THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, BUT IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(5)
File No. 333-99273
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 2003
PRELIMINARY PROSPECTUS SUPPLEMENT
(To Prospectus dated October 22, 2002)
4,000,000 MEDS(SM)
[US STEEL CORPORATION LOGO]
UNITED STATES STEEL CORPORATION
% SERIES B MANDATORY CONVERTIBLE PREFERRED SHARES (MEDS)
We will pay annual dividends on each of our MEDS in the amount of $ .
Dividends will be cumulative from the date of issuance and will accrue and be
paid quarterly. The first dividend payment will be made on June 15, 2003. The
liquidation preference is $50 per MEDS, plus accrued and unpaid dividends.
On June 15, 2006, each of our MEDS will automatically convert, subject to
adjustments described in this prospectus supplement, into between and
shares of our common stock depending on the then current market price
of our common stock. At any time prior to the conversion date, holders may elect
to convert each of our MEDS, subject to adjustments described in this prospectus
supplement, into shares of our common stock, although by doing so
would forfeit any undeclared dividends.
Prior to this offering, there has been no market for our MEDS. We have applied
to list the MEDS on the New York Stock Exchange under the symbol "X PrB." Our
common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Stock Exchange under the symbol "X." The last reported
sale price of our common stock on January 31, 2003 was $14.35 per share.
U. S. Steel has granted the underwriters an option for 30 days to purchase up to
600,000 additional MEDS.
INVESTING IN OUR MEDS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-10
OF THIS PROSPECTUS SUPPLEMENT AND BEGINNING ON PAGE 2 OF THE ATTACHED PROSPECTUS
TO WHICH THIS PROSPECTUS SUPPLEMENT RELATES.
-------------------------------------------------------------------------------------------
PER MEDS TOTAL
-------------------------------------------------------------------------------------------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to U. S. Steel, before expenses $ $
-------------------------------------------------------------------------------------------
The underwriters expect to deliver the MEDS to purchasers on or about February
, 2003.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
JPMORGAN
GOLDMAN, SACHS & CO. LEHMAN BROTHERS
SALOMON SMITH BARNEY SCOTIA CAPITAL
, 2003
IN MAKING YOUR INVESTMENT DECISION, YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE
ATTACHED PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH ANY OTHER INFORMATION. IF YOU RECEIVE ANY OTHER INFORMATION,
YOU SHOULD NOT RELY ON IT. WE AND THE UNDERWRITERS ARE OFFERING TO SELL THE
SECURITIES ONLY IN PLACES WHERE OFFERS AND SALES ARE PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT COVER OF THIS PROSPECTUS SUPPLEMENT.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PAGE
Forward-looking statements.......... ii
Summary............................. S-1
Risk factors........................ S-10
Use of proceeds..................... S-21
Capitalization...................... S-22
Ratio of earnings to combined fixed
charges and preferred stock
dividends......................... S-23
Price range of common stock and
dividends......................... S-24
Selected financial information...... S-25
Description of the MEDS............. S-27
Certain federal income tax
considerations.................... S-39
Underwriting........................ S-44
Legal matters....................... S-46
PROSPECTUS PAGE
Where you can find more
information....................... ii
Our company......................... 1
Risk factors........................ 2
Summary consolidated financial
information....................... 16
Ratio of earnings to fixed
charges........................... 19
Use of proceeds..................... 19
Description of the debt
securities........................ 19
Description of capital stock........ 30
Description of depositary shares.... 37
Description of Warrants............. 40
Description of convertible or
exchangeable securities........... 41
Description of stock purchase
contracts and stock purchase
units............................. 41
Plan of distribution................ 41
Validity of securities.............. 43
Experts............................. 44
---------------
MEDS(SM) is a service mark of JPMorgan.
i
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the attached prospectus and the documents
incorporated herein and therein by reference include "forward-looking
statements" that are identified by the use of forward-looking words or phrases,
including, but not limited to, "intends," "intended," "expects," "expected,"
"anticipates" and "anticipated." These forward-looking statements are based on
(1) a number of assumptions made by management concerning future events and (2)
information currently available to management. Readers are cautioned not to put
undue reliance on those forward-looking statements, which are not a guarantee of
performance and are subject to a number of uncertainties and other facts, many
of which are outside our control, that could cause actual events to differ
materially from those statements. All statements other than statements of
historical facts included in this prospectus supplement and the attached
prospectus and the documents incorporated herein and therein by reference,
including those regarding our future financial position, results of operations,
cash flows and costs, and those regarding our business strategy and growth
opportunities, are forward-looking statements. Although we believe our
expectations reflected in those forward-looking statements are reasonable, we
cannot assure you that these expectations will prove to be correct. Important
factors that could cause actual results to differ materially from our
expectations ("Cautionary Statements"), in addition to those factors disclosed
under "Risk factors" beginning on page 2 of the attached prospectus and on page
S-10 of this prospectus supplement and in our SEC filings listed under "Where
you can find more information", include:
-- prices and volumes of our sales of steel products;
-- levels of imports of steel products into the United States;
-- general economic, financial market and political conditions; and
-- whether or not and to what extent we participate in the consolidation of
the domestic steel industry.
These forward-looking statements represent our judgment as of the date of this
prospectus supplement. All subsequent written and oral forward-looking
statements are expressly qualified in their entirety by the Cautionary
Statements. Unless otherwise required by law, we disclaim any intent or
obligation to update the respective forward-looking statements.
ii
SUMMARY
The following information supplements, and should be read together with, the
information contained or incorporated by reference in other parts of this
prospectus supplement and the attached prospectus. This summary highlights
selected information from the prospectus supplement and the attached prospectus.
As a result, it does not contain all of the information you should consider
before investing in our MEDS. You should carefully read this prospectus
supplement and the attached prospectus, including the documents incorporated by
reference in it, which are described under "Where you can find more information"
in the attached prospectus. Unless the context otherwise requires, references in
this prospectus to "U. S. Steel," "USS," "we," "us" and "our" are to United
States Steel Corporation and its subsidiaries. References to tons are to U.S.
short or "net" tons (2,000 lbs.) unless otherwise indicated. A metric ton ("mt"
or "tonne") is equal to roughly 1.10 U.S. short tons (2,205 lbs).
UNITED STATES STEEL CORPORATION
We are the largest integrated steel producer in North America and have annual
global steelmaking capacity of 17.8 million tons. We have a broad and diverse
mix of products and customers. We make, sell and transport a wide range of
value-added steel products to customers with demanding technical applications in
the automotive, appliance, container, industrial machinery, construction and oil
and gas industries. We are one of the leading steel sheet suppliers to the North
American automotive and appliance industries, one of the largest producers of
tin mill products in North America, the largest integrated flat-rolled producer
in Central Europe and the largest domestic producer of seamless oil country
tubular goods.
We have a significant market presence in each of our major product areas and we
have long-term relationships with many of our major customers. For the year
ended December 31, 2002, we shipped 14.6 million tons of steel globally and
generated revenues and other income of $7,054 million.
We operate three integrated steel mills in North America--Gary Works in Indiana,
Mon Valley Works in Pennsylvania and Fairfield Works in Alabama--which have
annual steelmaking capacity of 12.8 million tons. We also operate processing and
finishing facilities at six locations in those three states and in Ohio. We
produce most of the iron ore and coke and a portion of the coal we use as raw
materials in our domestic steelmaking process, and we sell some of this
production to third parties. We also own real estate, steel distribution, and
engineering and consulting services businesses.
In addition to our domestic facilities, we have significant operations in
Central Europe through U. S. Steel Kosice, s.r.o., which we acquired in November
2000. USSK, headquartered in Kosice in the Slovak Republic, is the largest
integrated steel sheet producer in Central Europe, with annual steelmaking
capacity of 5.0 million tons. USSK has enabled us to establish a low-cost
manufacturing base in Europe and positioned us to serve our global customers.
STEEL INDUSTRY CONDITIONS
CONSOLIDATION AND RESTRUCTURING IS UNDERWAY. The domestic steel industry is
restructuring after many years of oversupply and low prices, which resulted in
significant capacity closures starting in late 2000 and led to the introduction
of Section 201 import tariffs in March 2002. The
S-1
combination of capacity closures, trade restrictions and the imposition of
tariffs led to a recovery in steel prices from 20-year lows in late 2001 and
early 2002.
The pace of domestic steel industry consolidation has accelerated as evidenced
by a number of recent acquisitions, including the acquisition of assets from
bankrupt companies. Transactions during 2002 included the purchases of assets of
Trico Steel Co. LLC, Acme Metals, Inc. and LTV Corporation out of bankruptcy and
the purchase of Birmingham Steel Corporation. One factor facilitating the
restructuring of the domestic integrated steel industry has been the elimination
of unfunded pension, healthcare and other legacy costs through the bankruptcy
process. We believe the continuing consolidation of steelmaking assets will
reduce the domestic steel industry's cost basis, creating a more globally
competitive industry structure.
STEEL PRICES RECOVERED DURING 2002. In December of 2001, hot-rolled prices hit
a 20-year low of $210 per ton, according to published sources. In March 2002,
President Bush announced his decision to impose trade restrictions in response
to the prior finding of the International Trade Commission under Section 201 of
the Trade Act of 1974 that imports were a substantial cause of serious injury to
the domestic steel industry. Domestic spot market hot-rolled prices for December
of 2002, as reported by published sources, were $300 per ton, more than $90 per
ton higher than those realized in December of 2001.
COMPETITIVE STRENGTHS
LEADING GLOBAL STEEL PRODUCER. We are the 11th largest global steel producer
and the largest integrated steel producer in North America. We are a leading
provider of flat-rolled steel to customers with demanding technical applications
in the automotive, appliance, container and construction industries. We supply
each of the "Big 3" automotive companies and are a growing supplier to foreign
automotive companies with manufacturing facilities in the United States. We are
a leading supplier of carbon sheet product to the North American appliance
industries and one of the largest tin mill product producers in North America.
We are the largest domestic producer of seamless oil country tubular goods.
The acquisition of USSK in 2000 has enabled us to establish a low-cost
manufacturing base in Central Europe, has positioned us to serve our global
customers and has enabled us to participate in the continued economic
development in Central Europe. In addition, USSK's arrangements with Sartid,
a.d. in Serbia have expanded our European distribution network.
DIVERSIFIED PRODUCT AND CUSTOMER MIX. We have a broad and diversified mix of
products and customers. Our customers include the automotive, appliance,
container, industrial machinery, construction and oil and gas industries. None
of our customers represented 10% of our revenues in 2002. We believe this
product and end-market diversity decreases the potential impact of a downturn in
any one product or industry.
MODERNIZED COMPETITIVE FACILITIES. We have four well-maintained and globally
competitive fully integrated steel manufacturing facilities, as well as a number
of finishing operations, and we continue to focus on cost reductions at all of
our facilities. During the five years ended December 31, 2002, we have invested
over $1.4 billion in modernizing and upgrading our plants. We believe our
modernized facilities and extensive finishing capabilities give us the
flexibility to adjust our capital spending based on changing market and economic
conditions and take advantage of growth opportunities while maintaining
acceptable liquidity.
S-2
STRONG LIQUIDITY POSITION. As of December 31, 2002 we had total liquidity of
$1.03 billion, which we define to include cash and cash equivalents and
availability under our receivables sales program, inventory credit facility and
USSK credit facilities.
BUSINESS STRATEGY
FOCUS ON GROWING HIGHER VALUE-ADDED CAPABILITIES. In North America we are
focused on providing value-added steel products to our target markets where we
believe our leadership position, production and processing capabilities and
technical service give us a competitive advantage. We continue to enhance our
value-added businesses through the upgrading and modernization of our production
facilities. We intend to expand our capabilities and market positions in our key
markets.
EXPAND OUR GLOBAL BUSINESS PLATFORM. We plan to create a global company through
the utilization of our European and domestic assets and consideration of further
opportunities that are consistent with our business strategy. Through our
purchase of USSK, we initiated a major offshore expansion and followed many of
our customers into the Central European market. USSK has entered into
arrangements with Sartid, an integrated steel producer in Serbia. We are
exploring additional opportunities for investment in Central Europe to increase
our source of low cost steel, serve those customers who are seeking worldwide
supply arrangements and participate in the economic development in the region.
CONTINUE TO REDUCE COSTS. We previously announced a plan to reduce our domestic
costs by $30 per ton over a three-year period beginning with 2002. Currently, we
are ahead of this plan, which should ultimately result in annual operating
savings of over $300 million, from 2001 levels, by the end of 2004. USSK also
has a cost reduction program that has reduced costs by more than $30 per ton
since our acquisition of USSK in November 2000.
S-3
RECENT DEVELOPMENTS
FINANCIAL RESULTS
On January 28, 2003, we announced our fourth quarter and full-year unaudited
2002 results. The information set forth below should be read in conjunction with
the more detailed information included in our Current Report on Form 8-K filed
January 28, 2003 and our Current Report on Form 8-K filed June 4, 2002.
-------------------------------------------------------------------------------------------
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
(IN MILLIONS EXCEPT PER SHARE DATA) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues and other income............................ $1,899 $1,414 $7,054 $6,375
Net income (loss).................................... $ 12 $ (174) $ 62 $ (218)
Adjustments for special items (Pre-tax):
Pension settlement loss............................ 90 -- 100 --
Asset impairments-receivables...................... -- 72 14 146
Asset impairments-intangible asset................. -- 20 -- 20
Costs related to separation........................ -- 16 -- 25
Costs related to Fairless shutdown................. -- 9 1 38
Federal excise tax refund.......................... (2) -- (38) --
Insurance recoveries related to USS-POSCO fire..... (19) (23) (39) (46)
Gain on VSZ share sale............................. (20) -- (20) --
Reversal of litigation accrual..................... -- -- (9) --
Gain on Transtar reorganization.................... -- -- -- (68)
Prior year tax adjustments......................... -- (9) -- (62)
Tax effect of special items........................ (17) (32) (3) (92)
------------------------------------
Net income (loss) adjusted for special items......... $ 44 $ (121) $ 68 $ (257)
Net income (loss) per diluted share.................. $ 0.12 $(1.95) $ 0.64 $(2.45)
Net income (loss) adjusted per diluted share......... $ 0.44 $(1.36) $ 0.70 $(2.89)
-------------------------------------------------------------------------------------------
The presentation of net income (loss) adjusted per diluted share and net income
(loss) adjusted for special items reflects our results exclusive of period items
that management considers to be unusual and non-recurring.
S-4
--------------------------------------------------------------------------------
DECEMBER 31,
----------------
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------
SUMMARY BALANCE SHEET DATA
Cash and cash equivalents................................... $ 243 $ 147
Other current assets........................................ 2,198 1,926
Property, plant and equipment -- net........................ 2,978 3,084
Pension asset............................................... 1,654 2,745
Other assets................................................ 905 435
------ ------
Total assets.............................................. $7,978 $8,337
====== ======
Current liabilities......................................... $1,371 $1,259
Long-term debt.............................................. 1,408 1,434
Employee benefits........................................... 2,601 2,008
Other long-term liabilities................................. 569 1,130
Stockholders' equity........................................ 2,029 2,506
------ ------
Total liabilities and stockholders' equity................ $7,978 $8,337
====== ======
NATIONAL STEEL
On January 9, 2003, we announced the signing of an asset purchase agreement with
National Steel Corporation, which filed for bankruptcy protection on March 6,
2002, to acquire substantially all of National's steelmaking, processing and
finishing assets for approximately $950 million, including the assumption of
approximately $200 million of liabilities. The assets of National we had agreed
to acquire included: facilities at National's two integrated steel plants, Great
Lakes Steel, in Ecorse and River Rouge, Michigan; Granite City Division, Granite
City, Illinois; the Midwest finishing facility in Portage, Indiana; ProCoil
Corporation in Canton, Michigan; and various other subsidiaries and
joint-venture interests, including National's interest in Double G Coatings. For
the year ended December 31, 2001, National reported net sales of $2,492 million.
We believe the acquisition of National would significantly increase our
value-added production capabilities and enhance our ability to serve the needs
of our North American customers in the automotive, container, appliance and
construction industries. The closing of our agreement with National was
contingent on, among other things, the approval of the Bankruptcy Court for the
Northern District of Illinois, Eastern Division, and the execution and
ratification of a new labor agreement with the United Steelworkers of America
with respect to the steelworkers at the National facilities we would acquire.
On January 30, 2003, National announced that it had signed an agreement with
another party, under which National would sell substantially all of its assets,
including its pellet-making facility, for $1,125 million, consisting of cash and
the assumption of approximately $200 million of liabilities. A hearing in the
Bankruptcy Court has been scheduled for February 6, 2003, at which a motion to
approve certain portions of that agreement, including bidding procedures
attached thereto, will be considered. The closing of the agreement between
National and that other party is contingent on, among other things, the approval
of the Bankruptcy Court and the execution and ratification of a new labor
agreement with the USWA with respect to the steelworkers at the National
facilities to be acquired. The bidding procedures attached to that agreement
contemplate that an auction will be held subsequent to March 17, 2003. We and
others will have the opportunity to submit bids for National's assets at any
such auction.
S-5
We remain interested in acquiring the assets of National if we are able to reach
a new labor agreement with the USWA for the steelworkers at the National
facilities and acquire the assets at a price that we view to be appropriate in
light of conditions in the steel and financial markets at the time of the
auction. We are in discussions with the USWA regarding such a labor agreement,
as well as other matters, including our mutual interest in encouraging
consolidation in the North American integrated steel industry. We also continue
to evaluate other potential acquisitions.
We cannot assure you that we will participate in or prevail at the auction for
National's assets. If we were to acquire National's assets, we may use the
proceeds from this offering to pay a portion of the purchase price.
OTHER INITIATIVES
Work continues on several potential transactions to dispose of non-strategic
assets. These include the sale of the raw materials and transportation
businesses to an entity to be formed by affiliates of Apollo Management L.P.,
which U. S. Steel estimates would result in a pretax loss of up to $300 million;
the sale of most of the assets of U. S. Steel Mining; and the contribution of
certain timber properties to one or more employee benefit plans. In addition, we
continue to explore possibilities for participating in the restructuring of
Sartid. We are also exploring opportunities in Poland.
OUTLOOK
Shipments for the Flat-rolled segment in the 2003 first quarter are expected to
improve somewhat from fourth quarter levels. The first quarter average realized
price is also expected to improve slightly from the previous quarter. First
quarter costs, however, will continue to be negatively affected by higher prices
for natural gas. For full-year 2003, Flat-rolled shipments are expected to
approximate 10.1 million net tons, as compared to 9.9 million net tons in 2002.
For the Tubular segment, first quarter 2003 shipments are projected to be up
substantially from the 2002 fourth quarter, and the average realized price is
expected to be lower than in the fourth quarter. Shipments for full-year 2003
are expected to be approximately 1.1 million net tons, as compared to 0.8
million net tons in 2002, as higher energy prices should spur a recovery in
North American drilling activity in the second half of 2003.
USSK's first quarter 2003 shipments are expected to increase slightly from the
2002 fourth quarter, and shipments for the full year are projected to be
approximately 4.1 million net tons, as compared to 3.9 million net tons in 2002.
USSK's average realized price in the first quarter should improve slightly from
the fourth quarter due primarily to a January 1, 2003 price increase for all
products. On January 31, 2003, a work stoppage suspended all rail movements in
Slovakia. Since USSK is dependent upon rail shipments for delivery of its raw
materials and shipment of most of its finished products, a prolonged disruption
of rail services would adversely impact USSK's shipments, revenue and operating
income. Although as of February 3, 2003, USSK was once again receiving rail
service, we cannot predict the ultimate outcome of this work stoppage.
In the fourth quarter 2002, as previously reported, U. S. Steel recorded a
pretax pension settlement loss of $90 million for the nonunion qualified plan
and, under the accounting rules related to additional minimum pension
liabilities, a charge to equity of $748 million for the union plan. In addition,
based on preliminary actuarial information for 2003, U. S. Steel expects
S-6
annual net periodic pension costs to be $65 million and annual retiree medical
and life insurance costs to be $210 million. In 2002, U. S. Steel recorded a
credit of $103 million for pensions (excluding settlement charges of $100
million) and a $138 million expense for retiree medical and life insurance
(excluding multiemployer and other plans). Pension costs are expected to
increase from 2002 primarily because of lower plan assets, average asset return
assumptions that have been reduced from 8.8% to 8.2%, and a discount rate that
has been reduced from 7.0% to 6.25%. The anticipated increase in retiree medical
and life insurance costs primarily reflects unfavorable health care claims cost
experience in 2002 for union retirees, the use of the lower discount rate and
higher assumed medical cost inflation. For 2003, a 10% annual rate of increase
in the per capita cost of covered health care benefits has been assumed; this
rate is assumed to decrease gradually to 4.75% for 2010 and remain at that level
thereafter. As a result of the above factors and payments made in 2002 from
benefit plans, our underfunded benefit obligations for retiree medical and life
insurance increased from $1.8 billion at year-end 2001 to $2.6 billion at
year-end 2002. Also, the funded status of the pension benefit obligation
declined from an overfunded position of $1.2 billion at year-end 2001 to an
underfunded position of $0.4 billion at year-end 2002.
S-7
THE MEDS OFFERING
The following summary is not intended to be complete. For a more detailed
description of the MEDS, see "Description of the MEDS."
Issuer........................ United States Steel Corporation.
Securities Offered............ 4 million MEDS.
Liquidation Preference........ $50 per MEDS, plus accrued and unpaid
dividends.
Dividend Payment Dates........ The 15th calendar day (or the following
business day if the 15th is not a business day)
of each March, June, September and December,
beginning on June 15, 2003.
Dividend Rate................. $ for each MEDS per year.
Mandatory Conversion Date..... June 15, 2006, or such later date as to which
such date may be deferred as discussed under
"Description of the MEDS --
Conversion -- Mandatory conversion," which we
call the conversion date.
Mandatory Conversion.......... On the conversion date, each of our MEDS will
automatically convert into shares of our common
stock, based on the conversion rate as of June
15, 2006.
Conversion Rate............... The conversion rate for each of our MEDS will
be not more than shares of our common
stock and not less than shares of our
common stock, depending on the average market
price for shares of our common stock as of June
15, 2006, as described below.
The average market price is the average of the
closing price per share of our common stock on
each of the 20 consecutive trading days ending
on the third trading day immediately preceding
June 15, 2006. The average market price will be
calculated as described under "Description of
the MEDS--Conversion--Mandatory conversion."
If the average market price of our common stock
as of June 15, 2006 is greater than or equal to
$ , the conversion rate will be
shares of our common stock per MEDS.
If the average market price of our common stock
as of June 15, 2006 is less than $ but
greater than $ , the conversion rate
will be equal to $50 divided by the average
market price of our common stock as of June 15,
2006. If the average market price of our common
stock as of June 15, 2006 is less than or equal
to $ , the conversion rate will be
shares of our common stock per MEDS.
The conversion rate is subject to adjustments
as described under "Description of the
MEDS--Conversion--Anti-dilution adjustments."
S-8
Optional Conversion........... At any time prior to the mandatory conversion
of the MEDS, you may elect to convert each of
your MEDS into shares of our common
stock. This conversion rate is subject to
adjustments as described under "Description of
the MEDS--Conversion--Anti-dilution
adjustments."
Early Conversion Upon Cash
Merger........................ Prior to the conversion date, if we are
involved in a merger, acquisition or
consolidation in which at least 30% of the
consideration for shares of our common stock
consists of cash or cash equivalents, which we
refer to as the "cash merger," then on or after
the date of the cash merger, you will have the
right to convert your MEDS into shares of our
common stock at the conversion rate in effect
immediately before the cash merger.
Anti-dilution Adjustments..... The formula for determining the conversion rate
and the number of shares of our common stock to
be delivered upon a conversion may be adjusted
if certain events occur. See "Description of
the MEDS--Conversion--Anti-dilution
adjustments."
Voting Rights................. The holders of our MEDS are not entitled to any
voting rights, except as required by applicable
state law and as described under "Description
of the MEDS--Voting rights."
New York Stock Exchange
Symbol........................ We have applied to list the MEDS on the New
York Stock Exchange under the symbol "X PrB."
S-9
RISK FACTORS
In addition to the risk factors disclosed in the accompanying prospectus, other
information contained or incorporated by reference in this prospectus supplement
and the accompanying prospectus, the following factors should be carefully
considered prior to deciding whether to purchase the MEDS.
RISKS RELATED TO THE MEDS
PURCHASERS OF OUR MEDS WILL BEAR THE RISK OF A DECLINE IN THE MARKET PRICE OF
SHARES OF OUR COMMON STOCK BELOW THE INITIAL PRICE.
The number of shares of our common stock issuable upon conversion of the MEDS is
fixed within a range. The maximum number of shares that may be issued, subject
to certain anti-dilution adjustments, is shares of our common stock per
MEDS. If the market price of our common stock on the conversion date is less
than $ per share, holders of our MEDS will receive shares of common stock
with an aggregate market value that is less than the amount paid by the holders
for the MEDS. Any such decline in the market price of shares of our common stock
may be substantial.
PURCHASERS OF OUR MEDS MAY NOT REALIZE THE BENEFIT OF AN INCREASE IN THE MARKET
PRICE OF SHARES OF OUR COMMON STOCK.
The market value of our common stock that you will receive upon mandatory
conversion of our MEDS on the conversion date will exceed the stated amount of
$50 per MEDS only if the average market price as of June 15, 2006 of our common
stock equals or exceeds the threshold appreciation price of $ . The
threshold appreciation price represents an appreciation of % over the
initial price. This means that the opportunity for equity appreciation provided
by an investment in our MEDS is less than that provided by a direct investment
in shares of our common stock. If the average market price of our common stock
as of June 15, 2006 exceeds the initial price but is less than the threshold
appreciation price, a holder of our MEDS will realize no equity appreciation on
our common stock. Furthermore, if the average market price of our common stock
as of June 15, 2006 exceeds the threshold appreciation price, the value of the
common stock received upon conversion will be approximately % of the value
of the common stock that could be purchased with $ at the time of the
offering.
COVENANT RESTRICTIONS MAY LIMIT OUR ABILITY TO PAY DIVIDENDS ON THE MEDS AND OUR
COMMON STOCK AND MAY POSTPONE OUR ABILITY TO CONVERT THE MEDS INTO SHARES OF OUR
COMMON STOCK.
Under the terms of our 10 3/4% senior notes due 2008, we may not be able to pay
dividends on capital stock, including but not limited to the MEDS and our common
stock, unless we can meet certain restricted payment tests, including a 2-to-1
consolidated coverage ratio based on EBITDA and consolidated cash interest
expense, as defined in the indenture, for a period covering the then most recent
four quarters. Although we met this consolidated coverage ratio test as of
December 31, 2002, we did not meet it as of September 30, 2002. Notwithstanding
these covenant restrictions, we are permitted to make, as of December 31, 2002,
up to $28 million of restricted payments, including, but not limited to,
payments of dividends on the MEDS and our common stock. In addition, we have the
ability to make, as of December 31, 2002, up to $12 million in dividend payments
on our common stock through December 31, 2003. If in future periods we are not
in compliance with the restricted payments tests and we
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have paid dividends up to the amount otherwise permitted under the senior notes,
we would be unable to pay dividends on the MEDS and our common stock. We may
also be unable to pay dividends due to inadequate cash flow and borrowing
capacity.
If we are unable to pay all accumulated and unpaid dividends on June 15, 2006
due to restrictions under our senior notes, the conversion date of the MEDS will
be deferred until we are able to pay such dividends in full. The MEDS will
continue to accumulate dividends until they are converted.
NO MARKET FOR OUR MEDS CURRENTLY EXISTS. AN ACTIVE TRADING MARKET FOR OUR MEDS
MAY NOT DEVELOP.
The MEDS are a new issue of securities for which no market currently exists. If
our MEDS are traded after their initial issuance, they may trade at a discount
from the public offering price depending on prevailing interest rates, the
market for similar securities, the trading price of our common stock and other
factors. A holder of MEDS may not be able to sell them in the future, and any
sale of MEDS may be at a price equal to or less than the public offering price
of the MEDS. An active market may not develop or be maintained for the MEDS. The
underwriters currently intend to make a market in the MEDS, subject to
applicable law and regulations. However, the underwriters are not obligated to
do so and may discontinue any market making at any time without notice.
THE TRADING PRICE FOR OUR COMMON STOCK WILL DIRECTLY AFFECT THE TRADING PRICE
FOR OUR MEDS.
To the extent there is a secondary market for our MEDS, the trading price of our
common stock will directly affect the trading price of our MEDS. It is
impossible to predict whether the price of our common stock will rise or fall.
Our credit quality, operating results, economic and financial prospects, whether
or not and to what extent we participate in the consolidation of the domestic
steel industry and other factors will affect the trading price of our common
stock. Market conditions can also affect the capital markets generally, and the
price of our common stock. These conditions may include the level of, and
fluctuations in, the trading prices of stocks generally and sales of substantial
amounts of our common stock in the market after the offerings or the perception
that those sales are likely to occur.
YOU MAY SUFFER DILUTION OF THE SHARES OF OUR COMMON STOCK ISSUABLE UPON
CONVERSION OF OUR MEDS.
The number of shares of our common stock issuable upon conversion of our MEDS is
subject to adjustment only for share splits and combinations, share dividends
and specified other transactions. The number of shares of our common stock
issuable upon conversion is not subject to adjustment for other events, such as
employee stock option grants, offerings of our common stock for cash, or in
connection with acquisitions, or other transactions which may reduce the price
of our common stock. The terms of our MEDS do not restrict our ability to offer
common stock in the future or to engage in other transactions that could dilute
our common stock. We have no obligation to consider the interests of the holders
of our MEDS in engaging in any such offering or transaction.
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PURCHASERS OF OUR MEDS MAY SUFFER DILUTION OF OUR MEDS UPON THE ISSUANCE OF A
NEW SERIES OF PREFERRED STOCK RANKING EQUALLY WITH THE MEDS SOLD IN THIS
OFFERING.
The terms of our MEDS do not restrict our ability to offer a new series of
preferred stock that ranks equally with our MEDS in the future or to engage in
other transactions that could dilute our MEDS. We have no obligation to consider
the interests of the holders of our MEDS in engaging in any such offering or
transaction.
IF YOU PURCHASE OUR MEDS, YOU WILL HAVE NO RIGHTS AS A COMMON STOCKHOLDER UNTIL
THE MEDS ARE CONVERTED INTO SHARES OF OUR COMMON STOCK.
Until you acquire shares of our common stock upon conversion, you will have no
rights with respect to our common stock, including voting rights (except as
required by applicable state laws and as described under "Description of the
MEDS--Voting rights"), rights to respond to tender offers and rights to receive
any dividends or other distributions on our common stock. Upon conversion, you
will be entitled to exercise the rights of a holder of common stock only as to
actions for which the record date occurs after the conversion date.
RECENT PROPOSALS MAY AFFECT TAXATION OF DIVIDENDS FOR US AND FOR HOLDERS OF OUR
MEDS.
President Bush in early 2003 proposed eliminating U.S. income taxes on dividends
consisting of distributions of previously taxed corporate earnings, effective
for distributions made on or after January 1, 2003 with respect to corporate
earnings after 2000. Under the proposal, all or a portion of dividends paid by a
corporation to its shareholders during a calendar year would be tax-free if
those dividends are paid from previously taxed corporate income. The current
proposal would also partially eliminate the dividends received deduction in
respect of dividends paid by us. Based on the information available, it is not
clear how the proposal, if enacted, would affect any dividends paid in 2003 with
respect to our MEDS and common stock because U. S. Steel did not file a federal
income tax return in 2002 (U. S. Steel was included in the Marathon consolidated
federal income tax return for 2001 that was filed in 2002). Investors should be
aware, however, that prospects for the enactment of this legislation are
uncertain, and we cannot predict whether these rules will be enacted or what
changes may be made to them prior to enactment.
RISKS RELATED TO PROPOSED INDUSTRY CONSOLIDATION
On December 4, 2001, we announced our support for significant consolidation in
the domestic integrated steel industry and we continue to be interested in
participating in consolidation of the domestic steel industry. We have had and
continue to have discussions with several parties regarding consolidation
opportunities. We may or may not participate in the auction for National's
assets and if we do participate, we may not be the successful bidder. The market
price of our common stock and our MEDS may decline as a result of these factors.
IF WE ACQUIRE NATIONAL'S ASSETS OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON
STOCK AND OUR MEDS COULD BE ADVERSELY AFFECTED.
If we acquire National's assets:
-- we would incur significant additional indebtedness to pay the purchase
price for National's assets or we may utilize availability under our receivables
sales program and revolving credit facility, which could reduce our liquidity;
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-- the market price of our common stock and the MEDS may decline if we are
unable to integrate National into our operations or to achieve the expected
benefits of the transaction;
-- we may be subject to unknown environmental or other risks inherent in the
National transaction;
-- the process of integrating the operations of National could cause an
interruption of, or loss of momentum in, the activities of our or National's
business or the loss of key personnel; and
-- we would incur charges to reflect costs of integration.
IF WE DO NOT PARTICIPATE IN THE CONSOLIDATION IN THE DOMESTIC INTEGRATED STEEL
INDUSTRY, OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK AND THE MEDS
COULD BE ADVERSELY AFFECTED.
During 2002 there were a number of acquisitions in the domestic steel industry.
We expect this consolidation to continue in 2003. In addition to the prospective
purchase of National's assets out of bankruptcy by us or a third party, the
assets of Bethlehem Steel may be purchased out of bankruptcy pursuant to an
offer that has been made by International Steel Group. If another party were to
purchase National's assets or International Steel Group were to purchase
Bethlehem Steel's assets, we would no longer be the largest integrated steel
producer in North America. In addition, if we do not participate in the
consolidation of the domestic integrated steel industry our cost basis may be
higher than that of our competitors and we will not have the benefits of the
operating synergies that may result from consolidation. These factors could
adversely affect our business and the market price of our common stock and the
MEDS could be adversely affected.
IF WE PARTICIPATE IN CONSOLIDATION IN THE DOMESTIC INTEGRATED STEEL INDUSTRY,
OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK AND THE MEDS COULD BE
ADVERSELY AFFECTED.
In order to complete possible future acquisitions, we may issue equity, which
would dilute the ownership of our current equity holders, including holders of
the MEDS, or incur additional indebtedness. In addition, we may utilize
availability under our receivable sales program or inventory credit facility or
otherwise use our liquidity. The incurrence of additional debt or the
utilization of our existing liquidity could increase our interest expense and
otherwise adversely affect our financial condition, operating results and cash
flow. These factors could adversely affect our business and the market price of
our common stock and the MEDS.
IF WE WERE TO FINANCE AN ACQUISITION BY INCURRING ADDITIONAL DEBT, RATING
AGENCIES MAY DOWNGRADE OUR CREDIT RATINGS, WHICH WOULD INCREASE OUR COST OF
BORROWING AND MAY MAKE IT MORE DIFFICULT FOR US TO RAISE CAPITAL.
The interest rate on borrowings under our inventory credit facility and the
amount of receivables eligible under our receivable sales program are
determined, in part, by our credit ratings. On January 9, 2003, following our
announcement that we had entered into an asset purchase agreement with National,
rating agencies placed our credit ratings under review. National has since
announced that it has entered into an asset purchase agreement with another
party and we expect that there will be an auction for National's assets
subsequent to March 17, 2003. If we were to acquire National's assets or
complete any other acquisition and
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our credit ratings were downgraded, or if our credit ratings were downgraded for
any other reason:
-- the cost of borrowings under our inventory credit facility would increase;
-- the fees payable under our receivable sales program would increase; and
-- the amount of receivables eligible for sale under our receivable sales
program could be reduced.
In addition, a downgrade in our credit ratings could make capital raising more
difficult and increase the cost of future borrowings.
ACQUIRED COMPANIES AND ASSETS MAY INCREASE OUR INDEBTEDNESS AND OTHER
OBLIGATIONS AND REQUIRE SIGNIFICANT EXPENDITURES.
Possible future acquisitions could result in the incurrence of additional debt
and related interest expense, underfunded pension and other post-retirement
obligations, contingent liabilities and amortization expenses related to
intangible assets, all of which could have a material adverse effect on our
financial condition, credit ratings, operating results and cash flow.
Many of the available domestic acquisition targets have incurred operating
losses in recent years and may require significant capital and operating
expenditures to return them to profitability. Financially distressed steel
companies typically do not maintain their assets adequately. Such assets may
need significant repairs and improvements. We may also have to buy sizable
amounts of raw materials, spare parts and other materials for these facilities
before they can resume profitable operation. Many potential acquisition
candidates are financially distressed steel companies that may not have
maintained appropriate environmental programs. These problems may require
significant expenditures.
RISKS RELATED TO OUR BUSINESS
OVERCAPACITY IN THE STEEL INDUSTRY MAY NEGATIVELY AFFECT OUR PRODUCTION LEVELS.
There is an excess of global steelmaking capacity over global consumption of
steel products. Recently, a number of domestic steel facilities that had been
closed have become operational again, contributing to the overcapacity. This has
caused shipments and prices for our domestic operations to vary from year to
year and quarter to quarter, affecting our results of operations and cash flows.
From 1997 through 2002, our domestic steel shipments have varied from a high of
11.6 million net tons in 1997 to a low of 9.8 million net tons in 2001.
Production levels as a percentage of capacity have ranged from a high of 96.5%
in 1997 to a low of 78.9% in 2001. Many factors influence these results,
including demand in the domestic market, international currency conversion rates
and domestic and international government actions.
OUR BUSINESS IS CYCLICAL. FUTURE ECONOMIC DOWNTURNS, A STAGNANT ECONOMY OR
CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Demand for most of our products is cyclical in nature and sensitive to general
economic conditions. Our business supports cyclical industries such as the
automotive, appliance, construction and energy industries. As a result, future
downturns in the U.S. or European economy or in any of these industries, which
may result from war with Iraq or other factors,
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could adversely affect our results of operations and cash flows. Because we and
other integrated steel producers generally have high fixed costs, reduced
volumes result in operating inefficiencies, such as those experienced in 2001.
From 1997 through 2002, our net income has varied from a high of $452 million in
1997 to a loss of $218 million in 2001 as our domestic steel shipments have
varied from a high of 11.6 million net tons in 1997 to a low of 9.8 million net
tons in 2001. Future economic downturns, a stagnant economy or currency
fluctuations, such as an increase in the strength of the dollar, which would
lead to a decrease in the cost of imported products, may adversely affect our
business, results of operations and financial condition.
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS AND OTHER OBLIGATIONS, WHICH COULD
LIMIT OUR OPERATING FLEXIBILITY AND OTHERWISE ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
As of September 30, 2002, we were liable for indebtedness of approximately $1.4
billion. This does not include obligations of Marathon for which we are
contingently liable and that are not recorded on our balance sheet. As of
September 30, 2002, such obligations of Marathon were $166 million. This
substantial amount of indebtedness and related covenants could limit our
operating flexibility and otherwise adversely affect our financial condition.
Our high degree of leverage could have important consequences to you, including
the following:
-- our ability to satisfy our obligations with respect to any other debt
securities or preferred stock may be impaired in the future;
-- it may become difficult for us to obtain additional financing for working
capital, capital expenditures, debt service requirements, acquisitions or
general corporate or other purposes in the future;
-- a substantial portion of our cash flow from operations must be dedicated to
the payment of principal and interest on our indebtedness, thereby reducing the
funds available to us for other purposes including the payment of dividends on
our MEDS and our common stock;
-- some of our borrowings are and are expected to be at variable rates of
interest (including borrowings under our inventory credit facility), which will
expose us to the risk of increased interest rates;
-- the sale prices, costs of selling receivables and amounts available under
our receivables sales program fluctuate due to factors that include the amount
of eligible receivables available, the costs of the commercial paper funding and
our long-term debt ratings; and
-- our substantial leverage may limit our flexibility to adjust to changing
economic or market conditions, reduce our ability to withstand competitive
pressures and make us more vulnerable to a downturn in general economic
conditions.
OUR BUSINESS REQUIRES SUBSTANTIAL DEBT SERVICE, CAPITAL INVESTMENT, OPERATING
LEASE, CAPITAL COMMITMENTS AND MAINTENANCE EXPENDITURES THAT WE MAY BE UNABLE TO
FULFILL.
With approximately $1.4 billion of debt outstanding as of September 30, 2002, we
have substantial debt service requirements. Based on this outstanding debt,
almost all of which is at fixed rates, our combined principal and interest
payments will average approximately $150 million annually over the next five
years.
Our operations are capital intensive. For the five-year period ended December
31, 2002, total capital expenditures were $1.4 billion. Capital expenditures in
2003 are expected to be
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approximately $350 million. Our business also requires substantial expenditures
for routine maintenance. USSK has a commitment to the Slovak government for a
capital improvements program over a period commencing with the acquisition date
and ending on December 31, 2010, and, as of September 30, 2002, the remaining
commitment under this program was $591 million. At September 30, 2002, our
domestic contractual commitments to acquire property, plant and equipment
totaled $22 million. We are required to make a $37.5 million payment in July of
2003 in connection with our acquisition of USSK.
As of December 31, 2001, we were obligated to make aggregate lease payments of
$325 million under operating leases over the next five years. Some of our
operating lease agreements include contingent rental charges that are not
determinable to any degree of certainty. These charges are primarily based on
utilization of the power generation facility at our Gary Works location and
operating expenses incurred related to our headquarters' office space.
As of September 30, 2002 we had contingent obligations consisting of indemnity
obligations under active surety bonds totaling approximately $73 million,
guarantees of approximately $27 million of indebtedness for unconsolidated
entities and commitments under take or pay arrangements of approximately $741
million. As the general partner of the Clairton 1314B Partnership, L.P., we are
obligated to fund cash shortfalls incurred by that partnership but may withdraw
as the general partner if we are required to fund in excess of $150 million in
operating cash shortfalls. As of September 30, 2002, we were also contingently
liable for $166 million of debt and other obligations of Marathon.
Our business may not generate sufficient operating cash flow or external
financing sources may not be available in an amount sufficient to enable us to
service or refinance our indebtedness, to pay dividends on the MEDS or our
common stock or to fund other liquidity needs.
IMPORTS OF STEEL MAY DEPRESS DOMESTIC PRICE LEVELS AND HAVE AN ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS AND CASH FLOWS.
Steel imports to the United States accounted for an estimated 25% of the
domestic steel market in the first nine months of 2002, 24% for the year 2001,
and 27% for the year 2000. We believe steel imports into the United States
involve widespread dumping and subsidy abuses and the remedies provided by
United States law to private litigants are insufficient to correct these
problems. Imports of steel involving dumping and subsidy abuses depress domestic
price levels, and have an adverse effect upon our revenue, income and cash
flows. Over the past six years, the average annual transaction prices for our
domestic steel products have decreased from a high of $479 per net ton in 1997
to a low of $427 per net ton in 2001.
THE REMEDIES UNDER SECTION 201 OF THE TRADE ACT WILL BE REDUCED IN 2003 AND 2004
AND ARE SET TO EXPIRE IN 2005.
The trade remedies announced by President Bush, under Section 201 of the Trade
Act of 1974, on March 5, 2002 became effective for imports entering the U.S. on
and after March 20, 2002 and are intended to provide protection against imports
from certain countries for a period of three years. Slab imports are subject to
a quota of 5.4 million tons until March 2003 on product shipped from countries
other than Canada and Mexico, with excess imports subject to a tariff of 30%.
The annual quota increases to 5.9 million tons in March 2003 and 6.4 million
tons in March 2004. Imports of finished carbon and alloy steel products
(hot-rolled, cold-rolled and coated sheet, as well as plate and tin mill
products) from developed countries are subject to a
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30% tariff until March 2003, decreasing to 24% and 18% in March 2003 and March
2004, respectively. Imports of these finished products from developing countries
are subject to an anti-surge mechanism to ensure they do not substantially
increase their shipments from historic levels.
The reduction of tariffs and increase in quotas could have an adverse effect on
our results, particularly if the economy suffers a downturn. Imports of finished
flat-rolled products from Canada and Mexico are not subject to the import
remedies announced by the President. Since March 5, 2002 the Department of
Commerce and the Office of the United States Trade Representative have announced
the exclusion of 727 products from the trade remedies. When announcing the
seventh set of exclusions on August 22, 2002 they also announced that no further
exclusions would be granted during 2002 and that beginning in November 2002
there would be another opportunity for parties to submit exclusion requests for
consideration by March 2003. The exclusions granted impact a number of products
we produce and have weakened the protection initially provided by this relief.
Various countries have challenged President Bush's action with the World Trade
Organization and taken other actions responding to the Section 201 remedies.
TRADE RESTRICTIONS IMPOSED BY OTHER COUNTRIES AFFECT OUR EXPORTS.
On December 20, 2001, the European Commission commenced an anti-dumping
investigation concerning the import of hot-rolled coils and hot-rolled pickled
and oiled coils from Slovakia and five other countries. On January 20, 2003, the
Commission announced the dumping margin applicable to those imports at 25.8% and
the injury margin at 18.6%. USSK is currently in discussions with the Commission
regarding the possibility of entering into a price undertaking agreement for
future shipments of hot-rolled coils into the European Union. If no price
undertaking agreement is reached by March 2003, duties equal to the injury
margin of 18.6% would be imposed upon hot-rolled coils shipped by USSK into the
European Union.
The European Commission also recently announced quotas and tariffs in a
safeguard trade action on certain products, including non-alloy hot-rolled
coils, hot-rolled strip, hot-rolled sheet and cold-rolled flat products, which
are produced by USSK. Shipment quotas for these products for the first year of
the measure were set at 10% above the average shipments during the period
1999-2001 and 15% thereafter. Shipments into the European Union in excess of the
quotas would result in the imposition of a tariff of 17.5% for non-alloy
hot-rolled coils (15.7% beginning in March 2003 and 14.1% in March 2004) and 26%
for the other three products (23.4% in March 2003 and 21.0% in March 2004). The
safeguard measures are scheduled to expire in March 2005. The safeguard measures
and any anti-dumping measures would terminate upon Slovakia becoming a member of
the European Union.
Safeguard proceedings similar to those pursued by the European Commission have
recently been commenced by Poland, Hungary and the Czech Republic. Provisional
quota and tariff measures have been imposed in Poland and Hungary.
THE RECENT INVESTMENT PERFORMANCE OF PENSION PLAN EQUITY HOLDINGS WILL
UNFAVORABLY IMPACT OUR RESULTS OF OPERATIONS AND COULD AFFECT FUTURE CASH FLOW.
The investment performance of pension plan equity holdings over the last three
years will unfavorably impact net periodic pension cost during 2003 through the
use of a lower asset base in calculating expected return on plan assets and may
impact future profitability and liquidity, which could affect debt covenants and
borrowing arrangements. At the end of the
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fourth quarter of 2002, the accumulated benefit obligations of the union pension
plan exceeded the fair value of the plan assets by approximately $540 million.
As a result, the pension asset related to the union pension plan was removed
from the balance sheet, an additional minimum liability of $540 million was
established and a charge to equity of $748 million for the pension plan was
recorded. In the fourth quarter of 2002, we also recorded a pre-tax pension
settlement loss of $90 million for the nonunion qualified pension plan. The
funded status of the pension benefit obligation declined from an overfunded
position of $1.2 billion at year-end 2001 to an underfunded position of $0.4
billion at year-end 2002. In addition, based on preliminary actuarial
evaluations of benefit costs for 2003, we expect annual pension costs to be $65
million. In 2002, we recorded a credit of $103 million for pensions (excluding
settlements of $100 million). Pension costs are expected to increase from 2002
primarily because of reduced plan assets, average asset return assumptions that
have been reduced from 8.8% to 8.2% and a discount rate that has been reduced
from 7.0% to 6.25%. These estimates are forward-looking statements. Predictions
regarding the return on plan assets and the resulting pension expenses are
subject to substantial uncertainties such as (among other things) investment
performance and interest rates.
Preliminary funding valuations of the union pension plan as of December 31,
2002, indicate that the plan will not require cash funding for the 2003 plan
year. However, cash funding in 2004 and beyond for the union pension plan could
be required, the level of which depends upon various factors such as future
asset performance, the level of interest rates used to measure ERISA minimum
funding levels, the impacts of business acquisitions or sales, union negotiated
changes and future government regulation. We may also make voluntary
contributions in one or more future periods in order to mitigate potentially
larger required contributions in later years. Any such funding requirements
could have an unfavorable impact on our debt covenants, borrowing arrangements
and cash flows.
OUR RETIREE EMPLOYEE HEALTH CARE AND RETIREE LIFE INSURANCE COSTS ARE HIGHER
THAN THOSE OF MANY OF OUR COMPETITORS.
We maintain defined benefit retiree health care and life insurance plans
covering substantially all domestic employees upon their retirement. Health care
benefits are provided through comprehensive hospital, surgical and major medical
benefit provisions or through health maintenance organizations, both subject to
various cost-sharing features. Life insurance benefits are provided to nonunion
retiree beneficiaries primarily based on employees' annual base salary at
retirement. For domestic union retirees, benefits are provided for the most part
based on fixed amounts negotiated in labor contracts with the appropriate
unions. In 2002, we recorded a $138 million expense for retiree medical and life
insurance. Based on preliminary actuarial valuations for 2003, we expect annual
retiree medical and life insurance expense to be $210 million. The anticipated
increases in retiree medical and life insurance expense primarily reflects
unfavorable health care claims cost experience in 2002 for union retirees, the
use of a discount rate of 6.25%, rather than 7.0% and higher assumed medical
cost inflation. For 2003, a 10% annual rate of increase in the per capita cost
of covered health care benefits has been assumed; this rate is assumed to
decrease gradually to 4.75% for 2010 and remain at that level thereafter. As a
result of the above factors and payments made in 2002 from benefit plans, our
underfunded benefit obligations for retiree medical and life insurance increased
from $1.8 billion at year-end 2001 to $2.6 billion at year-end 2002. These
estimates are forward-looking statements. Predictions regarding retiree medical
and life insurance expense are subject to substantial uncertainties such as
(among other things) interest rates and medical
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cost inflation. Mini-mills, foreign competitors and many producers of products
that compete with steel provide lesser benefits to their employees and retirees
and this difference in expense could adversely impact our competitive position.
Companies that emerge from bankruptcy, or companies that purchase the facilities
of bankrupt entities, may also provide lesser benefits to their employees and
retirees.
FUTURE FUNDING FOR RETIREE MEDICAL BENEFITS MAY REQUIRE SUBSTANTIAL PAYMENTS
FROM CURRENT CASH FLOW.
We are obligated to provide medical and other benefits to retirees. Cash
payments of these benefits in 2002 and 2001 totaled $212 million and $183
million, respectively. During 2002 and 2001, substantially all payments on
behalf of union retirees were paid from a VEBA trust established under our
collective bargaining agreements. We currently project that, beginning in 2004,
these cash payments will have to be made from corporate funds which will reduce
our cash flow that would otherwise be available for other purposes.
HIGH ENERGY COSTS ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Our operations consume large amounts of energy and we consume significant
amounts of natural gas. Domestic natural gas prices have ranged from an average
of $2.74 per million BTU in 1999 to an average of $4.96 per million BTU in 2001.
Natural gas prices averaged $3.43 per million BTU in the first nine months of
2002 and increased to $4.49 per million BTU in the fourth quarter of 2002.
Average natural gas prices for 2003 are expected to be higher than average
natural gas prices for 2002. An increase in natural gas prices would increase
our costs and adversely impact our results of operations.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO UNCERTAINTIES AND RISKS FROM ABROAD,
WHICH COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
USSK, located in the Slovak Republic, constitutes 28% of our total raw steel
capability and accounted for 17% of revenue for 2001. USSK exports about 80% of
its products, with the majority of its sales being to other European countries.
USSK is affected by the worldwide overcapacity in the steel industry and the
cyclical nature of demand for steel products and that demand's sensitivity to
worldwide general economic conditions. In particular, USSK is subject to
economic conditions and political factors in Europe, which if changed could
negatively affect its results of operations and cash flow. Political factors
include, but are not limited to, taxation, nationalization, inflation, currency
fluctuations, increased regulation, export quotas, tariffs and other
protectionist measures. USSK is also subject to foreign currency exchange risks
because its revenues are primarily in euros and its costs are primarily in
Slovak korunas and United States dollars. The Slovak Republic has applied for
membership in the European Union and may be required to amend its environmental,
tax and other laws to secure that membership. Changes in those laws could
adversely impact USSK.
MANY LAWSUITS HAVE BEEN FILED AGAINST US INVOLVING ASBESTOS-RELATED INJURIES
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL POSITION.
We are a defendant in a large number of cases in which approximately 14,000
claimants allege injury resulting from exposure to asbestos. Nearly all of these
cases involve multiple defendants. These claims fall into three major groups:
(1) claims made under certain federal and general maritime law by employees of
the Great Lakes Fleet or Intercoastal Fleet, former operations of U. S. Steel;
(2) claims made by persons who performed work at U. S. Steel
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facilities; and (3) claims made by industrial workers allegedly exposed to an
electrical cable product formerly manufactured by U. S. Steel. To date all
actions resolved have been either dismissed or resolved for immaterial amounts.
In 2002, we disposed of claims from approximately 1,700 claimants with aggregate
total payments of approximately $700,000 and over 4,700 cases were
administratively dismissed. It is not possible to predict with certainty the
outcome of these matters; however, based upon present knowledge, management
believes that it is unlikely that the resolution of the pending actions will in
the aggregate have a material adverse effect on our financial condition. Among
the factors that management considered in reaching this conclusion are: (1) that
U. S. Steel has been subject to a total of approximately 34,000 asbestos claims
over the last twelve years that have been administratively dismissed due to the
failure of the claimants to present any medical evidence supporting their
claims, (2) that over the last several years the total number of pending claims
has remained steady, (3) that it has been many years since U. S. Steel employed
maritime workers or manufactured electrical cable and (4) U. S. Steel's history
of trial outcomes, settlements and dismissals. This statement of belief is a
forward-looking statement. Predictions as to the outcome of pending litigation
are subject to substantial uncertainties with respect to (among other things)
factual and judicial determinations, and actual results could differ materially
from those expressed in this forward-looking statement.
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USE OF PROCEEDS
We estimate the net proceeds from our sale of MEDS in this offering, after
deducting estimated expenses of $300,000 and underwriting discounts and
commissions, to be approximately $ million (or $ million if the
underwriters exercise their over-allotment option). We intend to use the net
proceeds of this offering for general corporate purposes, including funding
working capital, financing potential acquisitions, debt reduction and voluntary
contributions to our employee benefit plans. If we were to acquire National's
assets, we may use the net proceeds from this offering to pay a portion of the
purchase price. Pending application of the net proceeds of this offering, the
proceeds will be held in cash and cash equivalents.
S-21
CAPITALIZATION
The following table sets forth our cash and cash equivalents and our
capitalization at September 30, 2002, (i) on an actual basis and (ii) on an
adjusted basis to give effect to the sale by us of 4 million MEDS, at a price of
$50 per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
The financial data at September 30, 2002 in the following table are derived from
our unaudited financial statements as of and for the nine months ended September
30, 2002. The following data are qualified in their entirety by our financial
statements and other information contained elsewhere or incorporated by
reference in this prospectus supplement and the accompanying prospectus.
-----------------------------------------------------------------------------------
SEPTEMBER 30, 2002
(IN MILLIONS) ACTUAL AS ADJUSTED
-----------------------------------------------------------------------------------
Cash and cash equivalents................................... $ 105 $ 299
=====================
Long-term debt due within one year.......................... 7 7
Long-term debt:
Senior notes, net of $4 million discount.................. 531 531
Industrial revenue bonds.................................. 471 471
USSK loan facility........................................ 301 301
Senior quarterly income debt securities................... 49 49
Capital leases............................................ 76 76
---------------------
Total debt............................................. 1,435 1,435
Stockholders' equity:
% Series B mandatory convertible preferred shares, no
par value per share, no shares outstanding actual, 4
million shares outstanding as adjusted................. -- 194
Common stock, $1 par value per share, 200.0 million shares
authorized, 102.2 million shares outstanding actual and
as adjusted............................................ 102 102
Other stockholders' equity(1)............................. 2,674 2,674
---------------------
Total stockholders' equity............................. 2,776 2,970
---------------------
Total capitalization................................. $4,211 $ 4,405
-----------------------------------------------------------------------------------
(1) Does not include a charge to equity of $748 million recorded at year-end
2002 related to additional minimum pension liabilities of the pension plan
for union employees.
S-22
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth our ratio of earnings to combined fixed charges
and preferred stock dividends for the periods indicated:
----------------------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- ------------------------------------
2002 2001 2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------
Ratio of earnings to combined fixed
charges and preferred stock
dividends(a)........................ 1.35 (b) (c) 1.05 2.10 5.15 4.72
----------------------------------------------------------------------------------------------
(a) For the purposes of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends, "earnings" are defined as income
before income taxes and extraordinary items adjusted for minority interests
in consolidated subsidiaries, income (loss) from equity investees, and
capitalized interest, plus fixed charges, amortization of capitalized
interest and distributions from equity investees. "Fixed charges" consist
of interest, whether expensed or capitalized, on all indebtedness,
amortization of premiums, discounts and capitalized expenses related to
indebtedness, and an interest component equal to one-third of rental
expense, representing the portion of rental expense that management
believes is attributable to interest. "Preferred stock dividends" consists
of pretax earnings required to cover preferred stock dividends associated
with the 6.50% Preferred Stock attributed to U.S. Steel by Marathon prior
to the Separation which was retained and subsequently repaid by Marathon in
connection with the Separation.
(b) Earnings did not cover combined fixed charges and preferred stock dividends
by $277 million.
(c) Earnings did not cover combined fixed charges and preferred stock dividends
by $598 million.
S-23
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
STOCK PRICE RANGE AND DIVIDENDS
Our common stock is listed on the New York Stock Exchange (the "NYSE"), the
Chicago Stock Exchange and the Pacific Stock Exchange under the symbol "X." The
NYSE is the principal market for our common stock. Before December 31, 2001, our
businesses comprised an operating unit of USX Corporation, now named Marathon
Oil Corporation, and Marathon had a class of common stock, the USX-U.S. Steel
Group common stock, that was intended to reflect the performance of those
businesses. On December 31, 2001, each share of USX-U.S. Steel Group common
stock was converted into one share of our common stock. The following table sets
forth the range of high and low sales prices of the USX-U.S. Steel Group common
stock through December 31, 2001, and the high and low prices of our common stock
since then, as reported by the NYSE on the composite tape, and dividends paid on
our common stock for the stated periods.
-------------------------------------------------------------------------------------------
DIVIDENDS
PAID PER
HIGH LOW SHARE
-------------------------------------------------------------------------------------------
2001
First Quarter............................................. $18.00 $14.00 $ 0.25
Second Quarter............................................ 22.00 13.72 0.10
Third Quarter............................................. 21.70 13.08 0.10
Fourth Quarter............................................ 18.75 13.00 0.10
2002
First Quarter............................................. 19.99 16.36 0.05
Second Quarter............................................ 22.00 17.22 0.05
Third Quarter............................................. 19.99 10.66 0.05
Fourth Quarter............................................ 14.90 10.87 0.05
2003
First Quarter (through January 31, 2003).................. 17.73 12.89 --
-------------------------------------------------------------------------------------------
On January 31, 2003, the last reported sale price of our common stock on the
NYSE was $14.35 per share.
DIVIDEND POLICY
Our board of directors intends to declare and pay dividends on our common stock
based on our financial condition and results of operations, although it has no
obligation under Delaware law or our certificate of incorporation to do so.
Dividends on our capital stock are limited to legally available funds. The terms
of our existing indebtedness restrict our ability to pay dividends unless we can
meet certain restricted payment tests as described in "Risk factors--Risks
related to the MEDS." In early 2002, we established a quarterly dividend rate of
$0.05 per share of common stock effective with the March 2002 payment.
S-24
SELECTED FINANCIAL INFORMATION
Prior to December 31, 2001, the businesses of U. S. Steel comprised an operating
unit of USX Corporation, now named Marathon Oil Corporation ("Marathon").
Marathon had two outstanding classes of common stock: USX-Marathon Group common
stock, which was intended to reflect the performance of Marathon's energy
business, and USX-U. S. Steel Group common stock ("Steel Stock"), which was
intended to reflect the performance of Marathon's steel business. On December
31, 2001, U. S. Steel was capitalized through the issuance of 89.2 million
shares of common stock to holders of Steel Stock in exchange for all outstanding
shares of Steel Stock on a one-for-one basis (the "Separation"). The following
table sets forth selected financial information for U. S. Steel. Consolidated
balance sheet data as of December 31, 2001 and September 30, 2002 and statement
of operations data for the nine months ended September 30, 2002 reflect U. S.
Steel as a separate, stand-alone entity. All other balance sheet and statement
of operations data in the table below represent a carve-out presentation of the
businesses comprising U. S. Steel, and are not intended to be a complete
presentation of the financial position or results of operations for U. S. Steel
on a stand-alone basis. The financial information for the years ended December
31, 1997 through December 31, 2001 has been derived from the audited financial
statements. The financial information for the nine months ended September 30,
2002 and 2001 has been derived from the unaudited financial statements that, in
the opinion of management, reflect all adjustments necessary for fair
presentation of the results for the periods covered. All such adjustments are of
a recurring nature unless disclosed otherwise. This information should be read
in conjunction with the more detailed information and consolidated financial
statements included in our Current Report on Form 8-K filed June 4, 2002, our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and the
additional reports and documents incorporated by reference in the accompanying
prospectus.
---------------------------------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) 2002 2001 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues and other income(1)........... $5,155 $4,961 $6,375 $6,132 $5,470 $6,477 $7,156
Income (loss) from operations.......... 126 (153) (405) 104 150 579 773
Income (loss) before extraordinary
losses............................... 50 (44) (218) (21) 51 364 452
Net income (loss)...................... 50 (44) (218) (21) 44 364 452
PER COMMON SHARE DATA
Income (loss) before extraordinary
losses(2) -- basic and diluted....... $ 0.52 $(0.50) $(2.45) $(0.24) $ 0.57 $ 4.08 $ 5.07
Net income (loss)(2) -- basic and
diluted.............................. 0.52 (0.50) (2.45) (0.24) 0.49 4.08 5.07
Dividends paid(3)...................... 0.15 0.45 0.55 1.00 1.00 1.00 1.00
S-25
---------------------------------------------------------------------------------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) 2002 2001 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END)
Total assets........................... $8,679 $9,337 $8,337 $8,711 $7,525 $6,749 $6,694
Capitalization(4):
Notes payable........................ $ -- $ -- $ -- $ 70 $ -- $ 13 $ 13
Long-term debt, including amount due
within one year.................... 1,435 2,758 1,466 2,375 915 476 510
Preferred stock of subsidiary........ -- 66 -- 66 66 66 66
Trust preferred securities........... -- 183 -- 183 183 182 182
Equity............................... 2,776 1,829 2,506 1,919 2,056 2,093 1,782
------------------------------------------------------------
Total capitalization................. $4,211 $4,836 $3,972 $4,613 $3,220 $2,830 $2,553
------------------------------------------------------------
OTHER DATA:
Capital expenditures................... $ 150 $ 197 $ 287 $ 244 $ 287 $ 310 $ 261
Depreciation, depletion and
amortization......................... 266 246 344 360 304 283 303
Net periodic pension credits(5)........ 77 98 120 273 234 191 149
OPERATING DATA:
Steel shipments (thousands of net tons)
-- Domestic steel...................... 8,121 7,597 9,797 10,756 10,629 10,686 11,643
-- USSK................................ 2,870 2,841 3,714 317 -- -- --
---------------------------------------------------------------------------------------------------------
(1) Consists of revenues, dividend and investee income (loss), net gains on
disposal of assets and other income (loss).
(2) Earnings per share for the nine months ended September 30, 2002 is based on
the weighted average outstanding common shares during the nine months.
Earnings per share for all other periods presented is based on the
outstanding common shares at December 31, 2001 as a result of the Separation
and the initial capitalization of U. S. Steel on that date.
(3) Dividends paid per share for all periods presented, except for the nine
months ended September 30, 2002, represent amounts paid on USX-U. S. Steel
Group common stock.
(4) The increase in equity and the decrease in long-term debt, preferred stock
of subsidiary and trust preferred securities from December 31, 2000 to 2001
and from September 30, 2001 to 2002 were primarily due to transactions
related to the Separation, including the $900 million value transfer. The
increase in long-term debt and notes payable from December 31, 1999 to 2000
was primarily due to cash used in operating activities of $627 million
(including $530 million in elective funding to voluntary employee benefit
trusts) and the $325 million of debt included in the acquisition of USSK.
(5) Net periodic pension credits, which are included in income from operations,
are primarily non-cash and primarily reflect an expected return on plan
assets in excess of current costs.
S-26
DESCRIPTION OF THE MEDS
The description in this prospectus supplement of the terms of our MEDS is only a
summary. The terms of our MEDS are contained in our certificate of incorporation
and the Certificate of Designation relating to the MEDS. Our certificate of
incorporation is filed as an exhibit to our filings incorporated by reference in
the registration statement of which this prospectus supplement is a part and the
Certificate of Designation will be filed as an exhibit to a Current Report on
Form 8-K after the date of this prospectus supplement.
GENERAL
Our certificate of incorporation authorizes the issuance of 14,000,000 shares of
preferred stock without the approval of the holders of our common stock, in one
or more series, from time to time, with each such series to have such
designation, powers, preferences and rights as may be determined by our board of
directors. The MEDS constitute a series of these shares of preferred stock. See
"Description of Capital Stock" in the accompanying prospectus for a description
of our capital stock.
When issued, the MEDS offered hereby will constitute a single series consisting
of up to 4,600,000 shares of preferred stock (of which 4,000,000 shares will be
outstanding upon the completion of this offering, unless the underwriters elect
to exercise the over-allotment option). The holders of our MEDS will have no
preemptive rights. The MEDS will be validly issued, fully paid and
non-assessable.
Our MEDS will rank senior to all of our now outstanding common stock or common
stock that we may issue in the future. As of January 31, 2003, there are
currently 102,614,309 shares of our common stock outstanding.
The terms of our MEDS restrict our ability to issue capital stock that ranks
senior to our MEDS, as discussed below under "Voting rights."
DIVIDENDS
GENERAL
Dividends on our MEDS will be payable quarterly, when, as and if declared by our
board of directors out of funds legally available therefor, on the 15th calendar
day (or the following business day if the 15th is not a business day) of March,
June, September and December of each year (each a "Dividend Payment Date") at
the annual rate of $ per MEDS. The initial dividend on the MEDS, for the
first dividend period, assuming our issue date is , 2003, will be
$ per MEDS, and will be payable, if declared, on June 15, 2003. Each
subsequent quarterly dividend on our MEDS, if declared, will be $ .
The amount of dividends payable on each of our MEDS for each full quarterly
period will be computed by dividing the annual dividend rate by four. The amount
of dividends payable for any other period that is shorter or longer than a full
quarterly dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
A dividend period is the period ending on the day before a Dividend Payment Date
and beginning on the preceding Dividend Payment Date or, if none, the date of
issue. Dividends payable, if declared, on a Dividend Payment Date will be
payable to holders of record as they
S-27
appear on our stock register on the 1st calendar day of the calendar month in
which the applicable Dividend Payment Date falls.
We are obligated to pay a dividend on our MEDS only when, as and if our board of
directors or an authorized committee of our board declares the dividend payable
and we have assets that legally can be used to pay the dividend.
Dividends on our MEDS will be cumulative. This means that if our board of
directors or an authorized committee of our board fails to declare a dividend,
the dividend will accumulate until declared and paid or will be forfeited upon
optional conversion by the holder.
We are not obligated to pay holders of our MEDS any interest or sum of money in
lieu of interest on any dividend not paid on a Dividend Payment Date or any
other late payment. We are also not obligated to pay holders of our MEDS any
dividend in excess of the full dividends on the MEDS that are payable as
described above.
If our board of directors or an authorized committee of our board does not
declare a dividend for any dividend period, the board of directors or an
authorized committee may declare and pay the dividend on any subsequent date,
whether or not a Dividend Payment Date. The persons entitled to receive the
dividend in such case will be holders of our MEDS as they appear on our stock
register on a date selected by the board of directors or an authorized
committee. That date must be not more than 60 days prior to this dividend
payment date.
PAYMENT RESTRICTIONS
If we do not pay a dividend on a Dividend Payment Date, then, until all accrued
and unpaid dividends are paid and the full quarterly dividend on our MEDS for
the current and all prior dividend periods is declared and paid or set apart for
payment:
-- We may not take any of the following actions with respect to any of our
stock that ranks junior to our MEDS as to payment of dividends or distribution
of assets upon winding up, including our shares of common stock:
-- declare or pay any dividend or make any distribution of assets on any
junior capital stock, other than dividends or distributions of our capital
stock that ranks junior to our MEDS as to payment of dividends and the
distribution of assets upon winding up and cash in lieu of fractional
shares in connection with any such dividend or distribution; or
-- redeem, purchase or otherwise acquire any junior capital stock, except
upon conversion or exchange for our capital stock that ranks junior to our
MEDS as to payment of dividends and the distribution of assets upon winding
up and cash in lieu of fractional shares in connection with any such
conversion or exchange.
-- We may not redeem, purchase or otherwise acquire other of our capital stock
that ranks equally with our MEDS as to payment of dividends or the distribution
of assets upon winding up, except for conversion or exchange for shares of our
capital stock that rank junior to our MEDS as to payment of dividends and the
distribution of assets upon winding up and cash in lieu of fractional shares in
connection with any such conversion or exchange.
S-28
CONVERSION
MANDATORY CONVERSION
Our MEDS, unless previously converted at your option or upon specified cash
mergers described below or a later Dividend Payment Date in the circumstances
described below, the "conversion date," into a number of newly issued shares of
common stock equal to the conversion rate. Upon conversion, dividends on our
MEDS will cease to accrue and we will make arrangements for the payment of cash
in respect of accrued and unpaid dividends.
The conversion rate, which is the number of newly issued shares of common stock
issuable upon conversion of our MEDS on the conversion date, will, subject to
adjustment under certain circumstances as described under "--Anti-dilution
adjustments" below, be as follows:
-- If the "average market price" of our common stock, which is the average of
the closing prices per share of common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding June 15,
2006, is equal to or greater than $ , which we call the "threshold
appreciation price", then the conversion rate will be shares of our common
stock per MEDS.
-- If the average market price of our common stock is less than $ but
greater than $ , the conversion rate will be equal to $50 divided by the
average market price of our common stock per MEDS.
-- If the average market price of our common stock is less than or equal to
$ , the conversion rate will be shares of our common stock per MEDS.
If the average market price as of June 15, 2006 is greater than or equal to
$ , upon mandatory conversion on the conversion date, we will be obligated
to deliver shares of our common stock per MEDS, resulting in the holders of
the MEDS receiving only % of the appreciation in market value of our common
stock above $ . If the average market price as of June 15, 2006 is greater
than $ and less than $ , upon mandatory conversion on the conversion
date, we will be obligated to deliver only a fraction of a share of our common
stock having a market value equal to $ per MEDS, resulting in the holders of
the MEDS receiving none of the appreciation in the market value of our common
stock from $ to $ . If the average market price as of June 15, 2006 is
less than or equal to $ , upon mandatory conversion on the conversion date,
we will be obligated to deliver shares of our common stock per MEDS,
regardless of the market price of such share, resulting in the holders of the
MEDS realizing the entire loss on the decline in market value of our common
stock.
For purposes of determining the average market price for our common stock, the
closing price of our common stock on any date of determination means the closing
sale price or, if no closing price is reported, the last reported sale price of
our shares of common stock on the New York Stock Exchange on that date. If our
common stock is not listed on the New York Stock Exchange on any date, the
closing price of our common stock on any date of determination means the closing
sales price as reported in the composite transactions for the principal U.S.
securities exchange on which our common stock is so listed or quoted, or if our
common stock is not so listed or quoted on a U.S. national or regional
securities exchange, as reported by the Nasdaq Stock Market, or, if our common
stock is not so reported, the last quoted bid price for our common stock in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization or, if that bid price is not available, the market value of our
common stock on that date as determined by a nationally recognized independent
investment banking firm retained by us for this purpose.
S-29
A trading day is a day on which our common stock:
-- is not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of business; and
-- has traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of our common stock.
If we make a determination in good faith that the payment in cash on June 15,
2006 of all accrued and unpaid dividends on the MEDS would breach any of the
terms of, or constitute a default under, the terms of our 10 3/4% Senior Notes
due August 1, 2008, the conversion date will be deferred and we will provide
prompt notice of such deferral, but no earlier than 60 days before June 15,
2006, to the holders of our MEDS. Subsequent to the conversion date deferral,
promptly after any determination in good faith by us that the payment in cash of
all accrued and unpaid dividends on the MEDS would not breach any of the terms
of, or constitute a default under, the terms of these senior notes, we will
declare a new conversion date and provide notice of such date to the holders of
our MEDS at least 30 days but not more than 60 days before the new conversion
date. The new conversion date will be the first Dividend Payment Date that is at
least 30 days after the delivery of such notice. We may also satisfy our notice
obligations by publishing such notice in a newspaper customarily published at
least once a day for at least five days each calendar week and of general
circulation in New York, New York. Dividends on the MEDS continue to accrue
until they are converted.
CONVERSION AT THE OPTION OF HOLDER
The holders of our MEDS have the right to convert them, in whole or in part, at
any time prior to the conversion date, into our shares of common stock at the
optional conversion rate of our shares of common stock for each of our MEDS,
subject to adjustment as described below. The optional conversion rate is
equivalent to a conversion price equal to the threshold appreciation price.
Holders of our MEDS at the close of business on a record date for any payment of
dividends will receive the dividend then payable on that MEDS on the
corresponding Dividend Payment Date even if optional conversion of our MEDS
occurs between that record date and the corresponding Dividend Payment Date.
However, if you surrender our MEDS for conversion after the close of business on
a record date for any payment of dividends and before the opening of business on
the next succeeding Dividend Payment Date, you must include payment of an amount
equal to the dividend on our MEDS which is to be paid on that Dividend Payment
Date.
Except as described above, upon any optional conversion of our MEDS, we will
make no payment or allowance for unpaid dividends, whether or not in arrears, on
that MEDS, or for dividends or distributions on our common stock issued upon
conversion.
EARLY CONVERSION UPON CASH MERGER
Prior to the conversion date, if we are involved in a merger in which at least
30% of the consideration for our shares of common stock consists of cash or cash
equivalents, which we refer to as a "cash merger," then on or after the date of
the cash merger each holder of our MEDS will have the right to convert our MEDS
at the conversion rate in effect immediately before the cash merger. We refer to
this right as the "merger early conversion right." We will provide each of the
holders with a notice of the completion of a cash merger within five business
days thereof. The notice will specify a date, which shall be not less than 20
nor more
S-30
than 30 days after the date of the notice, on which the merger early conversion
will occur and a date by which each holder's merger early conversion right must
be exercised. The notice will set forth, among other things, the applicable
conversion rate and the amount of the cash (including amounts for accrued and
unpaid dividends), securities and other consideration receivable by the holder
upon conversion. To exercise the merger early conversion right, you must deliver
to us, on or one business day before the exercise date for the merger early
conversion date, the certificate evidencing your MEDS, if our MEDS is held in
certificated form. If you exercise the merger early conversion right, we will
deliver to you on the merger early conversion date the kind and amount of
securities, cash or other property that you would have been entitled to receive
if you had converted your MEDS immediately before the cash merger at the
conversion rate in effect at such time. If you do not elect to exercise your
merger early conversion right, you will receive for your MEDS cash, securities
or other property into which our shares of common stock were converted at the
conversion rate in effect on the conversion date.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the conversion rate and the number of our shares of
common stock to be delivered upon conversion may be adjusted if certain events
occur, including:
1) the payment of a dividend or other distributions to holders of our common
stock in common stock;
2) the issuance to all holders of our common stock of rights or warrants, other
than any dividend reinvestment or share purchase or similar plans, entitling
them to subscribe for or purchase our common stock at less than the current
market price (as defined below);
3) subdivisions, splits and combinations of our common stock;
4) distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or other assets
(excluding any dividend or distribution covered by clause (1) or (2) above and
any dividend or distribution paid exclusively in cash);
5) distributions consisting exclusively of cash to all holders of our common
stock in an aggregate amount that, when combined with (a) other all-cash
distributions made within the preceding 12 months and (b) the cash and the fair
market value, as of the date of expiration of the tender or exchange offer
referred to below, of the consideration paid in respect of any tender or
exchange offer by us or a subsidiary of ours for our common stock concluded
within the preceding 12 months, exceeds 15% of our aggregate market
capitalization (such aggregate market capitalization being the product of the
current market price of our common stock multiplied by the number of shares of
common stock then outstanding) on the date fixed for the determination of
stockholders entitled to receive such distribution; and
6) the successful completion of a tender or exchange offer made by us or any
subsidiary of ours for our common stock that involves an aggregate consideration
that, when combined with (a) any cash and the fair market value of other
consideration payable in respect of any other tender or exchange offer by us or
a subsidiary of ours for our common stock concluded within the preceding 12
months and (b) the aggregate amount of any all-cash distributions to all holders
of our common stock made within the preceding 12 months, exceeds 15% of our
aggregate market capitalization on the date of expiration of such tender or
exchange offer.
The "current market price" per common share on any day means the average of the
daily closing prices for the five consecutive trading days preceding the earlier
of the day preceding
S-31
the day in question and the day before the "ex date" with respect to the
issuance or distribution requiring such computation. For purposes of this
paragraph, the term "ex date," when used with respect to any issuance or
distribution, means the first date on which our shares of common stock trade
without the right to receive the issuance or distribution.
In the case of reclassifications, consolidations, mergers, sales or transfers of
assets or other transactions that cause our common stock to be converted into
the right to receive other securities, cash or property, each share of our MEDS
then outstanding would, without the consent of the holders of our MEDS, become
convertible into such other securities, cash or property instead of our common
stock. In such event, on the conversion date the conversion rate then in effect
will be applied to the value on the conversion date of the securities, cash or
property a holder would have received if it had held the stock covered by our
MEDS when the applicable transaction occurred. Holders have the right to settle
their obligations under our MEDS early in the event of certain cash mergers as
described under "--Early conversion upon cash merger."
In the case of the payment of a dividend or other distribution on our common
stock of shares of capital stock of any class or series, or similar equity
interests, of or relating to a subsidiary or other business unit, which we refer
to as a "spin-off," the conversion rate in effect immediately before the close
of business on the record date fixed for determination of stockholders entitled
to receive that distribution will be increased by multiplying:
-- the conversion rate by
-- a fraction, the numerator of which is the current market price per share of
our shares of common stock plus the fair market value, determined as described
below, of those shares of capital stock or similar equity interests so
distributed applicable to one share of common stock and the denominator of which
is the current market price per share of our shares of common stock.
The adjustment to the conversion rate under the preceding paragraph will occur
on the date that is earlier of:
-- the tenth trading day following the effective date of the spin-off; and
-- the date of the securities being offered in the initial public offering of
the spin-off, if that initial public offering is effected simultaneously with
the spin-off.
For purposes of this section, "initial public offering" means the first time
securities of the same class or type as the securities being distributed in the
spin-off are offered to the public for cash.
In the event of a spin-off that is not effected simultaneously with an initial
public offering of the securities being distributed in the spin-off, the fair
market value of the securities to be distributed to holders of our common stock
means the average of the closing sale prices of those securities over the first
10 trading days following the effective date of the spin-off. Also, for purposes
of such a spin-off, the current market price of our shares of common stock means
the average of the closing sales prices of our common stock over the first 10
trading days following the effective date of the spin-off.
If, however, an initial public offering of the securities being distributed in
the spin-off is to be effected simultaneously with the spin-off, the fair market
value of the securities being distributed in the spin-off means the initial
public offering price, while the current market price of our common stock means
the closing sale price of our common stock on the trading day on
S-32
which the initial public offering price of the securities being distributed in
the spin-off is determined.
In addition, we may increase the conversion rate if our board of directors or an
authorized committee of our board deems it advisable to avoid or diminish any
income tax to holders of our shares of common stock resulting from any dividend
or distribution of shares (or rights to acquire shares) or from any event
treated as a dividend or distribution for income tax purposes or for any other
reasons.
Adjustments to the conversion rate will be calculated to the nearest 1/10,000th
of a share. No adjustment in the conversion rate will be required unless the
adjustment would require an increase or decrease of at least 1% in the
conversion rate. If any adjustment is not required to be made because it would
not change the conversion rate by at least 1%, then the adjustment will be
carried forward and taken into account in any subsequent adjustment.
We will be required, as soon as practicable following the occurrence of an event
that requires or permits an adjustment in the conversion rate, to provide
written notice to the holders of shares of our MEDS of the occurrence of that
event. We will also be required to deliver a statement setting forth in
reasonable detail the method by which the adjustment to the conversion rate was
determined and setting forth the revised conversion rate.
FRACTIONAL SHARES
No fractional shares of common stock will be issued upon conversion of our MEDS.
In lieu of any fractional share otherwise issuable in respect of the aggregate
number of shares of our MEDS of any holder which are converted upon mandatory
conversion or any optional conversion, that holder will be entitled to receive
an amount in cash equal to the same fraction of:
-- in the case of mandatory conversion, the current market price; or
-- in the case of an optional conversion by a holder, the closing price of our
shares of common stock determined as of the second trading day immediately
preceding the effective date of conversion.
GENERAL
Upon any conversion of our MEDS, our shares of common stock will be issued and
delivered to you or your designee, upon presentation and surrender of the
certificate evidencing our MEDS, if our MEDS is held in certificated form, and
payment by you of any transfer or similar taxes payable in connection with the
issuance of our common stock to any person other than you.
Prior to the date on which our common stock is issued on conversion, our common
stock underlying our MEDS will not be deemed to be outstanding for any purpose
and you will have no rights with respect to the common stock, including voting
rights, rights to respond to tender offers and rights to receive any dividends
or other distributions on our common stock by virtue of holding our MEDS.
LIQUIDATION RIGHTS
In the event of the voluntary or involuntary liquidation, dissolution or winding
up of U. S. Steel, the holders of our MEDS will be entitled to receive, out of
our assets legally available for distribution to stockholders--before any
distribution of assets is made on our
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shares of common stock or any future class of securities which ranks junior to
our MEDS--a liquidating distribution in the amount of $50, plus an amount equal
to the sum of all accrued and unpaid dividends, whether or nor earned or
declared, for the then-current dividend period and all prior dividend periods.
For the purpose of the preceding paragraph, none of the following will
constitute a voluntary or involuntary liquidation, dissolution or winding up of
U. S. Steel:
-- the sale of all or substantially all of our property or business;
-- the merger or consolidation of U. S. Steel into or with any other
corporation; or
-- the merger or consolidation of any other corporation into or with U. S.
Steel.
After the payment to the holders of our MEDS of the full preferential amounts
provided above, the holders of our MEDS will have no right or claim to any of
our remaining assets.
If our assets available for distribution to the holders of our MEDS upon any
liquidation, dissolution or winding up of U. S. Steel, whether voluntary or
involuntary, are insufficient to pay in full all amounts to which the holders
are entitled as provided above, no such distribution will be made on account of
any other shares ranking equally with our MEDS as to the distribution of assets
upon that liquidation, dissolution or winding up unless a pro rata distribution
is made on our MEDS, with the amount allocable to each series of parity shares
determined on the basis of the aggregate liquidation preference of the
outstanding shares of each series and distributions to the shares of each series
being made on a pro rata basis.
VOTING RIGHTS
The holders of the shares of our MEDS are not entitled to any voting rights,
except as required by applicable state law and as described below.
If the equivalent of six quarterly dividends payable on our MEDS, or any other
class or series of preferred stock ranking equally with our MEDS as to the
payment of dividends, has not been paid, the number of directors on our board
shall be increased by two, without duplication of any increase made pursuant to
the terms of any other series of our preferred stock which do not have a
separate class vote and upon which like voting rights have been conferred and
are exercisable. The holders of our MEDS--voting as a single class with the
holders of shares of any such other class of preferred stock--will be entitled
to elect two directors at any meeting of our stockholders at which directors are
to be elected during the period their dividends remain in arrears. This voting
right will continue until we have paid, or declared and set apart for payment,
full cumulative dividends for all past periods on all of that class or classes
of preferred stock and our MEDS.
We will not, without the approval of the holders of at least 66 2/3% of our MEDS
then outstanding, amend any of the provisions of our charter so as to affect
adversely the powers, preferences, privileges or rights of the holders of our
MEDS.
We will not, without the approval of the holders, voting together as a single
class, of at least 66 2/3% of our MEDS then outstanding and all shares of any
other series of our preferred stock ranking equally with our MEDS as to
dividends or upon dissolution:
-- issue, authorize or increase the authorized amount of, or issue or
authorize any obligation or security convertible into or evidencing a right to
purchase, any share of any class ranking prior to our MEDS as to dividends or
upon dissolution; or
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-- reclassify any of our authorized shares of capital stock into any share of
any class, or any obligation or security convertible into or evidencing a right
to purchase such share, ranking prior to our MEDS as to dividends or upon
dissolution.
No such vote will be required for us to take any of these actions to issue,
authorize or increase the authorized amount of, or issue or authorize any
obligation or security convertible into or evidencing a right to purchase, any
share ranking equally with or junior to our MEDS.
REDEMPTION
The MEDS are not redeemable.
AUTHORIZED SHARES OF COMMON STOCK
We will at all times reserve and keep available out of our authorized and
unissued shares of common stock, solely for issuance upon the conversion of our
MEDS, that number of our shares of common stock as shall from time to time be
issuable upon the conversion of all our MEDS then outstanding. Our MEDS
converted into our shares of common stock or otherwise reacquired by us shall
resume the status of authorized and unissued preferred stock, undesignated as to
series, and shall be available for subsequent issuance.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Mellon Investor Services LLC will act as registrar for our MEDS. We will act as
transfer agent and paying agent for the payment of dividends for our MEDS.
U. S. Steel maintains its own stock transfer department at the following
address: United States Steel Corporation, Shareholders Services Department, 600
Grant Street, Room 611, Pittsburgh, PA 15219-2800. Certificates representing
MEDS can also be presented for registration of transfer at Mellon Shareholder
Services, 120 Broadway, 13th Floor, New York, NY 10021.
Mellon Investor Services, LLC, 500 Grant Street, Pittsburgh, PA 15219 is the
registrar for the MEDS and our common stock.
BOOK ENTRY AND SETTLEMENT
Settlement for the MEDS will be made by the underwriters in immediately
available funds. All payments of dividends on the MEDS will be made by us in
immediately available funds. The MEDS will trade in DTC's settlement system
until maturity.
BOOK-ENTRY ONLY ISSUANCES
DTC will act as securities depositary for the MEDS. The MEDS will be issued only
as fully registered securities registered in the name of Cede & Co., DTC's
nominee ("Cede"). One or more fully registered global MEDS certificates,
representing the total aggregate number of MEDS, will be issued and will be
deposited with DTC. Although voting with respect to the MEDS is limited, in
those cases where a vote is required, neither DTC nor Cede will itself consent
or vote with respect to MEDS. Under its usual procedures, DTC would solicit
votes on behalf of the holders of the MEDS through an Omnibus Proxy. Except as
provided herein, a Beneficial Owner in a global MEDS certificate will not be
entitled to receive physical delivery of MEDS securities. Accordingly, each
Beneficial Owner must rely on the procedures of DTC to
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exercise any rights under the MEDS. A more detailed description of the DTC
book-entry system is set forth below.
BOOK-ENTRY SYSTEM--THE DEPOSITORY TRUST COMPANY
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants (the "Participants") deposit with DTC.
DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. Direct
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations (the "Direct
Participants"). DTC is owned by a number of its Direct Participants and by the
NYSE, the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others,
such as securities brokers and dealers, banks, and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a Direct Participant either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission.
The ownership interest of each actual owner of a MEDS ("Beneficial Owner")
within the DTC system is recorded on the Direct and Indirect Participants'
records and is credited to the Direct Participant on DTC's records. Beneficial
Owners do not receive written confirmation from DTC of their transactions, but
Beneficial Owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participants through which the Beneficial Owners
convert or hold MEDS. Transfers of ownership interests in the MEDS are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in a MEDS security, except in the event that use of
the book-entry system for such MEDS security is discontinued.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the MEDS represented by a global
certificate.
To facilitate subsequent transfers, all the MEDS deposited by Participants with
DTC are registered in the name of Cede. The deposit of MEDS with DTC and their
registration in the name of Cede effect no change in beneficial ownership. DTC
has no knowledge of the identity of the Beneficial Owners of the MEDS, as its
records reflect only the identity of the Direct Participants to whose accounts
such MEDS are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants and by Direct Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements that may be in
effect from time to time.
Conversions are coordinated through DTC. Conversions notices shall be sent to
Cede by a Direct Participant for the benefit of Beneficial Owners. DTC will
reduce the amount of interest of a
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Direct Participant in the MEDS as a result of any such conversion in accordance
with its procedures.
In addition, although voting with respect to the MEDS is limited, in those cases
where a vote is required, neither DTC nor Cede will itself consent or vote with
respect to such securities. Under its usual procedures, DTC would mail an
Omnibus Proxy to the issuer of the MEDS security for which a vote is being
solicited as soon as possible after the record date. The Omnibus Proxy assigns
Cede consenting or voting rights to those Direct Participants to whose accounts
the voting MEDS are credited on the record date (identified in a listing
attached to the Omnibus Proxy). USS believes that the arrangements among DTC,
Direct and Indirect Participants, and Beneficial Owners will enable the
Beneficial Owners to exercise rights equivalent in substance to the rights that
can be directly exercised by a holder of a MEDS security.
Dividend payments on the MEDS are made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown of DTC's record unless DTC has reason to believe
that it will not receive payments on such payment date. Payments by Participants
to Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the account of customers in
bearer form or registered in "street name," and such payments will be the
responsibility of such Participant and not of DTC, the Trust, or the Company,
subject to any statutory or regulatory requirements to the contrary that may be
in effect from time to time. Payment of dividends to DTC is the responsibility
of the issuer of the MEDS, disbursement of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC has advised the Company that it will take any action permitted to be taken
by a holder of the MEDS (including, without limitation, the presentation of a
stock certificate for conversion) only at the direction of one or more
Participants to whose account with DTC interests in shares presented by a global
certificate are credited and only in respect of such number of the shares of the
Convertible Securities represented by a global certificate as to which such
participants have been given such direction.
Except as provided herein, a Beneficial Owner in a global MEDS certificate will
not be entitled to receive physical delivery of such securities. Accordingly,
each Beneficial Owner must rely on the procedures of DTC to exercise any rights
under such securities. Because DTC can only act on behalf of Participants, who
in turn act on behalf of Indirect Participants, the ability of a person having a
beneficial interest in shares represented by a global certificate to pledge such
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate of such interest.
DTC may discontinue providing its services as Depository with respect to the
MEDS at any time by giving reasonable notice to the issuer. Under such
circumstances, in the event that a successor securities depositary is not
obtained, certificates for the MEDS for which DTC has discontinued its services
are required to be printed and delivered. In addition, we may decide to
discontinue use of the system of book-entry transfers through DTC (or any
successor depositary) with respect to the MEDS. In that event, certificates for
the MEDS will be printed and delivered. The information in this section
concerning DTC and DTC's book-entry system has been obtained from sources that
we believe to be reliable, but we take no responsibility for the accuracy
thereof.
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LISTING
We have applied to list the MEDS and the common stock issuable on conversion of
the MEDS on the NYSE.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax consequences
relevant to the purchase, ownership, and disposition of our MEDS and common
shares acquired upon conversion of our MEDS. The following summary is based upon
current provisions of the Internal Revenue Code of 1986 (the "Code"), Treasury
regulations and judicial or administrative authority, all of which are subject
to change, possibly with retroactive effect. The summary is limited to the U.S.
federal income tax consequences to investors who are citizens or residents of
the U.S. or that are U.S. corporations, except for the limited discussion below
under the heading "Non-U.S. Holders." State, local and foreign tax consequences
are not summarized, nor are tax consequences to special classes of investors,
including, but not limited to tax-exempt organizations, insurance companies,
banks or other financial institutions, real estate investment trusts, regulated
investment companies, dealers in securities, persons liable for the alternative
minimum tax, traders in securities that elect to use a mark-to-market method of
accounting for their securities holdings, persons that will hold U.S. Steel
shares as a position in a hedging transaction, "straddle," "conversion
transaction," "integrated" or constructive sale transaction or other risk
reduction transaction and holders whose "functional currency" is not the U.S.
dollar. Tax consequences may vary depending upon the particular status of an
investor. The summary is limited to taxpayers who will hold our MEDS and our
common shares received in exchange therefor as "capital assets" within the
meaning of Section 1221 of the Code. There can be no assurance that future
changes in applicable law or administrative and judicial interpretations thereof
will not adversely affect the tax consequences summarized herein or that there
will not be differences of opinion as to the interpretation of applicable law.
Each potential investor should consult with its own tax adviser as to the
federal, state, local, foreign and any other tax consequences of the purchase,
ownership, conversion, and disposition of our MEDS and common shares.
If a partnership holds our MEDS or shares of our common stock, the tax treatment
of a partner will generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a partnership that holds
our MEDS or shares of our common stock, you should consult your tax advisor.
DEFINITION OF U.S. HOLDER AND NON-U.S. HOLDER
As used in this discussion, (i) the term "U.S. holder" means a beneficial owner
of shares of our MEDS or common stock that is a U.S. person and (ii) the term
"non-U.S. holder" means a beneficial owner of shares of our MEDS or common stock
that is not a U.S. person. A U.S. person means a person that is for U.S. federal
income tax purposes:
-- an individual who is a citizen or resident of the United States;
-- a corporation or partnership created or organized in or under the laws of
the United States or of any State or political subdivision thereof or therein,
including the District of Columbia (other than a partnership that is not treated
as a U.S. person under applicable Treasury regulations);
-- an estate the income of which is subject to U.S. federal income tax
regardless of the source thereof; or
-- a trust with respect to which a court within the United States is able to
exercise primary supervision over its administration and one or more U.S.
persons have the authority to control
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all of its substantial decisions, or certain electing trusts that were in
existence on August 19, 1996 and were treated as domestic trusts on that date.
An individual may, subject to certain exceptions, be deemed to be a resident of
the United States for a calendar year by reason of being present in the United
States for at least 31 days in such calendar year and for an aggregate of at
least 183 days during a three-year period ending with such current calendar year
(counting for such purposes all of the days present in such current calendar
year, one-third of the days present in the immediately preceding calendar year,
and one-sixth of the days present in the second preceding calendar year).
U.S. HOLDERS
DIVIDENDS
Dividend distributions with respect to our MEDS and common stock will be taxable
as ordinary income to the extent of U. S. Steel's current and accumulated
earnings and profits. To the extent that the amount of a dividend distribution
with respect to our MEDS or common stock exceeds our current and accumulated
earnings and profits, such distribution will be treated first as a tax-free
return of capital to the extent of the holder's adjusted tax basis in such MEDS
or common stock, as the case may be, and thereafter as capital gain and will to
that extent not be eligible for the dividends received deduction otherwise
available to corporate holders, discussed below.
Dividend distributions paid to corporate holders out of our current and
accumulated earnings and profits may be eligible for the 70% dividends received
deduction as provided in Section 243 of the Code, subject to the minimum holding
period requirement under Section 246(c) of the Code (generally at least 46 days,
excluding any period during which the holder has diminished the holder's risk of
loss) and other applicable requirements.
In general, a corporate holder that receives an "extraordinary dividend", as
defined in Section 1059(c) of the Code, will be required, if it does not meet
certain minimum holding period requirements (generally two years), to reduce its
basis in the shares with respect to which such "extraordinary dividend" is
received by the portion of such dividend that is not taxed because of the
dividends received deduction.
In determining entitlement to dividends received deductions, corporate holders
should also consider the "debt-financed portfolio stock" rules of Section 246A
of the Code, under which the dividends received deduction could be reduced to
the extent that a holder incurs indebtedness directly attributable to such
holder's investment in our MEDS or common shares.
President Bush in early 2003 has proposed eliminating U.S. income taxes on
dividends consisting of distributions of previously taxed corporate earnings,
effective for distributions made on or after January 1, 2003 with respect to
corporate earnings after 2000. Under the proposal, all or a portion of dividends
paid by a corporation to its shareholders during a calendar year would be
tax-free if those dividends are paid from previously taxed corporate income. The
current proposal would also partially eliminate the dividends received deduction
in respect of dividends paid by us. Based on the information available, it is
not clear how the proposal, if enacted, would affect any dividends paid in 2003
with respect to our MEDS and common stock because U. S. Steel did not file a
federal income tax return in 2002 (U. S. Steel was included in the Marathon
consolidated federal income tax return for 2001 that was filed in 2002).
Investors should be aware, however, that prospects for the enactment of this
legislation
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are uncertain, and we cannot predict whether these rules will be enacted or what
changes may be made to them prior to enactment.
DISPOSITIONS
A holder will generally recognize capital gain or loss on a sale or exchange of
our MEDS or our common stock equal to the difference between the amount realized
upon the sale or exchange and the holder's tax basis in the shares sold or
exchanged. Such capital gain or loss will be long-term capital gain or loss if
the holder's holding period for the shares sold or exchanged is more than one
year.
CONVERSION INTO COMMON STOCK
As a general rule, no gain or loss will be recognized by a holder on the
conversion of our MEDS into our common stock. Dividend income may be recognized,
however, to the extent cash is received in payment of dividends in arrears upon
a mandatory conversion. The tax basis of the common stock received upon
conversion will generally be equal to the tax basis of our MEDS converted,
adjusted to reflect any income or gain recognized on the conversion. The holding
period of our common stock received will include the holding period of our MEDS
converted.
A holder generally will recognize gain (or loss) upon conversion of our MEDS
into our common stock to the extent that any cash the holder is paid in lieu of
a fractional share of common shares exceeds (or is less than) the holder's tax
basis in such fractional share.
Holders of our MEDS should also consider the possible application of the
conversion premium rules of Section 305 of the Code and the Treasury regulations
promulgated thereunder, under which a holder of convertible preferred shares
may, under certain circumstances, be required to include into income as a
constructive dividend the excess of the redemption price of such preferred
shares over its issue price.
ADJUSTMENT OF CONVERSION RATE
Holders of our MEDS might be treated as receiving a constructive distribution
from U. S. Steel if:
-- a conversion rate is adjusted and as a result of the adjustment the
proportionate interest of holders of our MEDS in the assets or earnings and
profits of U. S. Steel increased; and
-- the adjustment is not made pursuant to a bona fide, reasonable antidilution
formula.
An adjustment in a conversion rate would not be considered made pursuant to a
reasonable antidilution formula if the adjustment were made to compensate for
certain taxable distributions with respect to U. S. Steel common shares.
Thus, certain adjustments to the Conversion Rate and the Optional Conversion
Rate to reflect U. S. Steel's distribution of certain rights, warrants,
evidences of indebtedness, securities or other assets to holders of common
shares may result in constructive distributions taxable as dividends to the
holders of our MEDS. The distribution would be treated in the manner described
above under "Dividends".
INFORMATION REPORTING AND BACKUP WITHHOLDING ON U.S. HOLDERS
In general, information reporting requirements will apply to dividend payments
on our MEDS and our common stock. Certain U.S. holders may be subject to backup
withholding at a rate of
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30% for 2003, 29% for 2004 and 2005, 28% for 2006 through 2010 and 31% after
2010 with respect to the payment of dividends on our MEDS or common shares and
to certain payments of proceeds on the sale or redemption of our MEDS unless
such holders provide a correct taxpayer identification number or certification
of foreign or other exempt status, and otherwise comply with applicable
requirements of the backup withholding rules.
Any amount withheld under the backup withholding rules from a payment to a
holder is allowable as a credit against such holder's U.S. federal income tax,
which may entitle the holder to a refund, provided that the holder provides the
required information to the IRS.
NON-U.S. HOLDERS
DIVIDENDS
Generally, dividends (including constructive distributions taxable as dividends)
paid to a non-U.S. holder with respect to our MEDS or our common shares will be
subject to a 30% U.S. withholding tax, or such lower rate as may be specified by
an applicable tax treaty, unless the dividends are (i) effectively connected
with a trade or business carried on by the non-U.S. holder within the United
States (and the non-U.S. holder provides the payor with a Form W-8ECI) or (ii)
if a tax treaty applies, attributable to a U.S. permanent establishment
maintained by the non-U.S. holder. Dividends effectively connected with such
trade or business or attributable to such permanent establishment will generally
be subject to U.S. federal income tax on a net basis at applicable individual or
corporate rates and, in the case of a non-U.S. holder which is a corporation,
may be subject to a "branch profits tax" at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty.
A non-U.S. holder of our MEDS or common stock that wishes to claim the benefit
of an applicable treaty rate for dividends (and avoid backup withholding as
discussed below), will be required to (a) complete IRS Form W-8BEN (or other
applicable form) and certify under penalty of perjury that such holder is not a
U.S. person or (b) if the MEDS or common stock are held through foreign
intermediaries, satisfy the relevant certification requirements of applicable
United States Treasury regulations. Special certification and other requirements
apply to certain non-U.S. holders that are entities rather than individuals.
DISPOSITIONS
A non-U.S. holder generally will not be subject to U.S. federal income tax with
respect to gain realized on a sale, exchange or redemption of our MEDS or our
common shares so long as:
-- the gain is not effectively connected with a U.S. trade or business of the
holder (or if a tax treaty applies, the gain is not effectively connected with
the conduct by the non-U.S. holder of a trade or business within the U.S. and
attributable to a U.S. permanent establishment maintained by such non-U.S.
holder);
-- in the case of a nonresident alien individual who holds our MEDS or common
shares as a capital asset, such holder is not present in the U.S. for 183 or
more days in the taxable year of the sale or disposition and certain other
conditions are met; and
-- U. S. Steel is not and has not been a "United States real property holding
corporation," within the meaning of Section 897 of the Code at any time within
the shorter of the five-year period preceding such disposition or the non-U.S.
holder's holding period in such MEDS or
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common stock. Liability to tax by reason of such status is subject to detailed
exceptions in favor of certain small holders (5% or less) of our MEDS or common
stock.
We believe we are not and do not anticipate becoming a "United States real
property holding corporation" for U.S. federal income tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING ON NON-U.S. HOLDERS
Payment of dividends (including constructive dividends), and the tax withheld
with respect thereto, is subject to information reporting requirements. These
information reporting requirements apply regardless of whether withholding was
reduced or eliminated by an applicable income tax treaty or withholding was not
required because the dividends were effectively connected with a trade or
business in the United States conducted by the non-U.S. holder. Copies of the
information returns reporting such dividends and withholding may also be made
available under the provisions of an applicable income tax treaty or agreement
to the tax authorities in the country in which the non-U.S. holder resides.
United States backup withholding at the rates discussed above will generally
apply on payment of dividends to non-U.S. holders unless such holders furnish to
the payor a Form W-8BEN (or other applicable form), or otherwise establish an
exemption.
Payment by a U.S. office of a broker of the proceeds of a sale of our MEDS or
common shares is subject to both backup withholding and information reporting
unless the non-U.S. holder, or beneficial owner thereof, as applicable,
certifies that it is a non-U.S. holder on Form W-8BEN, or otherwise establishes
an exemption. Subject to exceptions, backup withholding and information
reporting generally will not apply to a payment of proceeds from the sale of our
MEDS or common shares if such sale is effected through a foreign office of a
broker.
Any amount withheld under the backup withholding rules from a payment to a
holder is allowable as a credit against such holder's U.S. federal income tax,
which may entitle the holder to a refund, provided that the holder provides the
required information to the IRS.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below, for whom J.P. Morgan Securities Inc. is acting as representative, have
severally agreed to purchase, and we have agreed to sell to them, severally, the
number of MEDS indicated below:
----------------------------------------------------------------------------
NAME NUMBER OF MEDS
----------------------------------------------------------------------------
J.P. Morgan Securities Inc. ................................
Goldman, Sachs & Co. .......................................
Lehman Brothers Inc. .......................................
Salomon Smith Barney Inc. ..................................
Scotia Capital (USA) Inc. ..................................
----------
Total.................................................. 4,000,000
==========
The underwriters are offering the MEDS subject to their acceptance of the MEDS
from us and subject to prior sale. The underwriting agreement provides that the
obligation of the underwriters to pay for and accept delivery of the MEDS
offered by this prospectus supplement is subject to the approval of certain
legal matters by their counsel and to other conditions. The underwriters are
obligated to take and pay for all of the MEDS offered by this prospectus
supplement if any are taken. However, the underwriters are not required to take
or pay for the MEDS covered by the underwriters' over-allotment option described
below.
The underwriters initially propose to offer some of the MEDS directly to the
public at the public offering price listed on the cover page of this prospectus
supplement. The underwriters may also offer some of the MEDS to securities
dealers at a price that represents a concession not in excess of $ per
security. After the initial offering of the MEDS, the offering price and other
selling terms may from time to time be changed by the representatives of the
underwriters.
We have granted to the underwriters an option to purchase from us within 30 days
from the date of this prospectus supplement up to an aggregate of
additional MEDS at the public offering price listed on the cover page of
this prospectus supplement less underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. If the option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional MEDS as the number listed next
to the underwriter's name in the preceding table bears to the total number of
MEDS offered by all the underwriters. If the underwriters' over-allotment option
is exercised in full, the total public offering price would be approximately
$ , the total underwriting discounts and commissions would be
approximately $ and the total proceeds to us, before offering expenses,
would be approximately $ .
We estimate that the total expenses of this offering payable by us, excluding
underwriting discounts and commissions, will be approximately $300,000.
The MEDS are a new issue of securities with no established trading market. We
have been advised by the underwriters that they intend to make a market in the
MEDS but are not obligated to do so and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the MEDS.
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We have applied to list our MEDS on the New York Stock Exchange under the symbol
"X PrB." The underwriters will undertake to sell a minimum of 100,000 MEDS, with
an aggregate market value of at least $2,000,000 to not less than 100 U.S.
holders of MEDS to meet the New York Stock Exchange distribution requirements
for trading.
In connection with this offering, certain of the underwriters may distribute
prospectuses electronically. We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, and
to contribute to payments the underwriters may be required to make under the
Securities Act.
We and each of our directors and officers have agreed, without the prior written
consent of J.P. Morgan Securities Inc. on behalf of the underwriters, not to,
during the period ending 90 days after the date of this prospectus supplement:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any of our common stock or any securities convertible into or
exercisable or exchangeable for common stock; or
-- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our common
stock
whether any transaction described above is to be settled by delivery of common
stock, such other securities, in cash or otherwise. The restrictions described
in the preceding paragraph do not apply to:
-- grants of employee stock options pursuant to the terms of a plan in effect
on the date of this prospectus supplement;
-- issuances of shares of common stock pursuant to the exercise of options
outstanding on the date of this prospectus supplement;
-- issuances of shares of common stock pursuant to our dividend reinvestment
and direct stock purchase plan; and
-- issuances of shares of common stock upon conversion of the MEDS.
In order to facilitate the offering of the MEDS, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the MEDS.
Specifically, the underwriters may over-allot in connection with the offering,
creating a short position in the MEDS for their own account. A short sale is
covered if the short position is no greater than the number of MEDS available
for purchase by the underwriters under the over-allotment option. The
underwriters can close out a covered short sale by exercising the over-allotment
option or purchasing MEDS in the open market. In determining the source of MEDS
to close out a covered short sale, the underwriters will consider, among other
things, the open market price of the MEDS compared to the price available under
the over-allotment option. The underwriters may also sell MEDS in excess of the
over-allotment option, creating a naked short position. The underwriters must
close out any naked short position by purchasing MEDS in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the MEDS in the
open market after pricing that could adversely affect investors who purchase
MEDS in the offering. As an additional means of facilitating the offering of
MEDS, the underwriters may bid for and purchase any MEDS in the open market to
stabilize the price of the MEDS. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer
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for distributing the MEDS in the offering, if the syndicate repurchases
previously distributed MEDS in transactions to cover syndicate short positions,
in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the MEDS above independent market
levels or prevent or retard a decline in the market price of the MEDS. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
Certain of the underwriters and their affiliates perform various financial
advisory, investment banking and commercial banking services from time to time
for us and our affiliates. J.P. Morgan Securities Inc. is acting as our
financial advisor in connection with the potential acquisition of the assets of
National. J.P. Morgan Securities Inc. is an affiliate of JPMorgan Chase Bank,
which is a lender and an agent under our credit facility. Scotia Capital (USA)
Inc. is an affiliate of the Bank of Nova Scotia, which is also a lender under
our credit facility.
LEGAL MATTERS
Certain legal matters with respect to the MEDS will be passed upon for us by
Morgan, Lewis & Bockius LLP, Pittsburgh, Pennsylvania and Dan D. Sandman, Esq.,
Vice Chairman and Chief Legal & Administrative Officer or Robert M. Stanton,
Esq., Assistant General Counsel--Corporate of U. S. Steel. Certain legal matters
will be passed upon for the underwriters by Simpson Thacher & Bartlett, New
York, New York. Messrs. Sandman and Stanton, in their capacities set forth
above, are each paid a salary by U. S. Steel, participate in various employee
benefit plans offered by U. S. Steel and own common stock of U. S. Steel.
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