===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 20-F
| | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-14666
------------------
ISPAT INTERNATIONAL N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
15th Floor, Hofplein 20
3032 AC Rotterdam
The Netherlands
(Address of principal executive offices)
-----------------
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
Class A Common Shares Euronext Amsterdam N.V.
(the "Amsterdam Stock Exchange")
New York Stock Exchange
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
- -------------------------------------------------------------------------------
(Title of Class)
Securities for which there is reporting obligation pursuant
to Section 15(d) of the Act
- -------------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of the issuer's classes of
capital or common stock as of the close of the period covered
by the annual report.
Class A Common Shares, par value EUR 0.01 per share.............51,735,794
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
past 90 days.
Yes |X| No
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 Item 18 |X|
===============================================================================
TABLE OF CONTENTS
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION.......................3
CERTAIN DEFINED TERMS.........................................................4
PART I........................................................................5
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.......5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.....................5
ITEM 3. KEY INFORMATION.............................................5
A. Selected Financial Data................................5
B. Capitalization and Indebtedness........................6
C. Reasons for the Offer and Use of Proceeds..............6
D. Risk Factors...........................................6
ITEM 4. INFORMATION ON THE COMPANY.................................15
A. History and Development of the Company................15
B. Business Overview.....................................17
C. Organizational Structure..............................23
D. Property, plant and Equipment.........................24
E. Downstream Activities.................................34
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS...............36
A. Operating Results.....................................36
B. Liquidity and Capital Resources.......................55
C. Research and Development, Patents and Licenses, etc...56
D. Trend Information.....................................56
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................57
A. Directors and Senior Management.......................57
B. Compensation..........................................63
C. Board Practices.......................................65
D. Employees.............................................68
E. Share Ownership.......................................68
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..........69
A. Major Shareholders....................................69
B. Related Party Transactions............................71
C. Interest of Experts and Counsel.......................71
ITEM 8. FINANCIAL INFORMATION......................................72
A. Consolidated Statements and Other Financial
Information...........................................72
B. Significant Changes...................................75
ITEM 9. THE OFFER AND LISTING......................................75
A. Offer and Listing Details.............................75
B. Plan of Distribution..................................77
C. Markets...............................................77
D. Selling Shareholders..................................77
E. Dilution..............................................77
F. Expenses of the Issue.................................77
ITEM 10. ADDITIONAL INFORMATION....................................77
A. Share Capital.........................................77
B. Memorandum and Articles of Association................77
C. Material Contracts....................................78
D. Exchange Controls.....................................78
E. Taxation..............................................78
F. Dividends and Paying Agents...........................85
G. Statements by Experts.................................85
H. Documents on Display..................................85
I. Subsidiary Information................................85
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................86
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES....91
1
PART II......................................................................91
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...........91
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS...............................91
ITEM 15. CONTROLS AND PROCEDURES...................................91
PART III.....................................................................91
ITEM 17. FINANCIAL STATEMENTS......................................91
ITEM 18. FINANCIAL STATEMENTS......................................92
ITEM 19. EXHIBITS..................................................92
2
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
Unless the context otherwise requires, the term "Ispat International"
refers to Ispat International N.V. and the term "Company" or "Ispat" refers to
Ispat International and its operating subsidiaries taken as a whole. In
addition, unless the context otherwise requires, all descriptions of the Company
in this Annual Report are provided as if the Company had existed since 1989 and
the operating subsidiaries were owned by Ispat International from their date of
acquisition or creation by the controlling shareholder.
This Annual Report contains audited consolidated financial statements
and notes thereto of the Company as of December 31, 2001 and 2002 and for each
of the years ended December 31, 2000, 2001 and 2002 (together, the "Consolidated
Financial Statements") and selected consolidated financial information of the
Company for the periods presented in the Consolidated Financial Statements and
as of December 31, 1998, 1999 and 2000 and for the years ended December 31, 1998
and 1999. The Consolidated Financial Statements and the selected consolidated
financial information, which include the accounts of Ispat International and its
subsidiaries, all of which are controlled by Ispat International, have been
prepared in accordance with Accounting Principles Generally Accepted in the
United States of America (`U.S. GAAP') (see also Note 2 to the Consolidated
Financial Statements) and have been audited by Deloitte & Touche Accountants,
independent auditors. Intercompany balances and transactions have been
eliminated on consolidation with the exception of shipment quantities. The
financial records of each of the operating subsidiaries are maintained in the
currency of the country in which such subsidiary is located using the statutory
or generally accepted accounting principles of such country. For consolidation
purposes, financial statements have been prepared in conformity with U.S. GAAP
and expressed in Dollars, the reporting currency.
3
CERTAIN DEFINED TERMS
All references to `Ispat International' are to `Ispat International
N.V.'; to `Ispat Inland' are to Ispat Inland Inc.; to `Imexsa' or `Ispat
Mexicana' are to Ispat Mexicana, S.A. de C.V.; to `Ispat Sidbec' are to Ispat
Sidbec Inc.; to `Caribbean Ispat' are to Caribbean Ispat Limited; to `Ispat
Europe' or `Ispat Europe Group' are collectively to Ispat Hamburger Stahlwerke
GmbH (`IHSW'), Ispat Stahlwerk Ruhrort GmbH (`ISRG'), Ispat Walzdraht Hochfeld
GmbH (`IWHG'), Ispat Unimetal S.A., Trefileurope and SMR. All references to the
"controlling shareholder" refer, collectively, to Lakshmi N. Mittal and the
members of his immediate family.
Unless otherwise stated, all references to "Dollars" or "$" or "USD"
are to the currency of the United States of America. All references to "Pesos"
are to Mexican Pesos, the currency of Mexico. All references to "C$" are to
Canadian Dollars, the currency of Canada. All references to "Euro" or "(euro)"
are to the currency of the euro zone.
As used herein, all references to "Cash Cost of Production" are to all
direct and indirect manufacturing costs (excluding depreciation) for the
applicable product translated from the currency in which it is reported into
Dollars at the average exchange rate for the relevant period.
"Production capacity" means the annual production capacity of plant
and equipment based on existing technical parameters as estimated by management.
"Steel products" as used herein refers to finished and semi-finished steel
products and excludes direct reduced iron ("DRI"). All quantity figures for
shipments of our steel products include intercompany sales.
The term "tonnes" as used herein means a metric tonne. A metric tonne
is equal to 1,000 kilograms or 2,204.62 pounds. The term "ton" as used herein
means a short ton. One short ton is equal to 2,000 pounds. All references to
iron ore, iron ore pellets, DRI, hot metal and scrap are calculated using
tonnes, and all references to steel products including liquid steel are
calculated using tons.
All references to "Sales" include freight and handling costs and fees
as per EITF Issue No. 00-10. All references to "Net Sales" exclude freight and
handling costs and fees.
4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table presents selected consolidated financial information of the
Company for each of the periods indicated. This data should be read in
conjunction with the consolidated financial statements of the Company included
in this Annual Report, which have been prepared on the basis of generally
accepted accounting principles in the United States of America.
(Millions of $ except share data and per share data)
Years Ended December 31,
1998 1999 2000 2001 2002
Statement of Income Data
Sales1 $ 3,635 $ 4,898 $ 5,343 $ 4,486 $ 4,889
Cost of sales (exclusive of depreciation)1 3,014 4,270 4,670 4,273 4,356
Gross profit (before deducting depreciation) 621 628 673 213 533
Gross margin as percentage of Sales 17.8% 12.8% 12.6% 4.7% 10.9%
Depreciation 91 164 177 177 177
Selling, general and administrative expenses 126 156 181 155 152
Other operating expenses - - - 75 62
Operating income 404 308 315 (194) 142
Operating margin as percentage of Sales 11.6% 6.3% 5.9% (4.3%) 2.9%
Other income (expense) - net - 15 23 13 14
Financing costs:
Net interest expenses (132) (184) (216) (228) (203)
Net gain (loss) from foreign exchange and
monetary position 16 (11) - (9) 23
Income before taxes 288 128 122 (418) (24)
Net income 237 85 99 (312) 49
Basic and diluted earnings per common share2 1.93 0.71 0.82 (2.58) 0.40
Cash dividends per common share3 $ 0.15 $ 0.15 $ 0.15
At December 31,
1998 1999 2000 2001 2002
Balance Sheet Data
Cash and cash equivalents, including
short-term investments $ 525 $ 317 $ 292 $ 85 $ 77
Property, plant and equipment - net 3,179 3,333 3,299 3,109 3,035
Total assets 5,927 5,966 5,978 5,313 5,512
Payable to banks and current portion of
long-term debt 549 457 391 338 262
Long term debt 2,400 2,184 2,124 2,041 2,022
Shareholders' equity 801 854 884 338 128
5
Other Data:
Net cash provided/(used) by operating activities 253 599 381 40 168
Net cash used in investing activities (1,474) (184) (195) (48) (80)
Net cash provided/(used) by financing activities 987 (432) (139) (123) (101)
Total production of DRI
(thousands of tonnes) 6,292 6,353 6,872 4,918 5,893
Total shipments of steel products
(thousands of tons) 10,792 15,430 16,356 14,118 15,037
_____________________
(1) In 2001, the Company adopted EITF 00-10 (issued by the FASB Emerging
Issues Task Force) which requires the inclusion of all shipping and handling
costs billed to customers in the Sales figure as well as in Cost of Sales. The
Company accordingly recast prior period numbers for 1998, 1999 and 2000 to
reflect the same. The application of EITF Issue No. 00-10 does not affect
earnings, as it only involves inclusion of shipping and handling costs in both
sales and cost of Sales. Shipping and handling costs wer (in $ million) 143,
218, 246, 208 and 243 for the year ended December 31, 1998, 1999, 2000 and 2002.
(2) Earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the periods
presented. The computation of diluted earnings per common share is similar to
basic earnings per common share, except that diluted earnings per share reflects
the potential dilution that could occur if dilutive securities and other
contracts to issue common shares were exercised or converted into common shares
or resulted in the issuance of common shares that then shared in the earnings
(losses) of the Company.
(3) Dividends are presented on cash basis.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable
D. Risk Factors
Our decision to suspend acquisition activities may affect our competitive
position and financial performance
The Company has historically relied on the acquisition and successful
turnaround of under-performing assets and operations as a key component of its
growth strategy. Because of the Company's current financial condition and high
leverage, and the decision to focus on debt reduction, the Company has decided
to suspend the pursuit of acquisition opportunities for an indefinite time. The
decision not to pursue acquisitions may adversely affect the Company's current
and future competitive position and, consequently, its results of operations and
financial performance.
We may encounter potential conflicts of interest
Our controlling shareholder or group affiliates may make acquisitions
in the same or related lines of business. In January 2003, LNM Holdings NV, an
entity owned by our controlling shareholder, acquired a majority stake in Nova
Hut in the Czech Republic. Currently, we face limited or little competition from
this acquisition in our primary markets; however, it could in the future compete
directly or indirectly with us in certain markets and products. Our controlling
shareholder may continue to make acquisitions in the future, which may directly
or indirectly compete with us in certain markets and products.
6
Our controlling shareholder also directly and indirectly owns and
controls Ispat Karmet in Kazakhstan, Ispat Sidex in Romania, Ispat Annaba in
Algeria, and holds a significant interest in ISCOR in South Africa, and controls
Ispat Indo. Currently, we face limited or little competition from these
affiliates in our primary markets; however, they could in the future compete
directly or indirectly with us in certain markets and products.
Our controlling shareholder, who is Chairman of our Board of
Directors, also acts as a director of Ispat Karmet, Ispat Annaba, Ispat Sidex,
Ispat Indo, Nova Hut and Iscor. Each of LNM Holdings NV, Ispat Karmet and Ispat
Indo is a party to a management services agreement with our Company, pursuant to
which LNM Holdings NV, Ispat Karmet and Ispat Indo pay a periodic fee to our
Company as compensation for management services rendered to the affiliate by our
Company.
We have engaged in commercial and financial transactions with
affiliates, as detailed in Note 6 to the Consolidated Financial Statements which
could result in conflicting interests. If we enter into any commercial
transactions with affiliates in the future, we intend to do so on terms that are
no less favorable to us than those we could have obtained from unaffiliated
third parties.
We have significant debt obligations to service which may limit our flexibility
in managing our business
Our principal amount of indebtedness outstanding could have important
consequences to our company and the holders of the Class A common shares,
including the following:
o we have significant cash interest expense and principal
repayment obligations;
o our ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired;
o our current debt level may limit our flexibility to adjust
to changing market conditions, reduce our ability to
withstand competitive pressures and make us more vulnerable
to a downturn in general economic conditions; and
o adverse business conditions may lead to difficulties in debt
servicing which may limit our ability to make acquisitions,
finance capital expenditures and working capital
requirements.
At December 31, 2002, we had outstanding approximately $2,284 million
in aggregate principal amount of indebtedness consisting of approximately $262
million of short-term indebtedness (including current portion of long-term debt)
and $2,022 million of long-term indebtedness. A portion of our working capital
financing consists of uncommitted lines of credit which may be cancelled by the
lenders in certain circumstances.
We have guaranteed our subsidiaries debt which may limit our flexibility in
managing our business
We have provided guarantees for some of the debt and credit lines of
our operating subsidiaries. Any possible invocation of these guarantees may
limit our ability to raise additional financing and may limit our flexibility in
managing our business.
Additionally, any possible invocation of any of these guarantees could
cause some or all of the other guaranteed debt to accelerate, creating severe
liquidity pressures.
At December 31, 2002, we had guaranteed approximately $1.6 billion in
aggregate of the total aggregate indebtedness of approximately $2.3 billion.
We have created special purpose entities which may limit our ability to raise
additional financing
We have created special purpose entities to partially finance the
working capital requirement of Ispat Europe. These entities do not feature in
our balance sheet and are collateralized against working capital assets.
7
Adverse business conditions or a decline in the quality of such working capital
assets may cause an increase in the collateral requirements related to the
entities. Any negative change in our access to working capital financing through
these or other entities, or increase in the collateral requirements related to
such entities, would adversely affect our liquidity and flexibility to manage
our business.
We have limited our capital expenditure
We have continued to exercise control on our capital expenditure.
Capital expenditure in 2002 was $108 million as against $97 million in 2001 and
$184 million in 2000. Capital expenditure in 2002 and 2001was largely restricted
to spending required to maintain the operating condition of our plant and
equipment. Our limited capital expenditures may affect our ability to upgrade
current, or purchase new, plant and equipment and may, therefore, lead to
reduced efficiencies. Any reduction in efficiency will adversely affect our
revenues, profit margins and cash flows.
Our income taxes may substantially increase if changes in the tax laws or their
interpretation occur
We may face a significant increase in our income taxes if tax rates in
the jurisdictions where our operating subsidiaries operate, increase and/or are
modified by regulatory authorities in a manner adverse to our Company. This may
adversely affect our cash flows, liquidity and ability to pay dividends.
See "Operating and Financial Review and Prospects--Income Taxes." In
the past, we have paid minimal income taxes due to, among other things:
o a favorable tax regime in Trinidad and Tobago which has
allowed Caribbean Ispat to be exempt from tax on all income
derived from exports, which constitute a substantial portion
of Caribbean Ispat's sales. This tax regime has now been
amended and this benefit no longer exists;
o the existence of net operating losses at certain of our
operating subsidiaries prior to their acquisition, which
were allowed to be carried forward; and
o the availability of accelerated depreciation which resulted
in lower taxes on a cash basis due to timing differences
between the recognition of certain expenses for tax and book
purposes at certain of our operating subsidiaries and
benefits of consolidation of entities within one
jurisdiction, in particular Imexsa. See also "Financial
Information - Legal Proceedings" and Note 16 to the
Consolidated Financial Statements.
Our pension liabilities may go up due to a decline in value of pension assets
and may limit our flexibility to manage our business
The Company faces significant risks with regard to cash contributions,
which may be required for the pension plans of its operating subsidiaries. The
Company's required contributions could increase significantly if equity markets
continue to decline or interest rates continue to remain low. Further there
could be a recalculation of the pension liability, if the pension funding relief
legislation passed in the United States of America (HR 3090) is not renewed.
International trade actions or barriers may adversely affect our product sales
and revenue generation
Ispat International is an international company with sales spanning
many countries, and, therefore, its business has significant exposure to the
effects of trade actions and barriers. Recently, various countries, including
the United States of America have, or are contemplating, the institution of
trade actions and barriers. For example, in March 2000 the United States of
America imposed a "Section 201" tariff rate quota on imports of steel wire rod,
and in 2001 and 2002, U.S. trade agencies made affirmative determinations under
U.S. antidumping and countervailing duty laws against exports of steel wire rod
to the United States of America. In March 2002, the U.S. administration again
invoked Section 201 to limit certain steel imports into the United States of
America. The action included 30% tariff rate increases for hot-rolled sheet,
cold-rolled sheet, coated sheet, and hot-rolled bar, with the rate declining to
8
24% in the second year and 18% in the third. In addition, there was a tariff
rate quota imposed on steel slab. Because of the international nature of the
Company, it is difficult to predict the continuing effects of current or future
trade actions. On balance, these actions have had a generally positive effect on
the results of our U.S. operations and on steel prices globally in 2002.
However, while several of the developments described above may benefit certain
subsidiaries of the Company, there can be no assurance that potential benefits
will ultimately accrue because of World Trade Organization ("WTO") challenges,
exclusion requests and various economic uncertainties. In addition, the European
Union, Japan, Canada and other countries are considering their own trade
protection actions which may adversely affect our operations. As a result, any
change in the current status of international trade actions may have an adverse
affect on our product sales and revenue generation. See also "Financial
Information - Legal Proceedings" and Note 16 to the Consolidated Financial
Statements.
Regulatory and Trade-related legal proceedings could adversely affect our
business
In addition to the more general trade barriers described above, if we
were party to a regulatory or trade-related legal proceeding that was decided
against us or any of our operating subsidiaries, it could adversely affect our
business, financial condition, results of operations, cash flows or prospects.
See also "Financial Information - Legal Proceedings" and Note 16 to the
Consolidated Financial Statements.
Due to our global presence, we face unpredictable foreign governmental policies
and international economic conditions that could hurt our business
Governmental, political and economic developments relating to
inflation, interest rates, taxation, currency fluctuations, social or political
instability, diplomatic relations, international conflicts and other factors, in
countries in which we have operations, may adversely affect our business,
financial condition, results of operations and prospects. For example, we have
operations in emerging-market countries such as Mexico and Trinidad and Tobago
and may have operations or dealings in other emerging-market countries in the
future. Historically, governments in many emerging-market countries have
exercised substantial influence over many aspects of their economies. Although
the governments of Mexico and Trinidad and Tobago have pursued policies of
economic liberalization and deregulation in the past decade, a significant
change in those policies may adversely affect business and economic conditions
in Mexico and Trinidad and Tobago, in general, and our business in particular.
Further, these emerging-market countries may experience social,
political and economic disturbances and instability from time to time, which
could, also hurt our operations. For example, in the past, Mexico has
experienced considerable political, social and economic instability, which
resulted in an economic recession and significant volatility in exchange rates,
reduced availability of credit, high inflation and high interest rates. In
response to these developments, since 1995, the government has implemented a
series of economic reform measures. These reform measures, among other things,
are designed to stabilize the Peso and reduce inflation. For the year ended
December 31, 2002, Imexsa's sales accounted for 12% of the Company's
consolidated sales and its operating profit accounted for approximately 40% of
our consolidated operating profit. We do not have, and do not intend to obtain,
political risk insurance in any country where we conduct business.
Absence of domestic markets in certain subsidiaries may limit our flexibility in
managing business
Some of our subsidiaries such as Caribbean Ispat and Ispat Mexicana
are primarily export oriented as domestic markets are not adequate to support
the operations. Any rise in trade barriers or trade related actions in main
export markets may adversely affect the operations of these subsidiaries and may
limit our flexibility in managing business.
See also "Financial Information - Legal Proceedings" and Note 16 to
the Consolidated Financial Statements.
9
We may experience currency fluctuations and become subject to exchange controls
that could adversely affect our business
We operate and sell our products in a number of countries, and as a
result, our business, financial condition, results of operations and prospects
could be adversely affected by fluctuations in exchange rates. A majority of our
sales are either Dollar-denominated or based on Dollar prices, which limits our
exposure to a devaluation against the Dollar of the currencies of the countries
in which we operate. Nevertheless, any depreciation of currencies of major steel
producing countries could enhance the business margins of our competitors who
also have Dollar-denominated sales and could adversely affect our results of
operations. Our net sales from Ispat Europe, comprising approximately 23% of our
net sales, and our net sales from Ispat Sidbec, comprising approximately 11% of
our net sales, are predominantly denominated in Euros and Canadian dollars,
respectively, and have been impacted by currency fluctuations. In addition, most
of our operating subsidiaries incur a significant portion of their costs in the
currency of the country in which they operate, and exchange-rate fluctuations
that result in an appreciation in the value of such currencies against the
Dollar would result in an increase in our operating costs in Dollar terms.
Mexico and a number of other emerging market countries have suffered
balance of payment deficits and, from time to time, shortages of foreign
exchange reserves. Although neither the Mexican Government nor the government of
any other country in which we currently operate restricts the ability of foreign
persons or entities to convert their respective currencies into U.S. dollars or
other currencies, we cannot assure you that the Mexican Government or such other
governments will not initiate policies restricting or limiting the ability of
our operating subsidiaries to convert the currencies in which they operate into
foreign currencies. This could include restricting our ability to convert the
currencies in which our subsidiaries operate to foreign currencies in order to
meet their foreign currency denominated debt obligations. Any such restrictive
exchange control policy could adversely affect our business, financial
condition, results of operations and prospects.
On January 1, 1999, the Euro was introduced and is planned to
eventually function as the single currency of Europe. On that date, eleven of
the fifteen member countries of the European Union, including The Netherlands,
where we maintain our registered office, Luxembourg, where we maintain the
registered office and certain operations of Ispat Europe, and France and
Germany, where a substantial portion of the assets and operations of Ispat
Europe are maintained, established fixed conversion rates between their existing
sovereign currencies and the Euro. These countries adopted the Euro as their
common legal currency on that date, and on January 1, 2002, the Euro replaced
the sovereign legal currencies of these countries.
We have significant operations within the European Union including
many of the countries that have adopted the Euro. We cannot predict the impact
the Euro will have on continuing steel operations within the European Union and
the international steel-trading environment.
We could experience labor disputes which could disrupt our business
We have in the past experienced work stoppages and disruptions at
certain of our operating subsidiaries. At Imexsa there was a labor dispute
resulting in a stoppage of work from December 22, 2001 to January 17, 2002. Work
stoppages or other labor-related developments could adversely affect our
business, financial condition, results of operations and prospects.
Approximately 84% of our employees are represented by labor unions and are
generally covered by collective bargaining or similar agreements, which are
regularly renewable. However, a work stoppage or strike could occur:
o prior to the expiration of the current labor agreements;
o during negotiations of new labor agreements or extensions of
existing labor agreements; or
o during the negotiations of wage and benefit levels.
Each of our operating subsidiaries has concluded collective bargaining
agreements with labor unions representing a substantial majority of its
employees. Although we believe that we will successfully negotiate new
collective bargaining agreements with our unions when existing agreements
expire, such negotiations:
10
o may not be successful;
o may result in a significant increase in the cost of labor;
or
o may breakdown and result in the disruption of the operations
of our operating subsidiaries.
At Ispat Sidbec, negotiations are currently taking place concerning
the renewal of the collective labor agreement which expired on January 31, 2003.
These labor negotiations at Ispat Sidbec have not led to a work stoppage or
disturbance, and we currently anticipate such labor negotiations to be
successfully concluded.
However, we can give no assurance that such labor negotiations will
conclude successfully or that no work stoppages or labor disturbances will
occur. Any such work stoppages or labor disturbances at Ispat Sidbec, or any of
the other operating subsidiaries of the Company, may have an adverse affect on
the operations and financial results of the Company.
Credit rating downgrades or similar triggers may affect our flexibility in
managing business
During the course of 2002, primarily as a result of actions relating
to the restructuring of the debt at Imexsa, certain of the credit ratings of the
Company and its subsidiaries were downgraded. Following the successful
restructuring of Imexsa, these credit ratings were upgraded, although in certain
instances not to previous levels. Any decline in our credit rating may lead to
some of our lenders recalling loans or withdrawing credit lines. This may
adversely affect liquidity management, our competitiveness and ability to manage
our business.
Significant decreases in steel prices and demand due to economic conditions and
other factors affecting the steel industry could result in a decrease in our
gross and operating margins for the year
The steel industry is highly cyclical in nature and sensitive to
general economic conditions and other factors beyond our control, such as
worldwide production capacity and fluctuations in steel imports and tariffs,
which are difficult to predict. Because we obtain nearly all of our revenues
from the sale of steel and steel related products, any economic downturn in
Europe, North America, Asia or elsewhere could result in a significant decrease
in demand or prices for our steel and steel related products which could in turn
result in decreases in our gross and operating margins and declines in our
business, financial condition, results of operations and prospects for the year.
For example, in 2000-2001, an economic downturn in North America and other parts
of the world resulted in lower steel prices, which resulted in lower gross and
operating margins for our company. Although certain economic indicators are
pointing to modest renewed growth in 2003, there still exists a substantial risk
of a "double-dip" downturn in the global economy as a result of geo-political
and other uncertainties. Any such return to negative economic growth may
adversely affect our business, financial condition and results of operations.
We face significant price and other forms of competition from other steel
producers, which could hurt our results of operations
Generally, the markets in which we conduct business are highly
competitive. Increased competition could cause us to lose market share, increase
expenditures or reduce pricing, any one of which could hurt our results of
operations. The world steel industry has historically suffered from substantial
over-capacity. Excess capacity in some of the products sold by us will intensify
price competition for such products. This could require us to reduce the price
for our products and, as a result, negatively impact our results of operations.
We compete primarily on the basis of quality and the ability to meet customers'
product specifications, delivery schedules and price. Some of our competitors
may:
o benefit from greater capital resources;
o have much longer operating histories;
o have different technologies; and
11
o have lower raw material and energy costs.
In addition, our competitive position within the global steel industry
may be affected by, among other things:
o the recent trend toward consolidation amongst our
competitors in the steel industry, particularly in Europe
and the United States of America;
o exchange rate fluctuations that may make our products less
competitive in relation to the products of steel companies
based in other countries; and
o the development of new technologies for the production of
steel and steel related products and the development of new
media for the sale of steel related products, such as the
Internet, which could impact the way we produce and sell our
products.
We may encounter supply shortages and increases in the cost of raw materials,
energy and transportation
We require substantial amounts of raw materials/energy in our
production process consisting principally of iron ore fines, iron ore pellets,
scrap, electricity and natural gas. Any prolonged interruption in the supply of
raw materials or energy, or substantial increases in their costs, could
adversely affect our business, financial condition, results of operations and
prospects. For example, there was a temporary loss of production at Imexsa in
the fourth quarter of 2002 caused by a natural gas supply disruption following
an explosion at the supplier's premises. The availability and prices of raw
materials may be negatively affected by:
o new laws or regulations;
o suppliers' allocations to other purchasers;
o interruptions in production by suppliers;
o accidents or other similar events at suppliers' premises or
along the supply chain;
o changes in exchange rates;
o consolidation in the steel related industry;
o worldwide price fluctuations and other factors; and
o transportation.
In addition, energy costs, including the cost of natural gas and
electricity, make up a substantial portion of our cash cost of production. The
price of energy has varied significantly in the past and may vary significantly
in the future largely as a result of market conditions and other factors beyond
our control. Because the production of DRI and steel involves the use of
significant amounts of natural gas, we are sensitive to the price of natural
gas.
We have a controlling shareholder who can appoint our directors and determine
the outcome of shareholder votes
Our controlling shareholder indirectly has the right to make binding
nominations for the appointment of all members of our Board of Directors and to
determine the outcome of any action requiring shareholder approval. In addition,
the controlling shareholder will have the ability, by virtue of his indirect
ownership of Class B common shares, to prevent or cause a change in control of
our company and our subsidiaries. Some of our debt could become due prior to its
stated maturity following a change in control of our company if the controlling
shareholder were to decide to dilute his ownership below stated levels of
ownership.
12
As of the date of this report our controlling shareholder indirectly
owned all of our Class B common shares and 26,100,000 Class A common shares,
representing 48% of the Class A common shares, with an aggregate of
approximately 97% of the voting rights. Holders of Class A common shares are
entitled to one vote per share, and holders of Class B common shares are
entitled to ten votes per share.
Because we are a holding company with no revenue-generating operations of our
own, we depend on the cash flows and earnings of our subsidiaries which may not
be sufficient to meet our needs
Because Ispat International is a holding company with no business
operations of its own, we are dependent upon the earnings and cash flows of, and
dividends and distributions from, our operating subsidiaries to pay our
expenses, meet any future debt obligations and pay any cash dividends or
distributions on the Class A common shares that may be authorized by our Board
of Directors and shareholders. If we are unable to generate sufficient cash flow
from such earnings and distributions from our subsidiaries, we may have to delay
or cancel the payment of dividends on Class A common shares. The Company did not
pay a dividend to the Class A common shares in 2001 and 2002. Other potential
measures to obtain funds, such as by selling assets, may be restricted by our
operating subsidiaries' debt instruments, and our ability to use equity
financings is dependent on our results of operations and prevailing market
conditions.
Our major assets are interests in the capital stock of our operating
subsidiaries. We rely on our operating subsidiaries to generate sufficient
earnings and cash flows to pay dividends or distribute funds to our company to
enable us to pay our expenses and meet any future debt obligations. Our
operating subsidiaries' ability to pay dividends to us is subject to limitations
under the applicable laws of their respective jurisdictions and the terms of
certain of their debt agreements.
The ability of our operating subsidiaries to pay dividends or
distribute funds to our company may also be restricted by, among other things,
the imposition of, or increases in the rate of, taxes on dividends or
distributions in the jurisdictions in which the operating subsidiaries operate
or are taxable, or by the imposition of policies restricting the ability of our
operating subsidiaries to convert the currencies of the countries in which they
operate into other currencies.
Under Dutch law, we can only pay dividends distributions to the extent
we receive dividends from our subsidiaries, recognize gain from the sale of our
assets, or record share premium as a result of the issuance of common shares.
See Notes 8 and 10 to the Consolidated Financial Statements. In addition, since
we have guaranteed certain debt obligations of some of our operating
subsidiaries, we face other limitations under the guarantees on our ability to
make dividend payments, distributions and other similar payments as well as on
our ability to incur additional debt. See "Financial Information - Dividend
Distributions" and Notes 8 and 10 to the Consolidated Financial Statements.
Our competitive position depends on our senior management team and the loss of
its members could materially hurt our business
Our ability to maintain our competitive position and to implement our
business strategy is dependent to a large degree on the services of our senior
management team, particularly Mr. Lakshmi N. Mittal, Chairman of the Board of
Directors and Chief Executive Officer of Ispat International, who has managed
our company since its inception. The loss of or any diminution in Mr. Mittal's
services or those of the other members of Ispat's senior management team or an
inability to attract, retain and maintain additional senior management personnel
could materially hurt our business, financial condition, results of operations
or prospects. We may not be able to retain our existing senior management
personnel or to attract additional qualified senior management personnel in the
future. We do not maintain key man life insurance on any members of our senior
management.
Natural disasters could significantly damage our production facilities
Natural disasters could significantly damage our production
facilities. In particular, Imexsa's production facilities are located in Lazaro
Cardenas, Michoacan, Mexico, an area that has historically experienced
earthquakes of varying magnitude. Extensive damage to Imexsa's production
complex or any of our other major production
13
complexes, whether as a result of an earthquake or other natural disasters,
could materially hurt our business, financial condition, results of operations
or prospects. The book value of Imexsa's production facilities represented 9% of
our total assets at December 31, 2002; Imexsa's sales in 2002 accounted for 12%
of our sales; and Imexsa's operating income in 2002 accounted for approximately
40% of our operating income in 2002.
Our insurance policies have limited coverage and we may not be insured against
some of the risks to our business
The occurrence of an event that is uninsurable or not fully insured
could materially hurt our financial condition and results of operations and
prospects. We maintain comprehensive full-value insurance on all of our property
and equipment in amounts that we believe are consistent with industry practices
but we may not be fully insured against some risks to our business. Our
insurance policies cover, among other things, all-risk machinery breakdown and
boiler explosion. The all-risk policy covers physical loss or damage to the
property and equipment of our company on a reinstatement basis, and certain
consequential losses, including business interruption arising from the
occurrence of an insured event under the policy. Under the all-risk policy,
damages and losses caused by certain natural disasters, such as earthquakes,
floods and windstorms are also covered. We also maintain public and product
liability insurance in an amount of $200 million. Each of our operating
subsidiaries also maintains various other insurance, such as workmen's
compensation insurance and marine insurance.
We may have to spend substantial sums to meet environmental regulations
We have spent, and can be expected to spend in the future, substantial
amounts to comply with environmental laws and regulations which, over time, have
become more stringent. If this trend continues, we may be required to make
changes in our operations and our costs may increase. Our operations are subject
to strict environmental laws and regulations in each of the jurisdictions in
which we operate. These laws and regulations govern, generally, air and water
pollution, the management and disposal of hazardous substances and the
remediation of contamination. These requirements, or enforcement of these
requirements, may become even more stringent in the future. Failure to comply
could result in the assessment of civil and criminal penalties, the suspension
of operations and lawsuits by private parties. Ispat Inland is a defendant in
various administrative or judicial actions initiated by governmental agencies,
including a U.S. Environmental Protection Agency ("EPA") consent decree which
will require significant expenditures over the next several years that may be
material to our results and operations or our financial condition. Please also
read the section entitled "Financial Information--Legal Proceedings" and Note 16
to the Consolidated Financial Statements for a more detailed description of the
1993 EPA consent decree and other environmental actions affecting our business.
Forward-Looking Statements and Associated Risks
This Annual Report contains forward-looking statements that involve a
number of risks and uncertainties. These forward-looking statements reflect the
company's views with respect to future events and financial performance. Actual
results could differ materially from those projected in the forward-looking
statements as a result of many factors, including the factors discussed above.
In addition, among the other factors that could cause actual results to differ
materially are the following: inventory risks due to shifts in market demand
and/or price erosion of purchased inputs; changes in product mix; costs and
yield issues associated with initiating production at new factories and the
factors affecting future performance listed above. The words "believe,"
"expect", "anticipate", "intend", "estimate", "plan" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Neither our independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures, with respect
to the prospective financial information contained herein, nor have they
expressed any opinion or any other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim any association
with, the prospective financial information.
14
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company.
Ispat International N.V. was incorporated under the laws of The
Netherlands on May 27, 1997, to hold various steel and steel-related companies
owned by Mr. Lakshmi N. Mittal and members of his immediate family
(collectively, the "controlling shareholder") which were contributed or
transferred to Ispat International by its controlling shareholder in connection
with a reorganization that was consummated in July 1997.
The registered offices of Ispat International are located at 15th
Floor, Hofplein 20, 3032 AC Rotterdam, The Netherlands. The telephone number of
the registered offices is (31-10) 217-8800. Ispat International's agent in the
United States of America is CT Corporation System, located at 1633 Broadway, New
York, New York 10019.
We have grown through a series of acquisitions and by improving the
operating performance of each acquired facility, through focused capital
expenditure programs and implementation of improved management practices,
resulting in increases in production and shipment of steel products, reduction
in cash costs of production and increases in productivity. Our aggregate capital
expenditures were approximately $108 million, $97 million and $184 million
during 2002, 2001 and 2000, respectively. Following is a summary of each of our
acquisitions:
o Caribbean Ispat Asset Lease and Acquisition. In May 1989,
Caribbean Ispat began leasing the plant assets of ISCOTT,
and in December 1994, Caribbean Ispat purchased the plant
assets of ISCOTT, exercising its purchase option under the
ISCOTT Lease (as defined herein) for a purchase price of $70
million, which was paid in cash. As part of the acquisition,
Caribbean Ispat made certain commitments to spend $73.5
million in capital expenditures over a three-year period,
all of which has been spent.
o Imexsa Acquisition. In January 1992, Imexsa acquired the
assets and selected liabilities of Siderurgica del Balsas,
S.A. de C.V. and equity interests in several related
companies, as part of the privatization of the Mexican steel
industry, for an aggregate purchase price of $220 million.
As part of the acquisition, Imexsa committed to spend $50
million in capital expenditures over a period of five years
from the date of acquisition, all of which has been spent.
In addition, we agreed to invest up to $300 million for the
construction of a hot strip mill, failing which 5% of the
capital stock of Caribbean Ispat would be transferred by our
controlling shareholder to the Mexican government. In 1995,
we obtained the consent of the Mexican government to
substitute this by a $300 million capital expenditure
program by Imexsa, all of which was completed as of December
31, 1997. In 2002, the Company's 51% owned pipe making
subsidiary in Mexico, Productura Mexicana de Tuberia,
concluded the sale of substantially all of its production
assets.
o Ispat Sidbec Acquisition. In August 1994, we acquired all of
the capital stock of Sidbec-Dosco inc. from a company owned
by the Government of the Province of Quebec for a purchase
price of approximately $52 million and assumed debt of
approximately $134 million. As part of the acquisition,
Ispat Sidbec committed to spend $73 million in capital
expenditures over a five-year period from the date of
acquisition, all of which has been spent. Pursuant to the
agreements relating to the acquisition, we made a C$30
million (approximately $22 million) capital contribution to
Ispat Sidbec.
o Ispat Hamburg Acquisition. Effective January 1, 1995, our
controlling shareholder, through an indirect subsidiary,
acquired the shares of Ispat Hamburg for approximately $6
million. Such subsidiary concurrently purchased from a
creditor of Ispat Hamburg its outstanding indebtedness for
an agreed amount (since fully repaid). Pursuant to the
agreements related to the Ispat Hamburg acquisition, such
subsidiary made a DM 30 million (approximately $21 million)
capital contribution to Ispat Hamburg. We also agreed to
spend DM 70 million (approximately $50 million) on capital
expenditures over a five-year period, which has been fully
spent within the stipulated period which ended on December
31, 1999.
15
o Ispat Duisburg Acquisition. In October 1997, we acquired
Ispat Ruhrort and Ispat Hochfeld (together, "Ispat
Duisburg") from Thyssen Stahl AG for DM 30 million, of which
DM 6 million was paid in cash, with the balance payable over
a period of six years. In addition, we assumed a debt of DM
90 million payable over a period of three years (since fully
repaid). As part of the acquisition, Thyssen is committed to
supply Ispat Duisburg hot metal for 10 years at a price
based on certain formula and Thyssen is obligated to
purchase 90% of its bloom requirements from Ispat Duisburg
at an agreed price formula.
o Irish Ispat Acquisition and Liquidation. In May 1996, we
acquired Irish Steel, the predecessor to Irish Ispat, from
the Irish Government for IR (pound)1 and assumed debt of
approximately $51 million. Following the acquisition, the
Company had over time injected (euro)30 million
(approximately $30 million) to fund capital investments and
operating losses at Irish Ispat.
On June 15, 2001 Irish Ispat announced the shutdown of its
steelmaking operations in Haulbowline, County Cork, Ireland,
and the calling of a creditors meeting for the appointment
of a liquidator. This decision was taken in view of
continuing losses of Irish Ispat and the continuing
deterioration of the steel market with no prospect for
recovery in the near to medium term.
o Ispat Inland Acquisition. In July, 1998, we acquired Ispat
Inland from Inland Steel Industries ("ISI") for an aggregate
purchase price of $1,399 million, which consisted of a net
cash payment of $1,115 million and assumption of debt of
$284 million. As part of the acquisition, Ispat Inland
entered into an agreement with the Pension Benefit Guaranty
Corporation ("PBGC") to provide certain financial assurances
with respect to Ispat Inland's pension plan. In accordance
with this agreement, Ispat Inland provided the PBGC a letter
of credit in the amount of $160 million, made cash
contributions of $25 million in 1998, $24 million in 1999,
$30.7 million in 2000 and $108.6 million in 2001 to the
Pension Trust and committed to certain minimum funding
requirements, including to fund the normal cost of the
pension plan. Included in the 2001 payments was a prepayment
of the entire 2002 obligation and a portion of the 2003
obligation. A further payment of $54.5 million was made in
January 2003. In addition, Ispat Inland granted to the PBGC
a first priority lien on selected assets. The agreement has
a term of at least five years or at least until certain
financial tests are met, whichever is later. However, the
agreement could terminate within five years if the pension
plan is terminated or Ispat Inland is sold and the purchaser
meets certain tests. In connection with our acquisition of
Ispat Inland, ISI caused its subsidiary Ryerson Tull, Inc.
(with which it has subsequently merged) to execute a
guaranty in favor of the PBGC in the amount of $50 million
(the "RT Guaranty"). We agreed that Ryerson Tull shall be
subrogated to the rights of the PBGC against Ispat
International and Ispat Inland to the extent of any payment
made by Ryerson Tull under the RT Guaranty.
o Ispat Unimetal Acquisition. In July 1999, we acquired Ispat
Unimetal, Trefileurope and SMR from Usinor for a total
consideration of (euro)100 million ($107 million).
We are one of the world's 10 largest steel producers, and have
steel-making operations in six countries. We are also the world's largest
producer of DRI with access to deep-water port facilities. Our operating
philosophy embraces both integrated mini-mill and blast furnace processes for
steel-making. Since 1992, we have experienced significant growth primarily as a
result of strategic acquisitions of steel-making facilities and initiatives
undertaken to improve the operating performance of these acquired facilities. As
a result, our steel shipments have increased from approximately 1.5 million tons
in 1992 to approximately 15.0 million tons in 2002, making us one of the
fastest-growing steel producers in the world over the past ten years. In 2002,
our consolidated sales, operating income and net income were approximately
$4,889 million, $142 million and $49 million, respectively.
We have a high degree of both product and geographic diversification.
We produce a broad range of high-quality, finished and semi-finished steel
products. Our flat and long product portfolios include high-quality cold rolled,
electro galvanized and coated steels, slabs, special bar quality and wire rods.
During 2002, we shipped our products to over eighty-five countries worldwide,
with our largest markets in the North America and Europe. See "--Business
Overview-Products." We conduct our business through our subsidiaries operating
in six countries.
16
These operations are: (i) Ispat Inland, the fifth largest integrated steel
producer in the United States of America; (ii) Imexsa, one of the largest steel
producers in Mexico; (iii) Ispat Sidbec, the fourth largest steel producer in
Canada; (iv) Caribbean Ispat, Trinidad, the largest steel producer in the
Caribbean; (v) Ispat Germany, comprising Ispat Hamburg and Ispat Duisburg, one
of the largest producers of high-quality long products in Germany; and, (vi)
Ispat Unimetal, one of Europe's highest quality producers of long products for
cold heading, wire drawing and forging in the form of wire rods, bars and
billets. Most of these operations are strategically located with access to
deep-water port facilities which allow for cost-efficient import of raw
materials and export of steel products.
B. Business Overview
Historically, we have grown through the acquisition of underperforming
steel facilities, primarily through implementation of improved operational and
management practices. As a result, we have benefited by increases in production
and shipments of steel products, and reductions in cash costs of production.
The following table provides the 2002 summary information on our seven
acquisitions of steel-making facilities:
Steel Shipments
-------------------------
Year Prior
Operating Year Product Production to 2002
Subsidiary Acquired Location Category Process Acquisition Shipments
- ------------------------------ -------- -------- -------- ---------- ----------- ---------
(thousands of tons)
Ispat Inland.................. 1998 U. S. Flat/Long BOF/EAF 5,260 5,654
Imexsa........................ 1992 Mexico Flat DRI/EAF 528 3,041
Ispat Sidbec.................. 1994 Canada Flat/Long DRI/EAF 1,294 1,534
Ispat Duisburg................ 1997 Germany Long BOF 1,540 1,502
Ispat Unimetal................ 1999 France Long EAF 1,447 1,342
Ispat Hamburg................. 1995 Germany Long DRI/EAF 936 1,111
Caribbean Ispat............... 1989 Trinidad Long DRI/EAF 395 853
--- ------
Total..................... 11,400 15,037
====== ======
17
The following table sets forth our operations in different geographic areas:
Americas Europe
----------------------------------------- -----------------------------
Others &
($ Millions) US Mexico Canada Trinidad France Germany Ireland Eliminations Consolidated
$ $ $ $ $ $ $ $ $
Year ended December
31, 2000
Sales to unaffiliated
customers 2,505 813 622 123 564 635 81 0 5,343
Net sales 2,439 841 609 233 534 664 86 (309) 5,097
Operating income 36 116 89 - 25 53 (1) (3) 315
Total assets at
December 31, 2000 3,185 1,678 907 549 293 409 68 (1,111) 5,978
Depreciation 106 15 16 18 5 10 4 3 177
Capital expenditures 83 30 19 10 13 10 3 16 184
Year ended December
31, 2001
Sales to unaffiliated
customers 2,212 534 503 103 535 582 17 0 4,486
Net sales 2,143 481 479 285 508 620 17 (255) 4,278
Operating income (127) (49) 21 (11) 15 31 (2) (72) (194)
Total assets at
December 31, 2001 3,080 1,480 857 528 266 327 - (1,225) 5,313
Depreciation 104 21 19 18 6 5 1 3 177
Capital expenditures 29 22 13 9 15 10 - (1) 97
Year ended December
31, 2002
Sales to unaffiliated
customers 2,388 588 557 129 618 609 0 0 4,889
Net sales 2,316 654 534 322 598 673 - (451) 4,646
Operating income 33 57 41 18 (7) 38 - (38) 142
Total assets at
December 31, 2002 3,162 1,449 883 523 451 377 - (1,333) 5,512
Depreciation 99 21 20 19 7 7 - 4 177
Capital expenditures 52 9 14 6 10 16 - 1 108
18
Products
We have a high degree of both product and geographic diversification.
We produce a broad range of high-quality, finished and semi-finished flat and
long steel products.
Our principal products currently include:
o DRI;
o Semi-finished flat products such as slabs;
o finished flat products such as hot-and cold-rolled and hot dipped and
electro galvanized steels;
o semi-finished long products such as blooms and billets; and
o finished long products such as bars, wire rods and wire products.
The following table sets forth our total production of DRI, and our
total shipments of flat and long products in 2002 by major product category:
Ispat Ispat Ispat Ispat
Inland Imexsa Sidbec CIL Germany Unimetal Total
------ ------ ------ --- ------- -------- -----
(In Thousands)
DRI production (tonnes)............. -- 2,858 178 2,316 541 -- 5,893
Flat Products shipments (tons)
Semi-finished....................... -- 3,025 45 -- -- -- 3,070
Finished............................ 4,985 16 639 -- -- -- 5,640
Long Products shipments (tons)
Semi-finished....................... -- -- 11 96 935 -- 1,042
Finished............................ 669 -- 839 757 1,678 1,342 5,285
----- ----- ----- ----- ----- ----- ------
5,654 3,041 1,534 853 2,613 1,342 15,037
===== ===== ===== ===== ===== ===== ======
Metallics Strategy
We are the world's largest producer and user of Direct Reduced Iron or
DRI, a pure iron raw material, with total 2002 production of approximately 5.9
million tonnes. The availability of internally produced DRI enables the Company
to produce higher quality grades of steel than mills using scrap as their
primary metallic input. Most commonly used types of scrap, such as HMS#1, have
high levels of non-ferrous elements and impurities. DRI enables the Company to
control the quality and consistency of its metallic input, which is essential to
ensure uniform high quality of the finished products produced. Historically, it
has also given the Company a cost advantage compared to scrap. In addition, the
production and hence usage of DRI allows the company to utilize a flexible
metallics mix depending on the economics. We have from time to time decreased or
increased DRI production in certain subsidiaries, and depending upon market
situation our production strategy is subject to continuous review and
modification.
Our marketing strategy is to work with our customers on product
development to meet their present and future requirements while utilizing our
assets in the most efficient and profitable manner. We focus our efforts on
providing solutions to our customers to reduce their cost and becoming their
preferred supplier of high quality steel products.
19
Raw Materials and Energy
Our principal requirements for raw materials are for iron ore fines,
iron ore pellets and scrap. Our strategy for the procurement of raw materials
consists of:
o Pursuing the lowest cost of ownership through aggregated
purchasing;
o Exploiting our global purchasing reach through presence in
the major steel markets; and
o Leveraging local cost advantages on a global scale.
Our principal suppliers for iron ore feed and iron ore pellets are
CVRD, MBR & FERTECO in Brazil, Shougang Hierro in Peru and QCM in Canada. In
addition, we obtain a portion of our iron ore from each of the Minorca and
Empire Mines in the United States of America to the extent of our stake holding
and from iron ore pellets from the Pena Colorada mine in Mexico. Our general
practice is to procure our scrap needs from local markets from suppliers within
close proximity to our operating plants.
Prices of externally sourced iron ore pellets are typically determined
annually on a contractual basis, and these prices are generally influenced by
global supply - demand considerations. Prices of iron ore pellets sourced from
our own subsidiaries or from joint ventures in which we have an interest are
based on the application of agreed upon pricing methodology.
Scrap prices are generally based on spot markets, and have experienced
significant fluctuations over the last few years. Energy costs, particularly
natural gas and electricity, constitute a substantial portion of our cash cost
of production. The price of energy has varied significantly in the past and may
vary significantly in the future largely as a result of market conditions and
other factors beyond our control. Because the production of DRI involves
significant amount of natural gas requirement, our production costs are
sensitive to the price of natural gas.
Prices of natural gas at our subsidiaries generally fall into one of
three categories: (a) spot (b) administered prices, based on movements in spot
prices, or (c) fixed contractual prices. At our U.S., Canadian and European
subsidiaries, natural gas prices have historically been based on spot prices. At
our Trinidadian operations, natural gas is supplied by a regulated agency, and
the prices are fixed by contract. At our Mexican subsidiary, natural gas is also
supplied by a government agency, but the prices are regulated prices based on a
formula linking them to spot price movements. In 2001, our Mexican subsidiary,
Ispat Mexicana, entered into a hedging arrangement with its supplier of natural
gas in the form of a three-year fixed price, fixed quantity, take-or-pay
contract for approximately 70% of its annual needs. This contract will expire in
December 2003.
Electricity is another major cost component. At all of our locations,
electricity is generally procured from local, regulated utility companies at
prices fixed by either contract or tariff.
See "Risk Factors--Supply and Cost of Raw Materials and Energy."
20
Government Regulations
See "Risk Factors--We may have to spend substantial sums to meet
environmental regulations," --International trade actions or barriers may
adversely affect our product sales and revenue generation" and "--Regulatory and
trade-related proceedings could materially hurt our business." See also
"Financial Information--Legal Proceedings."
Management
The Chairman and CEO of the company is Mr. Lakshmi N. Mittal. Mr.
Mittal's vision and his ability to guide our Company in its formulation and
execution of appropriate business strategies to meet the challenges of an
increasingly dynamic industry and business environment, has helped the Company
emerge as a leading player in steel production utilizing the integrated
mini-mill and blast furnace process, with a strong manufacturing base in North
American Free Trade Agreement ("NAFTA") and Europe. We are the only steelmaker
in NAFTA region to have steel making facilities in each of USA, Canada and
Mexico. The management is focused on building organizational excellence in our
people, our operations and in our aspirations.
Local management operates each operating subsidiary with full
responsibility for its profitability and corporate management teams supplement
their efforts. Each operating subsidiary maintains its own complete
organizational structure including manufacturing, engineering, research and
commercial staff functions and has a well defined business strategy. In
addition, we have corporate management teams that aid our operating subsidiaries
at a strategic level. Within the corporate management teams we have specialized
and experienced executives including finance, marketing, purchasing, operations,
shipping, human resources, internal assurance, strategic planning, business
development, technology, continuous improvement and law.
We extensively practice our Knowledge Integration Program ("KIP"),
which among others is a quality, cost and efficiency improvement program
designed to allow each operating subsidiary to benefit from the best practices
utilized by other operating subsidiaries. Under the KIP, senior and middle level
managers periodically meet with their counterparts from other operating
subsidiaries to share technical and operating experiences, coordinate activities
and stay abreast of technical and commercial developments and company-wide
practices. We believe that the KIP contributes significantly to reducing
procurement and conversion costs through bulk purchasing and improving overall
profitability and operating efficiencies through mutual assistance.
Business Strategy
Our strategy is to enhance shareholder value by strengthening our
position as a low cost producer of high-quality steel and playing a leading role
in the consolidation of the global steel industry. We also believe that the
market leaders in the new world economy will be those who can identify, capture,
and create value by formulating and implementing creative procurement, marketing
and financial solutions to tomorrow's challenges and opportunities.
This strategy includes the following key elements:
o Leverage our Global position. Our position as one of the
world's largest steel producers provides many opportunities
to achieve operational synergies and cost savings. A key
element in our strategy is to facilitate the sharing of
knowledge across our global operations, and effectively
leverage the extensive expertise of the Company's management
and employees to maximize the realization of these
advantages.
o Organic Growth. We continue to examine and pursue
opportunities to improve the operating performance of our
facilities and enhance our low cost production capabilities
through targeted capital expenditures. Historically, we have
been very successful at enhancing our production
capabilities at relatively low capital costs per ton.
21
o Use Technology as a Competitive Tool. We believe in the
judicious application of technological advances, as
essential to continued competitiveness. We will continue to
invest in incremental technological improvements wherever it
is appropriate.
o Remain a Low Cost Producer. We believe that our efficient
use of steel-making facilities, access to captive port
handling facilities and superior operating practices makes
us one of the lowest cost steel producers in each of the
markets in which we compete. We seek to further protect and
enhance our competitive position through continuous cost
reduction programs and through our KIP. We believe that KIP
has already provided significant benefits, including reduced
procurement costs of raw materials, consumables and spare
parts, as well as increased productivity through the
transfer of technological know-how among our operating
subsidiaries.
o Strengthen Our Leading Market Positions and Reputation for
Quality. Through our acquisitions and investments, we have
has become a leader in a number of markets and products. We
are the largest producer and consumer of DRI in the world.
Our European operations collectively are the largest
producers of high-quality wire rod on the continent and
Ispat Inland is one of the leading suppliers to the
automobile and appliance industries in North America and has
leading positions with Ford, Honda Toyota, Maytag and
Whirlpool. In addition, we believe we have established a
reputation for producing high-quality steel products, in
part due to our tradition of partnering with key customers.
We intend to continue such partnering with its key customers
in research and development efforts and in assisting them
with their product design initiatives. We believe this helps
ensure strong, long-term customer relationships and enables
us to produce higher quality steel products and create
long-term growth opportunities. In the future, we believe we
can further enhance our profitability by leveraging these
leading market positions to sell a broader range of higher
value-added products.
22
C. Organizational Structure
Ispat International is a holding company with no steel making
operations of its own. Our significant subsidiaries are:
o Ispat Inland, incorporated in the United States of America;
o Ispat Mexicana, incorporated in Mexico;
o Ispat Sidbec, incorporated in Canada;
o Caribbean Ispat, incorporated in Trinidad and Tobago;
o Ispat Europe, incorporated in Luxembourg;
o Ispat Hamburg, incorporated in Germany;
o Ispat Ruhrort, incorporated in Germany;
o Ispat Hochfeld, incorporated in Germany; and
o Ispat Unimetal, incorporated in France.
All of these significant subsidiaries are wholly-owned by Ispat
International, indirectly through intermediate holding companies.
This chart represents the operational rather than the exact legal or
ownership structure of our company.
--------------------
Ispat International
(The Netherlands)
--------------------
---------------------------------------------------------------------------------------------
------------- ------ -------- ------- --------- ------------
Ispat Ispat Ispat Ispat Caribbean Ispat
International Inland Mexicana Sidbec Ispat Europe
(U.K.) (U.S.) (Mexico) (Canada) (Trinidad) (Luxembourg)
------------- ------ -------- ------- --------- ------------
--------------------
Ispat Duisburg
-------- --------- -------- ---------
Ispat Ispat Ispat Ispat
Hamburg Hochfeld Ruhrort Unimetal
(Germany) (Germany) (Germany) (France)
-------- --------- -------- ---------
23
D. Property, Plants and Equipment
Our principal operating subsidiaries are Ispat Inland, Imexsa, Ispat
Sidbec, Caribbean Ispat, Ispat Hamburg, Ispat Duisburg and Ispat Unimetal. In
addition, we conduct operations through other subsidiaries and affiliates. All
of our operating subsidiaries are wholly-owned by Ispat International through
intermediate holding companies.
Certain of the Company's assets are encumbered in favor of the
Company's lenders. See Note 8 to the Consolidated Financial Statements.
Ispat Inland Inc. ("Ispat Inland")
General
Ispat Inland, formerly Inland Steel Co., is the fifth largest
integrated steel producer in the United States of America based on 2002
shipments of 5.7 million tons and accounted for approximately 5.8% of
domestically produced shipments within the United States of America in 2002. It
manufactures steel products which are rated by its customers as among the most
consistent and highest quality products available for a wide range of
applications. Ispat Inland produces steel sheet and strip and special bar
quality products for a broad base of customers in the automotive, appliance,
office furniture, electric motor, heavy equipment, forging, cold finishing and
transportation markets.
Ispat Inland's goal is to be a preferred supplier of steel products by
emphasizing best-in-class delivery and quality while maintaining competitive
service. A key element toward achieving this goal is its strategy of developing
strategic partnerships with its customers in order to supply value-added
products which carry higher margins.
Ispat Inland has a leading customer base. Many of its major customers
are industry leaders in their markets. About one-half of its sales to automotive
customers are to Ford, Chrysler and General Motors while the remainder is to
U.S. transplant units of foreign auto makers including Toyota, Honda,
Mitsubishi, BMW and Mercedes. In the appliance sector, Ispat Inland provides a
majority of Maytag's steel requirements and about 70% of Whirlpool's steel
requirements.
Additionally, Ispat Inland has maintained a long and stable
relationship with its major customers. In many instances, the relationships go
back for decades. Ispat Inland is considered a leading supplier to most of its
major customers.
Given the quality and stability of its customer base, Ispat Inland
benefits from having a dependable market for its products.
In addition to its integrated steel manufacturing facilities, Ispat
Inland has interests in two state-of-the-art, best-in-class finishing mills,
located near New Carlisle, Indiana. Ispat Inland holds a 60% interest in I/N Tek
which is a continuous cold-rolling plant that processes hot band into cold
rolled and a 50% interest in I/N Kote which has both hot dip and electro
galvanizing lines for flat rolled steel. The joint venture partner in each case
is Nippon Steel Corporation. Under the terms of the partnership agreements
relating to these joint ventures, both partners receive production-based
payments representing return on equity, but Ispat Inland alone has the rights to
all of the productive capacity of the joint ventures and the market exposure for
all of the product sales.
Ispat Inland also holds a 50% interest in PCI Associates which
operates a pulverized coal injection facility at Indiana Harbor Works. The
facility operates by injecting finely ground coal directly into the blast
furnaces, thereby reducing coke requirements. Ispat Inland also has interests in
iron-ore mining and pelletizing operations, owning and operating the Minorca
Mine in Minnesota and has a 21% interest in the Empire Mine in Michigan.
24
Production Facilities
Ispat Inland's steel manufacturing facilities are located on 1,900
acres at its Indiana Harbor Works in East Chicago, Indiana. The following table
sets forth a general description of Ispat Inland's principal production units
currently in operation:
Facility Description Production Capacity (1) Production in 2002
Blast furnace 3 Blast furnaces 5.6 million tons of hot 4.7 million tons
metal
Basic oxygen furnace 2 BOFs with 4 vessels with 5.9 million tons of liquid 5.4 million tons
(BOF) ladle metallurgy stations steel
and one RH type vacuum
degasser
Slab & bloom caster 3 continuous Slab & Bloom 5.3 million tons 5.3 million tons
casters
80" Hot strip mill With 5 roughing stands, 6 6.0 million tons 5.4 million tons
finishing stands, 3 walking
beam slab reheat furnaces
Cold rolling mill 2 Continuous pickle lines 3.1 million tons 2.6 million tons
56" and 80" Tandem mill 3.7 million tons 2.6 million tons
Continuous annealing 457,000 tons 331,000 tons
facilities
Batch annealing facility 1.7 million tons 1.7 million tons
3 Temper rolling mills 2.9 million tons 2.3 million tons
5 finishing lines 2.1 million tons 1.8 million tons
Coating lines 3 Coating lines 928,000 tons 854,000 tons
Electric arc furnace One 120 ton AC EAF (60 MVA) 610,000 tons of liquid steel 449,000 tons
with ladle metallurgy
station
Billet caster Four-strand continuous 800,000 tons 433,000 tons
caster
12" Bar mill Rod and Stelmor coil mill 700,000 tons 623,000 tons
with rounds, hexagons and
square products
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
25
Ispat Mexicana, S.A. de C.V. ("Imexsa")
General
Imexsa is one of the largest steel producers in Mexico, based on 2002
shipments of 3.0 million tons of slabs. Imexsa is also one of the largest and
high quality dedicated merchant slab producers in the world. Slabs are an
intermediate steel product used for manufacturing a broad range of flat products
such as plates and hot-rolled coils. Slabs are purchased both by steel
manufacturers without primary steel making facilities and by steel manufacturers
with either a temporary or permanent reliance on external sources for a portion
or all of their needs. Imexsa utilizes DRI as its primary metallic input for
substantially all of its production. Imexsa operates modern DRI plants, an
efficient EAF-based steel making plant and continuous casting facilities. Imexsa
has advanced secondary metallurgical capabilities, including ladle refining,
vacuum degassing and calcium silicon injection, which permit it to produce
higher quality slabs utilized for specialized steel applications in the
automotive, line pipe manufacturing, shipbuilding and appliance industries.
Since its inception, Imexsa has been an export-focused company. For the year
ended December 31, 2002, approximately 67% of Imexsa's slabs were exported
primarily to finished steel product manufacturers in the United States of
America, through dedicated deep water port facilities located adjacent to its
production complex in Lazaro Cardenas, Michoacan, on Mexico's Pacific coast.
In addition to its core steel-making facilities, Imexsa holds a 50%
equity interest in Consorcio Minero Benito Juarez Pena Colorada, S.A. de C.V.,
an iron ore mining and pelletizing company. Imexsa also has strategic interests
in several other ancillary companies, which provide significant benefits. These
include a 50% interest in Servicios Siderurgicos Integrados, S.A. de C.V.,
provides various products such as lime, industrial gas and services to Imexsa,
at its cost of producing these services.
Production Facilities
The following table sets forth a general description of Imexsa's principal
production units currently in operation:
Facility Description Production Capacity (1) Production in 2002
- ------------- ------------------------- --------------------------- ----------------------
Pelletizing plant Straight grate plant with 4.0 million tonnes of 2.5million tones
area of 4,994 ft(2) pellets
HyL DRI plant HyL III continuous plant 2.4 million tonnes of DRI 1.7 million tones
with four reactors
MIDREX(TM) DRI plant MIDREX(TM) 1.7 million tonnes of DRI 1.2 million tones
MEGAMOD plant
EAFs (steel melt shop) Four 220-ton EAFs with 150 4.0 million tons of 3.3 million tons
MVA transformers liquid steel
Secondary metallurgy Two 220-ton ladle -- --
furnaces, one calcium
silicon injection system,
one vacuum degassing unit
Continuous casting Two twin-strand slab 3.8 million tons of slabs 3.0 million tons
casting machines, capable
of producing a range of
slab sizes
Thermal power station Two 154-tons/hour steam 40 megawatts (two 20 --
boilers megawatt units)
Two steam-driven turbo
generators
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
26
Imexsa's production facilities are located on 1,075 acres adjacent to
a major deep-water port in Lazaro Cardenas, Michoacan, Mexico, through which
most of its slabs are shipped for export and its raw materials are received. The
port is the largest bulk material handling port in Mexico and the second largest
bulk material handling port in Latin America. The port includes a metals and
minerals wharf with three berths, operated by Corporacion del balsas under a
concession from the Mexican government which expires in 2014, and a multipurpose
terminal berth operated by Imexsa, which currently accepts vessels up to Panamax
size. Imexsa operates the multipurpose terminal berth under a concession from
the Mexican government which expires in 2010.
Ispat Sidbec Inc. ("Ispat Sidbec")
General
Ispat Sidbec is the fourth largest steelmaker in Canada, based on 2002
shipments of approximately 1.5 million short tons of finished steel products.
Ispat Sidbec manufactures a wide range of steel products, including hot, cold
and galvanized sheet, wire rods, bar and pipe products, and markets these
products primarily in Canada and the United States of America. Ispat Sidbec is
currently the only Canadian steelmaker utilizing internally produced DRI as the
primary raw material for steelmaking. Ispat Sidbec has two MIDREX(TM) DRI plants
with an aggregate production capacity of 1.5 million metric tonnes. Ispat
Sidbec's facilities are located near substantial iron ore reserves and have
access to ample natural gas and hydroelectric power.
Production Facilities
Ispat Sidbec's facilities are located in the Province of Quebec on
approximately 1,050 acres of land in Contrecoeur, 100 acres in Longueuil and 23
acres in Montreal. The following table sets forth a general description of Ispat
Sidbec's principal production facilities currently in operation:
Facility Description Production Capacity (1) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
Contrecoeur
Direct reduction plant Two MIDREX(TM) Modules 1.5 million metric tonnes 197,000 tons
of DRI
EAFs Two 150-short ton EAFs 1.8 million tons of liquid 1.7 million tons
with 130 MVA transformers steel
Secondary metallurgy Two 150-ton ladle furnaces -- --
Continuous casting One single-strand slab 900,000 tons of slabs 770,000 tons
casting machine
One six-strand billet 900,000 tons of billets 851,000 tons
casting
Hot strip mill One two-high reversing 683,000 tons of hot bands 693,000 tons
stand and one four-high
finishing stand
27
Facility Description Production Capacity (1) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
Cold rolling mill Pickling line 470,000 tons 449,000 tons
Two Sendzimir 470,000 tons 395,000 tons
cold-rolling mills
19 annealing furnaces 330,000 tons 264,000 tons
including a new Hydrogen
Furnace
One temper mill 330,000 tons 246,000 tons
Rod and bar mill One rod and bar mill with 450,000 tons of rods and 447,000 tons
125-ton/hour gas-fired bars
furnace to reheat billets
with 10 finishing stands
Longueuil
Bar mill Bar mill with one 90-ton/ 410,000 tons of finished 374,000 tons
hour gas-fire furnace to bars
reheat billets with 16
finishing stands
Montreal
Pipe mill Pipe mill with 100 foot 109,000 tons of pipe 61,000 tons
furnace six-strand forming
mill
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
____________________
The Contrecoeur works have direct access to a water terminal, owned by
the Port of Montreal, with docks on the south shore of the St. Lawrence River,
through which iron ore is received and steel products may be shipped. The St.
Lawrence River is accessible by ship for most of the year, although shipping
costs rise in the winter months when icebreakers are needed. As a result, during
the fall months, iron ore is stockpiled for use during the coldest months of the
year. Scrap is shipped by truck or rail. All plants have railway access, with
the exception of the Longueuil plant.
Acufil
Acufil, a wholly owned Canadian limited partnership, is one of
Canada's finest wire producers. Established in 1995 in Montreal, Acufil shipped
approximately 70,000 tons of wire, in 2002, to customers located in Canada and
the United States of America. Acufil is geographically located very close to its
wire rod supplier, Ispat Sidbec and services customers in the automotive,
agricultural, construction, bedding and furniture, cable, pulp tie and consumer
product industries.
Acufil produced 71,000 tons of wire products in 2002. After planned
improvements made to Acufil plant in 1996, Acufil has a production capacity of
approximately 99,000 tons per year of wire products. The facility is located in
Montreal Canada and consists of a modern acid picking line, two wire galvanising
lines, one patenting line and 20 wire drawing machines.
Acufil does not have a revolving credit facility with financial
institutions. Its financing is centralised at the parent company.
28
Its 300,000 square feet facility received certification for ISO 9002 in
September 2000. The plant also has a complete ISO certified testing facility
used by its customer service metallurgists to support product development and
other challenges faced by customers.
Acufil is a member of AWPA and the Wire Association International.
Delta Tube and Company, Limited
Delta Tube and Company, Limited was formed by Ispat Sidbec Inc (40%)
and Nova Steel (60%) to manufacture pipe for Ispat Sidbec and hollow structural
sections of Nova Steel. Delta Tube is equipped with two ERW lines which produce
pipes from two to six inches in diameter for the account of its two owners,
which are then sold by such owners. The facility is located in Montreal, Canada
and operates on a tolling arrangement per ton transformed and has a production
capacity of 75,000 tons. In 2002, Delta Tube rolled 62,000 tons.
Sorevco
Sorevco, a 50%-50% joint venture with Dofasco, operates a hot dip
galvanising line with a production capacity of 250, 000 short tons. It produces
galvanised sheet in widths of up to 55 inches, in thickness varying between 0.01
to 0.13 inches in a wide variety of zinc coatings. Ispat Sidbec and its partner
are each committed to supply 50% of Sorevco's full hard substrate requirements,
its primary raw material. Sorevco is of strategic importance to Ispat Sidbec as
it permits the sales of value-added flat-rolled products without requiring
additional production capacity for annealing and temper rolling at the
Contrecoeur plant. The hot dip galvanising line has a new galvanising process
for two-sided zinc coating of cold-rolled coil for the production of culvert
pipe used in road construction which offers good market opportunities in North
America. In 2002, Sorevco shipped 230,000 short tons of galvanised sheets.
Sorevco has a revolving credit facility (the "Sorevco Facility") with a
financial institution, secured by substantially all of the assets of Sorevco,
providing for a maximum borrowing of approximately $12.3 million (C$20 million).
This facility bears interest at floating rates based on certain lending indices
(at the option of Sorevco), plus a margin of 0.5% or 1.5% and matures in
September, 2003. At December 31, 2002, approximately $11.1 million (C$17.6
million) was outstanding under this facility. The Sorevco Facility contains
certain financial and other covenants, including covenants that require Sorevco
to maintain specified tangible net worth levels and restrict the incurrence of
indebtedness, distribution of capital to partners and other restricted payments,
creation of liens, sales of assets, transaction with affiliates and
amalgamations, consolidation and acquisition of all or substantially all assets
of other persons.
Walker Wire (Ispat) Inc.
Walker Wire (Ispat) is one of the United States of America's oldest and
most important wire processors. Established in 1944, Walker Wire currently ships
approximately 100,000 tons of wire and processed rod from coast to coast. With
three manufacturing facilities located in Ferndale, Michigan; Pontiac, Illinois
and Warren, Michigan, Walker Wire is geographically positioned to provide
unparalleled service to its customers in the automotive, agricultural,
construction, and consumer product industries.
Walker Wire, a wholly owned U.S. subsidiary, produces cold drawn wire
and bars at three facilities, with and aggregate production capacity of 109,000
short tons of drawn wire and bars. Walker Wire purchases majority of its rod
requirements from Ispat Sidbec and the balance from rod mills in the United
States of America and Europe. Walker Wire is equipped with two acid picking
lines and annealing facilities and specializes in value-added products for the
automotive industry; its location provides it with cost-effective access to
automotive part manufacturers in the Detroit and Chicago areas. Walker Wire is
of strategic importance to Ispat Sidbec as it permits the sales of value-added
wire and bars products without requiring additional production capacity for cold
drawing at the Contrecoeur plant. In 2002, Walker Wire shipped 87,000 tons of
galvanized wire.
Walker Wire has a revolving credit facility (the "Walker Wire
Facility") with a financial institution, secured by its accounts receivable and
inventory and certain related assets, providing for a maximum borrowing of
29
approximately $16 million. This facility bears interest at floating rates based
on certain lending indices (at the option of Walker Wire), less a margin of 1%
and matures in June 2003. At December 31, 2002, approximately $7.6 million was
outstanding under this facility. The Walker Wire Facility contains certain
financial and other covenants, including covenants that require Walker Wire to
maintain specified tangible net worth levels and current ratios and restrict the
incurrence of indebtedness, distribution of capital to shareholders and other
restricted payments, creation of liens, sales of assets, transaction with
affiliates and amalgamations, consolidation and acquisition of all or
substantially all assets of other persons.
Caribbean Ispat Limited ("Caribbean Ispat")
General
Caribbean Ispat, located in Trinidad, is the largest steelmaker in the
Caribbean, based on 2002 shipments of 853,000 tons of steel products. Caribbean
Ispat operates a modern DRI plant, an efficient EAF-based steel-making plant,
continuous casting facilities and a high-speed rolling mill. Caribbean Ispat
produces wire rods for use in a wide range of industrial applications, including
the manufacture of fences, cables, chains, springs, fasteners, wire strands and
wire ropes, as well as in the construction industry. In 2002, substantially all
of Caribbean Ispat's wire rod shipments were exported, primarily to steel
fabricators in South and Central America, the Caribbean and the United States of
America. Caribbean Ispat is also a significant producer, exporter, and user of
DRI. Caribbean Ispat receives its raw material imports and ships its steel
products through a deep-water port facility within Caribbean Ispat's production
complex.
Production Facilities
Caribbean Ispat's facilities are located on approximately 260 acres at
the Point Lisas Industrial Complex in Point Lisas, Couva, Trinidad and Tobago.
Caribbean Ispat leases the property on which the facilities are located from the
Point Lisas Industrial Port Development Company (the "PLIPDECO"). On February
12, 1996, Caribbean Ispat and PLIPDECO entered into a lease agreement extending
the terms of the lease of such property until April 10, 2038. The following
table and discussion set forth a general description of Caribbean Ispat's
principal production facilities currently in operation or under construction:
Facility Description Production Capacity (1) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
DRI Plants (I and II) Two MIDREX(TM) Series 400 1.0 million tonnes of DRI 948,000 tonnes
modules
DRI Plant (III) MIDREX(TM) 1.4 million tonnes of DRI 1,368,000 tonnes
MEGAMOD(TM) plant
EAFs Two 132-ton EAFs with 80 1.2 million tons of liquid 938,000 tons
MVA transformers steel
Secondary metallurgy Two 132-ton ladle furnaces -- --
Continuous casting Two four-strand casting 1.1 million tons of 901,000 tons
machines billets
Rod mill One 154-ton/hour reheating 810,000 tons of wire rods 777,000 tons
furnace and rolling mill
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
Caribbean Ispat's production facilities are located adjacent to a
dedicated deep-water dock facility near the waterfront of the Gulf of Paria.
Caribbean Ispat operates the facility, which is leased from National Energy
Corporation of Trinidad and Tobago Limited on a long-term basis (until the year
2015), for receipt and dispatch of various raw materials, consumables and
finished products. The berth of the dock facility has a service length of
30
about 450 yards and a depth of 45 feet. Lump and pellet ore for the DRI plant
and limestone for the calcining plant are the primary imported materials
received at the dock.
Ispat Europe Group S.A. ("Ispat Europe"), comprised of Ispat Hamburg, Ispat
Duisburg and Ispat Unimetal
Ispat Europe Group S.A. has been formed as the holding company for all
activities in Europe.
(a) Ispat Hamburger Stahlwerke GmbH ("Ispat Hamburg")
General
Ispat Hamburg operates the only integrated mini-mill in Western Europe.
Ispat Hamburg operates a modern DRI plant, an efficient EAF-based steel-making
plant, continuous casting facilities and a high-speed rolling mill. These
facilities use advanced processing techniques such as a high pressure intensive
cooling process by which liquid steel is cooled in the continuous casting
machine. Ispat Hamburg's wire rods are sold to customers principally in Germany,
other European Union countries and the Far East.
In addition, Ispat Hamburg owns Kent Wire Ispat Ltd., a leading
producer of wire mesh fabric in the United Kingdom.
Production Facilities
Ispat Hamburg's facilities are located on 145 acres on the Elbe River
in Hamburg, Germany. Ispat Hamburg leases the property on which the production
and port facilities are located from the City of Hamburg pursuant to a long-term
lease expiring in 2013, which is renewable for an additional 15-year term. Most
of Ispat Hamburg's raw material imports and steel products are shipped through a
dedicated deep-water port facility situated on the Elbe River adjacent to its
production complex in Hamburg, Germany. The following table sets forth a general
description of Ispat Hamburg's principal production facilities:
Facility Description Production Capacity (1) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
DRI Plant One MIDREX(TM) Series 400 600,000 tonnes of DRI 540,000 tonnes
module
EAF One 143-ton EAF with 105 1.2 million tons of liquid 1.2 million tons
MVA steel transformer steel
Secondary metallurgy One ladle furnace with -- --
25 MVA transformer
Continuous casting One six-strand billet 1.1 million tons of 1.1 million tons
caster billets
Rolling mill One high speed two-strand 992,000 tons of wire rods 983,000 tons
wire rod mill
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
31
(b) Ispat Stahlwerk Ruhrort GmbH ("Ispat Ruhrort") and Ispat Walzdraht Hochfeld
GmbH ("Ispat Hochfeld") (collectively, "Ispat Duisburg")
General
Ispat Duisburg uses basic oxygen furnace technology to produce high
quality semi-finished blooms, billets and wire rods. Ispat Duisburg transforms
hot metal into low residual steel in the converter shop using secondary
metallurgy equipment, including a ladle furnace and vacuum degassing equipment.
Production Facilities
Ispat Duisburg has two production facilities located on approximately
613 acres in Duisburg in the heart of Germany's steel consuming region. Ispat
Duisburg's plant contains a modern continuous bloom caster using the soft
reduction process which enables us to produce higher quality blooms. The
following table sets forth a general description of Ispat Duisburg's principal
production facilities:
Facility Description Production Capacity (2) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
Converter (liquid Two 154-ton 1.7 million tons of liquid 1.6 million tons
steel facility) converters steel
Secondary metallurgy One ladle furnace -- --
one ladle vacuum
degasser , one RH degasser
and one Tank degasser
Continuous bloom One linear six-strand 1.7 million tons 1.2 million tons
caster (1) bloom caster
Continuous billet One six-strand billet 1.3 million tons 282,000 tons
caster (1) caster
Billet rolling mill Two high reversing 1.0 million tons 863,000 tons
(including stands and finishing
conditioning mill) lines
Wire rod mill One three-strand 1.0 million tons 692,000 tons
rolling mill and one pusher
type reheating furnace
- -------------------
(1) The combined casting capacity is significantly higher than the steelmaking
capacity.
(2) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
(c) Ispat Unimetal
General
The company believes Ispat Unimetal is the largest high-quality wire
rods and bars producer in France, based on 2002 annualized shipments of
approximately 1.1 million tons of steel products. Ispat Unimetal manufactures a
wide range of high-quality billets, bars and rods in coils like wire cord,
free-cutting, cold heading, forging, springs, pre-stressed concrete wire and
other wire drawing qualities. Ispat Unimetal operates a state-of-the-art
twin-shell design DC electric arc furnace using the cost-effective "single
convert" route of steelmaking.
In addition, Ispat Unimetal owns Trefileurope S.A., one of the largest
and highest quality wire drawers in France and SMR, a leading bright bar
producer in France.
32
Production Facilities
Ispat Unimetal's facilities are located on 678 acres in Gandrange,
France and 8 acres in Schifflange, Luxembourg. Ispat Unimetal's steel making and
other facilities are located in the Lorraine region in France and in Luxembourg,
where Ispat Unimetal operates a wire rod mill. These locations provide proximity
to its core markets in France, Germany and the Benelux countries. The following
table sets forth a general description of Ispat Unimetal's principal production
facilities:
Facility Description Production Capacity (1) Production in 2002
- ---------- --------------------------- -------------------------- ----------------------
EAF One 182-ton EAF 1.6 million tons of liquid 1.2 million tons
steel
Secondary Metallurgy Two ladle furnaces and one -- --
ladle vacuum degasser
Continuous Casting One six-strand bloom and 2.0 million tons 1.3 million tons
one six-strand billet
casting machine
Billet Rolling Mill One continuous mill with 1.0 million tons 527,000 tons
12 vertical and horizontal
stands
Coil and Bar Mill One single-strand 600,000 tons 367,000 tons
continuous mill with 20
vertical and horizontal
stands
Wire Rod Mill One two-strand high speed 1.0 million tons 756,000 tons
rolling mill
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
Certifications
Ispat Unimetal has several certifications:
o Standards ISO 9002 - quality system requirements;
o ISO 14001 - environmental management system requirements for Gandrange
Plant;
o Customers Manuals EAQF - quality system requirements of French
Automotive constructors (European Equivalence with VDA6 (Germany) and
AVSQ 94 (Italy);
o QS9000 - quality system requirements for FORD, GM, CHRYSLER; and
o Standard ISO/CEI 17025 - for steel shop laboratory (general
requirements for the competence of testing and calibration
laboratories.
(d) Trefileurope
General
The Company believes Trefileurope is the fourth largest company in the
European wire drawing business based on 2002 annualized shipments of
approximately 370,000 tons of steel products. Trefileurope has an extensive
33
expertise in steel wires and manufactures a wide range of steel wires and ropes
for use in a wide range of industrial applications including automotive and
clutch springs, armoring wires for flexible off-shore pipes, elevator ropes,
aerial and ski-lift cables, hoisting and fishing, pre-stressed concrete
structures, domestic appliances, window fasteners, wind screen wipers, bolts and
nuts and nails. Trefileurope operates nine production facilities, seven in
France and one each in Belgium and Italy, all of which are ISO 9001 or 9002
certified.
Production Facilities
Trefileurope's facilities are located on 15 hectares in Bourg en
Bresse, 13 hectares in Lens, 15 hectares in Commercy, 13 hectares in Marnaval,
14 hectares in Ste. Colombe, two hectares in Perigueux, four hectares in Manois,
all in France, nine hectares in Belgium and three hectares in Italy. The
following table sets forth a general description of Trefileurope's principal
production facilities:
Facility Description Production Capacity(1) Production in 2002
- ---------- --------------------------- -------------------------- --------------------
Bourg en Bresse and Lens Roping wire drawing 91,500 tons 64,000 tons
machines
Stranding and Closing
machines
Pickling lines
Galvanizing lines
Oil tempering / quenching
lines
Commercy, Marnaval and Drawing machines 158,700 tons 152,000 tons
Trefilac Annealing machines
Galvanizing lines
Lacquering lines
Ste.-Colombe, Belgium and Pickling lines 163,000 tons 134,000 tons
Italy Drawing machines
Stranding machines
Plastic coating
Perigueux and Marnaval Drawing machines 27,500 tons 19,000 tons
Nail heading
Galvanizing machines
Quenching machines
- ------------------
(1) "Production capacity" means the annual production of plant and equipment
based on existing technical parameters as estimated by management.
(E) Downstream Activities
Ispat International owns or operates downstream facilities, which are
located in the United States of America, Canada and Europe.
(a) Walker Wire (Ispat) Inc.
Walker Wire (Ispat) is one of the United States of America's oldest and most
important wire processors. Established in 1944, Walker Wire shipped 86,500 tons
of wire and processed rod in 2002. With two manufacturing facilities located in
Ferndale, Michigan and Pontiac, Illinois, Walker Wire is geographically well
located to provide unparalleled service to its 17 customers in the automotive,
agricultural, construction and consumer product industries. Walker Wire is
equipped with two acid pickling lines and annealing facilities which enable it
to specialize in the manufacture of value-added products for the automotive
industry. Its location provides it with cost effective access to automotive
component manufacturers in the Detroit and Chicago areas. Walker Wire is of
34
strategic importance to Ispat Sidbec as it permits the sales of value-added wire
and bar products without requiring additional production capacity for cold
drawing at the Contrecoeur plant.
(b) Acufil Limited Partnership, Canada
Acufil, a wholly owned Canadian limited partnership, is one of Canada's
finest wire producers. Acufil shipped 70,300 tons of wire in 2002 to customers
in Canada and the United States of America. Acufil is located geographically
close to its wire rod supplier, Ispat Sidbec, and services customers in the
automotive, agricultural, construction, bedding and furniture, cable, pulp tie
and consumer product industries. The facility is located in Montreal, Canada,
and consists of a modern acid picking line, two wire galvanizing lines, one
patenting line and 20 wire drawing machines. Its 300,000 square feet facility
received certification for ISO 9002 in September 2000. The plant also has a
complete ISO certified testing facility used by its customer service
metallurgists to support product development.
(c) Sorevco and Company Limited, Canada
Sorevco, a 50/50 joint venture with Dofasco, produces galvanized sheet
in a wide variety of zinc coatings. Ispat Sidbec and its partner are each
committed to supply 50% of Sorevco's full hard substrate requirements, its
primary raw material. Sorevco is of strategic importance to Ispat Sidbec as it
permits the sale of value-added flat rolled products without requiring
additional production capacity for annealing and temper rolling at the
Contrecoeur plant. In 2002, Sorevco shipped 230,400 tons of galvanized sheets.
(d) Delta Tube and Company, Limited, Canada
Delta Tube and Company, Limited, located in Montreal, Canada was formed
by Ispat Sidbec Inc. (40%) and Nova Steel (60%) to manufacture pipe for Ispat
Sidbec and hollow structural sections for Nova Steel. Delta Tube is equipped
with two ERW lines which produce pipes from two to six inches in diameter for
the account of its two partners. This is a tolling operation and each partner is
responsible for its own sales and marketing. Delta Tube shipped 62,300 tons in
2002.
(e) Trefileurope
Trefileurope owns one of the largest steel wire drawing operations in
Europe. It has nine specialized drawing operations located in three different
countries (France, Italy and Belgium). All of these are certified for ISO 9001
and 9002. Trefileurope has extensive experience in the manufacture of a wide
range of steel wires, ropes etc and offers a complete range of products in the
low and high carbon wire business. Markets for such products include the
automobile industry and users of high quality steel rope that are utilized for a
range of applications such as springs, elevator hoisting cables. Trefileurope
manufactured 374,000 tons of steel wires in 2002, compared to 360,000 tons in
2001. (See also above)
(f) Societe Metallurgique de Revigny (SMR)
SMR, based in France, is one of the leading producers of bright bars in
Europe. SMR sells to the bright bar industry, which includes various industrial
applications. SMR produced 120,000 tons of bright bars in 2002, compared to
121,000 tons in 2001.
(g) Kent Wire (Ispat) Limited, U.K.
Kent Wire, based in the United Kingdom, operates a modern fabric
reinforcement plant with one of the highest productivity rates and lowest costs.
It sells to the construction industry principally in the United Kingdom and
Ireland.
35
(h) Ispat Shipping Limited, U.K.
Ispat Shipping Limited (`ISL') is responsible for providing cost
effective ocean transportation solutions to the Company's manufacturing
subsidiaries and affiliates, covering both raw materials and finished products.
Its location in London, which is the hub of global shipping business, is a
strategic advantage. In 2002, ISL handled 17.2 million tonnes of cargo. In
addition, ISL manages four modern Panamex vessels, three U.S. flag vessels and
has 50% equity in one cape size vessel.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The Company has made, and may continue to make, various forward-looking
statements with respect to its financial position, business strategy, projected
costs, projected savings, and plans and objectives of management. Such
forward-looking statements are identified by the use of the forward-looking
words or phrases such as "anticipates," "intends," "expects," "plans,"
"believes," "estimates," or words or phrases of similar meaning. These forward
looking statements are subject to numerous assumptions, risks and uncertainties,
and the statements looking-forward beyond 2002 are subject to greater
uncertainty because of the increased likelihood of changes in underlying factors
and assumptions. Actual results could differ materially from those anticipated
in the forward-looking statements.
A. Operating Results
The following discussion should be read in conjunction with the
Consolidated Financial Statements included in this Annual Report. The
Consolidated Financial Statements, which include the accounts of Ispat
International and its subsidiaries, all of which are controlled by Ispat
International, have been prepared in accordance with U.S. GAAP. Inter-company
balances and transactions have been eliminated on consolidation.
The records of each of our operating subsidiaries are maintained in the
currency of the country in which the operating subsidiary is located, using the
statutory or generally accepted accounting principles of such country. For
consolidation purposes, the financial statements which result from such records
have been restated to conform to U.S. GAAP and translated into Dollars, the
reporting currency.
Transactions in currencies other than the functional currency of a
subsidiary are recorded at the rates of exchange prevailing at the date of the
transaction. Monetary assets and liabilities in currencies other than the
functional currency are re-measured at the rates of exchange prevailing at the
balance sheet date and the related transaction gains and losses are reported in
the statements of income.
Upon consolidation, the results of operation of our subsidiaries and
affiliates whose functional currency is other than the Dollar are translated
into Dollars at weighted average exchange rates in the year and assets and
liabilities are translated at year-end exchange rates. Translation adjustments
are presented as a separate component of other comprehensive income in the
Consolidated Financial Statements and are included in net earnings only upon
sale or liquidation of the underlying foreign subsidiary or affiliated company.
Industry Conditions and Pricing Environment
The steel industry is highly cyclical in nature and sensitive to
general economic conditions. The demand and price of steel and related products
may fluctuate significantly as a result of general economic conditions and other
factors beyond our control and which are difficult to predict. These factors
include worldwide production capacity and fluctuations in steel imports and
tariffs.
In the last few years, the steel industry has witnessed many cycles.
Beginning in the second half of 1995, there was a general downturn in the global
steel markets and, consequently, generally reduced price realizations. Our
results of operations in 1996 were adversely affected by the decline in world
steel prices. During 1997 and the first half of 1998, the world steel market
remained relatively stable. However, beginning in the second half of 1998, due
to severe economic turmoil in several Asian countries and Russia, the global
demand and supply equilibrium
36
was severely impacted. As a result global steel prices fell sharply. This cycle
was reversed and markets were stable until the first half of 2000.
2001 was one of the worst years in recent history for the steel
industry. The global economic situation caused sales volumes and prices to go
down drastically. Selling prices declined to record low levels, and stayed at
those levels for a longer period of time as compared to many of the past
cyclical troughs. These negative trends were further exacerbated by significant
increases in the cost of key inputs, mainly energy and iron ore.
2002 was a turnaround year for the global steel industry, coming after
what was arguably the worst year in recent history. There was a gradual reversal
of the cycle which, along with the Section 201 trade rulings in the United
States of America. and certain emerging shifts in the global demand supply
situation for steel, brought about improvements in both demand for and pricing
of steel products.
Income Taxes
We have had very low income tax payments in the past due to, among other
things:
o a favorable tax regime in Trinidad and Tobago allowing Caribbean
Ispat's to be exempt from tax on all income derived from exports,
which constitute a substantial portion of Caribbean Ispat's sales.
This tax regime has now been amended and this benefit no longer
exists; and
o the existence of net operating losses at certain of our operating
subsidiaries prior to and after their acquisition, which were allowed
to be carried forward.
We expect increased tax payments due to currency fluctuations in
certain subsidiaries and in the future, as a result of full utilization of
remaining net operating losses at our operating subsidiaries. Furthermore, tax
payments may increase if the tax regime in jurisdictions in which the Company
operates, is materially modified or interpreted by regulatory authorities in a
manner adverse to our company. For example, certain tax payments at Imexsa
arising as a result of the 1999 Tax Reforms of the Mexican Tax Code's
Consolidation Regime, significantly increased our 2002 current tax expenses. See
"Risk Factors - Our income taxes may substantially increase if changes in the
tax laws or their interpretation occur."
Recent Developments
Trade Issues
On March 5, 2002, the Bush Administration imposed safeguard measures
under Section 201 affecting imports into the United States of America of
numerous steel products. This remedy included a 30% tariff rate on Hot Rolled
Sheet and Coil, Cold Rolled Sheet and Coil, Coated Sheet and Coil and Hot-Rolled
Bar. The tariff rate on all products included in the safeguard measures under
Section 201 will drop to 24% in the second year and 18% in the third year.
Due to the several exclusions granted as a result of pressure brought
upon by the European Union and the domestic steel consumers lobby, only about
10% of U.S. apparent consumption was subject to these safeguards. The Section
201 safeguards had a positive impact on pricing (helped by domestic capacity
closure in the United States of America) and the pricing rebound experienced in
the United States of America spread to the rest of the world. However, in the
fourth quarter, softening demand, economic uncertainty and lower levels of
manufacturing activity contributed to a drop in pricing in the United States of
America and currently, U.S. prices are out of step with pricing in the rest of
the world.
The mid-term review for the safeguard measures initiated under Section
201 will be undertaken in September-October 2003. The Bush administration is
under significant pressure from the domestic steel consumers lobby to eliminate
the tariffs. Consolidation of the Steel Industry in the Unites States of America
was one of the objectives of the Section 201 decision taken by the
Administration, and since there are positive signs towards consolidation in the
United States of America, we believe that the Administration will let the
safeguards introduced under Section 201 run its course.
37
Imports from Mexico and Canada were exempted from the Section 201
tariff rate increases pursuant to provisions of NAFTA. Those exceptions should
permit Ispat Mexicana and Ispat Sidbec to maintain their historical levels of
access to U.S. markets during the three-year period of relief. The NAFTA
exemption could be modified if it is determined that increased imports
constitute a "surge" within the meaning of U.S. law.
The March 2002 Section 201 remedy does not cover wire rod except sizes
greater than 19mm and all sizes of leaded free-machine steel. However, in March
2000, as a result of an earlier Section 201 proceeding (the "Wire Rod Section
201"), the U.S. government imposed a tariff rate quota on imports of that
product. Mexican and Canadian wire rod producers were exempted under NAFTA in
that proceeding. In November 2001, after a midterm review of the Wire Rod
Section 201, the remedies were modified to introduce a country specific Tariff
Rate Quota program, or TRQ. Caribbean Ispat, whose main product is wire rod,
received a 247,000 tons annual quota with a 5.0% duty for any tonnage above the
quota level. Also, there is an annual quota of 463,000 tons for European Union
countries, and the Company's European subsidiaries have a share in the same,
with a 5.0% duty above the quota level. The Wire Rod Section 201 remedies lapse
effective February 28, 2003.
On August 26, 2002, the U.S. Department of Commerce announced the final
determinations in the anti-dumping, or "AD," and countervailing duties, or "CVD"
investigations on imports of wire rod which had been initiated on September 24,
2001. The Company's subsidiaries affected by this ruling include Ispat Sidbec
(AD margin of 3.86% / CVD margin of 6.61%), Ispat Germany GmbH - consisting of
Ispat Hamburger Stalwerke GmbH and Ispat Walzdraht Hochfeld GmbH (CVD margin of
1.12%) and Caribbean Ispat Limited (AD margin of 11.4%). In October 2002, the
United States Trade Commission determined that the imports of these products
from Germany were negligible and, therefore, the AD and CVD investigations will
be terminated. To date, these margins have not adversely affected sales of the
above mentioned companies in the United States of America. In fact, price
increases in Wire Rod in the latter half of 2002 have partly compensated for the
AD/CVD duties being paid.
The European Union announced on March 25, 2002 that it would impose
additional duties ranging from 14% to 26% on 19 steel products imported above
levels established in new quotas. It does not include any products manufactured
by Ispat Europe.
In July 2002, the CITT (Canadian International Trade Tribunal) issued
its findings on the safeguard investigation it had been asked to conduct by the
Government of Canada on whether increased imports of certain steel products are
causing injury to Canadian steel producers. The CITT determined that increased
imports were a principal cause of serious injury to domestic producers of five
of the nine steel goods covered by the inquiry, specifically Discrete plate,
Cold Rolled Sheet and Coil, Reinforcing Bars, Angles, Shapes and Sections and
Standard Pipe. The CITT made some remedy recommendations to the Government of
Canada. A decision from the Government of Canada on any safeguard measures to be
implemented as per the CITT findings and recommendations is awaited. The
Company's Canadian subsidiary, Ispat Sidbec may derive benefits if any safeguard
measures are implemented.
While several of the developments described above may be expected to
benefit certain subsidiaries of the Company, there can be no assurance that
potential benefits will ultimately accrue because of WTO challenges, exclusion
requests, and various economic uncertainties.
Empire Mine
During the year, the Company's U.S. subsidiary took the strategic
decision to divest its participation in the Empire Mine Partnership and change
the relationship to a purely commercial one.
Effective December 31, 2002, Ispat Inland reduced its participation in
the Empire Mine partnership to 21%, by selling part of its interest in the
partnership to Cleveland Cliffs Inc, the other partner in Mine, for $1 plus the
assumption of all liabilities associated with that ownership interest.
Ispat Inland also has a right under the agreement to sell it remaining
21% interest to Cleveland Cliffs for $1 on December 31, 2007. Separately, Ispat
Inland entered into a 12-year purchase agreement with Cleveland Cliffs to
purchase its Blast Furnaces pellet requirements in excess of the pellets
provided from its remaining interest in the
38
Empire Mine and pellets products from its Minorca Mine. The price is based upon
an agreed methodology and is fixed for 2003 and 2004 and adjusted thereafter
based on a formula.
Trefileurope Antitrust Investigation
In the fall of 2002, a number of wire producers in Europe became the
subject of an investigation by the European Commission into alleged
infringements of provisions of the E.U. treaty concerning anticompetitive
practices. Certain of the Company's downstream subsidiaries in Europe, namely
Trefileurope S.A., Trefileurope Italia Srl and Fountainunion S.A., were amongst
companies included in this investigation. The investigation relates to marketing
of pre-stressed wire and strands steel products in the European Union. To date,
the European Commission has conducted on-site investigations and issued a
request for information with which the Company's concerned subsidiaries have
compiled, and they are cooperating fully with the European Commissions in this
investigation. At present, the investigations are still in progress and
therefore the ultimate outcome of and materiality of these proceedings cannot
presently be determined. Since the Company acquired these subsidiaries only in
July 1999, most of the alleged anti-competitive activities would have taken
place prior to the acquisition. The Company has notified the previous owners of
these developments and informed them that they could be liable for any possible
consequences arising from these investigations.
Sale of PMT
In 2002, the Company's 51% owned pipe making subsidiary in Mexico,
Productura Mexicana de Tuberia, concluded the sale of substantially all of its
production assets for a total consideration of $17.5 million. The Company
recorded a gain of $6.8 million, representing its share of the profit from this
transaction.
Ispat Mexicana's Debt Restructuring
In response to the reduction in sales volume and prices and other
negative developments faced by the Company, the Company initiated the process in
2001 to restructure its debt. The debt restructuring was completed on September
6, 2002.
The principal elements of debt restructuring are as noted below:
1. Exchange offer and consent solicitation. - All outstanding 1996 Senior
Certificates were exchanged for New Senior Certificates. The terms of the New
Senior Certificates are substantially similar to the terms of the 1996 Senior
Certificates except that, among other things, the New Senior Certificates (i)
have interest payable at 10 5/8% per annum; (ii) have a final maturity at May
2005; (iii) are guaranteed by certain subsidiaries of Mexico Operating
Subsidiary; (iv) are secured, along with Mexico Operating Subsidiary's existing
bank lenders, by certain assets of Mexico Operating Subsidiary (as discussed
below) on pro rata basis; and (v) have the benefit of the Excess Cash Flow Sweep
(as discussed below).
2. Bank Amendments and Waivers. - Mexico Operating Subsidiary's bank lenders
deferred principal payments on most of the outstanding bank debt for a period of
three years. The bank lenders also waived certain financial covenants during
this period, eliminated certain restrictions on the disposition of non-core
assets and granted permission to enter into a new working capital facility.
Existing bank lenders have the benefit of the Excess Cash Flow (as discussed
below) and are secured, along with the New Senior Certificates, by certain
assets of Mexico Operating Subsidiary (as discussed below) on a pro rata basis.
3. Excess Cash Flow Sweep. - Mexico Operating Subsidiary is required, on a
semi-annual basis commencing December 31, 2002, to apply all of its excess cash
flows (as defined in the Inter-creditor Agreement) to repurchase New Senior
Certificates and retire debt owed to its existing bank lenders (the `Excess Cash
Flow Sweep') in the proportion of 20% to the New Senior Certificates and 80% to
Mexico Operating Subsidiary's existing bank debt, at a price equal to 100% of
the principal amount thereof.
4. Ranking and Collateral. - The New Senior Certificates are secured by
receivables generated under a new supply agreement with Mitsubishi and those of
certain other customers of Mexico Operating Subsidiary (the `Receivables"). In
addition, Mexico Operating Subsidiary's existing bank lenders and the New Senior
Certificates
39
are secured, on a pro rata basis, by (i) a first priority lien on all property,
plant and equipment of Mexico Operating Subsidiary; (ii) a pledge on the stock
of Mexico Operating Subsidiary and its immediate parent; and (iii) a first
priority lien on the inventory and receivable not otherwise pledged to secure
the new working capital facility or the Receivables.
5. New Working Capital Facility. - Mexico Operating Subsidiary is entitled to
draw up to $68 million for its working capital needs, subject to the condition
that amounts outstanding owed under the new working capital facility cannot
exceed $35 million unless authorized by Mexico Operating Subsidiary's other bank
lenders. The new working capital facility is secured by a first priority lien on
certain inventory and receivables.
6. Shareholder Loan. - An amount of $20 million was loaned to Mexico Operating
Subsidiary by Ispat International for working capital needs. The loan is
subordinated to other debt of Mexico Operating Subsidiary and secured by a
second priority lien on certain inventory and receivables.
7. Sale of non-core assets. - Mexico Operating Subsidiary was entitled to sell
certain non-core assets in 2002 in order to repay some of the debt relating to
its shipping loans.
The Structured Senior Export Certificates due 2005 (the `1996
Certificates') are denominated in U.S. Dollars with effective interest payable
quarterly at 11.64% per annum. The principal amount of the Senior Certificates
is payable in quarterly installments until May 2005.
40
Year Ended December 31, 2002 compared to Year Ended December 31, 2001
The summary consolidated financial and other information,
including the accounts of Ispat International N.V. and its majority owned
subsidiaries has been prepared in accordance with accounting standards generally
accepted in the United States of America ("U.S. GAAP"). The consolidated
financial statements and other information for 2001 include results of Irish
Ispat Limited for the first three months1. All material inter-company balances
and transactions have been eliminated. Total shipments of steel products include
intercompany shipments.
Overview and Summary
Ispat International is one of the world's largest steel producers, with
major steelmaking operations in the Unites States, Canada, Mexico, Trinidad and
Tobago, Germany and France. The Company produces a broad range of coated, cold
rolled and hot rolled carbon steel products, bars and wire rods and
semi-finished steel products in the form of slabs, blooms and billets. In
addition, the Company is also the world's largest producer and consumer of DRI
and is also in the merchant DRI business. In 2002, Ispat International shipped
15 million tons of high-quality steel products to customers in about eighty-five
countries, predominantly - over 90% of sales revenue - in participating
countries of NAFTA and the European Union.
The steel industry is highly cyclical in nature. Steel markets recently
have been experiencing larger and more pronounced cyclical fluctuations. This
trend combined with the upward pressure on costs of key inputs namely metallics
and energy, presents an increasing challenge for steel producers. The key
drivers for maintaining a competitive position and good financial performance in
this increasingly challenging scenario are product differentiation, customer
service, cost reduction and cash management. Ispat International has always
pursued, and continues to pursue, these drivers as core elements of its
operating philosophy.
2002 was a turnaround year for the global steel industry, coming after
what was arguably the worst year in recent history. The Section 201 trade
rulings by the U.S. Government, combined with certain emerging shifts in the
global demand-supply situation for steel, helped generate improvements in steel
demand and pricing, benefiting those steel companies that had suitably
positioned themselves.
Ispat International experienced the benefits from the market
improvements in 2002, starting from the second quarter. Increased sales volumes
and selling prices were realized, along with a better product mix. There were,
however, increases in some of the major cost items, mainly metallics and
transportation. The Company continued its cost reduction efforts and these
helped mitigate to some extent the increases in uncontrollable costs.
Approximately $125 million of cost savings were achieved during the year.
In 2002, Ispat International's sales volumes and selling prices
increased by 7% and 6% respectively compared to 2001. Operating income in 2002
was $142 million as compared to an operating loss of $194 million in 2001. Net
income for 2002 was $49 million as against net loss of $312 million for 2001.
Critical Accounting Policies
The information on and analysis of the Company's operating results and
financial condition are based on figures contained in the Company's financial
statements, which have been prepared in accordance with U.S. GAAP. The
preparation of these financial statements requires the Company management to
make judgments in relation to certain estimates and assumptions used in the
application of accounting policies. These judgments and estimates are made on
the basis of available facts and are a normal part of the process of preparing
financial statements. While the use of different assumptions and estimates could
have caused the results to be different from those reported, the Company
believes that the possibility of material differences between two periods is
considerably reduced by being consistent in the application of such judgments.
- --------
1 On June 15, 2001, the Company announced the shutdown of its steel making
operations in Ireland and the calling of a creditors' meeting for the
appointment of a liquidator. Consequently, beginning in the second quarter of
2001, the results of Irish Ispat Limited have not been consolidated.
41
The accounting policies that the Company considers critical, in terms
of the likelihood of a material impact arising from a change in the assumptions
or estimates used in the application of the accounting policy in question, are
outlined below.
Impairment of Long Lived Assets:
Statement of Financial Accounting Standards (SFAS) No. 144 requires
companies to write down the carrying value of long lived assets including
investments where their value has been permanently impaired due to technological
or economic reasons. The Company applied this accounting standard in relation to
its 2002 financial statements and concluded that no significant impairment
provisions were necessary except in two items as below:
(i) the Company recognized impairment of its idled 2A Bloomer and 21" Bar
Mill at Ispat Inland, resulting in an asset write-off of $23 million,
following the Company's assessment that these facilities, which were
idled in the fourth quarter of 2001, were unlikely to be restarted;
(ii) the Company also recognized $39 million towards the write-off of
investments in the Empire Mine. (Reference is made to the Section on
One Time Items)
Deferred Tax Assets:
The Company charges tax expenses or accounts for tax credits based on
the differences between the financial statement amounts and the tax base amounts
of assets and liabilities. Deferred tax assets are also recognized for the
estimated future effects of tax loss carry-forward. The Company annually reviews
the deferred tax assets in the different jurisdictions in which it operates to
assess the possibility of realizing such assets based on projected earnings. It
takes an appropriate valuation allowance where it appears more likely than not,
based on these projections, that the deferred tax assets will not be realized.
The Company expects that it is more likely than not that the deferred tax assets
of $476 million will be fully realized.
Provisions for Pensions and Other Post Employment Benefits (SFAS 87 and 106):
The Company's operating subsidiaries have different types of pension
plans for their employees. Likewise, most of the subsidiaries in North America
also offer post employment benefits, primarily post employment health care. The
expense associated with these pension plans and employee benefits, as well as
the carrying amount of the related liability/asset in the Balance Sheet is based
on a number of assumptions and factors such as the discount rate, expected wage
increases, expected return on plan assets, future health-care cost trends or
market value of the underlying assets. Changes in any of these assumptions or
market values, particularly in the case of the U.S. and Canadian subsidiaries,
could have a material impact on the associated liabilities. In 2002, the
combined effects of declining market value of underlying pension assets and a
reduction in the discount rate from 7.5% to 7.1% resulted in an after tax charge
of $273 million to Other Comprehensive Income. This is a non-cash charge and is
reversible if the market value of pension fund assets at a future evaluation
date goes up.
Recent accounting pronouncements
SFAS No. 143
The Financial Accounting Standards Board (`FASB') has issued Statement
of Financial Accounting Standards (`SFAS') No. 143, `Accounting for Asset
Retirement Obligations', which is effective for all fiscal years beginning after
June 15, 2002. SFAS No.143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is evaluating this pronouncement
to determine its impact, if any, on the consolidated financial statements.
SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
`Reporting Gains and Losses from Extinguishment of Debt', and an amendment of
that Statement, SFAS No. 64, `Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements'. SFAS No. 145 also rescinds SFAS No. 44, `Accounting
for Intangible Assets of Motor Carriers'. SFAS No. 145 amends SFAS 13,
`Accounting for Leases', to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effect that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
42
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions.
The provisions of SFAS No. 145 related to the rescission of SFAS No. 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions in
paragraph 8 and 9(c) of SFAS No. 145 related to statement 13 shall be effective
for transactions occurring after May 15, 2002. All other provisions of SFAS No.
145 shall be effective for financial statements issued on or after May 15, 2002.
The Company during the current fiscal year ended has reported $19 million as
extraordinary item being the gain on repurchase of its certain debts. Upon
adoption of SFAS No. 145 any such gain or loss on extinguishment of debt
previously classified as an extraordinary item in prior periods presented that
does not meet the criteria of APB Opinion No. 30 for such classification will be
reclassified to conform to the provisions of SFAS No. 145. The Company will
adopt SFAS No. 145 as of January 1, 2003 and will report such gains and losses
in `Other income (expenses) - net' line item in accordance with SFAS No. 145.
SFAS No. 146
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, `Accounting for Costs Associated with Exit or Disposal Activities'. SFAS
146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company is currently reviewing the impact of the
adoption of SFAS 146 on the Company's consolidated financial statements.
SFAS No. 148
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, `Accounting for Stock-Based Compensation which addresses
financial accounting and reporting for recording expenses for the fair value of
stock options. SFAS 148 provides alternative methods of transition for a
voluntary change to fair value based method of accounting for stock-based
employee compensation. Additionally, SFAS 148 requires more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. The Company has determined that the adoption of SFAS 148 does not
have material impact on its financial position or results of operations.
FIN 45
In November 2002, the FASB issued FASB Interpretation No.45 (`FIN 45'),
`Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others'. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 is effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating the impact of the application of this
interpretation, but does not expect a material impact from the application of
FIN 45 on its consolidated financial statements.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of APB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the Equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the equity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
Results of Operations
Revenue
Sales increased by 9% from $4,486 million to $4,889 million in 2002.
Total steel shipments increased by 7% from 14.1 million tons to 15.0 million
tons. Net Sales2 also went up during the same period from $4,278 million to
$4,646 million, an increase of 9%.
The Company uses net sales numbers for managing its business. All the
analyses presented here onwards are based on net sales numbers.
- --------
2 Net Sales exclude freight and handling costs and fees charged to customers.
Sales for the years 2002, 2001 and 2000 included an amount (in million) of $243,
$208 and $246 respectively for freight and handling costs and fees billed to
customers.
43
All the North American subsidiaries achieved improvements both in
volume and average selling prices due to general improvements in the market
conditions. At Ispat Europe, net sales in Dollars were higher due to
appreciation of Euro by 6% during the same period whereas steel shipments
remained flat and average selling prices in Euros were marginally lower.
The following table gives a summary of key sales numbers:
Net Sales 3 Changes in Shipments
----------- --------------------
Subsidiary 2002 2001 Net Sales Shipments Selling prices
- ---------- ---- ---- --------- --------- ---------------
- ---------- $ Million $ Million % % %
--------- --------- -- -- --
Ispat Inland 2,223 2,008 11 6 5
Ispat Mexicana 649 470 38 18 18
Ispat Sidbec 534 463 15 7 7
Caribbean Ispat - Steel 183 156 17 13 3
Caribbean Ispat - DRI 138 128 8 1 7
Ispat Europe Group 1,129 1,070 5 1 (1)4
At Ispat Inland, the 5% increase in selling prices was primarily due to
an improvement in the spot market prices and certain contract sales, that were
negotiated in the second half of 2002 as well as better product mix.
At Ispat Mexicana, shipments increased by 18% in spite of loss of
production in the fourth quarter of 2002 caused by Natural Gas supply disruption
following an explosion at the supplier's premises. Additionally, there was a 18%
increase in selling prices primarily due to improved market conditions for
slabs, mainly in the U.S. market, helped in part by the favorable Section 201
trade ruling.
At Ispat Sidbec, the 7% increase in shipments and the 7% increase in
selling prices were primarily due to general improvement in North American
market environment following the Section 201 ruling in the United States of
America.
At Caribbean Ispat, steel shipments in 2002 were higher by 13% as
compared to 2001. This, however, was primarily due to the fact that shipments in
2001 were partly impacted by the caster project implementation in the fourth
quarter. DRI shipments were marginally higher in spite of being negatively
impacted by non-availability of ships due to the prolonged general strike in
Venezuela in the fourth quarter of 2002. This impact was offset in part by
higher selling prices primarily due to better market conditions.
At Ispat Europe, net sales in Dollars were higher due to appreciation
of Euro by 6% during the same period whereas steel shipments remained flat and
average selling prices in Euro were marginally lower.
Costs
The Company's focus on cost reductions continued in 2002, resulting in
cost savings of $125 million. However, there were increases in the prices of key
metallic inputs such as iron ore and scrap, resulting in a lower net cost
reduction.
At Ispat Inland, costs were lower excluding the negative impact of $62
million from two one-time items as discussed later. This was due to the benefits
of ongoing cost saving efforts offset in part by increased prices of metallics.
At Ispat Mexicana, costs were marginally lower due to increased
production offset in part by higher metallic prices.
- --------
3 Net Sales numbers are stand-alone numbers for certain operating subsidiaries
and include inter-company shipments.
4 For Ispat Europe Group the percentage change is based on Euro selling prices.
44
At Ispat Sidbec, cost increased primarily due to increased cost of
metallic inputs offset in part by better raw material input mix and ongoing cost
reduction effort.
At Caribbean Ispat, cost of steel decreased primarily due to increased
production as against the previous year. DRI cost decreased mainly due to better
ore mix offset in part by higher costs.
At Ispat Europe, costs continued to be negatively impacted by increases
in the prices of scrap. Other increases include wage increases as per collective
agreements. These cost increases were partly mitigated by ongoing cost saving
efforts.
The selling, general and administrative expenses were marginally lower,
in spite of higher levels of operations.
Gross Profit and Operating Income
The Company improved in both gross profit5 (sales less cost of sales,
exclusive of depreciation) and operating income as a result of continuous cost
reduction efforts as well as marginal increase in selling prices. Gross profit
increased by 150% from $213 million to $533 million. There was an operating
income of $142 million in 2002 as compared with an operating loss of $194
million in 2001.
The gross profit margin (gross profit as a % of net sales) improved
from 5.0% to 11.5%, mainly due to improvements at the North American
subsidiaries offset in part by reduction in Ispat Europe Group. The operating
margin (operating income as a % of net sales) was positive at 3.0% as against
negative at 4.5% in 2001.
The comparative numbers of gross profit margin at the Company's
operating subsidiaries were as follows:
Subsidiary Gross Profit Margin %
- ---------- ---------------------
2002 2001
---- ----
Ispat Inland 10.0 0.5
Ispat Mexicana 14.9 3.7
Ispat Sidbec 13.9 9.0
Caribbean Ispat 13.8 4.7
Ispat Europe Group 10.0 11.3
Comparative numbers of operating income and operating margin at the
Company's operating subsidiaries were as follows:
Subsidiary Operating Income Operating Margin
- ---------- ---------------- ----------------
$ Million (%)
--------- ---
2002 2001 2002 2001
---- ---- ---- ----
Ispat Inland 33 6 (127)7 1.5 (6.3)
Ispat Mexicana 61 (18) 9.4 (3.8)
Ispat Sidbec 41 5 7.7 1.1
Caribbean Ispat 18 (11) 5.6 (3.8)
Ispat Europe Group 31 38 2.7 3.6
- --------
5 Management believes that gross profit provides useful management information
as it is a measure of profit margins over cost of sales.
6 After write down of $62 million towards Empire Mine and 2A Bloomer and 21" Bar
Mill.
7 After including $38 million towards certain one-time items. Refer to the
section below.
45
Other operating expenses during the year were $62 million as against
$75 million in the previous year. (Reference is made to the Section on One-Time
Items).
Financing Costs:
Net interest expense (interest expenses less interest income) was $203
million in 2002 compared to $228 million in 2001. The decrease in interest
expense was primarily due to the following reasons:
(i) Interest expense in the fourth quarter of 2001 was higher due to
inclusion of non-cash expenses of $15 million in accordance with SFAS
No. 133, from marking to market value, in an interest hedge contract,
(ii) Savings in interest cost on floating rate debt due to a fall in LIBOR,
and
(iii) Reduction of debt.
This decrease was offset in part by debt restructuring costs at Ispat
Mexicana.
Impact of Exchange Rate Movements:
The Company uses U.S. Dollars as its reporting currency and has major
steel manufacturing operations in six countries, including the United States of
America. Movements in the exchange rates of the currencies of the countries in
which it has operations versus the U.S. Dollar could normally be expected to
have an impact on the earnings of the Company. Such exchange rate movements,
however, affect both revenues and costs. At the Company's Canadian, European and
Trinidadian subsidiaries the net impact of exchange rate movements is not
significant. At the Mexican subsidiary, exchange rate movements have an impact
on earnings arising from (a) translation of certain Peso denominated
liabilities, primarily deferred tax, (b) the impact on local currency cost items
and (c) tax credits or expense arising from translation of the U.S. denominated
monetary liabilities. In 2002, there was a gain from foreign exchange of $23
million and a Deferred Tax Credit of $56 million.
One time items (Expense) Income:
The Company recorded the following one-time items ($ Million):
Item Description 2002 2001 Included in
Slab reheating furnace start-up costs (28) Cost of sales
Workforce restructuring provision (18) Cost of sales
Credit for settlement of lawsuit 8 Cost of sales
Write down in value of e-commerce software (17) Other operating expenses
Impairment loss on ocean-going vessels (22) Other operating expenses
Provision for arbitration related to scrap supply contract (19) Other operating expenses
Irish Ispat Closure (17) Other operating expenses
Write-off of investments in e-commerce activities (19) Other income / (expense)
Write-down of 2A Bloomer and 21" Bar Mill (23) Other operating expenses
Write-down in investments of Empire Mine (39) Other operating expenses
Gain on sale of assets by pipe making subsidiary in Mexico 7 Other income / (expense)
During 2002, the Company recognized impairment of its idled 2A Bloomer
and 21" Bar Mill at Ispat Inland, resulting in an asset write-off of $23
million. In the case of the 2A Bloomer, Ispat Inland conducted a FAS 144
impairment test based on the comparative costs of the two alternatives of (a)
using the Bloomer to produce billets and purchase additional slabs and (b) idle
the Bloomer and purchase billets instead. It was determined following the above
comparative evaluation and based on current and expected market conditions for
semi-finished steel, that it would not be economical to operate the 2A Bloomer.
In the case of the 21" Bar Mill, Ispat Inland took into account the
fact that, arising from recent developments in the market, its competitive
position has been adversely affected. Ispat Inland determined, considering this
and other factors, that the continued operation of the 21" Bar Mill will not
generate positive long-term cash flow.
46
Ispat Inland also recognized the write-off of its investment in the
Empire Mine. The amount of the write-off was $39 million. The write off was
based on the determination, following a FAS 144 impairment test, which was
performed taking into account the negative and deteriorating financial
performance over the last two years as well as the terms of the recently
concluded sale of part of its interest in the Mine, that its investment in the
Mine was impaired and the fair value of the investment was $1.
Ispat Mexicana recorded a gain of $7 million, representing its share of
the profit arising from the sale of assets of its 51% owned pipe making
subsidiary.
During 2002, the U.S. Operating Subsidiary purchased $39 million bonds
at discounts from face value. As a result of these early redemptions, the U.S.
Operating Subsidiary recognized an extraordinary gain of $30 million. This gain
after tax was $19 million.
Income Tax
The Company recorded a current tax expense of $18 million ($8 million
in 2001) in 2002 primarily due to inclusion of certain tax payments at Imexsa
arising as a result of the 1999 Tax Reforms of the Mexican Tax Code's
Consolidation Regime.
There was deferred tax benefit of $72 million in 2002 (benefit of $114
million in 2001). The deferred tax benefit was primarily due to the exchange
loss on the U.S. Dollar denominated net monetary liabilities arising from
depreciation of the currency during the year in Mexico as well as losses at
Ispat Inland due to non-cash write down as discussed above.
Net Income
There was a net income of $49 million in 2002 compared to a net loss of
$312 million in 2001 due to the reasons discussed before. The 2002 net income
included an extraordinary gain of $19 million after tax arising out of
repurchase of debt at a discount at Ispat Inland as mentioned before.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash generated from
its operations and various working capital credit lines at its operating
subsidiaries.
In 2002, the Company generated $168 million of cash from its operating
activities as compared with $40 million during 2001. Since volumes of operations
and sales were higher than the last year, particularly in the fourth quarter,
inventory levels were higher, but net working capital (defined as Accounts
Receivable Plus Inventories Plus Other Current Assets Minus Trade Accounts
Payable Minus Accrued Expenses) was maintained at approximately the same level
as last year.
Capital expenditure during 2002 was $108 million compared to $97
million in 2001. Capital expenditure during the year included partial reline of
Blast Furnace #5 at Ispat Inland at a cost of approximately $17 million. The
Company also incurred $13 million for the preparatory work for reline of Blast
Furnace #7 and completion of a Bar Mill upgrade (Kocks Block) at Ispat Unimetal
at a cost of $4 million.
At December 31, 2002 the Company's cash and cash equivalents were $77
million ($85 million at December 31, 2001). In addition, the Company's operating
subsidiaries had available borrowing capacity under their various credit lines,
including receivable factoring and securitization facilities, of $308 million
($354 million at December 31, 2001). The following table gives the details of
working capital credit facilities at various units:
47
Subsidiary Limit Utilization Availability (8)
----- ----------- ----------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Ispat Inland 294 305 234 202 60 103
Ispat Sidbec 111 105 13 13 98 92
Caribbean Ispat 57 81 57 81 - -
Ispat Europe 66 87 41 31 25 56
Off Balance Sheet Facilities (Refer to Note 19 to the Consolidated Financial
Statements)
In addition to the credit facilities listed above, certain of the
Company's European subsidiaries were parties to receivables factoring and
securitization facilities as per the following details:
($Millions)
Subsidiary Limit Utilization Availability (8)
----- ----------- ----------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Ispat Europe Receivables 257 213 132 110 125 103
(factoring and securitization)
Debt (Refer to Note 8 to the Consolidated Financial Statements)
The Company's total external debt - both long and short term, was
$2,284 million. The corresponding amount as at December 31, 2001 was $2,379
million. The following table gives significant details:
Long-Term Debt Payable to Current portion of
-------------- ---------- ------------------
Subsidiary ('LTD') Bank LTD Total Debt
- ---------- ------- ---- --- ----------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Ispat Inland 1,086 1,093 9 23 7 7 1,102 1,123
Ispat Mexicana 428 377 - - 15 124 443 501
Ispat Sidbec 236 295 13 13 54 18 303 326
Caribbean Ispat 106 135 57 81 29 26 192 242
Ispat Europe9 131 120 41 31 4 - 176 151
Most of the debt is secured by liens on specified assets of the
relevant subsidiary and carry interest rates at varying levels based on a
combination of fixed and variable interest rates. The details are given in Note
8 to the Consolidated Financial Statements. Most of the loan agreements require
our subsidiaries to comply with certain financial and other covenants. At
December 31, 2002, all our subsidiaries were in compliance with all such
covenants.
Approximately $1.6 billion of the above debt is guaranteed by Ispat
International.
The Company has been able to decrease its total debt at all its
operating subsidiaries. At Ispat Europe Group, although Long-Term Debt was
reduced during the year by (euro)10 million, the translation effect arising from
the strengthening of Euro against the U.S. Dollar by 19% caused the Long-Term
Debt in the U.S. Dollar to increase by $11 million.
- --------
8 Corresponding exercisable limits are lower, which are based on the level of
inventory/receivable.
9 Debt at Ispat Europe has gone up primarily because of the appreciation of
Euro.
48
Debt repayments during the year were $105 million.
The Company has scheduled amortizations of debt in the year 2003 of
$125 million. The Company plans to accelerate debt reduction by using all
surplus cash generated towards debt repayment.
The Company expects its liquidity to improve in 2003. The improvement
is expected to come mainly from cash generated by operations and working capital
reduction. Overall liquidity in 2003 is expected to be adequate to meet the
needs of the business, to finance capital expenditure (expected to be
approximately $180 million), meet the scheduled amortization of debt
(approximately $125 million) and increase cash balance. As stated earlier, the
Company plans to use all such surplus cash to repay debt.
The main sources of the improvements in cash generated by operations
are higher average selling prices of its products, higher shipments and cost
savings from its ongoing cost reduction program (offset partly by expected
increases in certain key cost items). However, the expected improvements in
liquidity are not entirely dependent on higher prices and cost reductions. If
average selling prices and cost levels were to stay at the same levels as in the
fourth quarter of 2002, the Company's overall liquidity would still be adequate
to take care of working capital needs of the business, capital expenditure as
planned and scheduled amortization of debt. In such an event, the impact will be
only on cash availability to repay debt over and above the scheduled
amortizations.
The major item of capital expenditure for 2003 is the reline of Blast
Furnace #7 at Ispat Inland, at an estimated cost of $85 million (in addition to
$13 million already spent on this project in 2002).
In July 2003, the Letter of Credit for $160 million provided to the
Pension Benefit Guarantee Corporation (`PBGC') by the Company's U.S. subsidiary
will expire. In addition, the guarantee for $50 million provided to PBGC by
Ryerson Tull Inc., will also expire in the same month.
Out of the $308 million undrawn lines available at December 31, 2002,
$57 million at Caribbean Ispat consisted of uncommitted (on demand) lines, while
all the rest consisted of committed lines.
Shareholders' Equity
As a result of changes in the market value of pension assets and key
assumptions used in estimating pension cost and liability, the Company's U.S.
and Canadian subsidiaries recorded additional minimum pension liability. This
adjustment was recorded in Other Comprehensive Income (`OCI') and the amount was
approximately $273 million net of income tax. The Shareholders' Equity reduced
from $338 million at December 31, 2001 to $128 million at December 31, 2002. Out
of the above OCI adjustment of $273 million, Ispat Inland recorded a $251
million Additional Minimum Pension Liability due to the combined effects of
declining equity market performance and a reduction in the discount rate from
7.5% to 7.1%.
Treasury stock movements:
During the year 2002, the Company sold 2,117,781 of its treasury stock
shares to Ispat Inland Pension Fund for a total consideration of $5 million.
Also, the Company bought back 139,200 of its shares from the open market during
the year at an average consideration of $2.25 per share under a share buy-back
program announced by the Company on October 28, 2002.
Outlook for 2003
The Company looks forward to 2003 with optimism. However, the
prevailing uncertainties in the global political and economic environment cannot
be ignored. Any protracted instability caused by military conflict or other
developments could have an adverse effect on the Company, and could
significantly alter the outlook.
The Company expects to benefit from improvements in the prices of its
products, both spot and contract. At the same time, costs are also likely to
increase, coming mainly from increases in the prices of metallics, energy and
transportation. With modest increases in volume and continuing cost reduction
efforts, the Company expects to
49
achieve higher levels of operating and net income. Ispat International will
continue its efforts to realize the strategic advantages of being an integrated
mini-mill in the emerging situation in the metallics markets.
The challenges for 2003 include the successful reline and improvement
of Blast Furnace #7 at Ispat Inland and the need to improve the performance of
Ispat Unimetal. Debt reduction will be a priority area and this objective will
be pursued by improving cash generation and cash management, and by applying all
surplus cash to reduce debt.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Overview and Summary
Ispat International N.V. is one of the world's largest and most global
steel producers, with major steelmaking operations in the United States of
America, Canada, Mexico, Trinidad, Germany and France10. The Company produces a
broad range of coated, cold rolled and hot rolled products, high quality wire
rods and semi-finished flat and long products. In 2001, Ispat International
shipped 14.1 million tons of high quality steel products to customers in about
eighty-five countries, predominantly - over 90% of sales revenue - in
participating countries of NAFTA (North American Free Trade Agreement) and the
European Union.
The steel industry is highly cyclical in nature and 2001 was one of the
worst years in recent history for the industry. The global economic situation
caused sales volumes and prices to go down drastically. Selling prices declined
to record low levels, and stayed at those levels for a longer period of time as
compared to many of the past cyclical troughs. These negative trends were
further exacerbated by significant increases in the cost of key inputs, mainly
energy and iron ore.
Ispat International was severely affected by the above developments.
The Company responded by intensifying its focus on internal improvements. The
Company carried out major cost reduction programs aimed at achieving significant
and sustainable cost savings, as well as working capital reduction and cash
management initiatives which together enabled it to mitigate to some extent the
very considerable adverse impact of the external factors.
Sales volumes and sales11 revenues in 2001 were down by 14% and 16%
respectively compared to 2000. There was an operating loss of $194 million in
2001 as compared to an operating income of $315 million in 2000. The Net Loss
for 2001 was $312 million as against Net Income of $99 million for 2000. EBITDA
was $26 million in 2001 against $515 million in 2000. EBITDA adjusted for
unusual items, as discussed later, was $119 million in 2001 against $522 million
in 2000. The negative impact of lower selling prices, lower sales volume and
increases in uncontrollable costs like energy was approximately $558 million.
The Company achieved approximately $104 million of savings from a focused cost
reduction program and working capital reduction (excluding cash and cash
equivalents) of $238 million.
Results of Operations
Historically, the Company has grown through acquisitions. There were no
material acquisitions in 2000 and 2001, and consequently the results of
operations for 2001 did not benefit from earnings of subsidiaries acquired
during the year or previous year. The Board of the Company has decided that no
significant acquisition activity will be
- --------
10 On June 15, 2001, the Company announced the shutdown of its steel making
operations in Ireland and the calling of a creditors' meeting for the
appointment of a liquidator. Consequently, beginning in the second quarter of
2001, the results of Irish Ispat Limited have not been consolidated.
11 In September 2000, the Financial Accounting Standards Board Emerging Issues
Task Force ("EITF") reached a final consensus on EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." This consensus requires
that all amounts billed to a customer in a sale transaction related to shipping
and handling be classified as revenue. The Company historically netted shipping
charges billed to customers with shipping and handling costs, which were
included in Net Sales in the Consolidated Statements of Operations. With respect
to the classification of costs related to shipping and handling incurred by the
seller, the EITF determined that the classification of such costs is an
accounting policy decision that should be disclosed. The Company adopted the
consensus on EITF Issue No. 00-10 in the fourth quarter of fiscal 2001. As a
result of EITF Issue No. 00-10, the Company has adopted a policy to include
shipping and handling costs in its Cost of Sales; accordingly, the Company
recast all prior periods presented to reflect shipping and handling amounts
billed to customers as Revenues and the corresponding expenses as Cost of Sales.
50
pursued until the Company's operating results return to healthy levels,
stressing the importance of focusing exclusively on improving operational
performance and cash flow in the current situation.
Revenue
The Company's operating results are driven by sales volume, product
mix, selling price and cost. Earnings are particularly sensitive to changes in
sales prices, which directly impact earnings, and volume, which affects both
revenue and cost.
Sales declined by 16% from $5,343 million in 2000 to $4,486 million in
2001. These Sales numbers are based on the application of EITF Issue No. 00-10
(issued by the FASB Emerging Issues Task Force ("EITF") in September 2000 and
adopted by the Company this year) and includes all shipping and handling fees
and costs billed to customers. Prior period numbers have been recast to reflect
the same. The application of EITF Issue No. 00-10 does not affect earnings, as
it only involves inclusion of shipping and handling fees and costs in Sales and
Cost of Sales.
The financial statements present numbers inclusive of shipping and
handling fees and costs. However, the Company believes that net sales numbers
based on net realizations from sales transactions more truly reflect sales
performance. The Company uses net sales numbers for managing its business. All
the analyses presented here onwards are based on net sales numbers.
Total steel shipments decreased by 14% to 14.1 million tons in 2001
from 16.4 million tons in 2000. Net Sales decreased during the same period from
$5,097 million to $4,280 million, a decline of 16%. Net Sales of finished
products were adversely affected at the Company's subsidiaries due to general
economic weakness, high levels of steel imports at low prices in our principal
markets (especially in the United States of America and Canada), high inventory
levels at customers' businesses (especially North American service centers) and
the impact of exchange rate movements. All of the Company's subsidiaries
suffered broad sales price erosion. In regional terms, sales price erosion was
more pronounced in North America than in Europe. Although finished product sales
volumes were uniformly lower at all units, there was generally no major loss of
market share. Slab sales at Ispat Mexicana were severely affected, with sales
declining by 43%, as a result of the slump in steel industry; while DRI sales at
Caribbean Ispat increased significantly due to improved plant operations.
The following table gives a summary of key net sales numbers:
Changes in
----------
Net Sales12 Steel Net Sales Price
----------- ----- ---------------
2001 2000 Net Sales Shipments Steel
---- ---- --------- --------- -----
Subsidiary $ Million $ Million % % %
--------- --------- -- -- --
Ispat Inland.............................................. 2,008 2,305 (13) (4) (9)
Ispat Mexicana............................................ 470 827 (43) (33) (17)
Ispat Sidbec.............................................. 463 592 (22) (14) (9)
Caribbean Ispat13......................................... 285 233 22 1 (6)
Ispat Germany............................................. 619 663 (7) (4) (2)
Ispat Unimetal Group...................................... 508 534 (5) (4) (1)
Costs
In spite of the Company's ongoing cost reduction efforts, per unit
costs were higher in 2001 than in 2000. This increase was mainly due to lower
level of operations resulting from lower shipments, as well as significant
increases ($108 million) in certain uncontrollable cost elements, mainly natural
gas and iron ore. The Company planned and implemented a focused, organization
wide cost reduction program, and achieved savings of approximately $104 million
covering a wide spectrum of cost elements, including manpower rationalization,
operational efficiency,
- --------
12 Net Sales numbers above exclude unusual items and are standalone numbers for
certain operating subsidiaries.
13 Net Sales at Caribbean Ispat increased primarily due to increased DRI
shipments.
51
purchasing and administrative costs. In addition, the Company also worked to
control its metallics costs by (a) managing the sourcing of DRI to reduce the
impact of the steep increase in natural gas prices, (b) where possible, using
more scrap to take advantage of the lower scrap prices, and (c) alternative
sourcing of blooms and billets in some subsidiaries. However, these efforts,
though effective, only partly mitigated the increase in costs.
Selling, general and administrative expenses ("SG&A") were lower by
nearly 14% compared to the previous year, mainly due to focused cost reduction
program. This is in spite of a write off of approximately $6 million for
doubtful receivables at the Canadian subsidiary. Also, the SG&A figure includes
the cost associated with the Accounts Receivable Purchase ("Receivable
Securitization") facility at Ispat Germany and at Ispat Unimetal Group. This
cost, which would be included as part of interest expense if the facility had
been a conventional working capital credit facility, was approximately $4
million in 2001 ($3 million in 2000).
Depreciation was higher because of the inclusion of $39 million of
certain unusual items viz. (a) write-down in value of e-Commerce software by $17
million and (b) an impairment charge with respect to certain ocean going vessels
of $22 million.
The Company's Consolidated Statement of Income for 2001 includes
certain unusual items. The following is a summary of these items, along with a
description of the item, the related amount and the line item in the Statement
of Income where it is included.
Amount
Item ($ Millions) Included in:
- --- ------------ ------------
Cost Items
Irish Ispat closure.................................................... 17 Other operating expenses
Provision for arbitration award relating to a scrap supply contract.... 19 Other operating expenses
Write-down in value of e-Commerce software............................. 17 Depreciation
Impairment loss on ocean going vessels................................. 22 Depreciation
Slab Reheating Furnace start-up costs.................................. 28 Cost of Sales
Write-off of investments in e-Commerce activities...................... 19 Other Income/Expenses
Workforce restructuring Provision...................................... 18 Cost of Sales
Revenue Item
Credit for settlement of lawsuit....................................... 8 Cost of Sales
Corresponding numbers for unusual items included in the 2000 financial
statements were:
Amount
Item ($ Millions) Included in:
- --- ------------ ------------
Cost Items
Settlement of lawsuit with State of Louisiana.......................... 15 Cost of Sales
Workforce restructuring Provision...................................... 4 Cost of Sales
Revenue Item
Profit on sale of assets............................................... 12 Other Income/Expenses
Gross Profit and Operating Income
The Company experienced a significant decline in both Gross Profit and
Operating Income in 2001 as compared to 2000 due to the reasons outlined above.
Gross Profit decreased by 68% from $673 million in 2000 to $213 million in 2001.
Operating Income declined from $315 million in 2000 to an Operating Loss of $194
million in 2001. Excluding the impact of the unusual items described above,
operating loss for 2001 was $81 million.
The Gross Profit Margin (Gross Profit as a % of Net Sales) declined
from 13.2% in 2000 to 5.0% in 2001. Operating Margin (Operating Profit as a % of
Net Sales) in 2000 was 6.2% as against an Operating Loss in 2001.
52
The comparative numbers of Gross Profit Margin14 and Operating
Margin14 at the Company's operating subsidiaries were as follows:
Gross Profit Operating
Margin (%) Margin (%)
---------- ----------
Subsidiary 2001 2000 2001 2000
- ---------- ---- ---- ---- ----
Ispat Inland........................ 0.5 8.4 Negative 2.3
Ispat Mexicana...................... 3.6 22.1 Negative 17.5
Ispat Sidbec........................ 9.0 17.0 1.1 12.2
Caribbean Ispat..................... 4.7 9.8 Negative 0.0
Ispat Germany....................... 11.5 14.7 5.1 8.0
Ispat Unimetal Group................ 10.6 12.6 2.9 4.6
Financing Costs
Net interest expense (interest expense less interest income) was $228
million in 2001 compared to $216 million in 2000. The Company's net interest
expense went up even though the level of total borrowing went down during the
year. This was due largely to an increase in the average cost of borrowing. The
main reasons for the increase in average borrowing costs were:
(a) In February 2001, Ispat Europe issued Euro 150 million of
Senior Secured Notes, due 1st February 2011 at a coupon of 11.875%,
which was higher than the Company's average cost of all other
borrowings at the time,
(b) Inclusion of non cash expenses of $15 million in accordance
with SFAS No. 133, from marking to market value, in an interest hedge
contract, and
(c) There was an increase in spread on certain Floating Rate
debt, mainly at Ispat Inland and Ispat Sidbec, as part of amendments
made to the loan agreements.
The increase in average borrowing costs were partly offset by the
savings in interest cost on floating rate debt due to a fall in LIBOR and a
reduction of debt.
In addition, loss from foreign exchange was $9 million in 2001 compared
to $Nil in 2000.
The Company has entered into receivable securitization arrangements in
Ispat Germany and Ispat Unimetal Group, and the corresponding costs associated
with these facilities, of $3 million in 2000 and $4 million in 2001, are
included in Selling, general and administrative expenses.
Income Tax
The Company recorded a current tax expense of $8 million in 2001 ($20
million in 2000) and recorded a deferred tax benefit of $114 million in 2001
(expense of $3 million in 2000). The deferred tax benefit was mainly at the
Company's U.S., Canadian and Mexican subsidiaries and relates mainly to tax loss
carry forward. Based on the Company's assessment, it is more likely than not
that these subsidiaries will earn sufficient taxable income in the future to
fully utilize the tax loss carry forward. At Caribbean Ispat, on the other hand,
the Company took a valuation allowance of $11 million, thereby fully reserving
for the deferred tax asset at that subsidiary.
Net Income
The Company incurred a Net Loss of $312 million in 2001 compared to a
Net Income of $99 million in 2000 due to the reasons discussed above.
- --------
14 Margins above exclude unusual items and are standalone numbers for certain
operating subsidiaries.
53
Liquidity and Cash Flow
The Company's principal sources of liquidity are cash generated from
its operations and various working capital credit lines at its subsidiaries. As
discussed above, 2001 was an extremely difficult year for the steel industry,
but the Company took various steps to aggressively control costs, reduce working
capital, sell non core assets, minimize capital expenditure and manage cash.
Working capital was reduced by $238 million without compromising customer
service levels. Certain non core assets were sold, including aircraft for $21
million. Capital expenditure was reduced by 47% from $184 million in 2000 to $97
million in 2001. As a result of these measures, although the Company suffered a
Net Loss of $312 million, the impact on net cash was minimized to a large
extent.
The Company funded $109 million in Ispat Inland pension plan, $61
million of which represents a pre-payment of the entire 2002 obligation and a
portion of 2003 obligation.
During the year, total debt (excluding Ispat Europe bonds) was reduced
by $254 million, mainly through making scheduled repayments on various loans.
New borrowings completed during 2001 included the Ispat Europe Bond issue of
Euro 150 million Senior Secured Notes maturing on 1st February 2011 with a
coupon of 11.875%.
The Company's cash position at the end of 2001 was tight, with cash and
cash equivalents of $85 million available, primarily at the operating
subsidiaries, as compared to $292 million at the end of 2000.
The Company had available $251 million under various credit lines at
the end of 2001. This compares with an availability of $318 million at the end
of 2000. The utilization of, and availability under these credit lines at each
subsidiary were as follows:
Subsidiary Limit15 Utilization Availability15
------- ----------- --------------
($ Millions) 2001 2000 2001 2000 2001 2000
- ------------ ---- ---- ---- ---- ---- ----
Ispat Inland..................................... 320 335 217 202 103 133
Ispat Sidbec..................................... 105 108 13 23 92 85
Caribbean Ispat.................................. 81 90 81 73 0 17
Ispat Germany.................................... 48 131 10 52 38 79
Ispat Unimetal Group............................. 39 10 21 10 18 0
Others........................................... -- 15 -- 11 -- 4
TOTAL............................................ 593 689 342 371 251 318
In addition, both Ispat Germany and Ispat Unimetal Group are parties to
Receivable Securitization arrangements (sometimes referred to as "off Balance
Sheet financing") under which they had combined availability of $103 million as
at the end of 2001 as per the following details:
Subsidiary Limit15 Utilization Availability15
------- ----------- --------------
($ Millions) 2001 2000 2001 2000 2001 2000
- ------------ ---- ---- ---- ---- ---- ----
Ispat Germany--Receivable........................ 119 -- 41 -- 78 --
Ispat Unimetal Group--Receivable................. 94 100 69 66 25 34
TOTAL............................................ 213 100 110 66 103 34
All of the Company's subsidiaries met all of their debt service
obligations (scheduled principal and interest payments) in 2001 and complied
with all the covenants under the various loan agreements, after obtaining
appropriate waivers in certain cases. The Company initiated discussions with
lenders of the relevant subsidiaries as early as the fourth quarter of 2001 to
obtain certain amendments, waivers or rescheduling of payments. The Company has
already received or has reached agreement in principle regarding several
amendments and waivers. With these amendments, waivers and rescheduling
agreements in place and with the anticipated improvements in the steel market
situation, the
- --------
15 Corresponding exercisable/available limits are lower, which are based on the
level of inventory/receivable.
54
Company believes that it will be able to continue to meet its debt related
obligations in the future, as well as return to an improved financial position.
The Company has placed a very high priority on improving its liquidity,
reducing debt and strengthening its Balance Sheet. It will continue to focus
aggressively, as in the past, on these areas.
Balance Sheet
Debt
The Company's total debt, both short and long term, was $2,379 million
as at December 31, 2001. The corresponding figure at the end of 2000 was $2,515
million. Most of this debt is at the Company's operating subsidiaries and is
secured or will be secured following the conclusion of the debt restructuring of
Ispat Mexicana, by a lien or mortgage on their tangible assets. Some of this
debt is also guaranteed by the parent company (see below). These numbers do not
include: (a) amounts drawn under receivable securitization facilities at Ispat
Germany and Ispat Unimetal Group, of $103 million at 2001 end and $66 million at
2000 end (details given in the section dealing with Liquidity and Cash Flow,
above) and (b) a standby Letter of Credit in the amount of $160 million provided
to the Pension Benefit Guaranty Corporation ("PBGC") for which the Company's
United States of America subsidiary is the Account Party. This Letter of Credit
is renewable annually and terminates in July 2003, unless otherwise extended.
The parent company Ispat International has guaranteed some of the debt
of its subsidiaries. At December 31, 2001, the total amount of debt guaranteed
by the parent company was $1.6 billion (2000: $1.6 billion).
Shareholders' Equity
As a result of changes in certain key assumptions used in estimating
pension cost and liability, the Company's U.S. and Canadian subsidiaries
recorded additional minimum pension liability (SFAS 87). This adjustment was
recorded in Other Comprehensive Income and the amount was approximately $333
million, or approximately $213 million net of income tax. This had the effect of
reducing the amount of Shareholders' Equity in the Balance Sheet. Together with
the Net Loss for the year of $312 million and certain other routine (and
non-material) charges to Other Comprehensive Income, the Shareholders' Equity
declined from $884 million at December 31, 2000 to $338 million at December 31,
2001.
B. Liquidity and Capital Resources
We are a holding company with no operations of our own and,
consequently, we are dependent on dividends and other payments from our
operating subsidiaries for all of our cash needs. Our operating subsidiaries are
subject to certain restrictions under the terms of their debt agreements and are
subject to statutory limitations in their respective jurisdictions, which limit
their ability to pay dividends. While we have received from our controlling
shareholder certain prepayment of fees in 2002, none of our affiliates or our
controlling shareholder is obliged to provide us with additional financing or
capital contributions in the future. In connection with certain debt or
obligations of some of our operating subsidiaries, we have entered into
guarantee agreements in favor of the holders of such indebtedness.
At December 31, 2002, we had secured and unsecured bank lines and other
working capital facilities totaling the equivalent of $545 million. At December
31, 2002, we had a total of $362 million in borrowings outstanding under these
bank lines and working capital facilities. Exercisable limits are lower in
certain cases and dependent on movement of Inventory and Receivables.
Net cash provided by operating activities was $168 million for the year
ended December 31, 2002, primarily as a result of Net Loss from operating
activities, offset in part by an improvement in working capital management. Net
cash provided by operating activities was $40 million for the year ended
December 31, 2001.
Net cash used in financing activities was $101 million for the year
ended December 31, 2002, which primarily consisted of payments of long-term
debt. Net cash used in financing activities was $123 million for the year ended
December 31, 2001.
55
Net cash used in investing activities was $80 million for the year
ended December 31, 2002, principally due to capital expenditures of our
operating subsidiaries. Net cash used in investing activities was $48 million
for the year ended December 31, 2001.
Our aggregate capital expenditures were $108 million and $97 million
during 2002 and 2001, respectively. Our capital expenditures for 2003 are
estimated to be approximately $180 million, which primarily includes
expenditures for the reline of Blast Furnace #7 at Ispat Inland and other normal
maintenance capital expenditures. In addition, we expect that our scheduled debt
repayment for 2003 will be approximately $125 million.
The primary sources of liquidity for the operating subsidiaries are
cash provided from operating activities and external borrowings. We believe that
we will have sufficient liquidity to meet our capital expenditures, debt service
and operating requirements for the foreseeable future. The main sources of the
improvements in cash generated by operations are higher average selling prices
of its products, higher shipments and cost savings from its ongoing cost
reduction program (offset partly by expected increases in certain key cost
items). However, the expected improvements in liquidity are not entirely
dependent on higher prices and cost reductions. If average selling prices and
cost levels were to stay at the same levels as in the fourth quarter of 2002,
the Company's overall liquidity would still be adequate to take care of working
capital needs of the business, capital expenditure as planned and scheduled
amortization of debt. In such an event, the impact will be only on cash
availability to repay debt over and above the scheduled amortizations.
C. Research and Development, Patents and Licenses, etc.
Research and development costs are not significant and are expensed as
incurred.
D. Trend Information
The Company looks forward to 2003 with optimism. However, the
prevailing uncertainties in the global political and economic environment cannot
be ignored. Any protracted instability caused by military conflict or other
developments could have an adverse effect on the Company, and could
significantly alter the outlook.
The Company expects to benefit from improvements in the prices of its
products, both spot and contract. At the same time, costs are also likely to
increase, coming mainly from increases in the prices of metallics, energy and
transportation. With modest increases in volume and continuing cost reduction
efforts, the Company expects to achieve higher levels of operating and net
income. Ispat International will continue its efforts to realize the strategic
advantages of being an integrated mini-mill in the emerging situation in the
metallics markets.
The challenges for 2003 include the successful reline and improvement
of Blast Furnace #7 at Ispat Inland and the need to improve the performance of
Ispat Unimetal. Debt reduction will be a priority area and this objective will
be pursued by improving cash generation and cash management, and by applying all
surplus cash to reduce debt.
56
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Management of our business is vested in the Board of Managing Directors
(the "Board of Directors") of Ispat International. Mr. Lakshmi N. Mittal is
Chairman of the Board of Directors and Chief Executive Officer ("CEO") of Ispat
International. In establishing our strategic direction and corporate policies,
Mr. Mittal is supported by members of Ispat International's executive management
team with substantial professional and worldwide steel industry experience.
It is our intention, and our controlling shareholder has confirmed to
us that he intends, to maintain on the Board of Directors at all times at least
two directors who are not and have not been officers or employees of any of
Ispat International's subsidiaries or affiliates.
We continue to have a strong emphasis on corporate governance. Ispat
International has five external directors on its Board. The companies Audit
Committee also comprises of three independent members.
Current members of our Board of Directors are set forth below:
Name Age Position within Ispat International
Lakshmi N. Mittal................... 52 Chairman of the Board of Managing Directors and Chief
Executive Officer
Aditya Mittal....................... 27 Member of the Board of Managing Directors and Director
Finance and Head of Mergers and Acquisitions
Malay Mukherjee..................... 55 Member of the Board of Managing Directors, President and
Chief Operating Officer
Peter D. Southwick.................. 50 Member of the Board of Managing Directors and President
and Chief Operating Officer of Ispat Inland Inc.
Narayanan Vaghul.................... 66 Member of the Board of Managing Directors
Ambassador Andres Rozental.......... 57 Member of the Board of Managing Directors
Fernando Ruiz Sahagon............... 59 Member of the Board of Managing Directors
Muni Krishna T Reddy................ 57 Member of the Board of Managing Directors
Rene Lopez.......................... 58 Member of the Board of Managing Directors
Board of Directors
LAKSHMI N. MITTAL Chairman of the Board of Directors and Chief Executive Officer
Mr. Lakshmi N. Mittal is the Chairman of the Board of Directors and
Chief Executive Officer of Ispat International. He has approximately 31 years of
experience in steel and related industries. He is the founder of Ispat
International and has been responsible for the strategic direction and
development of the Company's business. Mr. Lakshmi N. Mittal is also the
Chairman of LNM Holdings N.V. and main steel making subsidiaries. He is also a
non-executive director of Iscor Limited, a member of the Executive Committee of
the International Iron and Steel Institute and a director of ICICI Bank Limited.
He is also trustee in a number of Charitable Trusts. Mr. Lakshmi N. Mittal was
named Steel Maker of the Year in 1996 by New Steel, a leading industry
publication. Mr. Lakshmi N. Mittal was also awarded the 8th honorary Willy Korf
Steel Vision Award, the highest recognition for worldwide achievement in the
steel industry. The award was presented by American Metal Market and World Steel
Dynamics.
ADITYA MITTAL Member of the Board of Directors and Director Finance and Mergers
and Acquisitions
Mr. Aditya Mittal joined Ispat International in January 1997, where he
is now Director Finance for Ispat International. Mr. Aditya Mittal managed Ispat
International's IPO in 1997, and was instrumental in its acquisition efforts
including Ispat Inland and Ispat Unimetal. He is also Vice-Chairman of LNM
Holdings N.V. where he has been responsible for all its Mergers and Acquisitions
(M&A) activities, and serves on the board of Iscor Limited. Prior to this, in
July 1996, Mr. Aditya Mittal worked at Credit Suisse First Boston, in M&A. He
holds a Bachelor's Degree of Science in Economics from the Wharton School in
Pennsylvania with concentrations in Strategic
57
Management and Corporate Finance, from where he graduated magna cum laude. He is
the son of Mr. Lakshmi N. Mittal.
MALAY MUKHERJEE Member of the Board of Directors and President and Chief
Operating Officer
Mr. Mukherjee is the President and Chief Operating Officer of Ispat
International and has over 30 years of experience in a range of technical,
commercial and managerial roles in the steel industry. Mr. Mukherjee has held
various senior management positions within the Company, including Managing
Director of Ispat Mexicana S.A. de C.V. and Managing Director of Ispat Karmet
JSC ("Ispat Karmet"), a Group affiliate, President and CEO of Ispat Europe SA,
Luxembourg.
PETER D. SOUTHWICK Member of the Board of Directors and President and Chief
Operating Officer of Ispat Inland Inc.
Dr. Southwick is the President and Chief Operating Officer of Ispat
Inland. Dr. Southwick has over 22 years of experience in the steel industry, and
he joined Inland Steel in 1980. Prior to his recent position, Dr. Southwick has
held various senior positions at Ispat Inland including Executive Vice
President, Operations and Vice President, Operations - Flat Products. Dr.
Southwick has published numerous technical papers and a book titled "Accelerated
Cooling of Steels". In 2003, he is serving as the Vice Chairman of American Iron
and Steel Institute. He is member of the Iron and Steel Society, the American
Society for Quality and the Institute of Materials.
NARAYANAN VAGHUL Member of the Board of Directors
Mr. Vaghul has 47 years of experience in the financial sector and has
been the Chairman of Industrial Credit and Investment Corporation of India
Limited / I.C.I.C.I Bank for the past 18 years. Prior to this, he was Chairman
of the Bank of India and Executive Director of the Central Bank of India. He was
chosen as the Businessman of the Year in 1992 by Business India, a leading
Indian publication, and has served as a consultant to the World Bank, the
International Finance Corporation and the Asian Development Bank. Mr. Vaghul was
also the visiting Professor of the Stern Business School in the New York
University. Mr. Vaghul is Chairman of the Indian Institute of Finance Management
& Research and is also board member of various other companies, including Wipro
Limited, Mahindra & Mahindra, Nicholas Piramal India Limited, Samtel Color and
Apollo Hospitals.
AMBASSADOR ANDRES ROZENTAL Member of the Board of Directors
Ambassador Andres Rozental has a long and distinguished career in the
Mexican Diplomatic Service. Over the past 34 years, he has held various senior
government and diplomatic posts including Ambassador of Mexico to United
Kingdom, Ambassador of Mexico to the Kingdom of Sweden, Ambassador, Permanent
Representative to the United Nations in Geneva, as well as Deputy Foreign
Minister of Mexico. From December 2000 to January 2002, he was
Ambassador-at-Large and Special Presidential Envoy for President Vicente Fox of
Mexico. Ambassador Rozental has received several awards, including the Grand
Cross of the Polar Star (Sweden) and the Grand Cross of the Civil Merit Order
(Spain). He is also an officer of the National Order of Merit (France).
Ambassador Rozental is currently a member of the Board of Directors of Deutsche
Latin American Companies Trust, Grupo Industrial Omega, Aeroplazas de Mexico and
Fumisa. He is Chairman of the Board of Latinoamericana de Duty Free and the
President of his own consulting firm, Rozental & Asociados in Mexico City.
FERNANDO RUIZ SAHAGON Member of the Board of Directors
Mr. Ruiz has approximately 30 years of experience in the field of
accounting, finance and tax and is currently a partner at Chevez, Ruiz,
Zamarripa y Cia., S.C., a leading tax consulting firm in Mexico. Mr. Ruiz is a
member of several professional associations, including the Instituto Mexicano de
Ejecutivos de Finanzas, Colegio de Contadores Publicos de Mexico, Instituto de
Contadores Publicos and Academia de Estudios Fiscales de la Contaduria Publica.
He is the President of the Business Coordinator Counsel's Tax Committee (CCE)
and a board member of various companies including Kimberly Clark de Mexico, S.A.
de C.V., Accel, S.A. de C.V., Afore Siglo XXI, S.A. de C.V., Corporacion San
Luis, S.A. de C.V., Grupo Palacio de Hierro, S.A. de C.V., Grupo Camesa, S.A. de
C.V., Basf Mexicana, S.A. de C.V. (a subsidiary of Basf, A.G.), Bacardi, S.A. de
C.V. (a subsidiary of Bacardi International, Ltd.).
58
MUNI KRISHNA T. REDDY Member of the Board of Directors
Mr. Muni Krishna T. Reddy has over 33 years of experience in financial
services and he is presently the Group Chief Executive of State Bank of
Mauritius Ltd (SBM Group). He holds the following directorships: Chairman of the
Board of SBM Nedbank International Ltd.; Director on the boards of Air Mauritius
Ltd; British American (Holdings) Ltd, Nassau; British American Insurance Company
of the Bahamas Ltd; British American International Corporation Ltd; British
American (UK) Limited; Fidelity Bank & Trust International Ltd, Nassau; India
Growth Fund Inc, New York (USA); Intercommercial Bank Ltd, Trinidad;
Intercommercial Trust & Merchant Bank Ltd; Mauritius Telecom Ltd; Overseas
Telecommunications Services Ltd; South Asia Regional Fund Ltd; Member of Board
of Governors, International Institute for Insurance and Finance. Prior to taking
over as Chief Executive Officer of SBM Group in 1987, Mr. Reddy worked in
Singapore and India. Mr. Reddy was conferred in 1993 with the title "Grand
Officer of the Order of the Star and Key of the Indian Ocean" (GOSK), by the
Government of the Republic of Mauritius for distinguished services in Banking.
RENE LOPEZ Member of the Board of Directors
Mr. Lopez has approximately 36 years of experience in international
finance, manufacturing and marketing with multinational corporations including
Alcatel-Alsthom and GEC Alsthom, where he has worked since 1966. He was
President and General Manager of Alcatel-Alsthom and GEC Alsthom Canada.
Currently, Mr. Lopez is owner and President of Gesterel Inc. in Canada, a
Consultancy Services boutique specializing in Merger and Acquisitions, Finance
and technology transfer management
Executive Officers
The current executive officers of Ispat International are set forth
below:
BHIKAM AGARWAL, Chief Financial Officer
Mr. Agarwal is the Chief Financial Officer of Ispat International and
has over 27 years of experience in steel and related industries. He has held
various senior executive positions within the Company since its first
acquisition in 1989. He has been responsible for the financial strategy of the
Company and has been chief coordinator of its prior activities in the capital
markets, two of which received "deal of the year" awards from International
Financing Review, a leading global financial publication. Mr. Agarwal has also
led the finance and accounting functions of the company and it's Knowledge
Integration Program across all the operating subsidiaries, since the Program's
inception.
JOSEPH ALVARADO, Director, Marketing, Long Products
Mr. Alvarado is Director, Marketing, Long Products of Ispat North
America. Mr. Alvarado joined Inland Steel in 1976 and rose through a variety of
finance, sales and operating positions before leaving in 1997 as President of
Inland Steel's Long Product Division. He joined Ispat North America after
serving as Vice President, Commercial for Birmingham Steel Co. Mr. Alvarado
holds a B.A. in economics from Notre Dame University and an MBA from Cornell
University.
ASHOK ARANHA, Director, Materials
Mr. Aranha joined the Company in 1991 and was responsible for the
development and implementation of the Company's purchasing strategy and the
implementation of most global purchases for the Company. He has over 33 years of
experience in material and procurement management. Mr. Aranha was the head of
materials at Ispat Hamburger Stahlwerke GmbH prior to this position. He holds an
MBA from XLRI, Jamshedpur, India.
VIJAY K. BHATNAGAR, Managing Director, Ispat Mexicana
Mr. Bhatnagar is the Managing Director of Ispat Mexicana since October
2002 with over 33 years of experience in aluminum and electronics industries. He
is a metallurgical engineer by qualification and worked in
59
various line and staff positions at INDAL (erstwhile ALCAN subsidiary) in India
for over 30 years. He later became the Joint Managing Director and then the
Managing Director of AT&S Indian operations (a subsidiary of AT&S AG Austria)
and worked in these positions from 1999 until 2002.
ARVIND CHOPRA, Director of Internal Assurance
Mr. Chopra joined the Company in April 2000 and is responsible for the
facilitation of management's performance of risk assessments and for the
evaluation of internal controls. He is also in charge of the independent
internal auditing function. Formerly a Partner with KPMG, Mr. Chopra has over 17
years of experience in internal auditing, risk management, internal control
evaluations and corporate governance related matters. He has also held positions
at Arthur Andersen, Nestle and Price Waterhouse. Mr. Chopra is a member of
Institute of Chartered Accountants of India and the Institute of Internal
Auditors.
SIMON EVANS, General Counsel
Mr. Evans joined the Company in September 2001 as General Counsel. He
has over 14 years experience in corporate and commercial law in both industry
and private practice. Formerly, Mr. Evans was European Counsel at Rohm and Haas
Company and prior to that he worked at the law firm Taylor Joynson Garrett,
London. Mr. Evans is a graduate of Oxford University and the College of Law,
Guildford.
DENIS FRASER, Executive Vice-President and Chief Operating Officer of Ispat
Sidbec Inc.
Mr. Fraser joined Ispat Sidbec in February 1999 as Commercial Director,
Wire Rod, and was until April 2002, General Manager of the Wire Rod business
unit. Mr. Fraser holds a bachelor's degree in mechanical engineering from the
Ecole Polytechnique and an MBA in finance and accountancy from McGill
University. In his 18-year career with a major oil company prior to joining
Ispat Sidbec, he held several key positions in operations, sales and marketing.
VIJAY KRISHNA GOYAL, Company Secretary
Mr. Goyal joined the Company in May 1999 and is responsible for the
functions of corporate secretary reporting to the Board. Formerly, an internal
auditor with ITC Limited, India he worked as corporate internal auditor at Ispat
International N.V. and as Head of Internal Audit at Ispat Unimetal. Mr. Goyal
has approximately ten years of experience in corporate finance, auditing and
accounting. He is a member of the Institute of Chartered Accountants of India
and Institute of Cost and Works Accountants of India.
ALAIN GRENAUT, Chief Executive Officer of Ispat Unimetal
Mr. Grenaut is the Chief Executive Officer of Ispat Unimetal. Prior to
this, he was the Corporate Marketing Director of Lucchini Group for 2 years, and
before, Vice-President for Strategy, Research and Development at Ispat Europe.
He has vast experience of long products in the European Steel Industry, having
taken over various functions either in Quality Control, Production and Marketing
for different French and European companies during the last 32 years. He is a
graduate of the French High School of Mines.
AUGUSTINE KOCHUPARAMPIL, Chief Financial Officer, Ispat Europe Group S.A.
Mr. Kochuparampil is the Chief Financial Officer of Ispat Europe Group
S.A. He joined the Company in 1994 and has held various responsible positions in
finance and accounting functions in Europe. He has over 26 years experience in
the financial and related functions in steel industry. Mr. Kochuparampil is a
member of the Institute of Cost and Works Accountants of India and possesses a
degree in Law.
JOHN KURIYAN, Managing Director of Caribbean Ispat
Mr. Kuriyan is the Managing Director of Caribbean Ispat and has over 30
years experience in engineering, manufacturing and general management in the
steel and rubber industry. Prior to joining Caribbean Ispat, he was Director
General of Servicios Siderurgicos Integrados, S.A. de C.V., a subsidiary of
Imexsa. He has also served as
60
Senior Vice President, Manufacturing at Dunlop India Limited and as President
and CEO of Falcon Tyres Limited. He is a graduate of the Indian Institute of
Technology and holds a Bachelor of Technology degree in Mechanical Engineering
and is a Postgraduate from the same institute in Industrial Engineering.
ABDELLATIF LAASRAOUI, Director, Technical and Business Development
Mr. Laasraoui is the Director, Technical and Business Development for
the Company. He has extensive international experience in the steel and aluminum
industries in areas such as corporate strategy, performance improvement,
investment strategy, process technology and related areas. Prior to joining the
Company, Mr. Laasraoui was a Senior Engagement Manager at McKinsey & Company,
based in Chicago, where he has worked since 1993. He has also worked as a
Metallurgical Process Engineer at Hatch Associates, Toronto & Montreal in
Canada.
BERNARD LAUPRETRE, Chief Executive Officer of Trefileurope
Mr. Laupretre was appointed the Chief Executive Officer of
Trefileurope, a wire drawing company and subsidiary of Ispat Unimetal in Europe
in September 2002. He joined the Company in February 1990 and has held various
senior management positions. Mr. Laupretre holds an engineer degree from Arts et
Metiers school (France) and a MBA from ISA (France).
RICHARD LEBLANC, President and Chief Executive Officer of Ispat Sidbec Inc.
Mr. Leblanc is the President and Chief Executive Officer of Ispat
Sidbec and has approximately 34 years of experience in the steel industry. Mr.
Leblanc spent 18 years in various senior management positions at Stelco Inc.
before joining Sidbec in 1987 as Vice-President, Production. He became President
and Chief Executive Officer in 1996. Mr. Leblanc is a Director of the American
Iron and Steel Institute and the Canadian Steel Producers Association.
GREG LUDKOVSKY, Director, Technology
Dr. Ludkovsky is Chief Technology Officer of the Company, as well as
Vice President Research and Development and Chief Technology Officer of Ispat
Inland. Mr. Ludkovsky joined Inland Steel in 1979 and advanced through a number
of positions in steel products research prior to becoming Vice President,
Research and Development of Inland Steel in 1995. Dr. Ludkovsky has a PhD in
Metallurgical Engineering.
GREGOR MUNSTERMANN, Managing Director, Ispat Hamburger Stahlwerke GmbH
Mr. Munstermann has been Managing Director of Ispat Hamburger
Stahlwerke GmbH since March 2001. He has over 15 years experience in the steel
industry. His previous positions include General Manager of the Steel Plant and
the Direct Reduction Plant, Ispat Hamburger Stahlwerke GmbH. Mr. Munstermann
holds a Diploma at University Clausthal-Zellerfeld.
JEAN-PIERRE PICARD, Director, Marketing, Flat Products
Mr. Picard, Director, Marketing, Flat Products is responsible for flat
products marketing strategy ensuring a strong market driven approach in the
development of the Company's business strategy and the delivery of value to the
customers. He is also responsible for Ispat E-Commerce marketing initiatives. He
joined Ispat Sidbec in 1980 as Vice-President of Marketing and Sales. He was
previously Senior Vice-President of British Steel, Canada where he worked for 13
years. Mr. Picard has been active in many steel industry related associations.
THEKKEMEDOM N. RAMASWAMY, Director, Finance
Mr. Ramaswamy is Director, Finance for Ispat International. He is
responsible for corporate finance and financial strategy. He has 33 years
experience covering a wide range of financial management functions and has been
with the Company since 1989, previously holding positions as General Manager,
Finance at Caribbean Ispat (1989 - 1992), Director, Finance at Ispat Mexicana
(1992 - 1994) and CFO at Ispat Sidbec (1994 - 2002). He holds a
61
Bachelor of Commerce Degree from the University of Madras, India, an MBA from
the Indian Institute of Management, Ahmedabad, India and is a Fellow Member of
The Association of Chartered Certified Accountants, UK.
GERHARD RENZ, President and Chief Operating Officer of Ispat Europe Group S.A.
Mr. Renz is the President and Chief Operating Officer of Ispat Europe
and has over 29 years of experience in the steel industry. Mr. Renz formerly
worked as the Managing Director of Ispat Germany. Mr. Renz is a board member of
Verein Deutsche Eisenhuttenleute, Wirtschaftsvereinigung Stahl and the European
Iron and Steel Institute.
MICHAEL G. RIPPEY, Vice President, Finance & Administration, and Chief Financial
Officer, Ispat Inland Inc.
Mr. Rippey joined the Company's finance organization in 1984 and
advanced through positions of increasing responsibility before being named vice
president Finance and CFO Ispat Inland in 1998. His responsibilities also
include purchasing, human resources, legal and union relation functions for the
Company. Mr. Rippey has a bachelor's degree from Indiana University; a master's
degree in banking and finance from Loyola University, Chicago; and an MBA from
the University of Chicago.
STEPHEN C. ROGERS, Vice President, Sales & Marketing, Ispat Inland Inc.
Mr. Rogers is responsible for sales and marketing at of flat products
at Ispat Inland. He was elected to his current position in 2000 after serving as
president of the company's bar-products division. Mr. Rogers joined the Company
in 1977 and advanced through hot-and cold-rolling operations before moving to
sales, then plate products. He has a bachelor's degree from Wabash College,
Crawfordsville, Ind., and an MBA from the University of Chicago. Mr. Rogers is a
member of the board of directors of the Metals Service Center Institute.
BILL SCOTTING, Director, Continuous Improvement
Mr. Scotting joined the Group in September 2002 to lead the Group's
Continuous Improvement activities. Formerly an Associate Principal at McKinsey &
Company, Mr. Scotting has 18 years experience in the steel industry in
technical, operations management and consulting roles. He has also held
positions at BHP Steel, Pioneer Concrete (UK), Mascott Partnership and CRU
International. Mr. Scotting holds a Bachelor of Science (Metallurgy) from the
University of Newcastle in Australia and an MBA (with distinction) from Warwick
Business School in the UK.
GARY L. VAN ASPEREN, Vice President, Manufacturing, Ispat Inland Inc.
Mr. Van Asperen is responsible for all manufacturing and maintenance at
Ispat Inland's Indiana Harbor Works and at its joint ventures with Nippon Steel
Corp., I/N Tek and I/N Kote. Mr. Van Asperen joined the Company in 1963 and has
served in a broad range of responsibilities in metallurgy, technical services,
sales, quality, operating technology and the operation of flat-rolling and
coating mills. He was named president of I/N Tek and I/N Kote in 1998 and vice
president of Ispat Inland in 2001. He has a metallurgical-engineering degree
from the South Dakota School of Mines and an MBA from Indiana University.
OLAF-ROMAN BARON VON ENGELHARDT, Director, Marketing, Ispat Europe
Dr. von Engelhardt is Director, Marketing of Ispat Europe. Dr. Von
Engelhardt joined the Company in 1999 and is responsible for sales and marketing
of products manufactured by its steel-making operations in Europe. He has over
26 years of experience in the steel industry, including Head of Marketing,
Planning, Dispatching and General Services at Arbed Saarstahl GmbH, General
Manager of Saarstahl GmbH, formerly Arbed Saarstahl GmbH, in charge of direct
sales and Managing Director of Vertriebsgesellschaft Saarstahl GmbH, Germany.
VIRAL C. VORA, Director, Shipping
62
Mr. Vora joined the company in 1989. He is responsible for the
implementation of transportation policy and strategy for the company's raw
materials and finished products. He is also responsible for the operation,
chartering and management of the company owned/chartered ships. He has over 28
years of experience in the shipping industry and has worked in the areas of
chartering, operations and insurance. Mr. Vora was formerly General Manager,
Shipping at Caribbean Ispat Limited. Mr. Vora has a degree in statistics and
mathematics.
INDER WALIA, Director, Human Resources
Mr. Walia joined the Company in 2000 and is responsible for the
development and implementation of human resources strategies for the Company. He
has 21 years of experience in human resources positions. He has a post-graduate
degree in Human Resources from Tata Institute of Social Sciences, Mumbai, India.
He is also an active member of various committees. Mr. Walia has held various
positions in human resources at Modi Corp and HCL Hewlett Packard.
BERND WEBERSINKE, Managing Director, Ispat Walzdraht Hochfeld GmbH and Ispat
Stahlwerk Ruhrort GmbH
Mr. Webersinke has been Managing Director of Ispat Walzdracht Hochfeld
GmbH since 1997 and Ispat Stahlwerk Ruhrort GmbH since 1999, and has over 25
years of experience in the steel industry. Prior to his current position, he
worked as General Manager in production and maintenance at Ispat Hamburger
Stahlwerke GmbH. Mr. Webersinke is a Board Member of Germany's Steel Makers
Association (VDEh). He is a metallurgical engineer by profession.
B. Compensation
Director Compensation
The total remuneration of the members of the Executive Board at December 31,
is as follows:
(Thousands of U.S. Dollars, except for share data) 2002 2001
- -------------------------------------------------------------------------------
Base salary 2,273 2,060
Short-term performance-related bonus 1,460 265
Long-term incentives (number of options) 230,000 -
The annual remuneration of the member of the Executive Board was as follows:
2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(Thousands of U.S. Short-term Short-term Long-term incentive
Dollars, except for performance performance Number of Number of
share data) rated bonus rated bonus Option Options
- --------------------------------------------------------------------------------------------------------------------
Lakshmi N. Mittal 863 832 670 - 80,000 -
Aditya Mittal 260 196 195 41 25,000 -
Malay Mukherjee 473 417 355 144 50,000 -
Peter D. Southwick 404 404 240 80 45,000 -
Narayanan Vaghul 83 51 - - 10,000 -
Ambassador Andres
Rozental 94 113 - - 10.000 -
Fernando Ruiz Sahagon 90 44 - - 10,000 -
Muni Krishna T. Reddy 1 0 - - - -
Rene Lopez 5 3 - - - -
---------------------------------------------------------------------------------------
2,273 2,060 1,460 265 230,000 -
---------------------------------------------------------------------------------------
The amount outstanding at December 31, 2002 in respect of loans and
advances to members of the Executive Board was $0 (2001 - $0).
The following table provides summarizes information on the options outstanding
and the movements on the options granted to the Board:
Weighted
average
exercise
Granted in price
2002 2000 1999 Total (1)
- --------------------------------------------------------------------------------------------------------------------
Lakshmi N. Mittal 80,000 80,000 80,000 240,000 7.59
Aditya Mittal 25,000 7,500 7,500 40,000 5.26
Malay Mukherjee 50,000 40,000 40,000 130,000 7.18
Peter D. Southwick 45,000 30,000 30,000 105,000 6.83
Narayanan Vaghul 10,000 5,000 - 15,000 4.36
Ambassador Andres Rozental 10,000 5,000 - 15,000 4.36
Fernando Ruiz Sahagon 10,000 5,000 - 15,000 4.36
Muni Krishna T. Reddy - - - -
Rene Lopez - - - -
-----------------------------------------------------------------
230,000 172,500 157,500 560,000
-----------------------------------------------------------------
Exercise Price (2) $ 2.26 $ 8.57 $ 11.94
Term (in years) 10 10 10
- -----------------------------
(1) None of the options have been exercised.
(2) All options were granted at an exercise price equal to the market value on
the date of grant.
Stock Option Plan
In 1999, the Company adopted a stock option plan, the Ispat Plan. Under
the terms of the Ispat Plan, the Company may grant options to senior management
of Ispat International and its affiliates for up to 6,000,000 shares of common
stock. The exercise price of each option equals not less than the fair market
value of Ispat International stock on the date of grant, with a maximum term of
10 years. Options are granted at the discretion of the Company's Board of
Director's Plan Administration Committee or its delegate. The options vest
either ratably upon each of the first three anniversaries of the grant date, or,
in total, upon the death, disability or retirement of the participant.
The Company had chosen to account for stock-based compensation using
the intrinsic value method prescribed in APB 25, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. As indicated above,
all options were granted at an exercise price equal to or greater than the fair
market value on the date of grant and accordingly, no compensation expense has
been recognized in these financial statements pursuant to APB 25. The Company
has decided to expense stock-based compensation starting 2003. Had compensation
cost for the Ispat Plan been determined based on the fair value at the grant
date for awards in 1999, 2000 and 2002 consistent with the provisions of SFAS
148, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
63
Years ended December 31,
2000 2001 2002
- ----------------------------------------------------------------------------------------------------------------
Net Income - as reported $ 99 $ (312) $ 49
Pro forma compensation expense 10 9 5
Net Income - pro forma based on SFAS 148 89 (321) 44
- ----------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share from continuing operations $ 0.82 $ (2.58) $ 0.24
Basic and diluted earnings extraordinary earnings per common share - - 0.16
Basic and diluted earnings per common share 0.82 (2.58) 0.40
Basic and diluted earnings per common share - pro forma 0.74 (2.65) 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant of Ispat International stock is
estimated on the date of grant using the Binomial Option Pricing Model with the
following weighted-average assumptions used:
- ------------------------------------------------------------------------------------------------------------------------------------
Year of grant
2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------
Dividend yield 3.85 10.49 -
Expected annualized volatility 66% 63% 83%
Discount rate - Bond equivalent yield 5.27% 4.86% 5.03%
Expected life in years 8 8 8
- -----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The status of the Ispat Plan with respect to the Company is summarized below at
December 31, 2002:
Number of shares
---------------------------------------------------
2000 2001 2002
- -------------------------------------------------------------------------------------------------------------
Opening balance as of January 1, 1,314,000 2,512,000 2,202,000
Granted during the year(1) 1,361,000 - 1,349,500
Canceled or expired 163,000 310,000 160,000
Outstanding at December 31, 2,512,000 2,202,000 3,391,500
--------- --------- ----------
Fair value of the option at the grant date $ 4.22 $ - $ 1.82
========= ========= ===========
At December 31, 2002, the stock options are exercisable as follows:
Year Options Exercise price (1)
- --------------------------------------------------------------------------------
2002 1,718,833 10.54
2003 2,137,500 10.25
2004 2,514,167 8.82
2005 2,952,833 7.84
2006 3,391,500 7.12
- --------------------------------------------------------------------------------
(1) Exercise price of $11.94, $8.57 and $2.26 in 1999, 2000 and 2002
respectively
64
C. Board Practices
Article 18, paragraph 1 of our Articles of Association provides that
our Board of Managing Director shall consist of five or more class A, class B
and Class C managing directors (and composed at all times by one class A
managing director and at least two class C managing directors). Article 18,
paragraph 2 stipulates that members of the Board of Managing Directors are
appointed by the general meeting of shareholders for a term commencing on the
day following the annual general meeting of shareholders up to and including the
day of the annual general meeting of the shareholders in the next financial
year. Article 18, paragraph 2 further provides that as long as the controlling
shareholder is entitled directly or indirectly to cast the majority of the votes
that may be cast by all shareholders, the provisions of paragraph 2 of Article
18 do not apply to class A managing director.
In June 2001, we adopted a Corporate Governance framework in conformity
with best practices on Corporate Governance. We will continue to diligently
monitor new, proposed and final U.S. and Dutch Corporate regulatory requirements
and will make adjustments to our Corporate Governance controls and procedures to
stay in full compliance with these requirements on a timely basis. The Company
is fully committed to meeting and whenever possible exceeding the Corporate
Governance mandates and requirements under current and proposed SEC and NYSE
rules and Dutch law.
Role of the Board and Management
Ispat International's business is conducted through operating
subsidiaries, which are managed by their Board of Directors and headed by the
subsidiary's chief executive officer (CEO). The Board of Ispat International
N.V. ('The Board') provides the oversight to enhance the value to the
stakeholders.
Directors Independence
As per the criteria laid out by Ispat International's Board, directors
will be considered "independent" if they do not have a material relationship
with the Company. Ispat International Board consists of nine members, of which
five are independent, constituting a majority of the Board. Of the five
independent members only one of the members has a relationship with the Company.
This relationship is below the threshold laid down by the Board, of less than
one percent of the revenues of the firm on which he serves as executive officer.
This member however does not serve on any of the Board Committees.
Function of the Board
As per Ispat International's Corporate Governance guidelines adopted in
June 2001, the Board of directors shall be responsible for the stewardship of
the corporation and should assume responsibility for the adoption of a corporate
strategy; monitoring of risk and control; succession planning; including
appointing; training and monitoring of senior management; an investor relations
program for the corporation; the integrity of the corporation's internal control
and management information system; setting of remuneration policy which
incorporates appropriate performance hurdles.
Qualification
Directors should possess the highest personal and professional ethics,
integrity, and be committed to representing the interests of the stakeholders.
Ispat International's members possess experience in managing large companies and
contribute towards the protection of the stakeholder interests in the Company
through expertise in their respective fields. All Directors bring an independent
judgment to bear on issues of strategy, performance, resources and standards of
conduct.
Size of the Board and Selection Process
All directors are subject to election by shareholders (except where the
Articles of Association provide otherwise). The names of directors submitted for
election or re-election shall be accompanied by sufficient biographical details
to enable shareholders to take an informed decision on their election. Ispat
International Board consists of nine members, which is considered reasonable
given the size of the Company. All members of the Board
65
and its respective Committees, except Mr. Lakshmi N. Mittal and Mr. Aditya
Mittal (who as Class A directors are currently exempted, as per provisions of
the Articles of Association), will next be considered for reappointment at the
shareholders meeting to be held on March 28, 2003.
Board Committees
The Board has established the following Committees to assist the Board
in discharging its responsibilities: (i) Audit; (ii) Remuneration; (iii)
Nomination. The Committees have written charters and consist solely of
independent directors.
a) Board Agenda
The items placed before the Board includes among others strategic plans
of the enterprise; annual operating plans and budgets and any updates; capital
budgets and any updates; quarterly results for the Company and its strategic
business units; minutes of Audit Committee and other sub-committee meetings; the
information on recruitment and remuneration of senior officers just below the
Board level; environment, health and safety related matters; risk management
policy of the group and such other matters considered important for the Boards'
oversight.
b) Ethics and Conflict of Interest
Ethics and conflict of interest are governed by the Code of Business
Conduct adopted by the Company. The Code of Business Conduct sets out standards
for ethical behaviour, which are to be followed by all employees, officers and
directors in the discharge of their duties. They must always act in the best
interests of the Company and must avoid any situation where their personal
interests conflict or could conflict with their obligations toward the Company.
As employees, they must not acquire any financial or other interest in any
business or participate in any activity that could deprive the Company of the
time or the scrupulous attention that they need to devote to the performance of
their duties. Any behaviour that deviates from Ispat International's code of
conduct is to be reported to the employee's supervisor, a member of the
management, the head of the legal department or the head of the internal
audit/assurance department.
SEPARATE MEETING OF NON MANAGEMENT DIRECTORS
The independent non-executive directors regularly schedule meetings without the
presence of management.
AUDIT COMMITTEE
Charter and Meetings
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing: the
financial reports and other financial information provided by the Corporation to
any governmental body or the public; the Corporation's system of internal
control regarding finance, accounting, legal compliance and ethics that the
management and Board have established and the Corporation's auditing, accounting
and financial reporting processes generally.
The Audit Committee's primary duties and responsibilities are to serve
as an independent and objective party to monitor the Corporation's financial
reporting process and internal control system; review and appraise the audit
efforts of the Corporation's independent accountants and internal auditing
department; provide an open avenue of communication among the independent
accountants, financial and senior management, the internal auditing department
and the Board of Directors. It is responsible for approving the appointment and
fees of the independent auditors. It is also responsible for monitoring the
independence of the external auditors.
The audit committee met eight times during the year. Of these, four
were physical meetings and four were teleconference meetings.
66
Audit Committee Members
The Audit Committee consists of three Board Members: Mr. Narayanan
Vaghul, Mr. Muni Krishna T Reddy and Ambassador Andres Rozental, all of whom are
independent. The Chairman of the Audit Committee is Mr. Narayanan Vaghul, who
has significant financial experience and expertise and is the Chairman of ICICI
Bank, a company which is listed on the NYSE and Mumbai Stock Exchange. Both Mr.
Muni Krishna T Reddy and Ambassador Andres Rozental have considerable experience
in managing company affairs.
Process for Handling Complaints about Accounting Matters
As part of the Board's procedure for receiving and handling complaints
or concerns about the Company's financial accounting internal control and
auditing issues, Ispat International's Code of Business Conduct requires all
employees to bring any issues or complaints they may have to the Audit
Committee's attention.
REMUNERATION COMMITTEE
Charter and Meetings
The Remuneration Committee is comprised of three independent directors.
The purpose of having a Remuneration Committee consisting exclusively of
directors who are independent of management is to have members who are free of
any business or other relationship which could interfere with the exercise of
their independent judgment. The Board has established the Remuneration Committee
to determine on their behalf and on behalf of the shareholders within agreed
terms of reference, the Company framework of remuneration and compensations
including stock options for executive directors, the CFO, CEO's of principal
operating subsidiaries and designated senior officers at the corporate level.
The Remuneration Committee is required to meet at least twice a year.
Remuneration Committee Members
The Remuneration Committee consists of three Board Members, Mr.
Narayanan Vaghul, Ambassador Andres Rozental and Mr. Rene Lopez, all of whom are
independent. The Committee elects its chair.
Remuneration Principles
The Committee believes that its principal responsibility in
compensating executives is to encourage and reward performance that will lead to
long-term enhancement of shareholder value. None of the Board of Directors
currently have contracts with the Company or any of its subsidiaries that
provide benefits upon termination of employment. The Committee reviews the
remuneration of executive members on the Board, CFO, CEO's of operating
subsidiaries and designated senior officers at the corporate level.
Stock Option Plan
The Company's Global Stock Option Plan ('the Plan'),was adopted at the
meeting of the Board held on September 15, 1999 and has a duration of ten years.
Under the Plan, Eligible Employees (senior management of the Company or any of
its Affiliates) may be awarded options to purchase stock in the Company (or
equivalent stock appreciation rights at an exercise price not less than the fair
market value of the shares of the Company at the date of award. Awards vest in
three instalments on each of the first, second and third anniversary of the date
of grant (or earlier on the termination of employment due to death, disability
or retirement) and are exercisable within ten years of grant (or until the date
of earlier termination of employment for some other reason). The maximum number
of shares of common stock available with respect to all the awards under the
plan is currently six million in the aggregate.
With the intention of following best practices on Corporate Governance,
the stock option plan of the Company was approved by the shareholders at a
general meeting held on October 11, 2002.
67
NOMINATION COMMITTEE
Charter and Meetings
Ispat International has a Nomination Committee comprising exclusively
of three independent directors. The Committee elects its Chairman and Members of
the Committee are appointed and can be removed by the Board of directors. The
Nomination Committee is required to meet at least twice every year.
Nomination Committee Members
The Nomination Committee consists of three Board members, Mr.
Narayanan Vaghul, Mr. Muni Krishna T Reddy and Ambassador Andres Rozental, all
of whom are independent. Ambassador Andres Rozental is the Chairman of the
Nomination Committee.
Function of the Nomination Committee
The Nomination Committee will at the request of the Board, consider any
appointment or reappointment to the Board. It will provide advice and
recommendations to the Board on such appointment. The Committee is also
responsible for developing, monitoring and reviewing Corporate Governance
principles applicable to the Company.
Internal Assurance / Internal Audit
The Company has an Internal Audit function. The function is under the
responsibility of the Director - Internal Assurance, who reports to the Audit
Committee, consisting exclusively of independent directors. The function is
staffed by full time professional staff located at each of the principal
operating subsidiaries and at the corporate level. Recommendations and matters
relating to internal control processes, raised by the Internal Assurance
function and their implementation are regularly reviewed by the Audit Committee.
External Auditors' Independence
The appointment and determination of fees of the external auditors is
the direct responsibility of the Audit Committee. The Audit Committee is further
responsible for obtaining annually a written statement from the external
auditors that their independence has not been impaired. The external auditors
have informed the Company of their intention to rotate their lead and engagement
partners in line with the new requirements. The responsibility of approving
non-audit services by the external auditors has been delegated by the Audit
Committee to the Chairman of the Audit Committee. Non-audit services which fall
in the prohibited category are not provided by the external auditors. During the
year the Audit Committee carried out a review of former employees of the
external auditors employed by the Company and concluded, based on this review,
that no such former employee was in a position of significant oversight.
RISK MITIGATION
We initiated a comprehensive group wide risk assessment in 2001. The
management has constituted a Risk Committee. Risk mitigation plans identifying
major risks and mitigation strategies have been drawn up and implemented for
each operating subsidiaries and compliance therewith are reviewed at defined
regular intervals. Risk mitigation at each principal operating subsidiaries was
reviewed during 2002 and mitigation plans for new risks which have been
perceived at each operating subsidiaries have been incorporated.
D. Employees
We have approximately 15,400 employees in our steelmaking and steel
related operations spread across our subsidiaries.
68
E. Share Ownership
The share ownership of our directors and executive officers is 128,950
(excluding shares owned by controlling shareholder). The number of options
granted to directors and executive officers in 1999 were 352,500 at an exercise
price of $11.94, in 2000 were 369,500 at an exercise price of $8.57 and in 2002
were 596,500 at an exercise price of $2.26. No options were granted during 2001.
These options vest either ratably upon each of the first three anniversaries of
the grant date, or, in total, upon the death, disability or retirement of the
participant. The option term expires ten years after the grant date.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
At December 31, 2002, 54,850,000 Class A shares and 72,150,000 Class B
shares were issued. Out of the above, 51,735,794 Class A shares and the entire
amount of the Class B shares were outstanding.
In connection with the introduction of the Euro on January 1, 2002, the
Company has converted the nominal value of its shares from Dutch Guilders into
Euro. In order to accomplish the conversion, the articles of association were
amended on December 31, 2001, in accordance with a resolution of the
shareholders passed at a meeting held on December 21, 2001. After the
conversion, the authorized common shares of the Company consisted of 500,000,000
Class A shares, with a par value of 0.01 Euro per share, and 72,150,000 Class B
shares, with a par value of 0.10 Euro per share.
The preference and relative rights of the Class A shares and Class B
shares are substantially identical except for disparity in voting power and
conversion rights. Holders of Class A shares are entitled to one vote per share
and holders of Class B shares are entitled to ten votes per share on all matters
submitted to a vote at shareholders meetings. Each Class B share is convertible,
at the option of the holder, into one Class A share.
The following table sets forth information as of December 31, 2002 with
respect to the beneficial ownership of our Class A common shares and Class B
common shares by each person who is known to be the beneficial owner of more
than 5% of either class of shares, and all directors and officers as a group.
Class A Class B
Common Shares Common Shares Total Common Shares
------------------------ -------------------------- -----------------------
Percentage
Percentage Percentage of Total
of of Common
Number Class Number Class Number Shares
---------------- -------- ---------- ---------- ----------- -----------
Controlling Shareholder......... 26,100,000 47.58 72,150,000 100 98,250,000 77.36
Treasury Stock(1)............... 3,114,206(2) 5.68 -- -- 3,114,206 2.45
Public Shareholders............. 25,635,794 46.74 -- -- 25,635,794 20.19
Total........................... 54,850,000 100.00 72,150,000 100 127,000,000 100.00
Directors and Officers.......... 253,140(3)(4) 0.46 -- -- 253,140 0.20
- ----------
(1) Represents class A common shares repurchased by Ispat International pursuant
to the previously announced share repurchase programs of the company.
(2) Consisting of 139,200 Class A common shares repurchased in fiscal year ended
December 31, 2002, 368,000 Class A common shares repurchased in fiscal year
ended December 31, 2001, 242,600 Class A common shares repurchased in fiscal
year ended December 31, 2000, 5,358,200 Class A common shares repurchased in
the fiscal year ended December 31, 1998 and 1,458,960 Class A common shares
repurchased in the fiscal year ended December 31, 1997 and excluding 253,140
Class A common shares awarded to certain senior executives of the company,
2,117,781 and 2,081,833 Class A shares issued to Ispat Inland Pension Fund
in 2002 and 2001 respectively.
(3) These 253,140 Class A common shares are included in shares owned by public
shareholders indicated above.
(4) During 1998 the company awarded 198,750 common shares to certain senior
executives of the company in connection with the company's initial public
offering undertaken in 1997 and also awarded 54,390 common shares to certain
senior executives as Bonus shares in connection with the company's stock
bonus plan (the "Stock Bonus Plan").
69
Our Class A common shares may be held in registered form or bearer
form, as the holder may elect. Registered shares may consist of either New York
Shares, which are registered in a register kept by or on behalf of Ispat
International by its New York transfer agent, or Dutch Shares, which are
registered in a register kept by or on behalf of Ispat International by its
Dutch transfer agent. Shares in registered form may be evidenced by
certificates. The bearer shares may be represented by either K-certificates,
legal title to which passes by possession, or CF-certificates, which must be
deposited with an authorized custodian and are transferred by means of the
book-entry transfer system maintained by NECIGEF (Nederlands Centraal Instituut
voor Giraal Effectenverkeer, The Netherlands Central Institute for Giro
Securities). Bearer shares will be settled through the book-entry transfer
system maintained by NECIGEF and its participants, including Euroclear and
Cleastream.
As of February 25, 2003 there were 109 U.S. record holders holding an
aggregate of 26,781,338 of New York Shares, representing 48% of the Class A
common shares outstanding. Our knowledge of the number of New York Shares held
by U.S. holders is based solely on the records of our New York transfer agent
regarding registered Class A common shares.
As of February 25, 2003 there are 1,968,662 of the Class A common
shares being held in the Netherlands. We cannot present the number of holders in
the Netherlands because the shares are held as bearer shares.
Voting Rights
As of February 25, 2003, the controlling shareholder owned all of the
Class B common shares and 26,100,000 Class A common shares, representing 48% of
the Class A common shares, with an aggregate of 97% of the voting rights. The
controlling shareholder indirectly has the right to make binding nominations for
the appointment of all members of the Board of Directors and to determine the
outcome of any action requiring shareholder approval. In addition, the
controlling shareholder will have the ability, by virtue of his indirect
ownership of Class B common shares, to prevent or cause a change in control of
the company and its subsidiaries.
Conversion: Restriction on Transfers
Under our Articles of Association, each Class B common share is
convertible at any time and from time to time at the option of the holder
thereof into one Class A common share. However, the conversion of a Class B
common share into a Class A common share is a reduction of the issued share
capital of Ispat International under Dutch law and requires approval by the
shareholders. In addition, the conversion of a Class B common share into a Class
A common share will result in a reduction of the votes of the holder from ten to
one. The Class A common shares have no conversion rights.
The controlling shareholder and Ispat International have entered into a
shareholder and registration rights agreement (the "Shareholder's Agreement").
Pursuant to the Shareholder's Agreement, no person holding record or beneficial
ownership of Class B common shares may transfer (as defined in the Shareholder's
Agreement) such Class B common shares, except to a permitted transferee
("Permitted Transferee"). A Permitted Transferee means: (i) Mr. Lakshmi N.
Mittal; (ii) his parents, spouse, children (natural or adopted), grandchildren
or other issues; (iii) trusts the primary beneficiaries of which are any of the
foregoing persons or any charitable organization designated by any of them,
which trusts are controlled, directly or indirectly, by any of the persons under
clause (i), (ii) or (v); (iv) corporations, partnerships, limited liability
companies and other persons if at least 80% of the economic interest in any such
person is owned by any of the persons under clause (i) and (ii) or any
charitable organization designated by any of them; and (v) in the case of any
person in clause (i) and (ii), the heirs, executors, administrators or personal
representatives upon the death of such person or upon the incompetence or
disability of such person for the purposes of the protection and management of
such individual's assets. The Shareholder's Agreement further provides that if
at any time a record or beneficial holder of Class B common shares ceases to be
a Permitted Transferee, such holder (i) will not be entitled to exercise the
voting rights attached to such Class B common shares and (ii) will notify the
Board of Directors that it is no longer a Permitted Transferee, which
notification shall be deemed to be a request to convert such Class B common
shares into Class A common shares. Notwithstanding the foregoing, if at any time
a holder of Class B common shares enters into a contract to transfer to a person
that is not a Permitted Transferee (a "Non-Permitted Transferee") a number of
Class A common shares equivalent to that which would result from the conversion
of all or a portion of such holder's Class B common shares and thereafter such
conversion is opposed by creditors of Ispat International in accordance with
applicable
70
Dutch law, which opposition has not been finally determined within six months
after the commencement thereof, such holder shall be free to transfer its Class
B common shares to such Non-Permitted Transferee. By its terms, the
Shareholder's Agreement may not be amended, other than for manifest error,
except by approval of a majority of the Class A common shareholders (other than
the controlling shareholder and Permitted Transferees) at a general
shareholders' meeting.
B. Related Party Transactions
We engage in certain commercial and financial transactions with
companies that are wholly-owned or controlled, directly or indirectly, by our
controlling shareholder. See Note 6 to the Consolidated Financial Statements.
C. Interest of Experts and Council
None
72
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18 for a list of financial statements.
Export Sales
Management considers our steel operations to be a single business
segment. Because Ispat International has no operations in its home country of
the Netherlands, all of its sales are considered to be foreign sales. Annual
sales to individual customers did not exceed 10% of total net sales in any of
the periods presented.
Legal Proceedings
In the ordinary course of its business, the Company is party to
various legal actions.
Ispat Inland is involved in various environmental and other
administrative or judicial actions initiated by governmental agencies. While it
is not possible to predict the results of these matters, it does not expect
environmental expenditures, excluding amounts that may be required in connection
with the 1993 consent decree in the 1990 Environmental Protection Agency ("EPA")
lawsuit, to materially affect the results of operations or financial position.
Corrective actions relating to the EPA Consent Decree may require significant
expenditures over the next several years that may be material to the results of
operations, the financial position and the liquidity of the Company. At December
31, 2002, the reserves for environmental liabilities totalled $28 million, $22
million of which is related to the sediment remediation under the 1993 EPA
Consent Decree. At December 31, 2001, those amounts had been $27 million and $21
million, respectively.
Ispat Inland is anticipated to make capital expenditures of $2 million
to $5 million annually in each of the next five years for construction, and have
ongoing annual expenditures (non capital) of $35 million to $40 million for the
operation of air and water pollution control facilities to comply with current
federal state and local laws and regulations.
Ispat Inland and an independent, unaffiliated producer of raw materials
are parties to a long-term supply agreement under which Ispat Inland was
obligated to fund an escrow account to indemnify said producer of raw materials
against a specific contingency. Contributions to the escrow were determined by
the agreement and the funds were restricted from Ispat Inland's use while in the
escrow. Ispat Inland received full recovery of $39 million, the escrowed amount,
in April of 2001. No further contributions to the escrow are required at this
time as Ispat Inland believes the likelihood of the specific contingency
occurring is remote.
In December 2001, Caribbean Ispat settled arbitration proceedings
with respect to a scrap supply contract. This amounted to $21 million of which
$16 million was paid in cash and the balance of $5 million is being paid in
twelve quarterly instalments which started on March 31, 2002. No interest is to
accrue on the remaining balance unless the remaining instalments are not paid
when due. During 2002, a claim by a third party for alleged entitlement to the
settlement monies was the subject of separate proceedings in Trinidad which have
been settled without any additional liability on the Company.
On March 5, 2002, as a result of an investigation under Section 201,
President Bush imposed trade remedies affecting imports into the United States
of America of numerous steel products. These remedies included 30% tariff rate
increases for hot-rolled sheet, cold-rolled sheet, coated sheet, and hot-rolled
bar with the rates declining to 24% in year two and 18% in year three.
Several foreign supplying countries challenged the President's action
through the dispute resolution procedures of the WTO. The Section 201 remedy has
allowed the Ispat Inland to increase U.S. prices for some of the covered
products, benefiting the Ispat Inland's financial position. However, subsequent
to the imposition of the Section 201 remedy, the U.S. government granted a
number of exclusions to the remedy for products of the types that are made by
Ispat Inland. Most notably, exclusions in the form of duty-free quotas were
granted for foreign producers of interstitial-free carbon sheet and leaded
hot-rolled bar.
72
Imports from Ispat Mexicana and Ispat Sidbec were exempted from the
Section 201 tariff rate increases pursuant to provisions of the NAFTA. Those
exceptions should permit these companies to maintain historical access to U.S.
markets during the three-year period of relief. The NAFTA exemption could be
modified if it is determined that increased imports constitute a "surge" within
the meaning of U.S. law. The effect on the Ispat Europe is expected to be modest
given their historically low level of exports to the U.S. A number of WTO-member
developing countries have also been exempted from the remedy. However, the
developing country exemption can also be revoked if a "surge" is shown, and a
number of domestic producers have filed for the revocation of the exempt status
for a number of WTO-member developing countries.
The March 2002 Section 201 remedy does not cover steel wire rod, the
product sold in the United States of America by Caribbean Ispat. However as a
result of an earlier Section 201 proceeding relating to steel wire rod,
Caribbean Ispat received a 247,000 annual quota with a 5% duty above this level,
which has restricted its' ability to sell steel wire rod to the U.S. market.
This restriction for wire rod comes to an end on March 01, 2003. The impact of
the wire rod tariff rate quotas on the Ispat Europe has been negligible.
In 2002, U.S. trade agencies also made affirmative determinations under
U.S. AD and CVD laws for steel wire rod. Caribbean Ispat, Ispat Sidbec, and
Ispat Europe certain of the operating companies under Ispat Europe were required
to post bonds on their exports to the U.S. in 2001, and in 2002 final dumping
and CVD margins were issued. For Caribbean Ispat, the margins were 11.40% and 0%
respectively which entitles the company to receive a refund of the CVD already
paid. For Ispat Sidbec, the margins were 3.86% and 6.61% which is being appealed
by Ispat Sidbec and the Government of Quebec. No margins were assessed against
the operating companies under Ispat Europe, since the investigation was
terminated as to Germany following a finding of "negligibility" in the German AD
case.
In April 2002, the U.S. Department of Commerce issued preliminary
anti-dumping duty margins against cold-rolled imports from 20 countries.
However, in late 2002 the U.S. ITC issued negative final injury determinations
against all 20 countries, terminating the investigations and eliminating the
duties. The effect on Ispat Inland is likely to be somewhat negative. The U.S.
petitioners have appealed the decision to the U.S. Court of International Trade.
Following the imposition by the United States of America of tariff rate
increases under Section 201, the European Union announced in September 2002 that
it would impose additional duties ranging from 17.5% to 26%, on 7 steel products
imported above levels established in new quotas. Three additional products are
still under investigation. The remedy will remain in effect until the U.S.
Section 201 steel remedy is abolished.
On March 22, 2002, the Canadian government initiated a safeguard
investigation by asking its International Trade Tribunal ("ITT") to investigate
whether increased imports of certain steel products are causing, or threatening
to cause, injury to Canadian steel producers. In a report issued in July of
2002, the ITT found injury on a range of products, including plate, pipe,
cold-rolled sheet in angles, shapes and sections. In an August 2002 report, the
ITT recommended additional tariffs, ranging from 7% to 25%, above a quota level
based on historical imports. The ITT found that U.S. imports of plate,
coiled-rolled sheet coils, angles, shapes and sections substantially contributed
to the injury and recommended that U.S. imports not be exempted from the
safeguard remedy under NAFTA. As at the end of 2002 the Canadian government has
not yet acted on the ITT recommendations. At this time the potential impact of
this action on the Canadian Operating Subsidiary and other Company subsidiaries
is uncertain.
Under the U.S. Continued Dumping and Subsidy Offset Act of 2000 ("CDSOA"),
commonly known as the "Byrd Amendment," Ispat Inland was awarded approximately
$1.2 million in collected customs duties, based on its participation in or
support for various U.S. AD and CVD cases. The payment is based on "qualifying
expenditures" and is distributed to U.S. steel companies out of funds collected
from foreign producers under AD and CVD orders. On September 2, 2002, the WTO
issued a final ruling condemning the CDSOA. In its ruling the WTO recommended
that the U.S. repeal the Byrd Amendment in order to comply with its findings.
The U.S. government has appealed the decision, but the future of the CDSOA and
offset distributions is questionable.
While several of the developments described above may be expected to
benefit certain subsidiaries of the Company, there can be no assurance that
potential benefits will ultimately accrue because of WTO challenges, exclusion
requests and various economic uncertainties.
73
The European Commission has raised claims of (euro)47 million for
repayment by DSG Dradenauer Stahlgesellschaft mbH ("DSG") of loan amounts
alleged to qualify as improper subsidies from the City of Hamburg. These
subsidies are claimed to be contradictory to the European Commission's rulings
on competitive markets in the steel industry and the European Commission has
initiated legal action to settle the matter. In April 2002, the European Court
of Justice decided that the loan was an unauthorised subsidy under EC law. DSG
has stated that the loan is fully repaid. The court in Hamburg, Germany has
confirmed the position of DSG. An appeal is now pending in the German courts and
a decision may be expected in 2003. The Company cannot predict the final outcome
of these proceedings. In August 2002, DSG was sold, the final purchase price to
be determined on December 31, 2004 based on the shareholders' equity of DSG at
that date. DSG is no longer a subsidiary of the Company.
Pursuant to a constitutional challenge to the 1999 Tax Reforms of the
Mexican Tax Code's Consolidation Regime by the Company's Mexican holding
company, Grupo Ispat International S.A. de C.V. ("Grupo"), Grupo and or
consolidated subsidiaries had to pay the difference between the provisional
amount paid under the old rules and the provisional amount required under the
new rules adjusted for actualization and penalties. A settlement agreement was
signed with the Mexican tax authorities amounting to $13 million and this was
paid in full in 2002.
On April 15, 2002, the Administration Portuaria Integral de Lazaro
Cardenas S.A. de C.V. ("API") initiated before the General Office of Ports
(Direccion General de Puertos) the process for the cancellation of the
registration of the partial assignment of rights that Ispat Servicios Portuarios
S.A. de C.V. ("ISP"), a subsidiary of Ispat Mexicana SA de CV, had entered into
with the API for use and benefit from the multiple-use terminal located in the
Port of Lazaro Cardenas, Mexico. This was challenged by ISP. As a result of
negotiations new authorizations have been obtained from API and the General
Customs Administration in favor of Grupo's subsidiary, Ispat Portuarios, SA de
CV in order for it to operate the terminal.
In the Autumn of 2002, three subsidiaries of the Company
(Trefileurope S.A., Trefileurope Italia S.r.l. and Fontainunion S.A.), along
with other European manufacturers of pre-stressed wire and strands steel
products, received notice from the European Commission that it was conducting an
investigation into possible anticompetitive practices. The Company and its
subsidiaries are cooperating fully with the European Commission in this
investigation. Should the European Commission find that the companies have
breached EC law, it may impose a fine on the company or companies that it holds
responsible for the conduct, through decisive influence or otherwise. The fine
levied cannot exceed the limit set in Article 15(2) of EC Council Regulation
17/62. The Company is currently unable to assess the ultimate outcome of the
proceedings before the European Commission or the amount of any fines that may
result. As the alleged anticompetitive activities would have taken place in
large part prior to the acquisition of the subsidiaries, the Company has
notified the previous owners that it will hold them liable for all consequences
of the investigation.
Dividend Distributions
Under Dutch law, as of December 31, 2002, our consolidated retained
earnings are restricted from distributions. We can only pay dividends or make
distributions to the extent we receive dividends from our subsidiaries,
recognize gains from sale of our assets, or record share premium to a reserve
not being the Special Reserve as a result of the issuance of new common shares
in each case provided the rules summarized below allow us to do so. See Note 10
to the Consolidated Financial Statements. In addition, pursuant to certain
guarantee agreements we have entered into, there are restrictions on our ability
to incur additional indebtedness and make certain payments.
The Board of Directors may reserve a portion or all of our annual
profits. The portion of our annual profits that remains unreserved will be
distributed to the shareholders. The Board of Directors may resolve that we make
distributions out of our general share premium account and out of any other
reserves that are available for shareholder distributions under Dutch law. The
Board of Directors may resolve that we may make stock dividends as well as cash
dividends. The Board of Directors may also resolve that we pay interim
dividends. We may not make distribution or pay dividends, or interim dividends,
if the payment would reduce shareholders' equity to an amount less than the sum
of our issued share capital plus reserves that are required to be maintained by
Dutch law or the Articles of Association. Rights to cash dividends and
distributions that have not been collected within five years and two days after
the date on which they became due and payable revert to the company.
74
All calculations to determine the amounts available for dividends will
be based on our statutory accounts, which will, as a holding company, be
different from our consolidated accounts. Because we are a holding company and
have no operations of our own, we are dependent on dividends or other advances
from our operating subsidiaries to fund any cash dividends. See "Risk
Factors--Because we are a holding company with no revenue-generating operations
of our own, we depend on the cash flows of our subsidiaries which may not be
sufficient to meet our needs.
The holders of the Class A common shares and the Class B common shares
are entitled to receive prop rata to the number of shares held by such
shareholder without regard to the class or par value of such shares such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefore. Our Articles of Association provide that future
dividends, if any, will be declared and paid in Dollars unless the Board of
Directors determines otherwise. Cash dividends payable to holders of New York
Shares will be paid to the New York Transfer Agent and Registrar. Cash dividends
payable to holders of the Bearer Shares and registered shares registered in The
Netherlands will be paid to the Dutch Transfer and Paying Agent who will convert
such dividends into Euro for disbursement to such holders. In certain cases,
however, cash dividends will be paid directly to the holders of K-certificates.
We anticipate that all of our earnings will be reinvested in our
business and applied to reduction of indebtedness, and consequently do not
expect to declare a dividend in the current year.
Any determination to pay cash dividends would be at the discretion of
our Board of Directors, in accordance with Dutch law and the article of
association of the Company, and after taking into account various factors,
including our financial conditions, results of operations, outstanding
indebtedness, current and anticipated cash needs, plans for expansion as well as
commercial restrictions and other factors affecting our operating subsidiaries.
B. Significant Changes
None
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Nature of Trading Market
The table below sets forth the high and low sales prices for our Class
A common shares on the New York Stock Exchange and the Amsterdam Stock Exchange
during the periods indicated.
New York Amsterdam
$ (euro)
- ------
Jul 8 1997 - Dec 31, 1997
High..................................... 29.13 29.84
Low..................................... 18.25 18.25
Jan 1 1998 - Dec 31, 1998
High..................................... 30.12 29.86
Low..................................... 5.19 5.34
Jan 1 1999 - Dec 31, 1999
High..................................... 16.13 15.95
Low..................................... 6.94 7.07
Jan 1 2000 - Dec 31, 2000
75
High..................................... 18.25 18.16
Low..................................... 2.13 2.42
Jan 1 2001 - Dec 31, 2001
High..................................... 4.06 4.09
Low..................................... 0.80 0.81
Jan 1 2002 - Dec 31, 2002
High..................................... 3.08 3.11
Low..................................... 1.26 1.34
Jan 1 2001 - Mar 31, 2001
High..................................... 4.06 4.36
Low..................................... 2.59 2.75
Apr 1 2001 - Jun 30, 2001
High..................................... 3.78 4.25
Low..................................... 2.51 2.95
Jul 1 2001 - Sept 30, 2001
High..................................... 3.38 3.89
Low..................................... 1.30 1.50
Oct 1 2001 - Dec 31, 2001
High..................................... 1.83 1.97
Low..................................... 0.80 0.90
Jan 1 2002 - Mar 31, 2002
High..................................... 1.93 2.24
Low..................................... 1.26 1.55
Apr 1 2002 - Jun 30, 2002
High..................................... 3.08 3.11
Low..................................... 1.84 1.90
Jul 1 2002 - Sept 30, 2002
High..................................... 2.98 3.07
Low..................................... 1.97 2.06
Oct 1 2002 - Dec 31, 2002
High..................................... 2.46 2.67
Low..................................... 2.05 2.07
Aug 1 2002 - Aug 31, 2002
High..................................... 2.70 2.80
Low..................................... 2.30 2.25
Sept 1 2002 - Sept 30, 2002
High..................................... 2.60 2.70
Low..................................... 1.90 2.00
Oct 1 2002 - Oct 31, 2002
High..................................... 2.48 2.70
Low..................................... 1.91 2.10
Nov 1 2002 - Nov 31, 2002
High..................................... 2.50 2.69
Low..................................... 2.15 2.20
Dec 1 2002 - Dec 31, 2002
High..................................... 2.30 2.50
Low..................................... 2.00 2.00
76
Jan 1 2002 - Jan 31, 2003
High..................................... 2.75 2.60
Low..................................... 2.05 2.05
B. Plan of Distribution
Not applicable.
C. Markets
In the United States, our Class A common shares are traded on the New
York Stock Exchange, the principal U.S. trading market. Outside the United
States, our Class A common shares are traded on the Amsterdam Stock Exchange.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Pursuant to Article 2 of our Articles of Association, the objects and
purposes of the company are the following:
o to participate in, take an interest in, and conduct the management of
business enterprises;
o to finance, to provide security for or undertake the obligations of
third parties, and
o to conduct all activities incidental to any of the foregoing.
We hereby incorporate by reference the following sections from our
Registration Statement on Form F-1 (Reg. No. 333-7206), as declared effective on
August 6, 1997, "Description of Capital Stock--Shareholder and Voting Rights,"
"--Liquidation Rights," "--Issue of Common Shares; Preemptive Rights,"
"--Repurchase of Shares," "--Reduction of Share Capital," "--Amendment of the
Articles of Association" and "--Limitations on Rights to Hold or Vote Class A
Shares."
C. Material Contracts
None.
77
D. Exchange Controls
There are no legislative or other legal provisions currently in force
in The Netherlands or arising under the Articles of Association restricting the
payment of dividends to holders of the Class A common shares not resident in The
Netherlands, except for regulations restricting the remittance of dividends and
other payments in compliance with United Nations and European Union sanctions,
for example, dividend and other payments to residents of Libya and Iraq.
There are no limitations, either under the laws of The Netherlands or
in the Articles of Association or other constituent documents, on the right of
foreigners to hold or vote on our shares.
E. Taxation
United States of America Taxation
The following discussion contains a description of the material U.S.
federal income tax consequences of the ownership and disposition of Class A
common shares generally applicable to the following persons who beneficially own
such Class A common shares as capital assets ("U.S. Shareholders"): (i) citizens
or residents of the United States of America (as defined for U.S. federal income
tax purposes), (ii) corporations or partnerships created or organized in or
under laws of the United States of America or of any state or the District of
Columbia, (iii) estates the income of which is subject to U.S. federal income
taxation regardless of its source and (iv) trusts the administration of which is
subject to the primary supervision of a court in the United States of America
and with respect to which one or more U.S. persons have the authority to control
all substantial decisions. The summary does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a U.S.
Shareholder's decision to acquire Class A common shares. In particular, this
summary does not address (a) the tax treatment of special classes of U.S.
Shareholders, such as banks, insurance companies, tax-exempt organizations or
dealers in securities, (b) the tax treatment of U.S. Shareholders that own
(directly, indirectly or through attribution) 10% or more of the voting power of
all shares of Ispat International or (c) any aspect of state, local or non-U.S.
tax laws.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), judicial decisions, administrative pronouncements and existing and
proposed Treasury regulations, changes to any of which after the date of this
Annual Report could have a retroactive effect.
Prospective investors should consult their tax advisors as to the tax
consequences of the ownership and disposition of Class A common shares in light
of their particular circumstances, including the effect of any non-United States
taxes and United States state or local taxes.
Taxation of Capital Gains
Gain or loss, if any, recognized by a U.S. Shareholder on the sale or
other disposition of Class A common shares will be subject to U.S. federal
income taxation as capital gain or loss in an amount equal to the difference
between the U.S. Shareholder's adjusted tax basis in the Class A common shares
and the amount realized on the disposition. Any such gain or loss will generally
be treated as long-term capital gain or loss if the U.S. Shareholder's holding
period with respect to the Class A common shares is longer than one year. In the
case of non-corporate U.S. Shareholders, long-term capital gain generally is
subject to a maximum tax rate of 20%. For U.S. federal income tax purposes,
capital losses are subject to limitations on deductibility. Gain realized by a
U.S. Shareholder on the sale or other disposition of Class A common shares
generally will be treated as income from sources within the United States of
America for the purposes of the foreign tax credit limitation, unless the gain
is attributable to an office or fixed place of business maintained by the U.S.
Shareholder outside the United States of America, and certain other conditions
are met.
78
Taxation of Distributions on Class A Common Shares
The gross amount of any distribution by Ispat International (including
Dutch taxes withheld therefrom) with respect to class A common shares generally
will be includible in the gross income of a U.S. Shareholder as dividend income
to the extent paid out of current or accumulated earnings and profits of Ispat
International, as determined under U.S. federal income tax principles. To the
extent that the amount of any distribution exceeds Ispat International's current
and accumulated earnings and profits for a taxable year, the distribution will
be first treated as a tax-free return of the capital to the extent of the U.S.
Shareholder's adjusted tax basis in the class A common shares and to the extent
that such distribution exceeds the U.S. Shareholder's adjusted tax basis in the
class A common shares, such excess will be taxed as a capital gain.
Distributions treated as dividends generally will be treated as income from
sources outside the United States of America and generally will be passive
income for purposes of the foreign tax credit limitation. U.S. Shareholders will
not be entitled to the dividends received deduction with respect to such
dividends.
If a U.S. Shareholder receives a distribution in Euro denominated
distribution (or other non-U.S. currency), the amount of the distribution for
U.S. federal income tax purposes will be the U.S. dollar value of the
distribution (determined at the spot rate on the date of such payment)
regardless of whether the payment is later converted into U.S. dollars. In such
case, the U.S. Shareholder may recognize ordinary income or loss as a result of
currency fluctuations between the date on which the distribution is made and the
date the distributed amount is converted into U.S. dollars.
Credit for Foreign Taxes Withheld
Subject to the limitations set forth in Section 904 of the Code, the
Netherlands tax withheld or paid with respect to dividends on the Class A common
shares generally will be eligible for credit against a U.S. Shareholder's U.S.
federal income tax liability. Alternatively, a U.S. Shareholder may claim a
deduction for such amount of withheld Netherlands taxes, but only for a year for
which such U.S. Shareholder elects to do so with respect to all foreign income
taxes. Currently, Ispat International may, with respect to certain dividends
received from qualifying non-Netherlands subsidiaries, credit taxes withheld
from those dividends against the Netherlands withholding tax imposed on a
dividend paid by Ispat International, up to a maximum of the lesser of (i) 3% of
the portion of the gross amount of the dividend paid by Ispat International that
is subject to withholding, and (ii) 3% of the gross amount of the dividends
received from qualifying non-Netherlands subsidiaries. The credit reduces the
amount of the dividend withholding tax that Ispat International is required to
pay to The Netherlands Tax Administration but does not reduce the amount of tax
Ispat International is required to withhold from the dividends. Ispat
International will endeavor to provide to U.S. Shareholders information
concerning the extent to which it has applied the reduction described above with
respect to dividends paid to U.S. Shareholders. To the extend that Ispat
International utilizes this regime U.S. Shareholders should consult their tax
advisors to determine the appropriate U.S. tax treatment of the dividends and
the Netherlands tax withheld from the dividend payment. The overall limitation
on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. The rules relating to the determination of the
foreign tax credit are complex and U.S. Shareholders should consult their tax
advisors to determine whether and to what extent a credit would be available.
Passive Foreign Investment Company Status
Special U.S. federal income tax rules apply to U.S. persons owning
capital stock of a "passive foreign investment company" ("PFIC"). A foreign
corporation will be considered a PFIC for any taxable year in which 75% or more
of its gross income is passive income or in which 50% or more of the average
value (or, if elected, the adjusted tax basis) of its assets are considered
"passive assets" (generally assets that generate passive income). Ispat
International believes that it currently is not a PFIC for U.S federal income
tax purposes and does not anticipate that it will become a PFIC in the future.
This conclusion is based upon an analysis of its financial position and an
interpretation of the PFIC provisions that Ispat International believes is
correct. However, no assurances can be made that the applicable tax law or other
relevant circumstances will not change in a manner that affects the PFIC
determination. (to be confirmed). If Ispat International were classified as a
PFIC, a U.S. Shareholder would be subject to increased tax liability (possibly
including an interest charge) upon the sale or other disposition of Class A
common shares or upon receipt of "excess distributions," unless such U.S.
Shareholder elected to be taxed currently on its pro rata portion of Ispat
Internationals income, whether or not such income was distributed in the form of
79
dividends or otherwise. In the event that Ispat International becomes aware that
it is a PFIC for any taxable year, it will promptly notify its U.S Shareholders
of such determination.
Foreign Personal Holding Company Status
A foreign corporation will be classified as a foreign personal holding
company (an "FPHC") if (i) at any time during its taxable year, five or fewer
individuals, who are U.S. citizens or residents, directly or indirectly own more
than 50% of the corporation's stock (by either voting power or value) (the
"shareholder test") and (ii) the corporation receives at least 60% of its gross
income (reduced to at least 50% after the initial year of qualification), as
adjusted, for the taxable year from certain passive sources (the "income test").
Because Ispat International will derive most of its income from dividends paid
by wholly owned subsidiaries with active operations, Ispat International
believes that it meets, and expects that it will continue to meet, the income
test. Ispat International believes that the shareholder test was not met prior
to the Global Offering and will not be met immediately after the Global
Offering. However, due to a number of factors (including the FPHC stock
attribution rules, possible change in residence by current indirect
shareholders, and possible acquisition of Class A common shares by purchase,
gift or bequest by individuals related to, or partners of, current indirect
shareholders) there can be no assurances that Ispat International will not
become an FPHC in the future. If Ispat International were classified as an FPHC,
U.S. Shareholders (including certain indirect holders) would be required to
include in income, as a dividend, their pro rata share of Ispat International's
undistributed FPHC income if they were holders on the last day of Ispat
International's taxable year (or, if earlier, the last day on which Ispat
International satisfies the shareholder test). In addition, if Ispat
International became an FPHC, U.S. persons who acquire Class A common shares
from decedents would not receive a "stepped-up" basis in such Class A common
shares. Instead, such a holder would have a tax basis equal to the lower of fair
market value or the decedent's basis. Ispat International will notify U.S.
Shareholders in the event that it becomes aware that it is classified as an FPHC
for any taxable year.
Backup Withholding
Dividend payments made in respect of Class A common shares made within
the United States of America to a non-corporate U.S. Shareholder will generally
be subject to "backup withholding" at a rate of 30% (subject to periodic
reduction through 2006) if the holder or beneficial owner fails to provide an
accurate taxpayer identification number in the manner required by United States
of America law and applicable regulations, if there has been notification from
the U.S. Internal Revenue Service of a failure by the holder or beneficial owner
to report all interest or dividends required to be shown on its U.S. federal
income tax returns or, in certain circumstances, if the holder or beneficial
owner fails to comply with applicable certification requirements.
In general, payment of the proceeds from the sale of Class A common
shares to or through a U.S. office of a broker is subject to U.S. backup
withholding. However, backup withholding generally will not apply to a payment
made outside the United States of America of the proceeds of a sale of Class A
common shares through an office outside the United States of America of a
non-United States broker.
Amounts withheld under the backup withholding rules may be credited
against a U.S. Shareholder's U.S. tax liability, and a U.S. Shareholder may
obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the U.S. Internal Revenue
Service and providing the required information.
Netherlands Taxation
The following discussion of certain Dutch tax issues is included for
general information purposes only and does not address every potential tax
consequence of an investment in class A common shares under the laws of the
Netherlands. Each shareholder and prospective investor should consult his or her
own tax advisor with respect to the tax consequences of acquiring, owning and
disposing of Class A common shares.
Dutch Taxation of Resident Shareholders
This section is only intended for the following investors:
80
o individuals who are resident or deemed to be resident in the
Netherlands for tax purposes or who have opted to be taxed as resident
in the Netherlands and who invest in Class A common shares, excluding
(i) individuals who invest in Class A common shares that form part of
a substantial interest or a deemed substantial interest in Ispat
International or (ii) individuals who are, or are deemed to be,
employees, directors or board members of Ispat International or
individuals who are, or are deemed to be, employees, directors, board
members of any entity related to Ispat International ("Dutch
Individuals"); and
o corporate entities, which term includes associations which are taxable
as corporate entities, that are resident or deemed to be resident in
the Netherlands for tax purposes and who invest in Class A common
shares, excluding corporate entities that are (i) not subject to Dutch
corporate income tax, (ii) exempt from Dutch corporate income tax
including but not limited to pension funds ("pensioenfondsen") as
defined under Dutch law or (iii) investment institutions
("beleggingsinstellingen") as defined under Dutch Law (Corporate
Entities).
o Generally, a holder of Class A common shares will not have a
substantial interest if he, his partner, certain other relatives
(including foster children) or certain persons sharing his household,
do not hold, alone or together, whether directly or indirectly, the
ownership of, or certain other rights over, Class A common shares
representing five per cent or more of the total issued and outstanding
capital (or the issued and outstanding capital of any class of shares)
of Ispat International, or rights to acquire shares, whether or not
already issued, that represent at any time (and from time to time)
five per cent or more of the total issued and outstanding capital (or
the issued and outstanding capital of any class of shares) of Ispat
International or the ownership of certain profit participating
certificates that relate to five per cent or more of the annual profit
of Ispat International or to five per cent or more of the liquidation
proceeds of Ispat International. A deemed substantial interest is
present if (part of) a substantial interest has been disposed of, or
is deemed to have been disposed of, on a non-recognition basis.
Individual and Corporate Income Tax
Dutch Individuals not engaged in an enterprise
A Dutch Individual (i) who holds Class A common shares that are not
attributable to an enterprise of which the resident derives a share of the
profit, whether as an entrepreneur or pursuant to a co-entitlement to the net
worth of an enterprise other than as an entrepreneur or a shareholder, (ii) who
is not performing other activities in the Netherlands in respect of the A common
shares including activities which are beyond the scope of normal investment
activities and (iii) who does not have a substantial interest or a deemed
substantial interest in Ispat International, generally is subject to income tax
at a rate of 30% on a deemed yield of 4% of the individual's net aggregate
investment assets less applicable exemptions.
Dutch individuals engaged in an enterprise and Corporate Entities
Any benefits derived from Class A common shares (including any capital
gains realized on the disposal thereof) that are attributable to an enterprise
of which the resident derives a share of the profit, whether as an entrepreneur
or pursuant to a co-entitlement to the net worth of an enterprise other than as
an entrepreneur or a shareholder , generally are subject to income tax at
progressive rates. Any benefits derived from shares (including any capital gains
realized on the disposal thereof) that are held by a Dutch corporate entity
generally are subject to corporate income tax.
Withholding Tax
Dividends distributed by Ispat International generally are subject to a
withholding tax imposed by the Netherlands at a rate of 25% per cent. The
expression "dividends distributed by Ispat International" as used herein
includes, but is not limited to:
(i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not recognized for Netherlands
dividend withholding tax purposes;
81
(ii) liquidation proceeds, proceeds from the redemption of Class A
common shares or, as a rule, consideration for the repurchase of Class A common
shares by Ispat International in excess of the average paid-in capital
recognized for Netherlands dividend withholding tax purposes;
(iii) the par value of shares issued to a holder of Class A common
shares or an increase of the par value of Class A common shares, as the case may
be, to the extent that it does not appear that a contribution, recognized for
Netherlands dividend withholding tax purposes, has been made or will be made;
and
(iv) partial repayment of paid-in capital, recognized for Netherlands
dividend withholding tax purposes, if and to the extent that there are net
profits ("zuivere winst"), unless the general meeting of shareholders of Ispat
International has resolved in advance to make such repayment and provided that
the par value of the Class A common shares concerned has been reduced by an
equal amount by way of an amendment of the Articles of Association.
Dutch Individuals and Dutch corporate entities generally can credit the
withholding tax against their Netherlands income tax or corporate income tax
liability and generally are entitled to a refund of dividend withholding tax
insofar as the withholding tax exceeds their aggregate income tax or corporate
income tax liability. In the case of certain holders of Class A common shares
subject to Dutch corporate income tax and enjoying the participation exemption,
no withholding tax may need to be withheld at all.
Distribution Tax. In the period from January 1, 2001 up to and
including December 31, 2005, Ispat International will be subject to a temporary
special distribution tax at a rate of 20% on certain dividends, that are
qualified as "excessive". Dividends are considered to be "excessive" e.g. when
the total proceeds distributed during a particular calendar year, exceed the
highest of (1) 4% of Ispat International's market capitalization at the
beginning of the relevant calendar year; (2) twice the amount of the average
annual dividends (exclusive of extraordinary distributions) by reference to the
three calendar years immediately preceding January 1, 2001; or (3) our adjusted
consolidated commercial result for the preceding book year. Certain exceptions
exist. To the extent dividends that are subject to this surtax are distributed
to certain qualifying shareholders, Ispat International is not required to
withhold Netherlands dividend withholding tax.
Gift, Estate and Inheritance Taxes
Netherlands gift, estate or inheritance taxes may apply to an
acquisition of Class A common shares by way of a gift by, or on the death of, a
holder of Class A common shares who is resident or deemed to be resident in the
Netherlands.
For purposes of Netherlands gift, estate and inheritance tax, an
individual who holds the Netherlands nationality will be deemed to be resident
in the Netherlands if he has been resident in the Netherlands at any time during
the ten years preceding the date of the gift or his death.
For purposes of Netherlands gift tax, an individual not holding the
Netherlands nationality will be deemed to be resident in the Netherlands if he
has been resident in the Netherlands at any time during the twelve months
preceding the date of the gift.
Dutch Taxation for Non-Resident Shareholders
Withholding Tax
Dividends distributed by Ispat International generally are subject to a
withholding tax imposed by the Netherlands at a rate of 25%. The expression
"dividends distributed by Ispat International" as used herein includes, but is
not limited to:
(i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not recognized for Netherlands
dividend withholding tax purposes;
82
(ii) liquidation proceeds, proceeds from the redemption of Class A
common shares or, as a rule, consideration for the repurchase of Class A common
shares by Ispat International in excess of the average paid-in capital
recognized for Netherlands dividend withholding tax purposes;
(iii) the par value of shares issued to a holder of Class A common
shares or an increase of the par value of Class A common shares, as the case may
be, to the extent that it does not appear that a contribution, recognized for
Netherlands dividend withholding tax purposes, has been made or will be made;
and
(iv) partial repayment of paid-in capital, recognized for Netherlands
dividend withholding tax purposes, if and to the extent that there are net
profits ("zuivere winst"), unless the general meeting of shareholders of Ispat
International has resolved in advance to make such repayment and provided that
the par value of the Class A common shares concerned has been reduced by an
equal amount by way of an amendment of the Articles of Association.
If a holder of Class A common shares is resident in a country other
than the Netherlands and if a taxation convention is in effect between the
Netherlands and such country, such holder of Class A common shares may,
depending on the terms of such double taxation convention, be eligible for a
full or partial exemption from, or refund of, Netherlands dividend withholding
tax.
Under the double taxation convention in effect between The Netherlands
and the United States of America (the "Treaty"), dividends paid by Ispat
International to a resident of the United States of America (other than an
exempt organization or exempt pension organization) are generally eligible for a
reduction of the 25% Netherlands withholding tax to 15%, or in the case if
certain U.S. corporate shareholders owning at least 10% of the voting power of
Ispat International, 5%, unless the Class A common shares held by such resident
are attributable to a business or part of a business that is, in whole or in
part, carried on through a permanent establishment or a permanent representative
in The Netherlands. The Treaty provides for a complete exemption for dividends
received by exempt pension organizations and exempt organizations, as defined
therein. Except in the case of exempt organizations, the reduced dividend
withholding rate can be applied at source upon payment of the dividends,
provided that the proper forms have been filed in advance of the payment.
Qualifying U.S. exempt organizations must seek a full refund of the tax withheld
by filing the proper forms. A holder of Class A common shares other than
individual will not be eligible for the benefits of the Treaty if such holder of
Class A common shares does not satisfy one or more of the tests set forth in the
limitation on benefits provisions of Article 26 of the Treaty.
According to a legislative proposal regarding anti-dividend stripping
retroactive per April 27, 2001, no exemption from, or refund of, Netherlands
withholding tax will be granted if the ultimate recipient of a dividend paid by
Ispat International is not considered to be the beneficial owner of such
dividend. Such recipient is not considered to be the beneficial owner if such
recipient paid a consideration (in cash or in kind) in connection with the
dividend and such payment forms part of a sequence of transactions , and further
it is likely that (i) an individual or a company (other than the holder of the
dividend coupon) benefited, in whole or in part, directly or indirectly, from
the dividend and such individual or company would be to a lesser extent entitled
to an exemption from, or refund of, Netherlands withholding tax than the
recipient of the dividend and (ii) such individual or company, directly or
indirectly, retains or acquires a position in the shares that is comparable with
his or its position in similar shares that he or it had before the sequence of
transactions began. The term "sequence of transactions" as used herein includes
the sole acquisition of one or more dividend coupons and the establishment of
short-time rights of enjoyment on shares, while the transferor retains the
ownership of the shares. The Treaty provides for a divergent definition of the
beneficial owner that generally will overrule the proposed definition of the
beneficial owner under the laws of the Netherlands
Under certain circumstances, it will not be required to transfer the
full amount of withholding tax withheld to the Netherlands tax authorities with
respect to dividend distributions out of dividends received from Ispat
International's foreign affiliates. The amount not transferred cannot exceed 3%
of the gross amount of any cash dividend paid on the Class A common shares. This
reduction is not paid out to holders of Class A common shares, but remains with
Ispat International instead.
Distribution Tax.
83
In the period from January 1, 2001 up to and including December 31,
2005 Ispat International will be subject to a temporary special distribution tax
at a rate of 20% on certain dividends that are qualified as "excessive".
Dividends are considered to be "excessive" e.g. when the total proceeds
distributed during a particular calendar year, exceed the highest of (1) 4% of
Ispat International's market capitalization at the beginning of the relevant
calendar year; (2) twice the amount of the average annual dividends (exclusive
of extraordinary distributions) by reference to the three calendar years
immediately preceding January 1, 2001; or (3) our adjusted consolidated
commercial result for the preceding book year. Certain exceptions exist. The
qualification of this surtax and the consequences thereof for foreign
shareholders is uncertain. To the extent dividends that are subject to this
surtax are distributed to certain qualifying shareholders, Ispat International
is not required to withhold Netherlands dividend withholding tax.
Taxes on Income and Capital Gains
A holder of Class A common shares will not be subject to any
Netherlands taxes on income or capital gains in respect of dividends distributed
by Ispat International or in respect of any gain realized on the disposal of
Class A common shares (other than the withholding tax described above), provided
that:
(i) such holder does not have an enterprise or an interest in an
enterprise that is, in whole or in part, (deemed to be) carried on through a
permanent establishment or a permanent representative in the Netherlands and to
which enterprise or part of an enterprise, as the case may be, the Class A
common shares are attributable; and
(ii) such holder does not have a substantial interest or a deemed
substantial interest in Ispat International or, if such holder does have such an
interest, it forms part of the assets of an enterprise.
Generally, a holder of Class A common shares will not have a
substantial interest if he, his partner, certain other relatives (including
foster children) or certain persons sharing his household, do not hold, alone or
together, whether directly or indirectly, the ownership of, or certain other
rights over, Class A common shares representing five per cent or more of the
total issued and outstanding capital (or the issued and outstanding capital of
any class of shares) of Ispat International, or rights to acquire shares,
whether or not already issued, that represent at any time (and from time to
time) five per cent or more of the total issued and outstanding capital (or the
issued and outstanding capital of any class of shares) of Ispat International or
the ownership of certain profit participating certificates that relate to five
per cent or more of the annual profit of Ispat International or to five per cent
or more of the liquidation proceeds of Ispat International. A deemed substantial
interest is present if (part of) a substantial interest has been disposed of, or
is deemed to have been disposed of, on a non-recognition basis.
Gift, Estate and Inheritance Taxes
No gift, estate and inheritance taxes will arise in the Netherlands
with respect to an acquisition of Class A common shares by way of a gift by, or
on the death of, a holder of Class A common shares who is neither a resident nor
deemed to be resident in the Netherlands, unless:
(i) the holder at the time of the gift has or at the time of his death
had an enterprise or an interest in an enterprise that is or was, in whole or in
part, carried on through a permanent establishment or a permanent representative
in the Netherlands and to which enterprise or part of an enterprise, as the case
may be, the Class A common shares are or were attributable; or
(ii) in the case of a gift of Class A common shares by an individual
who at the time of the gift was neither resident nor deemed to be resident in
the Netherlands, such individual dies within 180 days after the date of the
gift, while being resident or deemed to be resident in the Netherlands.
For purposes of Netherlands gift, estate and inheritance tax, an
individual who holds the Netherlands nationality will be deemed to be resident
in the Netherlands if he has been resident in the Netherlands at any time during
the ten years preceding the date of the gift or his death.
84
For purposes of Netherlands gift tax, an individual not holding the
Netherlands nationality will be deemed to be resident in the Netherlands if he
has been resident in the Netherlands at any time during the twelve months
preceding the date of the gift.
Other Netherlands Taxes and Duties
Other than capital tax which will be payable by Ispat International, no
registration tax, transfer tax, stamp duty or any other similar documentary tax
or duty will be payable in the Netherlands in respect of or in connection with
the subscription, issue, placement, allotment or delivery of the Class A common
shares.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
A copy of any or all of the documents deemed to be incorporated herein
by reference, unless such documents have been modified or superseded as
specified herein, may be obtained at our registered office set out in Item 4.
I. Subsidiary Information
Not applicable.
85
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are to interest rate fluctuations and
to exchange rate movements. We use financial instruments, including fixed and
variable rate debts, as well as swap and collar contracts to finance our
operations and to hedge interest rate exposures. We do not hold or issue
derivative financial instruments for trading purposes. The fair value
information presented is based on the information available to management as of
the date of the balance sheet. Although we are not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since the debt dates, and therefore, the current estimates of fair value may
differ significantly from the amounts presented herein. The estimated fair
values of certain financial instruments have been determined using available
market information or other valuation methodologies that require considerable
judgment in interpreting market data and the developing estimates. The estimates
presented herein are not necessarily indicative of the amounts that we could
realize in the current market exchange.
Interest Rate Risk Overview
For debt obligations the following table presents principal cash flows
and related interest rates by fiscal year of maturity. Variable rates disclosed
represent the weighted average rate of the portfolio at the end of the period.
For the interest rate swaps and collars, the table presents notional amounts and
related interest rates by fiscal year of maturity. For these instruments, the
variable rates presented are based on employed forward (spot) rates in the yield
curve as of the end of each fiscal year. Employed forward (spot) rates should
not be considered the predictor for actual or future interest rates.
Fiscal year end 2002
Expected maturity date
Interest
rate at
December
31,
Years Fair
Long-term debt 2002 2003 2004 2005 2006 2007 there-after Total Value
- --------------------------------------- ------------ -------- ---------- ---------- ---------- ---------- --------------------------
(amounts in million USD)
VARIABLE INTEREST RATES:
First Mortgage Bonds (USD).............. 7 7 330 324 -- -- 668 443
Average Interest Rate.............. 5.65 % 5.82% 7.17 % 8.23% 8.92%
Revolving credit facilities............. -- 76 149 -- -- -- 225 225
2.44% to 3.96%to 5.02% to
2.94% 4.46 5.52
Senior Secured Credit Facilities (USD).. 54 119 118 -- -- -- 291 291
Average Interest Rate.............. 4.90 % to 5.07 6.42 % 7.48 %
5.90% % to to 7.42% to 8.48%
6.07%
Bank loans (USD)........................ 4 5 63 85 -- 195 352 352
Average Interest Rate.............. 4.20 % to 4.37 5.72 % 6.78 % 7.48 % 7.97 %
6.08% % to to 7.60% to to to
6.25% 8.66 % 9.36 % 9.85 %
EXIM Bank--United States (USD).......... -- 6 6 6 -- 11 29 29
Average Interest Rate.............. 2.50 % 2.67% 4.02% 5.08 % 5.78% 6.27%
International Financial Corporation
(USD)................................... 13 8 3 2 -- -- 26 26
Average Interest Rate.............. 5.19 % to 5.36 6.71 % 7.77 % 8.47 %
5.30% % to to 6.82% to to
5.47% 7.88% 8.58%
Others.................................. 5% to 10% 20 13 13 4 4 1 55 55
----- -------- --------- --------- --------- --------- ------ -------
98 234 682 421 4 207 1,646 1,421
----- -------- --------- --------- --------- --------- ------ -------
86
Fiscal year end 2002
Expected maturity date
---------------------------------------------------------------------------------------------
Interest
rate at
December
31, Years Fair
Long-term debt 2002 2003 2004 2005 2006 2007 there-after Total Value
-------------- ---- ---- ---- ---- ---- ---- ----------------- -----
(amounts in million USD)
FIXED INTEREST RATES:
Senior Secured Notes .................. 13 15 18 23 23 9 101 101
10.40 % 10.40% 10.40% 10.40% 10.40% 10.40% 10.40 %
Senior Export Notes ...................
11 20 31 -- -- -- 62 62
11.17 % 11.17% 11.17% 11.17%
First Mortgage bonds .................. -- 1 2 5 39 41 88 57
5.75% to 5.75% to 5.75% to 5.75% to 5.75% to 5.75% to
7.90% 7.90% 7.90% 7.90% 7.90% 7.90%
Industrial development revenue
bonds ............................ -- -- -- -- 20 92 112 35
5.75% to 5.75% to
7.25% 7.25%
Senior Secured Notes denominated in
Euro .................................. -- -- -- -- -- 129 129 115
11.875% 11.875%
Others................................. 0.03 % to 3 3 1 -- -- 2 9 9
7.54%
---------------------------------------------------------------------------------
27 39 52 28 82 273 501 379
---------------------------------------------------------------------------------
125 273 734 449 86 480 2,147 1,800
---------------------------------------------------------------------------------
87
The following table presents principal cash flows and related interest
rates by fiscal year of maturity for the year ended 2001.
Fiscal year end 2001
Expected maturity date
---------------------------------------------------------------------------------------------
Interest
rate at
December
31,
Years Fair
Long-term debt 2001 2002 2003 2004 2005 2006 there-after Total Value
- --------------------------------------- ------------ -------- ---------- ---------- ---------- ---------- --------------------------
(amounts in million USD)
VARIABLE INTEREST RATES:
First Mortgage Bonds (USD)................ 7 7 7 331 324 -- 676 394
Average Interest Rate................ 6.35% 7.26% 7.86% 8.24% 8.53% 8.53%
Senior Secured Credit Facilities (USD).... 18 58 118 118 -- -- 312 348
Average Interest Rate................ 8.41% to 9.32% to 9.92% to 10.30% to 10.59% to 10.59% to
9.41% 10.32% 10.92% 11.30% 11.59% 11.59%
Credit line agreement (USD)............... 62 33 33 44 55 137 364 364
Average Interest Rate................ 6.39% to 7.21% to 7.81% to 8.19% to 8.48% to 8.48% to 8.48% to
7.85% 8.76% 9.36% 9.74% 10.03% 10.03% 10.03%
EXIM Bank--United States (USD)............. 10 10 9 -- -- -- 29 29
Average Interest Rate................ 2.68% 3.59% 4.19% 4.57%
International Financial Corporation
(USD)..................................... 19 13 8 3 2 -- 45 45
Average Interest Rate................ 7.19% to 8.10% to 8.70% to 9.08% to 9.37% to 9.37% to
7.31% 8.22% 8.82% 9.20% 9.49% 9.49%
Others.................................. 6% to 10% -- 16 2 1 1 6 26 26
----- -------- --------- --------- --------- --------- ------ -------
116 137 177 497 382 143 1,452 1,206
----- -------- --------- --------- --------- --------- ------ -------
88
Fiscal year end 2001
---------------------------------------------------------------------------------------------
Expected maturity date
Interest
rate at
December
31, Years
Fair
Long-term debt 2001 2002 2003 2004 2005 2006 there-after Total Value
-------------- ---- ---- ---- ---- ---- ---- ----------------- -----
(amounts in million USD)
FIXED INTEREST RATES:
Senior Secured Notes ..................... 6 13 15 18 24 31 107 87
10.40 % 10.40% 10.40% 10.40% 10.40% 10.40 %
Unsecured structured senior export
certificates ........................ 52 28 -- -- -- -- 80 76
10.65 % 10.65% 10.65%
First Mortgage bonds ..................... -- 1 2 3 7 103 116 53
5.75% to 5.75% to 5.75% to 5.75% to 5.75% to 5.75% to
7.90% 7.90% 7.90% 7.90% 7.90% 7.90%
Industrial development revenue
bonds ............................... -- -- -- -- -- 128 128 39
5.75% to 5.75% to
7.25% 7.25%
Revolving credit facilities............... -- -- 26 155 -- -- 181 181
2.77% to 3.42% 2.77%
3.42%
Senior Secured Notes denominated in
Euro ..................................... -- -- -- -- -- 119 119 93
11.875% 11.875%
Others................................... 3.58 % to 6 9 8 7 3 5 38 38
7.54%
---------------------------------------------------------------------------------
64 51 51 183 34 386 769 567
---------------------------------------------------------------------------------
180 188 228 680 416 529 2,221 1,773
---------------------------------------------------------------------------------
Interest Rate Instruments
On July 16, 1998, Ispat Inland issued $875 million of First Mortgage
Bonds as security both for the Senior Secured Credit Facilities and for an
interest rate hedge ("the Hedge"). In October 1998, Ispat Inland entered into
the Hedge. The Hedge consists of a five-year interest rate collar. The Hedge is
based on LIBOR with a floor of 4.5% and a ceiling of 6.26% on a notional amount
of $450 million. The fair market value of the Hedge is $14 million as of
December 31, 2002 (2001: $13 million; 2000: $2 million).
The Senior Secured Credit Facility at Ispat Sidbec Inc. is
collateralized by all of its property, plant and equipment and a second ranking
charge on its accounts receivables and inventories In the past Ispat Sidbec has
concluded a few interest rate swap agreements covering approximately $200
million of its borrowings under the Senior Secured Credit Facility, each of
which effectively fixed the base rate (LIBOR) on the swapped portion for various
periods up to September 2003. At the end of December 2002, there were two swaps
in place, each covering $ 100 million of the Senior Secured Credit facility for
periods up to April 2003 and September 2003, respectively, and at fixed LIBOR of
4.81% and 4.9%, respectively.
The fair market value of the interest rate swap is $4.3 million as of
December 31, 2002 (2001: $7.1 million).
See Notes 7 and 8 to the Consolidated Financial Statements on Payables
to Bank (Short Term Debt) and Long Term Debt.
89
Exchange Rate Sensitivity
We have operations in various countries around the world. Each
operation actively manages its foreign currency exposure including by using
derivative financial instruments. We have established a control environment
which includes polices and procedures for risk assessment and the approval and
monitoring of derivative financial instruments activities. These contracts
generally are short term in nature. In this way, we believe we have mitigated a
certain portion of our foreign exchange exposure. As of December 31, 2001 and
2002, the estimated fair value of these forward exchange contracts amount to $42
million and $ 16 million, respectively with a total notional contract amount of
$42 million and $16 million, respectively.
Commodity Price Sensitivity
We utilize derivative commodity instruments not for trading purposes
but to hedge exposure to fluctuations in the costs of natural gas and certain
nonferrous commodities. Timing of these transactions corresponds to the expected
need for the underlying physical commodity and is intended as a hedge against
the cost volatility of these commodities. Contracts generally do not extend out
beyond one year.
At Ispat Inland, futures and swap contracts are used to manage
fluctuations in the cost of natural gas and certain nonferrous metals, primarily
zinc which is used in the coating of steel. Timing of these transactions
corresponds to the expected need for the underlying physical commodity and is
intended as a hedge (not as defined by SFAS No. 133) against the cost volatility
of these commodities. The counterparties to these contracts are internationally
recognized companies which are not considered a credit risk by Ispat Inland.
Such contracts generally do not extend out beyond three years. At December 31,
2002 and 2001, Ispat Inland had entered into contracts for these commodities for
notional amounts of $15 million and $18 million respectively.
At Ispat Sidbec, a hypothetical 10% fluctuation in the purchase price
of natural gas would have an impact on pre-tax income by $5 million (2001- $2
million).
Imexsa utilizes derivative commodity instruments not for trading
purposes but to hedge exposure to fluctuations in the costs of natural gas. In
February 2001, Imexsa entered into a fixed price natural gas contract with Pemex
at a price of $4 per MMBTU for a volume of 25,350 Giga calories per day. On the
above fixed price quantity, a hypothetical 10% fluctuation on the purchase price
of natural gas will have an impact on pre-tax income of approximately $15
million. The fair value of such contracts as on December 31, 2002 was $161
(2001-$209).
90
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Part II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,as
amended) as of a date within 90 days prior to the filing of this annual report
and concluded that, as of the date of their evaluation, the Company's disclosure
controls and procedures were effective and designed to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to them by others within those entities, particularly during the
period in which this annual report is being prepared.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
91
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the reports of
Deloitte & Touche Accountants and Ernst & Young thereon, are filed as part of
this Annual Report.
Page
Report of Deloitte & Touche Accountants......................................F-1
Report of Ernst & Young (Caribbean Ispat Limited)............................F-3
Report of Ernst & Young (Ispat Hamburg Group of Companies)...................F-4
Consolidated Balance Sheets..................................................F-5
Consolidated Statements of Income............................................F-6
Consolidated Statements of Comprehensive Income..............................F-6
Consolidated Statements of Changes in Shareholders' Equity...................F-7
Consolidated Statements of Cash Flows........................................F-8
Notes of Consolidated Financial Statements...................................F-9
ITEM 19. EXHIBITS
Exhibit Number Description
- -------------- -----------
1.1 Amended and Restated Articles of Association of Ispat International
N.V. dated December 31, 2001 (English translation filed as Exhibit 1 to
Ispat International N.V.'s annual report on Form 20-F for the year
ended December 31, 2001, and incorporated by reference hereto).
2.1 Amendments dated March 1, 2002, March 30, 2001 and September 30,1999 to
the Credit Agreement (the "Credit Agreement"), dated July 16, 1998,
among Ispat Inland, L.P., Ispat Inland Inc., Burnham Trucking Company,
Inc., Incoal Company, the Lenders named therein and Credit Suisse First
Boston.
The Credit Agreement (filed as part of Exhibit 3.10 to Ispat
International N.V.'s annual report on Form 20-F for the year ended
December 31, 1998, and incorporated by reference hereto).
Except for such instruments as have been filed herein under Exhibit
2.1, the total amount of long-term debt securities of Ispat
International N.V. authorized under any instrument does not exceed 10%
of the total assets of the Company on a consolidated basis. The Company
undertakes to furnish to the Commission all other instruments relating
to long-term debt of the Company and its subsidiaries upon request by
the Commission.
4.1 Ispat International N.V. Global Stock Option Plan, effective September
15, 1999 (filed as Exhibit 4.1 to Ispat International N.V.'s annual
report on Form 20-F for the year ended December 31, 2000, and
incorporated by reference hereto).
8.1 List of Significant Subsidiaries.
92
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.
Date: February 28, 2003
ISPAT INTERNATIONAL N.V.
By: /s/ Vijay Krishna Goyal
--------------------------
Vijay Krishna Goyal
Company Secretary
93
CERTIFICATION
I, Lakshmi N. Mittal, certify that:
1) I have reviewed this annual report on Form 20-F of Ispat International N.V.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ Lakshmi N. Mittal
- -----------------------
Lakshmi N. Mittal
Chairman and CEO of Ispat International N.V.
94
CERTIFICATION
I, Bhikam C. Agarwal, certify that:
1) I have reviewed this annual report on Form 20-F of Ispat International N.V.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ Bhikam C. Agarwal
- ----------------------
Bhikam C. Agarwal
CFO of Ispat International N.V.
95
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Deloitte & Touche Accountants......................................F-1
Report of Ernst & Young (Caribbean Ispat Limited)............................F-3
Report of Ernst & Young (Ispat Hamburg Group of Companies)...................F-4
Consolidated Balance Sheets..................................................F-5
Consolidated Statements of Income............................................F-6
Consolidated Statements of Comprehensive Income..............................F-6
Consolidated Statements of Changes in Shareholders' Equity...................F-7
Consolidated Statements of Cash Flows........................................F-8
Notes of Consolidated Financial Statements...................................F-9
Accountants
Oostmaaslaan 71
3063 AN Rotterdam
P.O. Box 4506
3066 AM Rotterdam
The Netherlands
Tel: +31(10)8801400
Fax: +31(10)8801616
www.deloitte.nl
Deloitte
& Touche
To the Board of Directors and Shareholders of
Ispat International N.V.
Date
February 17, 2003 A.J.Coster OML/2685370/op9998
Independent Auditors' report
We have audited the accompanying consolidated balance sheets of Ispat
International N.V. and subsidiaries at December 31, 2001 and 2002, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002, all expressed in millions of U.S. Dollars. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We did not audit the combined financial statements of the Ispat Hamburg Group of
Companies and the financial statements of Caribbean Ispat Limited at December
31, 2002 and for each of the three years in the period ended December 31, 2002.
We also did not audit the consolidated financial statements of Ispat Unimetal
S.A. as of December 31, 2001 and for the year ended December 31, 2001. In
addition, we did not audit the consolidated financial statements of Trefileurope
S.A. as of December 31, 2000 and for the year ended December 31, 2000. Each of
the aforementioned companies is a consolidated subsidiary of the Company. The
financial statements of these subsidiaries reflect total assets constituting 18%
and 13%, respectively, of consolidated total assets at December 31, 2001 and
2002, and total sales constituting 15%, 25% and 14%, respectively, of
consolidated total sales for the years ended December 31, 2000, 2001 and 2002.
Those financial statements were audited by other auditors whose reports thereon
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for such subsidiaries, is based solely on the reports of such other
auditors.
*/We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
- ---------
Deloitte Deloitte & Touche Accountants is a Partnership
Touche of private (professional) companies.
Tohmatsu
- ---------
F-1
Deloitte
& Touche
February 17, 2003
2
OML/2685370/op9998
In our opinion, based on our audits and the reports of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2001 and 2002, and the results
of its operations and cash flows for each of the three years in the period ended
December 31, 2002, in conformity with generally accepted accounting principles
in the United States of America.
/s/ Deloitte & Touche Accountants
F-2
ERNST & YOUNG
P.O. Box 158
517 Sweet Briar Road Phone: (868) 628-1105
St. Clair Fax: (868) 622-0918
Port-of-Spain
Trinidad and Tobago
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF CARIBBEAN ISPAT LIMITED
We have audited the balance sheets of Caribbean Ispat Limited as of December 31,
2002 and 2001, and the related statements of operations and comprehensive loss,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caribbean Ispat Limited as of
December 31, 2002 and 2001, and the results of its operations and cash flows for
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Port of Spain,
TRINIDAD:
February 14, 2003
F-3
ERNST & YOUNG Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
Valentinskamp 24
20354 Hamburg
Postiach 30 17 09
20306 Hamburg
Telefon (0 40) 3 61 32-0
Telefax (0 40) 3 61 32-777
hamburg-@ernst-young.de
www.ernst-young.de
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THE ISPAT HAMBURG GROUP OF COMPANIES
We have audited the consolidated balance sheet of the Ispat Hamburg Group of
Companies (collectively the "Group", which is a subsidiary of Ispat
International N.V.) as at December 31, 2002 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for the year ended December 31, 2002 and the combined balance sheet
of the Ispat Hamburg Group of Companies as at December 31, 2001 and the related
combined statements of income, comprehensive income, changes in shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2001. These financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of matarial misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Ispat Hamburg
Group of Companies as of December 31, 2002 and the consolidated results of their
operations and their cash flows for the year ended December 31, 2002 and the
combined financial position of the Ispat Hamburg Group of Companies as of
December 31, 2001 and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
M. Tabel E.,-W. Schluschen
Wirtschaftsprufer Wirtschaftsprufer
Hamburg, Germany
February 12, 2003
F-4
ISPAT INTERNATIONAL N.V. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
------------
2001 2002
---- ----
(Millions of U.S. Dollars,
except share data)
ASSETS
Current Assets:
Cash and cash equivalents ..................................................... $ 85 $ 77
Trade accounts receivable, net of allowance for doubtful accounts
of $31 at December 31, 2001 and $41 at December 31, 2002 ................ 451 529
Inventories (Note 3) ....................................................... 805 873
Prepaid expenses and other ................................................. 65 95
Deferred tax assets (Note 12) .............................................. 37 38
------- -------
Total Current Assets .................................................... 1,443 1,612
Property, Plant and Equipment - net (Note 4) .................................. 3,109 3,035
Investments in Affiliates and Joint Ventures (Note 5) ......................... 299 257
Deferred Tax Assets (Note 12) ................................................. 273 438
Intangible Pension Assets (Note 11) ........................................... 83 84
Other Assets .................................................................. 106 86
------- -------
Total Assets ............................................................ 5,313 $ 5,512
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Payable to banks and current portion of long-term debt (Note 7) ............ $ 338 $ 262
Trade accounts payable ..................................................... 540 607
Accrued expenses and other liabilities ..................................... 303 377
Deferred tax liabilities (Note 12) ......................................... 28 28
------- -------
Total Current Liabilities ............................................... 1,209 1,274
Long-Term Debt (Notes 8 and 9) ................................................ 2,041 2,022
Deferred Tax Liabilities (Note 12) ............................................ 134 69
Deferred Employee Benefits (Note 11) .......................................... 1,493 1,881
Other Long-Term Obligations ................................................... 98 138
------- -------
Total Liabilities ....................................................... 4,975 5,384
======= =======
Commitments and Contingencies (Notes 15 and 16)
Shareholders' Equity (Note 10)
Common Shares:
Class A shares, (euro) 0.01 par value per share, 500,000,000
shares authorized, 54,850,000 shares issued and 51,735,794
and 49,757,213 outstanding at December 31, 2002 and 2001
respectively ............................................................ -- --
Class B shares,(euro)0.10 par value per share, 72,150,000 shares
authorized, 72,150,000 shares issued and outstanding .................... 7 7
Additional Paid-in Capital .................................................... 480 484
Retained Earnings ............................................................. 92 141
Cumulative Other Comprehensive Income ......................................... (241) (504)
------- -------
Total Shareholders' Equity .............................................. 338 128
------- -------
Total Liabilities and Shareholders' Equity .............................. $ 5,313 $ 5,512
======= =======
See notes to the consolidated financial statements
F-5
ISPAT INTERNATIONAL N.V. AND SUBSIDIARIES
Consolidated Statements of Income
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(Millions of U.S. Dollars,
except share and per share data)
Sales ................................................................... $ 5,343 $ 4,486 $ 4,889
Costs and expenses:
Cost of sales (exclusive of depreciation shown separately below) ..... 4,670 4,273 4,356
Depreciation ......................................................... 177 177 177
Selling, general and administrative .................................. 181 155 152
Other operating expenses (Note 13) ................................... -- 75 62
------- ------- -------
5,028 4,680 4,747
------- ------- -------
Operating income (loss) ................................................. 315 (194) 142
Other income (expense) - net ............................................ 23 13 14
Financing costs:
Interest expense-net of capitalized interest of $2 in 2000, .......... (241) (242) (208)
$2 in 2001 and $1 in 2002
Interest income ...................................................... 25 14 5
Net gain (loss) from foreign exchange ................................ -- (9) 23
------- ------- -------
(216) (237) (180)
------- ------- -------
Income (loss) before taxes .............................................. 122 (418) (24)
Income tax expense (benefit): (Note 12)
Current .............................................................. 20 8 18
Deferred ............................................................. 3 (114) (72)
------- ------- -------
23 (106) (54)
------- ------- -------
Net income (loss) from continuing operations ............................ 99 (312) 30
Extraordinary gain on repurchase of debt, net of tax (Note 8) ........... -- -- 19
------- ------- -------
Net income (loss) ....................................................... $ 99 $ (312) $ 49
======= ======= =======
Basic and diluted earnings per common share from continuing operations... $ 0.82 $ (2.58) $ 0.24
Basic and diluted extraordinary earnings per common share ............... -- -- 0.16
Basic and diluted earnings per common share ............................. 0.82 (2.58) 0.40
Weighted average common share outstanding (in millions) ................. 120 121 123
Consolidated Statements of Comprehensive Income
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(Millions of U.S. Dollars)
Net income (loss) ....................................................... $ 99 $ (312) $ 49
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment - net of income
taxes of $6 in 2000, $2 in 2001 and $2 in 2002 ....................... (21) (20) 6
Minimum pension liability adjustment - net of income
taxes of $12 in 2000, $120 in 2001 and $148 in 2002 .................. (26) (213) (273)
Derivative financial instruments ........................................ -- (3) 4
Others .................................................................. (3) (5) --
------- ------- -------
(50) (241) (263)
------- ------- -------
Comprehensive income (loss) ............................................. $ 49 $ (553) $ (214)
======= ======= =======
See notes to the consolidated financial statements
F-6
ISPAT INTERNATIONAL N.V. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Cumulative Other
Comprehensive Income
---------------------
Foreign
Common Stock Additional Currency Derivative Pension
------------ Paid-in Retained Translation Financial and Shareholders'
Shares Amount Capital Earnings Adjustment Instrument Others Equity
(Millions of U.S. Dollars and millions of shares)
Balance at December 31, 1999 ....... 120 $ 4 $ 480 $ 320 $ 57 $ -- $ (7) $ 854
Net Income ......................... -- -- 99 -- -- -- 99
Other Comprehensive Income (loss)... -- -- -- (21) -- (29) (50)
Treasury stock (Note 10) ........... -- (1) -- -- -- -- (1)
Dividends on common shares @
$0.15 per common share ....... -- -- (18) -- -- -- (18)
---- ----- ----- ----- ----- ----- ----- -----
Balance at December 31, 2000 ....... 120 4 479 401 36 -- (36) 884
Net Loss ........................... -- -- (312) -- -- -- (312)
Other Comprehensive Income (loss)... -- -- -- (20) (8) (213) (241)
Treasury stock (Note 10) ........... 2 -- 4 -- -- -- -- 4
Redenomination in Euro (Note 10) 3 (3) -- -- -- -- --
Other (Note 10) ................... -- -- 3 -- -- -- 3
---- ----- ----- ----- ----- ----- ----- -----
Balance at December 31, 2001 ....... 122 7 480 92 16 (8) (249) 338
Net lncome ......................... -- -- 49 -- -- -- 49
Other Comprehensive Income (loss)... -- -- -- 6 4 (273) (263)
Treasury stock (Note 10) ........... 2 -- 4 -- -- -- -- 4
---- ----- ----- ----- ----- ----- ----- -----
Balance at December 31, 2002 ....... 124 $ 7 $ 484 $ 141 $ 22 $ (4) $(522) $ 128
==== ===== ===== ===== ===== ===== ===== =====
See notes to the consolidated financial statements
F-7
ISPAT INTERNATIONAL N.V. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(Millions of U.S. Dollars)
Operating activities:
Net income (loss) from continuing operations ................ $ 99 $ (312) $ 30
Extraordinary gain on repurchase of debt, net of tax ........ -- -- 19
Net income (loss) ........................................... 99 (312) 49
Adjustments required to reconcile net income to net cash
provided from operations:
Depreciation ........................................... 177 177 177
Deferred employee benefit costs ........................ (47) (106) (52)
Net foreign exchange loss (gain) ....................... -- 9 (23)
Deferred income tax .................................... 3 (114) (61)
Undistributed earnings from joint ventures ............. (26) 12 --
Other operating expenses ............................... -- 56 62
Other .................................................. (12) 2 (2)
Changes in operating assets and liabilities:
Trade accounts receivable .............................. 53 114 (64)
Short-term investments ................................. 64 78 --
Inventories ............................................ 27 169 (37)
Prepaid expenses and other ............................. (27) 24 (31)
Trade accounts payable ................................. 62 (81) 45
Accrued expenses and other liabilities ................. 8 12 105
------- ------- -------
Net cash provided from operating activities ............... 381 40 168
------- ------- -------
Investing activities:
Purchase of property, plant and equipment ................. (184) (97) (108)
Proceeds from sale of assets and investments
including affiliates and joint ventures ................ 23 37 18
Investments in affiliates and joint ventures .............. (25) 8 11
Other ..................................................... (9) 4 (1)
------- ------- -------
Net cash used in investing activities ..................... (195) (48) (80)
------- ------- -------
Financing activities:
Proceeds from payable to banks ............................ 2,294 2,416 2,359
Proceeds from long-term debt .............................. 297 125 125
Payments of payable to banks .............................. (2,341) (2,418) (2,346)
Payments of long-term debt ................................ (370) (250) (243)
Purchase of treasury stock ................................ (1) (1) (1)
Sale of treasury stock .................................... -- 5 5
Dividends ................................................. (18) -- --
------- ------- -------
Net cash used by financing activities ..................... (139) (123) (101)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ...... 47 (131) (13)
------- ------- -------
Effect of exchange rate changes on cash ................... (3) 2 5
------- ------- -------
Cash and cash equivalents:
At the beginning of the year .............................. 170 214 85
------- ------- -------
At the end of the year .................................... $ 214 $ 85 $ 77
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest - net of amounts capitalized ..................... $ 188 $ 244 $ 199
Income taxes .............................................. 3 4 20
See notes to the consolidated financial statements
F-8
ISPAT INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
Nature of business
Ispat International N.V. ('Ispat International') together with its
subsidiaries (the 'Company') is a manufacturer of steel and steel related
products. The Company owns and operates manufacturing facilities in the United
States of America ('U.S.'), Mexico, Canada, Trinidad and Tobago ('Trinidad'),
Germany, France and Luxembourg. These manufacturing facilities, each of which
includes its respective subsidiaries, are referred to herein as the 'Operating
Subsidiaries'.
Organization
Ispat International is formed and organized under the laws of the
Netherlands to hold directly or indirectly certain subsidiaries involved in the
steel manufacturing activities described above. Ispat International has no
manufacturing operation of its own and its major assets are interests in the
common and preferred stock of the Operating Subsidiaries.
Basis of presentation
The consolidated financial statements, which include the accounts of Ispat
International and its subsidiaries all of which are controlled by Ispat
International, have been prepared in accordance with US Generally Accepted
Accounting Principles ('US GAAP') (see also Note 2). Intercompany balances and
transactions have been eliminated on consolidation.
The records of each of the Operating Subsidiaries are maintained in the
currency of the country in which the Operating Subsidiary is located, using the
statutory or generally accepted accounting principles of such country. For
consolidation purposes, the financial statements which result from such records
have been adjusted to conform to US GAAP, using the U.S. Dollar as the reporting
currency.
The principal subsidiaries of Ispat International, each of which is a wholly
owned subsidiary, included in the consolidated financial statements are as
follows:
Company Location
- ------- --------
Caribbean Ispat Limited............................................... Trinidad
Ispat Mexicana, S.A. de C.V........................................... Mexico
Ispat Sidbec Inc...................................................... Canada
Ispat Hamburger Stahlwerke GmbH....................................... Germany
Irish Ispat Limited (1)............................................... Ireland
Ispat Stahlwerk Ruhrort GmbH and Ispat Walzdraht Hochfeld GmbH........ Germany
Ispat Inland Inc...................................................... U.S.
Ispat Unimetal S.A. (including Trefileurope and Society
Metallurgique de Revigny S.N.C.) .................................. France
1. On June 15, 2001 the Company announced the shutdown of its steel making
operations in Haulbowline, County Cork, Ireland and the calling of a
creditors meeting for the appointment of a liquidator. This decision was
taken in view of continuing losses at Irish Ispat and after months of
evaluating ways to make the plant more competitive in light of market
conditions at that time.
Foreign currency translation and translation of financial statements
Transactions in currencies other than the functional currency of a
subsidiary are recorded at the rates of exchange prevailing at the date of the
transaction. Monetary assets and liabilities in currencies other than the
functional currency are
F-9
remeasured at rates of exchange prevailing at the balance sheet date and the
related transaction gains and losses are reported in the statements of income.
Upon consolidation, the results of operation of the subsidiaries and
affiliates whose functional currency is other than the U.S. Dollar are
translated into U.S. Dollars at weighted average exchange rates in the year and
assets and liabilities are translated at year end exchange rates. Translation
adjustments are presented as a separate component of other comprehensive income
in the financial statements and are included in net earnings only upon sale or
liquidation of the underlying foreign subsidiary or affiliated company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions used.
Recent accounting pronouncements
SFAS No. 143
The Financial Accounting Standards Board ('FASB') has issued Statement of
Financial Accounting Standards ('SFAS') No. 143, 'Accounting for Asset
Retirement Obligations', which is effective for all fiscal years beginning after
June 15, 2002. SFAS No.143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is evaluating this pronouncement
to determine its impact, if any, on the consolidated financial statements.
SFAS No. 145
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
'Reporting Gains and Losses from Extinguishment of Debt', and an amendment of
that Statement, SFAS No. 64, 'Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements'. SFAS No. 145 also rescinds SFAS No. 44, 'Accounting
for Intangible Assets of Motor Carriers'. SFAS No. 145 amends SFAS 13,
'Accounting for Leases', to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effect that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meaning, or describe their applicability under changed conditions.
The provisions of SFAS No. 145 related to the recession of SFAS No. 4 shall
be applied in fiscal years beginning after May 15, 2002. The provisions in
paragraph 8 and 9(c) of SFAS No. 145 related to statement 13 shall be effective
for transactions occurring after May 15, 2002. All other provisions of SFAS No.
145 shall be effective for financial statements issued on or after May 15, 2002.
The Company during the current fiscal year ended has reported $19 as
extraordinary item being the gain on repurchase of its certain debts. Upon
adoption of SFAS No. 145 any such gain or loss on extinguishment of debt
previously classified as an extraordinary item in prior periods presented that
does not meet the criteria of APB Opinion No. 30 for such classification will be
reclassified to conform to the provisions of SFAS No. 145. The Company will
adopt SFAS No. 145 as of January 1, 2003 and will report such gains and losses
in 'Other income (expenses) - net' line item in accordance with SFAS No. 145.
SFAS No. 146
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, 'Accounting for Costs Associated with Exit or Disposal Activities'.
SFAS 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 replaces Emerging Issues Task Force No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company is currently reviewing the impact of the
adoption of SFAS 146 on the Company's consolidated financial statements.
F-10
SFAS No. 148
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, 'Accounting for Stock-Based Compensation which addresses
financial accounting and reporting for recording expenses for the fair value of
stock options. SFAS 148 provides alternative methods of transition for a
voluntary change to fair value based method of accounting for stock-based
employee compensation. Additionally, SFAS 148 requires more prominent and more
frequent disclosures in financial statements about the effects of stock-based
compensation. The Company has determined that the adoption of SFAS 148 does not
have material impact on its financial position or results of operations.
FIN 45
In November 2002, the FASB issued FASB Interpretation No.45 ('FIN 45'),
'Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others'. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 is effective on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company is currently evaluating the impact of the application of this
interpretation, but does not expect a material impact from the application of
FIN 45 on its consolidated financial statements.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of APB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the Equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the equity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
Cash equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are carried at the lower of cost or net realizable value. Cost
is determined using the average cost and first in, first out ('FIFO") method.
Costs of production in process and finished goods include the purchase costs of
raw materials and conversion costs such as direct labor and an allocation of
fixed and variable production overheads. Raw materials and spare parts are
valued at invoice cost inclusive of freight and other shipping costs.
Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight line method over the useful lives of the related assets, ranging from
10 to 50 years for buildings and 2 to 45 years for machinery and equipment.
Major improvements which add to productive capacity or extend the life of an
asset are capitalized while repairs and maintenance are charged to expense as
incurred. Property, plant and equipment under construction are recorded as
construction in progress until they are ready for their intended use; thereafter
they are transferred to the related category of property, plant and equipment
and depreciated over their estimated useful lives. Interest during construction
is capitalized to property, plant and equipment under construction until the
assets are ready for their intended use. Gains and losses on retirement or
disposal of assets are determined as the difference between net disposal
proceeds and carrying amount and reflected in the statement of income.
Long-lived assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of evaluating the recoverability
of long-lived assets, the recoverability test is performed using undiscounted
future net cash flows of assets grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. If the undiscounted future net cash flows are less than the
carrying amount of the asset, the asset is deemed impaired. The amount of the
impairment is measured as the difference between the carrying value and the fair
value of the asset.
Investment in affiliates and joint ventures
Investments in majority owned affiliates and joint ventures, where control
does not exist and 20% to 50% owned affiliates and joint ventures in which the
Company has the ability to exercise significant influence, are accounted for
under the equity method of accounting whereby the investment is carried at cost
of acquisition, plus the Company's equity in undistributed earnings or losses
since acquisition, less dividends received.
Investments in less than 20% owned affiliates are accounted for by the cost
method.
F-11
The Company periodically reviews all of its investments in affiliates and
joint ventures for which fair value is less than cost to determine if the
decline in value is other than temporary. If the decline in value is judged to
be other than temporary, the cost basis of the investment is written down to
fair value. The amount of any write-down is included in other operating
expenses.
Debt issuance costs
Debt issuance costs, which are included in other assets, are stated at cost
and amortized over the life of the related debt using the effective interest
method. Amortization of debt issuance costs is included in interest expense
which is a component of financing costs, or alternatively, capitalized as
borrowing costs on qualifying assets where applicable.
Retirement benefits
The Company has defined benefit pension plans covering majority of its
employees. Benefits are based on, generally, the employee's years of service and
compensation. For those plans, which are funded, the assets are held in separate
trustee administered funds. The Company's policy is to amortize prior service
costs over the average future service period of active plan participants.
Experienced gains and losses in excess of 10% of the greater of the accumulated
benefit obligation and fair value of plan assets are amortized over the average
remaining service period of active participants. The liabilities and net
periodic pension cost related to these plans are calculated by independent
actuaries on the basis of formulas defined in the plans using the projected unit
actuarial credit method.
In addition to providing certain pension benefits, the Company sponsors
several unfunded defined post-retirement plans that provide health care and life
insurance benefits to majority of its active and retired employees and their
covered dependent and beneficiaries. These plans are contributory, with retiree
contributions adjusted periodically, and contain other cost-sharing features,
such as deductibles and coinsurance. Covered employees generally are eligible
for these benefits when they have reached a certain age and these benefits are
based on length of service.
Revenue recognition
Revenues are primarily recognized when products are shipped or services are
provided to customers, the sales price is fixed and determinable, collectibility
is reasonably assured, and title and risks of ownership have passed to the
buyer. Costs associated with revenues, including shipping and other
transportation costs, are recorded in cost of sales.
Accounting for shipping and handling costs
The Company classifies all amounts billed to a customer in a sale
transaction related to shipping and handling as sales and all shipping and
handling costs as cost of sales.
Financing costs
Financing costs include interest, amortization of discounts or premiums on
borrowings, amortization of costs incurred in connection with the arrangement of
borrowings and net gain or loss from foreign exchange on translation of
long-term debt, net of unrealized gains and losses on foreign exchange
contracts.
Research and development costs
Research and development costs are expensed as incurred.
Environmental costs
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation or cost reduction, are expensed. Liabilities are recorded
when environmental assessments and or remedial efforts are probable, and the
cost can be reasonably estimated based on ongoing engineering studies,
discussions with the environmental authorities and assumptions as to the areas
that may have to be remediated along with the nature and extent of the
remediation that may be required. The ultimate cost to the Company is dependent
upon factors beyond its control such as the scope and methodology of the
remedial action requirements to be established by environmental and public
health authorities, new laws or government regulations, rapidly changing
technology and the outcome of any potential related litigation.
Taxes on income
The provision for income taxes includes income taxes currently payable or
receivable and those deferred. Deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between the
financial statement
F-12
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets are also recognized for the estimated future effects of tax
loss carry-forwards. Deferred tax assets and liabilities are measured using
enacted statutory tax rates in effect for the year in which the differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in the statement of operations
in the period in which the enactment date changes. Deferred tax assets are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized.
Derivative financial instruments
Derivative financial instruments are utilized by the Company to manage
commodity price and foreign exchange risks. The Company has established a
control environment which includes policies and procedures for risk assessment
and the approval and monitoring of derivative financial instrument activities.
Derivative financial instruments utilized by the Company also include foreign
currency forward contracts. Additionally, derivatives are used to hedge exposure
to interest rate fluctuations for floating rate debt for which the gains or
losses are recognized in interest expense. The Company does not enter into
foreign currency hedging contracts related to its investment in affiliated
companies.
All derivatives, whether designated in hedging relationships or not, are
recorded on the balance sheet at fair value. If the derivative is designated as
a fair value hedge, the changes in the fair value of the derivative and the
hedged item are recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ('OCI') and are recognized in the income statement
when the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. Gains and losses
related to financial instruments that are utilized to manage exposures to
fluctuations in the cost of energy and raw materials used in the production
process are recognized as a part of the cost of the underlying product or
service when the contracts are closed.
Earnings per common share
Earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the periods presented. The
computation of diluted earnings per common share is similar to basic earnings
per common share, except that diluted earnings per share reflects the potential
dilution that could occur if dilutive securities and other contracts to issue
common shares were exercised or converted into common shares or resulted in the
issuance of common shares that then shared in the earnings (losses) of the
Company.
Stock Option Plan
In 1999, the Company established the Ispat International N.V. Global Stock
Option Plan (the 'Ispat Plan'). SFAS No. 148, 'Accounting for Stock-Based
Compensation' encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company had
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in APB 25 and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of Ispat International's stock at the date of the grant over
the amount an employee must pay to acquire the stock. The Company has adopted
the disclosure requirements of SFAS 148. The Company has decided to expense
stock-based compensation starting 2003.
Segment reporting
The Company operates in a single business segment, which is composed of the
manufacturing of semi-finished and finished steel products.
Reclassifications
Certain reclassifications have been made to the prior period's financial
statements in order to conform to the 2002 classifications.
Consolidation policy
The consolidated financial statements include the accounts of the Company
and all significant subsidiaries. Intercompany transactions and balances have
been eliminated in the consolidation.
F-13
NOTE 3: INVENTORIES
December 31,
------------
2001 2002
---- ----
Finished products $ 278 $ 280
Production in process 210 252
Raw materials 196 224
Manufacturing supplies spare parts and other 121 117
------ ------
$ 805 $ 873
====== ======
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
Buildings Machinery
and and Construction
Land Improvements equipment in process Total
---- ------------ --------- ---------- -----
Balance at December 31, 2001
Gross value $ 71 $ 544 $ 3,551 $ 66 $ 4,232
Accumulated depreciation -- (128) (995) -- (1,123)
------- ------- ------- ------- -------
Net carrying value 71 416 2,556 66 3,109
------- ------- ------- ------- -------
Balance at December 31, 2002
Gross value 68 543 3,574 48 4,233
Accumulated depreciation -- (160) (1,038) -- (1,198)
------- ------- ------- ------- -------
Net carrying value $ 68 $ 383 $ 2,536 $ 48 $ 3,035
======= ======= ======= ======= =======
NOTE 5: INVESTMENTS IN AFFILIATES AND JOINT VENTURES
The Company's investments in affiliates and joint ventures, which include joint
ventures accounted for using the equity method, are as follows:
Operating Ownership Type of December 31,
Investee activity percentages ownership 2001 2002
- -------- -------- ----------- --------- ---- ----
Located in U.S.
Empire Iron Mining Partnership................... Taconite/
('E.I.M.P.')(1).................................. Pellets 21% Partnership $ 38 $ -
PCI Associates................................... Pulverized coal 50% Partnership 24 22
I/N Tek(2)....................................... Cold rolling 60% Partnership 48 52
I/N Kote......................................... Galvanizing 50% Partnership 136 140
Located in Mexico
Consorcio Minero
Benito Juarez.................................... Mining and
Pena Colorada S.A. de C.V. pelletizing plant
('Pena Colorada')................................ 50% Common stock 24 10
Servicios Siderurgicos Integrados, S.A. Port operations,
de C.V. ('Sersiin').............................. lime, industrial
gases and
engineering workshop 50% Common stock 8 9
Located in Canada
Sorevco.......................................... Galvanizing plant 50% Limited partnership 6 7
Delta Tube....................................... Tubes 40% Limited partnership 2 2
Located in Germany
Westfalische Drahtindustrie GmbH ('WDI')......... Wire drawing 33.3% Common stock 10 11
Other............................................ - - - 3 4
------ ------
$ 299 $ 257
====== ======
F-14
1) U.S. Operating Subsidiary sold 47.5% of its 40% interest in E.I.M.P.
effective December 31, 2002, of the mine to Cleveland Cliffs, and its entire
investment in the partnership was written off. See also Note 13.
2) I/N Tek, a general partnership formed for a joint venture between the
Company and Nippon Steel Corporation ('NSC'), owns and operates a
cold-rolling facility. I/N Tek is 60% owned by a wholly owned subsidiary of
the Company and 40% owned by NSC. The Company has rights to the productive
capacity of the facility, except in certain limited circumstances and has an
obligation to use the facility for the production of cold rolled steel,
under a tolling arrangement with I/N Tek. Due to this lack of control by the
Company, the Company accounts for its investment in I/N Tek under the equity
method. The Company does not exercise control over I/N Tek as all
significant management decisions of the joint venture require agreement by
both the partners.
Summary condensed information, in the aggregate, of the Company's investments
accounted for using the equity method is disclosed as follows:
December 31,
------------
2000 2001 2002
---- ---- ----
Condensed Statement of Income Data
Gross revenue............................... $ 1,728 $ 1,508 $ 1,088
Gross profit................................ 277 115 83
Net income.................................. 94 24 40
At December 31,
---------------
2001 2002
---- ----
Condensed Balance Sheet Data
Current assets ............................. $ 380 $ 388
Total assets .............................. 1,643 1,598
Current liabilities.......................... 422 455
Total liabilities............................ 1,082 1,110
Net assets .............................. 561 488
NOTE 6: BALANCES AND TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties, all of which are affiliates and joint
ventures of the Company were as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Transactions
Purchases of raw material:
Pena Colorada ............................... $ 34 $ 26 $ 33
Sersiin ..................................... 23 14 18
E.I.M.P ..................................... 118 106 102
PCI Associates (Tolling fee) ................ 46 43 34
LNM Holdings N.V. and its subsidiaries ...... -- -- 29
Sales:
WDI ......................................... 43 51 47
Sorevco ..................................... 19 16 22
I/N Kote .................................... 343 311 346
LNM Holdings N.V. and its subsidiaries ...... 2 9 8
Other ....................................... 6 9 18
Purchases:
I/N Tek (Tolling charges) ................... 146 143 142
Other ....................................... 7 4 7
Sale of plant property & equipment - net of loan
LNM Holdings N.V ............................ -- 16 --
F-15
Year ended December 31,
-----------------------
2001 2002
---- ----
Receivables:.......................................
WDI.......................................... $ 12 $ 12
LNM Holdings N.V. and its subsidiaries ...... 2 3
Others....................................... 8 7
Payables:..........................................
Sersiin...................................... 1 9
LNM Holdings N.V. and its subsidiaries ...... 2 5
Others....................................... 8 8
Accrued expenses and other liabilities.............
LNM Holdings N.V. ........................... - 5
Other long-term obligation:
LNM Holdings N.V. ........................... - 25
LNM Holdings N.V., Ispat Karmet JSC and P.T. Ispat Indo, indirectly
wholly-owned subsidiaries of the controlling shareholder, have entered into
management services agreements with the Company pursuant to which LNM Holdings
N.V., Ispat Karmet JSC and P.T. Ispat Indo pay fee to the Company as
compensation for management as and when services are rendered by the Company.
The Company and LNM Holdings N.V. completed an agreement effective June 17,
2002 under which the Company, through its subsidiaries, will provide management
and support services to LNM Holdings N.V. and its subsidiaries. These services
will be offset against an advance payment of $30 million over the next several
years.
NOTE 7: PAYABLE TO BANKS
Payable to banks include borrowings and overdraft. The Company has the following
secured and unsecured bank lines and other working capital facilities:
At December 31,
---------------
2001 2002
---- ----
Committed.................................................................................. $ 540 $ 485
Uncommitted................................................................................ 53 60
------- -------
..................................................................................... $ 593 $ 545
------- -------
The Company had the following under such bank lines and working capital facilities:
Presented under current liabilities (includes overdraft of $31 in 2001 and $21 in 2002).... $ 159 $ 137
Presented under long-term liabilities...................................................... 183 225
------- -------
..................................................................................... $ 342 $ 362
------- -------
Borrowings under the lines are primarily denominated in U.S. Dollars, except for
the following:
Euro: (euro)45 million (2001-(euro)55 million) inventory financing credit facility......... $ 10 $ 29
Other Euro credit facilities......................................................... -- 8
British Pound.............................................................................. 1 5
Canadian dollar (147 million Canadian dollar credit facility).............................. 2 --
French Franc............................................................................... 14 --
Italian Lira............................................................................... 2 --
======= ========
These facilities do not include securitizations and factoring of
receivables, which are discussed in Note 18.
The credit facilities provide for borrowing at various interest rates and
support letters of credit in addition to providing borrowings to fund local
working capital requirements at the Operating Subsidiaries. Weighted-average
interest rate on the bank lines, working capital facilities and temporary
overdrafts ranged from 4.9% to 6.6% in 2001 and 2.6% to 6.5% in 2002.
F-16
Certain of the credit facilities contain restrictive covenants that (i)
require the Company's subsidiaries to comply with certain financial maintenance
tests including the ratio of current assets to current liabilities and the ratio
of total liabilities to total capital; (ii) require the maintenance of specified
levels of net worth, (iii) prohibit subsidiaries from entering into agreements
that restrict their ability to pay dividends and (iv) limit the payment of
dividends (see Note 10).
Certain of the lines of credit are collateralized by current assets and
property, plant and equipment with a net carrying value of $893 at December 31,
2002 (2001 - $788).
NOTE 8: LONG-TERM DEBT
December 31,
------------
2001 2002
---- ----
AT U.S. OPERATING SUBSIDIARY:
First Mortgage Bonds:
Series U, Tranche B, $350, due July 16, 2005 ..................... $ 338 $ 334
Series U, Tranche C, $350, due July 16, 2006 ..................... 338 334
Series R, 7.9% due January 15, 2007 .............................. 32 29
Series 1977, 5.75% due February 1, 2007 .......................... 21 20
Series 1993, 6.8% due June 1, 2013 ............................... 44 26
Series 1995, 6.85% due December, 2012 ............................ 19 13
Industrial Development Revenue Bonds:
Pollution Control Project No 11, 7.125% due June 1, 2007 ......... 21 21
Pollution Control Project No 13, 7.250% due November 1, 2011 ..... 42 32
Exempt Facilities Project No 14, 6.7% due November 1, 2012 ....... 5 5
Exempt Facilities Project No 15, 5.75% due October 1, 2011 ....... 52 46
Exempt Facilities Project No 16, 7% due January 1, 2014 .......... 8 8
Revolving Credit Facilities - 7.09% to 7.71% ..................... 181 225
AT MEXICO OPERATING SUBSIDIARY
Bank loans denominated in U.S. Dollars, floating interest ........ 364 352
Senior Structured Export Certificates, 10.625% ................... 80 62
Export-Import Bank of the U.S., LIBOR plus 0.30% ................. 29 29
AT CANADA OPERATING SUBSIDIARY
Senior Secured Credit Facilities(1):
Tranche A, $150, LIBOR plus 1.25%-4.05% .......................... 70 54
Tranche B, $125, LIBOR plus 1.75%-4.55% .......................... 121 118
Tranche C, $125, LIBOR plus 2.25%-5.05% .......................... 121 118
AT TRINIDAD OPERATING SUBSIDIARY
Senior Secured Notes, 10.4% ...................................... 107 101
International Finance Corporation, LIBOR plus 3.25% - 3.38% ...... 45 26
Others ........................................................... 9 8
AT ISPAT EUROPE GROUP:
Senior Secured(euro)150 million, due February 1, 2011, 11.875%.... 119 129
Other
Shipping Subsidiaries ......................................... 38 30
Other.......................................................... 17 27
Total long-term debt ............................................. 2,221 2,147
------ ------
Less current portion of long-term debt ........................... 180 125
------ ------
Total long-term debt ............................................. $2,041 $2,022
====== ======
(1) Interest rates are contingent on the achievement of certain financial
ratios.
F-17
AT U.S. OPERATING SUBSIDIARY:
First Mortgage Bonds
Series U, Tranche B and C (the 'Term Loans') are with a syndicate of
financial institutions (the 'Term Loan Lenders') for whom Credit Suisse First
Boston is the agent. Each of the Tranche B and Tranche C Loan is repayable in
quarterly installments of $1 until maturity.
Borrowings under the Term Loans bear interest at a rate per annum equal to,
at the Company's option, the higher of (a) the Agent's prime rate or (b) the
rate which is 0.5 of 1% in excess of the Federal Funds effective rate (together
the 'Base Rate'), plus 2.75% or (2) the London Interbank Offered Rates ('LIBOR')
(as defined in the Credit Agreement) plus 3.75%. The fee for the Letter of
Credit ('LC') is 4.00% of the LC amount per annum (the 'LC Fee'). The spread
over the LIBOR and Base Rate and the LC Fee will be reduced if the U.S.
Operating Subsidiary's Consolidated Leverage Ratio (as defined in the Credit
Agreement) falls to specified levels. The effective rate of interest paid on
Series U First Mortgage Bonds was 5.6% for the year ended December 31, 2002
(7.8% for the year ended December 31, 2001).
The Company entered into a hedge as required under the agreement. It is a 5
year interest rate collar based on LIBOR with a floor of 4.50% and a ceiling of
6.26% on a notional amount of $ 450. The facilities and the hedge are fully and
unconditionally guaranteed by Ispat International.
A substantial portion of the Company's facilities at its Indiana Harbor
Works is subject to a lien to First Mortgage. This property had a book value of
approximately $1,600 at December 31, 2002 (2001 - $1,700).
The U.S. Operating Subsidiary must also maintain a minimum Consolidated
EBITDA, as defined in the Credit Agreement. The U.S. Operating Subsidiary
amended the Credit agreement, effective March 30, 2001, to eliminate the minimum
Consolidated EBITDA requirement for 2001. The U.S. Operating Subsidiary was in
compliance with this covenant at December 31, 2002. The Credit Agreement also
contains other covenants that, among other things, prohibit or limit the ability
of the Company or the Borrower to pay dividends and other restricted payments,
incur indebtedness, create liens, engage in transactions with affiliates, sell
assets and engage in mergers and consolidations.
Industrial Development Revenue Bonds
During 2002, the U.S. Operating Subsidiary purchased $39 (2001- $13) bonds
at discounts from face value. As a result of these early redemptions, the U.S.
Operating Subsidiary recognized an extraordinary gain of $30. This gain after
tax was $19.
Revolving Credit Facilities
Revolving credit facilities are denominated in U.S. Dollars and are from the
Chase Manhattan Bank, as agent. These credit facilities are shown as long-term
debt as the Company has the ability and intent to refinance these obligations as
they mature under the respective credit agreements. The average interest rates
on these facilities range from 2.6% to 3.1% and $76 of the outstanding balance
is repayable in 2004 and $149 in 2005.
Contingent Liability
A standby LC in the amount of $160 extending to July 7, 2003 is provided to
the Pension Benefit Guarantee Corporation, which is arranged by Credit Suisse
First Boston. The LC has not been drawn upon. The lenders are committed to
renewing the LC annually for five years, as or contingent on the Company and
Borrower making certain representations and warranties.
AT MEXICO OPERATING SUBSIDIARY:
Bank Loans Denominated In U.S. Dollars, Floating Interest
California Commerce Bank, USA
Loan payable to a foreign bank under a line-of-credit agreement is
denominated in U.S. Dollars with an annual variable interest rate of LIBOR plus
300 basis points (effective annual interest rate at December 31, 2002 and 2001
are 5.53% and 7.623%, respectively). Principal is payable in quarterly
installments with maturities until May 2005. $10 was outstanding at December 31,
2002 (2001- $14).
F-18
Bancomer, Mexico
Loan payable to a Mexican bank is denominated in U.S. Dollars. The loan
bears interest at floating rate of LIBOR plus 325 basis points (effective annual
interest rate at December 31, 2002 and 2001 are 5.25% and 7.40%, respectively).
Principal is payable in semi-annual installments until 2008. $49 was outstanding
at December 31, 2002 (2001-$78).
Bancomer, Mexico
Loan payable to a Mexican bank is denominated in U.S. Dollars. The loan
bears interest at floating rate of LIBOR plus 225 basis points (effective annual
interest rate at December 31, 2002 and 2001 are 4.20% and 6.39%, respectively).
Principal is payable in semi-annual installments until 2008. $73 was outstanding
at December 31, 2002 (2001-$52).
Banamex, Mexico
Loans payable to a Mexican bank under a line-of-credit agreement is
denominated in U.S. Dollars, with annual variable interest rates of LIBOR plus
375 basis points (effective annual interest rate at December 31, 2002 and 2001
are 5.86% and 7.85%, respectively). Principal is payable in semi-annual
installments of $28 million with maturities from 2005 to 2009. $220 was
outstanding at December 31, 2002 and at December 31, 2001.
Senior Structured Export Certificates, 10.625%
The New Senior Structured Export Certificates due 2005 (the 'New Senior
Certificates') are denominated in U.S. Dollars with interest payable quarterly
at 10.625% per annum. The principal amount of the New Senior Certificates is
payable in quarterly installments till May 2005.
The New Senior Certificates are redeemable in whole or in part at a price
equal to 100% of the outstanding principal amount, plus accrued interest thereon
and a prepayment make whole premium (only in case of trigger event) as defined
in the agreement.
The New Senior Certificates are payable primarily from the proceeds of U.S.
Dollar denominated accounts receivable to be generated from sales of steel slabs
to Mitsubishi Corporation (the 'steel purchaser'), under a long-term supply
agreement and sales of steel slabs to certain other customers. Subject to
certain exceptions, the supply agreement with Mitsubishi requires the steel
purchaser to purchase sufficient volumes of slabs to generate receivables in
each quarter in an aggregate face amount equal to 1.3 times the scheduled
quarterly debt service on the New Senior Certificates.
Export-Import Bank of The United States
Loan payable to a financial institution guaranteed by the Export-Import Bank
of the United States is denominated in U.S. Dollars. The loan bears interest at
an annual variable rate of LIBOR plus 0.30% (effective annual interest rate at
December 31, 2002 and 2001 are 2.54% and 2.68%, respectively). Principal is
payable in semi-annual installments of $3 with maturities from 2004 to 2008.
Debt Restructuring at Mexico Operating Subsidiary
In response to the reduction in sales volume and prices and other negative
developments faced by the Company, the Company initiated the process in 2001 to
restructure its debt. The debt restructuring was successfully completed on
September 6, 2002. The principal elements of debt restructuring are as noted
below:
1. Exchange offer and consent solicitation. - All outstanding 1996 Senior
Certificates were exchanged for New Senior Certificates. The terms of the
New Senior Certificates are substantially similar to the terms of the 1996
Senior Certificates except that, among other things, the New Senior
Certificates (i) have interest payable at 10 5/8% per annum; (ii) have a
final maturity at May 2005; (iii) are guaranteed by certain subsidiaries of
Mexico Operating Subsidiary; (iv) are secured, along with Mexico Operating
Subsidiary's existing bank lenders, by certain assets of Mexico Operating
Subsidiary (as discussed below) on pro rata basis; and (v) have the benefit
of the Excess Cash Flow Sweep (as discussed below).
2. Bank Amendments and Waivers. - Mexico Operating Subsidiary's bank lenders
deferred principal payments on most of the outstanding bank debt for a
period of three years. The bank lenders also waived certain financial
covenants during this period, eliminated certain restrictions on the
disposition of non-core assets and granted permission to enter into a new
working capital facility. Existing bank lenders have the benefit of the
Excess Cash Flow (as discussed below) and are
F-19
secured, along with the New Senior Certificates, by certain assets of Mexico
Operating Subsidiary (as discussed below) on a pro rata basis.
3. Excess Cash Flow Sweep. - Mexico Operating Subsidiary is required, on a
semi-annual basis commencing December 31, 2002, to apply all of its excess
cash flows (as defined in the Inter-creditor Agreement) to repurchase New
Senior Certificates and retire debt owed to its existing bank lenders (the
'Excess Cash Flow Sweep') in the proportion of 20% to the New Senior
Certificates and 80% to Mexico Operating Subsidiary's existing bank debt, at
a price equal to 100% of the principal amount thereof.
4. Ranking and Collateral. - The New Senior Certificates are secured by
receivables generated under a new supply agreement with Mitsubishi and those
of certain other customers of Mexico Operating Subsidiary (the
'Receivables"). In addition, Mexico Operating Subsidiary's existing bank
lenders and the New Senior Certificates are secured, on a pro rata basis, by
(i) a first priority lien on all property, plant and equipment of Mexico
Operating Subsidiary; (ii) a pledge on the stock of Mexico Operating
Subsidiary and its immediate parent; and (iii) a first priority lien on the
inventory and receivable not otherwise pledged to secure the new working
capital facility or the Receivables.
5. New Working Capital Facility. - Mexico Operating Subsidiary is entitled to
draw up to $68 for its working capital needs, subject to the condition that
amounts outstanding owed under the new working capital facility cannot
exceed $35 unless authorized by Mexico Operating Subsidiary's other bank
lenders. The new working capital facility is secured by a first priority
lien on certain inventory and receivables.
6. Shareholder Loan. - An amount of $20 was loaned to Mexico Operating
Subsidiary by Ispat International for working capital needs. The loan is
subordinated to other debt of Mexico Operating Subsidiary and secured by a
second priority lien on certain inventory and receivables.
7. Sale of non-core assets. - Mexico Operating Subsidiary was entitled to sell
certain non-core assets in 2002 in order to repay some of the debt relating
to its shipping loans.
The Structured Senior Export Certificates due 2005 (the '1996 Certificates')
are denominated in U.S. Dollars with effective interest payable quarterly at
11.64% per annum. The principal amount of the Senior Certificates is payable in
quarterly installments until May 2005.
AT CANADA OPERATING SUBSIDIARY:
Senior secured credit facilities
The Tranche A facility is bearing an interest at rates ranging from LIBOR
plus 1.25% to LIBOR plus 4.05% depending on the achievement of certain financial
ratios. For 2002 the effective average rate is 7.07% (2001 effective average
rate was 8.21%). The facility will mature in July 2003 and is repayable in
installments of $19 in March 2003 and $35 in July 2003.
The Tranche B facility is bearing an interest at rates ranging from LIBOR
plus 1.75% to LIBOR plus 4.55% depending on the achievement of certain financial
ratios. For 2002 the effective average rate is 7.60% (2001 effective average
rate was 8.53%). The facility will mature in July 2004 and is repayable in
installments of $0.3 in March 2004 and $118 in July 2004.
The Tranche C facility is bearing an interest at rates ranging from LIBOR
plus 2.25% to LIBOR plus 5.05% depending on the achievement of certain financial
ratios. For 2002 the effective average rate is 8.11% (2001 effective average
rate was 9.03%). The facility will mature in January 2005 and is repayable in
installments of $0.3 in March 2004, $0.3 in June 2004 and $118 in January 2005.
The Senior Secured Credit Facility is collateralized by all property, plant
and equipment of the Canadian Operating Subsidiary and a second ranking charge
on accounts receivables and inventories. The Company has an interest rate swap
agreement for $200 at December 31, 2002 (2001 - $311) of the outstanding
borrowings, which effectively fixed the interest base rate at rates ranging from
4.81% to 4.90% on the swapped portion.
F-20
AT TRINIDAD OPERATING SUBSIDIARY:
Senior Secured Notes, 10.4%
The 10.4% Senior Secured Notes are denominated in U.S. Dollars and have been
used to finance the construction of a DRI plant. The notes mature in May 2008
with principal and interest repayable in semi-annual installments started in
November 2002.
International Finance Corporation
Loans payable to the International Finance Corporation are denominated in
U.S. Dollars and collateralized by property, plant and equipment with a net book
value of $423 at December 31, 2001. Principal and interest are due in
semi-annual installments beginning December 1998 with interest accruing at LIBOR
plus 3.25% to 3.38%, maturing in 2004 through 2006.
At the request of the Trinidad Operating Subsidiary, the International
Finance Corporation and their Participants have agreed to a waiver of the
current ratio requirement for December 31, 2001, an amendment to the current
ratio covenant for 2002 and a waiver of the late payment of principal due on
December 15, 2001.
AT ISPAT EUROPE GROUP:
Senior Secured Notes Denominated in Euro, Due February 1, 2011, 11.875%
Ispat Europe Group SA, a wholly owned subsidiary of the Company has issued
Senior Secured Notes worth (euro) 150 million. The Bonds issued on February 1,
2001 will mature on February 1, 2011. These Notes are secured by mortgage over
the Property plant and equipment of the German Subsidiaries and an indirect
pledge on the shares of the French Operating Subsidiary. The interest rate is
fixed at 11.875% per annum and payable semi-annually.
OTHER:
Shipping Subsidiaries
Loans payable at shipping subsidiaries are denominated in U.S. Dollars to
finance the purchase of equipment collateralized by the related assets. The
interest rates on the loans range from 7.4% to 7.61%. Principal and interest are
due in monthly/semi-annual installments with maturities ranging from 2003 to
2007.
OTHER
Various loans with interest rates ranging from 0.5% to 7.5% for other loans.
Maturities of long-term debt at December 31, 2002 are as follows:
Years ending December 31,
- -------------------------
2003 .................................................... $ 125
2004 .................................................... 273
2005 .................................................... 734
2006 .................................................... 449
2007 .................................................... 86
Subsequent years.................................................... 480
-------
Total .................................................... $ 2,147
=======
Certain long-term debt and other agreements of the Company and its
subsidiaries provide for various covenants that restrict the ability of certain
of the Company's subsidiaries to pay dividends, make certain payments, incur
additional indebtedness, make certain investments, create liens, guarantee
indebtedness, sell or acquire assets, enter into mergers or consolidations and
form subsidiaries, as well as require compliance with certain other financial
maintenance tests in certain cases. Such financial maintenance tests include
certain financial ratios and minimum levels of net worth. A significant part of
the
F-21
Company's net assets at December 31, 2002 (see Note 10) was subject to
restrictive covenants, affecting capital distributions and the ability of the
subsidiaries to loan or advance funds to the shareholders and other
restrictions.
NOTE 9: FINANCIAL INSTRUMENTS AND CREDIT RISK
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ('SFAS 133') (as amended by SFAS 137 and SFAS 138),
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value.
The adoption of SFAS 133 resulted in a cumulative pre-tax reduction to
income of $ nil ($ nil after tax) and a cumulative pre-tax reduction to OCI of
$18 ($12 after tax). The reduction to income was mostly attributable to the
ineffective portion of fair value and cash flow hedges. The increase to OCI was
mostly attributable to gains on cash flow hedges offset by deferred losses that
had been recorded under accounting principles at December 31, 2000. All
derivative gains and losses included in OCI as of January 1, 2002 were
reclassified into earnings during fiscal 2002.
Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at December
31, 2001 and 2002 are summarized below.
The estimated fair values of certain financial instruments have been
determined using available market information or other valuation methodologies
that require considerable judgment in interpreting market data and developing
estimates. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different assumptions and/or estimation methodologies may
have a material effect on the estimated fair values.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and short-term investments approximate their fair values. Cash
equivalents are carried at cost which approximates market value and accounts
receivable and short-term investments are short-term in nature.
The Company's short and long-term debt consists of debt instruments which
bear interest at fixed rates and variable rates tied to market indicators. The
fair value of the Company's variable rate debt approximates its carrying amount
given the floating rate nature of the debt at prevailing market rates. The fair
value of fixed rate debt is based on estimated future cash flows discounted
using the current market rates for debt of the same remaining maturities and
credit risk. The estimated fair values of the Company's short and long-term debt
are as follows:
December 31, 2001 December 31, 2002
----------------- -----------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----- ---------- -------- ----------
Instruments payable bearing interest at variable rates.. $ 1,452 $ 1,206 $ 1,646 $ 1,421
Instruments payable bearing interest at fixed rates..... 769 593 501 379
------- -------- -------- --------
Long-term debt, including current portion .............. $ 2,221 $ 1,799 $ 2,147 $ 1,800
Payable to banks ....................................... $ 159 $ 159 $ 137 $ 137
======= ======== ======== ========
A portion of the interest cost of the floating rate debt used in connection
with the financing of the acquisition of U.S. Operating Subsidiary was hedged
through the use of an interest rate collar and interest rate swap (see Note 8).
The carrying value of the collar and the swap equals the fair value.
The fair value of cash, accounts receivable and accounts payable balances
approximate their carrying value due to their short maturities.
F-22
The fair value of forward exchange contracts, all of which are short-term in
nature, was estimated based on the applicable year-end exchange rates and are
presented below:
Foreign Currency
Forward Contracts
-----------------
December 31,
------------
2001 2002
---- ----
Notional amount................................. 42 16
Fair value...................................... 42 16
Carrying amount................................. 42 16
The fair value information presented herein is based on information
available to management at the dates presented. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively valued for purposes of these
financial statements.
The Company uses futures and swap contracts to manage fluctuations in the
cost of natural gas and certain nonferrous metals, primarily zinc which is used
in the coating of steel. Timing of these transactions corresponds to the
expected need for the underlying physical commodity and is intended as a hedge
against the cost volatility of these commodities.
A portion of the floating rate debt used in connection with the financing of
the acquisition of the U.S. Operating Subsidiary was hedged through the use of
an interest collar. Due to the decline in interest rates during fiscal years
2002 and 2001, the fair value of the collar represented a derivative liability
of approximately $14 and $13 respectively.
Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted and
from movements in interest rates and foreign exchange rates. The Company does
not anticipate non-performance by counterparties. The Company generally does not
require collateral or other security to support financial instruments with
credit risk.
Concentrations of credit risk (whether on or off balance sheet) that arise
from financial instruments exist for groups of customers or counterparties when
they have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic or
other conditions.
Financial instruments that potentially subject the Company to credit risk
primarily consist of trade accounts receivable and derivative contracts.
The Company considers its credit risk associated with trade accounts
receivable to be somewhat limited due to a large number of customers comprising
the Company's customer base and their geographic dispersion. The Company sells a
significant amount of product pursuant to orders throughout its main markets.
The Company grants credit based on evaluations of its customers' financial
situation, in certain cases without requiring guarantees or letters of credit,
and monitors the exposure of potential losses from granting credit.
The counterparties to derivative contracts are generally major financial
institutions and credit risk is generally limited to the unrealized gains and
losses on such contracts should the counterparties fail to perform as
contracted. Additionally, the Company utilizes a portfolio of financial
institutions either headquartered or operating in the same countries in which
the Company conducts its business. As a result, the Company considers the risk
of counterparty default to be minimal.
The U.S. Operating Subsidiary had $1,093 of long-term debt (including debt
due within one year) outstanding at December 31, 2002. Of this amount $894 is
floating rate debt (fair value $668). The remaining $199 of fixed rate debt had
a fair value of $92. Assuming a hypothetical 10% decrease in interest rates at
December 31, 2002, the fair value of this fixed rate debt would be estimated to
be $100. Fair market values are based upon market prices or current borrowing
rates with similar rates and maturities.
The Mexico Operating Subsidiary utilizes derivative commodity instruments
not for trading purposes but to hedge exposure to fluctuations in the costs of
natural gas. In February 2001, the Mexico Operating Subsidiary entered into a
fixed price
F-23
natural gas contract with Pemex at a price of $4 per mmbtu, excluding
transportation charges, for a volume of 25350 G cal per day. A hypothetical 10%
fluctuation on the purchase price of natural gas will have an impact on pre-tax
income of approximately $15. The fair value of such contracts as on December 31,
2002 was $161 (2001 - $209).
At the Canadian Operating Subsidiary, an annual consumption of natural gas
of Canadian Dollar 81 million (2001 - Canadian Dollar 33 million) at an exchange
rate of 0.65 (Canadian Dollar to U.S. Dollar) would result in an annual
consumption of $53 (2001 - $22). Therefore, a hypothetical 10% fluctuation in
the purchase price of natural gas would have an impact on pre-tax income at the
Canadian Operating Subsidiary of approximately $5 (2001 - $2).
NOTE 10: SHAREHOLDERS' EQUITY
The authorized common shares of the Company consisted of 500,000,000 Class A
shares, with a par value of (euro) 0.01 per share, and 72,150,000 Class B
shares, with a par value of (euro) 0.10 per share. At December 31, 2002,
54,850,000 Class A shares and 72,150,000 Class B shares were issued and
51,735,794 ( 2001 - 49,757,213) Class A shares and 72,150,000 (2001-72,150,000)
Class B shares were outstanding.
During 2001, in connection with the introduction of Euro on January 1, 2002,
the Company converted the nominal value of its shares from Dutch Guilders into
Euro. The articles of association have been amended on December 31, 2001 based
on the resolution of the shareholders meeting held on December 21, 2001. By this
conversion the total common stock par value of the Company increased by $3 which
had been accounted for through Additional Paid-in Capital in Equity.
The preference and relative rights of the Class A shares and Class B shares
are substantially identical except for disparity in voting power and conversion
rights. Holders of Class A shares are entitled to one vote per share and holders
of Class B shares are entitled to ten votes per share on all matters submitted
to a vote of shareholders. Each Class B share is convertible, at the option of
the holder, into one Class A share.
At December 31, 2002 the Company had 3,114,206 of its own Class A shares
which it purchased on the open market for a net consideration of $103 (at
December 31, 2001 5,092,787 at a consideration of $107).
During the year 2002, the Company sold 2,117,781 of its treasury stock
shares to Ispat Inland Pension Fund for a total consideration of $5. Also, the
Company bought back 139,200 of its shares from the open market during the year
at a consideration of $1 under a share buy-back program announced by the Company
on October 28, 2002.
In 2001, the Company sold 2,081,833 shares to Ispat Inland Pension Fund for
a total consideration of $5 and bought back 368,000 shares from the open market
at a consideration of $1.
These shares have been acquired for the purpose of the Company's employee
stock option plan.
All calculations to determine the amounts available for dividends are based
on Ispat International's Dutch statutory accounts, which, as a holding company,
are different from its consolidated accounts.
Ispat International has no manufacturing operations of its own. Accordingly,
it can only pay dividends or distributions to the extent it is able to arrange
the cash dividend distribution from its subsidiaries, recognizes gains from the
sale of its assets or records share premium from the issuance of (new) common
shares. Certain of the Company's Operating Subsidiaries are subject to
restrictions under the terms of their debt agreements for paying dividends. As a
result, subsidiaries of Ispat International had $336 in retained earnings which
are free of restriction for the payment of dividend at December 31, 2002.
Dividends are payable by Ispat International in either U.S. Dollars or in Euros.
Ispat International received no cash dividends for the years 2000, 2001 and
2002, respectively, from its subsidiaries.
In 2001, the Company recorded a capital contribution of $3 relating to the
gain on the sale of assets to a party under common control of the Company's
principal shareholder.
F-24
Stock Option Plan
In 1999, the Company adopted a stock option plan, the Ispat Plan. Under the
terms of the Ispat Plan, the Company may grant options to senior management of
Ispat International and its affiliates for up to 6,000,000 shares of common
stock. The exercise price of each option equals not less than the fair market
value of Ispat International stock on the date of grant, with a maximum term of
10 years. Options are granted at the discretion of the Company's Board of
Director's Plan Administration Committee or its delegate. The options vest
either ratably upon each of the first three anniversaries of the grant date, or,
in total, upon the death, disability or retirement of the participant.
The Company had chosen to account for stock-based compensation using the
intrinsic value method prescribed in APB 25, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. As indicated above,
all options were granted at an exercise price equal to or greater than the fair
market value on the date of grant and accordingly, no compensation expense has
been recognized in these financial statements pursuant to APB 25. The Company
has decided to expense stock-based compensation starting 2003. Had compensation
cost for the Ispat Plan been determined based on the fair value at the grant
date for awards in 1999, 2000 and 2002 consistent with the provisions of SFAS
148, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
(Millions of U.S. Dollars, except share data)
Years ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Net Income - as reported........................................................ $ 99 $ (312) $ 49
Pro forma compensation expense.................................................. 10 9 5
Net Income - pro forma based on SFAS 148........................................ 89 (321) 44
------- -------- -------
Basic and diluted earnings per common share from continuing operations.......... $ 0.82 $ (2.58) $ 0.24
Basic and diluted extraordinary earnings per common share....................... -- -- 0.16
Basic and diluted earnings per common share..................................... 0.82 (2.58) 0.40
Basic and diluted earnings per common share - pro forma......................... 0.74 (2.65) 0.36
The fair value of each option grant of Ispat International stock is estimated on
the date of grant using the Binomial Option Pricing Model with the following
weighted-average assumptions used:
Year of grant
-------------
2000 2001 2002
---- ---- ----
Dividend yield ................................................................. 3.85 10.49 --
Expected annualized volatility.................................................. 66% 63% 83%
Discount rate - Bond equivalent yield........................................... 5.27% 4.86% 5.03%
Expected life in years.......................................................... 8 8 8
The status of the Ispat Plan with respect to the Company is summarized below at
December 31, 2002:
Number of shares
2000 2001 2002
---- ---- ----
Opening balance as of January 1,................................................ 1,314,000 2,512,000 2,202,000
Granted during the year......................................................... 1,361,000 -- 1,349,500
Canceled or expired............................................................. 163,000 310,000 160,000
Outstanding at December 31,..................................................... 2,512,000 2,202,000 3,391,500
--------- --------- ----------
Fair value of the option at the grant date $ 4.22 $ - $ 1.82
========= ========= ===========
F-25
At December 31, 2002, the stock options are exercisable as follows:
Average
Year Options Exercise Price(1)
- ---- ------- -----------------
2002 ............................................ 1,718,833 10.54
2003 ............................................ 2,137,500 10.25
2004 ............................................ 2,514,167 8.82
2005 ............................................ 2,952,833 7.84
2006 ............................................ 3,391,500 7.12
(1) Exercise Price of $11.94 in 1999, $8.57 in 2000 and $2.26 in 2002
NOTE 11: EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS
The Company's principal Operating Subsidiaries in the U.S., Canada,
Trinidad, Germany, France and Luxembourg provide defined benefit pension plans
to their employees. A brief summary of the plans provided by the subsidiaries in
the countries in which the Company operates is as follows:
U.S. Operating Subsidiary
The U.S. Operating Subsidiary's Pension Plan and Pension Trust which covers
certain employees of the Company, is a non-contributory benefit plan with
pensions based on final pay and years of service for all salaried employees and
certain wage employees, and years of service and a fixed rate (in most instances
based on frozen pay or on job class) for all other wage employees including
members of the United Steelworkers of America.
Canadian Operating Subsidiaries
The Canadian Operating Subsidiary offers contributory and non-contributory
defined benefit pension plans for substantially all of its employees. Benefits
for the non-contributory plans are generally calculated based on the number of
years of service of the unionized employees and based on actuarial computations.
Benefits for the contributory plans are generally calculated based on the number
of years of service and the maximum average eligible earnings of each employee
during any period of five consecutive years.
The Canadian Operating Subsidiary provides certain post-employment and
post-retirement medical benefits and life insurance for certain groups of
retired employees. The Company is accruing the cost of these benefits for
current and future retirees using the projected unit credit actuarial method.
Trinidad Operating Subsidiary
The Company's Operating Subsidiary in Trinidad maintains a contributory
defined benefit pension plan for substantially all of its employees, the
benefits of which are based on the employees' length of service.
German Operating Subsidiaries
The German Operating Subsidiaries maintain unfounded defined pension plans
for a certain number of employees the benefits of which are based on such
employees' length of service and applicable pension table under the terms of
individual agreements.
Additionally, certain of the employees at the Duisburg operations, after
completing a minimum period of continuous employment are entitled to a Pension
benefit based on length of service and compensation.
French Operating Subsidiaries
Under French law, the French Operating Subsidiaries have an obligation to
pay lump sum retirement indemnities to employees calculated based on the length
of service and compensation at retirement. The French Operating Subsidiaries
also have a commitment to provide additional post-retirement benefits linked to
years of service and compensation at retirement reduced by retirement benefits
available from the state managed pension scheme.
Additionally, lump sum payments are also required to be paid to employees
who have completed a defined number of years of service in the Company.
F-26
Mexico Operating Subsidiary
The Mexico Operating Subsidiary is obligated to provide seniority premiums,
which consist of a one-time payment of 12 days wages for each year worked,
calculated on the basis of the latest salary. Maximum salary used in these
calculations is limited to double the legal minimum wage.
The components of the net periodic benefit cost of the defined benefit plans
for the years ended December 31 are as follows:
Pension benefits
U.S. Operating Subsidiary
--------------------------
2000 2001 2002
---- ---- ----
Components of net periodic benefit cost:
Service cost........................................$ 29 $ 31 $ 36
Interest cost ...................................... 159 163 160
Expected return on plan assets ..................... (194) (197) (195)
Special termination benefits ....................... -- 8 --
Amortizations ...................................... 7 8 8
----- ----- -----
$ 1 $ 13 $ 9
===== ===== =====
Pension benefits
Canadian Operating Subsidiary
-----------------------------
2000 2001 2002
---- ---- ----
Components of net periodic benefit cost:
Service cost........................................$ 5 $ 5 $ 6
Interest cost ...................................... 16 17 17
Expected return on plan assets ..................... (14) (14) (15)
Amortizations ...................................... 1 1 1
Recognized actuarial gain .......................... (1) (1) 1
----- ----- -----
$ 7 $ 8 $ 10
===== ===== =====
Pension benefits
Trinidad Operating Subsidiary
-----------------------------
2000 2001 2002
---- ---- ----
Components of net periodic benefit cost:
Service cost........................................$ 2 $ 2 $ 2
Interest cost ...................................... 2 3 3
Expected return on plan assets ..................... (5) (5) (5)
Net amortizations .................................. -- -- (1)
----- ----- -----
$ (1) $ -- $ (1)
===== ===== =====
Pension benefits
German Operating Subsidiaries
-----------------------------
2000 2001 2002
---- ---- ----
Components of net periodic benefit cost:
Service cost........................................$ -- $ -- $ 1
Interest cost ...................................... 1 1 1
----- ----- -----
$ 1 $ 1 $ 2
===== ===== =====
F-27
Pension benefits
French Operating Subsidiary
---------------------------
2000 2001 2002
---- ---- ----
Components of net periodic benefit cost:
Service cost........................................$ 1 $ 1 $ 1
Interest cost....................................... 1 1 1
----- ----- -----
$ 2 $ 2 $ 2
===== ===== =====
The following assumptions were used:
2000 2001 2002
---- ---- ----
Discount rates for obligations ................ 7.00%-8.00% 6.50%-7.50% 6.50%-8.00%
Assumed rates of compensation increases ....... 4.00% 4.00% 4.00%-5.50%
Expected long-term rate of return on assets.... 7.75%-9.50% 7.75%-9.50% 7.50%-9.50%
The change of benefit obligation and plan assets and reconciliation of funded
status through the measurement date are as follows:
Trinidad Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of the period ......... $ 31 $ 28
Service cost .......................................... 2 2
Interest cost ......................................... 3 3
Participants' contributions ........................... -- 1
Benefit improvements .................................. -- 5
Actuarial (gains) losses .............................. (7) 2
Benefits paid ......................................... (1) (1)
---- ----
Benefit obligation at end of the period ............... $ 28 $ 40
---- ----
Change in fair value of plan assets
Fair value of plan assets at beginning of the period... 49 54
Actual return on plan assets .......................... 4 7
Employers' contribution ............................... 1 1
Participants' contribution ............................ 1 1
Benefits paid ......................................... (1) (2)
---- ----
Fair value of plan assets at end of the period ........ $ 54 $ 61
---- ----
Funded status of the plans ............................ 26 21
Unrecognized net actuarial losses ..................... (16) (15)
Unrecognized transition asset ......................... (3) (2)
Unrecognized prior service cost ....................... 8 12
---- ----
Prepaid pension at end of period ...................... $ 15 $ 16
==== ====
F-28
U.S. Operating Subsidiary(1)
Year Ended December 31,
2001 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of the period.......... $ 2,094 $ 2,218
Service cost ........................................ 31 36
Interest cost ........................................ 163 160
Plan amendment ........................................ 8 --
Actuarial losses....................................... 108 111
Benefits paid ........................................ (186) (203)
-------- ---------
Benefit obligation at end of the period................ $ 2,218 $ 2,322
-------- ---------
Change in fair value of plan assets
Fair value of plan assets at beginning of the period... 1,922 1,852
Actual return on plan assets........................... 8 (93)
Employers' contribution................................ 108 --
Benefits paid ........................................ (186) (203)
-------- ---------
Fair value of plan assets at end of the period......... $ 1,852 $ 1,556
-------- ---------
Underfunded status of the plans........................ (366) (766)
Unrecognized net actuarial gains....................... 363 761
Unrecognized prior service cost........................ 81 73
-------- ---------
Accrued pension liability at end of period............. $ 78 $ 68
-------- ---------
Accrued benefit liability(2)........................... (354) (757)
Intangible asset....................................... 81 73
Accumulated other comprehensive income................. 351 752
-------- ---------
Amount recognized on balance sheet..................... $ 78 $ 68
======== =========
(1) The actuarial computation for the U.S. Operating Subsidiary was performed at
November 30, 2002 while the actuarial computation for the other Operating
Subsidiaries was performed at December 31, 2002.
(2) An amount of $55 has been recorded under current liabilities.
F-29
Canadian Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of the period ...... $ 255 $ 264
Service cost ....................................... 5 6
Interest cost ...................................... 17 17
Participants' contributions ........................ 1 1
Amendments ......................................... 2 --
Actuarial losses ................................... 12 4
Benefits paid ...................................... (12) (12)
Foreign currency exchange rate differences ......... (16) 3
----- -----
Benefit obligation at end of the period ............ $ 264 $ 283
----- -----
Change in fair value of plan assets
Fair value of plan assets at beginning of the period 199 191
Actual return on plan assets ....................... 5 (5)
Employers' contribution ............................ 10 8
Participants' contribution ......................... 1 1
Benefits paid ...................................... (12) (12)
Foreign currency exchange rate differences ......... (12) 2
----- -----
Fair value of plan assets at end of the period ..... $ 191 $ 185
----- -----
Underfunded status of the plans .................... (73) (98)
Unrecognized net actuarial gains ................... 46 69
Unrecognized prior service cost .................... 12 11
----- -----
Accrued pension liability at end of period ......... $ (15) $ (18)
===== =====
Accrued benefit liability .......................... (58) (85)
Intangible pension asset ........................... 12 11
Accumulated Comprehensive Income ................... 31 56
----- -----
Amount recognized on balance sheet ................. $ (15) $ (18)
===== =====
German Operating Subsidiaries
Year Ended December 31,
-----------------------
2001 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of the period....... $ 17 $ 18
Service cost .................................... -- 1
Interest cost ..................................... 1 1
Plan amendments..................................... -- (2)
Actuarial losses.................................... -- 3
Foreign currency exchange rate differences.......... -- 2
----- -----
Benefit obligation at end of the period............. $ 18 $ 23
----- -----
Underfunded status of the plans..................... (18) (23)
----- -----
Accrued pension liability at end of period.......... (18) (23)
----- -----
Amount recognized on balance sheet ................. $ (18) $ (23)
----- -----
F-30
French Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Change in benefit obligation
Benefit obligation at beginning of the period........ $ 17 $ 14
Service cost......................................... 1 1
Interest cost........................................ 1 1
Actuarial gains...................................... (5) --
Foreign currency exchange rate differences........... -- 3
----- -----
Benefit obligation at end of the period.............. $ 14 $ 19
----- -----
Underfunded status of the plans...................... (14) (19)
----- -----
Accrued pension liability at end of period........... (14) (19)
----- -----
Amount recognized on balance sheet................... $ (14) $ (19)
----- -----
Post-retirement benefits
The Company's Operating Subsidiaries in the U.S., Canada and France provide
post-retirement benefits, including medical benefits and life insurance benefits
to retirees. The post-retirement plans relate to the U.S., Canadian and French
operating subsidiaries.
Substantially all of the U.S. Operating Subsidiary's employees are covered
under post-retirement life insurance and medical benefit plans that require
deductible and co-insurance payments from retirees. The post-retirement life
insurance benefit formula used in the determination of post-retirement benefit
cost is primarily based on applicable annual earnings at retirement for salaried
employees and specific amounts for hourly employees. The U.S. Operating
Subsidiary does not prefund any of these post-retirement benefits. Effective
January 1, 1994, a Voluntary Employee Benefit Association Trust was established
for payment of health care benefits made to United Steel Workers of America.
Funding of the Trust is made as claims are submitted for payment.
The net periodic post-retirement benefit cost was as follows:
U.S. Operating Subsidiary
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Service cost......................... $ 8 $ 8 $ 8
Interest cost ....................... 56 60 58
Amortization ........................ (28) (20) (20)
Special termination benefits ........ -- 3 --
Recognized (gains) .................. -- (3) (1)
---- ---- ----
Net periodic benefit cost ........... $ 36 $ 48 $ 45
---- ---- ----
Canadian Operating Subsidiary
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Service cost......................... $ -- $ 1 $ --
Interest cost........................ 1 1 1
---- ---- ----
Net periodic benefit cost............ $ 1 $ 2 $ 1
---- ---- ----
F-31
French Operating Subsidiary
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Service cost......................... $ 1 $ 1 $ 2
Interest cost........................ 1 1 1
---- ---- ----
Net periodic benefit cost............ $ 2 $ 2 $ 3
---- ---- ----
The following weighted average assumptions were used for the U.S. Operating
Subsidiary in accounting for the post-retirement benefit plan:
November 30, November 30, November 30,
2000 2001 2002
---- ---- ----
Discount rates for obligations ................... 8.00% 7.50% 6.50%-7.10%
Rate of compensation increase .................... 4.00% 4.00% 4.00%
Health care cost trend rate ...................... 4.50% 4.50% 4.50%
The following tables sets forth the post-retirement benefit obligation at the
dates indicated:
U.S. Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Benefit obligation at beginning of period........... $ 770 $ 797
Service cost ..................................... 8 8
Interest cost ..................................... 60 58
Special termination benefits........................ 3 --
Actuarial losses.................................... 14 32
Benefits paid ..................................... (58) (56)
-------- -------
Benefits obligation at end of period................ $ 797 $ 839
-------- -------
Fair value of assets................................ -- --
-------- -------
Underfunded status of plan.......................... (797) (839)
Unrecognized net (gain)............................. (98) (65)
Unrecognized prior service cost..................... (107) (87)
-------- -------
Accrued post-retirement benefit obligation at
end of period.................................... $ (1,002) $ (991)
-------- -------
Canadian Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Benefit obligation at beginning of period........... $ 14 $ 15
Service cost .................................... 1 --
Interest cost ..................................... 1 1
Actuarial losses.................................... 1 1
Benefits paid ..................................... (1) (1)
Foreign currency exchange rate changes.............. (1) --
-------- -------
Benefits obligation at end of period................ $ 15 $ 16
-------- -------
Fair value of assets................................ -- --
-------- -------
Underfunded status of plan.......................... (15) (16)
Unrecognized prior service cost..................... 3 4
-------- -------
Accrued post-retirement benefit obligation at
end of period.................................... $ (12) $ (12)
-------- -------
F-32
French Operating Subsidiary
Year Ended December 31,
-----------------------
2001 2002
---- ----
Benefit obligation at beginning of period........... $ 14 $ 15
Service cost ..................................... 1 2
Interest cost ..................................... 1 1
Actuarial losses.................................... 1 --
Benefits paid ..................................... (1) (1)
Foreign currency exchange rate changes.............. (1) 3
-------- -------
Benefits obligation at end of period................ $ 15 $ 20
-------- -------
Fair value of assets................................ -- --
-------- -------
Underfunded status of plan.......................... (15) (20)
Unrecognized prior service cost..................... -- --
-------- -------
Accrued post-retirement benefit obligation at
end of period.................................... $ (15) $ (20)
-------- -------
An increase of 1% in the health care cost trend rate of the U.S. Operating
Subsidiary would increase the benefit obligation by $107 and the annual net
periodic cost by $10. A 1% decrease would reduce the benefit obligation by $87
and the annual net periodic annual net cost by $8.
At the Canadian Operating Subsidiary, for evaluation purposes, the annual
growth rate assumption for the cost of health care for each participant was
established at 14.3% in 2002. The rate is expected to gradually decline to 5.3%
in 2009 and remain at this level subsequently. A 1% change would have an effect
of $1.
NOTE 12: INCOME TAX EXPENSE (BENEFIT)
The breakdown of the income tax expense (benefit) before extraordinary gains or
losses is as follows:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Current:
U.S. .............................................. $ (12) $ -- $ (3)
Mexico.............................................. 26 -- 13
Canada.............................................. 2 1 --
Trinidad ........................................... 1 1 1
Germany ............................................ 3 3 4
France ............................................. (1) 1 --
Others ............................................. 2 2 3
Deferred:
U.S. ............................................... (11) (75) (17)
Mexico.............................................. 14 (18) (53)
Canada.............................................. 3 (31) (6)
Trinidad ........................................... (13) 11 --
Germany............................................. 9 (1) 4
-------- ------- ------
Income tax expense (benefit) ........................ $ 23 $ (106) $ (54)
-------- ------- ------
F-33
The following table reconciles the income tax expense compared at the statutory
rate of each tax jurisdiction and the Company's overall effective tax rate:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Tax expense (benefit) at aggregate
statutory rates of all jurisdictions:
U.S. ..................................................... $ (19) $ (69) $ 6
Mexico..................................................... 6 (93) 5
Canada..................................................... 18 (12) 5
Germany ................................................... 11 (12) 12
Trinidad .................................................. -- (19) (2)
France..................................................... 8 9 --
Others..................................................... 1 -- 1
------ ------- -----
$ 25 $ (196) $ 27
====== ======= =====
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Increase (decrease) resulting from:
Tax loss carryforwards ............................... Germany -- 1 --
Tax loss carryforwards ............................... Trinidad -- 18 47
Tax loss carryforwards ............................... Mexico -- 15 (20)
Change in valuation allowance ........................ France (8) (8) (2)
Depletion ............................................ U.S. (4) (3) (3)
Manufacturing tax credits ............................ Canada (3) 2 (1)
Large corporation tax and other taxes ................ Canada 1 1 1
Export allowances .................................... Mexico -- 1 --
Export allowances .................................... Trinidad -- -- 28
Benefit arising from interest in partnership ......... Canada (17) (21) (13)
Depreciation ......................................... Germany -- 1 --
Depreciation ......................................... Trinidad -- -- (55)
Valuation allowance .................................. Trinidad -- 13 (11)
Employee benefit cost ................................ Trinidad -- -- (5)
Inflationary effects ................................. Mexico 27 35 14
Non-deductible expense ............................... Mexico 5 6 2
Participation in results of subsidiaries and others... Mexico -- -- (8)
Restructuring ........................................ Germany -- 12 (4)
Effects of foreign currency translation .............. Mexico 2 18 (34)
Miscellaneous accruals ............................... U.S. -- (3) (23)
Others ............................................... Canada -- -- 2
Others ............................................... Mexico -- -- 2
Others ............................................... France -- -- 2
Others ............................................... Various (5) 2 --
----- ----- -----
Income tax expense (benefit) ......................... $ 23 $(106) $ (54)
===== ===== =====
F-34
Deferred Income tax
Temporary differences and the resulting deferred tax assets and liabilities at
December 31, 2001 and 2002 are summarized as follows:
Year Ended December 31,
-----------------------
2001 2002
---- ----
Current deferred tax assets:
Facilities relocation restructuring................... U.S. $ 19 $ 19
Accrued vacation...................................... U.S. 12 13
Allowance for doubtful accounts....................... France 1 --
Inventories........................................... France 10 6
Property taxes........................................ U.S. 2 2
Accrued lawsuit settlement............................ U.S. 1 --
Inventories........................................... U.S. 3 6
Others................................................ U.S. 1 --
Accrued expenses...................................... Mexico 2 1
Tax loss carryforwards................................ Mexico -- 20
Interest.............................................. Trinidad -- 2
Others................................................ France 2 --
Others................................................ Germany 1 2
------- --------
Total current deferred tax assets..................... $ 54 $ 71
======= ========
Year Ended December 31,
-----------------------
2001 2002
---- ----
Noncurrent deferred tax assets:
Environmental accrual................................. France 3 2
Environmental accrual................................. Canada 1 1
Employee benefit costs................................ U.S. 397 346
Employee benefit costs................................ Canada 14 18
Minimum pension liability............................. Canada 4 9
Employee benefit costs................................ France 13 8
Income tax contingencies.............................. U.S. 41 48
Accumulated depreciation.............................. France -- 20
Accrued restructuring costs........................... Germany 10 --
Research & development costs.......................... Canada -- 3
Property, plant and equipment......................... Canada 27 32
Minimum pension liability............................. U.S. 132 275
Net operating losses and alternative minimum tax...... U.S. 145 191
Net operating losses and alternative minimum tax...... Canada 37 33
Net operating losses and alternative minimum tax...... Trinidad 19 66
Net operating losses and alternative minimum tax...... France 58 25
Net operating losses and alternative minimum tax...... Germany 15 --
Net operating losses and alternative minimum tax...... Mexico 2 --
Debt issuance cost.................................... Mexico -- 1
Others................................................ Germany 3 3
Others................................................ Canada 5 4
------- --------
Total noncurrent deferred tax assets.................. 926 1,085
------- --------
Total deferred tax assets............................. 980 1,156
------- --------
Valuation allowances
Valuation allowance................................... Trinidad (14) (3)
Valuation allowance................................... France (62) (60)
------- --------
(76) (63)
------- --------
Net deferred tax asset after valuation allowances..... 904 1,093
------- --------
F-35
Year Ended December 31,
-----------------------
2001 2002
---- ----
Current deferred tax liabilities:
Inventories........................................... Germany (1) --
Amortizations expense ................................ U.S. (3) (4)
Deduction in purchase in lieu of cost of sales ....... Mexico (25) (19)
----- -----
Total current deferred tax liabilities ............... (29) (23)
----- -----
Noncurrent deferred tax liabilities:
Property, plant and equipment ........................ Mexico (119) (75)
Property, plant and equipment ........................ U.S. (488) (486)
Property, plant and equipment ........................ France (25) --
Property, plant and equipment ........................ Trinidad (5) (60)
Property, plant and equipment and others ............. Germany (24) (9)
Investment in joint ventures ......................... U.S. (51) (51)
Debt issuance costs .................................. Mexico (2) --
Imputed interest ..................................... Mexico (2) (2)
Employee benefit costs ............................... Trinidad -- (5)
Net operating losses and alternative minimum tax ..... Germany (7) --
Others................................................ U.S. (1) (1)
Others................................................ Germany -- (2)
Others................................................ Canada (4) --
Others................................................ Mexico 1 --
----- -----
Total noncurrent deferred tax liabilities ............ (727) (691)
----- -----
Total deferred tax liabilities ....................... (756) (714)
----- -----
$ 148 $ 379
===== =====
At December 31, 2002, the Company had a valuation allowance of $63 ($76 at
December 31, 2001) to reduce its deferred tax assets to estimated realizable
value. The valuation allowance primarily relates to the deferred tax assets
arising from tax loss operating carryforwards and capital loss carryforwards in
France as well as other temporary timing differences. In France, tax loss
operating carryforwards and capital loss carryforwards have no expiration date.
The utilization of tax operating carryforwards is, however, restricted to the
taxable income of the subsidiary generating the losses. In addition, capital
loss carryforwards can only be offset against capital gains. The reduction in
the total valuation allowance for the year ended December 31, 2002 arises
principally from a reduction in the temporary timing differences between the
fiscal and commercial valuation of certain balance sheet items as well as a
limited utilization of the tax loss carry forward. Offsetting this reduction was
a decrease in the valuation allowance attributable to French net operating
losses.
At December 31, 2002, based upon the level of historical taxable income and
projections for future taxable income over the periods in which the temporary
timing differences are anticipated to reverse, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences, net of the valuation allowances, at December 31, 2002. However, the
amount of the deferred tax asset considered realizable could be adjusted in the
future if estimates of taxable income are revised.
The Company has not provided any deferred income taxes on the undistributed
earnings of its foreign subsidiaries based upon its determination that such
earnings will be indefinitely reinvested. At December 31, 2002, the cumulative
undistributed earnings of these subsidiaries were approximately $321 million
($162 million at December 31, 2001). If such earnings were not considered
indefinitely reinvested, deferred foreign income taxes would have been provided,
after consideration of estimated foreign tax credits. However, determination of
the amount of deferred federal and foreign income taxes is not practical.
F-36
Tax loss carry forward
The expiration limits for tax loss carry forwards at various operating
subsidiaries are as follows:
U.S. ...............................................2019 to 2021
Mexico...............................................2003 to 2012
Canada...............................................2009 to 2010
Germany..............................................indefinite
Trinidad.............................................indefinite
France...............................................indefinite
Netherlands..........................................indefinite
NOTE 13: OTHER OPERATING EXPENSES
Other operating expenses include:
Year Ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Closure of Company's Irish Operating Subsidiary .................. $ -- $ 17 $ --
Arbitration settlement with respect to a scrap supply contract.... -- 19 --
Write-down in value of certain e-commerce software(1) ............ -- 17 --
Impairment loss on oceangoing vessels(1) ......................... -- 22 --
Write-off of Empire Mine investments ............................. -- -- 39
Impairment loss on 2A Bloomer and 21" Bar Mill ................... -- -- 23
---- ----- -----
$ -- $ 75 $ 62
==== ===== =====
(1) Certain regroupings have been made to the prior period's financial
statements in order to conform to 2002 groupings.
NOTE 14: RESERVES
Balance at Additions charged to Deduction/ Balance at
December 31, 2001 cost & expenses release December 31, 2002
----------------- --------------- ------- -----------------
Accounts receivable .................. $ 31 $ 12 $ 2 $ 41
Inventories .......................... 40 3 4 39
Environmental ........................ 27 1 -- 28
Shutdown reserves .................... 25 -- 2 23
Voluntary severance offer and other... 2 -- 1 1
Deferred tax valuation allowances..... 76 -- 13 63
NOTE 15: COMMITMENTS
The Company leases various facilities, land and equipment under
non-cancelable lease arrangements which expire at various dates through 2031. In
most cases, management expects that in the normal course of business, leases
that expire will be renewed or replaced by other leases.
F-37
Future minimum lease payments required under operating leases that have
initial or remaining non-cancelable terms in excess of one year are as follows:
Year ending
2003 ................................................ $ 18
2004 ................................................ 17
2005 ................................................ 15
2006 ................................................ 7
2007 ................................................ 5
Thereafter................................................ 45
------
Total minimum lease payments.............................. $ 107
======
Rent expense amounted to $35, $29 and $27 for the years ended December 31,
2000, 2001 and 2002, respectively.
In the normal course of business, the Company enters into various long-term
raw material supply contracts which generally provide for the purchase prices to
be negotiated annually based on market prices.
In the ordinary course of its business the Company has guaranteed certain
debts of its subsidiaries, totaling $1,600.
The Company's Operating Subsidiary in the U.S. has an agreement with the
Pension Benefit Guaranty Corporation ('PBGC') to provide certain financial
assurances with respect to its pension plan. In accordance with this agreement,
the Company provided the PBGC a letter of credit in the amount of $160, made a
cash contribution of $108.6 in 2001 and $30.7 in 2000 to the Pension Trust and
committed to certain minimum funding requirements, including to fund normal cost
of the pension plan plus, through 2003, an additional $5 per year. Included in
the 2001 payments was a prepayment of the entire 2002 obligation and a portion
of the 2003 obligation. The U.S. Operating Subsidiary made a further payment of
$54.5 during the first quarter of 2003. In addition, the U.S. Operating
Subsidiary granted to the PBGC a first priority lien on selected assets. Also,
Ryerson Tull, Inc., the former parent of the U.S. Operating Subsidiary, provided
a $50 guaranty of the U.S. Operating Subsidiary payment obligations with respect
to its pension plan. These guarantees expire on July 16, 2003 unless renewed.
The agreement has a term of at least five years or at least until certain
financial tests are met, whichever is later, however, the agreement could
terminate within five years if the pension plan is terminated or the U.S.
Operating Subsidiary is sold and the purchaser meets certain tests.
The Company's Operating Subsidiary in the U.S. has guaranteed $67 of
long-term debt attributable to I/N Kote, one of its equity investments.
The Company's Operating Subsidiary in the U.S. has a 15 year agreement, with
approximately 11 years remaining, with a third party to purchase approximately
1.2 million tons of coke annually, on a take or pay basis at prices determined
by certain cost factors from a heat recovery coke battery facility located on
land leased to the third party. Under a separate tolling agreement with another
third party, the Company's U.S. Operating Subsidiary has committed to pay
tolling charges over approximately 11 remaining years to desulpharize fuel gas
from the coke battery and to convert the heat output from the coke battery to
electrical power and stream. At December 31, 2002 and 2001, the estimated
minimum tolling charges remaining over the life of this agreement were
approximately $225 and $254 respectively.
The Company's Operating Subsidiary in the U.S. has, as a part of the
agreement covering the 1990 sale of the Inland Lime & Stone Company division
assets, agreed, subject to certain exceptions, to purchase at prices which
approximate market, its annual limestone needs through 2002. With the completion
of that agreement, the Company's Operating Subsidiary in the U.S. is considering
competitive bids for its limestone needs for 2003 and beyond.
The Company's Operating Subsidiary in the U.S. has a total amount of firm
commitments to contractors and suppliers in connection with construction
projects primarily related to additions to property, plant and equipment for an
amount of $7 million at December 31, 2002, and $3 at December 31, 2001.
In the fourth quarter of 2002, the Company's U.S. Operating Subsidiary
recognized a write-off amounting to $39 for the assets associated with the
Empire Mine Partnership. The U.S. Operating Subsidiary agreed to sell part of
its interest in the Empire Partnership to a subsidiary of Cleveland-Cliffs Inc.
for 'one' U.S. Dollar thereby reducing its interest to 21%. Cleveland-Cliffs,
F-38
Inc. will indemnify the Operating Subsidiary for liabilities associated with the
Operating Subsidiary's continuing ownership interest in the Empire Partnership.
The U.S. Operating Subsidiary will have the option to sell its remaining
interest in the Empire Partnership for 'one' U.S. Dollar to a subsidiary of
Cleveland-Cliffs Inc. at any time after December 31, 2007. In addition, for
twelve years, the U.S. Operating Subsidiary will purchase from subsidiaries of
Cleveland-Cliffs all of its pellet requirements beyond those produced by the
Minorca Mine and such subsidiary's remaining interest in Empire. The U.S.
Operating Subsidiary will pay a price for such pellets based on an agreed
methodology which is fixed for 2003 and 2004 and will be adjusted thereafter
based on a formula.
Under the new 10 5/8% Senior Structured Export Certificates (the 'New SENs')
of Imexsa Export Trust No. 96-1 issued in exchange for outstanding 10 1/8%
Senior Structured Export Certificates of Imexsa Export Trust No. 96-1 (See Notes
9 and 19), the Company's Mexico Operating Subsidiary is committed to sell steel
slabs to Mitsubishi Corporation and other customers with a Standard & Poor's
Ratings Services and Moody's Investor Service, Inc. credit rating no lower than
Mitsubishi during the term of the agreement, which expires in May 31, 2005,
based on sufficient volumes of slabs to generate receivables in each quarter in
an aggregate face amount equal to 2 times the scheduled quarterly debt service
(principal and interest) of the New SENs. The selling price of steel slabs to
Mitsubishi Corporation or other customer for any quarter is derived from a
formula based on the market price.
In August 1999, the Company's Mexican subsidiary entered into a long-term
slab supply agreement commencing in January 2001, with a local customer APM S.A.
de C.V., whereby the customer will purchase 75% of its total slab requirements
at 99% of the weighted average FOB Stowed base price for Mexican subsidiary's
non-affiliated customers plus the quality extras. In the year 2002, the Mexican
Subsidiary shipped approximately 0.817 million tonnes under this contract.
On February 8, 2001, the Company's Mexican Subsidiary entered into a three
year agreement for the period January 1, 2001 to December 31, 2003, with Pemex
Gas y Petroquimica Basica to purchase 25,350 Gcal per day of natural gas at a
fixed price of $4 per mmbtu excluding transportation charges.
Pursuant to its agreement with ISCOTT, the Company was required to offer new
shares representing 40% of its Trinidad Operating Subsidiary's total issued
share capital in a public offering to Trinidad and Tobago nationals and locally
controlled corporations by June 30, 1998. The Agreement also provides that such
offering must be made at a fair price and on such other terms to be negotiated,
and in default of agreement, by the Trinidad and Tobago Stock Exchange (TTSE).
The Government extended the deadline to make the offering in the second half of
2000 and has also agreed in principle, as an alternative arrangement, to allow
the shares of Ispat International to be listed and offered on the TTSE. The
Company is currently working with the Government to resolve the requirement.
In September 2002, the Company's Operating Subsidiary in Trinidad agreed
with the National Gas Company of Trinidad and Tobago Limited ('NGC') to pay
outstanding amounts for gas supplied whereby they agreed to pay to NGC
approximately $5 in 2002 and approximately $13 in monthly installments in each
of 2003 and 2004 towards the outstanding balance including interest. The
Operating Subsidiary has further agreed to accelerate certain of these payments
to NGC in the event of increased cash flow under a variable factor method.
The Company's Operating Subsidiary in Trinidad had an agreement with a third
party to purchase between 2.5 and 4.5 million metric tons of direct reduction
iron ore pellets annually, for ten years, on a take or pay basis. In 2002 the
parties reached an agreement to replace the remainder of the contract with
annually negotiated purchase agreements and have accordingly entered into an
agreement for purchase of 2.5 million metric tons of direct reduction iron ore
pellets between January 1, 2002 and February 28, 2003. It is anticipated that in
2003 a further annual purchase agreement will be negotiated.
NOTE 16: CONTINGENCIES
In the ordinary course of its business, the Company is party to various
legal actions.
The U.S. Operating Subsidiary is involved in various environmental and other
administrative or judicial actions initiated by governmental agencies. While it
is not possible to predict the results of these matters, it does not expect
environmental
F-39
expenditures, excluding amounts that may be required in connection with the 1993
Consent Decree in the 1990 Environmental Protection Agency ('EPA') lawsuit, to
materially affect the results of operations or financial position. Corrective
actions relating to the EPA Consent Decree may require significant expenditures
over the next several years that may be material to the results of operations,
the financial position and the liquidity of the Company. At December 31, 2002,
the reserves for environmental liabilities totaled $28, $22 of which is related
to the sediment remediation under the 1993 EPA Consent Decree. At December 31,
2001, those amounts had been $27 and $21, respectively.
The Company's Operating Subsidiary in the U.S. is anticipated to make
capital expenditures of $2 to $5 annually in each of the next five years for
construction, and have ongoing annual expenditures (non-capital) of $35 to $40
for the operation of air and water pollution control facilities to comply with
current federal state and local laws and regulations.
The U.S. Operating Subsidiary and an independent, unaffiliated producer of
raw materials are parties to a long-term supply agreement under which the U.S.
Operating Subsidiary was obligated to fund an escrow account to indemnify said
producer of raw materials against a specific contingency. Contributions to the
escrow were determined by the agreement and the funds were restricted from the
U.S. Operating Subsidiary's use while in the escrow. The U.S. Operating
Subsidiary received full recovery of $39, the escrowed amount, in April of 2001.
No further contributions to the escrow are required at this time as the U.S.
Operating Subsidiary believes the likelihood of the specific contingency
occurring is remote.
In December 2001, the Company's Operating Subsidiary in Trinidad settled
arbitration proceedings with respect to a scrap supply contract. This amounted
to $21 of which $16 was paid in cash and the balance of $5 is being paid in
twelve quarterly installments which started on March 31, 2002. No interest is to
accrue on the remaining balance unless the remaining installments are not paid
when due. During 2002 a claim by a third party for alleged entitlement to the
settlement monies was the subject of separate proceedings in Trinidad which have
been settled without any additional liability on the Company.
On March 5, 2002, as a result of an investigation under the U.S. law
('Section 201'), the U.S. President imposed trade remedies affecting imports
into the United States of numerous steel products. Those remedies included 30%
tariff rate increases for hot rolled sheet, cold rolled sheet, coated sheet, and
hot rolled bar with the rates declining to 24% in year two and 18% in year
three. These four product lines represent the core of the U.S. Operating
Subsidiary production and sales.
Several foreign supplying countries challenged the U.S. President's action
through the dispute resolution procedures of the World Trade Organization
('WTO'). The Section 201 remedy has allowed the U.S. Operating Subsidiary to
increase U.S. prices for some of the covered products, including hot rolled bar,
benefiting the U.S. Operating Subsidiary's financial position. However,
subsequent to the imposition of the Section 201 remedy, the U.S. government
granted a number of exclusions to the remedy for products of the types that are
made by the U.S. Operating Subsidiary. Most notably, exclusions in the form of
duty-free quotas were granted for foreign producers of interstitial-free carbon
sheet and leaded hot rolled bar.
By allowing a significant volume of products to enter without the tariff
rate increases of 30% in the first year, 24% in the second year and 18% in the
third and final year, these quota exclusions will lessen the benefit of the
Section 201 remedy to the U.S. Operating Subsidiary. The U.S. government also
granted the U.S. Operating Subsidiary's request for a 250,000 ton exclusion for
interstitial-free slab to be imported pursuant to a furnace-relining
certification.
Imports from the Mexico Operating Subsidiary and the Canadian Operating
Subsidiary were exempted from the Section 201 tariff rate increases pursuant to
provisions of the North American Free Trade Agreement ('NAFTA'). Those
exceptions should permit these companies to maintain historical access to U.S.
markets during the three year period of relief. The NAFTA exemption could be
modified if it is determined that increased imports constitute a 'surge' within
the meaning of U.S. law. The effect on the European Operating Subsidiaries is
expected to be modest given their historically low level of exports to the U.S.
A number of WTO-member developing countries have also been exempted from the
remedy. However, the developing country exemption can also be revoked if a
'surge' is shown, and a number of domestic producers have filed for the
revocation of the exempt status for a number of WTO-member developing countries.
The March 2002 Section 201 remedy does not cover steel wire rod, the product
sold in the United States by the Trinidad Operating Subsidiary. However, as a
result of an earlier Section 201 proceeding relating to steel wire rod, the
Trinidad Operating Subsidiary received a 247,000 annual quota with a 5% duty
above this level, which has restricted the Operating Subsidiary's
F-40
ability to sell steel wire rod to the U.S. market. This restriction for wire rod
comes to an end on March 1, 2003. The impact of the wire rod tariff rate quotas
on the European Operating Subsidiaries has been negligible.
In 2002, U.S. trade agencies also made affirmative determinations under U.S.
anti-dumping ('AD') and countervailing duty ('CVD') laws for steel wire rod. The
Trinidad Operating Subsidiary, the Canadian Operating Subsidiary, and the
European Operating Subsidiaries companies were required to post bonds on their
exports to the U.S. in 2001, and in 2002 final dumping and CVD margins were
issued. For the Trinidad Operating Subsidiary, the margins were 11.40% and 0%
respectively which entitles the Company to receive a refund of the CVD already
paid. For the Canadian Operating Subsidiary, the margins were 3.86% and 6.61%.
The latest margins are being appealed by the Canadian Operating Subsidiary and
the Government of Quebec. No margins were assessed against the European
Operating Subsidiaries, since the investigation was terminated as to Germany
following a finding of 'negligibility' in the German AD case.
In late April 2002, the U.S. Department of Commerce issued preliminary
anti-dumping duty margins against cold rolled imports from 20 countries.
However, in late 2002 the U.S. ITC issued negative final injury determinations
against all 20 countries, terminating the investigations and eliminating the
duties. The effect on the U.S. Operating Subsidiary is likely to be somewhat
negative. The U.S. petitioners have appealed the decision to the U.S. Court of
International Trade.
In the aftermath of the U.S. President's imposition of tariff rate increases
under Section 201, the European Union announced in September 2002 that it would
impose additional duties ranging from 17.5 to 26% on 7 steel products imported
above levels established in new quotas. Three additional products are still
under investigation. The remedy will remain in effect until the U.S. Section 201
steel remedy is abolished. The products covered include bars and coils produced
by European Operating Subsidiaries and may therefore have a positive effect on
the prices these companies obtain for their products in the European Union. The
European Union originally announced its intention to retaliate against the U.S.
Section 201 remedies, but it has been at least temporarily placated by the
granting of exclusions discussed above. The negative impact of these actions on
non-European Company subsidiaries is expected to be negligible since their
exports to Europe are modest.
On March 22, 2002, the Canadian government initiated a safeguard
investigation by asking its International Trade Tribunal ('ITT') to investigate
whether increased imports of certain steel products are causing or threatening
to cause injury to Canadian steel producers. In a report issued in July of 2002,
the ITT found injury on a range of products, including plate, pipe, and cold
rolled sheet and bar. In August 2002 report, the ITT recommended additional
tariffs ranging from 7% to 25% above a quota level based on historical imports.
The ITT found that U.S. imports, for all products except reinforcing bar,
substantially contributed to the injury and recommended that U.S. imports not be
exempted from the safeguard remedy under NAFTA. As at the end of 2002, the
Canadian government has not yet acted on the ITT recommendations. At this time
the potential impact of this action on the Canadian Operating Subsidiary and
other Company subsidiaries is uncertain.
Under the U.S. Continued Dumping and Subsidy Offset Act of 2000 ('CDSOA'),
commonly known as the 'Byrd amendment,' the U.S. Operating Subsidiary was
awarded approximately $1 in collected customs duties, based on its participation
in or support for various U.S. AD and CVD cases. The payment is based on
'qualifying expenditures' and is distributed to U.S. steel companies out of
funds collected from foreign producers under AD and CVD orders. On September 2,
2002, the WTO issued a final ruling condemning the CDSOA. In its ruling the WTO
recommended that the U.S. repeal the Byrd amendment in order to comply with its
findings. The U.S. government has appealed the decision, but the future of the
CDSOA and offset distributions is questionable.
While several of the developments described above may be expected to benefit
certain subsidiaries of the Company, there can be no assurance that potential
benefits will ultimately accrue because of WTO challenges, exclusion requests,
and various economic uncertainties.
The European Commission has raised claims of (euro) 47 million for repayment
by DSG Dradenauer Stahlgesellschaft mbH ('DSG') of loan amounts alleged to
qualify as improper subsidies from the City of Hamburg. These subsidies are
claimed to be contradictory to the European Commission's rulings on competitive
markets in the steel industry and the European Commission has initiated legal
action to settle the matter. In April 2002, the European Court of Justice
decided that the loan was an unauthorized subsidy under the EC law. DSG has
stated that the loan is fully repaid. The court in Hamburg, Germany has
confirmed the position of DSG. An appeal is now pending in the German courts and
a decision is expected in middle 2003. The Company cannot predict the final
outcome of these proceedings. In August 2002, DSG was sold, the final purchase
price to be
F-41
determined on December 31, 2004 based on the shareholders' equity of DSG at that
date. DSG is no longer a subsidiary of the Company.
Pursuant to a constitutional challenge to the 1999 Tax Reforms of the
Mexican Tax Code's Consolidation Regime by the Company's Mexican holding
company, Grupo Ispat International S.A. de C.V. ('Grupo'), Grupo and or
consolidated subsidiaries had to pay the difference between the provisional
amount paid under the old rules and the provisional amount required under the
new rules adjusted for actualization and penalties. The net amount payable
according to the authorities was approximately $13 and this was paid in full in
June 2002. In December 2002, a settlement agreement was signed with the Mexican
tax authorities concerning the final amount.
On April 15, 2002, the Administration Portuaria Integral de Lazaro Cardenas
S.A. de C.V. ('API') initiated before the General Office of Ports (Direccion
General de Puertos) the process for the cancellation of the registration of the
partial assignment of rights that Ispat Servicios Portuarios S.A. de C.V.
('ISP'), a subsidiary of the Company's Operating Subsidiary in Mexico had
entered into with the API for use and benefit from the multiple-use terminal
located in the Port of Lazaro Cardenas, Mexico. This was challenged by ISP. As a
result of negotiations, new authorizations have been obtained from API and the
General Customs Administration in favor of Grupo's subsidiary, Ispat Portuarios,
SA de CV in order for it to operate the terminal.
In the Autumn of 2002, three subsidiaries of the Company (Trefileurope S.A.,
Trefileurope Italia S.r.l. and Fontainunion S.A.), along with other European
manufacturers of pre-stressed wire and strands steel products, received notice
from the European Commission that it was conducting an investigation into
possible anti-competitive practices. The Company and its subsidiaries are
cooperating fully with the European Commission in this investigation. Should the
European Commission find that the companies have breached the EC law, it may
impose a fine on the Company or companies that it holds responsible for the
conduct, through decisive influence or otherwise. The fine levied cannot exceed
the limit set in Article 15(2) of EC Council Regulation 17/62. The Company is
currently unable to assess the ultimate outcome of the proceedings before the
European Commission or the amount of any fines that may result. As the alleged
anti-competitive activities would have taken place in large part prior to the
acquisition of the subsidiaries, the Company has notified the previous owners
that it will hold them liable for all consequences of the investigation.
NOTE 17: SEGMENT AND GEOGRAPHIC INFORMATION
The management considers the Company's steel operation to be a single
business segment. As the Company has no operations in its home country of the
Netherlands, all of its sales are considered to be foreign sales. Annual sales
to any individual customer did not exceed 10% of total sales in any of the
periods presented.
Information with respect to the Company's operations in different geographic
areas is as follows:
Americas Europe
--------------------------------------- --------------------------
U.S. Mexico Canada Trinidad France Germany Ireland Others & Consoli-
Eliminations dated
Year ended December 31, 2000
Sales to unaffiliated customers $ 2,505 $ 813 $ 622 $ 123 $ 564 $ 635 $ 81 $ -- $ 5,343
Net sales 2,439 841 609 233 534 664 86 (309) 5,097
Operating income 36 116 89 25 53 (1) (3) 315
Total assets at December 31, 2000 3,185 1,678 907 549 293 409 68 (1,111) 5,978
Depreciation 106 15 16 18 5 10 4 3 177
Capital expenditures 83 30 19 10 13 10 3 16 184
Year ended December 31, 2001
Sales to unaffiliated customers $ 2,212 $ 534 $ 503 $ 103 $ 535 $ 582 $ 17 $ -- $ 4,486
Net sales 2,143 481 479 285 508 620 17 (255) 4,278
Operating income (127) (49) 21 (11) 15 31 (2) (72) (194)
Total assets at December 31, 2001 3,080 1,480 857 528 266 327 -- (1,225) 5,313
Depreciation 104 21 19 18 6 5 1 3 177
Capital expenditures 29 22 13 9 15 10 (1) 97
F-42
Americas Europe
------------------------------------ -------------------------
U.S. Mexico Canada Trinidad France Germany Ireland Others & Consoli-
Eliminations dated
Year ended December 31, 2002
Sales to unaffiliated customers $ 2,388 $ 588 $ 557 $ 129 $ 618 $ 609 $-- $ -- $ 4,889
Net sales 2,316 654 534 322 598 673 -- (451) 4,646
Operating income 33 57 41 18 38 (7) -- (38) 142
Total assets at December 31, 2002 3,162 1,449 883 523 451 377 -- (1,333) 5,512
Depreciation 99 21 20 19 7 7 -- 4 177
Capital expenditures 52 9 14 6 10 16 -- 1 108
F-43
NOTE 18: FINANCIAL INFORMATION FOR ISSUER, SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The senior notes issued by Ispat Europe will be jointly, severally, fully and
unconditionally guaranteed on a senior basis by Ispat International, Ispat
Germany GmbH, Ispat Hamburger Stahlwerke GmbH, Ispat Stahlwerk Ruhrort GmbH and
Ispat Walzdraht Hochfeld GmbH. Presented below is condensed consolidating
financial information for:
* Ispat International on a parent company only basis;
* Ispat Europe on a parent company only basis;
* Ispat Europe's guarantor subsidiaries, Ispat Germany GmbH, Ispat
Hamburger Stahlwerke GmbH, Ispat Stahlwerk Ruhrort GmbH and Ispat
Walzdraht Hochfeld GmbH on a combined basis;
* Ispat Europe's non-guarantor subsidiary, Ispat Unimetal
* Ispat Europe eliminations; and
* Ispat Europe consolidated.
* Ispat International's non-guarantor subsidiaries, on a combined basis;
* Ispat International eliminations; and
* Ispat International and subsidiaries consolidated.
Ispat Europe has no business operation of its own. Accordingly, it can only pay
dividends or distributions to the extent it is able to arrange a distribution
from its subsidiaries, recognize gain from the sale of its assets or records
share premium from the issuance of common shares. Ispat Europe and its operating
subsidiaries are subject to certain restrictions under the terms of certain of
their debt agreements for paying dividends. As a result, $7 million of Ispat
Europe's retained earnings are free of restriction for the payment of dividends
as at December 31, 2002.
F-44
Condensed consolidating statements of income for the year ended
December 31, 2000
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $ - $ - $ 692 $ 586 $ (36) $ 1,242
Costs and expenses:
Cost of sales (exclusive of depreciation shown - - 595 511 (29) 1,077
separately below)
Depreciation - - 10 5 - 15
Selling, general and administrative 13 - 34 40 (7) 67
- ------------------------------------------------------------------------------------------------------------------------------------
(13) 53 30 - 83
Operating income
Equity in earnings of subsidiaries 111 62 - - (62) -
Other income (expense) - net - - 1 - - 1
Financing costs:
Net interest income (expense) 1 - (7) (2) - (9)
Net gain (loss) from foreign exchange - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
99 62 47 28 (62) 75
Income before taxes
Income tax (benefit) expense:
Current - - 3 1 - 4
Deferred - - 9 - - 9
- ------------------------------------------------------------------------------------------------------------------------------------
$ 99 $ 62 $ 35 $ 27 $ (62) $ 62
Net income
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 4,176 $ (75) $ 5,343
3,657 (64) 4,670
162 - 177
104 (3) 181
- -----------------------------------------------
253 (8) 315
- (111) -
23 (1) 23
(208) - (216)
- - -
- -----------------------------------------------
68 (120) 122
16 - 20
(6) - 3
- -----------------------------------------------
$ 58 $ (120) $ 99
- -----------------------------------------------
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2000
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net income $ 99 $ 62 $ 35 $ 27 $ (62) $ 62
Other comprehensive income (loss) (50) - (10) (2) - (12)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 49 $ 62 $ 25 $ 25 $ (62) $ 50
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 58 $ (120) $ 99
(38) 50 (50)
- -------------------------------------------------
$ 20 $ (70) $ 49
- -------------------------------------------------
F-45
Condensed consolidating statements of cash flows for the year ended December 31,
2000
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net cash provided by operating activities $ 65 $- $ 59 $ 15 $ - $ 74
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment (1) - (9) (13) - (22)
Proceeds from sale of investment including - - - - - -
affiliates and joint ventures
Investment in affiliates and joint ventures (45) - -
Other - - (1) - - (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (46) - (10) (13) - (23)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from payable to banks - - 16 5 - 21
Proceeds from long-term debt - - - - - -
Payments of payable to banks - - (26) - - (26)
Payments of long-term debt payable to unrelated - - (4) (1) - (5)
parties
Payments of long-term debt payable to - - (31) (14) - (45)
affiliated
Purchase of treasury stock (1) - - - - -
Dividends (18) - - - - -
Issue of share capital - net - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (19) - (45) (10) - (55)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents - - 4 (8) - (4)
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - (5) (1) - (6)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 1 - 12 14 - 26
- ------------------------------------------------------------------------------------------------------------------------------------
At the end of the year $ 1 $ - $ 11 $ 5 $ - $ 16
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 256 $ (14) $ 381
- -------------------------------------------------
(161) - (184)
23 - 23
(25) 45 (25)
(8) (9)
- -------------------------------------------------
(171) 45 (195)
- -------------------------------------------------
2,273 - 2,294
321 (24) 297
(2,315) (2,341)
(359) (6) (370)
1 44 -
- - (1)
- (18)
45 (45) -
- -------------------------------------------------
(34) (31) (139)
- -------------------------------------------------
51 - 47
- -------------------------------------------------
3 - (3)
- -------------------------------------------------
143 - 170
- -------------------------------------------------
$ 197 $ - $ 214
- -------------------------------------------------
F-46
Condensed consolidating balance sheets as of December 31, 2001
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ - $ - $ 17 $ 4 $- $ 21
Trade accounts receivable - - 58 86 - 144
Inventories - - 72 95 - 167
Other current assets 43 14 51 13 (41) 37
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 43 14 198 198 (41) 369
Property, plant and equipment - net - - 89 70 - 159
Investments in affiliates 465 367 10 1,270 (1,637) 10
Other assets 5 8 16 3 - 27
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 513 $ 389 $ 313 $ 1,541 $ (1,678) $ 565
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Payable to banks and current portion of $ - $ 4 $ 10 $ 21 $ - $ 35
long-term debt
Trade accounts payable - - 61 90 - 151
Accrued expenses and other current liabilities 175 35 57 91 (77) 106
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 175 39 128 202 (77) 292
Long-term debt - 119 - 1 - 120
Deferred employee benefits - - 23 39 - 62
Other long-term obligations - - 15 15 - 30
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 175 158 166 257 (77) 504
Shareholders' equity 338 231 147 1,284 (1,601) 61
Total liabilities and shareholders' equity $ 513 $ 389 $ 313 $ 1,541 $ (1,678) $ 565
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 64 $ - $ 85
307 - 451
642 (4) 805
2,032 (2,010) 102
- -------------------------------------------------
3,045 (2,014) 1,443
2,965 (15) 3,109
289 (465) 299
450 (20) 462
- -------------------------------------------------
$ 6,749 $ (2,514) $ 5,313
- -------------------------------------------------
$ 307 $ (4) $ 338
389 - 540
563 (513) 331
- -------------------------------------------------
1,259 (517) 1,209
1,921 - 2,041
1,431 - 1,493
202 - 232
- -------------------------------------------------
4,813 (517) 4,975
1,936 (1,997) 338
$ 6,749 $ (2,514) $ 5,313
- -------------------------------------------------
F-47
Condensed consolidating statements of income for the year ended December
31, 2001
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Sales $ - $ - $ 630 $ 552 $ (38) $ 1,144
Costs and expenses:
Cost of sales (exclusive of depreciation shown - - 562 492 (29) 1,025
separately below)
Depreciation - - 5 6 8 19
Selling, general and administrative 6 - 34 36 (8) 62
Other operating expense - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
(6) 29 18 (9) 38
Operating income
Equity in earnings of subsidiaries (306) 33 - - (33) -
Other income (expense) - net - - 2 - - 2
Financing costs:
Net interest income (expense) - (12) (2) (2) - (16)
Net gain (loss) from foreign exchange - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes
Income tax (benefit) expense: (312) 21 29 16 (42) 24
Current - - 3 1 - 4
Deferred - - (1) - - (1)
- -----------------------------------------------------------------------------------------------------------------------------------
$ (312) $ 21 $ 27 $ 15 $ (42) $ 21
Net income
- -----------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 3,631 $ (289) $ 4,486
3,517 (269) 4,273
189 8 177
91 (4) 155
- 36 75
- ---------------------------------------------
(166) (60) (194)
- 306 -
253 (242) 13
(212) - (228)
(126) 117 (9)
- ---------------------------------------------
(251) 121 (418)
4 - 8
(115) 2 (114)
- ---------------------------------------------
$ (140) $ 119 $ (312)
- ---------------------------------------------
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2001
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net income $ (312) $ 21 $ 27 $ 15 $ (42) $ 21
Other comprehensive income (loss) (241) - (7) (4) - (11)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ (553) $ 21 $ 20 $ 11 $ (42) $ 10
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ (140) $ 119 $ (312)
(230) 241 (241)
- -------------------------------------------------
$ (370) $ 360 $ (553)
- -------------------------------------------------
F-48
Condensed consolidating statements of cash flows for the year ended December
31, 2001
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net cash provided by operating activities $ 8 $15 $ 54 $ 3 $ (3) $ 69
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment - - (10) (15) - (25)
Proceeds from sale of investment including - - 36 - - 36
affiliates and joint ventures
Investment in affiliates and joint ventures (13) - - - - -
Other - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (13) - 26 (15) - 11
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from payable to banks - - - 12 - 12
Proceeds from long-term debt - 125 - - - 125
Proceeds from long-term debt payable to - 10 - - (10) -
affiliated
Payments of payable to banks - - (43) - - (43)
Payments of long-term debt payable to unrelated - (13) (36) - - (49)
parties
Payments of long-term debt payable to - (13) - - 13 -
affiliated
Purchase of treasury stock (1) - - - - -
Sale of treasury stock 5 - - - - -
Dividends - (122) - - - (122)
Issue of share capital - net - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 4 (13) (79) 12 3 (77)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1) 2 1 - - 3
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - (2) 2 (1) - (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 1 - 14 5 - 19
- ------------------------------------------------------------------------------------------------------------------------------------
At the end of the year $ - $ - $ 17 $ 4 $ - $ 21
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ (12) $ (25) $ 40
- -------------------------------------------------
(86) 14 (97)
18 (17) 37
(221) 242 8
4 - 4
- -------------------------------------------------
(285) 239 (48)
- -------------------------------------------------
2,404 - 2,416
14 (14) 125
173 (173) -
(2,375) - (2,418)
(211) 10 (250)
(17) 17 -
- - (1)
- - 5
(65) 187 -
240 (240) -
- -------------------------------------------------
163 (213) (123)
- -------------------------------------------------
(134) 1 (131)
- -------------------------------------------------
4 (1) 2
- -------------------------------------------------
194 - 214
- -------------------------------------------------
$ 64 $ - $ 85
- -------------------------------------------------
F-49
Condensed consolidating balance sheets as of December 31, 2002
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ - $ - $ 21 $ 12 $- $ 33
Trade accounts receivable - - 67 71 - 138
Inventories - - 86 123 - 209
Other current assets 95 16 113 19 (86) 62
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 95 16 287 225 (86) 442
Property, plant and equipment - net - - 112 92 - 204
Investments in affiliates 359 367 11 - (367) 11
Other assets 3 6 15 2 - 23
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 457 $ 389 $ 425 $ 319 $ (453) $ 680
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Payable to banks and current portion of $ - $ 4 $ 16 $ 26 $ - $ 46
long-term debt
Trade accounts payable - - 92 102 - 194
Accrued expenses and other current liabilities 304 71 60 63 (72) 122
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 304 75 168 191 (72) 362
Long-term debt - 129 - 1 - 130
Deferred employee benefits - - 30 48 - 78
Other long-term obligations 25 1 21 30 (14) 38
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 329 205 219 270 (86) 608
Shareholders' equity 128 184 206 49 (367) 72
Total liabilities and shareholders' equity $ 457 $ 389 $ 425 $ 319 $ (453) $ 680
- -----------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 44 $ - $ 77
391 - 529
681 (17) 873
2,068 (2,092) 133
- ---------------------------------
3,184 (2,109) 1,612
2,831 - 3,035
246 (359) 257
601 (19) 608
- ---------------------------------------------
$ 6,862 $ (2,487) $ 5,512
- ---------------------------------------------
$ 216 $ - $ 262
413 - 607
488 (509) 405
- ---------------------------------------------
1,117 (509) 1,274
1,892 - 2,022
1,803 - 1,881
144 - 207
- ---------------------------------------------
4,956 (509) 5,384
1,906 (1,978) 128
$ 6,862 $ (2,487) $ 5,512
- ---------------------------------------------
F-50
Condensed consolidating statements of income for the year ended December
31, 2002
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Sales $ - $ - $ 688 $ 574 $ (43) $ 1,219
Costs and expenses:
Cost of sales (exclusive of depreciation shown 4 2 609 530 (36) 1,105
separately below)
Depreciation - - 7 7 14
Selling, general and administrative 7 2 35 39 (7) 69
Other operating expense - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (11) (4) 37 (2) - 31
Equity in earnings of subsidiaries 59 26 - - (26) -
Other income (expense) - net - - 3 - - 3
Financing costs:
Net interest income (expense) 1 (16) (1) (1) - (18)
Net gain (loss) from foreign exchange - - - (1) - (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes 49 6 39 (4) (26) 15
Income tax (benefit) expense:
Current - - 3 2 - 5
Deferred - - 4 - - 4
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary income 49 6 32 (6) (26) 6
Extraordinary gain - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 49 $ 6 $ 32 $ (6) $ (26) $ 6
- -----------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 4,105 $ (435) $ 4,889
3,654 (407) 4,356
163 - 177
82 (6) 152
62 - 62
- -------------------------------------------
144 (22) 142
- (59) -
18 (7) 14
(185) (1) (203)
27 (3) 23
- -------------------------------------------
4 (92) (24)
13 - 18
(76) - (72)
- -------------------------------------------
67 (92) 30
19 - 19
- -------------------------------------------
$ 86 $ (92) $ 49
- -------------------------------------------
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2002
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net income $ 49 $ 6 $ 32 $ (6) $ (26) $ 6
Other comprehensive income (loss) - (28) 30 10 - 12
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 49 $ (22) $ 62 $ 4 $ (26) $ 18
- -----------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 86 $ (92) - $ 49
(279) 4 (263)
- -------------------------------------------------
$ (193) $ (88) $ (214)
- -------------------------------------------------
F-51
Condensed consolidating statements of cash flows for the year ended December
31, 2002
Ispat Europe - Issuer Subsidiary
----------------------------------------------------------
Ispat
Ispat Ispat Ispat Europe -
International - Europe - Europe - Non- Ispat Ispat
Parent Parent Subsidiary Guarantor Europe - Europe-
Company Company Guarantors Subsidiary Eliminations Consolidated
------------- -----------------------------------------------------------------
Net cash provided by operating activities $ 93 $16 $ 10 $ 19 $ (3) $ 42
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment - - (10) (15) - (25)
Proceeds from sale of investment including - - - - -
affiliates and joint ventures -
Investment in affiliates and joint ventures (98) - - - - -
Other 1 - - 1 3 4
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (97) - (10) (14) 3 (21)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from payable to banks - - 3 17 - 20
Proceeds from long-term debt - 3 - - - 3
Proceeds from long-term debt payable to - - - - - -
affiliated
Payments of payable to banks - - - (17) - (17)
Payments of long-term debt payable to unrelated - (12) - - - (12)
parties
Payments of long-term debt payable to - (7) - - - (7)
affiliated
Purchase of treasury stock (1) - - - - -
Sale of treasury stock 5 - - - - -
Dividends - - - - - -
Issue of share capital - net - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 4 (16) 3 - - (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents - - 3 5 8
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - 1 2 - 3
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year - - 17 4 - 21
- ------------------------------------------------------------------------------------------------------------------------------------
At the end of the year $ - $ - $ 21 $ 11 $ - $ 32
- ------------------------------------------------------------------------------------------------------------------------------------
Ispat
International Ispat Ispat
- Non- International International
guarantor - -
Subsidiaries Eliminations Consolidated
- -------------------------------------------------
$ 48 $ (15) $ 168
- -------------------------------------------------
(83) - (108)
18 - 18
(17) 126 11
(5) (1) (1)
- -------------------------------------------------
(87) 125 (80)
- -------------------------------------------------
2,339 - 2,359
122 - 125
30 (30) -
(2,329) - (2,346)
(231) - (243)
(7) 14 -
- - (1)
- - 5
(2) 2 -
88 (88) -
- -------------------------------------------------
10 (102) (101)
- -------------------------------------------------
(29) 8 (13)
- -------------------------------------------------
2 - 5
- -------------------------------------------------
64 - 85
- -------------------------------------------------
$ 37 $ 8 $ 77
- -------------------------------------------------
F-52
NOTE 19: SECURITIZATION AND FACTORING OF RECEIVABLES
Certain subsidiaries of the Company have an agreement to sell interest in
pools of the Company's trade receivables on a non-recourse basis, to independent
Special Purpose Vehicle (SPV). Participation interests in new receivables may be
sold, as collections reduce previously sold accounts. The proceeds from the sale
of trade accounts receivables are included in the cash flows from operating
activities in the Consolidated Statements of Cash Flows. The sale proceeds
consist of an initial payment (up to a maximum of $142) and a deferred payment.
The initial payment can go up to a maximum of 85% of recorded amounts for the
receivables sold. The deferred proceeds outstanding amounted to $27 and $10 at
December 31, 2001 and 2002 respectively. Gross receivables sold were $82, $137
and $60 at December 31, 2000, 2001 and 2002 respectively.
Additionally, some of our subsidiaries have entered into Factoring
Agreements with certain banks/financial institutions under which they are
entitled to sell eligible accounts receivables from the customers up to an
agreed limit. The bank/financial institution buys these receivables without
recourse to the seller. Payments for sale of these receivables are received in
two installments. The first installment ranging between 90% to 95% of the
receivables sold (up to a maximum of $115) is paid immediately on sale of the
receivables. The deferred proceeds outstanding amounted to $7 at December 31,
2002. Gross receivables sold were $96 at December 31, 2002. The balance portion
of the purchase price is held back towards factoring commission, interest
charges and any possible bonus or discounts till the receivables are collected
from the customer by the Factoring agent. The proceeds from the sale of trade
accounts receivables are included in the cash flows from operating activities in
the Consolidated Statements of Cash Flows.
The receivables are sold at a discount that is included in Selling, general
and administrative expenses in the consolidated statements of income and
amounted $3, $4 and $5 for 2000, 2001 and 2002 respectively.
Securitization
2000 2001 2002
- -------------------------------------------------------------------------------
Proceeds from trade receivable sold to SPV 409 658 487
Nominal of trade receivables sold to SPV 433 688 498
Servicing fees received - - -
Other Interest 3 4 3
Purchases of delinquent or foreclosed assets, if
any - - -
Servicing advances - - -
Repayments of servicing advances - - -
Deferred payments on balance sheet 22 27 10
Factoring
2000 2001 2002
- --------------------------------------------------------------------------------
Proceeds from trade receivable sold under
factoring agreement - - 208
Nominal of trade receivables sold under factoring
agreement - - 216
Discounts incurred - - 2
Purchases of delinquent or foreclosed assets, if
any - - -
Servicing advances - - -
Repayments of servicing advances - - -
Deferred payments on balance sheet - - 7
F-53
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
1.1 Amended and Restated Articles of Association of Ispat International
N.V. dated December 31, 2001 (English translation filed as Exhibit 1 to
Ispat International N.V.'s annual report on Form 20-F for the year
ended December 31, 2001, and incorporated by reference hereto).
2.1 Amendments dated March 1, 2002, March 30, 2001 and September 30,1999 to
the Credit Agreement (the "Credit Agreement"), dated July 16, 1998,
among Ispat Inland, L.P., Ispat Inland Inc., Burnham Trucking Company,
Inc., Incoal Company, the Lenders named therein and Credit Suisse First
Boston.
The Credit Agreement (filed as part of Exhibit 3.10 to Ispat
International N.V.'s annual report on Form 20-F for the year ended
December 31, 1998, and incorporated by reference hereto).
Except for such instruments as have been filed herein under Exhibit
2.1, the total amount of long-term debt securities of Ispat
International N.V. authorized under any instrument does not exceed 10%
of the total assets of the Company on a consolidated basis. The Company
undertakes to furnish to the Commission all other instruments relating
to long-term debt of the Company and its subsidiaries upon request by
the Commission.
4.1 Ispat International N.V. Global Stock Option Plan, effective September
15, 1999 (filed as Exhibit 4.1 to Ispat International N.V.'s annual
report on Form 20-F for the year ended December 31, 2000, and
incorporated by reference hereto).
8.1 List of Significant Subsidiaries.