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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-14666
MITTAL STEEL COMPANY N.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
THE NETHERLANDS
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
15TH FLOOR, HOFPLEIN 20
3032 AC ROTTERDAM
THE NETHERLANDS
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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CLASS A COMMON SHARES EURONEXT AMSTERDAM N.V.
NEW YORK STOCK EXCHANGE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
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(Title of Class)
Securities for which there is reporting obligation pursuant to Section 15(d)
of the Act
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(Title of Class)
Indicate the number of outstanding shares of the issuer's
classes of capital or common stock as of the close of the
period covered by the annual report.
CLASS A COMMON SHARES, PAR VALUE EUR 0.01 PER SHARE........ 194,509,790
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
Page
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION.................. 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................ 5
PART I 7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........... 7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................... 7
ITEM 3. KEY INFORMATION................................................. 7
A Selected Financial Data.................................. 7
B Capitalization and Indebtedness.......................... 8
C Reasons for the Offer and Use of Proceeds................ 8
D Risk Factors............................................. 8
ITEM 4. INFORMATION ON THE COMPANY...................................... 19
A History and Development of the Company................... 19
B Business Overview........................................ 24
C Organizational Structure................................. 33
D Property, Plants and Equipment........................... 34
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................... 48
A Operating Results........................................ 53
B Liquidity and Capital Resources.......................... 63
C Research and Development, Patents and Licenses........... 68
D Trend Information........................................ 68
E Off-Balance Sheet Arrangements........................... 70
F Tabular Disclosure of Contractual Obligations............ 70
G Safe Harbor.............................................. 71
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...................... 72
A Directors and Senior Management.......................... 72
B Compensation............................................. 78
C Board Practices.......................................... 81
D Employees................................................ 86
E Share Ownership.......................................... 86
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............. 87
A Major Shareholders....................................... 87
B Related Party Transactions............................... 89
C Interest of Experts and Counsel.......................... 90
ITEM 8. FINANCIAL INFORMATION........................................... 91
A Consolidated Statements and Other Financial Information.. 91
B Significant Changes...................................... 94
ITEM 9. THE OFFER AND LISTING........................................... 95
A Offer and Listing Details................................ 95
B Plan of Distribution..................................... 95
C Markets.................................................. 95
D Selling Shareholders..................................... 96
E Dilution................................................. 96
F Expenses of the Issue.................................... 96
ITEM 10. ADDITIONAL INFORMATION......................................... 97
A Share Capital............................................ 97
B Memorandum and Articles of Association................... 97
C Material Contracts....................................... 97
D Exchange Controls........................................ 97
E Taxation................................................. 98
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F Dividends and Paying Agents.............................. 104
G Statements by Experts.................................... 104
H Documents on Display..................................... 105
I Subsidiary Information................................... 105
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 106
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES......... 110
A Debt Securities.......................................... 110
B Warrant and Rights....................................... 110
C Other Securities......................................... 110
D American Depositary Shares............................... 110
PART II 111
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................ 111
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS................................................ 111
ITEM 15. CONTROLS AND PROCEDURES........................................ 111
ITEM 16. [RESERVED]..................................................... 111
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT............................... 111
ITEM 16B. CODE OF ETHICS................................................. 111
ITEM 16C. PRINCIPLE ACCOUNTANT FEES AND SERVICES......................... 112
ITEM 16D. EXEMPTIONS FROM LISTINGS STANDARDS FOR AUDIT COMMITTEES........ 112
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED.... 112
PART III 114
ITEM 17. FINANCIAL STATEMENTS........................................... 114
ITEM 18. FINANCIAL STATEMENTS........................................... 114
ITEM 19. EXHIBITS....................................................... 115
2
PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORMATION
DEFINITIONS
Unless otherwise indicated:
*"Ispat International" refers to Ispat International N.V. and its
subsidiaries as they existed prior to the acquisition of LNM Holdings on
December 17, 2004 and to their predecessor companies for periods prior to the
organization of Ispat International in 1997.
*"LNM Holdings" refers to LNM Holdings N.V. and its subsidiaries as
they existed prior to their acquisition by Ispat International on December 17,
2004 and to their predecessor companies for the periods prior to the
organization of LNM Holdings. On December 20, 2004, LNM Holdings N.V.'s name was
changed to Mittal Steel Holdings N.V.
*"Mittal Steel" refers to (i) with respect to time periods occurring on
or after December 17, 2004, Mittal Steel Company N.V., formerly known as Ispat
International N.V., and its subsidiaries (which include LNM Holdings and its
subsidiaries) and (ii) with respect to time periods occurring before December
17, 2004, Ispat International and its subsidiaries and their predecessors
adjusted to give effect to the acquisition of LNM Holdings and its subsidiaries
and their predecessors.
Unless the context otherwise requires, the term "Mittal Steel" refers
to Mittal Steel Company N.V. and the term "Company", "corporation", "enterprise"
or "Mittal" refers to Mittal Steel and its subsidiaries.
In connection with changing its corporate name from Ispat International
N.V. to Mittal Steel Company N.V., Mittal Steel is also changing the corporate
names of certain of its subsidiaries. Set forth below are certain of Mittal
Steel's subsidiaries, listed by jurisdiction of organization, indicating the
former name of the subsidiary, the current/contemplated new name of the
subsidiary and the abbreviations used herein. Certain of the name changes have
not yet been effected, but Mittal Steel anticipates completing this process in
the second quarter of 2005. For the purposes of this Annual Report, the new name
or abbreviated names will be used where applicable.
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COUNTRY FORMER NAME OF CURRENT/CONTEMPLATED NEW NAME ABBREVIATION
SUBSIDIARY OF SUBSIDIARY
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Algeria Ispat Annaba Spa ("Ispat Mittal Steel Annaba Spa Mittal Steel Annaba
Annaba")
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Ispat Tebessa Spa ("Ispat Mittal Steel Tebessa Spa Mittal Steel Tebessa
Tebessa")
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Bosnia RZR Ljubija a.d. RZR Ljubija a.d. RZR Ljubija
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BH Steel Mittal Steel Zenica a.d. Mittal Steel Zenica
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Canada Ispat Sidbec Inc. ("Ispat Mittal Canada Inc. Mittal Canada
Sidbec")
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Czech Republic Ispat Nova Hut a.s. (Ispat Nova Mittal Steel Ostrava a.s. Mittal Steel Ostrava
Hut")
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Dubai (United Arab LNM Marketing FZE ("LNM Mittal Steel Marketing FZE Mittal Steel Marketing
Emirates) Marketing")
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France Ispat Unimetal S.A Mittal Steel Gandrange S.A. Mittal Steel Gandrange
("Unimetal")
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Trefileurope S.A. Trefileurope S.A. Trefileurope
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Germany Ispat Hamburger Stahlwerke GmbH Mittal Steel Hamburg GmbH Mittal Steel Hamburg
("Ispat Hamburg" or "IHSW")
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Ispat Stahlwerk Ruhrort GmbH Mittal Steel Ruhrort GmbH Mittal Steel Ruhrort
("ISRG")
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Ispat Walzdraht Hochfeld GmbH Mittal Steel Hochfeld GmbH Mittal Steel Hochfeld
("IWHG")
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Kazakhstan Ispat Karmet OJSC ("Ispat Mittal Steel Temirtau OJSC Mittal Steel
Karmet") Temirtau
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Luxembourg Ispat Europe Group S.A. ("Ispat Mittal Steel Europe Mittal Steel Europe
Europe Group" or S.A.
"IEG")
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Macedonia RZ Ladna Valavnica a.d. Mittal Steel Skopje (CRM) a.d. Mittal Steel
Mittal Steel Skopje (HRM) a.d. Skopje
RZ Valavnica za Lenti
a.d.
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Mexico Ispat Mexicana, S.A. de C.V. Mittal Steel Lazaro Cardenas Mittal Steel Lazaro
("Ispat Mexicana" or "Imexsa") S.A. de C.V. Cardenas
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Poland Ispat Polska S.A. ("Ispat Mittal Steel Poland S.A. Mittal Steel
Polska") Poland
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Romania Ispat Sidex S.A. ("Ispat Sidex") Mittal Steel Galati S.A. Mittal Steel Galati
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Ispat Petrotub S.A. ("Ispat Mittal Steel Roman S.A. Mittal Steel Roman
Petrotub")
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Ispat Tepro S.A. (Ispat Tepro") Mittal Steel Iasi S.A. Mittal Steel Iasi
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S.C. Siderurgica S.A Mittal Steel Hunedoara S.A. Mittal Steel
Hunedoara
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South Africa Ispat Iscor Limited ("Ispat Mittal Steel South Africa Mittal Steel South
Iscor") Limited Africa
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Trinidad and Caribbean Ispat Limited Mittal Steel Point Lisas Mittal Steel Point Lisas
Tobago ("CIL") Limited
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United States of Ispat Inland Inc. ("Ispat Ispat Inland Inc. Ispat Inland or Inland
America Inland")
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All references to "ISG" refer to International Steel Group Inc.
All references to the "controlling shareholder" refer, collectively, to
Mr. Lakshmi N. Mittal and his wife, Mrs. Usha Mittal.
All references to "production capacity" mean the annual production
capacity of plant and equipment based on existing technical parameters as
estimated by management. All references to "steel products" as used herein mean
to finished and semi-finished steel products and exclude direct reduced iron
("DRI"). All quantity figures for shipments of our steel products include
intercompany sales. All references to "Sales" include shipping and handling fees
and costs as per EITF Issue No. 00-10.
The term "tonnes" as used herein means a metric tonne. A metric tonne
is equal to 1,000 kilograms or 2,204.62 pounds. The term "ton" or "net ton" as
used herein means a short ton. One short ton is equal to 2,000 pounds. All
references to iron ore, iron ore pellets, DRI, hot metal, coke, coal, pig iron
and scrap are calculated using tonnes, and all references to steel products
including liquid steel are calculated using tons.
The term "Articles of Association" refers to the amended and restated
articles of association of Mittal Steel, dated December 17, 2004.
FINANCIAL INFORMATION
This Annual Report contains audited consolidated financial statements
and notes thereto of the Company at December 31, 2003 and 2004 and for each of
the years ended December 31, 2002, 2003 and 2004 (together, the "Consolidated
Financial Statements") and selected consolidated financial information of Mittal
Steel for the periods presented in the Consolidated Financial Statements and at
December 31, 2000, 2001 and 2002 and for the years ended December 31, 2000 and
2001.
On December 17, 2004, Ispat International N.V. completed its
acquisition of LNM Holdings N.V. and changed its name to Mittal Steel Company
N.V. As Ispat International N.V. and LNM Holdings N.V. are affiliates under
common control, the acquisition of LNM Holdings N.V. is accounted for on the
basis of common control accounting, which is similar to the method of accounting
formerly known as a "pooling-of-interests ".
As a result, these consolidated financial statements and all other
financial and operating data contained herein reflect the financial position and
results of operations for Mittal Steel as though the former Ispat
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International N.V. and the former LNM Holdings N.V., were part of the combined
Mittal Steel Company N.V. during all the periods presented herein. Intercompany
balances and transactions have been eliminated in consolidation.
The Consolidated Financial Statements, which include the accounts of
Mittal Steel and its subsidiaries, all of which are controlled by Mittal Steel,
have been prepared in accordance with U.S. Generally Accepted Accounting
Principles ("U.S. GAAP") (see also Notes 1 and 2 to the Consolidated Financial
Statements) and have been audited by Deloitte Accountants B.V., independent
registered public accounting firm. The financial records of each of the
operating subsidiaries are maintained in the currency of the country in which
such subsidiary is located using the statutory or generally accepted accounting
principles of such country. For consolidation purposes, financial statements
have been prepared in conformity with U.S. GAAP and expressed in U.S. dollars,
the reporting currency.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 based on
estimates and assumptions. Forward-looking statements include, among other
things, statements concerning the financial condition, results of operations and
the business of Mittal Steel, including its recently acquired subsidiary, LNM
Holdings and the proposed merger with ISG, and the anticipated financial and
other benefits of the recently completed acquisition of LNM Holdings and the
proposed merger with ISG. These statements usually contain the words "believes",
"plans", "expects", "anticipates", "intends", "estimates" or other similar
expressions. For each of these statements, you should be aware that
forward-looking statements involve known and unknown risks and uncertainties.
Although it is believed that the expectations reflected in these forward-looking
statements are reasonable, there is no assurance that the actual results or
developments anticipated will be realized or, even if realized, that they will
have the expected effects on the business or operations of Mittal Steel. These
forward-looking statements speak only as of the date on which the statements
were made and no obligation has been undertaken to publicly update or revise any
forward-looking statements made in this Annual Report or elsewhere as a result
of new information, future events or otherwise, except as required by applicable
laws and regulations. In addition to other factors and matters contained in this
Annual Report, it is believed the following factors, among others, could cause
actual results to differ materially from those discussed in the forward-looking
statements:
*cost savings and other benefits expected to result from the recently completed
acquisition of LNM Holdings and the proposed merger with ISG may not be fully
realized or realized within the expected time frame;
*costs or difficulties related to the integration of the businesses of Mittal
Steel, LNM Holdings and ISG may be greater than expected;
*the risk of a significant delay in the completion of the proposed merger with
ISG and/or unexpected consequences resulting from the recently completed
acquisition of LNM Holdings and the proposed merger with ISG;
*the risk that a government authority may impose unfavorable terms as a
condition to the merger with ISG;
*operating results following the recently completed acquisition of LNM Holdings
and the proposed merger with ISG may be lower than expected;
*adverse changes in interest rates may reduce interest margins;
*general economic conditions, whether nationally or in the market areas in which
Mittal Steel conducts business, may be less favorable than expected;
*the risk of disruption or volatility in the economic, political or social
environment in those countries in which Mittal Steel conducts business;
*legislation or regulatory changes may adversely affect the businesses in which
Mittal Steel is engaged;
*uncertainty as to the actions of the controlling shareholder of Mittal Steel;
*Mittal Steel's ability to maintain operational flexibility given its high debt
level;
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*Mittal Steel's ability to attract and retain talented management;
*fluctuations in currency exchange rates;
*Mittal Steel's ability to operate within the limitations imposed by financing
arrangements;
*Mittal Steel's ability to obtain financing on acceptable terms to finance its
growth;
*the risk of significant supply shortages and increases in the cost of raw
materials, energy and transportation;
*the risk of labor disputes;
*the risk of decreasing prices for Mittal Steel's products and other forms of
competition in the steel industry;
*increased competition from substitute materials (e.g. aluminum); and
*Mittal Steel's ability to successfully operate within a cyclical industry.
These factors and others that could cause results to differ materially
for those discussed in forward-looking statements are discussed in more detail
in this Annual Report, including under "Item 3D -- Key Information -- Risk
Factors".
6
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial
information of Mittal Steel for the years ended December 31, 2000, 2001, 2002,
2003 and 2004. This selected consolidated financial information should be read
in conjunction with the respective audited Consolidated Financial Statements of
Mittal Steel, including the notes thereto.
YEAR ENDED DECEMBER 31,
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2000 2001 2002 2003 2004
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(all amounts in $ millions except per share data and percentages)
STATEMENT OF INCOME DATA
Sales $ 6,274 $ 5,423 $ 7,080 $ 9,567 $ 22,197
Cost of sales (exclusive of depreciation) 5,180 4,952 5,752 7,568 14,694
Gross profit (before deducting depreciation) 1,094 471 1,328 1,999 7,503
Gross margin as percentage of Sales 17.4% 8.7% 18.8% 20.9% 33.8%
Depreciation 240 229 266 331 553
Selling, general and administrative expenses 231 204 298 369 804
Other operating expenses -- 75 62 -- --
Operating income/(loss) 623 (37) 702 1,299 6,146
Operating margin as percentage of Sales 9.9% (0.7)% 9.9% 13.6% 27.7%
Other income (expense) - net 24 20 32 70 128
Income from equity investments -- -- 111 162 66
Financing costs:
Net interest expense (242) (235) (222) (175) (187)
Net gain/(loss) from foreign exchange (2) (18) 15 44 (20)
Income/(loss) before taxes, minority interest 403 (270) 638 1,400 6,133
and cumulative effect of change in accounting
principle
Net income/(loss) 398 (199) 595 1,182 4,701
Basic and diluted earnings/(loss) per
common share(1) 0.62 (0.31) 0.92 1.83 7.31
AT DECEMBER 31,
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2000 2001 2002 2003 2004
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(all amounts in $ millions)
BALANCE SHEET DATA
Cash and cash equivalents, including
short-term investments and restricted cash $ 339 $ 225 $ 417 $ 900 $ 2,634
Property, plant and equipment - net 3,914 4,138 4,094 4,654 7,562
Total assets 6,826 7,161 7,909 10,137 19,153
Payable to banks and current portion of
long-term debt 403 470 546 780 341
Long-term debt (including affiliates) 2,187 2,262 2,187 2,287 1,639
Shareholders' equity 1,530 1,106 1,442 2,561 5,846
Share capital(2) 535 539 543 533 488
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YEAR ENDED DECEMBER 31,
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2000 2001 2002 2003 2004
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(all amounts in $ millions except quantity information)
OTHER DATA:
Net cash provided by operating activities $ 740 $ 237 $ 539 $ 1,438 $ 4,611
Net cash used in investing activities (281) (214) (360) (814) (801)
Net cash provided by (used in) by financing (408) (92) 16 (282) (2,329)
activities
Total production of DRI (thousands of tonnes) 6,872 4,918 5,893 7,202 9,664
Total shipments of steel products (thousands
of tons) 20,304 18,634 24,547 27,446 42,071
(1) Earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the periods
presented considering retroactively the shares issued by Mittal Steel in
connection with the acquisition of LNM Holdings.
(2) Comprised of common shares and additional paid-in capital less treasury
stock.
DIVIDENDS
In 2000, a dividend of $18 million, $0.15 per share was declared by the
Company and paid to its then shareholders.
The following dividends were declared by LNM Holdings to its
shareholder before it was acquired by the Company:
- 2003 - dividend of $164 million, $0.33 per LNM Holdings share
(which, when recalculated based on the total number of Mittal
Steel shares in the consolidated balance sheet of Mittal
Steel, works out to $0.25 per Mittal Steel share);
- 2004 - dividend of $2,386 million, or $4.77 per LNM Holdings
share, (which, when recalculated based on the total number of
Mittal Steel shares in the consolidated balance sheet of
Mittal Steel, works out to $3.71 per Mittal Steel share).
The above LNM Holdings dividends were paid (and, to the extent
remaining unpaid as of the date of this Annual Report, will be paid) only to the
sole shareholder of LNM Holdings prior to its acquisition by the Company.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Our business, financial condition or results of operations could be
materially adversely affected by any of the risks and uncertainties described
below. Additional risks not presently known to us, or that we currently deem
immaterial, may also impair our business operations.
MITTAL STEEL HAS EXPERIENCED RAPID GROWTH THROUGH SUCCESSFUL ACQUISITIONS IN A
RELATIVELY SHORT PERIOD OF TIME. MITTAL STEEL MAY NOT HAVE THE MANAGEMENT
RESOURCES OR SUFFICIENT LEVELS OF INVESTMENT TO CONTINUE TO MEET ITS STRATEGIC
OBJECTIVES.
Mittal Steel has experienced rapid growth and development through
successful acquisitions in a relatively short period of time and may continue to
pursue acquisitions in order to meet its strategic objectives. Such growth
entails significant investment, as well as increased operating costs. Overall
growth in Mittal Steel's business also requires greater allocation of management
resources from daily operations. In addition, the management of such growth
(including management of multiple operating assets) will require, among other
things, the continued development of Mittal Steel's financial and information
management control systems, the
8
ability to integrate newly acquired assets with existing operations, the ability
to attract and retain sufficient numbers of qualified management and other
personnel, the continued training and supervision of such personnel and the
ability to manage the risks and liabilities associated with the acquired
businesses. Failure to manage such growth, while at the same time maintaining
adequate focus on the existing assets of Mittal Steel, could have a material
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects. In addition, although Mittal Steel has grown through
successful acquisitions in the past, no assurance can be given that it will be
able to identify, acquire and successfully integrate additional companies in the
future.
BENEFITS OF THE RECENTLY COMPLETED ACQUISITION OF LNM HOLDINGS AND THE PROPOSED
MERGER WITH ISG MAY NOT BE REALIZED.
Assuming Mittal Steel completes the proposed merger with ISG, and
taking into account the recent completion of the acquisition of LNM Holdings,
Mittal Steel will be integrating three companies that have previously operated
independently. Integrating Ispat International's operations and personnel with
those of ISG and LNM Holdings will be a complex process. Mittal Steel may not be
able to integrate the operations of ISG and LNM Holdings with Ispat
International's operations rapidly or without encountering difficulties. The
successful integration of Ispat International with ISG and LNM Holdings will
require, among other things, integration of ISG's, LNM Holdings' and Ispat
International's products, sales and marketing operations, information and
software systems, coordination of employee retention, hiring and training
operations and coordination of future research and development efforts. The
diversion of the attention of the combined company's management to the
integration effort and any difficulties encountered in combining operations
could adversely affect the combined company's businesses. Further, the process
of combining Ispat International, ISG and LNM Holdings could negatively impact
employee morale and the ability of Mittal Steel to retain some of Ispat
International's, ISG's and LNM Holdings' key personnel after the acquisition of
LNM Holdings and the merger with ISG.
STEEL COMPANIES ARE SUSCEPTIBLE TO CHANGES IN GOVERNMENTAL POLICIES AND
INTERNATIONAL ECONOMIC CONDITIONS.
Governmental, political and economic developments relating to
inflation, interest rates, taxation, currency fluctuations, social or political
instability, diplomatic relations, international conflicts and other factors may
adversely affect the business, financial condition, results of operations or
prospects of international steel companies. Mittal Steel has not, and currently
does not intend to obtain, political risk insurance in any country in which it
conducts its business.
MITTAL STEEL RELIES ON ECONOMIC GROWTH IN THE COUNTRIES IN WHICH ITS OPERATING
SUBSIDIARIES OPERATE, WHICH MAY NOT CONTINUE. A SLOWDOWN IN ECONOMIC GROWTH IN
SUCH COUNTRIES MAY HAVE A MATERIAL ADVERSE EFFECT ON MITTAL STEEL'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
Mittal Steel's business strategy was developed partly on the
assumptions that economic growth in the countries in which it operates and the
modernization, restructuring and upgrading of the physical infrastructure in
such countries will continue, thus creating an increased demand for its steel
products and maintaining a stable level of steel prices in such countries and in
other key product markets. While the demand in these countries for steel and
steel products has gradually increased, there is no assurance that this trend
will continue. Any slowdown in the development of these economies or any
reduction in the investment budgets of governmental agencies and companies
responsible for the modernization of such physical infrastructure may have a
material adverse effect on Mittal Steel's business, financial condition, results
of operations or prospects.
MITTAL STEEL IS SUBJECT TO POLITICAL AND SOCIAL UNCERTAINTIES IN SOME OF THE
DEVELOPING COUNTRIES IN WHICH IT OPERATES. ANY DISRUPTION OR VOLATILITY IN THE
POLITICAL OR SOCIAL ENVIRONMENT IN THOSE COUNTRIES MAY HAVE A MATERIAL ADVERSE
EFFECT ON MITTAL STEEL'S BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR
PROSPECTS.
Mittal Steel operates in a number of developing countries.
Approximately 71% of the sales of Mittal Steel for the year ended December 31,
2004 originated in developing countries. Some of the developing countries in
which Mittal Steel operates have been undergoing substantial political
transformations, from centrally controlled command economies to pluralist
market-oriented democracies. There can be no assurance that the political and
economic reforms necessary to complete such a transformation will continue. In
addition, ethnic, religious, historical and other divisions have, on occasion,
given rise to tensions and, in certain cases, military conflict. The political
systems in these countries may be vulnerable to the populations' dissatisfaction
with reforms, social and ethnic unrest and changes in governmental policies, any
of which could have a material
9
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects and its ability to continue to do business in these
countries.
MITTAL STEEL IS SUBJECT TO ECONOMIC RISKS AND UNCERTAINTIES IN THE COUNTRIES IN
WHICH IT OPERATES. ANY DETERIORATION OR DISRUPTION OF THE ECONOMIC ENVIRONMENT
IN THOSE COUNTRIES MAY HAVE A MATERIAL ADVERSE EFFECT ON MITTAL STEEL'S
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
Over the past few years, many of the countries in which Mittal Steel
operates have experienced economic growth and improved economic stability in
certain sectors. However, there can be no assurance that economic growth will
continue in the future, and the legal systems in these countries, in particular
with respect to bankruptcy proceedings, remains underdeveloped. Although
economic conditions have improved in the last two and a half years, the prospect
of widespread bankruptcy, mass unemployment and the deterioration of certain
sectors of these economies still exists. No assurance can be given that reform
policies will continue to be implemented and, if implemented, will be
successful, or that these countries will remain receptive to foreign trade and
investment, or that their economies will improve.
MITTAL STEEL HAS MADE SIGNIFICANT CAPITAL EXPENDITURE COMMITMENTS AND OTHER
COMMITMENTS IN CONNECTION WITH CERTAIN ACQUISITIONS.
In connection with the acquisition of certain of its operating
subsidiaries, Mittal Steel has made significant capital expenditure commitments
and other commitments with various governmental bodies over the next few years.
Mittal Steel expects to fund such capital expenditure commitments and other
commitments primarily through internal sources, but there can be no assurance
that Mittal Steel will be able to generate or obtain sufficient funds to meet
these requirements in the future or to complete these projects on a timely basis
or at all. In addition, completion of these projects may be affected by factors
that are beyond the control of Mittal Steel. See "Item 5 -- Operating and
Financial Review and Prospects - Liquidity and Capital Resources -- Tabular
Disclosure of Contractual Obligations" and Note 18 to the Mittal Steel's
Consolidated Financial Statements.
Mittal Steel has also made certain commitments relating to employees at
certain of its operating subsidiaries. In many of these jurisdictions, it has
agreed, in connection with the acquisition of interests in these subsidiaries
that it will not make collective dismissals for certain periods. These periods
generally extend up to 10 years following the date of acquisition. The inability
to make such dismissals may affect the ability of Mittal Steel to coordinate its
workforce in response to changing market conditions and may have an effect on
its business, financial condition, results of operations or prospects.
Although Mittal Steel has remained in compliance with its obligations
under the relevant acquisition agreements, Mittal Steel may not be able to
remain in compliance with some or all of these requirements in the future.
Failure to remain in compliance may result in forfeiture of part of Mittal
Steel's investment and/or the loss of certain tax and regulatory benefits and
may therefore have an adverse effect on its business, financial condition,
results of operations or prospects.
PENSION PLAN UNDER-FUNDING AT SOME OF MITTAL STEEL'S OPERATING SUBSIDIARIES AND
THE NEED TO MAKE SUBSTANTIAL CASH CONTRIBUTIONS TO PENSION PLANS, WHICH MAY
INCREASE IN THE FUTURE, MAY REDUCE THE CASH AVAILABLE FOR ITS BUSINESS.
Mittal Steel's principal operating subsidiaries in Canada, France,
Germany, Trinidad, the United States, South Africa and Kazakhstan provide
defined benefit pension plans to their employees. Some of these plans are
currently under-funded, in particular the pension plan of Inland, Mittal Steel's
U.S. operating subsidiary. At December 31, 2004, the value of Inland's pension
plan assets was $1,923 million, while the projected benefit obligation was
$2,667 million, resulting in a deficit of $744 million. A large part of Mittal
Steel's pension liabilities and funding requirements are at its U.S. operating
subsidiary. See Note 14 to the Mittal Steel's Consolidated Financial Statements.
The funded status of Inland's pension plan has been adversely affected
in the last few years by a number of factors including low interest rates, which
have impacted investment returns and discount rate assumptions and weak equity
market performance. This also has had an impact on required future cash funding
requirements. In addition to its agreement with the Pension Benefit Guaranty
Corporation, or the PBGC, Mittal Steel is also required to make significant cash
contributions pursuant to Title I of the Employee Retirement Income Security Act
of 1974, as amended, or ERISA. Assuming modestly rising interest rates and
reasonable market returns, the total of these contribution requirements
(including the contributions required under the
10
agreement with the PBGC) could exceed $500 million over the next few years and
could be significantly higher depending on future asset performance, the levels
of interest rates used to determine ERISA minimum funding requirements,
actuarial assumptions and experience, union negotiated changes, future
government regulations and the terms of the agreement with PBGC. Total cash
contributions made to Inland's pension plan were $425 million from 1998 through
December 31, 2004. The contribution required and made in 2004 was $112 million.
Mittal Steel expects to contribute approximately $175 million to Inland's
pension plan in 2005.
Mittal Steel's funding obligations depend upon future asset
performance, the level of interest rates used to measure ERISA minimum funding
levels, actuarial assumptions and experience, union negotiated changes, future
government regulation and the terms of the agreement with PBGC. Due to the large
number of variables that determine pension funding requirements, which are
difficult to predict, as well as any legislative action, future cash funding
requirements for Mittal Steel's pension plans could be significantly higher than
amounts currently estimated. These funding requirements could have a material
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects.
THE DEPENDENCE OF CERTAIN OPERATING SUBSIDIARIES OF MITTAL STEEL ON EITHER
EXPORT OR DOMESTIC MARKETS MAY LIMIT ITS FLEXIBILITY IN MANAGING ITS BUSINESS.
Some of Mittal Steel's operating subsidiaries are primarily export
oriented, as domestic markets are not adequate to support operations, and some
of its operating subsidiaries are substantially dependent on the domestic
markets of their countries of operation. Any rise in trade barriers or trade
related actions in main export markets, or any fall in demand in the export or
domestic markets due to weak economic conditions or other reasons, may adversely
affect the operations of these subsidiaries and may limit Mittal Steel's
flexibility in managing its business. See "Item 4B - Information on the Company
-- Business Overview -- Government Regulation" and "Item 8A -- Financial
Information -- Legal Proceedings" and Note 19 to the Mittal Steel Consolidated
Financial Statements.
MITTAL STEEL MAY ENCOUNTER SUPPLY SHORTAGES AND INCREASES IN THE COST OF RAW
MATERIALS, ENERGY AND TRANSPORTATION.
Steel production requires substantial amounts of raw materials and
energy, including iron ore fines, iron ore pellets, scrap, electricity, natural
gas, coal and coke. Any prolonged interruption in the supply of raw materials or
energy, or substantial increases in their costs, could adversely affect the
business, financial condition, results of operations or prospects of steel
companies. The availability and prices of raw materials may be negatively
affected by:
*new laws or regulations;
*suppliers' allocations to other purchasers;
*interruptions in production by suppliers;
*accidents or other similar events at suppliers' premises or along the supply
chain;
*changes in exchange rates;
*consolidation in steel-related industries;
*worldwide price fluctuations and other factors; and
*availability and cost of transportation.
In addition, energy costs, including the cost of natural gas and
electricity, make up a substantial portion of the cost of goods sold by steel
companies. The price of energy has varied significantly in the past and may vary
significantly in the future largely as a result of market conditions and other
factors beyond the control of steel companies. Because the production of direct
reduced iron and steel involves the use of significant amounts of natural gas,
steel companies are sensitive to the price of natural gas.
Further, global developments, particularly the dramatic increase in the
demand for materials and inputs used in steel manufacturing from China, may
cause severe shortages and/or substantial price increases of key
11
raw materials and ocean transportation capacity. Inability to recoup such cost
increases from increases in the selling prices of steel companies' products, or
inability to cater to their customers' demands because of non-availability of
key raw materials or other inputs, may have a material adverse effect on the
business, financial condition, results of operations or prospects of steel
companies.
While Mittal Steel has been able to procure sufficient supplies of raw
materials to meet its production needs, there can be no assurance that it will
be able to procure adequate supplies in the future. In addition, a substantial
portion of Mittal Steel's raw materials are procured under contracts that are
either short-term or are subject to periodic price negotiations. Any prolonged
interruption, discontinuation or other disruption in the supply of raw materials
or energy, or substantial increases in their costs, could adversely affect the
business, financial condition, results of operations or prospects of Mittal
Steel.
MITTAL STEEL MAY FACE SIGNIFICANT PRICE AND OTHER FORMS OF COMPETITION FROM
OTHER STEEL PRODUCERS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
Generally, the markets in which steel companies conduct business are
highly competitive. Increased competition could cause Mittal Steel to lose
market share, increase expenditures or reduce pricing, any one of which could
have a material adverse effect on its business, financial condition, results of
operations or prospects. The global steel industry has historically suffered
from substantial over-capacity. Excess capacity in some of the products sold by
Mittal Steel will intensify price competition for such products. This could
require Mittal Steel to reduce the price for its products and, as a result, may
have a material adverse effect on its business, financial condition, results of
operations or prospects. Mittal Steel competes primarily on the basis of quality
and the ability to meet customers' product specifications, delivery schedules
and price. Some of the competitors of Mittal Steel may:
*benefit from greater capital resources;
*have different technologies;
*have lower raw material and energy costs; and
*have lower employee post-retirement benefit costs. See "Item 5 -- Operating and
Financial Review and Prospects".
In addition, the competitive position of Mittal Steel within the global
steel industry may be affected by, among other things:
*the recent trend toward consolidation amongst competitors in the steel
industry, particularly in Europe and the United States;
*exchange rate fluctuations that may make the products of Mittal Steel less
competitive in relation to the products of steel companies based in other
countries; and
*the development of new technologies for the production of steel and
steel-related products.
MITTAL STEEL IS SUSCEPTIBLE TO THE CYCLICALITY OF THE STEEL INDUSTRY.
The steel industry is highly cyclical and is affected significantly by
general economic conditions and other factors such as worldwide production
capacity, fluctuations in steel imports/exports and tariffs. Steel prices are
sensitive to a number of supply and demand factors. Steel markets recently have
been experiencing larger and more pronounced cyclical fluctuations. This trend,
combined with the upward pressure on costs of key inputs, mainly metallics and
energy, presents an increasing challenge for steel producers. The key drivers
for maintaining a competitive position and good financial performance in this
challenging environment are product differentiation, customer service, cost
reduction and cash management.
The volatility and the length and nature of business cycles affecting
the steel industry have become increasingly unpredictable, and the recurrence of
another major downturn in the industry may have a material adverse effect on the
business, financial condition, results of operations or prospects of steel
companies, including Mittal Steel.
12
COMPETITION FROM OTHER MATERIALS MAY HAVE A MATERIAL ADVERSE EFFECT ON MITTAL
STEEL'S BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
In many applications, steel competes with other materials, such as
aluminum (particularly in the automobile industry), cement, composites, glass,
plastic and wood. Additional substitutes for steel products could adversely
affect future market prices and demand for steel products.
THE COMPETITIVE POSITION OF MITTAL STEEL DEPENDS ON ITS SENIOR MANAGEMENT TEAM
AND THE LOSS OF ANY MEMBER FROM SUCH SENIOR MANAGEMENT TEAM COULD HAVE A
MATERIAL ADVERSE EFFECT ON MITTAL STEEL'S BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR PROSPECTS.
The ability of Mittal Steel to maintain a competitive position and to
implement its business strategy is dependent to a large degree on the services
of its senior management team and particularly Mr. Lakshmi N. Mittal, Chairman
of the board of directors and Chief Executive Officer of Mittal Steel. The loss
of or any diminution in Mr. Lakshmi N. Mittal's services or those of the members
of the senior management team of Mittal Steel or an inability to attract, retain
and maintain additional senior management personnel, could have a material
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects. Mittal Steel may not be able to retain its existing
senior management personnel or to attract additional qualified senior management
personnel in the future. Mittal Steel does not maintain key man life insurance
on any members of its senior management.
MITTAL STEEL MAY EXPERIENCE CURRENCY FLUCTUATIONS AND BECOME SUBJECT TO EXCHANGE
CONTROLS THAT COULD ADVERSELY AFFECT ITS BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR PROSPECTS.
Mittal Steel operates and sells products in a number of countries, and
as a result, its business, financial condition, results of operations or
prospects could be adversely affected by fluctuations in exchange rates. Major
changes in exchange rates, particularly changes in the value of the U.S. dollar
against the currencies of countries in which Mittal Steel operates, could have
an adverse effect on its business, financial condition, results of operations or
prospects.
The imposition of exchange controls or other similar restrictions on
currency convertibility in the countries in which Mittal Steel operates could
adversely affect its business, financial condition, results of operations or
prospects. For example, some operations involving the South African rand and the
Kazakh tenge are subject to limitations imposed by the South African Reserve
Bank and National Bank of Kazakhstan, respectively. These restrictions have not
historically had a material adverse effect on the business, financial condition,
results of operations or prospects of Mittal Steel South Africa or Mittal Steel
Temirtau, respectively. However, in the future these or other restrictions could
have a material adverse effect on Mittal Steel's business, financial condition,
results of operations or prospects.
MITTAL STEEL COULD EXPERIENCE LABOR DISPUTES THAT COULD DISRUPT OPERATIONS.
A substantial majority of the employees of Mittal Steel are represented
by labor unions and are covered by collective bargaining or similar agreements,
which are subject to periodic renegotiation. Strikes or work stoppages could
occur prior to, or during the negotiations leading to new collective bargaining
agreements, during wage and benefits negotiations or, occasionally, during other
periods for other reasons. See "Item 8A -- Financial Information -- Legal
Proceedings" and Notes 18 and 19 to the Mittal Steel Consolidated Financial
Statements.
Any such breakdown leading to work stoppage and disruption of
operations could have an adverse effect on the operations and financial results
of Mittal Steel. Additionally, many of the contractors working at Mittal Steel's
operating subsidiaries' plants employ workers who are represented by various
trade unions. Disruptions with these contractors could also have a material
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects.
EQUIPMENT DOWNTIME OR SHUTDOWNS COULD ADVERSELY AFFECT MITTAL STEEL'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
Steel manufacturing processes are dependent on critical steel-making
equipment, such as furnaces, continuous casters, rolling mills and electrical
equipment (such as transformers), and these equipments may incur downtime as a
result of unanticipated failures or other events, such as fires or furnace
breakdowns. Mittal
13
Steel's manufacturing plants have experienced, and may in the future experience,
plant shutdowns or periods of reduced production as a result of such equipment
failures or other events. Such disruptions could have an adverse effect on
Mittal Steel's operations, customer service levels and financial results.
THE INCOME TAX LIABILITY OF MITTAL STEEL MAY SUBSTANTIALLY INCREASE IF THE TAX
LAWS AND REGULATIONS IN COUNTRIES IN WHICH IT OPERATES CHANGE OR BECOME SUBJECT
TO VARYING INTERPRETATIONS OR INCONSISTENT ENFORCEMENT OR IF THE OPERATING
SUBSIDIARIES OF MITTAL STEEL ARE UNABLE TO UTILIZE CERTAIN TAX BENEFITS.
Taxes payable by companies in many of the countries in which Mittal
Steel operates are substantial and include value-added tax, excise duties,
profit taxes, payroll-related taxes, property taxes and other taxes.
Tax laws and regulations in some of the countries in which Mittal Steel
operates may be subject to frequent change, varying interpretation and
inconsistent enforcement. Ineffective tax collection systems and continuing
budget requirements may increase the likelihood of the imposition of arbitrary
or onerous taxes and penalties in the future, which could have a material
adverse effect on Mittal Steel's business, financial condition, results of
operations or prospects. In addition to the usual tax burden imposed on
taxpayers, these conditions create uncertainty as to the tax implications of
some business decisions. This uncertainty could expose Mittal Steel to
significant fines and penalties and to enforcement measures despite its best
efforts at compliance, and could result in a greater than expected tax burden.
See "Item 4B -- Information on the Company -- Business Overview -- Government
Regulation" and "Item 8A -- Financial Information -- Legal Proceedings" and Note
15 to the Mittal Steel Consolidated Financial Statements.
In addition, many of the jurisdictions in which Mittal Steel operates
have adopted transfer pricing legislation. While Mittal Steel believes that its
operations are conducted in compliance with applicable transfer pricing
legislation, if tax authorities impose significant additional tax liabilities as
a result of transfer pricing adjustments, it could have a material adverse
effect on Mittal Steel's business, financial condition, results of operations or
prospects.
Mittal Steel's operating subsidiaries receive certain tax benefits
(such as tax loss carryforwards), which result in temporary reductions or
limitations on the total tax liability of the relevant operating subsidiary. The
loss of these benefits on their scheduled expiration or as a result of a failure
to comply with conditions imposed in connection with the acquisition of the
relevant operating subsidiary may cause a corresponding increase in the tax
liability associated with these operations.
It is possible that taxing authorities in the countries in which Mittal
Steel operates will introduce additional revenue raising measures. Although it
is unclear how these provisions would operate, the introduction of any such
provisions may affect the overall tax efficiency of Mittal Steel and may result
in significant additional taxes becoming payable. Although Mittal Steel will
undertake to minimize such exposures, it cannot offer any assurance that
additional tax exposure will not arise or that any such additional tax exposure
will not have a material adverse effect on its business, financial condition,
results of operations or prospects.
Mittal Steel may face a significant increase in its income taxes if tax
rates and tax laws and regulations in the jurisdictions and treaties between
jurisdictions in which it operates increase and/or are modified by regulatory
authorities in an adverse manner. This may adversely affect Mittal Steel's cash
flows, liquidity and ability to pay dividends. See "Item 5 -- Operating and
Financial Review and Prospects -- Review of Operating Results -- Year Ended
December 31, 2004 Compared to Year Ended December 31, 2003 -- Income Tax."
MITTAL STEEL MAY BE UNABLE TO FULLY UTILIZE ITS DEFERRED TAX ASSET.
At December 31, 2004, Mittal Steel had $1,161 million recorded as a
deferred tax asset on its balance sheet. This asset can only be utilized if, and
to the extent that, Mittal Steel's operating subsidiaries generate adequate
levels of taxable income in future periods to set off the tax loss carryforwards
and reverse the temporary differences before they expire. Mittal Steel's ability
to generate taxable income is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond its
control. Consequently, Mittal Steel cannot assure you that it will generate
sufficient taxable income to realize its deferred tax asset. If Mittal Steel
generates lower taxable income than the amount it has assumed in determining the
deferred tax asset, then a valuation reserve will be required, with a
corresponding charge against income.
STEEL COMPANIES ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATIONS, AND MITTAL
STEEL MAY BE REQUIRED TO SPEND CONSIDERABLE AMOUNTS OF MONEY IN ORDER TO COMPLY
WITH SUCH REGULATIONS.
14
Steel companies have spent, and can be expected to spend in the future,
substantial amounts to comply with environmental laws and regulations, which,
over time, have become more stringent. The operations of steel companies are
subject to strict environmental laws and regulations in each of the
jurisdictions in which they operate. These laws and regulations govern,
generally, air and water pollution, the management and disposal of hazardous
substances and the remediation of contamination. These requirements, or
enforcement of these requirements, may become even more stringent in the future.
Failure to comply could result in the assessment of civil and criminal
penalties, the suspension of operations and lawsuits by private parties.
In addition, EU Directives as well as any new or additional
environmental compliance requirements that may arise out of the implementation
by different countries of the Kyoto Protocol (United Nations Framework on
Climate Change, 1992) may impose new and/or additional rules or more stringent
environmental norms that steel companies may have to comply with. Such
requirements may require additional capital expenditures or modifications in
operating practices, particularly at steel companies operating in countries that
have recently joined the European Union or are scheduled to join the European
Union in the near future. If any of these new rules, regulations, norms or
allocations contain major changes or are introduced very rapidly, there could be
a material adverse effect on Mittal Steel's business, financial condition,
results of operations or prospects. See "Item 4B -- Information on the Company
-- Business Overview -- Government Regulation".
Inland is involved in various environmental and other administrative or
judicial actions initiated by governmental agencies. In 1990, Inland was a party
to a lawsuit filed by the U.S. Environmental Protection Agency, or the EPA,
under the Resource Conservation and Recovery Act. In 1993, Inland entered into a
consent decree, or the EPA Consent Decree, which, among other things, requires
the investigation and remediation of the Indiana Harbor Works. Corrective
actions relating to the EPA Consent Decree may require significant expenditures
over the next several years. At December 31, 2004 and December 31, 2003,
Inland's reserves for environmental liabilities totaled $37 million and
$37million, respectively, $22 million and $22 million of which is related to the
sediment remediation under the EPA Consent Decree. See "Item 4B -- Information
on the Company -- Business Overview -- Government Regulation", "Item 8A --
Financial Information -- Legal Proceedings," and Notes 18 and 19 to the Mittal
Steel Consolidated Financial Statements.
In addition, Mittal Steel has agreed to make certain capital
expenditures related to environmental matters in connection with its acquisition
of certain of its operating subsidiaries. See "Item 4B -- Information on the
Company -- Business Overview -- Government Regulation", "Item 8A -- Financial
Information -- Legal Proceedings" and Note 18 to the Mittal Steel Consolidated
Financial Statements.
FUTURE SALES OF MITTAL STEEL'S COMMON SHARES MAY AFFECT THE MARKET PRICE OF ITS
SHARES.
Sales, or the possibility of sales, of substantial numbers of Mittal
Steel's common shares in the public markets, including in The Netherlands and
the United States, could have an adverse affect on the market price of its
common shares. Any subsequent offering of the common shares of Mittal Steel may
have rights, preferences or privileges senior to those of the common shares of
Mittal Steel currently outstanding.
NATURAL DISASTERS COULD SIGNIFICANTLY DAMAGE MITTAL STEEL'S PRODUCTION
FACILITIES.
Natural disasters could significantly damage Mittal Steel's production
facilities and general infrastructure. In particular, Mittal Steel Lazaro
Cardenas's production facilities are located in Lazaro Cardenas, Michoacan,
Mexico and Mittal Steel Temirtau is located in the Karaganda region of the
Republic of Kazakhstan, both of which are areas that have historically
experienced earthquakes of varying magnitude. Extensive damage to either
facility, or any other major production complexes, whether as a result of an
earthquake or other natural disaster, could have a material adverse effect on
Mittal Steel's business, financial condition, results of operations or
prospects.
MITTAL STEEL'S INSURANCE POLICIES PROVIDE LIMITED COVERAGE, POTENTIALLY LEAVING
IT UNINSURED AGAINST SOME BUSINESS RISKS.
The occurrence of an event that is uninsurable or not fully insured
could have a material adverse effect on Mittal Steel's business, financial
condition, results of operations or prospects. Mittal Steel maintains
comprehensive insurance on all property and equipment in amounts believed to be
consistent with industry practices but it may not be fully insured against some
business risks. Mittal Steel's insurance policies cover physical loss or damage
to its property and equipment on a reinstatement basis arising from a number of
15
specified risks and certain consequential losses, including business
interruption arising from the occurrence of an insured event under the policies.
Under these policies, damages and losses caused by certain natural disasters,
such as earthquakes, floods and windstorms, are also covered. Each of the
operating subsidiaries of Mittal Steel also maintains various other types of
insurance, such as workmen's compensation insurance and marine insurance.
Notwithstanding the insurance coverage that Mittal Steel and its subsidiaries
carry, the occurrence of an accident that causes losses in excess of limits
specified under the policy, or losses arising from events not covered by their
insurance policies, could have a material adverse effect on Mittal Steel's
business, financial condition, results of operations or prospects.
PRODUCT LIABILITY CLAIMS COULD ADVERSELY AFFECT MITTAL STEEL'S OPERATIONS.
Mittal Steel sells products to major manufacturers who are engaged to
sell a wide range of end products. Furthermore, Mittal Steel's products are also
sold to, and used in, certain safety-critical applications. If Mittal Steel were
to sell steel that is inconsistent with the specifications of the order or the
requirements of the application, significant disruptions to the customer's
production lines could result. There could also be significant consequential
damages resulting from the use of such products. Mittal Steel has a limited
amount of product liability insurance coverage and a major claim for damages
related to products sold could have a material adverse effect on its business,
financial condition, results of operations or prospects.
INTERNATIONAL TRADE ACTIONS OR REGULATIONS AND TRADE-RELATED LEGAL PROCEEDINGS
MAY ADVERSELY AFFECT SALES, REVENUES AND BUSINESS IN GENERAL OF STEEL COMPANIES.
Mittal Steel is an international operation with sales spanning many
countries, and therefore, its businesses have significant exposure to the
effects of trade actions and barriers. In the past, various countries, including
the United States, have instituted, or are contemplating the institution of,
trade actions and barriers.
Mittal Steel cannot predict the timing and nature of similar or other
trade actions by the United States or any other country. Because of the
international nature of Mittal Steel's operations it may be affected by any
trade actions or restrictions introduced by any country in which it sells, or
has the potential to sell, its products. Any such trade actions could adversely
affect Mittal Steel's profit margins and, as a result, its business, financial
condition, results of operations or prospects and, depending on the timing,
nature and jurisdiction of such actions, such adverse effects could be material.
In addition to the more general trade barriers described above, if any
steel company were party to a regulatory or trade-related legal proceeding that
was decided adversely to such company, or an operating subsidiary thereof, it
could adversely affect the business, financial condition, results of operations
or prospects of such company.
See "Item 4B -- Information on the Company -- Business Overview --
Government Regulations".
SIGNIFICANT EXPENDITURES AND SENIOR MANAGEMENT TIME MAY BE REQUIRED WITH RESPECT
TO MITTAL STEEL'S INTERNAL CONTROLS TO ENSURE COMPLIANCE WITH THE REQUIREMENTS
OF SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002 WHEN THE REGULATIONS OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION, OR THE SEC, THEREUNDER COME FULLY INTO
EFFECT.
Section 404 of the Sarbanes-Oxley Act and the regulations of the SEC
thereunder, upon becoming effective, will require senior executive and senior
financial officers of Mittal Steel to assess on a regular basis the internal
controls for financial reporting, evaluate the effectiveness of such internal
controls and disclose any material weaknesses in such internal controls. Mittal
Steel's external auditors will also be required to provide an attestation of
management's evaluation. In the event that Mittal Steel senior management or
independent auditors determine that Mittal Steel's internal controls over
financial reporting are not effective as defined under Section 404, investor
perceptions of Mittal Steel may be adversely affected and could cause a decline
in the market price of Mittal Steel stock. The rules regarding management's
report on internal controls and attestation will apply to Mittal Steel from the
fiscal year ending December 31, 2006.
The provisions of Section 404 of the Sarbanes-Oxley Act may also apply
to entities acquired by Mittal Steel in the future, some of which may have
material control weaknesses. For example, ISG has disclosed in its annual filing
on Form-10K for the year ended December 31, 2004 that it had identified three
material weaknesses in its internal control over financial reporting, including
deficiencies in its policies and procedures relating to the accumulation of
certain cost information, computer systems security and fraud risk prevention.
16
THERE IS NO GUARANTEE THAT THE CONDITIONS TO THE PROPOSED MERGER WITH ISG WILL
BE SATISFIED AND THAT THE MERGER WILL BE COMPLETED.
Mittal Steel's proposed merger with ISG is subject to a number of
conditions primarily the approval by the requisite majority of shareholders of
Mittal Steel and ISG. As a general matter, if the conditions to the merger are
not satisfied or, if permissible, waived on or before April 30, 2005, Mittal
Steel or ISG may terminate the merger agreement, in which case the merger will
not be completed. If the merger is not completed, the anticipated benefits of
the merger will not be realized and could impact the stock price of Mittal
Steel's class A common shares.
MITTAL STEEL'S CONTROLLING SHAREHOLDER CAN APPOINT ITS DIRECTORS AND DETERMINE
THE OUTCOME OF SHAREHOLDER VOTES.
Mr. Lakshmi N. Mittal and his wife, Mrs. Usha Mittal, who together are
Mittal Steel's controlling shareholder, have the power to elect the majority of
the members of the Mittal Steel board of directors, and to exercise voting
control over the decisions adopted at the Mittal Steel general meetings of
shareholders, including matters involving mergers or other business
combinations, the acquisition or disposition of assets, issuances of equity and
the incurrence of indebtedness. In particular, the controlling shareholder has
the ability to prevent or cause a change in control of Mittal Steel.
Circumstances may occur in which the interests of Mittal Steel's controlling
shareholder could be in conflict with the interests of other shareholders. In
addition, Mittal Steel's controlling shareholder may pursue certain transactions
that in its view will enhance its equity investment, even though such
transactions may not be in the interest of other shareholders.
MITTAL STEEL'S DEBT LEVEL MAY LIMIT ITS FLEXIBILITY IN MANAGING ITS BUSINESS.
At December 31, 2004, Mittal Steel had outstanding $3,630 million in
aggregate principal amount of debt consisting of $341 million of short-term
indebtedness (including current portion of long-term debt), $1,639 million of
long-term indebtedness and $1,650 dividend payable. A portion of Mittal Steel's
working capital financing consists of uncommitted lines of credit, which may be
cancelled by the lenders in certain circumstances. In addition, on January 25,
2005, Mittal Steel announced that it had arranged commitments, subject to
customary conditions, from a group of arrangers for a $3.2 billion unsecured
revolving credit facility, the proceeds from which it expects to utilize to
finance part of the cash portion of the proposed merger with ISG, to refinance
existing indebtedness and for general corporate purposes. The level of debt
outstanding could have important adverse consequences to Mittal Steel, including
impairing its ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or other
purposes, and limiting its flexibility to adjust to changing market conditions
or withstand competitive pressures, resulting in greater vulnerability to a
downturn in general economic conditions.
MITTAL STEEL HAS GUARANTEED ITS SUBSIDIARIES' DEBT, WHICH MAY LIMIT ITS
FLEXIBILITY IN MANAGING ITS BUSINESS.
Mittal Steel has provided guarantees for some of the debt and credit
lines of its operating subsidiaries. Out of the total debt of $3,630 million at
December 31, 2004 of the operating subsidiaries of Mittal Steel, approximately
31%, or $1,136 million, was guaranteed by Mittal Steel. Some of these guarantees
have provisions whereby a default by one operating subsidiary could, under
certain circumstances, lead to defaults at other operating subsidiaries.
Any possible invocation of any of these guarantees could cause some or
all of the other guaranteed debt to accelerate, creating severe liquidity
pressures. Further, it may also limit Mittal Steel's ability to raise additional
financing and may limit its flexibility in managing its business.
CREDIT RATING DOWNGRADES OR SIMILAR EVENTS MAY AFFECT MITTAL STEEL'S FLEXIBILITY
IN MANAGING ITS BUSINESS.
Although Mittal Steel currently enjoys an investment grade credit
rating, it has been in the past subject of credit rating downgrades during
periods of cyclical downturns in the steel industry. For example, during the
course of 2002 as a result of developments relating to the restructuring of the
debt at Mittal Steel Lazaro Cardenas, certain of the credit ratings of Mittal
Steel and its subsidiaries were downgraded. Although Mittal Steel does not have
negative rating triggers in its debt agreements, any decline in its credit
rating will increase Mittal Steel's cost of borrowing. Any of these actions may
adversely affect its business, financial condition, results of operations or
prospects.
17
MITTAL STEEL MAY ENCOUNTER DIFFICULTIES IN ENFORCING COURT JUDGMENTS OR ARBITRAL
AWARDS IN CERTAIN COUNTRIES IN WHICH IT OPERATES.
Some of the countries in which Mittal Steel operates are not parties to
multilateral or bilateral treaties with western jurisdictions for the mutual
enforcement of court judgments. Consequently, should a judgment be obtained from
a court in any such jurisdictions it is unlikely to be given direct effect in
the courts of these countries. However, all of the countries in which Mittal
Steel's operating subsidiaries are located are parties to the 1958 New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Accordingly, most of the agreements to which Mittal Steel's operating
subsidiaries in such jurisdictions are party contain provisions allowing for
arbitration of disputes. A foreign arbitral award obtained in a state that is
party to the 1958 convention should be recognized and enforced by a court in a
signatory country (subject to the qualifications provided for in the convention
and requirements established by relevant legislation and judicial practice).
Reliance upon international treaties may meet with resistance or a lack of
understanding on the part of the applicable court or other officials, thereby
introducing delay and unpredictability into the process of enforcing any foreign
judgment or any foreign arbitral award in these countries.
BECAUSE MITTAL STEEL IS A HOLDING COMPANY WITH NO REVENUE-GENERATING OPERATIONS,
IT DEPENDS ON EARNINGS AND CASH FLOWS OF OPERATING SUBSIDIARIES, WHICH MAY NOT
BE SUFFICIENT TO MEET FUTURE NEEDS.
Because Mittal Steel is a holding company with no business operations
of its own, it is dependent upon the earnings and cash flows of, and dividends
and distributions from, operating subsidiaries to pay expenses, meet its debt
service obligations, including under its credit facilites, and pay any cash
dividends or distributions on its common shares. Some of these operating
subsidiaries have debt outstanding or are subject to acquisition agreements that
impose restrictions or prohibitions on such operating subsidiaries' ability to
pay dividends.
Since Mittal Steel is incorporated under the laws of The Netherlands it
can only pay dividends and other distributions to the extent it receives
dividends and other distributions from its operating subsidiaries, recognizes
gains from the sale of assets or records share premium as a result of the
issuance of common shares. See Notes 9 and 11 to the Mittal Steel Consolidated
Financial Statements.
18
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
MITTAL STEEL OVERVIEW
Mittal Steel Company N.V. is a public limited liability company that
was incorporated on May 27, 1997 under the laws of The Netherlands under the
name "Ispat International N.V". Mittal Steel completed its initial public
offering of its class A common shares in August 1997. On December 17, 2004,
Ispat International changed its name to "Mittal Steel Company N.V."
The registered offices of Mittal Steel are located at 15th Floor,
Hofplein 20, 3032 AC Rotterdam, The Netherlands. The telephone number of the
registered offices is +31 10 217 8800. Mittal Steel is registered at the
Commercial Register in Rotterdam under number 24275428.
Mittal Steel is one of the world's largest steel producers(1), with
steel-making operations in Algeria, Bosnia, Canada, Czech Republic, France,
Germany, Kazakhstan, Mexico, Poland, Romania, South Africa, Trinidad and Tobago,
and the United States. In addition it also has steel-rolling facilities in
Luxembourg and Macedonia. Mittal Steel's operating philosophy embraces
mini-mill, integrated mini-mill and blast furnace processes for steel-making.
Mittal Steel's steel shipments have increased from 1.5 million tons in 1992 to
42.1 million tons in 2004. In 2004, its consolidated sales, operating income and
net income were $22,197 million, $6,146 million and $4,701 million,
respectively. Mittal Steel has grown through a series of acquisitions and by
improving the operating performance of each acquired facility, through focused
capital expenditure programs and implementation of improved management
practices, resulting in increases in production and shipment of steel products,
reduction in cash costs of production and increases in productivity. Mittal
Steel's aggregate capital expenditures were approximately $898 million, $421
million and $265 million during 2004, 2003 and 2002, respectively.
Mittal Steel is a holding company with no business operations of its
own. All of its significant subsidiaries are wholly or majority owned, directly
or indirectly through intermediate holding companies. Since 1992, Mittal Steel
has acquired numerous steel-making assets, which currently constitute its major
operating subsidiaries. Some of the recent acquisitions/investments are
described below:
*In October 2001, Mittal Steel acquired a 70% interest in Mittal Steel Annaba.
Mittal Steel Annaba, located in Algeria, is one of the largest steel producers
in Northern Africa.
*In October 2001, Mittal Steel acquired a 70% interest in Mittal Steel Tebessa.
Mittal Steel Tebessa, located in Algeria, owns iron ore mines.
*In November 2001, Mittal Steel acquired a 91.6% interest, which increased to
99.4% in September 2003, in Mittal Steel Galati. Mittal Steel Galati, located
in Romania, is one of the largest single site steel producers in Central and
Eastern Europe.
*In November 2001, Mittal Steel concluded a Business Assistance Agreement with
Mittal Steel South Africa, pursuant to which it agreed to provide Mittal Steel
South Africa with business, technical, purchasing and marketing assistance for a
three-year period and also undertook to acquire a strategic shareholding in
Mittal Steel South Africa by March 2003. In 2001, Mittal Steel acquired an 8.3%
interest, which increased to over 50% during 2004, in Mittal Steel South Africa.
Mittal Steel South Africa, located in South Africa, is the largest steel
producer in Africa.
*In January 2003, Mittal Steel acquired a 69.7% interest, which increased to
approximately 75.7% (the Company also has an option, subject to certain
restrictions, for the purchase of an additional 8.6%), in Mittal Steel Ostrava.
Mittal Steel Ostrava is the largest steel producer in the Czech Republic.
*In July 2003, Mittal Steel acquired a 70.8% interest in Mittal Steel Iasi.
Mittal Steel Iasi, located in Romania, is a downstream steel products
manufacturer.
*In December 2003, Mittal Steel acquired a 69.8% interest in Mittal Steel Roman.
Mittal Steel Roman, located
----------
1 Source: International Iron and Steel Institute Report, "World Steel in Figures
2004."
19
in Romania, is a downstream steel products manufacturer.
*In January 2004, Mittal Steel announced that it had reached an agreement with
the administration of the Yingkou Economic and Technical Development Zone to
establish a cold-rolling and coating plant in Yingkou, Liaoning Province,
People's Republic of China. The facility, when completed, will have an annual
production capacity of approximately 440,000 tons of cold-rolled and coated
steel.
*In March 2004, Mittal Steel acquired a 69% interest in Mittal Steel Poland,
which increased to 72.4%, and a commitment to purchase a 25% interest by
December 2007. Mittal Steel Poland, located in Poland, is one of the largest
steel producers in Central and Eastern Europe.
*In April 2004, Mittal Steel acquired an 80.9% interest in Mittal Steel
Hunedoara which increased to 86.6% as a result of debt to equity swap. Mittal
Steel Hunedoara, located in Romania, is a downstream steel products
manufacturer.
*In April 2004, Mittal Steel entered into a joint venture with government of
Bosnia and Herzegovina, pursuant to which Mittal Steel acquired a 51% interest
in the RZR Ljubija iron ore mines in Bosnia and Herzegovina. These mines have
been non-operational since the early 1990s.
*In May 2004, Mittal Steel acquired a 44.5% interest, subsequently increased to
a 88.3% interest, in Mittal Steel Skopje (CRM) a.d. Mittal Steel Skopje (CRM)
a.d. is located near Skopje, Macedonia.
*In May 2004, Mittal Steel acquired a 56.8% interest, subsequently increased to
a 77.3% interest, in Mittal Steel Skopje (HRM) a.d. Mittal Steel Skopje (HRM)
a.d. is located near Skopje, Macedonia.
*In December 2004, Mittal Steel acquired a 51% interest in Mittal Steel Zenica
in Bosnia from the Government of the Federation of Bosnia and Herzogovina and
Kuwait Consulting & Investment Co. ("KCIC"). In conjunction with the acquisition
of the controlling interest in Mittal Steel Zenica, the Company irrevocably
committed to purchase the additional 49% interest in the total outstanding
capital by November 2006. Simultaneously, KCIC, which holds these shares at
December 31, 2004, has irrevocably committed to sell this 49% interest in Mittal
Steel Zenica to the Company. Because these irrevocable commitments transfer
operational and economic control of these remaining shares, it has been
accounted for as an acquisition of the remaining shares, with a liability
recorded equal to the fair value of the guaranteed payments. As of the
acquisition date, the Company's total effective ownership percentage in Mittal
Steel Zenica was 100%. The results of Mittal Steel Zenica have been included in
the Consolidated Financial Statements since December 2004.
OVERVIEW OF PROPOSED ISG MERGER
On October 24, 2004, Mittal Steel and ISG entered into a merger
agreement, whereby a wholly-owned subsidiary of Mittal Steel will be merged with
ISG. Under the terms of the agreement, ISG shareholders will receive $42 per
share, of which 50% will be paid in Mittal Steel class A common shares and 50%
will be paid in cash. ISG shareholders will be able to elect between cash and
Mittal Steel class A common shares, subject to proration such that 50% of the
total consideration will be in cash and 50% will be in Mittal Steel class A
common shares.
The merger with ISG is subject to approval by the requisite majority
of shareholders of Mittal Steel and ISG, as well as regulatory approvals and
satisfaction of other customary closing conditions. Many of the conditions have
been met, including regulatory merger approvals. The registration statement on
Form F-4 relating to the proposed merger was declared effective by the SEC on
March 11, 2005. The shareholder meetings are scheduled to be held on April 12,
2005. Mittal Steel expects the merger to be completed on or around April 15,
2005. As a general matter, if the conditions to the merger are not satisfied or,
if permissible, waived on or before April 30, 2005, Mittal Steel or ISG may
terminate the merger agreement.
Ispat International Investments, S.L. (an entity owned by the
controlling shareholder of Mittal Steel) entered into a parent shareholder
support agreement with ISG, which provides, among other things, that Ispat
International Investments, S.L. will vote all of its Mittal Steel common shares
in favor of the merger. In addition, Mr. Wilbur L. Ross, the Chairman of ISG's
board of directors, and certain of his affiliates, and Mr. Rodney B. Mott, ISG's
President and Chief Executive Officer and a member of ISG's board of directors,
also simultaneously entered into a company shareholder support agreement with
Mittal Steel, which provides, among other things, that they will each vote all
of their shares of ISG common stock in favor of the merger.
20
Following the merger, Mr. Wilbur L. Ross is expected to join Mittal
Steel's board of directors and Mr. Rodney B. Mott is expected to become the
Chief Executive Officer of Mittal Steel's combined U.S. operations.
On October 24, 2004, Mittal Steel, ISG and the United Steelworkers
of America ("USWA"), executed a letter of understanding in which the USWA agreed
to support the merger and to waive its right of first refusal to acquire ISG
under the ISG collective bargaining agreement. The parties also agreed, among
other things, that two USWA designees would join the board of directors of the
merged company; upon completion of the acquisition of LNM Holdings and the
merger with ISG, the ISG collective bargaining agreement with the USWA will be
adapted, subject to ratification, to Inland plants and the Inland employees will
be covered under the ISG collective bargaining agreement with the USWA, as
amended to include the terms agreed to pursuant to such letter of understanding
and any other adjustments regarding Inland employees negotiated by the parties
and consistent with the principles set forth under ISG's current collective
bargaining agreement; and during the term of the collective bargaining
agreement, the merged company will maintain substantially all of the current
steel-making capacity at Inland Indiana Harbor Works.
OVERVIEW OF ISG'S OPERATIONS
ISG is one of the largest integrated steel producers in North
America with annual raw steel production capability of about 23 million net
tons. ISG ships a variety of steel products from 13 major steel producing and
finishing facilities in eight states. ISG has grown by acquiring out of
bankruptcy the steel-making assets of LTV Steel Company Inc., or LTV, Acme Steel
Company, or Acme, Bethlehem Steel Corporation, or Bethlehem, Weirton Steel
Corporation, or Weirton, and Georgetown Steel Corporation, or Georgetown. ISG
operates principally in one segment of business, carbon steel, and substantially
all of its operations are in the United States. For the year ended December 31,
2004, ISG generated revenue and net income of $9,016 million and $1,027 million,
respectively. In 2004, ISG shipped 15.5 million tons of steel.
ISG's principal products include a broad range of hot-rolled,
cold-rolled and coated sheets, tin mill products, carbon and alloy plates, wire
rod, rail products and semi-finished shapes to serve the automotive,
construction, pipe and tube, appliance, container and machinery markets. For the
year ended December 31, 2004, hot-rolled, cold-rolled and coated sheets
represented approximately 41%, 19% and 21% of ISG's total products. ISG sells
its steel products directly to end-users, third-party processors and service
centers primarily located in the Midwest and along the eastern seaboard of the
United States. To service its customers, ISG has a dedicated sales force of
approximately 90 employees who are principally aligned with its business units.
In 2004, over half of ISG's sales were sold pursuant to long-term customer
contracts.
ISG's business depends on continued access to reliable supplies of
various raw materials, principally iron ore, coal, coke, scrap, energy and
industrial gases. In 2004, ISG consumed approximately 16.5 million net tons of
iron ore pellets, 4.1 million tons of iron ore fines and other iron ore
materials and 5.9 million dry net tons of coke, 4.2 million net tons of coal,
and purchased 4.0 million net tons of scrap. ISG has entered into contracts, or
has captive sources for substantially all of its 2005 iron ore supplies. ISG
also has contracted a significant portion of its 2005 coke supplies and
substantially all of its coal supplies. All of its purchased scrap supplies are
purchased on the short-term market. In addition, ISG's steel operations consume
large amounts of electricity, natural gas, oxygen and other industrial gases.
ISG purchases it electrical power requirements from various suppliers. In
addition, ISG operated cogeneration facilities on certain of its sites that
utilize waste gases from the blast furnaces to supplement its electrical power
requirements and control its energy costs. ISG purchases natural gas under
short-term supply contracts with a common group of suppliers. ISG uses financial
instruments to hedge such purchases when appropriate. Various service providers
provide transportation of natural gas to ISG's facilities. ISG has several
long-term contracts to supply its oxygen, hydrogen, argon and nitrogen gas
requirements.
PRINCIPAL OPERATING FACILITIES
ISG's steel operations consist of five integrated steel-making
plants, one basic oxygen furnace/compact strip mill, three electric arc furnace
plants and four finishing plants. ISG also owns interests in various joint
ventures that support these facilities, as well as numerous raw material,
railroad and transportation assets.
Integrated Steel-making Facilities
Burns Harbor. ISG's Burns Harbor facility is located on
approximately 3,300 acres in Indiana on Lake Michigan, about 50 miles southeast
of Chicago, Illinois. Burns Harbor is an integrated mill capable of producing
21
hot-rolled sheet, cold-rolled sheet, hot dip galvanized sheet and steel plate
for use in automotive, appliance, service center, construction, and ship
building applications. Burns Harbor's iron producing facilities include a
sintering plant, two coke oven batteries (one of which is under a capital lease
that ISG expects to purchase in 2005) and, two blast furnaces with granularized
coal injection capable of producing approximately 4.8 million net tons of hot
metal per year. The steel producing shop consists of three basic oxygen
furnaces, one degasser, two ladle treatment stations, two continuous slab
casters (an 84-inch two strand and a 76-inch two strand) capable of producing
approximately 4.7 million net tons of raw steel per year. Finishing facilities
include an 80-inch hot-strip mill, two 80-inch continuous pickling lines, an
80-inch five-stand tandem mill, batch annealing facilities, a continuous anneal
line, an 80-inch five stand temper mill, a 72-inch hot dip galvanizing line,
which is capable of producing both galvanized and galvannealed sheets, and two
plate mills (160-inch and 110-inch).
Indiana Harbor. ISG's Indiana Harbor facility is located on
approximately 1,200 acres in Indiana, 20 miles southeast of Chicago, Illinois on
Lake Michigan. Indiana Harbor is an integrated mill capable of producing
hot-rolled sheet, cold-rolled sheet, and hot dip galvanized sheet for use in
automotive, appliance, service center, tubular, strip converters, and contractor
applications. Indiana Harbor's iron producing facilities include a sintering
plant and two blast furnaces capable of producing approximately 3.6 million net
tons of hot metal per year. The steel producing shop consists of two basic
oxygen furnaces, 2 ladle metallurgy stations, a vacuum degasser and two
continuous slab casters (88-inch one strand and 80-inch one strand) capable of
producing 4.0 million net tons of raw steel per year. Finishing facilities
include an 84-inch hot-strip mill, a 76-inch pickle line, an 80-inch five-stand
tandem mill, batch annealing facilities, a two-stand temper mill, 72-inch and
60-inch hot dip galvanizing lines.
Cleveland. ISG's Cleveland facility is located on approximately
1,200 acres on opposite banks of the Cuyahoga River, near Lake Erie in
Cleveland, Ohio. Cleveland is an integrated mill capable of producing hot-rolled
sheet, cold-rolled sheet, and electro-galvanized sheet for automotive, strip
converter, service center and tubular applications. Its iron producing
facilities includes a coke oven battery located in Warren, Ohio and two blast
furnaces that are capable of producing approximately 3.1 million net tons of hot
metal per year. Cleveland has two steel producing shops. The west side shop
consists of two basic oxygen furnaces, a ladle metallurgy station and a 63-inch
two strand caster. The east side shop includes two basic oxygen furnaces, a
ladle metallurgy station, a degasser and a 73-inch two strand caster. The two
shops combined are capable of producing approximately 3.8 million net tons of
raw steel per year. Finishing facilities include an 84-inch hot strip mill, an
84-inch continuous pickling line, an 84-inch five stand tandem mill, batch
annealing facilities, an 84-inch one stand temper mill and a hot dip galvanize
line, currently under construction and scheduled to begin production in late
2005.
Sparrows Point. ISG's Sparrows Point facility is located on
approximately 3,100 acres on the Chesapeake Bay near Baltimore, Maryland.
Sparrows Point is an integrated mill capable of producing hot-rolled sheet,
cold-rolled sheet, galvanized and Galvalume(TM) sheets, and tin plate products
for use in the construction, service center, container, and export markets. The
iron producing facilities include a sintering plant, a blast furnace with
pulverized coal injection capable of producing approximately 4.0 million net
tons of hot metal per year. The steel producing shop includes two vessel basic
oxygen furnaces, two ladle metallurgy stations and two continuous slab casters
(104-inch single strand and 89-inch single strand) capable of producing 3.9
million net tons of raw steel per year. Finishing facilities include a 68-inch
hot-strip mill, a 61-inch continuous pickling line, a 67-inch continuous
pickling and five stand tandem mill, a 48-inch five strand tin tandem mill,
batch annealing facilities, and one continuous anneal line, a 67-inch one stand
temper mill, a 48-inch hot dip galvanizing line, two 48-inch galvanize /
Galvalume(TM) lines, tin mill facilities (one 48-inch two stand tin temper mill,
a 48-inch two stand double cold reducing mill, and three 38-inch electrolytic
tin plating lines). Sparrows Point's location on the Chesapeake Bay makes it the
only domestic integrated steel mill with direct ocean access and provides us
with a deep-water port and the capability to ship products and receive raw
materials by ship, thereby reducing ISG's freight costs.
Weirton. ISG's Weirton, West Virginia facility is located on
approximately 2,700 acres near the Ohio River. Weirton is an integrated mill
capable of producing hot-rolled sheet, cold-rolled sheet, galvanized,
electro-galvanized, and tin plate products for use in construction, service
center, container and tubular markets. The iron producing shop includes two
blast furnaces capable of producing approximately 2.5 million net tons of hot
metal per year. The steel producing shop includes two vessel basic oxygen
furnaces with two ladle treatment stations and two vacuum degassing facilities,
and a 48-inch four strand continuous caster capable of producing approximately
3.0 million tons of raw steel per year. Finishing facilities include a 54-inch
hot strip mill, 54-inch and 48-inch continuous picklers, two 48-inch five stand
and one 48-inch four stand tandem cold mills, batch anneal, three continuous
anneal lines, three temper mills, (48-inch one stand for sheet products, a
40-inch two
22
stand and 45-inch two stand for tin products), two double cold reducing mills,
two-48 inch and one 42-inch hot dip galvanizing lines, one 38-inch
electro-galvanizing line, four tin plate lines.
Riverdale. ISG's Riverdale, Illinois facility is located on 165
acres approximately 14 miles west of our Indiana Harbor facility. Riverdale
produces hot rolled sheet for strip converter and service center applications.
Hot metal is supplied from our Indiana Harbor and Burns Harbor blast furnaces to
Riverdale's basic oxygen furnaces. Principal facilities include a steel
producing shop with two basic oxygen furnaces, two ladle metallurgy facilities
and a 63-inch one strand continuous slab caster which uses a compact strip
process capable of producing approximately 750,000 net tons of raw steel per
year. This caster directly feeds a 62-inch wide tunnel furnace and a seven-stand
hot-strip rolling mill. The Riverdale compact strip mill incorporates the latest
casting and rolling technology designs.
Electric Arc Furnaces
Georgetown. ISG's Georgetown, South Carolina facility is located on
60 acres on Winyah Bay. Georgetown produces wire rod for use by converters and
original equipment manufacturers. Steel producing facilities consist of two
alternating current electric arc furnaces capable of producing approximately 1.0
million net tons of liquid steel per year, with two ladle metallurgy stations, a
six strand continuous billet caster capable of producing approximately 1.0
million net tons of raw steel per year. Finishing operations include a wire rod
rolling mill capable of producing 750,000 net tons of wire rod per year. At
Georgetown, ISG also has a direct reduced iron plant that is capable of
producing about 550,000 metric tons annually. Georgetown's location provides
deep water access and the capability to ship products and receive raw materials
by ship.
Trinidad and Tobago. In late 2004, ISG restarted a hot briquette
iron plant in Trinidad and Tobago capable of producing at least 300,000 metric
tons annually.
Coatesville. ISG's Coatesville facility is located in Coatesville,
Pennsylvania, about 45 miles west of Philadelphia, Pennsylvania. Coatesville is
capable of producing over 450 different chemistries including a wide range of
carbon and alloy discreet plate products (including carbon, high-strength, low
alloy, commercial alloy, military alloy, flame-cut and clad) for use in
infrastructure, chemical process facilities and shipbuilding applications. Steel
producing facilities consist of an alternating current electric arc furnace
capable of producing approximately 0.9 million tons of liquid steel per year, a
vacuum degasser, an ingot teaming facility, and an 85-inch strand slab caster
capable of producing approximately 0.8 million net tons of raw steel per year.
Finishing facilities include two plate mills (a 140-inch and a 206-inch) and
heat-treating facilities. An additional finishing facility in Piedmont, North
Carolina provides plasma arc cutting capabilities.
Steelton. ISG's Steelton facility is located in Steelton,
Pennsylvania, about 100 miles west of Philadelphia, Pennsylvania. Steelton
produces railroad rails, specialty blooms, and flat bars for use in railroad and
forging markets. Steelton's steel producing facilities consist of a direct
current electric arc furnace capable of producing approximately 1.1 million net
tons of liquid steel per year, a ladle arc reheating furnace, a vacuum degasser,
a three strand continuous bloom caster and an ingot teaming facility capable of
producing approximately 1.0 million net tons of raw steel per year. Finishing
operations include a 44-inch blooming mill, a 28-inch rail mill, in-line rail
head-hardening facilities, rail finishing and a 20-inch bar mill.
Rolling and Finishing Facilities
Hennepin. ISG's Hennepin, Illinois finishing facility is located on
861 acres on the Illinois River, about 100 miles west of Chicago, Illinois.
Hennepin produces cold rolled sheet and hot dip galvanized sheet for the
electrical, appliance, and construction markets. Hot band substrate is supplied
from our Burns Harbor and Indiana Harbor facilities. Principal operating
facilities include an 84-inch continuous pickling line, an 84 inch five strand
tandem mill, batch annealing, an 84-inch temper mill and an 84-inch hot dip
galvanizing line. Hennepin's location on the Illinois River makes it capable of
shipping and receiving by barge.
Columbus Coatings. ISG's Columbus Coatings facility is located in
Columbus, Ohio. Columbus produces hot dip galvanized sheet for the automotive
market. Our Burns Harbor facility supplies cold-rolled coils and is responsible
for marketing the finished product. The principal operating facility includes a
72-inch hot dip galvanizing line. ISG also operates a steel slitter and
warehousing facility at its Columbus facility through Columbus Processing
Company.
Conshohocken. ISG's Conshohocken facility is located in
Conshohocken, Pennsylvania, about 15 miles north of Philadelphia, Pennsylvania.
Conshohocken produces both coil and discreet plate for use in construction
23
and military applications. Slabs are provided by our Sparrows Point and
Coatesville facilities. Principal facilities consist of a 110-inch Steckel mill,
and heat facilities.
Lackawanna. ISG's Lackawanna facility is located in Lackawanna, New
York, about 5 miles south of Buffalo. Lackawanna produces cold-rolled sheet and
hot dip galvanized sheet for use in the automotive and original equipment
markets. Hot-band substrate is supplied principally from ISG's Burns Harbor and
Cleveland facilities. Principal facilities include a 75-inch continuous
pickling, a 75-inch 4-stand tandem mill, batch annealing, a temper mill, and a
72-inch galvanizing line.
RECENT DEVELOPMENTS
On March 11, 2005, Ispat Inland ULC, an indirect wholly owned
subsidiary of Mittal Steel, received the consents from the holders of a majority
of its outstanding Senior Secured Floating Rate Notes due 2010 and 9.75% Senior
Secured Notes due 2014, to amend the terms of the indenture governing the notes
to eliminate the requirement that any acquisition of a U.S. steel-making
business be made by Mittal Steel through its wholly owned subsidiary Inland or
its subsidiaries.
On February 22, 2005, Mittal Steel Ruhrort, signed an agreement,
with ThyssenKrupp Stahl AG for the purchase of between 1.3 and 1.5 million
tonnes of pig iron each year for a 20-year term commencing October 2007. This
agreement replaces an existing supply agreement between the parties under which
Mittal Steel Ruhrort agreed to purchase from ThyssenKrupp Stahl AG 1.3 million
tonnes of pig iron each year until September 2007.
On February 11, 2005, Fitch Ratings assigned a "BBB" senior
unsecured rating and a "F2" short term rating to Mittal Steel.
On February 10, 2005, Mittal Steel's board of directors approved a
dividend policy for fiscal year 2005 of $0.10 per share per quarter (as from the
second quarter of 2005), which is subject to approval by Mittal Steel's
shareholders.
On February 1, 2005, Moody's Investor Services Ltd. assigned a
"Baa3" senior implied rating to Mittal Steel and upgraded Mittal Steel's senior
unsecured issuer rating to "Ba1". In addition, Moody's Investor Services Ltd.
upgraded the senior notes of Mittal Steel Europe and Inland to "Ba1".
On January 25, 2005, Mittal Steel announced that it had arranged
commitments, subject to customary conditions, from a group of arrangers for a
$3.2 billion unsecured revolving credit facility, the proceeds from which it
expects to utilize to finance part of the cash portion of the merger with ISG,
to refinance certain existing indebtedness and for general corporate purposes.
On January 24, 2005, Standard & Poor's Ratings Services raised its
long-term corporate credit and senior secured debt ratings on Inland to "BBB-"
from "BB-". In addition, Standard & Poor's Ratings Services assigned a "BB+"
rating to Inland's senior unsecured debt.
On January 14, 2005, Mittal Steel signed a share purchase agreement
with Hunan Valin Iron & Steel Group Co., Ltd., or the Valin Group, to acquire
37.17% of the outstanding shares of Hunan Valin Steel Tube & Wire Co., Ltd., or
Valin, a listed subsidiary of the Valin Group. Under the terms of the share
purchase agreement, Mittal Steel will acquire 656,250,000 legal person shares
from the Valin Group at a price of Renminbi, or RMB, 3.96 per share, for a total
consideration of RMB 2,599 million, approximately $314 million. The
consideration is subject to adjustment based on the net asset value of Valin at
December 31, 2004. Subject to the receipt of all necessary approvals and waivers
from the regulatory authorities in the People's Republic of China, the
transaction is expected to close in the second quarter of 2005.
B. BUSINESS OVERVIEW
Mittal Steel has a high degree of both product and geographic
diversification. It produces a broad range of finished and semi-finished steel
products that include hot-rolled sheets, cold-rolled sheets, electro-galvanized
and coated steel, bars, wire-rods, wire-products, pipes, billets, blooms and
slabs. Mittal Steel's plants manufacture steel products to various
specifications, including many difficult and technically sophisticated products;
and they sell these products to customers for use in a number of high-end
applications. During 2004, Mittal Steel shipped its products to customers in
over 90 countries worldwide, with its largest markets in North
24
America and Europe. See "Item 4B -- Information on the Company -- Business
Overview -- Products". Mittal Steel conducts its business through its
subsidiaries operating in 14 countries. Most of these operations are
strategically located with access to on-site deep water port facilities, which
allow for cost-efficient import of raw materials and export of steel products.
For the year 2004, the average number of employees for Mittal Steel was
approximately 164,000 employees.
See also Note 20 to the Mittal Steel Consolidated Financial
Statements.
The following table summarizes certain financial data relating to
our operations in different geographic areas:
----------------------------------------------------------------
AMERICAS EUROPE REST OF OTHERS & CONSOLIDATED
WORLD ELIMINATIONS
----------------------------------------------------------------
(amounts in $ millions)
YEAR ENDED DECEMBER 31, 2002
Sales $3,796 $2,152 $1,483 $(351) $7,080
Operating income 141 64 476 21 702
Depreciation 162 34 70 - 266
Capital expenditures 81 54 130 - 265
Total assets at December 31, 2002 (at year end) 7,029 7,800 2,181 (9,101) 7,909
YEAR ENDED DECEMBER 31, 2003
Sales $4,072 $3,800 $2,275 $(580) $9,567
Operating income 136 317 707 139 1,299
Depreciation 165 116 84 (34) 331
Capital expenditures 142 131 222 (74) 421
Total assets at December 31, 2003 (at year end) 7,349 9,654 3,225 (10,091) 10,137
YEAR ENDED DECEMBER 31, 2004
Sales $6,560 $9,905 $7,648 $(1,916) $22,197
Operating income 1,583 1,965 2,399 199 6,146
Depreciation 185 297 212 (141) 553
Capital expenditures 130 289 560 (81) 898
Total assets at December 31, 2004 (at year end) 8,342 17,203 8,707 (15,099) 19,153
PRODUCTS
Mittal Steel has a high degree of product diversification. Its
plants produce a broad range of finished and semi-finished carbon steel products
that include hot-rolled sheets, cold-rolled sheets, plates, electro-galvanized
and coated sheets, bars, wire-rods, wire-products, pipes, billets, blooms,
slabs, tinplate, structural sections and rails. Its plants manufacture steel
products of different specifications, including many difficult and technically
sophisticated products, and they sell these products to demanding customers for
use in a number of high-end applications.
Mittal Steel's principal products include:
*direct reduced iron;
*semi-finished flat products such as slabs;
*finished flat products such as plates, hot and cold-rolled sheets and
hot-dipped and electro-galvanized sheets and tinplate;
*semi-finished long products such as blooms and billets;
25
*finished long products such as bars, wire-rods, structural sections, rails and
wire-products; and
*seamless and welded pipe and tubes.
In 2004, Mittal Steel was one of the world's largest producers of
direct reduced iron with total production of 9.7 million tonnes. Direct reduced
iron enables it to control the quality and consistency of its metallic input,
which is essential to ensure uniform high quality of the finished products.
Direct reduced iron has historically given Mittal Steel a cost advantage
compared to scrap.
The following table sets forth Mittal Steel's total production of
direct reduced iron, and its total shipments of steel products for the year
ended December 31, 2004:
---------------------------------------------------------------------
AMERICAS EUROPE REST OF TOTAL
WORLD
---------------------------------------------------------------------
Direct reduced iron production 7,596 607 1,461 9,664
(thousand tonnes)
Shipments of steel products 12,115 18,011 11,945 42,071
(thousands tons)
STEEL-MAKING PROCESS
Historically, primary steel producers have been divided into
"integrated" and "mini-mill" producers. Over the past few decades, a third type
of steel producer has emerged that combines the strengths of both the integrated
and the mini-mill processes and these producers are referred to as "integrated
mini-mill producers".
INTEGRATED STEEL-MAKING
In integrated steel production, coal is converted to coke in a coke
oven, and then combined in a blast furnace with iron ore and limestone to
produce pig iron, which is subsequently combined with scrap in a converter,
which is generally a basic oxygen or tandem furnace, to produce raw or liquid
steel. Once produced, the liquid steel is metallurgically refined and then
transported to a continuous caster for casting into a slab, which is then
further shaped or rolled into its final form. Various finishing or coating
processes may follow this casting and rolling. Recent modernization efforts by
integrated steel producers have focused on cutting costs through eliminating
unnecessary production steps, reducing manning levels through automation, and
decreasing waste generated by the process. In recent years, integrated steel
production has declined as a proportion of total steel production due to the
high costs of building, operating and maintaining integrated steel operations,
including lost production time associated with periodic blast furnace relinings.
This reduction in integrated production capacity has increased the market share
of the remaining producers of the highest value-added products that require the
cleanest steel.
MINI-MILLS
A mini-mill employs an electric arc furnace to directly melt scrap
and/or scrap substitutes such as direct reduced iron, thus entirely replacing
all of the steps up to and including the energy-intensive blast furnace. A
mini-mill incorporates the melt shop, ladle metallurgical station, casting, and
rolling into a unified continuous flow. Mini-mills are generally characterized
by lower costs of production and higher productivity than integrated steel
makers. These attributes are due in part to the lower capital costs and lower
operating costs resulting from the streamlined melting process and more
efficient plant layouts of mini-mills. The quality of steel produced by
mini-mills is primarily limited by the quality of the metallic raw materials
used in liquid steel-making, which is affected by the limited availability of
high-quality scrap or virgin ore-based metallics for use in the electric arc
furnaces. Mini-mills are substantially dependent on scrap, which in recent years
has been characterized by price volatility, generally rising prices and limited
availability from time to time.
INTEGRATED MINI-MILLS
Integrated mini-mills are mini-mills that produce their own
metallic raw materials consisting of high quality scrap substitutes, such as
direct reduced iron. Unlike most mini-mills, integrated mini-mills are able to
produce steel with the quality of an integrated producer, since scrap
substitutes such as direct reduced iron are derived from virgin iron ore, which
has fewer impurities. The internal production of scrap substitutes as the
26
primary metallic feedstock provides integrated mini-mills with a competitive
advantage over traditional scrap-based mini-mills by insulating the integrated
mini-mills from their dependence on scrap, which is generally more expensive and
has been subject to price volatility, generally rising prices and limited
availability from time to time. The internal production of metallic feedstock
also enables integrated mini-mills to reduce handling and transportation costs.
The high percentage use of scrap substitutes such as direct reduced iron also
allows the integrated mini-mills to take advantage of periods of low scrap
prices by procuring a wide variety of lower-cost scrap grades, which can be
blended with the higher-purity direct reduced iron charge. Because the
production of direct reduced iron involves the use of significant amounts of
natural gas, integrated mini-mills are more sensitive to the price of natural
gas than mini-mills using scrap.
KEY PRODUCTS
Steelmakers primarily produce two types of steel products, flat and
long. Flat products, such as sheet or plate, are produced from semi-finished
slabs. Long products, such as bars, rods and structural shapes, are rolled from
blooms and/or billets.
FLAT PRODUCTS
Slab. A slab is a semi-finished steel product obtained by rolling
ingots on a rolling mill or processing them through a continuous caster and
cutting them into various lengths. A slab has a rectangular cross section and is
used as a starting material in the production process of other flat products
(e.g., hot rolled sheet).
Hot-Rolled Sheet. Hot-rolled sheet is minimally processed steel that
is used in the manufacture of various non-surface critical applications, such as
automobile suspension arms, frames, wheels, and other unexposed parts in auto
and truck bodies, agricultural equipment, construction products, machinery,
tubing, pipe and guard rails. All flat-rolled steel sheet is initially
hot-rolled, a process that consists of passing a cast slab through a multi-stand
rolling mill to reduce its thickness to less than 12 millimeters. Flat-rolled
steel sheet that has been wound is referred to as "coiled".
Cold-Rolled Sheet. Cold-rolled sheet is hot-rolled sheet that has
been further processed through a pickle line, which is an acid bath that removes
scaling from steel's surface, and then successively passed through a rolling
mill without reheating until the desired gauge, or thickness, and other physical
properties have been achieved. Cold-rolling reduces gauge and hardens the steel
and, when further processed through an annealing furnace and a temper mill,
improves uniformity, ductility and formability. Cold-rolling can also impart
various surface finishes and textures. Cold-rolled steel is among other things
used in steel applications that demand higher surface quality or finish, such as
exposed automobile and appliance panels. As a result, the prices of cold-rolled
sheet are higher than the prices of hot-rolled sheet. Typically, cold-rolled
sheet is coated or painted prior to sale to an end-user.
Coated Sheet. Coated sheet is generally cold-rolled steel that has
been coated with zinc, aluminum or a combination thereof to render it
corrosion-resistant and to improve its paintability. Hot-dipped galvanized,
electro-galvanized and aluminized products are types of coated sheet. These are
also the highest value-added sheet products because they require the greatest
degree of processing and tend to have the strictest quality requirements. Coated
sheet is used for many applications, often where exposed to the elements, such
as automobile exteriors, major household appliances, roofing and siding, heating
and air conditioning equipment, air ducts and switch boxes, as well as in
certain packaging applications, such as food containers.
Plates. Plates are produced by hot-rolling either reheated slabs or
ingots. The principal end uses for plates include various structural products
such as for bridge construction, storage vessels, tanks, shipbuilding, line
pipe, industrial machinery and equipment.
Tinplate. Tinplate is a light gauge cold rolled, low-carbon steel
usually coated with a micro-thin layer of tin. Tinplate is usually between 0.14
millimeters and 0.84 millimeters thick and offers particular advantages for
packaging, such as strength, workability, corrosion resistance, weldability and
ease in decoration. Food and general line steel containers are made from
tinplate.
LONG PRODUCTS
Bars. Bars are long steel products that are rolled from billets.
Merchant bar and reinforcing bar (rebar) are two common categories of bars.
Merchant bars include rounds, flats, angles, squares, and channels that are
27
used by fabricators to manufacture a wide variety of products such as furniture,
stair railings, and farm equipment. Rebar is used to strengthen concrete in
highways, bridges and buildings.
Billets/Blooms. Billets and blooms are semi-finished steel products.
Billets generally have square cross sections up to 155 millimeters x 155
millimeters, and blooms have square cross-sections generally greater than 155
millimeters x 155 millimeters. These products are either rolled or continuously
cast and are used for further processing by rolling to produce finished products
like wire rod, bars and other sections.
Special Bar Quality (SBQ) Steel. SBQ steel is the highest quality
steel long product, and is typically used in safety-critical applications by
manufacturers of engineered products. SBQ steel must meet specific applications'
needs for strength, toughness, fatigue life and other engineering parameters.
SBQ steel is the only bar product that typically requires customer
qualification, and is generally sold under contract to long-term customers.
End-markets are principally the automotive, heavy truck and agricultural
sectors, and products made with SBQ steel include axles, crankshafts,
transmission gears, bearings and seamless tubes.
Wire Rods. Wire rod is ring-shaped coiled steel with diameters
ranging from 5.5 to 42 millimeters. Wire rod is used in the automotive,
construction, welding and engineering sectors.
Wire Products. Wire products include a broad range of products
produced by cold reducing wire rod through a series of dies to improve surface
finish, dimensional accuracy and physical properties. Wire products are used in
a variety of applications such as springs, concrete wire, electrical conductors
and structural cables.
Seamless Tube. Seamless tubes have outer dimensions of approximately
25 to 508 millimeters. They are produced by piercing solid steel cylinders in a
forging operation in which the metal is worked from both the inside as well as
the outside. The final product is a tube with uniform properties from the
surface through the wall and from one end to the other.
Welded Pipes and Tubes. Welded pipes and tubes are manufactured from
steel sheet that is bent into a cylinder and welded either longitudinally or
helically.
Structural Sections. Structural sections or shapes is the general
term for rolled flanged shapes having at least one dimension of their
cross-section as 76 millimeters or greater. They are produced in a rolling mill
from reheated blooms or billets. Structural sections include wide-flange beams,
bearing piles, channels, angles and tees. They are used mainly in the
construction industry and in many other structural applications.
Rails. Rails are hot rolled from a reheated bloom. They are used
mainly for railway rails but they also have many industrial applications, for
example, rails for construction cranes.
DIRECT REDUCED IRON
Direct reduced iron is iron produced by a direct reduction process
that removes the oxygen from the iron ore without melting it. Direct reduced
iron is used as feedstock for electric arc furnaces and is a high quality
substitute for scrap.
RAW MATERIALS AND ENERGY
Mittal Steel's principal inputs are iron ore, coal, coke, scrap, hot
metal, alloys, natural gas and electricity.
Our strategy for the procurement of raw materials comprises:
- Pursuing the lowest prices available and lowest cost of ownership
through aggregated purchasing and supply chain optimization;
- Exploiting our global purchasing reach; and
- Leveraging local cost advantages on a global scale.
Mittal Steel secures iron ore supplies from its own mines and
through long and short-term purchase agreements with certain iron ore suppliers.
Its mines are located in Kazakhstan, the United States, Algeria and
28
Mexico. Mittal Steel has entered into strategic long-term contracts with certain
iron ore mines in South Africa, as well as long-term contracts with iron ore
suppliers in the United States. Iron ore from captive mines as well as those on
strategic long-term contracts fulfill a majority of the Company's iron ore
requirements.
The remaining quantities of iron ore are procured through other
contracts with both international and local suppliers. These contracts generally
provide for the purchase prices to be negotiated annually based on market
prices. Mittal Steel's principal international suppliers include Companhia Vale
do Rio Doce and MineraAoes Brasileiras Reunidas S.A. in Brazil, Shougang Hierro
Peru S.A. in Peru, Corporacion Venezolana de Guyana in Venezuela and Quebec
Cartier Mining Co. in Canada.
Mittal Steel is self sufficient in its coke requirements. The
Company has its own coke-making facilities/subsidiaries in Poland, Kazakhstan,
South Africa, Romania and the Czech Republic and through a joint venture
agreement between Sun Coal Company and Primary Energy LLC and Inland. Certain of
Mittal Steel's operating subsidiaries buy coke from local sources to optimize
cost savings from transport efficiencies. Mittal Steel procures the majority of
its scrap requirements locally to optimize transport costs. Mittal Steel
procures its electricity requirements from local, regulated utility companies at
prices fixed by either contract or tariff, except at its locations in the United
States where a significant portion of its electricity requirements are purchased
from onsite generation owned by third parties.
Mittal Steel procures most of its natural gas requirements from the
natural gas spot market or through short-term contracts entered into with local
suppliers of natural gas with prices fixed by either contract or tariff based on
spot market prices.
MARKETING
Mittal Steel's marketing strategy focuses on optimizing product mix
profitability, developing in priority the domestic and natural markets of our
business units, and providing reliable quality, delivery and efficient customer
service.
With the support of Mittal Steel's research centers we work with our
customers on product development to meet their present and future requirements
while utilizing Mittal Steel's assets in the most efficient and profitable
manner. We focus our efforts on providing solutions to our customers to reduce
their costs and becoming their preferred supplier of high quality steel
products.
The majority of Mittal Steel's products are sold directly to
customers through our own sales force. A portion is sold through intermediate
international traders.
SHIPPING
Mittal Shipping Limited is responsible for providing ocean
transportation solutions to the company's manufacturing subsidiaries and
affiliates, covering both raw materials and finished products. Its location in
London, a key hub of the global shipping business, is a strategic advantage.
Mittal Shipping arranged transportation for approximately 27 million tonnes of
cargo in 2004.
GOVERNMENT REGULATIONS
See "Item 3D -- Key Information -- Risk Factors" and "Item 8 --
Financial Information -- Legal Proceedings".
Mittal Steel's operations are subject to various regulatory regimes
in the regions in which it conducts its operations. The following is a
discussion of the principal features of selected regulatory regimes that are or
are likely to affect its operations.
ENVIRONMENTAL REGULATION
Mittal Steel is subject to various environmental laws and
regulations in the jurisdictions in which it conducts its operations. These
regulations include requirements to obtain permits for certain emissions made in
the ordinary course of its business and to conduct certain land and soil
restoration activities. In connection with some of its acquisitions, Mittal
Steel has also committed to make certain investments in pollution control
measures and environmental abatement.
29
EU Directive 2004/35/ EC of April 21, 2004 on Environmental
Liability with Regard to the Prevention and Remedy of Environmental Damage, or
the Environmental Liability Directive, provides for remedies for damage to the
environment. While the manner and impact of the implementation of the
Environmental Liability Directive is not yet certain, Mittal Steel is closely
monitoring the potential impact on its operations.
EU Directive 2003/87/ EC of October 13, 2003, or the Directive,
established a program under which member states are allowed to trade greenhouse
gas emission allowances within the European Community, subject to certain
conditions. Member states must ensure that, from January l, 2005, no
installation undertakes certain activities specified in the Directive that
results in emissions specified in relation to that activity unless its operator
holds a permit issued by a competent authority. The Directive also establishes
carbon dioxide emission trading starting from January 1, 2005.
The operations of Mittal Steel Temirtau are subject to oversight by
the Ministry of Natural Resources and Environmental Protection of Kazakhstan,
which establishes pollution limits and quotas. Relevant legislation imposes
various fees for discharges of pollutants and other environmental damage and
limits for discharges, and entities that emit pollution in excess of these
amounts must pay higher rates. According to the terms of its acquisition by
Mittal Steel, through 2005 Mittal Steel Temirtau is required to make annual
expenditures on pollution control measures of at least KZT 200 million
(approximately $1.5 million) and to adhere to environmental regulations in
effect as of November 17, 1995.
The operations of Mittal Steel Galati are subject to environmental
laws and regulations concerning emissions into air, discharges to ground water
and waterways and the generation, handling, labeling, storage, transportation,
treatment and disposal of waste material. The Company has undertaken to invest
$76 million during the periods 2002-2006 on environmental protection.
The operations of Ispat Inland Inc. are subject to environmental
laws and regulations concerning emissions into the air, discharges into ground
water and waterways, and the generation, handling, labelling, storage,
transportation, treatment and disposal of waste material. These include various
United States federal statutes regulating the discharge or release of pollutants
to the environment, including the Clean Air Act, Clean Water Act, Resource
Conservation and Recovery Act, or RCRA, Comprehensive Environmental Response,
Compensation and Liability Act of 1980, or CERCLA, also known as Superfund, Safe
Drinking Water Act and Toxic Substances Control Act, as well as state and local
requirements. Violations of these laws and regulations can give rise to a
variety of civil, administrative, and, in some cases, criminal actions and could
also result in substantial liabilities or require substantial capital
expenditures. In addition, under CERCLA the Environmental Protection Agency
("EPA") has authority to impose liability for site remediation on waste
generators, past and present site owners and operators, and transporters,
regardless of fault or the legality of the original disposal activity. Liability
under CERCLA is strict, joint and several.
FOREIGN TRADE
Mittal Steel is an international operation with sales spanning many
countries, and therefore, its businesses have significant exposure to the
effects of trade actions and barriers. Various countries, including the United
States, have previously instituted, or are contemplating the institution of,
trade actions and barriers.
Twice in 2000 and 2002, U.S. petitioners sought to have antidumping
and countervailing duties assessed against cold rolled imports from 12 countries
and 20 countries respectively. On both occasions the U.S. International Trade
Commission (the "ITC") issued negative final injury determinations, effectively
terminating the investigations. U.S. petitioners appealed the 2000 ITC decision
to the U.S. Court of International Trade (the "CIT"), which remanded that
decision to the ITC on October 28, 2003. On May 6, 2004, the ITC published its
revised findings and affirmed its previous negative injury determinations. The
U.S. petitioners also appealed the 2002 ITC decision to the CIT, which the CIT
denied on February 19, 2004, affirming the ITC's negative injury findings. In
April of 2005, the U.S. Department of Commerce ("Commerce") and the ITC will
complete a five-year "sunset" review of existing countervailing duty and
antidumping orders against hot-rolled carbon steel flat products from Brazil,
Japan and Russia that could result in the termination of such orders. In
November of 2005, Commerce and the ITC will begin a similar sunset review of
existing antidumping and countervailing duty orders against corrosion-resistant
imports from Australia, Canada, France, Germany, Japan and Korea. Actions taken
by trade authorities in connection with these matters could result in the
assessment of increased levies or customs duties on future export sales into the
United States, and/or increase the supplies of steel into the United States,
and, in either case, negatively impact future profit margins.
30
Exports of steel products manufactured by Mittal Steel Temirtau
require licenses from the Ministry of Industry and Trade of the Republic of
Kazakhstan.
Exports of steel products by Mittal Steel Galati to the European
Union require licenses from the Ministry of Industry and Trade of the Republic
of Romania.
Mittal Steel Annaba is required to domicile (submit for
registration) export contracts with the Central Bank of Algeria.
FOREIGN EXCHANGE
Some operations involving the South African rand are subject to
limitations imposed by the South African Reserve Bank. For example, approval of
the South African Reserve Bank is required in order to obtain foreign financing,
forward exchange controls, hedging arrangements etc. These restrictions have not
historically had a material impact on the operations of Mittal Steel South
Africa.
The purchase and sale of foreign currency by Kazakh residents
(including individuals and legal entities) is restricted by the National Bank of
Kazakhstan. Purchases and sales of foreign currency may only be conducted by
residents through authorized banks or other authorized organizations. Payments
in "routine currency operations" may be made by residents of Kazakhstan to
non-residents through authorized banks without restriction. Such "routine
currency operations" include import/export settlements with payment within 180
days; short-term loans with terms of less than 180 days; dividends, interest and
other income from deposits, investments, loans and other operations; and
non-commercial transactions such as wages, pensions, and alimony. Operations
involving the movement of capital from residents to non-residents require a
license from the National Bank of Kazakhstan, and transactions involving the
movement of capital from non-residents to residents must be registered with the
National Bank of Kazakhstan. Licenses are issued on a case-by-case basis, and
are valid only for a single transaction. These transactions include payments for
exclusive rights to intellectual property; payments for rights to immovable
property; settlements for import/export transactions and loans having terms of
more than 180 days; and international transfers of pension assets and insurance
and re-insurance contracts of an accumulative nature. Most transactions in which
Mittal Steel Temirtau engages are not currently subject to licensing or
registration requirements from the National Bank of Kazakhstan.
The Algerian foreign currency market is regulated by the Central
Bank of Algeria. Exchange control regulations do not permit capital account
convertibility with a few exceptions of Algerian companies investing in overseas
projects. Currency outflows on current account, while freely permitted for
import of goods, are subjected to controls for payments for service contracts.
Dividend repatriation is permitted on overseas capital investments. Algerian
companies are not permitted to invest their cash surplus overseas. All overseas
remittances have to be made through the Central Bank. Exporters are permitted to
retain 50% of the proceeds in foreign currency accounts out of which 10% can be
utilized freely and the balance with certain restrictions. Hedging of currencies
is not permitted.
MANAGEMENT
The Chairman and Chief Executive Officer of Mittal Steel is Mr.
Lakshmi N. Mittal. Mr. Mittal's vision and his ability to guide Mittal Steel in
its formulation and execution of appropriate business strategies to meet the
challenges of an increasingly dynamic industry and business environment, have
helped it to emerge as a world leader in the steel industry, with a global
manufacturing and marketing presence.
For the purposes of global strategy formulation, planning and
central functions, the global operations of Mittal Steel are divided into three
regions: the Americas, Europe and Rest of World. Operating subsidiaries in each
of the regions have their own manufacturing, engineering and commercial
organizations and operate as profit centers within the framework of Mittal
Steel's global and regional business strategies.
Within corporate and, where appropriate, regional management there
are specialized and experienced executives in fields such as finance, marketing,
purchasing, operations, shipping, human resources, communications, internal
assurance, strategic planning, and continuous improvement, technology and law.
Knowledge sharing has been an integral part of Mittal Steel's
management philosophy and approach since the time of its first acquisition. The
Company implements a Knowledge Management Programme
31
("KMP"), which aims to develop, share and utilize the knowledge and experience
of Mittal Steel management and employees in order to accelerate improvement in
business performance. This programme covers all key functional areas such as
procurement, health and safety, and marketing, as well as the main steel
producing and processing steps. The KMP includes detailed benchmarking,
technical meetings, and inter-plant expert and operational support to drive
improvement. It allows each business unit to benefit from the scale and reach of
Mittal Steel's global presence and to have access to the best practices and
expertise in the Company. Mittal Steel believes the KMP provides a
differentiating advantage to its performance by contributing to reduced
procurement and conversion costs and enhanced productivity and profitability.
BUSINESS STRATEGY
Our strategy is to enhance shareholder value by continuously
strengthening our position as a low cost, high quality steel producer and
achieving the maximum benefits from our global position. We strive to identify,
capture, and create value by formulating and implementing efficient solutions to
our procurement, marketing, operating and financial challenges and
opportunities.
Our strategy includes the following key elements:
- Leverage our Global Position. Our position as one of the largest and
most international steel producers in the world provides
opportunities to achieve operational synergies and cost savings. A
key element in our strategy is to maximize the realization of these
advantages.
- Acquisition Strategy. We continue to look at acquisition
opportunities in markets which are strategic to the growth of our
business.
- Improve Operating Performance. We continue to examine and pursue
opportunities to improve the operating performance of our facilities
and enhance our low cost production capabilities. Historically, we
have been successful at enhancing our production capabilities at
relatively low capital costs per ton.
- Use Technology as a Competitive Tool. We believe the judicious
application of technological advances is essential to continued
competitiveness. We will continue to invest in incremental
technological improvements wherever it is appropriate.
- Remain a Low-Cost Producer. We believe that our efficient use of
steel-making facilities and our superior operating practices makes
us one of the lowest cost steel producers in each of the markets in
which we compete. We seek to further protect and enhance our
competitive position through continuous cost reduction programs and
through our KMP. We believe that the KMP has already provided
significant benefits, including reduced procurement costs of raw
materials, consumables and spare parts, as well as increased
productivity through the transfer of technological know-how among
our operating subsidiaries.
- Strengthen our Leading Market Positions and Reputation for Quality.
Over the years, we have built strong customer franchises in a number
of markets and products. We are one of the largest producers and
consumers of DRI in the world. Our European operations collectively
are the largest producers of high-quality wire rod on the continent
and Inland is one of the leading suppliers to the automobile and
appliance industries in North America and has a leading position
with major car manufacturers. In addition, we believe we have
established a reputation for producing high-quality steel products,
in part due to our tradition of partnering with key customers. We
intend to continue such partnering with key customers in research
and development efforts and in assisting them with their product
design initiatives. We believe this helps ensure strong, long-term
customer relationships and enables us to produce higher quality
steel products and create long-term growth opportunities. In the
future, we believe we can further enhance our profitability by
leveraging these leading market positions to sell a broader range of
higher value-added products.
- Maintain a strong financial profile. Our investment grade status
provides us access to low cost financing for our operations and for
potential acquisitions. We strive to at least maintain this status,
through the steel cycle.
32
C. ORGANIZATIONAL STRUCTURE
Mittal Steel is a holding company with no business operations of its
own. All of Mittal Steel's significant operating subsidiaries are wholly or
majority owned by Mittal Steel, indirectly through intermediate holding
companies. The following chart represents the current operational structure, and
not the legal or ownership structure of Mittal Steel.
------------
Mittal Steel
------------
|
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| | |
--------------------------------------------- ----------------------------------------------- ---------------------------------
Americas Europe Rest of World
--------------------------------------------- ----------------------------------------------- ---------------------------------
| | |
------------------------------------- -------------------------------------- -----------------------
| | | | | | | | | | |
--------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
Ispat Mittal Mittal Mittal Mittal Mittal Mittal Mittal Mittal Mittal Mittal
Inland Canada Steel Steel Steel Steel Steel Steel Steel Steel Steel
Lazaro Point Europe Poland Galati Ostrava Temirtau Annaba South
Cardenas Lisas Africa
---------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
The following table sets forth the registered office of each
significant operating subsidiary of Mittal Steel.
SUBSIDIARY REGISTERED OFFICE
AMERICAS
Inland 3210 Watling Street
East Chicago, IN 46312
U.S.A.
Mittal Steel Lazaro Cardenas S.A. de C.V.Fco. J. Mujica No. 1-B
Apartado Postal No. 19-A
Cd. Lazaro Cardenas, Mich
C.P. 60950
Mexico
Mittal Canada 4000 route des Acieries
Contrecoeur (Quebec)
J0L 1C0
Canada
Mittal Steel Point Lisas Mediterranean Drive
Point Lisas
Couva
Trinidad and Tobago
EUROPE
Mittal Steel Europe 34-38 Avenue de la Liberte
L-1930 Luxembourg
Luxembourg
Mittal Steel Poland Ul Chorzowska 50, 40-121
Katowice, Poland
Mittal Steel Galati Strada Smardan nr. 1 --
800.698, Judetul Galati Romania
Mittal Steel Ostrava Vratimovska 689, Ostrava 7,
Ostrava-Kuncice, Czech Republic
REST OF WORLD
Mittal Steel Temirtau 472319 Termitau City, Lenin Avenue 1,
Kazakhstan
Mittal Steel Annaba Sidi Amar, El-Hadjar
Complex B.P. 2055,
Annaba 2300, Algeria
33
MITTAL STEEL SOUTH AFRICA Delfos Boulevard
Vanderbijlpark, 1911
South Africa
P.O. Box 2
Vanderbijlpark, 1900
South Africa
D. PROPERTY, PLANTS AND EQUIPMENT
Mittal Steel's principal operating subsidiaries in the Americas are
Inland, Mittal Steel Lazaro Cardenas, Mittal Canada and Mittal Steel Point
Lisas; in Europe are Mittal Steel Poland, Mittal Steel Galati, Mittal Steel
Ostrava and Mittal Steel Europe; and in the Rest of World are Mittal Steel
Temirtau, Mittal Steel Annaba and Mittal Steel South Africa. In addition, Mittal
Steel conducts operations through other subsidiaries and affiliates. All of its
operating subsidiaries are substantially owned by Mittal Steel through
intermediate holding companies.
Certain of Mittal Steel's assets are encumbered in favor of its
lenders. See Note 11 to the Mittal Steel's Consolidated Financial Statements.
AMERICAS
INLAND
General
Inland is the fourth largest integrated producer of steel in the
United States, with shipments of 5.6 million tons in 2004. Inland was
established in 1893, and all raw steel made by Inland is produced at its Indiana
Harbor Works located in East Chicago, Indiana. The property on which this plant
is located, consisting of approximately 1,900 acres, is held by Inland in fee.
The basic production facilities of Inland at its Indiana Harbor Works consist of
blast furnaces for making iron; basic oxygen and electric furnaces for making
steel; a continuous billet caster, a continuous combination slab/bloom caster
and two continuous slab casters; and a variety of rolling mills and processing
lines that produce finished steel mill products. A continuous annealing line and
slitting equipment are leased by Inland. Inland has granted the PBGC a lien upon
the caster facility to secure the payment of future pension funding obligations.
Substantially all of the remaining property, plant and equipment at the Indiana
Harbor Works, other than the caster facility and leased equipment, is subject to
the lien of the First Mortgage of Inland dated April 1, 1928, as amended and
supplemented. The Indiana Harbor Works is also subject to a second lien in favor
of the USWA to secure a post-retirement health benefit.
I/N Tek, a partnership in which a subsidiary of Inland owns a 60%
interest, has constructed a 1.7 million ton annual production capacity
cold-rolling mill on approximately 200 acres of land, which it owns in fee,
located near New Carlisle, Indiana. Substantially all of the property, plant and
equipment owned by I/N Tek is subject to a lien securing related indebtedness.
The I/N Tek facility is adequate to serve the present and anticipated needs of
Inland planned for such facility.
I/N Kote, a partnership in which a subsidiary of Inland owns a 50%
interest, has constructed a one million ton annual production capacity steel
galvanizing facility on approximately 25 acres of land, which it owns in fee,
located adjacent to the I/N Tek site. Substantially all of the property, plant
and equipment owned by I/N Kote is subject to a lien securing related
indebtedness. The I/N Kote facility is adequate to serve the present and
anticipated needs for galvanized products of Inland planned for such facility.
PCI Associates, or PCI, a partnership in which a subsidiary of
Inland owns a 50% interest, has constructed a pulverized coal injection facility
on land located within the Indiana Harbor Works. Inland leases PCI Associates
the land upon which the facility is located. A 50% undivided interest in
substantially all of the property, plant and equipment at the PCI facility is
subject to a long-term lease, with the balance of the PCI facility owned by PCI
Associates. The PCI facility is adequate to serve the present and anticipated
needs of Inland planned for such facility.
Inland owns property at the Indiana Harbor Works used in connection
with a joint coke and energy production project with Sun Coal Company and
Primary Energy LLC.
34
A subsidiary of Inland owns a fleet of 321 coal hopper cars (100-ton
capacity each) used in unit trains to move coal and coke to the Indiana Harbor
Works. Inland time-charters three vessels for the transportation of iron ore and
limestone on the Great Lakes. During 1998, Inland transferred ownership of such
vessels to a third party subject to a lien in favor of the PBGC on the vessels
to secure the payment of future pension funding obligations. Such equipment is
adequate, when combined with purchases of transportation services from
independent sources, to meet the present and anticipated transportation needs of
Inland.
Inland also owns and maintains research and development
laboratories in East Chicago, Indiana. These facilities are adequate to serve
its present and anticipated needs.
Production Facilities
The following table sets forth a general description of Inland's
principal production units at the Indiana Harbor Works.
-------------------------------------------------------------------------------------------------------------------
FACILITY PRODUCTION CAPACITY PRODUCTION IN 2004 (1)
-------------------------------------------------------------------------------------------------------------------
3 blast furnaces 5.7 million tons of hot metal 5.2 million tons
2 basic oxygen furnaces 5.9 million tons of liquid steel 5.7 million tons
3 slab and bloom casters 5.6 million tons 5.6 million tons
80" Hot strip mill 6.0 million tons 5.3 million tons
Cold-rolling mill:
2 continuous pickle lines 3.1 million tons 2.6 million tons
56" and 80" tandem mill 3.7 million tons 2.5 million tons
Continuous annealing facilities 457,000 tons 349,000 tons
Batch annealing facility 1.7 million tons 1.6 million tons
3 temper rolling mills 2.9 million tons 2.3 million tons
5 finishing lines 2.1 million tons 1.8 million tons
3 coating lines 928,000 tons 789,000 tons
1 electric arc furnace 610,000 tons of liquid steel 513,000 tons
1 continuous billet caster 800,000 tons 499,000 tons
12" bar mill 700,000 tons 636,000 tons
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
Products
Inland produces and sells a wide range of steel products, largely
carbon and high-strength low-alloy steel grades, in flat-rolled and bar forms.
Flat products generated 87% of Inland's 2004 revenue. This division manufactures
and sells hot-rolled, cold-rolled, coated and galvanized steel sheets used in
various applications including automotive, steel service center, appliance,
office furniture and electrical motor markets. Inland's flat products division
also manages Inland's iron ore and iron-making operations, and produces the
major portion of its raw steel requirements. Inland is one of the leading
producers in the United States of automotive sheet, the highest value-added
flat-rolled carbon steel product, and one of the largest suppliers of steel to
the appliance market. Over 80% of Inland's flat-rolled steel revenues are
generated by value-added cold-rolled or coated steels. Nearly all of Inland's
steel products are made to fill specific orders due to the unique chemistry,
surface quality, and width and gauge requirements of our customers.
Inland's bar division generated 13% of Inland's 2004 revenue, and
manufactures and sells a variety of bar products, including SBQ to the
automotive industry directly, as well as to forgers and cold finishers, heavy
equipment manufacturers and steel service centers. SBQ steel is used by our
customers in the automotive, agricultural and transportation industries, among
others, to manufacture products such as axles and bearings.
35
MITTAL STEEL LAZARO CARDENAS
General
Mittal Steel Lazaro Cardenas is the largest steel producer in
Mexico. Mittal Steel Lazaro Cardenas operates a pelletizer plant, two direct
reduced iron plants, an electric arc furnace-based steel-making plant and
continuous casting facilities. Mittal Steel Lazaro Cardenas has advanced
secondary metallurgical capabilities, including ladle refining, vacuum degassing
and calcium silicon injection, which permit it to produce higher quality slabs
that are used for specialized steel applications in the automotive, line pipe
manufacturing, shipbuilding and appliance industries.
Mittal Steel Lazaro Cardenas's production facilities are located on
1,075 acres adjacent to a major deep water port in Lazaro Cardenas, Michoacan,
Mexico, through which most of its slabs are shipped for export and its raw
materials are received. The port is the largest bulk material handling port in
Mexico and the second largest bulk material handling port in Latin America. The
port includes a metals and minerals wharf with three berths, operated by our
joint venture, Corporacion del Balsas, S.A. de C.V., or Corporacion del Balsas,
under a concession from the Mexican government, which expires in 2014, and a
multipurpose terminal berth operated by Mittal Steel Lazaro Cardenas, which
currently accepts vessels up to Handymax size. Mittal Steel Lazaro Cardenas
operates the multipurpose terminal berth under a concession from the Mexican
government, which expires in 2010.
During 2003, Mittal Steel Lazaro Cardenas received re-certification
for QS 9000 through 2006 (previously obtained in 1999 and valid through 2003)
and holds several certifications for manufacturing customer specific
shipbuilding grades of steel. Some of the value-added products developed in 2003
were heat-treatment grades for plate manufacturing, oil country tubular goods,
high chromium grade for oil exploration applications and also for the gas
transportation industry. As part of moving up the value chain, Mittal Steel
Lazaro Cardenas has invested $17.0 million in a Ruhrstahl Heraeus Top Lance, or
RHTL, plant. The new plant, which commenced operations in October 2004, will
enable it to produce up to 1.0 million tons of ultra low carbon interstitial
free steel mainly for the automobile segment. Mittal Steel Lazaro Cardenas
(through an affiliate) is also constructing an oxygen gas plant, in which it is
investing $13.5 million and which is expected to be operational by the end of
March 2005. Since its inception, Mittal Steel Lazaro Cardenas has been an
export-focused company. In 2004, approximately 65% of Mittal Steel Lazaro
Cardenas's slabs were exported to finished steel product manufacturers in China,
Taiwan, Germany, Kazakhstan, France, Thailand and the United States.
In addition to its core steel-making facilities, Mittal Steel Lazaro
Cardenas holds a 50% equity interest in Pena Colorada, an iron ore mining and
pelletizing company which has the capacity to produce 4.0 million tonnes of
pellets, of which Mittal Steel Lazaro Cardenas's share is 50%. Mittal Steel
Lazaro Cardenas also has strategic interests in several other ancillary
companies, which provide significant benefits. These include:
*a 50% interest in Corporacion del Balsas, which manages captive port facilities
for handling raw materials;
*a 50% interest in Servicios Siderurgicos Integrados, S.A. de C.V., which
provides various products such as industrial gas and services to Mittal Steel
Lazaro Cardenas, at its cost of producing these services; and
*a 50% interest in Cal del Balsas, S.A. de C.V., which produces lime products.
Production Facilities
The following table sets forth a general description of Mittal Steel
Lazaro Cardenas's principal production units:
------------------------------------------------------------------------------------------------------------------
FACILITY PRODUCTION CAPACITY PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
Pelletizer plant 4.0 million tonnes of pellets 3.6 million tonnes
Direct reduced iron plant - HYL 2.4 million tonnes of DRI 2.4 million tonnes
Direct reduced iron plant - Midrex 1.7 million tonnes of DRI 1.8 million tonnes
4 electric arc furnaces 4.0 million tons of liquid steel 4.0 million tons
36
2 continuous casters 3.8 million tons of slabs 3.9 million tons
Thermal power station 40 megawatts-two 20 megawatt units 83.18 million kwh
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
Products
Mittal Steel Lazaro Cardenas is the world's largest supplier of
slabs to the merchant market. Slabs are purchased both by steel manufacturers
without primary steel-making facilities and by steel manufacturers with either a
temporary or permanent reliance on external sources for a portion or all of
their needs. Mittal Steel Lazaro Cardenas's product line mainly caters to
high-end applications of its customers.
Mittal Steel Lazaro Cardenas utilizes direct reduced iron as its
primary metallic input for virtually all of its production.
MITTAL CANADA
General
Mittal Canada is the fourth largest steelmaker in Canada, based on
2004 shipments of approximately 1.6 million tons of finished steel products.
Mittal Canada is currently the only Canadian steelmaker utilizing internally
produced direct reduced iron as the primary raw material for steel-making.
Production Facilities
Mittal Canada's facilities are located in the Province of Quebec on
approximately 1,050 acres of land in Contrecoeur, 100 acres in Longueuil and 23
acres in Montreal. The following table sets forth a general description of
Mittal Canada's principal production facilities.
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
2 direct reduced iron plants 1.5 million tonnes of DRI 1,085,000 tonnes
2 electric arc furnaces 1.8 million tons of liquid steel 1.7 million tons
1 continuous slab caster 900,000 tons of slabs 800,000 tons
1 six-strand billet caster 900,000 tons of billets 900,000 tons
Hot strip mill 683,000 tons of hot bands 682,000 tons
Cold-rolling mill:
Pickling line 470,000 tons 460,000 tons
2 cold-rolling mills 470,000 tons 406,000 tons
19 annealing furnaces 330,000 tons 284,000 tons
1 temper mill 330,000 tons 268,000 tons
2 rod and bar mills 860,000 tons of rods and bars 801,000 tons
1 pipe mill 109,000 tons of pipe 80,000 tons
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
37
Products
Mittal Canada manufactures a wide range of steel products, including
hot, cold and galvanized sheet, wire rods, bar and pipe products, and markets
these products primarily in Canada and the United States.
The Contrecoeur works have direct access to a water terminal, owned
by the Port of Montreal, with docks on the south shore of the St. Lawrence
River, through which iron ore is received and steel products may be shipped. The
St. Lawrence River is accessible by ship for most of the year, although shipping
costs rise in the winter months when icebreakers are needed. As a result, during
the fall months, iron ore is stockpiled for use during the coldest months of the
year. Scrap is shipped by truck or rail. All plants have railway access, with
the exception of the Longueuil plant.
MITTAL STEEL POINT LISAS
General
Mittal Steel Point Lisas located in Trinidad and Tobago, is the
largest steelmaker in the Caribbean, based on 2004 shipments of 0.8 million tons
of steel products. Mittal Steel Point Lisas operates direct reduced iron plants,
an electric arc furnace-based steel-making plant, continuous casting facilities
and a high-speed rolling mill.
Production Facilities
Mittal Steel Point Lisas facilities are located on approximately 260
acres at the Point Lisas Industrial Complex in Point Lisas, Couva, Trinidad and
Tobago. Mittal Steel Point Lisas leases the property on which the facilities are
located from the Point Lisas Industrial Port Development Company (the
"PLIPDECO"). On February 12, 1996, Mittal Steel Point Lisas and PLIPDECO entered
into a lease agreement extending the terms of the lease of such property until
April 10, 2038. The following table and discussion set forth a general
description of Mittal Steel Point Lisas' principal production facilities.
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
2 Direct reduced iron plants 1.3 million tonnes of DRI 1.0 million tonnes
1.4 million tonnes of DRI 1.3 million tonnes
2 electric arc furnaces 1.2 million tons of liquid steel 907,000 tons
2 continuous casters 1.1 million tons of billets 871,000 tons
1 rod mill 810,000 tons of wire rods 679,000 tons
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
Mittal Steel Point Lisas's production facilities are located
adjacent to a dedicated deep water dock facility near the waterfront of the Gulf
of Paria. Mittal Steel Point Lisas operates the facility, which is leased from
National Energy Corporation of Trinidad and Tobago Limited through 2015, for the
receipt and dispatch of various raw materials, consumables and finished
products. The berth of the dock facility has a service length of about 450 yards
and a depth of 45 feet. The primary imported materials received at the dock are
iron ore pellets and limestone.
Products
Mittal Steel Point Lisas produces wire rods for use in a wide range
of industrial applications, including the manufacture of welding electrodes,
cables, chains, springs, fasteners, wire strands and wire ropes, pre-stressed
concrete strands, tire beads, as well as in the construction industry. In 2004,
substantially all of Mittal Steel Point Lisas's wire rod shipments were
exported, primarily to steel fabricators in South and Central America, the
Caribbean and the United States. Mittal Steel Point Lisas is also a significant
producer, exporter, and user of direct reduced iron.
38
EUROPE
MITTAL STEEL EUROPE
General
Mittal Steel Europe is the holding company of all our operating
subsidiaries in Germany and France. The principal steel-making operations are in
Hamburg and Duisburg in Germany, and in Gandrange in France. In addition, it has
a number of downstream facilities in Belgium, France, Germany, Italy, Luxembourg
and the United Kingdom. The downstream business is one of the largest in Europe.
Production Facilities
The following table sets forth a general description of Mittal Steel
Europe's principal production units.
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
1 direct reduced iron plant 600,000 tonnes 607,000 tonnes
2 electric arc furnaces 2.8 million tons of liquid steel 2.5 million tons
2 blast oxygen furnace - converter shops 1.7 million tons of liquid steel 1.5 million tons
5 continuous casters 4.9 million tons of billets/blooms 3.9 million tons
2 billet rolling mills 2.0 million tons of billets 1.2 million tons
4 wire rod mills 3.6 million tons of wire rods 2.7 million tons
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
Products
Mittal Steel Europe's principal products are wire rods, bars,
billets and blooms, and Mittal Steel Europe's subsidiaries are the largest
producers of high quality wire rods in Europe. In addition, Mittal Steel
Europe's downstream facilities produce wires for various applications, including
springs, elevator ropes, hoisting ropes, wire mesh and bright drawing bars.
More than 85% of Mittal Steel Europe's products are sold in Western
European markets, while the remainder is exported primarily to USA and Asia.
Mittal Steel Europe ships its products primarily to customers in the
construction, engineering and automotive industries.
Mittal Steel Europe meets its iron ore requirements largely from
suppliers in Brazil and Canada. It has long-term contracts for pig iron supply
to Mittal Steel Ruhrrot and Mittal Steel Gandrange. Mittal Steel Europe sources
scrap mainly from the Western European markets.
On February 22, 2005, Mittal Steel Ruhrort signed an agreement, with
ThyssenKrupp Stahl AG for the purchase of between 1.3 and 1.5 million tonnes of
pig iron each year for a 20-year term commencing October 2007. This agreement
replaces an existing supply agreement between the parties under which Mittal
Steel Ruhrort, agreed to purchase from ThyssenKrupp Stahl AG 1.3 million tonnes
of pig iron each year until September 2007.
MITTAL STEEL POLAND
General
Mittal Steel held a 72.4% interest in Mittal Steel Poland as at
December 31, 2004, as well as the irrevocable right, as agreed by Mittal Steel
and the Polish state authorities, to purchase an additional 25% interest in
Mittal Steel Poland from Polish state authorities.
39
Mittal Steel Poland, formerly Polski Huty Stali S.A., or PHS, took
control of the businesses of four steel companies in 2003: Huta Katowice S.A.,
Huta T. Sendzimira S.A., Huta Florian S.A. and Huta Cedler S.A., all of which
were then Polish state-owned enterprises. Mittal Steel Poland is the largest
steel producer in Poland, with an annual production capacity of approximately
8.3 million tons of crude steel. The agreement for the acquisition of Mittal
Steel Poland by Mittal Steel was concluded in October 2003 and the acquisition
was completed in March 2004. The major operations of Mittal Steel Poland are
based in Dabrowa Gornicza, Krakow, Sosnowiec and Swietochlowice, Poland.
Mittal Steel Poland produces a wide range of steel products,
including both long products (including billets, blooms, sections, rails, and
wire-rods and tubes) and flat products (including slabs, hot-rolled products,
cold-rolled products and galvanized and coated coils).
The sale of Mittal Steel Poland by the government of Poland was part
of its initiative to restructure its national steel industry. Pursuant to the
acquisition agreement, Mittal Steel committed to make capital expenditures of
Euro 497 million (equivalent to approximately $677 million based on the exchange
rate as at December 31, 2004) through December 2009, as well as to comply with
the PHS restructuring plan that the government of Poland agreed with the
European Commission as part of the European Union accession process, including
the shutdown of some rolling and finishing facilities and minimum employment
levels.
In connection with the combination of four steel companies into
Mittal Steel Poland, Mittal Steel Poland also became the owner of shares in a
number of related companies. Some of these subsidiaries operate rolling mills
that engage in converting billets, slabs and other semi-finished products into a
range of finished products.
Production Facilities
The following are the principal production facilities of Mittal
Steel Poland:
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FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (3)
------------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
13 coke oven batteries(1) 5,375 thousand tonnes 5,235 thousand tonnes
2 sintering plants 9,800 thousand tonnes 8,585 thousand tonnes
5 blast furnaces (four operational) 7,385 6,908
2 converter plants with six basic 8,378 7,684
oxygen
continuous steel casters (for billets 3,307 3,314
and blooms)
1 continuous steel caster (for slabs) 2,205 2,135
Breakdown mill 4,960 2,022
Continuous billet mill 2,205 755
Hot-rolling mill 2,315 2,223
Cold-rolling mill 1,488 1,093
Heavy-section mill 1,047 1,036(2)
Medium-section mill 937 951(2)
Galvanizing line 551 568
Wire rod mill 607 518
Tube mill 183 142
(1) Includes coke production of Zaklady Koksownicze Zdzieszowice, a subsidiary
of Mittal Steel Poland.
(2) Production in excess of the stated capacity is possible by adjusting the
facility loading and product mix.
(3) Production facility details include the production numbers for the full year
2004 for each step in the steel-making process. Output from one step in the
process is used as input in the next step in the process. Hence, the summation
of production number will not give the quantity of saleable finished steel
products.
40
Products
Mittal Steel Poland's product range includes slabs, billets, blooms,
sections, hot-rolled sheets and strips, cold-rolled sheets and strips,
galvanized sheets, welded tubes, wire-rods and other wire products and coated
sheets.
More than 50% of Mittal Steel Poland's products are sold in the
domestic market, while the remainder are exported, primarily to customers
located in other member states of the European Union. Mittal Steel Poland ships
its products primarily to customers in the construction, engineering, transport,
mining and automotive industries.
MITTAL STEEL GALATI
General
Mittal Steel acquired 91.6% of Combinatul Siderurgic Sidex S.A.
Galati, now Mittal Steel Galati, from the Authority for Privatization and
Management of State Ownership of Romania in November 2001, and increased its
interest to 99.4% in September 2003. Mittal Steel Galati operates the largest
integrated steel plant in Romania and is among the largest producers of steel in
Central and Eastern Europe.
According to its own estimates, Mittal Steel Galati produces
approximately 69% of the total steel consumption in Romania in its product
range.
In connection with its acquisition by Mittal Steel, Mittal Steel
Galati agreed with the Romanian government to make capital expenditures of
approximately $251 million from November 2001 through December 2006, of which
$76 million is to be used for environmental projects, as well as a further $100
million in capital expenditures from 2007 through 2011. These investments are
secured by a pledge of a portion of Mittal Steel's shares in Mittal Steel
Galati.
Mittal Steel has provided employment commitments for a five-year
period from the date of its acquisition of Mittal Steel Galati during which it
agreed not to engage in any collective dismissals of employees at Mittal Steel
Galati. Pursuant to the acquisition agreement, Mittal Steel Galati is also
exempt from enforcement of certain Romanian fiscal and environmental laws until
such time as Romania joins the European Union.
Production Facilities
Mittal Steel Galati has a total annual production capacity of 6.6
million tons of crude steel. The following table sets forth a general
description of Mittal Steel Galati's principal production facilities:
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
6 coke ovens 2,212 thousand tonnes 1,712 thousand tonnes
3 sintering plants 8,150 thousand tonnes 5,401 thousand tonnes
5 blast furnaces 6,944 4,670
6 basic oxygen furnaces 7,055 5,155
4 continuous slab casters 3,913 4,259
5 continuous bloom casters 596 604
1 billet mill 661 577
2 heavy plate mills 2,315 1,754
1 hot strip mill 3,858 2,176
Cold-rolling mill 1,742 847
41
Hot dip galvanizing line 220 218
Welded pipe plant 49 29
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
(2) Production in excess of the design capacity is achieved by improved control
and production parameters.
Products
Mittal Steel Galati produces and markets a large variety of
products, including slabs, billets, plates, hot rolled, cold rolled and
galvanized sheet and large diameter longitudinally welded pipes. Approximately
35% of its products are sold domestically. Sales outside the domestic market,
Europe, North America and South America are made by Mittal Steel Marketing.
MITTAL STEEL OSTRAVA
General
In January 2003, Mittal Steel acquired a 69.7% interest, which
increased to approximately 75.7% (the Company also has an option, subject to
certain restrictions, for the purchase of an additional 8.6%), voting interest,
in Mittal Steel Ostrava, the largest steel producer in the Czech Republic. The
sale of Mittal Steel Ostrava by the government of the Czech Republic was part of
an initiative to restructure the Czech steel industry. Mittal Steel made capital
expenditure commitments totaling $243 million over 10 years, including $135
million from 2003 through 2007 and $20 million for environmental improvements.
Upon acquisition, Mittal Steel rescheduled the debt obligations of the Mittal
Steel Ostrava with a consortium of Czech and international banks led by the
International Finance Corporation.
Mittal Steel Ostrava has an annual production capacity of over 3.6
million tons of crude steel.
In connection with the acquisition, Mittal Steel Ostrava also
committed to follow the medium-term restructuring plan approved by the European
Commission. This plan includes certain reductions in capacity and employment
levels. Also, Mittal Steel Ostrava has obligations to make contributions for
developments in the surrounding region under the Share Purchase Agreement.
Production Facilities
Mittal Steel Ostrava's production facilities are located in Ostrava,
Czech Republic. The sinter plant and blast furnaces, although located on the
same site as the remainder of the production facilities, are owned and operated
by Vysoke Pece Ostrava, a.s., in which Mittal Steel has a total interest of
approximately 84%. The following table sets forth a general description of
Mittal Steel Ostrava's principal production facilities:
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
3 coke ovens 1,500 thousand tonnes 1,460 thousand tonnes
2 sinter plants(2) 3,640 thousand tonnes 3,553 thousand tonnes
4 blast furnaces(2) 3,789 3,755
Steel mill with 4 open hearth 3,638 3,536
tandem furnaces
3 continuous casters 3,667 3,477
Hot strip mill 1,217 1,142
2 section mills 1,400 1,313
Wire rod mill 675 588
2 seamless tube mills 315 328(3)
42
Spiral welding shop 50 41
Power plant 201 MW 1,507 MWh
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next process. Hence, the summation of production numbers will not give
the quantity of saleable finished steel products.
(2) Owned and operated by Vysoke Pece Ostrava, a.s.
(3) Production in excess of the design capacity is achieved by improved control
and production parameters.
Mittal Steel Ostrava also has a controlling ownership share in
several other small operating companies, including cold-rolling mills,
hot-rolling mills and a welded tube manufacturer.
Products
Mittal Steel Ostrava produces mostly long products. Over 44% of
Mittal Steel Ostrava's production is sold in the domestic market, and the
remainder is sold primarily to customers in other European countries. Mittal
Steel Ostrava sells most of its production directly to end users, primarily in
the engineering, automotive and construction industries, as well as to
"stockists" (small-lot resellers).
REST OF WORLD
MITTAL STEEL ANNABA
General
Mittal Steel Annaba, located in Algeria, is a joint venture entered
into in October 2001 between Mittal Steel and Groupe Sider, or Sider, an agency
of the government of the Republic of Algeria, pursuant to which Mittal Steel
acquired a 70% ownership in Mittal Steel Annaba for a capital contribution of
$25 million. Mittal Steel simultaneously acquired a 70% interest in Mittal Steel
Tebessa, an iron ore producer that supplies Mittal Steel Annaba, from Enterprise
Publique Economique du Fer et du Phosphate, or Ferphos. Mittal Steel also has a
right of first refusal on the purchase of the remaining 30% of Mittal Steel
Annaba and Mittal Steel Tebessa should either Sider or Ferphos, respectively,
sell its remaining interest. Mittal Steel Annaba is the only integrated steel
plant in Algeria, with an annual production capacity of approximately 2.0
million tons of crude steel. Mittal Steel Annaba also owns port facilities at
Annaba, which is located approximately 17 kilometres away from its steel
producing operations, for handling exports of steel products and imports of raw
materials.
In connection with its acquisition, Mittal Steel provided capital
expenditure commitments for Mittal Steel Annaba of $140 million (of which
environmental investment commitments amount to $25 million) over 10 years from
the date of acquisition, including minimum investment of $80 million and a
minimum shipping level of 1.3 million tons per year by October 2006. Mittal
Steel also provided employment commitments extending through October 2005 during
which it agreed that it would not undertake any collective dismissals and agreed
to provide a working capital facility of $15 million for five years. Mittal
Steel also agreed to make capital expenditures of $30 million at Mittal Steel
Tebessa, $20 million of which is to be invested through 2006.
Production Facilities
Mittal Steel Annaba's production facilities consist of six basic
oxygen furnaces and one electric arc furnace. Mittal Steel Annaba completed the
modernization of its hot strip mill in 2002, and completed construction in March
2004 of a new bar mill with an annual production capacity of 400,000 tons.
The following table sets forth a general description Mittal Steel Annaba's
principal production facilities:
------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
------------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
2 coke making batteries (1 565 thousand tonnes 585 thousand tonnes (2)
operational)
1 sintering plant 3,170 thousand tonnes 1,809 thousand tonnes
43
2 blast furnaces 1,896 1,093
6 basic oxygen furnaces and one 1,989 1,115
electric arc furnace
Hot-rolling mill 1,984 474
Cold-rolling mill 992 237
2 bar and rod mills 896 451 (3)
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
(2) Production in excess of capacity is achieved by adjusting the coal blend.
(3) New bar mill completed in March 2004.
Products
Mittal Steel Annaba produces both long and flat products. The flat
product range includes slabs, hot rolled and cold-rolled coils and sheets,
hot-dipped galvanized products and tin plates, and the long product range
includes billets, wire-rods, rebars and seamless tubes. Mittal Steel Annaba
supplies products primarily to the construction, housing, engineering, packaging
and petrochemical industries.
Approximately 80% of Mittal Steel Annaba's products are sold
domestically, with large quantities exported to customers in Europe and the
Maghreb region of northern Africa.
Mittal Steel Annaba obtains approximately 76% of its iron ore
requirement from Mittal Steel Tebessa, and imports the balance. Mittal Steel
Annaba purchases coking coal from various suppliers, including suppliers located
in the United States and Australia and fulfills its coke requirements from its
own production.
MITTAL STEEL TEMIRTAU
General
Mittal Steel acquired steel manufacturing facilities in the
Karaganda region of the Republic of Kazakhstan in November 1995 from the
government of the Republic of Kazakhstan. Mittal Steel subsequently acquired a
nearby power plant and coal and iron ore mines. These facilities are now all
held by Mittal Steel Temirtau and its subsidiaries. Since its acquisition by
Mittal Steel, Mittal Steel Temirtau's annual shipments of finished products have
increased from the pre-acquisition level of 2.5 million tons to 3.96 million
tons in 2004. This increase has been accomplished primarily by investment in
Mittal Steel Temirtau's operating equipment and through application of the
operating, financial, procurement and marketing strategies and strengths of
Mittal Steel. The share of Mittal Steel Temirtau's value-added products,
primarily cold-rolled and coated products, in its total output has increased
from 6% in 1995 to over 52% in 2004.
In December 2001, Mittal Steel Temirtau signed an investment
agreement with the government of the Republic of Kazakhstan, pursuant to which
Mittal Steel Temirtau agreed to make capital expenditures of approximately $580
million. Total related capital expenditures through the year ended December 31,
2004 were $450 million. These capital expenditures have included reconstructing
blast furnaces, constructing a continuous caster, constructing a coke oven
battery, upgrading a tin plate rolling mill and establishing a galvanizing line,
and other technological updates of fixed assets. Mittal Steel Temirtau is also
constructing twin strand slab casters and conducting a major overhaul of a blast
furnace. Mittal Steel Temirtau plans to construct a color coating line, an
additional cold-rolling mill, a coke oven battery and a tinning line in 2005 and
2006.
Mittal Steel has also agreed not to undertake collective dismissals
with respect to Mittal Steel Temirtau employees. In connection with the
acquisition of Mittal Steel Temirtau, Mittal Steel was also exempted from
compliance with certain changes in environmental laws for 10 years from the date
of acquisition.
Production Facilities
Mittal Steel Temirtau's integrated steel plant consists of three
basic oxygen furnaces and four blast furnaces, with a total annual production
capacity of 6.6 million tons of crude steel. Mittal Steel Temirtau's rolled
steel is shipped to customers in coil, strip or sheet form. In 2002, Mittal
Steel Temirtau obtained EN ISO 9001-2000 certification for one of its
galvanizing lines and in 2003 it obtained this certification for its rolling
mills.
44
Over 90% of Mittal Steel Temirtau's production is exported, and the
production that is sold domestically accounts for a majority of domestic steel
consumption.
The following table sets forth a general description of Mittal Steel
Temirtau's principal production facilities:
---------------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004 (1)
---------------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
5 coke oven batteries 2,628 thousand tonnes 2,646 (2) thousand tonnes
1 sintering plant 7,152 thousand tonnes 6,495 thousand tonnes
4 blast furnaces 4,333 4,283
3 basic oxygen furnaces 5,200 5,110
2 slab mills 6,000 5,139
1 hot strip mill 4,600 4,131
2 cold-rolling mills 2,280 2,205
3 electrolytic tinning lines 375 292
2 hot-dip galvanizing and
aluminum-zinc coating lines 805 769
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next step in the process. Hence, the summation of production numbers will
not give the quantity of saleable finished steel products.
(2) Production in excess of the stated capacity is possible by adjusting the
facility loading and product mix.
Products
Mittal Steel Temirtau's product range of flat steel products
includes pig-iron, slabs, hot and cold-rolled coils and sheets, black-plates,
covers, tin-plates, hot-dipped galvanized products and pipes.
Mittal Steel Temirtau sells steel products to a range of industries,
including the tube and pipe making sectors, and manufacturers of consumer goods
and appliances. Export sales of products manufactured by Mittal Steel Temirtau
other than to customers in Europe, the Russian Federation and other CIS
countries are conducted by Mittal Steel Marketing.
A significant percentage of Mittal Steel Temirtau's production is
exported to China and other countries in West, Central and Southeast Asia.
MITTAL STEEL SOUTH AFRICA
General
Mittal Steel South Africa is the largest steel producer in Africa
and has an installed annual production capacity of 8.8 million tons of crude
steel. In 2001, Mittal Steel acquired 8.26% of the shares in Mittal Steel South
Africa, and increased its interest to 34.8% through additional purchases during
2002. In December 2002, Mittal Steel made an offer to Mittal Steel South Africa
shareholders to acquire up to an additional 12.19% of Mittal Steel South
Africa's issued share capital. This offer was fully subscribed, and acquisition
of these shares was completed in February 2003, as a result of which Mittal
Steel's ownership of Mittal Steel South Africa increased to 47%. In return for
the offer, the shareholders agreed to waive their right to receive a mandatory
offer when Mittal Steel's shareholding in Mittal Steel South Africa exceeded
35%. By December 31, 2003, Mittal Steel had made additional purchases by which
it increased its interest in Mittal Steel South Africa to 49.99% and following
approval from the South African Competition Tribunal, Mittal Steel acquired a
further 2,000 shares in June 2004, increasing its shareholding in Mittal Steel
South Africa to slightly over 50%. Mittal Steel South Africa is consolidated
into Mittal Steel's financial statements from January 1, 2004.
45
Approximately 70% of Mittal Steel South Africa's sales in 2004 were
of flat products and 30% were of long products. According to its own estimates,
Mittal Steel South Africa has an overall domestic market share of approximately
63% in 2004. Mittal Steel South Africa's common shares are listed on the JSE
Securities Exchange, South Africa under the symbol "MLA".
Production Facilities
Mittal Steel South Africa operates two integrated steel plants, a
facility based on COREX furnaces and direct reduced iron facilities. Mittal
Steel South Africa has four production facilities: Vanderbijlpark Steel and
Saldanha Steel, which produce flat products, and Newcastle and Vereeniging
Steel, which produce long steel products. The production facilities are
supported by a metallurgical by products division (Iscor Coke and Chemicals).
Mittal Steel South Africa's Vanderbijlpark Steel is located in South Africa's
Gauteng Province and has an annual production capacity of 3.4 million tons.
Saldanha Steel, based on South Africa's west coast near the deep-sea port of
Saldanha, is a technologically modern facility with an annual production
capacity of 1.4 million tons. Newcastle Steel, located in the northern part of
Kwa-Zulu Natal Province, has an annual production capacity of 2.0 million tons.
Vereeniging Steel located in Gauteng province, has an annual production capacity
of 0.4 million tons of specialty steel products. The following table sets forth
a general description of Mittal Steel South Africa's principal production
facilities:
-----------------------------------------------------------------------------------------------------------------
FACILITY CAPACITY (PER YEAR) PRODUCTION IN 2004(1)
-----------------------------------------------------------------------------------------------------------------
(Thousand tons, except as noted)
10 coke oven batteries 2,853 thousand tonnes 2,341 thousand tonnes
2 sintering plants 5,206 thousand tonnes 4,420 thousand tonnes
5 direct reduced iron kilns and one 1,554 thousand tonnes 1,461 thousand tonnes
MIDREX(R) converter
3 blast furnaces 5,500 4,686
1 COREX(R) C2000 865 821
5 basic oxygen furnaces 6,301 4,693
5 electric arc furnaces 3,955 3,056
7 ladle furnaces 6,811 6,253
Continuous casting four slab, two 9,067 7,344
bloom and one billet casters
2 hot strip mills 4,798 4,552
1 hot plate mill 450 386
2 cold-rolling mills with five stand 1,654 1,469
tandem mills
Bar, rod and billet mills 3,329 2,994
Galvanizing lines -- two 645 549
continuous, one electrolytic
2 tinning lines -- one continuous, 462 381
one for cans
2 continuous pickling lines 2,082 1,812
2 continuous annealing lines 601 541
3 tempering mills 733 623
1 colour coating line 98 70
(1) Production facility details include the production numbers for each step in
the steel-making process. Output from one step in the process is used as input
in the next process. Hence, the summation of production numbers will not give
the quantity of saleable finished steel products.
46
Business Assistance Agreement
At the time of its initial investment in Mittal Steel South Africa
in November 2001, Mittal Steel entered into a Business Assistance Agreement, or
the BAA, with Mittal Steel South Africa, which expired on December 31, 2004.
Within the framework of the BAA, Mittal Steel undertook to provide Mittal Steel
South Africa with business, technical, purchasing and marketing assistance; to
assist Mittal Steel South Africa in attaining additional sustainable savings;
and to invest a minimum of $75 million in acquiring a strategic shareholding in
Mittal Steel South Africa prior to March 2003. The agreement originally provided
for Mittal Steel to be allotted a certain percentage of shares in Mittal Steel
South Africa through the end of 2004, contingent on the achievement of specified
cost savings, but was amended in December 2003 to provide for payment in either
shares or cash.
Mittal Steel received $94 million in cash as BAA remuneration in
December 2003 for the sustainability period ending June 2003 and $114 million in
cash as final remuneration in August 2004 for the sustainability period ending
June 2004.
Products
Mittal Steel South Africa's range of products includes hot-rolled
sheets, cold-rolled sheet, coated-sheet, wire-rod and forged steel. Most of
Mittal Steel South Africa's production is sold domestically. Asia is its largest
export market, though significant quantities are also sold to customers in
Europe and other parts of Africa. Mittal Steel South Africa's steel products are
marketed internationally through Macsteel International Holdings B.V., a joint
venture with Macsteel Holdings (Pty) Limited in which Mittal Steel South Africa
holds a 50% interest. Macsteel International purchases products from Mittal
Steel South Africa, and charges a contractual gross margin for its services with
respect to these sales.
47
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The acquisition of LNM Holdings was accounted for as a combination of
entities under common control for accounting and financial reporting purposes.
Under this method of accounting, recorded assets and liabilities of Ispat
International and LNM Holdings are carried forward at their historical amounts,
income of Mittal Steel includes income of Ispat International and LNM Holdings
for the entire fiscal year in which the acquisition occurred and the reported
income of the separate corporations for the prior years are combined. The
Consolidated Financial Statements, which include the accounts of Mittal Steel
and its subsidiaries, all of which are controlled by Mittal Steel, have been
prepared in accordance with U.S. GAAP. Inter-company balances and transactions
have been eliminated on consolidation. Total shipments of steel products include
intercompany shipments. All references to "Sales" include shipping and handling
fees and costs as defined in EITF Issue No. 00-10.
The records of each of Mittal Steel's operating subsidiaries are
maintained in the currency of the country in which the operating subsidiary is
located, using the statutory or generally accepted accounting principles of such
country. For consolidation purposes, the financial statements that result from
such records have been translated to conform to U.S. GAAP and converted into
U.S. dollars, the reporting currency. The Canadian dollar is the functional
currency of Mittal Canada, the Czech koruna is the functional currency of Mittal
Steel Ostrava, the Polish zloty is the functional currency of Mittal Steel
Poland, the South African rand is the functional currency of Mittal Steel South
Africa, the Bosnia and Herzegovina convertible mark is the functional currency
of Mittal Steel Zenica, the Romanian lei is the functional currency of Mittal
Steel Roman, Mittal Steel Iasi and Mittal Steel Hunedoara, the Euro is the
functional currency of Mittal Steel Europe and the U.S. dollar is the functional
currency of all other operating subsidiaries. Transactions in currencies other
than the functional currency of a subsidiary are recorded at the rates of
exchange prevailing at the date of the transaction. Monetary assets and
liabilities in currencies other than the functional currency are re-measured at
the rates of exchange prevailing at the balance sheet date and the related
transaction gains and losses are reported in the statements of income. Upon
consolidation, the results of operations of Mittal Steel's subsidiaries and
affiliates whose functional currency is other than the U.S. dollar are
translated into U.S. dollars at weighted average exchange rates in the relevant
year and assets and liabilities are translated at year-end exchange rates.
Translation adjustments are presented as a separate component of other
comprehensive income in the Consolidated Financial Statements and are included
in net earnings only upon sale or liquidation of the underlying foreign
subsidiary or affiliated company.
RECENT ACQUISITIONS
Mittal Steel completed a number of acquisitions of steel producing assets
during 2001, 2002 and 2003. Mittal Steel has completed a number of additional
acquisitions in 2004, as set forth below.
- In December 2004, Mittal Steel acquired LNM Holdings from Mittal Steel
S.a.r.l., a wholly owned subsidiary of The Richmond Investment Holdings
Limited (an entity controlled by the controlling shareholder of Mittal
Steel and, at the time, the sole shareholder of LNM Holdings). Mittal
Steel S.a.r.l. received 0.27931958 Mittal Steel class A common shares and
0.77068042 Mittal Steel class B common shares, for each LNM Holdings
common share, or, in the aggregate, 139,659,790 Mittal Steel class A
common shares and 385,340,210 Mittal Steel class B common shares.
- In December 2004, Mittal Steel acquired a 51% interest in Mittal Steel
Zenica in Bosnia from the Government of the Federation of Bosnia and
Herzogovina and Kuwait Consulting & Investment Co. ("KCIC"). In
conjunction with the acquisition of the controlling interest in Mittal
Steel Zenica, the Company irrevocably committed to purchase the additional
49% interest in the total outstanding capital by November 2006.
Simultaneously, KCIC, which holds these shares at December 31, 2004, has
irrevocably committed to sell this 49% interest in Mittal Steel Zenica to
the Company. Because the irrevocable commitments transfer operational and
economic control of these remaining shares, it has been accounted for as
an acquisition of the remaining shares, with a liability recorded equal to
the fair value of the guaranteed payments. As of the acquisition date, the
Company's total effective ownership percentage in Mittal Steel Zenica was
100%. The results of Mittal Steel Zenica have been included in the
Consolidated Financial Statements since December 2004.
- In June 2004, Mittal Steel purchased 2,000 additional shares in Mittal
Steel South Africa, raising its stake in Mittal Steel South Africa to just
above 50%.
48
- In May 2004, Mittal Steel acquired a 44.5% interest, subsequently
increased to a 88.3% interest, in Mittal Steel Skopje (CRM) a.d. Mittal
Steel Skopje (CRM) a.d. is located near Skopje, Macedonia.
- In May 2004, Mittal Steel acquired a 56.8% interest, subsequently
increased to a 77.3% interest, in Mittal Steel Skopje (HRM) a.d. Mittal
Steel Skopje (HRM) a.d. is located near Skopje, Macedonia.
- In April 2004, Mittal Steel entered into a joint venture with government
of Bosnia and Herzegovina pursuant to which Mittal Steel acquired a 51%
interest in the RZR Ljubija iron ore mines in Bosnia and Herzegovina.
These mines have been non-operational since the early 1990s.
- In April 2004, Mittal Steel acquired a 80.9% interest in Mittal Steel
Hunedoara which increased to 86.6% as a result of debt to equity swap.
Mittal Steel Hunedoara, located in Romania, is a downstream steel products
manufacturer.
- In March 2004, Mittal Steel acquired a 69% interest in Mittal Steel
Poland, which increased to 72.4% as at December 31, 2004, and a commitment
to purchase a 25% interest by December 2007. Mittal Steel Poland, located
in Poland, is one of the largest steel producers in Central and Eastern
Europe.
RECENT DEVELOPMENTS
- On March 11, 2005, Ispat Inland ULC, an indirect wholly owned subsidiary
of Mittal Steel, received the consents from the holders of a majority of
its outstanding Senior Secured Floating Rate Notes due 2010 and 9.75%
Senior Secured Notes due 2014, to amend the terms of the indenture
governing the notes to eliminate the requirement that any acquisition of a
U.S. steel-making business be made by Mittal Steel through its wholly
owned subsidiary Inland or its subsidiaries.
- On February 22, 2005, Mittal Steel Ruhrort signed an agreement, with
ThyssenKrupp Stahl AG for the purchase of between 1.3 and 1.5 million
tonnes of pig iron each year for a 20-year term commencing October 2007.
This agreement replaces an existing supply agreement between the parties
under which Mittal Steel Ruhrort agreed to purchase from ThyssenKrupp
Stahl AG 1.3 million tonnes of pig iron each year until September 2007.
- On February 11, 2005, Fitch Ratings assigned a "BBB" senior unsecured
rating and a "F2" short term rating to Mittal Steel.
- On February 10, 2005, Mittal Steel's board of directors approved a
dividend policy for the fiscal year 2005 of $0.10 per share per quarter
(as from the second quarter of 2005), which is subject to approval by
Mittal Steel's shareholders.
- On February 1, 2005, Moody's Investor Services Ltd. assigned a "Baa3"
senior implied rating to Mittal Steel and upgraded Mittal Steel's senior
unsecured issuer rating to "Ba1". In addition, Moody's Investor Services
Ltd. upgraded the senior notes of Mittal Steel Europe and Inland to "Ba1".
- On January 25, 2005, Mittal Steel announced that it had arranged
commitments, subject to customary conditions, from a group of arrangers
for a $3.2 billion unsecured revolving credit facility, the proceeds from
which it expects to utilize to finance part of the cash portion of the
merger with ISG, to refinance certain existing indebtedness and for
general corporate purposes.
- On January 24, 2005, Standard & Poor's Ratings Services raised its
long-term corporate credit and senior secured debt ratings on Inland to
"BBB-" from "BB-". In addition, Standard & Poor's Ratings Services
assigned a "BB+" rating to Inland's senior unsecured debt.
- On January 14, 2005, Mittal Steel signed a share purchase agreement with
Hunan Valin Iron & Steel Group Co., Ltd., or the Valin Group, to acquire
37.17% of the outstanding shares of Hunan Valin Steel Tube & Wire Co.,
Ltd., or Valin, a listed subsidiary of the Valin Group. Under the terms of
the share purchase agreement, Mittal Steel will acquire 656,250,000 legal
person shares from the Valin Group at a price of RMB 3.96 per share, for a
total consideration of RMB 2,599 million, approximately $314 million. The
consideration is subject to adjustment based on the net asset value of
Valin as at December 31, 2004. Subject to the receipt of all necessary
approvals and waivers from the regulatory authorities in the People's
Republic of China, the transaction is expected to close in the second
quarter of 2005.
49
FACTORS AFFECTING THE BUSINESS
CYCLICALITY OF THE STEEL INDUSTRY
The steel industry is highly cyclical and is affected significantly by
general economic conditions and other factors such as worldwide production
capacity, fluctuations in steel imports/exports and tariffs. Steel prices are
sensitive to a number of supply and demand factors. Recently, steel markets have
been experiencing larger and more pronounced cyclical fluctuations. This trend,
combined with the upward pressure on costs of key inputs, mainly metallics and
energy, presents an increasing challenge for steel producers. The key drivers
for maintaining a competitive position and good financial performance in this
challenging environment are product differentiation, customer service, cost
reduction and cash management.
In 2001, the steel industry faced a severe downturn, which gradually
reversed in 2002. Section 201 trade rulings in the United States and certain
emerging shifts in global supply and demand for steel brought about improvements
in both demand for and pricing of steel products.
In 2003, world crude steel production increased by 7%, primarily due to
China where production increased by 21%, making it the largest steel producing
nation. Further, steel imports into China increased by 53% from 2002 to meet the
demand from the automobile, white goods and construction sectors. The strong
demand in China increased prices for steel as well as key raw materials such as
iron ore, coke, scrap and alloys. To partly mitigate the impact of these input
cost increases, steel companies in the United States started applying
surcharges.
In the year 2004, world crude steel production increased by 8.8% to 1.05
billion metric tonnes compared to the same period in 2003. The growth in 2004
continues to be led by China, which increased production by 23.2%, while growth
in North America was 5% and growth in the European Union (excluding the 10 new
member states in 2004) was 7%, largely led by robust growth in industrial
production. Costs of key raw materials have continued to increase due to
imbalances between demand and supply in certain regions and higher freight
costs, leading to higher steel prices. Although steel prices do follow trends in
raw material prices, the percentage changes may not be to the same extent.
Percent increases in costs of input factors are driven by demand-supply balance,
availability and demand from alternative markets. Similarly steel pricing and
demand is driven by demand from the end-user segments. Steel price surcharges
are often implemented on contracted steel prices to recover increases in input
costs. However, spot market steel prices and short-term contracts are driven by
market prices.
CONSOLIDATION IN THE STEEL INDUSTRY
Within the past few years, the U.S. steel industry has significantly
consolidated, primarily led by ISG, United States Steel Corporation ("US
Steel"), Nucor and Steel Dynamics. ISG was formed as a result of the acquisition
of LTV, Bethlehem, Acme, Weirton and Georgetown in 2004. US Steel acquired
National Steel; Nucor acquired Birmingham Steel and Trico; while Steel Dynamics
acquired Qualitech Steel and GalvPro.
In Europe consolidation took place with the formation of Arcelor, which is
a combination of Aceralia, Arbed and Usinor, three large European companies. In
the recent past, Mittal Steel has acquired several assets primarily in Central
and Eastern Europe, namely Romania, Czech Republic, Poland, Macedonia and
Bosnia. Consolidation has occurred to achieve greater efficiency and economies
of scale, particularly in response to the effective consolidation undertaken by
raw material suppliers and consumers of steel products.
GLOBAL STEEL TRADE
Mittal Steel's ability to sell products is influenced by a number of
factors including in varying degrees, by trends in global trade for steel
products, particularly trends in imports of steel products into its principal
markets. In the United States, Section 201 tariffs were in place through most of
2003. U.S. steel imports fell by 29% primarily due to higher demand in China and
higher ocean freight costs. In the 2004, high freight costs and continuing
strong demand in China, Asia and Europe protected the U.S. market from cheaper
imports. As a result, prices in North America have increased in 2004.
RAW MATERIALS AND OCEAN FREIGHT COSTS
50
Raw material prices and ocean freight costs have generally continued to
increase in 2004. These price increases are mainly due to increased demand of
key raw materials and longer voyage timings caused by changes in supply sources,
as well as to port congestion, which reduces availability of ships and
consequently increases freight rates.
Chinese steel mills, which have usually sourced their iron ore from
Australia, had to source a part of their needs of iron ore from as far as Brazil
to meet growing demand. Imports of iron ore into China continued to increase
through the year 2004 compared to the same period in 2003. China imported 41%
more iron ore in 2004 (approximately 200 million tonnes), as demand from
steel-makers surged. This demand has increased not just iron ore prices, but
also freight costs as demand for Capesize vessels increased in 2004.
Coking coal prices have been increasing over the last two years. Prices
increased substantially due to higher demand and supply constraints. Coke export
prices have increased in China due to a new value-added tax as well as to the
removal of tax credits that were available in 2003. Further, coke exports from
China are also affected by transport infrastructure. Overall, prices have
increased more than three-fold compared to levels at the beginning of 2003.
Natural gas prices in North America continued to be up to $7 per mmbtu for
the year 2004. Demand for natural gas in North America is increasing at around
3% per annum while supplies are increasing by only 1%. Prices did not ease
during the summer of 2004 mainly due to higher oil prices, delays in bringing
new production to market and sustained demand.
Demand for high-grade scrap continued to be robust in 2004. During 2004,
scrap prices in North America continued to increase and touched a high of $400
per long ton for automotive bundles due to a combination of strong demand from
the steel industry, transport availability and cost. Scrap prices in Europe
continued to increase on the back of export-led demand from Turkey and Asia.
Scrap prices have shown a tendency to soften in the early 2005, however, they
remain higher than 2003.
Ocean freight rates remained volatile throughout the year 2004, exposing
the fragile state of this supply/demand balance. Strong demand in China for
metallics has also increased the need for Capesize and Panamex vessels to
transport coking coal and ore. Capesize ships are very large bulk carriers with
deadweight exceeding 150,000 tons. Such ships are unable to go through the Suez
Canal and therefore have to sail round the Cape of Good Hope to and from Europe.
Panamax ships are large ships capable of transiting the Panama Canal and have a
deadweight of 55,000 tons. In addition, longer voyage times to the Far East and
port congestion in Asia, as well as at loading ports, contributed to the
shortage of ships in the Western Hemisphere. Given the inelastic nature of
shipping capacity in the short term, this has increased freight costs
significantly in 2004.
IMPACT OF EXCHANGE RATE MOVEMENTS
Mittal Steel operates in different geographical locations with different
functional currencies. The U.S. dollar weakened against the Euro, Algerian
dinar, Czech koruna, Kazakh tenge, Polish zloty, Romanian lei, South African
rand and the Canadian dollar in the year 2004. These exchange rate movements had
an adverse impact on the costs and competitive position of some of Mittal
Steel's subsidiaries, particularly the Canadian, Algerian, Czech, Polish,
Romanian, Kazakh and South African operating subsidiaries and had a favorable
impact on its operating subsidiaries in the United States. However, the
translation impact of the functional currencies into U.S. dollars was favorable
for most of Mittal Steel's non-U.S. operating subsidiaries.
Mittal Steel manages this risk through specific hedges to the extent
management considers appropriate.
CRITICAL ACCOUNTING POLICIES AND USE OF JUDGMENTS AND ESTIMATES
The information regarding and analysis of Mittal Steel's operational
results and financial condition are based on figures contained in the Mittal
Steel's Consolidated Financial Statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires Mittal Steel's management to make judgments in relation to certain
estimates and assumptions used in the application of accounting policies. These
judgments and estimates are made on the basis of available facts and are a
normal part of the process of preparing financial statements. While the use of
different assumptions and estimates could have caused the results to be
different from those reported, Mittal Steel believes that the possibility of
material differences between two periods is considerably reduced because of the
consistency in the application of such judgments.
51
The accounting policies that Mittal Steel considers critical, in terms of
the likelihood of a material impact arising from a change in the assumptions or
estimates used in the application of the accounting policy in question, are
outlined below.
IMPAIRMENT OF LONG LIVED ASSETS
According to Statement of Financial Accounting Standard ("SFAS") 144, an
impairment loss must be recognized when the carrying amount of a long-lived
asset is not recoverable and exceeds its fair value. The carrying amount of a
long-lived asset is not recoverable if it exceeds the expected sum of the
undiscounted cash flows over its remaining useful life. Additionally, APB
Opinion No. 18, "The Equity Method of Accounting For Investment in Common
Stock," requires that a loss in value of an equity method investment that is
other than a temporary decline should be recognized. Based on these accounting
standards, Mittal Steel recognized the following impairments in 2002:
- Impairment of the idled 2A Bloomer and 21" Bar Mill in the Americas region
(Inland), resulting in an asset write-off of $23 million, following an
assessment that those facilities, which were idled in the fourth quarter
of 2001, were unlikely to be restarted; and
- Write-off of the assets associated with the Empire Mine of $39 million in
connection with the sale, effective December 31, 2002, of part of Mittal
Steel's interest in the Empire Partnership (and the sale of its related
fluxing equipment) to a subsidiary of Cleveland-Cliffs Inc., thereby
reducing Mittal Steel's interest in the Empire Mine from 40% to 21%.
During 2003 and 2004 there was no material uncertainty relating to the
recoverability of long-lived assets. Additionally, there were only temporary
declines on equity method investments. Mittal Steel continues to monitor both
internal and external factors which could result in an impairment of long-lived
assets or a loss in value of an equity method investment.
DEFERRED TAX ASSETS
Mittal Steel charges tax expenses or accounts for tax credits based on the
differences between the financial statement amounts and the tax base amounts of
assets and liabilities. Deferred tax assets are also recognized for the
estimated future effects of tax losses carried forward. Mittal Steel annually
reviews the deferred tax assets in the different jurisdictions in which it
operates to assess the possibility of realizing such assets based on projected
earnings. A valuation allowance is recorded when it is more likely than not,
based on these projections, that the deferred tax assets will not be realized.
Mittal Steel expects that it is more likely than not that the deferred tax
assets of $1,161 million as of December 31, 2004 will be fully realized. The
amount of future taxable income required to recover this asset is approximately
$4,400 million.
PROVISIONS FOR PENSIONS AND OTHER POST EMPLOYMENT BENEFITS (SFAS 87 AND 106)
Mittal Steel's operating subsidiaries have different types of pension
plans for their employees. Also, most of the subsidiaries in the Americas region
offer post employment benefits, primarily post employment health care. The
expense associated with these pension plans and employee benefits, as well as
the carrying amount of the related liability/asset on the balance sheet is based
on a number of assumptions and factors such as the discount rate, expected wage
increases, expected return on plan assets, future health care cost trends and
market value of the underlying assets. Actual results that differ from these
assumptions are accumulated and amortized over future periods and, therefore,
will affect recognized expense and the recorded obligation in future periods,
particularly in the case of Mittal Steel's U.S. and Canadian subsidiaries. Such
accumulated unrecognized costs amounted to $1,074 million for pensions, and $144
million for other post retirement benefits as of December 31, 2004. In addition,
there is an unrecognized net gain of $102 million relating to other post
retirement benefits.
The decrease in the discount rate from 6.25% to 6.05% in 2004 contributed
to the increase in unrecognized prior service costs. These costs are amortized
over the estimated average remaining service period of active participants of
approximately 11 years.
With respect to our U.S. operating subsidiaries, a 0.50% change in the
discount rate would increase or decrease 2004 pension and other post retirement
benefits expenses by approximately $11.0 million and increase
52
or decrease pension and other post retirement benefits liabilities by
approximately $184 million. A 0.50 percent change in the assumed rate of return
on plan assets would increase or decrease pension cost by $9.7 million.
ENVIRONMENTAL AND OTHER CONTINGENCIES
Mittal Steel is currently engaged in the investigation and remediation of
environmental contamination at a number of the facilities through which it
operates. Mittal Steel is subject to changing and increasingly stringent
environmental laws and regulations concerning air emissions, water discharges
and waste disposal, as well as certain remediation activities that involve the
clean up of soils and groundwater. Mittal Steel recognizes a liability for
environmental remediation when it is likely that such remediation will be
required and the amount can be estimated. Environmental liabilities assumed in
connection with the acquisition of steel facilities and other assets are
recorded at the present value of the estimated future payments. There are
numerous uncertainties over both the timing and the ultimate costs that Mittal
Steel expects to incur with respect to this work. Significant judgment is
required in making these estimates and it is reasonable that others may come to
different conclusions. If, in the future, Mittal Steel is required to
investigate and remediate any currently unknown contamination and waste on
properties that it owns, Mittal Steel may record significant additional
liabilities. Also, if Mittal Steel estimates the cost to remediate currently
known contamination and waste change, it will reduce or increase the recorded
liabilities through credits or charges in the income statement.
The estimates of loss contingencies for environmental matters are based on
various judgments and assumptions. These estimates typically reflect judgments
and assumptions relating to the likelihood, nature, magnitude and timing of
assessment, remediation and/or monitoring activities and the probable cost of
these activities. In some cases, judgments and assumptions are made relating to
the obligation or willingness and ability of third parties to bear a
proportionate or allocated share of cost of these activities, including third
parties who sold Mittal Steel or purchased assets from it subject to
environmental liabilities. Mittal Steel also considers, among other things, the
activity to date at particular sites, information obtained through consultation
with applicable regulatory authorities and third-party consultants and
contractors and its historical experience with other circumstances judged to be
comparable. Due to the numerous variables associated with these judgments and
assumptions, and the effects of changes in governmental regulation and
environmental technologies, both the precision and reliability of the resulting
estimates of the related contingencies are subject to substantial uncertainties.
Mittal Steel regularly monitors environmental matters and estimated exposure to
loss contingencies, reporting changes to the appropriate individuals and
agencies, and modifying any disclosure of such matters and contingencies.
PURCHASE ACCOUNTING
Accounting for acquisitions requires Mittal Steel to allocate the cost of
the enterprise to the specific assets acquired and liabilities assumed based on
their estimated fair values at the date of the acquisition. This often results
in positive or negative goodwill. Accounting principles allow Mittal Steel up to
one year to acquire all necessary valuation information for the allocation.
Management often obtains appraisals and actuarial or other valuations in order
to aid in determining the estimated fair value of assets acquired and
liabilities assumed. In addition, when the fair value of the assets acquired
exceeds their costs, Mittal Steel is required to pro rate that excess to reduce
noncurrent assets, making the amount initially assigned to all assets and
liabilities more important. This application of management judgment and
estimates to account for acquisitions could significantly affect the financial
statements. In light of this, Mittal Steel considers purchase accounting a
critical accounting policy.
A. OPERATING RESULTS
The following review of operating results is based on the Consolidated
Financial Statements included herein.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Summary
The following events, which occurred in 2004, have had a significant
effect on Mittal Steel's historical results of operations:
53
- Mittal Steel's Consolidated Financial Statements for the year ended
December 31, 2004 include the results of the following operations, the
results of which were not, or not fully, included in the year ended
December 31, 2003:
- The results of Mittal Steel Poland were included from March 5, 2004,
the date of its acquisition by Mittal Steel.
- Mittal Steel acquired Mittal Steel Ostrava on January 31, 2003.
Therefore the relevant results of operations of Mittal Steel Ostrava
for 2003 are included only for the eleven months ended December 31,
2003.
- Mittal Steel acquired controlling interests in Mittal Steel Iasi in
July 2003, Mittal Steel Roman in December 2003 and Mittal Steel
Hunedoara in April 2004.
- Mittal Steel acquired Mittal Steel Skopje (formerly known as RZ
Valavnica Z.A. Lenti a.d. and RZ Ladna Valavnica a.d.) in May 2004.
- Mittal Steel South Africa is being consolidated from January 1, 2004.
In addition, Mittal Steel increased its equity interest in Mittal
Steel South Africa from 49.99% to slightly over 50% in 2004, and it consolidated
Mittal Steel South Africa's results of operations in its financial statements.
Therefore, Mittal Steel's Consolidated Financial Statements for the year ended
December 31, 2004 include the results of operations of Mittal Steel South Africa
for the entire period. Prior to January 1, 2004 Mittal Steel's investment in
Mittal Steel South Africa was accounted for under the equity method, pursuant to
which Mittal Steel recorded a percentage of Mittal Steel South Africa's net
income equal to its equity interest as "income from equity investment." Although
the inclusion of Mittal Steel South Africa's results in the Mittal Steel's
Consolidated Financial Statements in the year ended December 31, 2004 resulted
in significant increases in Mittal Steel's consolidated figures for, among other
things, sales, shipments, operating income, gross profit and selling, general
and administrative expenses during that period, the increase in Mittal Steel's
equity interest was not large enough to have a material effect on its net
income, because its share of net income was always included in prior periods as
a line item in the income statement.
Results of Operations
The key performance indicators which Mittal Steel's management uses to
analyze operations are sales, average selling price, shipments, cost per ton,
gross profit and operating income. Management's analysis of liquidity and
capital resources is driven by working capital and operating cash flow. The
following analysis presents key performance indicators by each operating
segment. The gross profit and operating income analyses are carried out for
Mittal Steel as a whole.
Sales, Shipments and Average Selling Prices
During the year ended December 31, 2004, Mittal Steel experienced
benefits from the continued increase in the global demand and prices for steel
beginning in 2004. Sales of Mittal Steel increased to $22.2 billion for the year
ended December 31, 2004, compared to $9.6 billion for the year ended December
31, 2003. The following table gives a summary of sales for each of Mittal
Steel's regions:
SALES FOR THE YEAR ENDED (3) CHANGE IN
---------------------------- --------------------------------------
AVERAGE
2004 2003 SALES SHIPMENTS SELLING PRICE
---- ---- ----- --------- -------------
REGION (in $ millions) (in $ millions) (%) (%) (%)
------
Americas 6,560 4,072 61 4 51
Europe (1) 9,905 3,800 161 68 59
Rest of World (2) 7,647 2,275 236 132 52
(1) Includes results of Mittal Steel Ostrava from January 31, 2003 and Mittal
Steel Poland from March 5, 2004 and other subsidiaries as discussed above.
(2) Includes results of Mittal Steel South Africa from January 2004.
(3) Figures are prior to intercompany eliminations.
Excluding the effects of the acquisition of Mittal Steel Poland,
Mittal Steel Ostrava, Mittal Steel South
54
Africa and the other subsidiaries acquired during the year ended December 31,
2004, sales increased in Mittal Steel to $12.5 billion for the year ended
December 31, 2004 from $8.4 billion for the year ended December 31, 2003.
Average selling prices increased by 54% for the year ended December
31, 2004 compared to the year ended December 31, 2003. Excluding the effects of
Mittal Steel Poland, Mittal Steel Ostrava, Mittal Steel South Africa and the
other subsidiaries acquired during the year ended December 31, 2004, average
selling prices increased by 51% for the year ended December 31, 2004 compared to
the same period in 2003. The average price realized improved as a result of
strong demand for steel, leading to higher base selling prices, surcharges for
the cost of raw materials and a more favorable product mix.
Mittal Steel's shipments increased to 42.1 million tons for the year
ended December 31, 2004 compared to 27.4 million tons for the year ended
December 31, 2003. Excluding the effects of Mittal Steel Poland, Mittal Steel
Ostrava, Mittal Steel South Africa and the other subsidiaries shipments
increased to 25.6 million tons in December 31, 2004 from 24.5 million tons as at
December 31, 2003. The increase in shipments was due to the strong demand for
steel.
Americas
During the year ended December 31, 2004, sales in the Americas region
increased to $6,560 million, compared to $4,072 million for the year ended
December 31, 2003. This increase was largely due to an increase in selling
prices as a result of a strong global demand, better product mix, and the
implementation of pricing surcharges designed to offset the increase in key
input costs, such as coke, scrap and iron ore. In addition, the strength of the
Canadian dollar against the U.S. dollar also resulted in a higher average
selling price in U.S. dollars.
The average selling price in the Americas region increased by 51% at
December 31, 2004 compared to the similar period in 2003.
Total shipments in the Americas region increased to 12.1 million tons
as at December 31, 2004 from 11.6 million tons as at December 31, 2003 largely
due to the increase in demand as well as the benefits derived following
completion of the reline of Blast Furnace No. 7 at Inland.
Europe
During the year ended December 31, 2004, Mittal Steel completed the
acquisition of Mittal Steel Poland. Due to its experience in augmenting its
business through strategic acquisitions, Mittal Steel believes that it has been
able to successfully manage the integration of Mittal Steel Poland into its
business.
For the year ended December 31, 2004, sales in the European region
have increased to $9,905 million as compared to $3,800 million for the year
ended December 31, 2003.
Excluding the effects of the subsidiaries acquired during the year
ended December 31, 2004, for the year ended December 31, 2004, sales in the
European region increased to $3,787 million as compared to $2,628 million for
the year ended December 31, 2003. The average selling price in the European
region increased by 59% at December 31, 2004 compared to the similar period in
2003. Excluding the effect of Mittal Steel Poland, Mittal Steel Ostrava and the
other subsidiaries acquired during the year ended December 31, 2004, average
selling price in the European region increased by 54% at December 31, 2004
compared to a similar period in 2003 due to increased global demand for steel
products and improved product mix. In addition, the strength of the Euro against
the U.S. dollar resulted in a higher average selling price in U.S. dollars.
Shipments in the European region increased to 18.0 million tons at
December 31, 2004 from 10.7 million tons at December 31, 2003. Excluding the
impact of Mittal Steel Poland, Mittal Steel Ostrava and the other subsidiaries
acquired during the year ended December 31, 2004, shipments increased to 8.4
million tons at December 31, 2004 from 7.8 million tons at December 31, 2003.
Shipments increased across most product lines driven by strong global demand.
Rest of World
Sales in the Rest of World region for the year ended December 31, 2004
increased to $7,647 million compared to $2,275 million for the year ended
December 31, 2003. Excluding the effect of the consolidation of
55
Mittal Steel South Africa in the Rest of World region, for the year ended
December 31, 2004, sales increased to $4,046 million from $2,275 million for the
year ended December 31, 2003. This was largely due to higher prices. In
addition, the strength of the South African rand against the U.S. dollar
resulted in a higher average selling price in U.S. dollars.
The average selling price in the Rest of World region increased by 52%
at December 31, 2004 compared to the similar period in 2003. Excluding the
impact of Mittal Steel South Africa, average selling prices increased by 45% for
year ended December 31,2004 as compared to the year ended December 31, 2003.
Shipments in the Rest of World region increased to 11.9 million tons
at December 31, 2004 from 5.1 million tons at December 31, 2003. Excluding the
impact of the consolidation of Mittal Steel South Africa, shipments in the Rest
of World region remained flat at 5.1 million tons between December 31, 2004 and
December 31, 2003.
Cost of Sales
Due to the increase in the cost of key inputs, such as iron ore,
scrap, electricity, natural gas and transportation, the average cost per ton for
Mittal Steel increased by 31% for the year ended December 31, 2004, compared to
the year ended December 31, 2003.
Excluding the effects of cost per ton related to Mittal Steel Poland,
Mittal Steel Ostrava, Mittal Steel South Africa, and other subsidiaries acquired
during the 2004, Mittal Steel's average cost per ton increased by 30% for the
year ended December 31, 2004, compared to the year ended December 31, 2003. This
increase in cost was largely due to the higher cost of raw materials and other
key inputs driven by an increasingly strong sellers market for these inputs.
Americas
In the Americas region, average cost per ton increased by 22% for the
year ended December 31, 2004, compared to the year ended December 31, 2003. This
was largely due to an increase in the cost of key inputs, such as coke, coal,
scrap and alloys. In addition, at Inland labor costs were higher in 2004 as
compared to the 2003 due to increases in employee profit sharing and pension
expense. The appreciation of the Canadian dollar against the U.S. dollar also
resulted in a higher cost per ton in U.S. dollars.
Europe
Average cost per ton in the European region, increased by 41% for the
year ended December 31, 2004, compared to the year ended December 31, 2003.
Excluding the effects of subsidiaries acquired during 2004, Mittal Steel's
average cost per ton increased by 35% for the year ended December 31, 2004,
compared to the year ended December 31, 2003. This increase is primarily due to
increases in the cost of key raw material such as scrap, iron ore, coal, coke,
energy and ferro alloy prices. In addition, the significant appreciation of the
Euro and other relevant currencies against the U.S. dollar resulted in a higher
cost in U.S. dollars.
Rest of World
Average cost per ton in the Rest of World region, increased by 87% for
the year ended December 31, 2004, compared to the year ended December 31, 2003.
Excluding the inclusion of Mittal Steel South Africa, average cost per ton
increased by 37% during 2004.
Average cost per ton increased due to increases in the cost of
purchased metallics and other raw materials. In addition, the strength of the
South African rand against the U.S. dollar also resulted in a higher cost in
U.S. dollar.
Gross Profit and Gross Profit Margins
For the year ended December 31, 2004, compared to the year ended
December 31, 2003 overall gross profit (sales less cost of sales, excluding
depreciation) increased by 142% and gross profit margin (gross profit divided by
Sales) increased by 34%.
56
The following table gives a summary of the gross profit margins of
Mittal Steel (including subsidiaries acquired during the year ended December 31,
2004) by region:
GROSS PROFIT MARGIN
YEAR ENDED
-------------------
2004 2003
---- ----
REGION (%) (%)
------
Americas 28 9
Europe 29 18
Rest of World 38 43
Americas
In the Americas region, gross profit increased to $1,848 million at
December 31, 2004 from $371 million at December 31, 2003. Gross margin in the
Americas improved due to higher base prices and implementation of pricing
surcharges, favorable U.S. to Canadian dollar exchange rates and an increase in
the volume of sales. These favorable trends were offset by higher input costs,
higher employee profit shares and pension and healthcare expenses.
Europe
In the European region, gross profit increased to $2,826 million at
December 31, 2004, from $696 million at December 31, 2003. Excluding the effects
of Mittal Steel Poland, Mittal Steel Ostrava and other subsidiaries acquired
during 2004, gross profit increased to $948 million at December 31, 2004 from
$448 million at December 31, 2003. Gross margin in the European region improved
mainly due to improved average selling prices, strong demand and a favorable
product mix. Increases in the volume of sales also contributed to higher
margins, although higher input costs offset the gains in gross margins.
Rest of World
In the Rest of World region, gross profit increased to $2,940 million
at December 31, 2004 from $969 million at December 31, 2003 due to higher
selling prices which were greater than prior increases in selling prices, the
addition of subsidiaries acquired during 2004 and the translation impact of
higher exchange rates against the U.S. dollar. Excluding the effects of Mittal
Steel South Africa, gross profit increased to $1,523 million at December 31,
2004 from $969 million at December 31, 2003 due to higher selling prices.
However, in percentage terms, the gross profit margin went down in 2004, due to
consolidation of Mittal Steel South Africa which had a lower gross profit
margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses at Mittal Steel increased
by 118% for the year ended December 31, 2004, compared to the year ended
December 31, 2003, primarily due to higher levels of sales activity, as well as
higher costs of logistics. Excluding the acquisition of Mittal Steel Poland,
Mittal Steel Ostrava, Mittal Steel South Africa and other subsidiaries acquired
during 2004, selling, general and administrative expenses have increased by 32%.
Operating Income
Operating income at Mittal Steel increased to $6.1 billion for the
year ended December 31, 2004, compared to $1.3 billion for the year ended
December 31, 2003.
Excluding the impact of the subsidiaries acquired during 2004,
operating income increased to $3.8 billion from $1.2 billion for the ended
December 31, 2003. This increase was largely due to a higher average selling
price that more than offset the increases in costs, and the inclusion of the
subsidiaries acquired during 2004.
57
The following table gives a summary of the operating income of Mittal
Steel in its regions:
OPERATING INCOME OPERATING MARGIN
---------------------------------- ----------------
YEAR ENDED
---------------------------------- ----------------
REGION 2004 2003 2004 2003
------ --------------- --------------- ------ ------
(in $ millions) (in $ millions) (%) (%)
Americas 1,583 136 24 3
Europe 1,965 317 20 8
Rest of World 2,399 707 31 31
Americas
For the year ended December 31, 2004, compared to the year ended
December 31, 2003, operating income in the Americas region increased to $1,583
million from $136 million largely due to increased gross profit (as discussed
above) and reduction in property tax.
Europe
For the year ended December 31, 2004, compared to the year ended
December 31, 2003, operating income in the European region increased to $1,965
million from $317 million. Excluding the impact of the Mittal Steel Poland,
Mittal Steel Skopje, and Mittal Steel Hunedoara, for the year ended December 31,
2004, compared to the year ended December 31, 2003, operating income increased
to $588 million from $193 million, largely due to increased gross profit (as
discussed above).
Rest of World
Operating income in the Rest of World region for the year ended
December 31, 2004, compared to the year ended December 31, 2003, increased to
$2,399 million from $707 million. Excluding the impact of Mittal Steel South
Africa, operating income in the Rest of World region increased to $1,341 million
from $707 million, largely due to increased gross profit (as discussed above).
Financing Costs
Net interest expense at Mittal Steel increased to $186 million at
December 31, 2004, as compared to $175 million as at December 31, 2003 primarily
due to refinancing of debt at Inland.
Income Tax
Mittal Steel's consolidated income tax expense amounted $817 million
for the year ended December 31, 2004, as compared to $184 million for the year
ended December 31, 2003. In both 2004 and 2003, the effective tax rate was
approximately 13% on income before taxes of $6,133 million and $1,400 million,
respectively. The effective tax rate in 2004 differed from the weighted average
combined statutory rate of 22%, mainly as a result of reductions in valuation
allowances against tax loss carryforwards, which accounted for 56% of the
difference, and tax holiday benefits, which accounted for an additional 33% of
the difference.
In 2004, the high level of income earned by the Company resulted in
the utilization of significant tax loss carryforwards against which the Company
had previously recorded full valuation allowances. Total net reductions in
valuation allowances in 2004 amounted to $474 million, which is comprised mainly
of reductions in valuation allowances of the South African operating subsidiary
of $207 million and the Czech operating subsidiary of $170 million.
As a result of commitments under certain agreements related to
acquisitions and capital investments undertaken by the Company, income from
operating activities in certain countries such as Algeria and Romania were
wholly exempt from taxes in 2004. Such benefits reduced the tax expense of the
operating subsidiaries in Romania and Algeria by $190 million and $45 million,
respectively.
The Company signed an amendment to the Mittal Steel Galati share
purchase agreement resulting in termination of their 5 year exemption to pay
corporate income tax and other economic incentives previously provided to Mittal
Steel Galati. This amendment has prospective impact beginning January 1, 2005.
Mittal Steel Annaba and Mittal Steel Tebessa are exempt from corporate tax for a
period of 10 years commencing from
58
October 2001 provided certain commitments are met as specified in Note 18 to the
Mittal Steel Consolidated Financial Statements.
Minority Interest
Minority interest in income of subsidiaries amounted to $615 million
in 2004. This consisted primarily of the share of minority shareholders in the
net income of primarily Mittal Steel South Africa, Mittal Steel Poland, Mittal
Steel Ostrava, Mittal Steel Annaba and Mittal Steel Galati.
Net Income
Mittal Steel's net income increased to $4,701 million for the year
ended December 31, 2004, compared to net income of $1,182 million for the year
ended December 31, 2003. This increase was primarily due to higher operating
income, partly offset by higher net interest cost and a higher tax charge, as
discussed above.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Summary
The following events occurred in 2003, which had a significant effect
on Mittal Steel's historical results of operations:
- The Mittal Steel Consolidated Financial Statements for 2003 included the
results of operations of Mittal Steel Ostrava, a newly acquired operating
subsidiary in the European region, for the eleven months ended December
31, 2003 (i.e., from the date of its acquisition).
- Mittal Steel acquired Mittal Steel Iasi and Mittal Steel Roman during
2003.
- In 2003, Mittal Steel increased its equity interest in Mittal Steel South
Africa from 34.8% to 49.99%. Therefore the percentage of Mittal Steel
South Africa's net income recorded by Mittal Steel in its Consolidated
Financial Statements as "income from equity investment" increased from
34.8% to 49.99%. In addition, during December 2003, Mittal Steel received
$94 million in remuneration from Iscor under a business assistance
agreement, which was entered into in November 2001.
Results of Operations
The key performance indicators which management uses to analyse operations
are sales, average selling price, shipments, cost per ton, gross profit and
operating income. Management's analysis of liquidity and capital resources is
driven by working capital and operating cash flow. The following analysis
presents key performance indicators by each operating segment. The gross profit
and operating income analyses are carried out for Mittal Steel as a whole.
Sales, Shipments and Average Selling Prices
The following table gives a summary of sales at Mittal Steel in its
regions for the year ended December 31, 2003 compared to the year ended December
31, 2002:
SALES FOR THE YEAR ENDED (2) CHANGE IN
--------------------------------- ---------------------------------------
AVERAGE
2003 2002 SALES SHIPMENTS SELLING PRICE
--------------- --------------- ----- --------- -------------
REGION (in $ millions) (in $ millions) (%) (%) (%)
------
Americas 4,072 3,796 7 5 1
Europe(1) 3,800 2,152 77 34 23
Rest of World 2,275 1,483 53 (6) 41
(1) Includes results of Mittal Steel Ostrava from January 31, 2003, Mittal Steel
Iasi from July 2003 and Mittal Steel Roman from December 2003.
(2) Figures are prior to intercompany eliminations.
Americas
59
Sales increased in the Americas region to $4,072 million at December 31,
2003 from $3,796 million at December 31, 2002. The increase in sales is due to
an increase in shipments by 5% to 11.6 million tons and better prices
realizations.
Europe
In the European region sales increased to $3,800 million at December 31,
2003 from $2,152 million at December 31, 2002. The inclusion of Mittal Steel
Ostrava in 2003 resulted in increases in sales of $1,162 million. Sales
increased in U.S. dollar terms in 2003 as compared to 2002 due to the
appreciation of the Euro by 20% against the U.S. dollar in 2003.
Shipments increased to 10.7 million tons at December 31, 2003 from 8.0
million tons at December 31, 2002. The inclusion of Mittal Steel Ostrava in 2003
resulted in an increase in shipments of 2.9 million tons.
In the European region, the average selling price increased by 23% in
2003, primarily driven by improved market conditions and increased sales of
relatively higher priced Mittal Steel Ostrava products. Excluding the effects of
Mittal Steel Ostrava and the subsidiaries acquired during the year ended
December 31, 2003, the average selling price in the European region increased by
23%.
Rest of World
In the Rest of World region, sales increased to $2,275 million in 2003
from $1,483 million in 2002, primarily due to a 41% increase in average selling
price. This was largely due to stronger global demand, which led to higher
selling prices and increased sales to customers in Asia, particularly in China.
During the same period, shipments decreased by 6% in the Rest of World
region. The decrease in shipments occurred as a result of temporary reductions
in overall volumes at the relevant operating subsidiaries, due, in part, to an
increased focus on production and sales of value-added products at Mittal Steel
Annaba.
Cost of Sales and Cost Per Ton
The average cost per ton for Mittal Steel increased by 12% for the year
ended December 31, 2003, compared to the year ended December 31, 2002. Excluding
the effects of the new acquisitions during 2003, cost per ton increased by 25%
for the year ended December 31, 2003, compared to the year ended December 31,
2002. These increases were primarily the result of higher raw material costs,
reflecting the general state of the market in a time of high demand, but also
reflecting, in part, Mittal Steel's increased focus on production of value-added
products.
Americas
In the Americas region, average cost per ton increased by 5% for the year
ended December 31, 2003, compared to the year ended December 31, 2002.
Cost per ton increased at all Americas subsidiaries due to higher costs
for natural gas, scrap and pension costs. Natural gas costs, which are largely
driven by spot market gas prices in North America, increased by 90% from 2002
levels due to increases in demand. Average cost of scrap increased by 28% in
2003 due to strong export demand for scrap from China.
Europe
In the European region, average cost per ton increased by 17% for the year
ended December 31, 2003, compared to the year ended December 31, 2002. Excluding
newly acquired subsidiaries, average cost per ton increased by 19% for the year
ended December 31, 2003, compared to the year ended December 31, 2002. Cost per
ton increased in 2003 over the prior year, in U.S. dollars terms, due to the
weakening of the U.S. dollar, increases in iron ore prices, increases in scrap
prices, higher energy costs and higher absorption of fixed costs due to lower
shipments.
Rest of World
In the Rest of World region, in addition to increases in input costs,
lower capacity utilization at Mittal
60
Steel Annaba and strengthening of the Kazakh tenge against the U.S. dollar
contributed to a 16% increase in average cost per ton for the year ended
December 31, 2003, compared to the year ended December 31, 2002.
Gross Profit and Gross Profit Margins
Overall gross profit (sales less cost of sales, excluding depreciation)
increased to $1,999 million at December 31, 2003 from $1,328 million in December
31, 2002. Gross profit margin (gross profit divided by Net Sales) increased to
21% compared to an increase of 19% at December 31, 2002.
Excluding the effect of the subsidiaries acquired during 2003, gross
profit increased to $1,752 million at December 31, 2003 from $1,327 million at
December 31, 2002. These increases were due to higher selling prices and
increased shipments, offset in part by increases in raw material costs and the
costs of other key inputs and freight cost.
The following table gives a summary of the gross profit margin of Mittal
Steel (including the subsidiaries acquired during the year 2003), in its regions
for the year ended December 31, 2003 compared to the year ended December 31,
2002:
GROSS PROFIT MARGIN
YEAR ENDED
--------------------
REGION 2003 2002
------ ------- --------
(%) (%)
Americas 9 11
Europe 18 13
Rest of World 43 45
General and Administrative Expenses
Selling, general and administrative expenses increased in 2003, by 24%
mainly due to the appreciation of the Euro and the Canadian dollar against the
U.S. dollar.
Other Operating Expenses
Other operating expenses in 2002 related to $39 million towards the
write-off of Empire Mine investments and $23 million towards an impairment loss
on the 2A Bloomer and 21" Bar Mill. These costs were not incurred in 2003. See
Note 16 to the Mittal Steel Consolidated Financial Statements.
Operating Income
The following table gives a summary of the operating income and operating
margin of Mittal Steel for the year ended December 31, 2003 compared to the year
ended December 31, 2002:
OPERATING INCOME
YEAR ENDED OPERATING MARGIN
------------------------------------ ----------------
REGIONS 2003 2002 2003 2002
------- --------------- --------------- ---- ----
(in $ millions) (in $ millions) (%) (%)
Americas 136 141 3 4
Europe 317 64 8 3
Rest of World 707 476 31 32
Americas
For the year ended December 31, 2003, compared to the year ended December
31, 2002, operating income in the Americas region decreased to $136 million from
$141 million. This decrease was largely due to higher costs, primarily due to
increases in prices of raw materials.
Europe
61
For the year ended December 31, 2003, compared to the year ended December
31, 2002, operating income in the European region increased to $317 million from
$64 million. Excluding the impact of the subsidiaries acquired during the year
ended December 31, 2003, operating income in the European region increased to
$193 million at December 31, 2003 from $64 million at December 31, 2002, due to
higher selling prices and increased shipments, offset in part by increases in
raw material costs and the costs of other key inputs and freight costs.
Rest of World
Operating income in the Rest of World region for the year ended December
31, 2003, compared to the year ended December 31, 2002, increased to $707
million at December 31, 2003 from $476 million at December 31, 2002 due to
increased demand and higher sales.
Other Income/(Expense)
Other income was higher by $89 million during 2003. Components of other
income include (i) higher profits from joint ventures and (ii) the gain from
repurchase of bonds and the sale of land in Europe.
Financing Costs
Net interest expense (interest expenses less interest income) was 21%
lower in 2003 at $175 million compared to 2002. Interest expense decreased as a
result of lower average borrowings and lower interest rates, which reduced
borrowing costs.
Net Gain or Loss from Foreign Exchange
Mittal Steel uses U.S. dollars as its reporting currency. Movements in the
exchange rates of the currencies of the countries in which Mittal Steel has
operations versus the U.S. dollar have an impact on the earnings of Mittal
Steel. Such exchange rate movements affect both revenues and costs.
Net gain from foreign exchange for 2003 was $44 million, an increase of
$29 million from $15 million in 2002.
Income Tax
Mittal Steel recorded a current tax expense of $43 million in 2003
compared to $64 million in 2002. Deferred tax expenses were $141 million in
2003, compared to benefit of $32 million in 2002.
Apart from the normal tax on profits on Mittal Steel in the Americas
region, current tax expenses increased due to certain additional non-cash
provisions made at Inland. In 2002, the deferred tax benefit was higher due to
the exchange loss on dollar denominated net monetary liabilities arising from
depreciation of the currency during the year at Mittal Steel Lazaro Cardenas. In
2003, this benefit was significantly lower at Mittal Steel Lazaro Cardenas.
In the Rest of World region Mittal Steel Temirtau has entered into
agreements with the Kazakhstan government. Under these agreements, Mittal Steel
Temirtau is entitled to lower taxes based on certain capital expenditure
programs.
The effective tax rate increased to 13% in 2003 from 5% in 2002 on income
before taxes of $1,400 million and $638 million, respectively. This increase is
largely due to higher contributions to net income by subsidiaries that have
relatively high statutory tax rates. Income before taxes in Kazakhastan, which
has a statutory tax rate of 30%, increased 96% over the previous year. This
contributed a 5% increase in the effective rate.
Additionally, the effective tax rate during 2002 was reduced by the income
tax benefit of $40 million generated by Mexico, which resulted in an effective
tax rate for that country of 235% as compared to 50% in 2003. This difference
was due to tax losses from foreign translation effects in 2002 of $56 million as
compared to $14 million in 2001.
During 2003, subsidiaries in France and Canada increased the valuation
allowances on deferred tax
62
assets related to net operating loss carryforwards by $13 million and $14
million, respectively. These increases account for approximately 2% of the
effective tax rate in 2003. The additional valuation allowances were determined
necessary based on management's assessment as to the recoverability of the
deferred tax assets.
For both France and Canada, negative evidence regarding the recoverability
of the deferred tax assets consisted of, among other things, the fact that
operations in both countries generated losses for tax purposes in each of the
previous three years.
Minority Interest
Minority interest in income of subsidiaries amounted to $35 million in
2003. This consisted of the share of minority shareholders in the net income of
mainly Mittal Steel Ostrava, Mittal Steel Annaba and Mittal Steel Galati.
Net Income
Mittal Steel net income increased to $1,182 million for the year ended
December 31, 2003, compared to net income of $595 million for the year ended
December 31, 2002. This increase was due to higher operating income, lower
interest rates and a higher tax charge, as discussed above.
Effect of Change in Accounting Principles
Mittal Steel adopted the provisions of SFAS 143, Accounting for Asset
Retirement Obligations, from January 1, 2003. Based on analyses Mittal Steel has
performed, it has been determined that the assets for which an asset retirement
obligation must be recorded are Mittal Steel's Minorca Mine, a subsidiary of
Inland, and a property in Hamburg. The cumulative impact of adopting SFAS 143 on
January 1, 2003, is an increase in assets and liabilities of $9 million and $19
million, respectively. At Mittal Steel Europe, there was a provision of $11
million for retirement obligations on the same asset but not calculated in
accordance with the provisions of SFAS 143. Since this provision was no longer
required, it was reversed. Accordingly, a cumulative post-tax gain of $1 million
is reflected on the Consolidated Statement of Income as a Cumulative Effect of
Change in Accounting Principle.
B. LIQUIDITY AND CAPITAL RESOURCES
Mittal Steel's principal sources of liquidity are cash generated from its
operations and various working capital credit lines at its operating
subsidiaries.
Cash and cash equivalents including restricted cash at Mittal Steel
increased to $2.6 billion as at December 31, 2004, compared to $900 million as
at December 31, 2003, due to higher cash flow from operations. In addition,
Mittal Steel's subsidiaries had approximately $1.5 billion of unused
availability under their credit lines as of December 31, 2004.
On March 25, 2004, Mittal Steel and Inland guaranteed a $800 million
principal amount of senior secured notes issued by Ispat Inland ULC, a wholly
owned subsidiary of Mittal Steel. This offering was comprised of $150 million of
floating rate notes bearing interest at LIBOR plus 6.75% due April 1, 2010 and
$650 million of fixed rate notes bearing interest at 9.75% (issued at 99.212% to
yield 9.875%) due April 1, 2014. The $775.5 million net proceeds from the
offering were used (i) to retire the entire balance outstanding of $661.5
million of Tranche B and Tranche C loans under the credit agreement dated July
16, 1998, as amended, with a syndicate of financial institutions for whom Credit
Suisse First Boston was the agent, and (ii) repay the entire balance outstanding
of $105 million under the inventory revolving credit facility, with the
remainder of the proceeds used to reduce the amount outstanding under the
receivables revolving credit facility. Series U and W First Mortgage Bonds were
retired at the close of the refinancing. The early retirement of the term loans
was done at par, without prepayment penalty.
In June 2004, the Company finalised a 3-year revolving credit facility
with a consortium of financial institutions in an aggregate amount of $400
million of which $250 million was committed and a further $150 million was to be
syndicated later. This credit facility is secured by certain assets of certain
subsidiaries. As of December 31, 2004 $250 million was utilised under the
facility.
63
In June 2004, the Company also concluded a $100 million term facility with
the International Finance Corporation ("IFC"). As of December 31, 2004 there
were no drawings under this facility.
On December 30, 2004, Ispat Inland ULC, a wholly owned subsidiary of
Mittal Steel, redeemed $227.5 million principal amount of its 9.75% senior
secured notes due 2014 (the "Senior Secured Notes"), at a redemption price equal
to 109.75% of the outstanding principal amount redeemed, plus accrued and unpaid
interest on such amount to, but excluding, December 30, 2004. Prior to the
redemption of the Senior Secured Notes, Mittal Steel purchased $256 million of
capital stock of Inland. Consistent with the terms of the Senior Secured Notes,
the cash proceeds from the stock offering were used to redeem the notes. After
giving effect to this redemption, $422.5 million principal amount of the Senior
Secured Notes remain outstanding.
On October 11, 2004, LNM Holdings declared a dividend of $2,000 million to
The Richmond Investment Holdings Limited, its sole shareholder as on that date,
which was a condition precedent to Ispat International's acquisition of LNM
Holdings. As at March 15, 2005, The Richmond Investment Holdings Limited had
received $625 million and it will receive the balance of the dividend in 2005.
This dividend will be entirely paid from cash flow from operations. Mittal Steel
does not anticipate using any borrowing to pay this dividend.
As at December 31, 2004, Mittal Steel's total external debt, which
includes both long-term debt, short-term debt, loan from shareholder and
including dividend payable as well as borrowing under working capital
facilities, was $3.6 billion, compared to $3.1 billion as at December 31, 2003.
Almost all external debt is borrowed by operating subsidiaries and secured by
liens on the assets of the relevant operating subsidiaries. As at December 31,
2004 most of Mittal Steel's external debt carries interest rates at varying
levels based on a combination of fixed and variable interest rates. Under most
of the loan agreements, its operating subsidiaries are required to comply with
certain financial covenants. As at December 31, 2004, Mittal Steel's operating
subsidiaries were in compliance with all such covenants. Approximately $1.1
billion external debt is guaranteed by Mittal Steel.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Sources and Uses of Cash
Mittal Steel's principal sources of liquidity are cash generated from
operations and various working capital credit lines at its operating
subsidiaries. In management's opinion, Mittal Steel's working capital is
sufficient for its present requirements. A summary of the cash flow is given
below.
SUMMARY OF CASHFLOW
YEAR ENDED
--------------------
2004 2003
-------- --------
(in $ millions)
Net cash provided from operating activities 4,611 1,438
Net cash used in investing activities (801) (814)
Net cash used by financing activities (2,329) (282)
Net Cash Provided From Operating Activities
Cash flow from operating activities at Mittal Steel increased to $4,611
million for the year ended December 31, 2004, compared to $1,438 million for the
year ended December 31, 2003, due to higher net income partially offset by
higher working capital.
Net working capital (defined as accounts receivable plus inventories plus
other current assets minus trade accounts payable minus accrued expenses) at
Mittal Steel increased by $1.2 billion for the year ended December 31, 2004, as
compared to the year ended December 31, 2003, due to higher levels of inventory
and accounts receivables to support the higher levels of operations and sales,
partly offset by increased trade payables and increased accrued expense and
other liabilities. A significant portion of the increase was also attributable
to the inclusion of Mittal Steel South Africa and Mittal Steel Poland in 2004.
Net Cash Used In Investing Activities
Net cash used in investing activities at Mittal Steel was $801 million for
the year ended December 31,
64
2004, as compared to $814 million for the year ended December 31, 2003.
Capital expenditures of Mittal Steel in 2004 were $898 million. Some major
projects included in this were:
- Mittal Steel Temirtau - construction of a new Slab Caster and
reconstruction of Blast Furnace No.4;
- Mittal Steel Galati - modernization of Pickling Line CRM1 and continuous
Casting Machine No.1 and reconstruction of Battery No.4;
- Mittal Steel South Africa - installation of a Pulverized Coal Injection
("PCI") plant;
- Mittal Steel Poland - modernization of four top charging coke oven
batteries and a PCI system;
- Mittal Steel Lazaro Cardenas - RHTL degasser and installation of a new
Oxygen Plant; and
- Mittal Canada - restart of DRI module No.1.
Net Cash Provided By (Used in) Financing Activities
Net cash used in financing activities at Mittal Steel was $2,329 million
for the year ended December 31, 2004, as compared to $282 million for the year
ended December 31, 2003. During the year ended December 31, 2004, Mittal Steel
reduced borrowing by $1,521 million, while cash dividends amounted to $763
million.
Working Capital Facilities
The following table gives a summary of the working capital facilities of
Mittal Steel:
LIMIT UTILIZATION AVAILABILITY
----------------------------- ----------------------------- ------------------------------
AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31,
2004 2003 2004 2003 2004 2003
----------------------------- ----------------------------- ------------------------------
REGION (in $ millions) (in $ millions) (in $ millions)
Americas 589 569 181 372 408 197
Europe 698 161 496 124 201 37
Rest of World 827 92 121 20 705 72
Receivables Factoring
In addition to the credit facilities listed above, certain of Mittal
Steel's European operating subsidiaries were parties to receivables factoring
arrangements. The following table presents a summary of these facilities:
LIMIT UTILIZATION AVAILABILITY
----------------------------- ----------------------------- ------------------------------
AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31,
2004 2003 2004 2003 2004 2003
----------------------------- ----------------------------- ------------------------------
REGION (in $ millions) (in $ millions) (in $ millions)
Americas - - - - - -
Europe 284 261 144 159 140 102
Rest of World - - - - - -
Debt
As at December 31, 2004, Mittal Steel's external debt was $3,630 million
(including $1,650 million of dividend payable), compared to $3,067 million
(including loan from shareholder) as at December 31, 2003.
Most of Mittal Steel's debt is secured by liens on specified assets of the
relevant subsidiary and carries interest rates at varying levels based on a
combination of fixed and variable interest rates. The details are given in Note
11 to the Mittal Steel Consolidated Financial Statements. Most of the loan
agreements require Mittal Steel's subsidiaries to comply with certain financial
and other covenants. At December 31, 2004, all Mittal Steel's operating
subsidiaries were in compliance with all such covenants. Approximately $1.1
billion of the above debt was guaranteed by Mittal Steel.
Please refer to "Item 5 -- Operating and Financial Review and Prospects --
Trend Information -- Funding".
65
On March 25, 2004, Inland received $776 million of net proceeds from the
issuance and sale of $800 million principal amount of its Senior Secured Notes.
These net proceeds were used to retire the entire balance outstanding of $662
million of Tranche B and Tranche C Loans under Inland's credit agreement, and to
repay the entire balance outstanding of $105 million under its inventory
revolving credit facility, with the remainder of the proceeds used to reduce the
amount outstanding under its receivables revolving credit facility.
On December 30, 2004, Inland redeemed $227.5 million principal amount of
its Senior Secured Notes, at a redemption price equal to 109.75% of the
outstanding principal amount redeemed, plus accrued and unpaid interest on such
amount to, but excluding December 30, 2004. Prior to the redemption of the
Senior Secured Notes, Mittal Steel purchased $256 million of capital stock of
Inland. Consistent with the terms of the indenture with respect to the Senior
Secured Notes, the cash proceeds from the stock offering were used to redeem the
Senior Secured Notes. After giving effect to this redemption, $422.5 million
principal amount of the Senior Secured Notes remain outstanding.
Inland Pension Funding
Inland has made cash contributions to its pension plan of approximately
$425 million since 1998 through December 31, 2004, including $111.5 million
during 2004.
For further details concerning Mittal Steel's pension plans, please refer
to Note 14 to the Mittal Steel Consolidated Financial Statements.
Shareholders' Equity
Shareholders' equity increased to $5,846 million at December 31, 2004. In
addition, during 2004, Mittal Steel repurchased 5.3 million of its own shares
for $54 million (at an average price of $10.26).
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Sources and Uses of Cash
Mittal Steel's principal sources of liquidity are cash generated from
operations and various working capital credit lines at its operating
subsidiaries. The following table presents a summary of cash flow of Mittal
Steel:
SUMMARY OF CASHFLOW
YEAR ENDED
-------------------
2003 2002
------ ------
(in $ millions)
Net cash provided from operating activities 1,438 539
Net cash used in investing activities (814) (360)
Net cash provided (used) by financing activities (282) 16
Net Cash Provided From Operating Activities
In 2003, cash flow from operations increased to $1,438 million from $539
million in 2003 mainly due to higher income and improvements in working capital.
During 2003, Net working capital (defined as Accounts Receivable plus
Inventories plus Other Current Assets minus Trade Accounts Payable minus Accrued
Expenses) was reduced by $25 million due to an increase in inventories of $18
million, prepaid expenses and other of $87 million and Trade Accounts payable of
$51 million. These increases were more than offset by increases in Accrued
Expenses and other liabilities of $181 million.
Net Cash Used In Investing Activities
Net cash used in investing activities was $814 million. Capital
expenditures in 2003 were $421 million as against $265 million in 2002. This was
mainly due in part to capital expenditures on the reline of Blast Furnace No. 7
at Inland of $89 million. Further capital expenditure growth was due to projects
at Mittal Steel Galati, including reconstruction of battery no. 2 in the coke
oven plant, modernization of caster 1 in basic oxygen furnace 1 and
reconstruction of pickling line no. 2, and the inclusion of Mittal Steel Ostrava
in 2003,
66
where investments were made in the by-products plant and in modernizing a blast
furnace and a tandem furnace.
In addition, significant capital expenditures at Mittal Steel Temirtau
related to the installation of the continuous caster, reconstruction of Blast
Furnace 3, as well as investments in its coal division. In addition, Mittal
Steel Annaba invested in a bar mill.
Net Cash Used In Financing Activities
Net utilization of cash in financing activities was $282 million (2002:
net provision of cash of $16 million) primarily due to dividend payments and
repayments of debt. Total long-term debt repaid during 2003 was $110 million
(2002: $(12) million) , after receipt of a loan of $94 million from an affiliate
in 2003.
See also "Item 5 -- Operating and Financial Review and Prospects -- Trend
Information -- Funding".
Working Capital Facilities
At December 31, 2003, Mittal Steel's cash and cash equivalents (inclusive
of restricted cash of $140 million) amounted to $900 million ($417 million
inclusive of restricted cash of $22 million at December 31, 2002). In addition,
Mittal Steel's operating subsidiaries had available borrowing capacity under
their various credit lines, including receivable factoring and securitization
facilities, of $408 million ($364 million at December 31, 2002). The following
table gives a summary of the working capital credit facilities of Mittal Steel:
LIMIT UTILIZATION AVAILABILITY
----------------------------- ----------------------------- ---------------------------
AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC AS OF DEC 31,
2003 2002 2003 2002 31,2003 2002
------------- ------------- ------------- ------------- --------- -------------
REGION (in $ millions) (in $ millions) (in $ millions)
Americas 569 462 372 304 197 158
Europe 161 117 124 92 37 25
Rest of the World 92 69 20 13 72 56
Factoring and Securitization
In addition to the credit facilities listed above, certain of Mittal
Steel's European subsidiaries were parties to receivables factoring and
securitization facilities as per the following details:
LIMIT UTILIZATION AVAILABILITY
----------------------------- ----------------------------- ---------------------------
AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC 31, AS OF DEC AS OF DEC 31,
2003 2002 2003 2002 31,2003 2002
------------- ------------- ------------- ------------- --------- -------------
REGION (in $ millions) (in $ millions) (in $ millions)
Americas - - - - - -
Europe 261 257 159 132 102 125
Rest of World - - - - - -
Debt
Mittal Steel's total external debt (both long and short term) was $3,067
million at December 31, 2003. The corresponding amount as at December 31, 2002
was $2,733 million.
Most of Mittal Steel's debt is secured by liens on specified assets of the
relevant subsidiary and carries interest rates at varying levels based on a
combination of fixed and variable interest rates. The details are given in Note
11 to the Mittal Steel Consolidated Financial Statements. Most of the loan
agreements require Mittal Steel's subsidiaries to comply with certain financial
and other covenants. At December 31, 2003, all Mittal Steel's operating
subsidiaries were in compliance with all such covenants. Approximately $1.8
billion of the above debt was guaranteed by Mittal Steel.
Please refer to "Item 5 -- Operating and Financial Review and Prospects --
Trend Information -- Funding".
67
Inland Pension Funding
On September 15, 2003, Inland entered into a settlement agreement with
Ryerson Tull, pursuant to which Ryerson Tull paid Inland $21 million to release
Ryerson Tull from various environmental and other indemnification obligations
arising out of the sale by Ryerson Tull of Inland to Mittal Steel in 1998. The
$21 million received from Ryerson Tull was paid into Inland's pension plan, and
went to reduce the amount of a Ryerson Tull guaranty/letter of credit provided
to the Pension Benefit Guaranty Corporation, or PBGC, upon the sale of Inland.
Inland also agreed with Ryerson Tull to, among other things, make specified
monthly contributions to Inland's pension plan totaling $29 million over the
12-month period beginning January 2004, thereby eliminating, by the end of such
year, the obligation of Ryerson Tull to provide the continuing guaranty and
letter of credit to the PBGC, which guaranty/letter of credit Inland had
previously committed to take all necessary action to eliminate. In addition,
Inland committed to reimburse Ryerson Tull for the cost of the letter of credit
to the PBGC, and to give Ryerson Tull one-third of any proceeds that may become
payable in connection with the NRDA settlement under an environmental insurance
policy.
Inland has made cash contributions to its pension plan of approximately
$313 million since 1998 through December 31, 2003, including approximately $125
million during 2003.
Funding obligations depend upon future asset performance, the level of
interest rates used to measure Employee Retirement Income Security Act minimum
funding levels, actuarial assumptions, union negotiated changes and future
government regulation. Any such funding requirements could have an unfavorable
impact on Mittal Steel's borrowing arrangements and cash flows.
Shareholders' Equity
Shareholders' equity increased to $2,561 million at December 31, 2003.
During 2003, Mittal Steel took an after-tax charge of $79 million through other
comprehensive income, primarily as a result of reduction in discount rate in
pension liabilities (2002: $273 million). In addition, during 2003, Mittal Steel
repurchased 2.6 million of its own shares for $8 million.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
Research and development costs were $20 million in 2004 as compared to
$14 million in 2003. These costs are fully expensed as incurred.
D. TREND INFORMATION
OVERVIEW
Market conditions for Mittal Steel's products are expected to continue
to remain stable in the year 2005. Shipments in the year 2005 are expected to be
higher, primarily due to the inclusion for full year of certain acquisitions
completed during 2004, and the completion of the proposed merger with ISG during
2005. Mittal Steel expects higher costs of production, due to higher input cost
of raw materials. Selling prices are also expected to be higher.
Working capital is expected to increase in the year 2005 due to
increases in costs and selling prices as well as higher volumes associated with
new acquisitions.
Capital expenditure is expected to be higher in the year 2005 mainly
due to expenditure on projects forming part of commitments made under various
acquisition agreements, primarily in Europe. We expect to spend approximately
$1,500 million in capital expenditures in 2005 (including proposed expenditure
at ISG), largely out of cashflow from operations. See Note 18 to the Mittal
Steel Consolidated Financial Statements.
Overall Mittal Steel expects that operating income per ton for the year
2005 to be similar to the previous year. Income taxes are expected to increase
primarily due to reduced availability of tax loss carryforwards, and the changes
in the tax position at certain subsidiaries.
68
STEEL INDUSTRY
In 2003-2004, steel markets have been dominated by increased
consumption in China due to the high GDP growth and capital investment. In 2004,
China increased production of crude steel by approximately 23% and contributed
approximately 26% of global steel output. Steel production in China is expected
to grow in 2005 by between 6% and 10%, compared to 13% in 2004. Excluding China,
steel production increased by approximately 4.5% in 2004 and is expected to
increase further by 3% in 2005, assuming economic recovery and/or a stable
economy in Asia, Europe, Japan and the United States.
Steel producers in Europe announced price increases for the first
quarter of 2005 reflecting both strong domestic demand as well as continuing
strength in the Chinese market. The general expectation is that steel prices
will rise in tandem with raw material prices in 2005.
SALES
Overall, the year 2005 should continue to see increases in sales due to
increased demand. Higher demand for steel is driven not only by China, but also
the recovery in United States, Europe, Japan and Asia.
COSTS
The increased global demand for steel has resulted in significant price
increases for key commodity inputs such as iron ore, scrap, coke and alloys,
during the year 2004. In the year 2005, we have already seen further sharp
increases in iron ore prices. While the impact on Mittal Steel is partially
mitigated by its ownership of certain mining assets, nonetheless, rapid cost
increases are occurring in the market.
INCOME TAXES
Mittal Steel's combined effective tax rate is expected to increase in
future years primarily due to the loss of tax exemptions in Romania which effect
will be offset in part by reductions caused by decreases in the statutory tax
rates in certain jurisdictions including the Czech Republic and Mexico.
Moreover, the Company's future cash flow requirements related to tax obligations
are expected to increase due to the utilization of tax loss carryforwards in
2004.
On December 15, 2004, Mittal Steel signed an amendment to the Mittal
Steel Galati Share Purchase Agreement resulting in the termination of its 5-year
exemption to pay corporate income taxes and receive other economic incentives
previously provided to Mittal Steel Galati. This amendment has prospective
impact beginning January 1, 2005, and has resulted in Mittal Steel recording a
deferred tax asset of $34 million in the fourth quarter of 2004. This deferred
tax asset represents the tax effect of temporary differences which would have
reversed within the previous tax holiday period, recovery of which is now more
likely than not. Romanian taxable income will be taxed at the statutory rate,
currently 16%, beginning January 1, 2005.
FUNDING
As at December 31, 2004 it is estimated that Mittal Steel would have
approximately $212 million of scheduled debt amortization between 2005 and 2006.
On January 25, 2005, Mittal Steel announced that it had arranged
commitments, subject to customary conditions, from a group of arrangers for a
$3.2 billion unsecured revolving credit facility.
On March 11, 2005, Ispat Inland ULC, an indirect wholly owned
subsidiary of Mittal Steel, received the consents from the holders of a majority
of its outstanding Senior Secured Floating Rate Notes due 2010 and 9.75% Senior
Secured Notes due 2014, or Senior Secured Notes, to amend the terms of the
indenture governing the notes to eliminate the requirement that any acquisition
of a U.S. steel-making business be made by Mittal Steel through its wholly-
owned subsidiary Inland or its subsidiaries.
OTHER DEVELOPMENTS
Carbon Emissions Trading
Under Directive 2003/87/ EC, or the Directive, dated October 13, 2003,
the European Union,
69
established a scheme for greenhouse gas emission allowance trading within the
European Community. Member States must ensure that, from January 1, 2005, no
installation undertakes any activity listed in Annex I of the Directive,
resulting in emissions specified in relation to that activity unless its
operator holds a permit issued by a competent authority. Mittal Steel is
currently examining the matter and will formulate a response to this development
designed to ensure compliance.
E. OFF-BALANCE SHEET ARRANGEMENTS
Mittal Steel has no unconsolidated special purpose financing or
partnership entities that are likely to create material contingent obligations.
In addition, Mittal Steel is not contingently liable for $41 million of long
term debt attributable to I/N Kote, one of its equity investments. For a
discussion of off-balance sheet arrangements for the year ended December 31,
2004, compared to year ended December 31, 2003, refer to Note 23 to Mittal
Steel's Consolidated Financial Statements.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Mittal Steel has various purchase commitments for materials, supplies
and items of permanent investment incidental to the ordinary course of business.
Management believes that these commitments are not in excess of current market
prices and reflect normal business operations. Mittal Steel had outstanding at
December 31, 2004, various long-term obligations that will become due in 2005
and beyond.
These various purchase commitments and long-term obligations will have
an effect on Mittal Steel's future liquidity and capital resources. The table
below shows, by major category of commitment and long-term obligations
outstanding as of December 31, 2004, Mittal Steel's current estimate of their
annual maturities.
TOTAL LESS 1-3 4-5 MORE
THAN 1 YEARS YEARS THAN 5
YEAR YEARS
-----------------------------------------------------
(in $ millions)
Long-Term Debt Obligations - scheduled repayments $1,743 $104 $464 $175 $1,000
- Note 11 to the Mittal Steel
Consolidated Financial Statements
Operating Lease Obligations - Note 18 to the 97 22 25 12 38
Mittal Steel Consolidated Financial Statements
Environment Commitments* - Note 18 and Note 19 167 9 48 44 66
to the Mittal Steel Consolidated Financial Statements
I/N Kote Debt Guarantee - Note 18 to the Mittal 41 15 26 - -
Steel Consolidated Financial Statements
Pension Agreements * 175 175 - - -
Other Post Retirement Benefits * 282 60 109 113 -
Purchase Obligations - Note 18 to the Mittal Steel 4,501 779 1,023 809 1,891
Consolidated Financial Statements
Other Long-Term Liabilities Reflected Mittal 642 62 373 138 69
Steel's Balance Sheet
Acquisition/Investment Commitments - Note 18 to 1,446 363 642 286 155
the Mittal Steel Consolidated Financial Statements
------------------------------------------------------
Total $9,094 $1,589 $2,710 $1,577 $3,219
======================================================
*These are not total obligations, refer to the discussion below.
Estimated payments for long-term obligations have been determined by
Mittal Steel based on payment schedules for those long-term obligations where
set payments exist. For long-term obligations with no set payment schedules,
estimates have been made by Mittal Steel based on the most likely timing of cash
payments based on the facts and circumstances that exist as of December 31,
2004. The ultimate timing of these future cash flows may differ due to events
and circumstances that are out of the direct control of Mittal Steel. Also
included are liabilities related to environmental matters, which are further
discussed in Note 19 to the Mittal Steel Consolidated Financial Statement. For
further details on commitments, please refer to Note 18 to the Mittal Steel
Consolidated Financial Statements.
70
In addition to the long-term obligations and commitments disclosed
above, Mittal Steel has, in the normal course of business, provided guarantees
to third parties in connection with indebtedness of its subsidiaries. Mittal
Steel estimates that the fair value of these guarantees is not material and does
not expect to incur material losses as a result of these guarantees. Mittal
Steel has provided guarantees to third parties for indebtedness of its
subsidiaries, the outstanding value of which was approximately $1.1 billion as
at December 31, 2004.
*ENVIRONMENTAL COMMITMENTS
On June 10, 1993, the U.S. District Court for the Northern District of
Indiana entered the EPA Consent Decree that resolved all matters raised by a
lawsuit led by the EPA against, among others, Inland. Inland cannot presently
reasonably estimate the costs or time required to satisfy these obligations
under the EPA Consent Decree. At December 31, 2004, Inland had recognized $37
million for environmental liabilities.
See "Item 8A -- Consolidated Statement and other Financial Information
-- Legal Proceedings" and Note 19 of Mittal Steel Consolidated Financial
Statements.
*PENSION AGREEMENTS
These amounts are required under Inland's agreements with the PBGC and
Ryerson Tull. We have not included any amounts that may be required beyond these
contractual commitments due to the significant difficulty in forecasting these
amounts with any accuracy.
*OTHER POST RETIREMENT BENEFITS
We accrue an annual cost for these benefit obligations under plans
covering current and future retirees in accordance with generally accepted
accounting principles. These amounts could differ significantly from the
estimates forecasted because of changes in Medicare, or other regulations and/or
health care costs. We believe it is impossible to make an accurate prediction of
cash requirements for these obligations beyond five years.
G. SAFE HARBOR
All information that is not historical in nature and disclosed under
"Item 5 -- Operating and Financial Review and Prospects" is deemed to be a
forward looking statement. See "Cautionary Statements Regarding Forward-Looking
Statements".
71
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Management of Mittal Steel's business is vested in its board of
directors. Mr. Lakshmi N. Mittal is Chairman of the board of directors and Chief
Executive Officer of Mittal Steel. In establishing Mittal Steel's strategic
direction and corporate policies, Mr. Lakshmi N. Mittal is supported by members
of Mittal Steel's senior management team with substantial professional and
worldwide steel industry experience.
It is Mittal Steel's intention, and its controlling shareholder has
confirmed to Mittal Steel that it intends, to maintain on the Mittal Steel board
of directors at all times at least two directors who are not and have not been
senior managers or employees of any of Mittal Steel's subsidiaries or
affiliates.
Mittal Steel continues to have a strong emphasis on corporate
governance. Mittal Steel has five independent directors on its board of
directors. See "Item 6C -- Board Practices -- Corporate Governance -- Director
Independence". Mittal Steel's Audit Committee, Nomination Committee and
Remuneration Committee are comprised exclusively of three independent members
each.
The members of the Mittal Steel board of directors are as set forth
below:
DATE
JOINED
NAME AGE BOARD CLASS/TERM POSITION WITHIN MITTAL STEEL
------------------ ---- -------- ------------- ---------------------------------------------
Lakshmi N. Mittal 54 May 1997 Class A- 2008 Chairman of Mittal Steel's Board of Directors
and Chief Executive Officer
Aditya Mittal 29 May 2000 Class A- 2008 Member of Mittal Steel's Board of Directors,
President and Group Chief Financial Officer
Malay Mukherjee 57 July 1997 Class B- 2005 Member of Mittal Steel's Board of Directors
and Chief Operating Officer
Narayanan 68 July 1997 Class C- 2005 Member of Mittal Steel's Board of Directors
Vaghul(1)(2)(3)(4)
Ambassador Andres July 1997 Class C- 2005 Member of Mittal Steel's Board of Directors
Rozental(1)(2)(3)(4) 59
Fernando Ruiz Sahagun(4) 61 July 1997 Class C- 2005 Member of Mittal Steel's Board of Directors
Rene Lopez(3)(4) 60 November Class C- 2005 Member of Mittal Steel's Board of Directors
2002
Muni Krishna T. 59 November Class C- 2005 Member of Mittal Steel's Board of Directors
Reddy(1)(2)(4) 2002
Vanisha Mittal Bhatia 24 December Class A- 2008 Member of Mittal Steel's Board of Directors
2004
(1) Audit Committee
(2) Nomination Committee
(3) Remuneration Committee
(4) Non-executive and independent directors
The business address of each of the members of Mittal Steel's board of
directors is Mittal Steel's offices at 15th Floor, Hofplein 20, 3032 AC
Rotterdam, The Netherlands.
BOARD OF DIRECTORS
Lakshmi N. Mittal
Mr. Lakshmi N. Mittal is the Chairman of the board of directors and
Chief Executive Officer of Mittal Steel. He is the founder of Mittal Steel and
has been responsible for the strategic direction and development of
72
the Company. He is also a non-executive director of Mittal Steel South Africa,
an executive committee member of the International Iron and Steel Institute, a
member of the Foreign Investment Council in Kazakhstan, the International
Investment Council in South Africa, the World Economic Forum's International
Business Council, a director of ICICI Bank Ltd. and is on the Advisory Board of
the Kellogg School of Management in the U.S. Mr. Mittal was awarded Fortune
magazines `European Businessman of the Year 2004' and was named `Entrepreneur of
the Year' by The Wall Street Journal. He was previously named Steel Maker of the
Year in 1996 by New Steel, a leading industry publication and was awarded the
8th honorary Willy Korf Steel Vision Award, the highest recognition for
worldwide achievement in the steel industry. The award was presented by American
Metal Market and World Steel Dynamics.
Aditya Mittal
Mr. Aditya Mittal is President and Group Chief Financial Officer of
Mittal Steel. He joined the Company in 1997 and was formerly Vice-Chairman of
the Board of Directors and Head of Mergers and Acquisitions of LNM Holdings,
where he was responsible for all acquisitions since 2000. From 1997 to 2000, he
served as Head of Mergers and Acquisitions at Ispat International. Mr. Aditya
Mittal also serves on Mittal Steel's board of directors and the board of
directors of Mittal Steel South Africa. From 1996 to 1997, Mr. Aditya Mittal
worked at Credit Suisse First Boston in the mergers and acquisitions area. He
holds a bachelor's degree in economics from the Wharton School in Pennsylvania,
United States with specialization in strategic management and corporate finance,
from which he graduated magna cum laude. He is the son of Mr. Lakshmi N. Mittal.
Malay Mukherjee
Mr. Mukherjee is the Chief Operating Officer of Mittal Steel and has
over 32 years of experience in a range of technical, commercial and general
management roles in the steel industry. Mr. Mukherjee has held various senior
management positions within Mittal Steel, including Managing Director of Mittal
Steel Lazaro Cardenas and President and Chief Executive Officer of Mittal Steel
Europe. He has also served as Managing Director of Mittal Steel Temirtau.
Narayanan Vaghul
Mr. Vaghul has 49 years of experience in the financial sector and has
been the Chairman of Industrial Credit and Investment Corporation of India
Limited for 16 years and of ICICI Bank for the last two years. Prior to this, he
was Chairman of the Bank of India and Executive Director of the Central Bank of
India. He was chosen as the Businessman of the Year in 1992 by Business India, a
leading Indian publication, and has served as a consultant to the World Bank,
the International Finance Corporation and the Asian Development Bank. Mr. Vaghul
was also a visiting Professor at the Stern Business School at New York
University. Mr. Vaghul is Chairman of the Indian Institute of Finance Management
& Research and is also a board member of various other companies, including
Wipro Limited, Mahindra & Mahindra Limited, Nicholas Piramal India Limited,
Apollo Hospitals Limited and Himatsingka Seide Limited.
Ambassador Andres Rozental
Ambassador Andres Rozental has a long and distinguished career in the
Mexican Diplomatic Service. Over the past 36 years, he has held various senior
government and diplomatic posts including Ambassador of Mexico to the United
Kingdom, Ambassador of Mexico to the Kingdom of Sweden, Ambassador, Permanent
Representative to the United Nations in Geneva, as well as Deputy Foreign
Minister of Mexico. From December 2000 to January 2002, he was
Ambassador-at-Large and Special Presidential Envoy for President Fox of Mexico.
Ambassador Rozental has received several awards, including the Grand Cross of
the Polar Star (Sweden) and the Grand Cross of the Civil Merit Order (Spain). He
is also an officer of the National Order of Merit (France). Ambassador Rozental
is currently a member of the board of managing directors of New India Investment
Trust Ltd., Aeroplazas de Mexico and Inmobiliaria Fumisa. He is Chairman of the
Board of Latinoamericana de Duty Free and the President of his own consulting
firm, Rozental & Asociados in Mexico City. He is President of the Mexican
Council on Foreign Relations and a trustee of the Universidad de las Americas,
his alma mater.
Fernando Ruiz Sahagun
Mr. Ruiz has approximately 31 years of experience in the field of
accounting, finance and tax and is currently a partner at Chevez, Ruiz,
Zamarripa y Cia., S.C., a leading tax consulting firm in Mexico. Mr. Ruiz is
73
a member of several professional associations, including the Instituto Mexicano
de Ejecutivos de Finanzas, Colegio de Contadores Publicos de Mexico, Instituto
de Contadores Publicos and Academia de Estudios Fiscales de la Contaduria
Publica. He is the President of the Business Coordinator Counsel's Tax Committee
(CCE) and a board member of various companies including Kimberly Clark de
Mexico, S.A. de C.V., Accel, S.A. de C.V., Grupo Financiero Santander Serfin,
S.A. de C.V., Corporacion San Luis, S.A. de C.V., Grupo Palacio de Hierro, S.A.
de C.V., Grupo Camesa, S.A. de C.V., BASF Mexicana, S.A. de C.V. (a subsidiary
of BASF AG), Bacardi, S.A. de C.V. (a subsidiary of Bacardi International Ltd.),
Grupo Mexico, S.A. de C.V. and Innova, S. de. R.L. de C.V.
Rene Lopez
Mr. Lopez has approximately 37 years of experience in international
finance, manufacturing and marketing with multinational corporations including
Alcatel-Alsthom and GEC Alsthom, where he has worked since 1966. He was
President and General Manager of Alcatel-Alsthom and GEC Alsthom Canada.
Currently Mr. Lopez is owner and President of Gesterel Inc. in Canada, a
consultancy services boutique specializing in mergers and acquisitions, finance
and technology transfer management.
Mr. Lopez had received the commemorative medal at the 125th anniversary
of the Canadian Confederation.
Muni Krishna T. Reddy
Mr. Reddy has over 34 years of experience in financial services and he
is presently the Chairman of State Bank of Mauritius Ltd. (SBM Group), Chairman
of Bank SBM Madagascar, Chairman of SBM Nedbank International ltd. and Deputy
Chairman of Global Financial Services PLC Malta. He holds the following
directorships: Director on the Boards of Air Mauritius Ltd; British American
(Holdings) Ltd; British American Insurance Company of the Bahamas Ltd; British
American International Corporation Ltd; British American (UK) Ltd; India Growth
Fund Inc, New York; Intercommercial Bank Ltd, Trinidad; Intercommercial Trust &
Merchant Bank Ltd; Mauritius Telecom Ltd; Overseas Telecommunication Services
Ltd and South East Asia Regional Fund Ltd. Mr. Reddy has taken over as Chairman
of SBM Group in October 2003, after having been the Chief Executive Officer of
SBM Group for more than 16 years. Prior to taking over as Chief Executive
Officer of SBM Group in 1987, Mr. Reddy worked in Singapore and India. Mr. Reddy
was conferred in 1993 with the title "Grand Officer of the Order of the Star and
Key of the Indian Ocean" (GOSK) by the government of the Republic of Mauritius
for distinguished services in Banking.
Vanisha Mittal Bhatia
Mrs. Vanisha Mittal Bhatia was appointed as a member of the LNM
Holdings board of directors in June 2004. Mrs. Vanisha Mittal Bhatia was
appointed to Mittal Steel's board of directors in December 2004. She has a
Bachelor of Arts degree in Business Administration from the European Business
School, and has completed corporate internships at Mittal Shipping Limited,
Mittal Steel Hamburg Gmbh and with an internet-based venture capital fund. She
is the daughter of Mr. Lakshmi N. Mittal.
SENIOR MANAGEMENT
Bhikam C. Agarwal
Mr. Agarwal is the Executive Vice President, Finance and Corporate
Controller of Mittal Steel and has over 29 years of experience in steel and
related industries. He has held various senior executive positions within Mittal
Steel and was previously Chief Financial Officer since its formation as Ispat
International. He has been responsible for the financial strategy of Mittal
Steel and has been a coordinator of its prior activities in the capital markets,
two of which received "deal of the year" awards from International Financing
Review, a leading global financial publication. Mr. Agarwal has also led the
finance and accounting functions of Ispat International across all its operating
subsidiaries.
Roeland Baan
Mr. Baan was appointed Chief Executive Officer for Mittal Steel Central
and Eastern Europe in August, 2004. He joined Mittal Steel from the global
conglomerate SHV Holdings, which lists metals recycling amongst its non-core
activities. He spent eight years as a member of the Energy Divisions Executive
Committee
74
and was responsible for developing and executing the Group's strategy across a
number of key regions including Europe, South America and the Mediterranean rim.
Prior to this, Mr. Baan spent 16 years with Shell, where he held a number of
positions worldwide. He holds a Masters Degree in Economics from Vrije
Universiteit in Amsterdam.
Narendra Chaudhary
Mr. Chaudhary is the Chief Executive Officer of Mittal Steel Galati, a
position he has held since December 2001. Prior to joining Mittal Steel Galati,
he was Chief Executive Officer of Mittal Steel Temirtau. Mr. Chaudhary possesses
over 39 years of experience in a variety of technical and managerial functions
in the steel industry. Mr. Chaudhary joined Mittal Steel Lazaro Cardenas in
Mexico, in 1993 as Director, Operations, and became Executive Director in 1996.
He worked at various Steel Authority of India Limited, or SAIL, plants in
various capacities for 28 years. Mr. Chaudhary has a Bachelor's Degree in
Engineering from Bihar Institute of Technology, India.
N.K. Choudhary
Dr. Choudhary is the General Director and Chief Executive Officer of
Mittal Steel Temirtau, a position he has held since January 2002. Dr. Choudhary
started his career as a mining engineer in the Bhilai Steel Plant, India, in
1964. In 1984 he moved to India's largest public sector aluminium company,
National Aluminium Company ltd (Nalco). In 1992 he joined Indian Aluminium
Company Ltd, or INDAL, as Chief Engineer -- New Projects, to lead the Utkal
Alumina Project -- a World Class Mega Project. From 1992 to 1998 he worked in
various senior positions like the Director and Chief Executive of Utkal Alumina
India Ltd and Director and Group President -- Smelter, Chemicals & Power. In
December 1997 Dr. Choudhary was appointed as a Director of the INDAL Board and
Chief Operating Officer of the Company. In October 1998 he assumed the position
of Managing Director -- Operations of INDAL. In April 1999 Dr. Choudhary was
also appointed as independent Chairman of the Board of Directors of Utkal
Alumina International Limited -- a joint venture project undertaken by INDAL,
Norsk Hydro of Norway and Alcan Aluminium of Canada.
Frantisek Chowaniec
Mr. Chowaniec is the Chief Executive Officer of Mittal Steel Ostrava
and Mittal Steel Poland. Mr. Chowaniec has over 35 years experience in the
running and management of the steel industry. He graduated from the
Metallurgical Faculty of VSB Ostrava and graduated from a Post-graduate Manager
Course at the University of North Florida.
Davinder Chugh
Mr. Chugh is the Chief Executive Officer of Mittal Steel South Africa
and has over 25 years experience in the steel industry, in particular materials
purchasing, logistics, warehousing and shipping. Prior to being appointed Chief
Executive, Mr. Chugh held the position of Commercial Director at Mittal Steel
South Africa since May 2002. Before joining Mittal Steel South Africa he was
vice president of purchasing at Mittal Steel Europe. Mr. Chugh has been with
Mittal Steel since 1995 and successfully integrated the materials management
functions at newly acquired Mittal Steel plants in Hamburg, Duisburg, France,
Romania and Algeria. Prior to this, he held several senior positions at the
Steel Authority India Limited in New Delhi, India. He holds degrees in science
and law and has a master's degree in business administration.
Simon Evans
Mr. Evans joined Mittal Steel in September 2001 as General Counsel. He
has over 16 years of experience in corporate and commercial law in both industry
and private practice. Formerly, Mr. Evans was European Counsel at Rohm and Haas
Company and prior to that he worked at the law firm Taylor Joynson Garrett,
London. Mr. Evans is a graduate of Oxford University in Oxford, England and the
College of Law, Guildford in Surrey, England.
Richard Leblanc
Mr. Leblanc is the President and Chief Executive Officer of Mittal
Canada, and has approximately 36 years of experience in the steel industry. Mr.
Leblanc spent 18 years in various senior management positions at Stelco Inc.
before joining Mittal Canada in 1987 as Vice-President, Production. He became
President and Chief
75
Executive Officer in 1996. Mr. Leblanc is a Director of the American Iron and
Steel Institute and the Canadian Steel Producers Association. He holds a
bachelor's degree in electrical engineering from Laval University in Quebec,
Canada.
Sudhir Maheshwari
Mr. Maheshwari is the Executive Vice President, Finance and Corporate
Treasurer of Mittal Steel and has over 16 years of experience in steel and
related industries. He was previously the Chief Financial Officer of LNM
Holdings since January 2002. He has played an integral and key role in all the
recent acquisitions by LNM Holdings. Mr Maheshwari has worked for Mittal Steel
for 15 years. He held the positions of Chief Financial Officer at Mittal Steel
Europe, Ispat Germany and Mittal Steel Point Lisas, and Director of Finance and
M&A at Mittal Steel. He has also played a key role in various corporate finance
and capital market projects including the IPO in 1997. Mr. Maheshwari is an
Honours Graduate in Accounting and Commerce and a member of The Institute of
Chartered Accountants and The Institute of Company Secretaries in India.
Gerhard Renz
Mr. Renz is the President and Chief Operating Officer of Mittal Steel
Europe and has over 31 years of experience in the steel industry. Mr. Renz
formerly worked as the Managing Director of Mittal Steel Hamburg. Mr. Renz is a
board member of Verein Deutsche Eisenhuttenleute, Wirtschaftsvereinigung Stahl
and the European Iron and Steel Institute. He holds a German (bachelor's) degree
in engineering.
Henk Scheffer
Mr. Scheffer joined Mittal Steel in March 2003 as Company Secretary,
and he is responsible for compliance with corporate legal requirements and
supporting and facilitating Mittal Steel's board of directors. Previously, Mr.
Scheffer worked at Canon for 13 years in various legal and general management
positions. Mr. Scheffer holds a law degree from Rijks Universiteit Groningen
(RUG).
Louis Schorsch
Dr. Schorsch is the President and Chief Executive Officer of Inland and
has over 26 years of experience in consulting and managerial roles predominantly
relating to the steel industry. Prior to joining Inland in October 2003, Dr.
Schorsch held various senior positions in the consulting and e-commerce sectors.
His immediate previous assignments have been as President and Chief Executive
Officer of GSX.Com Inc. and Principal at McKinsey & Company, where he worked
from 1985 until 2000. While at McKinsey, he was a co-leader of the firm's metals
practice. Dr. Schorsch has published numerous articles in such publications as
Business Week and Challenge and has also co-authored a book on steel titled
"Upheaval in a Basic Industry".
PROPOSED CHANGES TO DIRECTORS AND SENIOR MANAGEMENT FOLLOWING THE ISG MERGER
Upon completion of the ISG merger, Mr. Wilbur L. Ross, Chairman of the
ISG board of directors, is expected to become a member of Mittal Steel's board
of directors. Mr. Rodney B. Mott, ISG's President and Chief Executive Officer
and a member of the ISG board of directors, is expected to become Chief
Executive Officer of Mittal Steel's combined U.S. operations. The merger
agreement and related documentation do not guarantee that Mr. Ross will serve as
a director of Mittal Steel for any specified period after the merger. At the
Mittal Steel extraordinary general meeting of shareholders scheduled for April
12, 2005, Mr. Malay Mukherjee and Mr. Fernando Ruiz Sahagun intend to resign as
directors of Mittal Steel. Mr. Mukherjee will remain as the Chief Operating
Officer of Mittal Steel and Mr. Ruiz Sahagun will become a director of Mittal
Steel's U.S. subsidiary. Mr. Lewis B. Kaden has been nominated for election as a
class C director of Mittal Steel at the extraordinary general meeting of
shareholders for term starting on the day following the extraordinary meeting of
the Company, and ending on the date of the annual general meeting of
shareholders of the Company to be held in 2006.
Wilbur L. Ross
Mr. Ross has served as the Chairman of the ISG board of directors since
ISG's inception. Mr. Ross is the Chairman and Chief Executive Officer of WL Ross
& Co. LLC, a merchant banking firm, a position he has held since April 2000. Mr.
Ross is also the Chairman and Chief Executive Officer of WLR Recovery Fund L.P.,
WLR Recovery Fund II L.P., Asia Recovery Fund, Asia Recovery Fund Co-Investment,
Nippon Investment
76
Partners and Absolute Recovery Hedge Fund. Mr. Ross is also the general partner
of WLR Recovery Fund L.P., WLR Recovery Fund II L.P., Asia Recovery Fund, and
Absolute Recovery Hedge Fund. Mr. Ross is also Chairman of Ohizumi Manufacturing
Company in Japan, Burlington Industries and Cone Mills Corporation in the United
States, and Insuratex, Ltd. in Bermuda. Mr. Ross is a board member of the
Turnaround Management Association, Nikko Electric Co. in Japan, Tong Yang Life
Insurance Co. in Korea, and of Syms Corp., Clarent Hospital Corp., 360 Networks
Corp. and News Communications Inc. in the United States. Mr. Ross is also a
member of the Business Roundtable. Previously, Mr. Ross served as the Executive
Managing Director at Rothschild Inc., an investment banking firm, from October
1974 to March 2000. Mr. Ross was also formerly Chairman of the Smithsonian
Institution National Board.
Rodney B. Mott
Mr. Mott has served as ISG's President and Chief Executive Officer and
a member of the ISG board of directors since April 2002. Mr. Mott has over 30
years of management experience in the metals industry. He served as President
and Chief Executive Officer of Pechiney Rolled Products, an aluminum rolling
company and a division of Pechiney SA from January 2000 to August 2001. From
1987 to 2000 Mr. Mott held various positions with Nucor, a mini-mill steel
producer, including Vice President/ General Manager of Nucor Steel, a division
of Nucor, at the Blytheville, Arkansas and Berkley, South Carolina facilities.
Prior to joining Nucor, Mr. Mott was Superintendent of Operations at Lone Star
Steel from 1986 to 1987. He began his metals management career at U.S. Steel's
Fairless Hills operation, where he held positions of increasing responsibility
during a 14-year career from 1971 to 1986. Mr. Mott is also a board member of
the American Iron and Steel Institute and the National Association of
Manufactures.
Lewis B. Kaden
Mr. Kaden has approximately 38 years of experience in corporate
governance, dispute mediation, labor and employment law, and economic policy. He
is currently a partner at the law firm of Davis Polk & Wardwell. Prior to that,
Mr. Kaden served as Counsel to the Governor of New Jersey, as a Professor of Law
at Columbia University and as director of Columbia's Center for Law and Economic
Studies. He served as a director of Bethlehem Steel Corporation for ten years
and is currently Chairman of the Board of Directors of the Markle Foundation. He
is a member of the Council on Foreign Relations and the moderator of the
Business-Labor Dialogue. Mr. Kaden is a magna cum laude graduate of Harvard
College and of Harvard Law School.
77
B. COMPENSATION
The total annual remuneration of the members of Mittal Steel's board of
directors for 2003 and 2004 was as follows:
YEAR ENDED
----------------------------------
2003 2004
----------------------------------
(All amounts in $ thousands except
option information)
Base salary 3,826 4,471
Short-term performance-related bonus 1,962 11,747
Long-term incentives (number of
options) - -
The annual remuneration of the members of Mittal Steel's board of
directors was as follows:
2003 2004 2003 2004 2003 2004
-----------------------------------------------------------------------------
SHORT-TERM SHORT-TERM LONG-TERM LONG-TERM
PERFORMANCE PERFORMANCE NUMBER OF NUMBER OF
RELATED RELATED OPTIONS OPTIONS
-----------------------------------------------------------------------------
(All amounts in $ thousands except option information)
Lakshmi N. Mittal 1,247 1,679 429 4,596 - -
Aditya Mittal 910 1,193 1,327 4,050 - -
Vanisha Mittal Bhatia* - - - -- - -
Malay Mukherjee 870 807 206 3,101 - -
Dr. Peter Southwick** 420 - - - - -
Narayanan Vaghul 84 136 - - - -
Ambassador Andres Rozental 86 213 - - - -
Fernando Ruiz Sahagun 60 89 - - - -
Muni Krishna T. Reddy 84 206 - - - -
Rene Lopez 65 148 - - - -
Total 3,826 4,471 1,962 11,747 - -
*Mrs. Vanisha Mittal Bhatia was elected to Mittal Steel's board of directors on
December 15, 2004.
**Dr. Peter Southwick resigned from Mittal Steel's board of directors on October
1, 2003.
The amount outstanding at December 31, 2004 in respect of loans and
advances to members of Mittal Steel's board of directors was $0 million
(December 31, 2003: $0 million and December 31, 2002: $0 million). In 2004, $0
million was accrued by Mittal Steel to provide pension benefits to the
directors. In addition, Mittal Steel has not given any guarantees for the
benefit of the members of Mittal Steel's board of directors.
78
The following table provides summarized information on the options
outstanding and the movements on the options granted to Mittal Steel's board of
directors (in 2001, 2003 and 2004 no options were granted to members of Mittal
Steel's board of directors):
------------------------------------------------------------------------------------------------------------------
GRANTED IN GRANTED IN GRANTED IN TOTAL (1) WEIGHTED
1999 2000 2002 AVERAGE
EXERCISE
PRICE
------------------------------------------------------------------------------------------------------------------
Lakshmi N. Mittal 80,000 80,000 80,000 240,000 $7.59
Aditya Mittal 7,500 7,500 25,000 40,000 $5.26
Vanisha Mittal Bhatia(2) - - - - -
Malay Mukherjee 40,000 40,000 50,000 130,000 $7.18
Dr.Peter Southwick(3) 30,000 30,000 45,000 105,000 $6.83
Narayanan Vaghul 2,000 5,000 10,000 17,000 $5.25
Ambassador Andres Rozental - 5,000 10,000 15,000 $4.36
Fernando Ruiz Sahagun - 5,000 10,000 15,000 $4.36
Muni Krishna T. Reddy - - - - -
Rene Lopez - - - - -
Total 159,500 172,500 230,000 562,000 $6.94
Exercise price(4) $11.94 $8.57 $2.26 - -
Term (in years) 10 10 10 - -
Expiration date September 14, June 1, 2010 April 5, 2012 - -
2009
(1) None of the options has been exercised, except for 90,000 options granted to
Dr. Peter Southwick. Dr. Southwick exercised all his vested options in 2004 and
currently retains 15,000 non-vested options.
(2) Mrs. Vanisha Mittal Bhatia was elected to Mittal Steel's board of directors
on December 15, 2004.
(3) Dr. Peter Southwick resigned from Mittal Steel's board of directors on
October 1, 2003.
(4) All options were granted at an exercise price equal to the market value on
the date of grant.
The total annual remuneration of the senior management of Mittal Steel
(including amounts paid by LNM Holdings prior to its December 17, 2004
acquisition by Ispat International to any such senior manager in his capacity as
a senior manager of LNM Holdings) for 2004 was as follows: $4 million in base
salary, and $4 million in short-term performance related bonus. For 2004, $1
million was accrued by Mittal Steel to provide pension benefits to its senior
management. No options were granted to senior management for 2004. As of
December 31, 2004, $0 million was outstanding in respect of loans and advances
to senior management of Mittal Steel. The maximum amount outstanding during 2004
to senior management in respect of loans and advances was approximately $0.2
million. No interest was payable on the loans.
STOCK OPTION PLAN
In 1999, Mittal Steel established the Mittal Steel Stock Option Plan,
which is described more fully in Note 13 to the Mittal Steel's Consolidated
Financial Statements. Under the terms of the Mittal Steel Stock Option Plan,
Mittal Steel may grant options to senior management of Mittal Steel for up to
six million Mittal Steel class A common shares (increased up to a maximum of 10
million Mittal Steel class A common shares in 2003). The exercise price of each
option equals not less than the fair market value of Mittal Steel class A common
shares on the date of grant, with a maximum term of 10 years. Options are
granted at the discretion of Mittal Steel's board of directors or its delegate.
The options vest either ratably upon each of the first three
79
anniversaries of the grant date or, in total, upon the death, disability or
retirement of the participant. All outstanding option rights exercisable in at
least the current and next financial year under the Mittal Steel Stock Option
Plan can be satisfied by the Mittal Steel class A common shares currently held
in treasury.
Prior to 2003, Mittal Steel accounted for those plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, or Opinion 25. No
stock-based employee compensation cost is reflected in 2001 and 2002 net income,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common shares on the date of grant.
Effective January 1, 2003, Mittal Steel adopted the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, or SFAS 123, prospectively to all
employee awards granted, modified, or settled after January 1, 2003. This
prospective adoption of the fair value provisions of SFAS 123 is in accordance
with the transitional provisions of SFAS No. 148, Accounting for Stock-Based
Compensation, or SFAS 148, issued in December 2002 for recognizing compensation
cost of stock options. There were no stock options granted, modified or settled
during 2003 and accordingly, no compensation expense has been recognized in
2003.
SFAS 148 also requires that if awards of stock-based employee
compensation were outstanding and accounted for under the intrinsic value method
of Opinion 25 for any period in which an income statement is presented, a
tabular presentation is required as follows for Mittal Steel:
YEAR ENDED DECEMBER 31
-------------------------------------------------------
2001 2002 2003 2004
-------------------------------------------------------
(All amounts in $ million except per share information)
Net income, as reported $(199) $595 $1,182 $4,701
Add: Stock-based employee compensation expense - - - -
included in reported net income, net of related tax
effects
Deduct: Total stock-based employee compensation 3 3 1 1
expense determined under fair value based method
for all awards, net of related tax effects
Pro forma net income $(202) $592 $1,181 $4,700
Earnings per share:
Basic and diluted -- as reported $(0.31) $0.92 $1.83 $7.31
Basic and diluted - pro forma (0.31) 0.92 1.83 7.31
The fair value of each option grant of Mittal Steel class A common
shares is estimated on the date of grant using Black-Scholes Model Method with
the following weighted-average assumptions used:
YEARS OF GRANT
-------------------------------------------------------
2001 2002 2003 2004
-------------------------------------------------------
Dividend Yield - - - -
Expected annualized volatility - 83% - -
Discount rate -- Bond equivalent yield - 5.03% - -
Expected life in years - 8 - -
The status of the Mittal Steel Stock Option Plan with respect to Mittal
Steel is summarized below at December 31, 2004:
80
NUMBER OF SHARES WEIGHTED AVERAGE
EXERCISE PRICE ($)
-------------------------------------
Opening balance as of January 1, 2002 2,202,000 $10.17
GRANTED DURING 2002 1,349,500 2.26
Exercised
Forfeitures (160,000) 7.95
Outstanding at December 31, 2002 3,391,500 7.13
GRANTED DURING 2003 - -
Exercised (91,166) 2.26
Forfeitures/restoration 39,000 11.72
Outstanding at December 31, 2003 3,339,334 7.32
GRANTED DURING 2004 - -
Exercised (1,384,118) 7.76
Forfeitures/restoration (244,000) 9.07
Outstanding at December 31, 2004 1,711,216 6.72
At December 31, 2004 the stock options granted under the Mittal Steel
Stock Option Plan are exercisable as follows:
YEAR OPTIONS AVERAGE EXERCISE
PRICE ($) (1)
-------------------------------------------------------------------------------
2005 1,711,216 $6.72
2006 1,711,216 6.72
2007 1,711,216 6.72
2008 1,711,216 6.72
2009 1,711,216 6.72
(1) Based on exercise price of $11.94, $8.57 and $2.26 for 1999, 2000 and 2002,
the respective years of the grant date.
C. MITTAL STEEL BOARD PRACTICES
Article 18, paragraph 1 of Mittal Steel's Articles of Association
provides that its board of directors shall consist of five or more class A,
class B and class C directors (and comprised at all times of one class A
director and at least two class C directors). Article 18, paragraph 3 stipulates
that class A directors are appointed for a period of four years starting on the
day after the day of the annual general meeting of shareholders on which they
are appointed and ending on the day of the annual general meeting of
shareholders that will be held in the fourth year after their appointment. The
same paragraph sets out that class B and class C directors are appointed for a
period of one year starting on the day after the annual general meeting of
shareholders on which they are appointed and ending on the day of the annual
general meeting of shareholders that will be held in the next year.
CORPORATE GOVERNANCE
In June 2001, Mittal Steel adopted corporate governance guidelines in
line with best practices on corporate governance. Mittal Steel will continue to
monitor diligently new, proposed and final U.S. and Dutch corporate regulatory
requirements and will make adjustments to its corporate governance controls and
procedures to stay in compliance with these requirements on a timely basis.
Mittal Steel is committed to meeting the corporate governance mandates and
requirements under applicable current and proposed SEC and New York Stock
Exchange ("NYSE") listing standards and the laws of The Netherlands. There are
no significant differences between Mittal Steel's current corporate governance
practices and those currently required to be followed by U.S. domestic companies
under the NYSE listing standards.
The new Dutch Corporate Governance Code was published on December 9,
2003. During the Mittal
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Steel annual general meeting of shareholders held on May 5, 2004, the
implications of the new Dutch Corporate Governance Code were discussed with its
shareholders and certain proposed changes to Mittal Steel's Articles of
Association to bring them in line with the requirements of the Dutch Corporate
Governance Code were approved by the shareholders. The changes to Mittal Steel's
Articles of Association lowered the number of votes required to overrule a
binding nomination for the appointment of a member of Mittal Steel's board of
directors made by the holders of Mittal Steel class B common shares from a
majority of at least two thirds of votes cast representing more than half of the
issued share capital of Mittal Steel to an absolute majority of votes cast
representing at least one third of the issued share capital of Mittal Steel. In
addition, Mittal Steel's Articles of Association now provide that a class A
director can be appointed for a maximum term of four years and cannot be
appointed indefinitely as was previously permitted. Accordingly, Mittal Steel is
materially in line with the requirements of the provisions of the Dutch
Corporate Governance Code, in accordance with the implementation provisions.
However, Mittal Steel's annual general meeting of shareholders also approved
that Mittal Steel will differ from the Dutch Corporate Governance Code with
regard to the separation of the posts of Chairman and Chief Executive Officer.
Mittal Steel's Chairman and Chief Executive Officer will continue to be Mr.
Lakshmi N. Mittal.
ROLE OF MITTAL STEEL'S BOARD OF DIRECTORS AND MANAGEMENT
Mittal Steel's business is conducted through operating subsidiaries,
which are managed by their board of directors and headed by the subsidiary's
CEO/President. Mittal Steel's board of directors and the senior corporate
management provide the oversight to enhance the value to the stakeholders.
DIRECTOR INDEPENDENCE
As per the criteria laid down by Mittal Steel's board of directors,
directors will be considered "independent" if they do not have a material
relationship with Mittal Steel. Mittal Steel's board of directors currently
consists of nine directors, of whom Messrs. Rene Lopez, Fernando Ruiz Sahagun,
Muni Krishna T. Reddy and Narayanan Vaghul and Ambassador Andres Rozental are
independent under Mittal Steel's independence criteria and the NYSE listing
standards. These directors constitute a majority of Mittal Steel's board of
directors. A firm of tax lawyers, of which Mr. Fernando Ruiz Sahagun is a
partner, renders advice to Mittal Steel and some of its group companies. On the
basis of Dutch corporate governance rules Mr. Fernando Ruiz Sahagun would as a
result not be considered as "independent". However, the board of directors has
determined that this relationship would not impede Mr. Fernando Ruiz Sahagun's
ability to act as an independent director. Mr. Fernando Ruiz Sahagun does not
serve on any committees of Mittal Steel's board of directors. Mr. Kaden, who
will be nominated as a director at the extraordinary general meeting of
shareholders scheduled for April 12, 2005, would be considered independent under
Mittal Steel's independence criteria, the Dutch Corporate Governance Code and
the NYSE listing standards.
FUNCTION OF MITTAL STEEL'S BOARD OF DIRECTORS
As per Mittal Steel's Corporate Governance guidelines, Mittal Steel's
board of directors are responsible for the stewardship of Mittal Steel and
assume responsibility for the adoption of a corporate strategy; monitoring of
risk and control; succession planning including appointing, training and
monitoring of senior management personnel; maintaining an investor relations
program for Mittal Steel; ensuring the integrity of Mittal Steel's internal
control and management information system; and setting a remuneration policy
that incorporates appropriate performance hurdles. Mittal Steel's board of
directors and each of its committees also have the power to hire independent
advisors as they deem necessary.
QUALIFICATION
Directors should possess the highest personal and professional ethics
and integrity, and be committed to representing the interests of the
stakeholders. Mittal Steel's directors possess experience in managing large
companies and contribute towards the protection of the stakeholders interests in
Mittal Steel through expertise in their respective fields. All directors bring
an independent judgment to bear on issues of strategy, performance, resources
and standards of conduct.
SIZE OF MITTAL STEEL'S BOARD OF DIRECTORS AND SELECTION PROCESS
All directors are subject to election by the shareholders. The names of
directors submitted for election shall be accompanied by sufficient biographical
details to enable shareholders to make an informed decision on
82
their election. Each time a member of Mittal Steel's board of directors is to be
appointed, the meeting of holders of Mittal Steel class B common shares may make
a binding nomination. A binding nomination can be overruled by a shareholders'
resolution passed by an absolute majority of votes cast representing at least
one third of the issued share capital of Mittal Steel. Mittal Steel's board of
directors currently consists of nine members, which is considered reasonable
given the size of Mittal Steel. All members of Mittal Steel's board of
directors, except for Messrs. Lakshmi N. Mittal and Aditya Mittal and Mrs.
Vanisha Mittal Bhatia (who as class A directors only stand for re-election once
every four years), will next be considered for re-appointment at the annual
general shareholders meeting in 2005. At the extraordinary general meeting of
shareholders, Mr. Mukherjee and Mr. Ruiz Sahagun intend to resign as directors
of Mittal Steel. Mr. Mukherjee will remain as the Chief Operating Officer of
Mittal Steel and Mr. Ruiz Sahagun will become a director of Mittal Steel's U.S.
subsidiary. Mr. Kaden has been nominated for election as a class C director of
Mittal Steel at the extraordinary general meeting of shareholders scheduled for
April 12, 2005 for a term starting on the day following this extraordinary
general meeting and ending on the date of the annual general meeting of
shareholders of the Company to be held in 2006. Mr, Ross has been nominated for
election as a class C director of Mittal Steel for a term commencing on the day
following completion of the proposed merger with ISG and ending on the date of
the annual general meeting of shareholders of the Company to be held in 2006.
During 2003, Dr. Peter Southwick, one of the class B directors,
resigned from Mittal Steel's board of directors. Dr. Southwick continues to be
employed by one of Mittal Steel's subsidiaries.
BOARD COMMITTEES
Mittal Steel's board of directors has established the following
committees to assist the board of directors in discharging its responsibilities:
(i) Audit; (ii) Remuneration; and (iii) Nomination.
BOARD AGENDA
The items placed before Mittal Steel's board of directors include,
among others, strategic plans of Mittal Steel; annual operating plans and
budgets and any updates; capital budgets and any updates; quarterly results for
Mittal Steel and its strategic business units; minutes of Audit Committee and
other committee meetings; the information on recruitment and remuneration of
senior management; environment, health and safety related matters; risk
management policy of the group and such other matters considered important for
the oversight of Mittal Steel's board of directors.
ETHICS AND CONFLICT OF INTEREST
Ethics and conflicts of interest are governed by the Code of Business
Conduct adopted by Mittal Steel. The Code of Business Conduct sets out standards
for ethical behavior, which are to be followed by all employees and directors of
Mittal Steel in the discharge of their duties. They must always act in the best
interests of Mittal Steel and must avoid any situation where their personal
interests conflict, or could conflict with their obligations toward Mittal
Steel. As employees, they must not acquire any financial or other interest in
any business or participate in any activity that could deprive Mittal Steel of
the time or the scrupulous attention that they need to devote to the performance
of their duties. Any behavior that deviates from Mittal Steel's Code of Business
Conduct is to be reported to the employee's supervisor, a member of the
management, the head of the legal department or the head of the internal audit/
internal assurance department.
Mittal Steel's Code of Business Conduct is available on Mittal Steel's
website at http://www.mittalsteel.com.
SEPARATE MEETING OF NON-EXECUTIVE DIRECTORS
The non-executive directors of Mittal Steel regularly schedule
meetings without the presence of management. There is no minimum number of
meetings that the non-executive directors must hold per year. During 2004, the
non-executive directors of Mittal Steel held four meetings separate from the
executive directors. The presiding independent director at each of these
meetings is chosen at the meeting.
COMMUNICATIONS WITH THE BOARD
Mittal Steel's board of directors has established a process through
Mittal Steel's website at http://www.mittalsteel.com by which a shareholder or
any other person may send communications directly to
83
the board of directors.
MITTAL STEEL AUDIT COMMITTEE
The primary function of the Mittal Steel Audit Committee is to assist
Mittal Steel's board of directors in fulfilling its oversight responsibilities
by reviewing: the financial reports and other financial information provided by
Mittal Steel to any governmental body or the public; Mittal Steel's system of
internal control regarding finance, accounting, legal compliance and ethics that
the management and Mittal Steel's board of directors have established and Mittal
Steel's auditing, accounting and financial reporting processes generally.
The Audit Committee's primary duties and responsibilities are to serve
as an independent and objective party to monitor Mittal Steel's financial
reporting process and internal controls system; review and appraise the audit
efforts of Mittal Steel's independent accountants and internal auditing
department; provide an open avenue of communication among the independent
accountants, financial and senior management, the internal auditing department
and Mittal Steel's board of directors. It is responsible for approving the
appointment and fees of the independent auditors. It is also responsible for
monitoring the independence of the external auditors.
AUDIT COMMITTEE MEMBERS
The Audit Committee consists of three directors: Messrs. Narayanan
Vaghul and Muni Krishna T. Reddy and Ambassador Andres Rozental, all of whom are
independent under Mittal Steel's Corporate Governance guidelines, the New York
Stock Exchange standards as well as the Dutch Corporate Governance Code. The
Chairman of the Audit Committee is Mr. Narayanan Vaghul, who has significant
experience and financial expertise. Mr. Vaghul is the Chairman of ICICI Bank, a
company that is listed on the New York Stock Exchange and the Mumbai Stock
Exchange. Mr. Reddy and Ambassador Andres Rozental also have considerable
experience in managing companies' affairs.
CHARTER AND MEETINGS
Mittal Steel's Audit Committee charter is available on Mittal Steel's
website at http://www.mittalsteel.com. The Audit Committee, which is required to
meet at least four times a year, met nine times during 2004. Of these meetings,
six were physical meetings and three were teleconference meetings.
PROCESS FOR HANDLING COMPLAINTS ABOUT ACCOUNTING MATTERS
As part of the procedures of Mittal Steel's board of directors for
receiving and handling complaints or concerns about Mittal Steel's financial
accounting, internal controls and auditing issues, Mittal Steel's Code of
Business Conduct encourages all employees to bring such issues to the Audit
Committee's attention. Concerns relating to accounting or auditing matters may
be communicated through the Mittal Steel website at http://www.mittalsteel.com.
Employees reported no significant complaints of this nature during 2004.
INTERNAL AUDIT/INTERNAL ASSURANCE
Mittal Steel has an Internal Audit function. The function is under the
responsibility of the Director -- Internal Assurance, who reports to the Audit
Committee. The function is staffed by full time professional staff located at
each of the principal operating subsidiaries and at the corporate level.
Recommendations and matters relating to internal control and processes are made
by the Internal Audit function, and their implementation is regularly reviewed
by the Audit Committee.
EXTERNAL AUDITORS' INDEPENDENCE
The appointment and determination of fees of the external auditors is
the direct responsibility of the Audit Committee. The Audit Committee is further
responsible for obtaining annually a written statement from the external
auditors that their independence has not been impaired. Mittal Steel's current
principal external auditors, Deloitte Accountants B.V., have informed Mittal
Steel of their intention to rotate their lead and engagement partners in line
with the new U.S. regulatory requirements in 2004 and 2005, respectively. The
Audit Committee has obtained a confirmation from the principal external auditors
that none of their former employees are in a position with Mittal Steel, which
may impair their independence.
84
MITTAL STEEL REMUNERATION COMMITTEE
CHARTER AND MEETINGS
The Mittal Steel Remuneration Committee is comprised of three
independent directors. The purpose of having a Remuneration Committee consisting
exclusively of directors who are independent of management is to have members
who are free of any business or other relationship, which could interfere with
the exercise of their independent judgment. Mittal Steel's board of directors
has established the Remuneration Committee to determine on their behalf and on
behalf of the shareholders within agreed terms of reference, Mittal Steel's
framework of remuneration and compensation, including stock options for
executive members of Mittal Steel's board of directors, the Chief Financial
Officers, and the Chief Executive Officers of operating subsidiaries and
designated senior management at the corporate level. The Remuneration Committee
is required to meet at least twice a year and met three times in 2004.
The charter of the Remuneration Committee is available on Mittal
Steel's website at http://www.mittalsteel.com.
REMUNERATION COMMITTEE MEMBERS
The Mittal Steel Remuneration Committee consists of three directors:
Mr. Narayanan Vaghul, Ambassador Andres Rozental and Mr. Rene Lopez, all of whom
are independent. The Chairman of the Remuneration Committee is Ambassador Andres
Rozental.
REMUNERATION PRINCIPLES
The Mittal Steel Remuneration Committee's principal responsibility in
compensating executives is to encourage and reward performance that will lead to
long-term enhancement of shareholder value. None of the members of Mittal
Steel's board of directors currently has entered into any contracts with Mittal
Steel or any of its subsidiaries that provide benefits upon termination of
employment. The Remuneration Committee reviews the remuneration of executive
members of Mittal Steel's board of directors, the Chief Financial Officers, and
the Chief Executive Officers of operating subsidiaries and designated senior
management at the corporate level.
MITTAL STEEL NOMINATION COMMITTEE
CHARTER AND MEETINGS
Mittal Steel has a Nomination Committee comprised exclusively of three
independent directors. The Nomination Committee elects its Chairman and members
of the Nomination Committee are appointed and can be removed by Mittal Steel's
board of directors. The Nomination Committee is required to meet at least twice
a year and met three times in 2004.
The charter of the Nomination Committee is available on Mittal Steel's
website at http://www.mittalsteel.com.
NOMINATION COMMITTEE MEMBERS
The Mittal Steel Nomination Committee consists of three directors:
Narayanan Vaghul, Muni Krishna T. Reddy and Ambassador Andres Rozental, all of
whom are independent. Ambassador Andres Rozental is the Chairman of the
Nomination Committee.
FUNCTION OF THE NOMINATION COMMITTEE
The Mittal Steel Nomination Committee will at the request of Mittal
Steel's board of directors, consider any appointment or reappointment to Mittal
Steel's board of directors. It will provide advice and recommendations to Mittal
Steel's board of directors on such appointment. The Nomination Committee is also
responsible for developing, monitoring and reviewing corporate governance
principles applicable to Mittal Steel.
85
D. EMPLOYEES
Mittal Steel had approximately 164,000 employees as of December 31,
2004.
The table below sets forth the breakdown of the total year-end number
of employees by geographical region for the past three years.
YEAR ENDED
---------------------------------
REGION 2002 2003 2004
-------------------------------------------------------------------------
Americas 10,971 10,414 9,713
Europe 4,672 41,816 79,278
Rest of World 64,007 64,093 75,402
Total 79,650 116,323 164,393
In general, Mittal Steel has a good relationship with its employees and
with the labor unions.
Inland is currently negotiating a new labor agreement with the United
Steelworkers of America, as the previous agreement expired on July 31, 2004.
Under the terms of the previous agreement, both parties agreed to negotiate a
successor agreement without resorting to strikes or lockouts. In addition, both
parties agreed that open issues would be submitted to binding arbitration and
that the successor agreement will be based on the agreements currently in place
at other domestic integrated steel producers. In the light of Mittal Steel's
proposed merger with ISG, the arbitration procedure was postponed, and the
parties agreed that the current ISG Collective Bargaining Agreement would be
adopted with negotiated adjustments for circumstances particular to Inland.
Negotiations are ongoing and it is expected that a final agreement, that
requires union membership ratification, will be reached shortly.
E. SHARE OWNERSHIP
As of December 31, 2004, the aggregate beneficial share ownership of
Mittal Steel directors and senior management (19 individuals) is 403,268 Mittal
Steel class A common shares (excluding shares owned by Mittal Steel's
controlling shareholder and including options to acquire 299,668 Mittal Steel
class A common shares that are exercisable within 60 days of December 31, 2004),
being 0.06% of the total issued share capital of Mittal Steel. Excluding options
to acquire Mittal Steel class A common shares, these 19 individuals own 103,600
Mittal Steel class A common shares. See "Item 7 -- Major Shareholders and
Related Party Transactions". The percentage of total common shares in the
possession of the controlling shareholder (including the treasury stock) has
risen from 81.54% prior to December 17, 2004 to 96.98% after that date as a
result of the LNM Holdings acquisition. The number of options granted to
directors and senior management in 2002 was 596,500 at an exercise price of
$2.26. No options were granted during 2001, 2003 and 2004. These options vest
either ratably upon each of the first three anniversaries of the grant date, or,
in total, upon the death, disability or retirement of the participant. The
option term expires 10 years after the grant date.
In accordance with the new Dutch Corporate Governance Code, independent
non-executive members of Mittal Steel's board of directors will no longer
receive any share options.
86
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
As at December 31, 2004, the authorized common shares of Mittal Steel
consisted of 5,000,000,000 class A common shares, par value of EUR0.01 per
share, and 721,500,000 class B common shares, par value of EUR0.10 per share. At
December 31, 2004, 194,509,790 class A common shares and 457,490,210 class B
common shares were issued and 185,284,650 (2003: 189,247,282) class A common
shares (excluding treasury shares) and 457,490,210 (2003: 457,490,210) class B
common shares were outstanding.
The preference and relative rights of the Mittal Steel class A common
shares and Mittal Steel class B common shares are substantially identical except
for disparity in voting power and conversion rights. Holders of Mittal Steel
class A common shares are entitled to one vote per share and holders of Mittal
Steel class B common shares are entitled to 10 votes per share on all matters
submitted to a vote of shareholders. Each Mittal Steel class B common share is
convertible, at the option of the holder, into one Mittal Steel class A common
share.
The following table sets forth information as of December 31, 2004 with
respect to the beneficial ownership of Mittal Steel class A common shares and
Mittal Steel class B common shares by each person who is known to be the
beneficial owner of more than 5% of either class of shares, and all directors
and senior management as a group.
MITTAL STEEL CLASS A MITTAL STEEL CLASS B TOTAL COMMON SHARES
COMMON SHARES (1) COMMON SHARES (1)
--------------------------------------------------------------------------------
NUMBER % OF CLASS NUMBER % OF CLASS NUMBER % OF TOTAL
----------- ---------- ------ ---------- ------ ----------
Controlling Shareholder (2) 166,048,123 85.37% 457,490,210 100% 623,538,333 95.63%
Treasury Stock (3) 8,802,397(4) 4.53 -- -- 8,802,397 1.35
Other Public
Shareholders 19,659,270 10.10 -- -- 19,659,270 3.02
Total 194,509,790 100.00% 457,490,210 100% 652,000,000 100.00%
Directors and Senior 403,268(6)(7) 0.21% -- -- 403,268(6)(7) 0.06%
Management (5)
(1) For purposes of this table a person or group of persons is deemed to have
beneficial ownership of any Mittal Steel class A common shares as of a given
date which such person or group of persons has the right to acquire within 60
days after December 31, 2004 upon exercise of vested portions of stock options.
The remaining non-vested stock options will be vested on April 5, 2005. The
amounts in the table do not include the number of Mittal Steel class A common
shares to be received upon conversion of the Mittal Steel class B common shares.
(2) Mr. Lakshmi Mittal and his wife, Mrs. Usha Mittal, together control Mittal
Steel through direct ownership of Mittal Steel class A common shares and through
indirect ownership of holding companies that own both Mittal Steel class A
common shares and Mittal Steel class B common shares. Ispat International
Investments S.L. is the owner of 26,100,000 Mittal Steel class A common shares
and 72,150,000 Mittal Steel class B common shares. As a result, Ispat
International Investments S.L. is the beneficial owner of 98,250,000 class A
common shares (assuming conversion of the Mittal Steel class B common shares
into Mittal Steel class A common shares). Mittal Steel S.a.r.l., a limited
liability company organized under the laws of Luxembourg, is the owner of
139,659,790 Mittal Steel class A common shares and 385,340,210 Mittal class B
common shares. As a result, Mittal Steel S.a.r.l. is the beneficial owner of
525,000,000 Mittal Steel class A common shares (assuming conversion of the
Mittal Steel class B common shares into Mittal Steel class A common shares). Mr.
Mittal is the direct owner of 30,000 Mittal Steel class A common shares and
holds options to acquire an additional 240,000 Mittal Steel class A common
shares of which 213,333 are, for the purposes of this table, deemed to be
beneficially owned by Mr. Mittal due to the fact that those options are
exercisable within 60 days. Mrs. Mittal is the direct owner of 5,000 Mittal
Steel class A common shares and holds options to acquire an additional 40,000
Mittal Steel class A common shares of which all 40,000 options are, for the
purposes of this table, deemed to be beneficially owned by Mrs. Mittal due to
the fact that those options are exercisable within 60 days. Mr. Mittal and Mrs.
Mittal share equally beneficial ownership of 100% of Ispat International
Investments S.L. and share equally beneficial ownership of 100% of Mittal Steel
S.a.r.l. Accordingly, Mr. Mittal is the beneficial owner of 623,493,333 Mittal
Steel class A common shares and Mrs. Mittal is the beneficial owner of
623,295,000 class A common shares (in each case, assuming conversion of the
Mittal Steel class B
87
shares into Mittal Steel class A common shares). Excluding options and assuming
no conversion of the Mittal Steel class B common shares into Mittal Steel class
A common shares, Mr. Lakshmi Mittal and Mrs. Usha Mittal, together directly and
indirectly through intermediate holding companies, own 165,794,790 Mittal Steel
class A common shares and 457,490,210 Mittal Steel class B common shares.
(3) Represents Mittal Steel class A common shares repurchased by Mittal Steel
pursuant to the previously announced share repurchase programs of Mittal Steel.
(4) Consisting of 5,300,000 Mittal Steel class A common shares repurchased in
the year ended December 31, 2004, 2,263,000 Mittal Steel class A common shares
repurchased in fiscal year ended December 31, 2003, 139,200 Mittal Steel class A
common shares repurchased in fiscal year ended December 31, 2002, 368,000 Mittal
Steel class A common shares repurchased in fiscal year ended December 31, 2001,
242,600 Mittal Steel class A common shares repurchased in fiscal year ended
December 31, 2000, 5,358,200 Mittal Steel class A common shares repurchased in
the fiscal year ended December 31, 1998 and 1,458,960 Mittal Steel class A
common shares repurchased in the fiscal year ended December 31, 1997 and
excluding 253,140 Mittal Steel class A common shares awarded to certain senior
executives of Mittal Steel, 23,532, 2,117,781 and 2,081,833 Mittal Steel class A
common shares issued to Inland's pension fund in 2003, 2002 and 2001
respectively, and 91,166 Mittal Steel class A common shares for options
exercised under Mittal Steel's pension plan during 2003 and excluding 1,374,951
Mittal Steel class A common shares for options exercised between December 31,
2003 and December 31, 2004, excluding 299,668 stock options that can be
exercised by directors and senior management (other than the controlling
shareholder) and excluding 253,333 stock options that can be exercised by the
controlling shareholder, in each case within 60 days of December 31, 2004.
(5) Excludes shares beneficially owned by the controlling shareholder.
(6) These 403,268 Mittal Steel class A common shares are included in shares
owned by public shareholders indicated above.
(7) During 1998, Mittal Steel awarded 198,750 common shares to certain senior
management of Mittal Steel in connection with Mittal Steel's initial public
offering undertaken in 1997 and also awarded 54,390 common shares to certain
senior executives as bonus shares in connection with Mittal Steel's stock bonus
plan.
The Mittal Steel class A common shares may be held in registered form
or bearer form, as the holder may elect. Registered shares may consist of either
shares traded on the NYSE, or New York Shares, which are registered in a
register kept by or on behalf of Mittal Steel by its New York transfer agent, or
shares traded on Euronext Amsterdam N.V. ("Euronext Amsterdam"), which are
registered in a register kept by or on behalf of Mittal Steel by its Dutch
transfer agent. Shares in registered form may be evidenced by certificates.
At December 31, 2004, there were 60 U.S. record holders holding an
aggregate of 27,824,355 New York Shares, representing 15% of the class A common
shares issued (including treasury shares). Mittal Steel's knowledge of the
number of New York Shares held by U.S. holders is based solely on the records of
its New York transfer agent regarding registered Mittal Steel class A common
shares.
At December 31, 2004, there were 926,645 of the Mittal Steel class A
common shares being held in The Netherlands. Mittal Steel cannot present the
number of holders in The Netherlands because all of the shares are held as
bearer shares.
VOTING RIGHTS
As of December 31, 2004, Mittal Steel's controlling shareholder owned
directly and indirectly through holding companies 165,794,790 Mittal Steel class
A common shares (approximately 89.5% of the issued and outstanding class (save
for class A common shares held in treasury)) and 457,490,210 Mittal Steel class
B common shares (100% of the issued and outstanding class), representing
approximately 99.6% of the combined voting interest in Mittal Steel. On
completion of the acquisition of LNM Holdings on December 17, 2004, 139,659,790
Mittal Steel class A common shares and 385,340,210 Mittal Steel class B common
shares were issued to an intermediate holding company owned by the controlling
shareholder. Prior to the recent completion of the acquisition of LNM Holdings,
the controlling shareholder owned 26,135,000 Mittal Steel class A common shares
(approximately 57.5% of the then issued and outstanding class (save for class A
common shares held in treasury)) and 72,150,000 Mittal Steel class B common
shares (100% of the then issued and outstanding class), representing
approximately 97.5% of the then combined voting interest in Mittal Steel.
The controlling shareholder, by virtue of its indirect ownership of
Mittal Steel class B common shares, indirectly has the right to make binding
nominations for the appointment of all members of Mittal Steel's board of
directors and to determine the outcome of any action requiring shareholder
approval. In addition, the controlling shareholder will have the ability, by
virtue of its indirect ownership of Mittal Steel class B common
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shares, to prevent or cause a change in control of Mittal Steel and its
subsidiaries.
CONVERSION: RESTRICTION ON TRANSFERS
Under Mittal Steel's Articles of Association, each Mittal Steel class B
common share is convertible at any time and from time to time at the option of
the holder thereof into one Mittal Steel class A common share. However, the
conversion of a Mittal Steel class B common share into a Mittal Steel class A
common share is a reduction of the issued share capital of Mittal Steel under
the laws of The Netherlands and requires approval by the shareholders. In
addition, the conversion of a Mittal Steel class B common share into a Mittal
Steel class A common share will result in a reduction of the votes of the holder
from 10 to one. The Mittal Steel class A common shares have no conversion
rights.
B. RELATED PARTY TRANSACTIONS
Mittal Steel engages in certain commercial and financial transactions
with affiliated companies and/or joint ventures (such as I/N Tek, I/N Kote,
Empire Iron Mining Partnership, PCI Associates, WDI, Pena Colorada, Sersiin,
Sorevco, Polski Koks and Macsteel International Holdings B.V. (both since 2004),
and Orind International/Orind Refractories. Many of these transactions are
pursuant to joint venture and partnership agreements.
Mittal Steel also engages in certain commercial transactions with
individuals and companies that are related to certain directors, directly or
indirectly, (such as Lindsay International, Alkharsh International, Glacier
Trade Centre, Dalijita Investments, Chevez Ruiz Zamarripa, LK Advisors, Dhamm
Steel Services, Mr. A.K. Hada and P.T. Ispat Indo).
P.T. Ispat Indo, an indirect wholly owned subsidiary of the controlling
shareholder, has entered into a management services agreement with Mittal Steel
pursuant to which P.T. Ispat Indo pays fees to Mittal Steel as compensation for
management services as and when services are rendered by Mittal Steel. Mittal
Steel also charges fees to P.T. Ispat Indo for usage of the "Ispat" trade mark.
Mittal Steel also supplies direct reduced iron to P.T. Ispat Indo/Glacier Trade
Centre.
Please refer to Note 7 of the Mittal Steel Consolidated Financial
Statements.
Other than the foregoing and in connection with the recently completed
acquisition of LNM Holdings, Mittal Steel declares that, to the best of its
knowledge, no member of its board of directors has an interest with regard to
transactions effected by Mittal Steel, that are unusual as to their nature and
to their terms and conditions in the course of the last and current financial
year.
In addition, except as otherwise referred to in this section, Mittal
Steel declares that, to the best of its knowledge, between members of its board
of directors on the one hand, including (i) legal entities (other than Mittal
Steel) or businesses in which they, directly or indirectly, hold 5% or more of
the shares or interest and (ii) their close family members, and Mittal Steel on
the other hand, no transactions or agreements (excluding employment agreements)
currently exist.
NON-COMPETITION AGREEMENT
Pursuant to the LNM Holdings acquisition agreement, Mr. Lakshmi N.
Mittal has entered into a non-competition agreement with Mittal Steel. Pursuant
to the non-competition agreement, Mr. Lakshmi N. Mittal has agreed, for a period
commencing upon the completion of the LNM Holdings acquisition agreement
(December 17, 2004) and expiring June 30, 2007, not to, without the consent of
Mittal Steel's Audit Committee, directly or indirectly acquire an interest in,
manage, operate, join, control, lend money or render financial or other
assistance to or participate in or be connected with, as an officer, employee,
partner, shareholder, consultant or otherwise, any person anywhere in the world
that engages in the business of manufacturing, producing or supplying iron ore,
coke, iron, steel or iron or steel products, hereinafter referred to as a
"Competitor". The non-competition agreement contains certain exceptions relating
to limited lending on the part of Mr. Lakshmi N. Mittal. The non-competition
agreement further provides that ownership of securities having no more than five
percent of the outstanding voting power of any Competitor that is listed on any
national securities exchange anywhere in the United States, Canada or Europe or
10% of the outstanding voting power of any Competitor that is listed on a
national securities exchange anywhere else in the world, will not be deemed to
be in violation of the non-competition agreement, so long as Mr. Lakshmi N.
Mittal does not have any other
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connection or relationship with such Competitor. In addition, Mittal Steel will
not be deemed to be a Competitor under the non-competition agreement, and PT.
Ispat Indo will not be deemed to be a Competitor so long as PT. Ispat Indo does
not (i) own an interest in, manage, operate, join, control, lend money or render
financial or other assistance to or participate in or become connected with, as
a partner, shareholder, consultant or otherwise, any Competitor carrying on
business outside Indonesia (provided that PT. Ispat Indo may own an equity
interest in any joint venture so long as PT. Ispat Indo's direct and indirect
equity or partnership interest therein does not exceed 20% and is not the
largest equity or partnership interest therein) or (ii) own, manage or operate
any material assets located outside Indonesia and relating to the business of
manufacturing, producing or supplying iron ore, coke, iron, steel, or iron or
steel products.
SHAREHOLDER'S AGREEMENT
The controlling shareholder and Mittal Steel, have entered into a
shareholder and registration rights agreement (the "Shareholder's Agreement").
Pursuant to the Shareholder's Agreement, no person holding record or beneficial
ownership of class B common shares may transfer (as defined in the Shareholder's
Agreement) such class B common shares, except to a permitted transferee
("Permitted Transferee"). A Permitted Transferee means: (i) Mr. Lakshmi N.
Mittal; (ii) his parents, spouse, children (natural or adopted), grandchildren
or other issues; (iii) trusts the primary beneficiaries of which are any of the
foregoing persons or any charitable organization designated by any of them,
which trusts are controlled, directly or indirectly, by any of the persons under
clause (i), (ii) or (v); (iv) corporations, partnerships, limited liability
companies and other persons if at least 80% of the economic interest in any such
person is owned by any of the persons under clause (i) and (ii) or any
charitable organization designated by any of them; and (v) in the case of any
person in clause (i) and (ii), the heirs, executors, administrators or personal
representatives upon the death of such person or upon the incompetence or
disability of such person for the purposes of the protection and management of
such individual's assets. The Shareholder's Agreement further provides that if
at any time a record or beneficial holder of class B common shares ceases to be
a Permitted Transferee, such holder (i) will not be entitled to exercise the
voting rights attached to such class B common shares and (ii) will notify the
Board of Directors that it is no longer a Permitted Transferee, which
notification shall be deemed to be a request to convert such class B common
shares into class A common shares. Notwithstanding the foregoing, if at any time
a holder of class B common shares enters into a contract to transfer to a person
that is not a Permitted Transferee (a "Non-Permitted Transferee") a number of
class A common shares equivalent to that which would result from the conversion
of all or a portion of such holder's class B common shares and thereafter such
conversion is opposed by creditors of Mittal Steel in accordance with applicable
Dutch law, which opposition has not been finally determined within six months
after the commencement thereof, such holder shall be free to transfer its class
B common shares to such Non-Permitted Transferee. By its terms, the
Shareholder's Agreement may not be amended, other than for manifest error,
except by approval of a majority of the class A common shareholders (other than
the controlling shareholder and Permitted Transferees) at a general
shareholders' meeting.
C. INTEREST OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 19 for a list of financial statements filed under Item 18.
EXPORT SALES
Management considers our steel operations to be a single business segment.
Because Mittal Steel has no operations in its home country of the Netherlands,
all of its sales are considered to be foreign sales. Annual sales to single
individual customer did not exceed 10% of Sales in any of the periods presented.
LEGAL PROCEEDINGS
In addition to the matters discussed below, Mittal Steel is party to
various legal actions arising in the ordinary course of business. Mittal Steel
does not believe that the adverse determination of any such pending routine
litigations, either individually or in the aggregate, will have a material
adverse effect on its results of operations, financial condition or cash flows.
AMERICAS
In 1990, Inland was party to a lawsuit filed by the EPA under the RCRA. In
1993, Inland entered into the EPA Consent Decree, which, among other things,
requires the investigation and remediation of the Indiana Harbor Works. At
December 31, 2004, Inland's reserves for environmental liabilities totaled $37
million including $28 million concerning the EPA Consent Decree, $22 million of
which is related to sediment remediation and $6 million is related to certain
other currently ongoing environmental matters under the EPA Consent Decree. At
this time, it is not possible to accurately predict, beyond the currently
established reserve, the amount of Inland's potential environmental liabilities.
In October 1996, Inland was identified as a potentially
responsible party due to alleged releases of hazardous substances from its
Indiana Harbor Works facility and was notified of the Natural Resource Damages
Act, or the NRDA, trustees' intent to perform an environmental assessment on the
Grand Calumet River and Indiana Harbor Canal System. A form of consent decree
was negotiated, and issued as a final order of the court in January 2005 under
which Inland will pay approximately $8.2 million over four years. Although
Inland has taken an accounting reserve on this matter for approximately $8.7
million, Inland currently believes that, as a result of related ongoing
negotiations with the EPA, Inland will be able to reduce the amount of the
separate $28 million environmental reserve established concerning Inland's EPA
Consent Decree by approximately $7 million to $9 million.
On September 15, 2003, Inland entered into a settlement agreement with
Ryerson Tull, pursuant to which Ryerson Tull paid Inland $21 million to release
Ryerson Tull from various environmental and other indemnification obligations
arising out of the sale by Ryerson Tull of Inland to Ispat International in
1998. The $21 million received from Ryerson Tull was paid into Inland's pension
plan, and went to reduce the amount of a Ryerson Tull guaranty/letter of credit
provided to the PBGC upon the sale of Inland. Inland also agreed with Ryerson
Tull to, among other things, make specified monthly contributions to Inland's
pension plan totaling $29 million over the 12-month period beginning January
2004, thereby eliminating, by the end of such year, the obligation of Ryerson
Tull to provide the continuing guaranty and letter of credit to the PBGC, which
guaranty/letter of credit Inland had previously committed to take all necessary
action to eliminate. On September 15, 2004, Inland contributed the remaining $29
million. In addition, Inland committed to reimburse Ryerson Tull for the cost of
the letter of credit to the PBGC and to give Ryerson Tull one-third of any
proceeds that may become payable in connection with the NRDA settlement under an
environmental insurance policy.
In January 2005, Inland received a third party complaint by Alcoa
Incorporated alleging that Inland is liable as successor to the interests of
Hillside Mining Co., or Hillside, a company that Inland acquired in 1943,
operated until the late 1940s and then sold the assets of in the early 1950s. It
is alleged in the complaint that since Hillside was operating in the area at the
same time as Alcoa, if Alcoa is found to be liable in the original suit that was
filed against it by approximately 340 individuals who live in the Rosiclare area
of southern Illinois, then Inland should also be found liable, and there should
be an allocation to Inland of the amount that would be owed to the original
plaintiffs. Those original plaintiffs are alleging that the mining and
processing operations allowed the release of fluorspar, manganese, lead and
other heavy metal contaminants, causing unspecified
91
personal injury and property damage. Inland has also been identified as a
potentially responsible party by the Illinois Environmental Protection Agency in
connection with this matter. Inland has requested further information from the
Illinois Environmental Protection Agency regarding their potential claim. Until
such time as this matter is further developed, management is not able to
estimate reasonably possible losses, or a range of such losses, the amounts of
which may be material in relation to Mittal Steel's financial position, results
of operations and cash flows. Inland intends to defend itself fully in these
matters.
In September 2003, the owners of a bulk cargo vessel commenced arbitration
proceedings against Mittal Steel Point Lisas and an affiliate in connection with
the loss of the vessel, which had been carrying a cargo of direct reduced iron
supplied by Mittal Steel Point Lisas from Trinidad to Indonesia. Mittal Steel is
unable to estimate the amount of liability, if any, arising from these
proceedings. In October 2004, Mittal Steel provided cash security of $9.4
million in accordance with a court order. The parties are at present preparing
submissions as part of the arbitration process.
In March 2004, a group of residents in Nova Scotia brought a potential
class action in the Supreme Court of Nova Scotia against various parties,
including Mittal Canada, alleging various torts for damage allegedly caused by
the steel plant and coke ovens formerly owned and occupied by Dominion Steel and
Coal Corporation from 1927 to 1967. Mittal Steel acquired Mittal Canada in 1994
and the plaintiffs are attempting to establish that Mittal Canada thereby
assumed the liabilities of the former occupiers. The plaintiffs are now seeking
to have the claim approved as a class action, though the court has not yet
issued a decision on this matter. Mittal Canada intends to file preliminary
motions to set aside this claim at an early stage. Mittal Steel is currently
unable to assess the outcome of these proceedings or the amount of Mittal
Canada's potential liability, if any.
EUROPE
In May 2003, the Irish government commenced proceedings against Mittal
Steel Lazaro Cardenas and Mittal Steel, claiming certain environmental cleanup
costs relating to the site of Irish Ispat Limited (subsidiary of Mittal Steel
Company N.V.), which was closed in 2001. In April 2004, the Irish government
filed a Notice of Discontinuance of its claim against Mittal Steel and served
its Statement of Claim against Mittal Steel Lazaro Cardenas in May 2004. In
October 2004, Mittal Steel Lazaro Cardenas served a Request for Further and
Better Particulars of Statement of Claim. In February 2005, the court dismissed
the claim with no order for costs.
In 1994, the European Commission raised claims of EUR47 million for
repayment by DSG Dradenauer Stahlgesellschaft GmbH, or DSG, a former subsidiary
of Mittal Steel, of loan amounts alleged to qualify as improper subsidies from
the City of Hamburg. In April 2002, the European Court of Justice decided that
the loan was an unauthorized subsidy under European Community law. DSG stated
that the loan had been fully repaid. At first instance, the court in Hamburg,
Germany confirmed the position of DSG. However, in April 2004, the High Court in
Hamburg ruled that DSG is obliged to pay DM 1 million (EUR0.5 million) to the
City of Hamburg. DSG is appealing this decision. Mittal Steel cannot predict the
final outcome of these proceedings. In August 2004, DSG filed for bankruptcy and
a receiver was appointed by the court. In August 2002, DSG was sold and
consequently is no longer a subsidiary of Mittal Steel.
In late 2002, three subsidiaries of Mittal Steel (Trefileurope,
Trefileurope Italia S.r.l. and Fontainunion S.A.), along with other European
manufacturers of pre-stressed wire and strands steel products, received notice
from the European Commission that it was conducting an investigation into
possible anti-competitive practices by these companies. Mittal Steel and its
subsidiaries are cooperating fully with the European Commission in this
investigation. The European Commission can impose fines (up to a maximum of 10%
of annual revenues) for breaches of EU competition law. Mittal Steel is
currently unable to assess the ultimate outcome of the proceedings before the
European Commission or the amount of any fines that may result. As the alleged
anti-competitive activities would have taken place in large part prior to the
acquisition of the subsidiaries, Mittal Steel has notified the previous owners
that it will seek indemnification for costs resulting from the investigation.
Sidex International Plc., or SIP, a joint venture that Mittal Steel Galati
formed with Balli Steel Plc in 1997, in 2002 raised a claim of approximately $48
million for non delivery of steel by Mittal Steel Galati from 1998 onwards as
well as interest, damages and costs. Mittal Steel Galati disputes this claim and
has brought a counterclaim for non payment by SIP plus damages, interest and
costs, in a total amount exceeding the amount of the claim raised by SIP. The
Arbitration decision is expected in the second quarter of 2005. Mittal Steel
expects to be fully indemnified from a third party in respect of the claim if a
definite and irrevocable decision is made in favor of SIP by a competent court
or arbitration tribunal.
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Since 2001, Mittal Steel Ostrava has been involved in a dispute with ICF
Kaiser Netherlands B.V., or ICF, the contractor for phase 1 of a mini-mill works
project (rolling mill P1500), and its parent company, Kaiser Group
International. Under the terms of the turnkey engineering and construction
contract, a maximum of three performance tests were required to ensure that the
mini-mill met contract mandated quality and quantity standards. Although the
mini-mill failed the first performance tests, ICF contends that Mittal Steel
Ostrava owes it various costs incurred by ICF in relation to the construction of
the mini-mill. As of January 31, 2005, the dispute has not been resolved and ICF
commenced legal proceedings against Mittal Steel Ostrava. Until recently, the
primary legal venue for this matter has been the United States Bankruptcy Court
for the District of Delaware, where Kaiser Group International is currently
going through bankruptcy reorganization. The Delaware bankruptcy court has
previously ruled that Kaiser Group International, as opposed to ICF, could
proceed with prosecution of its specific claims against Mittal Steel Ostrava in
the Delaware bankruptcy court venue. Mittal Steel Ostrava appealed this ruling,
and in the first quarter of 2004, the Delaware bankruptcy court's decision was
overturned by the United States District Court for the District of Delaware,
which ruled that the proceedings should be stayed pending the completion of
international arbitration proceedings. On January 6, 2004, ICF filed arbitration
claims against Mittal Steel Ostrava in the amount of $51 million with the
International Court of Arbitration in Paris, with the earliest possible award
ruling being issued sometime in 2005. The sum claimed was revised to $67 million
in November 2004 to include interest and additional costs. Mittal Steel
vigorously disputes this claim and has submitted a $50 million counterclaim
against ICF in these same arbitration proceedings. At December 31, 2004, Mittal
Steel has provided for a reserve of $34 million with respect to this matter, a
sum equal to the amount Mittal Steel Ostrava withdrew from the performance
letter of credit posted by ICF as well as retention fee payments claimed by ICF.
As Mittal Steel cannot estimate the amount or range of any additional potential
loss that may be incurred by Mittal Steel Ostrava, no additional amount has been
provided for as of December 31, 2004.
REST OF WORLD
In September 2004, the Environment Inspection Department of the Republic
of Kazakhstan raised a claim for approximately $20 million, alleging that Mittal
Steel Temirtau had failed to obtain the necessary approvals from the Environment
Ministry and had therefore engaged in pollution without permission during the
first six months of 2004. Mittal Steel Temirtau believes that it has acted in
accordance with the terms of agreement by which it was acquired by Mittal Steel,
which required compliance with environmental norms existing as of the date of
such agreement and to make specified minimum investments in controlling
environmental pollution, and Mittal Steel Temirtau plans to defend the matter.
During 2001, a complaint was brought against Mittal Steel South Africa
alleging certain violations of the South African Government Export Incentive
Scheme. The claim asks for damages in the amount of $20 million, plus interest.
There has been no activity with respect to this matter since 2001. As a result,
the Company cannot determine the outcome of this matter or estimate the amount
or range of potential loss that may be incurred by Mittal Steel South Africa.
Therefore, no amount has been provided for their potential claim as of December
31, 2004.
A claim has been brought against Mittal Steel South Africa by Harmony
Gold, Cadac (Pty) Ltd., Barnes Group of Companies and others relating to Mittal
Steel South Africa's alleged contravention of the South African Competition Act.
Any adverse decision would affect Mittal Steel South Africa's pricing policies.
As the Company cannot determine the outcome of this matter or estimate the
amount or range of potential loss that may be incurred by Mittal Steel South
Africa, no amount has been provided at December 31, 2004.
See also Note 19 to the Mittal Steel Consolidated Financial Statements.
DIVIDEND DISTRIBUTIONS
Mittal Steel's board of directors may reserve a portion of Mittal Steel's
annual profits. The portion of Mittal Steel's annual profits that remains
unreserved shall be distributed to shareholders of Mittal Steel pro rata based
on the number of common shares held by each shareholder, without regard to the
class or par value of such common shares. Mittal Steel's board of directors may
resolve that Mittal Steel make distributions out of its general share premium
account or out of any other reserves available for distributions under the laws
of The Netherlands, not being a legal reserve or the special share premium
reserve that Mittal Steel is required to maintain pursuant to Article 36.1 of
its Articles of Association, or the Special Reserve. Mittal Steel may declare
dividends in the form of common shares as well as in cash. Mittal Steel's board
of directors may also decide that
93
Mittal Steel pay interim dividends. Mittal Steel may only declare distributions,
including interim dividends, insofar as its shareholders' equity exceeds the sum
of its paid up issued share capital and certain reserves that are required to be
maintained by the laws of The Netherlands or Mittal Steel's Articles of
Association (including the Special Reserve). Distributions that have not been
claimed within five years and two days after the date on which they became due
and payable revert to Mittal Steel.
All calculations to determine the amounts available for dividends will be
based on Mittal Steel's statutory accounts, which will, as a holding company, be
different from its consolidated accounts. Because Mittal Steel is a holding
company and has no operations of its own, it is dependent on dividends or other
advances from its operating subsidiaries to fund any dividends.
The holders of Mittal Steel class A common shares and Mittal Steel class B
common shares are entitled to receive pro rata such distributions, if any, as
may be declared by Mittal Steel's board of directors out of funds legally
available for distribution. Kas Bank N.V. is the paying agent for dividends
payable on Mittal Steel common shares in The Netherlands, and the Bank of New
York is the paying agent for dividends payable on Mittal Steel common shares in
the United States.
On February 10, 2005, Mittal Steel's board of directors approved a
dividend policy for the fiscal year 2005 of $0.10 per share per quarter (as from
the second quarter of 2005), which is subject to approval by Mittal Steel's
shareholders.
B. SIGNIFICANT CHANGES
Not applicable.
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ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
NATURE OF TRADING MARKET
Mittal Steel class A common shares are listed and traded on the NYSE,
Mittal Steel's principal United States trading market, and outside the United
States on Euronext Amsterdam N.V., in each case under the symbol "MT".
The following table sets forth, for the periods indicated, the high and
low sales prices per share of Mittal Steel class A common shares as reported on
the NYSE and Euronext Amsterdam N.V.
THE NEW YORK STOCK EURONEXT AMSTERDAM
EXCHANGE MITTAL STEEL MITTAL STEEL CLASS A
CLASS A COMMON SHARES COMMON SHARES
--------------------- -----------------------
HIGH LOW HIGH LOW
--------------------- -----------------------
(in U.S. dollars) (in Euros)
YEAR ENDED DECEMBER 31, 2000 $ 18.37 $ 2. 00 Euro 18.00 Euro 2.55
YEAR ENDED DECEMBER 31, 2001 4.25 0.70 4.45 0.90
YEAR ENDED DECEMBER 31, 2002 3.10 1.26 3.25 1.51
YEAR ENDED DECEMBER 31, 2003
First Quarter 3.31 2.05 3.10 2.05
Second Quarter 4.70 3.16 4.00 2.50
Third Quarter 6.21 3.83 5.50 3.30
Fourth Quarter 9.06 5.24 7.50 4.30
YEAR ENDED DECEMBER 31, 2004
First Quarter 11.06 6.80 9.00 5.20
Second Quarter 15.06 9.41 12.50 8.30
Third Quarter 30.45 14.16 26.50 11.50
Fourth Quarter 42.80 24.50 32.45 19.60
MONTH ENDED
September 2004 30.45 24.78 26.50 20.52
October 2004 35.75 24.50 27.80 19.60
November 2004 42.20 33.45 32.29 26.10
December 2004 42.80 36.35 32.45 27.00
January 2005 38.70 30.20 28.90 22.55
February 2005 43.00 36.06 32.95 27.75
March 1- March 23, 2005 43.86 34.70 33.25 27.14
Note: Includes intraday highs and lows.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
In the United States, Mittal Steel class A common shares are traded on the
NYSE, Mittal Steel's principal U.S. trading market. Outside the United States,
Mittal Steel class A common shares are also traded on the Euronext Amsterdam
N.V.
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D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Pursuant to Article 2 of the Articles of Association, the objects and
purposes of the Company are the following:
- To participate in, take an interest in, and conduct the management of
business enterprises;
- To finance, to provide security for or undertake the obligations of third
parties; and
- To conduct all activities incidental to any of the foregoing.
We hereby incorporate by reference the following sections from our
Registration Statement on Form F-1 (Reg. No. 333-7206), as declared effective on
August 6, 1997, "Description of Capital Stock -- Shareholder and Voting Rights,"
" -- Liquidation Rights," " -- Issue of Common Shares; Preemptive Rights," " --
Repurchase of Shares," " -- Reduction of Share Capital," " -- Amendment of the
Articles of Association" and " -- Limitations on Rights to Hold or Vote class A
Shares."
The Articles of Association may be amended by resolution of the
shareholders upon proposal by Mittal Steel's board of directors. The resolution
of the shareholders to amend the Articles of Association shall require the prior
or simultaneous approval of each group of holders of shares of the class whose
rights are prejudiced by the amendment of the Articles of Association.
ANNUAL ACCOUNTS
Each year, Mittal Steel's board of directors must prepare annual accounts
within five months after the end of Mittal Steel's financial year, unless the
shareholders have approved an extension of this period for up to six additional
months due to certain special circumstances recognized as such under the laws of
The Netherlands.
C. MATERIAL CONTRACTS
The following are material contracts, not entered into in ordinary course
of business, to which Mittal Steel has entered into during the two years
immediately preceding publication of this Annual Report:
- Acquisition Agreement dated as of October 24, 2004 between Ispat
International N.V. and The Richmond Investment Holdings Limited. Under
this agreement, in December 2004, Ispat International acquired LNM
Holdings from Mittal Steel S.a.r.l., a wholly owned subsidiary of The
Richmond Investment Holdings Limited (an entity controlled by the
controlling shareholder of Mittal Steel and, at the time, the sole
shareholder of LNM Holdings). Mittal Steel S.a.r.l. received 0.27931958
Mittal Steel class A common shares and 0.77068042 Mittal Steel class B
common shares, for each LNM Holdings common share, or, in the aggregate,
139,659,790 Mittal Steel class A common shares and 385,340,210 Mittal
Steel class B common shares.
- Agreement and Plan of Merger and Reorganization, dated as of October 24,
2004, among Mittal Steel Company N.V. (formerly known as Ispat
International N.V.), Park Acquisition Corp. and International Steel Group
Inc. See "Item 4A -- History and Development of the Company -- Overview of
Proposed ISG merger".
D. EXCHANGE CONTROLS
There are no legislative or other legal provisions currently in force in
The Netherlands or arising under the Articles of Association restricting the
payment of dividends to holders of the class A common shares not
97
resident in The Netherlands, except for regulations restricting the remittance
of dividends and other payments in compliance with United Nations and European
Union sanctions.
There are no limitations, either under the laws of The Netherlands or in
the Articles of Association or other constituent documents, on the right of
foreigners to hold or vote on our shares.
E. TAXATION
U.S. TAX CONSIDERATIONS
The following discussion is a summary of certain U.S. federal income tax
consequences of the acquisition, ownership and disposition of Mittal Steel class
A common shares that are generally applicable to U.S. Holders (as defined below)
that hold their Mittal Steel class A common shares as capital assets (generally,
for investment purposes). This summary does not purport to address all the
material tax consequences that may be relevant to the holders of Mittal Steel
class A common shares, and does not take into account the specific circumstances
of any particular investors, some of which (such as tax-exempt entities, banks,
insurance companies, broker-dealers, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, regulated
investment companies, real estate investment trusts, partnerships and other
pass-through entities, investors liable for U.S. alternative minimum tax,
investors that own or are treated as owning 10% or more of Mittal Steel's voting
shares, investors that hold Mittal Steel class A common shares as part of a
straddle, hedge, conversion or constructive sale transaction or other integrated
transaction, and investors whose functional currency is not the U.S. dollar) may
be subject to special tax rules. This summary is based on the federal tax laws
and regulations of the United States, judicial decisions, published rulings and
administrative pronouncements, all as in effect on the date hereof, all of which
are subject to change (possibly with retroactive effect), and/or to differing
interpretations.
For purposes of this discussion, a "U.S. Holder" is any beneficial owner
of Mittal Steel class A common shares that is, for U.S. federal income tax
purposes:
- a citizen or individual resident of the United States;
- a corporation (or other entity taxable as a corporation for U.S. federal
income tax purposes) organized in or under the laws of the United States,
any state thereof, or the District of Columbia;
- an estate the income of which is subject to U.S. federal income tax
without regard to its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court and
the control of one or more U.S. persons or (ii) has a valid election in
effect under applicable Treasury regulations to be treated as a U.S.
person.
The U.S. federal income tax consequences of a partner in a partnership
holding Mittal Steel class A common shares generally will depend on the status
of the partner and the activities of the partnership. Partners in a partnership
holding Mittal Steel class A common shares should consult their own tax
advisors.
Except where specifically described below, this discussion assumes that
Mittal Steel is not a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes. See "U.S. Tax Consideration -- Passive Foreign
Investment Company Status". This summary does not address any aspects of U.S.
federal tax law other than income taxation or any state and local or non-U.S.
tax considerations that may be applicable to investors. Additionally, this
summary does not apply to an investor that is not a U.S. Holder or that holds
Mittal Steel class A common shares other than as a capital asset. Investors are
urged to consult their tax advisors regarding the U.S. federal, state and local
and other tax consequences of acquiring, owning and disposing of Mittal Steel
class A common shares.
THE DISCUSSION BELOW IS INTENDED FOR GENERAL INFORMATION ONLY AND DOES NOT
CONSTITUTE A COMPLETE ANALYSIS OF ALL U.S. FEDERAL INCOME TAX CONSEQUENCES
RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF MITTAL STEEL CLASS A
COMMON SHARES. INVESTORS IN MITTAL STEEL CLASS A COMMON SHARES SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR PARTICULAR
SITUATIONS.
98
TAXATION OF DIVIDENDS
Subject to the passive foreign investment company rules discussed below,
under U.S. federal income tax law, the cash distributions made by Mittal Steel
in respect of Mittal Steel class A common shares (including the amount of any
applicable withholding tax in The Netherlands) will constitute a taxable
dividend when such distribution is paid, actually or constructively to the
extent paid out of current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. The U.S. dollar amount of such a
dividend generally will be included in the gross income of a U.S. Holder as
ordinary income derived from sources outside the United States for U.S. foreign
tax credit purposes and generally will be passive income for purposes of the
foreign tax credit limitation. Dividends paid by Mittal Steel will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations in respect of dividends received from other U.S. corporations.
Subject to certain exceptions for short-term and hedged positions, and
provided that Mittal Steel is not a passive foreign investment company (as
discussed below), dividends received by certain U.S. Holders (including
individuals) prior to January 1, 2009 with respect to the Mittal Steel class A
common shares will be subject to U.S. federal income taxation at a maximum rate
of 15% if the dividends represent "qualified dividend income." Dividends paid on
the Mittal Steel class A common shares will be treated as qualified dividend
income if Mittal Steel was not in the year prior to the year in which the
dividend was paid, and is not in the year in which the dividend is paid, a
passive foreign investment company. As discussed further below, Mittal Steel
believes that it was not treated as a PFIC for U.S. federal income tax purposes
with respect to its 2004 taxable year, and Mittal Steel does not anticipate
becoming a PFIC for its 2005 taxable year. See "U.S. Tax Considerations --
Passive Foreign Investment Company Status."
Investors should be aware that the U.S. Treasury Department has announced
its intention to promulgate rules in proposed form pursuant to which
shareholders (and intermediaries) will be permitted to rely on certifications
from issuers to establish that dividends qualify for the reduced rate of U.S.
federal income taxation. Because proposed certification procedures have not yet
been issued, Mittal Steel is uncertain that it will be able to comply with them.
U.S. Holders of Mittal Steel class A common shares should consult their own tax
advisors regarding the availability of the reduced rate of U.S. federal income
tax on dividends in the light of their own particular circumstances.
To the extent, if any, that the amount of any distribution received by a
U.S. Holder in respect of Mittal Steel class A common shares exceeds the current
and accumulated earnings and profits of Mittal Steel, as determined under U.S.
federal income tax principles, the distribution first will be treated as a
non-taxable return of the U.S. Holder's adjusted tax basis in those Mittal Steel
class A common shares, and thereafter as U.S. source capital gain. Distributions
of additional Mittal Steel class A common shares that are made to U.S. Holders
with respect to their Mittal Steel class A common shares and that are part of a
pro rata distribution to all the Company's shareholders generally will not be
subject to U.S. federal income tax.
Subject to the limitations and conditions provided in the International
Revenue Code, a U.S. Holder of Mittal Steel class A common shares may deduct
from its U.S. federal taxable income, or claim as a credit against its U.S.
federal income tax liability, the amount of any Dutch taxes withheld from a
dividend paid by Mittal Steel to such U.S. Holder. The rules with respect to
foreign tax credits are complex, involve the application of rules that depend on
a U.S. Holder's particular circumstances and have been amended by recently
enacted legislation that is effective for taxable years beginning after December
31, 2006. Accordingly, U.S. Holders are urged to consult their tax advisors
regarding the availability of the foreign tax credit under their particular
circumstances, including the U.S. federal income tax treatment of any reduction
in the amount the dividend withholding tax in The Netherlands remitted by Mittal
Steel to the tax authorities in The Netherlands. See "Dutch Tax Considerations
-- Withholding Taxes."
TAXATION OF SALES OR OTHER DISPOSITIONS OF MITTAL STEEL CLASS A COMMON SHARES
In general, upon a sale or other taxable disposition of Mittal Steel class
A common shares, a U.S. Holder will recognize gain or loss for U.S. federal
income tax purposes in an amount equal to the difference between the amount
realized on the sale or other taxable disposition and the U.S. Holder's adjusted
tax basis in those Mittal Steel class A common shares. A U.S. Holder generally
will have an adjusted tax basis in each Mittal Steel class A common share equal
to its U.S. dollar cost. In general, subject to the passive foreign investment
company rules discussed below, such gain or loss recognized on a sale or other
taxable disposition of Mittal Steel class A common shares will be capital gain
or loss and, if the U.S. Holder's holding period for those Mittal Steel class A
common shares exceeds one year, will be long-term capital gain or loss. Certain
U.S.
99
Holders, including individuals, are eligible for preferential rates of U.S.
federal income tax in respect of long-term capital gains. Under U.S. federal
income tax law, the deduction of capital losses is subject to limitations. Any
gain or loss recognized by a U.S. Holder in respect of the sale or other taxable
disposition of Mittal Steel class A common shares generally will be treated as
derived from U.S. sources for U.S. foreign tax credit purposes.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Special U.S. federal income tax rules apply to U.S. persons owning capital
stock of a PFIC. A foreign corporation will be considered a PFIC for any taxable
year in which 75% or more of its gross income is passive income or in which 50%
or more of the average value (or, if elected, the adjusted tax basis) of its
assets are considered "passive assets" (generally assets that generate passive
income). Mittal Steel believes that it currently is not a PFIC for U.S federal
income tax purposes and does not anticipate that it will become a PFIC in the
future. This conclusion is based upon an analysis of its financial position and
an interpretation of the PFIC provisions that Mittal Steel believes is correct.
However, no assurances can be made that the applicable tax law or other relevant
circumstances will not change in a manner that affects the PFIC determination.
If, contrary to the discussion above, Mittal Steel were classified as a
PFIC, a U.S. Holder would be subject to increased tax liability (possibly
including an interest charge) upon the sale or other disposition of Mittal Steel
class A common shares or upon receipt of "excess distributions," unless such
U.S. Holder elected to be taxed currently (as discussed below) on its pro rata
portion of Mittal Steel's income, whether or not such income was distributed in
the form of dividends or otherwise. An excess distribution is generally, any
distribution to the U.S. Holder in respect to the shares during a single taxable
year that is greater than 125% of the average annual distributions received by
the U.S. Holder in respect to the Mittal Steel class A common shares during the
three preceding taxable years, or if shorter, the U.S. Holder's holding period
for the shares.
The special PFIC tax rules described above will not apply to a U.S. Holder
if the U.S. Holder elects to have Mittal Steel treated as a "qualified electing
fund" ("QEF"). U.S. Holders should consult their tax advisors as to the
availability and consequences of such election. Special rules apply for
calculating the amount of the foreign tax credit with respect to excess
distributions by a PFIC, or in certain cases, QEF inclusions.
In addition, if the Mittal Steel class A common shares are shares in a
PFIC and treated as a marketable stock, a U.S. Holder may also make a
mark-to-market election and will not be subject to the PFIC rules described
above. If the Mittal Steel class A common shares are so treated and a U.S.
Holder makes a mark-to-market election, in general, the U.S. Holder will include
as ordinary income each year the excess, if any, of the fair market value of the
Mittal Steel class A common shares at the end of the taxable year over the U.S.
Holder's adjusted basis in the Mittal Steel class A common shares. These amounts
of ordinary income will not be eligible for the favorable tax rates applicable
to qualified dividend income or long-term capital gains. The U.S. Holder will
also be allowed to take an ordinary loss in respect of the excess, if any, of
the adjusted basis of the Mittal Steel class A common shares over the fair
market value at the end of the taxable year (but only to the extent of the net
amount of previously included income as a result of the mark-to-market
election). The U.S. Holder's basis in the Mittal Steel class A common shares
will be adjusted to reflect any such income or loss amounts.
Notwithstanding any election made with regard to the Mittal Steel class A
common shares, dividends received will not constitute qualified dividend income
to a U.S. Holder if Mittal Steel is a PFIC either in the taxable year of the
distribution or the preceding taxable year. Dividends that do not constitute
qualified dividend income are not eligible for taxation at the 15% maximum rate
applicable to qualified dividend income. Instead, U.S. Holders must include the
gross amount of any such dividend paid by Mittal Steel out of its accumulated
earnings and profits (as determined for U.S. federal income tax purposes in
their gross income, and it be subject to tax at rates applicable to ordinary
income. A U.S. Holder that owns Mittal Steel class A common shares during any
year that Mittal Steel is a PFIC must file Internal Revenue Service Form 8621.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, except in the case of certain exempt recipients (such as
corporations), information reporting requirements will apply to dividends on
Mittal Steel class A common shares paid to U.S. Holders in the United States or
through certain U.S. related financial intermediaries and to the proceeds
received upon the sale, exchange or redemption of Mittal Steel class A common
shares by U.S. Holders within the United States or through certain U.S. related
financial intermediaries. Furthermore, backup withholding (currently at a rate
of
100
28%) may apply to those amounts if a U.S. Holder fails to provide an accurate
tax identification number, to certify that such holder is not subject to backup
withholding or to otherwise comply with the applicable requirements of the
backup withholding requirements.
Backup withholding is not an additional tax. The amount of backup
withholding imposed on a payment to a U.S. Holder will be allowed as a credit
against the holder's U.S. federal income tax liability provided that the
required information is properly furnished to the IRS.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT ABOVE IS
INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. EACH INVESTOR IN MITTAL STEEL
CLASS A COMMON SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO
THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
MITTAL STEEL COMMON SHARES BASED ON THE INVESTOR'S PARTICULAR CIRCUMSTANCES.
DUTCH TAX CONSIDERATIONS
The following is a summary of certain Dutch tax consequences of the
acquisition, holding and disposal of Mittal Steel class A common shares by both
Dutch resident and non-residents. This summary does not purport to describe all
possible tax considerations or consequences that may be relevant to a holder or
prospective holder of Mittal Steel class A common shares. In view of its general
nature, it should be treated with corresponding caution. Each holder or
prospective holder of Mittal Steel class A common shares should consult with a
tax adviser with regard to the tax consequences of its investment in Mittal
Steel class A common shares.
Except as otherwise indicated, this summary only addresses Dutch tax
legislation, as in effect and in force at the date hereof, as interpreted in
published case law, without prejudice to any amendments introduced at a later
date and implemented with or without retroactive effect.
WITHHOLDING TAX
Dividends distributed by Mittal Steel generally are subject to a
withholding tax imposed by The Netherlands at a rate of 25%. The expression
"dividends distributed" includes, among other things:
- distributions in cash or in kind, deemed and constructive distributions
and repayments of paid-in capital not recognized for Dutch dividend
withholding tax purposes;
- liquidation proceeds, proceeds of redemption of shares or consideration
for the repurchase of shares by Mittal Steel, or one of its subsidiaries,
to the extent such proceeds or consideration exceeds the average paid-in
capital recognized on these shares for Dutch dividend withholding tax
purposes;
- an amount equal to the par value of shares issued to a holder of shares or
an increase of the par value of shares, as the case may be, to the extent
that it does not appear that a contribution, recognized for Dutch dividend
withholding tax purposes, has been made or will be made; and
- partial repayment of paid-in capital, recognized for Dutch dividend
withholding tax purposes, if and to the extent that Mittal Steel has net
profits ("zuivere winst"), unless the general meeting of shareholders has
resolved in advance to make such repayment and provided that the par value
of the shares concerned has been reduced by an equal amount by way of an
amendment of the articles of association.
If a holder of shares is resident in a country other than The Netherlands
and if a double taxation convention is in effect between The Netherlands and
such other country, such holder of shares may, depending on the terms of that
double taxation convention, be eligible for a full or partial exemption from, or
refund of, Dutch dividend withholding tax. Under the terms of the double
taxation convention currently in force between the United States and The
Netherlands, dividends paid by a Dutch company to a U.S. shareholder are
generally subject to Dutch withholding tax at a rate of 15%.
101
Dutch resident individuals and Dutch resident entities can generally
credit the withholding tax against their income tax or corporate income tax
liability. Dutch resident entities may be eligible for a full exemption from
Dutch dividend withholding tax if the Dutch participation exemption applies on
their shares in Mittal Steel.
Pursuant to legislation to counteract "dividend stripping", a reduction,
exemption, credit or refund of dividend withholding tax is denied if the
recipient of the dividend is not the beneficial owner. This legislation
generally targets situations, commonly referred to as "dividend stripping", in
which a shareholder retains its economic interest in shares, but reduces the
withholding tax cost on dividends by a transaction with another party. It is not
required for these rules to apply that the recipient of the dividends is aware
that a dividend stripping transaction took place. However, the Dutch state
secretary of finance published its view that the rules should not be applicable
to such an unsuspecting recipient who purchased the shares on the stock
exchange. Furthermore, the state secretary of finance takes the position that
the definition of beneficial ownership introduced by this legislation will also
be applied in the context of a double taxation convention.
In general, upon making a distribution to shareholders, Mittal Steel is
required to remit all amounts withheld as Dutch dividend withholding tax to the
tax authorities. However, under certain circumstances Mittal Steel may be
allowed to reduce the amount of Dutch dividend withholding tax that is required
to be remitted to the Dutch tax authorities by the lesser of:
(i) 3% of the portion of the gross amount of the dividend paid by Mittal
Steel that is subject to Dutch dividend withholding tax; and
(ii) 3% of the gross amount of the dividends and profit distributions
received by Mittal Steel from qualifying non-Dutch subsidiaries in
the current calendar year (up to the date of the distribution) and
the two preceding calendar years, to the extent that these dividends
and profit distributions have not yet been taken into account for the
purposes of establishing the foregoing reduction.
Although this credit reduces the amount of dividend withholding tax that
Mittal Steel is required to pay to the Dutch authorities, it does not reduce the
amount of tax Mittal Steel is required to withhold from dividends. In these
circumstances, to the extent that Mittal Steel is not required to remit the
amount withheld as Dutch dividend withholding tax to the Dutch tax authorities,
the withholding tax may not qualify as a creditable tax for foreign tax credit
purposes.
TAXES ON INCOME AND CAPITAL GAINS
Dutch Resident Individuals
As a general rule, Dutch resident individuals will be taxed annually on a
deemed income of 4% of their net investment assets at an income tax rate of 30%.
The net investment assets for the year are the average of the investment assets
less the attributable liabilities at the beginning and at the end of the
relevant year. The value of the Mittal Steel class A common shares is included
in the calculation of the net investment assets. A tax-free allowance may be
available. Actual benefits derived from the Mittal Steel class A common shares,
including any capital gains realized upon the disposal thereof, are not as such
subject to Dutch income tax.
However, if the Mittal Steel shares are attributable to an enterprise from
which a Dutch resident individual derives a share of the profit, whether as an
entrepreneur or as a person who has a co-entitlement to the net worth of such
enterprise without being a shareholder, any benefit derived or deemed to be
derived from the Mittal Steel class A common shares, including any capital gain
realized on the disposal or exercise thereof, are generally subject to income
tax at a progressive rate with a maximum of 52%. Subject to the same progressive
rate are benefits derived from the Mittal Steel class A common shares in case a
Dutch resident individual carries out activities that exceed regular portfolio
asset management ("normaal vermogensbeheer") or derives benefits from the shares
that are (otherwise) taxable as benefits from other activities ("resultaat uit
overige werkzaamheden").
Furthermore, if a Dutch resident individual has an actual or deemed
substantial interest in Mittal Steel, any benefit derived or deemed to be
derived from the Mittal Steel class A common shares, including any capital gains
realized on the disposal or exercise thereof, are subject to income tax at a
rate of 25%. Please see below for the further clarification of the term
"substantial interest".
102
Dutch Resident Entities
Any benefit derived or deemed to be derived from the Mittal Steel class A
common shares held by Dutch resident entities, including any capital gains
realised on the disposal or exercise thereof, is generally subject to corporate
income tax at a rate of 31.5%(2), unless the participation exemption is
applicable. Under the participation exemption Dutch resident companies are
exempt from corporate income tax with respect to dividends and capital gains
(and losses) derived from or realized on the disposal of a qualifying
shareholding. Generally, the participation exemption applies if a Dutch resident
entity holds an interest of at least 5% in the issued and paid up share capital
of Mittal Steel.
A Dutch qualifying pension fund is not subject to corporate income tax
with respect to any benefits derived from the Mittal Steel class A common shares
(except to the extent it generates benefits from activities that are considered
not to be directly related with certain qualifying pension arrangements). A
qualifying Dutch resident investment fund ("fiscale beleggingsinstelling") is
subject to corporate income tax at a special rate of 0%.
Non-resident Holders
A holder of Mittal Steel class A common shares will not be subject to
Dutch taxes on income or capital gains in respect of any payment under the
Mittal Steel class A common shares or in respect of any gain realised on the
disposal or deemed disposal of the Mittal Steel class A common shares, provided
that:
(i) such holder is neither resident nor deemed to be resident of The
Netherlands nor, if such holder is an individual, has made an
election for the application of the rules of the Dutch income tax act
2001 as they apply to residents of The Netherlands; and
(ii) such holder does not have an interest in an enterprise or deemed
enterprise (statutorily defined term) which is, in whole or in part,
effectively managed in The Netherlands and/or carried on through a
permanent establishment, a deemed permanent establishment, or a
permanent representative in The Netherlands and to which enterprise
or part of an enterprise the Mittal Steel class A common shares are
attributable; and
(iii)such holder does not carry out any activities in The Netherlands that
exceed regular asset management ("normaal vermogensbeheer") and does
not derive benefits that are (otherwise) taxable as benefits from
other activities ("resultaat uit overige werkzaamheden") to which the
Mittal Steel class A common shares are attributable;and
(iv) such holder, individuals relating to such holder and certain of their
relatives by blood or marriage in the direct line (including foster
children) do not have a substantial interest or deemed substantial
interest in Mittal Steel or, if such holder does have such an
interest, such interest forms part of its business assets.
Generally, (a resident or non-resident) holder of shares will have a
substantial interest if he, his partner, certain other relatives (including
foster children) or certain persons sharing his household, alone or together,
directly or indirectly:
- hold shares representing 5% or more of Mittal Steel's total issued and
outstanding capital (or the issued and outstanding capital of any class
of shares);
- hold or have rights to acquire shares, whether or not already issued,
that represent at any time (and from time to time) 5% or more of Mittal
Steel's total issued and outstanding capital (or the issued and
outstanding capital of any class of shares); or
- hold or have the ownership of certain profit participating rights that
relate to 5% or more of Mittal Steel's annual profit and/or to 5% or
more of Mittal Steel's liquidation proceeds.
----------
(2) Please note that these rates will be decreased to 30.5% as from 1 January
2006 and to 30% as from 1 January 2007.
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A deemed substantial interest arises if a substantial interest (or part
thereof) has been disposed of, or is deemed to have been disposed of, on a
non-recognition basis.
GIFT, ESTATE AND INHERITANCE TAX
Dutch Residents
Gift, estate and inheritance taxes will arise in The Netherlands with
respect to an acquisition of Mittal Steel class A common shares by way of a gift
by, or on the death of, a holder of Mittal Steel class A common shares who is
resident or deemed to be resident in The Netherlands at the time of the gift or
his death.
Non-residents
No Dutch gift, estate or inheritance taxes will arise on the transfer of
Mittal Steel class A common shares by way of gift by, or on the death of, a
holder of Mittal Steel class A common shares who is neither resident nor deemed
to be resident in The Netherlands, unless:
i). such holder at the time of the gift has or at the time of his death
had an enterprise or an interest in an enterprise that is or was, in
whole or in part, effectively managed in The Netherlands and/or
carried on through a permanent establishment or a permanent
representative in The Netherlands and to which enterprise or part of
an enterprise the Mittal Steel class A common shares are or were
attributable; or
ii). such holder at the time of the gift is, or at the time of his/her
death was entitled to a share in the profits of an enterprise
effectively managed in The Netherlands, other than by way of the
holding of securities or through an employment contract, to which
enterprise the Mittal Steel class A common shares are or were
attributable, or are or were deemed to be attributable; or
iii).in the case of a gift of Mittal Steel class A common shares by an
individual who at the date of the gift was neither resident nor
deemed to be resident in The Netherlands, such individual dies within
180 days after the date of the gift, while being resident or deemed
to be resident in The Netherlands.
For purposes of Dutch gift, estate and inheritance taxes, amongst others,
a person that holds Dutch nationality will be deemed to be resident in The
Netherlands if he has been resident in The Netherlands at any time during the
ten years preceding the date of the gift or his death. Additionally, for
purposes of Dutch gift tax, amongst others, a person not holding the Dutch
nationality will be deemed to be resident in The Netherlands if he has been
resident in The Netherlands at any time during the twelve months preceding the
date of the gift. Applicable tax treaties may override deemed residency.
OTHER TAXES AND DUTIES
No Dutch registration tax, customs duty, transfer tax, stamp duty or any
other similar documentary tax or duty other than court fees, will be payable by
a holder of Mittal Steel class A common shares in respect of or in connection
with issuance, grant, exercise or disposal of Mittal Steel Class A common shares
or with respect of any payment of dividends by Mittal Steel thereon.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENTS BY EXPERTS
Not applicable.
104
H. DOCUMENTS ON DISPLAY
A copy of any or all of the documents deemed to be incorporated herein by
reference, unless such documents have been modified or superseded as specified
herein, may be obtained at our registered office as set out in Item 4 of this
Annual Report.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures are to interest rate fluctuations and to
exchange rate movements. Mittal Steel uses financial instruments, including
fixed and variable rate debts, as well as swap and collar contracts to finance
its operations and to hedge interest rate exposures. Mittal Steel does not hold
or issue derivative financial instruments for trading purposes. The fair value
information presented is based on the information available to management as of
the date of the balance sheet. Although Mittal Steel is not aware of any factors
that would significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since the debt dates, and therefore, the current estimates of fair
value may differ significantly from the amounts presented herein. The estimated
fair values of certain financial instruments have been determined using
available market information or other valuation methodologies that require
considerable judgment in interpreting market data and the developing estimates.
The estimates presented herein are not necessarily indicative of the amounts
that Mittal Steel could realize in the current market exchange.
INTEREST RATE SENSITIVITY
For debt obligations the following table presents principal cash flows and
related interest rates by fiscal year of maturity. Variable rates disclosed
represent the weighted average rate of the portfolio at the end of the period.
For the interest rate swaps and collars, the table presents notional amounts and
related interest rates by fiscal year of maturity. For these instruments, the
variable rates presented are based on employed forward (spot) rates in the yield
curve as of the end of each fiscal year. Employed forward (spot) rates should
not be considered the predictor for actual or future interest rates.
LONG-TERM DEBT ACTUAL 2005 2006 2007 2008 2009 YEARS TOTAL FAIR
INTEREST THERE- VALUE
RATE AFTER
-------------- ------ ---- ---- ---- ---- ---- ----- ----- ----
(amounts in $ millions)
VARIABLE INTEREST RATES:
First Mortgage Bonds ($) 5.75%-9.75% -- -- -- -- -- 150 150 163
BCR 4.2% -- 15 -- -- -- -- 15 15
Christiana Bank 2.9% -- 2 2 2 1 1 8 8
EBRD 5.9% 13 12 -- -- -- -- 25 25
Privatbank 5.2% 5 5 3 -- -- -- 13 13
BNP Paribas 3.4% 2 -- -- -- -- -- 2 2
Revolving Credit facility 4.7% -- -- 135 -- -- -- 135 135
IFC 5.7% -- 4 3 4 3 11 25 25
Investec Bank 3.3% -- -- 100 -- -- -- 100 100
EBRD 5.0% 17 17 16 17 16 -- 83 83
===== ===== ===== ===== ===== ===== ===== ===== =====
Total Variable $ 37 55 259 23 20 162 556 569
===== ===== ===== ===== ===== ===== ===== ===== =====
106
LONG-TERM DEBT ACTUAL 2005 2006 2007 2008 2009 YEARS TOTAL FAIR
INTEREST THERE- VALUE
RATE AFTER
-------------- ------ ---- ---- ---- ---- ---- ----- ----- ----
(amounts in $ millions)
FIXED INTEREST RATES:
First Mortgage Bonds 5.75%-9.75% -- -- 46 -- -- 456 502 589
Industrial Development
Revenue Bonds 5.75%-7.25% -- -- 15 -- -- 84 99 116
Senior Notes 10.4% 10 11 11 4 -- -- 36 36
Government of Algeria 5.0% 0 0 0 0 0 150 150 103
Ministry of Finance,
Romania 6.3% 1 1 1 1 1 1 6 4
Ministry of Finance,
Romania 7.2% 1 1 1 1 1 6 11 8
Other 3.4% -- -- -- -- -- 3 3 3
===== ===== ===== ===== ===== ===== ===== ===== =====
Total Fixed $ 12 13 74 6 2 700 807 859
===== ===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
VARIABLE RATE 2005 2006 2007 2008 2009 AFTER TOTAL
-------- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in Euros millions)
KFW-Germany 2.9-3.7% 3 3 3 2 2 2 15
ING BSK 5.7% 2 -- -- -- -- -- 2
Miscellaneous 4.8% 1 1 -- -- -- -- 2
===== ===== ===== ===== ===== ===== ===== =====
Total Variable Euro 6 4 3 2 2 2 19
===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
FIXED RATE 2005 2006 2007 2008 2009 AFTER TOTAL
----- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in Euros millions)
Eurobonds 11.9% -- -- -- -- -- 70 70
Ohridska Banka 9.0% 1 1 -- -- -- -- 2
West LB 5.6% 2 4 4 4 4 13 31
BV Camonica 5.0% 1 1 1 -- -- -- 3
UBS 6.5% 1 4 4 4 1 -- 14
===== ===== ===== ===== ===== ===== ===== =====
Total Fixed Euro 5 10 9 8 5 83 120
===== ===== ===== ===== ===== ===== ===== =====
107
ACTUAL
INTEREST THERE-
FIXED RATE 2005 2006 2007 2008 2009 AFTER TOTAL
----- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in MKD million)
Stopanska Banka 11% 1 3 3 2 -- -- 9
===== ===== ===== ===== ===== ===== ===== =====
Total Fixed MKD 1 3 3 2 -- -- 9
===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
FIXED RATE 2005 2006 2007 2008 2009 AFTER TOTAL
----- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in CZK millions)
Stroden Management ltd 22.00% 30 13 16 18 18 229 324
Konpo 25.00% 61 -- -- -- -- -- 61
===== ===== ===== ===== ===== ===== ===== =====
Total Fixed CZK 91 13 16 18 18 229 385
===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
VARIABLE RATE 2005 2006 2007 2008 2009 AFTER TOTAL
-------- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in CZK millions)
Konpo 4.5% 132 -- -- -- -- -- 132
Ceska 5.4% 75 -- -- -- -- -- 75
===== ===== ===== ===== ===== ===== ===== =====
Total Variable CZK 207 -- -- -- -- -- 207
===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
VARIABLE RATE 2005 2006 2007 2008 2009 AFTER TOTAL
-------- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in ZAR millions)
PPC - Saldanha 16% 11 11 11 11 11 40 95
===== ===== ===== ===== ===== ===== ===== =====
Total Variable ZAR 11 11 11 11 11 40 95
===== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
VARIABLE RATE 2005 2006 2007 2008 2009 AFTER TOTAL
-------- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in PLN millions)
Miscellaneous banks 2.8-8.7% 75 36 30 3 -- -- 144
====== ===== ===== ===== ===== ===== ===== =====
Total Variable PLN 75 36 30 3 -- -- 144
====== ===== ===== ===== ===== ===== ===== =====
ACTUAL
INTEREST THERE-
VARIABLE RATE 2005 2006 2007 2008 2009 AFTER TOTAL
-------- ---- ---- ---- ---- ---- ---- ----- -----
(amounts in CAD millions)
GECC 3.9% -- -- -- -- -- 109 109
===== ===== ===== ===== ===== ===== ===== =====
Total Variable CAD -- -- -- -- -- 109 109
===== ===== ===== ===== ===== ===== ===== =====
108
Interest Rate Instruments
The Senior Secured Credit Facility is collateralized by all property,
plant and equipment of the Canadian operating subsidiary and a second ranking
charge on accounts receivables and inventories. Mittal Steel has no interest
rate swap agreement as of December 31, 2004.
EXCHANGE RATE SENSITIVITY
Mittal Steel has operations in various countries around the world. Each
operation actively manages its foreign currency exposure by using derivative
financial instruments. We have established a control environment, which includes
polices and procedures for risk assessment and the approval and monitoring of
derivative financial instruments activities. These contracts generally are
short-term in nature. In this way, we believe that we have substantially
mitigated a significant portion of the foreign exchange exposure. At December
31, 2003 and 2004, the estimated fair value of these forward exchange contracts
amount to $120 million and $177 million, respectively, with a total notional
contract amount of $120 million and $177 million, respectively.
COMMODITY PRICE SENSITIVITY
Mittal Steel utilizes derivative commodity instruments not for trading
purposes but to hedge exposure to fluctuations in the costs of natural gas and
certain nonferrous commodities. Timing of these transactions corresponds to the
expected need for the underlying physical commodity and is intended as a hedge
against the cost volatility of these commodities. Contracts generally do not
extend out beyond one year.
The US operating subsidiary uses futures and swap contracts to manage
fluctuations in the cost of natural gas and certain nonferrous metals, primarily
zinc, which is used in the coating of steel. Timing of these transactions
corresponds to the expected need for the underlying physical commodity and is
intended as a hedge (not as defined by SFAS No. 133) against the cost volatility
of these commodities. The counterparties to these contracts are internationally
recognized companies which are not considered a credit risk by the Company.
Contracts generally do not extend out beyond two years. At December 31, 2003 and
2004, the Company had entered into contracts for these commodities for notional
amounts of $6 million and $109 million, respectively, which had fair values of
$nil (liability) and $1 (liability), respectively. For the year ended December
31, 2004, the Company recorded a loss of $1 million, and a gain of $1 million in
2003 and 2002, for changes in the fair value of open derivative instruments not
designated as a hedge (as defined by SFAS No. 133). Under terms of the futures
and swap contracts, the Company had approximately $nil on deposit with
counterparties both at December 31, 2003 and 2004, that was classified as an
other asset on the balance sheet.
The Mexico operating subsidiary utilizes derivative commodity instruments
not for trading purposes but to hedge exposure to fluctuations in the costs of
natural gas. In February 2001, the Mexico operating subsidiary entered into a
fixed price natural gas contract with Pemex at a price of $4 per mmbtu,
excluding transportation charges, for a volume of 25350 G cal per day. This
contract expired in December 31, 2003. For gas requirements in 2004, Mittal
Steel has entered into contracts in the futures market for a total volume of
24,780,000 MMBTU, at an average net price of $6.61 per MMBTU (excluding
transportation charges). A hypothetical 10% fluctuation on the purchase price of
natural gas will have an impact on pre-tax income of approximately $16 million.
The fair value of such contracts as on December 31, 2004 was $154 million (2003
- $44 million).
109
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
110
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed,
summarized and reported within time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Management
necessarily applies its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding management control objectives.
We conducted an evaluation, under the supervision and with the
participation of our management, including our Chairman and Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
foregoing, the Chairman and Chief Executive Officer and the Chief Financial
Officer concluded that our controls and procedures are effective as of such
date.
Changes in Internal Control over Financial Reporting
There have not been any significant changes in our internal control over
financial reporting over the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Mr. Narayanan Vaghul, Chairman
of Audit Committee, is an "audit committee financial expert" as defined in Item
16A of Form 20-F. Mr. Vaghul and each of the other members of the Audit
Committee are "independent directors" as defined under the NYSE listing
standards.
ITEM 16B. CODE OF ETHICS
The Company has adopted a "Code of Business Conduct" applicable to all
directors and to senior management, including our CEO and Chief Financial
Officer, and employees of the Company. The Code has been disseminated through
Company-wide communications and is posted on the Company's website at
http://www.mittalsteel.com.
The Company intends to disclose any amendment to or waiver from the Code
of Business Conduct applicable to any of the Company's directors, to the
Company's CEO and Chief Financial Officer or to any other person who is an
executive officer of the Company on the Company's website at
http://www.mittalsteel.com.
111
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte Accountants B.V. (Deloitte) acted as our principal independent
auditor for the fiscal years ended December 31, 2004 and 2003. Ernst & Young
(E&Y) was our other significant independent auditor being the auditor of our
operating units in erstwhile LNM Holdings NV. Set forth below are breakdown of
fees of Deloitte and E&Y for services performed in 2004 and 2003.
Audit Fees. Deloitte audit fees in 2004 and 2003 were $3.8 million and
$2.7 million respectively. E&Y audit fees in 2004 and 2003 were $9.9 million
(includes $3.4 million relating to SEC filings, comfort letters and consents)
and $2.0 million respectively. Audit fees are for the audit of our annual
consolidated financials statements, including other services normally provided
in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Deloitte audit-related fees in 2004 and 2003 were $2.3
million and $ 0.5 million respectively. E&Y audit-related fees in 2004 and 2003
were $1.6 million and $1.6 million respectively. Audit-related fees include
primarily fees for the due diligence work and employee benefit plan audits.
Tax Fees. Deloitte tax fees in 2004 and 2003 were $0.8 million and $0.7
million respectively. E&Y tax fees in 2004 and 2003 were $3.8 million and $2.2
million respectively. Tax fees are fees related to services for tax planning,
tax advice and tax compliance services.
All Other Fees. Deloitte fees in 2004 and 2003 for all other services were
$0.6 million and $0.5 million respectively. E&Y fees in 2004 and 2003 for all
other services were $0.5 million and $0.6 million respectively. All other fees
are for any products and services not included in the first three categories.
The Audit Committee has reviewed and approved all of the audit, audit
related, tax and other services provided by the principal external auditors,
Deloitte Accountants B.V., in 2004 within its scope prior to completion of the
engagements. None of the services provided in 2004 was approved under the de
minimis exception allowed under the Exchange Act.
The Audit Committee pre-approves all permissible non-audit services
related engagements rendered by the principal external auditor. The Audit
Committee has delegated pre-approval powers on a case by case basis to the Audit
Committee Chairman, for instances where the Committee is not in session and are
reviewed in the subsequent meeting.
In making its recommendation to appoint Deloitte as our principal
independent auditor for the fiscal year ended December 31, 2004 the Audit
Committee has considered whether the services provided by Deloitte are
compatible with maintaining the independence of Deloitte and has determined that
such services do not interfere with Deloitte's independence.
ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
(c) TOTAL NUMBER OF
SHARES PURCHASED AS (d) MAXIMUM NUMBER OF
PART OF PUBLICLY SHARES THAT MAY YET
(a) TOTAL NUMBER OF (b) AVERAGE PRICE ANNOUNCED PLANS BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED(1) PAID PER SHARE OR PROGRAMS(1) PLANS OR PROGRAMS(1)
------ ------------------- -------------- -------------- --------------------
1st Jan 2004 - 31st Jan 2004 0 0 0 7,870,040
1st Feb 2004 - 29th Feb 2004 0 0 0 7,870,040
1st Mar 2004 - 31st Mar 2004 3,300,000 $ 9.20 3,300,000 4,570,040
112
1st Apr 2004 - 30th Apr 2004 0 0 0 4,570,040
1st May 2004 - 31st May 2004 2,000,000 $ 12.00 2,000,000 2,570,040
1st Jun 2004 - 30th Jun 2004 0 0 0 2,570,040
1st Jul 2004 - 31st Jul 2004 0 0 0 2,570,040
1st Aug 2004 - 31st Aug 2004 0 0 0 2,570,040
1st Sep 2004 - 30th Sep 2004 0 0 0 2,570,040
1st Oct 2004 - 31st Oct 2004 0 0 0 2,570,040
1st Nov 2004 - 30th Nov 2004 0 0 0 2,570,040
1st Dec 2004 - 31st Dec 2004 0 0 0 2,570,040
--------- --------- --------- ---------
TOTAL 5,300,000 $ 10.26 5,300,000
(1) Each year, Mittal Steel's board of directors receives shareholder
authorization at the annual general meeting to acquire up to 10% of the nominal
value of Mittal Steel's total issued and outstanding share capital (which
includes the issued and outstanding class A and class B common shares),
provided, however, that only the class A common shares may be purchased by
Mittal Steel for a period of up to 18 months. In addition, the purchase price
may not exceed 125% of the current market price of the class A common shares on
the NYSE or Euronext Amsterdam and may not be less than the nominal value of the
class A common shares. Pursuant to the shareholder authorization, the board of
directors has authorized and publicly announced the purchase of up to the
following number of class A common shares on the dates indicated:
- 1,250,000 class A common shares on October 28, 1997;
- 2,500,000 class A common shares on December 22, 1997;
- 2,600,000 class A common shares on September 1, 1998;
- 6,350,000 class A common shares on September 8, 1998; and
- 5,000,000 class A common shares on October 28, 2002.
As of December 31, 2004, of the 17,700,000 class A common shares authorized,
15,129,960 class A common shares have been purchased.
113
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the reports of Deloitte
Accountants B.V., KPMG and Ernst & Young thereon, are filed as part of this
Annual Report.
Page
----
Report of Deloitte Accountants B.V................................................... F-2
Report of Ernst & Young Accountants (Mittal Steel Holdings N.V. and subsidiaries).... F-3
Report of KPMG Inc.(Ispat Iscor Limited December 31,2004)............................ F-4
Report of KPMG Inc.(Iscor Limited December 31, 2003 and 2002)........................ F-5
Report of Ernst & Young (Caribbean Ispat Limited).................................... F-6
Report of Ernst & Young (Ispat Hamburg Group of Companies)........................... F-7
Consolidated Balance Sheets.......................................................... F-8
Consolidated Statements of Income.................................................... F-10
Consolidated Statements of Comprehensive Income...................................... F-10
Consolidated Statements of Changes in Shareholders' Equity........................... F-11
Consolidated Statements of Cash Flows................................................ F-12
Notes to the Consolidated Financial Statements....................................... F-14
114
ITEM 19. EXHIBITS
Exhibit Number Description
-------------- -----------
1.1.* Amended and Restated Articles of Association of Mittal Steel Company. N.V.
dated December 17, 2004 (English translation filed as Exhibit 3.1 to Mittal
Steel Company N.V.'s registration statement on Form F-4 (Reg. No. 333-121220)
filed with the Commission on February 3, 2005, and incorporated by reference
hereto).
2.1.* Mittal Steel Company N.V. Global Stock Option Plan, effective September
15, 1999 (filed as Exhibit 4.1 to Mittal Steel Company N.V.'s annual report on
Form 20-F for the year ended December 31, 2000 (File No. 001-14666), and
incorporated by reference hereto).
4.1.* Acquisition Agreement dated as of October 24, 2004 between Mittal Steel
Company N.V. (formerly known as Ispat International N.V.) and The Richmond
Investment Holdings Limited (filed as Annex A in Exhibit 1.1 to Mittal Steel
Company N.V.'s report on Form 6K (File No. 001-14666) filed with the Commission
on November 18, 2004, and incorporated by reference hereto).
4.2.* Agreement and Plan of Merger and Reorganization dated as of October 24,
2004, among Mittal Steel Company N.V. (formerly known as Ispat International
N.V.), Park Acquisition Corp. and International Steel Group Inc. (filed as
Exhibit 1.1 to Mittal Steel Company N.V.'s report on Form 6-K (File No.
001-14666) filed with the Commission on October 28, 2004, and incorporated by
reference hereto).
4.3. Shareholder's agreement dated as of August 13, 1997 among Ispat
International N.V., LNM Holdings S.L. (renamed Ispat International Investments
S.L.) and Mr. Lakshmi N Mittal.
4.4.* Non-competition agreement dated as of December 17, 2004 between Ispat
International N.V. and Mr. Lakshmi N Mittal. (filed as Exhibit 10.4 to Mittal
Steel Company N.V.'s registration statement on Form F-4 (Reg. No. 333-121220)
filed with the Commission on February 3, 2005, and incorporated by reference
hereto).
8.1. List of Significant Subsidiaries.
12.1. Certifications of Mittal Steel Company N.V.'s Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act.
13.1. Certifications of Mittal Steel Company N.V.'s Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
14.1. Consent of Deloitte Accountants B.V.
14.2. Consent of Ernst & Young Accountants (Mittal Steel Holdings N.V. and
subsidiaries).
14.3. Consent of KPMG Inc. (Iscor Limited, December 31, 2003 and 2002 and Ispat
Iscor Limited, December 31, 2004).
14.4. Consent of Ernst & Young (Caribbean Ispat Limited).
14.5. Consent of Ernst & Young (Ispat Hamburg Group of Companies).
-------------
* Previously filed.
115
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003 AND
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 2004
INDEX
Page
----
Report of Deloitte Accountants B.V....................................... F-2
Report of Ernst & Young Accountants (Mittal Steel Holdings N.V. and
subsidiaries).......................................................... F-3
Report of KPMG Inc. (Ispat Iscor Limited December 31, 2004).............. F-4
Report of KPMG Inc. (Iscor Limited December 31, 2003 and 2002)........... F-5
Report of Ernst & Young (Caribbean Ispat Limited)........................ F-6
Report of Ernst & Young (Ispat Hamburg Group of Companies)............... F-7
Consolidated Balance Sheets.............................................. F-8
Consolidated Statements of Income........................................ F-10
Consolidated Statements of Comprehensive Income.......................... F-10
Consolidated Statements of Changes in Shareholders' Equity............... F-11
Consolidated Statements of Cash Flows.................................... F-12
Notes to the Consolidated Financial Statements........................... F-14
F-1
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mittal Steel Company N.V.
Rotterdam, The Netherlands
We have audited the accompanying consolidated balance sheets of Mittal Steel
Company N.V. (formerly Ispat International N.V.) and subsidiaries (the
"Company") as of December 31, 2003 and 2004, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
merger of Ispat International N.V. and Mittal Steel Holdings N.V. ("Mittal Steel
Holdings") (formerly LNM Holdings, N.V.), which has been accounted for on the
basis of common control accounting as described in note 1 to the consolidated
financial statements. We did not audit the financial statements of Mittal Steel
Holdings (except for Mittal Steel Poland, S.A. (formerly Ispat Polska, S.A.), a
consolidated subsidiary of Mittal Steel Holdings, whose financial statements for
the year ended December 31, 2004 were audited by us) for the years ended
December 31, 2002, 2003, 2004, which statements reflect total assets of $4,538
and $8,707 as of December 31, 2003 and 2004, respectively, and total sales of
$2,228, $4,167, and $10,293 for the years ended December 31, 2002, 2003 and
2004, respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Mittal Steel Holdings for 2002, 2003 and 2004, is based solely on
the report of such other auditors.
We did not audit the consolidated financial statements of the Ispat Hamburg
Group of Companies and the financial statements of Caribbean Ispat Limited for
the year ended December 31, 2002. Each of the aforementioned companies is a
consolidated subsidiary of the Company. The financial statements for these
subsidiaries reflect total sales constituting 9% of combined total sales for the
year ended December 31, 2002. Those financial statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion,
insofar as it relates to the amounts included for such subsidiaries, is based
solely on the reports of such other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements present fairly, in all material respects, the
financial position of Mittal Steel Company N.V. and subsidiaries at December 31,
2003 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE ACCOUNTANTS B.V.
Rotterdam, The Netherlands
March 24, 2005
/s/ Deloitte Accountants B.V.
F-2
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of the Board of Directors of Mittal Steel Company N.V.:
We have audited the accompanying consolidated balance sheets of Mittal Steel
Holdings Company N.V. (formerly LNM Holdings N.V.) and subsidiaries as of
December 31, 2003 and 2004, and the related consolidated statements of income,
comprehensive income, shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of Ispat Iscor Limited (formerly Iscor Ltd.)
and subsidiaries as of and for the year ended December 31, 2004, a consolidated
subsidiary at December 31, 2004, which statements reflect total assets and
revenues constituting 29% and 26%, respectively, of the related consolidated
totals. We also did not audit the consolidated financial statements of Ispat
Iscor Limited and subsidiaries as of December 31, 2003 and for the two years in
the period ended December 31, 2003, a corporation in which the Company has a
34.9% and 49.9% interest at December 31, 2002 and 2003, respectively. In the
consolidated financial statements, the Company's investment in Ispat Iscor
Limited and subsidiaries is stated at $581 million at December 31, 2003, and the
Company's equity in the net income of Ispat Iscor Limited and subsidiaries is
stated at $95 million and $195 million, for the years ended December 31, 2002
and 2003, respectively. These consolidated financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for Ispat Iscor Limited and subsidiaries,
is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Mittal Steel Holdings N.V. and
subsidiaries at December 31, 2003 and 2004, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
Rotterdam, The Netherlands
February 9, 2005
/s/ Ernst & Young Accountants
F-3
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ISPAT ISCOR LIMITED
We have audited the Consolidated Balance Sheet of Ispat Iscor Limited and
subsidiaries as at December 31, 2004 and the related Consolidated Income
Statement, Consolidated Statement of Changes in Equity, Consolidated Cash Flow
Statement and Consolidated Statement of Comprehensive Income for the year ended
December 31, 2004. These Consolidated Financial Statements are the
responsibility of the management and directors of Ispat Iscor Limited. Our
responsibility is to express an opinion on these Consolidated Financial
Statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned Consolidated Financial Statements
present fairly, in all material respects, the financial position of Ispat Iscor
Limited and subsidiaries at December 31, 2004 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
KPMG INC.
/s/ KPMG Inc.
Registered Accountants and Auditors
Pretoria, South Africa
February 8, 2005
F-4
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF ISPAT ISCOR LIMITED
We have audited the Consolidated Balance Sheets of Iscor Ltd. and subsidiaries
(the "Group") as at December 31, 2003 and 2002 and the related Consolidated
Income Statements, Consolidated Statements of Changes in Equity and Consolidated
Cash Flow Statements for each of the years in the two year period ended December
31, 2003. These Consolidated Financial Statements are the responsibility of the
management and directors of Iscor Ltd. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Consolidated Financial Statements present
fairly, in all material respects, the financial position of the Group as at
December 31, 2003 and 2002 and the results of their operations and their cash
flows for each of the years in the two year period ended December 31, 2003 in
conformity with International Financial Reporting Standards.
As described in note 1, Basis of Presentation, the Company has restated its 2002
and 2003 financial statements for the treatment of negative goodwill.
International Financial Reporting Standards vary in certain significant respects
from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences, as restated,
is presented in note 31 to the consolidated financial statements.
KPMG INC.
/s/ KPMG INC.
Registered Accountants and Auditors
Pretoria, South Africa
October 28, 2004 except for Note 1, Basis of Presentation
November 26, 2004
F-5
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
ERNST & YOUNG
P.O. Box 158
517 Sweet Briar Road Phone: (868) 628-1105
St. Clair Fax: (868) 622-0918
Port-of-Spain
Trinidad and Tobago
INDEPENDENT AUDITORS' REPORT
To the Stockholders of CARIBBEAN ISPAT LIMITED
We have audited the balance sheets of Caribbean Ispat Limited as of December 31,
2002 and 2001, and the related statements of operations and comprehensive loss,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2002 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Caribbean Ispat Limited as of
December 31, 2002 and 2001, and the results of its operations and cash flows for
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Port of Spain,
TRINIDAD:
February 14, 2003
/s/ Ernst & Young
F-6
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
Valentinskamp 24
20354 Hamburg
Postiach 30 17 09
20306 Hamburg
Telefon (0 40) 3 61 32-0
Telefax (0 40) 3 61 32-777
hamburg-@ernst-young.de
www.ernst-young.de
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE ISPAT HAMBURG GROUP OF
COMPANIES
We have audited the consolidated balance sheet of the Ispat Hamburg Group of
Companies (collectively the "Group", which is a subsidiary of Ispat
International N.V.) as at December 31, 2002 and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity and
cash flows for the year ended December 31, 2002 and the combined balance sheet
of the Ispat Hamburg Group of Companies as at December 31, 2001 and the related
combined statements of income, comprehensive income, changes in shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2001. These financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Ispat Hamburg
Group of Companies as of December 31, 2002 and the consolidated results of their
operations and their cash flows for the year ended December 31, 2002 and the
combined financial position of the Ispat Hamburg Group of Companies as of
December 31, 2001 and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
/s/ M. Tabel /s/ E.-W. Schluschen
Wirtschaftsprufer Wirtschaftsprufer
Hamburg, Germany
February 12, 2003
F-7
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2003 2004
(MILLIONS OF U.S. DOLLARS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 760 $ 2,495
Restricted cash ..................................................... 140 138
Short-term investments .............................................. -- 1
Trade accounts receivable, net of allowance for doubtful accounts of
$119 at December 31, 2003 and $267 at December 31, 2004 ......... 889 2,006
Inventories (note 4) ................................................ 1,587 4,013
Prepaid expenses and other current assets ........................... 275 666
Deferred tax assets - net (note 15) ................................. 32 306
------- -------
Total Current Assets ............................................. 3,683 9,625
Property, Plant and Equipment - net (note 5) ........................... 4,654 7,562
Investments in Affiliates and Joint Ventures (note 6) .................. 967 667
Deferred Tax Assets (note 15) .......................................... 536 855
Intangible Pension Assets (note 14) .................................... 117 106
Other Assets ........................................................... 180 338
------- -------
Total Assets ..................................................... $10,137 $19,153
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current portion of long-term debt (note 8) ..... $ 780 $ 341
Trade accounts payable .............................................. 1,015 1,899
Dividend payable .................................................... -- 1,650
Accrued expenses and other liabilities .............................. 796 2,307
Deferred tax liabilities (note 15) .................................. 28 33
------- -------
Total Current Liabilities ........................................ 2,619 6,230
Long-Term Debt, net of current portion (notes 11 and 12) ............... 2,193 1,639
Loan from shareholder .................................................. 94 --
Deferred Tax Liabilities (note 15) ..................................... 263 955
Deferred Employee Benefits (note 14) ................................... 1,933 1,931
Other Long-Term Obligations ............................................ 213 809
------- -------
Total Liabilities ................................................ $ 7,315 $11,564
======= =======
See notes to the consolidated financial statements
F-8
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31,
------------
2003 2004
---- ----
(MILLIONS OF U.S. DOLLARS,
EXCEPT SHARE DATA)
Minority Interest ............................................................................ $ 261 $ 1,743
Commitments and Contingencies (notes 18 and 19)
Shareholders' Equity (note 13)
COMMON SHARES:
Class A Shares, (EURO 0.01 par value per share, 5,000,000,000 shares authorized, 194,509,790
shares issued and 189,247,282 and 185,284,650 shares outstanding at December 31, 2003
and 2004, respectively)
Class B shares, (EURO 0.10 par value per share, 721,500,000 shares authorized, 457,490,210
shares issued and outstanding) ............................................................ 59 59
Treasury Stock ............................................................................... (110) (123)
Additional Paid-in Capital ................................................................... 584 552
Retained Earnings ............................................................................ 2,423 4,739
Accumulated Other Comprehensive Income ....................................................... (395) 619
-------- --------
Total Shareholders' Equity .......................................................... 2,561 5,846
-------- --------
Total Liabilities and Shareholders' Equity ................................................ $ 10,137 $ 19,153
======== ========
See notes to the consolidated financial statements
F-9
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
---- ---- ----
(MILLIONS OF U.S. DOLLARS,
EXCEPT SHARE AND PER SHARE DATA)
SALES ............................................................... $ 7,080 $ 9,567 $ 22,197
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation shown separately below) . 5,752 7,568 14,694
Depreciation ..................................................... 266 331 553
Selling, general and administrative .............................. 298 369 804
Other operating expenses (note 16) ............................... 62 -- --
-------- -------- --------
6,378 8,268 16,051
-------- -------- --------
Operating income .................................................... 702 1,299 6,146
Other income (expense) - net ........................................ 32 70 128
Income from equity method investments ............................... 111 162 66
FINANCING COSTS:
Interest expense-net of capitalized interest of $5 in 2002,
$8 in 2003 and $3 in 2004 ........................................ (232) (200) (265)
Interest income .................................................. 10 25 78
Net gain (loss) from foreign exchange transactions ............... 15 44 (20)
-------- -------- --------
(207) (131) (207)
-------- -------- --------
Income before taxes, minority interest and cumulative effect
of change in accounting principle ................................ 638 1,400 6,133
INCOME TAX EXPENSE (BENEFIT): (note 15)
Current .......................................................... 64 43 731
Deferred ......................................................... (32) 141 86
-------- -------- --------
32 184 817
-------- -------- --------
Income before minority interest and cumulative effect of
change in accounting principle ................................... 606 1,216 5,316
Minority interest ................................................... (11) (35) (615)
-------- -------- --------
Income from continuing operations ................................... 595 1,181 4,701
Cumulative effect of change in accounting principle ................. -- 1 --
-------- -------- --------
Net income .......................................................... $ 595 $ 1,182 $ 4,701
======== ======== ========
Basic and diluted earnings per common share before cumulative
effect of change in accounting principle ......................... $ 0.92 $ 1.83 $ 7.31
Basic and diluted earnings per common share ......................... 0.92 1.83 7.31
Weighted average common share outstanding (in millions) ............. 648 647 643
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
---- ---- ----
(MILLIONS OF U.S. DOLLARS)
Net income ............................................................ $ 595 $ 1,182 $ 4,701
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment - net of income
taxes of $2 in 2002, $1 in 2003 and $1 in 2004 ........................ 6 113 929
Minimum pension liability adjustment - net of income
taxes of $148 in 2002, $46 in 2003 and $38 in 2004 .................... (273) (79) 15
Unrealized gains on available for sale security - net of income
taxes of $nil ......................................................... -- 69 66
Unrealized gains on derivative financial instruments - net of income
taxes of $3 in 2002, $4 in 2003 and $7 in 2004 ........................ 4 6 4
------- ------- -------
(263) 109 1,014
------- ------- -------
Comprehensive income .................................................. $ 332 $ 1,291 $ 5,715
======= ======= =======
See notes to the consolidated financial statements
F-10
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ACCUMULATED OTHER COMPREHENSIVE INCOME
------------ ------------------------------------------------
Unrealized
Gains Unrealized
Foreign (Losses) on Gains on
Additional Currency Minimum Derivative Available
Treasury Paid-in Retained Translation Pension Financial for Sale Shareholders'
Shares Amount Stock Capital Earnings Adjustments Liability Instruments Securities Equity
------ ------ ----- ------- -------- ----------- --------- ----------- ---------- ------
Balance at
December 31, 2001 647 $ 59 $ (107) $ 585 $ 810 $ 16 $ (249) $ (8) $ -- $ 1,106
Net Income -- -- -- 595 -- -- -- -- 595
Other Comprehensive
Income (loss) -- -- -- -- 6 (273) 4 -- (263)
Treasury Stock (note 13) 2 -- 4 -- -- -- -- -- -- 4
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Balance at
December 31, 2002 649 59 (103) 585 1,405 22 (522) (4) -- 1,442
Net Income -- -- -- 1,182 -- -- -- -- 1,182
Other Comprehensive
Income (loss) -- -- -- -- 113 (79) 6 69 109
Treasury Stock (note 13) (2) -- (7) (1) -- -- -- -- -- (8)
Dividends -- -- -- -- (164) -- -- -- -- (164)
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Balance at
December 31, 2003 647 59 (110) 584 2,423 135 (601) 2 69 2,561
Net Income -- -- -- 4,701 -- -- -- -- 4,701
Other Comprehensive Income -- -- -- -- 929 15 4 66 1,014
Treasury Stock (note 13) (4) -- (13) (32) -- -- -- -- -- (45)
Dividends -- -- -- -- (2,385) -- -- -- -- (2,385)
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
Balance at
December 31, 2004 643 $ 59 $ (123) $ 552 $ 4,739 $ 1,064 $ (586) $ 6 $ 135 $ 5,846
------ ------ ------ ------- ------- ------- ------- ------- ------- -------
See notes to the consolidated financial statements
F-11
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
------- ------- -------
(MILLIONS OF U.S. DOLLARS)
OPERATING ACTIVITIES:
Net income ...................................................................... $ 595 $ 1,182 $ 4,701
ADJUSTMENTS REQUIRED TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATIONS:
Depreciation ............................................................... 266 331 553
Deferred employee benefit costs ............................................ (63) (167) (56)
Net foreign exchange loss (gain) ........................................... (23) (32) 28
Deferred income tax ........................................................ (32) 141 86
Gain from early extinguishment of debt ..................................... (30) -- 22
Income from equity method investment ....................................... (95) (140) (138)
Distribution from equity method investment ................................. 6 48 --
Loss (gain) on sale or write-off of property, plant & equipment ............ -- -- (19)
Minority interest .......................................................... 11 35 615
Other non-cash operating expenses .......................................... 28 15 (8)
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS:
Trade accounts receivable .................................................. (72) -- (386)
Inventories ................................................................ (119) (18) (1,374)
Prepaid expenses and other ................................................. (32) (87) (160)
Trade accounts payable ..................................................... (18) (51) 160
Accrued expenses and other liabilities ..................................... 117 181 587
------- ------- -------
Net cash provided by operating activities .................................... 539 1,438 4,611
------- ------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment .................................... (265) (421) (898)
Proceeds from sale of assets and investments
including affiliates and joint ventures ...................................... 35 26 83
Investments in affiliates and joint ventures ................................. (138) (280) 34
Acquisition of net assets of subsidiaries, net of cash acquired .............. 1 (21) (19)
Restricted cash .............................................................. 8 (118) 2
Other ........................................................................ (1) -- (3)
------- ------- -------
Net cash used in investing activities ........................................ (360) (814) (801)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from payable to banks ............................................... 2,400 3,646 2,258
Proceeds from long-term debt - net of debt issuance costs .................... 184 52 1,185
Proceeds from long-term debt from an affiliate ............................... 32 94 76
Payments of payable to banks ................................................. (2,360) (3,636) (2,738)
Payments of long-term debt ................................................... (244) (226) (2,127)
Payments of long-term debt to an affiliate ................................... -- (40) (175)
Purchase of treasury stock ................................................... (1) (8) (54)
Sale of treasury stock for stock option exercises ............................ 5 -- 9
Dividends (includes $27 dividend paid to minority shareholders in 2004 ....... -- (164) (763)
------- ------- -------
Net cash provided by (used in) financing activities .......................... 16 (282) (2,329)
------- ------- -------
Net increase in cash and cash equivalents .................................... 195 342 1,481
------- ------- -------
Effect of exchange rate changes on cash ...................................... 5 23 254
------- ------- -------
CASH AND CASH EQUIVALENTS:
At the beginning of the year ................................................. 195 395 760
------- ------- -------
At the end of the year ....................................................... $ 395 $ 760 $ 2,495
======= ======= =======
See notes to the consolidated financial statements
F-12
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------
2002 2003 2004
------ ------ ------
(MILLIONS OF U.S. DOLLARS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest - net of amounts capitalized $ 220 $ 201 $ 253
Income taxes 64 30 454
NON-CASH ACTIVITY:
Deferred taxes related to comprehensive income items 153 51 46
ASSET RETIREMENT IMPACT ON:
Property -- 9 --
Debt -- 19 --
Cash dividends declared but not paid -- -- 1,650
ROS capital contributions -- 1 24
See notes to the consolidated financial statements
F-13
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
NATURE OF BUSINESS
Mittal Steel Company N.V. ("Mittal Steel") or ("Company"), formerly Ispat
International N.V., together with its subsidiaries, is a manufacturer of steel
and steel related products. Mittal Steel owns and operates manufacturing
facilities in the United States of America ("U.S."), Mexico, Canada, Trinidad
and Tobago ("Trinidad"), Germany, France, Republic of Kazakhstan, the Republic
of Algeria, the Republic of Romania, the Czech Republic, the Republic of Poland,
the Republic of South Africa, the Republic of Macedonia and Bosnia and
Herzegovina.
These manufacturing facilities, each of which includes its respective
subsidiaries, are referred to herein as the "Operating Subsidiaries".
On December 17, 2004, Ispat International N.V. completed its acquisition of
Mittal Holdings N.V., formerly LNM Holdings N.V. and changed its name to Mittal
Steel Company N.V. As Ispat International and LNM Holdings N.V. are affiliates
under common control, the acquisition of LNM Holdings N.V. is accounted for on
the basis of common control accounting, which is similar to a previously
permitted method of accounting known as a "pooling-of-interests". These
consolidated financial statements reflect the financial position for those
assets and liabilities and results of operations for Mittal Steel from the
accounts of Ispat International and LNM Holdings N.V., as though Mittal Steel
had been a stand alone legal entity during the periods presented herein. These
consolidated financial statements have been prepared using the historical basis
in the assets and liabilities and the historical results of operations relating
to Ispat International N.V. and LNM Holdings N.V. based on the separate records
maintained for each of these businesses.
In connection with changing its corporate name from Ispat International N.V. to
Mittal Steel Company N.V., Mittal Steel is also changing the corporate names of
certain of its subsidiaries. Set forth below are certain of Mittal Steel's
subsidiaries, listed by jurisdiction of organization, indicating the former name
of the subsidiary, the current/contemplated new name of the subsidiary and the
abbreviations used herein. Certain of the name changes have been affected, but
Mittal Steel anticipates completing this process in the second quarter of 2005.
For the purposes of this Annual Report, the new name or abbreviated names will
be used where applicable.
F-14
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
COUNTRY FORMER NAME OF CURRENT/CONTEMPLATED ABBREVIATIONS
SUBSIDIARY NEW NAME OF SUBSIDIARY
Algeria Ispat Annaba Spa Mittal Steel Mittal Steel Annaba
("Ispat Annaba") Annaba Spa
Ispat Tebessa Spa Mittal Steel Mittal Steel Tebessa
("Ispat Tebessa") Tebessa Spa
Bosnia and RZR Ljubija a.d. Mittal Steel Mittal Steel Zenica
Herzegovina Zenica a.d.
Canada Ispat Sidbec Inc. Mittal Canada Inc. Mittal Canada
("Ispat Sidbec")
Czech Republic Ispat Nova Hut a.s. Mittal Steel Mittal Steel Ostrava
("Ispat Nova Hut") Ostrava a.s.
Valcovni Plechu a.s. Mittal Steel Mittal Steel Frydek
Frydek a.s.
Ispat Jakl Karvina a.s. Mittal Steel Mittal Steel Karvina
Karvina a.s.
United Arab LNM Marketing FZE Mittal Steel Mittal Steel Marketing
Emirates (Dubai) ("LNM Marketing") Marketing FZE
France Ispat Unimetal S.A Mittal Steel Mittal Steel Gandrange
("Unimetal") Gandrange S.A.
Trefileurope S.A. Trefileurope S.A. Trefileurope
Germany Ispat Hamburger Mittal Steel Mittal Steel Hamburg
Stahlwerke GmbH Hamburg GmbH
("Ispat Hamburg"
or "IHSW")
Ispat Stahlwerk Mittal Steel Mittal Steel Ruhrort
Ruhrort GmbH Ruhrort GmbH
("ISRG")
Ispat Walzdraht Mittal Steel Mittal Steel Hochfeld
Hochfeld GmbH Hochfeld GmbH
("IWHG")
Kazakhstan Ispat Karmet OJSC Mittal Steel Mittal Steel Temirtau
("Ispat Karmet") Temirtau OJSC
Luxembourg Ispat Europe Mittal Steel Mittal Steel Europe
Group S.A. Europe S.A.
("Ispat Europe
Group" or "IEG")
Macedonia RZ Ladna Valavnica a.d. Mittal Steel Mittal Steel Skopje
Skopje (CRM) a.d.
RZ Valavnica Mittal Steel
za Lenti a.d. Skopje (HRM) a.d.
Mexico Ispat Mexicana, Mittal Steel Mittal Steel Lazaro or Imexsa
S.A. de C.V. Lazaro Cardenas
("Ispat Mexicana" S.A. de C.V.
or "Imexsa")
Poland Ispat Polska S.A. Mittal Steel Mittal Steel Poland
("Ispat Polska") Poland S.A.
Romania Ispat Sidex S.A Mittal Steel Mittal Steel Galati
("Ispat Sidex") Galati S.A.
Ispat Petrotub Mittal Steel Mittal Steel Roman
S.A ("Ispat Petrotub") Roman S.A.
Ispat Tepro S.A Mittal Steel Mittal Steel Iasi
("Ispat Tepro") Iasi S.A.
S.C. Siderurgica S.A Mittal Steel Mittal Steel Hunedoara
Hunedoara S.A.
South Africa Ispat Iscor Mittal Steel Mittal Steel South Africa
Limited South Africa Limited
("Ispat Iscor")
Trinidad Caribbean Ispat Mittal Steel Mittal Steel Point Lisas
and Tobago Limited ("CIL") Point Lisas Limited
United Ispat Inland Inc. Ispat Inland Inc. Ispat Inland or Inland
States of America ("Ispat Inland")
F-15
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
ORGANIZATION
Mittal Steel is formed and organized under the laws of the Netherlands to hold
directly or indirectly certain subsidiaries involved in the steel manufacturing
activities described above. Mittal Steel has no manufacturing operation of its
own and its major assets are interests in the common and preferred stock of the
Operating Subsidiaries.
BASIS OF PRESENTATION
The consolidated financial statements, which include the accounts of Mittal
Steel and its operating subsidiaries, all of which are controlled by Mittal
Steel, have been prepared in accordance with U.S. Generally Accepted Accounting
Principles ("US GAAP"). Intercompany balances and transactions have been
eliminated in consolidation.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"),
an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statement", which requires the consolidation by a business enterprise
of variable interest entities, if the business enterprise is the primary
beneficiary. The FASB has amended FIN 46, now known as FIN 46 Revised December
2003 ("FIN 46(R)"). For the purpose of analyzing investments in potential
variable entities formed after January 31, 2003, the Company has applied the
provisions of FIN 46 and FIN 46(R) as of January 1, 2004. For the purpose of
analyzing potential variable interest entities previously defined as special
purpose entities ("SPE's") created before February 1, 2003; the Company has
applied the provisions of FIN 46 and FIN 46(R) for the period beginning January
1, 2004. The Company has also applied the provisions of FIN 46 and FIN 46(R) in
determining whether the Company holds potential interest in variable interest
entities not previously defined as SPE's for the period ended December 31, 2004.
The adoption of FIN 46(R) did not have a material impact on the Company's
consolidating financial position, results of operations or cash flows.
F-16
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
The principal subsidiaries of Mittal Steel included in the consolidated
financial statements are as follows:
COMPANY LOCATION OWNERSHIP PERCENTAGE
Caribbean Ispat Limited Trinidad 100.0%
Ispat Mexicana, S.A. de C.V. Mexico 100.0%
Ispat Sidbec Inc. Canada 100.0%
Ispat Hamburger Stahlwerke GmbH Germany 100.0%
Ispat Stahlwerke Ruhrort GmbH and
Ispat Walzdraht Hochfeld GmbH Germany 100.0%
Ispat Inland Inc. U.S. 100.0%
Ispat Unimetal S.A. (including Society
Metallurgique de Revigny S.N.C.) France 100.0%
Trefileurope S.A. France 100.0%
Ispat Karmet OJSC Kazakhstan 100.0%
LNM Marketing FZE Jebel Ali Free Zone,
United Arab Emirates 100.0%
BH Steel Zelgezara Zenica LLC Bosnia and Herzegovina 100.0%
S.C. Ispat Sidex S.A. Romania 99.4%
Ispat Polska Stali Poland 97.4%
RZ Ladna Valavnica AD Macedonia 88.3%
S.C. Siderurgica S.A Macedonia 77.3%
Ispat Nova Hut a.s. Czech Republic 75.7%
S.C. Ispat Tepro S.A. Romania 70.8%
Ispat Annaba Spa Algeria 70.0%
Ispat Tebessa Spa Algeria 70.0%
S.C. Ispat Petrotub S.A. Romania 69.8%
RZR Ljubija a.d. Bosnia and Herzegovina 51.0%
Ispat Iscor Limited South Africa 50.1%(1)
(1)As more fully discussed in note 3, in June 2004 the Company purchased 2,000
additional shares in Ispat Iscor, raising its ownership percentage in Ispat
Iscor to slightly over 50%. The Company has consolidated Ispat Iscor since
January 1, 2004 as the Company obtained majority control in 2004. Prior to this
date, the Company's investment in Ispat Iscor was accounted for using the equity
method of accounting.
FOREIGN CURRENCY TRANSLATION AND TRANSLATION OF FINANCIAL STATEMENTS
The records of each of Mittal Steel's operating subsidiaries are maintained in
the currency of the country in which the operating subsidiary is located, using
the statutory or generally accepted accounting principles of such country. For
consolidation purposes, the financial statements that result from such records
have been translated to conform to US GAAP and converted into U.S. Dollars, the
reporting currency. The functional currency of each of the operating
subsidiaries is the U.S. Dollar, except for Ispat Sidbec, Inc., Ispat Nova Hut,
Ispat Iscor, Ispat Polska, Ispat Tepro, Ispat Petrotub, Ispat Siderurgica, Ispat
Europe Group S..A. and the operating subsidiaries in the Republic of Macedonia
and in Bosnia and Herzegovina whose functional currency is the local currency.
Prior to October 1, 2004 the Romanian economy was considered highly
inflationary. The records of Ispat Tepro, Ispat Petrotub and Ispat Siderurgica
were remeasured as if its functional currency was the reporting currency for
periods prior to October 1, 2004. Upon consolidation, the results of operations
of Mittal Steel's subsidiaries and affiliates whose functional currency is other
than the U.S. Dollar are translated into U.S. Dollars at average exchange for
the year and assets and liabilities are translated at year-end exchange rates.
Translation adjustments are presented as a separate component of other
comprehensive income ("OCI") in the Consolidated Financial Statements and are
included in net earnings only upon sale or liquidation of the underlying foreign
subsidiary or affiliated company. Transactions in currencies other than the
functional currency of a subsidiary are recorded at the rates of exchange
prevailing at
F-17
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
the date of the transaction. Monetary assets and liabilities in currencies other
than the functional currency are remeasured at the rates of exchange prevailing
at the balance sheet date and the related transaction gains and losses are
reported in the statements of income.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates and
assumptions.
CASH AND CASH EQUIVALENTS
Cash equivalents represent highly liquid investments with original maturities of
three months or less.
RESTRICTED CASH
Restricted cash represents the required collateral with various banks as margin
for revolving letters of credit and guarantees.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts at an amount it
considers to be a sufficient estimate of losses resulting from the inability of
its customers to make required payments. An allowance is recorded and charged to
expense when an account is deemed to be uncollectible. In judging the adequacy
of the allowance for doubtful accounts, the company considers multiple factors
including historical bad debt experience, the current economic environment and
the aging of the receivables. Recoveries of trade receivable previously reserved
in the allowance are credited to income.
INVENTORIES
Inventories are carried at the lower of cost or market value. Cost is determined
using the first in, first out ("FIFO") method and average cost method, which
approximates FIFO. Costs of production in process and finished goods include the
purchase costs of raw materials and conversion costs such as direct labor and an
allocation of fixed and variable production overheads. Raw materials and spare
parts are valued at cost inclusive of freight, shipping and handling costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
All property, plant and equipments except land are depreciated using the
straight line method over the useful lives of the related assets, ranging from
10 to 50 years for buildings and improvements and 2 to 45 years for machinery
and equipment. Major improvements, which add to productive capacity or extend
the life of an asset, are capitalized, while repairs and maintenance are charged
to expense as incurred. Property, plant and equipment under construction are
recorded as construction in progress until they are ready for their intended
use; thereafter they are transferred to the related category of property, plant
and equipment and depreciated over their estimated useful lives. Interest during
construction is capitalized to property, plant and equipment under construction
until the assets are ready for their intended use. Gains and losses on
retirement or disposal of assets are determined as the difference between net
disposal proceeds and carrying amount and are reflected in the statement of
operations. The cost of coal-production assets are depreciated on a
unit-of-production basis. The rate of depreciation is determined based on the
rate of depletion of the proven developed reserves in the coal deposits mined.
Proven developed reserves are defined as the estimated quantity of product which
can be expected to be profitably extracted, processed and used in the production
of steel under current and foreseeable economic conditions.
NEGATIVE GOODWILL
The Company has historically purchased under-performing steel assets,
principally those involved in various privatization programs in former
government controlled economies. Businesses with these characteristics typically
have been purchased for an amount that does not exceed net asset fair value,
thus producing negative
F-18
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
goodwill for accounting purposes. The Company accounts for its negative goodwill
in accordance with FASB Statement of Financial Accounting Standards No. 141
("SFAS 141"), "Business Combinations". SFAS 141 requires that in a business
combination in which the fair value of the identifiable net assets acquired
exceeds the cost of the acquired business, the excess over cost (i.e., negative
goodwill) reduces, on a pro rata basis, amounts assigned to acquired non-current
assets, with certain exceptions. Any excess negative goodwill remaining after
reducing the amounts that would have been assigned to the assets acquired to
zero would be recognized as an extraordinary gain.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets held and used by Mittal Steel are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of evaluating the recoverability
of long-lived assets, the recoverability test is performed using undiscounted
future net cash flows of assets grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. If the undiscounted future net cash flows are less than the
carrying amount of the asset, the asset is deemed impaired. The amount of the
impairment is measured as the difference between the carrying value and the fair
value of the asset.
INVESTMENT IN AFFILIATES AND JOINT VENTURES
Investments in majority owned affiliates and joint ventures, where control does
not exist and 20% to 50% owned affiliates and joint ventures in which Mittal
Steel has the ability to exercise significant influence, are accounted for under
the equity method of accounting whereby the investment is carried at cost of
acquisition, plus Mittal Steel's equity in undistributed earnings or losses
since acquisition, less dividends received.
Investment in affiliates and others, over which the Company and/or its
subsidiaries do not have the ability to exercise significant influence and have
a readily determinable fair value, are accounted for at fair value with any
realized gain or loss included in other comprehensive income. To the extent that
these investments do not have a readily determinable fair value, they are
accounted for under the cost method.
Mittal Steel periodically reviews all of its investments in affiliates and joint
ventures for which fair value is less than cost to determine if the decline in
value is other than temporary. If the decline in value is judged to be other
than temporary, the cost basis of the investment is written down to fair value.
The amount of any write-down is included in other operating expenses.
DEBT ISSUANCE COSTS
Debt issuance costs, which are included in other assets, are stated at cost and
amortized over the life of the related debt using the effective interest method.
Amortization of debt issuance costs is included in interest expense, which is a
component of financing costs, or alternatively, capitalized as borrowing costs
on qualifying assets where applicable.
DIVIDEND PAYABLE
Dividends payable are recorded as a liability and reduction of retained earnings
when declared.
RETIREMENT BENEFITS
The measurement of pension and post-retirement benefit liabilities is based upon
the projected unit credit method in accordance with Statement of Financial
Accounting Standards 87 ("SFAS 87"), "Employers' Accounting for Pensions", and
SFAS 106, "Employers' Accounting for Post-retirement Benefits Other than
Pensions", respectively. As permitted under SFAS 87 and SAFS 106, changes in the
amount of either the projected benefit obligation (for pensions plans), the
accumulated benefit obligation (for other post-retirement plans) or differences
between actual and expected return on plan assets and from changes in
assumptions, can result in gains and losses not yet recognized in the Company's
consolidated financial statements.
The expected return on the plan assets is determined based on the expected long-
term rate of return on plan assets and the fair value or market related value of
that plan's assets. Amortization of an unrecognized net gain or loss is included
as a component of the Company's net periodic benefit plan cost for a year if, as
of
F-19
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
the beginning of the year, that unrecognized net gain or loss exceeds 10 percent
of the greater of (1) the projected benefit obligation (for pension plans) or
the accumulated post-retirement benefit obligation (for other post-retirement
plans) or (2) the fair value or market-related value of that plan's assets. In
such case the amount of amortization recognized by the Group is the resulting
excess divided by the average remaining service period of active employees
expected to receive benefits under the plan.
The Company elected retroactive application as of January 1, 2004 to account for
subsidies provided under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("Medicare Act"). Under certain conditions, the
Medicare Act provides for subsidies related to post-retirement healthcare
benefits that reduce the accumulated post-retirement benefit obligation ("APBO")
of companies in the United States. For more information regarding the impact of
the Medicare Act, see the Company's consolidated financial statements.
REVENUE RECOGNITION
Revenues are recognized when persuasive evidence of an arrangement exists,
delivery has occurred to customers, the sales price is fixed and determinable,
collectibility is reasonably assured, and title and risks of ownership have
passed to the buyer. The Company recognizes revenue upon shipment or upon
delivery, depending upon shipping terms of the transaction and when delivery is
deemed to have occurred.
SHIPPING AND HANDLING COSTS
Mittal Steel classifies all amounts billed to a customer in a sale transaction
related to shipping and handling costs as sales and all other shipping and
handling costs as cost of sales.
FINANCING COSTS
Financing costs include interest, amortization of discounts or premiums on
borrowings, amortization of costs incurred in connection with the arrangement of
borrowings and net gain or loss from foreign exchange on translation of
long-term debt, net of unrealized gains and losses on foreign exchange
contracts.
RESEARCH AND DEVELOPMENT COSTS AND ADVERTISING COSTS
Research and development costs and advertising costs are expensed as incurred
and are not material in any period presented.
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation or cost reduction, are expensed. Liabilities are recorded
when environmental assessments and or remedial efforts are probable, and the
cost can be reasonably estimated based on ongoing engineering studies,
discussions with the environmental authorities and assumptions as to the areas
that may have to be remediated along with the nature and extent of the
remediation that may be required. The ultimate cost to Mittal Steel is dependent
upon factors beyond its control such as the scope and methodology of the
remedial action requirements to be established by environmental and public
health authorities, new laws or government regulations, rapidly changing
technology and the outcome of any potential related litigation. Environmental
liabilities are discounted if the aggregate amount of the obligation and the
amount and timing of the cash payments are fixed or reliably determinable.
INCOME TAXES
The provision for income taxes includes income taxes currently payable or
receivable and those deferred. Deferred tax assets and liabilities are
recognized for the future tax consequences of temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are also recognized for the estimated
future effects of tax loss carryforwards. Deferred tax assets and liabilities
are measured using enacted statutory tax rates in effect for the year in which
the differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of changes in tax rates is recognized in the
statement of operations in the period in which the changes are enacted. Deferred
tax assets are reduced through the establishment of a valuation allowance at
such time as, based on available evidence, it is more likely than not that the
deferred tax assets will not be realized.
F-20
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments are utilized by Mittal Steel to manage its exposure to
commodity prices, fluctuations in foreign exchange risks, and interest rates.
Mittal Steel has established a control environment, which includes policies and
procedures for risk assessment and the approval and monitoring of derivative
instrument activities. Mittal Steel does not enter into foreign currency hedging
contracts related to its investment in affiliated companies. The Company and its
subsidiaries selectively use various financial instruments, primarily forward
exchange contracts, interest rate swaps and commodity future contracts, to
manage exposure to price fluctuations.
All derivatives, whether designated in hedging relationships or not, are
recorded on the balance sheet at fair value. If the derivative is designated as
a fair value hedge, the changes in the fair value of the derivative and the
hedged item are recognized in earnings. If the derivative is designated as a
cash flow hedge, changes in the fair value of the derivative are recorded in OCI
and are recognized in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. Gains and losses related to financial instruments
that are utilized to manage exposures to fluctuations in the cost of energy and
raw materials used in the production process are recognized as a part of the
cost of the underlying product when the contracts are closed.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding during the periods presented. The
computation of diluted earnings per common share is similar to basic earnings
per common share, except that diluted earnings per share reflects the potential
dilution that could occur if dilutive securities and other contracts to issue
common shares were exercised or converted into common shares or resulted in the
issuance of common shares that then shared in the earnings of Mittal Steel.
STOCK OPTION PLAN
In 1999, the Company established the Ispat International N.V. Global Stock
Option Plan (the "Ispat Plan"), which are described more fully in note 13.
Awards under the Company's plans vest over three years. Prior to 2003, the
Company accounted for those plans under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in 2001 and 2002 net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), prospectively to all employee awards
granted, modified, or settled after January 1, 2003. This prospective adoption
of the fair value provisions of SFAS 123 is in accordance with the transitional
provisions of SFAS No. 148, "Accounting for Stock-Based Compensation" ("SFAS
148") issued in December 2002 for recognizing compensation cost of stock
options. There were no stock options granted, modified or settled during 2004
and accordingly, no compensation expense has been recognized in 2004.
F-21
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
SFAS 148 also requires that if awards of stock-based employee compensation were
outstanding and accounted for under the intrinsic value method of Opinion 25 for
any period in which an income statement is presented, a tabular presentation is
required as follows:
YEAR ENDED DECEMBER 31
2002 2003 2004
------ ------ ------
Net income, as reported $ 595 $1,182 $4,701
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of 3 1 1
related tax effects
Pro forma net income $ 592 $1,181 $4,700
EARNINGS PER SHARE:
Basic and diluted - as reported $ 0.92 $ 1.83 $ 7.31
Basic and diluted - pro forma 0.92 1.83 7.31
SEGMENT REPORTING
Mittal Steel operates in a single business segment, which is composed of the
manufacturing of semi-finished and finished steel products.
RECENT ACCOUNTING PRONOUNCEMENTS
EITF 03-1
In March 2004, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairments
and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides a
three-step impairment model for determining whether an investment is
other-than-temporarily impaired and requires the Company to recognize such
impairments as an impairment loss equal to the difference between the
investment's cost and fair value at the reporting date. The Company believes
that the adoption of EITF 03-1 will not have a material effect on its
consolidated financial statements.
FSP 106-2
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003". This FSP supersedes FSP No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" which was issued by the FASB in
January 2004. FSP No. 106-2 provides specific guidance on accounting for the
effects of the Act for employers sponsoring post-retirement health care plans
that provide certain prescription drug benefits. Additionally, this guidance
allows companies who elected to follow the deferral provisions of FSP No. 106-1,
and whose prescription drug benefit plans are actuarially equivalent to the
benefit to be provided under Medicare Part D, to either reflect the effects of
the federal subsidy to be provided by the Act in their financial statements on a
prospective basis or a retroactive basis. The Company determined that at the
U.S. Operating Subsidiary, the prescription drug benefit provided by the U.S.
Operating Subsidiary's post-retirement benefit plan as of the date of the Act's
enactment was at least actuarially equivalent to those of Medicare Part D and,
accordingly, the Company will be entitled to the federal subsidy when it begins
in calendar year 2006. On July 1, 2004, the Company adopted the provisions of
FSP No. 106-2, and applied these provisions on a retroactive basis effective
January 1, 2004. The U.S. Operating Subsidiary calculated the effect of the
Medicare subsidy on its APBO as of December 8, 2003, the date of the Act's
enactment (all other actuarial assumptions determined as of November 30, 2003
were not changed). Based on this calculation, the Company recognized the effects
of the Medicare subsidy on its net periodic post-retirement benefit costs which
reduced this expense by $6 for the year ended December 31, 2004. Accordingly,
the accumulated post-retirement benefit obligation was reduced by $69 as a
result of this subsidiary. Other factors including the discount rate and other
actuarial assumptions mitigated the gain, resulting in an ending benefit
obligation of $882 at December 31, 2004 as a result of this subsidy.
F-22
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
SFAS 151
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151").
This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing", to clarify the accounting for abnormal amounts of idle facility
expense, freight handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS 151 are effective for inventory costs
incurred in fiscal years beginning after June 15, 2005. The company currently
believes that the adoption of SFAS 151 will not have a material effect on its
consolidated financial statements.
SFAS 153
In November 2004, the FASB issued SFAS No. 153 "Exchange of Nonmonetary Assets -
An Amendment of APB Opinion No. 29" ("FAS 153"). The provisions of this
statement are effective for non monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. This statement eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with a
general exception for exchange transactions that do not have commercial
substance - that is, transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. The Company currently
believes that the adoption of FAS 153 will not have a material effect on its
consolidated financial statements.
EITF 03-13
In November 2004, the EITF reached a consensus on Issue No. 03-13, "Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to
Report Discontinued Operations" ("EITF 03-13"). The guidance should be applied
to a component of an enterprise that is either disposed of or classified as held
for sale in fiscal periods beginning after December 15, 2004. The Company
currently believes that the adoption of EITF 03-13 will not have a material
effect on its consolidated financial statements.
SFAS 123R
In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)),
"Share-Based Payment," SFAS No. 123(R) replaces SFAS No. 123, "Accounting for
stock Issued to Employees," and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees". SFAS 123(R) requires that compensation costs
relating to share-based payment transactions be recognized in the consolidated
financial statements. Compensation costs will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) is effective as
of the first interim or annual reporting period that begins after June 15, 2005.
The Company is currently evaluating the provisions of SFAS 123(R) and has not
yet determined its impact on the Company's financial condition, results of
operations and cash flows.
F-23
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 3: ACQUISITIONS
A key element of the Company's strategy is to achieve growth through
acquisitions. The acquisitions provide for more significant presence in
economies that are expected to experience above average growth in steel
consumption.
On January 31, 2003, the Company acquired 7,710,973 existing shares and 924,384
newly issued shares of Ispat Nova Hut, representing 69.7% of the total issued
share capital of Ispat Nova Hut, as well as certain of its debts for $52 under
an agreement with Fond narodniho majetku Ceske republiky ("FNM"). Ispat Nova
Hut, operating in the Czech Republic, is in the business of production and sale
of steel products and also owns various ancillary businesses to support the
steel business. The Company acquired a further 573,294 shares of Ispat Nova Hut,
representing 4.6% of the total issued share capital of Ispat Nova Hut, under a
public offer, on November 21, 2003 for approximately $6. The minority interest
and negative goodwill has been adjusted accordingly, as shown below. During
2004, the Company acquired an additional 1.38% of the outstanding shares of
Ispat Nova Hut. The transaction was accounted for as a step acquisition under
the purchase method. The purchase price of these shares was approximately $11
which was paid from internally generated funds. As of December 31, 2004, the
Company has an option, subject to certain restrictions for the purchase of 8.6%
of the outstanding share capital of Ispat Nova Hut. The excess of the
acquisition cost over the fair value of the net assets purchased was
approximately $4. The results of Ispat Nova Hut have been included in the
consolidated financial statements since January 31, 2003. The valuation of
acquired assets and liabilities has been completed and such amounts are
reflected in the consolidated financial statements as of December 31, 2003 and
2004.
On July 9, 2003, the Company acquired 5,782,596 shares of Ispat Tepro, which is
in the business of production and sale of steel products in the Republic of
Romania, representing 70.8% of its total issued capital, for $0.8 under an
agreement with the Authority for Privatization and Management of State Holdings
("APAPS"). The Company has paid $0.3 with the balance $0.5 payable at the end of
18 months. The Company also has an option to acquire additional shares under a
debt equity swap for $0.8, which will, if exercised, increase the shareholding
of the Company in Ispat Tepro to approximately 83%. The results of Ispat Tepro
have been included in the consolidated financial statements since the date of
acquisition. The Company has completed its valuation of the acquired assets and
liabilities during 2004 and such amounts are reflected in the consolidated
financial statements as of December 31, 2004.
The Company acquired an additional 59,981,037 shares of Ispat Sidex,
representing 7.8% of the total issued share capital of Ispat Sidex, under a
compulsory offer, closed on September 23, 2003 for $26, increasing the Company's
ownership to 99.4%. The Company acquired its initial ownership in 91.6% of Ispat
Sidex's total issued outstanding share capital in November 2001. The acquisition
of the minority interest was accounted for under the purchase method of
accounting and resulted in negative goodwill of $35. The negative goodwill has
been allocated to the fair value of the tangible fixed assets acquired. Ispat
Sidex is located in the Republic of Romania and is in the business of production
and sale of steel and steel related products. The Company completed its
valuation of the acquired assets and liabilities during 2003 and such amounts
are reflected in the consolidated financial statements as of December 31, 2003
and 2004.
On December 19, 2003, the Company acquired 10,077,565 shares of Ispat Petrotub,
which is in the business of production and sale of steel products in the
Republic of Romania, representing 69.8% of the total issued capital of Ispat
Petrotub, for $6 under an agreement with APAPS. The Company has paid $2 and the
remaining balance of $4 is payable at the end of 18 months. The results of Ispat
Petrotub have been included in the consolidated financial statements since the
date of acquisition. The Company has completed its valuation of the acquired
assets and liabilities during 2004 and such amounts are reflected in the
consolidated financial statements as of December 31, 2004.
F-24
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
On March 5, 2004, the Company acquired a 69% interest in the total issued
capital of Polskie Huty Stali Spoka Akcyjna ("PHS"), a steel manufacturing
company in the Republic of Poland, from the State Treasury of the Republic of
Poland. In conjunction with the acquisition of the controlling interest in PHS,
the Company irrevocably committed to purchase an additional 25% interest by
December 2007. Simultaneously, the Polish state authorities, who currently hold
these shares, have irrevocably committed to sell this additional 25% interest in
PHS to the Company. Because the irrevocable commitments transfer operational and
economic control of these remaining shares, it has been accounted for as an
acquisition of the remaining shares, with a liability recorded equal to the fair
value of the guaranteed payments. As of the acquisition date, the Company's
total effective ownership percentage in PHS was 94.0%. The total purchase price
for PHS, including acquisition costs, was $519, which was funded though a
combination of cash, debt and the liabilities recorded under the acquisition
agreement. The results of PHS have been included in the consolidated financial
statements since March 2004. The Company has also committed to make capital
expenditures of $662 over a period ending by December 2009. Subsequent to
acquisition of the controlling interest in PHS, the Company renamed PHS to Ispat
Polska Stali. In addition, the Company increased its ownership percentage to
97.4% at December 31, 2004 through the purchase of additional shares held by
current and former employees for cash consideration of $26. The acquisition of
the minority interest was accounted for under the purchase method of accounting.
Ispat Polska, one of the largest steel producers in Central and Eastern Europe,
produces a wide range of steel products and owns various ancillary businesses to
support the steel business. The Company has completed its valuation of the
acquired assets and liabilities during 2004.
On December 10, 2004, the Company acquired a 51% interest in BH Steel Zeljezara
Zenica LLC ("BH Steel"), a steel manufacturing company located in Bosnia and
Herzegovina, for $80 from the Government of the Federation of Bosnia and
Herzegovina and Kuwait Consulting & Investment Co. ("KCIC"). In conjunction with
the acquisition of the controlling interest in BH Steel, the Company irrevocably
committed to purchase the additional 49% interest in the total outstanding
capital by November 2006. Simultaneously, KCIC, which holds these shares at
December 31, 2004, has irrevocably committed to sell this 49% interest in BH
Steel to the Company for $98. Because the irrevocable commitments transfer
operational and economic control of these remaining shares, it has been
accounted for as an acquisition of the remaining shares, with a liability
recorded equal to the fair value of the guaranteed payments. As of the
acquisition date, the Company's total effective ownership percentage in BH Steel
was 100%. The results of BH Steel have been included in the consolidated
financial statements since December 2004. On February 9, 2005, the Company
received notice that KCIC was exercising its put option under the agreement and
thereby selling its stake to the Company for $98. In connection with the
acquisition, the Company has committed to make capital expenditures of $135 over
a 10 year period. The Company is in the process of finalizing its valuation for
certain assets of BH Steel to assist it in allocating the purchase price to the
individual assets acquired and liabilities assumed. The preliminary allocation
of the purchase price included in the current period balance sheet is based on
the Company's current best estimate and is subject to revision based on final
determination of fair value. The Company anticipates that the valuation will be
completed prior to the anniversary date of the BH Steel acquisition. This may
result in adjustments to the purchase price allocation for BH Steel.
The above acquisitions were all accounted for by the purchase method of
accounting. The purchase price was allocated based on the estimated fair values
of the assets acquired and the liabilities assumed.
With respect to the above acquisitions, the table presented below summarizes the
estimated fair value of the assets acquired and liabilities assumed at the date
of acquisition. Based on the difference between the purchase price (including
acquisition costs) and the fair value to the assets acquired and the liabilities
assumed, based on exchange rates at the acquisition dates, the negative goodwill
is treated as disclosed below.
F-25
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
---------------------------------------------------------------------------------
2003 ACQUISITIONS 2004 ACQUISITIONS
ISPAT ISPAT ISPAT ISPAT
NOVA HUT TEPRO PETROTUB POLSKA BH STEEL
---------------------------------------------------------------------------------
Current assets $ 476 $ 5 $ 27 $ 864 $ 127
Property, plant & 968 7 58 1,758 216
equipment
Other assets 24 1 -- 52 1
---------------------------------------------------------------------------------
Total Assets $ 1,468 $ 13 $ 85 $ 2,674 $ 344
---------------------------------------------------------------------------------
Current liabilities $ 287 $ 9 $ 46 $ 669 $ 31
Long term loan 282 -- 20 48 38
Other long term 14 -- 2 337 12
liabilities
Deferred tax liabilities 12 -- -- 90 --
Minority interest 11 -- -- 34 --
---------------------------------------------------------------------------------
Total Liabilities 606 9 68 1,178 81
---------------------------------------------------------------------------------
Total Net Assets $ 862 $ 4 $ 17 $ 1,496 $ 263
---------------------------------------------------------------------------------
Minority interest $ 121 $ 1 $ 5 $ 91 $ --
Net assets acquired 741 3 12 1,405 263
Purchase price (58) (1) (11) (519) (178)
---------------------------------------------------------------------------------
Negative Goodwill $ 683 $ 2 $ 1 $ 886 $ 85
=================================================================================
In the consolidated financial statements, the negative goodwill balances reduced
the value, on a pro-rata basis, of non-current assets acquired, primarily
property, plant and equipment acquired, in accordance with FAS 141.
ACQUISITION OF ISPAT ISCOR
On June 9, 2004 after obtaining the necessary shareholder and the Republic of
South Africa Competition Tribunal approvals, the Company purchased an additional
2,000 shares in Ispat Iscor (formerly Iscor Limited) on the open market. The
2004 purchase increased the Company's 49.99% ownership in the outstanding share
capital of Ispat Iscor at December 31, 2003 to greater than 50%, and provided
the Company with effective control over Ispat Iscor's operations. The Company
had historically accounted for Ispat Iscor under the equity method of
accounting. A publicly traded company whose shares trade on the JSE Securities
Exchange, South Africa, Ispat Iscor is an integrated steel producer in the
Republic of South Africa and is comprised of four steel plants and a
metallurgical by-products processing division. The Company has included the
results of operations of Ispat Iscor in its Consolidated Statements of Income
for the year-ended December 31, 2004 as though it had been acquired at the
beginning of the year and deducted the pre-acquisition earnings as part of the
Company's minority interest.
The Company's investment in Ispat Iscor was accounted for under the equity
method of accounting from 2001 through 2003, and each of the Company's
investments in the outstanding shares of Ispat Iscor were accounted for as a
step acquisition under the purchase method of accounting. During 2001, the
Company
F-26
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
made an initial 8.26% investment in the outstanding shares of Ispat Iscor,
increasing its ownership percentage in both 2002 and 2003 through additional
share purchases on the open market and as part of a rights issue by Ispat Iscor.
The accounting treatment of the additional investment was in accordance with
Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for
Investments in Common Stock" ("APB 18"). Accordingly, in 2002 the Company
retroactively restated its investment in Iscor on the equity method of
accounting and recorded its ownership percentage of Iscor's income which
amounted to $95 in 2002 and $112 in 2003. At December 31, 2003, the Company had
a recorded equity-method investment in Ispat Iscor of $581.
In accordance with FAS 141, the acquisition of common shares of Ispat Iscor
prior to 2003 resulted in negative goodwill of $118 and $38 in 2002 and 2001,
respectively, based on the exchange rates at the acquisition dates. The negative
goodwill has been allocated to the underlying acquired non-current assets,
primarily property, plant and equipment, on a pro rata basis. Accordingly, the
related impact on depreciation on the Company's allocated share of Ispat Iscor's
property, plant and equipment has been adjusted, which is reflected in the
income from equity method investment in the Consolidated Statements of Income
for the years 2002 and 2003. The related impact on depreciation in 2004 is
reflected in depreciation expense. The acquisition of common shares of Ispat
Iscor in 2003 resulted in goodwill of $78, based on exchange rates at the
acquisition dates. The purchase of the 2,000 additional shares in 2004 had no
material impact on goodwill.
The allocation of the total purchase price of Ispat Iscor resulted in the
consolidation of total assets of $2,296 and total liabilities of $866. Total
assets are comprised of $835 in current assets, $1,220 in property, plant and
equipment and other non-current assets, including goodwill, of $241. Total
liabilities include $498 in current liabilities and $368 in non-current
liabilities. The negative goodwill amounts from each of the step acquisitions
reduced the value, on a pro-rata basis, of non-current assets acquired,
primarily property, plant and equipment acquired, in accordance with FAS 141.
OTHER 2004 ACQUISITIONS
During 2004, the Company acquired controlling interest and formed a joint
venture in various steel manufacturing and mining operations in Eastern Europe
for a combined purchase price, including acquisition costs, of $50 and the
assumption of certain liabilities of a seller of $52, each based on exchange
rates at the acquisition dates. The estimated fair value of assets acquired and
liabilities assumed at the date of acquisition was $95. In addition, the Company
has committed to certain capital investments over future periods with respect to
these acquisitions, which in total are not significant. The results of these
entities have been included in the consolidated financial statements since their
effective dates of acquisition. The Company is in the process of finalizing its
valuations for certain assets to assist in allocating the purchase price to the
individual assets acquired and liabilities assumed. The preliminary allocations
of the purchase price included in the current period balance sheet are based on
the Company's current best estimates and are subject to revision based on final
determination of fair values. The Company anticipates that the valuations and
other studies will be completed prior to the anniversary date of the
acquisitions. This may result in adjustments to the initial purchase price
allocation.
F-27
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
UNAUDITED PRO FORMA RESULTS
The following un-audited pro forma data for the Company includes the results of
operations of Ispat Nova Hut, Ispat Tepro, Ispat Petrotub, Ispat Polska, Ispat
Iscor, BH Steel and the Company's other 2004 acquisitions, as discussed above,
as if the acquisitions had been consummated as the beginning of 2003. The
unaudited pro forma data is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations.
---------------------------
UNAUDITED
PRO FORMA PRO FORMA
2003 2004
---------------------------
Sales $14,724 $22,818
Net Income 1,307 4,704
Earning per Common share - basic and diluted 2.02 7.32
F-28
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 4: INVENTORIES
Inventory, net of allowance for slow moving or obsolete inventory of $146 and
$244 at December 31, 2003 and 2004, respectively are comprised of the following
at December 31:
2003 2004
------ ------
Finished products $ 509 $1,095
Production in process 357 996
Raw materials 444 1,423
Manufacturing supplies, spare parts and other 277 499
------ ------
$1,587 $4,013
====== ======
F-29
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
-----------------------------------------------------------------------------------------
MACHINERY COAL
BUILDINGS AND AND CONSTRUCTION PRODUCTION
LAND IMPROVEMENTS EQUIPMENT IN PROCESS ASSETS TOTAL
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003
Gross value $ 131 $ 1,140 $ 6,048 $ 247 $ 206 $ 7,772
Accumulated depreciation -- (518) (2,475) -- (125) (3,118)
-----------------------------------------------------------------------------------------
NET CARRYING VALUE $ 131 $ 622 $ 3,573 $ 247 $ 81 $ 4,654
=========================================================================================
BALANCE AT DECEMBER 31, 2004
Gross value $ 202 $ 1,917 $ 8,577 $ 458 $ 234 $ 11,388
Accumulated depreciation -- (636) (3,039) -- (151) (3,826)
-----------------------------------------------------------------------------------------
NET CARRYING VALUE $ 202 $ 1,281 $ 5,538 $ 458 $ 83 $ 7,562
=========================================================================================
F-30
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 6: INVESTMENTS IN AFFILIATES AND JOINT VENTURES
The Company's investments in affiliates and joint ventures, which include joint
ventures accounted for using the equity method, are as follows:
OWNERSHIP
PERCENTAGES
OPERATING DECEMBER 31, TYPE OF DECEMBER 31,
INVESTEE ACTIVITY 2004 OWNERSHIP 2003 2004
---------------------------------------- ---------------------- ------------ ------------- ------- ------
EQUITY METHOD INVESTMENTS:
LOCATED IN U.S.
Empire Iron Mining Partnership Taconite/
(`E.I.M.P.')............................. Pellets 21% Partnership $ -- $ --
PCI Associates........................... Pulverized coal 50% Partnership 22 22
I/N Tek(1)............................... Cold rolling 60% Partnership 51 62
I/N Kote................................. Galvanizing 50% Partnership 141 146
LOCATED IN MEXICO
Consorcio Minero
Benito Juarez Mining and
Pena Colorada S.A. de C.V. palletizing
("Pena Colorada")......................... plant 50% Common stock 4 13
Servicios Siderurgicos Integrados, S.A. Port operations,
de C.V. ("Sersiin")....................... lime, industrial gases
and engineering
workshop 50% Common stock 9 8
LOCATED IN CANADA
Sorevco................................... Galvanizing plant 50% Limited 7 7
partnership
Delta Tube................................ Tubes 40% Limited 2 1
partnership
LOCATED IN GERMANY
Westfalische Drahtindustrie GmbH ("WDI")... Wire drawing 33.3% Common stock 12 15
LOCATED IN SOUTH AFRICA
Ispat Iscor(2)............................. Integrated steel plant 50.01% Common shares 581 -
Macsteel International Holdings B.V.(3).... Trading activities for
Ispat Iscor 50% Partnership -- 93
Other equity method investment............. -- -- -- -- 86
------- ------
829 453
------- ------
AVAILABLE FOR SALE SECURITY(4):
Equity security 44 55
Unrealized gain............................. -- -- -- 69 135
------- ------
Fair value.................................. -- -- -- 113 190
------- ------
OTHER INVESTMENTS:
Other....................................... -- -- -- 25 24
------- ------
$ 967 $ 667
======= ======
(1) I/N Tek, a general partnership formed for a joint venture between the
Company and Nippon Steel Corporation ("NSC"), owns and operates a
cold-rolling facility. I/N Tek is 60% owned by a wholly owned
subsidiary of the Company and 40% owned by an indirect wholly owned
subsidiary of NSC. Under the tolling arrangement the Company was
charged $142, $137 and $149 for such tolling services for the years
ended December 31, 2002, 2003 and 2004, respectively. The Company has
rights to the
F-31
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
productive capacity of the facility, except in certain limited
circumstances and has an obligation to use the facility for the
production of cold rolled steel, under a tolling arrangement with I/N
Tek. The Company does not exercise control over I/N Tek as all
significant management decisions of the joint venture require agreement
by both the partners. Due to this lack of control by the Company, the
Company accounts for its investment in I/N Tek under the equity method.
(2) As more fully discussed in note 3, the Company purchased an additional
2,000 shares of Ispat Iscor on June 9, 2004, taking the Company's
ownership percentage in the outstanding share capital of Ispat Iscor to
greater than 50%. During 2004 Ispat Iscor has been consolidated by the
Company. Prior to 2004, the Company accounted for its investment in
Iscor on the equity method of accounting. As a publicly traded Company,
the Company's investment in Ispat Iscor has an aggregate market value
of $965 at December 31, 2003. During 2003 and 2002, the Company
recorded its ownership percentage of Ispat Iscor's income which
amounted to $112 and $95, respectively. Prior to 2004, the consolidated
financial statements of Ispat Iscor were prepared under International
Financial Reporting Standards ("IFRS") and reconciled to US GAAP. The
income on equity method investments is based on Ispat Iscor's US GAAP
results of operations for the years ended December 31, 2003 and 2002.
The 2002 and 2003 financial statements of Ispat Iscor, prepared in
accordance with IFRS and the accompanying reconciliation to US GAAP,
have been restated on November 26, 2004. This restatement had no effect
on the US GAAP results of operations or shareholders' equity of Ispat
Iscor or the Company in any period presented. In November 2001, the
Company entered into a Business Assistance Agreement ("BAA") with Ispat
Iscor. The BAA is a performance based agreement which covers a three
year period up through December 31, 2004. Under the terms of the BAA,
the Company has undertaken to provide Ispat Iscor with business,
technical, procurement and marketing assistance, devise operational
improvements to sustain annual savings, and invest a minimum of $75 in
market purchases of Iscor before March 2003. Remuneration for the
Company's business assistance is performance based, linked to a scale
of cost savings targets. Settlement was initially provided for by the
issue of Ispat Iscor shares, but the BAA was amended in December 2003
to provide for settlement by way of either issue of shares or payment
of cash. During 2003, the Company received cash remuneration from Ispat
Iscor in the amount of $94, of which $47 was recorded as other income
and $47 as income from equity investment to properly eliminate the
effect of intercompany transactions in accordance with APB No. 18.
During 2004, the Company received $114 in cash remuneration from Ispat
Iscor under the BAA, the effects of which have been eliminated upon
consolidation after giving effect to minority interest shareholders.
(3) Macsteel International Holdings B.V. ("Macsteel") is an equity method
investment owned by Ispat Iscor. Ispat Iscor's steel products are
marketed internationally through Macsteel, a joint venture in which the
Ispat Iscor holds a non-controlling 50% interest. The Company
recognized $51 in equity income from Macsteel in 2004. Transactions
between the Company and its operating subsidiaries, Macsteel, as well
as with the Company's other equity method investees, have been
eliminated as if the investments were a consolidated subsidiary, in
accordance with APB No. 18.
(4) At December 31, 2003 and 2004, the Company owns approximately 8.6% of
the outstanding shares of Eregli Denirve Fabrikal ("Eregli"), the
largest iron and steel producer in the Republic of Turkey. Eregli is
publicly traded on the Istanbul Stock Exchange.
F-32
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Summary condensed information, in the aggregate, of the Company's investments
accounted for using the equity method is disclosed as follows:
DECEMBER 31,
2002 2003 2004
------ ------ ------
CONDENSED STATEMENT OF INCOME DATA
Gross revenue........................................ $2,836 $3,734 $2,128
Gross profit......................................... 516 668 150
Net income........................................... 219 297 90
AT DECEMBER 31,
2003 2004
------ ------
CONDENSED BALANCE SHEET DATA
Current assets...................... $1,181 $ 559
Total assets........................ 3,801 1,565
Current liabilities................. 886 606
Total liabilities................... 1,671 1,078
Net assets.......................... 2,130 487
The U.S. Operating Subsidiary and NSC own and operate another joint venture
which consists of a 500,000 ton electro galvanizing line and a 500,000 ton
hot-dip galvanizing line adjacent to the I/N Tek facility. I/N Kote, the general
partnership formed for this joint venture, is owned 50% by a wholly owned
subsidiary of the U.S. Operating Subsidiary and 50% by an indirect wholly owned
subsidiary of NSC. The U.S. Operating Subsidiary and NSC each have guaranteed
the share of long-term financing attributable to their respective subsidiary's
interest in the partnership. I/N Kote had $109 and $81 outstanding under its
long-term financing agreement at December 31, 2003 and 2004, respectively. I/N
Kote is required to buy all of its cold rolled steel from the U.S. Operating
Subsidiary, which is required to furnish such cold rolled steel at a price that
results in an annual return on equity to the partners of I/N Kote, depending
upon operating levels, of up to 10% after operating and financing costs. This
price may be subject to an adjustment ("return on sales adjustment" or "ROS
adjustment") if the U.S. Operating Subsidiary's return on sales ("ROS") differs
from I/N Kote's ROS, as defined in the Substrate Supply Agreement. As further
outlined in the Substrate Supply Agreement, the component (memo account
adjustment) of any ROS adjustment which results in negative ROS for I/N Kote
will be returned to the U.S. Operating Subsidiary and NSC in an amount
prescribed by a formula in the Substrate Supply Agreement if the U.S. Operating
Subsidiary's ROS is greater than I/N Kote's ROS in subsequent years. The U.S.
Operating Subsidiary recorded sales of cold rolled steel to I/N Kote of $349,
$343, and $323 for the years ended December 31, 2002, 2003 and 2004,
respectively. Prices of cold rolled steel sold by the U.S. Operating Subsidiary
to I/N Kote are determined pursuant to the terms of the joint venture agreement
and are based, in part, on operating costs of the partnership. In 2002, 2003 and
2004, the U.S. Operating Subsidiary sold cold rolled steel to I/N Kote at prices
that exceeded the U.S. Operating Subsidiary's production costs but were less
than the market prices for cold rolled steel products. The U.S. Operating
Subsidiary sells all I/N Kote products that are distributed in North America.
The U.S. Operating Subsidiary receives a 1% sales commission on I/N Kote sales
for which it earned $5 for each of the years ended December 31, 2004, 2003 and
2002.
During 2002, 2003 and 2004, certain conditions (as defined in the Substrate
Supply Agreement) were met resulting in either a memo account or ROS adjustment
being realized by the U.S. Operating Subsidiary. The U.S. Operating Subsidiary's
consolidated financial statements reflect a net adjustment of approximately $2,
$7 and ($19) for the years ended December 31, 2002, 2003 and 2004, respectively.
The memo account adjustment decreased the aggregate substrate price for 2004
while ROS adjustments increased the aggregate substrate price for 2002 and 2003
resulting in the U.S. Operating Subsidiary's return on sales being equal to the
return on sales of I/N Kote. As of December 31, 2004, the balance in the memo
account is $10. At December 31, 2003, the U.S. Operating Subsidiary recorded a
payable of $1 to I/N Kote for the excess of the ROS adjustment over than the
return of capital and annual equity return of the partners. At December 31,
2004, the U.S. Operating Subsidiary recorded a receivable from I/N Kote of
approximately $24, representing their portion of the 2004 memo account
adjustment and annual equity return.
F-33
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
During the development of the I/N Tek and I/N Kote joint ventures and to meet
ongoing capital needs, the U.S. Operating Subsidiary has loaned money to the
joint ventures. These partner loans are included in "Investments in Affiliates
and Joint Ventures" in the balance sheet. The outstanding balance of the I/N Tek
partner loans was $17 and $16 at December 31, 2003 and 2004, respectively. The
U.S. Operating Subsidiary recorded interest income related to the I/N Tek loans
of $1 for each of the years ended December 31, 2002, 2003 and 2004,
respectively. The outstanding balance of the I/N Kote partner loans was $27 and
$22 at December 31, 2003 and 2004, respectively. The U.S. Operating Subsidiary
recorded interest income on the I/N Kote loans of $1 for each of the years ended
December 31, 2002, 2003 and 2004, respectively. In the fourth quarter of 2002,
the terms of each of the I/N Tek and I/N Kote partnerships were extended through
December 31, 2021.
F-34
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 7: BALANCES AND TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties, all of which are affiliates and joint
ventures of the Company were as follows:
YEAR ENDED DECEMBER 31,
2002 2003 2004
------ ------ ------
TRANSACTIONS
PURCHASES OF RAW MATERIAL & OTHERS:
Pena Colorada.................................. $ 33 $ 44 $ 34
Sersiin........................................ 18 12 9
E.I.M.P........................................ 102 101 153
PCI Associates (Tolling fee)................... 34 32 57
Orind Refractories............................. 23 33 46
Cal. del. Balsas............................... -- -- 16
I/N Tek (Tolling charges)...................... 142 137 149
Lindsay International Pvt Ltd. ................ 20 32 40
Alkharsh International Pvt Ltd. ............... 2 2 --
M.G. Odra Gas................................. -- 9 9
Topham Eisen-und Stahlhandelsges............... -- 1 --
Corp. del. Balsas.............................. 3 2 5
Thyssen Trade Praha............................ -- 21 6
Trans Ispat.................................... 67 -- --
Czech Slag-Nova Hut............................ -- 2 --
TEGA........................................... -- -- 3
Polski Koks.................................... -- -- 372
Zaklad......................................... -- -- 40
Alkat.......................................... -- -- 26
Krakodlew...................................... -- -- 18
Stalprofil..................................... -- -- 12
Przedsibiorsti................................. -- -- 6
Other.......................................... 3 3 20
SALES:
Macsteel International Holdings BV............. $ -- $ -- $1,047
WDI............................................ 100 115 195
Sorevco........................................ 44 43 --
I/N Kote....................................... 349 343 323
P.T Ispat Indo/Glacier Trade Centre............ 5 20 1
Alpos.......................................... -- 12 18
M.G. Odra Gas.................................. -- 6 7
Topham Eisen-und Stahlhandelsges............... -- 22 45
Polish Steel Products.......................... -- -- 9
Sersiin........................................ 2 -- --
TEGA........................................... -- -- 6
SECO........................................... -- -- 1
Polski Koks.................................... -- -- 325
Zaklad......................................... -- -- 86
Alkat.......................................... -- -- 21
Krakodlew...................................... -- -- 14
Stalprofil..................................... -- -- 90
Valcovnia Plecku............................... -- -- 8
LK Advisers*................................... 0 0 0
Consolidated Wire Industries (Pty) Ltd.. ...... -- -- 26
Other.......................................... 7 -- 13
*Amounts are $0.1, $0.2 and $0.2 for the years 2002, 2003 and 2004
F-35
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
YEAR ENDED DECEMBER 31,
2003 2004
--- ---
RECEIVABLES:
WDI.......................................... $33 $34
Macsteel International Holdings B.V.......... -- 62
Orind International.......................... 1 1
I/N Tek...................................... 15 16
I/N Kote..................................... 13 33
P.T. Ispat Indo/Glacier Trade Centre......... 3 3
Alpos........................................ 7 7
Nova Hut Hungari............................. 8 --
Topham Eisen-und Stahlhandelsges............. 1 1
M.G. Odra Gas................................ 3 --
Corp. del. Balsas............................ 1 --
TEGA......................................... -- 1
Polski Koks.................................. -- 50
Stalprofil................................... -- 13
Zaklad....................................... -- 10
Barmet....................................... -- 2
Others....................................... 4 8
PAYABLES:
Pena Colorada................................ $10 $16
Sersiin...................................... 14 22
PCI Associates............................... 8 15
Orind Refractories........................... 9 14
Lindsay International Pvt Ltd. .............. 2 4
Alkharsh International Pvt Ltd.. ............ 1 1
Bulk Lehar................................... 3 2
M.G. Odra Gas................................ 3 2
Thyssen Trade Praha.......................... 1 --
Slapmet...................................... 6 --
Corp. Del Balsas............................. -- 3
Cal. Del Balsas.............................. -- 2
Polski Koks.................................. -- 58
Stalprofil................................... -- --
Zaklad....................................... -- 3
PL Technology................................ -- 3
Krakodlew.................................... -- 2
Other........................................ 1 6
LONG TERM DEBT FROM AFFILIATES/SHAREHOLDERS:
Richmond Investment Holdings Limited.......... $94 $--
F-36
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 8: PAYABLE TO BANKS
Payable to banks include borrowings and overdraft.
The Company has the following outstanding under such bank lines, working capital
facilities and revolving credit facilities:
AT DECEMBER 31,
2003 2004
----- ----
Presented under current liabilities (includes overdraft of $95 in 2003 and $65 in 2004) $ 244 $237
These facilities do not include securitizations and factoring of receivables,
which are discussed in note 23.
The credit facilities provide for borrowing at various interest rates and
support letters of credit in addition to providing borrowings to fund local
working capital requirements at the Operating Subsidiaries. Weighted-average
interest rate on the bank lines, working capital facilities and temporary
overdrafts ranged from 2.2% to 6.5% in 2003 and 2.0% to 8.7% in 2004.
Certain of the credit facilities contain restrictive covenants that (i) require
the Company's subsidiaries to comply with certain financial maintenance tests
including the ratio of current assets to current liabilities and the ratio of
total liabilities to total capital; (ii) require the maintenance of specified
levels of net worth, (iii) prohibit subsidiaries from entering into agreements
that restrict their ability to pay dividends and (iv) limit the payment of
dividends (see note 11).
Certain of the lines of credit are collateralized by current assets and
property, plant and equipment with a net carrying value of $258 at December 31,
2004 (2003: $810).
F-37
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 9: DIVIDEND PAYABLE
On October 11, 2004, LNM Holdings declared a dividend of $2,000 to its then sole
shareholder The Richmond Investment Holdings Limited. During 2004, LNM Holdings
has made dividend payments totalling $350 against this. The Company intends to
pay the outstanding amount in 2005.
F-38
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 10: ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses were comprised of the following at December 31:
2003 2004
------ ------
Accrued taxes payable........ $ 120 $ 597
Others....................... 676 1,710
------ ------
$ 796 $2,307
====== ======
ACCRUE EMPLOYEE TERMINATION COSTS
Prior to the acquisition of the controlling interest is Ispat Polska, Ispat
Polska entered into a head count reduction plan in order to comply with the Act
on Restructuring of Polish Steel Industry dated August 12, 2001 and Protocol 8
of the Republic of Poland Accession Treaty to the European Union. As part of the
acquisition of the controlling interest in Ispat Polska, the Company agreed to
provide certain entitlements for personnel whose employment with the Company
will be terminated in conjunction with required restructuring plans. In total,
the Company plans on terminating approximately 3,500 employees under the
head-count reduction plan. The total cost expected to be incurred relating to
this head-count reduction plan has been recorded at its present value as part of
the Company's initial purchase price allocation of its acquisition of Ispat
Polska. The components of the accrued employee termination cost, of which $85 is
included in accrued expenses and other liabilities and $21 is included in other
long-term obligations, are as follow:
2004
-----
Balance at March 5, 2004...................... $ 84
Cash payments............................... (12)
Interest expense.............................. 8
Foreign currency exchange..................... 26
-----
Balance remaining at December 31, 2004........ $ 106
=====
F-39
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 11: LONG-TERM DEBT
Long-term debt, denominated in U.S. Dollars unless otherwise noted, is comprised
of the following as of December 31:
2003 2004
------ ------
ISPAT INLAND
First Mortgage Bonds:
Series Y, due April 1, 2010....................................................... $ -- $ 150
Series Z, 9.75%, due April 1, 2014................................................ -- 419
Series U, Tranche B, $350, due July 16, 2005...................................... 331 --
Series U, Tranche C, $350, due July 16, 2006...................................... 331 --
Series R, 7.9% due January 15, 2007............................................... 28 28
Pollution Control Series 1977, 5.75% due February 1, 2007......................... 19 18
Pollution Control Series 1993, 6.8% due June 1, 2013.............................. 25 25
Pollution Control Series 1995, 6.85% due December, 2012........................... 12 12
Industrial Development Revenue Bonds
Pollution Control Project No 11, 7.125 % due June 1, 2007......................... 15 15
Pollution Control Project No 13, 7.250% due November 1, 2011...................... 32 32
Exempt Facilities Project No 14, 6.7% due November 1, 2012........................ 3 3
Exempt Facilities Project No 15, 5.75% due October 1, 2011........................ 47 47
Exempt Facilities Project No 16, 7% due January 1, 2014........................... 2 2
Revolving Credit Facilities - 2% to 4%............................................ 240 --
MITTAL STEEL LAZARO
Bank loans denominated in U.S. Dollars, floating interest......................... 348 --
Senior Structured Export Certificates, 10.625%.................................... 41 --
Export-Import Bank of the U.S., LIBOR plus 0.30%.................................. 29 --
MITTAL CANADA
Senior Secured Credit Facilities(1):
Tranche B, $125, LIBOR plus 1.75%-4.55%........................................... 118 --
Tranche C, $125, LIBOR plus 2.25%-5.05%........................................... 118 --
Revolving credit facility......................................................... -- 92
Other............................................................................. -- 2
MITTAL STEEL POINT LISAS
Senior Secured Notes, 10.4%....................................................... 88 36
International Finance Corporation, LIBOR plus 3.25% - 3.38%....................... 13 --
Others............................................................................ 5 1
MITTAL STEEL EUROPE
Senior Secured Notes Euro 150 million, due February 1, 2011, 11.875%.............. 137 95
MITTAL STEEL TEMIRTAU
Secured loans from financial institutions......................................... 38 25
MITTAL STEEL ANNABA
Loan from Government of the Republic of Algeria................................... 143 150
Loan from financial institution................................................... -- 25
MITTAL STEEL GALATI
Loans from banks guaranteed by the Government of Romania.......................... 17 17
Others............................................................................ 1 --
F-40
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
MITTAL STEEL OSTRAVA
Secured syndicate loan from Czech Banks - denominated in CZK...................... 47 --
Secured syndicate loans from Financial Institutions............................... 119 --
Secured syndicate loans from Financial Institutions - denominated in Euros........ 129 --
Loan from a Bank - denominated in CZK............................................. 13 14
Others............................................................................ 10 12
MITTAL STEEL SOUTH AFRICA
Unsecured loan from a third party - denominated in ZAR............................ -- 17
MITTAL STEEL POLAND
Loan from a bank.................................................................. -- 13
Loan from a bank - denominated in PLN............................................. -- 48
Loan from a bank - denominated in Euros........................................... -- 3
MITTAL STEEL SKOPJE
Loan from a bank - denominated in Euros........................................... -- 2
Loan from a bank - denominated in MKD............................................. -- 6
MITTAL STEEL ZENICA
Secured loans from banks - denominated in Euros................................... -- 46
MITTAL STEEL ROMAN
Secured loan from a Bank.......................................................... 14 15
Secured loan from a Bank - denominated in Euros................................... 24 22
OTHER
Shipping Subsidiaries........................................................... 19 8
Hire Purchase from a Financial Institution...................................... 33 --
Secured Loan from a Financial Institution....................................... 100 83
Secured loan from a consortium of financial institutions........................ -- 100
Revolving line of credit from a consortium of financial institutions............ -- 135
Secured loan from a bank........................................................ 25 --
Other........................................................................... 15 25
------ ------
Total long-term debt including current portion.................................... 2,729 1,743
------ ------
Less current portion of long-term debt............................................ 536 104
------ ------
Total long-term debt.............................................................. $2,193 $1,639
====== ======
----------
(1)Interest rates are contingent on the achievement of certain financial ratios.
ISPAT INLAND
REFINANCED DEBT
FIRST MORTGAGE BONDS
Series U, Tranche B and C (the "Term Loans") are with a syndicate of financial
institutions (the "Term Loan Lenders") for whom Credit Suisse First Boston is
the agent. Each of the Tranche B and Tranche C Loan is repayable in quarterly
instalments of $1 until maturity.
Borrowings under the Term Loans bear interest at a rate per annum equal to, at
the Company's option, (1) the higher of (a) the Agent's prime rate or (b) the
rate which is 0.5 of 1% in excess of the Federal Funds effective rate (together
the "Base Rate"), plus 2.75% or (2) the London Interbank Offered Rates ("LIBOR")
(as defined in the Credit Agreement) plus 3.75%. The fee for the Letter of
Credit ("LC") is 4.00% of the LC amount per annum (the "LC Fee"). The spread
over the LIBOR and Base Rate and the LC Fee will be reduced if the U.S.
Operating Subsidiary's Consolidated Leverage Ratio (as defined in the Credit
Agreement) falls to specified
F-41
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
levels. The effective rate of interest paid on Series U First Mortgage Bonds was
4.9% for the year ended December 31, 2004 (5.1% for the year ended December 31,
2003).
The Company entered into a hedge as required under the agreement. It is a 5 year
interest rate collar based on LIBOR with a floor of 4.50% and a ceiling of 6.26%
on a notional amount of $450. The facilities and the hedge are fully and
unconditionally guaranteed by Ispat International. The hedge expired on October
16, 2003.
A substantial portion of the Company's facilities at its Indiana Harbor Works is
subject to a lien to First Mortgage. This property had a book value of
approximately $1,600 at December 31, 2003.
The U.S. Operating Subsidiary must also maintain a minimum Consolidated Earnings
Before Interest, Taxes, Deprecation and Amortization ("EBITDA"), as defined in
the Credit Agreement. The U.S. Operating Subsidiary was in compliance with this
covenant at December 31, 2003. The Credit Agreement also contains other
covenants that, among other things, prohibit or limit the ability of the Company
or the Borrower to pay dividends and other restricted payments, incur
indebtedness, create liens, engage in transactions with affiliates, sell assets
and engage in mergers and consolidations. Any loans from the Company to its U.S.
Operating Subsidiary cannot be repaid until the U.S. Operating Subsidiary's
leverage falls to specified levels.
PRESENT DEBT
On March 25, 2004, a newly created subsidiary of the Borrower issued $800
principal amount of senior secured notes: $150 of floating rate notes bearing
interest at LIBOR plus 6.75% due April 1, 2010 and $650 of fixed rate notes
bearing interest at 9.75% (issued at 99.212% to yield 9.875%) due April 1, 2014
(the "Senior Secured Notes"). Also on March 25, 2004, the Company issued $800
principal amount of First Mortgage Bonds (Series Y, in a principal amount of
$150, and Series Z, in a principal amount of $650) to Ispat Inland Finance, LLC,
an indirect subsidiary of the Borrower which, in turn, pledged them to the
trustee for the Senior Secured Notes as security. The $776 net proceeds from the
offering were used to retire the entire balance outstanding of $662 of Tranche B
and Tranche C Loans under the Credit Agreement, and repay the entire balance
outstanding of $105 under the inventory revolving credit facility, with the
remainder of the proceeds used to reduce the amount outstanding under the
receivables revolving credit facility. Series U and W First Mortgage Bonds were
retired at the close of the refinancing. The early retirement of the Term Loans
was done at par, without prepayment penalty.
The Senior Secured Notes are also secured by a second position lien on the
inventory of the U.S. Operating Subsidiary. As further credit enhancement, the
Senior Secured Notes are fully and unconditionally guaranteed by the U.S.
Operating Subsidiary, certain subsidiaries of the U.S. Operating Subsidiary,
Mittal Steel and certain other affiliates of the Borrower.
The U.S. Operating Subsidiary is obligated to pay interest on the Series Y First
Mortgage Bonds at the rate paid on the floating rate Secured Notes, plus
one-half of one percent per annum and on the Series Z First Mortgage Bonds at a
rate of 10.25%. The First Mortgage Bonds are solely obligations of the U.S.
Operating Subsidiary and have not been guaranteed or assumed by or, otherwise,
become the obligation of Mittal Steel or any of its other subsidiaries. Each
series of First Mortgage Bonds issued by the U.S. Operating Subsidiary is
limited to the principal amount outstanding, with the Pollution Control Series
1977 Bonds and the Series R First Mortgage Bonds subject to a sinking fund. A
substantial portion of the property, plant and equipment owned by the U.S.
Operating Subsidiary at its Indiana Harbor Works is subject to the lien of the
First Mortgage. This property had a book value of approximately $1,500 on
December 31, 2004.
The terms of the Senior Secured Notes place certain limitations on the ability
of the U.S. Operating Subsidiary and its subsidiaries to, among other things,
(i) incur additional indebtedness, (ii) pay dividends or make other
distributions or repurchase or redeem stock, (iii) make investments, (iv) sell
assets, (v) incur liens, (vi) enter into agreements restricting their
subsidiaries' ability to pay dividends, (vii) enter into transactions with
affiliates, (viii) engage in certain businesses and (ix) consolidate, merge or
sell all or substantially all of its or their assets. The indenture under which
the Senior Secured Notes were issued also contains limitations on the ability of
the Borrower and the guarantors, other than Mittal Steel and those that are not
subsidiaries of the U.S. Operating Subsidiary to, among other things, engage in
business activities, other than performing their
F-42
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
obligations under the indenture, incur additional indebtedness, and pay
dividends. Such indenture also contains limited covenants that are applicable to
Mittal Steel. These limitations are subject to a number of exceptions and
qualifications. The U.S. Operating Subsidiary and Borrower were in compliance
with all covenants on December 31, 2004.
On December 30, 2004, the U.S. Operating Subsidiary redeemed $228 principal
amount of its 9.75% senior secured Series Z notes due 2014, at a redemption
price equal to 109.75% of the outstanding principal amount redeemed, plus
accrued and unpaid interest on such amount to, but excluding, December 30, 2004.
The U.S. Operating Subsidiary recognized a $22 loss on this early redemption of
debt which is included in other expenses. Prior to the redemption of the notes,
Mittal Steel purchased $256 of capital stock of the U.S. Operating Subsidiary.
Consistent with the terms of the senior secured notes, the cash proceeds from
the stock offering were used to redeem the notes. After giving effect to this
redemption, $422 principal amount of the 9.75% senior secured notes due in 2014
remain outstanding.
At December 31, 2004, the restrictions in the indenture for the Senior Secured
Notes and the credit agreement for the Inventory-Backed Revolver on paying
dividends or making other distributions to shareholders and the repurchase or
redemption of stock limited such payments to $340.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
During 2003, Mittal steel purchased $29 (2002: $40) bonds from face value. As a
result of these early redemptions recognized a gain of $14, net of tax $14
(2002: $30, net of tax $19).
REVOLVING CREDIT FACILITIES
Revolving credit facilities are denominated in U.S. Dollars and are from the
chase Manhattan Bank, as agent. The average interest rates on these facilities
range from 2% to 4%. In accordance with SFAS No. 6, "Classification of
Short-Term Obligations Expected to be Refinanced, an amendment of ARB No. 43,
Chapter 3A," and Emerging Issues Task Force 95-22, "Classifications of Borrowing
Outstanding Under a Revolving Credit Agreement that include both a Subjective
Acceleration Clause and a Lock-Box arrangement," amounts outstanding under the
Revolving Credit Facilities have been classified as current liabilities. At
December 31, 2004, based on the amount of eligible collateral, there was
approximately $360 available under the line. Drawings under the line included
$nil of loans and $8 of letters of credit issued for the purchase of commodities
on the international market and as security under various insurance and workers
compensation coverage's.
CONTINGENT LIABILITY
A standby letter of credit in the amount of $160 that expired on July 9, 2003
was provided to the Pension Benefit Guarantee Corporation ("PBGC"), which is
arranged by Credit Suisse First Boston. The letter of credit was not drawn upon.
In July 2003, the Company reached an agreement with the PBGC regarding
alternative security for the $160 letter of credit. The letter of credit was
allowed to expire, and in its place, the Company agreed to contribute $160 to
its pension plan over next two years and pay 50% of excess cash flows as defined
in the agreement with the PBGC to its pension plan. The U.S. Operating
Subsidiary contributed $50 in July 2003, and was required to contribute $83 in
2004 and an additional $28 in 2005. Outside of this PBGC Agreement, the Company
also contributed $21 in September 2003. Additionally, the Company pledged $160
of non-interest bearing First Mortgage Bonds to the PBGC as security until the
remaining $110 had been contributed to the pension plan and certain tests had
been met. At December 31, 2004, $112 has been contributed to the pension plan.
F-43
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
MITTAL STEEL LAZARO
BANK LOANS DENOMINATED IN U.S. DOLLARS, FLOATING INTEREST
CALIFORNIA COMMERCE BANK, U.S.A.
Loan payable to California Commerce Bank, U.S.A. under a line-of-credit
agreement is denominated in U.S. Dollars with an annual variable interest rate
of LIBOR plus 300 basis points (effective annual interest rate at December 31,
2003 was 4.99%). Principal is payable in quarterly instalments with maturities
until August 2005. $8 and $nil was outstanding at December 31, 2003 and 2004
respectively.
BANCOMER, MEXICO
Loan payable to Bancomer, Mexico is denominated in U.S. Dollars. The loan bears
interest at floating rate of LIBOR plus 325 basis points (effective annual
interest rate at December 31, 2003 was 4.35%). Principal is payable in
semi-annual instalments until 2008. $48 and $nil was outstanding at December 31,
2003 and 2004 respectively.
Loan payable to Bancomer, Mexico is denominated in U.S. Dollars. The loan bears
interest at floating rate of LIBOR plus 225 basis points (effective annual
interest rate at December 31, 2003 was 3.35%). Principal is payable in
semi-annual instalments until 2008. $72 and $nil was outstanding at December 31,
2003 and 2004 respectively.
BANAMEX, MEXICO
Loans payable to Banamex, Mexico under a line-of-credit agreement is denominated
in U.S. Dollars, with annual variable interest rates of LIBOR plus 375 basis
points (effective annual interest rate at December 31, 2003 was 4.88%).
Principal is payable in semi-annual instalments of $28 with maturities from 2005
to 2009. $220 and $nil was outstanding at December 31, 2003 and 2004
respectively.
SENIOR STRUCTURED EXPORT CERTIFICATES, 10.625%
The New Senior Structured Export Certificates due 2005 (the "New Senior
Certificates") are denominated in U.S. Dollars with interest payable quarterly
at 10.625% per annum. The principal amount of the New Senior Certificates is
payable in quarterly instalments till May 2005. $41 and $nil was outstanding as
at December 31, 2003 and 2004 respectively.
The New Senior Certificates are redeemable in whole or in part at a price equal
to 100% of the outstanding principal amount, plus accrued interest thereon and a
prepayment make whole premium (only in case of trigger event) as defined in the
agreement.
The New Senior Certificates are payable primarily from the proceeds of U.S.
Dollar denominated accounts receivable to be generated from sales of steel slabs
to Mitsubishi Corporation (the "steel purchaser"), under a long-term supply
agreement and sales of steel slabs to certain other customers. Subject to
certain exceptions, the supply agreement with Mitsubishi requires the steel
purchaser to purchase sufficient volumes of slabs to generate receivables in
each quarter in an aggregate face amount equal to 1.3 times the scheduled
quarterly debt service on the New Senior Certificates.
EXPORT-IMPORT BANK OF THE UNITED STATES
Loan payable to a financial institution guaranteed by the Export-Import Bank of
the United States is denominated in U.S. Dollars. The loan bears interest at an
annual variable rate of LIBOR plus 0.30% (effective annual interest rate at
December 31, 2003 was 2.05%). Principal is payable in semi-annual instalments of
$3 with maturities ranging from 2004 to 2008. $29 and $nil was outstanding as at
December 31, 2003 and 2004 respectively.
OTHERS
In February 2004 the Mexico Operating Subsidiary paid $6 to California Commerce
Bank and Senior Structured Export Certificates ("SSEC") on due dates. During the
year voluntary prepayments of debt to Banks and SSEC was initiated resulting in
total debt repayment to Banks and SSEC of $418. The Balance
F-44
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
bank debt outstanding at December 31, 2004 is $nil. The last and final payment
for SSEC was made in June under a waiver granted by the Banks.
The debt to Banks was unconditionally guaranteed by the Company and certain
subsidiaries of the Company. Also the debt to Banks is secured by a first
priority lien on substantially all property, plant and equipment of Mexican
Operating Subsidiary, a first priority lien on receivables of Mexican Operating
Subsidiary and a first priority pledge on the shares of Mexican Operating
Subsidiary and the Mexican holding at Mexico ("Grupo").
Under the debt agreements with Banks certain covenants restricted the ability of
Mexican Operating Subsidiary to incur indebtedness, create liens, effect certain
mergers and consolidations, sell assets, pay dividends, enter into affiliate
transactions or make investments and engage in other business.
In December an uncommitted line for letters of credit for $25 was granted by
HSBC Mexico to Mexico Operating Subsidiary, of which $5 is used and the balance
of $20 was available at December 31, 2004.
MITTAL CANADA
SENIOR SECURED CREDIT FACILITIES
The Tranche B facility is bearing interest at rates ranging from LIBOR plus
1.75% to LIBOR plus 4.55% depending on the achievement of certain financial
ratios. For 2003 the effective average rate was 6.46%. The facility will mature
in July 2004 and is repayable in instalments of $0.3 in March 2004 and $118 in
July 2004. $118 and $nil was outstanding at December 31, 2003 and 2004
respectively.
The Tranche C facility is bearing an interest at rates ranging from LIBOR plus
2.25% to LIBOR plus 5.05% depending on the achievement of certain financial
ratios. For 2003 the effective average rate was 6.96%. The facility will mature
in January 2005 and is repayable in instalments of $0.3 in March 2004, $0.3 in
June 2004 and $118 in January 2005. $118 and $nil was outstanding at December
31, 2003 and 2004 respectively.
The Senior Secured Credit Facility is collateralized by all property, plant and
equipment of the Canadian Operating Subsidiary and a second ranking charge on
accounts receivables and inventories.
REVOLVING CREDIT FACILITY
Canadian Operating Subsidiary has a revolving term credit facility of CAD $147
million bearing interest at the U.S. prime base plus 0% or the Canadian prime
rate plus 0%, maturing in July 2009 and collateralized by the Company's accounts
receivable and inventories. As of December 31, 2004, $92 was outstanding. Under
the conditions of the revolving term credit facility, the Canadian Operating
Subsidiary must satisfy certain restrictive covenants as to minimum financial
ratios, acquisition of fixed assets and payments of dividends or other
distributions of equity.
MITTAL STEEL POINT LISAS
SENIOR SECURED NOTES, 10.4%
The 10.4% Senior Secured Notes are denominated in U.S. Dollars and have been
used to finance the construction of a DRI plant. The notes mature in May 2008
with principal and interest repayable in semi-annual instalments which commenced
on in November 2002. During the year the Trinidad Operating Subsidiary repaid
$52. At December 31, 2004 $36 was outstanding ($88 at December 31, 2003).
INTERNATIONAL FINANCE CORPORATION
Loans payable to the International Finance Corporation are denominated in U.S.
Dollars and collateralized by property, plant and equipment with a net book
value of $397 at December 31, 2003. The Principal balance of $13 was paid in
full during 2004.
F-45
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
MITTAL STEEL EUROPE
SENIOR SECURED NOTES DENOMINATED IN EURO, DUE FEBRUARY 1, 2011, 11.875%
Ispat Europe Group SA, a wholly owned subsidiary of the Company has issued Euro
150 million Senior Secured Notes ("Bonds"). The Bonds issued on February 1, 2001
will mature on February 1, 2011. These Bonds are secured by mortgage over the
property plant and equipment of the German Operating Subsidiaries and an
indirect pledge on the shares of the French Operating Subsidiary. The interest
rate is fixed at 11.875% per annum and payable semi-annually.
In 2004, Ispat Europe Group purchased Euro 39 million ($48) Senior Secured Notes
at an average purchase price of 111.6% and paid Euro 14 million ($17) interest
on these Senior Secured Notes. At the end of the year 2004, the outstanding
Bonds were Euro 70 million ($95).
On and after February 1, 2006, Ispat Europe Group shall be entitled at its
option to redeem all or a portion of the Senior Secured Notes, if redeemed
during the 12-month period commencing on February 1st of the years as set forth
below:
PERIOD REDEMPTION PRICE
2006 105.938%
2007 103.958%
2008 101.979%
2009 and thereafter 100.000%
From 1st July 2004 two more banks have joined the consortium, providing
Inventory financing facility to Ispat Europe Group of Companies, namely, D Z
Bank for Euro 15 million ($19) and Bank Popularis Netaxis for Euro 10 million
($13 resulting in a total facility of Euro 68 million ($88)). The terms are
similar to the existing facility.
MITTAL STEEL TEMIRTAU
The secured loans from financial institutions bear interest at LIBOR plus margin
(effective interest rate for year 2003 and 2004 was 5.5% and 5.9%,
respectively). The principal, interest and other amounts re-payable under this
facility are fully secured by the current assets and property, plant and
equipment of Ispat Karmet with a book value of $1,431 at December 31, 2004. The
loan and interest is re-payable quarterly, with final payment due in 2006.
MITTAL STEEL ANNABA
Ispat Annaba has a ten year term loan agreement with the Government of Algeria.
The loan is re-payable in October 2011. This loan bears interest at 5% per annum
from October 2004, which is after a moratorium period of three years. The
Company has guaranteed the payment of the principal and interest payable under
this loan.
The loan from a financial institution bears interest at LIBOR plus margin
(effective interest rate for year 2004 was 5.7%) and is fully secured by the
property, plant and equipment of Ispat Annaba with a December 31, 2004 book
value of $274. The loan and interest is re-payable in semi annual instalments,
with final payment due in 2012.
F-46
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
MITTAL STEEL GALATI
Ispat Sidex has taken over the state guaranteed loans received from banks prior
to its acquisition by the Company. These loans, including related interest and
fees, shall continue to be paid by the Government of Romania on behalf of Ispat
Sidex. Ispat Sidex will reimburse to the Government of Romania in seven annual
instalments commencing in 2005, which is after an initial three year grace
period from the date of payments made by the Government of Romania to the
original lenders. These loans bear interest between 6.3% and 7.2 % per annum.
MITTAL STEEL OSTRAVA
The secured syndicate loan from Czech banks bears interest at PRIBOR plus margin
(effective interest rate for 2003 was 3.6%). The loan was repaid during 2004.
The secured syndicate loan from financial institutions bears interest at LIBOR
plus margin (effective interest rate for year 2003 was 2.7%) and the secured
syndicate loan from financial institutions, denominated in Euro bears interest
at EURIBOR plus margin (effective interest rate for year 2003 was 3.7%). The
loans were re-payable in 18 semi annual instalments starting in 2004. The
Company had an interest rate swap agreement for approximately 50% of both U.S.
Dollars and Euro denominated loans which effectively fixed the interest rate at
3.1% for $59.4 of U.S. Dollar loan and 3.4% for Euro 51.3 million of the Euro
loan. During 2004, the Company made unscheduled debt and interest re-payments
and has relieved itself of these obligations as of December 31, 2004.
The loan from a bank, denominated in CZK, bears interest at 22%. The loan is
repayable quarterly and interest is repayable monthly. The loan matures in
December 2022. The loan is secured by a pledge of certain of Ispat Nova Hut's
property, plant and equipment with an aggregate book value of $7 at December 31,
2004.
The various other loans carry interest rates ranging from 4.5% to 25.0% at
December 31, 2004. The loans are secured by a pledge of certain of Ispat Nova
Hut's property, plant and equipment with an aggregate book value of $15 at
December 31, 2004.
MITTAL STEEL SOUTH AFRICA
The unsecured loan from a third party bears interest at 16% per annum and is
re-payable in annual instalments, with final payment due in 2013.
MITTAL STEEL POLAND
The loans from banks are variable rate notes with an effective interest rate
ranging from 2.8% to 8.7%. Interest and principal repayments are due quarterly,
with maturities ranging between 2005 through 2009.
MITTAL STEEL SKOPJE
The secured loan from a bank, denominated in Euros, bears interest at a fixed
rate of 9% per annum. The loan and interest are re-payable quarterly, with final
payment due in 2007. The loan is secured by the shares of RZ Ladna Valavnica AD.
The secured loan from a bank, denominated in the Macedonian Denar, bears
interest at a fixed rate of 11% per annum. The loan and interest are re-payable
monthly, with final payment due in 2008. The loan is secured by the inventory of
RZ Ladna Valavnica AD with a December 31, 2004 net book value of $10.
F-47
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
MITTAL STEEL ZENICA
The secured loans from banks, denominated in Euros, bear interest between 5% and
9% per annum. The loans and interest are re-payable in semi-annual instalments,
with maturities ranging between 2007 and 2013. The loans are secured by the
certain of the assets of BH Steel with a book value of $9 as at December 31,
2004.
MITTAL STEEL ROMAN
The secured loan from a bank bears interest at LIBOR plus margin (effective
interest rate for the year 2003 and 2004 was 4.2% and 4.6%, respectively). The
loan is re-payable in 2006. The loan is secured by a portion of the current
assets and the property, plant and equipment of Ispat Petrotub with an aggregate
book value of $40 at December 31, 2004.
The secured loan from a bank, denominated in Euro, is partly guaranteed by the
Ministry of Finance in the Republic of Romania and partly secured by a letter of
credit. The loan bears interest at EURIBOR plus margin (effective interest rate
for the year 2004 was 2.9%). The loan is re-payable in semi-annual instalments,
with final payment due in 2011.
OTHER
Loans payable at shipping subsidiaries are denominated in U.S. Dollars to
finance the purchase of equipment collateralized by the related assets. The
interest rates on the loans range from 7.36% to 8.11%. Principal and interest
are due in monthly/semi-annual instalments with maturities ranging from 2005 to
2007.
The hire purchase loan from a financial institution was fully repaid during the
year 2004.
The secured loan from financial institution with a carrying value of $83 is for
capital expenditure and working capital requirement at Ispat Sidex. The loan is
guaranteed by the Company and certain of its Operating Units and certain
subsidiaries and secured by a pledge of certain current assets with a book value
of $913 at December 31, 2004 and property, plant and equipment with a book value
$308 of Ispat Sidex at December 31, 2004. The loan bears interest at LIBOR plus
variable margin (effective interest rate for the year 2003 and 2004 was 4.7% and
5.0% respectively). The loan is re-payable in 12 semi annual instalments, which
began in 2004.
In June 2004, the Company finalized a three year, revolving credit facility with
a consortium of financial institutions in an aggregate amount of $400, which is
extendable for two additional years at the option of the lender. At December 31,
2004, the consortium of financial institutions committed $250 of the total
amount, and it is expected that the remaining $150 will be syndicated at a
future point in time. The credit facility is secured by an enterprise mortgage
and the assets of Ispat Sidex and Ispat Karmet. The facility bears interest at
LIBOR plus margin (effective interest rate for 2004 was 4.7%). At December 31,
2004, the Company has outstanding indebtedness under the facility of $135, with
the remaining available credit of $115 being utilized as a guarantee for certain
of the Company's payments due in 2007 in connection with its acquisition of
Ispat Polska.
The secured loan from a consortium of financial institutions is secured by
pledge of 67,700,955 shares of Ispat Iscor. The loan bears interest at LIBOR
plus margin (effective rate for 2004: 3.3%) and is scheduled to be repaid in
2007.
The secured loan from a bank with a carrying value of $25 in 2003 was secured by
a pledge of 40,905,400 shares of Ispat Iscor. The loan bore interest at LIBOR
plus margin (effective rate for 2003 and 2004 was 4.7% and 4.6% respectively).
The loan was re-paid in 2004 as originally scheduled.
Various loans with interest rates ranging from 0% to 6.77% for other loans.
F-48
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Certain debt agreements of the Company and/or its subsidiaries provide for
various covenants requiring certain consent from lenders in specified
circumstances, to declare or pay any dividends, make certain restricted
payments, incur additional indebtedness, make certain investments, create liens,
guarantee indebtedness, sell or acquire assets with certain exceptions, enter
into any merger or consolidation or reorganization, as well as require
compliance with other financial maintenance tests, which includes financial
ratios and minimum levels of net worth. The Company is in compliance with the
financial covenants contained within the amended agreements related to all of
its non-current borrowings.
In June 2004, the Company concluded a $100 term facility with the International
Finance Corporation ("IFC"), which bears interest at LIBOR plus margin and is
repayable between 2007 and 2012. This facility was not utilized during 2004 and
no amount is outstanding at December 31, 2004. Ispat Iscor has borrowing
facilities with major financial institutions of approximately $737 and Ispat
Sidex has borrowing facilities with a Romanian bank for $31. Neither of these
facilities have been utilized as of December 31, 2004.
Maturities of long-term debt at December 31, 2004 are as follows:
YEARS ENDING DECEMBER 31,
2005 .................................................... $104
2006 .................................................... 108
2007 .................................................... 356
2008 .................................................... 46
2009 .................................................... 129
Subsequent years.................................................... 1,000
------
TOTAL .................................................... $1,743
======
F-49
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 12: FINANCIAL INSTRUMENTS AND CREDIT RISK
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
2003 and 2004 are summarized below:
The estimated fair values of certain financial instruments have been determined
using available market information or other valuation methodologies that require
considerable judgment in interpreting market data and developing estimates.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The use
of different assumptions and/or estimation methodologies may have a material
effect on the estimated fair values.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate their fair values due to the
short-term nature of these instruments.
The Company's short and long-term debt consists of debt instruments which bear
interest at fixed rates and variable rates tied to market indicators. The fair
value of the Company's variable rate debt approximates its carrying amount given
the floating rate nature of the debt at prevailing market rates. The fair value
of fixed rate debt is based on estimated future cash flows discounted using the
current market rates for debt of the same remaining maturities and credit risk.
The estimated fair values of the Company's short and long-term debt are as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2004
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
Instruments payable bearing interest at variable rates..... $ 2,098 $ 2,018 $ 751 $ 764
Instruments payable bearing interest at fixed rates........ 631 533 992 1,041
----------- ---------- --------- ----------
Long-term debt, including current portion.................. $ 2,729 $ 2,551 $ 1,743 $ 1,805
Payable to banks........................................... $ 244 $ 244 $ 237 $ 237
=========== ========== ========= ==========
The fair value of forward exchange contracts, all of which are short-term in
nature, were estimated based on the applicable year-end exchange rates and are
presented below:
FOREIGN CURRENCY
FORWARD CONTRACTS
DECEMBER 31,
2003 2004
---- ----
Fair value............................................... $120 $177
Carrying amount.......................................... 120 177
The fair value information presented herein is based on information available to
management at the dates presented. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively valued for purposes of these financial
statements.
The Company uses futures and swap contracts to manage fluctuations in the cost
of natural gas and certain nonferrous metals, primarily zinc which is used in
the coating of steel. Timing of these transactions corresponds to the expected
need for the underlying physical commodity and is intended as a hedge against
the cost volatility of these commodities.
CREDIT RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted and
from movements in interest rates and foreign exchange rates. The Company does
not anticipate non-performance by counterparties. The Company generally does not
require collateral or other security to support financial instruments with
credit risk.
F-50
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
Financial instruments that potentially subject the Company to credit risk
primarily consist of trade accounts receivable and derivative contracts.
The Company considers its credit risk associated with trade accounts receivable
to be somewhat limited due to a large number of customers comprising the
Company's customer base and their geographic dispersion. The Company sells a
significant amount of product pursuant to orders throughout its main markets.
The Company grants credit based on evaluations of its customers' financial
situation, in certain cases, without requiring guarantees or letters of credit,
and monitors the exposure of potential losses from granting credit. To reduce
the risk the Company routinely assesses the financial strength of its customers
and as a consequence, believes that its accounts receivable credit risk exposure
is limited.
The counterparties to derivative contracts are generally major financial
institutions and credit risk is generally limited to the unrealized gains and
losses on such contracts should the counterparties fail to perform as
contracted. Additionally, the Company utilizes a portfolio of highly rated
financial institutions either headquartered or operating in the same countries
in which the Company conducts its business. As a result, the Company considers
the risk of counterparty default to be minimal.
A portion of the floating rate debt used in connection with the financing of the
acquisition of the U.S. Operating Subsidiary was hedged through the use of an
interest collar that expired on October 16, 2003.
The U.S. Operating Subsidiary uses futures and swap contracts to manage
fluctuations in the cost of natural gas and certain nonferrous metals, primarily
zinc, which is used in the coating of steel. Timing of these transactions
corresponds to the expected need for the underlying physical commodity and is
intended as a hedge (not as defined by SFAS No. 133) against the cost volatility
of these commodities. The counterparties to these contracts are internationally
recognized companies which are not considered a credit risk by the Company.
Contracts generally do not extend out beyond two years. At December 31, 2003 and
2004, the Company had entered into contracts for these commodities for notional
amounts of $6 and $109, respectively, which had fair values of $nil (liability)
and $1 (liability), respectively. For each of the twelve months ended December
31, 2004, 2003 and 2002, the Company recorded a loss of $1, for changes in the
fair value of open derivative instruments not designated as a hedge (as defined
by SFAS No. 133). Under terms of the futures and swap contracts, the Company had
approximately $nil on deposit with counterparties both at December 31, 2003 and
2004, that was classified as an other asset on the balance sheet.
The U.S. Operating Subsidiary had $752 of long-term debt (including debt due
within one year) outstanding at December 31, 2004. Of this amount $150 is
floating rate debt (fair value $163). The remaining $602 of fixed rate debt had
a fair value of $705. Assuming a hypothetical 10% decrease in interest rates at
December 31, 2004, the fair value of this fixed rate debt would be estimated to
be $733. Fair market values are based upon market prices or current borrowing
rates with similar rates and maturities.
The Mexico Operating Subsidiary utilizes derivative commodity instruments not
for trading purposes but to hedge exposure to fluctuations in the costs of
natural gas. In February 2001, the Mexico Operating Subsidiary entered into a
fixed price natural gas contract with Pemex at a price of $4 per mmbtu,
excluding transportation charges, for a volume of 25350 G cal per day. This
contract expired in December 31, 2003. For gas requirements in 2004, the Company
has entered into contracts in the futures market for a total volume of
24,780,000 MMBTU, at an average net price of $6.61 per MMBTU (excluding
transportation charges). A hypothetical 10% fluctuation on the purchase price of
natural gas will have an impact on pre-tax income of approximately $16. The fair
value of such contracts as on December 31, 2004 was $164 (2003 - $44).
F-51
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 13: SHAREHOLDERS' EQUITY
The authorized common shares of the Company consisted of 5,000,000,000 Class A
shares, with a par value of Euro 0.01 per share, and 721,500,000 Class B shares,
with a par value of Euro 0.10 per share. At December 31, 2004 194,509,790 (2003
- 194,509,790) Class A shares and 457,490,210 Class B shares were issued and
185,284,650 (2003 - 189,247,282) Class A shares (excluding treasury shares) and
457,490,210 (2003 -457,490,210) Class B shares were outstanding.
The preference and relative rights of the Class A shares and Class B shares are
substantially identical except for disparity in voting power and conversion
rights. Holders of Class A shares are entitled to one vote per share and holders
of Class B shares are entitled to ten votes per share on all matters submitted
to a vote of shareholders. Each Class B share is convertible, at the option of
the holder, into one Class A share.
At December 31, 2004, the Company had 9,225,140 of its own Class A shares which
it purchased on the open market for a net consideration of $123 (at December 31,
2003 - 5,262,508 at a consideration of $110).
During the year 2003, the Company sold 23,532 of its treasury stock shares to
Ispat Inland Pension Fund for a total consideration of $0.01. Also, the Company
bought back 5,300,000 (2003 - 2,263,000) of its shares from the open market
during the year at a consideration of $54 (2003 - $8) under a share buy-back
program announced by the Company. These shares have been acquired for the
purpose of the Company's employee stock option plan.
All calculations to determine the amounts available for dividends are based on
Mittal Steel's Dutch statutory accounts, which, as a holding company, are
different from its consolidated accounts.
Mittal Steel has no manufacturing operations of its own. Accordingly, it can
only pay dividends or distributions to the extent it is able to arrange the cash
dividend distribution from its subsidiaries recognizes gains from the sale of
its assets or records share premium from the issuance of (new) common shares.
Certain of the Company's Operating Subsidiaries are subject to restrictions
under the terms of their debt agreements for paying dividends. As a result,
subsidiaries of Mittal Steel had $3,435 in retained earnings which are free of
restriction for the payment of dividend at December 31, 2004. Dividends are
payable by Mittal Steel in either U.S. Dollars or in Euros.
The following dividends were declared by LNM Holdings to its shareholder before
it was acquired by the Company:
- 2003 - dividend of $164, $0.33 per LNM Holdings share (which, when
recalculated based on the total number of Mittal Steel shares in the
consolidated balance sheet of Mittal Steel, works out to $0.25 per
Mittal Steel share);
- 2004 - dividend of $2,386, or $4.77 per LNM Holdings share, (which,
when recalculated based on the total number of Mittal Steel shares in
the consolidated balance sheet of Mittal Steel, works out to $3.71 per
Mittal Steel share).
The above LNM Holdings dividends were paid (and, to the extent remaining unpaid
as of the date of this Annual Report, will be paid) only to the sole shareholder
of LNM Holdings prior to its acquisition by the Company.
In December 2004, Mittal Steel acquired LNM Holdings from Mittal Steel S.a.r.l.,
a wholly owned subsidiary of The Richmond Investment Holdings Limited (an entity
controlled by the controlling shareholder of Mittal Steel and, at the time, the
sole shareholder of LNM Holdings). Mittal Steel S.a.r.l. received 0.27931958
Mittal Steel class A common shares and 0.77068042 Mittal Steel class B common
shares, for each LNM Holdings common share, or, in the aggregate, 139,659,790
Mittal Steel class A common shares and 385,340,210 Mittal Steel class B common
shares.
F-52
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
SHARE RETENTION AGREEMENTS
Ispat Karmet has entered into share retention agreements with European Bank for
Reconstruction and Development ("EBRD") and International Finance Corporation
("IFC"), whereby until the date on which the EBRD and IFC loans have been repaid
in full, Ispat Karmet's holding company or its nominee shall not, unless EBRD
and IFC otherwise agree in writing, transfer, assign, pledge, dispose or
encumber 67% of its total issued equity share capital.
The Company has pledged 20% of the outstanding shares of Ispat Sidex towards its
commitment to pay the remaining purchase price owed to APAPS relating to the
Company's acquisition of Ispat Sidex. Further, the Company has also pledged 50%
of the outstanding shares of Ispat Sidex's towards the Company's ten year
capital expenditure commitment at Ispat Sidex which commenced November 2001.
The Company has pledged 44.8% of the outstanding shares of Ispat Tepro towards
its commitment to pay the remaining purchase price owed to APAPS relating to the
Company's acquisition of Ispat Tepro.
The Company has entered into a share pledge agreement with APAPS for 51.1% of
its share holding in Ispat Petrotub's share capital towards its commitment to
pay the purchase price for Ispat Petrotub. The Company has also entered into a
share pledge agreement with APAPS for 49.9% of its share holding in Ispat
Petrotub's share capital towards its capital expenditure commitment for five
years commencing December 2003.
The Company has entered into a share pledge agreement with APAPS for 1.4% of its
share holding in Ispat Siderurgica's share capital towards its commitment to pay
the purchase price for Ispat Siderurgica. The Company has also entered into a
share pledge agreement with APAPS for 51.7% of its share holding in Ispat
Siderurgica's share capital towards its capital expenditure commitment for five
years commencing April 2004.
The Company has entered into a share retention agreement with IFC wherein it
undertakes to retain at least 51% of the registered share capital of Ispat
Annaba towards the commitment for repayment of loans to IFC by Ispat Annaba.
STOCK OPTION PLAN
In 1999, the Company adopted a stock option plan, the Ispat Plan. Under the
terms of the Ispat Plan, the Company may grant options to purchase common stock
to senior management of Ispat International and its affiliates for up to
6,000,000 shares of common stock. The exercise price of each option equals not
less than the fair market value of Ispat International stock on the date of
grant, with a maximum term of 10 years. Options are granted at the discretion of
the Company's Board of Directors' Plan Administration Committee or its delegate.
The options vest either ratably upon each of the first three anniversaries of
the grant date, or, in total, upon the death, disability or retirement of the
participant.
Prior to 2003, the Company had chosen to account for stock-based compensation
using the intrinsic value method prescribed in APB 25, and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock. As
indicated above, all options were granted at an exercise price equal to or
greater than the fair market value on the date of grant and accordingly, no
compensation expense has been recognized in these financial statements pursuant
to APB 25 effective January 1, 2003. The Company has decided to expense
stock-based compensation under the fair value recognition provisions of SFAS 123
(see note 2).
The fair value of each option grant of Ispat International stock is estimated on
the date of grant using Black-Scholes Model Method with the following
weighted-average assumptions used:
YEAR OF GRANT
2002 2003 2004
---- ---- ----
Dividend yield.................................. - - -
Expected annualized volatility.................. 83% - -
Discount rate - Bond equivalent yield........... 5.03% - -
Expected life in years.......................... 8 - -
F-53
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
The status of the Ispat Plan with respect to the Company is summarized below at
December 31, 2004:
NUMBER RANGE OF WEIGHTED
OF SHARES EXERCISE PRICES AVERAGE
EXERCISE PRICE
PER SHARE
---------- --------------- --------------
Outstanding, December 31, 2001 2,202,000 $8.57 - $11.94 $ 10.17
Granted 1,349,500 2.26 2.26
Exercised - -
Cancelled (160,000) 2.26 - 11.94 7.95
Outstanding, December 31, 2002 3,391,500 $2.26 - $11.94 $ 7.13
Granted - -
Exercised (91,166) 2.26 2.26
Cancelled/restoration 39,000 2.26 - 11.94 11.72
Outstanding, December 31, 2003 3,339,334 $2.26 - $11.94 $ 7.32
Granted - -
Exercised (1,384,118) 2.26 - 11.94 7.76
Cancelled (244,000) 2.26 - 11.94 9.07
Outstanding, December 31, 2004 1,711,216 $2.26 - $11.94 $ 6.72
Exercisable, December 31, 2004 1,321,721 $2.26 - $11.94 $ 8.03
Exercisable, December 31, 2003 2,542,542 $2.26 - $11.94 $ 8.62
Exercisable, December 31, 2002 1,878,073 $2.26 - $11.94 $ 9.24
The following table summarizes information about stock options at December 31,
2004:
OPTIONS OUTSTANDING
WEIGHTED
AVERAGE OPTIONS
CONTRACTUAL EXERCISABLE
EXERCISE NUMBER LIFE NUMBER
PRICES OF SHARES (IN YEARS) OF SHARES
----------- --------- ---------- -----------
$11.94 471,116 4.71 471,116
8.57 485,633 5.42 485,633
2.26 754,467 7.26 364,972
$2.26 - 11.94 1,711,216 6.04 1,321,721
F-54
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 14: PENSIONS AND OTHER POST-RETIREMENT PLANS
Certain of the Operating Subsidiaries maintain defined benefit pension plans to
their employees. A summary of these plans is as follows:
U.S. AND CANADIAN PLANS
The U.S. Operating Subsidiary's Pension Plan and Pension Trust is a
non-contributory defined benefit plan covering substantially all of its
employees. Benefits for most non-represented employees are determined under a
"Cash Balance" formula as an account balance which grows as a result of interest
credits and of allocations based on a percentage of pay. Benefits for other
non-represented salaried employees are determined as a monthly benefit at
retirement depending on final pay and service. Benefits for wage and salaried
employees represented by the United Steelworkers of America are determined as a
monthly benefit at retirement based on fixed rate and service. The Company also
sponsors a savings plan through which eligible salaried employees may elect to
save a portion of their salary, and the Company matches the first five percent
of each participant's salary contributed, subject to certain IRS limitations.
Compensation expense related to this savings plan amounted to $4 for each of the
years ended December 31, 2002, 2003, and 2004.
The Canadian Operating Subsidiary offers contributory and non-contributory
defined benefit pension plans for substantially all of its employees. Benefits
for the non-contributory plans are generally calculated based on the number of
years of service of the unionized employees and based on actuarial computations.
Benefits for the contributory plans are generally calculated based on the number
of years of service and the maximum average eligible earnings of each employee
during any period of five consecutive years.
The Canadian Operating Subsidiary provides certain post-employment and
post-retirement medical benefits and life insurance for certain groups of
retired employees. The Company is accruing the cost of these benefits for
current and future retirees using the projected unit credit actuarial method.
TRINIDAD PLAN
The Company's Operating Subsidiary in Trinidad maintains a contributory defined
benefit pension plan for substantially all of its employees, the benefits of
which are based on the employees' length of service.
EUROPEAN PLANS
The German Operating Subsidiaries maintain unfunded defined pension plans for a
certain number of employees the benefits of which are based on such employees'
length of service and applicable pension table under the terms of individual
agreements.
Additionally, certain of the employees at the Duisburg operations, after
completing a minimum period of continuous employment are entitled to a pension
benefit based on length of service and compensation.
Under French law, the French Operating Subsidiaries have an obligation to pay
lump sum retirement indemnities to employees calculated bases on the length of
service and compensation at retirement. The French Operating Subsidiaries also
have a commitment to provide additional post-retirement benefits linked to years
of service and compensation at retirement reduced by retirement benefits
available from the state managed pension scheme.
Additionally, lump sum payments are also required to be paid to employees who
have completed a defined number of years of service at Mittal Steel.
MEXICAN PLAN
The Mexican Subsidiary provides for seniority premiums to its employees, which
consists of a one-time payment of 12 days wages for each year worked, calculated
on the basis of employees' most recent salary. The maximum salary used in this
calculation is limited to double the legal minimum wage. The liabilities and net
periodic cost related to these retirement benefits are calculated by independent
actuaries using the
F-55
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
projected unit credit method.
The Mexican Subsidiary also provides seniority premium benefits, which are
mandated by Mexican law, to employees upon unjustified dismissal, after 15 years
of service or to the employee's beneficiary upon death. Net periodic cost
related to such obligation was not material for the years ended December 31,
2003 and 2004. The related accrued liability of $3 and $3 as of December 31,
2003 and 2004 respectively is classified in the consolidated balance sheets as
other long -term liabilities. Other required disclosures are not material and
consequently are not presented herein.
SOUTH AFRICAN PLAN
At the South African Subsidiary, the Company also offers two qualified savings
plans to assist its employees in providing for retirement or for other future
needs. Under these plans, which are governed by the South African Pension Funds
Act of 1956, the Company contributes 10% of participating employee's qualified
earnings. Ispat Iscor contributed $17 to the plan in 2004.
Additionally certain employees at the South African Subsidiary are covered by
multi-employer pension plans. Company contributions to these plans were not
material in 2004.
OTHER SUBSIDIARIES' PLANS
Retirement benefits are provided in accordance with defined benefit unfunded
plans, agreed upon in the labour union agreements at various Operating
Subsidiaries, wherever applicable. The Company amortizes prior service costs
over the average future service period of active plan participants. The
liabilities and net periodic pension costs related to these plans are annually
calculated on the basis of formulas defined in the plans using the projected
unit actuarial credit method and fully provided for in the financial statements.
The measurement date is December 31.
Beginning in 2004, the Company offered a qualified savings plan to certain
corporate employees in providing for retirement or for other future needs. Under
this plan, the Company contributes between 15% and 25% of participating
employee's qualified earnings. Contributions to this plan were not material in
2004.
PLAN ASSETS
The weighted-average asset allocations for the Funded Pension Plans at 31
December (1), 2003, and 2004, by asset category are as follows:
DECEMBER 31, 2004 DECEMBER 31 2003
-------------------------------- ------------------------------
U.S. CANADA TRINIDAD U.S. CANADA TRINIDAD
-------------------------------- ------------------------------
Equity Securities 64% 61% 55% 62% 60% 49%
Fixed Income (including cash) 18% 39% 38% 18% 40% 45%
Real Estate 6% - - 6% - -
Other 12% - 7% 14% - 6%
-------------------------------- ------------------------------
TOTAL 100% 100% 100% 100% 100% 100%
================================ ==============================
The respective Finance and Retirement Committees of the Board of Directors in
the U.S., Canada & Trinidad have general supervisory authority over the
respective trust funds. These committees have established the following asset
allocation targets:
----------
(1) U.S. Pension plans weighted asset allocation taken at November 30, 2003 and
November 30, 2004 respectively.
F-56
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
DECEMBER 31, 2004
---------------------------------
U.S. CANADA TRINIDAD
---------------------------------
Equity Securities 63% 60% 48%
Fixed Income (including cash) 23% 40% 48%
Real Estate 5% - -
Other 9% - 4%
---------------------------------
TOTAL 100% 100% 100%
=================================
U.S. PLAN ASSETS
The investment objectives for the U.S. Pension Plan are defined in the Statement
of Investment Policy dated December 1, 2000. The objectives stated therein are
as follows:
A. Investments of the Trust Fund are made solely in the interest of the
participants and beneficiaries of the Ispat Inland Inc. Pension Plan
and for the exclusive purposes of providing benefits to such
participants and their beneficiaries and defraying the reasonable
expenses of administering the Plans and the Trust.
B. The investment objectives shall be to: 1) provide long-term growth
(in the form of income and/or capital appreciation) in Trust assets
so as to maximize the amounts available to provide benefits to Plan
participants and their beneficiaries and 2) maintain adequate
liquidity in the Trust's assets to permit timely payment of all
benefits to such participants and their beneficiaries. In carrying
out these objectives, short-term fluctuations in the value of the
Trust's assets shall be considered secondary to long-term investment
results.
C. The Trust Fund shall be invested with the care, skill, prudence and
diligence under the circumstances prevailing from time to time that
a prudent man acting in a like capacity and familiar with such
matters would use in the investment of a fund of like character and
with like aims.
D. The investments of the Trust Fund shall be diversified so as to
minimize the risk of large losses, unless under the circumstances it
is clearly prudent not to do so.
The Policy provides for broad ranges around these targets to reduce rebalancing
trading cost and facilitate the management of the Trust Fund. Investment risk is
monitored by the Company on an ongoing basis, in part through the use of
quarterly investment portfolio reviews, compliance reporting by investment
managers, and periodic asset/liability studies and reviews of the Plan's funded
status.
Futures contracts are used to obtain equity exposure for a portion of the cash
held in the Trust. The notional value of futures contracts as of November 30,
2003 and 2004 was $48.
The Company uses a long-term rate of return assumption of 9.5%. This assumption
is viewed in a long-term context and is evaluated annually. The expected return
assumption is supported by the asset allocation of the Trust and the historical
long-term return on Trust assets.
TRINIDAD PLAN ASSETS
The Plan's assets are held in trust and invested on a long-term basis.
Investment strategy is largely dictated by local investment restrictions
(maximum of 50% in equities and 20% overseas) and asset availability since the
local equity market is small and there is little secondary market activity in
debt securities. The Plan is not permitted to invest in assets of the company.
CANADA PLAN ASSETS
Asset allocation is established according to the objectives of the Pension Fund.
This is based on the risk/return trade-off defined by the Committee in view of
the long-term outlook for financial markets and
F-57
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
by taking into account the Plan benefits, its commitments and financial
situation after considering all the factors that could affect the provisioning,
solvency and capacity of the Plan to meet its obligations.
SUMMARIES OF CHANGES IN THE BENEFIT OBLIGATION AND OF THE UNFUNDED STATUS OF THE
PLANS FOLLOW:
AT DECEMBER 31, 2003
--------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
--------------------------------------------------------------
CHANGE IN BENEFITS OBLIGATION
Benefit Obligation At Beginning Of The Period $2,715 $2,605 $40 $42 $28
Service Cost 52 40 2 2 8
Interest Cost 190 183 3 3 1
Participants' Contributions 2 1 1 - -
Plan Amendment (1) 41 41 - - -
Actuarial Losses 250 242 8 - -
Benefits Paid (225) (214) (1) - (10)
Foreign Currency Exchange Rate Differences 76 65 - 11 -
Benefit Obligation At End Of The Period $3,101 $2,963 $53 $58 $27
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair Value Of Plan Assets At Beginning Of The Period $1,802 $1,741 $61 $- $-
Actual Return On Plan Assets 340 324 16 - -
Employers' Contribution 151 140 1 - 10
Participants' Contribution 2 1 1 - -
Benefits Paid (225) (214) (1) - (10)
Foreign Currency Exchange Rate Differences 42 42 - - -
Fair Value Of Plan Assets At End Of The Period $2,112 $2,034 $78 $- $-
--------------------------------------------------------------
AT DECEMBER 31, 2004
--------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
--------------------------------------------------------------
CHANGE IN BENEFITS OBLIGATION
Benefit Obligation At Beginning Of The Period $3,101 $2,963 $53 $58 $27
Effect of business acquisitions 59 - - - 59
Service Cost 72 46 3 2 21
Interest Cost 193 180 3 3 7
Participants' Contributions 2 1 1 - -
Plan Amendment (1) - - - - -
Actuarial Losses 159 138 3 1 17
Benefits Paid (245) (227) (1) (2) (15)
Foreign Currency Exchange Rate Differences 67 34 - 9 24
Benefit Obligation At End Of The Period $3,408 $3,135 $62 $71 $140
--------------------------------------------------------------
F-58
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair Value Of Plan Assets At Beginning Of The Period $2,109 $2,032 $77 $- $-
Actual Return On Plan Assets 301 279 22 - -
Employers' Contribution 130 120 1 - 15
Participants' Contribution 2 1 1 - -
Benefits Paid (237) (227) (1) - (15)
Foreign Currency Exchange Rate Differences 22 22 - - -
Fair Value Of Plan Assets At End Of The Period $2,327 $2,227 $100 $- $-
--------------------------------------------------------------
THE FUNDED/UNFUNDED STATUS
AT DECEMBER 31, 2003
--------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
--------------------------------------------------------------
Unfunded (funded) status of the plans $(992) $(931) $24 $(58) $(27)
Unrecognized net actuarial (loss) gains 926 941 (15) - -
Unrecognized transition asset (2) - (2) - -
Unrecognized prior service cost 127 117 10 - -
Accrued Pension liability at end of period 59 127 17 (58) (27)
Accrued benefit liability (986) (918) - (58) (27)
Intangible asset 117 117 17 - -
Accumulated other comprehensive income 928 928 - - -
Unfunded (funded) accumulated obligation and net liability
recognized on the Balance Sheet $59 $127 $17 $(58) $(27)
--------------------------------------------------------------
AT DECEMBER 31, 2004
--------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
--------------------------------------------------------------
Unfunded (funded) status of the plans $(1,081) $(908) $38 $(71) $(140)
Unrecognized net actuarial (loss) gains 939 967 (28) - -
Unrecognized transition asset 3 5 (2) - -
Unrecognized prior service cost 115 106 9 - -
Accrued Pension liability at end of period (24) 170 17 (71) (140)
Accrued benefit liability (1,071) (876) - (71) (140)
Intangible asset 106 106 17 - -
Accumulated other comprehensive income 940 940 - - -
Unfunded (funded) accumulated obligation and net liability
recognized on the Balance Sheet $(24) $170 $17 $(71) $(140)
--------------------------------------------------------------
F-59
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
ACCUMULATED BENEFIT OBLIGATION
The accumulated benefit obligation for all defined benefit pension plans was
$3,090 and $3,336 at December 31, 2003 and 2004, respectively
Amount for pension plans with accumulated benefit obligations in excess of plan
assets are as follows:
AT DECEMBER 31, 2003
--------------------------------------------------------------
U.S. &
TOTAL CANADIAN EUROPE OTHER
-------------------------------------------------------------
Projected benefit obligation $3,049 $2,964 $58 $27
Accumulated benefit obligation 3,075 2,951 75 49
Fair Value of plan assets 2,032 2,032 - -
-------------------------------------------------------------
AT DECEMBER 31, 2004
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN EUROPE OTHER
-------------------------------------------------------------
Projected benefit obligation $3,331 $3,120 $71 $140
Accumulated benefit obligation 3,314 3,108 87 119
Fair Value of plan assets 2,212 2,212 - -
-------------------------------------------------------------
F-60
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
THE FOLLOWING TABLE DETAILS THE COMPONENTS OF PENSION COSTS:
AT DECEMBER 31, 2002
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC COST (BENEFIT)
Service cost $50 $42 $2 $2 $4
Interest cost 183 177 3 2 1
Expected return on plan assets (215) (210) (5) - -
Amortizations 8 9 (1) - -
Recognized actuarial gain 1 1 - - -
$27 $19 $(1) $4 $5
-------------------------------------------------------------
AT DECEMBER 31, 2003
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC COST (BENEFIT)
Service cost $52 $40 $2 $2 $8
Interest cost 190 183 3 3 1
Expected return on plan assets (208) (202) (6) - -
Amortizations 13 13 - - -
Recognized actuarial gain 12 12 - - -
$59 $46 $(1) $5 $9
-------------------------------------------------------------
AT DECEMBER 31, 2004
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
>
COMPONENTS OF NET PERIODIC COST (BENEFIT)
Service cost $72 $46 $3 $2 $21
Interest cost 193 180 3 3 7
Expected return on plan assets (210) (204) (6) - -
Amortizations 13 13 - - -
Recognized actuarial gain 58 41 - - 17
$126 $76 $- $5 $45
-------------------------------------------------------------
CASH FLOWS
CONTRIBUTIONS
The Company expects to contribute $175 to the U.S. Trust in 2005. These
contributions are to be made pursuant to an agreement between the Company and
the PBGC and another agreement between the Company and Ryerson Tull, Inc. There
are no ERISA minimum funding requirements due in 2005.
F-61
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
The company expects to contribute $4 to the Trinidad Trust in 2005, which is
equal to its minimum statutory regular contributions
The company expects to contribute $18 to the Canadian Trust in 2005.
ESTIMATED FUTURE PENSION AND POST-RETIREMENT PAYMENTS
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
EXPECTED BENEFIT PAYMENTS
TOTAL U.S. & CANADIAN TRINIDAD EUROPE OTHER
------------------------------------------------------------------
2005 $304 $283 $1 $6 $14
2006 296 277 2 5 12
2007 304 283 2 7 12
2008 311 290 2 6 13
2009 319 297 2 7 13
Five years thereafter 1,692 1,581 17 31 63
------------------------------------------------------------------
POST-RETIREMENT BENEFITS
Mittal Steel's Operating Subsidiaries in the U.S., Canada and France provide
post-retirement benefits, including medical benefits and life insurance benefits
to retirees. The post-retirement plans relate to the U.S., Canadian and French
operating subsidiaries.
Substantially all of the U.S. Operating Subsidiary's employees are covered under
post-retirement life insurance and medical benefit plans that require deductible
and co-insurance payments from retirees. The post-retirement life insurance
benefit formula used in the determination of post-retirement benefit cost is
primarily based on applicable annual earnings at retirement for salaried
employees and specific amounts for hourly employees. The U.S. Operating
Subsidiary does not pre-fund any of these post-retirement benefits. Effective
January 1, 1994, a Voluntary Employee Benefit Association Trust was established
for payment of health care benefits made to United Steel Workers of America.
Funding of the Trust is made as claims are submitted for payment.
In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003". This FSP supersedes FSP No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" which was issued by the FASB in
January 2004. FSP No. 106-2 provides specific guidance on accounting for the
effects of the Act for employers sponsoring post-retirement health care plans
that provide certain prescription drug benefits. Additionally, this guidance
allows companies who elected to follow the deferral provisions of FSP No. 106-1,
and whose prescription drug benefit plans are actuarially equivalent to the
benefit to be provided under Medicare Part D, to either reflect the effects of
the federal subsidy to be provided by the Act in their financial statements on a
prospective basis or a retroactive basis.
The Company determined that the prescription drug benefit provided by the
Company's post-retirement benefit plan as of the date of the Act's enactment was
at least actuarially equivalent to those of Medicare Part D and, accordingly,
the Company will be entitled to the federal subsidy when it begins in calendar
year 2006. On July 1, 2004, the Company adopted the provisions of FSP No. 106-2,
and applied these provisions on a retroactive basis effective January 1, 2004.
The Company calculated the effect of the Medicare subsidy on its APBO as of
December 8, 2003, the date of the Act's enactment (all other actuarial
assumptions determined as of November 30, 2003 were not changed). Based on this
calculation, the Company recognized the effects of the Medicare subsidy on its
net periodic post-retirement benefit costs which reduced this expense by $6 for
the year ended December 31, 2004. Additionally, the accumulated post-retirement
benefit obligation was also reduced by $69. Other factors including the discount
rate and other
F-62
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
actuarial assumptions mitigated the gain, resulting in an ending benefit
obligation of $882.
Summaries of changes in the benefit obligation and of the unfunded status of the
post-retirement benefit obligations are as follows:
AT DECEMBER 31, 2003
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
STATUS OF THE POST-RETIREMENT BENEFIT OBLIGATION
Benefit Obligation at beginning of period $875 $855 $- $20 $-
Service Cost 10 9 - 1 -
Interest Cost 60 59 - 1 -
Plan amendment (1) (105) (105) - - -
Special termination benefit - - - - -
Actuarial loss (gain) 172 172 - - -
Benefits Paid (66) (65) - (1) -
Foreign currency exchange rate changes 8 4 - 4 -
Benefits obligation at end of period 954 929 - 25 -
Benefit obligation 954 929 - 25 -
Fair value of assets - - - - -
Funded (under funded) status of the plans (954) (929) - (25) -
Unrecognized net loss 105 105 - - -
Unrecognized transition asset - - - - -
Unrecognized prior service cost (166) (166) - - -
ACCRUED POST-RETIREMENT BENEFIT OBLIGATION $(1,015) $(990) $- $(25) $-
-------------------------------------------------------------
AT DECEMBER 31, 2004
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
STATUS OF THE POST-RETIREMENT BENEFIT OBLIGATION
Benefit Obligation at beginning of period $954 $929 $- $25 $-
Effect of Business Acquisitions 4 - - - 4
Service Cost 9 9 - - -
Interest Cost 54 52 - 1 1
Plan amendment (1) - - - - -
Special termination benefit - - - - -
Actuarial loss (gain) (14) (12) - (1) (1)
Benefits Paid (75) (73) - (1) (1)
Foreign currency exchange rate changes 5 2 - 2 1
Benefits obligation at end of period 937 907 - 26 4
Benefit obligation 937 907 - 26 4
Fair value of assets - - - - -
Unfunded status of the plans (937) (907) - (26) (4)
Unrecognized net loss 102 102 - - -
Unrecognized transition asset - - - - -
Unrecognized prior service cost (144) (144) - - -
ACCRUED POST-RETIREMENT BENEFIT OBLIGATION $(979) $(949) $- $(26) $(4)
-------------------------------------------------------------
F-63
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
THE NET PERIODIC POST-RETIREMENT BENEFIT COST WAS AS FOLLOWS:
AT DECEMBER 31, 2002
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC
Service cost $ 10 $ 8 $-- $ 2 $--
Interest cost 60 59 -- 1 --
Amortizations (20) (20) -- -- --
Special termination benefits -- -- -- -- --
Recognized actuarial gain (1) (1) -- -- --
$ 49 $ 46 $-- $ 3 $--
-------------------------------------------------------------
AT DECEMBER 31, 2003
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC
Service cost $ 11 $ 10 $-- $ 1 $--
Interest cost 60 59 -- 1 --
Amortizations (20) (20) -- -- --
Special termination benefits -- -- -- -- --
Recognized actuarial gain -- -- -- -- --
$ 51 $ 49 $-- $ 2 $--
-------------------------------------------------------------
AT DECEMBER 31, 2004
-------------------------------------------------------------
U.S. &
TOTAL CANADIAN TRINIDAD EUROPE OTHER
-------------------------------------------------------------
COMPONENTS OF NET PERIODIC
Service cost $ 9 $ 9 $ -- $ -- $--
Interest cost 54 52 -- 1 1
Amortizations (29) (29) -- -- --
Special termination benefits -- -- -- -- --
Recognized actuarial gain (1) -- -- -- (1)
$ 33 $ 32 $ -- $ 1 $--
-------------------------------------------------------------
F-64
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
ASSUMPTIONS
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFIT OBLIGATIONS AT DECEMBER 31,
PENSION BENEFITS OTHER BENEFITS
-------------------------------------- ----------------------------------------
2002 2003 2004 2002 2003 2004
-------------------------------------- ----------------------------------------
Discount rate 6.5%-8% 5%-10% 4.75%-10% 6.5%-7.1% 6.25%-6.5% 4.75%-10%
Rate of compensation increase 4%-5.5% 3%-7% 3%-18% 4.0% 3%-5.28% 3%-5.28%
-------------------------------------- ----------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
NET PERIODIC BENEFIT COST FOR YEARS ENDED DECEMBER 31,
PENSION BENEFITS OTHER BENEFITS
--------------------------------------- -----------------------------------------
2002 2003 2004 2002 2003 2004
--------------------------------------- -----------------------------------------
Discount rate 6.5%-8% 5%-10% 4.75%-10% 6.5%-8% 5%-10% 5%-10%
Rate of compensation increase 4%-5.5% 3%-7% 3%-18% 4%-5.5% 4%-7% 4%-8%
Expected long-term rate of
return on assets 7.5%-9.5% 3%-8% 5.28%-9.5% 4.75%-9.5% 5%-9.5% 4.75%-9.5%
--------------------------------------- -----------------------------------------
HEALTH CARE COST TREND
DECEMBER 31,
----------------------------------------
2002 2003 2004
----------------------------------------
Health care cost trend rate 4.50% 4.50%-9.20% 4.50%-8.6%
----------------------------------------
An increase of 1% in the health care cost trend rate of the U.S. Operating
Subsidiary would increase the benefit obligation by $129.6 and the annual net
periodic cost by $10. A 1% decrease would reduce the benefit obligation by $113
and the annual net periodic cost by $8.5.
At the Canadian Operating Subsidiary, for evaluation purposes, the annual growth
rate assumption for the cost of health care for each participant was established
at 8.6% in 2004. The rate is expected to gradually decline to 3.6% in 2010 and
remain at this level thereafter. A 1% change would have an effect of $2.
F-65
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 15: INCOME TAX EXPENSE
The breakdown of the income tax expense/(benefit) is as follows:
YEARS ENDED DECEMBER 31,
------------------------
2002 2003 2004
------------------------
CURRENT:
U.S. $ (3) $ 11 $ 3
Mexico 13 1 35
Other Americas 1 2 3
Poland -- -- 174
Czech Republic -- -- 92
Other Europe 4 5 64
Kazakhstan 42 5 18
Other Rest of World 7 19 342
------------------------
TOTAL CURRENT INCOME TAX EXPENSE $ 64 $ 43 $731
DEFERRED:
U.S. $ (6) $(22) $150
Mexico (53) (9) 71
Other Americas (6) (9) 58
Romania -- -- (31)
Czech Republic -- 22 (117)
Poland -- -- 5
Other Europe 4 10 (7)
Kazakhstan 29 142 83
Other Rest of World -- 7 (126)
------------------------
TOTAL DEFERRED TAX EXPENSE (BENEFIT) (32) 141 86
------------------------
TOTAL INCOME TAX EXPENSE $ 32 $184 $817
========================
F-66
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
The following table reconciles the income tax expense (benefit) calculated at
the statutory rate of each tax jurisdiction to the corresponding amounts as
reported:
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------
UNITED OTHER
STATES MEXICO AMERICAS ROMANIA
------------------------------------------------
Statutory tax expense (benefit) $(7) $(6) $ 3 $ 5
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- -- -- --
Benefit arising from interest in partnership -- -- (13) --
Change in valuation allowance -- -- (25) --
Benefit of tax holiday -- -- -- (5)
Effects of foreign currency translation -- (56) -- --
Restructuring -- -- -- --
Export allowances -- -- 27 --
Inflationary effects -- 21 -- --
Others (2) 1 3 --
------------------------------------------------
Income tax expense (benefit) $(9) $(40) $(5) $--
================================================
OTHER
OTHER REST
EUROPE KAZAKHSTAN OF WORLD TOTAL
----------------------------------------------
Statutory tax expense (benefit) $13 $67 $6 $81
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- 4 -- 4
Benefit arising from interest in partnership -- -- -- (13)
Change in valuation allowance 3 -- -- (22)
Benefit of tax holiday -- -- -- (5)
Effects of foreign currency translation -- -- -- (56)
Restructuring (10) -- -- (10)
Export allowances -- -- -- 27
Inflationary effects -- -- -- 21
Others 2 -- 1 5
----------------------------------------------
Income tax expense (benefit) $8 $71 $7 $32
==============================================
F-67
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
YEAR ENDED DECEMBER 31, 2003
---------------------------------------------------------------
UNITED OTHER CZECH
STATES MEXICO AMERICAS ROMANIA REPUBLIC
---------------------------------------------------------------
Statutory tax expense (benefit) $(20) $ 5 $ 19 $ 48 $ 38
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- -- -- -- --
Benefit arising from interest in
partnership -- -- (15) -- --
Rate change -- -- -- -- (11)
Change in valuation allowance -- -- 12 -- (4)
Contingencies -- -- -- -- --
Benefit of tax holiday -- -- -- (48) --
Non-taxable exchange difference -- -- (16) -- --
Effects of foreign currency translation -- (14) -- -- --
Restructuring -- -- -- -- --
Export allowances -- -- 1 -- --
Miscellaneous accruals 9 -- -- -- --
Inflationary effects -- 1 -- -- --
Others (8) -- (1)
---------------------------------------------------------------
Income tax expense (benefit) $(11) $ (8) $ (7) $ -- $ 22
===============================================================
OTHER
OTHER REST OF
EUROPE KAZAKHSTAN WORLD TOTAL
------------------------------------------------
Statutory tax expense (benefit) $ 11 $ 132 $ 23 $ 256
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- 2 -- 2
Benefit arising from interest in
partnership -- -- -- (15)
Rate change -- -- -- (11)
Change in valuation allowance 12 -- -- 20
Contingencies -- 13 -- 13
Benefit of tax holiday -- -- -- (48)
Non-taxable exchange difference -- -- -- (16)
Effects of foreign currency translation -- -- -- (14)
Restructuring (8) -- -- (8)
Export allowances -- -- -- 1
Miscellaneous accruals -- -- -- 9
Inflationary effects -- -- -- 1
Others -- -- 3 (6)
------------------------------------------------
Income tax expense (benefit) $ 15 $ 147 $ 26 $ 184
================================================
F-68
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------
UNITED OTHER CZECH
STATES MEXICO AMERICAS ROMANIA REPUBLIC
------------------------------------------------------------------
Statutory tax expense (benefit) $142 $106 $ 93 $ 150 $ 106
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- -- -- -- 1
Benefit arising from interest -- -- (19) -- --
in partnership
Rate change -- (22) -- 73 --
Change in valuation allowance -- -- (14) (63) (170)
Contingencies -- -- -- -- --
Benefit of tax holiday -- -- -- (190) --
Effects on foreign currency
translation -- 4 -- (24) --
Restructuring -- -- -- -- --
Inflationary effects -- 17 -- -- --
Fixed assets -- -- -- (11) --
Other taxes 9 -- -- -- --
Others 2 1 1 34 38
------------------------------------------------------------------
Income tax expense (benefit) $153 $106 $ 61 $ (31) $ (25)
==================================================================
OTHER
OTHER REST OF
POLAND EUROPE KAZAKHSTAN WORLD TOTAL
------------------------------------------------------------------
Statutory tax expense (benefit) $185 $ 96 $ 94 $ 400 $1372
INCREASE (DECREASE) RESULTING FROM:
Permanent Items -- -- (4) 2 (1)
Benefit arising from interest -- -- -- -- (19)
in partnership
Rate change -- -- -- -- 51
Change in valuation allowance -- (20) -- (207) (474)
Contingencies -- -- (25) -- (25)
Benefit of tax holiday -- -- -- (45) (235)
Effects on foreign currency
translation 4 -- 39 -- 23
Restructuring -- (6) -- -- (6)
Inflationary effects -- -- -- -- 17
Fixed assets -- -- -- -- (11)
Other taxes -- -- -- 43 52
Others (10) (13) (3) 23 73
------------------------------------------------------------------
Income tax expense (benefit) $179 $ 57 $101 $ 216 $ 817
==================================================================
F-69
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
DEFERRED INCOME TAX
Deferred tax assets and (liabilities) at December 31, 2003 and 2004 are
summarized as follows:
YEARS ENDED DECEMBER 31,
------------------------
2003 2004
------------------------
CURRENT NET DEFERRED TAX ASSETS CONSIST OF THE FOLLOWING:
Facilities relocation restructuring U.S. $19 $22
Accrued vacation U.S. 13 12
Other U.S. (4) (6)
Property, plant and equipment Other Americas -- 40
Research and development Other Americas -- 2
Property, plant and equipment Romania -- 15
Other Romania -- 3
Net operating loss carryforward Poland -- 12
Restructuring Poland -- 16
Other Poland -- 7
Net operating loss carryforward Czech Republic 34 1
Other Czech Republic 6 9
Valuation Allowance Czech Republic (40) (3)
Net operating loss carryforward Other Europe 5 22
Other Other Europe 11 7
Valuation allowance Other Europe (16) (8)
Net operating loss carryforward Other Rest of World -- 104
Reserves Other Rest of World -- 28
Other Other Rest of World 4 23
TOTAL NET CURRENT DEFERRED TAX ASSETS $32 $306
NONCURRENT DEFERRED TAX ASSETS CONSIST OF THE FOLLOWING:
Employee benefit costs U.S. $345 $287
Minimum pension liabilities U.S. 321 384
Net operating losses and alternative minimum tax U.S. 251 259
Property, plant and equipment U.S. (507) (570)
Other U.S. (5) (67)
Net operating loss carryforward Other Americas 57 1
Property, plant and equipment Other Americas 45 8
Employee benefit costs Other Americas 34 39
Other Other Americas (3) (2)
Valuation allowance Other Americas (14) --
F-70
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Net operating loss carryforward Romania -- 7
Property, plant and equipment Romania 63 11
Allowance for Receivables Romania -- 3
Valuation Allowance Romania (63) --
Property, plant and equipment Czech Republic 144 138
Net operating loss carryforward Czech Republic -- 11
Valuation Allowance Czech Republic (144) (11)
Property, plant and equipment Poland -- 263
Reserves Poland -- 6
Net operating loss carryforward Other Europe 118 100
Property, plant and equipment Other Europe 23 19
Employee benefit costs Other Europe 16 20
Other Other Europe 12 18
Valuation allowance Other Europe (169) (157)
Property, plant and equipment Other Rest of World -- 82
Other Other Rest of World 12 6
TOTAL NET NONCURRENT DEFERRED TAX ASSETS $536 $855
------------------------
TOTAL NET DEFERRED TAX ASSETS $568 $1,161
CURRENT NET DEFERRED TAX LIABILITIES CONSISTS OF THE FOLLOWING:
Inventories Mexico $(17) $(16)
Accrued expenses Mexico 8 11
Reserves Romania -- (3)
Other Other Europe (19) (25)
------------------------
TOTAL NET CURRENT DEFERRED TAX LIABILITIES $(28) $(33)
Noncurrent net deferred tax liabilities consists of the following:
Property, plant and equipment Mexico $(95) $(99)
Net operating loss carryforward Mexico 43 --
Inventories Mexico -- (42)
Other Mexico (2) 16
Property, plant and equipment Other Americas (69) (80)
Net operating loss carryforward Other Americas 65 54
Other Other Americas (5) (5)
Other Other Europe (11) (26)
Property, plant and equipment Poland -- (157)
Employee benefit costs Poland -- 19
Other Poland -- 3
Property, plant and equipment Czech Republic -- (86)
Reserves Czech Republic (40) (8)
Property, plant and equipment Rest of World (7) (432)
Net operating loss carryforward Rest of World -- 97
Employee benefit costs Rest of World -- 13
Reserves Rest of World -- 2
Property, plant and equipment Kazakhstan (142) (229)
Employee benefit costs Kazakhstan -- 5
------------------------
TOTAL NET NONCURRENT DEFERRED TAX LIABILITIES (263) (955)
------------------------
TOTAL NET DEFERRED TAX LIABILITIES $(291) $(988)
========================
F-71
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
At December 31, 2004, Mittal Steel had a valuation allowance of $179 ($446
December 31, 2003) to reduce its deferred tax assets to estimated realizable
value. The valuation allowance primarily relates to the deferred tax assets
arising from tax loss carryforwards and capital loss carryforwards in France as
well as other temporary timing differences. In France, tax loss carryforwards
and capital loss carryforwards have no expiration date. The utilization of tax
loss carryforwards is, however, restricted to the taxable income of the
subsidiary generating the losses. In addition, capital loss carryforwards can
only be offset against capital gains. During 2004 changes in economic events and
circumstances led to the reduction in valuation allowance at several of the
operating subsidiaries including the Czech Operating Subsidiary ($170) and the
South African Operating Subsidiary ($207).
At December 31, 2004, based upon the level of historical taxable income and
projections for future taxable income over the periods in which the temporary
timing differences are anticipated to reverse, management believes it is more
likely than not that Mittal Steel will realize the benefits of these deductible
differences, net of the valuation allowances, at December 31, 2004. However, the
amount of the deferred tax asset considered realizable could be adjusted in the
future if estimates of taxable income are revised.
Mittal Steel has not provided any deferred income taxes on the undistributed
earnings of its foreign subsidiaries based upon its determination that such
earnings will be indefinitely reinvested. If such earnings were not considered
indefinitely reinvested, deferred foreign income taxes would have been provided,
after consideration of estimated foreign tax credits. However, determination of
the amount of deferred foreign income taxes on reinvested earnings is not
practicable.
As provided for certain agreement related to acquisitions and capital
investments undertaken by the Company, income from operating activities in
certain countries is subject to reduced tax rates, or, in some cases is wholly
exempt from taxes. Such arrangements expire over various fiscal years through
2011.
Mittal Steel Temirtau and the Government of Kazakhstan signed an agreement that
fixed its corporate income tax payments for the years 2005 through 2009. The
fixed corporate income tax payments are dependent upon Mittal Steel Temirtau's
completion of required capital investments by December 31, 2004, which was
subsequently extended to December 31, 2006. As of December 31, 2004, the Company
has incurred approximately $450 of the total $580 required capital investments.
The Company signed an amendment to the Mittal Steel Galati share purchase
agreement resulting in the termination of their 5 year exemption to pay
corporate income tax and other economic incentives previously provided to Mittal
Steel Galati. This amendment has prospective impact beginning January 1, 2005.
Mittal Steel Annaba and Mittal Steel Tebessa are exempt from corporate tax for a
period of 10 years commencing from October 2001 provided certain commitments are
met as specified in note 18.
F-72
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
TAX LOSS CARRYFORWARDS
At December 31, 2004, the Company had total estimated net tax loss carryforwards
of $2,089.
Such amount includes net operating losses of $881 primarily related to the U.S.,
the Mexican and the Canadian Operating Subsidiaries which expire as follows:
YEAR EXPIRING
2005 $11
2006 27
2007 22
2008 85
2009 50
2010 24
2011 4
2012 1
2013 16
2020 133
2021 260
2022 3
2023 239
2024 6
The remaining tax loss carryforwards of $1,208 are indefinite lived and are
attributable to the Company's operations in France and South Africa.
Tax loss carryforwards are denominated in the currency of the countries in which
the respective subsidiaries are located and operate. Fluctuations in currency
exchange rates could reduce the U.S. Dollar equivalent value of these tax loss
carryforwards in future years.
F-73
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 16: OTHER OPERATING EXPENSES
Other operating expenses include:
YEAR ENDED DECEMBER 31,
2002
----
Write-off of Empire Mine investments .................. $39
Impairment loss on 2A Bloomer and 21" Bar Mill ........ 23
----
$62
====
F-74
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
BALANCE AT ADDITIONS BALANCE AT
DECEMBER 31, CHARGED TO DECEMBER
2003 INCOME DEDUCTIONS/RELEASE ACQUISITIONS 31, 2004
--------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 119 $ 13 $24 $ 159 $ 267
Environmental (see note 19) 37 - - 130 167
Shutdown reserves(1) 27 1 - 59 87
Voluntary severance offer and other 1 4 4 12 13
Inventory obsolescence 146 47 15 66 244
Deferred tax valuation allowances 446 - 474 207 179
BALANCE AT ADDITIONS BALANCE AT
DECEMBER 31, CHARGED TO DECEMBER
2002 INCOME DEDUCTIONS/RELEASE ACQUISITIONS 31, 2003
--------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 77 $ 42 $ - $ - $ 119
Environmental (see note 19) 28 9 - - 37
Shutdown reserves(1) 23 7 3 - 27
Voluntary severance offer and other 1 - - - 1
Inventory obsolescence 133 11 16 18 146
Deferred tax valuation allowances 216 20 - 210 446
(1)The U.S. Operating Subsidiary maintains various shutdown reserves for former
or dormant entities. Additions relate to liability recorded upon adoption of
SFAS 143 on January 1, 2003 and accretion during 2003 (see note 18).
F-75
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 18: COMMITMENTS
Mittal Steel leases various facilities, land and equipment under non-cancellable
lease arrangements. In most cases, management expects that in the normal course
of business, leases that expire will be renewed or replaced by other leases.
Future minimum lease payments required under operating leases that have initial
or remaining non-cancellable terms in excess of one year are as follows:
YEAR ENDING
2005 ...................................................................................................... $ 22
2006 ...................................................................................................... 15
2007 ...................................................................................................... 10
2008 ...................................................................................................... 7
2009 ...................................................................................................... 5
Thereafter................................................................................................... 38
------
Total minimum lease payments................................................................................. $ 97
======
Rent expense amounted to $29, $27 and $30 for the years ended December 31, 2002,
2003 and 2004, respectively.
In the normal course of business, Mittal Steel enters into various long-term raw
material supply contracts, which generally provide for the purchase prices to be
negotiated annually based on market prices.
In the ordinary course of its business, the Company has guaranteed certain debts
of is subsidiaries totaling $1,214.
At December 31, 2004 and December 31, 2003, the Company's US Operating
Subsidiary guaranteed $41 and $54, respectively, of long-term debt attributable
to I/ N Kote, one of its equity investments. Since the US Operating Subsidiary
accounts for its investment in I/N Kote under the equity method, the debt which
matures on January 12, 2007 is not recorded in the US Operating Subsidiary's
Condensed Consolidated Balance Sheet. The US Operating Subsidiary's guarantee
could be invoked in an event of default as defined in the provisions of the I/N
Kote loan agreement. In addition to its 50% share of the remaining principal
balance, the US Operating Subsidiary also guarantees any outstanding interest
due, both of which bear interest at a rate equal to the higher of (1) the
prescribed borrowing rate on the loan, or (2) the Bank's (Mizuho Corporate Bank
Limited) prime rate, plus 2%. If the US Operating Subsidiary performed on its
guarantee, it would continue to own its share of I/N Kote, subject to the
security interest of the Bank in the assets of I/N Kote. The terms of the
guarantee require the US Operating Subsidiary to maintain a minimum tangible net
worth (as defined). The US Operating Subsidiary was in compliance with this term
at December 31, 2004.
On July 16, 1998, the Company's US Operating Subsidiary entered into an
agreement (the "Agreement") with the Pension Benefit Guaranty Corporation (the
"PBGC") to provide certain financial assurances with respect to the US Operating
Subsidiary's Pension Plan. In accordance with the Agreement, the US Operating
Subsidiary provided the PBGC a $160 letter of credit which expired on July 9,
2003, and has made certain specified contributions to its Pension Plan. In
addition, the US Operating Subsidiary granted to the PBGC a first priority lien
on selected assets. In July 2003, the US Operating Subsidiary reached an
agreement with the PBGC regarding alternative security for the $160 letter of
credit. The letter of credit was allowed to expire, and in its place, the US
Operating Subsidiary agreed to contribute $160 over the next two years and pay
50% of excess cash flows ($147 for 2004 is to be paid in 2005) as defined in the
agreement with the PBGC to the US Operating Subsidiary's Pension Plan. Under
this agreement, the US Operating Subsidiary contributed $50 in July 2003, $83 in
2004 and is required to contribute $28 in 2005. Outside of this Agreement, the
US Operating Subsidiary also contributed $21 in September 2003. Additionally,
the US Operating Subsidiary pledged $160 of non-interest bearing First Mortgage
Bonds to the PBGC as security until the remaining $110 has been contributed to
the Pension Plan and certain tests have been met.
Under the Agreement, Ryerson Tull Inc., the former parent of the US Operating
Subsidiary, also provided to the PBGC a $50 guarantee of the US Operating
Subsidiary's Pension Plan obligations, later issuing a letter of credit to
secure this guarantee. The US Operating Subsidiary committed to take all
necessary action to replace the guaranty/letter of credit by July 16, 2003, but
was unable to do so, and therefore the guaranty and letter of credit continued
in place. Separately, on September 15, 2003, the US Operating Subsidiary entered
into a settlement agreement with Ryerson Tull under which, among other things,
Ryerson Tull paid the US Operating Subsidiary $21 to release Ryerson Tull from
various environmental and other indemnification obligations arising out of the
sale by Ryerson Tull of the US Operating Subsidiary to Mittal Steel. The $21
received from Ryerson Tull was
F-76
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
paid into the US Operating Subsidiary Pension Plan and went to reduce the amount
of the Ryerson Tull guaranty/letter of credit. The US Operating Subsidiary has
agreed to make specified monthly contributions to its Pension Plan totaling $29
over the twelve-month period beginning January 2004, thereby eliminating any
remaining guaranty/letter of credit obligations of Ryerson Tull with respect to
the US Operating Subsidiary's Pension Plan. Of the $112 of contributions made to
the US Operating Subsidiary's Pension Plan during 2004, $29 reduced the amount
of, and by September 15, 2004, eliminated the Ryerson Tull guaranty / letter of
credit. In addition, the US Operating Subsidiary committed to reimburse Ryerson
Tull for the cost of the letter of credit to the PBGC, and to share with Ryerson
Tull one-third of any proceeds which the US Operating Subsidiary might receive
in the future in connection with a certain environmental insurance policy.
In 1998, the US Operating Subsidiary entered into an agreement with a third
party to purchase 1.2 million tons of coke annually for approximately 15 years
on a take-or-pay basis at prices determined by certain cost factors from a heat
recovery coke battery facility located on land leased from the US Operating
Subsidiary. The actual purchases of coke under this agreement were 1.3 million,
1.2 million and 1.2 million tons in 2004, 2003 and 2002, respectively. Under a
separate tolling agreement with another third party, the US Operating Subsidiary
has committed to pay tolling charges over approximately 15 years to desulphurize
flue gas from the coke battery and to convert the heat output from the coke
battery to electrical power and steam. The US Operating Subsidiary advanced $30
during construction of the project, which is recorded as a deferred asset on the
balance sheet at December 31, 2003 and would have been credited against cash
payments during the second half of the energy tolling arrangement. During the
fourth quarter of 2004, an agreement was reached to allow the third party to pay
the US Operating Subsidiary a deposit repayment equal to $54. Upon receipt of
these funds, the deferred asset was written off and a corresponding gain of $1
was recognized by the US Operating Subsidiary. As of December 31, 2004 and
December 31, 2003, the estimated minimum tolling charges remaining over the life
of this agreement were approximately $254 and $199, respectively.
The US Operating Subsidiary sold all of its limestone and dolomite properties in
1990. The US Operating Subsidiary entered into a long-term contract with the
buyer of the properties to purchase, subject to certain exceptions and at prices
which approximate market, the full amount of the annual limestone needs of the
US Operating Subsidiary through 2002. The US Operating Subsidiary has extended
this arrangement at a fixed price through 2007.
In 2002, the US Operating Subsidiary entered into an agreement with
Cleveland-Cliffs, Inc. to purchase from subsidiaries of Cleveland-Cliffs, Inc.
all of its pellet requirements beyond those produced by the Minorca Mine (a
wholly owned subsidiary of the US Operating Subsidiary) for twelve years. The
price of the pellets is fixed for the first two years and then, adjusted over
the term of the agreement based on various market index factors.
The total amount of firm commitments of the US Operating Subsidiary and its
subsidiaries to contractors and suppliers in connection with construction
projects primarily related to additions to property, plant and equipment, was
$22 and $2 at December 31, 2004 and December 31, 2003, respectively.
In 1993, the US Operating Subsidiary established a partnership, PCI Associates,
with a subsidiary of NIPSCO, Inc. to lease from General Electric Capital
Corporation certain equipment located at the Indiana Harbor Works relating to
the injection of pulverized coal into the US Operating Subsidiary's blast
furnaces ("the PCI lease"). The term of the PCI lease is 18 years from the lease
closing date, August 31, 1993. In 2003, NIPSCO sold its portion of PCI
Associates to Primary Energy Steel LLC. Upon the failure of PCI Associates, an
Indiana General Partnership, to pay certain amounts due or to perform certain
duties under the PCI Lease or the insolvency of any of the Primary Energy Steel
LLC parties or of the US Operating Subsidiary partner, the US Operating
Subsidiary will be required, so long as it is the operator of the facility, to
reimburse the lessor for certain amounts due, or to perform such actions, under
the lease relating to its operations. The guaranteed amounts and duties do not
pertain to the base rents due under the lease, which are the responsibility of
Nisource, Inc. The US Operating Subsidiary could be responsible for its
percentage of the liabilities, costs or expenses associated with specified
misrepresentations or covenant breaches, discounted at 10%. The US Operating
Subsidiary cannot reasonably estimate the amounts which could be due under this
guarantee, however, it is not likely that resulting payment obligations in
connection with any such arrangements could materially affect the financial
condition or results of operations of the US Operating Subsidiary. The US
Operating Subsidiary has not recognized any liability associated with this
guarantee.
It is anticipated that the US Operating Subsidiary will make capital
expenditures of $2 to $7 annually in each of the next five years for the
construction, and have ongoing annual expenditures (non-capital) of $35 to $40
to operate air and water pollution control facilities to comply with current
federal, state and local laws and regulations.
F-77
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
On March 27, 1996, the Mexican Operating Subsidiary entered into an agreement
for the period to December 31, 2005, with Pemex Gas y Petroquimica Basica
("Pemex") to purchase natural gas. During 2004 the Mexican Operating Subsidiary
consumed approximately 34,128 Gcal per day of natural gas invoiced by Pemex at
the prevailing market price applied for each month.
In March 2002 the Mexican Operating Subsidiary signed an agreement with Shougan
Hierro Peru, valid until April 2007, for the supply of 500,000 MT per annum of
Pellet Feed to the Mexican operations. As of December 31, 2004, 339,000 MT per
annum had been received.
In April 2002 the Mexican Operating Subsidiary signed an agreement with MBR
Overseas Ltd, valid until December 2007, for the supply of 1,920,000 MT per
annum of Pellet Feed to the Company's Mexican operations. This agreement has
been superceded by a long term Agreement for the period January 1, 2005 to
December 31, 2015 for 2,000,000 MT of pellet feed and 600,000 MT of lump ore per
annum and 300,000 MT of sinter fines for 2005 and 1,000,000 MT of sinter fines
per annum for the rest of the contract period. As December 31, 2004, 1,781,000
MT per annum had been received.
Pursuant to its agreement with ISCOTT and the Government of Trinidad and Tobago
made on December 30, 1994, the Company was required to offer new shares
representing 40% of its Trinidadian Operating Subsidiary's total issued share
capital in a public offering to Trinidad and Tobago nationals and locally
controlled corporations by June 30, 1998. The Agreement also provides that such
offering must be made at a fair price and on such other terms to be negotiated,
and in default of agreement, by the Trinidad and Tobago Stock Exchange (TTSE).
The Government extended the deadline to make the offering in the second half of
2000 and has also agreed in principle, as an alternative arrangement, to allow
the shares of Mittal Steel to be listed and offered on the TTSE. The Company is
currently working with the Government to resolve the requirement.
In September 2002, the Trinidadian Operating Subsidiary agreed with the National
Gas Company of Trinidad and Tobago Limited ("NGC') to pay outstanding amounts
for gas supplied whereby they paid to NGC approximately $5 in 2002 and
approximately $22 in 2003 and agreed to pay $7 in monthly installments in 2004
towards the outstanding balance including interest. The Trinidadian Operating
Subsidiary further agreed to accelerate certain of these payments to NGC in the
event of increased cash flow under a variable factor method. With the payment on
December 31, 2004 the full amount outstanding was paid.
The Trinidadian Operating Subsidiary had an agreement with a third party to
purchase between 2.5 and 4.5 million metric tons of direct reduction iron ore
pellets annually, for ten years, on a take or pay basis. In 2002 the parties
agreed to replace the remainder of the contract with annually negotiated
purchase agreements and entered into an agreement for the purchase of between
2.5 and 4.5 million metric tons of direct reduction iron ore pellets between
January 1, 2002 and February 28, 2003. The Trinidadian Operating Subsidiary
entered into a subsequent agreement for the purchase of between 2.0 and 3.0
million metric tons of direct reduction iron ore pellets between March 1, 2003
and February 29, 2004. A further agreement was entered into for the purchase of
between 2.0 and 3.5 million metric tons of direct reduction iron ore pellets
between March 1, 2004 to February 28, 2005. Negotiations are currently taking
place with the third party for a purchase agreement for the period 2005 - 2007.
In February 2005 the German Operating Subsidiary signed an agreement with
ThyssenKrupp Stahl AG for the purchase of between 1.3 - 1.5 million tons of pig
iron each year for a 20 year term commencing October 2007. This agreement
replaces an existing supply agreement between the parties under which the German
Operating Subsidiary agreed to purchase from ThyssenKrupp Stahl AG 1.3 million
tons of pig iron each year until September 2007.
The Company and its subsidiaries have capital commitments outstanding against
major contracts as of December 31, 2004 amounting to $400 (2003: $280).
The Company has committed to invest $140 at its Algerian Operating Subsidiary
over a ten year period commencing October 2001 of which $80 shall be invested in
the first five years of operations to attain shipping levels of 1.2 million
metric tons per year. The Algerian Operating Subsidiary has spent $64 through
December 31, 2004. The Algerian Operating Subsidiary has committed to complete
and realize the industrial pollution control program estimated to cost up to $25
over a ten year period commencing October 2001 for which the Algerian Operating
Subsidiary has spent $4 through December 31, 2004. The Company also committed to
invest $30 at Ispat Tebessa over a ten year period commencing October 2001, $20
of which is to be invested in the first five years of operations. The Company
has spent $11 through December 31, 2004 towards this commitment.
The Company has committed to inject $175 to finance part of the total capital
expenditure commitment of $351 (including $76 for environmental protection) at
its Romanian Operating Subsidiary over a ten year period ending in 2011. The
amount committed to be spent is $30, $66, $56, $55 and $44 for period November
15, 2001 to December 31, 2002, 2003, 2004 2005 and 2006, respectively and
thereafter $20 every year from sixth to tenth year. The Romanian Operating
Subsidiary has spent $250 and the Company has injected $60 to the Romanian
Operating Subsidiary up to December 31, 2004. The Romanian Operating Subsidiary
has also committed to contribute $5 per year to provide certain employees
facilities.
F-78
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
The Company's Czech Operating Subsidiary has committed to invest $243, including
$20 for environmental investment, from 2003 to 2012, out of which $135 shall be
invested by 2007. The Czech Operating Subsidiary has spent $40 up to December
31, 2004 towards this commitment.
The Company has committed to invest $10 at Ispat Tepro, including $1 for
environmental investment, over five years commencing July 2003. Ispat Tepro has
spent less than $1 through December 31, 2004 toward this commitment.
The Company has committed to invest $18 at Ispat Petrotub over a ten year period
commencing January 2004, out of which $8 shall be invested in first five years.
Furthermore, the Company has also committed to invest at Ispat Petrotub, $13 for
environmental investment over the first five years commencing January 2004.
Ispat Petrotub has spent less than $1 through December 31, 2004 toward this
commitment.
The Company has committed to invest $12 at S.C. Siderurgica S.A. over a ten year
period commencing 2004, out of which $7 shall be invested in first five years.
Further, the Company has also committed to invest $4 in environmental investment
at S.C. Siderurgica S.A.
The sale of the Company's Polish Operating Subsidiary by the government of
Poland was part of an initiative to restructure the Polish steel industry.
Pursuant to the acquisition agreement, the Company committed to make capital
expenditures of Euro 497 million (equivalent to approximately $662 based on the
exchange rate prevailing on the date of the commitment) through December 2009,
as well as to comply with the PHS restructuring plan that the government of
Poland agreed with the European Commission as part of the European Union
accession process, including the shutdown of some rolling and finishing
facilities and minimum employment levels. Through December 31, 2004, the
Company's Polish Subsidiary has spent $38 towards this commitment.
The Company has, with the acquisition of BH Steel, committed to invest in
capital commitments of $135 over a ten year period. Additionally, investments of
$60 to $80 will be made to increase the quality of production at BH Steel over
the same ten year period.
The Company has committed, subject to market conditions, to invest in projects
in its Kazakh Operating Subsidiary totaling $580 until the year 2006. Through
December 31, 2004, the Company has spent $450 toward this commitment. The
Company plans to invest the remaining portion during 2005 and 2006.
The Company and its subsidiaries had contingent liabilities amounting to $50 as
on December 31, 2004 (2003: $28 ) in respect of bills of exchange discounted
with banks which had not matured.
For certain of its Operating Subsidiaries, the Company has provided employment
commitments for various periods in which the Company has agreed not to engage in
any collective dismissals of employees.
Compliance standards for environmental remediation vary significantly depending
on the local regulatory environment in which the Operating Subsidiaries operate.
The Kazakh Operating Subsidiary is maintaining the Environmental Plan of Action
(based on the World Bank standards), which is also in compliance with the EBRD
and IFC loan agreements. In accordance with the agreement with the Government of
Algeria, the Algerian Operating Subsidiary continues its Environmental Plan of
Action so as to achieve the norms, as specified therein, by March 2009. In
accordance with the agreement with APAPS, the Romanian Operating Subsidiary
continues its Environmental Plan of Action so as to complete the investment
program, as specified therein, by 2006. The Czech Operating Subsidiary continues
its Environmental Plan of Actions so as to complete the investment program, as
agreed with the Czech Republic National Property Fund, Fond Narodniho Majetku
("FNM"), by 2010. Environmental remediation obligations existing as of the
acquisition date, up to $49, are the responsibility of and will be paid by FNM.
The Company believes the likelihood is remote that the environmental remediation
obligations will exceed $49.
The operations of the Kazakh Operating Subsidiary are subject to supervision by
the Ministry of Natural Resources and
F-79
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Environmental Protection of Kazakhstan, which established pollution limits and
quotas. Relevant legislation imposes various fees for discharges of pollutants
and other environmental damage and limits for discharges, and entities that emit
pollution in excess of these amounts must pay higher rates. According to the
terms of its acquisition by the Company, through 2005 the Kazakh Operating
Subsidiary is required to make annual expenditures on pollution control measures
of approximately $2 and to adhere to environmental regulations in effect as of
November 17, 1995.
ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations". This Statement establishes
standards for accounting for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Company recorded the fair value of a legal liability for an asset retirement
obligation ("ARO") in the period in which it is incurred and capitalizes the ARO
by increasing the carrying amount of the related asset. The liability is
accreted to its present value each period and the capitalized cost is
depreciated over the useful life of the related asset. Based on analysis the
Company has performed, it has been determined that there are two assets for
which an asset retirement obligation must be recorded.
The first asset is the Company's Minorca Mine at Ispat Inland. The Minorca Mine,
through the Environmental Impact Statement (EIS) process, does have a
reclamation plan on file with the state of Minnesota. Each year the Minorca Mine
is required by the Minnesota Department of Natural Resources (MDNR) to submit an
annual mining and reclamation summary for the year just completed and to provide
mining and reclamation plans for the coming year. When possible the Minorca Mine
reclaims abandoned areas on a yearly basis. By doing this, the mine keeps up
with the reclamation to avoid a huge cost at the end of the mine life. Each fall
the MDNR conducts a field review of prior reclamation work, to point out
deficiencies that need to be corrected. A complete environmental site assessment
was done in 1996. The Minnesota Pollution Control Agency conducted a multi-media
inspection of the entire property with no violations. Currently, Ispat Inland
Mining Company is in compliance with all environmental standards and therefore,
the Company expects little or no environmental remediation at the time of
closure of the mine. As of December 31, 2004, the estimated total future
reclamation costs are $18.
The second asset retirement obligation relates to the removal costs of the
manufacturing facilities and remediation at the site property at Ispat Hamburg.
Under the terms of the lease agreement, Ispat Hamburg will be responsible for
removal and remediation costs for the factory land at the end of its lease in
2013.
Changes in the liability for asset retirement obligations during 2003 consisted
of the following:
2003 2004
---- ----
Balance as of January 1, $ 17 $ 20
Accretion................................................................................. 1 1
Translation adjustment.................................................................... 2 -
--------- --------
Balance as of December 31,................................................................ $ 20 $ 21
--------- --------
The asset retirement obligation liability balances as if SFAS No. 143 had been
adopted on January 1, 2001 (instead of January 1, 2003) was as follows:
2002 2003
---- ----
Liability for asset retirement obligations at beginning of period......................... $15 $17
Liability for asset retirement obligations at end of period............................... 17 20
F-80
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 19: CONTINGENCIES
The Company is a party to a number of legal proceedings arising in the ordinary
course of business. The Company does not believe that the adverse determination
of any such pending routine litigation, either individually or in the aggregate,
will have a material adverse effect on its business, financial condition,
results of operations, or cash flows. Where these actions are being contested
their outcome is not predictable with assurance.
ENVIRONMENTAL LIABILITIES
The Company is subject to various environmental laws and regulations that
require environmental assessment or remediation efforts at its multiple
locations and Operating Subsidiaries.
The US Operating Subsidiary is involved in various environmental and other
administrative or judicial actions initiated by governmental agencies. At
December 31, 2004, and December 31, 2003, the reserves for environmental
liabilities totaled $37 and $37, respectively. In 1993, the U.S. Operating
Subsidiary agreed to a Consent Decree in connection with the Environmental
Protection Agency ("EPA") lawsuit. Of the recorded reserves, $22 and $22,
respectively, is related to the sediment remediation under the EPA Consent
Decree, which obligates the U.S. Operating Subsidiary to pay a specified amount
of $19 plus interest at the 13-week Treasury bill rate. The U.S. Operating
Subsidiary has recorded an estimated liability of $6 related to certain other
currently ongoing environmental matters which are not related to the sediment
remediation portion of the EPA Consent Decree. The 1993 EPA Consent Decree also
requires remediation of the U.S. Operating Subsidiary's Indiana Harbor Works
site ("the Corrective Action") which is a distinct and separate responsibility
under the Consent Decree. The 1993 EPA Consent Decree establishes a three-step
process for the Corrective Action, each of which requires approval by the EPA,
consisting of: assessment of the site (including stabilization measures),
evaluation of remediation alternatives and remediation of the site. The U.S.
Operating Subsidiary is presently assessing the nature and the extent of
environmental contamination. Assessments under the EPA Consent Decree have been
ongoing since the decree was entered and no significant new environmental
exposures have been identified. It is anticipated that this assessment will cost
approximately $2 to $4 per year over the next several years. Until the first two
steps are completed, the remedial action to be implemented cannot be determined.
Because future required payments under the EPA Consent Decree are substantially
fixed, management does not believe that environmental expenditures related to
the EPA Consent Decree, in excess of the amounts currently accrued, if any, will
have a material effect on the results of operations, financial position or cash
flows of the Company. Insurance coverage with respect to work required under the
1993 EPA Consent Decree is not significant.
In October 1996, the US Operating Subsidiary was identified as a potentially
responsible party due to alleged releases of hazardous substances from its
Indiana Harbor Works facility and was notified of the Natural Resource Damages
Act (NRDA) Trustees' intent to perform an environmental assessment on the Grand
Calumet River and Indiana Harbor Canal System. A form of consent decree has been
negotiated and issued as a final order of the court in January 2005 under which
the U.S. Operating Subsidiary will pay approximately $1 in the first year and
approximately $2 in each of the four years thereafter, for a total of
approximately $9. The US Operating Subsidiary has also incurred approximately $1
in costs related to this matter which are payable within 30 days of the
effective date of the Consent Decree. The U.S. Operating Subsidiary has recorded
a liability for this matter of approximately $9. Management believes that the
required future payments related to these matters are substantially fixed, and,
accordingly, does not believe that reasonably possible losses in excess of the
amounts accrued, if any, will have a material effect on Mittal Steel's financial
position, results of operations, and cash flows.
A notice of violation ("NOV") was issued on July 2, 2002 by the EPA against the
US Operating Subsidiary, Indiana Harbor Coke Company, L.P. ("IHCC") and
Cokenergy, Inc., alleging violations of air quality and permitting regulations
for emissions from the Heat Recovery Coal Carbonization facility which is
operated by IHCC. An amended NOV stating similar allegations was issued on
August 8, 2002. Management believes that recent developments in this case have
been favorable to the Company and that this matter will not have a material
effect on Mittal Steel's financial position , results of operations and cash
flows.
F-81
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
In addition, in January 2005 the US Operating Subsidiary received a Third Party
Complaint by Alcoa Incorporated alleging that the US Operating Subsidiary is
liable as successor to the interests of Hillside Mining Co., a company that the
US Operating Subsidiary acquired in 1943, operated until the late 1940s and then
sold the assets of in the early 1950s. It is alleged that since Hillside was
operating in the area at the same time as Alcoa, if Alcoa is found to be liable
in the original suit that was filed against it by approximately 340 individuals
who live in the Rosiclare area of southern Illinois, then the US Operating
Subsidiary should also be found liable, and there should be an allocation to the
US Operating Subsidiary of the amount that would be owed to the original
Plaintiffs. Those original Plaintiffs are alleging that the mining and
processing operations allowed the release of fluorspar, manganese, lead and
other heavy metal contaminants, causing unspecified personal injury and property
damage. The US Operating Subsidiary has also been identified as a potentially
responsible party by the Illinois EPA in connection with this matter. The US
Operating Subsidiary has requested further information from the Illinois EPA
regarding their potential claim. Until such time as this matter is further
developed, management is not able to estimate reasonably possible losses, or a
range of such losses, the amounts of which may be material in relation to Mittal
Steel's financial position, results of operations and cash flows. The U.S.
Operating Subsidiary intends to defend itself fully in these matters.
The U.S. Comprehensive Environmental Response, Compensation, and Liability Act,
also known as Superfund, and analogous state laws can impose liability for the
entire cost of cleanup at a site upon current or former site owners or operators
or parties who sent hazardous materials to the site, regardless of fault or the
lawfulness of the activity that caused the contamination. The US Operating
Subsidiary is a potentially responsible party at several state and federal
Superfund sites. The US Operating Subsidiary could, however, incur additional
costs or liabilities at these sites based on new information, if additional
cleanup is required, private parties sue for personal injury or property damage,
or other responsible parties sue for reimbursement of costs incurred to clean up
the sites. The US Operating Subsidiary could also be named a potentially
responsible party at other sites if its hazardous materials or those of its
predecessor were disposed of at a site that later becomes a Superfund site.
Environmental remediation for periods prior to the privatizations of the
Company's Operating Subsidiaries in the Czech Republic, Romania, Kazakhstan and
Algeria are borne by the local governments in those countries. Environmental
remediation relating to periods subsequent to the privatizations have been
complied with, and accordingly there are no remediation liabilities for which
the Company is responsible at December 31, 2004 with respect to the Company's
Operating Subsidiaries in the Czech Republic, Romania, Kazakhstan and Algeria.
The liability primarily relates to environmental remediation costs recognized
(a) fully in terms of decommissioned facilities, and (b) pro-rated costs for
facilities to be decommissioned in the future in terms of site-specific holistic
environmental master plans developed in consultation with external consultants
taking cognizance of appropriate statutory regulation. As part of the Company's
acquisition of Ispat Polska in March 2004, the Company recorded as part of the
preliminary purchase price allocation a liability related to estimated costs
probable of payment for environmental remediation obligations existing at the
time of acquisition.
At December 31, 2004. the Polish Operating Subsidiary had recorded an
undiscounted reserve of $110. At December 31, 2004, the South African Operating
Subsidiary had recorded an environmental reserve of $226, discounted at 10% with
respect to environmental remediation. The discounted amount of $130 is recorded
at December 31, 2004. The expected future cash flows relating to environmental
remediation costs at the South African Operating Subsidiary is as follows at
December 31, 2004:
2005 $ 11
2006 25
2007 28
2008 28
2009 29
Later years 105
---
Total undiscounted environmental remediation
costs at the South African Operating Subsidiary $ 226
In September 2004, the Environmental Inspection Department of the Republic of
Kazakhstan raised a claim for approximately $20, alleging that the Kazakh
Operating Subsidiary had failed to obtain the necessary approvals from the
Environment Ministry and had therefore engaged in pollution without permission
during the first six months of 2004. The Kazakh Operating Subsidiary believes
that it has acted in accordance with the terms of the arrangement by which it
was acquired by the Company, which required compliance with environmental norms
existing as of the date of such agreement and to make specified minimum
investments in controlling pollution. The Company vigorously disputes this
claim. In December 2004, the Kazakh Operating Subsidiary signed a pollution
reduction plan with the Kazakhstan Ministry of Environmental Protection, which
the Company believes brings this matter to a close, with the Company paying no
amounts related to this claim. The Company has therefore not provided for this
potential expense at December 31, 2004.
LEGAL CLAIMS
In 1994, the European Commission raised claims of EUR 47 million for repayment
by DSG Dradenauer Stahlgesellschaft GmbH ("DSG"), a former subsidiary of the
Company, of loan amounts alleged to qualify as improper subsidies from the City
of Hamburg. In April 2002, the European Court of Justice decided that the loan
was an unauthorized subsidy under European
F-82
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Community law. DSG stated that the loan had been fully repaid. At first
instance, the court in Hamburg, Germany confirmed the position of DSG. However,
in April 2004, the High Court in Hamburg ruled that DSG is obliged to pay DM 1
million (EUR 0.5 million) to the City of Hamburg. DSG is appealing this
decision. The Company cannot predict the final outcome of these proceedings. In
August 2004, DSG filed for bankruptcy and a receiver was appointed by the court.
In August 2002, DSG was sold and consequently is no longer a subsidiary of the
Company.
In September 2003, the owners of a bulk cargo vessel commenced arbitration
proceedings against the Trinidadian Operating Subsidiary and an affiliate in
connection with the loss of the vessel, which had been carrying a cargo of
direct reduced iron supplied by the Trinidadian Operating Subsidiary from
Trinidad to Indonesia. The Company is unable to estimate the amount of
liability, if any, arising from these proceedings. In October 2004, the Company
provided cash security of $9 in accordance with a court order. The parties are
at present preparing submissions as part of the arbitration process.
In May 2003, the Irish government commenced proceedings against the Company's
Mexican Operating Subsidiary and the Company, claiming certain environmental
cleanup costs relating to the site of Irish Ispat Limited, which was closed in
2001. In April 2004, the Irish government filed a Notice of Discontinuance of
its claim against the Company and served its Statement of Claim against the
Mexican Operating Subsidiary in May 2004. In October 2004, the Mexican Operating
Subsidiary served a Request for Further and Better Particulars of Statement of
Claim. In February 2005, the court struck out the claim with no order for costs.
In late 2002, three subsidiaries of the Company (Trefileurope, Trefileurope
Italia S.r.l. and Fontainunion S.A.), along with other European manufacturers of
pre-stressed wire and strands steel products, received notice from the European
Commission that it was conducting an investigation into possible
anti-competitive practices by these companies. The Company and its subsidiaries
are cooperating fully with the European Commission in this investigation. The
European Commission can impose fines (up to a maximum of 10% of annual revenues)
for breaches of European Community competition law. The Company is currently
unable to assess the ultimate outcome of the proceedings before the European
Commission or the amount of any fines that may result. As the alleged
anti-competitive activities would have taken place in large part prior to the
acquisition of the subsidiaries, the Company has notified the previous owners
that it will seek indemnification for costs resulting from the investigation.
In March 2004, a group of residents in Nova Scotia brought a potential class
action in the Supreme Court of Nova Scotia against various parties, including
the Company's Canadian Operating Subsidiary, alleging various torts for damage
allegedly caused by the steel plant and coke ovens formerly owned and occupied
by Dominion Steel and Coal Corporation from 1927 to 1967. The Company acquired
the Company's Canadian Operating Subsidiary in 1994 and the plaintiffs are
attempting to establish that the Company's Canadian Operating Subsidiary thereby
assumed the liabilities of the former occupiers. The plaintiffs are now seeking
to have the claim approved as a class action, though the court has not yet
issued a decision on this matter. The Canadian Operating Subsidiary intends to
file preliminary motions to set aside this claim at an early stage. The Company
is currently unable to assess the outcome of these proceedings or the amount of
the Company's Canadian Operating Subsidiary's potential liability, if any.
The US Operating Subsidiary and an independent, unaffiliated producer of raw
materials are parties to a long-term supply agreement under which the US
Operating Subsidiary was obligated to fund an escrow account to indemnify said
producer of raw materials for the continuing availability of certain tax credits
under the US Tax code, which credits extend until January 1, 2008. Contributions
to the escrow account were determined by the agreement and the funds were
restricted from Company use while in the escrow account. The US Operating
Subsidiary received full recovery of $39, the escrowed amount, in April of 2001.
No further contributions to the escrow account are required at this time as the
US Operating Subsidiary believes the likelihood of the specific contingency
occurring is remote. If there is any loss, disallowance or reduction in the
allowable tax credits applicable to the raw materials previously sold to the US
Operating Subsidiary, the US Operating Subsidiary is required to repay the
independent, unaffiliated producer the amount by which the cost of the raw
materials was decreased as a result of such tax credits, subject to certain
adjustments, plus interest. As of December 31, 2004, the US Operating
Subsidiary's cumulative cost reduction due to such tax credits totaled $185. The
US Operating Subsidiary has not recognized any liability associated with this
indemnity.
Sidex International Plc. ("SIP"), a joint venture that Ispat Sidex formed in
1997 with Balli Steel Plc, in 2002 raised a claim of approximately $48 for
alleged non-delivery of steel by Ispat Sidex from 1998 onwards as well as
interest, damages and costs. Arbitration proceedings began in mid-November 2004
and an arbitration decision is expected in the second quarter of 2005. Ispat
Sidex expects to be indemnified by a third party if an award is granted in favor
of SIP by a competent court or arbitration tribunal by a definite and
irrevocable decision with respect to this claim. Ispat Sidex vigorously disputes
this claim and has
F-83
brought a counterclaim for non-payment by SIP plus damages, interest and costs,
in total exceeding the amount of the claim raised by SIP. As the Company cannot
determine the outcome of this matter or estimate the amount or range of
potential loss that may be incurred by Ispat Sidex, no amount has been provided
as of December 31, 2004.
In February 2003, the Romanian Customs Authorities alleged non-compliance with
respect to custom formalities relating to imported steel products at the
Romanian Operating Subsidiary and assessed a penalty on the Romanian Operating
Subsidiary in the amount of $14. The Romanian Operating Subsidiary subsequently
appealed the decision of the Romanian Custom Authorities with the court of first
instance and received a favourable ruling from the court of first instance with
respect to $7 alleged in the claim. With respect to the remaining $7 assessment,
the Company received an initial favourable ruling in the court of first instance
for $4, which is likely to be appealed by the Customs Authorities to the Court
of Appeals. The remaining balance has been initially awarded to the Romanian
Customs Authorities, although the Company has filed an appeal with the Court of
Appeals. As a result of the unfavourable ruling, however, the Company believes
that it is probable that it will incur a loss with respect to the remaining
balance and has therefore provided a reserve for such amount at December 31,
2004.
Since 2001, the Czech Operating Subsidiary has been involved in a dispute with
ICF Kaiser Netherlands B.V. ("ICF"), the contractor for phase 1 of a mini-mill
works project (rolling mill P1500), and its parent company, Kaiser Group
International. Under the terms of the turnkey engineering and construction
contract, a maximum of three performance tests were required to ensure that the
mini-mill met contract mandated quality and quantity standards. Although the
mini-mill failed the first performance tests, ICF contends the Czech Operating
Subsidiary owes various costs incurred by ICF in relation to the construction of
the mini-mill. The dispute has not been resolved and ICF has commenced legal
action against the Czech Operating Subsidiary. Until recently, the primary legal
venue for this matter has been the United States Bankruptcy Court for the
District of Delaware, where Kaiser Group International is currently going
through bankruptcy reorganization. The Delaware bankruptcy court has previously
ruled that Kaiser Group International, as opposed to ICF, could proceed with
prosecution of its specific claims against the Czech Operating Subsidiary in the
Delaware bankruptcy court venue. The Czech Operating Subsidiary appealed this
ruling, and during the first quarter of 2004, the Delaware bankruptcy court's
decision was overturned by the United States District Court for the District of
Delaware, which ruled that the proceedings should be stayed pending the
completion of international arbitration proceedings. On January 6, 2004, ICF
filed arbitration claims against the Czech Operating Subsidiary in the amount of
$51 with the International Court of Arbitration in Paris, with the earliest
possible award ruling being issued sometime in 2005. The sum claimed was revised
to $67 in November 2004 to include interest and additional costs. The Company
vigorously disputes this claim and has submitted a $50 counterclaim against ICF
in these same arbitration proceedings. At December 31, 2004, the Company has
provided for a reserve of $34 with respect to this matter, a sum equal to the
amount the Czech Operating Subsidiary withdrew from the performance letter of
credit posted by ICF as well as retention fee payments claimed by ICF. As the
Company cannot estimate the amount or range of any additional potential loss
that may be incurred by the Czech Operating Subsidiary, no additional amount has
been provided as of December 31, 2004.
During 2001, a complaint was brought against the South African Operating
Subsidiary alleging certain violations of the South African Government Export
Incentive Scheme. The claim asks for damages in the amount of $20, plus
interest. There has been no activity with respect to this matter since 2001. As
a result, the Company cannot determine the outcome of this matter or estimate
the amount or range of potential loss that may be incurred by the South African
Operating Subsidiary. Therefore, no amount has been provided for their potential
claim as of December 31, 2004.
The South African Operating Subsidiary is involved in a dispute with Harmony
Gold, Cadac (Pty) Ltd., Barnes Group of Companies and others alleging that the
South African Operating Subsidiary is in violation of the Competition Act. Any
adverse decision by the Competition Commission or Competition Tribunal in the
Republic of South Africa would impact the pricing formulas used by the South
African Operating Subsidiary. As the Company cannot determine the outcome of
this matter or estimate the amount or range of potential loss that may be
incurred by the South African Operating Subsidiary, no amount has been provided
at December 31, 2004.
The Company does not believe that, as of December 31, 2004, any material matters
exist relating to the fiscal matters in its country of incorporation and the
countries where its Operating Subsidiaries conduct business, including the
current pending or future governmental claims and demands, would require
adjustment to the accompanying financial statements.
F-84
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 20: SEGMENT AND GEOGRAPHIC INFORMATION
The management considers the Company's steel operation to be a single business
segment. As the Company has no operations in its home country of the
Netherlands, all of its sales are considered to be foreign sales. Annual sales
to any individual customer did not exceed 10% of total sales in any of the
periods presented.
Information with respect to the Company's operations in different geographic
areas is as follows:
OTHERS &
AMERICAS EUROPE REST OF WORLD ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Sales $3,796 $2,152 $1,483 $(351) $7,080
Operating income 141 64 476 21 702
Depreciation 162 34 70 - 266
Capital expenditures 81 54 130 - 265
TOTAL ASSETS AS AT DECEMBER 31, 2002 $7,029 $7,800 $2,181 $(9,101) $7,909
YEAR ENDED DECEMBER 31, 2003
Sales $4,072 $3,800 $2,275 $(580) $9,567
Operating income 136 317 707 139 1,299
Depreciation 165 116 84 (34) 331
Capital expenditures 142 131 222 (74) 421
TOTAL ASSETS AS AT DECEMBER 31, 2003 $7,349 $9,654 $3,225 $(10,091) $10,137
YEAR ENDED DECEMBER 31, 2004
Sales $6,560 $9,905 $7,648 $(1,916) $22,197
Operating income 1,583 1,965 2,399 199 6,146
Depreciation 185 297 212 (141) 553
Capital expenditures 130 289 560 (81) 898
TOTAL ASSETS AS AT DECEMBER 31, 2004 $8,342 $17,203 $8,707 $(15,099) $19,153
F-85
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Information concerning certain countries was as follows:
SALES FOR THE YEARS ENDED LONG-LIVED ASSETS(1)
DECEMBER 31 AS OF DECEMBER 31
-----------------------------------------------------------------------------
2002 2003 2004 2003 2004
-----------------------------------------------------------------------------
AMERICAS
United States $2,397 $2,223 $3,158 $1,751 $1,689
Mexico 668 872 1,509 467 472
Other 731 977 1,893 625 630
TOTAL AMERICAS $3,796 $4,072 $6,560 $2,843 $2,791
EUROPE
Romania $899 $1,216 $2,087 $263 $360
Czech Republic - 1,162 2,070 799 873
Poland - - 3,563 - 2,237
Other 1,253 1,422 2,185 312 724
TOTAL EUROPE $2,152 $3,800 $9,905 $1,374 $4,194
REST OF WORLD
Kazakhstan $869 $1,189 $1,381 $784 $1,018
Other 614 1,086 6,267 333 2,190
TOTAL REST OF WORLD 1,483 2,275 7,648 1,117 3,208
ELIMINATIONS(2) (351) (580) (1,916) (680) (2,631)
TOTAL $7,080 $9,567 $22,197 $4,654 $7,562
----------
(1)Consists of property, plant and equipment, net of accumulated depreciation
(2)Eliminations relate to inter-region
F-86
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 21: FINANCIAL INFORMATION FOR ISSUER, SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES
The senior notes issued by Ispat Europe will be jointly, severally, fully and
unconditionally guaranteed on a senior basis by Mittal Steel, Mittal Steel
Germany GmbH, Mittal Steel Hamburg, Mittal Steel Germany GmbH, Mittal Steel
Hamburg, Mittal Steel Ruhrort and Mittal Steel Hochfeld GmbH. Presented below is
condensed consolidating financial information for:
- Mittal Steel on a parent company only basis;
- Mittal Steel Europe, on a parent company only basis;
- Mittal Steel Europe's guarantor subsidiaries, Mittal Steel Germany GmbH,
Mittal Steel Hamburg, Mittal Steel Ruhrort and Mittal Steel Hochfeld GmbH
on a combined basis;
- Mittal Steel Europe's non-guarantor subsidiary, Mittal Steel Gandrange;
- Mittal Steel Europe eliminations; and
- Mittal Steel Europe consolidated;
- Mittal Steel's non-guarantor subsidiaries, on a combined basis;
- Mittal Steel eliminations; and
- Mittal Steel and subsidiaries consolidated.
Ispat Europe has no business operation of its own. Accordingly, it can only pay
dividends or distributions to the extent it is able to arrange a distribution
from its subsidiaries, recognize gain from the sale of its assets or records
share premium from the issuance of common shares. Ispat Europe's operating
subsidiaries are subject to certain restrictions under the terms of certain of
their debt agreements for paying dividends. As a result, $53 of Ispat Europe's
retained earnings is free of restriction for the payment of dividends as at
December 31, 2004.
F-87
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2002
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
-----------------------------------------------------------------
MITTAL MITTAL STEEL
STEEL MITTAL STEEL EUROPE -
MITTAL STEEL - EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------
Net sales $- $- $688 $574 $(43) $1,219
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation shown
separately below) 4 2 609 530 (36) 1,105
Depreciation - - 7 7 14
Selling, general and administrative 7 2 35 39 (7) 69
Other operating expense - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Operating income (11) (4) 37 (2) - 31
Other income (expense) - net - - 3 - - 3
Equity in earnings of subsidiaries 605 26 - - (26) -
FINANCING COSTS:
Net interest income (expense) 1 (16) (1) (1) - (18)
Net gain (loss) from foreign exchange - - - (1) - (1)
------------------------------------------------------------------------------------------------------------------------------------
Income before taxes and minority interest 595 6 39 (4) (26) 15
Income tax (benefit) expense:
Current - - 3 2 - 5
Deferred - - 4 - - 4
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before minority interest 595 6 32 (6) (26) 6
Minority Interest- - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $595 $6 $32 $(6) $(26) $6
------------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON- MITTAL STEEL
GUARANTOR - MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------
Net sales $6,296 $(435) $7,080
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation shown
separately below) 5,050 (407) 5,752
Depreciation 252 - 266
Selling, general and administrative 228 (6) 298
Other operating expense 62 - 62
-----------------------------------------------------------------------------------------------
Operating income 704 (22) 702
Other income (expense) - net 36 (7) 32
Equity in earnings of subsidiaries 111 (605) 111
FINANCING COSTS:
Net interest income (expense) (204) (1) (222)
Net gain (loss) from foreign exchange 19 (3) 15
-----------------------------------------------------------------------------------------------
Income before taxes and minority interest 666 (638) 638
Income tax (benefit) expense:
Current 59 - 64
Deferred (36) - (32)
-----------------------------------------------------------------------------------------------
Net income (loss) before minority interest 643 (638) 606
Minority Interest- (11) - (11)
-----------------------------------------------------------------------------------------------
Net income (loss) $632 $(638) $595
-----------------------------------------------------------------------------------------------
F-88
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2002
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
------------------------------------------------------------------
MITTAL MITTAL STEEL
STEEL MITTAL STEEL EUROPE -
MITTAL STEEL - EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------
Net income $ 595 $6 $32 $(6) $(26) $6
Other comprehensive income (loss) - (28) 30 10 - 12
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 595 $(22) $62 $4 $(26) $18
------------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON- MITTAL STEEL
GUARANTOR - MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------
Net income $632 $(638) $595
Other comprehensive income (loss) (279) 4 (263)
---------------------------------------------------------------------------------------------
Comprehensive income $353 $(634) $332
---------------------------------------------------------------------------------------------
F-89
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2002
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
--------------------------------------------------------------
MITTAL
MITTAL MITTAL STEEL
MITTAL STEEL STEEL EUROPE - MITTAL MITTAL
STEEL EUROPE - EUROPE - NON- STEEL STEEL
-PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
Net cash provided by operating activities $ 640 $16 $10 $19 $(3) $42
----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment - - (10) (15) - (25)
Proceeds from sale of investment including affiliates
and joint ventures - - - - - -
Investment in affiliates and joint ventures (644) - - - - -
Other - - - 1 3 4
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (644) - (10) (14) 3 (21)
----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks - - 3 17 - 20
Proceeds from long-term debt - 3 - - - 3
Proceeds from long-term debt payable to affiliated - - - - - -
Payments of payable to banks - - - (17) - (17)
Payments of long-term debt payable to unrelated
parties - (12) - - - (12)
Payments of long-term debt payable to affiliated - (7) - - - (7)
Purchase of treasury stock (1) - - - - -
Sale of treasury stock 5 - - - - -
Dividends - - - - - -
Issue of share capital - net - - - - - -
----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 4 (16) 3 - - (13)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents - - 3 5 - 8
----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - 1 3 - 4
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year - - 17 4 - 21
----------------------------------------------------------------------------------------------------------------------------------
At the end of the year $ - $- $21 $12 $- $33
----------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------
Net cash provided by operating activities $418 $(561) $539
-----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (240) - (265)
Proceeds from sale of investment including affiliates
and joint ventures 35 - 35
Investment in affiliates and joint ventures (166) 672 (138)
Other 5 (1) 8
-----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (366) 671 (360)
-----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks 2,380 - 2,400
Proceeds from long-term debt 181 - 184
Proceeds from long-term debt payable to affiliated 62 (30) 32
Payments of payable to banks (2,343) - (2,360)
Payments of long-term debt payable to unrelated
parties (232) - (244)
Payments of long-term debt payable to affiliated (7) 14 -
Purchase of treasury stock - - (1)
Sale of treasury stock - - 5
Dividends (2) 2 -
Issue of share capital - net 88 (88) -
-----------------------------------------------------------------------------------------------------
Net cash used by financing activities 127 (102) 16
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 179 8 195
-----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 9 (8) 5
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 174 - 195
-----------------------------------------------------------------------------------------------------
At the end of the year $362 - $395
-----------------------------------------------------------------------------------------------------
F-90
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating balance sheets as of December 31, 2003
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
--------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1 $- $19 $19 $- $38
Restricted Cash -
Trade accounts receivable - - 76 76 - 152
Inventories - - 113 149 - 262
Other current assets 130 40 201 572 (760) 53
---------------------------------------------------------------------------------------------------------------------------------
Total current assets 131 40 409 816 (760) 505
Property, plant and equipment - net - - 140 107 - 247
Investments in affiliates 2,806 326 81 145 (540) 12
Other assets 4 5 20 2 - 27
---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,941 $371 $650 $1,070 $(1,300) $791
---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current portion
of long-term debt $- $4 $9 $41 $- $54
Trade accounts payable - - 101 106 - 207
Accrued expenses and other current
liabilities 360 60 117 235 (239) 173
---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 360 64 227 382 (239) 434
Long-term debt - 134 - 15 (13) 136
Deferred employee benefits - - 38 58 - 96
Other long-term obligations 20 - 30 15 - 45
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 380 198 295 470 (252) 711
---------------------------------------------------------------------------------------------------------------------------------
Minority Interest
Shareholders' equity 2,561 173 355 600 (1,048) 80
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,941 $371 $650 $1,070 $(1,300) $791
---------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $721 $- $760
Restricted Cash 140 140
Trade accounts receivable 737 - 889
Inventories 1,333 (8) 1,587
Other current assets 2,389 (2,265) 307
-------------------------------------------------------------------------------------------------------
Total current assets 5,320 (2,273) 3,683
Property, plant and equipment - net 4,407 - 4,654
Investments in affiliates 955 (2,806) 967
Other assets 844 (42) 833
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS $11,526 $(5,121) $10,137
-------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current portion of long-term
debt $726 $- $780
Trade accounts payable 808 - 1,015
Accrued expenses and other current liabilities 1,073 (782) 824
-------------------------------------------------------------------------------------------------------
Total current liabilities 2,607 (782) 2,619
Long-term debt 1,976 81 2,193
Deferred employee benefits 1,837 - 1,933
Other long-term obligations 525 (20) 570
-------------------------------------------------------------------------------------------------------
Total liabilities 6,945 (721) 7,315
-------------------------------------------------------------------------------------------------------
Minority Interest 261 - 261
Shareholders' equity 4,320 (4,400) 2,561
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,526 $(5,121) $10,137
-------------------------------------------------------------------------------------------------------
F-91
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2003
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
----------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------
Net sales $- $- $799 $634 $(50) $1,383
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation
shown separately below) - (2) 700 606 (39) 1,265
Depreciation - - 7 10 - 17
Selling, general and administrative 14 1 40 44 (10) 75
Other operating expense - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Operating income (14) 1 52 (26) (1) 26
Other income (expense) - net 18 (1) 6 (1) - 4
Equity in earnings of subsidiaries 1,188 13 - - (13) -
Financing costs:
Net interest income (expense) (10) (15) (1) (2) - (18)
Net gain (loss) from foreign exchange - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Income before taxes, minority interest and
cumulative effect of change in accounting
principle 1,182 (2) 57 (29) (14) 12
Income tax (benefit) expense:
Current - - 5 2 - 7
Deferred - - 10 - - 10
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before minority interest and
cumulative effect of change in accounting
principle 1,182 (2) 42 (31) (14) (5)
Minority Interest - - - - - -
Cumulative effect of change in accounting
principle - - 3 - - 3
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,182 $(2) $45 $(31) $(14) $(2)
------------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------- -------------- ------------
Net sales $8,426 $(242) $9,567
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation shown
separately below) 6,528 (225) 7,568
Depreciation 314 - 331
Selling, general and administrative 291 (11) 369
Other operating expense - - -
--------------------------------------------------------------------------------------------------------------
Operating income 1,293 (6) 1,299
Other income (expense) - net 62 (14) 70
Equity in earnings of subsidiaries 162 (1,188) 162
Financing costs:
Net interest income (expense) (147) - (175)
Net gain (loss) from foreign exchange 44 - 44
--------------------------------------------------------------------------------------------------------------
Income before taxes, minority interest and cumulative
effect of change in accounting principle 1,414 (1,208) 1,400
Income tax (benefit) expense:
Current 36 - 43
Deferred 131 - 141
--------------------------------------------------------------------------------------------------------------
Net income (loss) before minority interest and
cumulative effect of change in accounting principle 1,247 (1,208) 1,216
Minority Interest (35) - (35)
Cumulative effect of change in accounting principle (2) - 1
--------------------------------------------------------------------------------------------------------------
Net income (loss) $1,210 $(1,208) $1,182
--------------------------------------------------------------------------------------------------------------
F-92
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2003
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
----------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------------------
Net income $1,182 $(2) $45 $(31) $(14) $(2)
Other comprehensive income (loss) - 5 35 18 - 58
----------------------------------------------------------------------------------------------------------------------------
Comprehensive income $1,182 $3 $80 $(13) $(14) $56
----------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------
Net income $1,210 $(1,208) $1,182
Other comprehensive income (loss) 51 - 109
-----------------------------------------------------------------------------------------------------
Comprehensive income $1,261 $(1,208) $1,291
-----------------------------------------------------------------------------------------------------
F-93
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2003
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
---------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------
Net cash provided by operating activities $1,054 $(57) $144 $15 $(59) $43
------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES: (22)
Purchases of property, plant and equipment - - (16) (6) -
Proceeds from sale of investment including -
affiliates and joint ventures - - - - -
Restricted Cash -
Investment in affiliates and joint ventures (1,116) 41 - 1 (42)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,116) 41 (16) (5) (42) (22)
------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks - - - 22 - 22
Proceeds from long-term debt 71 - - 2 - 2
Proceeds from long-term debt payable to
affiliated - - 24 - (24) -
Payments of payable to banks - - (8) (14) - (22)
Payments of long-term debt payable to
unrelated parties - (15) - (1) - (16)
Payments of long-term debt payable to
affiliated - (4) (141) (15) 160 -
Purchase of treasury stock (8) - - - - -
Capital contribution - - (4) - - (4)
Dividends - - - - - -
Issue of share capital - net - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities 63 (19) (129) (6) 136 (18)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1 (35) (1) 4 35 3
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - 35 (1) 3 (35) 2
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year - - 21 12 - 33
------------------------------------------------------------------------------------------------------------------------------------
At the end of the year $1 $- $19 $19 $- $38
------------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------
Net cash provided by operating activities $1,433 $1,092 $1,438
--------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (399) - (421)
Proceeds from sale of investment including
affiliates and joint ventures 5 - 5
Restricted Cash (118) (118)
Investment in affiliates and joint ventures (289) 1,125 (280)
--------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (801) 1,125 (814)
--------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks 3,624 - 3,646
Proceeds from long-term debt 73 (94) 52
Proceeds from long-term debt payable to affiliated 60 34 94
Payments of payable to banks (3,614) - (3,636)
Payments of long-term debt payable to unrelated
parties (210) - (226)
Payments of long-term debt payable to affiliated (54) 14 (40)
Purchase of treasury stock - - (8)
Capital contribution - 4 -
Dividends (203) 39 (164)
Issue of share capital - net 28 (28) -
--------------------------------------------------------------------------------------------------
Net cash used by financing activities (296) (31) (282)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 336 2 342
--------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 23 (2) 23
--------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 362 - 395
--------------------------------------------------------------------------------------------------
At the end of the year $721 $- $760
--------------------------------------------------------------------------------------------------
F-94
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2004
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
--------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
Net sales $ - $37 $ 1,275 $ 928 $ (124) $ 2,116
COSTS AND EXPENSES:
Cost of sales (exclusive of
depreciation shown separately below) - 14 1,011 843 (103) 1,765
Depreciation - - 10 10 - 20
Selling, general and administrative 38 12 49 40 (21) 80
Other operating expense - - - - - -
-----------------------------------------------------------------------------------------------------------------------------
Operating income (38) 11 205 35 - 251
Other income (expense) - net 24 (7) 5 (1) - (3)
Equity in earnings of subsidiaries 4,720 - - - - -
Financing costs:
Net interest income (expense) (5) (15) (3) (1) - (19)
Net gain (loss) from foreign
exchange - - - - - -
-----------------------------------------------------------------------------------------------------------------------------
Income before taxes and minority
interest 4,701 (11) 207 33 - 229
INCOME TAX (BENEFIT) EXPENSE:
Current - 1 64 - - 65
Deferred - - 13 (20) - (7)
-----------------------------------------------------------------------------------------------------------------------------
Income before minority interest - (12) 130 53 - 171
Minority interest - - - - - -
-----------------------------------------------------------------------------------------------------------------------------
Net income $4,701 $(12) $130 $53 $- $171
-----------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------
Net sales $ 20,262 $ (181) $ 22,197
COSTS AND EXPENSES:
Cost of sales (exclusive of
depreciation shown separately below) 13,065 (136) 14,694
Depreciation 533 - 553
Selling, general and administrative 727 (41) 804
Other operating expense - - -
----------------------------------------------------------------------------------------
Operating income 5,937 (4) 6,146
Other income (expense) - net (263) 370 128
Equity in earnings of subsidiaries 66 (4,720) 66
Financing costs:
Net interest income (expense) (165) 2 (187)
Net gain (loss) from foreign
exchange (40) 20 (20)
----------------------------------------------------------------------------------------
Income before taxes and minority
interest 5,535 (4,332) 6,133
INCOME TAX (BENEFIT) EXPENSE:
Current 666 - 731
Deferred 90 3 86
----------------------------------------------------------------------------------------
Income before minority interest 4,779 (4,335) 5,316
Minority interest (615) - (615)
----------------------------------------------------------------------------------------
Net income $4,164 $(4,335) $4,701
----------------------------------------------------------------------------------------
F-95
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2004
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
----------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------
Net income $4,701 $(12) $130 $53 $- $171
Other comprehensive income (loss) 33 (12) 45 (7) - 26
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $4,734 $(24) $175 $46 $- $197
-----------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------
Net income $4,164 $(4,335) $4,701
Other comprehensive income (loss) 1,056 (101) 1,014
-----------------------------------------------------------------------------------------------------
Comprehensive income $5,220 $(4,436) $5,715
-----------------------------------------------------------------------------------------------------
F-96
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating balance sheets as of December 31, 2004
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
--------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents including
short-term investments $12 $2 $18 $11 $- $31
Restricted Cash - - - - - -
Trade accounts receivable - 7 208 117 - 332
Inventories - 3 147 233 - 383
Other current assets 522 55 288 794 (1,024) 113
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 534 67 661 1,155 (1,024) 859
Property, plant and equipment - net - - 151 111 - 262
Investments in affiliates 6,248 298 15 565 (863) 15
Other assets 29 1 13 2 - 16
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,811 $366 $840 $1,833 $(1,887) $1,152
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current portion of
long-term debt $- $4 $8 $29 $- $41
Trade accounts payable - 5 138 169 - 312
Accrued expenses and other current
liabilities 965 132 285 284 (457) 244
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 965 141 431 482 (457) 597
Long-term debt - 96 - 14 (13) 97
Deferred employee benefits - - 44 64 - 108
Other long-term obligations - - 35 10 - 45
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 965 237 510 570 (470) 847
------------------------------------------------------------------------------------------------------------------------------------
Minority Interest
Shareholders' equity 5,846 129 330 1,263 (1,417) 305
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,811 $366 $840 $1,833 $(1,887) $1,152
------------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents including short-term
investments $2,449 $4 $2,496
Restricted Cash 138 - 138
Trade accounts receivable 1,679 (5) 2,006
Inventories 3,670 (40) 4,013
Other current assets 1,991 (1,654) 972
------------------------------------------------------------------------------------------------------
Total current assets 9,927 (1,695) 9,625
Property, plant and equipment - net 7,300 - 7,562
Investments in affiliates 10,286 (15,882) 667
Other assets 1,273 (19) 1,299
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $28,786 $(17,596) $19,153
------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current portion of long-term
debt $300 $- $341
Trade accounts payable 1,587 - 1,899
Accrued expenses and other current liabilities 4352 (1,571) 3,990
------------------------------------------------------------------------------------------------------
Total current liabilities 6,239 (1,571) 6,230
Long-term debt 1,725 (183) 1,639
Deferred employee benefits 1,823 - 1,931
Other long-term obligations 1,719 - 1,764
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,506 (1,754) 11,564
------------------------------------------------------------------------------------------------------
Minority Interest 1,743 - 1,743
Shareholders' equity 15,537 (15,842) 5,846
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,786 $(17,596) $19,153
------------------------------------------------------------------------------------------------------
F-97
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2004
MITTAL STEEL EUROPE - ISSUER SUBSIDIARY
--------------------------------------------------------------------
MITTAL STEEL
MITTAL STEEL MITTAL STEEL EUROPE -
MITTAL STEEL EUROPE - EUROPE - NON- MITTAL STEEL MITTAL STEEL
- PARENT PARENT SUBSIDIARY GUARANTOR EUROPE- EUROPE-
COMPANY COMPANY GUARANTORS SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------
Net cash provided by operating activities $232 $(21) $150 $493 $(615) $7
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment - - (9) (7) - (16)
Proceeds from sale of investment including
affiliates and joint ventures - - - - - -
Investment in affiliates and joint ventures (93) 28 82 133 - 243
Other - 3 1 - - 4
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing
activities (93) 31 74 126 - 231
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks - 4 (2) 5 - 7
Proceeds from long-term debt - - - - - -
Proceeds from long-term debt payable to
affiliated 30 38 13 - - 51
Payments of payable to banks - - - (16) - (16)
Payments of long-term debt payable to
unrelated parties - - - - - -
Payments of long-term debt payable to
affiliated (113) (49) (241) (1) - (291)
Purchase of treasury stock (54) - - - - -
Sale of treasury stock 19 - - - - -
Dividends - (1) - - - (1)
Capital contribution (10) - - (615) 615 -
-----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (128) (8) (230) (627) 615 (250)
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 11 2 (6) (8) - (12)
-----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - 5 1 - 6
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 1 - 19 18 - 37
-----------------------------------------------------------------------------------------------------------------------------------
At the end of the year $12 $2 $18 $11 $- $31
-----------------------------------------------------------------------------------------------------------------------------------
MITTAL STEEL
- NON-
GUARANTOR MITTAL STEEL- MITTAL STEEL-
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------
Net cash provided by operating activities $4,678 $(306) $4,611
-----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (882) - (898)
Proceeds from sale of investment including affiliates
and joint ventures 83 - 83
Investment in affiliates and joint ventures (4,930) 4,814 34
Other 285 (309) (20)
-----------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (5,444) 4,505 (801)
-----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks 2,251 - 2,258
Proceeds from long-term debt 1,185 - 1,185
Proceeds from long-term debt payable to affiliated 91 (96) 76
Payments of payable to banks (2,722) - (2,738)
Payments of long-term debt payable to unrelated
parties (2,127) - (2,127)
Payments of long-term debt payable to affiliated (351) 580 (175)
Purchase of treasury stock - - (54)
Sale of treasury stock - - 19
Dividends (1,066) 304 (763)
Capital contribution 4,993 (4,993) (10)
-----------------------------------------------------------------------------------------------------
Net cash used by financing activities 2,254 (4,205) (2,329)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,488 (6) 1,481
-----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 248 - 254
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At the beginning of the year 720 2 760
-----------------------------------------------------------------------------------------------------
At the end of the year $2,456 $(4) $2,495
-----------------------------------------------------------------------------------------------------
F-98
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 22: FINANCIAL INFORMATION FOR ISSUER, SUBSIDIARIES AND NON-GUARANTOR
SUBSIDIARIES OF THE PROPOSED OFFERING
On March 9, 2004, Ispat Inland Inc. announced that an affiliate will offer $800
of senior secured notes through a private placement, subject to market and other
conditions. The proceeds from the offering by Ispat Inland ULC, a newly created
finance subsidiary, are expected to be used to repay existing debt. The notes
will be secured by a pledge of $800 of Ispat Inland Inc.'s first mortgage bonds,
and will be jointly, severally, fully and unconditionally guaranteed by Ispat
Inland Inc., certain of its existing and future domestic subsidiaries, Mittal
Steel, and Ispat Inland LP, a limited purpose finance subsidiary.
Presented below is condensed consolidating financial information as required by
Rule 3-10 of Regulation S-X related to this proposed offering for the following:
- Mittal Steel on a parent company only basis;
- Ispat Inland ULC, a newly formed limited purpose finance subsidiary, the
proposed issuer;
- Ispat Inland Inc. and its guarantor subsidiaries and Ispat Inland LP on a
combined basis;
- Mittal Steel's non-guarantor subsidiaries on a combined basis;
- Mittal Steel eliminations; and
- Mittal Steel and subsidiaries consolidated
F-99
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2002
ISPAT INLAND - ISSUER SUBSIDIARY
-----------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
---------------------------------------------------------------------------------------------------
Net sales $ -- $ 1,836 $ 2,300 $(1,832) $ 2,304 $ --
COSTS AND EXPENSES:
Cost of sales (exclusive
of depreciation shown
separately below) 4 1,967 1,947 (1,832) 2,082 --
Depreciation -- 99 -- 99 --
Selling, general and
administrative 7 31 1 -- 32 --
Other operating expense -- -- 62 -- 62
---------------------------------------------------------------------------------------------------
Operating income (11) (261) 290 -- 29 --
Other income (expense)
- net -- 20 14 -- 34 1
Equity in earnings
of subsidiaries 605 -- -- -- -- --
FINANCING COSTS:
Net interest income
(expense) 1 (57) (20) -- (77) (9)
Net gain (loss) from
foreign exchange -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Income before taxes and
minority interest 595 (298) 284 -- (14) (8)
Income tax (benefit)
expense:
Current -- (47) 45 -- (2) (1)
Deferred -- (44) 39 -- (5) (2)
---------------------------------------------------------------------------------------------------
Net income (loss)
before minority interest 595 (207) 200 -- (7) (5)
Minority Interest -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Net Income/(Loss) $ 595 $ (207) $ 200 -- $ (7) $ (5)
---------------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------
Net sales $ 5,360 $ (584) $ 7,080
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation
shown separately below) 4,210 (544) 5,752
Depreciation 167 -- 266
Selling, general and administrative 281 (22) 298
Other operating expense -- -- 62
-------------------------------------------------------
Operating income 702 (18) 702
Other income (expense) - net 8 (11) 32
Equity in earnings of subsidiaries 111 (605) 111
FINANCING COSTS:
Net interest income (expense) (137) -- (222)
Net gain (loss) from foreign exchange 73 (58) 15
-------------------------------------------------------
Income before taxes and minority interest 757 (692) 638
Income tax (benefit) expense:
Current 67 -- 64
Deferred (25) -- (32)
-------------------------------------------------------
Net income (loss) before minority
interest 715 (692) 606
Minority Interest (11) -- (11)
-------------------------------------------------------
Net Income/(Loss) $ 704 $ (692) $ 595
-------------------------------------------------------
F-100
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2002
ISPAT INLAND - ISSUER SUBSIDIARY
---------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
-------------- ---------------------------------------------------------------------------
Net income (loss) $ 595 $(207) $ 200 $ -- $ (7) $ (5)
Other comprehensive income (loss) -- (249) (2) -- (251) --
--------------------------------------------------------------------------------------------
Comprehensive income $ 595 $(456) $ 198 $ -- $(258) $ (5)
--------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------------------------------------------
Net income (loss) $ 704 $(692) $ 595
Other comprehensive income (loss) (14) 2 (263)
----------------------------------------------
Comprehensive income $ 690 $(690) $(332)
----------------------------------------------
F-101
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2002
ISPAT INLAND - ISSUER SUBSIDIARY
--------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
------------------------------------------------------------------------------------------------
Net cash provided
by operating activities $ 640 $ 136 $ (115) $-- $ 21 $ (5)
------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property,
plant and equipment (PP&E) -- (52) -- -- (52) --
Proceeds from sale of
assets and investment
including affiliates
and joint ventures -- -- -- -- -- --
Restricted Cash -- -- -- -- -- --
Investment in affiliates
and joint ventures (644) (46) 57 -- 11 --
Other investing activities -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Net cash provided (used)
by investing activities (644) (98) 57 -- (41) --
------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable
to banks -- -- 2,242 -- 2,242 --
Proceeds from
long-term debt -- -- -- -- -- 3
Proceeds from long-term
debt payable to affiliated -- 2 -- -- 2 7
Payments of payable to banks -- (15) (2,198) -- (2,213) --
Payments of long-term debt
payable to unrelated parties -- (20) -- -- (20) (7)
Payments of long-term debt
payable to affiliated -- (3) -- -- (3) --
Purchase of treasury stock (1) -- -- -- -- --
Sale of treasury stock 5 -- -- -- -- --
Capital contribution -- -- -- -- -- --
Dividends -- (2) -- -- (2) --
Issue of share capital - net -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Net cash used by financing
activities 4 (38) 44 -- 6 3
------------------------------------------------------------------------------------------------
Net increase (decrease)
in cash and cash equivalents -- -- (14) -- (14) (2)
Effect of exchange rate
changes - cash -- -- -- -- -- --
Cash and cash equivalents:
At the beginning
of the year -- 2 22 -- 24 3
At the end of the year $ -- $ 2 $ 8 $-- $ 10 $ 1
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------
Net cash provided by operating activities $ 461 $ (578) $ 539
-------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(PP&E) (213) -- (265)
Proceeds from sale of assets and investment
including affiliates and joint ventures 35 -- 35
Restricted Cash 8 -- 8
Investment in affiliates and joint ventures (195) 690 (138)
Other investing activities -- -- --
-------------------------------------------------------
Net cash provided (used) by investing
activities (365) 690 (360)
-------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from payable to banks 158 -- 2,400
Proceeds from long-term debt 181 -- 184
Proceeds from long-term debt payable to
affiliated 30 (7) 32
Payments of payable to banks (147) -- (2,360)
Payments of long-term debt payable to
unrelated parties (221) 4 (244)
Payments of long-term debt payable to
affiliated (13) 16 --
Purchase of treasury stock -- -- (1)
Sale of treasury stock -- -- 5
Capital contribution 83 (83) --
Dividends 38 (36) --
Issue of share capital - net 6 (6) --
-------------------------------------------------------
Net cash used by financing activities 115 (112) 16
-------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 211 -- 195
Effect of exchange rate changes - cash 5 -- 5
Cash and cash equivalents:
At the beginning of the year 168 -- 195
At the end of the year $ 384 $ -- $ 395
F-102
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2003
ISPAT INLAND - ISSUER SUBSIDIARY
-------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
-----------------------------------------------------------------------------------------
Net sales $ -- $ 2,107 $ 548 $ (432) $ 2,223 $ --
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation
shown separately below) -- 2,092 443 (432) 2,103 --
Depreciation -- 97 -- 97 --
Selling, general and administrative 14 32 1 -- 33 --
Other operating expense -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Operating income (14) (114) 104 -- (10) --
Other income (expense) - net 18 1 13 -- 14 7
Equity in earnings of subsidiaries 1,188 -- -- -- -- --
Financing costs:
Net interest income (expense) (10) (64) (6) (70) 3
Net gain (loss) from foreign exchange -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Income before taxes 1,182 (177) 111 -- (66) 10
INCOME TAX (BENEFIT) EXPENSE:
Current -- 9 2 -- 11 (1)
Deferred -- (46) 20 -- (26) 5
-----------------------------------------------------------------------------------------
Net income (loss) before minority
interest, income from equity method
investments and cumulative effect of
change in accounting principle 1,182 (140) 89 -- (51) 6
Minority Interest -- -- -- -- -- --
Cumulative effect of change in
accounting principle -- (2) -- -- (2) --
-----------------------------------------------------------------------------------------
Net income (loss) $ 1,182 $ (142) $ 89 $ (53) $ 6
-----------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------
Net sales $ 7,741 $ (397) $ 9,567
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation
shown separately below) 5,830 (365) 7,568
Depreciation 234 -- 331
Selling, general and administrative 354 (32) 369
Other operating expense -- -- --
-------------------------------------------------------
Operating income 1,323 -- 1,299
Other income (expense) - net 52 (21) 70
Equity in earnings of subsidiaries 162 (1,188) 162
Financing costs:
Net interest income (expense) (98) -- (175)
Net gain (loss) from foreign exchange 97 (53) 44
-------------------------------------------------------
Income before taxes 1,536 (1,262) 1,400
INCOME TAX (BENEFIT) EXPENSE:
Current 33 -- 43
Deferred 179 (17) 141
-------------------------------------------------------
Net income (loss) before minority
interest, income from equity method
investments and cumulative effect of
change in accounting principle 1,324 (1,245) 1,216
Minority Interest (35) -- (35)
Cumulative effect of change in
accounting principle 3 -- 1
-------------------------------------------------------
Net income (loss) $ 1,292 $(1,245) $ 1,182
-------------------------------------------------------
F-103
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2003
ISPAT INLAND - ISSUER SUBSIDIARY
----------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
---------------------------------------------------------------------------------------------
Net income $ 1,182 $ (142) $ 89 $-- $ (53) $ 6
Other comprehensive income (loss) -- (79) (2) -- (81) --
---------------------------------------------------------------------------------------------
Comprehensive income $ 1,182 $ (221) $ 87 $-- $ (134) $ 6
---------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------
Net income $ 1,292 $(1,245) $ 1,182
Other comprehensive income (loss) 208 (18) 109
-----------------------------------------------
Comprehensive income $ 1,500 $(1,263) $ 1,291
-----------------------------------------------
F-104
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating balance sheets as of December 31, 2003
ISPAT INLAND - ISSUER SUBSIDIARY
------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 2 $ 11 $ -- $ 13 $ --
Restricted Cash -- -- -- -- -- --
Trade accounts receivable -- 39 177 -- 216 --
Inventories -- 372 -- -- 372 --
Other current assets 130 (104) 137 -- 33 7
------------------------------------------------------------------------------------------------
Total current assets 131 309 325 -- 634 7
Property, plant and
equipment - net -- 1,751 -- -- 1,751 --
Investments in affiliates 2,806 321 214 (321) 214 90
Other assets 4 533 4 -- 537 657
------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,941 $ 2,914 $ 543 $ (321) $ 3,136 $ 754
------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Payable to banks and current
portion of long-term debt $ -- $ 118 $ 150 $ -- $ 268 $ 7
Trade accounts payable -- 157 26 -- 183 --
Accrued expenses and other
current liabilities 360 271 3 -- 274 --
------------------------------------------------------------------------------------------------
Total current liabilities 360 546 179 -- 725 7
Long-term debt -- 1,088 -- -- 1,088 655
Shareholder Loan -- -- -- -- -- --
Deferred employee benefits -- -- -- -- -- --
Other long-term obligations 20 1,707 3 -- 1,710 6
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 380 3,341 182 -- 3,523 668
------------------------------------------------------------------------------------------------
Minority Interest -- -- -- -- -- --
Shareholders' equity 2,561 (427) 361 (321) (387) 86
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,941 $ 2,914 $ 543 $ (321) $ 3,136 $ 754
------------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 744 $ 2 $ 760
Restricted Cash 140 -- 140
Trade accounts receivable 679 (6) 889
Inventories 1,224 (9) 1,587
Other current assets 2,527 (2,390) 307
-----------------------------------------------------
Total current assets 5,314 (2,403) 3,683
Property, plant and
equipment - net 2,903 -- 4,654
Investments in affiliates 6,970 (9,113) 967
Other assets 331 (696) 833
-----------------------------------------------------
TOTAL ASSETS $ 15,518 $(12,212) $ 10,137
-----------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Payable to banks and current
portion of long-term debt $ 511 $ (6) $ 780
Trade accounts payable 832 -- 1,015
Accrued expenses and other
current liabilities 1,227 (1,037) 824
-----------------------------------------------------
Total current liabilities 2,570 (1,043) 2,619
Long-term debt 2,099 (1,649) 2,193
Shareholder Loan 94 -- 94
Deferred employee benefits -- -- --
Other long-term obligations 674 (1) 2,409
-----------------------------------------------------
TOTAL LIABILITIES 5,437 (2,693) 7,315
-----------------------------------------------------
Minority Interest 261 -- 261
Shareholders' equity 9,820 (9,519) 2,561
-----------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 15,518 $(12,212) $ 10,137
-----------------------------------------------------
F-105
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2003
ISPAT INLAND - ISSUER SUBSIDIARY
--------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
--------------------------------------------------------------------------------------------------
Net cash provided by
operating activities $ 1,054 $ 61 $ (39) $-- $ 22 $ 13
--------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (PP&E) -- (111) -- -- (111) --
Proceeds from sale of
assets and investment
including affiliates and
joint ventures -- -- -- -- -- --
Investment in affiliates and
joint ventures (1,116) (98) 117 -- 19 --
Restricted Cash -- -- -- -- -- --
Other investing activities -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Net cash provided (used)
by investing activities (1,116) (209) 117 -- (92) --
--------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from payable
to banks -- 973 2,429 -- 3,402 --
Proceeds from long-term debt 71 25 -- -- 25 --
Proceeds from long-term debt
payable to affiliated -- 61 -- -- 61 --
Payments of payable to banks -- (886) (2,504) -- (3,390) --
Payments of long-term debt
payable to unrelated parties -- -- -- -- -- (13)
Payments of long-term debt
payable to affiliated -- (9) -- -- (9) (1)
Purchase of treasury stock (8) -- -- -- -- --
Sale of treasury stock -- -- -- -- -- --
Capital contribution -- -- -- -- -- --
Dividends -- (16) -- -- (16) --
Issue of share capital - net -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
Net cash used by
financing activities 63 148 (75) -- 73 (14)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 1 -- 3 -- 3 (1)
Effect of exchange rate
changes -cash -- -- -- -- -- --
CASH AND CASH EQUIVALENTS:
At the beginning of the year -- 2 8 -- 10 1
At the end of the year $ 1 $ 2 $ 11 $-- $ 13 $ --
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-----------------------------------------------------
Net cash provided by
operating activities $ 1,561 $(1,212) $ 1,438
INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (PP&E) (310) -- (421)
Proceeds from sale of
assets and investment
including affiliates and
joint ventures 5 -- 5
Investment in affiliates and
joint ventures (287) 1,104 (280)
Restricted Cash (118) -- (118)
Other investing activities -- -- --
-----------------------------------------------------
Net cash provided (used)
by investing activities (710) 1,104 (814)
-----------------------------------------------------
Financing activities:
Proceeds from payable
to banks 229 15 3,646
Proceeds from long-term debt 66 (110) 52
Proceeds from long-term
debt payable to affiliated (149) 182 94
Payments of payable to banks (246) -- (3,636)
Payments of long-term debt
payable to unrelated parties (208) (5) (226)
Payments of long-term debt
payable to affiliated (43) 13 (40)
Purchase of treasury stock -- -- (8)
Sale of treasury stock -- -- --
Capital contribution (4) 4 --
Dividends (187) 39 (164)
Issue of share capital - net 28 (28) --
-----------------------------------------------------
Net cash used by
financing activities (514) 110 (282)
-----------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 337 2 342
Effect of exchange rate
changes -cash 23 -- 23
CASH AND CASH EQUIVALENTS:
At the beginning of the year 384 -- 395
At the end of the year $ 744 $ 2 $ 760
F-106
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of income for the year ended December 31,
2004
ISPAT INLAND - ISSUER SUBSIDIARY
---------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
---------------------------------------------------------------------------------------------------
Net sales $- $ 3,158 $- $-- $ 3,158 $ --
COSTS AND EXPENSES:
Cost of sales (exclusive of
depreciation shown separately
below) -- 2,563 (76) -- 2,487 --
Depreciation -- 101 -- -- 101 10
Selling, general and
administrative 38 39 -- -- 39 --
Other operating expense -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Operating income (38) 455 76 -- 531 (10)
Other income (expense) - net 24 (29) 16 -- (13) 13
Equity in earnings of
subsidiaries 4,720 2 -- -- 2 --
Financing costs:
Net interest income (expense) (5) (101) (7) -- (108) --
Net gain (loss) from foreign
exchange -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Income before taxes 4,701 327 85 -- 412 3
INCOME TAX (BENEFIT) EXPENSE:
Current -- -- 3 -- 3 --
Deferred -- 150 -- -- 150 (2)
---------------------------------------------------------------------------------------------------
Net income (loss) before
minority interest and equity
in earnings of subsidiaries 4,701 177 82 -- 259 5
Minority Interest -- -- -- -- -- --
---------------------------------------------------------------------------------------------------
Net income (loss) $ 4,701 $ 177 $ 82 $-- $ 259 $ 5
---------------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------
Net sales $ 19,292 $ (253) $ 22,197
COSTS AND EXPENSES:
Cost of sales (exclusive of depreciation
shown separately below) 12,417 (210) 14,694
Depreciation 442 -- 553
Selling, general and administrative 767 (40) 804
Other operating expense -- -- --
---------------------------------------------------------
Operating income 5,666 (3) 6,146
Other income (expense) - net 418 (314) 128
Equity in earnings of subsidiaries 64 (4,720) 66
Financing costs:
Net interest income (expense) (74) -- (187)
Net gain (loss) from foreign exchange (40) 20 (20)
---------------------------------------------------------
Income before taxes 6,034 (5,017) 6,133
INCOME TAX (BENEFIT) EXPENSE:
Current 728 -- 731
Deferred (65) 3 86
---------------------------------------------------------
Net income (loss) before minority
interest and equity in earnings of
subsidiaries 5,371 (5,020) 5,316
Minority Interest (615) -- (615)
---------------------------------------------------------
Net income (loss) $ 4,756 $ (5,020) $ 4,701
---------------------------------------------------------
F-107
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of comprehensive income for the year ended
December 31, 2004
ISPAT INLAND - ISSUER SUBSIDIARY
-------------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
----------------------------------------------------------------------------------------------
Net income $ 4,701 $ 177 $ 82 $-- $ 259 $ 5
Other comprehensive income (loss) 33 12 -- -- 12 --
----------------------------------------------------------------------------------------------
Comprehensive income $ 4,734 $ 189 $ 82 $-- $ 271 $ 5
----------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------
Net income $ 4,756 $(5,020) $ 4,701
Other comprehensive income (loss) 1,068 (99) 1,014
-------------------------------------------------
Comprehensive income $ 5,824 $(5,119) $ 5,715
-------------------------------------------------
F-108
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating balance sheets as of December 31, 2004
ISPAT INLAND - ISSUER SUBSIDIARY
--------------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
--------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12 $ 41 $ 40 $ -- $ 81 $ 1
Restricted Cash -- -- -- -- -- --
Trade accounts receivable -- 77 200 -- 277 --
Inventories -- 602 -- -- 602 --
Other current assets 522 61 (26) -- 35 584
--------------------------------------------------------------------------------------------
Total current assets 534 781 214 -- 995 585
Property, plant and equipment - net -- 1,689 -- -- 1,689 --
Investments in affiliates 6,248 364 231 (364) 231 90
Other assets 29 375 4 -- 379 15
--------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,811 $ 3,209 $ 449 $ (364) $ 3,294 $ 690
------------------------------------------------------------- ------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current
portion of long-term debt $ -- $ -- $ -- $ -- $ -- $ --
Trade accounts payable -- 202 33 -- 235 --
Accrued expenses and other
current liabilities 965 368 3 -- 371 31
------------------------------------------------------------------------------------------
Total current liabilities 965 570 36 -- 606 31
Long-term debt -- 1,013 -- -- 1,013 569
Shareholder Loan -- -- -- -- -- --
Deferred employee benefits -- 1,508 -- -- 1,508 --
Other long-term obligations -- 56 2 -- 58 --
------------------------------------------------------------------------------------------
TOTAL LIABILITIES 965 3,147 38 -- 3,185 600
------------------------------------------------------------------------------------------
Minority Interest -- -- -- -- -- --
Shareholders' equity 5,846 62 411 (364) 109 90
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,811 $ 3,209 $ 449 $ (364) $ 3,294 $ 690
------------------------------------------------------------------------------------------
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,398 $ 4 $ 2,496
Restricted Cash 138 -- 138
Trade accounts receivable 1,734 (5) 2,006
Inventories 3,455 (44) 4,013
Other current assets 2,491 (2,660) 972
------------------------------------------------------
Total current assets 10,216 (2,705) 9,625
Property, plant and equipment - net 5,873 -- 7,562
Investments in affiliates 11,477 (17,379) 667
Other assets 912 (36) 1,299
------------------------------------------------------
TOTAL ASSETS $ 28,478 $(20,120) $ 19,153
------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payable to banks and current
portion of long-term debt $ 341 $ -- $ 341
Trade accounts payable 1,664 -- 1,899
Accrued expenses and other
current liabilities 3,985 (1,362) 3,990
------------------------------------------------------
Total current liabilities 5,990 (1,362) 6,230
Long-term debt 1,001 (944) 1,639
Shareholder Loan -- -- --
Deferred employee benefits 423 -- 1,931
Other long-term obligations 1,706 -- 1,764
------------------------------------------------------
TOTAL LIABILITIES 9,120 (2,306) 11564
------------------------------------------------------
Minority Interest 1,743 -- 1,743
Shareholders' equity 17,615 (17,814) 5,846
------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 28,478 $(20,120) $ 19,153
------------------------------------------------------
F-109
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
Condensed consolidating statements of cash flows for the year ended December 31,
2004
ISPAT INLAND - ISSUER SUBSIDIARY
----------------------------------------------------------------------
ISPAT INLAND - ISPAT INLAND -
MITTAL STEEL - GUARANTOR NON-GUARANTOR CONSOLIDATING ISPAT INLAND - ISPAT
PARENT COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED INLAND LP
----------------------------------------------------------------------------------------
Net cash provided by operating activities $ 232 $ 47 $ 173 $-- $ 220 $ (9)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(PP&E) -- (40) -- -- (40) --
Proceeds from sale of assets and investment
including affiliates and joint ventures -- 1 -- -- 1 --
Investment in affiliates and joint ventures (93) 36 5 -- 41 --
Restricted Cash -- -- -- -- -- --
Other investing activities -- -- -- -- -- 227
----------------------------------------------------------------------------------------
Net cash provided (used) by investing
activities (93) (3) 5 -- 2 227
----------------------------------------------------------------------------------------
Financing activities:
Proceeds from payable to banks -- 397 1,697 -- 2,094 --
Proceeds from long-term debt -- 795 -- -- 795 --
Proceeds from long-term debt payable to
affiliated 30 (10) -- -- (10) 10
Payments of payable to banks -- (485) (1,847) -- (2,332) --
Payments of long-term debt payable to
unrelated parties -- (15) -- -- (15) (227)
Payments of long-term debt payable to
affiliated (113) (911) -- -- (911) --
Purchase of treasury stock (54) -- -- -- -- --
Sale of treasury stock 19 -- -- -- -- --
Capital contribution (10) 256 -- -- 256 --
Dividends -- (31) -- -- (31) --
Issue of share capital - net -- -- -- -- -- --
----------------------------------------------------------------------------------------
Net cash used by financing activities (128) (4) (150) -- (154) (217)
----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 11 40 28 -- 68 1
Effect of exchange rate changes -cash -- -- -- -- -- --
CASH AND CASH EQUIVALENTS:
At the beginning of the year 1 2 11 -- 13 --
At the end of the year $ 12 $ 42 $ 39 $-- $ 81 $ 1
MITTAL STEEL -
NON-GUARANTOR MITTAL STEEL - MITTAL STEEL -
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------------------------------------------------
Net cash provided by operating activities $ 5,089 $ (921) $ 4,611
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(PP&E) (858) -- (898)
Proceeds from sale of assets and investment
including affiliates and joint ventures 82 -- 83
Investment in affiliates and joint ventures (4,728) 4,814 34
Restricted Cash 2 -- 2
Other investing activities 60 (309) (22)
--------------------------------------------------------
Net cash provided (used) by investing
activities (5,442) 4,505 (801)
--------------------------------------------------------
Financing activities:
Proceeds from payable to banks 164 -- 2,258
Proceeds from long-term debt 390 -- 1,185
Proceeds from long-term debt payable to
affiliated 142 (96) 76
Payments of payable to banks (406) -- (2,738)
Payments of long-term debt payable to
unrelated parties (1,885) -- (2,127)
Payments of long-term debt payable to
affiliated 269 580 (175)
Purchase of treasury stock -- -- (54)
Sale of treasury stock -- -- 19
Capital contribution 4,122 (4,378) (10)
Dividends (1,036) 304 (763)
Issue of share capital - net -- -- --
--------------------------------------------------------
Net cash used by financing activities 1,760 (3,590) (2,329)
--------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,407 (6) 1,481
Effect of exchange rate changes -cash 254 -- 254
CASH AND CASH EQUIVALENTS:
At the beginning of the year 746 -- 760
At the end of the year $ 2,407 $ (6) $ 2,495
F-110
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 23: SECURITIZATION AND FACTORING OF RECEIVABLES
Certain subsidiaries of the Company had securitization facilities under an
agreement to sell interest in pools of the Company's trade receivables on a
non-recourse basis. Participation interests in new receivables were sold, as
collections reduce previously sold accounts. The proceeds from the sale of trade
accounts receivables are included in the cash flows from operating activities in
the Consolidated Statements of Cash Flows. The initial payment can go up to a
maximum of 85% of recorded amounts for the receivables sold. The deferred
proceeds outstanding amounted to $nil and $nil at December 31, 2003 and 2004
respectively. Gross receivables sold were $60, $nil and $nil at December 31,
2002, 2003 and 2004 respectively. These securitization facilities were
discontinued in 2003.
Additionally, some of our subsidiaries have entered into Factoring Agreements
with certain banks/financial institutions under which they are entitled to sell
eligible accounts receivables from the customers up to an agreed limit. The
bank/financial institution buys these receivables without recourse to the
seller. Payments for sale of these receivables are received in two instalments.
The first instalment ranging between 90% to 95% of the receivables sold (up to a
maximum of $284) is made available immediately on sale of the receivables. The
deferred proceeds outstanding and availability amounted to $34 and $167 at
December 31, 2003 and 2004 respectively. Gross receivables sold were $196 and
$342 at December 31, 2003 and 2004 respectively. The balance portion of the
purchase price is held back towards factoring commission, interest charges and
any possible bonus or discounts till the receivables are collected from the
customer by the Factoring agent. The proceeds from the sale of trade accounts
receivables are included in the cash flows from operating activities in the
Consolidated Statements of Cash Flows.
The receivables are sold at a discount that is included in selling, general and
administrative expenses in the consolidated statements of income and amounted
$5, $5 and $7 for 2002, 2003 and 2004 respectively.
SECURITIZATION
2002 2003 2004
---- ---- ----
Proceeds from trade receivables sold .......................................... $487 $ 30 $ -
Nominal of trade receivables sold ............................................. 498 30 -
Other Interest................................................................. 3 - -
Deferred payments on balance sheet............................................. 10 - -
FACTORING
2002 2003 2004
---- ---- ----
Proceeds from trade receivables sold under factoring agreement................. $208 $943 $1,236
Nominal of trade receivables sold under factoring agreement.................... 216 982 1,376
Discounts incurred............................................................. 2 5 7
Deferred payments on balance sheet............................................. 7 34 167
F-111
MITTAL STEEL COMPANY N.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Millions of U.S. Dollars, except share data and per share data)
NOTE 24: SUBSEQUENT EVENTS
Mittal Steel on January 14, 2005 announced that it has signed a share purchase
agreement with Hunan Valin Iron & Steel Group Co., Ltd. ("Valin Group") to
acquire 37.17% of the outstanding shares of Hunan Valin Steel Tube & Wire Co.,
Ltd., a listed subsidiary of Valin Group.
Under the terms of the share purchase agreement, Mittal Steel will acquire
656,250,000 legal person shares from Valin Group at a price of RMB 3.96 per
share for a total consideration of RMB 2,599 million ($314). The consideration
is subject to adjustment based on the net asset value of the Company as at
December 31, 2004.
Mittal Steel on January 21, 2005 announced that it has mandated ABN AMRO,
Citigroup Global Markets Limited, Deutsche Bank AG London and HSBC Bank plc (as
Mandated Lead Arrangers and Book Runners) and CSFB and UBS Limited (as Mandated
Lead Arrangers) to arrange a $3,200 unsecured revolving credit facility ("the
Facility"). The Facility has been fully underwritten by the Mandated Lead
Arrangers. It is expected to launch to the market at the end of January.
The Facility will be used to finance the cash portion of the consideration
payable in connection with the proposed merger with International Steel Group
Inc. ("ISG"), to refinance certain existing indebtedness of Mittal Steel and its
subsidiaries and for general corporate purposes. The Facility will have a
maturity of 5 years and the margin will be based on a rating grid. Mittal Steel
is currently rated BBB (positive outlook) by S&P. Mittal Steel's $4,500 proposed
merger with ISG is subject to approval by the shareholders of ISG and Mittal
Steel. The transaction is expected to be completed in the first half of 2005.
F-112
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
MITTAL STEEL COMPANY N.V.
/s/ Henk Scheffer
-------------------------------
Henk Scheffer
Company Secretary
Date: March 31, 2005
EXHIBIT INDEX
Exhibit Number Description
-------------- -------------
1.1.* Amended and Restated Articles of Association of Mittal Steel Company. N.V.
dated December 17, 2004 (English translation filed as Exhibit 3.1 to Mittal
Steel Company N.V.'s registration statement on Form F-4 (Reg. No. 333-121220)
filed with the Commission on February 3, 2005, and incorporated by reference
hereto).
2.1.* Mittal Steel Company N.V. Global Stock Option Plan, effective September
15, 1999 (filed as Exhibit 4.1 to Mittal Steel Company N.V.'s annual report on
Form 20-F for the year ended December 31, 2000 (File No. 001-14666), and
incorporated by reference hereto).
4.1.* Acquisition Agreement dated as of October 24, 2004 between Mittal Steel
Company N.V. (formerly known as Ispat International N.V.) and The Richmond
Investment Holdings Limited (filed as Annex A in Exhibit 1.1 to Mittal Steel
Company N.V.'s report on Form 6K (File No. 001-14666) filed with the Commission
on November 18, 2004, and incorporated by reference hereto).
4.2.* Agreement and Plan of Merger and Reorganization dated as of October 24,
2004, among Mittal Steel Company N.V. (formerly known as Ispat International
N.V.), Park Acquisition Corp. and International Steel Group Inc. (filed as
Exhibit 1.1 to Mittal Steel Company N.V.'s report on Form 6-K (File No.
001-14666) filed with the Commission on October 28, 2004, and incorporated by
reference hereto).
4.3. Shareholder's agreement dated as of August 13, 1997 among Ispat
International N.V., LNM Holdings S.L. (renamed Ispat International Investments
S.L.) and Mr. Lakshmi N Mittal.
4.4.* Non-competition agreement dated as of December 17, 2004 between Ispat
International N.V. and Mr. Lakshmi N Mittal. (filed as Exhibit 10.4 to Mittal
Steel Company N.V.'s registration statement on Form F-4 (Reg. No. 333-121220)
filed with the Commission on February 3, 2005, and incorporated by reference
hereto).
8.1. List of Significant Subsidiaries.
12.1. Certifications of Mittal Steel Company N.V.'s Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act.
13.1. Certifications of Mittal Steel Company N.V.'s Chief Executive Officer and
Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
14.1. Consent of Deloitte Accountants B.V.
14.2. Consent of Ernst & Young Accountants (Mittal Steel Holdings N.V. and
subsidiaries).
14.3. Consent of KPMG Inc. (Iscor Limited, December 31, 2003 and 2002 and Ispat
Iscor Limited, December 31, 2004).
14.4. Consent of Ernst & Young (Caribbean Ispat Limited).
14.5. Consent of Ernst & Young (Ispat Hamburg Group of Companies).
-----------------------------
* Previously filed.