantly affected by fluctuations in the U.S. and global economies.
Because integrated steel makers have high fixed costs, reduced volumes result
in operating inefficiencies, such as those experienced to date in 2001. Over
the past five years, our net income has varied from a high of $452 million in
1997 to a loss of $21 million in 2000. Continuation or worsening of the current
economic downturn, as a result of the events of September 11, 2001 or
otherwise, future economic downturns, a stagnant economy or currency
fluctuations may materially adversely affect our business, results of
operations and financial condition.
Many of our international competitors are larger and have higher credit ratings
Based on International Iron and Steel Institute statistics, we rank as the
eleventh largest steel producer in the world, assuming full-year production at
USSK. Many of our larger competitors have investment grade credit ratings and,
due to their superior size and credit ratings, United States Steel may be at a
disadvantage in participating in consolidations. In addition, terms of our
indebtedness contain covenants that may limit our ability to participate in
certain consolidations.
Competition from mini-mill producers could result in reduced selling prices and
shipment levels for us
Domestic integrated producers, such as United States Steel, have lost market
share in recent years to domestic mini-mill producers. Mini-mills generally
produce a narrower range of steel products than integrated producers, but
typically enjoy certain competitive advantages such as lower capital
expenditures for construction of facilities 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
27
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.
High energy costs can adversely impact our results of operations
Our operations consume large amounts of energy, a significant amount of
which is natural gas. Domestic natural gas prices have significantly increased
from an average of $2.27 per million BTUs in 1999 to an average of $5.88 per
million BTUs in the first half of 2001. At current consumption levels, a $1.00
change in domestic natural gas prices would result in an estimated $45 million
change in our annual domestic pretax operating costs.
Environmental compliance and remediation could result in substantially
increased capital requirements and operating costs
The domestic businesses of United States 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 United States 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. In addition,
we are involved in a number of environmental remediation projects relating to
the remediation of former and present operating locations and are involved in a
number of other remedial actions under federal and state law. See "Business--
Environmental Matters" on page 102. Our environmental expenditures were $230
million in 2000, $253 million in 1999 and $266 million in 1998.
To the extent that competitors, particularly foreign steel producers and
manufacturers of competitive products, are not required to undertake equivalent
costs, the competitive position of United States Steel could be adversely
impacted.
USSK is subject to the national 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. In addition,
USSK has entered into agreements with the government to bring its facilities
into European Union environmental compliance.
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 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, benefits are provided for the most part based on
fixed amounts negotiated in labor contracts with the appropriate unions. As of
December 31, 2000, United States Steel reported an unfunded
28
obligation for such benefit obligations in the amount of $1,307 million. Mini-
mills, foreign competitors and many producers of products that compete with
steel are obligated to provide lesser benefits to their employees and retirees
and this difference in costs could adversely impact our competitive position.
Bankruptcies of domestic competitors have resulted in lowered operating costs
of such competitors
Since 1998, more than 18 domestic steel companies have sought protection
under Chapter 11 of the United States Bankruptcy Code. Many of these companies
have continued to operate and have enjoyed significant cost advantages over us.
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, have been relieved of certain
environmental, retiree and other obligations. As a result, they are able to
operate with lower costs than we are.
Many lawsuits have been filed against us involving asbestos-related injuries
We have been and are a defendant in a large number of cases in which
plaintiffs allege injury resulting from exposure to asbestos. Many of these
cases involve multiple plaintiffs and most have multiple defendants. These
cases fall into three major groups: (1) claims made under federal and general
maritime law by employees of the Great Lakes or Intercoastal Fleets, former
operations of United States Steel; (2) claims by persons who performed work at
United States Steel facilities; and (3) claims made by industrial workers
allegedly exposed to an electrical cable product formerly manufactured by
United States Steel. If adversely determined, these lawsuits could have a
material adverse effect on United States Steel's financial position. See
"Business--Legal Proceedings" on page 105.
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 also accounted for 16% of revenue for the first half of 2001.
USSK exports more than 80% of its product, with the majority of its sales being
to other European countries. USSK is subject to economic conditions in the
European Union and global markets it serves. It is also subject to political
factors, including taxation, nationalization, inflation, currency fluctuations,
increased regulation and protectionist measures. In addition, USSK is subject
to foreign currency exchange risks because its revenues are primarily in euro-
denominated currencies and its costs are primarily in Slovak crowns and United
States dollars.
Following the Separation, we will have a substantial amount of indebtedness and
other obligations, which could limit our operating flexibility and otherwise
adversely affect our financial condition
If the Separation had occurred on June 30, 2001, United States Steel
Corporation would be liable for indebtedness in a total amount equal to
approximately $1.8 billion. In the Separation, United States Steel Corporation
will also agree to be responsible for certain guarantee and operating lease
obligations of Marathon Oil Corporation not reflected in its financial
statements. As of June 30, 2001, these obligations were estimated to be $133
million. In addition, we may incur other obligations for working capital,
refinancing of a portion of the $1.8 billion referred to above or for other
purposes. This substantial amount of indebtedness could limit our operating
flexibility and could otherwise adversely affect our financial condition.
29
Our high degree of leverage could have important consequences to you,
including the following:
. our ability to satisfy our obligations with respect to the SQUIDS and
other obligations may be impaired in the future;
. our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions or general
corporate or other purposes may be impaired 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 expected inventory and accounts
receivable credit facilities), which will expose us to the risk of
increased interest rates; 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.
If indebtedness is incurred in the future, it may exacerbate the
consequences described above and could have other important consequences.
Our business requires substantial debt service, capital investment and
maintenance expenditures which we may be unable to meet
Based on our pro forma debt levels, we anticipate that our scheduled
interest payments for the 12 months immediately following the Separation will
be approximately $148 million, assuming an annual weighted average interest
rate of 8.50%. The amortization and maturities of the anticipated accounts
receivable facility and inventory revolving credit facility have not yet been
negotiated with lenders. Additionally, our operations are capital intensive.
For the five-year period ended December 31, 2000, total capital expenditures
were $1,439 million and we plan capital expenditures of $325 million in 2001.
Our business also requires substantial expenditures for routine maintenance.
We may be unable to raise such amounts through internally generated cash or
from external sources. See "--Operating and Cash Losses and Fewer Sources of
Cash" on page 30 below and "--Following the Separation, United States Steel
Corporation Will Not Have Access to the Financial and Other Resources of USX
Corporation" on page 22.
We have incurred operating and cash losses and will have fewer sources of cash
For the six months ended June 30, 2001, and the year ended December 31,
2000, United States Steel had segment income (loss) from operations of ($138)
million and $25 million, respectively. Additionally, for the year ended
December 31, 2000, United States Steel generated negative cash from operations
of $494 million after investing activities and dividends (excluding the $500
million elective VEBA funding). We may not realize positive operating income
or cash flows from continuing operations in the foreseeable future.
Historically, United States Steel funded its negative operating cash flow
with cash supplied by USX, a portion of which was reflected as a payment from
Marathon under the tax allocation policy and the remainder of which was
represented by increased amounts of debt attributed by USX. As a stand alone
company, United States Steel Corporation will need to fund any of its negative
operating cash flow from external sources and adequate sources may be
unavailable or the cost of such funding may adversely impact United States
Steel.
30
The terms of indebtedness entered into and to be entered into by United States
Steel Corporation in connection with the Separation will contain restrictive
covenants that may limit United States Steel Corporation's operating
flexibility
If the Separation had occurred on June 30, 2001, the amount of financing
that United States Steel Corporation would have incurred in connection with the
Separation, including the SQUIDS but not including assumption of existing
obligations, is $899 million. This includes the $535 million of indebtedness
(reduced by a $5 million discount) evidenced by the 10 3/4% Senior Notes due
August 1, 2008 that we issued on July 27 and September 11, 2001 (the "Senior
Notes"). The Senior Notes impose significant restrictions on us compared to the
terms of the current financial obligations of USX. These restrictions, among
other things:
. impose restrictions on payment of dividends;
. limit additional borrowings, including limiting the amount of borrowings
secured by inventories or accounts receivable;
. limit asset sales and sale of the stock of subsidiaries; and
. restrict our ability to make capital expenditures or certain
acquisitions.
Moreover, additional anticipated financing may also include the restrictions
above and may:
. require security interests in accounts receivable and inventory;
. impose certain financial ratios; and
. require maintenance of net asset levels.
If these covenants are breached, creditors would be able to declare their
obligations immediately due and payable and foreclose on any collateral, and
such breaches may cause cross-defaults under instruments governing our other
outstanding indebtedness. Additional indebtedness that we may incur in the
future may also contain similar covenants, as well as other restrictive
provisions.
Our operations are subject to business interruptions and casualty losses
Steel making and raw material operations are subject to unplanned events
such as explosions, fires, inclement weather, accidents and transportation
interruptions. To the extent not covered by insurance, our costs, revenues and
cash flows may be adversely impacted.
Our business could be adversely affected by strikes or work stoppages by its
unionized employees
Currently, substantially all domestic hourly employees of our steel, coke
and taconite pellet facilities are covered by a collective bargaining agreement
with the United Steelworkers of America which 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. In addition, the majority of USSK employees are represented by a union
under a collective bargaining agreement expiring in February 2004, which is
subject to annual wage negotiations. Strikes or work stoppages and the
resulting adverse impact on its relationship with its customers could have a
material adverse effect on United States Steel's 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.
31
Risks Related to the Business of Marathon
A substantial or extended decline in oil or gas prices would have a material
adverse effect on Marathon
Prices for oil and gas fluctuate widely. Marathon's revenues, operating
results and future rate of growth are highly dependent on the prices it
receives for its oil, gas and refined products. Historically, the markets for
oil, gas and refined products have been volatile and may continue to be
volatile in the future. Many of the factors influencing prices of oil, gas and
refined products are beyond the control of Marathon. These factors include:
. worldwide and domestic supplies of oil and gas,
. weather conditions,
. the ability of the members of OPEC to agree to and maintain oil price
and production controls,
. political instability or armed conflict in oil-producing regions,
. the price and level of foreign imports,
. the level of consumer demand,
. the price and availability of alternative fuels,
. the availability of pipeline capacity, and
. domestic and foreign governmental regulations and taxes.
The long-term effects of these and other conditions on the prices of oil and
gas are uncertain. For example, oil prices declined significantly in 1998 and,
for an extended period of time, remained substantially below prices obtained in
previous years. In late 1999, oil and natural gas prices increased
significantly and have remained at higher levels.
Lower oil and gas prices may reduce the amount of oil and gas that Marathon
produces, which may adversely affect its revenues and operating income.
Significant reductions in oil and gas prices may require Marathon to reduce its
capital expenditures.
Oil and gas reserve data and future net revenue estimates of Marathon are
uncertain
Estimates of reserves by necessity are projections based on engineering
data, the projection of future rates of production and the timing of future
expenditures. Estimates of Marathon's proved oil and gas reserves and projected
future net revenues are based on reserve reports which it prepares. The process
of estimating oil and gas reserves requires substantial judgment on the part of
the petroleum engineers, resulting in imprecise determinations, particularly
with respect to new discoveries. Different reserve engineers may make different
estimates of reserve quantities and revenues attributable thereto based on the
same data. Future performance that deviates significantly from the reserve
reports could have a material adverse effect on the business and prospects of
Marathon.
Fluctuations in the price of oil and natural gas have the effect of
significantly altering reserve estimates as the economic projections inherent
in the estimates may reduce or increase the quantities of recoverable reserves.
Such prices may not be realized or the estimated production volumes may not be
produced during the periods indicated. Actual future production, oil and
natural gas prices, revenues, taxes, development expenditures, operating
expenses and quantities of recoverable oil and natural gas reserves most likely
will vary from our estimates.
32
If Marathon fails to acquire or find additional reserves, its reserves and
production will decline materially from their current levels
The rate of production from oil and gas properties generally declines as
reserves are depleted. Except to the extent that Marathon acquires additional
properties containing proved reserves, conducts successful exploration and
development activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, its proved reserves will
decline materially as reserves are produced. Future oil and gas production is,
therefore, highly dependent upon our level of success in acquiring or finding
additional reserves. Because Marathon is smaller than many of its competitors,
it has fewer reserves and will be at an even greater disadvantage to its
competitors if it fails to acquire or find additional reserves.
Marathon's refined product margins can be adversely affected by rising crude
oil prices and environmental regulations
Marathon conducts domestic refining, marketing and transportation operations
primarily through its 62% owned consolidated subsidiary, Marathon Ashland
Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest,
Southeast, Ohio River Valley and the upper Great Plains. The profitability of
these operations depends largely on the margin between the cost of crude oil
and other feedstocks refined and the selling prices of refined products. MAP is
a purchaser of crude oil in order to satisfy its refinery throughout
requirements. As a result, its overall profitability could be adversely
affected by availability of supply and rising crude oil and other feedstock
prices which are not recovered in the marketplace. Refined product margins have
been historically volatile and vary with the level of economic activity in the
various marketing areas, the regulatory climate, logistical capabilities and
the available supply of refined products.
In addition, environmental regulations, particularly the 1990 Amendments to
the CAA, have imposed, and are expected to continue to impose, increasingly
stringent and costly requirements on refining and marketing operations which
may have an adverse effect on margins.
The oil and gas exploration and production industry is very competitive
There is strong competition relating to all aspects of the oil and natural
gas industry, and in particular in the exploration and development of new oil
and natural gas reserves. Marathon competes with major integrated and
independent oil and gas companies for the acquisition of oil and gas properties
and leases, for the equipment and labor required to develop and operate these
properties, and in the marketing of natural gas to end-users. Many of these
competitors have financial and other resources substantially greater than that
available to Marathon. In addition, many of Marathon's larger competitors may
be better able to respond to factors that affect the demand for oil and natural
gas production, such as changes in worldwide oil and natural gas prices and
levels of production, the cost and availability of alternative fuels and the
application of government regulations. Marathon also competes in attracting and
retaining personnel, including geologists, geophysicists and other specialists
and generalists. Marathon may not be able to attract or retain technical
personnel in the future.
Environmental compliance and remediation could result in increased capital
requirements and operating costs
The businesses of Marathon 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 CAA, with respect to air
emissions; CWA, with respect to water discharges; RCRA, with respect to solid
and hazardous waste treatment, storage and disposal; CERCLA, with respect to
releases and remediation of hazardous substances; and the Oil Pollution Act of
1990, with respect to
33
oil pollution and response. In addition, many states where Marathon operates
have similar laws dealing with the same matters. These laws and their
associated regulations are constantly evolving and many of them have become
more 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 finalized or in certain instances are undergoing revision. These
environmental laws and regulations, particularly the 1990 Amendments to the
CAA, new water quality standards and stricter fuel regulations could result in
increased capital, operating and compliance costs.
Marathon has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of Marathon's products
and services, operating results will be adversely affected. The specific impact
of these laws and regulations on each of Marathon's competitors may vary
depending on a number of factors, including the age and location of its
operating facilities, marketing areas, production processes and whether or not
it is engaged in the petrochemical business or the marine transportation of
crude oil or refined products.
Of particular significance to MAP are the new Tier II Fuels regulations
proposed in late 1999. The gasoline rules, which were finalized by the U.S.
Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel
rule which was finalized in January 2001, require substantially reduced sulfur
levels. The combined capital cost to achieve compliance with the gasoline and
diesel regulations could amount to approximately $700 million between 2003 and
2005. This is a forward-looking statement and can be only a broad-based
estimate due to the ongoing evolution of regulatory requirements. Some factors
(among others) that could potentially affect gasoline and diesel fuel
compliance costs include obtaining the necessary construction and environmental
permits, operating considerations, and unforeseen hazards such as weather
conditions. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of Marathon's products and services,
operating results will be adversely affected.
Marathon's reliance on foreign production of oil and gas exposes Marathon to
risks from abroad which could negatively affect its results of operations
Marathon's oil and gas producing activities rely heavily upon production
outside of the United States. For the years 2000, 1999 and 1998, international
production accounted for 38%, 33% and 34%, respectively. Development of new
production properties in countries outside the United States may require
protracted negotiations with host governments, national oil companies and third
parties and are frequently subject to economic and political considerations,
such as taxation, nationalization, inflation, currency fluctuations, increased
regulation and approval requirements and governmental regulation, which could
adversely affect the economics of projects.
Marathon's exploration and production operations are subject to business
interruptions and casualty losses
Exploration and production operations are subject to unplanned occurrences,
including, without limitation, blowouts, explosions, fires, loss of well
control and spills, adverse weather, labor disputes, and maritime accidents. To
the extent not covered by insurance, Marathon's costs, revenues and cash flows
could be adversely impacted.
Marathon's refining, marketing and transportation operations are subject to
business interruptions and casualty losses
Refining, marketing and transportation operations are subject to business
interruptions due to unplanned events such as explosions, fires, pipeline
interruptions, crude oil or refined product spills,
34
inclement weather or labor disputes. They are also subject to the additional
hazards of marine operations, such as capsizing, collision and damage or loss
from severe weather conditions. To the extent not covered by insurance,
Marathon's costs, revenues and cash flows could be adversely impacted.
Marathon does not insure against all potential losses and could be seriously
harmed by unexpected liabilities
As discussed above, both the exploration and production and the refining,
marketing and transportation operations of Marathon are subject to business
interruptions and casualty losses. Marathon maintains insurance against many,
but not all, potential losses or liabilities arising from its operations in
accordance with customary industry practices and in amounts that it believes to
be prudent. Losses and liabilities arising from such events could reduce
Marathon's revenues and increase its costs to the extent not covered by
insurance. The occurrence of any of the aforementioned events and any payments
made as a result of such events and the liabilities related thereto, would
reduce the funds available for exploration, drilling and production and could
have a material adverse effect on Marathon's financial position or results of
operations.
35
THE EXCHANGE OFFERS
Purpose of the Exchange Offers
United States Steel is making the exchange offers in connection with the
Separation and the related financing described on page 122 of this prospectus.
Outstanding Securities Subject to the Exchange Offers
United States Steel is offering to exchange the SQUIDS for each of the three
series of Outstanding Securities. Specifically, United States Steel is
offering:
. $50 principal amount of SQUIDS for each share of 6.50% Preferred Stock
properly tendered and accepted, plus a cash payment equal to accrued but
unpaid dividends;
. $50 principal amount of SQUIDS for each 6.75% QUIPS properly tendered
and accepted, plus a cash payment equal to accrued but unpaid
distributions; and
. $25 principal amount of SQUIDS for each 8.75% MIPS properly tendered and
accepted, plus a cash payment equal to accrued but unpaid dividends.
Conditions Precedent to the Exchange Offers
The exchange offers are subject to the following conditions precedent:
Condition 1. At least $150 million principal amount of the SQUIDS, in the
aggregate, are issued in the exchange offers.
Condition 2. The USX board of directors has not terminated the Separation.
Condition 3. No action or event shall have occurred, failed to occur or been
threatened, no action shall have been taken, and no statute, rule, regulation,
judgment, order, stay, decree or injunction shall have been promulgated,
enacted, entered, enforced or deemed applicable to the exchange offers, by or
before any court or governmental, regulatory or administrative agency,
authority or tribunal, which either:
. challenges the making of the exchange offers or the exchange of
Outstanding Securities under the exchange offers or might, directly or
indirectly, prohibit, prevent, restrict or delay consummation of, or
might otherwise adversely affect in any material manner, the exchange
offers or the exchange of Outstanding Securities under the exchange
offers, or
. in the reasonable judgment of United States Steel, could materially
adversely affect the business, condition (financial or otherwise),
income, operations, properties, assets, liabilities or prospects of
United States Steel LLC and its subsidiaries, taken as a whole, or
materially impair the contemplated benefits to United States Steel of
the exchange offers or the exchange of Outstanding Securities under the
exchange offers, or might be material to holders of Outstanding
Securities in deciding whether to accept the exchange offers.
Condition 4. There shall not have occurred: (1) any general suspension of or
limitation on trading in securities on the New York Stock Exchange or in the
over-the-counter market (whether or not mandatory), (2) any material adverse
change in the prices of the Outstanding Securities, (3) a material impairment
in the general trading market for debt securities, (4) a declaration of a
banking moratorium or any suspension of payments in respect of banks by federal
or state authorities in the United States (whether or not mandatory), (5) a
commencement of a war, armed hostilities or other national or international
crisis directly or indirectly relating to the United States, (6) any limitation
(whether or not mandatory) by any governmental authority on, or other event
having a reasonable
36
likelihood of affecting, the extension of credit by banks or other lending
institutions in the United States, (7) any material adverse change in United
States securities or financial markets generally, or (8) in the case of any of
the foregoing existing at the time of the commencement of the exchange offers,
a material acceleration or worsening thereof; and
Condition 5. The trustee with respect to the 6.75% QUIPS or the 8.75% MIPS
under the related indenture (each, a "Trustee") shall not have objected in any
respect to, or taken any action that could in the reasonable judgment of United
States Steel adversely affect the consummation of any of the exchange offers,
the exchange of Outstanding Securities under the exchange offers, nor shall any
Trustee have taken any action that challenges the validity or effectiveness of
the procedures used by United States Steel in making the exchange offers or the
exchange of the Outstanding Securities under the exchange offers.
All of the foregoing conditions are for the sole benefit of United States
Steel and may be waived by United States Steel, in whole or in part, in its
sole discretion. Any determination made by United States Steel concerning an
event, development or circumstance described or referred to above shall be
conclusive and binding.
If any of the foregoing conditions are not satisfied, United States Steel
may, at any time before the expiration date of the exchange offers:
(a) terminate the exchange offers and return all tendered Outstanding
Securities to the holders thereof;
(b) modify, extend or otherwise amend the exchange offers and retain all
tendered Outstanding Securities until the expiration date, as may be
extended, subject, however, to the withdrawal rights of holders (see "The
Exchange Offers--Withdrawal of Tenders" on page 43 and "--Expiration Date;
Extensions; Amendments" on page 37 below); or
(c) waive the unsatisfied conditions and accept all Outstanding
Securities tendered and not previously withdrawn.
We will accept up to a maximum face amount of (i) $ million of 6.50%
Preferred Stock, (ii) $ million of 6.75% QUIPS and (iii) $ million of 8.75%
MIPS in the exchange offers. If we receive tenders for more than the face
amount of any series of Outstanding Securities than are set forth above, we
will prorate the number of validly tendered Outstanding Securities in such
series that we will exchange from each tendering holder as described under "The
Exchange Offers--Acceptance of Outstanding Securities for Exchange; Proration"
on page 38.
Except for the requirements of applicable U.S. federal and state securities
laws, there are no federal or state regulatory requirements to be complied with
or approvals to be obtained by United States Steel in connection with the
exchange offers which, if not complied with or obtained, would have a material
adverse effect on United States Steel.
Expiration Date; Extensions; Amendments
For purposes of each of the exchange offers, the term "expiration date"
shall mean 5:00 p.m., New York City time, on , 2001, subject to the right
of United States Steel to extend such date and time for the exchange offers in
its sole discretion, in which case, the expiration date shall mean the latest
date and time to which the exchange offers are extended.
United States Steel reserves the right, in its sole discretion, to (1) delay
accepting any validly tendered Outstanding Securities of any series, (2) extend
the exchange offers, or (3) terminate the exchange offers upon failure to
satisfy any of the conditions listed above or amend the exchange offers, by
giving oral or written notice of such delay, extension, termination or
amendment to the Exchange Agent. Any such delay in acceptance, extension,
termination or amendment will be
37
followed as promptly as practicable by a public announcement thereof which, in
the case of an extension, will be made no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
If the exchange offers are amended in a manner determined by United States
Steel to constitute a material change, United States Steel will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the holders of the Outstanding Securities, and United States
Steel will extend the exchange offers for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the holders, if the exchange offers would otherwise have expired
during such five to ten business day period. Any change in the consideration
offered to holders of Outstanding Securities of any series in the exchange
offers shall be paid to all holders of that series whose Outstanding Securities
have previously been tendered pursuant to the exchange offers.
Without limiting the manner in which United States Steel may choose to make
a public announcement of any delay, extension, amendment or termination of any
of the exchange offers, United States Steel shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by making a timely release to any appropriate news agency, including the
Dow Jones News Service.
Effect of Tender
Any tender by a holder of any series of Outstanding Securities that is not
withdrawn prior to the expiration date of the exchange offers will constitute a
binding agreement between that holder and United States Steel upon the terms
and subject to the conditions of the exchange offers and the applicable letter
of transmittal. The acceptance of the exchange offers by a tendering holder of
any series of Outstanding Securities will constitute the agreement by that
holder to deliver good and marketable title to the tendered Outstanding
Securities, free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind.
Absence of Dissenters' Rights
Holders of the Outstanding Securities do not have any appraisal or
dissenters' rights under Delaware law, the law governing the rights of holders
of the 6.50% Preferred Stock, or New York law, the law governing the indentures
relating to the 6.75% QUIPS and the 8.75% MIPS, in connection with the exchange
offers.
Accounting Treatment of Exchange Offers
The exchange offers will be accounted for as an extinguishment of preferred
securities under generally accepted accounting principles in the United States
of America. The SQUIDS to be issued in exchange for the Outstanding Securities
will be recorded at fair value. The fair value of the SQUIDS upon issuance is
expected to approximate the aggregate principal amount issued. Additional paid
in capital will be charged for any difference between the carrying value of the
Outstanding Securities and the fair value of the SQUIDS. For earnings per share
purposes, the difference between the carrying value of the Outstanding
Securities and the fair value of the SQUIDS will be subtracted from or added to
net income available to common shareholders.
Acceptance of Outstanding Securities for Exchange; Proration
Upon the terms and subject to the conditions of the exchange offers, if $
million face amount or less of 6.50% Preferred Stock, $ million face amount or
less of 6.75% QUIPS and $ million face amount or less of 8.75% MIPS have been
validly tendered and not withdrawn prior to the expiration date, we may accept
for exchange all of such Outstanding Securities. Upon the terms and
38
subject to the conditions of the exchange offers, if more than the maximum face
amount set forth above of any series of Outstanding Securities have been
validly tendered and not withdrawn prior to the expiration date, we may accept
for exchange Outstanding Securities of such series from each tendering holder
of such series of Outstanding Securities on a pro rata basis.
SQUIDS will be delivered in book-entry form and will be delivered on the
third business day following the expiration date of the exchange offers (the
"Exchange Date"); provided that if proration of tendered Outstanding Securities
of any series is required, we do not expect that we would be able to announce
the final proration factor or to accept Outstanding Securities for exchange
until up to seven business days after the expiration date. In such case, the
Exchange Date shall occur on or prior to the seventh business day following the
expiration date. Accrued but unpaid dividends or distributions on the
Outstanding Securities accepted for exchange will be paid through the Exchange
Date by crediting such amount on the Exchange Date to the DTC account to which
the SQUIDS will be delivered in exchange for such Outstanding Securities.
United States Steel will be deemed to have accepted validly tendered
Outstanding Securities of any series when, and if, United States Steel has
given oral or written notice thereof to the Exchange Agent. Subject to the
terms and conditions of the exchange offers, the issuance of SQUIDS will be
recorded in book-entry form, and payment in cash for accrued and unpaid
dividends or distributions, for Outstanding Securities of any series so
accepted will be effected by the Exchange Agent on the applicable Exchange Date
upon receipt of such notice. The Exchange Agent will act as agent for tendering
holders of the Outstanding Securities for the purpose of receiving tenders of
6.50% Preferred Stock represented by stock certificates and receiving book-
entry transfers of Outstanding Securities in the Exchange Agent's account at
DTC. If any tendered Outstanding Securities are not accepted for any reason set
forth in the terms and conditions of the exchange offers or if Outstanding
Securities are withdrawn, such unaccepted or withdrawn Outstanding Securities
will be returned without expense to the tendering holder or, with respect to
Outstanding Securities tendered by book-entry transfer into the Exchange
Agent's account at DTC, such Outstanding Securities will be credited to an
account maintained at DTC designated by the DTC participant who so delivered
such Outstanding Securities, in either case, as promptly as practicable after
the expiration or termination of the exchange offers.
Delivery of SQUIDS
The SQUIDS will be issued only in book-entry form through the facilities of
DTC. Accordingly, in order to participate in the exchange offers, a holder of
certificated shares of 6.50% Preferred Stock who is not a DTC participant must
either make arrangements with a DTC participant to have such DTC participant
receive SQUIDS issued in exchange for shares of 6.50% Preferred Stock accepted
in accordance with the terms of the exchange offers so that, in either case,
such holder may become a beneficial owner of SQUIDS issued in the exchange
offers. Each holder must designate in the letter of transmittal or "agent's
message" used to tender such certificated shares of 6.50% Preferred Stock the
DTC account number in which the SQUIDS and payment of accrued but unpaid
dividends or distributions on the Outstanding Securities are to be credited.
See "Description of the SQUIDS--Book-Entry System--The Depository Trust
Company" on page 135.
Procedures for Tendering
If you hold Outstanding Securities of any series and wish to have such
securities exchanged for SQUIDS, you must validly tender (or cause the valid
tender of) all of your Outstanding Securities using the procedures described in
this prospectus and in the accompanying letters of transmittal.
39
Only registered holders of Outstanding Securities are authorized to tender
the Outstanding Securities. The procedures by which you may tender or cause to
be tendered Outstanding Securities will depend upon the manner in which the
Outstanding Securities are held, as described below.
Tender of Certificated Shares of 6.50% Preferred Stock
If you hold certificated shares of 6.50% Preferred Stock and you wish to
tender your shares in the exchange offers, you must either (i) properly
complete and sign the yellow letter of transmittal enclosed with this
prospectus, or a facsimile thereof, in accordance with the instructions
contained in such letter of transmittal, together with any required signature
guarantees, and deliver the letter of transmittal, together with your
certificates representing shares of 6.50% Preferred Stock ("6.50% Stock
Certificates"), to the Exchange Agent, at the addresses or facsimile numbers
set forth on the back cover of this prospectus, which must be received by the
Exchange Agent prior to the expiration date, (ii) contact your broker to
transfer such shares of 6.50% Preferred Stock pursuant to the procedures for
book-entry transfer described below, which must be received by the Exchange
Agent prior to the expiration date, or (iii) comply with the guaranteed
delivery procedures described below.
Tender of Outstanding Securities Held Through a Nominee
If you are a beneficial owner of Outstanding Securities that are held of
record by a custodian bank, depositary, broker, trust company or other nominee,
and you wish to tender Outstanding Securities in any of the exchange offers,
you should contact the record holder promptly and instruct the record holder to
tender the Outstanding Securities on your behalf using one of the procedures
described below. A letter of instructions is contained in the solicitation
materials provided with this prospectus which you may use to instruct the
record holder to tender your Outstanding Securities.
Tender of Outstanding Securities Through DTC
Pursuant to authority granted by DTC, if you are a DTC participant that has
Outstanding Securities credited to your DTC account and thereby held of record
by DTC's nominee, you may directly tender your Outstanding Securities as if you
were the record holder. Because of this, references herein to registered or
record holders include DTC participants with Outstanding Securities credited to
their accounts. If you are not a DTC participant, you may tender your
Outstanding Securities by book-entry transfer by contacting your broker or
opening an account with a DTC participant. Within two business days after the
date of this prospectus, the Exchange Agent will establish accounts with
respect to the Outstanding Securities at DTC for purposes of the exchange
offers.
Any participant in DTC may tender Outstanding Securities by:
(a) effecting a book-entry transfer of the Outstanding Securities to be
tendered in the exchange offers into the account of the Exchange Agent at
DTC by electronically transmitting its acceptance of the exchange offers
through DTC's Automated Tender Offer Program ("ATOP") procedures for
transfer;
If ATOP procedures are followed, DTC will then verify the acceptance,
execute a book-entry delivery to the Exchange Agent's account at DTC and
send an agent's message to the Exchange Agent. An "agent's message" is a
message, transmitted by DTC to and received by the Exchange Agent and
forming part of a book-entry confirmation, which states that DTC has
received an express acknowledgment from a DTC participant tendering
Outstanding Securities that the participant has received and agrees to be
bound by the terms of the letter of transmittal and that United States
Steel may enforce the agreement against the participant. DTC participants
following this procedure should allow sufficient time for completion of the
ATOP procedures prior to the expiration date of the exchange offers;
40
(b) completing and signing the applicable letter(s) of transmittal
according to the instructions and delivering it, together with any
signature guarantees and other required documents, to the Exchange Agent at
its address on the back cover page of this prospectus; or
(c) complying with the guaranteed delivery procedures described below.
With respect to option (a), the Exchange Agent and DTC have confirmed that
the exchange offers are eligible for ATOP.
The letter of transmittal (or facsimile thereof), with any required
signature guarantees and other required documents, or (in the case of book-
entry transfer) an agent's message in lieu of the letter of transmittal, must
be transmitted to and received by the Exchange Agent prior to the expiration
date of the exchange offers at one of its addresses set forth on the back cover
page of this prospectus. Delivery of such documents to DTC does not constitute
delivery to the Exchange Agent.
Note for DTC Participants and Brokers, Dealers and Other Institutions
Wishing to be Designated as Soliciting Dealers in Tenders of Outstanding
Securities
In order to receive a soliciting dealer fee, a soliciting dealer must follow
the steps that are set forth in the Letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees, which each soliciting dealer will
receive with the Prospectus. Please note that a soliciting dealer will not
receive a soliciting dealer fee unless these steps are followed.
Guaranteed Delivery
If a DTC participant or holder of 6.50% Stock Certificate(s) desires to
participate in the exchange offers and the procedure for book-entry transfer of
Outstanding Securities or delivery of 6.50% Stock Certificates cannot be
completed on a timely basis, a tender of Outstanding Securities of any series
may be effected if the Exchange Agent has received at one of its addresses on
the back cover page of this prospectus prior to the applicable expiration date
of the exchange offers, a letter, telegram or facsimile transmission from a
firm or other entity identified in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (an "Eligible Guarantor Institution"), including (as
each of the following terms are defined in the Rule), (1) a bank, (2) a broker,
dealer, municipal securities dealer or government securities dealer or
government securities broker, (3) a credit union, (4) a national securities
exchange, registered securities association or clearing agency, or (5) a
savings institution that is a participant in a Securities Transfer Association
recognized program, which:
. indicates the account number of the DTC participant;
. indicates the name(s) in which the Outstanding Securities are held and
the amount of the Outstanding Securities tendered;
. states that the tender is being made thereby; and
. guarantees that, within two New York Stock Exchange trading days after
the date of execution of the letter, telegram or facsimile transmission
by the Eligible Guarantor Institution, the procedure for book-entry
transfer with respect to the Outstanding Securities will be completed
or, in the case of a holder of 6.50% Stock Certificates, that such 6.50%
Stock Certificates will be received by the Exchange Agent within such
two trading day period.
Unless the Outstanding Securities being tendered by the above-described
method are deposited with the Exchange Agent within the time period indicated
above according to DTC's ATOP procedures and an agent's message or letter of
transmittal is received, or, in the case of a holder of 6.50% Stock
Certificates, unless such 6.50% Stock Certificates are received by the Exchange
Agent within the time period indicated above, United States Steel may, at its
option, reject the tender. The notice of guaranteed delivery which may be used
by an Eligible Guarantor Institution for the purposes described in the
preceding paragraph is contained in the solicitation materials provided with
this prospectus.
41
Letters of Transmittal
Subject to and effective upon the acceptance for exchange and exchange of
SQUIDS for Outstanding Securities tendered by a letter of transmittal, by
executing and delivering a letter of transmittal (or agreeing to the terms of a
letter of transmittal pursuant to an agent's message), a tendering holder of
Outstanding Securities:
. irrevocably sells, assigns and transfers to or upon the order of United
States Steel all right, title and interest in and to, and all claims in
respect of or arising or having arisen as a result of the holder's
status as a holder of the Outstanding Securities tendered thereby;
. waives any and all rights with respect to the Outstanding Securities;
. releases and discharges United States Steel and the applicable Trustee
from any and all claims such holder may have, now or in the future,
arising out of or related to the Outstanding Securities, including,
without limitation, any claims that such holder is entitled to
participate in any redemption of the Outstanding Securities;
. represents and warrants that the Outstanding Securities tendered were
owned as of the date of tender, free and clear of all liens, charges,
claims, encumbrances, interests and restrictions of any kind;
. designates an account number of a DTC participant in which the SQUIDS
and payment of accrued but unpaid dividends or distributions on the
Outstanding Securities accepted in the exchange offers are to be
credited; and
. irrevocably constitutes and appoints the Exchange Agent the true and
lawful agent and attorney-in-fact of the holder with respect to any
tendered Outstanding Securities, with full powers of substitution and
revocation (such power of attorney being deemed to be an irrevocable
power coupled with an interest) to cause the Outstanding Securities
tendered to be assigned, transferred and exchanged in the exchange
offers.
There is a separate letter of transmittal for each series of Outstanding
Securities. The following table indicates the applicable letter of transmittal
to be used with the indicated series of Outstanding Securities:
Series of Outstanding Color of Letter
Securities of Transmittal
--------------------- ---------------
6.50% Preferred Stock YELLOW
6.75% QUIPS BLUE
8.75% MIPS GREEN
Proper Execution and Delivery of Letters of Transmittal
If you wish to participate in the exchange offers, delivery of your
Outstanding Securities, signature guarantees and other required documents are
your responsibility. Delivery is not complete until the required items are
actually received by the Exchange Agent. If you mail these items, United States
Steel recommends that you (1) use registered mail with return receipt
requested, properly insured, and (2) mail the required items sufficiently in
advance of the Expiration Date with respect to the exchange offers to allow
sufficient time to ensure timely delivery.
Except as otherwise provided below, all signatures on a letter of
transmittal or a notice of withdrawal must be guaranteed by a recognized
participant in the Securities Transfer Agents Medallion Program, the NYSE
Medallion Signature Program or the Stock Exchange Medallion Program. Signatures
on a letter of transmittal need not be guaranteed if:
. the letter of transmittal is signed by a participant in DTC whose name
appears on a security position listing of DTC as the owner of the
Outstanding Securities and the holder(s) has not completed the portion
entitled "Special Issuance and Payment Instructions" on the letter of
transmittal; or
42
. the Outstanding Securities are tendered for the account of an Eligible
Guarantor Institution. See Instruction 3 in the letter of transmittal.
Withdrawal of Tenders
Tenders of Outstanding Securities in connection with any of the exchange
offers may be withdrawn at any time prior to the expiration date of the
exchange offers, but you must withdraw all of your Outstanding Securities
previously tendered. Tenders of Outstanding Securities may not be withdrawn at
any time after such date unless the exchange offers are extended, in which case
tenders of Outstanding Securities may be withdrawn at any time prior to the
expiration date, as extended. In addition, tenders of Outstanding Securities
may be withdrawn after expiration of 40 business days from the commencement of
the exchange offers in the event that we have not yet accepted Outstanding
Securities in the exchange offers by such time.
Beneficial owners desiring to withdraw Outstanding Securities previously
tendered should contact the DTC participant through which such beneficial
owners hold their Outstanding Securities. In order to withdraw Outstanding
Securities previously tendered, a DTC participant may, prior to the expiration
date of the exchange offers, withdraw its instruction previously transmitted
through ATOP by (1) withdrawing its acceptance through ATOP, or (2) delivering
to the Exchange Agent by mail, hand delivery or facsimile transmission, notice
of withdrawal of such instruction. The notice of withdrawal must contain the
name and number of the DTC participant. A holder of 6.50% Stock Certificates
previously tendered other than through ATOP may withdraw such tender by
delivering to the Exchange Agent a notice of withdrawal, delivered by mail,
hand delivery, or facsimile transmission. The notice of withdrawal must contain
the name of the holder and the certificate numbers of the 6.50% Stock
Certificates to be withdrawn and must be signed by the registered holder of
such 6.50% Stock Certificates. The method of notification is at the risk and
election of the holder and must be timely received by the Exchange Agent.
Withdrawal of a prior instruction will be effective upon receipt of the notice
of withdrawal by the Exchange Agent. All signatures on a notice of withdrawal
must be guaranteed by a recognized participant in the Securities Transfer
Agents Medallion Program, the NYSE Medallion Signature Program or the Stock
Exchange Medallion Program; provided, however, that signatures on the notice of
withdrawal need not be guaranteed if the Outstanding Securities being withdrawn
are held for the account of an Eligible Guarantor Institution. A withdrawal of
an instruction must be executed by a DTC participant in the same manner as such
DTC participant's name appears on its transmission through ATOP to which such
withdrawal relates. A DTC participant may withdraw a tender only if such
withdrawal complies with the provisions described in this paragraph.
Withdrawals of tenders of Outstanding Securities may not be rescinded and
any Outstanding Securities withdrawn will thereafter be deemed not validly
tendered for purposes of the exchange offers. Properly withdrawn Outstanding
Securities, however, may be retendered by following the procedures described
above at any time prior to the expiration date of the exchange offers.
Miscellaneous
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Outstanding Securities in
connection with the exchange offers will be determined by United States Steel,
in its sole discretion, whose determination will be final and binding. United
States Steel reserves the absolute right to reject any and all tenders not in
proper form or the acceptance for exchange of which may, in the opinion of
counsel for United States Steel, be unlawful. United States Steel also reserves
the absolute right to waive any defect or irregularity in the tender of any
Outstanding Securities in the exchange offers, and the interpretation by United
States Steel of the terms and conditions of the exchange offers (including the
instructions in the letter of transmittal) will be final and binding on all
parties. None of United States Steel, USX, the Exchange Agent, the Information
Agent, the Dealer Managers or any other person will be under any duty to give
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification.
43
Tenders of Outstanding Securities involving any irregularities will not be
deemed to have been made until such irregularities have been cured or waived.
Outstanding Securities received by the Exchange Agent in connection with the
exchange offers that are not validly tendered and as to which the
irregularities have not been cured or waived will be returned by the Exchange
Agent to the DTC participant who delivered such Outstanding Securities by
crediting an account maintained at DTC designated by such DTC participant as
promptly as practicable after the expiration date of the exchange offers or the
withdrawal or termination of the exchange offers.
Transfer Taxes
United States Steel will pay all transfer taxes, if any, applicable to the
transfer and exchange of Outstanding Securities to United States Steel in the
exchange offers. If transfer taxes are imposed for any other reason, the amount
of those transfer taxes, whether imposed on the registered holder or any other
persons, will be payable by the tendering holder. Other reasons transfer taxes
could be imposed include:
. if SQUIDS in book-entry form are to be registered in the name of any
person other than the person signing the letter of transmittal; or
. if tendered Outstanding Securities are registered in the name of any
person other than the person signing the letter of transmittal.
If satisfactory evidence of payment of or exemption from those transfer
taxes is not submitted with the letter of transmittal, the amount of those
transfer taxes will be billed directly to the tendering holder and/or withheld
from any payments due with respect to the Outstanding Securities tendered by
such holder.
Exchange Agent
The Bank of New York has been appointed the Exchange Agent for the exchange
offers. Letters of transmittal, notices of guaranteed delivery and all
correspondence in connection with the exchange offers should be sent or
delivered by each holder of Outstanding Securities, or a beneficial owner's
custodian bank, depositary, broker, trust company or other nominee, to the
Exchange Agent at the addresses and telephone numbers set forth on the back
cover page of this prospectus. United States Steel will pay the Exchange Agent
reasonable and customary fees for its services and will reimburse it for its
reasonable, out-of-pocket expenses in connection therewith.
Information Agent
Mellon Investor Services LLC has been appointed as the Information Agent for
the exchange offers, and will receive customary compensation for its services.
Questions concerning tender procedures and requests for additional copies of
this prospectus, the letter of transmittal or the notice of guaranteed delivery
should be directed to the Information Agent at the address and telephone
numbers set forth on the back cover page of this prospectus. Holders of
Outstanding Securities may also contact their custodian bank, depositary,
broker, trust company or other nominee for assistance concerning the exchange
offers.
Dealer Managers and Soliciting Dealers
We have retained Goldman, Sachs & Co. to act as Dealer Managers in
connection with the exchange offers. In addition, the letter of transmittal
provides for designation of a soliciting dealer, who may be any broker or
dealer in securities, including the Dealer Managers in its capacity as a broker
or dealer, or any bank or trust company that solicits and obtains the tender
(the "Soliciting Dealer").
44
We and USX have agreed, jointly and severally, to pay to the Dealer
Managers, as compensation for their services in connection with the exchange
offers, a fee equal to 5/8% of the face amount of each Outstanding Security
exchanged in the exchange offers.
As compensation for the services of Soliciting Dealers in soliciting
tenders, we and USX have agreed to cause the Dealer Managers to pay to each
Soliciting Dealer, the name of which appears in the appropriate space in any
Letter of Transmittal or "agent's message", a solicitation fee of 2% of the
face amount of each such Outstanding Security accepted in the exchange offers
that was solicited by such Soliciting Dealer.
We and USX will also reimburse the Dealer Managers for certain expenses. The
obligations of the Dealer Managers to perform such function are subject to
certain conditions. We and USX have agreed to indemnify the Dealer Managers
against certain liabilities, including liabilities under the federal securities
laws, or to contribute to payments that the Dealer Managers may be required to
make in respect thereof. Questions regarding the terms of the exchange offers
may be directed to the Dealer Managers at the address and telephone number set
forth on the back cover page of this prospectus.
From time to time, the Dealer Managers have provided investment banking and
other services to USX and United States Steel for customary compensation.
Other Fees and Expenses
Tendering holders of Outstanding Securities will not be required to pay any
expenses of soliciting tenders in the exchange offers, including any fee or
commission to the Dealer Managers. However, if a tendering holder handles the
transaction through its broker, dealer, commercial bank, trust company or other
institution, such holder may be required to pay brokerage fees or commissions.
The principal solicitation is being made by mail; however, additional
solicitations may be made by telegraph, facsimile transmission, telephone or in
person by the Dealer Managers and the Information Agent, as well as by officers
and other employees of United States Steel and its affiliates.
45
INFORMATION ABOUT THE OUTSTANDING SECURITIES
As of September 30, 2001, there were outstanding 2,404,487 shares of 6.50%
Preferred Stock, 3,937,163 6.75% QUIPS, and 10,000,000 8.75% MIPS. The New York
Stock Exchange is the principal trading market for the Outstanding Securities
and for the USX-U. S. Steel Group Common Stock ("U. S. Steel Group Shares"),
the security into which the 6.50% Preferred Stock and the 6.75% QUIPS are
convertible. The following table sets forth, for the periods indicated, the
high and low closing sale price per security on the NYSE, based on published
financial sources.
6.50%
Preferred U. S. Steel
Stock 6.75% QUIPS 8.75% MIPS Group Shares
-------------- -------------- -------------- --------------
High Low High Low High Low High Low
------ ------ ------ ------ ------ ------ ------ ------
1999:
Third Quarter......... $49.25 $43.88 $45.81 $40.50 $25.13 $24.38 $30.06 $24.56
Fourth Quarter........ 45.00 41.94 43.06 39.00 25.13 23.50 33.00 21.75
2000:
First Quarter......... $43.63 $36.44 $42.69 $34.00 $24.38 $22.69 $32.94 $20.63
Second Quarter........ 40.00 35.81 37.63 33.00 23.75 21.31 26.88 18.25
Third Quarter......... 38.88 35.38 35.25 32.00 24.63 22.88 19.69 14.88
Fourth Quarter........ 36.00 32.31 33.19 28.13 24.69 23.13 18.31 12.69
2001:
First Quarter......... $39.09 $32.88 $36.55 $30.00 $25.00 $23.59 $18.00 $14.00
Second Quarter........ 47.50 37.00 47.50 34.41 25.13 24.33 22.00 13.72
Third Quarter......... 47.84 43.50 48.20 44.91 25.50 23.70 21.70 13.08
Fourth Quarter
(through
October , 2001)..... [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
On October [ ], 2001, the last full trading day prior to the printing of
this prospectus, the last reported sales prices of the 6.50% Preferred Stock,
6.75% QUIPS, 8.75% MIPS and U. S. Steel Group Shares on the NYSE Composite Tape
were [$ ], [$ ], [$ ], and [$ ] per share, respectively. You are urged to
obtain a current market quotation for the Outstanding Securities and U. S.
Steel Group Shares.
46
USE OF PROCEEDS
Historically, the indebtedness and other obligations reflected on the
combined balance sheet of United States Steel generally represent obligations
of USX that are attributed to United States Steel for accounting purposes only
and are not legal obligations of United States Steel LLC. Subject to a limited
number of exceptions, USX is the legal obligor of the obligations reflected on
the United States Steel balance sheet and they will remain obligations of
Marathon Oil Corporation following the Separation. Accordingly, United States
Steel will be required to incur new indebtedness to repay or otherwise
discharge a substantial amount of the USX obligations attributed to United
States Steel prior to the Separation.
The SQUIDS are being offered in exchange for the Outstanding Securities in
connection with the Separation and the related financing described on page 122
of this prospectus. We will not receive any cash proceeds as a result of the
exchange offers; however, the indebtedness represented by the SQUIDS will
replace a portion of the debt and other obligations attributed to United States
Steel by USX prior to the Separation.
Assuming the Separation had occurred on June 30, 2001, that an aggregate of
$365 million principal amount of SQUIDS are issued in the exchange offers, and
that United States Steel had completed all of the financing required by the
Separation by that date, our sources and uses would have been:
(Dollars in
Sources: millions)
-------- -----------
Assumed industrial revenue
bonds....................... $ 479
Assumed capital leases....... 90
USSK Loan Facility........... 325
New Financing required by the Separation(/1/):
Senior Notes................ 530
SQUIDS offered hereby ...... 365
Additional financing........ 4
---
Total new financing........ 899
Value Transfer............... 900
Invested cash(/2/)........... 189
------
Total Sources................ $2,882
======
(Dollars in
Uses: millions)
----- -----------
Debt attributed to
United States Steel.... $2,432
6.75% QUIPS............. 183
8.75% MIPS(/3/)......... 66
6.50% Preferred Stock... 121
Separation costs........ 29
Other................... 51
------
Total Uses.............. $2,882
======
---------------------
(1) In connection with the Separation, United States Steel will be required to
incur $899 million of new financing arrangements on a pro forma basis,
assuming the Separation occurred on June 30, 2001. The new financing
arrangements include the $365 million of SQUIDS offered hereby which will
be used to replace obligations of USX attributed to United States Steel.
Additional new financing arrangements to pay Marathon Oil Corporation
$505 million and fund Separation costs in the amount of $29 million include
the July 27 and September 11, 2001 sale of $535 million of Senior Notes, at
a discount of $5 million, and other financing arrangements of $4 million.
In the event that less than $365 million of SQUIDS are issued in the
exchange offers, the amount of the required payment to Marathon Oil
Corporation, and, consequently, the additional new financing arrangements
required, will be increased by the difference between $365 million and the
amount of the SQUIDS actually issued. United States Steel will obtain any
additional new financing required through one or a combination of
additional notes (including additional SQUIDS), lease financings, new
preferred or other security offerings and new credit facilities, including
a secured accounts receivable facility. Some or all of the additional
financing requirements may be funded through the preliminary tax settlement
from Marathon, which is expected to be at least $300 million and will be
received prior to the Separation. In addition, it is
47
a condition to the Separation that United States Steel have in place, at the
time of the Separation, cash and undrawn credit of at least $400 million.
The amount of additional required financing at Separation may vary as a
result of a number of factors, including the amount of SQUIDS actually
issued in the exchange offers, the operating performance of United States
Steel, its working capital position and the amount of the tax settlement
with Marathon.
(2) Invested cash represents amounts attributed to United States Steel by USX.
This cash will be retained by Marathon following the Separation.
(3) Represents the portion of the $250 million face amount of outstanding 8.75%
MIPS that is attributed to United States Steel. All of the 8.75% MIPS are
subject to the exchange offers.
48
CAPITALIZATION
The following table shows the cash and capitalization of United States Steel
as of June 30, 2001, on an historical basis, and of United States Steel
Corporation, on a pro forma basis to give effect to the Separation, the
exchange offers (assuming an aggregate of $365 million principal amount of
SQUIDS are issued in the exchange offers), the issuance of the Senior Notes and
the other transactions described in "Unaudited Pro Forma Condensed Combined
Financial Statements."
June 30, 2001
----------------
Actual Pro Forma
------ ---------
(Dollars in
millions)
Cash and cash equivalents..................................... $ 254 $ 65
====== ======
Notes payable and long-term debt due within one year(/1/)..... 347 18
------ ------
Long-term debt
New accounts receivable facility(/2/)....................... -- --
New inventory facility(/3/)................................. -- --
Assumed industrial revenue bonds............................ -- 470
Assumed capital leases...................................... -- 81
USSK Loan Facility.......................................... -- 325
Senior Notes(/4/)........................................... -- 530
SQUIDS offered hereby(/4/).................................. -- 365
Additional financing(/4/)................................... -- 4
Long-term debt attributed to United States Steel............ 2,085 --
------ ------
Total long-term debt...................................... 2,085 1,775
6.75% QUIPS................................................... 183 --
8.75% MIPS.................................................... 66 --
------ ------
Total debt and other financial obligations................ 2,681 1,793
Equity........................................................ 1,860 2,678
------ ------
Total capitalization...................................... $4,541 $4,471
====== ======
--------------------
(1) The pro forma balance consists of $9 million of assumed industrial revenue
bonds and $9 million of assumed capital leases.
(2) Currently expected to be a $400 million facility.
(3) Currently expected to be a $400 million facility.
(4) In connection with the Separation, United States Steel will be required to
incur $899 million of new financing arrangements on a pro forma basis,
assuming the Separation occurred on June 30, 2001. The new financing
arrangements include the $365 million of SQUIDS offered hereby which will
be used to replace obligations of USX attributed to United States Steel.
Additional new financing arrangements to pay Marathon Oil Corporation
$505 million and fund Separation costs in the amount of $29 million include
the July 27 and September 11, 2001 sale of $535 million of Senior Notes, at
a discount of $5 million, and other financing arrangements of $4 million.
In the event that less than $365 million of SQUIDS are issued in the
exchange offers, the amount of the required payment to Marathon Oil
Corporation, and, consequently, the additional new financing arrangements
required, will be increased by the difference between $365 million and the
amount of the SQUIDS actually issued. United States Steel will obtain any
additional new financing required through one or a combination of
additional notes (including additional SQUIDS), lease financings, new
preferred or other security offerings and new credit facilities, including
a secured accounts receivable facility. Some or all of the additional
financing requirements may be funded through the preliminary tax settlement
from Marathon, which is expected to be at least $300 million and will be
received prior to the Separation. In addition, it is a condition to the
Separation that United States Steel have in place, at the time of the
Separation, cash and undrawn credit of at least $400 million. The amount of
additional required financing at Separation may vary as a result of a
number of factors, including the amount of SQUIDS actually issued in the
exchange offers, the operating performance of United States Steel, its
working capital position and the amount of the tax settlement with
Marathon.
49
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Combined
Financial Statements for United States Steel
The following unaudited pro forma condensed combined balance sheet as of
June 30, 2001 gives effect to the exchange offers, the $900 million Value
Transfer, new financing arrangements, the assignment of certain USX corporate
assets and liabilities and the payment of Separation costs as if such
transactions had been consummated as of June 30, 2001. The following unaudited
pro forma condensed combined statements of operations for the six months ended
June 30, 2001, and the year ended December 31, 2000, give effect to changes in
net interest and other financial costs as a result of the exchange offers, the
Value Transfer and new financing arrangements, as if such transactions had been
consummated at the beginning of the periods presented.
Our pro forma presentation of the exchange offers assumes that the maximum
of $365 million face amount of the Outstanding Securities are tendered and
accepted pro rata in proportion to the maximum amount of each series of the
Outstanding Securities that may be accepted pursuant to the Exchange Offers. If
the minimum amount of $150 million of the Outstanding Securities are tendered
and accepted in the exchange offers, total long-term debt in the pro forma
condensed combined balance sheet would not be affected because the $215 million
would be replaced with additional financing arrangements and the effect on net
interest and other financial costs in the condensed combined statements of
operations, assuming a 10% rate for additional financing arrangements, would be
less than $1 million.
No pro forma adjustments were made for changes in the future level of
corporate administrative costs to be incurred by United States Steel
Corporation as compared with the historical level of such costs allocated to
United States Steel. These costs are expected to continue at approximately the
same level as previously allocated, except for insurance costs which are
estimated to be higher by $9 million annually.
No pro forma adjustments have been made in the unaudited pro forma condensed
combined statements of operations for nonrecurring charges associated with the
Separation. Such adjustments are reflected in the unaudited pro forma condensed
combined balance sheet.
The exchange offers will be accounted for as an extinguishment of preferred
securities and the SQUIDS will be recorded at fair value. The difference
between the carrying value of the Outstanding Securities exchanged and the fair
value of the SQUIDS issued will be charged or credited to additional paid in
capital. Following the Separation, United States Steel Corporation will account
for its assets and liabilities based on the historical values at which they
were carried by USX immediately prior to the Separation.
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma condensed combined
financial statements do not necessarily represent United States Steel
Corporation's financial position or results of operations had the transactions
occurred at such dates or project United States Steel Corporation's financial
position or results of operations for any future date or period. A number of
factors may affect United States Steel Corporation's results. See "Special Note
Regarding Forward-Looking Statements" on page (iv). In the opinion of
management, all adjustments necessary to present fairly the unaudited pro forma
condensed combined financial statements have been made. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
historical combined financial statements of United States Steel, including the
notes thereto, included elsewhere in this prospectus.
50
United States Steel Corporation
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 2001
Dollars in millions
United United States
States SQUIDS Steel
Steel Exchange Separation Value Corporation
Historical Offers Adjustments Transfer Pro Forma
---------- -------- ----------- -------- -------------
ASSETS
Cash and cash
equivalents............ $ 254 $ $(189)(B) $ $ 65
Other current assets.... 2,422 2,422
Property, plant and
equipment--net......... 3,098 20 (C) 3,118
Prepaid pensions........ 2,711 2,711
Other assets............ 469 (4)(A) 35 (B) 505
5 (C)
------ ---- ----- ----- ------
Total assets............ $8,954 $ (4) $(129) $ $8,821
====== ==== ===== ===== ======
LIABILITIES AND EQUITY
Current liabilities
other than debt........ $1,313 $ $ (43)(B) $ $1,268
(2)(C)
Notes payable and long-
term debt due within
one year............... 347 (329)(B) 18
Long-term debt.......... 2,085 246 (A) 344 (B) (900)(D) 1,775
Other long-term
liabilities............ 3,100 (2)(B) 3,082
(16)(C)
Mandatorily redeemable
convertible preferred
securities of a
subsidiary trust (6.75%
QUIPS)................. 183 (118)(A) (65)(B) --
Preferred stock of
subsidiary (8.75%
MIPS).................. 66 (42)(A) (24)(B) --
Equity.................. 1,860 (90)(A) (35)(B) 900 (D) 2,678
43 (C)
------ ---- ----- ----- ------
Total liabilities and
equity................. $8,954 $ (4) $(129) $ -- $8,821
====== ==== ===== ===== ======
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
51
United States Steel Corporation
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(A) Reflects the effects of the exchange offers as follows:
The decrease in other assets of $4 million reflects the removal of United
States Steel's portion of the deferred financing costs associated with the
6.75% QUIPS and 8.75% MIPS exchanged for SQUIDS as part of the exchange
offers.
The increase in debt of $246 million reflects an increase in debt
attributed to United States Steel relating to the exchange offers as
follows:
Dollars in Millions
-------------------
6.75% QUIPS exchanged............................... $118
Excess of fair value of SQUIDS issued over carrying
value of 6.75% QUIPS exchanged..................... 9
6.50% Preferred Stock exchanged..................... 77
8.75% MIPS exchanged................................ 42
----
$246
====
Following the Separation, United States Steel will be the obligor on the
entire $365 million principal amount of SQUIDS relating to the exchange
offers.
The decrease in mandatorily redeemable convertible securities of a
subsidiary trust (6.75% QUIPS) of $118 million reflects the portion of the
6.75% QUIPS assumed to be exchanged for SQUIDS as part of the exchange
offers.
The decrease in preferred stock of subsidiary (8.75% MIPS) of $42 million
reflects the portion of the 8.75% MIPS attributed to United States Steel
assumed to be exchanged for SQUIDS as part of the exchange offers.
The decrease in equity of $90 million consists of the portion attributed to
United States Steel of the following as part of the exchange offers:
Dollars in Millions
-------------------
6.50% Preferred Stock exchanged..................... $77
Excess of fair value of SQUIDS issued over carrying
value of 6.75% QUIPS exchanged..................... 9
Deferred financing costs associated with 6.75% QUIPS
and 8.75% MIPS exchanged........................... 4
---
$90
===
(B) Reflects the effects of the following:
(1) Reversal of the attribution to United States Steel of the financial
activities of USX, including invested cash, deferred financing costs,
accrued interest payable, debt, and preferred securities of
subsidiaries.
(2) Recognition of existing USX debt for which United States Steel
Corporation will be responsible under the Financial Matters Agreement.
(3) New financing arrangements of United States Steel Corporation, the
proceeds of which will be used to pay Marathon Oil Corporation in
connection with the Separation and to pay United States Steel
Corporation's portion of the Separation costs.
For a more detailed description, see "Description of Other Indebtedness" on
page 128.
The decrease in cash and cash equivalents of $189 million reflects the
reversal of the portion of USX invested cash historically attributed to
United States Steel which will be included in the accounts of Marathon Oil
Corporation.
52
The increase in other assets of $35 million primarily reflects estimated
deferred financing costs to be incurred related to the new financing
arrangements.
The decrease in current liabilities other than debt of $43 million
primarily reflects the reversal of the portion of USX's accrued interest
payable historically attributed to United States Steel which will be
included in the accounts of Marathon Oil Corporation.
The net increase in debt related to Separation adjustments of $15 million
(the sum of a decrease in notes payable and long-term debt due within one
year of $329 million and an increase in long-term debt of $344 million)
primarily reflects the refinancing of other obligations not classified as
debt and not exchanged in the exchange offers, net of invested cash, and
Separation Costs. The following table reconciles the amount of debt
attributed to United States Steel to the pro forma balance of United States
Steel Corporation debt.
Dollars
in millions
-----------
Debt attributed to United States Steel................. $2,432
Attributed debt related to the exchange offers......... 246
Other obligations, net of invested cash, attributed to
United States Steel which will be refinanced as debt:
6.75% QUIPS not exchanged............................ 65
8.75% MIPS not exchanged............................. 24
6.50% Preferred Stock not exchanged.................. 44
Invested cash........................................ (189)
Other financial activities........................... 37
Excess of redemption value over carrying value of
6.75% QUIPS......................................... 5
Separation costs..................................... 29
----
Net refinancing of other obligations................... 15
------
Debt before the Value Transfer......................... 2,693
Value Transfer......................................... (900)
------
Pro forma balance of United States Steel Corporation
debt.................................................. $1,793
======
The following table illustrates the composition of the pro forma balance of
United States Steel Corporation's debt at June 30, 2001:
Dollars
in millions
-----------
USX debt that will be the responsibility of United
States Steel Corporation:
USSK Loan Facility................................... $ 325
Industrial revenue bonds (for which Marathon Oil
Corporation remains obligated)...................... 479
Fairfield caster sublease............................ 84
Capital lease obligations and other.................. 6
New financing arrangements:
SQUIDS offered hereby................................ 365
10.75% Senior Notes.................................. 530
Other new financing arrangements..................... 4
----
Total new financing arrangements................... 899
------
Total debt............................................. 1,793
Less notes payable and long-term debt within one
year................................................ 18
------
Total long-term debt................................... $1,775
======
53
Historically, the indebtedness and other obligations reflected on the
United States Steel combined balance sheet generally represent obligations
of USX that are attributed to United States Steel for accounting purposes
only and are not legal obligations of United States Steel LLC. Immediately
following the internal reorganization of USX on July 2, 2001, the only
indebtedness that was a legal obligation of United States Steel LLC or its
subsidiaries was the $325 million USSK Loan Facility. The balance of the
indebtedness reflected on the unaudited pro forma condensed combined
balance sheet (including the SQUIDS) has been or will be incurred by United
States Steel in connection with the Separation.
In connection with the Separation, United States Steel will be required to
incur $899 million of new financing arrangements. The new financing
arrangements include the $365 million of SQUIDS offered hereby which will
be used to replace obligations of USX attributed to United States Steel.
Additional new financing arrangements to pay Marathon Oil Corporation
$505 million and fund Separation costs in the amount of $29 million include
the July 27, and September 11, 2001 sale of $535 million of the Senior
Notes, at a discount of $5 million, and other financing arrangements of $4
million. In the event that less than $365 million of Outstanding Securities
are validly tendered and accepted in the exchange offers, the amount of the
required payment to Marathon Oil Corporation, and consequently the
additional new financing arrangements required, will be increased by the
difference between the $365 million and the amount of the SQUIDS actually
issued. United States Steel will obtain any additional new financing
required through one or a combination of additional notes (including
additional SQUIDS), lease financings, new preferred or other security
offerings and new credit facilities, including a secured accounts
receivable facility. Some or all of the additional financing requirements
may also be funded through the preliminary tax settlement with Marathon
which is expected to be at least $300 million and will occur immediately
prior to the Separation. For more information regarding this tax
settlement, see "Relationship Between United States Steel Corporation and
Marathon Oil Corporation After the Separation-Tax Sharing Agreement" on
page 124.
The net decrease in other long-term liabilities of $2 million reflects
expected tax benefits related to Separation costs.
The net decrease in equity of $35 million consists of the following:
Dollars in millions
-------------------
6.50% Preferred Stock................................ $44
Excess of redemption value of the 6.75% QUIPS not
exchanged over carrying value....................... 5
Other adjustments, net............................... (14)
---
Net decrease in equity............................... $35
===
54
(C) Reflects the assignment of certain USX corporate assets and liabilities to
United States Steel Corporation. The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $ 20 $ -- $ -- $ -- $ 20
Assets and liabilities
associated with
employee benefits...... -- 5 2 66 73
Income tax assets and
liabilities, including
tax effect of above
adjustments............ -- -- -- (50) (50)
----- ------- ------- ------- -------
Increase in equity...... $ 20 $ 5 $ 2 $ 16 $ 43
===== ======= ======= ======= =======
(D) Reflects adjustments related to the $900 million Value Transfer. In
connection with the Separation, a portion of USX indebtedness and other
obligations will be repaid or retired and United States Steel Corporation
will incur indebtedness and other obligations and agree to repay a portion
of the indebtedness and other obligations of USX, such that the amount of
indebtedness and other obligations for which United States Steel
Corporation is responsible is $900 million less than the net amounts
attributed to United States Steel immediately prior to the Separation. For
a more detailed description of the Value Transfer, see "The Proposed
Separation" on page 122.
55
United States Steel Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 2001
Dollars in millions
United States
United States Steel
Steel Exchange Separation Corporation
Historical Offers Adjustments Pro forma
------------- -------- ----------- -------------
Revenues and other income.... $3,301 $ $ $3,301
Costs and expenses:
Cost of revenues (excludes
items shown below)........ 3,148 3,148
Selling, general and
administrative expenses .. 3 3
Depreciation, depletion and
amortization.............. 152 152
Taxes other than income
taxes..................... 126 126
------ --- ---- ------
Total costs and
expenses................ 3,429 3,429
------ --- ---- ------
Income (loss) from
operations.................. (128) (128)
Net interest and other
financial costs ............ 36 6 (A) (24)(C) 18
------ --- ---- ------
Income (loss) before income
taxes....................... (164) (6) 24 (146)
Provision (credit) for income
taxes....................... (143) (2)(B) 8 (B) (137)
------ --- ---- ------
Net income (loss)............ (21) (4) 16 (9)
====== === ==== ======
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
56
United States Steel Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2000
Dollars in millions
United States
United Steel
States Steel Exchange Separation Corporation
Historical Offers Adjustments Pro forma
------------- -------- ----------- -------------
Revenues and other income.... $6,132 $ $ $6,132
Costs and expenses:
Cost of revenues (excludes
items shown below)........ 5,656 5,656
Selling, general and
administrative expenses
(credits)................. (223) (223)
Depreciation, depletion and
amortization.............. 360 360
Taxes other than income
taxes..................... 235 235
------ --- ---- ------
Total costs and
expenses................ 6,028 6,028
------ --- ---- ------
Income from operations....... 104 104
Net interest and other
financial costs............. 105 11 (A) (79)(C) 37
------ --- ---- ------
Income (loss) before income
taxes....................... (1) (11) 79 67
Provision for income taxes... 20 (4)(B) 28 (B) 44
------ --- ---- ------
Net income (loss)............ (21) (7) 51 23
====== === ==== ======
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
57
United States Steel Corporation
Notes to Unaudited Pro Forma Condensed Combined
Statement of Operations
(A) Reflects an increase in net interest and other financial costs associated
with the issuance of SQUIDS in exchange for the Outstanding Securities in
the exchange offers. For purposes of this presentation, the assumed
interest rate on the SQUIDS is 9.50%.
(B) Reflects the income tax effects of the adjustment to net interest and
financial costs in this column.
(C) Reflects a decrease in net interest and other financial costs as a result
of a decrease in the amount of indebtedness of United States Steel
Corporation following the Separation, as compared to the amount of USX debt
attributed to United States Steel. The decrease primarily reflects the $900
million Value Transfer. Pro forma interest costs have been calculated based
on pro forma average levels of debt for the six months ended June 30, 2001,
and for the year ended December 31, 2000. Pro forma debt reflects new
financing arrangements, the proceeds of which will be used to pay Marathon
Oil Corporation in connection with the Separation and to pay United States
Steel Corporation's portion of the Separation costs.
The assumed interest rate for new financing arrangements was 10% based upon
expected market conditions and the expected credit rating of United States
Steel Corporation. The average interest rate for the six months ended June
30, 2001 for existing USX debt and other obligations on that date for which
United States Steel Corporation will be responsible was approximately 6
3/4%. The weighted average interest rate for the six months ended June 30,
2001 for all United States Steel Corporation pro forma debt and other
obligations was approximately 8.50%. A 1/8 percentage point change in the
assumed interest rate for new financing arrangements would have changed
annual interest costs by approximately $1 million.
58
Unaudited Pro Forma Condensed Financial Statements
for Marathon Oil Corporation
The following unaudited pro forma condensed balance sheet as of June 30,
2001 gives effect to the discontinuance of the businesses of United States
Steel Corporation, the exchange offers, the $900 million Value Transfer, the
assignment of certain USX corporate assets and liabilities to United States
Steel Corporation, the payment of Separation costs and the distribution of
shares of common stock of United States Steel Corporation to the holders of U.
S. Steel Group Shares as if such transactions had been consummated as of June
30, 2001. The following unaudited pro forma condensed statements of operations
for the six months ended June 30, 2001 and the year ended December 31, 2000
give effect to the discontinuance of the businesses of United States Steel
Corporation and interest changes as a result of the exchange offers, the Value
Transfer and the repayment of the 6.50% Preferred Stock as if such transactions
had been consummated at the beginning of the periods presented. The unaudited
pro forma condensed statements of operations of Marathon Oil Corporation for
the years ended December 31, 1999 and 1998 give effect to the discontinuance of
the businesses of United States Steel Corporation but do not give effect to any
adjustments associated with the Separation.
Our pro forma presentation of the exchange offers assumes that the maximum
of $365 million face amount of the Outstanding Securities are tendered and
accepted pro rata in proportion to the maximum amount of each series of the
Outstanding Securities that may be accepted pursuant to the Exchange Offers. If
the minimum amount of $150 million of the Outstanding Securities are tendered
and accepted in the exchange offers, the pro forma condensed combined balance
sheet would reflect a decrease in long-term debt and an increase in 8.75% MIPS
for the decrease in 8.75% MIPS exchanged and the effect on net interest and
other financial costs in the condensed combined statements of operations would
be less than $1 million.
No pro forma adjustments were made for changes in the future level of
corporate administrative costs to be incurred by Marathon Oil Corporation as
compared with the historical level of such costs allocated to Marathon. These
costs are expected to continue at approximately the same level as previously
allocated, except for insurance costs which are estimated to be higher by $2
million annually.
The exchange offers will be accounted for as an extinguishment of preferred
securities and the SQUIDS will be recorded at fair value. The difference
between the carrying value of the Outstanding Securities exchanged and the fair
value of the SQUIDS issued will be charged or credited to additional paid in
capital.
No pro forma adjustments have been made in the unaudited pro forma condensed
statements of operations for nonrecurring charges, including Separation costs
and the loss on the Separation. Such adjustments are reflected in the unaudited
pro forma condensed balance sheet.
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma condensed
financial statements do not necessarily represent Marathon Oil Corporation's
financial position or results of operations had the transactions occurred at
such dates or project Marathon Oil Corporation's financial position or results
of operations for any future date or period. A number of factors may affect
Marathon Oil Corporation's results. See "Special Note Regarding Forward-Looking
Statements" on page (iv). In the opinion of management, all adjustments
necessary to present fairly the unaudited pro forma condensed financial
statements have been made. The unaudited pro forma condensed financial
statements should be read in conjunction with the historical financial
statements of USX Corporation, including the notes thereto, which are
incorporated by reference in the registration statement of which this
prospectus forms a part.
59
Marathon Oil Corporation
Unaudited Pro Forma Condensed Balance Sheet
June 30, 2001
Dollars in millions
Marathon
Oil
Corporation
Pro Forma
Before
Exchange Marathon
Discontinued Offers and Oil
USX Operations Separation Exchange Separation Value Corporation
Historical Adjustments Adjustments Offers Adjustments Transfer Pro Forma
---------- ------------ ----------- -------- ----------- -------- -----------
ASSETS
Cash and cash
equivalents............ $ 723 $ (254)(A) $ 469 $ $ 189 (D) $ $ 658
Other current assets.... 6,465 (2,422)(A) 4,366 20 (D) 4,386
323 (B)
Net investment in
discontinued
operations............. 1,860 (A) 1,860 (90)(C) (35)(D) 900 (G) --
43 (E)
(2,678)(F)
Property, plant and
equipment--net......... 12,977 (3,098)(A) 9,879 (20)(E) 9,859
Prepaid pensions........ 2,928 (2,711)(A) 217 217
Other assets............ 1,421 (469)(A) 1,073 (5)(C) 549 (D) 1,535
121 (B) (82)(E)
------- ------- ------- ---- ------- ---- -------
Total assets............ $24,514 $(6,650) $17,864 $(95) $(2,014) $900 $16,655
======= ======= ======= ==== ======= ==== =======
LIABILITIES AND EQUITY
Current liabilities
other than debt........ $ 4,655 $(1,313)(A) $ 3,665 $ $ 32 (D) $ $ 3,699
323 (B) 2 (E)
Notes payable and long-
term debt due within
one year............... 686 (347)(A) 339 344 (D) 683
Long-term debt.......... 3,673 (2,085)(A) 1,588 119 (C) 407 (D) 900 (G) 3,014
Other long-term
liabilities............ 5,363 (3,100)(A) 2,384 (4)(D) 2,319
121 (B) (61)(E)
Mandatorily redeemable
convertible preferred
securities of a
subsidiary trust (6.75%
QUIPS)................. 183 (183)(A) -- --
Preferred stock of
subsidiary (8.75%
MIPS).................. 250 (66)(A) 184 (119) (C) 24(D) 89
Minority interest in
Marathon Ashland
Petroleum LLC.......... 2,010 2,010 2,010
Equity.................. 7,694 7,694 (95) (C) (80)(D) 4,841
(1,797)(F)
(881)(F)
------- ------- ------- ---- ------- ---- -------
Total liabilities and
equity................. $24,514 $(6,650) $17,864 $(95) $(2,014) $900 $16,655
======= ======= ======= ==== ======= ==== =======
See Notes to Unaudited Pro Forma Condensed Balance Sheet
60
Marathon Oil Corporation
Notes to Unaudited Pro Forma Condensed Balance Sheet
(A) Reflects the reclassification of all assets and liabilities of the
businesses of United States Steel Corporation to discontinued operations.
The measurement date for discontinued operations purposes will be on or
about the effective time of the Separation.
(B) Reflects the establishment of payables to United States Steel previously
eliminated in consolidation, primarily related to income taxes under USX's
tax allocation policy.
(C) Reflects the effects of the exchange offers as follows:
The decrease in net investment in discontinued operations of $90 million
reflects the equity impact of the securities exchanged as part of the
exchange offers that were attributed to United States Steel as follows:
Dollars
in millions
-----------
6.50% Preferred Stock exchanged.................................. $ 77
Excess of fair value of SQUIDS issued over carrying value of
6.75% QUIPS exchanged........................................... 9
Deferred financing costs associated with 8.75% MIPS and 6.75%
QUIPS exchanged................................................. 4
----
$ 90
====
The decrease in other assets of $5 million reflects the removal of
Marathon's portion of the deferred financing costs associated with the
8.75% MIPS exchanged for SQUIDS attributed to Marathon as part of the
exchange offers.
The increase in debt of $119 million reflects an increase in debt
attributed to Marathon relating to the exchange offers.
The decrease in preferred stock of subsidiary (8.75% MIPS) of $119 million
reflects the portion of the 8.75% MIPS attributed to Marathon assumed to be
exchanged for SQUIDS as part of the exchange offers.
The decrease in equity of $95 million reflects the $90 million equity
impact related to the securities exchanged that were attributed to United
States Steel which are reflected in both discontinued and continuing
operations, and $5 million of deferred financing costs associated with the
8.75% MIPS exchanged for SQUIDS that were attributed to Marathon.
(D) Reflects the effects of the following:
(1) Recognition of the financial activities of USX formerly attributed to
United States Steel, including invested cash, deferred financing costs,
accrued interest payable, debt, and preferred securities of
subsidiaries.
(2) Reversal of existing USX debt for which United States Steel Corporation
will be responsible under the Financial Matters Agreement.
(3) Establishment of receivables from United States Steel Corporation under
the Financial Matters Agreement for obligations relating to industrial
revenue bonds and a sublease of the Fairfield caster.
61
(4) Payment from United States Steel Corporation, the proceeds of which
will be used to redeem the Trust Preferred, to repay the 6.50%
Preferred Stock, to repay the Receivables Facility and to fund a
portion of the Separation costs.
(5) New financing arrangements of Marathon Oil Corporation, the proceeds of
which will be used to fund the remaining portion of the Separation
costs.
For a more detailed description, see "Description of Other Indebtedness" on
page 128.
The increase in cash of $189 million reflects the recognition of the
portion of USX invested cash historically attributed to United States Steel
which will be included in the accounts of Marathon Oil Corporation.
The increase in other current assets of $20 million reflects the principal
and accrued interest on industrial revenue bonds and the Fairfield caster
lease for which Marathon Oil Corporation remains obligated but United
States Steel Corporation assumes responsibility for repayment.
The decrease in net investment in discontinued operations of $35 million
reflects the offsetting impact of these adjustments on United States Steel
Corporation. For a detailed description, see "Unaudited Pro Forma Condensed
Combined Financial Statements for United States Steel" on pages 50 to 58.
The increase in other assets of $549 million primarily reflects receivables
from United States Steel Corporation of $470 million related to industrial
revenue bonds for which Marathon Oil Corporation remains obligated but
United States Steel Corporation assumes responsibility for repayment and
$78 million related to a sublease of the Fairfield caster to United States
Steel Corporation.
The increase in current liabilities other than debt of $32 million
primarily reflects the recognition of the portion of USX's accrued interest
payable historically attributed to United States Steel which will be
included in the accounts of Marathon Oil Corporation.
62
The net increase in debt of $751 million (the sum of an increase in notes
payable and long-term debt due within one year of $344 million and an
increase in long-term debt of $407 million) primarily reflects the exchange
offers, refinancing of other obligations, net of invested cash, by United
States Steel Corporation, the refinancing of other obligations and
Separation costs by Marathon Oil Corporation, and certain obligations
assumed by United States Steel Corporation but reflected as both an asset
and liability by Marathon Oil Corporation. The following table reconciles
the amount of total USX debt to the pro forma balance of Marathon Oil
Corporation debt.
Dollars
in millions
-----------
Total USX debt............................................ $4,359
Less debt attributed to discontinued operations........... 2,432
------
Debt of Marathon Oil Corporation before exchange offers
and separation adjustments............................... 1,927
Attributed debt related to the exchange offers............ 119
Other obligations, net of invested cash, which will be
refinanced by United States Steel Corporation:
6.75% QUIPS not exchanged............................... (65)
8.75% MIPS not exchanged................................ (24)
6.50% Preferred Stock not exchanged..................... (44)
Invested cash........................................... 189
Other financial activities.............................. (37)
Excess of redemption value over carrying value of 6.75%
QUIPS.................................................. (5)
Other obligations which will be refinanced by Marathon Oil
Corporation:
Separation costs........................................ 60
Redemption of the 6.75% QUIPS not exchanged............. 70
Repayment of the 6.50% Preferred Stock not exchanged.... 44
Obligations assumed by United States Steel Corporation,
reflected as both an asset and liability by Marathon Oil
Corporation:
Industrial revenue bonds................................ 479
Fairfield caster lease.................................. 84
---
Net refinancing of other obligations and obligations
assumed by United States Steel Corporation............... 751
------
Debt before the Value Transfer............................ 2,797
Value Transfer............................................ 900
------
Pro forma balance of Marathon Oil Corporation debt........ $3,697
======
The decrease in other long-term liabilities of $4 million reflects expected
tax benefits related to the Separation costs.
The increase in preferred stock of subsidiary (8.75% MIPS) of $24 million
reflects the recognition of the portion of the 8.75% MIPS historically
attributed to United States Steel assumed to remain outstanding after the
exchange offers, which will be included in the accounts of Marathon Oil
Corporation.
63
The decrease in equity of $80 million consists of the following:
Dollars
in millions
-----------
Repayment of 6.50% Preferred Stock not exchanged............. $44
Deferred financing costs associated with securities
exchanged................................................... 7
Adjustments related to Separation costs...................... 29
---
Net decrease in equity....................................... $80
===
The pro forma sources and uses of funds received from United States Steel
Corporation and from new financing arrangements were as follows:
Dollars
in millions
-----------
Payment from United States Steel Corporation................... $505
New financing required......................................... 19
----
524
====
Repayment of the Receivables Facility.......................... $350
Redemption of the 6.75% QUIPS not exchanged.................... 70
Repayment of the 6.50% Preferred Stock not exchanged........... 44
Payment of Separation costs.................................... 60
----
Total........................................................ $524
====
The payment from United States Steel Corporation will be reduced by the
amount paid by Marathon to United States Steel in the preliminary tax
settlement. This amount is expected to be at least $300 million. For more
information regarding this tax settlement, see "Relationship Between United
States Steel Corporation and Marathon Oil Corporation after the
Separation--Tax Sharing Agreement" on page 124.
(E) Reflects the assignment of certain USX corporate assets and liabilities to
United States Steel Corporation. The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $(20) $ -- $ -- $ -- $ (20)
Assets and liabilities
associated with
employee benefits...... -- (5) (2) (66) (73)
Reclassification of
intercompany balances.. -- (77) -- 77 --
Income tax assets and
liabilities, including
the tax effect of above
adjustments............ -- -- -- 50 50
---- ------- ------- ------- -------
Net effect on net
investment in
discontinued
operations............. $(20) $ (82) $ (2) $ 61 $ (43)
==== ======= ======= ======= =======
64
(F) Reflects the removal of the net investment in discontinued operations. Also
reflects the distribution of shares of common stock of United States Steel
Corporation to the holders of U. S. Steel Group Shares as a dividend.
Because the net investment in discontinued operations exceeded the fair
value, as measured by the aggregate market value of the U. S. Steel Group
Shares at June 30, 2001, a nonrecurring non-cash charge would have been
recognized as follows:
Dollars
in millions
-----------
Market value of the U. S. Steel Group Shares (89,156,721
shares of stock issued and outstanding at $20.15 per
share)...................................................... $1,797
Less net investment in discontinued operations............... 2,678
------
Loss on separation........................................... $ (881)
======
(G) Reflects adjustments related to the $900 million Value Transfer. In
connection with the Separation, a portion of USX indebtedness will be
repaid or retired and United States Steel Corporation will incur
indebtedness and agree to repay a portion of the indebtedness and other
obligations of USX, such that the amount of indebtedness and other
obligations for which United States Steel Corporation is responsible is
$900 million less than the net amounts attributed to United States Steel
immediately prior to the Separation. For a more detailed description of the
Value Transfer, see "The Proposed Separation" on page 122.
65
Marathon Oil Corporation
Unaudited Pro Forma Condensed Statement of Operations
Six Months Ended June 30, 2001
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Before
Exchange
Discontinued Offers and Marathon Oil
USX Operations Separation Exchange Separation Corporation
Historical Adjustments Adjustments Offers Adjustments Pro Forma
---------- ------------ ------------ -------- ----------- ------------
Revenues and other income........................ $21,188 $(3,301)(A) $17,911 $ $ $17,911
24 (B)
Costs and expenses:
Cost of revenues (excludes items shown below).. 15,560 (3,148)(A) 12,436 12,436
24 (B)
Selling, general and administrative expenses... 329 (3)(A) 340 340
14 (C)
Depreciation, depletion and amortization....... 761 (152)(A) 609 609
Taxes other than income taxes.................. 2,450 (126)(A) 2,324 2,324
Exploration expenses........................... 49 -- 49 49
------- ------- ------- ------- ------- -------
Total costs and expenses..................... 19,149 (3,391) 15,758 15,758
------- ------- ------- ------- ------- -------
Income from operations........................... 2,039 114 2,153 2,153
Net interest and other financial costs........... 109 (36)(A) 83 1 (F) 39 (G) 123
10 (D)
Minority interest in Marathon Ashland Petroleum
LLC............................................. 427 -- 427 427
------- ------- ------- ------- ------- -------
Income before income taxes....................... 1,503 140 1,643 (1) (39) 1,603
Provision for income taxes....................... 434 143 (A) 569 (15)(E) 554
(8)(E)
------- ------- ------- ------- ------- -------
Income from continuing operations................ 1,069 5 1,074 (1) (24) 1,049
Discontinued operations:
Results of operations, net of tax............... -- (5)(A) (5) 5 (H) --
------- ------- ------- ------- ------- -------
Income before cumulative effect of change in
accounting principle............................ 1,069 -- 1,069 (1) (19) 1,049
Cumulative effect of change in accounting
principle....................................... (8) -- (8) (8)
------- ------- ------- ------- ------- -------
Net income....................................... $ 1,061 $ -- $ 1,061 $ (1) $ (19) $ 1,041
======= ======= ======= ======= ======= =======
Applicable to Marathon Stock: (I)
Income before cumulative effect of change in
accounting principle............................ $ 1,090
Per share--basic............................... 3.53
--diluted........................................ 3.52
Cumulative effect of change in accounting
principle....................................... $ (8)
Per share--basic............................... (0.03)
66 --diluted..................................... (0.02)
Net income....................................... $ 1,082
Per share--basic and diluted................... 3.50
Applicable to Steel Stock: (I)
Income (loss) before cumulative effect of change
in accounting principle......................... $ (25)
Per share--basic and diluted................... (0.28)
Cumulative effect of change in accounting
principle....................................... $ --
Per share--basic and diluted................... --
Net income (loss)................................ $ (25)
Per share--basic and diluted................... (0.28)
Applicable to Marathon Oil Corporation Stock: (I)
Income before cumulative effect of change in
accounting principle............................ $ 1,049
Per share--basic............................... 3.40
--diluted........................................ 3.39
Cumulative effect of change in accounting
principle....................................... $ (8)
Per share--basic............................... (0.03)
--diluted........................................ (0.02)
Net income....................................... $ 1,041
Per share--basic and diluted................... 3.37
See Notes to Unaudited Pro Forma Condensed Statement of Operations.
66
Marathon Oil Corporation
Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 2000
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Before
Exchange
Discontinued Offers and Marathon Oil
USX Operations Separation Exchange Separation Corporation
Historical Adjustments Adjustments Offers Adjustments Pro Forma
---------- ------------ ------------ -------- ----------- ------------
Revenues and other
income................. $39,914 $(6,132)(A) $33,859 $ $ $33,859
77 (B)
Costs and expenses:
Cost of revenues
(excludes items shown
below)............... 31,056 (5,656)(A) 25,477 25,477
77 (B)
Selling, general and
administrative
expenses............. 402 223 (A) 643 643
18 (C)
Depreciation,
depletion and
amortization......... 1,605 (360)(A) 1,245 1,245
Taxes other than
income taxes......... 4,861 (235)(A) 4,626 4,626
Exploration expenses.. 238 -- 238 238
------- ------- ------- ---- ---- -------
Total costs and
expenses........... 38,162 (5,933) 32,229 32,229
------- ------- ------- ---- ---- -------
Income from operations.. 1,752 (122) 1,630 1,630
Net interest and other
financial costs........ 341 (105)(A) 236 2 (F) 87 (G) 325
Minority interest in
Marathon Ashland
Petroleum LLC.......... 498 -- 498 498
------- ------- ------- ---- ---- -------
Income before income
taxes.................. 913 (17) 896 (2) (87) 807
Provision for income
taxes.................. 502 (20)(A) 476 (1)(E) (32)(E) 443
(6)(E)
------- ------- ------- ---- ---- -------
Income from continuing
operations............. 411 9 420 (1) (55) 364
Discontinued operations:
Results of operations,
net of tax............ -- (9)(A) (9) 9 (H) --
------- ------- ------- ---- ---- -------
$
Net income.............. $ 411 -- $ 411 $ (1) $(46) $ 364
======= ======= ======= ==== ==== =======
Applicable to Marathon
Stock: (I)
Per share--basic and
diluted
Net income............ $ 1.39
Applicable to Steel
Stock: (I)
Per share--basic and
diluted
Net income (loss)..... $ (0.33)
Applicable to Marathon
Oil Corporation Stock:
(I)
Per share--basic and
diluted
Net income............ $ 1.17
See Notes to Unaudited Pro Forma Condensed Statement of Operations
67
Marathon Oil Corporation
Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 1999
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments Adjustments
---------- ------------ ---------------
Revenues and other income........... $29,119 $(5,470)(A) $23,707
58 (B)
Costs and expenses:
Cost of revenues (excludes items
shown below)..................... 21,679 (5,084)(A) 16,653
58 (B)
Selling, general and
administrative expenses.......... 203 283 (A) 498
12 (C)
Depreciation, depletion and
amortization..................... 1,254 (304)(A) 950
Taxes other than income taxes..... 4,433 (215)(A) 4,218
Exploration expenses.............. 238 238
Inventory market valuation
credits.......................... (551) (551)
------- ------- -------
Total costs and expenses........ 27,256 (5,250) 22,006
------- ------- -------
Income from operations.............. 1,863 (162) 1,701
Net interest and other financial
costs.............................. 362 (74)(A) 288
Minority interest in Marathon
Ashland Petroleum LLC.............. 447 447
------- ------- -------
Income before income taxes.......... 1,054 (88) 966
Provision for income taxes.......... 349 (25)(A) 320
(4)(E)
------- ------- -------
Income from continuing operations... 705 (59) 646
Discontinued operations:
Results of operations, net of tax.. 59 (A) 59
Extraordinary losses................ 7 7
------- ------- -------
Net income.......................... $ 698 $ -- $ 698
======= ======= =======
See Notes to Unaudited Pro Forma Condensed Statement of Operations
68
Marathon Oil Corporation
Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 1998
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments Adjustments
---------- ------------ ---------------
Revenues and other income........... $28,077 $(6,477)(A) $21,623
23 (B)
Costs and expenses:
Cost of revenues (excludes items
shown below)..................... 20,211 (5,604)(A) 14,630
23 (B)
Selling, general and
administrative expenses.......... 304 201 (A) 514
9 (C)
Depreciation, depletion and
amortization..................... 1,224 (283)(A) 941
Taxes other than income taxes..... 4,241 (212)(A) 4,029
Exploration expenses.............. 313 313
Inventory market valuation
charges.......................... 267 267
------- ------- -------
Total costs and expenses........ 26,560 (5,866) 20,694
------- ------- -------
Income from operations.............. 1,517 (588) 929
Net interest and other financial
costs.............................. 279 (42)(A) 237
Minority interest in Marathon
Ashland Petroleum LLC.............. 249 249
------- ------- -------
Income before income taxes.......... 989 (546) 443
Provision for income taxes.......... 315 (173)(A) 139
(3)(E)
------- ------- -------
Income from continuing operations... 674 (370) 304
Discontinued operations:
Results of operations, net of
tax.............................. 370 (A) 370
------- ------- -------
Net income.......................... $ 674 $ -- $ 674
======= ======= =======
See Notes to Unaudited Pro Forma Condensed Statement of Operations
69
Marathon Oil Corporation
Notes to Unaudited Pro Forma Condensed Statement of Operations
(A) Reflects the reclassification of all revenues and expenses of the
businesses of United States Steel to discontinued operations. The
measurement date for discontinued operations purposes will be on or about
the effective time of the Separation.
(B) Reflects the establishment of revenues and the related cost of revenues for
intercompany sales previously eliminated in consolidation.
(C) Reflects the reversal of general corporate overhead expenses allocated to
United States Steel that are not permitted to be reflected in discontinued
operations.
(D) Reflects the reversal of a portion of the interest expense allocated to
United States Steel that is not permitted to be reflected in discontinued
operations. The only period in which allocated interest exceeded the
permitted amount was the six months ended June 30, 2001.
(E) Reflects the income tax effects of the adjustments in this column.
(F) Reflects an increase in net interest and other financial costs associated
with the issuance of SQUIDS in exchange for the Outstanding Securities in
the exchange offers. For purposes of this presentation, the assumed
interest rate on the SQUIDS is 9.50%.
(G) Reflects an increase in net interest and other financial costs as a result
of an increase in the amount of indebtedness of Marathon Oil Corporation
following the Separation, as compared to the amount of USX debt attributed
to Marathon. The increase primarily reflects the $900 million Value
Transfer. Pro forma interest costs have been calculated based on pro forma
average levels of debt for the six months ended June 30, 2001, and for the
year ended December 31, 2000. Pro forma debt reflects the redemption of the
6.75% QUIPS and 6.50% Preferred Stock assumed to remain outstanding after
the exchange offers, repayment of the Receivables Facility, and payments
from United States Steel Corporation for debt attributed to United States
Steel prior to the Separation that will remain with Marathon Oil
Corporation. In 2001, pro forma debt also includes the effects of
additional drawings on existing lines of credit to fund a portion of
Marathon's share of the Separation costs. For the majority of the year
2000, the amount of debt that would have remained with Marathon Oil
Corporation was less than the net debt levels of USX attributed to
Marathon, adjusted for the $900 million Value Transfer. As a result, pro
forma debt for 2000 reflects additional drawings on existing lines of
credit to fund the redemption of the 6.75% QUIPS and 6.50% Preferred Stock
assumed to remain outstanding after the exchange offers, to repay the
Receivables Facility, and to pay Marathon's share of the Separation costs.
The assumed interest rate for new financings was 6% in 2001 and 7% in 2000,
which was based on the average borrowing rates on available lines of credit.
A 1/8 percentage point change in the assumed financing rate would have
changed annualized interest costs in 2000 by approximately $1 million.
(H) Reflects the elimination of discontinued operations as a result of the
Separation. Also includes amounts related to corporate administrative costs
and interest costs allocated to United States Steel but not classified as
discontinued operations.
70
(I) Weighted average shares of common stock outstanding were 308,928,000
(basic) and 309,338,000 (diluted) for both Marathon Group and, on a pro
forma basis, Marathon Oil Corporation for the six-month period ended June
30, 2001. Weighted average shares of common stock outstanding were
311,531,000 (basic) and 311,761,000 (diluted) for both Marathon Group and,
on a pro forma basis, Marathon Oil Corporation for year ended December 31,
2000. Weighted average shares of common stock outstanding (basic and
diluted) for the U. S. Steel Group were 88,906,000 for the six months ended
June 30, 2001, and 88,613,000 for the year ended December 31, 2000.
Preferred stock dividends of $4 million and $8 million reduced net income
applicable to U. S. Steel Group Shares for the six months ended June 30,
2001, and for the year ended December 31, 2000, respectively.
71
SELECTED HISTORICAL FINANCIAL INFORMATION
Selected Historical Financial Information for United States Steel
The following table sets forth selected historical information for United
States Steel and is not intended to be a complete presentation of the financial
position, the results of operations or cash flows of United States Steel on a
stand-alone basis. For financial information for United States Steel
Corporation which gives effect to the Separation and related transactions, see
"Unaudited Pro Forma Condensed Combined Financial Statements." This information
should be read in conjunction with United States Steel's combined financial
statements and USX Corporation's consolidated financial statements, including
the notes thereto, which appear elsewhere in this prospectus or are
incorporated by reference in the registration statement of which this
prospectus forms a part.
Six Months Year Ended
Ended June 30, December 31,
---------------- --------------------------------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------ ------ ------ ------ ------
(Dollars in millions)
Statement of Operations
Data:
Revenues and other
income(/1/)............ $ 3,301 $ 3,244 $6,132 $5,470 $6,477 $7,156 $6,872
Costs and expenses...... 3,429 3,041 6,028 5,320 5,898 6,383 6,389
------- ------- ------ ------ ------ ------ ------
Income (loss) from
operations............. (128) 203 104 150 579 773 483
Net interest and other
financial costs
(income)............... 36 48 105 74 42 87 116
------- ------- ------ ------ ------ ------ ------
Income (loss) before
income taxes and
extraordinary losses... (164) 155 (1) 76 537 686 367
Provision (credit) for
income taxes........... (143) 56 20 25 173 234 92
------- ------- ------ ------ ------ ------ ------
Income (loss) before
extraordinary losses... (21) 99 (21) 51 364 452 275
Extraordinary losses.... -- -- -- 7 -- -- 2
------- ------- ------ ------ ------ ------ ------
Net income (loss)....... $ (21) $ 99 $ (21) $ 44 $ 364 $ 452 $ 273
======= ======= ====== ====== ====== ====== ======
Balance Sheet Data--as
of end of period:
Property, plant and
equipment - net........ $ 3,098 $ 2,444 $2,739 $2,516 $2,500 $2,496 $2,551
Prepaid pensions........ 2,711 2,543 2,672 2,404 2,172 1,957 1,734
Total assets............ 8,954 7,606 8,711 7,525 6,749 6,694 6,580
Total debt and other
financial
obligations(/2/)....... 2,681 1,198 2,694 1,164 737 771 1,169
Long-term employee
benefit obligations.... 1,916 2,212 1,767 2,245 2,315 2,338 2,430
Equity.................. 1,860 2,094 1,919 2,056 2,093 1,782 1,566
Other Data:
Capital expenditures.... $ 141 $ 97 $ 244 $ 287 $ 310 $ 261 $ 337
Depreciation, depletion,
and amortization....... 152 153 360 304 283 303 292
EBITDA(/3/)(/4/)........ 24 356 464 447 862 1,076 773
Net pension
credits(/5/)........... 72 132 266 228 186 144 158
Ratio of earnings to
fixed charges(/6/)..... -- 3.06x 1.13x 2.33x 5.89x 5.39x 2.91x
Operating Data:
Steel shipments
(thousands of net tons)
--Domestic Steel....... 5,043 5,884 10,756 10,629 10,686 11,643 11,372
--USSK................. 1,818 -- 317 -- -- -- --
---------------------
(1) Consists of revenues, dividends and investee income (loss), net gains on
disposal of assets, gain on investee stock offering and other income
(loss).
(2) Consists of notes payable, long-term debt (including current portion),
trust preferred securities, and preferred stock of subsidiary.
(3) EBITDA represents net income before net 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 this as one measure to evaluate a
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
calculations used by various companies.
(4) EBITDA includes the following nonrecurring items for the periods
presented: (i) the six months ended June 30, 2001 include two items
relating to equity investees, a $68 million gain on the reorganization of
Transtar, Inc. and a $74 million charge for a substantial portion of the
accounts receivable balance due from Republic Technologies International,
LLC ("Republic"); (ii) the year ended December 31, 2000 includes $36
million of charges related to Republic for our share of their
restructuring costs and the impairment of a note receivable due to United
States Steel; (iii) the year ended December 31, 1999 includes two charges
related to equity investees, a $47 million charge for the impairment of
our investment in USS/Kobe Steel Company and a $22 million charge related
to the termination of our ownership interest in RTI International Metals,
Inc, formerly known as RMI Titanium Company; (iv) the year ended December
31, 1997 includes a $15 million gain on the sale of the plate mill at the
Texas Works; and (v) the year ended December 31, 1996 includes $13 million
of charges for severance costs at the Fairless Works and a $53 million
gain on the sale of RMI Titanium Company common stock. There were no
significant nonrecurring charges during the six months ended June 30, 2000
or the year ended December 31, 1998.
(5) Net pension credits are included in both income from operations and
EBITDA. Net pension credits are primarily non-cash and primarily reflect
an expected return on plan assets in excess of current costs. As of
December 31, 2000, the fair value of pension plan assets exceeded benefit
obligations by $2.4 billion.
(6) Earnings were deficient in covering fixed charges by $196 million for the
six months ended June 30, 2001. See "Summary--Summary Financial Data" for
a description of the calculation of the ratio of earnings to fixed
charges.
72
Selected Historical Financial Information for USX Corporation
The following table sets forth selected historical financial information for
USX Corporation. This information should be read in conjunction with USX
Corporation's consolidated financial statements, including the notes thereto,
which are incorporated by reference in the registration statement of which this
prospectus forms a part. This information does not give effect to the
Separation and related transactions. For such information, see "Marathon Oil
Corporation Unaudited Pro Forma Condensed Balance Sheet" and "Marathon Oil
Corporation Unaudited Pro Forma Condensed Statement of Operations" on pages 60
and 66.
Six Months
Ended
June 30 Year Ended December 31,
---------------- -------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- ------- -------
Dollars in millions (except per share data)
Statement of Operations
Data:
Revenues and other
income(1)(2)........... $21,188 $19,779 $39,914 $29,119 $28,077 $22,824 $22,938
Income from
operations(2).......... 2,039 1,588 1,752 1,863 1,517 1,705 1,779
Includes:
Inventory market
valuation credits
(charges)............. -- -- -- 551 (267) (284) 209
Gain (loss) on
ownership change in
MAP................... (6) 8 12 17 245 -- --
Income from continuing
operations............. 1,069 720 411 705 674 908 946
Income from discontinued
operations............. -- -- -- -- -- 80 6
Extraordinary losses.... -- -- -- (7) -- -- (9)
Cumulative effect of
change in accounting
principle.............. (8) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,061 $ 720 $ 411 $ 698 $ 674 $ 988 $ 943
Noncash credit from
exchange of preferred
stock.................. -- -- -- -- -- 10 --
Dividends on preferred
stock.................. (4) (4) (8) (9) (9) (13) (22)
------- ------- ------- ------- ------- ------- -------
Net income applicable to
common stocks.......... $ 1,057 $ 716 $ 403 $ 689 $ 665 $ 985 $ 921
======= ======= ======= ======= ======= ======= =======
Common Share Data:
Marathon Stock:
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. $ 1,090 $ 621 $ 432 $ 654 $ 310 $ 456 $ 671
Per share--basic....... 3.53 1.99 1.39 2.11 1.06 1.59 2.33
--diluted........... 3.52 1.99 1.39 2.11 1.05 1.58 2.31
Net income.............. 1,082 621 432 654 310 456 664
Per share--basic....... 3.50 1.99 1.39 2.11 1.06 1.59 2.31
--diluted........... 3.50 1.99 1.39 2.11 1.05 1.58 2.29
Dividends paid per
share.................. .46 .42 .88 .84 .84 .76 .70
Common Stockholders'
Equity per share....... 18.87 16.92 15.70 15.38 13.95 12.53 11.62
Steel Stock:
Income (loss) before
extraordinary losses... $ (25) $ 95 $ (29) $ 42 $ 355 $ 449 $ 253
Per share--basic....... (.28) 1.08 (.33) .48 4.05 5.24 3.00
--diluted........... (.28) 1.07 (.33) .48 3.92 4.88 2.97
Net income (loss)....... (25) 95 (29) 35 355 449 251
Per share--basic....... (.28) 1.08 (.33) .40 4.05 5.24 2.98
--diluted........... (.28) 1.07 (.33) .40 3.92 4.88 2.95
Dividends paid per
share.................. .35 .50 1.00 1.00 1.00 1.00 1.00
Common Stockholders'
Equity per share....... 20.83 23.59 21.58 23.23 23.66 20.56 18.37
Balance Sheet and Other
Data:
Capital expenditures.... $ 769 $ 1,669 $ 1,665 $ 1,580 $ 1,373 $ 1,168
Total assets............ 24,514 23,401 22,931 21,133 17,284 16,980
Capitalization:
Notes payable.......... $ 250 $ 150 $ -- $ 145 $ 121 $ 81
Total long-term debt... 4,109 4,460 4,283 3,991 3,403 4,212
Preferred stock of
subsidiary............ 250 250 250 250 250 250
Trust preferred
securities............ 183 183 183 182 182 --
Minority interest in
MAP................... 2,010 1,840 1,753 1,590 -- --
Redeemable Delhi
Stock(3).............. -- -- -- -- 195 --
Preferred stock........ 2 2 3 3 3 7
Common stockholders'
equity................ 7,692 6,762 6,853 6,402 5,397 5,015
------- ------- ------- ------- ------- -------
Total
capitalization...... $14,496 $13,647 $13,325 $12,563 $ 9,551 $ 9,565
======= ======= ======= ======= ======= =======
73
--------
(1) Consists of revenues, dividend and investee income (loss), gain (loss) on
ownership change in Marathon Ashland Petroleum LLC ("MAP"), net gains
(losses) on disposal of assets, gain on investee stock offering and other
income.
(2) Excludes amounts for the Delhi Group (sold in 1997), which have been
reclassified as discontinued operations.
(3) On January 26, 1998, USX redeemed all of the outstanding shares of USX--
Delhi Group Common Stock.
74
Selected Historical Financial Information for the Marathon Group
The following table sets forth selected historical information for the
Marathon Group. This information does not present the financial information for
Marathon Oil Corporation as if it were a separate entity for the periods
presented. For financial information for Marathon Oil Corporation which gives
effect to the transactions contemplated by the Plan of Reorganization, see
"Marathon Oil Corporation Unaudited Pro Forma Condensed Balance Sheet" and
"Marathon Oil Corporation Unaudited Pro Forma Condensed Statement of
Operations" on pages 60 and 66. This information should be read in conjunction
with USX Corporation's consolidated financial statements, including the notes
thereto, which are incorporated by reference in the registration statement of
which this prospectus forms a part.
Six Months
Ended June 30 Year Ended December 31,
---------------- -----------------------------------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- ------- -------
Dollars in millions
Statement of Operations
Data:
Revenues and other
income(1).............. $17,911 $16,565 $33,859 $23,707 $21,623 $15,775 $16,153
Income from operations.. 2,167 1,385 1,648 1,713 938 932 1,296
Includes:
Inventory market
valuation credits
(charges)............ -- -- -- 551 (267) (284) 209
Gain (loss) on
ownership change in
MAP.................. (6) 8 12 17 245 -- --
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. 1,090 621 432 654 310 456 671
Net income.............. 1,082 621 432 654 310 456 664
Balance Sheet and Other
Data:
Capital expenditures.... $ 628 $ 1,425 $ 1,378 $ 1,270 $ 1,038 $ 751
Total assets............ 16,004 15,232 15,674 14,544 10,565 10,151
Capitalization:
Notes payable......... $ 127 $ 80 $ -- $ 132 $ 108 $ 59
Total long-term debt.. 1,800 2,085 3,368 3,515 2,893 2,906
Preferred stock of
subsidiary........... 184 184 184 184 184 182
Minority interest in
MAP.................. 2,010 1,840 1,753 1,590 -- --
Common stockholders'
equity............... 5,834 4,845 4,800 4,312 3,618 3,340
------- ------- ------- ------- ------- -------
Total
capitalization..... $ 9,955 $ 9,034 $10,105 $ 9,733 $ 6,803 $ 6,487
======= ======= ======= ======= ======= =======
---------------------
(1) Consists of revenues, dividends and investee income (loss), gain (loss) on
ownership change in MAP, net gains (losses) on disposal of assets and
other income.
75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF UNITED STATES STEEL
The following information relates to the financial condition and results of
operations of United States Steel. A discussion of the financial condition and
results of operations of Marathon is incorporated by reference in the
registration statement of which this prospectus forms a part. See "Where You
Can Find More Information" on page (ii).
United States Steel, through its Domestic Steel segment, is engaged in the
production, sale and transportation of steel mill products, coke, taconite
pellets and coal; the management of mineral resources; real estate development;
and engineering and consulting services and, through its U. S. Steel Kosice
("USSK") segment, primarily located in the Slovak Republic, in the production
and sale of steel mill products and coke for the central European market.
Certain business activities are conducted through joint ventures and partially
owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating
Company ("PRO-TEC"), Clairton 1314B Partnership, Republic Technologies
International, LLC ("Republic") and Rannila Kosice, s.r.o. Management's
Discussion and Analysis should be read in conjunction with United States
Steel's Combined Financial Statements and Notes to Combined Financial
Statements.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of United States Steel. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects", "intends" or similar
words indicating that future outcomes are not known with certainty and 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 United States Steel, see "Risk Factors" beginning on page 22.
Results of Operations
Revenues and other income for the first six months of 2001 and 2000 and the
years 2000, 1999 and 1998 are set forth in the following table:
Six Months
Ended June 30
-------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Millions)
Revenues by product:
Sheet and semi-finished steel
products............................. $1,601 $1,790 $3,288 $3,433 $3,598
Tubular, plate, and tin mill
products............................. 1,096 884 1,731 1,140 1,546
Raw materials (coal, coke and iron
ore)................................. 254 268 626 549 744
Other(/1/)............................ 292 269 445 414 490
Income (loss) from affiliates........... 40 7 (8) (89) 46
Gain on disposal of assets.............. 16 28 46 21 54
Other income (loss)..................... 2 (2) 4 2 (1)
------ ------ ------ ------ ------
Total revenues and other income......... $3,301 $3,244 $6,132 $5,470 $6,477
====== ====== ====== ====== ======
---------------------
(1) Includes revenue from the sale of steel production by-products, real estate
development, resource management, and engineering and consulting services.
76
Revenues and other income increased by $57 million in the first six months
of 2001 compared with the first six months of 2000. The increase primarily
reflected the inclusion of USSK revenues, partially offset by lower domestic
shipment volumes (domestic steel shipments decreased 841,000 tons) and lower
average domestic steel product prices (average prices decreased $11 per ton).
Revenues and other income increased by $662 million in 2000 from 1999
primarily due to the consolidation of Lorain Tubular Company LLC, ("Lorain
Tubular") effective January 1, 2000, higher average realized prices,
particularly tubular product prices, and lower losses from investees, which, in
1999, included a $47 million charge for the impairment of United States Steel's
previous investment in USS/Kobe Steel Company and costs related to the
formation of Republic. Total revenues and other income in 1999 decreased by
$1,007 million from 1998 primarily due to lower average realized prices and
lower income from investees.
Income (loss) from operations for the first six months of 2001 and 2000 and
the years 2000, 1999 and 1998 are set forth in the following table:
Six Months
Ended June
30
------------
2001 2000 2000 1999 1998
----- ----- ---- ---- -----
(Dollars in millions)
Segment income (loss) for Domestic
Steel(/1/)(/2/).............................. $(220) $ 122 $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice(/3/).... 82 -- 2 -- --
----- ----- ---- ---- -----
Income (loss) for reportable segments..... $(138) $ 122 $ 25 $ 91 $ 517
Items not allocated to segments:
Net pension credits......................... 72 132 266 228 186
Administrative expenses..................... (15) (11) (25) (17) (24)
Costs related to former business
activities(/4/)............................ (38) (40) (91) (83) (100)
Costs related to the Separation............. (9) -- -- -- --
Asset impairments--Coal..................... -- -- (71) -- --
Impairment of United States Steel's
investment in USS/Kobe and costs related to
formation of Republic...................... -- -- -- (47) --
Loss on investment in RTI stock used to
satisfy indexed debt obligation............ -- -- -- (22) --
----- ----- ---- ---- -----
Total income (loss) from operations....... $(128) $ 203 $104 $150 $ 579
===== ===== ==== ==== =====
---------------------
(1) The first six months of 2001 include a favorable $68 million for United
States Steel's share of gain on the Transtar reorganization and a $74
million charge for a substantial portion of accounts receivable from
Republic. The first six months of 2000 include charges totaling $15 million
for certain environmental and legal accruals.
(2) Includes income from the sale, domestic production and transportation of
steel products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; engineering and consulting services;
and equity income from joint ventures and partially owned companies.
(3) Includes the sale and production of steel products and coke from facilities
primarily located in the Slovak Republic.
(4) Primarily represents postretirement costs other than pension (OPEB costs)
related to all retirees prior to January 1, 1987, and related to former
employees and retirees from the businesses sold or closed after January 1,
1987. Also includes certain other expenses (primarily litigation and
environmental remediation costs) associated to lines of business in which
USX is no longer engaged as a result of sale or closure.
77
Segment income for Domestic Steel
Segment income for Domestic Steel operations decreased $342 million in the
first six months of 2001, compared with the first six months of 2000, primarily
due to lower average steel prices, higher costs from operating inefficiencies
primarily due to lower throughput for sheet products, higher energy costs,
lower shipment volumes and lower results at iron ore and coal operations.
Domestic Steel operations recorded segment income of $23 million in 2000
versus segment income of $91 million in 1999, a decrease of $68 million. The
2000 segment income included $36 million for certain environmental and legal
accruals, a $34 million charge to establish reserves against notes and
receivables from financially distressed steel companies and a $10 million
charge for United States Steel's share of Republic special charges. Results in
1999 included $17 million in charges for certain environmental and legal
accruals and $7 million in various non-recurring investee charges. Excluding
these items, the decrease in segment income for Domestic Steel was primarily
due to higher costs related to energy and inefficient operating levels due to
lower throughput, lower income from raw materials operations, particularly coal
operations, and lower sheet shipments resulting from high levels of imports
that continued in 2000.
Segment income for Domestic Steel operations in 1999 decreased $426 million
from 1998. Results in 1998 included a net favorable $30 million for an
insurance litigation settlement and charges of $10 million related to a
voluntary workforce reduction plan. Excluding these items, the decrease in
segment income for Domestic Steel was primarily due to lower average steel
prices, lower income from raw materials operations, a less favorable product
mix and lower income from investees.
Segment income for U. S. Steel Kosice
Segment income for USSK was $82 million for the first six months of 2001 and
$2 million for the period following the November 24, 2000 acquisition through
year-end 2000.
Items not allocated to segments
Net pension credits associated with all of United States Steel's domestic
pension plans are not included in segment income for domestic operations. These
net pension credits, which are primarily noncash, totaled $72 million in first
six months of 2001, compared to $132 million in first six months of 2000. The
$60 million decrease in net pension credits in the first six months 2001 is
primarily due to the transition asset being fully amortized at the end of 2000.
In addition, these net pension credits totaled $266 million in 2000, $228
million in 1999 and $186 million in 1998. Net pension credits in 1999 included
$35 million for a one-time favorable pension settlement primarily related to
the voluntary early retirement program for salaried employees. Currently, the
net pension credit for 2001 is expected to be approximately $145 million,
excluding any potential impacts from the Separation. Future net pension credits
will no longer benefit from the transition asset, which was fully amortized in
2000, and can vary depending upon the market performance of plan assets,
changes in actuarial assumptions regarding such factors as a selection of a
discount rate and rate of return on assets, changes in the amortization levels
of prior period service costs, plan amendments affecting benefit payout levels,
business combinations and profile changes in the beneficiary populations being
valued. To the extent net pension credits decline in the future, income from
operations would be adversely affected.
Administrative expenses are corporate general and administrative costs
allocated to United States Steel by USX based upon utilization or other methods
management believes to be reasonable and which consider certain measures of
business activities, such as employment, investments and revenues. The costs
allocated to United States Steel were $15 million and $11 million for the six
78
months ended June 30, 2001 and 2000, respectively, and $25 million in 2000,
$17 million in 1999 and $24 million in 1998, which primarily consist of
employment costs including pension effects, professional services, facilities
and other related costs associated with corporate activities. The increase
from 1999 to 2000 primarily resulted from the nonrecurrence of favorable 1999
franchise tax settlements and employee compensation costs. The decrease from
1998 to 1999 was largely the result of lower franchise taxes, primarily due to
settlements of prior years' taxes.
Costs related to former business activities increased $8 million in 2000
from 1999 primarily due to higher litigation expenses. Costs related to former
business activities decreased $17 million in 1999 from 1998 primarily due to
lower litigation expenses and lower payments to a multiemployer health care
benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992.
Costs related to the Separation include professional fees and expenses and
certain other costs.
Asset impairments--Coal were for asset impairments at U. S. Steel Mining's
coal mines in Alabama and West Virginia in 2000 following a reassessment of
long-term prospects after adverse geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs related to
the formation of Republic totaled $47 million.
Income from operations in 1999 also included a loss on investment in RTI
stock used to satisfy indexed debt obligations of $22 million from the
termination of ownership in RTI International Metals, Inc.
Net interest and other financial costs for the first six months of 2001 and
2000 and the years 2000, 1999 and 1998 are set forth in the following table:
Six Months
Ended
June 30,
------------
2001 2000 2000 1999 1998
----- ----- ---- ---- ----
(Dollars in millions)
Net interest and other financial costs (income).. $ 36 $ 48 $105 $74 $42
Less:
Favorable adjustment to carrying value of
indexed debt(/1/)............................. -- -- -- (13) (44)
Favorable adjustment to interest related to
prior years' taxes(/2/)....................... (67) -- -- -- --
----- ---- ---- --- ---
Net interest and other financial costs adjusted
to exclude above items.......................... $ 103 $ 48 $105 $87 $86
===== ==== ==== === ===
--------------------
(1) In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes Due
February 1, 2000 ("Indexed Debt") indexed to the price of RTI common
stock. The carrying value of Indexed Debt was adjusted quarterly to
settlement value, based on changes in the value of RTI common stock. Any
resulting adjustment was credited to income and included in interest and
other financial costs.
(2) Reversal of interest accrued on prior year contested tax liabilities
resolved in the first quarter of 2001.
Adjusted net interest and other financial costs increased by $55 million in
the first six months of 2001 as compared with the same period in 2000. This
increase was largely due to a higher average debt level, which primarily
resulted from the elective funding for employee benefits and the acquisition
of USSK, both of which occurred in the fourth quarter of 2000.
79
Adjusted net interest and other financial costs increased $18 million in
2000 as compared with 1999, primarily due to higher average debt levels.
Adjusted net interest and other financial costs were $87 million in 1999 as
compared with $86 million in 1998.
The credit for income taxes in the first six months of 2001 was $143
million. The credit contained a $33 million tax benefit associated with the
Transtar reorganization and an unfavorable adjustment of $15 million related to
the settlement of prior years' taxes. In addition, as a result of tax credit
provisions of laws of the Slovak Republic and certain tax planning strategies,
virtually no income tax provision is recorded for income related to USSK.
The provision for income taxes in 2000 decreased compared to 1999 primarily
due to a decline in income from operations, partially offset by higher state
income taxes as certain previously recorded state tax benefits will not be
utilized. The provision for income taxes in 1999 decreased compared to 1998 due
to a decline in income from operations.
The extraordinary loss on extinguishment of debt of $7 million, net of
income tax benefit, in 1999 included a $5 million loss resulting from the
satisfaction of the indexed debt and a $2 million loss for United States
Steel's share of Republic's extraordinary loss related to the early
extinguishment of debt.
Net loss in the first six months of 2001 was $21 million, compared with net
income of $99 million in the first six months of 2000, a decrease of $120
million. United States Steel recorded a 2000 net loss of $21 million, compared
with net income of $44 million in 1999 and $364 million in 1998. Net income
decreased $65 million in 2000 from 1999 and decreased $320 million in 1999 from
1998. These decreases in net income primarily reflect the factors discussed
above.
Operating Statistics
First six months 2001 United States Steel shipments were 6.9 million net
tons. Domestic Steel shipments of 5.0 million tons and raw steel production of
5.2 million tons decreased 14% and 15%, respectively, from the same period in
2000. Domestic raw steel capability utilization in the first six months of 2001
averaged 83%, compared to 97% in the same period in 2000. At USSK, first six
month 2001 shipments were 1.8 million net tons, raw steel production was 2.1
million net tons and raw steel capability utilization was 93% based on annual
raw steel production capability which had been 4.5 million net tons.
Total steel shipments were 11.1 million tons in 2000, 10.6 million tons in
1999, and 10.7 million tons in 1998. Domestic Steel shipments comprised
approximately 9.8% of the domestic steel market in 2000. Domestic Steel
shipments were negatively affected by high import levels in 2000, 1999 and 1998
and by weak tubular markets in 1999 and 1998. Exports accounted for
approximately 5% of Domestic Steel shipments in 2000, 3% in 1999 and 4% in
1998.
Domestic raw steel production was 11.4 million tons in 2000, compared with
12.0 million tons in 1999 and 11.2 million tons in 1998. Domestic raw steel
production averaged 89% of capability in 2000, compared with 94% of capability
in 1999 and 88% of capability in 1998. In 2000, domestic raw steel production
was negatively impacted by a planned reline at Gary Works No. 4 blast furnace
in July 2000. Because of market conditions, United States Steel limited its
domestic production by keeping the Gary Works No. 4 blast furnace out of
service until February 2001. In 1998, domestic raw steel production was
negatively affected by a planned reline at Gary Works No. 6 blast furnace, an
unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the
idling of certain facilities as a result of the increase in imports. Because of
market conditions, United States Steel curtailed its domestic production by
keeping the Gary Works No. 6 blast furnace out of service until
80
February 1999, after a scheduled reline was completed in mid-August 1998. In
addition, domestic raw steel production was cut back at Mon Valley Works and
Fairfield Works during 1998.
Financial Condition and Cash Flows
Current assets at June 30, 2001 decreased $41 million from year-end 2000
primarily due to decreases in inventories, deferred income tax benefits and
income taxes receivable, partially offset by increases in cash and cash
equivalents and accounts receivable. Current assets at year-end 2000 increased
$736 million from year-end 1999 primarily due to an increase in cash and cash
equivalents, a larger income tax receivable from Marathon, and increased trade
receivables and inventories resulting from the acquisition of USSK.
Net property, plant and equipment at June 30, 2001 increased $359 million
from year-end 2000 primarily due to the consolidation of Transtar and the
acquisition of East Chicago Tin. Net property, plant and equipment at year-end
2000 increased $223 million from year-end 1999 primarily due to the acquisition
of USSK.
Current liabilities at June 30, 2001 increased $269 million from year-end
2000 primarily due to increases in notes payable, debt due within one year and
accrued taxes. Current liabilities in 2000 increased $107 million from 1999
primarily due to increased notes payable and increased debt due within one
year, partially offset by a decrease in payroll and benefits payable.
Total long-term debt and notes payable was $2,432 million at June 30, 2001,
$13 million lower than year-end 2000. Total long-term debt and notes payable at
December 31, 2000 of $2,445 million was $1,530 million higher than year-end
1999. USX debt attributed to United States Steel increased partially due to a
$500 million elective contribution to a Voluntary Employee Benefit Association
("VEBA"), a trust established by contract in 1994 covering United Steelworkers
of America retirees' health care and life insurance benefits, and the
acquisition of USSK. Excluding the impact of these items, the increase in debt
was primarily due to lower cash flow provided from operating activities
partially offset by reduced capital expenditures. Most of the debt is a direct
obligation of, or is guaranteed by, USX.
Employee benefits at June 30, 2001 increased $149 million from year-end 2000
primarily due to additional liabilities resulting from the Transtar
consolidation and the acquisition of the tin mill products business of LTV
Corporation. Employee benefits at December 31, 2000 decreased $478 million from
December 31, 1999 primarily due to the $500 million elective contribution to a
VEBA.
Net cash provided from operating activities increased $126 million in the
first six months of 2001, compared with the first six months of 2000. The
increase was due primarily to favorable working capital changes, which included
a favorable income tax settlement of $379 million with Marathon in the first
six months of 2001 compared to a favorable settlement of $97 million in the
first six months of 2000, partially offset by decreased net income (excluding
noncash items).
Net cash used in operating activities in 2000 was $627 million and reflected
the $500 million elective contribution to a VEBA and a $30 million elective
contribution to a non-union retiree life insurance trust, partially offset by
an income tax settlement with Marathon in accordance with the group tax
allocation policy. The $500 million VEBA contribution has provided United
States Steel with the flexibility to fund the ongoing costs of providing USWA
retiree health care and life insurance benefits from the VEBA instead of from
corporate cash flow for at least the next several years. It is estimated that
approximately $110 million of such obligations will be paid from the VEBA
instead of from corporate cash in 2001. Net cash used in operating activities
was $80 million in 1999 including a net payment of $320 million upon the
expiration of the accounts receivable program. Excluding
81
these non-recurring items in both years, net cash provided from operating
activities decreased $434 million in 2000 due mainly to decreased profitability
and an increase in working capital.
Net cash provided from operating activities was $380 million in 1998 and
included proceeds of $38 million for the insurance litigation settlement
pertaining to the 1995 Gary Works No. 8 blast furnace explosion and the payment
of $30 million for the repurchase of sold accounts receivable, partially offset
by an income tax settlement with Marathon in accordance with the group tax
allocation policy. Excluding these non-recurring items in both years, net cash
provided from operating activities decreased $110 million in 1999 due mainly to
decreased profitability.
Capital expenditures in the first six months of 2001 were $141 million,
compared with $97 million in the same period in 2000. The increase of $44
million is primarily due to exercising a buyout option of a lease for the
balance of the Gary Works No. 2 Slab Caster.
Capital expenditures of $244 million in 2000 included exercising an early
buyout option of a lease for approximately 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 Gary's hot strip mill; a blast
furnace stove replacement at Gary Works; and the continuation of an upgrade to
the Mon Valley cold reduction mill.
Capital expenditures of $287 million in 1999 included the completion of the
new 64" pickle line at Mon Valley Works; the replacement of one coiler at the
Gary hot strip mill; an upgrade to the Mon Valley cold reduction mill;
replacement of coke battery thruwalls at Gary Works; several projects at Gary
Works allowing for production of specialized high strength steels, primarily
for the automotive market; and completion of the conversion of the Fairfield
pipemill to use rounds instead of square blooms.
Capital expenditures of $310 million in 1998 included a reline of the Gary
Works No. 6 blast furnace; an upgrade to the galvanizing line at Fairless
Works; replacement of coke battery thruwalls at Gary Works; conversion of the
Fairfield pipemill to use round instead of square blooms; and additional
environmental expenditures primarily at Fairfield Works and Gary Works.
Contract commitments for capital expenditures at June 30, 2001 totaled $109
million compared with $206 million at year-end 2000 and $83 million at year-end
1999. In addition, 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 and ending on December 31, 2010.
Capital expenditures for 2001, which include expenditures related to the
recently acquired facilities of USSK, Transtar and East Chicago Tin, are
expected to be approximately $325 million, a reduction of over $100 million
from the amount originally expected, primarily due to the substitution of
leases for purchases and the delay or deferral of certain capital projects.
Major expenditures include exercising an early buyout option of a lease for the
balance of the Gary Works No. 2 Slab Caster; work on the No. 3 blast furnace at
Mon Valley Works; work on the No. 2 stove at the No. 6 blast furnace at Gary
Works; the completion of the replacement of coke battery thruwalls at Gary
Works; the completion of an upgrade to the Mon Valley cold reduction mill;
systems development projects; and projects at USSK, including the completion of
the tin mill upgrade.
The preceding statement concerning expected 2001 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, whether or not assets are
purchased or financed by operating leases, unforeseen hazards such as weather
conditions, explosions or fires, which could delay the timing of completion of
particular capital
82
projects. Accordingly, actual expenditures may differ materially from current
expectations in the forward-looking statement.
Investments in investees in 2000 of $35 million largely reflected an
investment in stock of VSZ in which United States Steel now holds a 25 percent
interest. Investments in investees in 1999 of $15 million was an investment in
Republic. Investments in investees in 1998 of $73 million mainly reflects
funding for entry into a joint venture in the Slovak Republic with VSZ.
The acquisition of U. S. Steel Kosice, s.r.o. totaled $10 million in 2000,
which reflected a $69 million purchase price net of cash acquired in the
transaction of $59 million. The first quarter 2001 acquisition of East Chicago
Tin and consolidation of Transtar were noncash transactions.
Net cash changes related to financial obligations decreased by $32 million
in the first six months of 2001, reflecting favorable cash from operations,
partially offset by capital expenditures and dividend payments. Financial
obligations consist of United States Steel's portion of USX debt and preferred
stock of a subsidiary attributed to both groups, as well as debt and financing
agreements specifically attributed to United States Steel.
Net cash changes related to financial obligations increased by $1,202
million, $486 million and $9 million in 2000, 1999 and 1998, respectively. The
increase in 2000 primarily reflected the net effects of cash used in operating
activities, including a VEBA contribution, cash used in investing activities,
dividend payments and preferred stock repurchases. The increase in 1999
primarily reflected the net effects of cash used in operating and investing
activities and dividend payments.
Dividends paid decreased $13 million in the first six months of 2001 from
the same period in 2000, due to a decrease in the dividend rate paid to U. S.
Steel Group common stockholders.
Liquidity
Prior to Separation
As a matter of policy, USX has managed most financial activities on a
centralized, consolidated basis, and will continue to do so until the
Separation. Such financial activities include the investment of surplus cash;
the issuance, repayment and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock; and the issuance and
repurchase of common stock. 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
are attributed to United States Steel based upon its cash flows for the periods
presented and its initial capital structure. However, a portion of most
financing transactions are attributed to and reflected in the combined
financial statements of United States Steel. Transactions such as leases,
certain collateralized financings, financial activities of consolidated
entities that are less than wholly owned by USX and transactions related to
securities convertible solely into USX-U.S. Steel Group Common Stock are or
will be specifically attributed to and reflected in their entirety in the
combined financial statements of United States Steel.
The cash requirements for United States Steel have been funded as part of
USX's program of managing financial activities on a centralized consolidated
basis. In December 2000, USX entered into a $1,354 million five-year revolving
credit agreement, terminating in November 2005, and a $451 million 364-day
facility, which together replaced the prior $2,350 million facility. At June
30, 2001, USX had no borrowings against its $1,354 million long-term revolving
credit agreement, no borrowings against its $451 million 364-day facility and
no commercial paper borrowings. There were no borrowings against USX's short-
term lines of credit totaling $115 million at June 30, 2001. At June 30, 2001,
there were no borrowings against the USSK $50 million revolving credit
agreement.
83
On July 31, 2001, the USX board of directors approved a plan of
reorganization of the corporation in order to separate the energy and steel
businesses. Until the plan of reorganization is implemented or abandoned, USX
management believes that it will be more difficult to access traditional debt
and equity markets.
Capital expenditures in the first half of 2001 were $141 million and are
expected to be approximately $325 million for the full year, including
expenditures related to the recently acquired facilities of USSK, Transtar, and
East Chicago Tin. Contract commitments for capital expenditures at June 30,
2001 totaled $109 million. Based upon preliminary assumptions, capital
expenditures are expected to be at least $260 million for the full year in
2002.
After Separation
Following the Separation, United States Steel will be an independent company
and will no longer have access to the financial resources of USX Corporation.
It is a condition to the Separation that United States Steel have in place, at
the time of the Separation, cash and undrawn credit facilities of at least $400
million.
Assuming the Separation had occurred on June 30, 2001, United States Steel
Corporation and its subsidiaries would have had total outstanding debt of
$1,793 million, including:
.a USSK loan facility of $325 million;
.assumed USX debt and capital leases of $569 million; and
.new financing arrangements of $899 million.
The $899 million of new financing arrangements include the $365 million of
SQUIDS offered hereby which will be used to replace obligations of USX
attributed to United States Steel. Additional new financing arrangements to pay
Marathon Oil Corporation $505 million and fund Separation costs in the amount
of $29 million include the July 27 and September 11, 2001 sale of $535 million
of Senior Notes, at a discount of $5 million, and other financing arrangements
of $4 million. In the event that less than $365 million of SQUIDS are issued in
the exchange offers, the amount of the required payment to Marathon Oil
Corporation, and, consequently, the additional new financing arrangements
required, will be increased by the difference between $365 million and the
amount of the SQUIDS actually issued. United States Steel will obtain any
additional new financing required through one or a combination of additional
notes (including additional SQUIDS), lease financings, new preferred or other
security offerings and new credit facilities, including a secured accounts
receivable facility. Some or all of the additional financing requirements may
be funded through the preliminary tax settlement from Marathon, which is
expected to be at least $300 million and will be received prior to the
Separation. In addition, it is a condition to the Separation that United States
Steel have in place, at the time of the Separation, cash and undrawn credit of
at least $400 million. The amount of additional financing required at
Separation may vary as a result of a number of factors, including the amount of
SQUIDS actually issued in the exchange offers, the operating performance of
United States Steel, its working capital position and the amount of the tax
settlement with Marathon.
Based on United States Steel's pro forma debt levels as of June 30, 2001,
United States Steel anticipates that its scheduled interest payments for the
twelve months immediately following the Separation will be approximately $148
million, assuming an annual weighted average interest rate of 8.50%.
United States Steel management believes that its liquidity will be adequate
to satisfy its obligations after the Separation for the foreseeable future,
including its obligations under the Financial Matters Agreement with Marathon
Oil Corporation and any other financing transactions
84
related to the Separation, and to complete currently authorized capital
spending programs. Future requirements for United States Steel's business
needs, including the funding of capital expenditures, debt service for the
financing to be incurred in relation to the Separation, and any amounts that
may ultimately be paid in connection with contingencies, are expected to be
financed by a combination of internally generated funds, proceeds from the sale
of stock, borrowings and other external financing sources. However, United
States Steel Corporation will no longer be party to the USX consolidated tax
return and, therefore, will no longer be eligible for cash settlements under
USX's Tax Allocation Policy. We cannot assure you 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, including the SQUIDS and the various other financing facilities
we expect to enter into in connection with the Separation (for which the
maturities and amortization schedules for payments of principal have yet to be
determined), or to fund our other liquidity needs. In the event that there is a
prolonged delay in the recovery of the manufacturing sector of the U.S.
economy, United States Steel believes that it can maintain adequate liquidity
through a combination of deferral of nonessential capital spending, sales of
non-strategic assets and further cash conservation measures.
USX has elected to file a consolidated United States federal income tax
return. Accordingly, the provision for federal income taxes and the related
payments or refunds of tax are determined on a consolidated basis. The
consolidated provision and the related tax payments or refunds have been
reflected in the United States Steel financial statements in accordance with
USX's Tax Allocation Policy.
For tax provision and settlement purposes, consolidated tax benefits or
detriments resulting from attributes generated by United States Steel,
principally net operating losses and minimum tax credits, which could not be
utilized on a separate return basis for United States Steel, but which were
utilized on the USX consolidated tax return were allocated to United States
Steel. As a result, a tax receivable or payable was recorded reflecting the
benefits or detriments accruing to United States Steel for the use of these
attributes by USX. The tax receivable from USX established at December 31, 2000
was settled in the first quarter 2001 by a $364 million reduction to
outstanding debt balances of United States Steel. Year to date settlements were
$379 million in the first six months of 2001, $91 million in 2000, $(2) million
in 1999, and $21 million in 1998. For pre-Separation tax years which have not
been settled with the IRS, the Tax Sharing Agreement replaces the USX Tax
Allocation Policy and generally provides for resettlement of these tax years on
a basis similar to the USX Tax Allocation Policy. A preliminary settlement for
the calendar year 2001 federal income taxes, which would be made in March 2002
under USX's current Tax Allocation Policy, will be made immediately prior to
the Separation at a discounted amount to reflect the time value of money. Under
the preliminary settlement for calendar year 2001, it is expected that United
States Steel will receive at least $300 million from Marathon immediately prior
to the Separation arising from USX's current Tax Allocation Policy.
Following the Separation, United States Steel will no longer be a member of
the USX consolidated group for tax purposes and, therefore, generally will no
longer be eligible for settlements under the Tax Sharing Agreement for post-
Separation tax years.
United States Steel management's opinion concerning liquidity and United
States 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
United States Steel (as measured by various factors including cash provided
from operating activities), the state of worldwide debt and equity markets,
investor perceptions and expectations of past and future performance, the
overall U.S.
85
financial climate, and, in particular, with respect to borrowings, by levels of
United States Steel's outstanding debt and credit ratings by rating agencies.
Environmental Matters, Litigation and Contingencies
United States 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 United States Steel's products and services, operating results will
be adversely affected. United States Steel believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs
in their operations, the competitive position of United States Steel could be
adversely affected.
In addition, United States Steel expects to incur capital expenditures for
its USSK operation to meet environmental standards under the Slovak Republic's
environmental laws.
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.
United States Steel is in the study phase of RCRA corrective action programs
at its Fairless Works and its former Geneva Works. A RCRA corrective action
program has been initiated at its Gary Works and at its Fairfield Works. Until
the studies are completed at these facilities, United States Steel is unable to
estimate the total cost of remediation activities that will be required.
United States Steel has been notified that it is a potential responsible
party ("PRP") at 22 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as of June 30, 2001. In addition,
there are 16 sites where United States Steel has received information requests
or other indications that United States Steel may be a PRP under CERCLA but
where sufficient information is not presently available to confirm the
existence of liability or to make any judgment as to the amount thereof. There
are also 29 additional sites related to United States 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, United States Steel is one of a number of
parties involved and the total cost of remediation, as well as United States
Steel's share thereof, is frequently dependent upon the outcome of
investigations and remedial studies. United States 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 resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
In October 1996, United States 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 the 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
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Assessment. United States Steel was identified as a PRP along with 15 other
companies owning property along the river and harbor canal. United States Steel
and eight other PRPs have formed a joint defense group. 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 U.S. Environmental Protection Agency
("EPA") to be included in a consent decree that United States Steel expects
will resolve this claim. A reserve has been established for United States
Steel's share of this anticipated settlement.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between United
States 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, which operated as a joint venture between USX and Kobe
until December 31, 1999 when USX purchased all of Kobe's interest in Lorain
Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA.
Most of the matters raised by the EPA relate to Republic's facilities, however,
air discharge from Lorain Tubular's #3 seamless pipe mill has also been cited.
Lorain Tubular will be responsible for matters relating to its facilities. The
final report and citations from the EPA have not been issued.
In 1998, United States 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, United States 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, United States 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, United States Steel will pay the public trustees $1 million
at the end of the remediation project for future monitoring costs and United
States 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. The sediment
remediation project is an approved final interim measure under the corrective
action program for Gary Works and is expected to cost approximately $36.4
million over the next five years. Estimated remediation and monitoring costs
for this project have been accrued.
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, United States Steel signed a consent decree to
conduct a feasibility study at the site relating to the alternative remedy. In
1999, a new Record of Decision was approved by the EPA and the U.S. Department
of Justice. On January 19, 2001, United States Steel signed a consent decree
with the EPA to remediate this site. On April 6, 2001, United States Steel paid
$0.4 million for costs associated with this site. The only remaining
outstanding claim is the natural resource damages claim filed by the
Commonwealth of Pennsylvania.
In 1987, the California Department of Health Services ("DHS") issued a
remedial action order for the GBF/Pittsburg landfill near Pittsburg,
California. DHS alleged that from 1972 through 1974, Pittsburg Works arranged
for the disposal of approximately 2.6 million gallons of waste oil, sludge,
caustic mud and acid, which were eventually taken to this landfill for
disposal. In 2000, the parties
87
reached a buyout arrangement with a third party remediation firm, whereby the
firm agreed to take title to and remediate the site and also indemnify the
PRPs. This commitment was backed by pollution insurance. United States Steel's
share to participate in the buyout was approximately $1.1 million. Payment of
the USX buyout amount was made December 2000. Title to the site was transferred
to the remediation firm on January 31, 2001.
In November 2000, a NOV was issued by the Jefferson County Health Department
("JCHD") alleging violation of the Halogenated Solvent National Emission
Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound
("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U.S.
Steel Group proposed a civil penalty of $100,000 and a VOC emission limit,
which have been agreed to by JCHD. A consent order was executed and approved by
the court in May 2001. The penalty was paid by United States Steel in June
2001.
New or expanded environmental requirements, which could increase United
States Steel's environmental costs, may arise in the future. United States
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, United States Steel does not anticipate
that environmental compliance expenditures (including operating and maintenance
and remediation) will materially increase in 2001. United States Steel's
capital expenditures for environmental are expected to be approximately $20
million in 2001 and are expected to be spent on projects primarily at Gary
Works and USSK. Predictions beyond 2001 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, United States Steel
anticipates that environmental capital expenditures will be approximately $51
million in 2002; 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.
United States Steel has been and is a defendant in a large number of cases
in which plaintiffs allege injury resulting from exposure of asbestos. Many of
these cases involve multiple plaintiffs and most have 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 or
Intercoastal Fleets, former operations of United States Steel; (2) claims made
by persons who did work at United States Steel facilities; and (3) claims made
by industrial workers allegedly exposed to an electrical cable product formerly
manufactured by United States Steel. To date all actions resolved have been
either dismissed or settled for immaterial amounts. It is not possible to
predict with certainty the outcome of these matters; however, based upon
present knowledge, United States Steel believes that it is unlikely that the
resolution of the remaining actions will have a material adverse effect on its
financial condition. 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.
United States 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 United States Steel Combined Financial Statements.
However, management believes that United States Steel will remain a viable and
competitive enterprise even though it is possible that these contingencies
could be resolved unfavorably to United States Steel.
88
Imports and Trade Issues
Steel imports to the United States accounted for an estimated 23%, 27%, 26%
and 30% of the domestic steel market demand in the first six months of 2001,
and for the years 2000, 1999 and 1998, respectively.
On November 13, 2000, United States Steel joined with eight other producers
and the Independent Steelworkers Union to file trade cases against hot-rolled
carbon steel flat products from 11 countries (Argentina, India, Indonesia,
Kazakhstan, the Netherlands, the People's Republic of China, Romania, South
Africa, Taiwan, Thailand and Ukraine). Three days later, the USWA also entered
the cases as a petitioner. Antidumping ("AD") cases were filed against all the
countries and countervailing duty ("CVD") cases were filed against Argentina,
India, Indonesia, South Africa, and Thailand. The U.S. Department of Commerce
("Commerce") has found margins in all of the cases. The International Trade
Commission ("ITC") has found material injury to the domestic industry in the
cases against Argentina and South Africa, and its determinations with respect
to the other countries are expected in early November.
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity
throughout the world, (2) negotiations with foreign governments to establish
rules that will govern steel trade in the future and eliminate subsidies, and
(3) an investigation by the ITC under section 201 of the Trade Act of 1974 to
determine whether steel is being imported into the United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry.
On June 22, 2001, the Bush Administration requested that the ITC initiate
investigations under section 201 of the Trade Act of 1974. Products included in
the request are in the following categories, subject to exclusion of certain
products:
(1) Carbon and alloy flat products;
(2) Carbon and alloy long products;
(3) Carbon and alloy pipe and tube; and
(4) Stainless steel and alloy tool steel products.
United States Steel believes that the remedies provided by AD and CVD are
insufficient to correct the widespread dumping and subsidy abuses that
currently characterize steel imports into our country and has, therefore, urged
the government to take actions such as those described above. United States
Steel, nevertheless, intends to file additional AD and CVD petitions against
unfairly traded imports that adversely impact, or threaten to adversely impact,
the results of United States Steel and is urging the U.S. government to take
additional steps.
On June 29, 2001, various domestic producers of coke and the United
Steelworkers of America filed antidumping cases against blast furnace coke from
China and Japan. United States Steel was not a petitioner in these cases, but
is a producer of coke and also an importer of coke from both China and Japan.
The investigations of both Commerce and the ITC in these cases have been
discontinued due to a finding by the ITC on August 10, 2001 that there is not a
reasonable indication that the domestic industry is materially injured or
threatened with material injury by reason of the imports.
On September 28, 2001, United States Steel joined with seven other producers
to file trade cases against cold-rolled carbon steel flat products from 20
countries (Argentina, Australia, Belgium, Brazil, China, France, Germany,
India, Japan, Korea, the Netherlands, New Zealand, Russia, South
89
Africa, Spain, Sweden, Taiwan, Thailand, Turkey, and Venezuela). AD cases were
filed against all the countries and CVD cases were filed against Argentina,
Brazil, France and Korea.
Quantitative And Qualitative Disclosures About Market Risk
Commodity Price Risk and Related Risks
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments as of June 30, 2001 is provided in the following
table(/1/):
Incremental Decrease
in Income Before
Income Taxes
Assuming a
Hypothetical Price
Change of:
--------------------
10% 25%
--------- ----------
(Dollars in
millions)
Commodity-Based Derivative Instruments
Natural Gas.............................................. $0.9(/2/) $ 2.2(/2/)
Zinc..................................................... 1.8(/2/) 4.6(/2/)
Tin...................................................... 0.1(/2/) 0.3(/2/)
---------------------
(1) 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 pretax income of a
hypothetical 10% and 25% changes in closing commodity prices at June 30,
2001. Management evaluates the portfolios of commodity-based derivative
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to June 30, 2001,
may cause future pretax income effects to differ from those presented in
the table.
(2) Price decrease.
90
Interest Rate Risk
USX 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 2000
and 1999 interest rates on the fair value of United States Steel's specifically
attributed non-derivative financial instruments and the United States Steel's
portion of USX's non-derivative financial instruments is provided in the
following table:
As of December 31,
As of June 30, ---------------------------------------------
2001 2000 1999
------------------ ---------------------- ----------------------
Incremental Incremental Incremental
Increase in Increase in Increase in
Fair Fair Fair Fair Fair Fair
Value Value(/2/) Value(/3/) Value(/2/) Value(/3/) Value(/2/)
------ ----------- ---------- ----------- ---------- -----------
(Dollars in millions)
Non-Derivative Financial
Instruments(/1/)
Financial assets:
Investments and long-
term
receivables(/4/)...... $ 86 -- $ 137 -- $ 122 --
Financial liabilities:
Long-term
debt(/5/)(/6/)........ $2,415 $75 $2,375 $80 $ 835 $20
Preferred stock of
subsidiary............ 66 5 63 5 63 5
USX obligated
mandatorily redeemable
convertible preferred
securities of a
subsidiary trust...... 182 13 119 10 169 15
------ --- ------ --- ------ ---
Total liabilities..... $2,663 $93 $2,557 $95 $1,067 $40
====== === ====== === ====== ===
---------------------
(1) 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.
(2) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2001,
December 31, 2000 and December 31, 1999, on the fair value of USX's non-
derivative financial instruments. For financial liabilities, this assumes a
10% decrease in the weighted average yield to maturity of USX's long-term
debt at June 30, 2001, December 31, 2000 and December 31, 1999.
(3) See Note 23 to the United States Steel Combined Financial Statements for
the year ended December 31, 2000 for carrying value of instruments.
(4) For additional information, see Note 16 to the United States Steel Combined
Financial Statements for the year ended December 31, 2000.
(5) Includes amounts due within one year.
(6) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities. For additional
information, see Note 11 to the United States Steel Combined Financial
Statements for the year ended December 31, 2000.
At June 30, 2001, USX'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 $75 million increase in the fair value of long-term debt
assuming a hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases in the fair
value of its debt portfolio would unfavorably affect USX's results and cash
flows only to the extent that USX elected to repurchase or otherwise retire all
or a portion of its fixed-rate debt portfolio at prices above carrying value.
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Foreign Currency Exchange Rate Risk
United States Steel is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies other
than U.S. dollars. United States Steel has not generally used derivative
instruments to manage this risk. However, United States Steel has made limited
use of forward currency contracts to manage exposure to certain currency price
fluctuations. At June 30, 2001, United States Steel had open euro forward sale
contracts for Slovak crowns with a total carrying value of approximately $20
million. A 10% increase in the June 30, 2001 euro forward rates would result in
a $2 million charge to income.
Equity Price Risk
United States Steel is subject to equity price risk and liquidity risk
related to its investment in VSZ. These risks are not readily quantifiable.
Safe Harbor
United States Steel's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about risks associated with United States Steel's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to United States Steel's hedging programs may differ
materially from those discussed in the forward-looking statements.
92
BUSINESS OF UNITED STATES STEEL
The following information relates to the business of United States Steel.
Information relating to the business of Marathon is incorporated by reference
in the registration statement of which this prospectus forms a part. See "Where
You Can Find More Information" on page (ii).
United States Steel, through its Domestic Steel segment, is engaged in the
production, sale and transportation of steel mill products, coke, taconite
pellets and coal; the management of mineral resources; real estate development;
and engineering and consulting services and, through its U. S. Steel Kosice
segment, primarily located in the Slovak Republic, in the production and sale
of steel mill products and coke for the central European market. Certain
business activities are conducted through joint ventures and partially owned
companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company
("PRO-TEC"), Clairton 1314B Partnership, Republic Technologies International,
LLC ("Republic") and Rannila Kosice, s.r.o.
A three-year summary of financial highlights for United States Steel is
provided below.
Assets
Revenues and Income from Net at Capital
Other Income(a) Operations(b) Income (Loss) Year-End Expenditures
--------------- ------------- ------------- -------- ------------
(Millions)
United States Steel
2000.................. $6,132 $104 $(21) $8,711 $244
1999.................. 5,470 150 44 7,525 287
1998.................. 6,477 579 364 6,749 310
The following table sets forth the total revenues and other income of United
States Steel for each of the last three years.
Revenues and Other Income
2000 1999 1998
------ ------ ------
(Millions)
Revenues by product:
Sheet and semi-finished steel products................ $3,288 $3,433 $3,598
Tubular, plate, and tin mill products................. 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)............... 626 549 744
Other(a).............................................. 445 414 490
Income (loss) from affiliates........................... (8) (89) 46
Gain on disposal of assets.............................. 46 21 54
Other income (loss)..................................... 4 2 (1)
------ ------ ------
Total revenues and other income......................... $6,132 $5,470 $6,477
====== ====== ======
---------------------
(a) Includes revenue from the sale of steel production by-products, real estate
development, resource management, and engineering and consulting services.
Steel Industry Background and Competition
The steel industry is cyclical and highly competitive and is affected by
excess world capacity, which has restricted price increases during periods of
economic growth and led to price decreases during economic contraction. In
addition, the domestic and international steel industries face competition from
producers of materials such as aluminum, cement, composites, glass, plastics
and wood in many markets.
93
United States Steel is the largest integrated steel producer in North
America and, through its subsidiary USSK, the largest integrated flat-rolled
producer in Central Europe. United States Steel competes with many domestic and
foreign steel producers. Competitors include integrated producers which, like
United States 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 such as lower capital expenditures for
construction of facilities 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. Depending on market
conditions, the additional production generated by flat-rolled mini-mills could
have an adverse effect on United States Steel's selling prices and shipment
levels.
Steel imports to the United States accounted for an estimated 23%, 27%, 26%
and 30% of the domestic steel market demand for the first six months of 2001,
and for the years 2000, 1999 and 1998, respectively. Steel imports of pipe
increased 37% and of hot-rolled steel increased 19% in 2000, compared to 1999.
Foreign competitors typically have lower labor costs and are often owned,
controlled or subsidized by their governments, allowing their production and
pricing decisions to be influenced by political and economic policy
considerations as well as prevailing market conditions. High levels of imported
steel are expected to continue to have an adverse effect on future market
prices and demand levels for domestic steel.
On November 13, 2000, United States Steel joined with eight other producers
and the Independent Steelworkers Union to file trade cases against hot-rolled
carbon steel flat products from 11 countries (Argentina, India, Indonesia,
Kazakhstan, the Netherlands, the People's Republic of China, Romania, South
Africa, Taiwan, Thailand and Ukraine). Three days later the USWA also entered
the cases as a petitioner. Antidumping ("AD") cases were filed against all the
countries and countervailing duty ("CVD") cases were filed against Argentina,
India, Indonesia, South Africa and Thailand. The U.S. Department of Commerce
("Commerce") has found margins in all of the cases. The International Trade
Commission ("ITC") has found material injury to the domestic industry in the
cases against Argentina and South Africa, and its determinations with respect
to the other countries are expected in early November.
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves: (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity
throughout the world; (2) negotiations with foreign governments to establish
rules that will govern steel trade in the future and eliminate subsidies; and
(3) an investigation by the ITC under section 201 of the Trade Act of 1974 to
determine whether steel is being imported into the United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry.
On June 22, 2001, the Bush Administration requested that the ITC initiate
investigations under section 201 of the Trade Act of 1974. Products included in
the request are in the following categories, subject to exclusion of certain
products:
(1) Carbon and alloy flat products;
(2) Carbon and alloy long products;
(3) Carbon and alloy pipe and tube; and
(4) Stainless steel and alloy tool steel products.
94
On October 22, 2001, the ITC ruled that 12 of 33 domestic steel product
lines have suffered serious injury because of foreign imports. These product
lines, from steel slabs to hot- and cold-rolled steel, account for 79% of all
steel produced in the United States. The ITC is required to hold hearings about
potential remedies and submit recommendations to the Bush Administration by
December 19, 2001. Such recommendations could include imposition of import
quotas, tariffs or a combination of the two. The Bush Administration will have
until February 19, 2002 to decide what action to take.
United States Steel believes that the remedies provided by AD and CVD are
insufficient to correct the widespread dumping and subsidy abuses that
currently characterize steel imports into our country. United States Steel,
nevertheless, intends to file additional AD and CVD petitions against unfairly
traded imports that adversely impact, or threaten to adversely impact, the
results of United States Steel and is urging the U.S. government to take
additional steps.
On June 29, 2001, various domestic producers of coke and the United
Steelworkers of America filed antidumping cases against blast furnace coke from
China and Japan. United States Steel was not a petitioner in these cases, but
is a producer of coke and also an importer of coke from both China and Japan.
The investigations of both Commerce and the ITC in these cases have been
discontinued due to a finding by the ITC on August 10, 2001 that there is not a
reasonable indication that the domestic industry is materially injured or
threatened with material injury by reason of the imports.
On September 28, 2001, United States Steel joined with seven other producers
to file trade cases against cold-rolled carbon steel flat products from 20
countries (Argentina, Australia, Belgium, Brazil, China, France, Germany,
India, Japan, Korea, Netherlands, New Zealand, Russia, South Africa, Spain,
Sweden, Taiwan, Thailand, Turkey, and Venezuela). AD cases were filed against
all the countries and CVD cases were filed against Argentina, Brazil, France,
and Korea.
United States 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. United States
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 other 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 United States 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. For further
information, see "--Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
USSK does business primarily in Central Europe and is subject to market
conditions in this area which are similar to domestic factors, including excess
world supply, and also can be influenced by matters peculiar to international
marketing such as tariffs.
Business Overview
United States Steel produces raw steel at Gary Works in Indiana, Mon Valley
Works in Pennsylvania, Fairfield Works in Alabama, and, through USSK, in
Kosice, Slovak Republic.
United States Steel has responded to competition resulting from excess steel
industry capability by eliminating less efficient facilities, modernizing those
that remain and entering into joint ventures, all with the objective of
focusing production on higher value-added products, where superior quality and
special characteristics are of critical importance. These products include bake
hardenable steels
95
and coated sheets for the automobile and appliance industries, laminated 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. Several recent modernization projects support United States
Steel's objectives of providing value-added products and services to customers.
These projects include, for the automotive industry--the degasser facility at
Mon Valley Works, the second hot-dip galvanizing line at PRO-TEC, the Fairless
Works galvanizing line upgrade and the cold reduction mill upgrades at Gary
Works and Mon Valley Works; for the construction industry--the dual coating
lines at Fairfield Works and Mon Valley Works; for the tubular market--the
Fairfield Works pipemill upgrade and acquiring full ownership of Lorain Tubular
Company LLC 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 which
replaced three older and less efficient facilities located at Fairless Works
and Mon Valley Works.
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, United States Steel took a major strategic step by expanding offshore
and following many of its customers into the European market. Our objective is
to advance USSK to become a leader among European steel producers and the prime
supplier of flat-rolled steel to the growing central European market. This
globalization strategy is also being pursued through our Acero Prime joint
venture in Mexico. The location of this joint venture allows for easy servicing
and just-in-time delivery to customers throughout Mexico.
Effective March 1, 2001, United States Steel acquired from LTV Corporation
("LTV") the tin mill products business of LTV for the assumption of $66 million
of employee-related liabilities. United States Steel is leasing the land and
acquired title to the buildings, facilities and inventory at LTV's former tin
mill operation in Indiana which we are operating as East Chicago Tin. United
States Steel intends to operate these facilities as an ongoing business and
East Chicago Tin mill employees became United States Steel employees. United
States Steel and LTV also entered into 5-year agreements for LTV to supply
United States Steel with pickled hot bands and for United States Steel to
provide LTV with processing of cold-rolled steel.
On August 14, 2001, we announced our intention to permanently close the cold
rolling and tin mill operations at Fairless Works, with a combined annual
finishing capability of 1.5 million tons, on or after November 12, 2001. Under
our labor agreement, we are required to discuss the proposed shutdown with the
United Steelworkers of America before making a final decision. We also
announced that, subject to market conditions, we currently intend to continue
operating the hot dip galvanizing line at Fairless Works. The anticipated
financial impact of the shutdown will be recorded in the second half of 2001
and is estimated to be a pretax charge of $35 million to $40 million. The near-
term cash impact will be minimal since about half of the charge is for
depreciation or impairment of fixed assets and the balance is primarily for
employee benefits that will be paid from trust funds which will be funded over
a period of years if required.
In addition to the modernization of its production facilities, United States
Steel has 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, bar and plate consuming industries.
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The following table lists products and services by facility or business
unit:
Domestic Steel
Gary.................... Sheets; Tin Mill; Plates; Coke
Fairfield............... Sheets; Tubular
Mon Valley/Fairless..... Sheets
USS-POSCO(/1/).......... Sheets; Tin Mill
East Chicago Tin........ Tin Mill
Lorain Tubular Company
LLC.................... Tubular
Republic Technologies
International,
LLC(/1/)............... Bar
PRO-TEC(/1/)............ Galvanized Sheet
Clairton................ Coke
Clairton 1314B
Partnership(/1/)....... Coke
Transtar................ Transportation
Minntac................. Taconite Pellets
U. S. Steel Mining...... Coal
Resource Management..... Administration of Mineral, Coal and
Timber Properties
Realty Development...... Real estate sales, leasing and management
Engineers and
Consultants............ Engineering and Consulting Services
USSK
U. S. Steel Kosice...... Sheets; Tin Mill; Plates; Coke
Walzwerke Finow......... Precision steel tubes; specialty shaped sections
Rannila Kosice(/1/)..... Color coated profile and construction products
---------------------
(1) Equity investee
Domestic Operations
United States Steel domestic operations includes plants which produce steel
products in a variety of forms and grades. Raw steel production was 11.4
million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million
tons in 1998. Raw steel produced was nearly 100% continuous cast in 2000, 1999
and 1998. Raw steel production averaged 89% of capability in 2000, compared
with 94% of capability in 1999 and 88% of capability in 1998. United States
Steel's stated annual domestic raw steel production capability was 12.8
millions tons for 2000 (7.5 million at Gary Works, 2.9 million at Mon Valley
Works, and 2.4 million at Fairfield Works).
Steel shipments were 10.8 million tons in 2000, 10.6 million tons in 1999
and 10.7 million tons in 1998. United States Steel shipments comprised
approximately 9.8% of domestic steel shipments in 2000. Exports accounted for
approximately 5% of United States Steel shipments in 2000, 3% in 1999 and 4% in
1998.
The following tables set forth significant United States Steel domestic
operations shipment data by major markets and products for each of the last
three years. Such data does not include
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shipments by joint ventures and other affiliates of United States Steel
accounted for by the equity method.
Steel Shipments By Market and Product (United States Production Only)
Sheets & Tubular,
Semi-finished Plate & Tin
Steel Mill Products Total
------------- ------------- ------
(Thousands of Net Tons)
Major Market--2000
Steel Service Centers....................... 1,636 679 2,315
Further Conversion:
Trade Customers........................... 742 432 1,174
Joint Ventures............................ 1,771 -- 1,771
Transportation (Including Automotive)....... 1,206 260 1,466
Containers.................................. 182 520 702
Construction and Construction Products...... 778 158 936
Oil, Gas and Petrochemicals................. -- 973 973
Export...................................... 346 198 544
All Other................................... 748 127 875
----- ----- ------
Total................................... 7,409 3,347 10,756
===== ===== ======
Major Market--1999
Steel Service Centers....................... 1,867 589 2,456
Further Conversion:
Trade Customers........................... 1,257 376 1,633
Joint Ventures............................ 1,818 -- 1,818
Transportation (Including Automotive)....... 1,280 225 1,505
Containers.................................. 167 571 738
Construction and Construction Products...... 660 184 844
Oil, Gas and Petrochemicals................. -- 363 363
Export...................................... 246 75 321
All Other................................... 819 132 951
----- ----- ------
Total................................... 8,114 2,515 10,629
===== ===== ======
Major Market--1998
Steel Service Centers....................... 1,867 696 2,563
Further Conversion:
Trade Customers........................... 706 434 1,140
Joint Ventures............................ 1,473 -- 1,473
Transportation (Including Automotive)....... 1,438 347 1,785
Containers.................................. 222 572 794
Construction and Construction Products...... 809 178 987
Oil, Gas and Petrochemicals................. -- 509 509
Export...................................... 226 156 382
All Other................................... 867 186 1,053
----- ----- ------
Total................................... 7,608 3,078 10,686
===== ===== ======
Our sheet business produces hot-rolled, cold-rolled and galvanized products.
We are committed to increasing our value-added shipments of cold rolled,
galvanized and other products processed from hot-rolled band. Value-added
products comprised 78% of domestic shipments in 2000, including finishing
performed by joint ventures. Our sheet customer base includes automotive,
appliance, service center, industrial and construction customers. We have long
standing relationships with many of them, as do our USS-POSCO, PRO-TEC and
Acero Prime joint ventures.
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In the last three years United States Steel has made a number of key
investments directed toward the automotive industry, including upgrades to our
steel making facilities to increase our capacity for both high strength and
highly formable steels, upgrades to our Fairless galvanizing line to produce
automotive quality product and constructing an automotive technical center in
Michigan. In addition, a number of our joint ventures expanded their automotive
capacity, most notably PRO-TEC, which added 400,000 tons of annual hot-dipped
galvanized capacity to bring its total capacity to 1.0 million tons per year.
The tubular, tin mill products and plate businesses complement the larger
steel sheet business by producing specialized products for specific markets.
Our tubular operations are located at Fairfield, Alabama, Lorain, Ohio, and
McKeesport, Pennsylvania and produce both seamless and electric resistance weld
("ERW") tubular products. We enjoy over a 50% share of the domestic market for
seamless standard and line pipe and a 25% share of the domestic market for oil
country tubular goods ("OCTG"). With the successful conversion in 2000 of the
Fairfield piercing mill to process rounds plus the acquisition of the remaining
50% interest in Lorain Tubular, we have the capability to produce 1.6 million
tons of tubular products in the 5 million ton market for the tubular products
we produce. With the continued high demand for energy, we believe we are well
positioned to supply the oil and gas industries with OCTG.
With the recent acquisition of East Chicago Tin operations, we are one of
the two largest tin mill products producers in North America. We supply a full
line of tin plate and tin-free steel ("TFS") products, primarily used in the
container industry. We believe our reputation in the marketplace is enhanced
through our attention to quality and customer service reliability. We expect
our acquisition of East Chicago Tin will provide significant operating
synergies while giving us the opportunity to better serve our existing and
newly acquired customers. We currently supply over 25% of the domestic market,
and coupled with USSK's tin capability, we anticipate being in a prime position
to service customers who have a global presence.
Our plate business is located within the Gary Works complex and is a major
supplier to the transportation market, and to the industrial, agricultural, and
construction equipment market. Our modern plate heat-treating facilities allow
us to offer our customers specialized plates for critical applications.
United States Steel and its wholly owned entity, U. S. Steel Mining LLC,
have domestic coal properties with bituminous coal reserves of approximately
787 million net tons at year-end 2000 and at year-end 1999. 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 93% of the reserves are owned, and the rest are leased.
The leased properties are covered by leases which expire in 2005 and 2012.
During 2000, United States 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. U. S. Steel Mining's coal production
was 5.5 million tons in 2000, compared with 6.2 million tons in 1999 and 7.3
million tons in 1998.
United States Steel controls domestic iron ore properties having iron ore
reserves in grades subject to benefication processes in commercial use by
United States Steel domestic operations of approximately 710 million tons at
year-end 2000, substantially all of which are iron ore concentrate equivalents
available from low-grade iron-bearing materials. All reserves are located in
Minnesota. Approximately 31% of these reserves are owned and the remaining 69%
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.
United States Steel's iron ore operations at Mt. Iron, Minnesota ("Minntac")
produced 16.3 million net tons of taconite pellets in 2000, 14.3 million net
tons in 1999
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and 15.8 million net tons in 1998. Taconite pellet shipments were 15.0 million
tons in 2000, compared with 15.0 million tons in 1999 and 15.4 million tons in
1998.
On March 23, 2001, Transtar, Inc. ("Transtar") completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L. P. As
a result of this transaction, United States Steel became the sole owner of
Transtar and certain of its subsidiaries, namely, the Birmingham Southern
Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake
Terminal Railroad Company; the McKeesport Connecting Railroad Company; the
Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior &
Gulf Navigation Company; and Tracks Traffic Management Services, Inc. and their
subsidiaries. Holdings became the owner of the other subsidiaries.
A subsidiary of United States 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.
United States Steel develops real estate for sale or lease and manages
retail and office space, business and industrial parks and residential and
recreational properties. United States Steel also administers the remaining
mineral lands and timber lands of United States Steel domestic operations and
is responsible for the lease or sale of these lands and their associated
resources, which encompass approximately 270,000 acres of surface rights and
1,500,000 acres of mineral rights in 13 states.
United States Steel participates directly and through subsidiaries in a
number of joint ventures included in the Domestic Steel segment. All of the
joint ventures are accounted for under the equity method. Certain of the joint
ventures and other investments are described below, all of which are at least
50% owned except Republic, Acero Prime and the Clairton 1314B Partnership.
United States Steel and Pohang Iron & Steel Co., Ltd. ("POSCO") of South
Korea participate in a joint venture, USS-POSCO, which owns and operates the
former U. S. Steel Pittsburg, California plant. The joint venture markets high
quality sheet and tin products, principally in the western United States. USS-
POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free
steel, with hot bands principally provided by United States Steel and POSCO.
Total shipments by USS-POSCO were approximately 1.5 million tons in 2000. On
May 31, 2001, a fire damaged USS-POSCO's facilities. Damage was predominantly
limited to the cold-rolling mill. USS-POSCO maintains insurance coverage
against such losses, including coverage for business interruption. The mill is
expected to resume production in the first quarter of 2002. Until such time,
the plant will continue customer shipments using cold-rolled coils from United
States Steel and POSCO as substitute feedstock.
United States Steel has a 16% investment in Republic Technologies
International LLC (Republic) which was accounted for under the equity method of
accounting. During the first quarter of 2001, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel has recognized certain debt
obligations of $14 million previously assumed by Republic. On April 2, 2001,
Republic filed a voluntary petition with the U.S. Bankruptcy Court to
reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the
first quarter of 2001, as a result of Republic's actions, United States Steel
recorded a pretax charge of $74 million for the potentially uncollectible
receivables from Republic.
United States Steel and Kobe Steel, Ltd. ("Kobe") participate in a joint
venture, PRO-TEC, which owns and operates two hot-dip galvanizing lines in
Leipsic, Ohio. The first galvanizing line
100
commenced operations in early 1993. In November 1998, operations commenced on a
second hot-dip galvanized sheet line which expanded PRO-TEC's capacity nearly
400,000 tons a year to 1.0 million tons annually. Total shipments by PRO-TEC
were approximately 1.0 million tons in 2000.
United States Steel and Worthington Industries Inc. participate in a joint
venture known as Worthington Specialty Processing which operates a steel
processing facility in Jackson, 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 2000, Worthington Specialty Processing shipments were
approximately 300 thousand tons.
United States Steel and Rouge Steel Company participate in Double Eagle
Steel Coating Company ("DESCO"), a joint venture which operates an
electrogalvanizing facility located in Dearborn, Michigan. This facility
enables United States Steel to supply the automotive demand for steel with
corrosion resistant properties. The facility can coat both sides of sheet steel
with zinc or alloy coatings and has the capability to coat one side with zinc
and the other side with alloy. Availability of the facility is shared equally
by the partners. In 2000, DESCO produced approximately 800 thousand tons of
electrogalvanized steel.
United States 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.
Startup began in 1998. In February 2000, an expansion project was announced
adding two manually operated welding lines. The expansion will create the
needed flexibility and capacity to service current and growing requirements for
automotive laser weld applications. Laser welded blanks are used in the
automotive industry for an increasing number of body fabrication applications.
United States Steel is the venture's primary customer and is responsible for
marketing the laser-welded blanks. In 2000, Olympic Laser Processing shipments
were approximately 676 thousand parts.
United States Steel, through its subsidiary, United States 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, for a
slitting and warehousing facility in San Luis Potosi, Mexico. In May 2000, an
expansion project was announced for the joint venture. The expansion project
involved the construction of a 60,000 square-foot addition that doubled the
facility's size and total warehousing capacity. A second slitting line and an
automatic packaging system were 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. Startup began
in the first quarter of 2001. In 2000, the joint venture processed
approximately 95 thousand tons.
United States Steel's purchases of transportation services from Transtar and
its subsidiaries and semi-finished steel from equity investees, primarily
Republic, totaled $566 million, $361 million and $331 million in 2000, 1999 and
1998, respectively. At December 31, 2000 and 1999, U. S. Steel's payables to
these investees totaled $66 million and $60 million, respectively. United
States Steel's revenues for steel and raw material sales to equity investees,
primarily PRO-TEC and USS-POSCO, totaled $958 million, $831 million and $725
million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999,
United States Steel's receivables from these investees were $177 million.
Generally, these transactions were conducted under long-term, market-based
contractual arrangements.
U. S. Steel Kosice
In November 2000, we acquired U. S. Steel Kosice, s.r.o. ("USSK"),
headquartered in Kosice in the Slovak Republic, which owns the steel-making
operations and related assets formerly held by
101
VSZ, a.s., making us the largest flat-rolled producer in Central Europe.
Currently, USSK has annual steel-making capability of 5.0 million tons and
produces and sells sheet, tin, tubular, precision tube and specialty products,
as well as coke. Our strategy is to serve existing United States Steel
customers in Central Europe and to grow our customer base in this region.
USSK produces steel products in a variety of forms and grades. In the first
half of 2001, USSK raw steel production was 2.1 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, cold rolling mill, pickling
lines, galvanizing line, tin coating line and two coke batteries.
USSK shipped 1.8 million tons for the first half of 2001. These shipments
included sheet products, galvanized sheet products and tin mill products. In
addition, USSK owns Walzwerke Finow GmbH, located in eastern Germany, which
produces about 90,000 tons per year of welded precision steel tubes from both
cold rolled and hot rolled product as well as cold rolled specialty shaped
sections. 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 percent 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 crowns. This results in exposure to currency fluctuations.
Ranilla Kosice, s.r.o., which is 49% owned by USSK, processes coated sheets,
both galvanized and painted, into various forms which are primarily used in the
construction industry.
Employees
On December 31, 2000, the total number of active United States Steel
domestic employees was 18,784 and the total number of active USSK employees was
16,244. Currently, substantially all domestic hourly employees of our steel,
coke and taconite pellet facilities are covered by a collective bargaining
agreement with the United Steelworkers of America which 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. In addition, hourly 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
United States Steel maintains a comprehensive environmental policy overseen
by the Public Policy Committee of the USX Board of Directors. The Environmental
Affairs organization has the responsibility to ensure that United States
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 United States Steel,
is charged with reviewing its overall performance with various environmental
compliance programs. Also, United States Steel, largely through the American
Iron and Steel Institute, continues its involvement in the negotiation of
various air, water, and waste regulations with federal, state and local
governments concerning the implementation of cost effective pollution reduction
strategies.
The businesses of United States 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
102
Response, Compensation and Liability Act ("CERCLA") with respect to releases
and remediation of hazardous substances. In addition, all states where United
States 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" and
"--Legal Proceedings."
United States 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 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
United States Steel's products and services, operating results will be
adversely affected. United States 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 United States 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
"--Legal Proceedings," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 or reject the Kyoto Protocol, it is not possible to estimate
the effect of regulations that may be considered for implementation of
emissions restrictions in the United States.
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 United
States Steel is on the coke-making and primary steel-making operations of
United States Steel, as described in this section. The coal mining operations
and sales of U. S. Steel 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.
The amendment to the Chrome Electroplating MACT to include the chrome processes
at Gary and Fairless is expected sometime in the next couple years. 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 2002. The
impact of these new standards could be significant to United States Steel, but
the cost cannot be reasonably estimated until the rules are finalized.
103
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 Emission Rate ("LAER") standard.
Effective January 1998, United States Steel elected to comply with the LAER
standards. United States 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. 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 2002. This MACT will
impact United States Steel, but the cost cannot be reasonably estimated at this
time.
The CAA also mandates the nationwide reduction of emissions of acid rain
precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired
electrical utility plants. United States Steel, like all other electricity
consumers, will be impacted by increased electrical energy costs that are
expected as electric utilities seek rate increases to comply with the acid rain
requirements.
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. EPA has issued a Nitrogen Oxide ("NOx") State
Implementation Plan ("SIP") call to require certain states to develop plans to
reduce NOx emissions focusing on large utility and industrial boilers. The
impact of these revised standards could be significant to United States Steel,
but the cost cannot be reasonably estimated until the final revised standards
and the NOx SIP call are issued and, more importantly, the states implement
their SIPs covering their standards.
In 2000, all of the coal production of U. S. Steel Mining was metallurgical
coal, which is primarily used in coke production. While USX believes that the
new environmental requirements for coke ovens will not have an immediate effect
on U. S. Steel 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 U. S. Steel Mining, but
the cost is not capable of being reasonably estimated until rules are proposed
or finalized.
Water
United States 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. In 1998, USX entered into a
consent decree with the Environmental Protection Agency ("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, USX 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, USX 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, United States Steel will pay the public trustees $1 million at the
end of the remediation project for future monitoring costs and United States
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. The sediment remediation
project is an approved final interim measure under the corrective action
program for Gary Works and is expected to cost approximately $36.4 million over
the next five years. Estimated remediation and monitoring costs for this
project have been accrued.
Solid Waste
United States 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.
104
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 United States 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.
United States 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 United States Steel, see "--
Legal Proceedings."
Properties
United States Steel or its predecessor USX has owned the vast majority of
the domestic properties in excess of 30 years with no material adverse claim
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, is subject to a lease
through 2004 with an option to purchase. The office space in Pittsburgh,
Pennsylvania used by USX and United States Steel is leased through 2007.
For property, plant and equipment additions, including capital leases, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Legal Proceedings
After the Separation, United States Steel Corporation will be a party to
the following litigation:
Inland Steel Patent Litigation. In July 1991, Inland Steel Company
("Inland") filed an action against United States Steel and another domestic
steel producer in the U.S. District Court for the Northern District of
Illinois, Eastern Division, alleging defendants had infringed two of Inland's
steel-related patents. Inland seeks monetary damages of up to approximately
$50 million and an injunction against future infringement. United States
Steel, in its answer and counterclaim, alleges the patents are invalid and not
infringed and seeks a declaratory judgment to such effect. In May 1993, a jury
found United States Steel to have infringed the patents. The District Court
has yet to rule on the validity of the patents. In July 1993, the U.S. Patent
Office rejected the claims of the two Inland patents upon a reexamination at
the request of United States Steel and the other steel producer. A further
request was submitted by United States Steel to the Patent Office in October
1993, presenting additional questions as to patentability which was granted
and consolidated for consideration with the original request. In 1994, the
Patent Office issued a decision rejecting all claims of the Inland patents. On
September 21, 1999, the Patent Office Board of Appeals affirmed the decision
of the Patent Office. Inland filed a notice of appeal with the Court of
Appeals for the Federal Circuit on November 17, 1999. On September 19, 2001,
the Court of Appeals for the Federal Circuit affirmed the decision of the
Patent Office Board of Appeals. Inland may file a motion for rehearing or may
file a writ of certiorari with the United States Supreme Court.
105
Asbestos Litigation. United States Steel has been and is a defendant in a
large number of cases in which plaintiffs allege injury resulting from exposure
to asbestos. Many of these cases involve multiple plaintiffs and most have
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
or Intercoastal Fleets, former operations of United States Steel; (2) claims
made by persons who performed work at United States Steel facilities; and (3)
claims made by industrial workers allegedly exposed to an electrical cable
product formerly manufactured by United States Steel. To date, all actions
resolved have been either dismissed or settled for immaterial amounts. It is
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 remaining actions will have a material adverse effect on its
financial condition. 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.
Environmental Proceedings. The following is a summary of the proceedings of
United States Steel that were pending or contemplated as of June 30, 2001,
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 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. Primary
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 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 its ultimate cost of compliance with CERCLA.
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 those stated
in forward-looking statements.
At June 30, 2001, United States Steel had been identified as a PRP at a
total of 22 CERCLA sites. Based on currently available information, which is in
many cases preliminary and incomplete, management believes that United States
Steel liability for cleanup and remediation costs in connection with eight of
these sites will be between $100,000 and $1 million per site and eight will be
under $100,000.
At the remaining 6 sites, management expects that United States Steel 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, Minn. Works, United States Steel spent a total of
approximately $11.2 million through 2000. 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
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. United States Steel is conducting an engineering
study of the estuary sediments and the construction of a
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breakwater in the estuary. Depending upon the method and extent of
remediation at this site, future costs are presently unknown and
indeterminable.
. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been
used at various times as a disposal site for coal mine refuse and
municipal and industrial waste. United States Steel was one of 15 PRPs
that have entered into an agreed order with the EPA to perform a
remediation of the site. Implementation of the remedial design plan,
resulting in a long-term cleanup of the site, is estimated to cost
approximately $28.5 million.
One of the PRPs filed suit against the EPA, the Ohio Environmental
Protection Agency, and 13 PRPs including United States Steel. The EPA,
in turn, filed suit against the PRPs to recover $1.5 million in
oversight costs. In May 1996, United States Steel entered into a final
settlement agreement to resolve this litigation and the overall
allocation. United States Steel agreed to pay 4.8% of the estimated
costs which would result in United States Steel paying an additional
amount of approximately $1.1 million over a two- to three-year period.
Through June 30, 2001, United States Steel has spent $982,000 at the
site. Remediation commenced in 1999 and should be substantially
completed in 2001.
. The D'Imperio and Ewan sites in New Jersey are waste disposal sites
where a former subsidiary allegedly disposed of used paint and solvent
wastes. USX has entered into a settlement agreement with the major PRPs
at the sites which fixes USX's share of liability at approximately $1.2
million, $605,000 of which United States Steel has already paid. The
balance, which is expected to be paid over the next several years, has
been accrued.
. The Berks Associates/Douglassville Site ("Berks Site") is situated on a
50-acre parcel located on the Schuylkill River in Berks County, Pa. Used
oil and solvent reprocessing operations were conducted on the Berks Site
between 1941 and 1986. In September 1997, United States Steel signed a
consent decree to conduct a feasibility study at the site relating to
the alternative remedy. In 1999, a new Record of Decision was approved
by EPA and the DOJ. On January 19, 2001, United States Steel signed a
consent decree with the EPA to remediate this site. On April 6, 2001,
United States Steel paid its share of the consent decree obligation,
which was $0.4 million. The only remaining outstanding claim is the
natural resource damages claim filed by the Commonwealth of
Pennsylvania.
. In 1988, United States Steel and three other PRPs 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, Pa.
The cost of such removal, which has been completed, was approximately
$4.2 million, of which United States Steel paid $3.4 million. The EPA
has indicated that further remediation of this site may be required in
the future, but it has not conducted any assessment or investigation to
support what remediation 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 ("RI") which was issued in 1997. It is not possible to
estimate accurately the cost of any remediation or the shares in any
final allocation formula; however, based on presently available
information, USX may have been responsible for as much as 70% of the
waste material deposited at the site. On October 10, 1995, the DOJ filed
a complaint in the U.S. District Court for Western Pennsylvania against
United States Steel and other Municipal & Industrial Disposal Co.
defendants to recover alleged costs incurred at the site. In June 1996,
United States Steel agreed to pay $245,000 to settle the government's
claims for costs against it, American Recovery, and Carnegie Natural
Gas. In 1996, United States Steel filed a cost recovery action against
parties who did not contribute to the cost of the removal activity at
the site. United States Steel reached a settlement in principle with all
of the parties except the site owner. The PRPs are awaiting issuance of
the State's Feasibility Study ("FS").
107
In addition, there are 16 sites related to United States Steel where
information requests have been received or there are other indications that
United States Steel may be a PRP under CERCLA but where sufficient information
is not presently available to confirm the existence of liability.
There are also 29 additional sites related to United States 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 4 of these sites will be under $100,000
per site, another 3 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 3 sites, including the Grand Calumet River remediation at Gary
Works, the Peters Creek Lagoon remediation at Clairton, 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 12 sites are not presently determinable.
The following is a discussion of remediation activities at the major
domestic United States Steel facilities:
Gary Works. In 1998, United States 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, United States 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. United States Steel will pay the public trustees $1 million at the end
of the remediation project for future monitoring costs and United States 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. In 1999, United States 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, United
States Steel purchased properties which were conveyed to the trustees. The
sediment remediation project is an approved final interim measure under the
corrective action program for Gary Works and is expected to cost approximately
$36.4 million over the next five years. Estimated remediation and monitoring
costs for this project have been accrued.
In October 1996, United States 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 Resource Damages Assessment. United States
Steel was identified as a PRP along with 15 other companies owning property
along the river and harbor canal. United States Steel and eight other PRPs have
formed a joint defense group. In 2000, the trustees concluded their assessment
of sediment injuries, which includes 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 United States Steel expects to
resolve this claim. A reserve has been established for United States Steel's
share of the anticipated settlement.
On October 23, 1998, a final Administrative Order on Consent was issued by
EPA addressing Corrective Action for Solid Waste Management Units throughout
Gary Works. This order requires
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United States Steel to perform a RCRA Facility Investigation ("RFI") and a
Corrective Measure Study ("CMS") at Gary Works. The Current Conditions Report,
United States Steel's first deliverable, was submitted to EPA in January 1997
and was approved by EPA in 1998. The Phase I RFI work plan was submitted to the
EPA in July 1999.
IDEM issued notices of violations ("NOVs") relating to Gary Works in 1994
alleging various violations of air pollution requirements. In early 1996,
United States Steel paid a $6 million penalty and agreed to install additional
pollution control equipment and programs and implement programs costing over
$100 million over a period of several years. In 1999, United States Steel
entered into an Agreed Order with IDEM to resolve outstanding air issues.
United States 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. In November
1999, IDEM issued an NOV alleging various air violations at Gary Works. An
agreed order is being negotiated.
Clairton. In 1987, USX 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, Pa. That
Consent Order required USX to pay a penalty of $50,000 and a monthly payment of
$2,500 for five years. In 1990, USX and the PaDER reached agreement to amend
the Consent Order. Under the amended Order, USX 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. As of June 30, 2001, remediation costs have
amounted to $9.5 million with another $489,000 projected to complete the
project.
Fairless Works. In January 1992, United States Steel commenced negotiations
with the EPA regarding the terms of an Administrative Order on consent,
pursuant to the RCRA, under which United States Steel would perform a RFI and a
CMS at Fairless Works. A Phase I RFI report was submitted during the third
quarter of 1997. A Phase II/III RFI will be submitted following EPA approval.
The RFI/CMS will determine whether there is a need for, and the scope of, any
remedial activities at Fairless Works.
Fairfield Works. In December 1995, United States Steel reached an agreement
in principle with the EPA and the DOJ with respect to alleged RCRA violations
at Fairfield Works. A consent decree was signed by United States Steel and the
United States and filed with the court on December 11, 1997, under which United
States Steel will pay a civil penalty of $1 million, implement two 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. The first RFI work plan for the site will be submitted for
agency approval in the first quarter of 2001.
Mon Valley Works/Edgar Thomson Plant. In September 1997, USX received a
draft consent decree addressing issues raised in an NOV issued by the EPA in
January 1997. The NOV alleged air quality violations at United States Steel's
Edgar Thomson Plant, which is part of Mon Valley Works. The draft consent
decree addressed these issues, including various operational requirements,
which EPA believed were necessary to bring the plant into compliance. USX has
completed implementing the compliance requirements identified by EPA. USX has
paid a cash penalty of $550,000 and implemented five SEPs valued at
approximately $1.5 million in settlement of the government's allegations. On
February 1, 2000, the U.S. District Court for Western Pennsylvania entered the
consent decree.
In November 2000, an NOV was issued by the Jefferson County Health
Department ("JCHD") alleging violation of the Halogenated Solvent National
Emission Standards for Hazardous Air Pollutants and the JCHD volatile organic
compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield
Works. United States Steel proposed a civil penalty of $100,000 and a VOC
emission limit which have been agreed to by JCHD. A consent order was executed
and approved by the court in May 2001. The penalty was paid by United States
Steel in June 2001.
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MANAGEMENT OF UNITED STATES STEEL
The following information relates to the management of United States Steel.
Information relating to the management of Marathon is incorporated by reference
in the registration statement of which this prospectus forms a part. See "Where
You Can Find More Information" on page (ii).
Upon completion of the Separation, the individuals listed below, with their
ages (as of June 30, 2001), are expected to be officers and directors of United
States Steel Corporation. The present principal occupation and five-year
employment history of each person named in the table follows the list below.
Each of the individuals listed below is a citizen of the United States.
Name Age Position
---- --- --------
Charles G. Carson, III........... 59 Vice President--Environmental Affairs
John J. Connelly................. 54 Vice President--Strategic Planning
J. Gary Cooper(1)................ 64 Director
Robert J. Darnall................ 63 Director
Roy G. Dorrance.................. 55 Vice Chairman and Chief Operating Officer
Albert E. Ferrara, Jr............ 52 Senior Vice President and Treasurer
James D. Garraux................. 48 Vice President--Employee Relations
Charles C. Gedeon................ 60 Executive Vice President--Raw Materials &
Diversified Business
Gretchen R. Haggerty............. 45 Senior Vice President and Controller
Dr. Shirley Ann Jackson(1)(2).... 54 Director
J. Paul Kadlic................... 59 Executive Vice President--Sheet Products
Charles R. Lee(1)(2)............. 61 Director
Paul E. Lego(1).................. 71 Director
John F. McGillicuddy(1).......... 70 Director
Dan D. Sandman................... 53 Vice Chairman and Chief Legal &
Administrative Officer
Seth E. Schofield(1)(2).......... 61 Director
Larry G. Schultz................. 51 Vice President--Investor Relations and
Financial Analysis
John W. Snow(1).................. 61 Director
Terrance D. Straub............... 55 Vice President--Governmental Affairs
John P. Surma, Jr................ 47 Vice Chairman and Chief Financial Officer
Stephan K. Todd.................. 55 Vice-President--Law
Thomas J. Usher(1)(2)............ 58 Chairman of the Board, Chief Executive
Officer and President
Douglas C. Yearley(1)(2)......... 65 Director
----------
(1)Current director of USX.
(2)Is also expected to be a director of Marathon Oil Corporation following the
Separation.
Charles G. Carson, III is currently vice president--Environmental Affairs of
United States Steel, and was appointed to this position in January 1993.
John J. Connelly is currently vice president--Business Development and Long
Range Planning of United States Steel, and was appointed to this position in
January 2001. From 1999 until January 2001, Mr. Connelly served as United
States Steel's vice president--Long Range Planning and International Business.
In 1994, he was named vice president--International Business for the U. S.
Steel Group and served as President of USX Engineers and Consultants, Inc. from
October 1994 to September 1996.
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J. Gary Cooper is Chairman and Chief Executive Officer, Commonwealth
National Bank. He was the United States Ambassador to Jamaica from 1994 to
1997. Ambassador Cooper is a director of Gen Corp Inc. and Protective Life
Corporation.
Robert J. Darnall is Chairman of Prime Advantage Corporation. He joined
Prime Advantage in early 2000. In late 1998 until early 2000, Mr. Darnall was
head of North American operations for Ispat International N.V. From 1992 to
1998, he served as the Chairman and Chief Executive Officer at Inland Steel
Industries until his retirement from that position in 1998. Mr. Darnall is a
member of the board of directors of Household International, Inc., Cummins,
Inc., Pactiv Corp., Sunoco, Inc., and the Federal Reserve Bank of Chicago,
where he currently serves as Deputy Chairman.
Roy G. Dorrance is currently executive vice president of United States
Steel, and was named to his current position in January 2001. From 1997 to
January 2001, he served as United States Steel executive vice president with
responsibility for production, sales and marketing of United States Steel sheet
product business. In 1995, he was appointed Vice President--Operations of
United States Steel. He is a member of the board of directors of the Winchester
Thurston School and Pittsburgh Theological Seminary.
Albert E. Ferrara, Jr. is currently vice president--Strategic Planning of
USX, having assumed this position in 1997, and from 1994 through 1996 he was
President of USX Realty Development.
James D. Garraux is currently vice president--Employee Relations of United
States Steel, and assumed his current position on August 1, 2000. He was
appointed general manager--employee relations in April of 1996.
Charles C. Gedeon is currently executive vice president--Raw Materials and
Diversified Businesses of United States Steel, and has served in this position
since 1992. Mr. Gedeon is a member of the Board of Directors of RTI
International Metals, Inc.
Gretchen R. Haggerty is currently vice president--Accounting and Finance of
United States Steel, and was named to her current position in 1998. Mrs.
Haggerty was elected vice president and treasurer of USX Corporation in 1991.
Dr. Shirley Ann Jackson is President of Rensselaer Polytechnic Institute.
She was appointed President in 1999 and was Chairman of the U.S. Nuclear
Regulatory Commission from 1995 to 1999. Dr. Jackson is a director of Albany
Molecular Research Inc., Federal Express Corporation, Newport News
Shipbuilding, Sealed Air Corporation and UtiliCorp United, Inc. She is a member
of the National Academy of Engineering, a Fellow of the American Academy of
Arts and Sciences, and a Fellow of the American Physical Society.
J. Paul Kadlic is currently executive vice president--Sheet Products of
United States Steel, and assumed this position on January 1, 2001. He was named
vice president--sales for sheet products in 1997. Prior to that, he served as
General Manager of Sales for almost 15 years.
Charles R. Lee is Chairman of the Board and Co-CEO, Verizon Communications
since his election on June 30, 2000. Mr. Lee was elected Chairman of the Board
and Chief Executive Officer of GTE, a predecessor of Verizon, in May 1992. Mr.
Lee is a director of The Procter & Gamble Company, United Technologies
Corporation, the Stamford Hospital Foundation, and the New American Schools
Development Corporation.
Paul E. Lego is Retired Chairman and CEO, Westinghouse Electric Corporation.
Mr. Lego retired as Chairman and CEO of Westinghouse Electric Corporation in
1993 after serving in that position since 1990. He is also Chairman of the
Board of Commonwealth Industries, Inc. and a director of Dominion Resources
Inc., Lincoln Electric Holdings, Inc. and Orlimar Golf Company.
111
John F. McGillicuddy is Retired Chairman, Chemical Banking Corporation. Mr.
McGillicuddy retired as Chairman and Chief Executive Officer of Chemical
Banking Corporation in 1994, having served as Chairman and Chief Executive
Officer of Chemical Banking Corporation and its predecessor Manufacturer's
Hanover Corporation since 1979. He is a director of Empire HealthChoice, Inc.,
Southern Peru Copper Corporation, and UAL Corporation.
Dan D. Sandman is currently General Counsel, Secretary, and Senior Vice
President--Human Resources & Public Affairs of USX. Mr. Sandman was elected to
this post in 1998. He was elected General Counsel and Secretary of USX
Corporation in 1993. In 1996, Mr. Sandman's duties, as General Counsel and
Secretary, were expanded to include overall responsibility for human resources
corporate wide, as well as direct responsibility for executive compensation as
Senior Vice President--Human Resources for USX. Mr. Sandman is a director of
Roppe Corporation.
Seth E. Schofield is Retired Chairman and Chief Executive Officer--USAir
Group. Mr. Schofield retired as Chairman and Chief Executive Officer in 1996
after having served in such position since 1992. He is a director of Calgon
Carbon Corp.
Larry G. Schultz is currently vice president--Accounting of USX, and was
named to his current position in 2000, after serving as Comptroller of U. S.
Steel Group from 1992.
John W. Snow is Chairman, President and Chief Executive Officer, CSX
Corporation, since 1991. He is a director of Circuit Cities Stores Inc.,
Verizon Communications and Johnson & Johnson.
Terrance D. Straub is currently vice president--Governmental Affairs of USX,
and has served in that position since 1991.
John P. Surma, Jr. is Assistant to the Chairman of USX, effective September
1, 2001, and has 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 the Pittsburgh PriceWaterhouse office leader for Audit and
Business Advisory Services. Mr. Surma joined Price Waterhouse LLP in 1976 and
was admitted to the partnership in 1987. He is a director of Calgon Carbon
Corp.
Stephan K. Todd is currently general counsel of United States Steel, and was
elected to his current post in June 1998. He was named assistant general
counsel in 1995.
Thomas J. Usher is currently Chairman of the Board and Chief Executive
Officer of USX and acting president of U. S. Steel Group, was elected to his
current post in July 1995 and was elected president and chief operating officer
of USX in 1994. In addition, Mr. Usher is on the board of directors of
H. J. jHeinz Company, PPG Industries, and PNC Financial Services Group.
Douglas C. Yearley is Chairman Emeritus of Phelps Dodge Corporation. Mr.
Yearley retired in May 2000 from Phelps Dodge Corporation after being elected
President in 1991 and Chief Executive Officer in 1989. He is a director of
Lockheed Martin Corporation.
None of the above individuals nor any other officer or director of USX
beneficially owns any of the Offered Securities, and no securities are to be
purchased from any officer or director of USX in connection with the exchange
offers.
112
Change in Control Agreements
USX has entered into change in control agreements, all of which are
substantially the same, with its executive officers and with the executive
officers of the U. S. Steel Group and the Marathon Group. The agreements with
the executive officers who will become employees of United States Steel
Corporation (the "United States Steel Agreements") will become obligations of
United States Steel Corporation.
The United States Steel Agreements provide that, if an officer's employment
is terminated under certain circumstances following a change in control, or
after certain events associated with a change in control, the officer will be
entitled to the following severance benefits:
. a cash payment of up to three times the sum of the officer's salary plus
bonus,
. life and health insurance benefits for up to 3 years after termination,
. 3 years of additional credit towards eligibility for retiree medical and
life insurance,
. a cash payment equal to the difference between amounts receivable by the
officer under our pension plans and those which would be payable if the
officer had worked for 3 more years at current pay rates,
. a cash payment equal to the difference between amounts receivable under
our savings and thrift plans and amounts which would have been received
if the officer's savings had been fully vested, and
. additional payments sufficient to compensate the officer for certain
federal excise taxes.
The severance benefits are payable if the officer's employment is terminated
by the officer for good reason or is terminated by United States Steel
Corporation for other than cause or disability. Severance benefits are not
payable if termination is due to the officer's death or occurs after the
officer reaches age 65.
In addition, the United States Steel Agreements provide that upon a change
in control all outstanding options, restored options, and stock appreciation
rights previously granted to the officer will be fully vested and exercisable,
and all restricted stock held by the officer will be fully vested.
Each United States Steel Agreement is automatically extended each year
unless the officer is notified that United States Steel Corporation does not
wish it extended. In any event, however, each agreement continues for two years
after a change in control.
The definition of a change in control for purposes of these agreements is
complex but is summarized as follows. It includes any change in control
required to be reported in response to Item 6 (e) of Schedule 14A under the
Securities Exchange Act of 1934 and provides that a change in control will have
occurred if:
. any person not affiliated with United States Steel Corporation acquires
20 percent or more of the voting power of its outstanding securities,
. the United States Steel Corporation board of directors no longer has a
majority made up of (1) individuals who were directors on the date of
the agreements and (2) new directors (other than directors who join the
board in connection with an election contest) approved by two-thirds of
the directors then in office who (a) were directors on the date of the
agreements or (b) were themselves previously approved by the board in
this manner,
. United States Steel Corporation merges with another company and United
States Steel Corporation's stockholders end up with less than 50 percent
of the voting power of the new entity,
113
. stockholders approve a plan of complete liquidation of United States
Steel Corporation, or
. there is a sale of all or substantially all of United States Steel
Corporation's assets.
Neither the approval and adoption of the Agreement and Plan of
Reorganization in connection with the Separation, nor the completion of the
Separation will constitute a change in control for purposes of these
agreements.
Completion and Retention Agreement With Thomas J. Usher
In connection with the Separation, USX entered into a Completion and
Retention Agreement with Thomas J. Usher, its current Chairman & Chief
Executive Officer. To facilitate the Separation and to maintain continuity in
both businesses, the board of directors asked Mr. Usher to serve as the
Chairman & Chief Executive Officer and President of United States Steel
Corporation, the Chairman of the board of directors of Marathon Oil
Corporation and Chairman of the board of managers of MAP. In deciding to ask
Mr. Usher to serve in these three roles, the board of directors determined
that Mr. Usher's unique experience and talents will bring value to both groups
of stockholders. Mr. Usher has over 35 years experience in the steel industry,
and with the recent death of Paul Wilhelm, the former President of United
States Steel, the board of directors believes that the stockholders will be
best served if Mr. Usher becomes the full time Chief Executive Officer of
United States Steel Corporation. The board of directors also believes that
since Clarence Cazalot, Philip G. Behrman, and Steven Lowden all joined
Marathon in 2000, there is a need to provide them, and the board of directors
of Marathon Oil Corporation, with Mr. Usher's knowledge of past activities,
decisions and developments concerning the business of Marathon Oil Company and
the Marathon Group. As non-employee Chairman of the board of directors of
Marathon Oil Corporation, Mr. Usher will be able to draw upon his experience
as Chairman & Chief Executive Officer of USX and as a member of the board of
directors of Marathon Oil Company to provide these insights. Similarly in his
role as Chairman of the board of managers of MAP, Mr. Usher brings a
familiarity with MAP. Among other things, Mr. Usher is the only Marathon
appointed member to have served on the board of managers of MAP since its
formation. He also has a working relationship with the members appointed by
Ashland, the owner of 38% of MAP, and this relationship will benefit Marathon
Oil Corporation and its stockholders after the Separation.
The Completion and Retention Agreement provides that Mr. Usher will
receive, or has received:
. A salary from USX of $1,400,000 for 2001 and if the Separation occurs, a
salary of $1,100,000 annually from United States Steel Corporation for
2002-2004, subject to adjustment by the board of directors and the
Compensation and Organization Committee of United States Steel
Corporation. This $300,000 reduction reflects the lower levels of
salaries in the steel and metal industries as compared to the energy
industry.
. If the Separation occurs, a $25,000 annual fee from Marathon Oil
Corporation for serving as Chairman of the board of directors of Marathon
Oil Corporation and of the board of managers of MAP. This fee is in
addition to regular fees paid by Marathon Oil Corporation to non-employee
directors.
. A grant of 90,000 restricted shares of USX--Marathon Group Common Stock
on August 8, 2001 with 30,000 shares vesting on August 8, 2002, May 1,
2003, and May 1, 2004, based upon the achievement of performance
objectives for 2001, 2002 and 2003, respectively.
. If the Separation occurs, a grant of stock appreciation rights for
500,000 shares of Marathon Oil Corporation common stock. The exercise
price of 150,000 shares is based on the average of the high and low
market price of USX--Marathon Group Common Stock on the last trading day
before the effective time of the Separation and the exercise price of
350,000 shares is based on the average of the high and low market price
of Marathon Oil Corporation
114
common stock on the first trading day after the effective time of the
Separation. The effective date of each grant is the same date as the
determination of the exercise price. These stock appreciation rights vest
on the effective date of the grant and expire on the earlier of ten years
from the effective date of grant, nine years following retirement or
three years following death while employed.
. A separation completion bonus, if the Separation occurs, of $6,000,000
will be payable by Marathon Oil Corporation on the first business day
after the effective time of the Separation and a retention bonus, of up
to $3,000,000, that is subject to a number of performance measures, will
be paid by United States Steel Corporation on the third anniversary of
the Separation.
. If the Separation occurs, and if Mr. Usher elects to receive his non-
qualified pension as a lump sum, the lump sum will be calculated using
the interest rates and mortality tables in effect for retirements on
December 31, 2001, instead of the rates and mortality tables in effect
at Mr. Usher's retirement, which could result in a greater or lesser
pension.
The Completion and Retention Agreement was negotiated on behalf of USX by
the Compensation Committee of the board of directors which is composed solely
of non-employee directors and is intended to provide an incentive to Mr. Usher
to serve in his three roles. Among the factors considered by the Compensation
Committee were the unique background Mr. Usher brings to each role, his past
performance in guiding both the steel and energy businesses, compensation
levels and practices at other steel and energy companies as well as other
companies of similar size and complexity as USX, Marathon and United States
Steel and the fact that as a non-employee director Mr. Usher will not be
eligible to receive compensation (salary, bonuses, options or other stock
based compensation) from Marathon Oil Corporation or MAP even though it is
expected that he will make major contributions to the future success of
Marathon Oil Corporation and MAP in his roles as chairman of the governing
bodies of each.
Dual Directorships
Upon completion of the Separation, Shirley Ann Jackson, Charles Lee, Seth
Schofield and Douglas Yearley, each of whom is currently a director of USX,
are expected to become directors of both United States Steel Corporation and
Marathon Oil Corporation. As such, they will be entitled to receive directors'
allowances and attendance fees from both United States Steel Corporation and
Marathon Oil Corporation in the amount that each company provides to its other
non-employee directors.
Also, upon completion of the Separation, Thomas J. Usher, the present
Chairman of the board of directors and Chief Executive Officer of USX, will be
Chairman of the board of directors, Chief Executive Officer and President of
United States Steel Corporation and will also serve as Chairman of the board
of directors of Marathon Oil Corporation.
Compensation of United States Steel Corporation Executive Officers
The following table sets forth certain information concerning the
compensation awarded to, earned by or paid to the chief executive officer and
the other four most highly compensated individuals who are expected to serve
as executive officers of United States Steel Corporation following the
Separation for services rendered to USX or its subsidiaries in all capacities
during 2000.
115
Summary Compensation Table
Restricted
Salary Other Annual Stock Options All Other
and Bonus Compensation Award(s) SARs Compensation
Name & Position Salary ($) Bonus ($) Total ($) ($) ($)(1) (#)(2) ($)(3)
--------------- ---------- --------- --------- ------------ ---------- ------- ------------
T. J. Usher............. 1,325,000 2,500,000 3,825,000 7,729 4,925,000 400,000 112,406
Chairman of the Board,
Chief Executive Officer
and President
D. D. Sandman .......... 459,167 650,000 1,109,167 4,597 923,438 80,000 47,693
Vice Chairman and Chief
Legal and
Administrative Officer
J. P. Surma, Jr. ...... 350,000 650,000 1,000,000 1,781 0 30,000 41,375
Vice Chairman and Chief
Financial Officer
R. G. Dorrance.......... 328,333 340,000 668,333 1,677 345,000 50,000 32,115
Vice Chairman and
Chief Operating
Officer
C. C. Gedeon............ 336,000 340,000 676,000 1,677 345,000 50,000 28,195
Executive Vice
President-Raw Materials
& Diversified
Businesses
---------------------
(1) Grants of restricted stock under the USX Corporation 1990 Stock Plan are
valued as of the date of grant. Grants are subject to conditions including
continued employment and achievement of business performance standards.
Dividends are paid on restricted stock. Shown below is the vesting schedule
for restricted stock scheduled to vest less than three years from the date
of grant, together with the number and value, as of December 31, 2000, of
the aggregate holdings of restricted stock for each of the executive
officers named in the Summary Compensation Table. Vesting shown assumes
achievement of business performance at peer-group standard.
(2) All option shares listed except those granted to Mr. Surma were granted
with tandem stock appreciation rights ("SARs").
(3) This column includes amounts contributed by USX under the USX Savings Fund
Plan or the Marathon Thrift Plan and the related supplemental savings
plans. Such amounts for 2000 are $79,500, $27,550, $39,375, $19,700 and
$18,480 for Messrs. Usher, Sandman, Surma, Dorrance and Gedeon,
respectively. Also included are amounts attributable to split-dollar life
insurance provided by USX. (Marathon Oil Company does not provide split-
dollar life insurance.) For 2000, these amounts are $30,906, $18,143,
$10,415 and $7,715 for Messrs. Usher, Sandman, Dorrance and Gedeon,
respectively. Also included are amounts attributable to a mandatory tax
compliance program. For 2000, these amounts were $2,000 each for
Messrs. Usher, Sandman, Surma, Dorrance and Gedeon.
116
Options/SARs and Restricted Stock Granted in 2000
The following table sets forth certain information concerning restricted
stock, stock options and stock appreciation rights ("SARs") granted during 2000
to each executive officer named in the Summary Compensation Table under the USX
1990 Stock Plan:
Restricted Stock Stock Options
------------------------- ---------------------------------------------------------------------
Number of % of Restricted Number of % of Stock Exercise
Class of Shares Stock Shares Option Shares Price per Expiration Assumed 5% Assumed
Name Stock Granted Shares Granted Granted Granted Share Date Gain 10% Gain
---- -------- --------- --------------- --------- ------------- --------- ------------ ---------- -----------
T.J. Usher...... Marathon 130,000 31.7% 260,000* 14.4% $25.5000 May 30, 2010 $4,169,568 $10,566,504
Steel
70,000 22.9% 140,000* 15.3% $23.0000 May 30, 2010 $2,025,044 $ 5,131,854
D.D. Sandman.... Marathon 24,375 5.9% 52,000* 2.9% $25.5000 May 30, 2010 $ 833,914 $ 2,113,301
Steel
13,125 4.3% 28,000* 3.1% $23.0000 May 30, 2010 $ 405,009 $ 1,026,371
J.P. Surma, Marathon 0 0 30,000 1.7% $25.5000 May 30, 2010 $ 481,104 $ 1,219,212
Jr............. Steel
0 0 0 0 -- -- -- --
R.G. Dorrance... Marathon 0 0 0 0 -- -- -- --
Steel
15,000 4.9% 50,000* 5.5% $23.0000 May 30, 2010 $ 723,230 $ 1,832,805
C.C. Gedeon..... Marathon 0 0 0 0 -- -- -- --
Steel
15,000 4.9% 50,000* 5.5% $23.0000 May 30, 2010 $ 723,230 $ 1,832,805
---------------------
* These options were granted with tandem SARs, which have the same exercise
date as the underlying options. Upon the exercise of an SAR, an optionee
receives an amount, in cash and/or shares, equal to the excess, for a
specified number of shares, of (a) the fair market value of a share on the
date the SAR is exercised (except that for any SAR exercised during the 10-
business-day period beginning on the third business day following the release
of quarterly earnings, the Compensation Committee may, in its sole
discretion, establish a uniform fair market value of a share for such period
which shall not be more than the highest daily fair market value and shall
not be less than the lowest daily fair market value during such 10-business-
day period) over (b) the exercise price per share.
Unvested Restricted Shares
Vesting Schedule for Restricted Stock Aggregate Holdings
--------------------------------------- -----------------------------
Value as of
Class of May 2002 May 2003 Class of December 31,
Date Granted Stock (Shares) (Shares) Stock Shares 2000 ($)
------------ -------- -------- -------- -------- ------- ------------
T.J. Usher.............. May 30, 2000 Marathon 26,000 26,000 Marathon 130,000 3,684,694
Steel Steel
May 30, 2000 14,000 14,000 70,000 1,255,625
------- ---------
200,000 4,940,319
D.D. Sandman............ May 30, 2000 Marathon 4,875 4,875 Marathon 24,375 690,880
Steel Steel
May 30, 2000 2,625 2,625 13,125 235,430
------- ---------
37,500 926,310
R.G. Dorrance........... May 30, 2000 Steel 3,000 3,000 Steel 15,000 269,063
C.C. Gedeon............. May 30, 2000 Steel 3,000 3,000 Steel 15,000 269,063
117
Options/SARs Exercised in 2000
Total Value
No. of Realized No. of
Shares for Both Unexercised Value of Unexercised In-
Underlying Classes of Options/SARs at The-Money Options/SARs
Options/SARs Stock December 31, at December 31, 2000
Name Exercised(1) ($)(1) 2000(1) for all Classes of Stock ($)(1)
---- ------------ ----------- --------------- -------------------------------
T.J. Usher.............. 0 -- 1,499,000 1,421,472
D.D. Sandman............ 0 -- 260,725 147,878
J.P. Surma, Jr.......... 0 -- 120,000 85,314
C.C. Gedeon............. 0 -- 162,500 0
R.G. Dorrance........... 0 -- 150,300 0
---------------------
Note: All options listed above are currently exercisable. Except for 50,000
shares held by Mr. Surma, the listed options were granted with SARs.
(1) Figures by class of stock are as follows:
No. of
Shares No. of
Underlying Unexercised
Class of Options/SARs Value Options/SARs at
Stock Exercised Realized ($) December 31, 2000
-------- ------------ ------------ -----------------
T.J. Usher................. Marathon 0 0 892,600
Steel 0 0 606,400
D.D. Sandman............... Marathon 0 0 153,400
Steel 0 0 107,325
J.P. Surma, Jr............. Marathon 0 0 120,000
Steel 0 0 0
C.C. Gedeon................ Marathon 0 0 0
Steel 0 0 162,500
R.G. Dorrance.............. Marathon 0 0 0
Steel 0 0 150,300
United States Steel Corporation 2002 Stock Plan
The United States Steel Corporation 2002 Stock Plan (the "United States
Steel 2002 Stock Plan") permits the grant of any or all of the following types
of awards in any combination or sequence: (a) stock options, (b) restored
options, (c) stock appreciation rights and (d) restricted stock, in each case,
in relation to shares of common stock of United States Steel Corporation ("New
U. S. Steel Shares"). Up to 10,000,000 New U. S. Steel Shares will be available
for grants during the period the plan is in effect, of which up to 1,400,000
New U. S. Steel Shares may be granted as restricted shares.
The Compensation and Organization Committee of the United States Steel board
of directors will administer the plan, including determining the types of
grants to be made and the vesting of restricted stock awards. Such vesting
determinations will be based on achievement of target levels under the
following performance measures:
. Income from operations as a percent of capital employed
. Income from operations per ton shipped
. Operating cash flow as a percent of capital employed
. Safety performance
118
The employees of United States Steel Corporation who are eligible for
participation under the United States Steel 2002 Stock Plan are all executive
officers and others in responsible positions whose performance, in the judgment
of the Compensation and Organization Committee, affects United States Steel
Corporation's success. It is expected that in 2002 approximately 175 employees
will be eligible for participation under the United States Steel 2002 Stock
Plan. Over the term of the United States Steel 2002 Stock Plan, it is
anticipated that other employees will become eligible for participation in the
plan.
During any calendar year, no participant will be awarded grants with respect
to more than 800,000 New U. S. Steel Shares.
It is not practical to predict the number of shares that will be awarded
under grants made to participants in the future because such numbers are, and
will continue to be, within the discretion of the Compensation and Organization
Committee under the terms of the United States Steel 2002 Stock Plan.
The United States Steel 2002 Stock Plan will terminate on December 31, 2006,
subject to earlier termination by the United States Steel board of directors.
United States Steel Corporation Senior Executive Officer Annual Incentive
Compensation Plan
The United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan (the "Steel Incentive Plan") provides for the
payment of cash awards to senior executive officers of United States Steel
based on the following performance measures:
. Income from operations
. Steel shipments
. Worker safety
. Toxic emissions improvement
. Work force diversity
. Common stock performance
The Compensation and Organization Committee of the United States Steel board
of directors will adopt, in accordance with regulations promulgated under the
Code to preserve tax deductibility of awards, applicable target levels under
these performance measures, and the amounts to be awarded for attaining such
target levels. In no event will the amount of an award payable to a participant
for a given year exceed $3,000,000.
Individuals serving in one of the positions listed below for at least a
portion of the calendar year will be eligible to participate in the Steel
Incentive Plan:
United States Steel Corporation Chairman
United States Steel Corporation Chief Executive Officer
United States Steel Corporation President
United States Steel Corporation Vice Chairman
United States Steel Corporation Chief Operating Officer
United States Steel Corporation Chief Financial Officer
United States Steel Corporation Chief Legal Officer
United States Steel Corporation Executive Vice Presidents
United States Steel Corporation Senior Vice Presidents
119
Pension Benefits
The United States Steel Plan for Non-Union Employee Pension Benefits ("Steel
Pension Plan") is comprised of two defined benefits. One is based on final
earnings and the other on career earnings. Directors who have not been
employees of United States Steel do not receive any benefits under the plan.
The following table shows the annual final earnings pension benefits for
retirement at age 65 (or earlier under certain circumstances) for various
levels of eligible earnings which would be payable to employees retiring with
the years of service shown. The benefits are based on a formula of a specified
percentage (dependent on years of service) of average annual eligible earnings
in the five consecutive years of the ten years prior to retirement in which
such earnings were highest. As of the date of this prospectus, Messrs. Usher,
Sandman, Dorrance and Gedeon have 35, 8, 30 and 15 years of service,
respectively. As of June 30, 2001, Mr. Surma had not accrued a benefit under
any pension plan or program sponsored by United States Steel. If Mr. Gedeon
retires with at least 16 credited years of service, he will receive from United
States Steel Corporation an amount equivalent to a final earnings and a
supplemental pension calculated as though he had an additional 14 years of
service. In connection with the Separation and in order to induce Dan D.
Sandman to serve as Vice Chairman and Chief Legal & Administrative Officer of
United States Steel Corporation, USX and Mr. Sandman have entered into an
agreement that provides if Mr. Sandman is employed by United States Steel
Corporation for five years after the Separation, upon his retirement, Mr.
Sandman will be offered the same enhanced retirement benefits as are being
offered to USX employees under the Voluntary Early Retirement Benefits Package
described on page 13 hereof.
15 20 25 30 35 40 45
Final Earnings Years Years Years Years Years Years Years
-------------- ------- ------- ------- ------- ------- ------- -------
$ 100,000 17,325 23,100 28,875 34,650 40,950 47,250 53,550
$ 300,000 51,975 69,300 86,625 103,950 122,850 141,750 160,650
$ 500,000 86,625 115,500 144,375 173,250 204,750 236,250 267,750
$ 700,000 121,275 161,700 202,125 242,550 286,650 330,750 374,850
$ 900,000 155,925 207,900 259,875 311,850 368,550 425,250 481,950
$1,100,000 190,575 254,100 317,625 381,150 450,450 519,750 589,050
$1,300,000 225,225 300,300 375,375 450,450 532,350 614,250 696,150
$1,500,000 259,875 346,500 433,125 519,750 614,250 708,750 803,250
Annual career earning benefits are equal to 1% of total career earnings plus
a 30 percent supplement. The estimated annual career earnings benefits payable
at normal retirement age 65, assuming no increase in annual earnings, will be
$233,400 for Mr. Usher, $114,420 for Mr. Sandman, $80,902 for Mr. Dorrance and
$69,562 for Mr. Gedeon. Earnings for the purpose of calculating both the final
earnings and career earnings pensions are limited to base salary as reflected
in the Summary Compensation table. They do not include any awards under any
bonus programs.
As of June 30, 2001, Mr. Surma had 4.5 years of service with Marathon Oil
Company and its subsidiaries and no service with USX or its other subsidiaries.
In connection with his employment by Marathon in 1997, Marathon agreed to
provide Mr. Surma with additional pension benefits by treating him as though he
had an additional 15 years of pension service. As a result of this provision,
if Mr. Surma retires at age 65, his total pension benefits from Marathon and
its subsidiaries, assuming no pay increases, will be $19,631 monthly.
As of June 30, 2001, Mr. Sandman had 19 years of service under Marathon's
pension plans. If Mr. Sandman retires at age 65, his total pension benefits
from Marathon and its subsidiaries, assuming no pay increases, will be $25,181
monthly.
In addition to the pension benefit described above, Messrs. Usher, Sandman,
Surma, Dorrance and Gedeon participate in the United States Steel Corporation
Executive Management Supplemental Pension Plan and are entitled, upon
retirement after age 60, or before age 60 with United States
120
Steel's consent, to the benefits shown in the table below based on bonuses paid
under applicable United States Steel plans. These bonuses are reported in the
bonus column of the Summary Compensation Table.
Annual
Bonus 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
------ -------- -------- -------- -------- --------- --------- ---------
$ 100,000 $ 23,100 $ 30,800 $ 38,500 $ 46,200 $ 53,900 $ 61,600 $ 69,300
300,000 69,300 92,400 115,500 138,600 161,700 184,800 207,900
500,000 115,500 154,000 192,500 231,000 269,500 308,000 346,500
700,000 161,700 215,600 269,500 323,400 377,300 431,200 485,100
900,000 207,900 277,200 346,500 415,800 485,100 554,400 623,700
1,100,000 254,100 338,800 423,500 508,200 592,900 677,600 762,300
1,300,000 300,000 400,400 500,500 600,600 700,700 800,800 900,900
1,500,000 346,500 462,200 577,500 693,000 808,500 924,000 1,039,500
1,700,000 392,700 523,600 654,500 785,400 916,300 1,047,200 1,178,100
1,900,000 438,900 585,200 731,500 877,800 1,024,100 1,170,400 1,316,700
121
THE PROPOSED SEPARATION
The Separation is expected to be implemented by merging a newly formed
corporate subsidiary of USX with and into USX, with USX continuing as the
surviving corporation.
As a result of the Separation:
. we will be converted into United States Steel Corporation, which will be
an independent, publicly traded company, wholly owned by the holders of
the then outstanding U. S. Steel Group Shares;
. the business of the Marathon Group will be owned and operated by
Marathon Oil Corporation, which will be an independent, publicly traded
company, wholly owned by the holders of the then outstanding Marathon
Group Shares; and
. each issued and outstanding U. S. Steel Group Share will be converted
into the right to receive one share of common stock of United States
Steel Corporation.
In connection with the Separation, certain indebtedness and other
obligations of USX will be repaid or retired and United States Steel
Corporation will incur indebtedness and other obligations and agree to repay
certain indebtedness and other obligations of USX, such that the amount of
indebtedness (including the indebtedness represented by the SQUIDS) and other
obligations for which United States Steel Corporation is responsible
immediately following the Separation is $900 million less than the net amounts
attributed to the U. S. Steel Group immediately prior to the Separation (the
"Value Transfer").
Following the Separation, United States Steel Corporation will account for
its assets and liabilities based on the historical values at which they were
carried by USX immediately prior to the Separation. This prospectus includes
historical combined financial information for United States Steel which
presents its financial position, results of operations and cash flows on a
carve-out basis. The unaudited pro forma condensed combined financial
information for United States Steel Corporation included in this prospectus
gives effect to the Value Transfer, new financing arrangements, the
reallocation of certain assets and liabilities, and the payment of Separation
costs.
The Separation will become effective at such time after the satisfaction or
waiver, to the extent permitted by law, of all of the conditions to the
Separation, as determined by the USX board of directors, upon the filing of a
certificate of merger with the Secretary of State of the State of Delaware or
such later time as specified in the certificate of merger. Completion of the
Separation is subject to a number of conditions including the conditions set
forth in the indenture governing the Senior Notes, the receipt of a private
letter ruling from the IRS and the completion of necessary regulatory and
third-party consents. Although we cannot predict the timing of receipt of such
ruling or satisfaction of such other conditions, we presently expect to
complete the Separation on or about December 31, 2001. Stockholders of USX
approved the Separation at a special meeting held on October 25, 2001.
The board of directors of USX may terminate the Plan of Reorganization that
governs the Separation and determine not to proceed with or to delay the
Separation for any reason at any time prior to its completion, even if it is
approved by USX stockholders and all of the other conditions to the Separation
are satisfied. The issuance of the SQUIDS is not subject to completion of the
Separation. In the event the Separation is not completed by December 31, 2002,
the SQUIDS will remain outstanding as obligations of United States Steel LLC
and the guarantee of USX will remain in effect until they are fully paid.
122
The above discussion includes forward-looking statements with respect to the
expected completion of the Proposed Separation. Some factors that could affect
the Proposed Separation include approval of a majority of the outstanding
shares of each class of the current USX common stock, receipt of a favorable
tax ruling from the IRS on the tax-free nature of the transaction, completion
of necessary financing arrangements, receipt of necessary regulatory and third
party consents, any materially adverse changes in business conditions for the
energy and/or steel businesses or other unfavorable circumstances.
123
RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL
CORPORATION AFTER THE SEPARATION
Following consummation of the Separation, United States Steel Corporation
and Marathon Oil Corporation will be independent companies and neither will
have any ownership interest in the other, although some of our directors will
also serve as directors of Marathon Oil Corporation. In connection with the
Separation and pursuant to the Plan of Reorganization, United States Steel
Corporation and Marathon Oil Corporation and their respective subsidiaries will
enter into a series of agreements governing their relationship subsequent to
the Separation and providing for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Separation. Set
forth below is a description of the material terms of such agreements. These
agreements have not yet been finalized and are subject to change.
Tax Sharing Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into
a Tax Sharing Agreement on behalf of themselves and their respective
consolidated groups 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 date of the
Separation and taxes resulting from transactions effected in connection with
the Separation.
The Tax Sharing Agreement will incorporate the general tax sharing
principles of USX's current tax allocation policy. In general, United States
Steel Corporation and Marathon Oil Corporation, will make payments between them
such that, with respect to any USX consolidated, combined, or unitary tax
returns for any taxable period or portion thereof ending on or before the date
of the Separation, the amount of taxes to be paid by each of United States
Steel Corporation and Marathon Oil Corporation will be determined, subject to
certain adjustments, as if the U. S. Steel Group and the Marathon Group each
filed its own consolidated, combined, or unitary tax return. The Tax Sharing
Agreement also will provide for payments between United States Steel
Corporation and Marathon Oil Corporation for certain tax adjustments which may
be made after the Separation, including adjustments related to the settlement
of tax audits for pre-Separation tax periods. Other provisions will address,
but will not be limited to, the handling of tax audits, settlements, and return
filing in cases where both United States Steel Corporation and Marathon Oil
Corporation have an interest in the results of these activities.
A preliminary settlement for the calendar year 2001 federal income taxes,
which would be made in March 2002 under USX's current tax allocation policy,
will be made immediately prior to the Separation at a discounted amount to
reflect the time value of money. Under the preliminary settlement for calendar
year 2001, it is expected that United States Steel will receive at least
$300 million from Marathon immediately prior to the Separation arising from
USX's current tax allocation policy. This policy provides that United States
Steel receives the benefit of tax attributes (principally net operating losses,
and various tax credits) that arise out of its business and which are used by
USX on a consolidated basis.
Additionally, pursuant to the Tax Sharing Agreement, United States Steel
Corporation and Marathon Oil Corporation will agree to protect the tax-free
status of the Separation. United States Steel Corporation and Marathon Oil
Corporation each will covenant that during the two-year period following the
Separation, it will not cease to be engaged in an active trade or business.
Each party also will represent that there is no plan or intention to liquidate
such party, take any other actions inconsistent with the information and
representations set forth in the ruling request filed with the IRS or sell or
otherwise dispose of its assets (other than in the ordinary course of business)
and will covenant that during the two-year period following the Separation, it
will not do so. To the extent that a breach of a representation or covenant
results in corporate tax being imposed on USX, the
124
breaching party, either United States Steel Corporation or Marathon Oil
Corporation, will be responsible for the payment of the corporate tax. In the
event that the Separation fails to qualify as a tax-free transaction through no
fault of either United States Steel Corporation or Marathon Oil Corporation,
the resulting corporate tax liability, if any, likely will be borne by United
States Steel Corporation pursuant to the Tax Sharing Agreement.
Even if the Separation otherwise qualifies for tax-free treatment under
section 355 of the Code, the Separation may become taxable to USX pursuant to
section 355(e) of the Code if 50% or more of either the shares of common stock
of Marathon Oil Corporation or shares of common stock of United States Steel
Corporation are acquired, directly or indirectly, as part of a plan or series
of related transactions that include the Separation. To minimize this risk,
both United States Steel Corporation and Marathon Oil Corporation will covenant
in the Tax Sharing Agreement that they will not enter into any transactions or
make any change in their equity structures that could cause the Separation to
be treated as part of a plan or series of related transactions to which section
355(e) may apply. If an acquisition occurs which results in the Separation
being taxable under section 355(e), the Tax Sharing Agreement provides that the
resulting corporate tax liability will be borne by the entity, either United
States Steel Corporation or Marathon Oil Corporation, with respect to which the
acquisition has occurred.
As discussed above in the section, "Risk Factors--Risks Related to
Separation--United States Steel Corporation Will Be Subject to Continuing
Contingent Liabilities of Marathon Oil Corporation Following the Separation",
although the Tax Sharing Agreement will allocate tax liabilities relating to
taxable periods ending on or prior to the Separation between United States
Steel Corporation and Marathon Oil Corporation, each corporation that was a
member of the USX consolidated group during any portion of a taxable period
ending on or prior to the date of the Separation is jointly and severally
liable under the Code for the federal income tax liability of the entire USX
consolidated group for that year. Thus, even though the Tax Sharing Agreement
will provide that one party (United States Steel Corporation or Marathon Oil
Corporation) will be responsible for the payment of a tax, the taxing
authorities may seek to collect the tax from the other party and consequently,
that other party would be entitled to seek indemnification under the Tax
Sharing Agreement. There can be no assurance that, in such circumstance,
Marathon Oil Corporation or United States Steel Corporation would be able to
satisfy its indemnification obligations under the Tax Sharing Agreement.
Transition Services Agreement
Currently, USX personnel at our Pittsburgh corporate headquarters provide
accounting, audit, corporate finance, government affairs, investor relations,
legal, stock transfer, strategic planning, public affairs and tax services that
primarily relate to corporate-wide matters and for which the costs are
allocated between the Marathon Group and the U. S. Steel Group. Effective upon
the Separation, Marathon Oil Corporation and United States Steel Corporation
will be responsible for their own needs in these areas, and USX corporate
personnel will be assigned to, and will be employed by, either Marathon Oil
Corporation or United States Steel Corporation. To the extent that one company
or the other is not able to immediately service its own needs, United States
Steel Corporation and Marathon Oil Corporation will enter into a transition
services agreement whereby one company will provide such services to the other
(to the extent requested) if the providing company is able to do so. Such
agreement will be for a term of up to twelve months and will be on a cost-
reimbursement basis. In addition, the company receiving such service will
release the other from any and all claims that may arise concerning the
adequacy, timeliness or quality of the service provided.
Although both the Marathon Group and U. S. Steel Group maintain independent
information technology and computer systems, USX headquarters relies on the two
groups for many of its computer applications. The Transition Services Agreement
will provide that, to the extent that either
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group has been supplying computer or information services to USX headquarters
or the other group, for a period of up to twelve months, Marathon Oil
Corporation or United States Steel Corporation will continue to provide
services to the other (to the extent requested) on the same basis that it is
currently provided on a cost-reimbursement basis. In addition, the company
receiving services will release the other from any and all claims that may
arise concerning the adequacy, timeliness or other quality of the services
provided.
The Transition Services Agreement also will provide that Marathon Oil
Corporation, as successor to USX, will grant to United States Steel Corporation
a fully paid, worldwide, nonexclusive license, without right to sublicense or
assign, in all computer programs, software, source code, and know-how (whether
patented, trademarked, copyrighted or not) owned or licensed (to the extent
permitted by the terms of such license) by USX in providing services used by
USX on a corporate basis or provided by USX to the U. S. Steel Group. Such
license will be granted without any representation or warranty whatsoever,
including suitability, ownership, usefulness, non-infringement or existence. A
similar grant of license will be made by United States Steel Corporation to
Marathon Oil Corporation.
The Transition Services Agreement will further provide that if, at any time
in the future, either Marathon Oil Corporation or United States Steel
Corporation requires any records, documents or other information in the
possession of the other relating to activities prior to the Separation, the
party having possession of such records, documents or other information shall
make it or copies available to the other party without charge.
Financial Matters Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into
the Financial Matters Agreement whereby United States Steel Corporation or its
subsidiaries will agree to incur or assume indebtedness and other obligations
of USX in connection with the Separation. The terms of the Financial Matters
Agreement are described in "Description of Other Indebtedness."
License Agreement
Upon consummation of the Separation, the License Agreement will provide that
Marathon Oil Corporation will grant to United States Steel Corporation a fully-
paid, worldwide, non-exclusive license to use the USX name rights and certain
intellectual property with the right to sublicense the same.
Insurance Assistance Agreement
Prior to the time of the corporate reorganization described in "Summary--
United States Steel LLC," the Marathon Group and the U. S. Steel Group
maintained independent property and business interruption insurance policies.
Other types of insurance, such as general liability, employer's liability,
automobile liability, workers' compensation, boiler and machinery and executive
risk, were purchased and held by USX for the benefit of USX and all of its
subsidiaries. Following the corporate reorganization described in "Summary--
United States Steel LLC," separate policies of insurance for certain general
liability, employer's liability, automobile liability, workers' compensation
and aircraft were issued to cover: (1) USX, and Marathon and its subsidiaries;
and (2) United States Steel LLC and its subsidiaries. The remaining policies of
insurance were maintained for the benefit of USX and its subsidiaries.
At the Separation, the insurance policies held for the benefit of USX and
its subsidiaries will be truncated and separate policies of insurance will be
purchased for Marathon Oil Corporation and its subsidiaries and for United
States Steel Corporation and its subsidiaries. Marathon Oil Corporation and
United States Steel Corporation will also enter into the Insurance Assistance
Agreement. This
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agreement will provide 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.
Under this agreement, Marathon Oil Corporation will be solely liable for pre-
Separation claims associated with the business of the Marathon Group, and
United States Steel Corporation will be solely liable for pre-Separation claims
associated with the business of the U. S. Steel Group. Liability for pre-
Separation claims associated with USX assets, directors and employees will be
allocated 65% to Marathon Oil Corporation and 35% to United States Steel
Corporation. The cost of extended reporting insurance for these pre-Separation
periods will also be split between Marathon Oil Corporation and United States
Steel Corporation on a 65%-35% basis, respectively. Finally, the agreement will
address the sharing of policy limits for extended reporting insurances
maintained jointly by Marathon and United States Steel prior to the Separation.
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DESCRIPTION OF OTHER INDEBTEDNESS
Current USX Financial Arrangements
USX manages most of its financial activities on a centralized, consolidated
basis. Such financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock; and the issuance and
repurchase of common stock. Transactions that relate 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
are attributed to the Marathon Group and the U. S. Steel Group based upon the
cash flows of each group for the periods presented and the initial capital
structure of each group. However, transactions such as leases, certain
collaterized financings, certain indexed debt instruments, financial activities
of consolidated entities which are less than wholly owned by USX and
transactions related to securities convertible solely into the Marathon Group
or the U. S. Steel Group are specifically attributed to and reflected in their
entirety in the financial statements of the group to which they relate.
These attributions are for accounting purposes only and do not reflect legal
ownership of cash or legal obligation to pay and discharge such obligations.
USX is the issuer of the 6.50% Preferred Stock, although it is attributed
solely to the U. S. Steel Group, and subsidiaries of USX are the issuers of the
6.75% QUIPS and the 8.75% MIPS which are also attributed, in whole or in part,
to the U. S. Steel Group (although supported by USX guarantees). Subject to a
limited number of exceptions, USX is the legal obligor of all long-term debt
and other financial instruments, including many--such as leases--that are not
reflected as liabilities on the consolidated or group balance sheets.
After the Separation, United States Steel Corporation will own and operate
the business of the U. S. Steel Group and United States Steel Corporation or
its subsidiaries will incur indebtedness and other obligations in an amount
approximately equal to all of the net amounts attributed to the U. S. Steel
Group immediately prior to the Separation, both absolute and contingent, less
the amount of the $900 million Value Transfer. Upon consummation of the
Separation, the name of USX Corporation will be changed to Marathon Oil
Corporation, and Marathon Oil Corporation and its subsidiary Marathon Oil
Company will own and operate the business of the Marathon Group and will remain
responsible for all of the liabilities of or attributed to the Marathon Group,
both absolute and contingent, plus $900 million.
USX is presently the legal obligor for most of the obligations attributed to
both groups, and, therefore, Marathon Oil Corporation, will remain legally
obligated for these obligations. Accordingly, United States Steel Corporation
will be required to replace a substantial amount of USX obligations attributed
to the U. S. Steel Group. Such replacement, after giving effect to the Value
Transfer, will be effected pursuant to the Financial Matters Agreement and will
require a post-Separation cash settlement between United States Steel
Corporation and Marathon Oil Corporation. This cash settlement will be
completed following the audit of balance sheets for both U. S. Steel Group and
Marathon Group as of the date of Separation. The audits of the balance sheets
and the determination of the cash settlement amount will be subject to a
dispute resolution procedure to be included in the Financial Matters Agreement.
After giving effect to the Financing required to complete the Separation,
and assuming the Separation had occurred on June 30, 2001, United States Steel
Corporation and its subsidiaries
. would have continued to be the direct obligor of $325 million of debt
under the USSK loan facility;
. would have assumed $569 million of debt and capital leases of USX
attributed to United States Steel and $133 million of certain guarantee
and operating lease obligations (which
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guarantee and lease obligations are not reflected in the financial
statements of USX or United States Steel); and
. would have incurred new indebtedness in the amount of approximately $899
million (including an aggregate of up to $365 million of SQUIDS) and,
assuming the issuance of an aggregate of $365 million principal amount
of SQUIDS in the exchange offers, would have paid $505 million of the
net proceeds thereof to Marathon Oil Corporation to be used to repay a
portion of the debt and other obligations attributed to United States
Steel by USX prior to the Separation, which may include, without
limitation, a redemption of the 8.75% MIPS outstanding after the
exchange offers, although no decision with respect to such a redemption
has been made. In the event that less than $365 million of SQUIDS are
issued in the exchange offers, the amount of such payment to Marathon
Oil Corporation will be increased by the difference between $365 million
and the amount of the SQUIDS actually issued.
In addition, United States Steel expects to enter into new credit
facilities, including a secured accounts receivable facility and a secured
inventory facility. Undrawn amounts under these facilities will provide
liquidity to United States Steel following the Separation.
Following the Separation, the annual weighted average interest rate of these
obligations is estimated to be approximately 8.50%. A one-eighth ( 1/8) percent
change in that rate is expected to have an annual impact of about $2 million of
interest expense.
Obligations for Which United States Steel Corporation or its Subsidiaries Will
Be the Direct Obligor
The following obligations of the U. S. Steel Group will continue as
obligations of United States Steel Corporation or its subsidiaries following
the Separation, and United States Steel or its subsidiaries will continue to be
the obligor:
SQUIDS. Following the Separation, United States Steel will be the sole
obligor of the SQUIDS, which will no longer be guaranteed by USX. For a
description of the terms of the SQUIDS, see "Description of the SQUIDS" on page
133.
Senior Notes. The $535 million principal amount of Senior Notes issued by
United States Steel on July 27 and September 11, 2001 will continue as
obligations of United States Steel following the Separation. The Senior Notes,
which mature on August 1, 2008 and pay interest at an annual rate of 10.75%,
represent an unsecured senior obligation of United States Steel. Interest on
the Senior Notes is payable in cash on a semiannual basis, beginning on
February 1, 2002. Until the completion of the Separation, the Senior Notes will
be fully and unconditionally guaranteed by USX. Following the Separation,
United States Steel Corporation will be the sole obligor of the Senior Notes,
which will no longer be guaranteed by USX. If the USX board of directors
decides not to proceed with the Separation, or if the Separation does not occur
on or before December 31, 2002, USX will continue to guarantee the Senior Notes
until they are fully paid. Upon a change of control (as defined in the
indenture governing the Senior Notes), we will be required to make an offer to
purchase the Senior Notes at 101% of the principal amount of the Senior Notes
plus accrued but unpaid interest.
Inventory Facility. We are documenting a three-year revolving credit
facility maturing December 31, 2004 in an amount of up to $400 million. The
facility is subject to several conditions and will be secured by all of our
domestic inventory and related assets, including receivables (other than those
sold under the proposed accounts receivable facility). The amount outstanding
under the facility will not exceed the permitted "borrowing base" calculated on
percentages of the values of our eligible inventory. Interest on borrowings
will be calculated based on either LIBOR or Chase Manhattan's prime rate using
spreads determined by our credit ratings.
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Borrowings under the facility may not be utilized until completion of the
Separation. Also, we must have received a payment under the tax settlement from
Marathon in excess of $300 million. The lenders will be able to terminate their
commitments and declare all outstanding sums due under the facility if certain
Events of Default occur. Following a change of control of United States Steel,
a lender may terminate its commitment and require an immediate prepayment of
all amounts owing to it under the facility.
Revolving Receivables Facility. We are finalizing a $400 million revolving
trade receivables program under which investors will purchase a pool of trade
receivables from a special purpose subsidiary of United States Steel. We expect
to sell most of our receivables to this subsidiary that will in turn sell an
undivided interest in receivables to companies that issue commercial paper to
fund those purchases or to financial institutions. The purchasers will
generally be compensated at a floating rate that is expected to be based on
spreads over the cost of commercial paper. We anticipate that there will be
criteria concerning the kinds of receivables that can be included in this
program and that we will be required to repurchase sold receivables under
certain circumstances. It is anticipated that there will be a number of
covenants in this program that could affect our ability to sell receivables or
require us to repurchase all of them and closing is subject to several
contingencies.
USSK Loan Facility. On November 24, 2000, USX acquired USSK which has a loan
facility with a group of financial institutions aggregating $325 million. The
facility, which is non-recourse to USX, bears interest at a fixed rate of 8.5%
per year. The loan is subject to annual repayments of $20 million beginning in
2003, with the balance due in 2010. Additional mandatory prepayments of the
loan may be required based upon a cash flow formula or a change in control of
USX. USSK also has a short-term $50 million credit facility that expires in
November 2001. The facility, which is non-recourse to USX, bears interest at
prevailing short-term market rates plus 1%. USSK is obligated to pay a .25%
commitment fee on undrawn amounts. At June 30, 2001, there were no borrowings
against this facility.
Operating Lease Obligations. United States Steel is the lessee under several
equipment leases and office building leases which, for accounting purposes, are
treated as operating leases. Total future lease payments under these leases as
of June 30, 2001 were approximately $250 million, with varying maturities.
USX Obligations to Be Assumed by United States Steel Corporation
The following obligations of USX will continue as direct obligations of
Marathon Oil Corporation, although United States Steel Corporation will agree
in the Financial Matters Agreement to assume and pay all liabilities for these
obligations following the Separation:
Industrial Revenue Bonds. As of June 30, 2001, USX had outstanding $479
million of obligations under industrial revenue bonds related to environmental
projects for current and former U. S. Steel Group facilities, $9 million of
which will be repaid on or prior to December 31, 2001. Pursuant to the
Financial Matters Agreement, United States Steel Corporation will assume all
obligations under these instruments. Only $1.8 million of the industrial
revenue bonds mature from 2002 to 2012. United States Steel must provide for
the discharge of Marathon Oil Corporation from the remaining liability under
the assumed industrial revenue bonds on or before the tenth anniversary of the
Separation. Such discharge may be accomplished by refinancing, paying to
Marathon Oil Corporation the then remaining principal amount of the obligations
or a combination of the foregoing.
Assumed Capital Leases. United States Steel Corporation is the lessee of a
slab caster at the Fairfield Works facility in Alabama with a term through
2012. This lease is treated as a capitalized lease and, as of June 30, 2001,
the amount of such obligation was $84 million. USX is the obligor under this
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lease. Under the Financial Matters Agreement, United States Steel will assume
and discharge all obligations under this lease. This lease is an amortizing
financing with a final maturity of 2012, subject to additional extensions. In
addition, there will be $6 million of other capital lease obligations which
will be assumed by United States Steel.
Operating Lease Obligations and Guarantees. In connection with past sales of
various plants and operations, United States Steel assigned and the purchasers
assumed certain leases of major equipment used in the divested plants and
operations. In the event of a default by any of the purchasers, United States
Steel remains contingently liable for payments under these leases. In addition,
United States Steel is assuming certain other obligations and guarantees of USX
related to the business of United States Steel. As of June 30, 2001, the total
exposure for all of these matters totaled $133 million.
New Financing Arrangements of United States Steel Corporation
United States Steel Corporation will incur additional indebtedness in
connection with the Separation. Assuming the Separation occurred on June 30,
2001, United States Steel Corporation would have to incur new indebtedness in
the amount of $899 million (including an aggregate of up to $365 million of
indebtedness relating to the SQUIDS). Additional new financing arrangements to
pay Marathon Oil Corporation $505 million and fund Separation costs in the
amount of $29 million include the July 27 and September 11, 2001 sale of $535
million of Senior Notes, at a discount of $5 million, and other financing
arrangements of $4 million. In the event that less than $365 million of SQUIDS
are issued in the exchange offers, the amount of the required payment to
Marathon Oil Corporation, and, consequently, the additional new financing
arrangements required, will be increased by the difference between $365 million
and the amount of the SQUIDS actually issued. United States Steel will obtain
any additional new financing required through one or a combination of
additional notes (including additional SQUIDS), lease financings, new preferred
or other security offerings and new credit facilities, including a secured
accounts receivable facility. Some or all of the additional financing
requirements may be funded through the preliminary tax settlement from
Marathon, which is expected to be at least $300 million and will be received
prior to the Separation. In addition, it is a condition to the Separation that
United States Steel have in place, at the time of the Separation, cash and
undrawn credit of at least $400 million. The amount of additional financing
required at Separation may vary as a result of a number of factors, including
the amount of SQUIDS actually issued in the exchange offers, the operating
performance of United States Steel, its working capital position and the amount
of the tax settlement with Marathon.
General Terms of the Financial Matters Agreement
The Financial Matters Agreement governs the assumption by United States
Steel Corporation of the industrial revenue bonds and other financial
obligations of USX specified above. The agreement will provide that United
States Steel Corporation will assume and discharge all principal, interest and
other duties of USX under these assumed 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 Oil Corporation. The
agreement also provides that on or before the tenth anniversary of the
Separation, United States Steel Corporation will provide for the discharge of
Marathon Oil Corporation from any remaining liability under any of the assumed
industrial revenue bonds. Such discharge may be accomplished by refinancing,
paying to Marathon Oil Corporation the then remaining principal amount of the
obligations or a combination of the foregoing.
The Financial Matters Agreement will prohibit Marathon Oil Corporation from
taking any action that would create a default under the assumed obligations or
otherwise accelerate the payment obligations thereunder. The agreement will
also obligate Marathon Oil Corporation to provide any letters of credit
required under any of these obligations provided that United States Steel
Corporation reimburses Marathon Oil Corporation for the costs of such letters
of credit when due and indemnifies and holds Marathon Oil Corporation harmless
against any draws under the letters of credit.
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The Financial Matters Agreement will provide for a general unsecured
obligation of United States Steel Corporation to Marathon Oil Corporation and
will rank equal to accounts payable and other obligations. The Financial
Matters Agreement will not contain any financial covenants and United States
Steel Corporation will remain free to incur additional debt, grant mortgages or
security interests in its property and sell or transfer assets without the
consent of Marathon Oil Corporation.
The Financial Matters Agreement will also provide that Marathon Oil
Corporation will indemnify United States Steel Corporation against any claims
arising out of USX financings not assumed by United States Steel Corporation.
Financing Arrangements of USX to Be Continued by Marathon Oil Corporation
Revolving Credit Facility. In November 2000, USX entered into a $1,354
million 5-year revolving credit agreement, expiring in November 2005, with a
group of financial institutions. Interest on the facility is based on defined
short-term market rates. During the term of the credit agreement, USX is
obligated to pay a variable facility fee on total commitments, which at June
30, 2001 was 0.125%. On June 30, 2001, there were no borrowings against this
facility. This facility will remain outstanding as an obligation of Marathon
Oil Corporation following the Separation. USX also has a similar $451 million
short-term credit facility expiring on November 29, 2001 with the same
financial institutions as the 5-year revolving credit agreement. On June 30,
2001, there were no borrowings under this facility. We expect that we will
renew this facility in 2001.
USX has from time to time issued commercial paper which it has classified as
long-term debt because it is supported by the unused and available credit on
the $1,354 million facility. On June 30, 2001, no commercial paper was
outstanding. We anticipate that Marathon Oil Corporation may issue commercial
paper in the future under similar circumstances.
Long- and Short-Term USX Obligations to Be Continued. Marathon Oil
Corporation will continue to be the obligor on the obligations of USX. The
principal components of these obligations are:
Amount
Interest Rates Maturity (in millions) as of
Obligations % Range June 30, 2001
----------- -------------- --------- -------------------
Obligations relating to
Industrial Revenue Bonds (1)... 3.30 to 6.875% 2009-2033 $ 508
Fairfield Caster Lease(2)....... 8.04% 2012 $ 84
Bank Term Loan.................. 6.57% 2006 $ 29
Guaranteed Notes and Loans of
Subsidiaries................... 7.00 to 9.05% 2002-2006 $ 320
8.75% MIPS...................... 8.75% 2044 $ 250(3)
Operating Leases and
Guarantees..................... 5.00 to 11.75% 2002-2017 $ 747
Other long- and short-term
obligations.................... 6.65 to 9.80% 2001-2023 $2,505
--------
(1) The rights and obligations pertaining to $479 million of the industrial
revenue bonds are being assigned to and assumed by United States Steel
Corporation pursuant to the Financial Matters Agreement.
(2) Fairfield Caster will be subleased to United States Steel Corporation under
the Financial Matters Agreement.
(3) To be reduced by the amount of 8.75% MIPS accepted in the exchange offers.
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DESCRIPTION OF THE SQUIDS
United States Steel LLC will issue the SQUIDS under an Indenture (the
"Indenture") between it and The Bank of New York, as trustee (the "Trustee").
The terms of the SQUIDS 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"). Subject to our compliance with certain limitations in
other debt instruments of ours, we are permitted to issue additional SQUIDS
under the Indenture in an unlimited principal amount.
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 SQUIDS. You may request
copies of these agreements at our address set forth under the heading "Where
You Can Find More Information" on page (ii).
Brief Description of the SQUIDS
The SQUIDS:
. are unsecured senior obligations of ours;
. are senior in right of payment to any future subordinated obligations of
ours; and
. are fully and unconditionally guaranteed by USX Corporation, our parent
company, until the Separation Date.
The Indenture does not limit us from incurring or issuing other unsecured or
secured debt. The Indenture, moreover, does not contain any provisions that
protect you in the event we issue a large amount of debt.
Principal, Maturity and Interest
We will issue the SQUIDS to be sold in the exchange offers in an aggregate
principal amount of at least $150 million and up to $365 million. The SQUIDS
will mature on December 31, 2031. We are permitted to issue more SQUIDS under
the Indenture on or prior to December 31, 2002 up to such additional aggregate
principal amount as would be permitted under the covenants of our outstanding
indebtedness (the "Additional SQUIDS"). The SQUIDS and the Additional SQUIDS,
if any, will be treated as a single class for all purposes of 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 SQUIDS", references to the SQUIDS include any Additional
SQUIDS actually issued.
We will issue the SQUIDS in minimum denominations of $25 and any integral
multiple of $25.
Interest on the SQUIDS will accrue from the Exchange Date at a rate of %
per annum and will be payable in arrears initially on March 31, 2002 and
thereafter quarterly on March 31, June 30, September 30 and December 31 of each
year (each, an "Interest Payment Date"). On an Interest Payment Date, interest
will be paid to the persons in whose names the SQUIDS were registered as of the
record date. With respect to any Interest Payment Date, the record date will be
the fifteenth day of the month in which such Interest Payment Date occurs,
except as otherwise provided in the Indenture.
The amount of interest payable for any period will be computed on the basis
of twelve 30-day months and a 360-day year and, for any period shorter than a
full quarterly interest period, will be computed on the basis of the actual
number of days elapsed in such 90-day quarterly interest period. If any
Interest Payment Date falls on a Saturday, a Sunday or a day on which banking
institutions in
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New York, New York are authorized or obligated by law or executive order to
close, then payment of interest may be made on the next succeeding business day
without additional interest.
Payments of principal and interest will be payable at the office of the
Trustee in New York, New York at which the Trustee's corporate trust business
is then principally administered or at such other paying agent as may be
designated pursuant to the Indenture. We may, however, at our option pay
interest by having the Trustee mail checks or make wire transfers to registered
holders of the SQUIDS.
At the maturity of the SQUIDS, the principal and accrued interest of the
SQUIDS will be payable upon the surrender of the SQUIDS by the registered
holders of the SQUIDS at the office of the Trustee. As long as the SQUIDS are
held through the facilities of DTC as described under "Book-Entry, Delivery and
Form" below, the only registered holder of the SQUIDS will be DTC or a nominee
of DTC.
Optional Redemption
Except as set forth below, we will not be able to redeem the SQUIDS at our
option prior to maturity.
The SQUIDS will be 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. Additionally,
we may at any time repurchase SQUIDS at any price in the open market and may
hold, resell or surrender such SQUIDS to the Trustee for cancellation. You will
not have the right to require us to repay SQUIDS prior to maturity.
Further, at any time on or prior to December 31, 2002, we may, at our
option, give written notice to redeem the SQUIDS , which notice shall be no
less than 30 nor more than 60 days prior to the redemption date, in whole or in
part at a redemption price (expressed as a percentage of principal amount) of
100%, plus accrued and unpaid interest to the redemption date; provided that
(1) the USX Board of Directors shall have determined not to proceed with
the Separation (and the guarantee of USX Corporation will stay in
effect until the SQUIDS are fully paid); and
(2) if we elect to redeem the SQUIDS in part, at least the minimum
aggregate principal amount of SQUIDS required to maintain listing of
the SQUIDS on the New York Stock Exchange, under the rules and
regulations thereof, remains outstanding.
Selection and Notice of Redemption
If we are redeeming less than all the SQUIDS at any time, the Trustee will
select SQUIDS 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 SQUIDS of $25 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 SQUIDS to be redeemed
at its registered address.
If any of the SQUIDS are to be redeemed in part only, the notice of
redemption that relates to those SQUIDS will state the portion of the principal
amount thereof to be redeemed. We will issue new SQUIDS in a principal amount
equal to the unredeemed portion of the original SQUIDS in the name of the
holder upon cancellation of the original SQUIDS. SQUIDS called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on SQUIDS or portions of them called for redemption.
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So long as the book-entry system is used for determining beneficial
ownership of the SQUIDS, the notice of redemption for any of the SQUIDS will be
given to Cede & Co. ("Cede"), as nominee for DTC as registered owner of the
SQUIDS. 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 SQUIDS.
Temporary Guarantee
USX Corporation will fully and unconditionally guarantee, on a senior
unsecured basis, our obligations under these SQUIDS until the effective time of
the Separation; provided that if the Separation does not occur on or before
December 31, 2002 or if the Board of Directors determines not to proceed with
the Separation, the guarantee of USX Corporation will stay in effect until the
SQUIDS have been fully paid.
Book-Entry System--The Depository Trust Company
DTC will act as securities depositary (the "Depository") for the SQUIDS. 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 that its participants (the "Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include Securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations (the "Direct Participants"). DTC
is owned by a number of its Direct Participants and by the NYSE, the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others, such as securities
brokers and dealers, banks, and trust companies that clear transactions through
or maintain a direct or indirect custodial relationship with a Direct
Participant either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the SEC.
The ownership interest of each actual owner of SQUIDS ("Beneficial Owner")
within the DTC system is recorded on the Direct and Indirect Participants'
records and is credited to the Direct Participant on DTC's records. Beneficial
Owners do not receive written confirmation from DTC of their transactions, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participants through which the Beneficial owners
exchanged or hold SQUIDS. Transfers of ownership interests in the SQUIDS are to
be accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in SQUIDS, except in the event that use
of the book-entry system for the SQUIDS is discontinued.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in SQUIDS represented by a global
certificate.
To facilitate subsequent transfers, all the SQUIDS deposited by Participants
with DTC are registered in the name of Cede. The deposit of SQUIDS with DTC and
their registration in the name of Cede effect no change in beneficial
ownership. DTC has no knowledge of the identity of the Beneficial Owners of the
SQUIDS, as its records reflect only the identity of the Direct Participants to
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whose accounts such SQUIDS are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
that may be in effect from time to time. Redemptions are coordinated through
DTC. Redemption notices shall be sent to Cede.
Interest payments on the SQUIDS are made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's record unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name," and such payments will
be the responsibility of such Participant and not of DTC, the Trust, or the
Company, subject to any statutory or regulatory requirements to the contrary
that may be in effect from time to time. Payment of interest to DTC is the
responsibility of the issuer of the SQUIDS, disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of SQUIDS only at the direction of one or more Participants
to whose account with DTC interests in shares presented by a global certificate
are credited and only in respect of such number of SQUIDS represented by a
global certificate as to which such Participants have given such direction.
Except as provided herein, a Beneficial Owner in a global SQUIDS certificate
will not be entitled to receive physical delivery of such securities.
Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under such securities. Because DTC can only act on behalf
of Participants, who in turn act on behalf of Indirect Participants, the
ability of a person having a beneficial interest in shares represented by a
global certificate to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate of such
interest.
DTC may discontinue providing its services as Depository with respect to the
SQUIDS at any time by giving reasonable notice to the issuer. Under such
circumstances, in the event that a successor securities depositary is not
obtained, certificates for the SQUIDS for which DTC has discontinued its
services are required to be printed and delivered. In addition, we may decide
to discontinue use of the system of book-entry transfers through DTC (or any
successor depositary) with respect to SQUIDS. Use of the book-entry system
through DTC will also be discontinued if an Event of Default occurs. In either
event, certificates for such SQUIDS will be printed and delivered. The
information in this section concerning DTC and DTC's book-entry system has been
obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Conditions to Separation
We will not permit the Separation to occur, unless:
(1) USX has received a private letter ruling from the IRS that the
Separation will qualify as a tax-free transaction within the meaning of
Section 355 of the Code;
(2) the transactions that give effect to the Value Transfer have occurred;
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(3) USX has not amended (i) the definition of U. S. Steel Group in its
certificate of incorporation or by-laws or (ii) its Management and
Allocation Policies, in either case, in any manner adverse to the
holders of the SQUIDS;
(4) immediately following the Separation and after giving pro forma effect
to any subsequent payments to be made as part of the Separation, (x) we
have an aggregate of at least $400 million available in undrawn
financings and cash, of which at least $300 million is available under
facilities with terms extending at least three years after the date
such facilities are put in place, and (y) no Default shall have
occurred and be continuing; and
(5) any differences between the documents giving effect to the Separation
(x) as executed and delivered and (y) as described in this prospectus
may not have a material adverse effect on the holders of the SQUIDS.
Change in Control Offer
If a Change in Control occurs, we will offer to purchase SQUIDS (the "Change
in Control Offer"), at a purchase price (the "Change in Control Purchase
Price") equal to 100% of the principal amount thereof, together with accrued
interest to the Change in Control Purchase Date referred to below (except that
interest installments due before the Change in Control Purchase Date will be
payable to the holders of those SQUIDS of record at the close of business on
the relevant record dates), as of the date that is 35 business days after the
occurrence of the Change in Control (the "Change in Control Purchase Date"),
subject to satisfaction by or on behalf of the holders of the requirements
included in the Indenture.
A "Change in Control" will be deemed to have occurred when any of the
following events will occur:
. any "person" or group of persons has acquired "beneficial ownership"
(within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended, and the applicable rules and regulations
thereunder) of shares of Voting Stock representing at least 35% of the
outstanding Voting Power of United States Steel or, for as long as the
guarantee by USX of the SQUIDS remains in effect, of USX;
. during any period of 25 consecutive months, commencing before or after
the Exchange Date, individuals who at the beginning of that 25-month
period were directors of United States Steel or, for as long as the
guarantee by USX of the SQUIDS remains in effect, USX, together with any
replacement or additional directors whose election was recommended by
incumbent management of United States Steel or USX, as applicable, or
who were elected by a majority of directors then in office, cease to
constitute a majority of the board of directors of United States Steel
or USX, as applicable;
. any person or group of related persons has acquired all or substantially
all of the assets of United States Steel or, for as long as the
guarantee by USX of the SQUIDS remains in effect, of USX; or
. the disposition, transfer or sale of the interests held in United States
Steel by USX, except in accordance with the Separation consummated in
compliance with the covenant described under "Certain Covenants--
Conditions to the Separation".
Notwithstanding the foregoing:
. in no event will the Separation, as described in this prospectus, or any
transfer or reorganization in connection with the Separation, be deemed
to be a Change in Control for purposes of this "--Change in Control
Offer";
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. a Change in Control will not be deemed to have occurred under the third
bullet point of the previous paragraph if United States Steel or USX, as
applicable, will have merged or consolidated with or transferred all or
substantially all of its assets to another Person in compliance with the
provisions under "Certain Covenants--Merger and Consolidation" and the
surviving or successor or transferee Person is no more leveraged than
was United States Steel or USX, as applicable, immediately prior to that
Change in Control and, in the event of a Change in Control with respect
to USX, that Change in Control does not result in United States Steel
being more leveraged; the term "leveraged", when used with respect to
any person, will mean the percentage represented by the total assets of
that person divided by its stockholders' or total equity, as applicable,
in each case determined and as would be shown in a consolidated balance
sheet of that Person prepared in accordance with generally accepted
accounting principles in the United States of America; and
. a Change in Control will not be deemed to have occurred by virtue of (1)
United States Steel, USX, any of their respective Subsidiaries, any
employee stock ownership plan or any other employee benefit plan of
United States Steel, USX or any of their respective Subsidiaries, or any
person holding Voting Stock for or pursuant to the terms of any such
employee benefit plan, acquiring beneficial ownership of shares of
Voting Stock, whether representing 35% or more of the outstanding Voting
Power of United States Steel or USX, as applicable, or otherwise or (2)
any person whose ownership of shares of Voting Stock representing 35% or
more of the outstanding Voting Power of USX results solely from USX's
calculation from time to time of the relative voting rights of the
classes of Voting Stock of USX.
Within 15 business days after the occurrence of a Change in Control, we will
mail a written notice of Change in Control by first-class mail to the Trustee
and to each holder, and to the beneficial owners as required by applicable law,
of SQUIDS and will cause a copy of that notice to be published in a daily
newspaper of national circulation. The notice will state:
(1) the events causing a Change in Control, specifying those events, and
the date of that Change in Control;
(2) the date by which holders must give notice of the exercise of their
rights under the Change in Control Offer;
(3) the Change in Control Purchase Date;
(4) the Change in Control Purchase Price;
(5) the name and address of the paying agent for the SQUIDS;
(6) that on the Change in Control Purchase Date, all SQUIDS surrendered in
accordance with this "--Change in Control Offer" for payment at the
Change in Control Purchase Price will be purchased by us at that price
and, if applicable, that interest thereon will cease to accrue on and
after that date;
(7) the procedures the holders must follow to exercise rights under this
"--Change in Control Offer", including procedures to be followed by a
holder acting as a holder of record on behalf of more than one
beneficial owner in exercising rights specified in this section with
respect to less than all of those beneficial owners; and
(8) the procedures for withdrawing a Change in Control Purchase Notice.
We will not be required to make a Change in Control Offer following a Change
in Control if a third party makes the Change in Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change in Control Offer made by us and purchases all
SQUIDS validly tendered and not withdrawn under such Change in Control Offer.
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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 SQUIDS as a result of a Change in 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 will not be deemed to have
breached our obligations under the covenant described hereunder by virtue of
its compliance with such securities laws or regulations.
The Change in Control purchase feature of the SQUIDS may in certain
circumstances make more difficult or discourage a sale or takeover of United
States Steel and, thus, the removal of incumbent management. We have no present
intention to engage in a transaction involving a Change in 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 in 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. The Indenture will not contain
any covenants or provisions that may afford holders of the SQUIDS protection in
the event of a highly leveraged transaction.
Any senior credit facility that we enter into in connection with the
Separation or otherwise may prohibit us from purchasing any SQUIDS and may also
provide that the occurrence of certain change of control events with respect to
us would constitute a default thereunder. In the event a Change in Control
occurs at a time when we are prohibited from purchasing SQUIDS, we may seek the
consent of our lenders to the purchase of SQUIDS or may attempt to refinance
the borrowings that contain such prohibition. If we do not obtain such a
consent or repay such borrowings, we will remain prohibited from purchasing
SQUIDS. In such case, our failure to offer to purchase SQUIDS would constitute
a default under the Indenture, which may, in turn, constitute a default under
any such credit facility.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a change in control or
require the repurchase of such indebtedness upon a change in control. Moreover,
the exercise by the holders of their right to require us to repurchase the
SQUIDS could cause a default under such indebtedness, even if the Change in
Control itself does not, due to the financial effect of such repurchase on us.
Finally, our ability to pay cash to the holders of SQUIDS following the
occurrence of a Change in 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 SQUIDS as a result of a Change in Control may be waived
or modified with respect to the SQUIDS with the written consent of the holders
of a majority in principal amount of the SQUIDS.
Certain Covenants
The Indenture contains covenants including, among others, those described
below.
Limitation on Liens
If we or any of our Subsidiaries mortgages, pledges, encumbers or subjects
to a lien (to "Mortgage" or a "Mortgage", as the context may require), as
security for any indebtedness for money borrowed, any Principal Property or any
shares of stock or other equity interests in any of our Subsidiaries that own,
directly or indirectly, one or more Principal Properties, we will secure or
will cause our applicable Subsidiary to secure the SQUIDS equally and ratably
with all indebtedness or obligations secured by the Mortgage then being given
and with any other indebtedness or other obligations of ours or that Subsidiary
then entitled to that Mortgage.
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However, this covenant will not apply in the case of:
. any Mortgage incurred by any Subsidiary of ours to secure indebtedness
for money borrowed incurred by such Subsidiary;
. any Mortgage, including a purchase money Mortgage, incurred in
connection with the acquisition of any Principal Property or shares of
stock or other equity securities (for purposes of this exception, the
creation of any Mortgage within 180 days after the acquisition or
completion of construction of that Principal Property or those shares of
stock or other equity securities will be deemed to be incurred in
connection with the acquisition of that Principal Property or those
shares of stock or other equity securities), the assumption of any
Mortgage previously existing on that acquired Principal Property or
those acquired shares of stock or other equity interests or any Mortgage
existing on the Principal Property of any Person when that Person
becomes a Subsidiary of ours;
. any Mortgage in favor of the United States of America, any State, any
foreign government or any agency, department, political subdivision or
other instrumentality of any of the foregoing, to secure partial,
progress or advance payments to us or any of our Subsidiaries pursuant
to the provisions of any contract or any statute;
. any Mortgage in favor of the United States of America, any State, any
foreign government or any agency, department, political subdivision or
other instrumentality of any of the foregoing, to secure borrowings by
us or any of our Subsidiaries for the purchase or construction of the
Principal Property Mortgaged;
. 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 or alteration of that Principal Property or any portion of
that Principal Property;
. any Mortgage existing on the date of the Indenture, whether or not that
Mortgage includes an after-acquired property provision; or
. any renewal of or substitution for any Mortgage permitted under the
preceding exceptions; provided, however, that the principal amount of
indebtedness secured by the Mortgage may not exceed the principal amount
of indebtedness secured at the time of the renewal or substitution and
that the renewal or substitution must be limited to all or a part of the
Principal Property, plus improvements and construction on that Principal
Property, or shares of stock or other equity securities which were
subject to the Mortgage that was renewed or substituted.
Limitation on Sale/Leaseback Transactions
We will not, and we will not permit any of our Subsidiaries to, sell or
transfer any Principal Property with the intention of taking back a lease on
that Principal Property.
However, this covenant will not apply if:
. the lease is to one of our Subsidiaries, or to us in the case of a
Subsidiary of ours;
. the lease is for a temporary period by the end of which it is intended
that the use of that Principal Property by the lessee will be
discontinued;
. we or one of our Subsidiaries could, in accordance with the covenant
"Limitation on Liens", Mortgage that Principal Property without equally
and ratably securing the SQUIDS;
. (1) we promptly inform the Trustee of that sale, (2) the net proceeds of
that sale are at least equal to the fair market value (as determined by
resolution adopted by our board of directors) of that Principal Property
and (3) we will, and in any such case we covenant that
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we will, within 180 days after that sale, apply an amount equal to the
net proceeds of that sale to the retirement of our debt or of debt of a
Subsidiary of ours in the case of Principal Property of that Subsidiary,
maturing by its terms more than one year after the date on which it was
originally incurred (the "funded debt"); provided that the amount to be
applied to the retirement of funded debt of ours or of a Subsidiary of
ours will be reduced by the amount below if, within 75 days after that
sale, we deliver to the Trustee an officers' certificate stating:
. that on a specified date after that sale we or a Subsidiary of ours,
as the case may be, voluntarily retired a specified principal amount
of funded debt;
. that the retirement was not effected by payment at maturity or
pursuant to any applicable mandatory sinking fund or prepayment
provision, other than provisions requiring retirement of any funded
debt of ours or a Subsidiary of ours, as the case may be, under the
circumstances referred to in this covenant; and
. the then optional redemption or prepayment price applicable to the
funded debt so retired or, if there is no such price applicable, the
amount applied by us or our Subsidiary, as the case may be, to the
retirement of that funded debt.
In the event of such a sale or transfer, we will deliver to the Trustee a
certified copy of the resolution of our board of directors referred to in the
parenthetical phrase contained in clause (2) of the last exception above and
an officers' certificate setting forth all material facts under this covenant.
For purposes of this covenant, the term "retirement of funded debt" will
include the "in substance defeasance" of that funded debt in accordance with
then applicable accounting rules.
Exempted Liens and Sale/Leaseback Transactions
Notwithstanding the restrictions set forth in "--Limitation on Liens" and
"--Limitation on Sale/Leaseback Transactions" above, we or any of our
Subsidiaries may, without equally and ratably securing the SQUIDS, (1)
Mortgage any Principal Property or any shares of stock or other equity
interests in any of our Subsidiaries that owns, directly or indirectly, one or
more Principal Properties or (2) sell or transfer any Principal Property with
the intention of taking back a lease on that Principal Property; provided,
that, in each case, at the time of that event, and after giving effect
thereto, the sum of the aggregate net book value of Principal Property or
shares of stock or other equity securities so Mortgaged and the aggregate net
book value of all Principal Property then subject to a sale/leaseback
transaction (other than as permitted under "--Limitation on Liens" and "--
Limitation on Sale/Leaseback Transactions" above) does not exceed 10% of
Consolidated Net Tangible Assets.
Merger and Consolidation
We 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 of our 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 us) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all our obligations under the
SQUIDS and the Indenture;
(2) immediately after such transaction, no Default shall have occurred and
be continuing; and
(3) 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.
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The Successor Company will be the successor to us and will succeed to, and
be substituted for, and may exercise every right and power of, ours under the
Indenture, and we, except in the case of a lease, would be released from the
obligation to pay the principal of and interest on the SQUIDS.
So long as the guarantee of the SQUIDS is in effect, USX may 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 of
its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Guarantor") 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 Guarantor (if not USX) shall expressly
assume, by an indenture supplemental thereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations
of USX under the SQUIDS and the Indenture;
(2) immediately after such transaction, no Default shall have occurred and
be continuing; and
(3) USX 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.
The Successor Guarantor will be the successor to USX and will succeed to,
and be substituted for, and may exercise every right and power of, USX under
the Indenture, and USX, except in the case of a lease, shall be released from
its obligations under the guarantee of the SQUIDS.
Defaults
Each of the following is an Event of Default:
(1) a default in the payment of interest on the SQUIDS when due, continued
for 30 days;
(2) a default in the payment of principal of any SQUID at its stated
maturity, upon optional redemption, upon a Change in Control Offer,
upon declaration of acceleration or otherwise;
(3) the failure by us to comply with our obligations under "--Certain
Covenants--Merger and Consolidation" above;
(4) the failure by us to comply for 30 days after notice with any of our
other obligations in the covenants described above under "--Certain
Covenants" above;
(5) the failure by us or USX to comply for 60 days after notice with any of
the other agreements contained in the Indenture;
(6) certain events of bankruptcy, insolvency or reorganization of USX, us
or a significant subsidiary of ours (the "bankruptcy provisions");
(7) any judgment or decree for the payment of money in excess of $50
million is entered against us or a significant subsidiary of ours,
remains outstanding for a period of 60 consecutive days following such
judgment and is not discharged, waived or stayed within 10 days after
notice (the "judgment default provision"); or
(8) prior to the Separation, the guarantee ceases to be in full force and
effect (other than in accordance with its terms) or USX denies or
disaffirms its obligations under the guarantee (the "security 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 SQUIDS notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
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If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding SQUIDS may declare the
principal of and accrued but unpaid interest on all the SQUIDS 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 related
to our bankruptcy, insolvency or reorganization occurs and is continuing, the
principal of and interest on all the SQUIDS 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 SQUIDS. Under certain circumstances, the
holders of a majority in principal amount of the outstanding SQUIDS may rescind
any such acceleration with respect to the SQUIDS 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 any of the rights or powers under the
Indenture at the request or direction of any of the holders of the SQUIDS
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 SQUID may pursue any remedy with respect to the Indenture or the SQUIDS
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 SQUIDS
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 SQUIDS
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 SQUIDS 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 the SQUIDS 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 SQUIDS 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 the SQUIDS, 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 SQUIDS. 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 SQUIDS with the consent of the holders of a majority in principal
amount of that series of SQUIDS then outstanding (including consents obtained
in connection with a tender offer or exchange for the SQUIDS) and any past
default or compliance with any provisions may also be waived with the
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consent of the holders of a majority in principal amount of that series of
SQUIDS then outstanding. However, without the consent of each holder of
outstanding SQUIDS affected thereby, an amendment or waiver may not, among
other things:
(1) reduce the amount of SQUIDS whose holders must consent to an amendment;
(2) reduce the rate of or extend the time for payment of interest on any of
the SQUIDS;
(3) reduce the principal of or extend the Stated Maturity of any of the
SQUIDS;
(4) reduce the amount payable upon the redemption of any of the SQUIDS or
change the time at which any of the SQUIDS may be redeemed as described
under "--Optional Redemption";
(5) make any of the SQUIDS payable in currency other than that stated in
the SQUIDS;
(6) impair the right of any holder of the SQUIDS to receive payment of
principal of and interest on such holder's SQUIDS 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 SQUIDS;
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions;
(8) make any change in the ranking or priority of any of the SQUIDS that
would adversely affect the holders; or
(9) make any change in the guarantee that would adversely affect the
holders.
Notwithstanding the preceding, without the consent of any holder of the
SQUIDS, we, USX and the 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 our
obligations under the Indenture;
(3) to provide for uncertificated SQUIDS in addition to or in place of
certificated SQUIDS (provided that the uncertificated SQUIDS are issued
in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated SQUIDS are described in Section
163(f)(2)(B) of the Code);
(4) to add guarantees with respect to the SQUIDS, or to secure the SQUIDS;
(5) to add to our or USX's covenants for the benefit of the holders of the
SQUIDS or to surrender any right or power conferred upon us or USX;
(6) to make any change that does not adversely affect the rights of any
holder of the SQUIDS; 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 SQUIDS 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 SQUIDS a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the SQUIDS, or any
defect therein, will not impair or affect the validity of the amendment.
144
Transfer
Initially all the SQUIDS are held through DTC. DTC's records reflect only
the identity of the Direct Participants to whose accounts the SQUIDS are
credited. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers. The SQUIDS will be issued in registered
form and will be transferable only upon the surrender of the SQUIDS being
transferred for registration of transfer. We may require payment of a sum
sufficient to cover 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 the SQUIDS 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 SQUIDS, to replace mutilated, destroyed, lost or
stolen SQUIDS and to maintain a registrar and paying agent in respect of the
SQUIDS.
In addition, at any time we may terminate our obligations under the
covenants described under "--Certain Covenants" (other than the covenant
described under "--Merger and Consolidation"), the bankruptcy provisions with
respect to significant subsidiaries and the judgment default provision
described under "--Defaults" above and the limitations contained in clause (3)
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 SQUIDS may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the SQUIDS may not be accelerated because of an Event of Default
specified in clause (4), (6) (with respect only to our significant
subsidiaries) or (7) under "--Defaults" above. If we exercise our legal
defeasance option, USX will be released from all of its obligations with
respect to its guarantee.
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 SQUIDS
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 SQUIDS will not recognize income, gain or loss
for U.S. Federal income tax purposes as a result of such deposit and defeasance
and will be subject to U.S. 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 change in applicable U.S. Federal income tax law).
Concerning the Trustee
The Bank of New York is to be the Trustee under the Indenture.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of ours, 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.
145
The holders of a majority in principal amount of the outstanding SQUIDS 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 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 SQUIDS,
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.
NYSE Listing
We have applied for listing of the SQUIDS on the NYSE. The SQUIDS are
expected to trade "flat". This means that the SQUIDS will trade at prices that
will include accrued and unpaid dividends and purchasers will not receive any
accrued and unpaid interest on the SQUIDS that is not included in the trading
price.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of ours or of
USX will have any liability for any obligations of ours or of USX under the
SQUIDS, the guarantee 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
SQUIDS, by accepting SQUIDS, waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the SQUIDS. 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 SQUIDS will be governed by, and construed in
accordance with, the laws of the State of New York.
Certain Definitions
"Consolidated Net Tangible Assets" means the aggregate value of all of our
assets and the assets of our consolidated subsidiaries after deducting from
those assets (1) all current liabilities, excluding all long-term debt due
within one year, (2) all investments in unconsolidated subsidiaries and all
investments accounted for on the equity basis and (3) 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 our most recent audited consolidated
financial statements.
"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).
"Management and Allocation Policies" means the policies and procedures
adopted by the board of directors of USX Corporation or otherwise used by USX
Corporation for the purpose of preparing financial statements of the U.S. Steel
Group.
"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.
"Principal Property" means any blast furnace facility or steel producing
facility, or casters which are part of a plant which includes such a facility,
having a net book value in excess of 1% of Consolidated Net Tangible Assets at
the time of determination.
146
"Sale/Leaseback Transaction" means an arrangement relating to property owned
by the Company or a restricted subsidiary on the date SQUIDS are first issued
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.
"Separation" means the separation of the Company from USX Corporation
pursuant to the Agreement and Plan of Reorganization to be entered into among
USX Corporation, the Company and certain subsidiaries in connection with the
Separation, as described in this prospectus.
"Separation Date" means the date the Separation occurs; provided such date
is on or prior to December 31, 2002.
"Subsidiary" means, with respect to any person, any other person the
majority of the outstanding shares of Voting Stock of which are, directly or
indirectly, owned or controlled by that first person or the management or
policies of which are otherwise, directly or indirectly, controlled by that
first person.
"U. S. Steel Group" means the U. S. Steel Group of USX Corporation, as
defined in the Restated Certificate of Incorporation of USX Corporation.
"Voting Power", as applied to the stock of any person, means the total
voting power represented by all outstanding Voting Stock of that person.
"Voting Stock" of a person means all classes of capital stock or other
interests, including partnership interests, of that 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.
147
COMPARISON OF THE OUTSTANDING SECURITIES AND THE SQUIDS
The following is a summary comparison of the material terms of the
Outstanding Securities and the SQUIDS. This summary does not purport to be
complete and is qualified in its entirety by reference to the documents
governing the Outstanding Securities and the SQUIDS, copies of which have been
filed as exhibits to the registration statement of which this prospectus forms
a part. For a more detailed description of the SQUIDS, see "Description of the
SQUIDS" on page 133. All outstanding shares of 6.50% Preferred Stock at the
effective time of the Separation will be converted into the right to receive,
in cash, $50 plus accrued but unpaid dividends, and all outstanding 6.75% QUIPS
at the effective time of the Separation will be redeemed for a cash payment of
$50 plus accrued but unpaid distributions.
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
Issuer.................. USX Corporation. USX Capital Trust USX Capital LLC, a The SQUIDS will be
I, a Delaware limited life issued by United
statutory business company organized States Steel LLC, a
trust and a wholly under the laws of Delaware limited
owned subsidiary of the Turks and liability company
USX Corporation. Caicos Islands and which is to be
a wholly owned converted at the
subsidiary of USX Separation into a
Corporation. Delaware
corporation named
United States Steel
Corporation. United
States Steel LLC is
currently a wholly
owned subsidiary of
USX Corporation.
Credit Support..........
None. USX has fully and USX has fully and The SQUIDS will
unconditionally unconditionally initially be
guaranteed the guaranteed the guaranteed by USX
payment of payment of Corporation (the
distributions and distributions and "SQUIDS
rights upon rights upon Guarantee"). USX
liquidation of USX liquidation of USX will be released
or redemption of or redemption of from the SQUIDS
the 6.75% QUIPS the 8.75% MIPS (the Guarantee when the
(the "6.75% QUIPS "8.75% MIPS Separation occurs,
Guarantee"). The Guarantee"). The provided the
6.75% QUIPS 8.75% MIPS Separation occurs
Guarantee will Guarantee will on or before
exist as long as exist as long as December 31, 2002.
the 6.75% QUIPS are the 8.75% MIPS are
outstanding. outstanding.
The 6.75% QUIPS The 8.75% MIPS The SQUIDS Guaran-
Guarantee ranks Guarantee ranks tee will rank
subordinate and subordinate and equally in right of
junior in right of junior in right of payment to the
payment to all payment to all other senior in-
other liabilities other liabilities debtedness of USX
of USX, equally in of USX and senior and senior in right
right to the most to the most of payment to all
senior preferred or preferred or subordinated in-
preference stock preference stock debtedness of USX.
issued by USX and issued by USX.
senior to the
common stock of
USX.
Distribution on
Liquidation............ Upon liquidation of Upon liquidation of Upon liquidation of As senior debt, it
USX, holders of USX Capital Trust USX Capital LLC, is paid in full
6.50% Preferred I, holders of holders of before any
Stock are entitled outstanding 6.75% outstanding 8.75% preferred
to receive $50.00 QUIPS are entitled MIPS are entitled securities or
per share, together to receive $50.00 to receive $25.00 subordinated debt
with accrued and per share, together per share, together of USX in
unpaid dividends, with accrued and with accrued and liquidation.
after payment in unpaid unpaid dividends,
full of all distributions, after payment in
indebtedness of after payment in full of all senior
USX. full of all senior indebtedness of
indebtedness of USX.
USX.
148
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
---------------- -------------------------- ---------------- ----------------
Subordination........... The 6.50% Pre- The 6.75% QUIPS are The 8.75% MIPS The SQUIDS are
ferred Stock is subordinated to all senior are subordinated senior,
subordinated to indebtedness of USX but to all unsecured obli-
claims of credi- senior to all capital senior gations and will
tors, including stock, including the 6.50% indebtedness rank equally in
holders of USX's Preferred Stock, and to of USX. right of payment
outstanding debt any guarantee now or with all of the
securities and hereafter entered into by existing and fu-
the Convertible USX in respect of capital ture senior in-
Debentures, and stock of its affiliates, debtedness of
structurally including the guarantee on United States
subordinated to the 6.75% QUIPS. Steel and will
all rank senior in
existing and fu- right of payment
ture to all future
obligations of subordinated
USX's subsidiar- indebtedness.
ies. The 6.50%
Preferred Stock
ranks senior to
all classes of
common stock of
USX and any
shares of junior
preferred stock
as to payment of
dividends and
upon liquida-
tion.
Distribution, Dividend
or Holders of the Holders of the 6.75% QUIPS Holders of the Holders of the
Interest Rate.......... 6.50% Preferred are entitled to 8.75% MIPS are SQUIDS will be
Stock are enti- receive 6.75% per annum entitled to entitled to re-
tled to receive cash distributions payable receive cumula- ceive interest
cumulative cash quarterly on the last cal- tive prefer- at a rate of %
dividends of endar day of March, June, ential cash div- per annum, pay-
6.50% per annum September and December of idends, at an able initially
payable quar- each year, but only if, annual rate of on March 31,
terly on the and to the extent that, 8.75% of the 2002 and there-
last calendar interest payments are made liquidation after quarterly
day of March, by USX in respect of con- preference of on March 31,
June, September vertible debentures held $25 per share, June 30, Septem-
and December of by USX Capital Trust I accruing from ber 30 and De-
each year, out having an aggregate prin- the date cember 31 of
of funds legally cipal amount equal to the of original is- each year.
available there- aggregate initial liquida- suance and pay-
for, when, as tion amount of the 6.75% able, in United
and if declared QUIPS issued by USX to USX States dollars,
by the Board of Capital Trust I (the "Con- monthly in ar-
Directors of vertible Debentures"). rears on the
USX. last day of each
If USX is not in default calendar month
in the payment of interest of each year,
on the Convertible Deben- when, as and if
tures, USX shall have the declared by the
right to defer payments of board of direc-
interest on the Convert- tors of USX Cap-
ible Debentures for a pe- ital LLC.
riod of up to 20 consecu-
tive quarters. During this
time, payments on the
6.75% QUIPS will not be
made but will continue to
accumulate and will bear
149
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
interest at the
distribution rate,
compounded
quarterly, to the
extent permitted by
applicable law.
Conversion.............. The 6.50% Preferred The 6.75% QUIPS are The 8.75% MIPS are The SQUIDS are not
Stock is convert- convertible, at the not convertible. convertible.
ible, at the option option of the
of the holder, in holder, in whole or
whole or in part, in part, into whole
into whole U. S. U. S. Steel Group
Steel Group Shares Shares at a
at a conversion conversion price of
price of $46.25 per $46.25 per U. S.
U. S. Steel Group Steel Group Share
Share (equivalent (equivalent to a
to a conversion ra- conversion ratio of
tio of 1.081 U. S. 1.081 U. S. Steel
Steel Group Shares Group Shares for
for each 6.50% Pre- each 6.75% QUIPS),
ferred Stock), sub- subject to
ject to adjustments adjustments upon
upon certain certain events.
events.
Mandatory
Redemption............. In certain In certain The 8.75% MIPS are The SQUIDS are not
circumstances, if circumstances, if not subject to subject to
USX causes the USX causes the mandatory mandatory
redemption of the redemption of the redemption. redemption.
U. S. Steel Group U. S. Steel Group
Shares or the Shares or the
Marathon Group Marathon Group
Shares, USX must Shares, USX must
redeem the 6.50% redeem the
Preferred Stock, in Convertible
whole, for $50 per Debentures, in
share, together whole, at 100% of
with accrued and the principal
unpaid dividends to amount thereof,
the redemption together with
date. interest accrued
and unpaid to the
redemption date.
Upon this, or any
redemption by USX
of the Convertible
Debentures, USX
Capital Trust I is
required to use the
funds received in
redemption to
redeem a number of
6.75% QUIPS having
an aggregate
liquidation amount
equal to the
aggregate principal
amount of the
Convertible
Debentures
redeemed.
In certain
circumstances, the
USX Capital Trust I
could be dissolved
and the Convertible
Debentures would be
distributed to
holders of the
6.75% QUIPS.
150
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
Optional
Redemption............. The 6.50% Preferred The Convertible The 8.75% MIPS are The SQUIDS will be
Stock is redeemable Debentures are redeemable, at the redeemable at the
at the option of redeemable at the option of USX option of United
USX, in whole or in option of USX, in Capital LLC (with States Steel, in
part, upon not less whole or in part, USX's consent), in whole or in part,
than 30 days' upon not less than whole or in part, at any time on or
notice, at a 30 days' notice nor from time to time, after December 31,
scheduled more than 60 days' for $25 per share 2006, upon not less
redemption price notice, at a plus accumulated than 30 days'
per share, which scheduled and unpaid notice nor more
price iscurrently, redemption price dividends (whether than 60 days'
and through per share, which or not declared) to notice, at a
December 31, 2001 price is currently, the date fixed for redemption price
will be, equal to and through redemption. The equal to 100% of
$50.65, together December 31, 2001 8.75% MIPS must be the principal
with accrued and will be, equal to redeemed if USX amount redeemed
unpaid dividends or $50.65, together repays a loan made plus accrued but
interest thereon to with accrued and by USX Capital LLC unpaid interest to
the redemption unpaid to USX from the the redemption
date. USX will not distributions proceeds received date. At any time
exercise its option thereon to the by USX Capital LLC on or prior to
to redeem the 6.50% redemption date. from the issuance December 31, 2002,
Preferred Stock if Upon this, or any of the 8.75% MIPS if the board of
USX is advised in redemption by USX (the "8.75% MIPS directors of USX
advance by either of the Convertible Loan"). has determined not
Moody's or S&P that Debentures, USX to proceed with the
to do so would Capital Trust I is Separation, the
result in an required to use the SQUIDS may be
immediate lowering funds received in redeemed in whole
of USX's credit redemption to or in part at the
rating on its redeem a number of option of United
senior unsecured 6.75% QUIPS having States Steel, upon
debt from its then an aggregate not less than
existing level, liquidation amount 30 days' notice nor
unless USX shall equal to the more than 60 days'
have received from aggregate principal notice, at a
the issuance of its amount of the redemption price
common stock, since Convertible equal to 100% of
the date which is Debentures the principal
two years prior to redeemed. USX will amount redeemed
the redemption not exercise its plus accrued but
date, net proceeds option to redeem unpaid interest to
in an aggregate the 6.75% QUIPS if the redemption
amount at least USX is advised in date. In connection
equal to the advance by either with any partial
aggregate principal Moody's Investors redemption, at
amount of the Service, Inc. least the minimum
securities to be ("Moody's") or aggregate principal
redeemed. Standard & Poor's amount of SQUIDS
Corporation ("S&P") required to
that to do so would maintain listing of
result in an the SQUIDS on the
immediate lowering NYSE, under the
of USX's credit rules and
rating on its regulations
senior unsecured thereof, must
debt from its then remain outstanding
existing level, following such
unless USX shall partial redemption.
have received from
the issuance of its
common stock, since
the date which is
two years prior to
the redemption
date, net proceeds
in an aggregate
amount at least
equal to the
aggregate principal
amount of the
securities to be
redeemed.
151
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
Limitation on Liens.....
The terms of the The terms of the The terms of the Under the Inden-
6.50% Preferred 6.75% QUIPS do not 8.75% MIPS do not ture, United States
Stock do not contain a covenant contain a covenant Steel and its sub-
contain a covenant with respect to with respect to sidiaries are pro-
with respect to limitations on limitations on hibited from, di-
limitations on liens. liens. rectly or indirect-
liens. ly, creating, as-
suming or permit-
ting to exist any
lien securing any
indebtedness on any
Principal Property,
other than certain
permitted liens,
without effectively
providing that the
SQUIDS shall be se-
cured equally and
ratably with the
obligations so se-
cured.
Limitations on
Sale/Leaseback
Transactions........... The terms of the The terms of the The terms of the Under the Inden-
6.50% Preferred 6.75% QUIPS do not 8.75% MIPS do not ture, unless other-
Stock do not contain any contain any wise provided
contain any covenants with covenants with therein, United
covenants with respect to respect to States Steel and
respect to limitations on limitations on its subsidiaries
limitations on sale/leaseback sale/leaseback are prohibited from
sale/leaseback transactions. transactions. entering into any
transactions. sale/lease-
back transaction
with respect to any
Principal Property,
other than certain
permitted
transactions.
Limitations on Dividends
and Redemptions........
Unless the full cu- Pursuant to the Pursuant to the The terms of the
mulative dividends 6.75% QUIPS Guaran- 8.75% MIPS Loan, if SQUIDS do not
on all outstanding tee, if USX or USX USX or USX Capital contain any cove-
6.50% Preferred Capital Trust I is LLC is in default nants with respect
Stock are paid in in default of its of its obligations, to declaring
full, USX is gener- obligations, USX is USX is generally dividends or making
ally prohibited generally prohib- prohibited from de- redemptions,
from declaring or ited from declaring claring or paying repurchases or
paying dividends or paying dividends dividends on, mak- similar
on, making any dis- on, making any dis- ing any distribu- transactions.
tribution with re- tributions with re- tions with respect
spect to, or re- spect to, or re- to, or redeeming,
deeming, purchas- deeming, purchas- purchasing, acquir-
ing, acquiring or ing, acquiring or ing or making liq-
making liquidation making liquidation uidation payments
payments with re- payments with re- with respect to
spect to any other spect to any of its any of its capital
capital stock of capital stock. stock.
USX ranking equally
or junior to the
6.50% Preferred
Stock.
152
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
Events of Default
and Acceleration....... In the event that Upon certain (i) if USX Capital Upon certain Events
the equivalent of defaults of USX LLC fails to pay of Default (as
six quarterly Capital Trust I or dividends on the defined herein),
dividends (whether if USX defaults on 8.75% MIPS for 18 holders of 25% of
consecutive or not) their obligations consecutive monthly the aggregate
are accrued but not under the dividend periods; outstanding SQUIDS
paid, holders of Convertible (ii) after certain may direct the
6.50% Preferred Debentures, holders defaults by USX on trustee to declare
Stock have certain of 25% of the its payments on the the principal and
voting rights to aggregate 8.75% MIPS Loan; or accrued but unpaid
elect two outstanding 6.75% (iii) after USX is interest to be
additional QUIPS may direct in default of any immediately due and
directors to the the appointed of its obligations payable. For more
board of trustee for the under the information, see
directors of USX. Convertible Guarantee, the "Description of the
Debentures to holders of the SQUIDS--Defaults"
declare the 8.75% MIPS will be on page 142.
principal and entitled to
interest on the authorize a trustee
Convertible to enforce the
Debentures to be payment of
immediately due and dividends, the
payable. 8.75% MIPS
Guarantee and the
8.75% MIPS Loan.
Mergers and
Consolidation.......... The terms of the The terms of the The 8.75% MIPS Loan Under the
6.50% Preferred 6.75% QUIPS and the provides that USX Indenture, United
Stock do not Convertible may not merge with States Steel and
contain any Debentures or into another USX may not
covenants which generally prohibit entity, permit consolidate with or
limit USX's ability USX and USX Capital another entity to merge into any
to engage in Trust I from merge with or into other entity, or
mergers and engaging in certain USX or sell, sell, convey,
consolidations. consolidations, transfer or lease transfer or lease
mergers, all or all or
conveyances, substantially all substantially all
transfers or of its assets to of its properties
leases. For another entity and assets to any
instance, USX may unless: person without the
not merge or consent of the
consolidate or sell holders of the
substantially all SQUIDS unless:
of its assets
unless the
successor
corporation (if not
USX) is a domestic
corporation and
assumes USX's
obligations under
the Convertible
Debentures.
. immediately
after such
transaction, no
default (as
defined in the
8.75% MIPS Loan)
shall have
occurred and be
continuing; and
. the survivor of . the successor
such merger or entity is
entity to which a person orga-
USX's assets are nized and val-
sold, idly existing
transferred or under the laws
leased (if not of the United
USX) is an States or any
entity organized state thereof
under the laws and the succes-
of the United sor company (if
States or any not United
state thereof States Steel or
and assumes all USX) shall ex-
of USX's pressly
obligations assume all of
under the 8.75% United States
MIPS Loan. Steel's (or, if
applicable,
USX's)
obligations un-
der the SQUIDS
and the
Indenture.
. immediately
after such
transaction, no
Event of Default
shall have
occurred and be
continuing.
153
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
The company shall
have delivered to
the Trustee an
officers'
certifcate and an
opinion of counsel
each stating that
such consolidation,
merger,
or transfer and
such supplemental
indenture
(if any) comply
with the Indenture.
Conditions to the
Separation............. The terms of the The 6.75% QUIPS do The 8.75% MIPS do The SQUIDS impose
6.50% Preferred not contain any not contain any conditions on the
Stock do not conditions to the conditions to the completion of the
contain any Separation. Separation. Separation, as
conditions to the described in
Separation. "Description of the
SQUIDS-Conditions
to Separation" on
page 136.
Voting Rights........... Generally, the Holders of the Holders of the Holders of the
6.50% Preferred 6.75% QUIPS do not 8.75% MIPS do not SQUIDS will not
Stock is non- have any right to have any right to have any right to
voting. Holders of vote on any matter vote on any matter vote on any matter
6.50% Preferred requiring USX requiring USX requiring United
Stock will have stockholder stockholder States Steel or USX
voting rights in approval. approval. stockholder
certain approval.
circumstances. If
six full quarterly
dividends (whether
consecutive or not)
payable on the
preferred stock of
USX of any series
(including the
6.50% Preferred
Stock) are accrued
and unpaid, the
holders of
preferred stock of
all series will
have the right at a
stockholder
meeting, voting as
a single class
without regard to
series, to elect
two additional
directors of USX.
The approval of the
holders of at least
66 2/3% of the
outstanding shares
of 6.50% Preferred
Stock and all other
preferred stock
ranking on a parity
with the 6.50%
Preferred Stock,
voting separately
as a class, will be
required for
certain amendments
to USX's
Certificate of
Incorporation
affecting adversely
the powers,
preferences or
rights of holders
of the 6.50%
Preferred Stock and
to authorize the
issuance of any
class or series of
preferred stock
ranking senior to
the 6.50% Preferred
Stock as to
dividends or
liquidation rights.
154
6.50% PREFERRED
STOCK 6.75% QUIPS 8.75% MIPS SQUIDS
------------------- ------------------- ------------------- -------------------
Listing and Trading.....
The 6.50% Preferred The 6.75% QUIPS are The 8.75% MIPS are Application has
Stock is listed on listed on the NYSE. listed on the NYSE. been made to list
the NYSE. To the To the extent 6.75% To the extent the SQUIDS on the
extent shares of QUIPS are tendered shares of the 8.75% NYSE under the
the 6.50% Preferred and accepted in the MIPS are tendered symbol [ ]. The
Stock are tendered exchange offers, and accepted in the SQUIDS are expected
and accepted in the the liquidity and exchange offers, to trade "flat."
exchange offers, trading market for the liquidity and This means that the
the liquidity and shares of the 6.75% trading market for SQUIDS trade at
trading market for QUIPS outstanding shares of the 8.75% prices that will
shares of the 6.50% following the MIPS outstanding include accrued and
Preferred Stock exchange offers, following the unpaid dividends
outstanding and the terms upon exchange offers, and purchasers will
following the which such shares and the terms upon not receive any
exchange offers, could be sold, which such shares accrued and unpaid
and the terms upon could be adversely could be sold, interest on the
which such shares affected. could be adversely SQUIDS that is not
could be sold, affected. included in the
could be adversely trading price.
affected. The SQUIDS will
constitute a new
issue of securities
of United States
Steel with no
established trading
market. The
liquidity of the
SQUIDS will be
affected by a
number of factors
described on page
22. There can be no
assurance that an
active market for
the SQUIDS will
develop or, if
developed, will be
sustained in the
future.
Dividends Received Dividends on the Distributions on Distributions on Interest payments
Deduction.............. 6.50% Preferred the 6.75% QUIPS are the 8.75% MIPS are on the SQUIDS will
Stock are eligible not eligible for not eligible for not be eligible for
for the dividends the dividends the dividends the dividends
received deduction received deduction received deduction received deduction
for corporate for corporate for corporate for corporate
holders for federal holders for federal holders for federal holders for federal
income tax income tax income tax income tax
purposes. purposes. purposes. purposes.
155
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General
In this section, we set forth the opinion of our special tax counsel, Miller
& Chevalier, Chartered regarding the material U.S. federal income tax
consequences of the exchange offers and the receipt, ownership and disposition
of SQUIDS. This opinion is based on (1) the Code, (2) income tax regulations
(proposed and final) issued under the Code (the "Treasury Regulations"), and
(3) associated administrative and judicial interpretations, all as they
currently exist as of the date of this prospectus. Such income tax laws,
however, may change at any time, and any change could be retroactive to the
issuance date of the SQUIDS.
This discussion applies only to those persons who hold Outstanding
Securities as capital assets (as defined in section 1221 of the Code) and who
receive SQUIDS pursuant to the exchange offers and will hold such SQUIDS as
capital assets. It does not address the tax consequences to taxpayers who are
subject to special rules (such as dealers in securities or currencies,
financial institutions, tax-exempt organizations, or insurance companies),
taxpayers with a functional currency other than the U.S. dollar, or taxpayers
who hold Outstanding Securities as a position in a straddle, as part of a
synthetic security or hedge, as part of a conversion transaction or other
integrated investment, or as other than a capital asset. If a partnership holds
SQUIDS, the tax treatment of a partner generally will depend on the status of
the partner and the activities of the partnership.
As used herein, the term "U.S. Holder" means a person who is (i) a citizen
or resident of the U.S., (ii) a corporation, partnership or other entity
created or 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, or (iv) 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. The term "Non-U.S. Holder"
means a holder that is not a U.S. Holder.
This discussion of material U.S. federal income tax considerations does not
constitute legal advice. Holders of Outstanding Securities are urged to consult
their own tax advisors regarding the federal, state, local, and foreign tax
consequences of the exchanges described herein and the receipt, ownership, and
disposition of SQUIDS and the effect of possible changes in federal and other
tax laws that may affect the tax consequences described herein.
Consequences to U.S. Holders
Tax Consequences of the Exchange Offers
Exchange of SQUIDS for 6.50% Preferred Stock
The exchange of SQUIDS for shares of 6.50% Preferred Stock plus the cash
payment amount, if any, (the "6.50% Preferred Stock Exchange") will be a
taxable event. The U.S. federal income tax consequences of the 6.50% Preferred
Stock Exchange to a U.S. Holder will vary depending on such holder's particular
facts and circumstances and whether, based on such circumstances, such holder
will qualify for capital gain treatment under section 302 of the Code.
U.S. Holders who will not own, directly or indirectly, any other stock of
USX following the 6.50% Preferred Stock Exchange will qualify for capital gain
treatment under section 302 of the Code.
U.S. Holders who will own, directly or indirectly, stock of USX following
the exchange will qualify for capital gain treatment if (i) the 6.50% Preferred
Stock Exchange is "substantially disproportionate" with respect to such holder
or (ii) the 6.50% Preferred Stock Exchange is "not essentially equivalent to a
dividend" with respect to such holder within the meaning of section 302(b) of
the Code. An
156
exchange will be "not essentially equivalent to a dividend" as to a particular
holder if it results in a meaningful reduction in such holder's direct and
indirect interest in USX. Although no binding authority exists for determining
whether a "meaningful reduction" has occurred, published Internal Revenue
Service guidance indicates that a meaningful reduction will be deemed to have
occurred if the holder owns a minimal interest in USX following the exchange,
the holder has no control over the affairs of USX, and the holder's percentage
equity interest in USX is reduced to some extent. U.S. Holders should consult
their own tax advisors as to whether such holders are able to satisfy the
foregoing tests.
If a U.S. Holder qualifies for capital gain treatment with respect to the
6.50% Preferred Stock Exchange, the amount of gain or loss recognized by such
holder will equal the difference between (i) the sum of (x) the cash payment
amount, if any, received by such holder and (y) the fair market value (i.e.,
trading price), as of the Exchange Date, of the SQUIDS received by such holder
in the exchange (the sum of (x) and (y) is referred to hereinafter as the
"Redemption Amount") and (ii) the holder's adjusted tax basis in the shares of
6.50% Preferred Stock surrendered in the exchange. Assuming that USX either (i)
does not declare a dividend on the 6.50% Preferred Stock prior to the Exchange
Date or (ii) declares a dividend on the 6.50% Preferred Stock prior to the
Exchange Date and the record date for such dividend occurs after the Exchange
Date, then such gain or loss will be capital gain or loss and will be treated
as long-term if the holder held the 6.50% Preferred Stock surrendered in the
6.50% Preferred Stock Exchange for more than one year. The deductibility of
capital losses is subject to limitations. If, however, USX declares a dividend
on the 6.50% Preferred Stock prior to the Exchange Date and the record date for
such dividend precedes the Exchange Date, a U.S. Holder will recognize ordinary
income to the extent of the cash payment amount, and the amount of gain
recognized will be reduced (or the amount of loss recognized will be increased)
by the same amount.
If a U.S. Holder does not qualify for capital gain treatment with respect to
the 6.50% Preferred Stock Exchange as set forth above, the Redemption Amount
will be treated as a dividend to such holder. In that case, such holder (i)
will recognize ordinary income in an amount equal to the Redemption Amount
received (without regard to the holder's adjusted tax basis in the shares of
6.50% Preferred Stock surrendered in the 6.50% Preferred Stock Exchange) and
(ii) will not recognize any loss resulting from the 6.50% Preferred Stock
Exchange. Corporate holders should consult their tax advisors concerning the
availability of the corporate dividends received deduction and the possible
application of the extraordinary dividend rules of section 1059 of the Code in
the event that the distribution is taxable as a dividend to such corporate
holder.
A U.S. Holder will have an adjusted tax basis in the SQUIDS received in the
6.50% Preferred Stock Exchange equal to the fair market value of the SQUIDS,
and the U.S. Holder's holding period for the SQUIDS will commence on the day
after the Exchange Date.
Exchange of SQUIDS for 6.75% QUIPS
The U.S. federal income tax consequences of a U.S. Holder's exchange of
SQUIDS for 6.75% QUIPS (the "6.75% QUIPS Exchange") will vary depending on
whether the exchange is taxable or is treated as part of a recapitalization,
which generally is a tax-free transaction. In either case, any amount that is
received for accrued and unpaid interest generally will be taxable to a U.S.
Holder as ordinary income in accordance with the U.S. Holder's regular method
of accounting for U.S. federal income tax purposes, provided that such holder
did not previously include such interest in income.
Under the Code, the 6.75% QUIPS Exchange will be treated as a
recapitalization if both the 6.75% QUIPS and the SQUIDS constitute "securities"
of USX within the meaning of the provisions of the Code governing
reorganizations. Such characterization will depend upon the facts and
circumstances surrounding the origin and nature of such instruments and upon
the interpretation of
157
numerous judicial decisions. Given the terms of the 6.75% QUIPS and the SQUIDS,
both the 6.75% QUIPS and the SQUIDS should be considered securities of USX for
U.S. federal income tax purposes, and, consequently, the 6.75% QUIPS Exchange
should qualify as a tax-free recapitalization.
Assuming that the 6.75% QUIPS Exchange constitutes a recapitalization, a
U.S. Holder will receive an adjusted tax basis in the SQUIDS equal to the U.S.
Holder's adjusted tax basis in the 6.75% QUIPS exchanged therefor, and the U.S.
Holder's holding period for the SQUIDS will include the period in which the
U.S. Holder held the 6.75% QUIPS.
If the 6.75% QUIPS Exchange does not constitute a recapitalization, a U.S.
Holder generally will recognize gain or loss on the 6.75% QUIPS Exchange equal
to the difference between (i) the fair market value (i.e., trading price) of
the SQUIDS received as of the Exchange Date and (ii) the U.S. Holder's adjusted
tax basis in the 6.75% QUIPS. A U.S. Holder will have an adjusted tax basis in
the SQUIDS equal to the fair market value of the SQUIDS, and the U.S. Holder's
holding period for the SQUIDS will commence on the day after the Exchange Date.
Any gain or loss recognized by a U.S. Holder generally will be long-term
capital gain or loss if the U.S. Holder has held the 6.75% QUIPS for more than
one year. The deductibility of capital losses is subject to limitations. Under
the market discount rules, however, any gain recognized by a U.S. Holder will
be ordinary income to the extent of the accrued market discount that has not
previously been included in income. See "-- Ownership of SQUIDS--Market
Discount" on page 159.
Exchange of SQUIDS for 8.75% MIPS
The U.S. federal income tax consequences of a U.S. Holder's exchange of
SQUIDS for 8.75% MIPS (the "8.75% MIPS Exchange") will vary depending on
whether the exchange is taxable or is treated as part of a recapitalization,
which generally is a tax-free transaction. In either case, any amount that is
received for accrued and unpaid interest generally will be taxable to a U.S.
Holder as ordinary income in accordance with the U.S. Holder's regular method
of accounting for U.S. federal income tax purposes, provided that such holder
did not previously include such interest in income.
The 8.75% MIPS Exchange should be a taxable event. Assuming that the 8.75%
MIPS Exchange is taxable, a U.S. Holder generally will recognize gain or loss
on the 8.75% MIPS Exchange equal to the difference between (i) the fair market
value (i.e., trading price) of the SQUIDS received as of the Exchange Date and
(ii) the U.S. Holder's adjusted tax basis in the 8.75% MIPS. A U.S. Holder will
have an adjusted tax basis in the SQUIDS equal to the fair market value of the
SQUIDS, and the U.S. Holder's holding period for the SQUIDS will commence on
the day after the Exchange Date. Any gain or loss recognized by a U.S. Holder
generally will be long-term capital gain or loss if the U.S. Holder has held
the 8.75% MIPS for more than one year. The deductibility of capital losses is
subject to limitations.
If the 8.75% MIPS Exchange constitutes a recapitalization, a U.S. Holder
will have an adjusted tax basis in the SQUIDS equal to the U.S. Holder's
adjusted tax basis in the 8.75% MIPS exchanged therefor, and the U.S. Holder's
holding period for the SQUIDS will include the period in which the U.S. Holder
held the 8.75% MIPS.
Ownership of SQUIDS
Stated Interest
Payments of stated interest on the SQUIDS generally will be taxable to a
U.S. Holder as ordinary income when received or accrued in accordance with the
U.S. Holder's regular method of accounting for U.S. federal income tax
purposes.
158
Original Issue Discount
SQUIDS will be issued with original issue discount ("OID") if the stated
principal amount due at maturity exceeds its issue price by more than a
statutorily-defined de minimis amount, which is an amount less than 0.25% of
the stated principal amount due at maturity multiplied by the number of
complete years to maturity. The issue price of the SQUIDS generally will be
equal to the fair market value (i.e., trading price) of the SQUIDS on the issue
date, which will be the Exchange Date.
If the SQUIDS are issued with OID, holders will be required to include OID
in ordinary income over the period that they hold the SQUIDS in advance of the
receipt of the cash attributable thereto. The amount of OID to be included in
income will be determined using a constant yield method. Any amount of OID
included in income will increase a holder's adjusted tax basis in the SQUIDS.
If the SQUIDS are issued with OID and at the Exchange Date a U.S. Holder has
an adjusted tax basis in the SQUIDS that is in excess of the issue price but is
equal or less than the principal amount, then the U.S. Holder has acquisition
premium which may be used to offset some or all of the OID that would otherwise
accrue on the SQUIDS. If the U.S. Holder has an adjusted tax basis in the
SQUIDS that is equal to or greater than the principal amount, there will be no
OID.
Bond Premium
If at the Exchange Date a U.S. Holder has an adjusted tax basis in the
SQUIDS in excess of the principal amount, the U.S. Holder will have "bond
premium" equal to the amount of such excess. Bond premium is amortizable at the
election of the holder as an offset to interest income as provided in
applicable Treasury Regulations. The U.S. Holder's adjusted tax basis in the
SQUIDS will be reduced by the amount of the amortized bond premium. Bond
premium on SQUIDS held by a U.S. Holder who does not elect to amortize the
premium will remain in the U.S. Holder's adjusted tax basis for the SQUIDS and
thus will decrease the gain or increase the loss otherwise recognized on the
disposition of the SQUIDS.
Market Discount
In the event that the 6.75% QUIPS Exchange or 8.75% MIPS Exchange
constitutes a tax-free recapitalization, the following market discount rules
may apply to a U.S. Holder participating in such exchanges. If at the Exchange
Date, such U.S. Holder has an adjusted tax basis in the SQUIDS that is less
than the principal amount (or, if the SQUIDS are issued with OID, the issue
price of the SQUIDS), and such discount is greater than a statutorily-defined
de minimis amount, then the SQUIDS may have market discount. A U.S. Holder will
recognize as ordinary income the amount of such market discount treated as
accrued upon disposition or redemption of the SQUIDS, unless the U.S. Holder
elects to recognize the accrued amount of such market discount ratably over the
term of the SQUIDS. A U.S. Holder's election to recognize the accrued amount of
market discount in income ratably over the term of the SQUIDS will apply to all
market discount obligations acquired by the U.S. Holder on or after the first
taxable year to which such U.S. Holder's election applies and may not be
revoked without the consent of the Internal Revenue Service.
Disposition of SQUIDS
A U.S. Holder of SQUIDS generally will recognize gain or loss on the sale,
exchange, redemption, or other disposition of SQUIDS in an amount equal to the
difference between the amount realized from the disposition of the SQUIDS (not
including any amounts attributable to accrued and unpaid interest) and the
holder's adjusted tax basis in the SQUIDS.
A U.S. Holder's adjusted tax basis generally will be equal to the initial
adjusted tax basis in the SQUIDS at the Exchange Date (1) increased by any
amount of OID included in income and market
159
discount recognized and (2) decreased by any amount of bond premium previously
amortized or any amount received as accrued interest treated as a return of
capital.
Gain or loss recognized by a U.S. Holder on the sale, exchange, retirement,
or other taxable disposition of the SQUIDS generally will be long-term capital
gain or loss if the SQUIDS were held for more than one year. The deductibility
of capital losses is subject to limitations.
The Separation will not result in a taxable exchange of the SQUIDS.
Consequences to Non-U.S. Holders
Tax Consequences of the Exchange Offers
If a Non-U.S. Holder exchanges 6.50% Preferred Stock for SQUIDS and does not
prove, in a manner satisfactory to the withholding agent, that such Non-U.S.
Holder qualified for capital gain treatment on the 6.50% Preferred Stock
Exchange, the withholding agent will treat the issuance of SQUIDS to the Non-
U.S. Holder as a dividend distribution. If USX declares a dividend on the 6.50%
Preferred Stock and the record date for such dividend precedes the Exchange
Date, the withholding agent will treat the cash payment amount to such Non-U.S.
Holder as a dividend distribution. See "--Consequences to U.S. Holders--Tax
Consequences of the Exchange Offers--Exchange of SQUIDS for 6.50% Preferred
Stock" on page 156. In general, Non-U.S. Holders will be subject to a
withholding tax of 30% on U.S. source dividends. The rate of withholding may be
reduced by an income tax treaty applicable to the Non-U.S. Holder, provided
that the Non-U.S. Holder qualifies for such treaty relief and provides a
properly executed IRS Form W-8BEN (or substitute form) claiming an exemption
from or reduction in the rate of withholding under an applicable tax treaty.
A Non-U.S. Holder that recognizes gain on the 6.50% Preferred Stock Exchange
(if qualifying for capital gain treatment under section 302 of the Code), the
6.75% QUIPS Exchange, and the 8.75% MIPS Exchange generally will not be subject
to U.S. federal income tax 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
SQUIDS and certain other conditions are satisfied; or
. Either the 6.75% QUIPS Exchange or the 8.75% MIPS Exchange, as the case
may be, is part of a plan to avoid tax and the gain represents accrued
interest (including OID), in which case the rules for interest would
apply.
Ownership of SQUIDS
Withholding Taxes
Generally, payments of principal and interest (including OID) on SQUIDS will
not be subject to U.S. withholding taxes provided that:
. The Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the
Company entitled to vote,
. The Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company through its stock ownership,
. 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
160
holds its SQUIDS through certain foreign intermediaries and it satisfies
the certification requirements of applicable Treasury regulations.
Special certification rules apply to certain Non-U.S. Holders that are
entities rather than individuals.
If a Non-U.S. Holder cannot satisfy the requirements described above,
payments of interest (including OID) 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 reduction in the rate of withholding under an applicable tax
treaty or (2) IRS Form W-8ECI (or successor form) stating that interest paid on
the SQUIDS 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 SQUIDS
If a Non-U.S. Holder sells SQUIDS or the SQUIDS are redeemed, the Non-U.S.
Holder will not be subject to U.S. federal income tax on any 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
SQUIDS and certain other conditions are satisfied.
. The sale of the SQUIDS is part of a plan to avoid tax and the gain
represents accrued interest (including OID), in which case the rules for
interest would apply.
U.S. Trade or Business
If a Non-U.S. Holder holds the SQUIDS in connection with a trade or business
that is conducted in the U.S.:
. Any interest on the SQUIDS, and any gain from a disposition of the
SQUIDS, generally will be subject to U.S. federal income tax as if the
Non-U.S. Holder were a U.S. Holder.
. If the Non-U.S. Holder is a corporation, it may be subject to the
"branch profits tax" on its earnings that are connected with the
holder's U.S. trade or business, including earnings from the SQUIDS.
This tax generally is imposed at a 30% rate but may be reduced or
eliminated by an applicable tax treaty.
Backup Withholding
If an individual U.S. Holder receives payments of interest, backup
withholding will not apply if such holder provides a taxpayer identification
number to the withholding agent. The exemption from backup withholding does not
apply if the withholding agent or an intermediary knows or has reason to know
that the holder should be subject to backup withholding.
If an individual Non-U.S. Holder is not subject to U.S. withholding tax
(other than backup withholding) as discussed above, or is subject to a reduced
rate of withholding under an applicable tax treaty as a result of providing a
properly executed IRS Form W-8BEN, backup withholding will not apply. Proceeds
from the sale of SQUIDS by an individual Non-U.S. Holder will not be subject to
backup withholding by a broker if the broker can associate payment of the
proceeds with documentation upon which it can rely to treat its customer as
foreign.
Holders which are U.S. corporations are not subject to backup withholding.
Holders which are classified as foreign corporations under U.S. federal income
tax principles generally are not subject to backup withholding if certain
documentary evidence indicating that the entity is treated as a corporation
under U.S. federal income tax laws has been provided or if under applicable
regulations the entity must be classified as a corporation.
161
Information Reporting
If an individual U.S. Holder receives payments of interest, information
reporting generally will apply. Information reporting generally does not apply
to payments to U.S. corporations.
If a Non-U.S. Holder receives payments of interest, information reporting
will generally apply. Where the payments can be reliably associated with a
payment to a Non-U.S. Holder, information reporting on Form 1042-S generally
will apply. Information reporting with respect to a Non-U.S. Holder does not
apply if the Non-U.S. Holder holds SQUIDS directly through a qualified
intermediary and required procedures are satisfied.
In general, a Non-U.S. Holder will not be subject to information reporting
by brokers with respect to the proceeds received from the sale of SQUIDS if
prior to payment of the proceeds the broker can associate the payment with
documentation upon which it can rely to treat the customer as a foreign person.
Certain ERISA Considerations
Generally, 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"), should exchange the Outstanding Securities for
SQUIDS only following the investing fiduciary's determination that the
investment in the SQUIDS is in accordance with the documents and instruments
governing the Plan and the applicable provisions of ERISA, the Code or any
Similar Law relating to a fiduciary's duties to the Plan, including, without
limitation, the prudence, diversification, delegation of control and prohibited
transaction provisions of ERISA, the Code and any other applicable Similar
Laws.
Investors proposing to acquire the SQUIDS with the assets of a Plan subject
to Title I of ERISA or Section 4975 of the Code should consider whether the
acquisition of the SQUIDS will contravene the prohibited transaction provisions
of Section 406 of ERISA or Section 4975 of the Code which prohibit such Plans
from engaging in specified transactions involving plan assets with persons or
entities who are "parties in interest," within the meaning of ERISA, or
"disqualified persons," within the meaning of Section 4975 of the Code, unless
an exemption is available. A party in interest or disqualified person who
engaged in a non-exempt prohibited transaction may be subject to excise taxes
and other penalties and liabilities under ERISA and the Code. In addition, the
fiduciary of the Plan that engages in such a non-exempt prohibited transaction
may be subject to penalties and liabilities under ERISA and the Code. Plans
which are not subject to ERISA or the Code but which are subject to Similar
Laws may be subject to similar restrictions on making Plan investments.
Because of the foregoing, the SQUIDS 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.
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 SQUIDS 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 SQUIDS.
162
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known to
USX as of September 30, 2001 to beneficially own five percent or more of any
class of the voting stock of USX:
Name and Address of Beneficial Amount and Nature of Percent of
Class Owner Beneficial Ownership Class
----- ------------------------------ -------------------- ----------
Marathon Wellington Management Company, LLP 15,562,200(1) 5.05(1)
Group
Shares
75 State Street
Boston, MA 02109
---------------------
(1) Based on Schedule 13G dated February 14, 2001 which indicates that
Wellington Management Company, LLP had sole voting power over no shares,
shared voting power over 762,600 shares, sole dispositive power over no
shares and shared dispositive power over 15,562,200 shares.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of each class of USX
common stock beneficially owned as of June 30, 2001 by each director, by each
executive officer and by all directors and executive officers as a group. No
director or executive officer beneficially owned, as of June 30, 2001, any
equity securities of USX other than those shown.
U. S.
Marathon Steel
Group Group
Name Shares Shares
---- --------- ---------
Neil A. Armstrong(1)...................................... 14,112 4,811
Clarence P. Cazalot, Jr.(2)(3)............................ 576,217 69,054
J. Gary Cooper(1)(2)...................................... 3,410 1,816
Charles A. Corry(1)(2)(3)................................. 3,923 81,337
Robert M. Hernandez(2)(3)(4).............................. 643,098 315,010
Shirley Ann Jackson(1)(2)................................. 2,806 1,771
Charles R. Lee(1)......................................... 13,781 5,388
Paul E. Lego(1)(2)........................................ 11,083 3,727
John F. McGillicuddy(1)................................... 13,349 4,482
Dan D. Sandman(2)(3)...................................... 275,498 166,217
Seth E. Schofield(1)(2)................................... 8,810 3,780
John W. Snow(1)........................................... 7,007 3,010
Thomas J. Usher(2)(3)..................................... 1,273,154 879,595
Douglas C. Yearley(1)..................................... 8,269 3,596
All Directors and Executive Officers as a group (35
persons)(1)(2)(3)(5)..................................... 3,871,179 3,089,472
---------------------
(1) Includes Common Stock Units credited under the USX Corporation Deferred
Compensation Plan for Non-Employee Directors as follows:
Marathon Group U. S. Steel Group
Common Stock Units Common Stock Units
------------------ ------------------
Neil A. Armstrong...................... 12,612 4,511
J. Gary Cooper......................... 2,378 770
Charles A. Corry....................... 3,923 1,377
Shirley Ann Jackson.................... 1,790 746
Charles R. Lee......................... 11,781 4,188
Paul E. Lego........................... 9,481 3,401
John F. McGillicuddy................... 11,349 4,082
Seth E. Schofield...................... 7,690 2,636
John W. Snow........................... 6,007 2,010
Douglas C. Yearley..................... 7,269 2,596
163
(2) Includes shares held under the USX Savings Fund Plan, the Marathon Thrift
Plan, the USX Dividend Reinvestment and Direct Stock Purchase Plans and
the 1990 Stock Plan.
(3) Includes shares which may be acquired upon exercise of outstanding
options as follows (all options other than those granted on May 29, 2001
are currently exercisable): Mr. Usher: Marathon Group Shares 1,101,100,
U. S. Steel Group Shares 781,400; Mr. Sandman: Marathon Group Shares
218,400, U. S. Steel Group Shares 142,325; Mr. Cazalot: Marathon Group
Shares 520,000, U. S. Steel Group Shares 55,000; Mr. Hernandez: Marathon
Group Shares 562,625, U.S. Steel Group Shares 282,625; Mr. Corry:
U. S. Steel Group Shares 80,000; and all directors and executive officers
as a group: Marathon Group Shares 3,179,220, U. S. Steel Group Shares
2,688,705.
(4) As of January 31, 2001 the United States Steel and Carnegie Pension Fund,
trustee of the United States Steel Corporation Plan for Employee Pension
Benefits and the United States Steel Corporation Plan for Non-Union
Employee Pension Benefits, owned 587,680 shares of the Marathon Group
Shares. This stock was received in exchange for common stock of Texas Oil
& Gas Corp. Mr. Hernandez is chairman and one of seven members of the
Investment Committee of the trustee. The board of directors of the
trustee has by formal resolution delegated sole power to vote and dispose
of such stock to a subcommittee of the Investment Committee which is
composed of members who are not officers or employees of USX.
Mr. Hernandez disclaims beneficial ownership of such stock.
(5) Total shares beneficially owned in each case constitute less than one
percent of the outstanding shares of each class except that all directors
and executive officers as a group own 1.25 percent of the Marathon Group
Shares and 3.47 percent of the U. S. Steel Group Shares.
LEGAL MATTERS
Certain legal matters with respect to the SQUIDS and the exchange offers
will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York. Skadden, Arps, Slate, Meagher & Flom LLP also represents the
Dealer Managers from time to time. Simpson Thacher & Bartlett, New York,
New York, will pass upon certain legal matters for the Dealer Managers.
EXPERTS
The combined financial statements of United States Steel as of December 31,
2000 and December 31, 1999 and for each of the three years in the period ended
December 31, 2000 included in this prospectus have been so included 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 financial statements of USX Corporation, and the financial
statements of the U. S. Steel Group and the Marathon Group of USX Corporation,
as of December 31, 2000 and December 31, 1999 and for each of the three years
in the period ended December 31, 2000 incorporated in this prospectus by
reference to the Annual Report on Form 10-K/A of USX Corporation for the year
ended December 31, 2000 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.
164
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Combined Financial Statements:
Report of Independent Accountants....................................... F-2
Combined Statement of Operations--Years Ended December 31, 2000, 1999
and 1998............................................................... F-3
Combined Balance Sheet--at December 31, 2000 and 1999................... F-4
Combined Statement of Cash Flows--Years Ended December 31, 2000, 1999
and 1998............................................................... F-5
Notes to Combined Financial Statements.................................. F-6
Unaudited Combined Financial Information:
Selected Quarterly Financial Data....................................... F-32
Supplementary Information on Mineral Reserves........................... F-32
Principal Unconsolidated Investees...................................... F-35
Unaudited Interim Combined Financial Information:
Combined Statement of Operations--Second Quarter and Six Months Ended
June 30, 2001 and 2000................................................. F-36
Combined Balance Sheet--at June 30, 2001 and December 31, 2000.......... F-37
Combined Statement of Cash Flows--Six Months Ended June 30, 2001 and
2000................................................................... F-38
Selected Notes to Combined Financial Statements......................... F-39
INDEX TO SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Financial Information:
Combined Statement of Operations--Third Quarter and Nine Months Ended
September 30, 2001...................................................... U-1
Preliminary Supplemental Statistics--Third Quarter and Nine Months Ended
September 30, 2001...................................................... U-4
F-1
Report of Independent Accountants
To the Stockholders of USX Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of United States Steel at December
31, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of USX 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.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 7, 2001
F-2
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS
2000 1999 1998
------ ------ ------
(Dollars in
millions)
Revenues and other income:
Revenues............................................. $6,090 $5,536 $6,378
Income (loss) from investees......................... (8) (89) 46
Net gains on disposal of assets...................... 46 21 54
Other income (loss).................................. 4 2 (1)
------ ------ ------
Total revenues and other income.................... 6,132 5,470 6,477
------ ------ ------
Costs and expenses:
Cost of revenues (excludes items shown below)........ 5,656 5,084 5,604
Selling, general and administrative expenses
(credits) (Note 12)................................. (223) (283) (201)
Depreciation, depletion and amortization............. 360 304 283
Taxes other than income taxes........................ 235 215 212
------ ------ ------
Total costs and expenses........................... 6,028 5,320 5,898
------ ------ ------
Income from operations................................. 104 150 579
Net interest and other financial costs (Note 7)........ 105 74 42
------ ------ ------
Income (loss) before income taxes and extraordinary
losses................................................ (1) 76 537
Provision for income taxes (Note 15)................... 20 25 173
------ ------ ------
Income (loss) before extraordinary losses.............. (21) 51 364
Extraordinary losses (Note 6).......................... -- 7 --
------ ------ ------
Net income (loss)...................................... (21) 44 364
Dividends on preferred stock........................... 8 9 9
------ ------ ------
Net income (loss) available to USX's net investment.... $ (29) $ 35 $ 355
====== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
F-3
UNITED STATES STEEL
COMBINED BALANCE SHEET
December 31
----------------------
2000 1999
---------- ----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 219 $ 22
Receivables, less allowance for doubtful accounts of
$57 and $10......................................... 625 486
Receivables subject to a security interest (Note
11)................................................. 350 350
Receivables from related parties (Note 13)........... 366 99
Inventories (Note 14)................................ 946 743
Deferred income tax benefits (Note 15)............... 201 281
Other current assets................................. 10 --
---------- ----------
Total current assets............................... 2,717 1,981
Investments and long-term receivables, less reserves of
$38 and $3 (Note 16).................................. 439 475
Long-term receivables from related parties (Note 13)... 97 97
Property, plant and equipment--net (Note 21)........... 2,739 2,516
Prepaid pensions (Note 12)............................. 2,672 2,404
Other noncurrent assets................................ 47 52
---------- ----------
Total assets....................................... $ 8,711 $ 7,525
========== ==========
LIABILITIES
Current liabilities:
Notes payable........................................ $ 70 $ --
Accounts payable..................................... 755 751
Accounts payable to related parties (Note 13)........ 5 6
Payroll and benefits payable......................... 202 322
Accrued taxes........................................ 173 177
Accrued interest..................................... 47 15
Long-term debt due within one year (Note 11)......... 139 13
---------- ----------
Total current liabilities.......................... 1,391 1,284
Long-term debt (Note 11)............................... 2,236 902
Deferred income taxes (Note 15)........................ 666 348
Employee benefits (Note 12)............................ 1,767 2,245
Deferred credits and other liabilities................. 483 441
Preferred stock of subsidiary (Note 10)................ 66 66
Mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely junior
subordinated convertible debentures of USX (Note 18).. 183 183
EQUITY (Note 19)
Preferred stock........................................ 2 3
USX's net investment................................... 1,950 2,073
Deferred compensation.................................. (3) --
Accumulated other comprehensive income (loss).......... (30) (20)
---------- ----------
Total equity....................................... 1,919 2,056
---------- ----------
Total liabilities and equity....................... $ 8,711 $ 7,525
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
F-4
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS
2000 1999 1998
------ ----- -----
(Dollars in
millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss)....................................... $ (21) $ 44 $ 364
Adjustments to reconcile to net cash provided from (used
in) operating activities:
Extraordinary losses.................................. -- 7 --
Depreciation, depletion and amortization.............. 360 304 283
Pensions and other postretirement benefits............ (847) (256) (215)
Deferred income taxes................................. 389 107 158
Net gains on disposal of assets....................... (46) (21) (54)
Changes in:
Current receivables--sold........................... -- (320) (30)
--operating turnover.................................... (263) (242) 232
Inventories......................................... (63) (14) 7
Current accounts payable and accrued expenses....... (262) 239 (285)
All other--net........................................ 126 72 (80)
------ ----- -----
Net cash provided from (used in) operating
activities......................................... (627) (80) 380
------ ----- -----
Investing activities:
Capital expenditures.................................. (244) (287) (310)
Acquisition of U. S. Steel Kosice s.r.o., net of cash
acquired of $59...................................... (10) -- --
Disposal of assets.................................... 21 10 21
Restricted cash--withdrawals.......................... 2 15 35
--deposits............................................ (2) (17) (35)
Investees--investments................................ (35) (15) (73)
--loans and advances.................................. (10) -- (1)
All other--net........................................ 8 -- 14
------ ----- -----
Net cash used in investing activities............... (270) (294) (349)
------ ----- -----
Financing activities (Note 10):
Increase in attributed portion of USX consolidated
debt................................................. 1,208 147 13
Specifically attributed debt:
Borrowings.......................................... -- 350 --
Repayments.......................................... (6) (11) (4)
Steel Stock issued.................................... -- -- 55
Preferred stock repurchased........................... (12) (2) (8)
Dividends paid........................................ (97) (97) (96)
------ ----- -----
Net cash provided from (used in) financing
activities......................................... 1,093 387 (40)
------ ----- -----
Effect of exchange rate changes on cash................. 1 -- --
------ ----- -----
Net increase (decrease) in cash and cash equivalents.... 197 13 (9)
Cash and cash equivalents at beginning of year.......... 22 9 18
------ ----- -----
Cash and cash equivalents at end of year................ $ 219 $ 22 $ 9
====== ===== =====
See Note 9, for supplemental cash flow information.
The accompanying notes are an integral part of these combined financial
statements.
F-5
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying combined financial statements represent a carve-out
financial statement presentation of the businesses comprising United States
Steel, and are not intended to be a complete presentation of the financial
position, the results of operations and cash flows of United States Steel on a
stand-alone basis. These combined financial statements are presented as if
United States Steel existed as an entity separate from the remaining businesses
of USX Corporation (USX) during the periods presented. The allocations and
estimates included in these combined financial statements are determined using
the methodologies described in Note 4.
United States Steel through its Domestic Steel segment, is engaged in the
production, sale and transportation of steel mill products, coke, taconite
pellets and coal; the management of mineral resources; real estate development;
engineering and consulting services and, through its U.S. Steel Kosice segment,
primarily located in the Slovak Republic, in the production and sale of steel
mill products and coke for the central European market. Most businesses within
the Domestic Steel segment are divisions of USX. Certain business activities
are conducted through joint ventures and partially owned companies, such as
USS-POSCO Industries, PRO-TEC Coating Company, Clairton 1314B Partnership,
Republic Technologies International LLC and Rannila Kosice s.r.o.
The accompanying combined financial statements include the historical
operations of certain divisions of USX and certain subsidiaries of USX. In this
context, no direct ownership existed among all the various units comprising
United States Steel; accordingly, USX's net investment in United States Steel
(USX's net investment) is shown in lieu of Common Stockholder's Equity in the
combined financial statements. The combined financial statements included
herein have been prepared from USX's historical accounting records.
2. Summary of Principal Accounting Policies
Principles applied in consolidation--Investments in entities over which
United States Steel has significant influence are accounted for using the
equity method of accounting and are carried at United States Steel's share of
net assets plus loans and advances.
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 comprehensive income (net of tax).
Investments in companies whose stock has no readily determinable fair value are
carried at cost.
Income from investees includes United States Steel's proportionate share of
income from equity method investments. Also, gains or losses from a change in
ownership of an unconsolidated investee are recognized in the period of change.
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 long-lived assets; 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.
Additionally, certain estimated liabilities are recorded when management
commits to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and assumptions used.
F-6
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Revenue recognition--Revenues are recognized generally when products are
shipped or services are provided to customers, the sales price is fixed and
determinable, and collectibility is reasonably assured. Costs associated with
revenues, including shipping and other transportation costs, are recorded in
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. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
Derivative instruments--United States Steel uses commodity-based derivative
instruments to manage its exposure to price risk. Management is authorized to
use futures, forwards, swaps and options related to the purchase of natural
gas, refined products and nonferrous metals used in steel operations. Recorded
deferred gains or losses are reflected within other current and noncurrent
assets or accounts payable and deferred credits and other liabilities, as
appropriate.
Long-lived assets--Depreciation is generally computed using a modified
straight-line method based upon estimated lives of assets and production
levels. The modification factors for domestic steel producing assets 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.
United States Steel evaluates impairment of its long-lived assets on an
individual asset basis or by logical groupings of assets. 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 long-lived assets 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 long-lived assets are reclassified as assets held for sale.
Proceeds from disposal of long-lived assets depreciated on a group basis are
credited to accumulated depreciation, depletion and amortization with no
immediate effect on income.
Major maintenance activities--United States Steel incurs planned major
maintenance costs primarily for blast furnace relines. Such costs 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.
Environmental remediation--United States 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 in
certain instances.
Postemployment benefits--United States Steel recognizes an obligation to
provide postemployment benefits, primarily for disability-related claims
covering indemnity and medical payments to certain employees. The obligation
for these claims and the related periodic costs are
F-7
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
measured using actuarial techniques and assumptions, including an appropriate
discount rate, analogous to the required methodology for measuring pension and
other postretirement benefit obligations. Actuarial gains and losses are
deferred and amortized over future periods.
Insurance--United States 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.
3. New Accounting Standards
In the fourth quarter of 2000, United States Steel adopted the following
accounting pronouncements primarily related to the classification of items in
the financial statements. The adoption of these new pronouncements had no net
effect on the financial position or results of operations of United States
Steel, although they required reclassifications of certain amounts in the
financial statements, including all prior periods presented.
. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in
Financial Statements," which summarizes the SEC staff's interpretations
of generally accepted accounting principles related to revenue
recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction of revenue or as
a component of both revenues and cost of revenues, and EITF Consensus
No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping goods to
customers.
. In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. United States Steel adopted
certain recognition and reclassification provisions of SFAS 140, which
were effective for fiscal years ending after December 15, 2000. The
remaining provisions of SFAS 140 are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos.
137 and 138. This Standard requires recognition of all derivatives as either
assets or liabilities at fair value. Changes in fair value will be reflected in
either current period net income or other comprehensive income, depending on
the designation of the derivative instrument. United States Steel may elect not
to designate a derivative instrument as a hedge even if the strategy would be
expected to qualify for hedge accounting treatment. The adoption of SFAS No.
133 will change the timing of recognition for derivative gains and losses as
compared to previous accounting standards.
United States Steel will adopt the Standard effective January 1, 2001. The
transition adjustment resulting from the adoption of SFAS No. 133 will be
reported as a cumulative effect of a change in accounting principle. The
transition adjustment for United States Steel is expected to be immaterial.
F-8
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The amounts reported as other comprehensive income will be reflected in net
income when the anticipated physical transactions are consummated. It is not
possible to estimate the effect that this Standard will have on future results
of operations.
4. Corporate Activities
Financial activities--As a matter of policy, USX manages most financial
activities on a centralized, consolidated basis. Such financial activities
include the investment of surplus cash; the issuance, repayment and repurchase
of short-term and long-term debt; the issuance, repurchase and redemption of
preferred stock; and the issuance and repurchase of common stock. 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 are attributed to United States Steel
based upon its cash flows for the periods presented and its initial capital
structure. Most financing transactions are not specifically attributed to
United States Steel but represent attributed amounts of USX's financial
activities. See Note 10, for United States Steel's attributed portion of USX's
financial activities. However, transactions such as leases, certain
collateralized financings, certain indexed debt instruments, financial
activities of consolidated entities which are less than wholly owned by USX and
transactions related to securities convertible solely into USX-U. S. Steel
Group Common Stock are or will be specifically attributed to and reflected in
their entirety in the financial statements of United States Steel.
Corporate general and administrative costs--Corporate general and
administrative costs are allocated to United States Steel by USX based upon
utilization or other methods management believes to be reasonable and which
consider certain measures of business activities, such as employment,
investments and revenues. The costs allocated to United States Steel were $25
million in 2000, $17 million in 1999 and $24 million in 1998, and primarily
consist of employment costs including pension effects, professional services,
facilities and other related costs associated with corporate activities.
Income taxes--All members of the USX affiliated group are included in the
consolidated United States federal income tax return filed by USX. Accordingly,
the provision for federal income taxes and the related payments or refunds of
tax are determined on a consolidated basis. The consolidated provision and the
related tax payments or refunds have been reflected in the United States Steel
financial statements in accordance with USX's tax allocation policy. In
general, such policy provides that the consolidated tax provision and related
tax payments or refunds are allocated to United States Steel for financial
statement purposes, based upon its financial income, taxable income, credits,
preferences, and other directly related amounts.
For tax provision and settlement purposes, tax benefits resulting from
attributes (principally net operating losses and various tax credits), which
cannot be utilized by United States Steel on a separate return basis but which
can be utilized on a consolidated basis in that year or in a carryback year,
are allocated to United States Steel if it generated the attributes. To the
extent that United States Steel is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately utilized on
the consolidated tax return, the prior years' allocation of such attribute is
adjusted such that the effect of the expiration is borne by United States Steel
if it generated the attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is adjusted in a subsequent
year to the extent necessary to allocate the tax benefits to United States
Steel if it would have realized the tax benefits on a separate return basis. As
a result, the allocated amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if United States Steel
had filed its own separate tax returns.
F-9
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. Business Combination
On November 24, 2000, United States Steel acquired U. S. Steel Kosice s.r.o.
(USSK), which is located in the Slovak Republic. USSK was formed in June 2000
to hold the steel operations and related assets of VSZ a.s. (VSZ), a
diversified Slovak corporation. The cash purchase price was $69 million.
Additional payments to VSZ of not less than $25 million and up to $75 million
are contingent upon the future performance of USSK. Additionally, $325 million
of debt was included with the acquisition. The acquisition was accounted for
under the purchase method of accounting. The 2000 results of operations include
the operations of USSK from the date of acquisition.
Prior to this transaction, United States 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. Previously, United States Steel had accounted for its investment in
VSZUSS under the equity method of accounting.
The following unaudited pro forma data for United States Steel includes the
results of operations of USSK for 2000 and 1999, giving effect to the
acquisition as if it had been consummated at the beginning of the years
presented. The 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 addition, VSZ did
not historically provide carve-out financial information for its steel
operations in accordance with generally accepted accounting principles in the
United States. Therefore, United States Steel made certain estimates and
assumptions regarding revenue and costs in the preparation of the following
unaudited pro forma data.
Year Ended
December 31
-------------
2000 1999
------ ------
(In millions)
Revenues and other income..................................... $7,094 $6,472
Income before extraordinary loss.............................. 57 36
Net income.................................................... 57 29
6. Extraordinary Losses
In 1999, United States Steel irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The
deposit of the shares resulted in the satisfaction of United States Steel's
obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1,
2000. Under the terms of the indenture, the trustee exchanged one RTI share for
each note at maturity. All shares were required for satisfaction of the indexed
debt; therefore, none reverted back to United States Steel.
As a result of the above transaction, United States Steel recorded in 1999
an extraordinary loss of $5 million, net of a $3 million income tax benefit,
representing prepaid interest expense and the write-off of unamortized debt
issue costs, and a pretax charge of $22 million, representing the difference
between the carrying value of the investment in RTI and the carrying value of
the indexed debt, which is included in net gains on disposal of assets.
In 1999, Republic Technologies International, LLC, an equity investee of
United States Steel, recorded an extraordinary loss related to the early
extinguishment of debt. As a result, United States Steel recorded an
extraordinary loss of $2 million, net of a $1 million income tax benefit,
representing its share of the extraordinary loss.
F-10
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. Other Items
2000 1999 1998
---- ---- ----
(In millions)
Net interest and other financial costs
Interest and other financial income:
Interest income.............................................. $ 3 $ 1 $ 5
Other........................................................ 7 -- --
---- ---- ----
Total...................................................... 10 1 5
---- ---- ----
Interest and other financial costs:
Interest incurred............................................ 88 45 40
Less interest capitalized.................................... 3 6 6
---- ---- ----
Net interest............................................... 85 39 34
Interest on tax issues....................................... 11 15 16
Financial costs on trust preferred securities................ 13 13 13
Financial costs on preferred stock of subsidiary............. 5 5 5
Amortization of discounts.................................... 1 1 2
Expenses on sales of accounts receivable..................... -- 15 21
Adjustment to settlement value of indexed debt............... -- (13) (44)
---- ---- ----
Total...................................................... 115 75 47
---- ---- ----
Net interest and other financial costs......................... $105 $ 74 $ 42
==== ==== ====
Foreign currency transactions
For 2000, the aggregate foreign currency transaction gain included in
determining net income was $7 million. There were no foreign currency
transaction gains or losses in 1999 and 1998.
8. Segment Information
United States Steel consists of two reportable operating segments: 1)
Domestic Steel and 2) U.S. Steel Kosice (USSK). Domestic Steel includes the
United States operations of United States Steel, while USSK includes the United
States Steel operations in the Slovak Republic. Domestic Steel is engaged in
the domestic production and sale of steel mill products, coke and taconite
pellets; the management of mineral resources; coal mining; engineering and
consulting services; and real estate development and management. USSK is
engaged in the production and sale of steel mill products and coke and
primarily serves European markets.
Segment income represents income from operations allocable to both operating
segments and does not include net interest and other financial costs and
provisions for income taxes. Additionally, the following items are not
allocated to operating segments:
. Net pension credits associated with pension plan assets and liabilities
. Certain costs related to former United States Steel business activities
. Allocated USX corporate general and administrative costs. These costs
primarily consist of employment costs including pension effects,
professional services, facilities and other related costs associated
with corporate activities
. Certain other items not allocated to operating segments for business
performance reporting purposes (see reconcilement schedule on page F-13)
Information on assets by segment is not provided as it is not reviewed by
the chief operating decision maker.
F-11
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following represents the operations of United States Steel:
Domestic
Steel USSK Total
-------- ---- ------
(In millions)
2000
Revenues and other income:
Customer.............................................. $5,981 $ 92 $6,073
Other subsidiaries of USX(a).......................... 17 -- 17
Equity in losses of unconsolidated investees.......... (8) -- (8)
Other................................................. 50 -- 50
------ ---- ------
Total revenues and other income..................... $6,040 $ 92 $6,132
====== ==== ======
Segment income.......................................... $ 23 $ 2 $ 25
Significant noncash items included in segment income -
depreciation, depletion and amortization(b)............ 285 4 289
Capital expenditures.................................... 239 5 244
1999
Revenues and other income:
Customer.............................................. $5,519 $-- $5,519
Other subsidiaries of USX(a).......................... 17 -- 17
Equity in losses of unconsolidated investees.......... (43) -- (43)
Other................................................. 46 -- 46
------ ---- ------
Total revenues and other income..................... $5,539 $-- $5,539
====== ==== ======
Segment income.......................................... $ 91 $-- $ 91
Significant noncash items included in segment income -
depreciation, depletion and amortization............... 304 -- 304
Capital expenditures(c)................................. 286 -- 286
1998
Revenues and other income:
Customer.............................................. $6,374 $-- $6,374
Other subsidiaries of USX(a).......................... 2 -- 2
Equity in earnings of unconsolidated investees........ 46 -- 46
Other................................................. 55 -- 55
------ ---- ------
Total revenues and other income..................... $6,477 $-- $6,477
====== ==== ======
Segment income.......................................... $ 517 $-- $ 517
Significant noncash items included in segment income -
depreciation, depletion and amortization............... 283 -- 283
Capital expenditures(c)................................. 305 -- 305
---------------------
(a) Revenues and transfers with other subsidiaries of USX were conducted under
terms comparable to those with unrelated parties.
(b) Difference between segment total and United States Steel total represents
amounts for impairment of coal assets.
(c) Differences between segment total and United States Steel total represent
amounts related to corporate administrative activities.
F-12
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following schedules reconcile segment amounts to amounts reported in
United States Steel's combined financial statements:
2000 1999 1998
------ ------ ------
(In millions)
Revenues and Other Income:
Revenues and other income of reportable segments..... $6,132 $5,539 $6,477
Items not allocated to segments:
Impairment and other costs related to an investment
in an equity investee............................. -- (47) --
Loss on investment in RTI stock used to satisfy
indexed debt obligations.......................... -- (22) --
------ ------ ------
Total revenues and other income.................. $6,132 $5,470 $6,477
====== ====== ======
Income:
Income for reportable segments....................... $ 25 $ 91 $ 517
Items not allocated to segments:
Impairment of coal assets.......................... (71) -- --
Impairment and other costs related to an investment
in an equity investee............................. -- (47) --
Loss on investment in RTI stock used to satisfy
indexed debt obligations.......................... -- (22) --
Administrative expenses............................ (25) (17) (24)
Net pension credits................................ 266 228 186
Costs related to former businesses activities...... (91) (83) (100)
------ ------ ------
Total income from operations..................... $ 104 $ 150 $ 579
====== ====== ======
Revenues by Product:
2000 1999 1998
------ ------ ------
(In millions)
Sheet and semi-finished steel products................. $3,288 $3,433 $3,598
Tubular, plate and tin mill products................... 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)................ 626 549 744
Other(a)............................................... 445 414 490
---------------------
(a) Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and resource
management.
F-13
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Geographic Area:
The information below summarizes the operations in different geographic
areas.
Revenues and Other Income
----------------------------
Within Between
Geographic Geographic
Year Areas Areas Total Assets(a)
---- ---------- ---------- ------ ---------
(In millions)
United States....................... 2000 $6,027 $-- $6,027 $2,745
1999 5,452 -- 5,452 2,889
1998 6,460 -- 6,460 3,043
Slovak Republic..................... 2000 95 -- 95 376
1999 3 -- 3 60
1998 6 -- 6 66
Other Foreign Countries............. 2000 10 -- 10 10
1999 15 -- 15 3
1998 11 -- 11 3
Total............................. 2000 $6,132 $-- $6,132 $3,131
1999 5,470 -- 5,470 2,952
1998 6,477 -- 6,477 3,112
---------------------
(a) Includes property, plant and equipment and investments.
F-14
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
9. Supplemental Cash Flow Information
2000 1999 1998
------- ------- --------
(In millions)
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of
amount capitalized)............................. $ (71) $ (77) $ (76)
Income taxes refunded (paid), including
settlements with USX under the tax allocation
policy.......................................... 81 3 (29)
Consolidated USX debt:
Commercial paper:
Issued......................................... $ 3,362 $ 6,282 $ --
Repayments..................................... (3,450) (6,117) --
Credit agreements:
Borrowings..................................... 437 5,529 17,486
Repayments..................................... (437) (5,980) (16,817)
Other credit arrangements--net................... 150 (95) 55
Other debt:
Borrowings..................................... -- 319 671
Repayments..................................... (54) (87) (1,053)
------- ------- --------
Total...................................... $ 8 $ (149) $ 342
======= ======= ========
Activity attributed to United States Steel....... $ 1,208 $ 147 $ 13
Activity attributed to other subsidiaries of
USX............................................. (1,200) (296) 329
------- ------- --------
Total...................................... $ 8 $ (149) $ 342
======= ======= ========
Noncash investing and financing activities:
Stock issued for dividend reinvestment and
employee stock plans............................ $ 5 $ 2 $ 2
Disposal of assets:
Deposit of RTI common shares in satisfaction of
indexed debt.................................. -- 56 --
Interest in USS/Kobe contributed to Republic... -- 40 --
Other disposals of assets--notes or common
stock received................................ 14 1 2
Business combinations:
Acquisition of USSK:
Liabilities assumed.......................... 568 -- --
Contingent consideration payable at present
value....................................... 21 -- --
Investee liabilities consolidated in step
acquisition................................. 3 -- --
Other acquisitions:
Liabilities assumed.......................... -- 26 --
Investee liabilities consolidated in step
acquisition................................. -- 26 --
F-15
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. Financial Activities Attributed to United States Steel
The following is the portion of USX financial activities attributed to
United States Steel. These amounts exclude amounts specifically attributed to
United States Steel.
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
Cash and cash equivalents............................ $ 171 $ 1 $ 364 $ 9
Other noncurrent assets.............................. 3 1 7 8
------ ---- ------ ------
Total assets....................................... $ 174 $ 2 $ 371 $ 17
====== ==== ====== ======
Notes payable........................................ $ 70 $-- $ 150 $ --
Accrued interest..................................... 45 13 95 95
Long-term debt due within one year (Note 11)......... 130 7 277 54
Long-term debt (Note 11)............................. 1,804 466 3,734 3,771
Preferred stock of subsidiary........................ 66 66 250 250
------ ---- ------ ------
Total liabilities.................................. $2,115 $552 $4,506 $4,170
====== ==== ====== ======
United States Consolidated
Steel(a) USX
-------------- --------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
(In millions)
Net interest and other financial costs (Note
7)............................................. $59 $39 $29 $309 $334 $324
---------------------
(a) United States Steel's net interest and other financial costs reflect
weighted average effects of all financial activities attributed by USX.
F-16
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt
United States Steel's portion of USX's consolidated long-term debt is as
follows:
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
Specifically attributed debt(a):
Receivables facility............................... $ 350 $350 $ 350 $ 350
Sale-leaseback financing and capital leases........ 88 92 95 107
Other.............................................. 3 -- 4 1
------ ---- ------ ------
Total............................................ 441 442 449 458
Less amount due within one year.................... 9 6 10 7
------ ---- ------ ------
Total specifically attributed long-term debt..... $ 432 $436 $ 439 $ 451
====== ==== ====== ======
USX debt attributed to United States Steel(b)........ $1,946 $477 $4,036 $3,852
Less unamortized discount.......................... 12 4 25 27
Less amount due within one year.................... 130 7 277 54
------ ---- ------ ------
Total long-term debt not specifically
attributed...................................... $1,804 $466 $3,734 $3,771
====== ==== ====== ======
Total long-term debt due within one year............. $ 139 $ 13 $ 287 $ 61
Total long-term debt due after one year.............. 2,236 902 4,173 4,222
---------------------
(a) As described in Note 4, certain financial activities are specifically
attributed to and reflected in their entirety in the financial statements
of United States Steel.
(b) Long-term debt activities of USX Corporation, not specifically attributed,
are attributed to United States Steel based on its cash flows.
12. Pensions and Other Postretirement Benefits
United States Steel has noncontributory defined benefit pension plans
covering substantially all U.S. 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 U.S. salaried employees based upon a percent
of total career pensionable earnings. United States Steel also participates in
multiemployer plans, most of which are defined benefit plans associated with
coal operations.
United States Steel also has defined benefit retiree health care and life
insurance plans (other benefits) covering most U.S. 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 U.S. union retirees, benefits
are provided for the most part based on fixed amounts negotiated in labor
contracts with the appropriate unions.
F-17
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension
Benefits Other Benefits
----------------- ------------------
2000 1999 2000 1999
------ ------- ------- -------
(In millions)
Change in benefit obligations
Benefit obligations at January 1..... $6,716 $ 7,549 $ 1,896 $ 2,113
Service cost......................... 76 87 12 15
Interest cost........................ 505 473 147 133
Plan amendments...................... -- 381(a) -- 14
Actuarial (gains) losses............. 430 (822) 260 (225)
Plan merger and acquisition.......... -- 42 -- 7
Settlements, curtailments and
termination benefits................ -- (207) -- --
Benefits paid........................ (806) (787) (166) (161)
------ ------- ------- -------
Benefit obligations at December 31... $6,921 $ 6,716 $ 2,149 $ 1,896
====== ======= ======= =======
Change in plan assets
Fair value of plan assets at January
1................................... $9,995 $10,243 $ 281 $ 265
Actual return on plan assets......... 139 729 26 20
Acquisition.......................... (1) 26 -- 1
Employer contributions............... -- -- 576(b) 34
Trustee distributions(c)............. (16) (14) -- --
Settlements paid..................... -- (207) -- --
Benefits paid from plan assets....... (805) (782) (41) (39)
------ ------- ------- -------
Fair value of plan assets at December
31.................................. $9,312 $ 9,995 $ 842 $ 281
====== ======= ======= =======
Funded status of plans at December
31.................................. $2,391(d) $ 3,279(d) $(1,307) $(1,615)
Unrecognized net gain from
transition.......................... (2) (69) -- --
Unrecognized prior service cost...... 719 817 12 19
Unrecognized actuarial gains......... (462) (1,639) (241) (526)
Additional minimum liability......... (19) (16) -- --
------ ------- ------- -------
Prepaid (accrued) benefit cost....... $2,627 $ 2,372 $(1,536) $(2,122)
====== ======= ======= =======
---------------------
(a) Results primarily from a five-year labor contract with the United
Steelworkers of America ratified in August 1999.
(b) Includes contributions of $530 million to a Voluntary Employee Benefit
Association trust, comprised of $30 million in contractual requirements
and an elective contribution of $500 million. Also includes a $30 million
elective contribution to the non-union retiree life insurance trust.
(c) Represents transfers of excess pension assets to fund retiree health care
benefits accounts under Section 420 of the Internal Revenue Code.
(d) Includes a plan that has accumulated benefit obligations in excess of plan
assets:
2000 1999
---- ----
Aggregate accumulated benefit
obligations.............................. $(40) $(29)
Aggregate projected benefit obligations... (49) (39)
Aggregate plan assets..................... -- --
F-18
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension Benefits Other Benefits
---------------------- ----------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(In millions)
Components of net
periodic benefit cost
(credit)
Service cost............. $ 76 $ 87 $ 71 $ 12 $ 15 $ 15
Interest cost............ 505 473 487 147 133 141
Expected return on plan
assets.................. (841) (781) (769) (24) (21) (21)
Amortization--net
transition gain......... (67) (67) (69) -- -- --
--prior service costs.... 98 83 72 4 4 4
--actuarial (gains)
losses.................. (44) 6 6 (29) (12) (16)
Multiemployer and other
plans................... -- -- 1 9 (a) 7 (a) 13 (a)
Settlement and
termination (gains)
losses.................. -- (35)(b) 10(b) -- -- --
----- ----- ----- ---- ---- ----
Net periodic benefit cost
(credit)................ $(273) $(234) $(191) $119 $126 $136
===== ===== ===== ==== ==== ====
---------------------
(a) Represents 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 broadly estimated to be $84 million, including the effects
of future medical inflation, and this amount could increase if additional
beneficiaries are assigned.
(b) Relates primarily to the 1998 voluntary early retirement program.
Pension Other
Benefits Benefits
---------- ----------
2000 1999 2000 1999
---- ---- ---- ----
Weighted average actuarial assumptions at December 31
Discount rate.......................................... 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets.................. 8.9% 8.5% 8.5% 8.5%
Increase in compensation rate.......................... 4.0% 4.0% 4.0% 4.0%
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was assumed
to decrease gradually to 5% for 2006 and remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
(In millions)
Effect on total of service and interest cost
components..................................... $ 16 $ (14)
Effect on other postretirement benefit
obligations.................................... 177 (151)
13. Transactions with Related Parties
Revenues and purchases--United States Steel revenues for sales to other
subsidiaries of USX totaled $17 million in both 2000 and 1999 and $2 million in
1998. United States Steel purchases from other subsidiaries of USX totaled $60
million, $41 million and $21 million in 2000, 1999 and 1998, respectively. At
December 31, 2000 and 1999, United States Steel receivables from related
parties totaled $366 million and $99 million, respectively, related to
transactions with other subsidiaries of USX. At December 31, 2000 and 1999,
United States Steel accounts payable to related parties totaled $5 million and
$6 million, respectively, related to transactions with other subsidiaries of
USX. These transactions were conducted under terms comparable to those with
unrelated parties.
F-19
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Income taxes receivable from/payable to USX--At December 31, 2000 and 1999,
amounts receivable or payable for income taxes were included in the balance
sheet as follows:
December
31
---------
2000 1999
---- ----
(In
millions)
Current:
Receivables........................................................ $364 $ 97
Accounts payable................................................... 4 1
Noncurrent:
Receivables........................................................ 97 97
These amounts have been determined in accordance with the tax allocation
policy described in Note 4. Amounts classified as current are settled in cash
in the year succeeding that in which such amounts are accrued. Noncurrent
amounts represent estimates of tax effects of certain issues for years that are
still under various stages of audit and administrative review. Such tax effects
are not settled until the audit of those respective tax years is closed. The
amounts ultimately settled for open tax years will be different than recorded
noncurrent amounts based on the final resolution of all of the audit issues for
those years.
14. Inventories
December
31
---------
2000 1999
---- ----
(In
millions)
Raw materials........................................................ $214 $101
Semi-finished products............................................... 429 392
Finished products.................................................... 210 193
Supplies and sundry items............................................ 93 57
---- ----
Total.............................................................. $946 $743
==== ====
At December 31, 2000 and 1999, respectively, the LIFO method accounted for
91% and 93% of total inventory value. Current acquisition costs were estimated
to exceed the above inventory values at December 31 by approximately $380
million and $370 million in 2000 and 1999, respectively. Cost of revenues was
reduced and income from operations was increased by $3 million in 2000 as a
result of liquidations of LIFO inventories.
15. Income Taxes
Income tax provisions and related assets and liabilities attributed to
United States Steel are determined in accordance with the USX tax allocation
policy (Note 4).
Provisions (credits) for income taxes were:
2000 1999 1998
---------------------- ---------------------- ----------------------
(In millions)
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
Federal................. $(357) $340 $(17) $(84) $ 99 $15 $19 $149 $168
State and local......... (12) 49 37 1 8 9 3 9 12
Foreign................. -- -- -- 1 -- 1 (7) -- (7)
----- ---- ---- ---- ---- --- --- ---- ----
Total................. $(369) $389 $ 20 $(82) $107 $25 $15 $158 $173
===== ==== ==== ==== ==== === === ==== ====
F-20
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
2000 1999 1998
---- ---- ----
(In millions)
Statutory rate applied to income before income taxes........ $-- $27 $188
Excess percentage depletion................................. (3) (7) (11)
Effects of foreign operations, including foreign tax
credits.................................................... (5) (2) (11)
State and local income taxes after federal income tax
effects.................................................... 24 6 8
Credits other than foreign tax credits...................... (3) (3) (3)
Adjustments of prior years' federal income taxes............ 5 -- --
Other....................................................... 2 4 2
---- --- ----
Total provisions........................................ $ 20 $25 $173
==== === ====
Deferred tax assets and liabilities resulted from the following:
December 31
--------------
2000 1999
------ ------
(In millions)
Deferred tax assets:
Minimum tax credit carryforwards............................. $ 39 $ 131
State tax loss carryforwards (expiring in 2001 through
2020)....................................................... 55 65
Employee benefits............................................ 782 998
Receivables, payables and debt............................... 52 68
Expected federal benefit for deducting state deferred income
taxes....................................................... 16 --
Contingency and other accruals............................... 71 52
Other........................................................ 2 11
Valuation allowances--state.................................. (34) (41)
------ ------
Total deferred tax assets(a)............................... 983 1,284
------ ------
Deferred tax liabilities:
Property, plant and equipment................................ 248 274
Prepaid pensions............................................. 1,046 921
Inventory.................................................... 15 16
Investments in subsidiaries and equity investees............. 82 96
Other........................................................ 61 44
------ ------
Total deferred tax liabilities............................. 1,452 1,351
------ ------
Net deferred tax liabilities............................. $ 469 $ 67
====== ======
---------------------
(a) USX expects to generate sufficient future taxable income to realize the
benefit of United States Steel's deferred tax assets.
The consolidated tax returns of USX for the years 1990 through 1997 are
under various stages of audit and administrative review by the IRS. United
States Steel believes it has made adequate provision for income taxes and
interest which may become payable for years not yet settled.
Pretax income in 2000 included $8 million attributable to foreign sources.
F-21
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Undistributed earnings of certain consolidated foreign subsidiaries at
December 31, 2000, amounted to $18 million. No provision for deferred U.S.
income taxes has been made for these subsidiaries because United States Steel
intends to permanently reinvest such earnings in those foreign operations. If
such earnings were not permanently reinvested, a deferred tax liability of $6
million would have been required.
16. Investments and Long-Term Receivables
December 31
-----------
2000 1999
----- -----
(In
millions)
Equity method investments.......................................... $ 325 $ 397
Other investments.................................................. 67 39
Receivables due after one year..................................... 5 11
Deposits of restricted cash........................................ 3 2
Other.............................................................. 39 26
----- -----
Total............................................................ $ 439 $ 475
===== =====
Summarized financial information of investees accounted for by the equity
method of accounting follows:
2000 1999 1998
------ ------ ------
(In millions)
Income data--year:
Revenues and other income............................. $3,484 $3,027 $3,163
Operating income (loss)............................... 112 (57) 193
Net income (loss)..................................... (166) (193) 97
Balance sheet data--December 31:
Current assets........................................ $ 911 $ 995
Noncurrent assets..................................... 2,196 2,402
Current liabilities................................... 1,171 1,181
Noncurrent liabilities................................ 1,307 1,251
United States Steel acquired a 25% interest in VSZ during 2000. VSZ does not
provide its shareholders with financial statements prepared in accordance with
generally accepted accounting principles in the United States (USGAAP).
Although shares of VSZ are traded on the Bratislava Stock Exchange, those
securities do not have a readily determinable fair value as defined under
USGAAP. Accordingly, United States Steel accounts for its investment in VSZ
under the cost method of accounting.
In 1999, United States Steel and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of USS/Kobe
Steel Company (USS/Kobe) with companies controlled by Blackstone Capital
Partners II. The combined entity was named Republic Technologies International,
LLC and is a wholly owned subsidiary of Republic Technologies International
Holdings, LLC (Republic). As a result of this transaction, United States Steel
recorded $47 million in charges related to the impairment of the carrying value
of its investment in USS/Kobe and costs related to the formation of Republic.
These charges were included in income (loss) from investees in 1999. In
addition, United States Steel made a $15 million equity investment in Republic.
F-22
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
United States Steel owned 50% of USS/Kobe and now owns 16% of Republic. United
States Steel accounts for its investment in Republic under the equity method of
accounting. The seamless pipe business of USS/Kobe was excluded from this
transaction. That business, now known as Lorain Tubular Company, LLC, became a
wholly owned subsidiary of United States Steel at the close of business on
December 31, 1999.
Dividends and partnership distributions received from equity investees were
$10 million in 2000, $2 million in 1999 and $19 million in 1998.
United States Steel's purchases of transportation services and semi-finished
steel from equity investees totaled $566 million, $361 million and $331 million
in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S.
Steel's payables to these investees totaled $66 million and $60 million,
respectively. United States Steel's revenues for steel and raw material sales
to equity investees totaled $958 million, $831 million and $725 million in
2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, United States
Steel's receivables from these investees were $177 million. Generally, these
transactions were conducted under long-term, market-based contractual
arrangements.
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
Leases Leases
------- ---------
(In millions)
2001......................................................... $ 11 $ 79
2002......................................................... 11 56
2003......................................................... 11 40
2004......................................................... 11 37
2005......................................................... 11 29
Later years.................................................. 84 64
Sublease rentals............................................. -- (62)
---- ----
Total minimum lease payments............................... 139 $243
====
Less imputed interest costs.................................. 51
----
Present value of net minimum lease payments included in
long-term debt............................................ $ 88
====
Operating lease rental expense:
2000 1999 1998
---- ---- ----
(In millions)
Minimum rental................................................ $132 $124 $131
Contingent rental............................................. 17 18 19
Sublease rentals.............................................. (6) (6) (7)
---- ---- ----
Net rental expense.......................................... $143 $136 $143
==== ==== ====
United States 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.
F-23
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
18. Trust Preferred Securities
In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly
Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust
I, a Delaware statutory business trust (Trust), for an equivalent number of
shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred
Securities at a fair value of $182 million.
USX owns all of the common securities of the Trust, which was formed for the
purpose of the Exchange. (The Trust Common Securities and the Trust Preferred
Securities are together referred to as the Trust Securities.) The Trust
Securities represent undivided beneficial ownership interests in the assets of
the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated
Debentures maturing March 31, 2037 (Debentures), having an aggregate principal
amount equal to the aggregate initial liquidation amount ($50.00 per security
and $203 million in total) of the Trust Securities issued by the Trust.
Interest and principal payments on the Debentures will be used to make
quarterly distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which accumulate at
the rate of 6.75% per annum on the Trust Preferred Securities and the accretion
from fair value to the initial liquidation amount, are charged to income and
included in net interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer payment of
interest for up to 20 consecutive quarters and, as a consequence, monthly
distributions on the Trust Preferred Securities will be deferred during such
period. If USX exercises this right, then, subject to limited exceptions, it
may not pay any dividend or make any distribution with respect to any shares of
its capital stock.
The Trust Preferred Securities are convertible at any time prior to the
close of business on March 31, 2037 (unless such right is terminated earlier
under certain circumstances) at the option of the holder, into shares of USX-
U.S. Steel Group Common Stock at a conversion price of $46.25 per share
(equivalent to a conversion ratio of 1.081 shares for each Trust Preferred
Security), subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at the option of
USX, at a premium of 101.95% of the initial liquidation amount through March
31, 2001, and thereafter, declining annually to the initial liquidation amount
on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the payment of redemption
and liquidation amounts on the Trust Preferred Securities by the Trust are
guaranteed by USX on a subordinated basis. In addition, USX unconditionally
guarantees the Trust's Debentures. The obligations of USX under the Debentures,
and the related indenture, trust agreement and guarantee constitute a full and
unconditional guarantee by USX of the Trust's obligations under the Trust
Preferred Securities.
F-24
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
19. Equity
2000 1999 1998
------ ------ ------
(In millions,
except per share
data)
Preferred stock:
Balance at beginning of year......................... $ 3 $ 3 $ 3
Repurchased.......................................... (1) -- --
------ ------ ------
Balance at end of year............................... 2 3 3
------ ------ ------
USX's net investment:
Balance at beginning of year......................... 2,073 2,126 1,808
Net income (loss).................................... (21) 44 364
Repurchase of 6.50% preferred stock.................. (11) (2) (8)
Common stock issued.................................. 6 2 59
Dividends on preferred stock......................... (8) (9) (9)
Dividends on common stock (per share $1.00).......... (89) (88) (88)
------ ------ ------
Balance at end of year............................... 1,950 2,073 2,126
------ ------ ------
Deferred compensation:
Balance at beginning of year......................... -- (1) (1)
Changes during year, net of taxes.................... (3) 1 --
------ ------ ------
Balance at end of year............................... (3) -- (1)
------ ------ ------
Accumulated other comprehensive income (loss):
Minimum pension liability adjustments (Note 12):
Balance at beginning of year....................... (7) (27) (25)
Changes during year, net of taxes (b).............. 3 20 (2)
------ ------ ------
Balance at end of year............................. (4) (7) (27)
------ ------ ------
Foreign currency translation adjustment:
Balance at beginning of year....................... (13) (8) (3)
Changes during year, net of taxes (b).............. (13) (5) (5)
------ ------ ------
Balance at end of year............................. (26) (13) (8)
------ ------ ------
Total accumulated other comprehensive income
(loss)(a)........................................... (30) (20) (35)
------ ------ ------
Total equity........................................... $1,919 $2,056 $2,093
====== ====== ======
---------------------
(a) Total comprehensive income (loss) for United States Steel for the years
2000, 1999 and 1998 was $(31) million, $59 million and $357 million,
respectively.
(b) Related income tax provision (credit):
Minimum pension liability adjustment......................... $(1) $(11) $ 1
Foreign currency translation adjustments..................... (5) 3 2
20. Stock-Based Compensation Plans
The 1990 Stock Plan of USX, as amended and restated, authorizes the
Compensation Committee of the board of directors of USX to grant restricted
stock, stock options and stock appreciation rights of USX-U. S. Steel Group
Common Stock to key management employees. Up to 0.8 percent of the outstanding
stock, as determined on December 31 of the preceding year, are available for
grants during each calendar year the 1990 Plan is in effect. In addition,
awarded shares that do not result in shares being issued are available for
subsequent grant, and any ungranted shares from prior years' annual allocations
are available for subsequent grant during the years the 1990 Plan is in effect.
As of December 31, 2000, 2,108,128 shares were available for grants in 2001.
F-25
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Restricted stock represents stock granted for such consideration, if any, as
determined by the Compensation Committee, subject to provisions for forfeiture
and restricting transfer. Those restrictions may be removed as conditions such
as performance, continuous 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.
Deferred compensation 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 expensed over the balance of the
vesting period and adjusted if conditions of the restricted stock grant are not
met.
The following table presents information on restricted stock grants:
2000 1999 1998
------- ------ ------
Number of shares granted................................. 305,725 18,272 17,742
Weighted-average grant-date fair value per share......... $ 23.00 $28.22 $37.28
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. Most stock options vest after one-year service period
and all expire 10 years from the date they are granted.
The following is a summary of stock option activity:
Shares Price(a)
--------- --------
Balance December 31, 1997................................... 1,633,100 $34.35
Granted................................................... 611,515 37.28
Exercised................................................. (230,805) 32.00
Canceled.................................................. (21,240) 35.89
---------
Balance December 31, 1998................................... 1,992,570 35.50
Granted................................................... 656,400 28.22
Exercised................................................. (2,580) 24.92
Canceled.................................................. (20,005) 38.51
---------
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
=========
---------------------
(a) Weighted-average exercise price
The weighted-average grant-date fair value per option was $6.63 in 2000,
$6.95 in 1999 and $8.29 in 1998.
F-26
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table represents stock options at December 31, 2000:
Outstanding Exercisable
-------------------------------------- ------------------------
Weighted-
Average Weight- Weight-
Range of Number Remaining Average Number Average
Exercise of Shares Contractual Exercise of Shares Exercise
Prices Under Option Life Price Under Option Price
-------- ------------ ----------- -------- ------------ --------
$23.00-28.22 1,592,305 8.8 years $25.17 678,135 $28.10
31.69-34.44 1,050,920 5.2 32.53 1,050,920 32.53
37.28-44.19 835,275 6.0 39.26 835,275 39.26
--------- ---------
Total 3,478,500 2,564,330
========= =========
Actual stock-based compensation expense was $1 million in 2000 and 1999 and
there was no amount in 1998. Incremental compensation expense, as determined
under a fair value model, was not material. Therefore, pro forma net income has
been omitted.
USX has a deferred compensation plan for non-employee directors of its Board
of Directors. The plan permits participants to defer some or all of their
annual retainers in the form of common stock units or cash and it requires new
directors to defer at least half of their annual retainer in the form of common
stock units. Common stock units are book entry units equal in value to a share
of stock. Deferred stock benefits are distributed in shares of common stock
within five business days after a participant leaves the Board of Directors.
During 2000, 4,872 shares of stock were issued and during 1999, 3,798 shares of
stock were issued. During 1998, no shares of common stock were issued.
21. Property, Plant and Equipment
December 31
-------------
2000 1999
------ ------
(In millions)
Land and depletable property..................................... $ 161 $ 152
Buildings........................................................ 602 484
Machinery and equipment.......................................... 8,409 8,007
Leased assets.................................................... 98 105
------ ------
Total.......................................................... 9,270 8,748
Less accumulated depreciation, depletion and amortization........ 6,531 6,232
------ ------
Net............................................................ $2,739 $2,516
====== ======
Amounts in accumulated depreciation, depletion and amortization for assets
acquired under capital leases (including sale-leasebacks accounted for as
financings) were $79 million and $81 million at December 31, 2000 and 1999,
respectively.
During 2000, United States 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.
22. Derivative Instruments
United States Steel remains at risk for possible changes in the market value
of derivative instruments; however, such risk should be mitigated by price
changes in the underlying hedged item. United States Steel is also exposed to
credit risk in the event of nonperformance by counterparties.
F-27
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The credit-worthiness of counterparties is subject to continuing review,
including the use of master netting agreements to the extent practical, and
full performance is anticipated.
The following table sets forth quantitative information by class of
derivative instrument:
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(Liabilities)(a) (Liabilities) (Loss) Values(b)
---------------- ------------- -------- ---------
(In millions)
December 31, 2000:
OTC commodity swaps--other
than trading(c)........... $-- $-- $-- $18
==== ==== ==== ===
December 31, 1999:
OTC commodity swaps--other
than trading.............. $ 3 $ 3 $ 3 $37
==== ==== ==== ===
---------------------
(a) The fair value amounts are based on exchange-traded index prices and
dealer quotes.
(b) Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts.
(c) The OTC swap arrangements vary in duration with certain contracts
extending into 2001.
23. 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 22, by individual balance sheet
account. As described in Note 4, United States Steel's specifically attributed
financial instruments and the portion of USX's financial instruments attributed
to United States Steel are as follows:
December 31
-------------------------------
2000 1999
--------------- ---------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
(In millions)
Financial assets:
Cash and cash equivalents.................... $ 219 $ 219 $ 22 $ 22
Receivables (including related parties'
receivables)................................ 1,341 1,341 935 935
Investments and long-term receivables........ 137 137 122 122
------ ------ ------ ------
Total financial assets..................... $1,697 $1,697 $1,079 $1,079
====== ====== ====== ======
Financial liabilities:
Notes payable................................ $ 70 $ 70 $ -- $ --
Accounts payable............................. 760 760 739 739
Accrued interest............................. 47 47 15 15
Long-term debt (including amounts due within
one year)................................... 2,375 2,287 835 823
Preferred stock of subsidiary and trust
preferred securities........................ 182 249 232 249
------ ------ ------ ------
Total financial liabilities................ $3,434 $3,413 $1,821 $1,826
====== ====== ====== ======
F-28
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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. Certain foreign
cost method investments are excluded from investments and long-term receivables
because the fair value is not readily determinable. United States Steel is
subject to market risk and liquidity risk related to its investments; however,
these risks are not readily quantifiable. Fair value of preferred stock of
subsidiary and trust preferred securities was based on market prices. 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 United States Steel's only unrecognized financial
instrument. It is not practicable to estimate the fair value of this form of
financial instrument obligation because there are no quoted market prices for
transactions which are similar in nature. For details relating to financial
guarantees, see Note 24.
24. Contingencies and Commitments
United States 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 United
States Steel's combined financial statements.
Environmental matters--
United States 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
$137 million and $101 million at December 31, 2000 and 1999, 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, United States Steel has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In 2000 and 1999, such capital expenditures
totaled $18 million and $32 million, respectively. United States 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.
Guarantees--
Guarantees of the liabilities of unconsolidated entities of United States
Steel totaled $82 million at December 31, 2000, and $88 million at December 31,
1999. In the event that any defaults of guaranteed liabilities occur, United
States Steel has access to its interest in the assets of the investees to
reduce potential losses resulting from these guarantees. As of December 31,
2000, the largest guarantee for a single such entity was $59 million.
Commitments--
At December 31, 2000 and 1999, United States Steel's contract commitments to
acquire property, plant and equipment totaled $206 million and $83 million,
respectively.
F-29
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 and ending on December 31, 2010. USSK is
required to report periodically to the Slovak government on its status toward
meeting this commitment. The first reporting period ends on December 31, 2003.
United States Steel entered into a 15-year take-or-pay arrangement in 1993,
which requires United States 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 2000, 1999 and 1998. If United States
Steel elects to terminate the contract early, a maximum termination payment of
$96 million, which declines over the duration of the agreement, may be
required.
25. Events Occurring After the Opinion Date (Unaudited)
On March 1, 2001, USX 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, USX assumed approximately $66 million of certain
employee related obligations from LTV. The acquisition was accounted for using
the purchase method of accounting. Results of operations for the six months of
2001 include the operations of East Chicago Tin from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L. P. As
a result of this transaction, United States Steel became the sole owner of
Transtar and certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. United States Steel accounted for this change in its
ownership interest using the purchase method of accounting. United States Steel
recognized in the first quarter of 2001, a pretax gain of $70 million (included
in income (loss) from investees) and a favorable deferred tax adjustment of $33
million related to this transaction. United States Steel previously accounted
for its investment in Transtar under the equity method of accounting.
During the first quarter of 2001, USX reached an agreement with the IRS
regarding its review of USX's consolidated tax returns for the years 1990 and
1991. In the first quarter of 2001, United States Steel recorded a favorable
adjustment of $67 million to net interest and financial costs and an
unfavorable adjustment of $15 million to provision for income taxes, both of
which were related to prior years' taxes.
United States Steel has a 16% investment in Republic Technologies
International LLC (Republic) which was accounted for under the equity method of
accounting. During the first quarter of 2001, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel has recognized certain debt
obligations of $14 million previously assumed by Republic. On April 2, 2001,
Republic filed a voluntary petition with the U.S. Bankruptcy Court to
reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the
first quarter of 2001, as a result of Republic's action, United States Steel
recorded a pretax charge of $74 million for the potentially uncollectible
receivables from Republic.
On July 2, 2001, a corporate reorganization was implemented to create a new
holding company structure. USX became a holding company that owns all of the
outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly
and indirectly, owns and operates the businesses of the USX-Marathon Group, and
United States Steel LLC, a Delaware limited liability company which owns and
operates the businesses of the USX-U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
F-30
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
On July 31, 2001, USX announced that its board of directors approved the
definitive plan of reorganization to separate the energy and steel businesses
of USX (Proposed Separation). The Proposed Separation envisions a tax-free
spin-off of the steel business of USX into a freestanding, publicly traded
company to be known as United States Steel Corporation. Holders of current USX-
U. S. Steel Group Common Stock will become holders of United States Steel
Corporation Common Stock. Holders of current USX-Marathon Group Common Stock
will continue to hold their shares in USX which will be renamed Marathon Oil
Corporation. The Proposed Separation does not contemplate a cash distribution
to stockholders. The Proposed Separation is subject to the approval of the
holders of a majority of the outstanding shares of each class of current USX
common stock, receipt of a favorable private letter ruling from the Internal
Revenue Service ("IRS") on the tax-free nature of the transaction, completion
of necessary financing arrangements and receipt of necessary regulatory and
third party consents. The transaction is expected to occur on or about December
31, 2001.
On May 31, 2001 a major fire damaged the cold-rolling mill at USS-POSCO,
which is fifty percent owned by United States Steel. Damage was predominantly
limited to the cold-rolling mill area of the plant. USS-POSCO maintains
insurance coverage against such losses, including coverage for business
interruption. The mill is expected to resume production in the first quarter of
2002, although full-production may not be achieved until mid-2002. Until such
time, the plant will continue customer shipments using cold-rolled coils from
United States Steel and POSCO as substitute feedstock.
On August 14, 2001, United States Steel announced its intention to
permanently close the cold rolling and tin mill operations at Fairless Works,
with an annual finishing capability of 1.5 million tons, on or after November
12, 2001. Under its labor agreement, United States Steel is required to discuss
the proposed shutdown with the United Steel Workers of America before making a
final decision. United States Steel also announced that, subject to market
conditions, it currently intends to continue operating the hot dip galvanizing
line at Fairless Works. The anticipated financial impact of the shutdown, which
is predominately noncash, will be recorded in the second half of 2001 and is
estimated to be a pretax charge of $35 to $45 million.
F-31
UNITED STATES STEEL
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
---------------------------- ----------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except per share data)
Revenues and other
income:
Revenues(a)........... $1,417 $1,462 $1,629 $1,582 $1,492 $1,415 $1,344 $1,285
Other income (loss)... (4) 13 27 6 8 (40) 1 (35)
------ ------ ------ ------ ------ ------ ------ ------
Total............... 1,413 1,475 1,656 1,588 1,500 1,375 1,345 1,250
Income (loss) from
operations............. (159) 60 112 91 75 (26) 103 (2)
Income (loss) before
extraordinary losses... (139) 19 56 43 34 (29) 55 (9)
Net income (loss)....... (139) 19 56 43 34 (31) 55 (14)
---------------------
(a) Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 3 of the Notes to Combined Financial Statements. Amounts
reclassified in the first, second and third quarters of 2000 were $41
million, $45 million and $45 million, respectively, and for the first,
second, third and fourth quarters of 1999 were $39 million, $41 million,
$38 million and $38 million, respectively.
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
United States 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. United States 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 our minerals
production in millions of tons for each of the last three years:
2000 1999 1998
---- ---- ----
Coal:
#50 Mine/Pinnacle Preparation Plant.............................. 3.3 4.1 4.5
Oak Grove Mine/Concord Preparation Plant......................... 2.2 2.1 2.8
---- ---- ----
Total coal production.......................................... 5.5 6.2 7.3
==== ==== ====
Iron Ore Pellets:
Minntac Mine and Pellet Plant.................................... 16.3 14.3 15.8
Adverse mining conditions in the form of unforeseen geologic conditions
occurred at both coal mining operations in the year 2000. Coal production was
diminished and mining costs were elevated. Force majeure conditions were
declared with respect to contracted coal deliveries 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, 2000.
No recent adverse events affected iron ore pellet production other than
fluctuations in market demand.
F-32
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)--(Continued)
Coal Reserves
United States Steel had 786.6 million short tons of recoverable coal
reserves classified as proven and probable at December 31, 2000. Proven and
probable reserves are defined by sites for inspection, sampling, and
measurement generally less than 1 mile apart, such that continuity between
points and subsequent economic evaluation can be assured.
Independent outside entities have reviewed United States Steel's coal
reserve estimates on properties comprising approximately 70% of the stated coal
reserves.
The following table summarizes our proven and probable coal reserves as of
December 31, 2000, 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 Received(4)
Probable ----------------- ------------------------------- BTU Per As Received(4)
Location Reserves(1)(5) Owned Leased Grade Volatility Pound % Sulfur
-------- -------------- -------- -------- ------------------- ----------- -------------- --------------
Assigned Reserves(2):
Oak Grove Mine, AL...... 52.1 52.1 -- Metallurgical Low >12,000 <1.0%
#50 Mine, WV............ 88.2 76.0 12.2 Metallurgical Low >12,000 <1.0%
----- -------- -------
Sub-total Assigned..... 140.3 128.1 12.2
Unassigned Reserves(3):
Alabama................. 123.4 123.4 -- Metallurgical Low to High >12,000 <1.0%
Alabama(5)(6)........... 47.6 47.6 -- Steam Low to High >12,000 0.7%-2.5%
Alabama................. 31.9 -- 31.9 Metallurgical Medium >12,000 <1.0%
Illinois................ 374.8 374.8 -- Steam High 11,600 2.3%
Indiana, Pennsylvania,
Tennessee, West
Virginia(6)............ 68.6 68.6 -- Metallurgical/Steam Low to High 11,600-13,000 1.0%-3.0%
----- -------- -------
Sub-total Unassigned... 646.3 614.4 31.9
Total Proven and
Probable............... 786.6 742.5 44.1
===== ======== =======
---------------------
(1) 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.
(2) Assigned Reserves means recoverable coal reserves which have been committed
by United States Steel to our operating mines and plant facilities.
(3) 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.
(4) "As received" means the quality parameters stated are with the expected
product moisture content and quality values that a customer can reasonably
expect to receive upon delivery.
F-33
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)--(Continued)
(5) All of United States Steel's recoverable reserves would be recovered
utilizing underground mining methods, with the exception of 17.2 million
short tons of owned, unassigned, recoverable, steam grade reserves in
Alabama which would be recovered utilizing surface mining methods.
(6) 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
United States Steel had 709.8 million short tons of recoverable iron ore
reserves classified as proven and probable at December 31, 2000. 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.
All 709.8 million tons of proven and probable reserves are assigned, which
means that they have been committed by United States Steel to its one operating
mine, and are of blast furnace pellet grade. United States Steel owns 219.2
million of these tons and leases the remaining 490.6 million tons. United
States Steel does not own, or control by lease, any unassigned iron ore
reserves.
Independent outside entities, including lessors, have reviewed United States
Steel's estimates on approximately 75% of the stated iron ore reserves.
F-34
UNITED STATES STEEL
PRINCIPAL UNCONSOLIDATED INVESTEES (UNAUDITED)
December 31, 2000
-----------------
Company Country Ownership Activity
------- ------------- --------- -----------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
F-35
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS (Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
---------------- --------------
2001 2000 2001 2000
------- ------- ------ ------
(In millions)
Revenues and other income:
Revenues................................... $ 1,733 $ 1,629 $3,243 $3,211
Income (loss) from investees............... (7) 14 40 7
Net gains on disposal of assets............ 10 13 16 28
Other income (loss)........................ 1 -- 2 (2)
------- ------- ------ ------
Total revenues and other income.......... 1,737 1,656 3,301 3,244
------- ------- ------ ------
Costs and expenses:
Cost of revenues (excludes items shown
below).................................... 1,599 1,462 3,148 2,890
Selling, general and administrative
expenses (credits)........................ 19 (57) 3 (120)
Depreciation, depletion and amortization... 79 78 152 153
Taxes other than income taxes.............. 67 61 126 118
------- ------- ------ ------
Total costs and expenses................. 1,764 1,544 3,429 3,041
------- ------- ------ ------
Income (loss) from operations................ (27) 112 (128) 203
Net interest and other financial costs....... 48 24 36 48
------- ------- ------ ------
Income (loss) before income taxes............ (75) 88 (164) 155
Provision (credit) for income taxes.......... (45) 32 (143) 56
------- ------- ------ ------
Net income (loss)............................ (30) 56 (21) 99
Dividends on preferred stock................. 2 2 4 4
------- ------- ------ ------
Net income (loss) available to USX's net
investment.................................. $ (32) $ 54 $ (25) $ 95
======= ======= ====== ======
Selected notes to combined financial statements appear on pages F-39 to F-45.
F-36
UNITED STATES STEEL
COMBINED BALANCE SHEET (Unaudited)
June
30 December 31
2001 2000
------ -----------
(In millions)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 254 $ 219
Receivables, less allowance for doubtful accounts of $128
and $57................................................. 649 625
Receivables subject to a security interest............... 350 350
Receivables from related parties......................... 323 366
Inventories.............................................. 916 946
Deferred income tax benefits............................. 171 201
Other current assets..................................... 13 10
------ ------
Total current assets................................... 2,676 2,717
Investments and long-term receivables, less reserves of $39
and $38................................................... 332 439
Long-term receivable from related parties.................. 43 97
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of $6,708 and
$6,531.................................................... 3,098 2,739
Prepaid pensions........................................... 2,711 2,672
Other noncurrent assets.................................... 94 47
------ ------
Total assets........................................... $8,954 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable............................................ $ 123 $ 70
Accounts payable......................................... 778 755
Accounts payable to related parties...................... -- 5
Payroll and benefits payable............................. 242 202
Accrued taxes............................................ 242 173
Accrued interest......................................... 51 47
Long-term debt due within one year....................... 224 139
------ ------
Total current liabilities.............................. 1,660 1,391
Long-term debt, less unamortized discount.................. 2,085 2,236
Deferred income taxes...................................... 709 666
Employee benefits.......................................... 1,916 1,767
Deferred credits and other liabilities..................... 475 483
Preferred stock of subsidiary.............................. 66 66
Mandatorily redeemable convertible preferred securities of
a subsidiary trust holding solely junior subordinated
convertible debentures of USX............................. 183 183
EQUITY
Preferred stock............................................ 2 2
USX's net investment....................................... 1,902 1,950
Deferred compensation...................................... (10) (3)
Accumulated other comprehensive loss....................... (34) (30)
------ ------
Total equity........................................... 1,860 1,919
------ ------
Total liabilities and equity........................... $8,954 $8,711
====== ======
Selected notes to combined financial statements appear on pages F-39 to F-45.
F-37
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended
June 30
------------------
2001 2000
-------- --------
(In millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss)......................................... $ (21) $ 99
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization................ 152 153
Pensions and other postretirement benefits.............. (51) (163)
Deferred income taxes................................... 56 146
Net gains on disposal of assets......................... (16) (28)
Changes in:
Current receivables................................... 64 13
Inventories........................................... 57 (29)
Current accounts payable and accrued expenses......... 61 (90)
All other--net.......................................... (77) (2)
-------- --------
Net cash provided from operating activities........... 225 99
-------- --------
Investing activities:
Capital expenditures.................................... (141) (97)
Disposal of assets...................................... 9 16
Restricted cash--withdrawals............................ 3 3
--deposits................................................ (2) (1)
Investees--investments.................................. (1) (11)
All other--net.......................................... 10 3
-------- --------
Net cash used in investing activities................. (122) (87)
-------- --------
Financing activities:
Increase (decrease) in attributed portion of USX
consolidated debt...................................... (26) 37
Specifically attributed debt repayments................. (6) (6)
Preferred stock repurchased............................. -- (12)
Dividends paid.......................................... (35) (48)
-------- --------
Net cash used in financing activities................. (67) (29)
-------- --------
Effect of exchange rate changes on cash................... (1) --
-------- --------
Net increase (decrease) in cash and cash equivalents...... 35 (17)
Cash and cash equivalents at beginning of year............ 219 22
-------- --------
Cash and cash equivalents at end of period................ $ 254 $ 5
======== ========
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of amount
capitalized)........................................... $ (93) $ (41)
Income taxes refunded, including settlements with USX... 387 85
Selected notes to combined financial statements appear on pages F-39 to F-45.
F-38
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying combined financial statements represent a carve-out
financial statement presentation of the businesses comprising United States
Steel and are not intended to be a complete presentation of the financial
position, the results of operations and cash flows of United States Steel on a
stand-alone basis. These combined financial statements are presented as if
United States Steel existed as an entity separate from the remaining businesses
of USX Corporation (USX) during the periods presented.
The accompanying combined financial statements include the historical
operations of certain divisions of USX and certain subsidiaries of USX. In this
context, no direct ownership existed among all the various units comprising
United States Steel; accordingly, USX's net investment in United States Steel
(USX's net investment) is shown in lieu of Common Stockholder's Equity in the
combined financial statements. The combined financial statements included
herein have been prepared from USX's historical accounting records.
The information furnished in these financial statements is unaudited but, in
the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments are
of a normal recurring nature unless disclosed otherwise. These combined
financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange Commission
and do not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements.
2. Effective January 1, 2001, United States Steel adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138.
This Standard, as amended, requires recognition of all derivatives at fair
value as either assets or liabilities. United States Steel uses commodity-based
and foreign currency derivative instruments to manage its exposure to price
risk. Management has authorized the use of futures, forwards, swaps and options
to reduce the effects of fluctuations related to the purchase of natural gas
and nonferrous metals and also certain business transactions denominated in
foreign currencies. United States 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
earnings. A cumulative effect adjustment relating to the adoption of SFAS No.
133 was recognized in other comprehensive income. The cumulative effect
adjustment relates only to deferred gains or losses existing as of the close of
business on December 31, 2000, for hedge transactions under prior accounting
rules. The effect of adoption of SFAS No. 133 was less than $1 million, net of
tax.
In June 2001, the Financial Accounting Standards Board approved Statements
of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141),
No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143
"Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations completed after June 30, 2001,
be accounted for under the purchase method. This standard also establishes for
all business combinations made after June 30, 2001, specific criteria for the
recognition of intangible assets separately from goodwill. SFAS 141 also
requires that the excess of fair value of acquired assets over cost (negative
goodwill) be recognized immediately as an extraordinary gain, rather than
deferred and amortized. United States Steel will account for all future
business combinations under SFAS 141.
F-39
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
SFAS 142 addresses the accounting for goodwill and other intangible assets
after an acquisition. The most significant changes made by SFAS 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.
United States Steel will adopt SFAS 142 effective January 1, 2002, as required.
At that time, amortization of existing goodwill will cease on the unamortized
portion associated with previous acquisitions and certain investments accounted
for under the equity method. This provision of SFAS 142 is not expected to have
a material impact on the results of operations for United States Steel.
Additionally, SFAS 142 requires that unamortized negative goodwill associated
with investments accounted for under the equity method and acquired before July
1, 2001, be recognized in income as a cumulative effect of change in accounting
principle. United States Steel expects to recognize a favorable cumulative
effect of a change in accounting principle of approximately $20 million, net of
tax, upon adoption. United States Steel continues to evaluate the financial
effects of the provisions of SFAS 142 pertaining to intangible assets other
than goodwill.
SFAS 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including: 1) the timing of
liability recognition; 2) initial measurement of the liability; 3) allocation
of asset retirement cost to expense; 4) subsequent measurement of the
liability; and 5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost 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. United States Steel will adopt the Statement effective January
1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will
be reported as a cumulative effect of a change in accounting principle. At this
time, United States Steel cannot reasonably estimate the effect of the adoption
of this Statement on either its financial position or results of operations.
3. The financial statement provision for income taxes and related tax
payments or refunds have been reflected in United States Steel's financial
statements in accordance with USX's tax allocation policy. In general, such
policy provides that the consolidated tax provision and related tax payments or
refunds are allocated to United States Steel principally upon its financial
income, taxable income, credits, preferences and other directly related
amounts.
The provision for income taxes for United States Steel is based on tax rates
and amounts which recognize management's best estimate of current and deferred
tax assets and liabilities.
4. On November 24, 2000, United States Steel acquired U. S. Steel Kosice,
s.r.o. (USSK), which is primarily located in the Slovak Republic. USSK was
formed in June 2000 to hold the steel operations and related assets of VSZ a.s.
(VSZ), a diversified Slovak corporation. The acquisition was accounted for
under the purchase method of accounting.
On March 1, 2001, United States 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, United States Steel assumed
approximately $66 million of certain employee related obligations from LTV. The
acquisition was accounted for using the purchase method of accounting. Results
of operations for the six months of 2001 include the operations of East Chicago
Tin from the date of acquisition.
F-40
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As
a result of this transaction, United States Steel became sole owner of Transtar
and certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. United States Steel accounted for the change in its
ownership interest in Transtar using the purchase method of accounting. United
States Steel recognized in the six months of 2001 a pretax gain of $68 million
(included in income (loss) from investees) and a favorable deferred tax
adjustment of $33 million related to this transaction. United States Steel
previously accounted for its investment in Transtar under the equity method of
accounting.
The following unaudited pro forma data for United States 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 periods presented. The six
months 2001 pro forma results exclude the $68 million gain and $33 million tax
benefit recorded as a result of the Transtar transaction. In addition, VSZ did
not historically provide historical carve-out financial information for its
steel activities prepared in accordance with generally accepted accounting
principles in the United States. Therefore, United States 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 six months of 2000.
The following 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.
Six Months
Ended June 30
--------------
2001 2000
------ ------
(In millions)
Revenues and other income...................................... $3,279 $3,850
Net income (loss).............................................. (123) 137
F-41
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. United States Steel consists of two reportable operating segments: 1)
Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the
United States operations of United States Steel while USSK includes the United
States Steel operations primarily located in the Slovak Republic. Domestic
Steel is engaged in the domestic production, sale and transportation of steel
mill products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; and engineering and consulting services.
USSK is engaged in the production and sale of steel mill products and coke and
primarily serves central European markets. The results of segment operations
are as follows:
Domestic Total
Steel USSK Segments
-------- ---- --------
(In millions)
Second Quarter 2001
Revenues and other income:
Customer.............................................. $1,447 $284 $1,731
Intersegment(a)....................................... 2 -- 2
Other subsidiaries of USX(a).......................... 2 -- 2
Equity in earnings (losses) of unconsolidated
investees............................................ (8) 1 (7)
Other................................................. 11 -- 11
------ ---- ------
Total revenues and other income..................... $1,454 $285 $1,739
====== ==== ======
Segment income (loss)................................... $ (69) $ 41 $ (28)
====== ==== ======
Second Quarter 2000
Revenues and other income:
Customer.............................................. $1,625 $-- $1,625
Other subsidiaries of USX(a).......................... 4 -- 4
Equity in earnings of unconsolidated investees........ 14 -- 14
Other................................................. 13 -- 13
------ ---- ------
Total revenues and other income..................... $1,656 $-- $1,656
====== ==== ======
Segment income.......................................... $ 68 $-- $ 68
====== ==== ======
--------
(a) Revenues and transfers between segments and with other subsidiaries of USX
were conducted under terms comparable to those with unrelated parties.
F-42
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Domestic Total
Steel USSK Segments
-------- ---- --------
(In millions)
Six Months 2001
Revenues and other income:
Customer............................................... $2,709 $530 $3,239
Intersegment(a)........................................ 3 -- 3
Other subsidiaries of USX(a)........................... 4 -- 4
Equity in earnings of unconsolidated investees......... 39 1 40
Other.................................................. 17 1 18
------ ---- ------
Total revenues and other income...................... $2,772 $532 $3,304
====== ==== ======
Segment income (loss).................................... $ (220) $ 82 $ (138)
====== ==== ======
Six Months 2000
Revenues and other income:
Customer............................................... $3,203 $-- $3,203
Other subsidiaries of USX(a)........................... 8 -- 8
Equity in earnings of unconsolidated investees......... 7 -- 7
Other.................................................. 26 -- 26
------ ---- ------
Total revenues and other income...................... $3,244 $-- $3,244
====== ==== ======
Segment income........................................... $ 122 $-- $ 122
====== ==== ======
---------------------
(a) Revenues and transfers between segments and with other subsidiaries of USX
were conducted under terms comparable to those with unrelated parties.
The following schedule reconciles segment revenues and income to amounts
reported in United States Steel's combined financial statements:
Second Quarter Ended Six Months
June 30 Ended June 30
---------------------- --------------
2001 2000 2001 2000
---------- ---------- ------ ------
(In millions)
Revenues and other income:
Revenues and other income of
reportable segments................. $ 1,739 $ 1,656 $3,304 $3,244
Elimination of intersegment
revenues............................ (2) -- (3) --
---------- ---------- ------ ------
Total revenues and other income.. $ 1,737 $ 1,656 $3,301 $3,244
========== ========== ====== ======
Income:
Income (loss) for reportable
segments............................ $ (28) $ 68 $ (138) $ 122
Items not allocated to segments:
Administrative expenses............ (8) (5) (15) (11)
Net pension credits................ 31 67 72 132
Costs related to former business
activities........................ (14) (18) (38) (40)
Costs related to Proposed
Separation........................ (8) -- (9) --
---------- ---------- ------ ------
Total income (loss) from
operations...................... $ (27) $ 112 $ (128) $ 203
========== ========== ====== ======
F-43
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. United States Steel's total comprehensive income (loss) was $(31) million
for the second quarter of 2001, $54 million for the second quarter of 2000,
$(24) million for the six months of 2001 and $98 million for the six months of
2000.
7. United States Steel has a 16% investment in Republic Technologies
International LLC (Republic) which was accounted for under the equity method of
accounting. During the first quarter of 2001, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel has recognized certain debt
obligations of $14 million previously assumed by Republic. On April 2, 2001,
Republic filed a voluntary petition with the U.S. Bankruptcy Court to
reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the
first quarter of 2001, as a result of Republic's action, United States Steel
recorded a pretax charge of $74 million for potentially uncollectible
receivables from Republic.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
June 30 December 31
2001 2000
------- -----------
(In millions)
Raw materials............................................... $170 $214
Semi-finished products...................................... 378 429
Finished products........................................... 259 210
Supplies and sundry items................................... 109 93
---- ----
Total..................................................... $916 $946
==== ====
9. At June 30, 2001, and December 31, 2000, estimated income tax receivables
from USX included in receivables from related parties were $320 million and
$364 million, respectively. In addition, long-term receivables from related
parties at June 30, 2001, and December 31, 2000, were $43 million and $97
million, respectively, of income taxes receivable from USX. These amounts have
been determined in accordance with the tax allocation policy discussed in Note
3.
10. Interest and other financial costs in the six months of 2001 included a
favorable adjustment of $67 million and provision for income taxes included an
unfavorable adjustment of $15 million, both of which are related to prior
years' taxes.
11. United States Steel is the subject of, or a party to, a number of
pending or threatened legal actions, contingencies and commitments relating to
United States Steel 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 United States Steel combined financial
statements.
United States 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. At June 30, 2001, and December 31, 2000,
accrued liabilities for remediation totaled $138 million and $137 million,
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.
F-44
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
For a number of years, United States Steel has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the second quarter of 2001 and for the years
2000 and 1999, such capital expenditures totaled $6 million, $18 million and
$32 million, respectively. United States 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.
Guarantees by United States Steel of the liabilities of affiliated entities
of United States Steel totaled $58 million at June 30, 2001. In the event that
any defaults of guaranteed liabilities occur, United States Steel has access
to its interest in the assets of the affiliates to reduce losses resulting
from these guarantees. As of June 30, 2001, the largest guarantee for a single
affiliate was $48 million.
United States Steel's contract commitments to acquire property, plant and
equipment at June 30, 2001, totaled $109 million compared with $206 million at
December 31, 2000.
12. On July 31, 2001, USX announced that its board of directors approved
the definitive plan of reorganization to separate the energy and steel
businesses of USX (Proposed Separation). The Proposed Separation envisions a
tax-free spin-off of the steel business of USX into a freestanding, publicly
traded company to be known as United States Steel Corporation. Holders of
current USX-U. S. Steel Group Common Stock will become holders of United
States Steel Corporation Common Stock. Holders of current USX-Marathon Group
Common Stock will continue to hold their shares in USX which will be renamed
Marathon Oil Corporation. The Proposed Separation does not contemplate a cash
distribution to stockholders. The Proposed Separation is subject to the
approval of the holders of a majority of the outstanding shares of each class
of current USX common stock, receipt of a favorable private letter ruling from
the Internal Revenue Service ("IRS") on the tax-free nature of the
transaction, completion of necessary financing arrangements and receipt of
necessary regulatory and third party consents. The transaction is expected to
occur on or about December 31, 2001. Costs related to the Proposed Separation
include professional fees and other expenses and are included in selling,
general and administrative expenses (credits). These costs in the second
quarter and six months of 2001 were $8 million and $9 million, respectively.
13. On July 2, 2001, a corporate reorganization was implemented to create a
new holding company structure. USX became a holding company that owns all of
the outstanding equity of Marathon Oil Company, an Ohio Corporation which,
directly and indirectly, owns and operates the businesses of the USX-Marathon
Group, and United States Steel LLC, a Delaware limited liability company which
owns and operates the businesses of the USX-U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
14. On August 14, 2001, United States Steel announced its intention to
permanently close the cold rolling and tin mill operations at Fairless Works,
with an annual finishing capability of 1.5 million tons, on or after November
12, 2001. Under its labor agreement, United States Steel is required to
discuss the proposed shutdown with the United Steel Workers of America before
making a final decision. United States Steel also announced that, subject to
market conditions, it currently intends to continue operating the hot dip
galvanizing line at Fairless Works. The anticipated financial impact of the
shutdown, which is predominately noncash, will be recorded in the second half
of 2001 and is estimated to be a pretax charge of $35 to $45 million.
F-45
SUPPLEMENTAL FINANCIAL INFORMATION
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS (Unaudited)
Third Quarter Nine Months
Ended Ended
September 30 September 30
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
(in millions,
except per share amounts)
Revenues and other income:
Revenues..................................... $1,645 $1,462 $4,888 $4,673
Income from investees........................ 11 6 51 13
Net gains on disposal of assets.............. 4 6 20 34
Other income (loss).......................... -- 1 2 (1)
------ ------ ------ ------
Total revenues and other income............ 1,660 1,475 4,961 4,719
------ ------ ------ ------
Costs and expenses:
Cost of revenues (excludes items shown
below)...................................... 1,519 1,344 4,658 4,234
Selling, general and administrative expenses
(credits)................................... 7 (56) 19 (176)
Depreciation, depletion and amortization..... 94 69 246 222
Taxes other than income taxes................ 65 58 191 176
------ ------ ------ ------
Total costs and expenses................... 1,685 1,415 5,114 4,456
------ ------ ------ ------
Income (loss) from operations.................. (25) 60 (153) 263
Net interest and other financial costs....... 38 27 74 75
------ ------ ------ ------
Income (loss) before income taxes.............. (63) 33 (227) 188
Provision (credit) for income taxes.......... (40) 14 (183) 70
------ ------ ------ ------
Net income (loss).............................. $ (23) $ 19 $ (44) $ 118
====== ====== ====== ======
The following notes are an integral part of this financial statement.
U-1
UNITED STATES STEEL
SELECTED NOTES TO COMBINED STATEMENT OF OPERATIONS (Unaudited)
1. The combined statement of operations for United States Steel includes the
historical operations of certain divisions of USX and certain subsidiaries of
USX. In this context, no direct ownership existed among all of the various
units comprising United States Steel. The combined statement of operations
included herein has been prepared from USX's historical accounting records.
2. On March 1, 2001, USX 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, USX assumed approximately $66 million of certain
employee related obligations from LTV. The acquisition was accounted for using
the purchase method of accounting. Results of operations for the nine months of
2001 include the operations of East Chicago Tin from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As
a result of this transaction, USX became sole owner of Transtar and certain of
its subsidiaries. Holdings became owner of the other subsidiaries of Transtar.
USX accounted for the change in its ownership interest in Transtar using the
purchase method of accounting. United States Steel recognized in the nine
months of 2001, a pretax gain of $68 million (included in income from
investees) and a favorable deferred tax adjustment of $33 million related to
this transaction. USX previously accounted for its investment in Transtar under
the equity method of accounting.
3. USX has a 16% investment in Republic Technologies International LLC
(Republic) which was accounted for under the equity method of accounting.
During the first quarter of 2001, USX discontinued applying the equity method
since investments in and advances to Republic had been reduced to zero. Also,
USX has recognized certain debt obligations of $14 million previously assumed
by Republic. On April 2, 2001, Republic filed a voluntary petition with the
U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S.
Bankruptcy Code. In the first quarter of 2001, as a result of Republic's
action, United States Steel recorded a pretax charge of $74 million for
potentially uncollectible receivables from Republic.
4. Interest and other financial costs in the nine months of 2001 includes a
favorable adjustment of $67 million and provision for income taxes includes an
unfavorable adjustment of $15 million related to prior years' taxes.
5. On August 14, 2001, USX announced its intention to permanently close the
cold rolling and tin mill operations at United States Steel's Fairless Works.
In the third quarter of 2001, United States Steel recorded a pretax charge of
$29 million relative to the shutdown.
6. On July 31, 2001, USX announced that its board of directors approved the
definitive plan of reorganization to separate the energy and steel businesses
of USX (Proposed Separation). The Proposed Separation envisions a tax-free
spin-off of the steel business of USX into a freestanding, publicly traded
company to be known as United States Steel Corporation. Holders of current USX-
U. S. Steel Group Common Stock will become holders of United States Steel
Corporation Common Stock. Holders of current USX-Marathon Group Common Stock
will continue to hold their shares in USX which will be renamed Marathon Oil
Corporation. The Proposed Separation does not contemplate a cash distribution
to stockholders. The Proposed Separation is subject to the approval of the
holders of a majority of the outstanding shares of each class of current USX
common stock, receipt of a favorable private letter ruling from the Internal
Revenue Service (IRS) on the tax-free
U-2
nature of the transaction, completion of necessary financing arrangements and
receipt of necessary regulatory and third-party consents. The transaction is
expected to occur on or about December 31, 2001.
7. On July 2, 2001, a corporate reorganization was implemented to create a
new holding company structure. USX became a holding company that owns all of
the outstanding equity of Marathon Oil Company, an Ohio Corporation which,
directly and indirectly, owns and operates the businesses of the USX-Marathon
Group, and United States Steel LLC, a Delaware limited liability company which,
directly and indirectly, owns and operates the businesses of the USX-U. S.
Steel Group. The reorganization will not have any impact on the results of
operations or financial position of USX Corporation, the Marathon Group or
United States Steel.
This reorganization in corporate form was independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
U-3
UNITED STATES STEEL
PRELIMINARY SUPPLEMENTAL STATISTICS (Unaudited)
Third
Quarter
Ended Nine Months
September Ended
30 September 30
------------ --------------
2001 2000 2001 2000
----- ----- ------ ------
(Dollars in millions)
Income (loss) from operations
Domestic Steel(a)(b)........................... $ (47) $ 23 $ (267) $ 145
U. S. Steel Kosice(c).......................... 39 -- 121 --
----- ----- ------ ------
Income (loss) from reportable segments......... $ (8) $ 23 $ (146) $ 145
Items not allocated to segment:
Net pension credits(d)........................ 38 67 110 199
Administrative expenses....................... (5) (7) (20) (18)
Costs related to former business
activities(e)................................ (21) (23) (59) (63)
Costs related to proposed separation(f)....... -- -- (9) --
Costs related to Fairless facility
shutdown(g).................................. (29) -- (29) --
----- ----- ------ ------
Total United States Steel.................... $ (25) $ 60 $ (153) $ 263
Capital expenditures
Domestic Steel................................. $ 39 $ 36 $ 166 $ 133
U. S. Steel Kosice............................. 17 -- 31 --
----- ----- ------ ------
Total United States Steel.................... $ 56 $ 36 $ 197 $ 133
Operating statistics
Average steel price: ($/net ton)
Domestic Steel............................... $ 420 $ 454 $ 429 $ 448
U. S. Steel Kosice........................... 256 -- 263 --
Steel shipments(h):
Domestic Steel............................... 2,554 2,557 7,597 8,441
U. S. Steel Kosice........................... 1,008 -- 2,826 --
----- ----- ------ ------
Total steel shipments...................... 3,562 2,557 10,423 8,441
Raw steel-production(h):
Domestic Steel............................... 2,689 2,752 7,933 8,938
U. S. Steel Kosice........................... 1,131 -- 3,214 --
----- ----- ------ ------
Total raw steel-production................. 3,820 2,752 11,147 8,938
Raw steel-capability utilization(i):
Domestic Steel............................... 83.3% 85.5% 82.9% 93.3%
U. S. Steel Kosice........................... 89.7% -- 85.9% --
Iron ore shipments--Domestic Steel(h).......... 4,494 4,770 11,594 11,455
---------------------
(a) Results in the third quarter and first nine months of 2001 include a
favorable $21 million from insurance recoveries for fire damages to the
cold rolling mill at USS-POSCO. Results in the first nine months of 2001
also include a favorable $68 million for USX's share of gain on the
Transtar reorganization and a $74 million charge for a substantial portion
of accounts receivable from Republic. Results in the third quarter and
first nine months of 2000 included $10 million for USX's share of
Republic's special charges. Results in the first nine months of 2000 also
include charges totaling $15 million for certain environmental and legal
accruals.
(b) Includes the sale, domestic production and transportation of steel
products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; engineering and consulting services;
and equity income from joint ventures and partially owned companies.
U-4
(c) Includes the production and sale of steel products and coke from facilities
primarily located in the Slovak Republic.
(d) Excludes termination costs of $11 million related to Fairless facility
shutdown.
(e) Includes other postretirement benefit costs and certain other expenses
principally attributable to former business units of United States Steel.
(f) Includes professional fees and expenses and certain other costs related to
the proposed separation.
(g) Includes costs related to the shutdown of the cold rolling and tin mill
facilities at Fairless Works.
(h) Thousands of net tons.
(i) Based on annual raw steel production capability of 12.8 million tons for
Domestic Steel and 5.0 million tons for U. S. Steel Kosice.
U-5
The Exchange Agent for the exchange offers is:
The Bank of New York
By Hand and Overnight By Registered or By Facsimile (Eligible
Courier: Certified Mail: Institutions only):
(914)773-5015
(914)773-5025
20 Broad Street 101 Barclay Street, 7E To Confirm by Telephone or
Corp. Trust Services Window New York, New York 10286 for Information Call:
New York, New York 10286 Attn: Reorganization Section (914)773-5735
Attn: Reorganization Unit
Any questions or requests for assistance or for additional copies of this
prospectus, the letter of transmittal, or related documents may be directed to
the Information Agent at the telephone number listed below. You may also
contact the Dealer Managers at their telephone number set forth or such
holder's custodian bank, depositary, broker, trust company, or other nominee
for assistance concerning the exchange offers.
The Information Agent for the exchange offers is:
Mellon Investor Services LLC
44 Wall Street - 7th Floor
New York, New York 10005
Toll Free: (866)293-6624
Phone: (917)320-6286
Fax: (917)320-6320
The Dealer Managers for the exchange offers are:
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Toll Free: (800) 828-3182
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Limited liability companies organized under the laws of the State of
Delaware are empowered by Section 18-108 of the Delaware Limited Liability
Company Act to indemnify any person, including officers and directors, from and
against any and all claims or demands whatsoever. Section 145 of the Delaware
General Corporation Law (the "DGCL") provides that a corporation has the power
to indemnify its officers, directors, employees and agents (or persons serving
in such positions in another entity at the request of the corporation) against
the expenses, including attorneys' fees, judgments, fines or settlement amounts
actually and reasonably incurred by them, in connection with the defense of any
action by reason of being or having been directors or officers, if such person
shall have acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interests of the corporation (and, with respect to any
criminal action, had no reasonable cause to believe the person's conduct was
unlawful), except that, if such action shall be by or in the right of the
corporation, no such indemnification shall be provided as to any claim, issue
or matter as to which such person shall have been judged to have been liable to
the corporation unless and to the extent that the Court of Chancery of the
State of Delaware, or another court in which the suit was brought, shall
determine upon application that, in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity.
Section 145 also provides that, to the extent a director or officer is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify such person against expenses actually and
reasonably incurred in connection therewith.
Article XI of the Amended and Restated Limited Liability Company Operating
Agreement (the "Restated Operating Agreement") of United States Steel LLC (the
"Company") provides, and, upon the conversion of the Company into a corporation
(the "Conversion"), Article V of the Bylaws of United States Steel Corporation
(the "Corporation" and, together with the Company, "United States Steel") will
provide that United States Steel shall indemnify and hold harmless to the
fullest extent permitted by law any person who was or is made or is threatened
to be made a party or is involved in any action, suit, or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
he, or a person for whom he is the legal representative, is or was a director,
officer, employee or agent of United States Steel or is or was serving at the
request of United States Steel as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, enterprise, or
nonprofit entity, including service with respect to employee benefit plans,
against all expenses, liability, and loss reasonably incurred or suffered by
such person.
Article V of the Bylaws of USX Corporation provides that USX Corporation
shall indemnify and hold harmless to the fullest extent permitted by law any
person who was or is made or is threatened to be made a party or is involved in
any action, suit, or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director, officer, employee or agent of USX
Corporation, or is or was serving at the request of USX Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise, or nonprofit entity, including service with respect
to employee benefit plans, against all expenses, liability, and loss reasonably
incurred or suffered by such person.
Policies of insurance are maintained by United States Steel and USX
Corporation under which the registrants' respective directors and officers are
insured, within the limits and subject to the limitations of the policies,
against certain expenses in connection with the defense of actions, suits or
II-1
proceedings, and certain liabilities which might be imposed as a result of such
actions, suits or proceedings, to which they are parties by reason of being or
having been such directors or officers.
The United States Steel LLC Restated Operating Agreement and Article XI of
the USX Corporation Restated Certificate of Incorporation provide, and after
the Conversion, the Restated Certificate of Incorporation of the Corporation
will provide, that none of the directors of United States Steel or USX
Corporation shall be personally liable to United States Steel or USX
Corporation, respectively, or their respective members, stockholders, or future
stockholders, for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to United States Steel or USX Corporation, respectively, or their respective
members, stockholders, or future stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (which, prior to the Conversion,
shall be applied as if United States Steel LLC were a corporation organized
pursuant to the DGCL), or (iv) for any transaction from which the director
derived an improper personal benefit.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules.
All schedules, for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission, are either: not
required; inapplicable; or the required information has been provided elsewhere
or incorporated by reference in this registration statement.
(c) Reports, Opinions or Appraisals. Not applicable.
Item 22. Undertakings
(a)(1) The undersigned registrants hereby undertake to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(2) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrants' annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrants of expenses incurred or paid by a director, officer or controlling
II-2
person of the registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of their respective counsels the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, United States Steel LLC
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Pittsburgh, state of
Pennsylvania on November 1, 2001.
UNITED STATES STEEL LLC
/s/ Gretchen R. Haggerty
By: _________________________________
Name: Gretchen R. Haggerty
Title: Vice President--Accounting
& Finance
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman and Chief November 1, 2001
______________________________________ Executive Officer
Thomas J. Usher (Principal Executive
Officer and Director)
/s/ Gretchen R. Haggerty Vice President--Accounting November 1, 2001
______________________________________ & Finance (Principal
Gretchen R. Haggerty Financial Officer and
Director)
* Comptroller (Controller) November 1, 2001
______________________________________
Paul C. Reinbolt
* Director November 1, 2001
______________________________________
Charles G. Carson, III
* Director November 1, 2001
______________________________________
John J. Connelly
* Director November 1, 2001
______________________________________
Roy G. Dorrance
* Director November 1, 2001
______________________________________
Albert E. Ferrara, Jr.
* Director November 1, 2001
______________________________________
James D. Garraux
* Director November 1, 2001
______________________________________
Charles C. Gedeon
* Director November 1, 2001
______________________________________
Bruce A. Haines
* Director November 1, 2001
______________________________________
Robert M. Hernandez
* Director November 1, 2001
______________________________________
J. Paul Kadlic
* Director November 1, 2001
______________________________________
Kenneth L. Matheny
* Director November 1, 2001
______________________________________
Dan D. Sandman
* Director November 1, 2001
______________________________________
Terrence D. Straub
* Director November 1, 2001
______________________________________
Stephan K. Todd
/s/ Gretchen R. Haggerty
*By: _________________________________
Gretchen R. Haggerty, Attorney-in-Fact
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, USX Corporation has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Pittsburgh, state of
Pennsylvania on November 1, 2001.
USX CORPORATION
/s/ Larry G. Schultz
By: _________________________________
Name: Larry G. Schultz
Title: Vice President--
Accounting
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman and Chief November 1, 2001
______________________________________ Executive Officer
Thomas J. Usher (Principal Executive
Officer and Director)
* Vice Chairman & Chief November 1, 2001
______________________________________ Financial Officer and
Robert M. Hernandez Director
/s/ Larry G. Schultz Vice President--Accounting November 1, 2001
______________________________________
Larry G. Schultz
* Director November 1, 2001
______________________________________
Neil A. Armstrong
* Vice Chairman and Director November 1, 2001
______________________________________
Clarence P. Cazalot, Jr.
* Director November 1, 2001
______________________________________
J. Gary Cooper
* Director November 1, 2001
______________________________________
Charles A. Corry
* Director November 1, 2001
______________________________________
Shirley Ann Jackson
* Director November 1, 2001
______________________________________
Charles R. Lee
* Director November 1, 2001
______________________________________
Paul E. Lego
* Director November 1, 2001
______________________________________
John F. McGillicuddy
* Director November 1, 2001
______________________________________
Seth E. Schofield
* Director November 1, 2001
______________________________________
John W. Snow
* Director November 1, 2001
______________________________________
Douglas C. Yearley
/s/ Larry G. Schultz
*By: _________________________________
Larry G. Schultz, Attorney-in-Fact
II-5
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated herein by
reference.
Exhibit
Number Description
------- -----------
1.1 Form of Dealer Managers Agreement, dated as of [ ], 2001, among
United States Steel LLC, Issuer; USX Corporation, Guarantor; and
Goldman, Sachs & Co., Dealer Managers.
2.1 Agreement and Plan of Reorganization, dated as of July 31, 2001, by
and between USX Corporation (to be renamed Marathon Oil Corporation)
and United States Steel LLC (to be converted into United States Steel
Corporation) (incorporated by reference to Annex A of United States
Steel LLC's Registration Statement on Form S-4 filed on September 20,
2001).
3.1 Amended and Restated Limited Liability Company Agreement of United
States Steel LLC (incorporated by reference to Exhibit 3.1 of United
States Steel LLC's Registration Statement on Form S-4 filed September
20, 2001).
3.2 Form of Certificate of Incorporation of United States Steel
Corporation (incorporated by reference to Exhibit 3.2 of United States
Steel LLC's Registration Statement on Form S-4 filed September 20,
2001).
3.3 Form of By-laws of United States Steel Corporation (incorporated by
reference to Exhibit 3.4 of United States Steel LLC's Registration
Statement on Form S-4 filed September 20, 2001).
3.4 Restated Certificate of Incorporation of USX Corporation (incorporated
by reference to Exhibit 3.1 of USX Corporation's Current Report on
Form 8-K filed July 2, 2001).
3.5 By-laws of USX Corporation (incorporated by reference to Exhibit 3.2
of USX Corporation's Current Report on Form 8-K filed July 2, 2001).
4.1 Form of Indenture among United States Steel LLC, Issuer; USX
Corporation, Guarantor; and The Bank of New York, Trustee.
4.2 Indenture, dated as of July 27, 2001, among United States Steel LLC
and United States Steel Financing Corporation, Issuers; USX
Corporation, Guarantor; and The Bank of New York, Trustee
(incorporated by reference to Exhibit 4.3 of United States Steel LLC's
Registration Statement on Form S-4 filed September 20, 2001).
5 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
the validity of the [ ]% Senior Quarterly Income Debt Securities due
2031 to be issued in the Exchange Offers.
8 Form of Opinion of Miller & Chevalier, Chartered, regarding Material
U.S. Federal Income Tax Consequences of the Exchange Offers.
10.1 Form of Tax Sharing Agreement between USX Corporation (to be renamed
Marathon Oil Corporation) and United States Steel LLC (to be converted
into United States Steel Corporation) (incorporated by reference to
Exhibit 10.1 of United States Steel LLC's Registration Statement on
Form S-4 filed September 20, 2001).
10.2 Form of Transition Services Agreement between USX Corporation (to be
renamed Marathon Oil Corporation) and United States Steel LLC (to be
converted into United States Steel Corporation) (incorporated by
reference to Exhibit 10.2 of United States Steel LLC's Registration
Statement on Form S-4 filed September 20, 2001).
10.3 Form of Financial Matters Agreement between USX Corporation (to be
renamed Marathon Oil Corporation) and United States Steel LLC (to be
converted into United States Steel Corporation) (incorporated by
reference to Exhibit 10.3 of United States Steel LLC's Registration
Statement on Form S-4 filed September 20, 2001).
Exhibit
Number Description
------- -----------
10.4 Form of Insurance Assistance Agreement between USX Corporation (to be
renamed Marathon Oil Corporation) and United States Steel LLC (to be
converted into United States Steel Corporation) (incorporated by
reference to Exhibit 10.4 of United States Steel LLC's Registration
Statement on Form S-4 filed September 20, 2001).
10.5 Form of License Agreement between USX Corporation (to be renamed
Marathon Oil Corporation) and United States Steel LLC (to be converted
into United States Steel Corporation) (incorporated by reference to
Exhibit 10.5 of United States Steel LLC's Registration Statement on
Form S-4 filed September 20, 2001).
10.6 Completion and Retention Agreement, dated as of August 8, 2001, among
USX Corporation, United States Steel LLC and Thomas J. Usher
(incorporated by reference to Exhibit 10.10 of United States Steel
LLC's Registration Statement on Form S-4 filed September 20, 2001).
10.7 Retention Agreement, dated as of September 14, 2001, among USX
Corporation, United States Steel LLC and Dan D. Sandman (incorporated
by reference to Exhibit 10.11 of United States Steel LLC's
Registration Statement on Form S-4 filed September 20, 2001).
10.8 Form of Change of Control Agreements between United States Steel and
Various Officers (incorporated by reference to Exhibit 10.12 of United
States Steel LLC's Registration Statement on Form S-4 filed September
20, 2001).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
opinion filed as Exhibit 5 to this Registration Statement on Form S-
4).
23.3 Consent of Miller & Chevalier, Chartered (contained in its opinion
filed as Exhibit 8 to this Registration Statement on Form S-4).
24.1 Powers of Attorney, United States Steel LLC.
24.2 Powers of Attorney, USX Corporation.
25.1 Form T-1 Statement of Eligibility of Trustee under the Trust Indenture
Act of 1939, as amended, of The Bank of New York, as trustee under the
Indenture filed as Exhibit 4.1 to this Registration Statement on Form
S-4.
99.1 Letter of Transmittal for 6.50% Cumulative Convertible Preferred Stock
of USX Corporation.
99.2 Letter of Transmittal for 6.75% Convertible Quarterly Income Preferred
Securities (QUIPSSM) of USX Capital Trust I.
99.3 Letter of Transmittal for 8.75% Cumulative Monthly Income Preferred
Shares, Series A (MIPS(R)), of USX Capital LLC.
99.4 Notice of Guaranteed Delivery for 6.50% Cumulative Convertible
Preferred Stock of USX Corporation.
99.5 Notice of Guaranteed Delivery for 6.75% Convertible Quarterly Income
Preferred Securities (QUIPSSM) of USX Capital Trust I.
99.6 Notice of Guaranteed Delivery for 8.75% Cumulative Monthly Income
Preferred Shares, Series A (MIPS(R)), of USX Capital LLC.
99.7 Consents of those named to be directors of United States Steel
Corporation.
Exhibit
Number Description
------- -----------
99.8 Consents of those named to be directors of Marathon Oil Corporation.
99.9 Form of Exchange Agent Agreement, dated as of [ ], 2001, between
United States Steel LLC and The Bank of New York.
99.10 Form of Information Agent Agreement, dated [ ], 2001, between Mellon
Investor Services, LLC and United States Steel LLC.
99.11 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.12 Form of Letter to Clients.
99.13 Letter to Holders of Certificated Shares of 6.50% Cumulative
Convertible Preferred Stock of USX Corporation.
99.14 Press Release.
99.15 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.