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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities exchange Act of 1934For the Fiscal Year Ended December 31, 2003
    
    Commission file number 1-31926
 International Steel Group Inc. (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State or Other Jurisdiction of
Incorporation or Organization)
    
    71-0871875(I.R.S. Employer
Identification Number)
 3250 Interstate Drive Richfield, Ohio(Address of Registrants Principal Executive Offices)
    
    44286-9000(Zip Code)
 Registrants telephone number including area code: (330) 659-9100 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
Common Stock par value $0.01
    
    Name of Each Exchange on Which Registered
New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
None Indicate by check mark 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 the past 90 days. Yes
[X]   No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act. Yes [   ]   No [X] Aggregate
market value of common equity held by non-affiliates: $1,202.6
million Shares of the registrants common stock were not traded on June 28, 2003,
the last day of the registrants second fiscal quarter in 2003. The amount
shown is based on $28.00 per share, the offering price of registrants Common
Stock in its initial public offering, which priced on December 11, 2003, gives effect to the conversion of ISGs Class B Common Stock into Common Stock
which occurred with the consummation of the initial public offering and
reflects the shares held immediately after the consummation of the initial
public offering. Voting stock held by directors, executive officers and
certain significant stockholders of International Steel Group Inc. is not
included in the computation. However, International Steel Group Inc. has made
no determination that such individuals are affiliates within the meaning of
federal securities law. Number
of common shares outstanding as of February 29, 2004: 97,470,609 Documents incorporated by reference:The Proxy Statement for the 2004 Annual
Meeting of Stockholders is incorporated into Part III. 1




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERSITEM 6. SELECTED HISTORICAL FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURTITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESIndependent Auditors ReportConsolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsList of SubsidiariesConsent of KPMG LLPPower of AttorneyCEO 302 CertificationCFO 302 Certification906 Certifications    Table of Contents  
 PART I 
 ITEM 1. BUSINESS Our Company International Steel Group Inc. (ISG) was formed in early 2002 by WL Ross &
Co. LLC (WLR) to acquire and operate globally competitive steel facilities.
Since formation, we have grown to become the second largest integrated steel
producer in North America, based on raw steelmaking capability, by acquiring
out of bankruptcy the steelmaking assets of The LTV Corporation (LTV), Acme
Steel Company (Acme) and Bethlehem Steel Corporation (Bethlehem). We have
annual raw steel production capability of about 18 million net tons and ship a
variety of steel products from 11 major steel producing and finishing
facilities in six states. We operate principally in one segment of business,
carbon steel, and substantially all of our operations are in the United States. In April 2002, we acquired the principal steelmaking and finishing assets
of LTV, including facilities in Cleveland, Ohio; Indiana Harbor, Indiana; and
Hennepin, Illinois. These assets were idle when we acquired them. In May
2002, we purchased certain semi-finished and raw material inventories from LTV. In October 2002, we acquired Acmes compact strip mill and basic oxygen
furnace in Riverdale, Illinois. These assets were idle when we acquired them.
We supply Riverdales basic oxygen furnace with hot metal from blast furnaces
at our Indiana Harbor and Burns Harbor facilities. In May 2003, we acquired substantially all of the assets of Bethlehem and
its subsidiaries. We acquired steelmaking and finishing facilities at Burns
Harbor, Indiana; Sparrows Point, Maryland; Coatesville, Pennsylvania; and
Steelton, Pennsylvania. We acquired rolling and finishing facilities at
Conshohocken, Pennsylvania; Lackawanna, New York; and Columbus, Ohio. We
acquired eight operating short line railroads and investments in several joint
ventures, including an iron ore mine in Hibbing, Minnesota (Hibbing
Taconite). The Bethlehem
facilities substantially broadened our product offerings and expanded our
geographic presence. Since our formation, we have negotiated innovative agreements with the
United Steelworkers of America (USWA) covering all our principal facilities. On February 19, 2004, we entered into an agreement to acquire most of the
assets of the Weirton Steel Corporation (Weirton) for about $255
million, which includes assuming certain liabilities. Closing is subject to
bankruptcy court approval, anti-trust matters and customary closing conditions.
The process of obtaining bankruptcy court approval will include the
solicitation by Weirton of competing offers for its assets, and there can be no
assurance that this transaction will be consummated. The acquisition is
expected to be completed in the second quarter of 2004. In 2002, the Weirton
facilities reported about 3.0 million net tons of raw steel capability and
shipped about 2.3 million net tons of finished product. Subsequently, we
reached a tentative agreement with the Independent Steelworkers Union at
Weirton for a new labor agreement that is expected to be in place if the
transaction closes. The Domestic Steel Industry Steel is produced either by integrated steel facilities or electric arc
furnaces. Integrated mills use blast furnaces to produce hot metal typically
from iron ore, limestone and coke. Coke is a refined carbon product produced
by firing coal in large coke ovens. Hot metal is then converted through the basic oxygen process into liquid
steel where it can be metallurgically refined.
For flat rolled steel products, liquid steel is either teemed into ingots for
later processing or cast into slabs in a continuous caster machine. The slabs
are further shaped or rolled at a hot strip mill. This may be followed by
various finishing processes, including pickling, cold-rolling, annealing,
tempering or coating processes, including 2




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galvanizing (zinc coating). These various processes are often distinct
steps undertaken at different times rather than during a continuous process and
may take place in separate facilities. Steel produced by integrated mills
tends to be cleaner or purer than steel produced by electric arc furnaces since
less scrap is used in the production process and scrap contains non-ferrous
tramp elements. These purer products are more often required for value-added
applications. A mini-mill uses an electric arc furnace to melt steel scrap or scrap
substitutes, which for flat rolled products is then cast into slabs in a
continuous casting process. The slabs are then rolled into finished product.
Mini-mills are designed to accommodate shorter production runs with relatively
fast product change-over time. Mini-mills generally produce a narrower range
of steel products than integrated producers and their products tend to be more
commodity in nature; however, mini-mills have historically enjoyed certain
competitive advantages as compared to integrated mills, including lower
required capital investment and lower labor costs per ton shipped. Since 2000, the domestic steel industry has experienced volatility, marked
by declining finished product prices, fluctuating domestic capacity and
declining demand. As a result of depressed market conditions, many steelmakers
were unable to generate profits. Many domestic steelmakers, particularly large
integrated steel producers, have been hampered with significant legacy costs,
particularly underfunded pension and retiree health obligations. Since 1997,
approximately 35 domestic companies in the steel industry have filed for
bankruptcy protection. The declining value of the U. S. dollar and steel imports combined with
surging ocean freight rates, coke prices and scrap prices in the fourth quarter
of 2003 required the domestic steel industry to begin raising prices. These
market conditions have continued into early 2004 and both steel prices and
input costs are expected to be volatile throughout the year. Products Our principal products include a broad range of hot-rolled, cold-rolled
and coated sheets, tin mill products, carbon and alloy plates, rail products
and semi-finished shapes serving the automotive, construction, appliance,
plate, rail, container, tin and machinery markets. We sell 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.
All of these products are available in standard carbon grades as well as high
strength, low alloy grades for more demanding applications. The following
chart sets forth ISGs respective product mixes based on shipments for 2003 and
2002 and on a pro forma basis as if Bethlehem had been acquired on January 1,
2003. 2003
    
    2002ProActual
    
    forma
    
    ActualHot Rolled
    
    
    46
    %
    
    
    42
    %
    
    
    71
    %Cold Rolled
    
    
    19
    %
    
    
    19
    %
    
    
    22
    %Coated
    
    
    20
    %
    
    
    21
    %
    
    
    7
    %Plate
    
    
    8
    %
    
    
    10
    %
    
    
    Tin Plate
    
    
    4
    %
    
    
    4
    %
    
    
    Rail and other
    
    
    3
    %
    
    
    4
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 3




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Hot-Rolled Products.All coiled flat-rolled steel is initially hot-rolled
by passing a slab through a multi-stand rolling mill to reduce its thickness to
less than 5/8 inch. Hot-rolled steel destined for the sheet market can be
either shipped as black band, or cleaned in an acid bath and sold as pickled
band. These products are used in non-critical surface applications such as
automotive frames and wheels, construction products, pipe, off-highway
equipment and guardrails. Cold-Rolled Products.Cold-rolled sheet is hot-rolled coil that has been
further processed through a pickler and then 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. Further processing through an annealing furnace and a temper mill
improves ductility and formability. Cold-rolling can also impart various
surface finishes and textures. Cold-rolled sheet is used in exposed steel
applications that demand higher surface quality, such as exposed automobile and
appliance panels. Cold-rolled sheet prices are usually higher than hot-rolled
steel prices. Typically, cold-rolled sheet is coated or painted. Coated Products.Either hot-rolled or cold-rolled coil may be coated with
zinc to render it corrosion resistant and to improve its paintability.
Hot-dipped galvanized, galvannealed, Galvalume, electrogalvanized and
aluminized products are types of coated steel. These are also the highest
value-added sheet products because they require the greatest degree of
processing and usually have the strictest quality requirements. Coated steel products are used in high volume applications such as
automobiles, household appliances, roofing and siding, heating and air
conditioning equipment, air ducts, switch boxes, chimney flues, awnings and
grain bins. Plate.Plate is steel that is generally more than 3/16 inch thick. It
can be made on either a coiled plate mill up to 1-inch thick or a discrete
plate mill. The coiled plate or discrete mill plate is then cut into sections
for specific end uses. Commodity steel plate is used in a variety of
applications such as storage tanks, ships and railcars, large diameter pipe and
machinery parts. More specialized steel plate, such as
high-strength-low-alloy, heat-treated, or alloy plate, can have superior
strength and performance characteristics for particular applications such as
the manufacture of construction, mining and logging equipment; pressure vessels
and oil and gas transmission lines; and the fabrication of bridges and
buildings. Quenched and tempered plate is harder and stronger and can be used
in products such as military armor and hard rock mining equipment. Tin Mill.Tin mill sheet steel is used to produce food and other
containers. It is available as black plate, tin plate and tin-free steel.
Black plate is an uncoated thin gage cold rolled steel, tin plate is black
plate electrolytically plated with metallic tin and tin-free steel is black
plate that has been electrolytically plated with metallic chromium and chromium
oxides. Both tin plate and tin-free steel undergo a plating process whereby
the molecules from the positively charged tin or chromium anode attach to the
negatively charged sheet steel. The thickness of the coating is readily
controlled through regulation of the voltage and speed of the sheet through the
plating area. Rail.Billets and blooms are fed through rollers that form rail. Rail is
available in a number of sections determined by their weight per yard and
relative strengths. Rail is sold to railroad companies and regional transit
authorities for new track projects as well as the repair of existing track. Customers We sell our products to a highly diversified customer base representing
all major steel-consuming markets as well as to third-party processors and
service centers. Our customers are primarily in the Midwest and along the
eastern seaboard of the United States. No single customer represented more
than 10% of our total consolidated revenues in 2003 or 2002. 4




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Direct Sales to End-Users.We sell directly to end-users representing a
wide range of consuming markets, including automotive, construction, appliance,
transportation, container, machinery and equipment. Our sales, technical and
engineering staff are organized with both a specific product (plate, flat
rolled, tinplate and rail products) and geographic market focus. Sales to Intermediate Processors and Steel Service Centers.A significant
portion of our sales are to intermediate processors and steel service centers.
These processors and steel service centers typically act as intermediaries
between steel producers and various end-user manufacturers that require further
processing or inventory programs. The additional services performed by steel
service centers and processors include pickling, galvanizing, cutting to
length, slitting to size, leveling, blanking, shape correcting, edge rolling,
shearing and stamping. Contract and Spot Sales. A majority of our sales in 2003 were sold on the
spot market with price terms of three months or less. We expect the Bethlehem
asset acquisition to enhance our ability to shift a portion of our sales to
contract sales with price terms typically 12 months or longer over time. With
the integration of Bethlehems sales, research and production capabilities, we
expect to gradually increase our automotive sales as a percentage of total
sales and decrease sales to intermediate processors and service centers. International Sales.Historically, the opportunities for sales outside
North America of domestic steel products have been intermittent and highly
competitive. Our export sales were $163.4 million in 2003 and $2.7 million in
2002. Sales, Customer Service and Product Development To service our customer base, we have a dedicated sales force of
approximately 75 employees, who are principally aligned with our business
units. Each of our major businesses has a dedicated sales and customer service
staff on site that is responsible for the products produced by that particular
facility. Although each sales group reports to a specific facility, it has
responsibility to represent products and services produced by other divisions
to increase customer convenience and maximize cross-selling opportunities. Our
overall sales strategy is directed by management at our corporate office and
implemented by the division sales groups at each of our businesses. Technical resources exist within each division sales group, supported by
plant technical personnel to help customers specify the proper material for
each end-use. We have created an automotive sales group at our Burns Harbor
facility to act as the focal point for our automotive sales, service and
development effort. In connection with the Bethlehem acquisition, we acquired a research and
product development facility and staff in Bethlehem, Pennsylvania. During
2003, we spent approximately $5 million for research and
development. In 2002, we did not have spending for research and
development. Backlog We had approximately $1.3 billion and $300 million of backlog orders on
December 31, 2003 and 2002, respectively. These backlogs consist of customer
commitments that generally can be modified or terminated at any time prior to
production. Typically, a customer will modify or cancel an order due to major
shifts in their inventory levels or market conditions that change their need
for the product. We estimate that substantially all of our backlog will be
shipped during the next fiscal year. We do not believe that our backlog data
and comparisons of that data as of different dates are reliable indicators of
future sales or future shipments. 5




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Competition Competition within the steel industry, both domestically and globally, is
intense and expected to remain so. Our primary domestic competitors are United
States Steel Corporation, Nucor Corporation, AK Steel Holding Corporation and
Ispat Inland Inc., as well as IPSCO Inc. However, the steel market in the
United States is also served by a number of foreign sources and domestic supply
is subject to changes in worldwide demand and currency fluctuations, among
other factors. More than 35 domestic companies in the steel industry have declared
bankruptcy in recent years and have either ceased production or more often
continued to operate after being acquired or reorganizing. In addition, many
foreign steel producers are owned and subsidized by their governments, and
their decisions with respect to production and sales may be influenced by
political and economic policy considerations rather than by prevailing market
conditions. There is typically considered to be substantial excess global
production capacity, which is likely to continue. This has historically resulted
in high levels of steel imports into the United States, and exerted downward
pressure on domestic steel prices. With the acquisition of the Bethlehem assets, we became the second largest
integrated steel producer in North America based on raw steelmaking capability.
We compete with other flat-rolled steel producers (both integrated steel mills
and mini-mills) and producers of plastics, aluminum, ceramics, carbon fiber,
concrete, glass, plastic and wood that can be used in lieu of flat-rolled
steels in manufactured products. Mini-mills generally offer a narrower range
of products than integrated steel mills but can have some cost advantages as a
result of their different production processes. The competition in the cut plate business, both carbon and alloy, is
somewhat fragmented with ISG having the largest capability and the widest
product range domestically. There is only one other major domestic producer of rail products, Oregon
Steel, which has about 50% of the domestic rail market. Imports have about 20%
of the domestic rail market. Price, quality, delivery and service are the primary competitive factors
in all markets that we serve and vary in relative importance according to the
product category and specific customer. Raw Materials Our business depends on continued access to reliable supplies of various
raw materials, principally iron ore, coal, coke, scrap, energy and industrial
gases. We believe there will be adequate sources of our principal raw materials
to meet our near term needs, although probably at higher prices than in the
past. Iron Ore For an integrated steelmaker, iron ore is an essential element in the
production of steel. In 2003 we consumed approximately 10.9 million net tons
of iron ore pellets and 2.7 million net tons of iron ore fines and other iron
ore materials. We estimate that our needs for 2004 will be approximately 15.5
million net tons of iron ore pellets and 4.5 million net tons of iron ore fines
and other iron ore materials. Cleveland-Cliffs Inc, one of our stockholders, is under a noncancellable
contract to supply all of our requirements for iron ore pellets through 2016
for our Cleveland and Indiana Harbor facilities. This agreement will renew on
an annual basis after 2016, unless either party gives at least two years
advance notice of termination. The agreement specifies product quality
requirements and provides us with the right to negotiate price adjustments or
to refuse to accept shipments of products in some circumstances. The prices we
pay for iron ore pellets under the agreement are subject to annual adjustments
for changes in certain price indices and selling prices for certain steel
products, which effectively helps maintain our operating margin percentage. 6




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Our share of estimated recoverable reserves in the Hibbing Taconite (See
Joint Ventures under PART 1. ITEM 2. PROPERTIES of this Annual Report) iron
ore mine joint venture at December 31, 2003 is 140 million net tons of iron ore
pellets. This mine and its processing facilities supply substantially all of Burns
Harbors current annual iron ore pellet requirements and are operated by
Cleveland-Cliffs Inc, which also owns 23% of the joint venture. Contracts are in place for substantially all of Sparrows Points 2004
requirements for iron ore at prices established in the international market. Coal and Coke Coke, a refined carbon product produced by baking coal to drive off
volatile matter, is the principal fuel used to produce hot metal in our blast
furnaces. The domestic supply of coke has decreased significantly over the
last decade and is expected to decrease further in the future primarily due to
increased costs of complying with the requirements of the Clean Air Act and
other environmental regulations. In the future, therefore, we may need to
import more of our coke requirements. Our integrated steelmaking facilities
have access to both inland and coastal waterway systems, which enable us to
more easily transport our coke needs. In 2003, we used 4.4 million net tons of coke and estimate that our needs
for 2004 will be about 5.5 million net tons. We expect that our coke batteries
in Warren, Ohio and Burns Harbor, Indiana will supply approximately 2.3 million
net tons in 2004. We also have contracts through 2005 for 0.3 million net tons
per year, a contract through 2006 for 0.3 million net tons per year and a
contract through 2020 for 0.7 million net tons per year. We have signed an
agreement to purchase 0.6 million net tons annually beginning in 2006 from a
coke oven to be constructed. For the remaining 1.9 million net tons of
estimated 2004 requirements, we have placed orders for about 50% of this
amount. However, in the current volatile international coke market, delivery
of these orders is not necessarily assured at the agreed prices. Within
certain limits, we have the ability to optimize fuel costs at our blast
furnaces by switching among the fuels of coke, natural gas, oil and, at the
Burns Harbor and Sparrows Point facilities, pulverized coal depending on their
relative costs. 2004 short-term coke prices have surged from late 2003 levels because of
strong international demand and rising ocean freight rates. We expect
sufficient coke to be available to meet the balance of our 2004 requirements
but at significantly higher prices than 2003. We estimate that our coke costs
will be at least $200 million higher in 2004 than the fourth quarter of
2003 on an annualized basis. We and other domestic steel producers have
recently announced steel price increases, including surcharges relating to
higher costs of coke and other raw materials, to recover some or all of these
cost increases. However, adequate supplies of coke may not be available to us
in the future causing potential production disruption, or prices of these
supplies may continue to increase significantly. We used about 2.9 million net tons of coal in 2003 and expect to use about
4.3 million net tons in 2004. We have contracts for substantially all our 2004
coal requirements for our coke oven batteries and pulverized coal injection at
prices about 10% higher than those in 2003. We do, however, periodically buy
small amounts of coal in the spot market for specific needs. Scrap Historically, we use hot metal for approximately 75% of our basic oxygen
furnace charge and scrap for approximately 25%. These percentages can change
plus or minus 10 percentage points depending on their relative costs, availability and
other factors. Approximately half of that scrap is generated at our own
facilities. Our electric arc furnaces use scrap for 100% of their production,
of which only a small portion is internally generated. Our estimated scrap
purchases in 2004 are 3.0 million net tons. There are no 7




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long-term scrap contracts available as all purchases are in a short-term
open market. Scrap prices surged in late 2003 and continued to rise rapidly in
early 2004. Electric arc furnaces use approximately five times more scrap per
ton of liquid steel and, therefore, higher scrap cost is a competitive
disadvantage for electric arc furnace steelmakers. We and other domestic steel
producers have recently announced price increases, including surcharges related
to scrap, to recover some or all of these cost increases. We expect scrap to
continue to be in sufficient supply to satisfy our needs, although at higher
prices than in recent history. We expect our first quarter 2004 scrap costs to
be at least $50 million higher than the fourth quarter of 2003. Energy and Industrial Gases Our steel operations consume large amounts of electricity, natural gas,
oxygen and other industrial gases. We purchase our electrical power
requirements from various suppliers. In addition, we operate co-generation
facilities on certain of our sites that utilize waste gases from the blast
furnaces to supplement our electrical power requirements and control our energy
costs. We purchase natural gas under short-term supply contracts with a common
group of suppliers. We use financial instruments to hedge such purchases when
appropriate. Various service providers provide transportation of the natural
gas to our facilities. We also have several long-term contracts to supply our
oxygen, argon and nitrogen gas requirements. Employees As of December 31, 2003 and 2002, we had approximately 12,000 and 3,400
employees. Since December 15, 2002, substantially all of the hourly employees
at our steelmaking facilities are under collective bargaining agreements with
the USWA, which expire in late 2008. These agreements were ratified in
February 2003 at the acquired LTV and Acme facilities and in June 2003 at the
acquired Bethlehem facilities. The terms of our collective bargaining
agreements will also apply, subject to approval by the USWA and ratification by
the covered workers, to any facilities with USWA-represented employees that we
may acquire in the future. Our collective bargaining agreements are
substantially different from those historically in effect in the domestic steel
industry. Our collective bargaining agreements provide for:  
    
    a six-year term;  
    
    five job classifications with broadened job descriptions;  
    
    increased work force flexibility;  
    
    base wages that increase 3% every 18 months through 2008;  
    
    incentive compensation tied to productivity and profits per ton shipped;  
    
    benefit costs that are shared by us and our employees;  
    
    a partnership involving both the union and management;  
    
    flexibility to hire contractors for non-core, capital and surge work;  
    
    defined contributions to USWA retiree healthcare benefits
based principally on profits per ton shipped and  
    
    defined contributions to USWA pensions based on the number of
employees hired and hours paid. 8




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These features provide greater flexibility and increased productivity as
compared to historical agreements at integrated steel mills. The absence of
significant defined benefit pension and retiree health care plans makes our
cost structure significantly more variable than most of our domestic integrated
competitors. We also paid substantially all of our hourly employees and
frontline supervisors production bonuses during every pay period in 2003.
These combined factors make our labor costs competitive with domestic
mini-mills and low cost international integrated producers. Our relations with
our hourly-represented employees and the USWA continue to be positive. Regulatory Environment Anti-Dumping Regulations U.S. steel producers compete with many foreign producers. Competition from
foreign producers is typically strong, and is substantially affected by the
relative strength of foreign economies, international freight rates and
fluctuation in the value of the U.S. dollar against foreign currencies, with
steel imports tending to increase when the value of the dollar is strong
relative to foreign currencies. The situation has been exacerbated by a
weakening of certain economies, particularly in Eastern Europe, Asia and Latin
America. Because of the ownership, control or subsidization of some foreign
steel producers by their governments, foreign producers production, sales and
pricing decisions are often influenced more by political and economic policy
considerations than by prevailing market conditions, realities of the
marketplace or consideration of profit or loss. From time to time since 1998,
when imports of hot-rolled and cold-rolled sheet products increased 43%
compared to the prior year, domestic steel producers have been adversely
affected by illegally dumped imported steel. Dumping involves selling a
product below cost or for less than in the exporters home country and is a
violation of U.S. trade laws. Most foreign markets are less open than the U.S.
market; allowing foreign producers to maintain higher prices in their own
markets, while dumping excess production at lower and often subsidized prices
into the U.S. market. Section 201 Tariffs On March 20, 2002, in response to a federal investigation of steel
imports, President Bush imposed a remedy under Section 201 of the United State
Trade Act. The remedy provided for (1) three years of declining tariffs ranging
from 9% to 30% on imports of hot-rolled, cold-rolled, coated sheet and tubular
steel products and (2) a three-year increasing tariff rate quota on imports of
steel slabs. Several foreign governments, including members of the European Union,
Japan, and other countries, appealed to the World Trade Organization (WTO)
contending that the Section 201 remedy violated global trade rules. On November
10, 2003, the highest trade court of the WTO issued a final decision declaring
that the Section 201 tariffs violated global trade rules. On December 4, 2003, the President announced his decision to rescind the
Section 201 tariffs. At the same time the Bush administration noted, however,
that the government will continue the steel import licensing and monitoring
program in order to respond quickly to future import surges that unfairly
damage the industry. Environmental Matters Our operations are subject to a broad range of laws and regulations
relating to the protection of human health and the environment. The prior
owners of our facilities expended in the past, and we expect to expend in the
future, substantial amounts to achieve or maintain ongoing compliance with
federal, state, and local laws and regulations, including the Clean Air Act,
the Resource Conservation and Recovery Act (RCRA), and the Clean Water Act.
These environmental expenditures are not projected to have a material adverse
effect on our consolidated financial position or on our competitive position
with respect to other 9




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similarly situated domestic steelmakers subject to the same environmental
requirements. RCRA and Other Remediation Requirements Under RCRA and similar state programs, the owners of certain facilities
that manage hazardous wastes are required to investigate and, if appropriate,
remediate historic environmental contamination found at the facility. All our
major operating and inactive facilities are or may be subject to a corrective
action program or other laws and regulations relating to environmental
remediation, including projects relating to the reclamation of industrial
properties, also known as brownfield projects. At our properties in Lackawanna, New York, a RCRA Facility Investigation
(RFI) is nearing completion. A report will be submitted to U.S. Environmental
Protection Agency (EPA) and the New York State Department of Environmental
Conservation for approval. We anticipate performing a Corrective Measures
Study (CMS) and then implementing likely required corrective measures. We have
estimated that the cost of performing anticipated remediation and post
remediation activities will be $72 million and will be completed over a period
of 15 years or more. Bethlehem, the U.S. EPA and the Maryland Department of the Environment
agreed to a phased RFI as part of a comprehensive multimedia pollution consent
decree with respect to our Sparrows Point, Maryland facility, which was entered
by the U.S. District Court for Maryland on October 8, 1997. We have assumed
Bethlehems ongoing obligations under the consent decree. The consent decree
requires us to address compliance, closure and post-closure care matters and
implement corrective measures associated with two onsite landfills (Grays
Landfill and Coke Point Landfill), perform a site-wide investigation required
by Section 3008(h) of RCRA, continue the operation and maintenance of a
remediation system at an idle rod and wire mill, and address several pollution
prevention items such as reducing the generation of iron kish, and recycling
blast furnace water treatment slurry and an onsite wastewater treatment plant
sludge. The potential costs, as well as the time frame for the complete
implementation of possible remediation activities at Sparrows Point, cannot be
reasonably estimated until more of the investigations required by the
decree have been completed and the data analyzed. Notwithstanding the above, it is
likely based on
currently available data that remediation will be required at the former coke plant. In addition, pursuant to the order of the U.S.
District Court for Maryland, we must also implement corrective measures at the
Grays Landfill, Coke Point Landfill, and post-closure care at the former Rod
and Wire Mill Area. The total cost of these related matters is estimated to be
approximately $43 million. We are required to prevent acid mine drainage from discharging to surface
waters at idled mining operations in western Pennsylvania. We entered into a
Consent Order and Agreement with Pennsylvania Department of Environmental
Protection (PaDEP) in May 2003 addressing the transfer of required permits from
Bethlehem to us and financial assurance for long-term operation and maintenance
of the wastewater treatment facilities associated with these mines. In
accordance with this Consent Order and Agreement, we submitted an operational
improvement plan to improve treatment facility operations and lower long-term
wastewater treatment costs. The Consent Order and Agreement required us to
propose a long-term financial assurance mechanism. A conceptual proposal was
submitted to PaDEP in September 2003 and updated in December 2003. We are
awaiting a final response. As an interim measure, the Consent Order and
Agreement required us in June 2003 to deposit an initial $1 million into an
escrow account. We will pay $150,000 monthly into an escrow account until a
final financial assurance mechanism is established. The total costs related to
these matters is estimated to be approximately $32 million. We own a large former integrated steelmaking site in Johnstown,
Pennsylvania. The site has been razed and there are a number of historic
waste disposal facilities located at the site that are subject to regulation by
PaDEP. There are also historic operating locations at the Johnstown site that
may have caused groundwater contamination. Although potentially subject to
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state authority, no comprehensive environmental investigations have been
performed at this site to date. We estimate the costs associated with future investigations and likely remediation at this facility that can be estimated to
be approximately $23 million. Our facility at Indiana Harbor, Indiana is subject to a U.S. EPA 3013
Administrative Order requiring development of a monitoring program to assess
soil and groundwater conditions associated with 14 solid waste management
units. The order was received on June 30, 2003 and requires submission of an
investigation plan to U.S. EPA for approval. The plan was submitted to the
U.S. EPA in November 2003. Although localized remediation activities have been
conducted at this facility, additional remediation may be required after the
investigation of these solid waste management units has been completed. It is
not possible to estimate the cost of any required remediation or monitoring
that may result from this investigation at this time. An area of subsurface
fuel oil contamination exists and is currently the subject of remediation
actions. A solid waste landfill at Indiana Harbor will require closure and
post-closure care. The total cost related to these matters that can be
estimated is approximately $22 million. At our Burns Harbor, Indiana facility, an RFI was completed in accordance
with a U.S. EPA approved work plan. Based on the results of the investigation,
we do not believe there will be any substantial remediation required to
complete the corrective action process at the facility; however, it is likely
that we will incur future costs primarily related to long term post-closure
monitoring. In addition, Bethlehem managed approximately one million net tons
of air pollution control dusts and sludges in piles on the ground at the Burns
Harbor site. While an alternative means of handling this material continues to
be evaluated, it is likely that we will incur future costs to manage this
material. We also have a continuing obligation pursuant to a consent order
issued by the U.S. District Court in Indiana to operate a collection and
treatment system to control contaminated groundwater seeps from the face of a
sea wall at the site. The total costs related to these matters is estimated to
be approximately $22 million. Our Cleveland, Ohio facilities may be subject to RCRA corrective action or
remediation under other environmental statutes. An integrated steel facility
has operated on the property since the early part of the 20th century. As a
result, soil and groundwater contamination may exist that might require
remediation pursuant to the RCRA corrective action program or similar state
programs. No RCRA corrective action has been demanded at any of the Cleveland
facilities by either federal or state authorities and no comprehensive
investigation of any of the facilities has been performed. However, certain
limited and localized remediation activities have been or will be conducted at
these sites. These remediation activities include a large permitted solid
waste landfill at the site that will require closure and post-closure in the
future. The cost of closure and post-closure care for this landfill is
estimated to be approximately $14 million. At our site of the former steel making facilities in Bethlehem,
Pennsylvania, a remedial investigation is being performed pursuant to the
Pennsylvania Land Recycling (Brownfield) Program in conjunction with
comprehensive redevelopment plans. These investigations are continuing to be
performed with input and oversight from both the PaDEP, and the EPA Region III
corrective action staff to ensure that the actions taken are acceptable to both
state and federal regulatory authorities. The majority of the site is subject
to a real estate sales agreement under which the buyer will assume responsibility
for environmental remediation, which we estimate to be about $13 million. Our facility at Riverdale, Illinois may be subject to RCRA corrective
action or remediation under other environmental statutes. The facility has
been operated as an integrated steel facility since the early part of the 20th
century. As a result, soil and groundwater contamination may exist that might
require remediation pursuant to the RCRA corrective action program or similar
state programs. Certain localized remediation activities have been conducted
at this facility; however, there is no present federal or state demand for a
RCRA corrective action program at the facility. No comprehensive environmental
investigation of the facility has been performed. In January 2004, the State
of Illinois filed a proceeding alleging that ISG arranged for the transport of
slag waste to an off-site location without performing the 11




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necessary testing and notification to the Illinois Environmental
Protection Agency and the owner of the land to which the material was sent.
ISG is evaluating the allegation. The State of Illinois may seek civil
penalties and injunctive relief, which are not expected to be material. Clean Air Act Our facilities are subject to a variety of permitting requirements under
the Clean Air Act, which restricts the type and amount of air pollutants that
may be emitted from regulated emission sources. On February 28, 2003, the U.S.
EPA issued a final rule to reduce hazardous air pollutant (HAP) emissions from
integrated iron and steel manufacturing facilities. The final rule will
require affected facilities to meet standards reflecting the application of
maximum achievable control technology (MACT) standards. Many of our
facilities are subject to the new MACT standards, and compliance with such
standards will be required by May 20, 2006. We anticipate installing controls
at facilities to comply with the new MACT standards with capital expenditures
of about $90 million through 2007. Other Clean Air Act requirements, such as revisions to national ambient
air quality standards for ozone and particulate matter, may have significant
impacts on us in the future, although whether and how we will be affected will
not be determined for many years. We may also be affected if the federal
government or the states in which we operate begin to regulate emissions of
greenhouse gases such as carbon dioxide. However, because we cannot predict
what requirements will be imposed on us or the timing of such requirements, we
are unable to evaluate the ultimate cost of compliance with respect to these
potential developments. The U.S. EPA has alleged that an acid fume scrubber at our Indiana Harbor
facility was not operated in compliance with federal hazardous air pollutant
standards for HCL emissions at the time we restarted the plant. We have
tentatively agreed to enter into a settlement with the U.S. EPA with respect to
this matter that would require us to pay a penalty of about $43,000 and to
undertake a supplemental environmental project in lieu of additional penalties
with an estimated cost of about $112,000. The supplemental project is underway
and will be completed by December 15, 2004. On July 8, 2003 the Indiana Department of Environmental Management
(IDEM) issued a notice of violation to the Indiana Harbor plant. The notice
of violation alleges that the H3 and H4 blast furnaces violated specified
opacity limitations on January 2, 2003 and April 2, 2003, respectively. The
notice of violation also alleges operations at the basic oxygen furnace
exceeded fugitive emission and that on May 14, 2003 the basic oxygen furnace
roof monitor exceeded an opacity standard. We expect to discuss the notice of
violation with the IDEM. IDEM may attempt to impose a penalty on us in regard
to these allegations, which is not expected to be material. Clean Water Act Our facilities also are subject to a variety of permitting requirements
under the Clean Water Act, which restricts the type and amount of pollutants
that may be discharged from regulatory sources into receiving bodies of waters,
such as rivers, lakes and oceans. On October 17, 2002, the U.S. EPA issued
regulations that will require existing wastewater dischargers to comply with
new effluent limitations. Several of our facilities are subject to the new
regulations, and compliance with such regulations will be required as new
discharge permits are issued for continued operation. The Circuit Court for Baltimore County, Maryland entered into a consent
decree in March 2001, which requires the installation of improvements to
Sparrow Points wastewater treatment plant. The improvements are underway and
we expect to spend about $16 million to complete the improvements in 2004. The
U.S. EPA has alleged, among other things, that water discharged from a
wastewater lagoon at the 12




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Indiana Harbor facility is not permitted pursuant to the facilitys
national pollution discharge elimination system (NPDES) permit. It is our
position that this discharge is authorized by the NPDES permit. As a result of
a meeting with the U.S. EPA on February 5, 2004, ISG believes that most of the
U.S. EPAs concerns have been resolved. Other We anticipate spending approximately $48 million over 40 years, including
$4 million in 2004, to address the removal and disposal of PCB equipment and
asbestos material utilized in operations applications at our facilities. There are a number of other facilities and properties, which ISG owns
across the United States which may present incidental environmental
liabilities. The estimated cost of future investigations and likely
remediation at these sites is estimated to be about $16 million. Intellectual Property We own a number of U.S. and foreign patents that relate to a wide variety
of products and processes, have filed pending patent applications and are
licensed under a number of patents. However, we believe no single patent or
license or group or patents or licenses is of material importance to our
overall business. We also own registered trademarks for certain of our
products and service marks for certain of our services, which, unlike patents
and licenses, are renewable so long as they are continued in use and properly
protected. FORWARD-LOOKING STATEMENTS ISG and its representatives may from time to time make forward-looking
statements in reports filed with the Securities and Exchange Commission,
reports to stockholders, press releases, other written documents and oral
presentations. These forward-looking statements may be identified by the use
of predictive, future-tense or forward-looking terminology, such as believes,
anticipates, expects, estimates, intends, may, will or similar
terms. These statements speak only as of the date of such statements and ISG
will undertake no ongoing obligation, other than that imposed by law, to update
these statements. These statements appear in a number of places in this report
and include statements regarding ISGs intent, belief or current expectations
of its directors, officers or advisors with respect to, among other things:  
    
    trends affecting ISGs financial condition, results of operations or future prospects;  
    
    business and growth strategies;  
    
    operating culture and philosophy;  
    
    financing plans and forecasts; and  
    
    the ongoing integration of the Bethlehem assets into our business. Any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may differ materially from those contained in the forward-looking
statements as a result of various factors, some of which are unknown. The
factors that could adversely affect ISGs actual results and performance
include, without limitation:  
    
    negative overall economic conditions or conditions in the markets served; 13




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
    
    competition within the steel industry;  
    
    changes in U.S. or foreign trade policy affecting steel imports or exports;  
    
    changes in foreign currencies affecting the strength of the U. S. dollar;  
    
    actions by domestic and foreign competitors;  
    
    the inability to achieve our anticipated growth objectives;  
    
    changes in availability or cost of raw materials, energy or other supplies;  
    
    labor issues affecting ISGs workforce or the steel industry generally; and  
    
    the inability to implement our operating culture and philosophy at the acquired facilities. Factors that could affect our results or performance include the following: Risks Related to the Steel Industry  Excess global capacity and the availability of competitive substitute
materials has resulted in intense competition and may exert further
downward pressure on prices. Competition within the steel industry, both domestic and worldwide, is
intense and is expected to remain so. We compete primarily on the basis of
price, quality and the ability to meet customers product needs and delivery
schedules. Our primary competitors are other integrated steel producers and
mini-mills, some of which are larger than we are and some of which have substantially greater
capital resources than we do. The highly competitive nature of the steel
industry periodically exerts downward pressure on prices for our products. In
the case of certain product applications, we and other steel manufacturers
compete with manufacturers of other materials, including plastic, aluminum,
graphite composites, ceramics, glass, wood and concrete. In addition, global
overcapacity in steel manufacturing and its negative impact on domestic steel
prices are likely to persist and could adversely affect our sales, margins and
profitability. This overcapacity has resulted in high levels of steel imports
into the United States, exerted downward pressure on domestic steel prices and
resulted in, at times, a dramatic reduction in, or, in the case of many steel
producers, the elimination of gross margins.  Increased imports of steel into the United States could adversely impact
domestic steel prices, which could adversely affect our sales, margins
and profitability. Based on American Iron and Steel Institute apparent steel supply
(excluding semi-finished products), imports of steel into the United States
constituted 20.4%, 20.2% and 22.3% of the domestic steel market supply for
2002, 2001 and 2000, respectively. Significant imports of steel into the
United States has at times exerted downward pressure on domestic steel prices
and substantially reduce sales, margins and profitability. We and other
domestic steel producers compete with many foreign producers. We face strong
competition from foreign producers, and competition has greatly increased in
recent years as a result of an excess of foreign steelmaking capacity.
Furthermore, a weakening of certain foreign economies, particularly in Eastern
Europe, Asia and Latin America, has at times resulted in lower local demand for
steel products and greater steel exports to the United States at depressed
prices. The U.S. government established various protective actions during 2001 and
2002, including the enactment of various steel import quotas and tariffs, which
contributed to a decrease of some steel imports during 2002. However, on
December 4, 2003, these steel import 14




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quotas
and tariffs were lifted. At
this time it is uncertain what impact the lifting of these measures will have
on the domestic steel industry over time, but there is a risk that the removal
of these measures will lead to a resurgence of steel imports and result in
downward pressure on domestic steel prices and negatively impact our sales,
margins and profitability.  Our level of production and our sales and earnings are subject to
significant fluctuations as a result of the cyclical nature of the
industries we serve. The price of steel and steel products may fluctuate significantly due to
many factors beyond our control. This fluctuation directly affects the levels
of production and sales and earnings. The domestic steel industry has been
highly cyclical in nature, influenced by a combination of factors, including
periods of economic growth or recession, strength or weakness of the U.S.
dollar, worldwide production capacity, levels of steel imports and applicable
tariffs. The demand for steel products is generally affected by macroeconomic
fluctuations in the United States and the global economies in which steel
companies sell their products. For example, future economic downturns,
stagnant economies or currency fluctuations in the United States or globally
could decrease the demand for products or increase the amount of imports of
steel into the United States, which could negatively impact our sales, margins
and profitability. A prolonged weakness in the U.S. automotive industry would reduce the
demand for our products and could reduce our sales. A significant portion of
our sales are currently sold directly to automotive customers and to
intermediate steel processor and service center markets where some of our
products are further processed and resold to various companies in the
automotive industry. The cyclical nature of the automotive industry is caused
by factors such as the level of consumer spending, the strength or weakness of
the U.S. dollar and the impact of international trade and various other
factors, including labor unrest and the availability of raw materials, which
affect the ability of the automotive industry to build cars. Any decrease in
automotive manufacturing will reduce our shipments, increase our operating
costs and reduce our earnings. In addition, if automobile manufacturers choose
to substitute steel with more plastics, aluminum and other steel substitutes in
their automobiles, it could further reduce demand for our products. In addition, a disruption or downturn in the oil and gas, gas
transmission, construction, commercial equipment, rail transportation,
appliance, agricultural and durable goods industries, all of which are
significant markets for our products and are highly cyclical, could negatively
impact our sales volumes, pricing, margins and earnings. Risks Related to Our Business  Because of our limited operating history, and our recent acquisitions of
various steelmaking assets, we believe that historical information
regarding the acquired assets is of limited relevance in understanding
our business as currently conducted and our prospects for the future. We have a limited operating history. We did not have any operations until
we consummated our acquisition of the idled steelmaking assets of LTV in April
2002 and we did not begin producing steel until May 2002. We completed the
acquisition of the idled steelmaking assets of Acme in October 2002 and did not
generate significant revenues from those assets during 2002. We completed the
acquisition of the Bethlehem steelmaking assets in May 2003. As a result, we
believe the historical financial results of the acquired assets are of limited
relevance in understanding our business as currently conducted.  We may not be able to integrate effectively our new employees and the
operations of the various assets we acquired or achieve the level of
efficiencies we intend. We are subject to the risks, expenses, uncertainties and problems
encountered by companies in the early stages of operations and associated with
the integration of new businesses. Our workforce may not be able to readily
adapt to the new work rules, job consolidations, software systems and unique
business culture of the combined companies. The dramatic changes in individual
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structure and software systems may result in operating inefficiencies and
increased expenses until the changes are fully incorporated into our
workforces daily routines. Additionally, the expansion of duties may require
additional training and skill development before we realize the full extent of
the planned efficiencies.  We may not be able to realize the anticipated federal income tax benefits
of acquiring the Bethlehem assets. Our acquisition of the Bethlehem assets was structured for federal
income tax purposes to allow us to acquire the historical tax attributes of
Bethlehems assets and net operating loss carryforwards subject to certain
limitations. We have not, however, obtained a ruling from the Internal Revenue
Service (IRS) nor have we undergone an IRS examination. If we do not meet
certain
profitability thresholds, we will not be able to realize the
expected federal income tax savings related to Bethlehems net operating loss
carryforwards and depreciable basis of plant and equipment.  Our business requires substantial capital investment and maintenance
expenditures, which we may be unable to provide. Our business strategy will require additional substantial capital
investment. We require capital for, among other purposes, managing acquired
assets, acquiring new equipment, maintaining the condition of our existing
equipment, completing future acquisitions and maintaining compliance with
environmental laws and regulations. To the extent that cash generated
internally and cash available under our credit facilities is not sufficient to
fund capital requirements, we will require additional debt and/or equity
financing. However, this type of financing may not be available or, if
available, may not be on satisfactory terms. Future debt financings, if
available, may result in increased interest and amortization expense, increased
leverage and decreased income available to fund further acquisitions and
expansion. In addition, future debt financings may limit our ability to
withstand competitive pressures and render us more vulnerable to economic
downturns. If we fail to generate or obtain sufficient additional capital in
the future, we could be forced to reduce or delay capital expenditures and
acquisitions, sell assets or restructure or refinance our indebtedness.  Unexpected equipment failures may lead to production curtailments or
shutdowns. Interruptions in production capabilities will inevitably increase
production costs and reduce our sales and earnings. In addition to equipment
failures, our facilities are also subject to the risk of catastrophic loss due
to unanticipated events such as fires, explosions or adverse weather
conditions. Our manufacturing processes depend on critical pieces of
steelmaking equipment, such as furnaces, continuous casters and rolling
equipment, as well as electrical equipment, such as transformers, and this
equipment may, on occasion, be out of service as a result of unanticipated
failures. In the future, we may experience material plant shutdowns or periods
of reduced production as a result of any equipment failures. Furthermore, any
interruption in production capability may require us to make large capital
expenditures to remedy the situation, which could have a negative effect on our
profitability and cash flows. Although we maintain business interruption
insurance, any recovery under this insurance policy may not offset the lost
revenues or increased costs that we experience during the disruption of our
operations. In addition to the revenue losses, which may not be recoverable
under the policy, longer-term business disruption could result in a loss of
customers. If this were to occur, our future sales levels, and therefore our
profitability, could be adversely affected.  Environmental regulations impose substantial costs and limitations on
operations. We have environmental liability risks and limitations on operations
brought about by the requirements of environmental laws and regulations. We
are subject to various federal, state and local environmental, health and
safety laws and regulations concerning issues such as air emissions, wastewater 16




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discharges, solid and hazardous waste management and disposal and the
investigation and remediation of contamination. These laws and regulations are
becoming increasingly stringent. While we believe that our facilities are in
material compliance with all applicable environmental laws and regulations, the
risks of substantial unanticipated costs and liabilities related to compliance
with these laws and regulations are an inherent part of our business. It is
possible that future conditions may develop, arise or be discovered that create
new environmental compliance or remediation liabilities and costs. While we
believe that we can comply with environmental legislation and regulatory
requirements and that the costs of compliance have been included within
budgeted cost estimates, compliance may prove to be more limiting and costly
than anticipated. We may also be subject from time to time to legal
proceedings brought by private parties or governmental agencies with respect to
environmental matters, including matters involving alleged property damage or
personal injury. We may also be subject to future claims with respect to
historic asbestos exposure relating to our acquired assets. While management
estimates that the risk of incurring liability as the result of any such claims
is remote, it is impossible to estimate at this time.  Any decrease in the availability, or increase in the cost, of raw
materials and energy could materially affect our earnings. Our operations depend heavily on the availability of various raw materials
and energy resources, including iron ore, coke, scrap, electricity and natural
gas. The availability of raw materials and energy resources may decrease and
their prices are likely to be volatile as a result of, among other things,
changes in overall supply and demand levels and new laws or regulations.
Disruption in the supply of our raw materials or energy resources could
temporarily impair our ability to manufacture some of our products or require
us to pay higher prices in order to obtain these raw materials or energy
resources from other sources. In the event our raw material and energy costs
increase, we may not be able to pass these higher costs on to our customers in
full or at all. Any increase in the prices for raw materials or energy
resources could materially increase our costs and therefore lower our earnings. We currently obtain all our iron ore pellet needs for our Cleveland and
Indiana Harbor facilities from one supplier, Cleveland-Cliffs Inc, pursuant to
a long-term supply contract. Additionally, as part of the Bethlehem asset
acquisition, we acquired a 62.3% interest in Hibbing Taconite. Excluding tonnage applicable to
interests owned by others, Hibbing Taconite is estimated to contain recoverable reserves at
December 31, 2003 sufficient to produce at least 140 million net tons of iron
ore pellets. This mine is operated by Cleveland-Cliffs Inc, which also owns
23% of the mine. Hibbing Taconite has mining and processing facilities,
which can supply a majority of our current annual iron ore requirements for
Burns Harbor. We expect these two sources will supply approximately 90% of our
iron ore pellet needs in 2004. Should Cleveland-Cliffs Inc or the
Hibbing Taconite mine
be unable to meet our iron ore pellet needs, or should the Cleveland-Cliffs Inc
contract be terminated, we may be unable to meet our iron ore pellet needs or
may be forced to obtain iron ore pellets at higher prices. Both the domestic and foreign supply of coke has decreased significantly
over the last decade as coke suppliers have ceased operations primarily due to
age of facilities and environmental issues. Global demand for coke is higher
due to increased global steel demand. These supply and demand dynamics have
supported higher global coke costs, which have surged in early 2004. In
addition to the coke we produce in our coke facilities, which amounts to about
42% of our estimated needs in 2004, we have contracts for the purchase of about
25% of our estimated future coke requirements through 2005. However, adequate
supplies of coke may not be available to us in the future, or, if available,
only at higher prices than the prices we currently pay. If we are unable to
obtain an adequate supply of coke in the future we would have to use
alternative and more costly sources of energy or reduce production, both of
which actions would have a negative impact on our earnings and cash flow. All our furnaces are equipped to burn natural gas or utilize electric
power, which are the primary energy sources used at our manufacturing
facilities. Backup systems are in place at most facilities to permit the use
of fuel oil or propane should that become necessary. Prices for natural gas
and electricity have fluctuated in recent years. Energy prices, particularly
for natural gas and fuel oil, were recently at 17




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historically high levels, which increased our production costs. Although
we continue to evaluate our energy costs and consider ways to factor energy
costs into our pricing, energy prices may increase further, which could
adversely affect our production costs, competitive position and results of
operations. A substantial and prolonged increase in energy costs would have an
adverse effect on our margins, earnings and cash flow.  A significant portion of our flat-rolled products are currently sold on
the spot market, and therefore, our sales, margins and earnings are
negatively affected by decreases in domestic spot flat-rolled steel
prices. Because a significant portion of our flat-rolled products are sold on the
spot market under contracts with terms of 12 months or less, our sales, margins
and earnings are negatively impacted by decreases in domestic flat-rolled steel
prices. As a result, downturns in the domestic flat-rolled steel market could
have an adverse effect on our sales, margins and earnings.  Our level of indebtedness and other demands on our cash resources could
materially adversely affect our ability to execute our business strategy
and make us more vulnerable to economic downturns. As of December 31, 2003, we had liquidity of $432.7 million, consisting of
cash and cash equivalents of $193.6 million and available borrowing capacity of
$239.1 million under our revolving credit facility, and total consolidated
debt, including current maturities and capital lease obligations, of
approximately $622.3 million. During the 12 months after December 31, 2003,
our anticipated principal repayments will be approximately $46.8 million.
Subject to the limits contained in our credit facilities, we may also incur
additional debt in the future. In addition to the principal repayments on our
outstanding debt, we have other demands on our cash resources, including, among
others, capital expenditures and operating expenses. Our level of indebtedness and the significant debt servicing costs
associated with that indebtedness could have material effects on our operations
and our ability to execute our business strategy. For example, they could:  
    
    require us to dedicate a substantial portion of our cash flow from operations
to payments on our debt, thereby reducing the amount of our cash flow available
for working capital, capital expenditures, payments of dividends on our common
stock, acquisitions and other general corporate purposes;  
    
    require us to raise additional capital through
the issuance of equity, which may have a dilutive impact to
existing stockholders;  
    
    limit our flexibility in planning for, or
reacting to, changes in the industries in which we compete;  
    
    place us at a competitive disadvantage compared
to our competitors, some of which have less debt service
obligations and greater financial resources than we do;  
    
    limit our ability to borrow additional funds;  
    
    increase our vulnerability to general adverse
economic and industry conditions; and  
    
    result in our failure to satisfy the financial
covenants contained in our credit facilities or in other
agreements governing our indebtedness, which could result in
an event of default that, if not cured or waived, could
restrict or eliminate our ability to finance the cash
requirements of our business. Our credit facilities are secured by substantially all our material
assets. If we default under these facilities, the lenders could choose to
declare all outstanding amounts immediately due and payable, and 18




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seek foreclosure of the assets we granted to them as collateral. If the
amounts outstanding under the credit facilities were accelerated, we may not
have sufficient resources to repay all outstanding amounts, and our assets may
not be sufficient to repay all of our outstanding debt in full. Foreclosures
on any of our material assets could disrupt our operations, and have a material
adverse effect on our reputation, production volume, sales and earnings.  Our variable rate indebtedness subjects us to interest rate risk, which
could cause our annual debt service obligations to increase
significantly. Some of our borrowings, including borrowings under our credit facilities,
are at variable rates of interest and expose us to interest rate risk. If
interest rates increase, our debt service obligations on our variable rate
indebtedness would increase even if the amount borrowed remained the same,
resulting in a decrease in our net income.  Our ability and the ability of some of our subsidiaries to engage in some
business transactions may be limited by the terms of our debt. Our credit facilities contain a number of financial covenants requiring us
to meet financial ratios and financial condition tests, as well as covenants
restricting our ability to:  
    
    incur additional debt;  
    
    in the case of ISG only, pay dividends on, redeem or repurchase capital stock;  
    
    allow our subsidiaries to issue new stock to any
person other than us or any of our other subsidiaries;  
    
    make investments;  
    
    incur or permit to exist liens;  
    
    enter into transactions with affiliates;  
    
    guarantee the debt of other entities, including joint ventures;  
    
    merge or consolidate or otherwise combine with another company; and  
    
    transfer or sell our assets. Our ability to borrow under our credit facilities will depend upon our
ability to comply with these covenants and our borrowing base requirements.
Our ability to meet these covenants and requirements may be affected by events
beyond our control and we may not meet these obligations. Our failure to
comply with these covenants and requirements could result in an event of
default under our credit facilities that, if not cured or waived, could
terminate our ability to borrow further, permit acceleration of the relevant
debt and permit foreclosure on any collateral granted as security under our
credit facilities.  Senior management may be difficult to replace if they leave. The loss of the services of one or more members of our senior management
team or the inability to attract, retain and maintain additional senior
management personnel could harm our business, financial condition, results of
operations and future prospects. Our operations and prospects depend in large
part on the performance of our senior management team, including our chief
executive officer, Rodney B. Mott, our chief operating officer, V. John
Goodwin, and the other members of the senior management team. We may not be
able to find qualified replacements for any of these individuals if their
services are no longer available. There is key man insurance only on Mr. Mott. 19




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Implementation of our strategy to pursue additional acquisition
opportunities has certain risks. We intend to continue to pursue value-adding acquisition opportunities in
the steel industry, including our proposed acquisition of substantially all the
assets of Weirton. As part of this strategy, we may expand existing
facilities, build additional plants, acquire other steel assets, enter into
joint ventures or form strategic alliances that we believe will expand or
complement our existing business. These transactions will likely involve some
or all of the following risks:  
    
    the potential disruption of our ongoing business;  
    
    the diversion of resources and managements time;  
    
    the inability of management to maintain
uniform standards, controls, procedures and policies;  
    
    the difficulty of managing the operations
of a larger company;  
    
    the risk of becoming involved in labor,
commercial or regulatory disputes or litigation related to
the new enterprise;  
    
    the risk of contractual or operational
liability to joint venture participants or to third parties
as a result of our participation;  
    
    the difficulty of competing for
acquisitions and other growth opportunities with companies
having greater financial resources than us; and  
    
    the difficulty of integrating the acquired
operations and personnel into our existing business. Pursuing our growth strategy may be required for us to remain competitive,
but we may not be able to complete any such transactions or obtain financing,
if necessary, for such transactions on favorable terms. Future transactions
may not improve the competitive position and business prospects as anticipated,
and could reduce sales or profit margins, and, therefore, earnings if they are
not successful. Risks Related to our Common Stock  Anti-takeover provisions in our charter documents and Delaware corporate
law may make it difficult for our stockholders to replace or remove our
current board of directors and could deter or delay third parties from
acquiring us, which may adversely affect the marketability and market
price of our common stock. Provisions in our certificate of incorporation and bylaws and in Delaware
corporate law may make it difficult for stockholders to change the composition
of our board of directors in any one year, and thus prevent them from changing
the composition of management. In addition, the same provisions may make it
difficult and expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our management and board of
directors. Public stockholders who might desire to participate in this type of
transaction may not have an opportunity to do so. These anti-takeover
provisions could substantially impede the ability of public stockholders to
benefit from a change in control or change our management and board of
directors and, as a result, may adversely affect the marketability and market
price of our common stock.  There may be circumstances in which the interests of our major
stockholders could be in conflict with your interests as a stockholder. 20




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Circumstances may occur in which major investors in ISG may have an
interest in pursuing acquisitions, divestitures or other transactions,
including, among other things, taking advantage of certain corporate
opportunities that, in their judgment, could enhance their investment in us or
another company in which they invest. These transactions might involve risks to
our other holders of common stock or adversely affect us or other investors. We may from
time to time engage in transactions with related parties and affiliates that
include, among other things, business arrangements, lease arrangements for
certain manufacturing facilities and offices and the payment of fees or
commissions for the transfer of manufacturing by one operating company to
another. These transactions, if any, may adversely affect our sales volumes,
margins, and earnings.  We may not pay dividends for the foreseeable future. We may retain any future earnings to support the development and expansion
of our business or make additional payments under our credit facilities and, as
a result, we may not pay cash dividends in the foreseeable future. Our payment
of any future dividends will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, cash needs, growth plans and the terms of any credit
agreements that we may be a party to at the time. Our credit facilities limit
us from paying cash dividends or other payments or distributions with respect
to our capital stock in excess of certain limitations. In addition, the terms
of any future credit agreement may contain similar restrictions on our ability
to pay any dividends or make any distributions or payments with respect to our
capital stock. Accordingly, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way to realize
their investment. 
 ITEM 2. PROPERTIES Principal Operating Facilities We are the second largest integrated steel producer in North America based
on raw steelmaking capability. Our steel operations consist of four integrated
steelmaking plants, one basic oxygen furnace/compact strip mill, two electric
arc furnace plants and four finishing plants. We also own interests in various
joint ventures that support these facilities, as well as numerous railroad and
transportation assets. Integrated Steelmaking Facilities Burns Harbor.Our Burns Harbor facility is located on approximately 3,300
acres in Indiana on Lake Michigan, about 50 miles southeast of Chicago,
Illinois, strategically located near many of our customers. Burns Harbor,
which is the newest integrated steel making facility in the United States, is
capable of producing hot-rolled sheet, cold-rolled sheet, corrosion resistant
coated sheet and steel plates for use in construction, machinery, automotive,
oil and gas and shipbuilding applications. Burns Harbors principal facilities
include a sintering plant, two coke oven batteries (one of which is under a
capital lease), two blast furnaces (including coal injection facilities), which
yield 4.8 million net tons of hot metal per year, three basic oxygen furnaces,
which each can make approximately 300 net tons of liquid steel in 30 minutes, a
vacuum degassing facility, two continuous slab casters that produce internally
clean steel with highly consistent chemistry (with a combined annual raw steel

production capability of about 4.7 million net tons), an 80-inch hot-strip
mill, two continuous pickling lines, an 80-inch five-stand cold-rolling mill,
sheet finishing mills, a continuous heat treating line, batch annealing
facilities, a 72-inch hot-dip galvanizing line, which is capable of making both
galvanized and galvannealed sheets, the currently idled 110-inch plate mill
(including two continuous reheat furnaces, a roughing mill, a finishing mill
and a normalizing furnace), which can roll plates from 3/16 to 1-inch thick,
and a 160-inch shared plate mill (including two continuous reheat furnaces,
four batch reheat furnaces, a roughing mill, a finishing mill, an 21




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in-line accelerated cooling facility, a quench and temper line and a batch
normalizing furnace), which can roll plates up to 15 inches thick. Burns Harbor
continuously casts 100% of its raw steel production volume. Indiana Harbor.Our Indiana Harbor facility is located on approximately
1,200 acres in Indiana, 20 miles southeast of Chicago, Illinois on Lake
Michigan, strategically located near many of our customers. Indiana Harbors
customer base includes the automotive, agricultural, appliance, pipemaking and
service center markets. Among its products are hot-rolled sheet, carbon and
high-strength, processed and unprocessed; cold-rolled sheet, carbon and
high-strength, enameling sheet, annealed cold-rolled and corrosion resistant
coated products. Indiana Harbors major facilities include a sintering plant
and two blast furnaces that have a capability to produce approximately 3.6
million net tons of hot metal per year. Indiana Harbor also has two basic
oxygen furnaces, a ladle metallurgy facility, a vacuum degasser facility, two
continuous slab casters (with annual raw steel production capability of about
4.0 million ton per year), three pusher reheat furnaces and an 84-inch
hot-strip mill. Indiana Harbors finishing facilities consist of a pickle
line, an 80-inch five-stand tandem mill, two hot-dip galvanizing lines, batch
annealing, a two-stand temper mill and various slitting, recoil and inspection
lines. Cleveland.Our Cleveland facilities are located on approximately 1,200
acres on opposite banks of the Cuyahoga River, near Lake Erie in Cleveland,
Ohio. Cleveland historically operated as two separate steel mills  Cleveland
East and Cleveland West. Although we acquired the entire facility, we have
only restarted operations at Cleveland East. We are considering whether to
restart the Cleveland West operations. We expect to make that decision, which
will be based primarily on the price and availability of required raw
materials, over the next few months. References to Cleveland in - Principal
Operating Facilities refer only to the facilities we are operating on the east
bank of the Cuyahoga River. Most of Clevelands output is hot-rolled or cold-rolled sheet, with
approximately 4% electrogalvanized sheet. The Cleveland blast furnaces are
capable of supplying about 3.1 million net tons to two basic oxygen furnaces.
Other major facilities located at Cleveland include a twin strand 9-inch
continuous slab caster (with annual raw steel production capability of about
3.0 million net tons), a ladle metallurgy facility, vacuum degassing
facilities, an 84-inch hot-strip mill, an 84-inch cold reducing mill, a temper
mill and a batch anneal shop. Cleveland is serviced by our regional coke
battery, the Warren Coke Battery, which supplies approximately 40% of
Clevelands coke needs. Clevelands hot-strip mill, when supplemented with
externally produced slabs, can produce approximately 3.8 million net tons
annually. With the integration of the Bethlehem assets into our business, we
believe that Cleveland may receive slabs from the Sparrows Point facility and
thus could be able to optimize production on the hot-strip mill. Sparrows Point.Our Sparrows Point facility is located on approximately
3,100 acres on the Chesapeake Bay near Baltimore, Maryland. Sparrows Point is
capable of producing 4.0 million net tons annually of slabs, hot-rolled sheet,
cold rolled sheet, coated sheet and tin for use in construction, container,
automotive and strapping applications. Principal facilities include a
sintering plant, a large blast furnace with a pulverized coal injection system,
two basic oxygen furnaces, a twin strand continuous slab caster (with annual
raw steel production capability of about 3.9 million net tons), a 68-inch
hot-strip mill, a new continuous pickling and cold reducing mill, two
galvanizing lines, two Galvalume lines and tin mill facilities that include
tin and chrome plating lines. Sparrows Point continuously casts 100% of its
raw steel production. Sparrows Points location on the Chesapeake Bay makes it
the only domestic 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 our freight costs. Sparrows Point supplies slabs to
Burns Harbor and Conshohocken plate facilities and to other ISG facilities
depending on market conditions. Riverdale.Our Riverdale, Illinois facility is located on 165 acres
approximately 14 miles west of our Indiana Harbor facility. We supply hot
metal from our Indiana Harbor and Burns Harbor blast furnaces to 22




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Riverdales basic oxygen furnaces. Riverdales major facilities include
basic oxygen furnaces; two ladle metallurgy furnaces, a continuous thin slab
caster which uses a compact strip process (with annual raw steel production
capability of about 750,000 net tons), 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 with
state-of-the-art computer-generated features to precisely control the
thickness, profile and flatness of our products. Electric Arc Furnaces Coatesville.Our facility located in Coatesville, Pennsylvania consists
of an electric arc furnace (with an annual raw steel production capability of
about 900,000 net tons), ingot teeming facilities, a slab caster, two plate
mills (140-inch and 206-inch) and heat treating facilities. This facility
refines more than 450 steel chemistries and together with our Conshohocken
facility, process some of the widest, heaviest and thickest plates in the
industry. This facility produces a wide range of carbon and alloy products
(carbon plate, high-strength, low alloy plate, commercial alloy plate, military
alloy plate and coiled and cut plate) and special products (clad plate,
re-sulpherized plate, steel plate, floor plate and clean steel plate) for use
in infrastructure, chemical process facilities and shipbuilding applications.
This facility also provides finishing and conversion services to key customers. Steelton.Our facility in Steelton, Pennsylvania consists of an electric
arc furnace (with an annual raw steel production capability of about 1.2
million net tons), a ladle furnace, a vacuum degassing facility, ingot teeming
facilities, a continuous bloom caster, a 44-inch blooming mill, a 28-inch rail
mill, in-line rail head-hardening facilities, finishing and shipping facilities
for long-length (80 foot) rails and a 20-inch bar mill. The Steelton facility
primarily produces railroad rails, specialty blooms and flat bars. Rolling and Finishing Facilities Hennepin.Our Hennepin, Illinois finishing facility is located on 861
acres on the Illinois River. It can produce more than 1.2 million net tons of
cold-rolled and galvanized steel products a year from a hot rolled band
substrate. The Hennepin facilitys location is well suited to serve the
electrical, machinery and appliance markets, which are predominantly located in
the industrial Midwest region of the United States. Additionally, Hennepins
location on the Illinois River makes it capable of shipping and receiving by
barge, thereby reducing shipping costs. Our Hennepin facility consists of an
84-inch pickle line, an 84-inch five-stand tandem mill, a batch annealing
facility, a temper mill, a hot-dip galvanized line and three processing lines.
The Burns Harbor and Indiana Harbor facilities currently provide substrate to
Hennepin. Columbus Coatings.Our Columbus Coatings facility is located in Columbus,
Ohio. It operates a coating line that produces quality corrosion resistant
steel sheets primarily for the exposed and unexposed automotive market. Our
Burns Harbor facility currently provides cold-rolled coils for most of Columbus
Coatings annual capability and is responsible for marketing of the finished
product. We expect to shift some of the source of that supply to our Cleveland
facility in the near future. We also operate a steel slitting and warehousing
facility at our Columbus facility through Columbus Processing Company. Conshohocken.Our facility in Conshohocken, Pennsylvania consists of a
110-inch Steckel mill, two reheat furnaces, a roughing mill, an in-line cooling
and cut-to-length line, a quench and temper line and batch heat-treating
system. This facility produces a wide range of carbon and alloy coiled and cut
plate from slabs produced at Coatesville and Sparrows Point for use in
infrastructure, chemical process facilities and shipbuilding applications.
This facility also provides finishing and conversion services to key customers. Lackawanna.We operate a 4-stand tandem mill, an annealing facility, a
temper mill, a continuous 23




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pickling line and a galvanizing line in Lackawanna, New York. The
galvanizing line produces about 335,000 net tons per year of quality
corrosion-resistant steel sheets for the unexposed automotive market.
Hot-rolled steel substrate is supplied principally from our Burns Harbor and
Cleveland facilities. Railroad and Transport We own the assets of seven short-line railroads, having sold three that
were acquired from Bethlehem, that transport raw materials and semi-finished
steel products within our various facilities, and an interstate truck broker
which serves our facilities. We also operate, under long-term charters, two 1,000-foot self-unloading
ore vessels that are used for the transportation of iron ore on the Great
Lakes. ISGHomer Research Facility As part of our acquisition of Bethlehems assets, we acquired the Homer
Research Facility, a research and product development facility in Bethlehem,
Pennsylvania. Our research efforts are focused on process and product
technologies that will benefit our customers manufacturing operations. Joint Ventures Hibbing Taconite.We own a total 62.3% direct and indirect interest in Hibbing
Taconite Company located in Hibbing, Minnesota, that owns iron ore reserves and
operates mines and a pelletizing plant. Hibbing Taconite has mining and
processing facilities that can supply all of Burns Harbors iron ore pellet
needs. We own a 90% interest in Ontario Iron Company, which is located in
Hibbing, Minnesota that owns surface, land and mineral leases used by Hibbing
Taconite. AK-ISG Metal Coatings Co.We own a 40% interest in an electrogalvanizing
joint venture facility, located on the east side of our Cleveland facility. Double G Coatings Company, L.P.We own a 50% interest in Double G
Coatings Company, L.P. or Double G, which is located near Jackson, Mississippi.
This company operates a 270,000-ton-per year sheet coating line that produces
galvanized and Galvalume(TM) coated sheets primarily for the construction
market. Sparrows Point provides cold-rolled coils for our share of production
and is responsible for marketing its share of the finished product. Steel Construction Systems.We own a 45% interest in Steel Construction
Systems, which is located in Orlando, Florida and manufactures steel studs and
roll-formed trusses for residential and light commercial buildings. Indiana Pickling and Processing Company.We own a 20% interest in Indiana
Pickling and Processing Company, which is located in Portage, Indiana and
operates a pickling line. Bethlehem Roll Technologies LLC.We own a 50% interest in Bethlehem Roll
Technologies LLC, which is located in Sparrows Point, Maryland and operates a
facility for grinding steel mill rolls for us and others. Chesapeake Heavy Machine Services, L.L.C.We own a 50% interest in
Chesapeake Heavy Machine Services, L.L.C., which is located in Sparrows Point,
Maryland and manages and markets the services of a machine shop. Burns Harbor Steel Health Resources, L.L.C.We own a 47.5% interest in
Steel Health Resources, L.L.C., which is located in Chesterton, Indiana and
operates a healthcare clinic. 24




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We account for all these joint ventures on the equity method except
Hibbing Taconite, which is pro-rata consolidated. 
 ITEM 3. LEGAL PROCEEDINGS See Environmental Matters under PART I, ITEM 1. BUSINESS of this
Annual Report for a discussion of environmental litigation and governmental
proceedings. In the ordinary course of business, we are involved in various pending or
threatened legal proceedings. We cannot predict with certainty the outcome of
any legal or environmental proceedings to which we are a party. In our
opinion, however, adequate liabilities have been recorded for losses that are
probable to result from legal proceedings and environmental remediation
requirements. If such liabilities prove to be inadequate, however, it is
reasonably possible that we could be required to record a charge to earnings
that could be material to the results of operations in a particular future
quarterly or annual period. We believe that any ultimate additional liability
arising from these actions, that is reasonably possible over what has been
recorded, will not be material to our consolidated financial condition and
sufficient liquidity will be available for required payments. As described elsewhere, we purchased only specified assets of Bethlehem,
Acme and LTV through sales in bankruptcy proceedings. The sellers in those
transactions retained liability for certain claims related to the assets that
we purchased, including personal injury claims. The sale orders issued by the
U.S. Bankruptcy Courts having jurisdiction over each respective transaction
entered orders barring assertion of claims (other than those in respect of
certain specifically assumed liabilities which did not include asbestos-related
liabilities), against us related to the assets in question, and confirming that
neither we nor our subsidiaries shall be responsible for any liabilities
related to the assets (other than those in respect of certain specifically
assumed liabilities which did not include asbestos-related liabilities). The
sale orders issued by the U.S. Bankruptcy Courts also found that under no
circumstances could we be deemed a successor to any of the sellers for purposes
of any liabilities. We believe the manner through which our facilities were
purchased in conjunction with the attendant orders of the U.S. Bankruptcy Court
places us in a better position than other steelmakers with substantial exposure
to asbestos-related liability or off-site environmental liability. Despite the
foregoing it is possible that future claims with respect to historic asbestos
exposure could be directed at us. The risk of incurring liability as the
result of such claims is considered remote. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 25, 2003, prior to our initial public offering, our
stockholders unanimously approved by written consent the adoption of our Third
Amended and Restated Certificate of Incorporation. 
 PART II 
  ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS ISGs common stock is listed on the New York Stock Exchange under the
stock symbol ISG and has been so listed since December 12, 2003, when it first
was listed in connection with the Companys initial public offering. The
approximate number of stockholders of record of ISGs common
stock is 55 as
of February 29, 2004. Between December 12, 2003 and December 31, 2003, inclusive, the highest
sales price of ISGs common stock was $42.14 per share, and the lowest sales
price of ISGs common stock was $31.04 per 25




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share. The closing price on February 29, 2004 was $39.21. No cash dividends have been declared since ISGs inception. Our credit
facilities permit us to pay cash dividends only under limited circumstances.
In general, we are permitted to pay cash dividends so long as we are not in
default under the credit facilities and the amount of the dividend, when taken
together with any other restricted payments and dividends made previously, does
not exceed:  
    
    the sum of:  
    
    $10 million,
    
    20% of our aggregate consolidated net income for full
fiscal years ending on or after December 31, 2003 but before the
date of the dividend, but only for those years where our
consolidated net income is positive, and
    
    50% of the net cash proceeds received by us from an
issuance of our equity that remain after full repayment of our
tranche A term loan, and 100% of the net cash proceeds received
by us from an issuance of our equity that remain after full
repayment of both our tranche A and tranche B term loans minus:  
    
    the sum of:  
    
    all dividends and other restricted payments made by us
and our subsidiaries under the relevant terms of our credit
facilities, and
    
    for full fiscal years ending on or after December 31,
2003 but before the date of the dividend in which our
consolidated net income is negative, 100% of the absolute value
of that negative amount, capped in any year at the then-current
maximum permitted dividend amount. At December 31, 2003, the maximum available for these payments was $52.5
million. We are also permitted to pay cash dividends in connection with or
under the terms of our employee benefit plans and stock option plans. The
terms of any future credit arrangement that we enter may contain similar
restrictions on our ability to pay dividends or make payments or distributions
with respect to our capital stock. Sales of Unregistered Securities On May 7, 2003, we issued securities that subsequently converted into
7,994,623 shares of restricted Common Stock to certain accredited investors, as
that term is defined in Rule 501(a) promulgated under the Securities Act, for a
purchase price of $19.60 per share of Common Stock, giving effect to a
conversion of our Class B Common Stock into Common Stock, for an aggregate
purchase price of $156,695,000. On May 7, 2003, we also issued securities that subsequently converted into
765,306 shares of Common Stock to Bethlehem Steel Corporation as partial
consideration for the Bethlehem assets. Both sales of the above securities were deemed to be exempt from
registration in reliance upon Section 4(2) of the Securities Act of 1933. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof, and appropriate legends were
affixed to the share certificates issued in such transactions, and to the share
certificates of the Common Stock into which the above-described securities
converted. All recipients had adequate access to information about us. No 26




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underwriters were involved in the foregoing sales of securities. Use of Proceeds From Our Completed Public Offering On December 17, 2003, we completed the initial public offering of our
Common Stock. The managing underwriters for the offering were Goldman, Sachs &
Co., UBS Securities LLC, J.P. Morgan Securities Inc., Bear, Stearns & Co. Inc.,
and CIBC World Markets Corp. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (Registration No. 333-107524) that was declared effective
by the Securities and Exchange Commission on December 11, 2003. All 18,975,000
shares of Common Stock registered under the registration statement, including
an aggregate of 2,475,000 shares of Common Stock covered by an over-allotment
option granted by us to the underwriters, were sold at a price to the public of
$28.00 per share. All of the shares sold in the offering were sold by us. The
offering did not terminate until after the sale of all of the securities
registered on the Registration Statement. The aggregate gross proceeds to us
from our initial public offering were approximately $531.3 million, before
deducting underwriting discounts, commission and expenses. The net proceeds to
us from the offering were approximately $491.6 million, after deducting an
aggregate of approximately $35.6 million in underwriting discounts and
commissions paid to the underwriters and $4.1 million in other expenses
incurred in connection with the offering. None of the proceeds from the offering were paid, directly or indirectly,
to any of our officers or directors or any of their associates, or to any
persons owning 10% or more of our outstanding common stock or any of our
affiliates. We used the net proceeds from our initial public offering as
follows:  
    
    $228.4 million to repay all amounts outstanding under the tranche A term loan under our credit
facilities,  
    
    $132.1 million to repay a portion of the amounts outstanding under the tranche B term loan
under our credit facilities,  
    
    $14.1 million to repay the amount outstanding under the credit facility of Chicago Cold
Rolling LLC, a subsidiary of ISG, in December 2003,  
    
    $2.8 million to repay the amount outstanding under the Acme Steel Promissory Note in January
2004,  
    
    and the remaining proceeds were used for general corporate and working capital purposes. 27




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ITEM 6. SELECTED HISTORICAL FINANCIAL DATA The following selected historical consolidated financial data as of and
for the year ended December 31, 2003 and for the period from inception,
February 22, 2002, through December 31, 2002 is derived from ISGs audited
consolidated financial statements. Two year Financial and Operating Summaries (Dollars in millions, except per share data)
    
    2003
    
    2002Statement
of Operations DataNet sales
    
    $
    4,070.0
    
    
    $
    933.1Costs and expenses
    
    
    4,066.5
    
    
    
    816.5Interest expense, net
    
    
    50.9
    
    
    
    2.6Income (loss) before income taxes
    
    
    (47.4
    )
    
    
    114.0(Benefit) provision for income taxes
    
    
    (23.9
    )
    
    
    45.9Net (loss) income
    
    
    (23.5
    )
    
    
    68.1Deemed dividend on conversion of Class B common stock
    
    
    (73.6
    )
    
    
    Net (loss) income applicable to common stock
    
    $
    (97.1
    )
    
    $
    68.1(Loss)
income per shareBasic
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    (1.26
    )
    
    $
    0.99Balance
Sheet DataCash and cash equivalents
    
    $
    193.6
    
    
    $
    9.8Receivables, inventories and other current assets
    
    
    1,513.8
    
    
    
    384.5Current liabilities
    
    
    (831.5
    )
    
    
    (234.1
    )Working capital
    
    $
    875.9
    
    
    $
    160.2Property, plant and equipment, net
    
    $
    861.9
    
    
    $
    244.8Total assets
    
    
    2,635.0
    
    
    
    668.1Total long-term debt and capital lease obligations
    
    
    575.5
    
    
    
    68.4Total liabilities
    
    
    1,685.8
    
    
    
    363.9Stockholders equity
    
    
    949.2
    
    
    
    304.2Other DataCapital expenditures
    
    $
    96.9
    
    
    $
    48.1Raw steel production capability at year end (net tons in thousands)
    
    
    18,000
    
    
    
    7,000Raw steel production (net tons in thousands)
    
    
    11,274
    
    
    
    3,081Steel products shipped (net tons in thousands)
    
    
    10,406
    
    
    
    2,602Employees at year end
    
    
    12,000
    
    
    
    3,400Common stock outstanding at year end (shares in thousands)
    
    
    97,471
    
    
    
    69,663
 28




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ISGs Consolidated Results of Operations for the Periods Ended December 31,
2003 and 2002 Overview ISG is an integrated U.S.-based steel manufacturing company that owns and
operates 11 major steel producing and finishing facilities in six states. The
Company was formed on February 22, 2002 and has since become the second largest
domestic integrated steel producer based on annual raw steel production
capability by acquiring out of bankruptcy the principal steel assets of three
companies. The following table below shows the assets acquired, liabilities assumed
and the net cash paid for the assets of Bethlehem Steel Corporation on May 7,
2003, Acme Steel Corporation on October 10, 2002 and The LTV Corporation in
April and May 2002. ($ in millions)Bethlehem
    
    Acme
    
    LTVAcquired assets:Receivables, net
    
    $
    379.2
    
    
    $
    
    
    
    $
    Inventories
    
    
    730.3
    
    
    
    
    
    
    
    52.4Property, plant and equipment
    
    
    602.8
    
    
    
    67.9
    
    
    
    135.2Intangibles and other assets
    
    
    132.7
    
    
    
    
    
    
    
    47.21,845.0
    
    
    
    67.9
    
    
    
    234.8Acquired liabilities:Accounts payable
    
    
    251.4
    
    
    
    
    
    
    
    Other current liabilities
    
    
    162.8
    
    
    
    3.9
    
    
    
    64.8Long term debt and capital lease obligations
    
    
    358.9
    
    
    
    
    
    
    
    Long term environmental and other obligations
    
    
    151.8
    
    
    
    3.1
    
    
    
    86.6Long term pension and other retiree benefits
    
    
    82.5
    
    
    
    
    
    
    
    1,007.4
    
    
    
    7.0
    
    
    
    151.4Net assets recorded
    
    
    837.6
    
    
    
    60.9
    
    
    
    83.4Value of stock issued
    
    
    (15.0
    )
    
    
    
    
    
    
    Cash paid, net
    
    $
    822.6
    
    
    $
    60.9
    
    
    $
    83.4
 Although there is generally considered to be substantial global excess
steel capacity, there is insufficient capacity in the United States to serve
the countrys typical annual market demand. Accordingly, when
the U. S. dollar has been strong, substantial steel imports have flowed to the United States
to meet that demand and utilize a portion of the excess global capacity.
Recently, with the significant growth in both production of and demand for
steel in the Peoples Republic of China, ocean going freight vessels and raw
materials such as coke and steel scrap have been in short supply, driving up
prices for these commodities. Also, the value of the U. S. dollar has recently
declined from general historic levels in the international market. All these
global economic industry factors have a significant positive effect on ISG and
the domestic steel industry. Higher international raw material costs and a
relatively weak domestic dollar causes imports of foreign steel to be more
expensive than domestically produced products, reducing available imports to
meet market demand. When worldwide demand is strong, there is also less
pressure on foreign steel producers to ship products into the domestic market.
With a relatively weak U. S. dollar, rising raw material costs and an improving
worldwide demand for steel products, the domestic steel industry expects to
realize substantial price increases in 2004 for the first time in several
years. This recent increase in prices and limited available international
supply of steel 29




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to the domestic market, however, could reverse just as rapidly
as it arose. The U. S. economy has been improving from the recession of late 2000 and
early 2001 with strong consumer demand, improving business investment in
equipment and software and an improving stock market resulting in strong growth
in Gross Domestic Product (GDP) in the second half of 2003. Non-residential
construction and selected machinery and equipment markets, however, have not
recovered. The ongoing consolidation of the domestic steel industry has
reduced the number of domestic competitors, mainly by financially sound
producers acquiring facilities from competitors who have gone through the
bankruptcy process. Over 35 domestic companies in the steel industry have
filed for bankruptcy protection in the past six years. Consolidation and
selective rationalization of some capacity could continue. While consolidation
has been occurring, the market remains somewhat fragmented because steel
service centers and processors compete with producers. Consolidated Results of Operations The discussion below relates to the results of ISG for the year ended
December 31, 2003 and the period from February 22, 2002 (inception) through December 31,
2002. Prior to the acquisition of assets from LTV in April 2002, we had no
operations. Our operating philosophy and labor contract are also substantially
different from those previously in effect at those operations. As a result, we
believe pro forma historical financial information, had we been organized and
owned those assets, is not appropriate for understanding what our financial
results would have been for such previous periods. Also, the acquisition of
Bethlehem assets in May 2003 more than doubled our shipping capacity.
Accordingly, our financial results for the year ended December 31, 2003 are not
comparable to our results for the period from February 22, 2002 (inception)
through December 31, 2002. Consolidated Results of Operations for the Year Ended December 31, 2003 In 2003, we had a net loss of $23.5 million on net sales of $4.1 billion
and shipments of 10.4 million net tons. In early May 2003, we completed the
acquisition of substantially all of the assets of Bethlehem and its
subsidiaries. We accounted for this acquisition as a business combination and
the results of these former Bethlehem facilities are included in our
consolidated financial statements since the date of the acquisition. The
Bethlehem acquisition more than doubled our shipping capacity. Sales of these
former Bethlehem operations represented about 55% of our 2003 sales. The
addition of the Bethlehem facilities substantially broadened our product mix
with the addition of plate, tin and rail products. It also improved our
product mix by increasing the percentage of higher value-added cold rolled and
coated products. 30




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The table below shows our revenues by product and certain other data for
the 2003 and 2002 periods and on a pro forma basis as if we had acquired
Bethlehem on January 1, 2003. 2003
    
    2002Actual
    
    Pro forma
    
    ActualHot Rolled
    
    
    46
    %
    
    
    42
    %
    
    
    71
    %Cold Rolled
    
    
    19
    
    
    
    19
    
    
    
    22Coated
    
    
    20
    
    
    
    21
    
    
    
    7Plate
    
    
    8
    
    
    
    10
    
    
    
    Tin Plate
    
    
    4
    
    
    
    4
    
    
    
    Rail and other
    
    
    3
    
    
    
    4
    
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Net sales (dollars in millions)
    
    $
    4,070.0
    
    
    $
    5,308.7
    
    
    $
    933.1Average derived price per ton shipped
    
    $
    391
    
    
    $
    406
    
    
    $
    359Shipments (tons in thousands)
    
    
    10,406
    
    
    
    13,076
    
    
    
    2,602Raw steel production (tons in thousands)
    
    
    11,274
    
    
    
    14,206
    
    
    
    3,081
 The $32 increase for 2003 in our price per ton, derived by dividing net
sales by net tons shipped, results from the Bethlehem acquisition. Excluding
the effect of Bethlehems product mix, the average price for 2003 was about $40
per ton below the 2002 price. Prices were lower, principally as a result of
additional industry capacity being restarted in late 2002 that was fully
operational during all of 2003, as total demand for steel remained about the
same. Cost of sales in 2003 was about 94% of sales compared to 81% for 2002. As
mentioned previously, excluding the effect of the Bethlehem acquisition,
average price per ton was down $40 or 11%. Excluding the effect of a higher
value added product mix, costs per ton shipped were higher in 2003 due to
reduced raw steel production for the second and third quarters causing fixed
costs to be absorbed over fewer net tons. In addition, 2002 includes certain
low cost slabs and coils purchased initially from LTV. Our 2003 results also
include $51.8 million of non-cash charges in connection with the acquisition of
Bethlehem assets. Under business combination accounting, inventory acquired is
recorded at a fair value that allows for a reasonable margin for costs to
complete processing and selling efforts. As a result, the cost of sales was
recorded at an amount greater than our costs to produce by $40.8 million.
Also, Bethlehem had certain supply contracts for electricity, natural gas and
coke at prices below current market rates at the acquisition date. We
recognized the value of these below market contracts as an asset and were
expensing this asset over the life of the associated contracts. Consequently,
we recognized a non-cash charge of $11.0 million in 2003 related to these
contracts. In the fourth quarter of 2003,we wrote off about $15.2 million of
these intangible assets as a provision for deferred income taxes. For more
information, see the discussion below on federal income tax provision. During
2003, liquidation of LIFO inventory quantities reduced cost of sales by about
$9.0 million. In 2003, our costs increased for natural gas, coke and employment.
Natural gas spot prices for facilities that were part of ISG in 2002 increased
about 50% to average $5.81 per MMBtu during 2003 as compared to approximately
$4 per MMBtu for 2002, or $46 million for the year. Coke costs for the
facilities that were part of ISG in 2002 increased for the coke ovens and
purchased coke, increasing costs about $42 million in 2003. Our employment
costs were higher in 2003 principally from higher required contributions to the
Steelworkers Pension Trust under our labor agreements. An expense of $2,800
per steelworker employed on the dates the labor agreements were ratified was
recognized for the Bethlehem facilities in 2003 and the LTV and Acme facilities
in 2002. The resulting expense was about $19.1 million and $7.6 million,
respectively. In addition, 2003 includes expense of $1.50 per hour paid for
steelworkers pension for a total of about $25.9 million. Marketing, administrative and other expenses increased in 2003 on an
absolute basis from 2002 levels as a result of the acquisition of Bethlehem
assets but decreased from 5.4% of sales for the period ended 31




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December 31, 2002,
to 3.8% of sales for the year ended December 31, 2003. Depreciation expense was $76.0 million and increased from 2002 as a result
of the Bethlehem acquisition. Interest costs increased from $2.6 million in 2002 to $50.9 million in
2003 as a result of our borrowing under our new credit facility in May to
finance the acquisition of Bethlehem assets and our assumption of capital
leases and certain debt of Bethlehem. The acquisition of Bethlehem assets was structured as a tax-free
reorganization. Accordingly, the historical tax attributes of Bethlehem with
certain limitations are carried forward to ISGs consolidated federal income
tax return. These tax attributes include Bethlehems net operating loss
carryforward and depreciable basis in property, plant and equipment. At the
date of acquisition, the net deferred tax assets acquired were not recognized
because there were a number of required actions related to, among other
matters, Bethlehems plan of liquidation under federal bankruptcy law. During
the fourth quarter of 2003, the Bankruptcy Court confirmed Bethlehems plan of
liquidation, which subsequently became effective
on December 31, 2003. Accordingly, in the fourth quarter, we determined
it was appropriate to recognize the acquired net deferred tax assets and any
related valuation allowance. We estimate the deferred tax assets acquired from
Bethlehem to be about $1.3 billion. The ultimate realization of these tax
benefits depends on our ability to generate future taxable income and agreement
by the Internal Revenue Service to the transaction structure. Generally
accepted accounting principles allow deferred tax assets to be recorded only if
based on managements judgment sufficient evidence exists to support that it is
more likely than not that the asset will be realized. Based on ISGs two
year existence, limited financial performance and cumulative tax loss from
inception, management concluded that the available evidence was insufficient to
support that it is more likely than not that the deferred tax asset will be
realized. Accordingly, a full valuation allowance was established for the
Bethlehem and ISG deferred tax asset in the fourth quarter of 2003 resulting in
a provision for federal income taxes of $5.3 million. In addition, generally
accepted accounting principles require that we recognize any tax benefits of
the Bethlehem acquisition realized in 2003 through the income statement only
after writing off any remaining intangible assets acquired from Bethlehem.
Accordingly, in the fourth quarter of 2003, we wrote off $15.2 million of
intangible assets as a provision for deferred income taxes. These adjustments combined with carrying back a portion of our 2003 tax
loss to obtain a federal income tax refund resulted in an unusually
high tax benefit in 2003. Consolidated Results of Operations for the Period Ended December 31, 2002 In 2002, we had net income of $68.1 on net sales of $933.1 million and
shipments of 2.6 million net tons. The substantial majority of these products
were sold to third-party processors and service centers on the spot market. Our
Hennepin and Riverdale facilities commenced operations in the fourth quarter of
2002. However, these facilities did not achieve their production capacities or
contribute significantly to our net sales in 2002. Prices at the start of 2002 were at their lowest level in many years, but
rapidly increased through the first nine months driven by significant domestic
capacity reduction, the impact of Section 201 tariffs and inventory replacement
by service centers. Fueled by these factors, spot market prices increased by as
much as 80% during 2002. During the majority of 2002, as we established our
market presence, we priced our products below the spot market price until the
fourth quarter when we began to price at the prevailing market price. Sales
throughout 2002 steadily increased as we restarted idled facilities and built
our customer base. During this restart period, our net sales were positively
impacted by the relatively high prices in the spot market. Cost of sales was approximately 81% of our sales. Labor costs in 2002 were
incurred under an 32




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interim collective bargaining agreement, which remained in
place until our new collective bargaining agreement became effective on
December 15, 2002. Our new agreement had a minimal impact on our results of
operations for 2002, but will result in higher future costs. Our energy
requirements for 2002 were purchased at both market rates and under future
contracts throughout 2002. In late 2002, natural gas prices began to escalate
from a price of approximately $3 per MMBtu to approximately $4 per MMBtu;
however, due to forward contracts purchased at earlier prices covering
approximately 70% of our requirements, there was no significant effect on our
results of operations in 2002. In addition, cost of sales for 2002 includes $21.4 million of
non-recurring costs related to the start-up of previously idled LTV and Acme
assets and a non-cash charge of $21.6 million due to the adoption of the LIFO
method for inventory valuation. Cost of sales in 2002 also included a charge of
$10.6 million relating to USWA contract-related expenses as well as the initial
contribution to the USWAs multiemployer pension plan for the employees covered
by our collective bargaining agreement. Finally, our cost of sales for 2002 was
in part influenced by our initial purchase of slabs and raw materials from LTV
at spot market prices, which were at historically low levels. Subsequently in
the second half of 2002, spot market steel prices rose significantly. As a
result, we were able to convert the slabs and raw materials
acquired from LTV to finished products which were sold at favorable
prices. Marketing, administrative and other expenses were $50.2 million during
2002. These expenses consisted primarily of salaries and expenses for sales and
marketing functions both at our corporate headquarters and each of our
operating facilities, legal and professional fees and information system
development costs. Depreciation of $11.0 million in 2002 was calculated on a straight-line
basis over estimated useful lives from three to 20 years. The depreciation
recorded in 2002 and to be recorded thereafter results from the advantageous
purchase prices paid for the idled LTV and Acme assets that were only a
fraction of the selling entities prior book value for the assets. Total net interest expense of $2.6 million includes $1.6 million of
interest expense on credit facilities, $1.4 million of amortization of deferred
debt fees and was reduced by $250,000 of capitalized interest and $173,000 of
interest income in 2002. During 2002, our income tax expense was $45.9 million. Our effective tax
rate was 40.3%. Current deferred tax assets relate primarily to differences
between financial and tax reporting for inventories and accrued expenses. Liquidity and Capital Resources Our business is capital intensive and requires substantial capital
expenditures for upgrading and maintaining our equipment and remaining in
compliance with environmental laws and regulations. Our short-term liquidity
needs arise primarily from capital expenditures, working capital requirements
and principal and interest payments related to our outstanding debt. We have
met these liquidity requirements with cash provided by operations, equity
offerings and debt. We define liquidity as our cash position and remaining availability under
our revolving credit facility. As of December 31, 2003, we had liquidity of
$432.7 million consisting of cash of $193.6 million and available borrowing
capacity of $239.1 million under our $350.0 million revolving credit facility.
As of December 31, 2002, we had liquidity of $102.9 million. Cash
provided by operating activities for 2003 was $288.9 million. Cash
from operating activities was positive despite recording a net loss because of
$112.7 million in non-cash charges to income, principally for depreciation and
deferred income taxes, and reducing working capital and other items
by $199.7 million, principally reducing inventories and increasing accounts payable and
other accrued 33




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liabilities. During 2002, cash used by operating activities was
$111.6 million and was primarily for building working capital related to
accounts receivable and inventory during the start-up of our operations. Cash used by investing activities was $885.2 million for 2003 as we paid
$822.6 million (net of cash acquired) to purchase the Bethlehem assets. This
amount is net of cash of $41.1 million received subsequent to the closing from
Bethlehem as required in the acquisition agreements for working capital
adjustments and amounts not needed for secured, priority and administrative
claims. Additional amounts could be received pending resolution of certain
legal and contingent issues. Also, this amount includes payments of $81.6
million related to the transition assistance program for USWA represented
former Bethlehem employees. We expect to pay an additional $23.6 million over
the next two quarters in connection with this program. We made capital expenditures of $96.9 million in 2003 including rebuilding
the hearth at the Indiana Harbor H-4 blast furnace that was damaged from a hot
metal leak. The blast furnace is now expected to operate for at least eight to
ten years before needing a major rebuild. We anticipate making capital
expenditures in 2004 of about $300 million of which about $100 million for strategic purposes. On February 19, 2004, we entered into an agreement to acquire most of the
assets of Weirton Steel Corporation for about $255 million,
which includes assuming certain liabilities. Closing is subject to bankruptcy
court approval, anti-trust matters and customary closing conditions. The
process of obtaining bankruptcy court approval will include the solicitation by
Weirton of competing offers for its assets, and there can be no assurance that
this transaction will be consummated. We expect to have the ability to pay the
cash portion of the acquisition from existing cash and credit arrangements. We
may pursue, however, financing alternatives that would improve liquidity and
increase financial flexibility. Proceeds from asset sales were $34.3 million in 2003 including $25.6
million for assets acquired from Bethlehem. We expect proceeds of about $50
million in 2004 from sales of surplus assets, including Bethlehems former
corporate headquarters building. Cash used in investing activities in 2002 was $178.1 million. This
included $144.3 million for the acquisition of assets from LTV and Acme.
Capital expenditures were $48.1 million, principally for the start-up of the
previously idled LTV and Acme facilities. Sales of assets totaled $14.3
million in 2002 of which $6.0 million was realized from the sale of a 20%
interest in the equity of an affiliate joint venture and the balance relates to
other surplus assets. Proceeds from certain sales were required to be used to
paydown outstanding amounts under our credit facilities. Cash
provided by financing activities for 2003 was $780.1 million. In May
2003, a private equity offering provided $156.7 million. In connection with
the Bethlehem asset acquisition, we entered into new credit facilities, which,
among other things, replaced ISGs prior $200.0 million secured revolving line
of credit. The new credit facilities permitted borrowings up to $1.0 billion
and consisted of a $350.0 million revolving credit facility, a $250.0 million
Tranche A term loan facility and a $400.0 million Tranche B term loan facility.
In December 2003, we completed our initial public offering that provided
$491.6 million. Some of these proceeds were used to repay $228.4 million of
the Tranche A loan and $132.1 million of the Tranche B loan as required in our
credit facilities. These amounts may not be reborrowed under the agreements.
As of December 31, 2003, we had $266.8 million outstanding under the new credit
facilities. Advances under the revolving credit facility permit borrowings
only in an amount not to exceed certain percentages of our receivables and
inventory. At December 31, 2003 interest on our borrowings under the revolving
credit facility was, at our option, at either LIBOR plus a margin ranging from
2.50% to 4.00% per annum or the Prime rate plus a margin ranging from 1.50% to
3.00% per annum. Rates will decrease by 0.5% if our ratio of debt and capital
leases to earnings before 34




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interest, taxes, depreciation and amortization
(EBITDA), as defined in the agreement, is 3.0 to 1.0 or less. Cash provided by financing activities was $299.5 million in 2002 from
equity offerings and net borrowings. Our credit facilities require certain mandatory pre-payments upon the
receipt of the proceeds from certain asset sales, casualty events, equity
offerings, debt offerings and in the event that we have excess cash flow as
determined in accordance with the credit facilities. They contain customary
affirmative and negative covenants for senior credit facilities of this type,
including, but not limited to, limitations on the incurrence of indebtedness,
asset dispositions, investments, dividends and other restricted payments, liens
and transactions with affiliates. The credit facilities also contain certain
financial covenants, including, but not limited to, a maximum leverage ratio, a
minimum fixed charge coverage ratio, a limitation on capital expenditures,
minimum EBITDA and minimum net worth as defined. They also contain customary
events of default, including, but not limited to, failure to pay principal or
interest, breach of covenants or representations and warranties, cross-default
to other indebtedness, judgment default and
insolvency. If an event of default occurs under the credit facilities,
the lenders under the credit facilities will be entitled to take various
actions, including demanding payment for all amounts outstanding and
foreclosing on any collateral. At December 31, 2003, we were in compliance
with all of our covenants. Contractual Obligations.The following table sets forth our contractual
obligations at December 31, 2003, and the effect such obligations are expected
to have on our liquidity and cash flow in future periods. Contractual Obligations Payments due by PeriodOne-
    
    Three-(dollars in millions)
    
    
    
    
    
    Less than
    
    Three
    
    Five
    
    BeyondAt December 31, 2003
    
    Total
    
    one year
    
    Years
    
    Years
    
    Five YearsDebt
    
    $
    374.3
    
    
    $
    11.5
    
    
    $
    22.9
    
    
    $
    339.9
    
    
    $
    Guarantee of joint venture debt and leases
    
    
    36.1
    
    
    
    9.1
    
    
    
    13.2
    
    
    
    13.2
    
    
    
    0.6Operating leases
    
    
    216.6
    
    
    
    34.6
    
    
    
    57.4
    
    
    
    41.5
    
    
    
    83.1Capital leases
    
    
    248.0
    
    
    
    35.3
    
    
    
    72.6
    
    
    
    43.1
    
    
    
    97.0Other long-term liabilities
    
    
    338.8
    
    
    
    54.0
    
    
    
    71.8
    
    
    
    37.0
    
    
    
    176.0Pensions and other retiree benefits
    
    
    143.4
    
    
    
    24.1
    
    
    
    39.5
    
    
    
    28.7
    
    
    
    51.1Purchase obligations
    
    
    6,505.2
    
    
    
    689.1
    
    
    
    1,298.0
    
    
    
    1,101.4
    
    
    
    3,416.7$
    7,862.4
    
    
    $
    857.7
    
    
    $
    1,575.4
    
    
    $
    1,604.8
    
    
    $
    3,824.5
 Purchase obligations include long-term contracts for our requirements of
certain commodities and others on a take or pay basis but exclude purchase
orders issued in the ordinary course of business, because they generally are
cancelable if our needs change. We expect to purchase goods and services on
such ordinary course purchase orders of about $4 -5 billion per year over the
next few years. Our ability to meet our debt service obligations and reduce
our total debt will depend upon our future performance, which in turn, will
depend upon general economic, financial and business conditions, along with
competition, legislation and regulation  factors that are largely beyond our
control. We believe that cash flow from operations, together with other
available sources of funds including additional borrowings under our credit
facilities will be adequate for at least the next twelve months for making
required payments of principal and interest on our indebtedness and for funding
anticipated capital expenditures and working capital requirements, including
purchase obligations. However, we cannot assure that our operating results,
cash flow and capital resources will be sufficient for repayment of our debt in
the future. 35




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Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. Interpretation No. 46 as revised in December 2003,
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risk
among parties involved. It is based on the concept that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. Interpretation No. 46 and its revision did not have an
effect on our consolidated financial position, results of operations or cash
flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 149 is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have an effect on our consolidated
financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 requires that certain financial instruments, which under previous
guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatory redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares of stock in exchange for cash or other assets and
certain obligations that can be settled with shares of stock. SFAS No. 150
is effective for all financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have an effect on the Companys consolidated financial position, results of
operations or cash flows. In December 2003, the FASB revised SFAS No. 132 (revised 2003), Employers
Disclosures about Pensions and Other Postemployment Benefits. SFAS No. 132
(revised 2003) requires additional disclosure on the assets, obligations cash
flows and net periodic benefit cost of defined benefit pension plans and other
defined benefit postretirement plans in the notes to consolidated financial
statements. The disclosures include describing the types of plan assets,
investment strategy, measurement dates, plan obligations cash flows, and
components of net periodic benefit cost recognized during interim periods. We
adopted SFAS No. 132 (revised 2003) in the fourth quarter of 2003 and since
this statement requires changes in disclosure only, it did not have any effect
on our consolidated financial position, results of operations or cash flows. Critical Accounting Policies and Estimates ISGs consolidated financial statements require management to select
accounting principles where alternatives exist and make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and in required disclosures. Future results may differ from these amounts
because outcomes may differ from those on which management based their
estimates. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Purchase Accounting.Accounting for acquisitions requires us to allocate
the cost of the enterprise to the specific assets acquired and liabilities
assumed based on their estimated fair value at the date of acquisition.
Accounting principles allow us up to one year to acquire all necessary
valuation information for the allocation. While independent appraisals and
other valuations are used to allocate the cost of acquisitions, management is
still required to make significant estimates and assumptions, for example,
regarding the timing of the sale of certain surplus assets acquired that are
not expected to be used in our business. In addition, when the fair value of
the assets acquired exceeds their cost, we are required to pro rate that excess
to reduce noncurrent assets making the amount initially assigned to all assets
and 36




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liabilities more important. Revenue Recognition.Sales are recognized primarily upon shipment and
transfer of all substantial risks of ownership to the customer. Shipments are
made only under a valid contract or purchase order where the sales price is
fixed or determinable and collectability of the resulting receivable is
reasonably assured. Sales are made with no rights to return product, other
than for defective materials. An allowance is estimated for future credits to
customer for returns of defective materials and other adjustments. The
adequacy of the allowance is periodically reviewed by comparison to actual
experience. Claims and adjustments in any future period from sales in 2003
could differ from our current estimates. Allowances for Accounts Receivable.We evaluate the collectability of our
receivables on a regular basis based on a combination of factors. When we
become aware that it is likely that a customer may not meet its financial
obligations to us, such as in the case of bankruptcy or deterioration in the
customers financial performance, we record a specific allowance
for bad debts to reduce the related receivable to the amount we reasonably expect to collect.
We also record allowances for accounts receivable for all other customers based on
a variety of factors, including the length of time the receivables are past due
and
historical experience. If circumstances related to specific customers
change, our estimates of the recoverability of receivables are adjusted. Inventories.We have adopted LIFO inventory accounting for about 20% of
our inventories. We did not adopt LIFO for the inventories acquired from
Bethlehem, but expect to adopt LIFO for that inventory in 2004. We record
slow-moving inventories at their estimated net realizable value, which
generally approximates the recoverable scrap value. We also periodically
evaluate our inventory carrying value to ensure that the amounts are stated at
the lower of cost or market. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. Such lower of cost or market write downs are typically infrequent
under LIFO inventory accounting. Impairment of Long-Lived Assets.We evaluate the recoverability of the
carrying value of long-lived assets used in operations, consisting of property,
plant and equipment and intangible assets regularly and when specific
indicators of impairment, such as reductions in demand or significant economic
factors are present. Our policy is to determine whether the carrying value of
an asset is impaired based on a comparison to the undiscounted estimated future
cash flows from the asset. If such a comparison indicated that there is
impairment, the impaired asset would be written down to fair value, which is
typically calculated using estimated future cash flows and a discount rate
based upon our weighted average cost of capital. Significant management
judgment is required in the forecast of future operating results that is used
in the preparation of estimated future cash flows and others may reasonably
arrive at different conclusions. It is reasonably possible that actual future
net sales and the remaining estimated economic life of the assets could differ
from the estimates used to assess the recoverability. In that event,
impairment charges or shortened useful lives of certain long-lived assets could
be required. To date, no impairments have been recognized. Deferred Income Taxes.Our acquisition of the assets of Bethlehem was
structured under the federal internal revenue code to allow us to acquire the
historical tax attributes of Bethlehems assets and net operating loss
carryforwards within certain limitations. Generally accepted accounting
principles allow us to record such deferred tax assets only when based on
available evidence it is more likely than not that we will realize these
benefits. ISG has less than two years of operations and these resulted in a
cumulative tax loss. Accordingly, there is currently insufficient evidence to
support recognizing the asset. We have established a full valuation allowance
at December 31, 2003, for our net deferred tax asset acquired from Bethlehem
and that generated by ISG. Because the fair value of the Bethlehem net assets
acquired exceeds our cost, we are required to reduce the fair value assigned to
noncurrent assets other than deferred taxes. If we had determined that it was
more likely than not that we would realize these deferred tax assets based on
available evidence, it is possible that we could have recognized an
extraordinary gain in 2003 after reducing all of the Bethlehem noncurrent
assets to zero. In the fourth 37




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quarter of 2003, we realized certain tax
benefits from the Bethlehem acquisition. Generally accepted accounting
principles required that we reduce any long-term intangible assets acquired
from Bethlehem before recognizing any benefit for income taxes in the income
statement. Accordingly, we wrote off about $15.2 million of intangible assets
through the provision for deferred income taxes in 2003. If based on available
evidence in the future, we determine that it is more likely than not that we
will realize these deferred tax assets, we will eliminate the valuation
allowance in that year by providing a benefit for income taxes in the income
statement. Environmental and Other Contingencies.We are currently engaged in the
investigation and remediation of environmental contamination at a number of our
facilities pursuant to both federal and state environmental laws. For a more
detailed site-by-site discussion, see Business  Environmental Matters. We
are 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. We recognize a liability for environmental remediation when it is
likely that such remediation will be required and we can estimate the amount.
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 discounted at 8%.
Environmental liabilities recorded in the future for currently unknown
contamination and future contamination will not be discounted. There are
numerous uncertainties over both the timing and the ultimate costs that we
expect 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, we are required to investigate and remediate
any currently unknown contamination and waste on properties we own, we may
record significant additional liabilities. Also, if our estimates of the cost
to remediate currently known contamination and waste change, we will reduce or
increase the recorded liabilities through credits or charges in the income
statement. Pensions and Other Postemployment Benefits. Accounting for defined
benefit pensions and other postemployment benefits requires the use of
actuarial techniques and assumptions including, among others, assumptions about
employees future retirement decisions, mortality of participants, future
increases in wages and health care costs, discount and interest rates and plan
continuation. These assumptions have a material impact on the net obligation
disclosed in the notes to the consolidated financial statements and the amount
recognized as expense for a year. For example, we do not plan to continue to
provide retiree medical benefits after the expiration of the current labor
agreement with the United Steelworkers of America in 2008. Accordingly, we
assume that only those who are eligible and choose to retire under the current
labor agreement will receive retiree medical benefits. We are also assuming
that the elimination of this retirement benefit in 2008 will not significantly
affect the ages at which our employees choose to retire. Changing either of
these assumptions would have a significant impact on our disclosed obligation
and annual expense for other postemployment benefits. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to certain risks associated with the fluctuation in
interest rates and prices in consumable commodities, including natural gas,
heating oil, coal, coke, steel scrap and non-ferrous metals. We seek to
minimize the potential adverse impact of those market risks through the use of
appropriate management techniques that could include derivative financial
instruments. At December 31, 2003, we held cash flow hedges with respect to
natural gas with the effective portion of such instruments reflected in
accumulated other comprehensive income. We conduct the majority of our
business in the United States and all of our revenues and expenses are
transacted in U.S. dollars. As a result, our operations are not materially
affected by fluctuations in the foreign currencies. We currently have no
financial instruments in place for managing the exposure for foreign currency
exchange rates. Therefore, a hypothetical change in the exchange rate of the
U.S. dollar versus other major currencies would impact our future earnings,
fair values or cash flows, only to the extent it affects domestic imports of,
demand for 38




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and price of raw materials and steel products. Energy costs expose us to cost volatility particularly on natural gas
requirements. Based on combined pro forma 2003 production, a $1 per MMBtu
change in natural gas prices would have changed production costs by
approximately $4.9 million per month. In an effort to manage the risks
associated with price fluctuations on natural gas and other commodities, from
time to time, we use a variety of hedging instruments including forward
contracts, futures, swaps and options. At any point in time, we may utilize
some or all of these hedging instruments in our portfolio. We are also exposed
to interest rate risk arising from the variable rate financing on our revolving
credit facility. A hypothetical increase or decrease in interest rates of 1%
on our new credit facilities would have changed interest expense by $4.0
million in 2003. Also, see previous discussion of coal, coke and steel scrap in PART 1,
ITEM 1. BUSINESS  RAW MATERIALS. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ISGs
Financial Statements and the accompanying Notes that are filed as part
of this Report are listed under PART IV, ITEM 14. FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K and are set forth on pages F-1 through F-28
immediately following the signature pages of this Report. 
  ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None 
 ITEM 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the end of the
period covered by this report (Evaluation Date). Based on this evaluation, our
principal executive officer and principal financial officer concluded as of the
Evaluation Date that our disclosure controls and procedures were effective such
that the information relating to ISG and consolidated subsidiaries, required to
be disclosed in our Securities and Exchange Commission (SEC) reports (i) is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms, and (ii) is accumulated and communicated to ISG
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure. 39




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors and Executive Officers of the Registrant The directors and executive officers of International Steel Group Inc. as
of March 10, 2004, are as follows: Name
    
    Age
    
    PositionWilbur L. Ross
    
    
    66
    
    
    Chairman of the Board of Directors and DirectorRodney B. Mott
    
    
    52
    
    
    President, Chief Executive Officer and DirectorV. John Goodwin
    
    
    60
    
    
    Chief Operating OfficerLeonard M. Anthony
    
    
    49
    
    
    Chief Financial Officer and SecretaryLonnie A. Arnett
    
    
    58
    
    
    Vice President, Controller and Chief Accounting OfficerWilliam Brake, Jr.
    
    
    43
    
    
    Vice President & General Manager, ISG ClevelandRobert J. Dalrymple
    
    
    45
    
    
    Vice President, Engineering & ServicesBrian D. Kurtz
    
    
    38
    
    
    Vice President, Finance and TreasurerJohn D. Lefler
    
    
    57
    
    
    Vice President & General Manager, ISG Sparrows PointJohn C. Mang III
    
    
    51
    
    
    Vice President & General Manager, ISG Burns HarborJerome V. Nelson
    
    
    43
    
    
    Vice President, Sales & MarketingGordon C. Spelich
    
    
    45
    
    
    Vice President, Business DevelopmentKaren A. Smith
    
    
    49
    
    
    Vice President & Corporate Manager Human ResourcesThomas F. Wood
    
    
    56
    
    
    Vice President & Corporate Manager Labor RelationsWilliam C. Bartholomay
    
    
    75
    
    
    Director
 Wilbur L. Ross, Jr.has served as the Chairman of the Board of Directors
and a director of the company since 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 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 Inc. in Japan. Mr. Ross is a member of The Business
Roundtable. 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. and News Communications Inc.
in the U.S. Previously, Mr. Ross served as a Senior Managing Director at
Rothschild Inc., an investment banking firm, from October 1976 to March 2000. Rodney B. Motthas served as our President, Chief Executive Officer and a
director of the company 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 1991 to 2000
Mr. Mott held various positions with Nucor Corporation, a mini-mill steel
producer, including Vice President/General Manager of Nucor Steel, a division
of Nucor Corporation, at the Blytheville, Arkansas and Berkley, South Carolina
facilities. Prior to joining Nucor, Mr. Mott was Superintendent of Operations
at Lone Star Steel from 1986 to 1987. He began his metal management career at
U.S. Steels Fairless Hills operation, where he held positions of increasing
responsibility during a 14-year career from 1971 to 1986. 40




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V. John Goodwinhas been our Chief Operating Officer since March 2003.
Prior to that, he served as Chairman and Chief Executive Officer of Steel
Consultants. Mr. Goodwin has 35 years of leadership experience in the American
steel industry including 27 years with U.S. Steel, an integrated steel
producer. During his service with U.S. Steel, Mr. Goodwin held positions of
increasing responsibility including serving as General Manager of Gary from
1987 to 1994, General Manager of Mon Valley from 1984 to 1987 and various
supervisory and management positions at Fairless from 1967 to 1984. After
leaving U.S. Steel, Mr. Goodwin assumed the position of CEO/COO of National
Steel from 1994 to 1996. Mr. Goodwin was also the former President and General
Manager of Beta Steel Corp. from 1998 to 2000. Leonard M. Anthonyhas been our Chief Financial Officer since May 2003.
He has over 25 years of financial management experience. He joined Bethlehem
Steel Corporation, an integrated steel producer, in 1979 and advanced through
increasingly responsible financial management positions. He served as
Corporate Credit Manager from October 1985 to October 1986, Director of
Financial Services from November 1986 to November 1990, Director Risk
Management from December 1990 to February 1993, Manager Financial Planning from
March 1993 to March 1995, Assistant Treasurer from March 1995 to March 1998,
Vice President and Treasurer from October 1999 to September 2001 and Senior
Vice President Finance and Chief Financial Officer from October 2001 to May
2003. Lonnie A. Arnettjoined ISG in November 2003 and currently serves as our
Vice President, Controller and Chief Accounting Officer. He worked at
Bethlehem from 1984 until October 2003, most recently in a similar capacity.
Mr. Arnett has 35 years of experience in accounting and finance with over 25
years being in the steel industry. William
Brake, Jr.was appointed Vice President & General Manager of ISG
Cleveland Inc. in January 2004 and previously served as our General Manager of
ISG Cleveland Inc. since March 2003. Since April 2002, he was Division Manager
Hot Rolling Operations, Cleveland. Prior to that, he worked for LTV Steel
Corp., an integrated steel producer, where he served as Manager Hot Strip Mill,
Cleveland. Robert J. Dalrymplehas been our Vice President, Engineering & Services
since April 2002. Prior to joining us, Mr. Dalrymple served as Vice President
of Steel at Minnesota Iron & Steel, Inc., a steel sheet mini-mill from May 1999
to April 2002 and Manager, Maintenance & Engineering at Nucor Steel Inc., a
mini-mill steel producer, from June 1995 to May 1999. Brian D. Kurtzhas been our Vice President, Finance and Treasurer since
January 2004 having previously served as Vice President & Corporate Controller
since May 2003 and Assistant Vice President & Corporate Controller since April
12, 2002. Prior to joining the company, Mr. Kurtz served as the Division
Controller of Nucor Steel Corporation, a mini-mill steel producer, from
September 1999 to April 2002 and as Division Accountant from December 1995 to
September 1999. John D. Leflerjoined ISG in March 2003 and served as a Transition Leader
at Bethlehem Steel Corporations Sparrows Point facility. In May 2003 he was
named Vice President & General Manager of ISG Sparrows Point. Prior to that
time, Mr. Lefler was the President and Chief Executive Officer of Minnesota
Iron & Steel, Inc., a steel sheet mini-mill, from March 1999 to March 2003. He
has over 36 years in the American steel industry, including service with Gulf
State Steel, an integrated steel mill, where he served as Vice President
Manufacturing from 1986 to 1992, Executive Vice President and General Manager
from 1992 to 1993 and President and Chief Executive Officer from 1999 to 2003.
Prior to that, Mr. Lefler was employed with U.S. Steel from 1976 to 1986 in
various management positions, including Chief Industrial Engineer,
Superintendent, Director Strategic Planning and Plant Manager. John C. Mang IIIhas been our Vice President & General Manager, ISG Burns
Harbor since May 2003. Prior to that time, Mr. Mang was the Vice President &
General Manager, ISG Cleveland from April 2002 to May 2003. He has also served
as Director of ISG Cleveland, Inc. and ISG Warren, Inc. since May 2002 until
January 2004. Previously, he worked at LTV Steel Corp., an integrated steel 41




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producer, where he served as Senior Vice President of Flat Rolled
Operations from February 2001 to March 2002, Vice President and General Manager
of Cleveland from April 1998 to February 2001, and as Vice President of L-S
Electro-Galvanizing Company from August 1999 to March 2002. Jerome V. Nelsonhas served as our Vice President, Sales & Marketing since
April 2002. Prior to that, he was employed with Birmingham Steel Corporation,
a mini-mill steel producer, where he served as Vice President, Sales &
Marketing from December 2001 to March 2002 and General Sales Manager from
August 2000 to December 2001. Previously Mr. Nelson was employed with Nucor
Steel Corporation, a mini-mill steel producer, as Sales Manager from November
1992 to August 2000. Mr. Nelson began his sales career in the metals industry
at LTV Steel in July 1983, worked for Bethlehem Steel Corporation from July
1988 to July 1992, and worked for Armco Advanced Materials from July 1992 to
November 1992. Gordon C. Spelichhas been our Vice President, Business Development since
April 2002. Prior to joining the company, Mr. Spelich worked as an independent
consultant serving the steel industry from September 2001 until April 2002.
Prior to that, Mr. Spelich served as Vice President of Operations at Pechiney
Rolled Products, an aluminum rolling company and a Division of Pechiney S.A.
from March 2000 to September 2001 and Manager, Operations at Nucor Steel, a
mini-mill steel producer, from October 1991 to March 2000. Karen A. Smithis our Vice President & Corporate Manager Human Resources
since January 2004 and previously served as Assistant Vice President &
Corporate Manager Human Resources since April 2002. Prior to that, she held
various positions in Human Resources and Benefits at Pechiney Rolled Products,
LLC from October 1992 to March 2002, including Benefits Administrator, Benefits
Manager, and Manager Benefits and Compensation. Thomas F. Woodis our Vice President & Corporate Manager Labor Relations
since January 2004 and previously served as Assistant Vice President &
Corporate Manager Labor Relations since April 2002. Prior to that, he worked
for LTV Steel Corp., an integrated steel producer, where he served as Manager
Industrial Relations, Cleveland from December 2000 to April 2002 and Manager
Industrial Relations, Indiana Harbor from August 1993 to December 2000. William C. Bartholomayhas served as a director of the company since April
2002. Mr. Bartholomay currently serves as Vice Chairman of Willis Group
Holdings, Inc., an insurance brokerage and financial services company, which he
joined on August 6, 2003. Prior to that time he served as the President of
Near North National Group, an insurance brokerage and financial services
company, a position which he had held for more than five years. Mr.
Bartholomay also serves as the Chairman of the Board of the Atlanta Braves
baseball team and as a director of both WMS Industries Inc., a gaming
manufacturer, and Midway Games Inc., a publisher of entertainment software. On December 29, 2000, LTV and substantially all of its domestic
subsidiaries filed separate petitions for reorganization under Chapter 11 of
the Code in bankruptcy court, and on October 15, 2001, Bethlehem and 22 of its
subsidiaries filed separate petitions for reorganization under Chapter 11 of
the Code in bankruptcy court. As described above, some of our officers were
employed by LTV or Bethlehem at the time those companies filed for bankruptcy. Code of Ethics; Committee Charters; Corporate Governance Guidelines ISG has adopted a Code of Business Conduct and Ethics, which is applicable
to all employees, including ISGs principal executive officer, principal
financial officer and principal accounting officer. Any person may request a
free copy of the Code by writing to:  International Steel Group Inc.
Attention: Investor Relations
3250 Interstate Drive
Richfield, Ohio 44286 42




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ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated and made part hereof
by reference to the material appearing under the heading Executive
Compensation in ISGs Proxy Statement, which will be filed, with the SEC not
later than 120 days after the end of our fiscal year. 
 ITEM 12. SECURTITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated and made part hereof
by reference to the material appearing under the heading Security Ownership of
Directors and Executive Officers and Equity Compensation Plan Information in
ISGs Proxy Statement which will be filed with the SEC not later than 120 days
after the end of our fiscal year. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated and made part hereof
by reference to the material appearing under the heading Certain Relationships
and Related Transactions in ISGs Proxy Statement which will be filed with the
SEC not later than 120 days after the end of our fiscal year. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated and made part hereof
by reference to the material appearing under the heading Accounting Fees and
Services in ISGs Proxy Statement which will be filed with the SEC not later
than 120 days after the end of our fiscal year. 43




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.  (a)
    
    Documents filed as part of this Report:  The following is an index of the financial statements, schedules and
exhibits included in this Report or incorporated herein by reference. (1) Financial Statements and SchedulesIndependent
Auditors Report
    
    
    F-1Consolidated Statements of Operations, for the year ended December
31, 2003 and for the period from inception, February 22, 2002,
through December 31, 2002
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-3Consolidated Statements of Stockholders Equity for the year ended December 31, 2003 and for
the period from inception, February 22, 2002, through December 31, 2002
    
    
    F-4Consolidated
Statements of Cash Flows, for the year ended December 31,
2003 and for the period from inception, February 22, 2002, through
December 31, 2002
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6(2) Consolidated Financial Statement SchedulesII   Valuation and Qualifying Accounts and Reserves, for the
year ended December 31, 2003 and for the period from inception,
February 22, 2002, through December 31, 2002
    
    
    F-30
 Schedules not included have been omitted because they are not applicable
or the required information is shown in the consolidated financial statement or
notes. Separate financial statements of subsidiaries not consolidated and 50

percent or less owned persons accounted for by the equity method have been
omitted because, considered in the aggregate as a single subsidiary, they do
not constitute a significant subsidiary. (3) Exhibits ExhibitNumber
    
    Description of Document3.1
    
    Third Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrants Registration Statement on Form
S-1 (Reg. No. 333-107524), as amended).3.2
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524), as
amended).
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ExhibitNumber
    
    Description of Document4.1
    
    Specimen certificate for shares of common stock (incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).4.2
    
    Form of Registration Rights Agreement by and among ISG and the investors
party thereto (incorporated by reference to Exhibit 4.2 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).4.3
    
    Registration Rights Agreement, dated as of May 6, 2003, by and between ISG and
the Pension Benefit Guaranty Corporation (incorporated by reference to
Exhibit 4.3 to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).4.4
    
    Convertible Subordinated Promissory Note, dated as of May 6, 2003, by ISG, as
Maker and the Pension Benefit Guaranty Corporation, as Payee (incorporated by
reference to Exhibit 4.4 to the Registrants Registration Statement on Form
S-1 (Reg. No. 333-107524), as amended).10.1
    
    Credit and Guaranty Agreement, dated as of May 7, 2003, by and among
International Steel Group Inc., as a Guarantor, ISG Acquisition Inc., ISG
Cleveland Inc., ISG Hennepin Inc., ISG Indiana Harbor Inc., ISG Warren Inc.,
ISG Riverdale
Inc., ISG Plate Inc., ISG Piedmont Inc., ISG Burns Harbor, Inc., ISG Sparrows
Point Inc., ISG Steelton Inc., and ISG Lackawanna Inc., as Borrowers, certain
subsidiaries of the company, as Guarantors, the Lenders party thereto from
time to time, UBS Securities LLC, as Joint Lead Arranger and Joint
Bookrunner, UBS AG, Stamford Branch, as Administrative Agent, Goldman Sachs
Credit Partners L.P., as Joint Lead Arranger, Joint Bookrunner and
Syndication Agent, The CIT Group/Business Credit, Inc., as Collateral Agent,
Fleet Capital Corporation, as Co-Documentation Agent and LaSalle Bank
National Association, as Co-Documentation Agent (incorporated by reference to
Exhibit 10.1 to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.2
    
    First Amendment to Credit and Guaranty Agreement, dated as of August 6, 2003,
by and among International Steel Group Inc., as a Guarantor, ISG Acquisition
Inc., ISG Cleveland Inc., ISG Riverdale Inc., ISG Plate Inc., ISG Piedmont
Inc., ISG Burns Harbor, Inc., ISG Sparrows Point Inc., ISG Steelton Inc., and
ISG Lackawanna Inc., as Borrowers, certain subsidiaries of the company, as
Guarantors, the Lenders party thereto from time to time, UBS Securities LLC,
as Joint Lead Arranger and Joint Bookrunner, UBS AG, Stamford Branch, as
Administrative Agent, Goldman Sachs Credit Partners L.P., as Joint Lead
Arranger, Joint Bookrunner and Syndication Agent, The CIT Group/Business
Credit, Inc., as Collateral Agent, Fleet Capital Corporation, as
Co-Documentation Agent and LaSalle Bank National Association, as
Co-Documentation Agent (incorporated by reference to Exhibit 10.2 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524), as
amended).10.3
    
    Second Amendment and Limited Waiver to Credit and Guaranty Agreement, dated
as of September 30, 2003, by and among International Steel Group Inc., as a
Guarantor, ISG Acquisition Inc., ISG Cleveland Inc., ISG Hennepin Inc., ISG
Indiana Harbor Inc., ISG Warren Inc., ISG Riverdale Inc., ISG Plate Inc., ISG
Piedmont Inc., ISG Burns Harbor, Inc., ISG Sparrows Point Inc., ISG Steelton
Inc., and ISG Lackawanna Inc., as Borrowers, certain subsidiaries of the
company, as Guarantors, the Lenders party thereto from time to time, UBS
Securities LLC, as Joint Lead Arranger and Joint Bookrunner, UBS AG, Stamford
Branch, as Administrative Agent, Goldman Sachs Credit Partners L.P., as Joint
Lead Arranger, Joint Bookrunner and Syndication Agent, The CIT Group/Business
Credit, Inc., as Collateral Agent, Fleet Capital Corporation, as
Co-Documentation Agent and LaSalle Bank National Association, as
Co-Documentation Agent (incorporated by reference to Exhibit 10.3 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524), as
amended).
 45




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ExhibitNumber
    
    Description of Document10.4
    
    Amended and Restated International Steel Group Inc. Officer Cash and Stock
Bonus Plan dated as of July 16, 2003 (incorporated by reference to Exhibit
10.4 to the Registrants Registration Statement on Form S-1 (Reg. No.
333-107524), as amended).10.5
    
    2002 Stock Option Plan of International Steel Group Inc. dated as of June 28,
2002 (incorporated by reference to Exhibit 10.5 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.6
    
    Release and Settlement Agreement, dated April 22, 2003, by and between
International Steel Group Inc. and the Pension Benefit Guaranty Corporation
(incorporated by reference to Exhibit 10.6 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-107524), as amended).10.7
    
    Pellet Sale and Purchase Agreement, dated as of April 10, 2002 by and among
Cleveland-Cliffs Iron Company, Cliffs Mining Company, Northshore Mining
Company, Northshore Sales Company, ISG Cleveland Inc. and ISG Indiana Harbor,
Inc. (incorporated by reference to Exhibit 10.7 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.8
    
    Asset Purchase Agreement, dated as of February 26, 2002, by and among WLR
Acquisition Corp., LTV Steel Company, Inc., The River Terminal Railway
Company, The Chicago Short Line Railway Company, and Cuyahoga Valley Railway
(incorporated by reference to Exhibit 10.8 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-107524), as amended).10.9
    
    First Amendment to the Asset Purchase Agreement, dated as of April 11, 2002,
by and among WLR Acquisition Corp., LTV Steel Company, Inc., The River
Terminal Railway Company, The Chicago Short Line Railway Company, and
Cuyahoga Valley
Railway (incorporated by reference to Exhibit 10.9 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.10
    
    Second Amendment to the Asset Purchase Agreement, dated as of June 4, 2002,
by and among WLR Acquisition Corp., LTV Steel Company, Inc., The River
Terminal Railway Company, The Chicago Short Line Railway Company, and
Cuyahoga Valley
Railway (incorporated by reference to Exhibit 10.10 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.11
    
    Third Amendment to the Asset Purchase Agreement, dated as of July 8, 2002, by
and among WLR Acquisition Corp., LTV Steel Company, Inc., The River Terminal
Railway Company, The Chicago Short Line Railway Company, and Cuyahoga Valley
Railway (incorporated by reference to Exhibit 10.11 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.12
    
    Asset Purchase Agreement, dated as of March 12, 2003, by and among ISG, ISG
Acquisition, Inc., Bethlehem, and the other sellers named therein
(incorporated by reference to Exhibit 10.12 to the Registrants Registration
Statement on Form S-1 (Reg. No. 333-107524), as amended).10.13
    
    Amendment No. 1 to Asset Purchase Agreement, dated as of April 22, 2003, by
and among ISG, ISG Acquisition, Inc., Bethlehem, and the other sellers named
therein (incorporated by reference to Exhibit 10.13 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).
 46




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##### Table of Contents



ExhibitNumber
    
    Description of Document10.14
    
    Amendment No. 2 to Asset Purchase Agreement, dated as of May 6, 2003, by and
among ISG, ISG Acquisition, Inc., Bethlehem, and the other sellers named
therein (incorporated by reference to Exhibit 10.14 to the Registrants
Registration Statement on Form S-1 (Reg. No. 333-107524), as amended).10.15
    
    Form of Indemnification Agreement with directors of ISG (incorporated by
reference to Exhibit 10.17 to the Registrants Registration Statement on Form
S-1 (Reg. No. 333-107524), as amended).10.16
    
    Form of Indemnification Agreement with officers of ISG (incorporated by
reference to Exhibit 10.18 to the Registrants Registration Statement on Form
S-1 (Reg. No. 333-107524), as amended).10.17
    
    Form of Indemnification Agreement with a person who is both an officer and
director of ISG (incorporated by reference to Exhibit 10.19 to the
Registrants Registration Statement on Form S-1 (Reg. No. 333-107524), as
amended).21.1
    
    List of Subsidiaries.23.1
    
    Independent Auditors Consent.24.1
    
    Power of Attorney.31.1
    
    Certification by the Chief Executive Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.31.2
    
    Certification by the Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Report on Form 8-K ISG filed the following Current Reports on Form 8-K during the fourth quarter of 2003: None 47




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. INTERNATIONAL STEEL GROUP INC. By:  /s/ LEONARD M. ANTHONY
Leonard M. AnthonyChief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated: Signature
    
    Title
    
    Date*
Rodney B. Mott
    
    President, Chief Executive
Officer and Director
(Principal Executive Officer)
    
    March 11, 2004/s/ LEONARD M. ANTHONY
Leonard M. Anthony
    
    Chief Financial Officer
(Principal Financial Officer)
    
    March 11, 2004*
Lonnie A. Arnett
    
    Vice President, Corporate
Controller and Chief
Accounting Officer
(Principal Accounting Officer)
    
    March 11, 2004*
Wilbur L. Ross, Jr.
    
    Chairman of the Board of
Directors and Director
    
    March 11, 2004*
William C. Bartholomay
    
    Director
    
    March 11, 2004
  *
    
    The undersigned, pursuant to a power of attorney, executed by each of
the officers and directors above and filed with the SEC herewith, by
signing his name hereto, does hereby sign this report on behalf of each of
the persons noted above in the capacities indicated. By:
    
    /s/ LEONARD M. ANTHONYName: Leonard M. AnthonyTitle: Attorney-in-Fact
 48




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##### Table of Contents



Independent Auditors Report The Board of Directors and Stockholders
International Steel Group Inc.: We have audited the accompanying consolidated balance sheets of International
Steel Group Inc. and subsidiaries (Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders equity and
cash flows for the year ended December 31, 2003 and the period from inception,
February 22, 2002, through December 31, 2002. These consolidated financial
statements are the responsibility of the Company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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of International Steel
Group Inc. and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for the year ended December 31, 2003
and the period from inception, February 22, 2002, through December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America. Cleveland, Ohio
March 9, 2004 /s/ KPMG LLP F-1




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.Consolidated Statements of Operations
(Dollars in millions, except per share data) For the periodfrom inceptionFebruary 22Year Ended
    
    throughDecember 31,
    
    December 31,2003
    
    2002Net sales
    
    $
    4,070.0
    
    
    $
    933.1Costs and expenses:Cost of sales
    
    
    3,836.9
    
    
    
    755.3Marketing, administrative, and other expenses
    
    
    153.6
    
    
    
    50.2Depreciation and amortization
    
    
    76.0
    
    
    
    11.0Total costs and expenses
    
    
    4,066.5
    
    
    
    816.5Income from operations
    
    
    3.5
    
    
    
    116.6Interest and other financing expense, net
    
    
    50.9
    
    
    
    2.6(Loss) income before income taxes
    
    
    (47.4
    )
    
    
    114.0(Benefit) provision for income taxes
    
    
    (23.9
    )
    
    
    45.9Net (loss) income
    
    $
    (23.5
    )
    
    $
    68.1Deemed dividend on conversion of Class B common stock
    
    

    (73.6
    )
    
    
    Net (loss) income applicable to common stock
    
    $
    (97.1
    )
    
    $
    68.1(Loss) income per common share:Basic
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    (1.26
    )
    
    $
    0.99
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Balance Sheets
December 31, 2003 and 2002
(Dollars in millions, except per share data) 2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    193.6
    
    
    $
    9.8Receivables, less allowances of $36.6 and $7.3
    
    
    553.9
    
    
    
    148.8Inventories
    
    
    866.8
    
    
    
    203.9Assets held for sale
    
    
    68.6
    
    
    
    16.1Prepaid and other current assets
    
    
    24.5
    
    
    
    15.7Total current assets
    
    
    1,707.4
    
    
    
    394.3Property,
plant and equipment, net
    
    
    861.9
    
    
    
    244.8Investments in joint ventures
    
    
    27.0
    
    
    
    14.1Other assets
    
    
    38.7
    
    
    
    14.9Total assets
    
    $
    2,635.0
    
    
    $
    668.1Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt and capital leases
    
    $
    46.8
    
    
    $
    1.1Accounts payable
    
    
    427.9
    
    
    
    117.8Accrued compensation and benefits
    
    
    212.9
    
    
    
    30.5Other current liabilities
    
    
    143.9
    
    
    
    84.7Total current liabilities
    
    
    831.5
    
    
    
    234.1Long term liabilities:Debt
    
    
    362.8
    
    
    
    68.4Capital leases
    
    
    212.7
    
    
    
    Environmental liabilities
    
    
    161.2
    
    
    
    44.5Pensions and other retiree benefits
    
    
    101.0
    
    
    
    0.3Other obligations
    
    
    16.6
    
    
    
    16.6Total liabilities
    
    
    1,685.8
    
    
    
    363.9Stockholders equity:Preferred
Stock, $0.01 par value per share, authorized 5,000 shares, none issued
    
    
    
    
    
    
    Common Stock, $0.01 par value per share, authorized 108,600,000
shares, 97,470,609 and 69,663,280 issued and outstanding
    
    
    1.0
    
    

    
    0.7Additional paid-in capital
    
    
    972.2
    
    
    
    235.4Retained (deficit) earnings
    
    
    (29.0
    )
    
    
    68.1Accumulated other comprehensive income
    
    
    5.0
    
    
    
    Total stockholders equity
    
    
    949.2
    
    
    
    304.2Total liabilities and stockholders equity
    
    $
    2,635.0
    
    
    $
    668.1
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



INTERNATIONAL STEEL
GROUP INC.
Consolidated Statements of Stockholders Equity 
 AccumulatedotherCommon Stock
    
    Class B Common Stock
    
    Additional
    
    Retained
    
    compre-
    
    Totalpaid-in
    
    earnings
    
    hensive
    
    stockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    (deficit)
    
    income
    
    equityBalance, February 22, 2002
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Proceeds from equity offering on April 22
    
    
    64,874,020
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    174.3
    
    
    
    
    
    
    
    
    
    
    
    175.0Proceeds from equity offering on October 10
    
    
    4,789,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61.1
    
    
    
    
    
    
    
    
    
    
    
    61.1Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.1
    
    
    
    
    
    
    
    68.1Balance, December 31, 2002
    
    
    69,663,280
    
    
    $
    0.7
    
    
    
    
    
    
    $
    
    
    
    
    235.4
    
    
    $
    68.1
    
    
    $
    
    
    
    $
    304.2Proceeds from Class B Common Stock
equity offering on May 7
    
    
    
    
    
    
    
    
    
    
    7,994,623
    
    
    
    0.1
    
    
    
    156.6
    
    
    
    
    
    
    
    
    
    
    
    156.7Class B Common Stock issued upon
Bethlehem acquisition
    
    
    
    
    
    
    
    
    
    
    765,306
    
    
    
    
    
    
    
    15.0
    
    
    
    
    
    
    
    
    
    
    
    15.0Proceeds from stock option exercise
    
    
    72,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2Proceeds from initial public equity offering
on December 12
    
    
    18,975,000
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    491.4
    
    
    
    
    
    
    
    
    
    
    
    491.6Conversion of Class B Common Stock to
Common Stock with initial public equity
offering on December 12
    
    
    8,759,929
    
    
    
    0.1
    
    
    
    (8,759,929
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deemed dividend on Class B Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73.6
    
    
    
    (73.6
    )
    
    
    
    
    
    
    Net gains on derivative instruments designated
as cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    5.0Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23.5
    )
    
    
    
    
    
    
    (23.5
    )Balance, December 31, 2003
    
    
    97,470,609
    
    
    $
    1.0
    
    
    
    
    
    
    $
    
    
    
    $
    972.2
    
    
    $
    (29.0
    )
    
    $
    5.0
    
    
    $
    949.2
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC.
Consolidated Statements of Cash Flows
(Dollars in millions) For the periodfrom inceptionFebruary 22, 2002Year Ended
    
    throughDecember 31,
    
    December 31,2003
    
    2002Cash flows from operating activities:Net (loss) income
    
    $
    (23.5
    )
    
    $
    68.1Adjustments for items not affecting cash from operating activities:Depreciation and amortization
    
    
    76.0
    
    
    
    11.0Deferred income taxes
    
    
    20.5
    
    
    
    (5.3
    )Other
    
    
    16.2
    
    
    
    (7.0
    )Changes in working capital and other items:Receivables
    
    
    11.2
    
    
    
    (145.7
    )Inventories
    
    
    67.5
    
    
    
    (151.5
    )Accounts payable
    
    
    58.5
    
    
    
    56.3Accrued income taxes
    
    
    (74.0
    )
    
    
    30.1Pension and other retiree benefits expense more than payments
    
    
    67.9
    
    
    
    0.3Other
    
    
    68.6
    
    
    
    32.1Net cash provided by (used in) operating activities
    
    
    288.9
    
    
    
    (111.6
    )Cash flows from investing activities:Capital expenditures and investments
    
    
    (96.9
    )
    
    
    (48.1
    )Acquisitions, net of cash received
    
    
    (822.6
    )
    
    
    (144.3
    )Proceeds from sales of assets
    
    
    34.3
    
    
    
    14.3Net cash used in investing activities
    
    
    (885.2
    )
    
    
    (178.1
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    941.6
    
    
    
    867.9Payments under revolving credit facility
    
    
    (1,002.3
    )
    
    
    (807.2
    )Proceeds from long-term debt
    
    
    710.0
    
    
    
    8.8Payments on long-term debt
    
    
    (469.3
    )
    
    
    Payments on capital leases
    
    
    (23.7
    )
    
    
    Issuance of common stock, net
    
    
    648.5
    
    
    
    236.2Deferred financing fees
    
    
    (24.7
    )
    
    
    (6.2
    )Net cash provided by financing activities
    
    
    780.1
    
    
    
    299.5Increase in cash and cash equivalents
    
    
    183.8
    
    
    
    9.8Cash and cash equivalents  beginning of period
    
    
    9.8
    
    
    
    Cash and cash equivalents  end of period
    
    $
    193.6
    
    
    $
    9.8Other information:Interest paid
    
    $
    34.3
    
    
    $
    1.4Interest capitalized
    
    
    0.4
    
    
    
    0.3Income taxes paid
    
    
    30.0
    
    
    
    21.2Capital lease obligation incurred
    
    
    0.2
    
    
    
    
 See accompanying notes to consolidated financial statements. F-5




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  1)
    
    Summary of Significant Accounting Policies  (a)
    
    Basis of PresentationThese consolidated financial statements include the accounts of
International Steel Group Inc. and its consolidated subsidiaries (ISG
or the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in
joint ventures are accounted for under the equity method of
accounting, except an iron ore-mining venture, which is pro rata
consolidated. Certain prior period amounts have been reclassified to
conform to the current period presentation.(b)
    
    Nature of OperationsISG was organized in February 2002 to acquire the principal
steelmaking and steel finishing assets from The LTV Corporation (LTV)
and began operations in April 2002. In October 2002, ISG acquired the
compact strip mill and basic oxygen furnace of Acme Steel Corporation
(Acme). In May 2003, ISG acquired substantially all the assets of
Bethlehem Steel Corporation and subsidiaries (Bethlehem). See Note 2,
Acquisitions,for additional information. ISG is a domestic
manufacturer of light flat-rolled, plate and rail steel products whose
customers are located primarily in the United States of America. ISG
reports its activities as a single segment and serves the automotive,
appliance, transportation, machinery and construction markets, either
directly or through steel service centers.(c)
    
    Revenue RecognitionSubstantially all revenue is recognized at the time products are
shipped and all substantial risks of ownership are transferred to the
customer.(d)
    
    Stock Based CompensationThe Company accounts for stock based compensation under the fair value
method as permitted under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation.(e)
    
    Amortization of Debt Issue CostsThe Company capitalizes certain debt issuance costs and amortizes them
on a straight-line basis over the expected term of the debt. In the
event of an early termination of debt, the unamortized amounts are
expensed in the period of termination.(f)
    
    Income TaxesIncome taxes are accounted for under the asset and liability method
that requires deferred income taxes to reflect the future tax
consequences attributable to differences between the tax and financial
reporting bases of assets and liabilities. Deferred tax assets and
liabilities recognized are based on the tax rates in effect in the
year in which differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management based on available evidence, it is more likely than not
that some or all of any net deferred tax assets will not be realized. F-6




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  (g)
    
    Earnings per ShareBasic earnings per share are computed using the weighted average
number of common shares outstanding during the period. Diluted
earnings per common share include the net incremental shares issuable
upon the assumed exercise of stock options and conversion of
convertible debt as if the conversion occurred at the beginning of the
period.(h)
    
    Cash and Cash EquivalentsCash and cash equivalents consist of highly liquid instruments with an
original maturity of three months or less and are carried at cost,
which approximates market value.(i)
    
    InventoriesInventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method of accounting
for about 20% of the inventories at December 31, 2003 and the balance is
determined using the first-in, first-out (FIFO) or average cost
method. We plan to adopt LIFO for all inventories in 2004.The components of inventories follow: December 31,2003
    
    2002FIFO or average cost:Raw materials
    
    $
    291.0
    
    
    $
    75.1Finished and semi-finished goods
    
    
    612.0
    
    
    
    150.4903.0
    
    
    
    225.5LIFO reserve
    
    
    (36.2
    )
    
    
    (21.6
    )Total
    
    $
    866.8
    
    
    $
    203.9
  During 2003, liquidation of LIFO inventory quantities reduced cost of
sales by about $9.0. Inventories acquired in a business combination
were valued at fair market value less, for in-process and finished
goods, costs to complete processing and a reasonable profit for
selling efforts. As a result, the value assigned to inventory
acquired from Bethlehem, see Note 2, Acquisitions, and cost of sales
for 2003 were $40.8 higher than our production costs.(j)
    
    Assets Held for SaleProperties expected to be sold within one year are recorded as assets
held for sale at the lower of the carrying value or fair value, less
costs to sell. These assets are not depreciated while classified as
held for sale. The net expense relating to all assets classified as
held for sale was $7.0 and $0.6 in 2003 and 2002.(k)
    
    Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of
the assets. The estimated useful lives are 20 years for buildings and
range from 3 to 10 years for machinery and equipment. Repairs and F-7




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  maintenance that do not significantly improve or extend the lives of
the respective assets are expensed as incurred throughout the year.The components of Property, plant and equipment, net follow: December 31,2003
    
    2002Land and land improvements
    
    $
    31.5
    
    
    $
    17.0Buildings
    
    
    70.0
    
    
    
    21.7Machinery and equipment
    
    
    796.6
    
    
    
    206.0Construction in progress
    
    
    50.2
    
    
    
    11.1Total
    
    
    948.3
    
    
    
    255.8Accumulated depreciation and amortization
    
    
    (86.4
    )
    
    
    (11.0
    )Total property, plant and equipment, net
    
    $
    861.9
    
    
    $
    244.8
  (l)
    
    Long-lived AssetsLong-lived assets are subject to an impairment assessment if there are
circumstances that indicate the carrying amount may no longer be
recoverable from future operations or sale. The amount of the
impairment recognized, if any, is the difference between the carrying
amount and the fair value of the asset.(m)
    
    ContingenciesLiabilities for loss contingencies, including environmental
remediation costs, arising from claims, assessments, litigation, fines
and penalties and other sources are recorded when it is probable that
a liability has been incurred and the amount can be reasonably
estimated.The Companys estimates of environmental remediation liabilities are
based on current technology and existing laws and regulations and
site-specific estimated costs. The liabilities recognized under
business combination accounting were recorded at their net present
value. These amounts are adjusted for accretion of the discount and
when the effect of new information or changes in law or technology can
be reasonably estimated. Required future recognition of any
environmental liabilities relating to currently owned properties will
not be discounted.(n)
    
    Use of EstimatesThe preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
that management make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from these estimates.(o)
    
    Market RiskISG is exposed to fluctuations in interest rates and the prices of
certain commodities such as natural gas, fuel oil, coke, steel
scrap, iron ore and various non-ferrous metals. Management is
authorized to use various financial instruments where available to
manage the F-8




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  exposures associated with these fluctuations. ISG may
employ the use of futures, forwards, collars, options and swaps to
manage certain exposures when practical. By policy, ISG does not enter
into such contracts for the purpose of speculation. These policies
include establishing a risk management philosophy and objectives,
providing guidelines for derivative usage and establishing procedures
for control and reporting of derivative activity. The change in value
of the effective portion of financial instruments used to hedge
certain exposures is reported as a component of other comprehensive
income and is reclassified into earnings in the same period during
which the hedged transactions affect earnings.(p)
    
    Recent Accounting PronouncementsIn January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. Interpretation No. 46 as revised in
December 2003, addresses consolidation by business enterprises of
variable interest entities and requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among
parties involved. It is based on the concept that companies that
control another entity through interests other than voting interests
should consolidate the controlled entity. Interpretation No. 46 and
its revision did not have an effect on the Companys consolidated
financial position, results of operations or cash flows.In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149
amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have an effect on the Companys
consolidated financial position, results of operations or cash flows.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 requires that certain financial instruments,
which under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments affected
include mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares of
stock in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. SFAS No. 150 is effective
for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have an effect on the Companys consolidated financial
position, results of operations or cash flows.In December 2003, the FASB revised SFAS No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postemployment
Benefits. SFAS No. 132 (revised 2003) requires additional disclosure
on the assets, obligations, cash flows and net periodic benefit cost
of defined benefit pension plans and other defined benefit
postretirement plans in the notes to consolidated financial
statements. The disclosures include describing the types of plan
assets, investment strategy, measurement dates, plan obligations, cash
flows, and components of net periodic benefit cost recognized during
interim periods. The Company adopted F-9




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  SFAS No. 132 (revised 2003) as
of December 31, 2003. Since this statement requires changes in
disclosure only, it did not have any effect on the Companys
consolidated financial position, results of operations or cash flows.(2)
    
    AcquisitionsIn 2002, ISG acquired certain steelmaking and finishing assets that had
been idled and assumed certain liabilities of LTV and Acme that were in
bankruptcy proceedings. In May 2003, ISG acquired substantially all the
assets and assumed certain liabilities of Bethlehem, which was in
bankruptcy proceedings. The acquisition of the Bethlehem net assets was
accounted for as a business combination. Bethlehems results have been
included in the consolidated financial results since May 1, 2003.The following unaudited pro forma data for ISG includes the results of
operations of the Bethlehem acquisition as if it had been consummated
on April 1, 2002, including the effects of the new
labor agreement as it pertains to the former Bethlehem facilities and the
financings incurred to fund the acquisition. Thus 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 indicative of
future results of operations. 2003
    
    2002(unaudited)Net sales
    
    $
    5,308.7
    
    
    $
    3,701.7Net income
    
    
    75.7
    
    
    
    180.5Net income applicable to common stock
    
    
    2.1
    
    
    
    180.5Income per shareBasic
    
    $
    0.03
    
    
    $
    2.47Diluted
    
    $
    0.03
    
    
    $
    2.37
  The purchase agreement included a minimum working capital requirement at
closing and requires Bethlehem to return to ISG any excess cash after all
secured, administrative and priority claims in Bethlehems bankruptcy case
have been paid. As a result, ISG received cash subsequent to the purchase
date from Bethlehem for working capital adjustments and excess cash.
Additional amounts could be received pending resolution of certain legal
and contingent issues.ISG created the transition assistance program to assist departing
USWArepresented Bethlehem employees. This program affects about 2,100
former employees and we expect to pay the remaining liability of $23.6
recorded at December 31, 2003 during 2004. The following amounts have
been paid (received) in connection with the Bethlehem purchase through
December 31, 2003: F-10




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data) Cash paid at closing
    
    $
    752.3Cash acquired
    
    
    (90.2
    )Net cash paid at closing
    
    
    662.1Subsequent required installments paid
    
    
    120.0USWA transition assistance program payments
    
    
    81.6Cash received for working capital adjustments and amounts
not needed for secured, priority and administrative claims
    
    
    (41.1
    )Cash paid, net
    
    $
    822.6
  ISG has made a preliminary allocation of the purchase price to the assets
acquired and liabilities assumed or recognized in the Bethlehem purchase
based on their estimated fair values. ISG has not yet received all
information expected to determine the final values to be assigned to all
assets and liabilities acquired as it relates to certain legal and
contingent issues. Values currently assigned are based on best estimates.
The fair value of the net assets acquired from Bethlehem was in excess of
the purchase price, resulting in negative goodwill. In accordance with
SFAS No. 141, Business Combinations, the negative goodwill was allocated as
a pro rata reduction of the amounts that would have otherwise been assigned
to the acquired non-current assets, primarily property, plant and equipment
and intangible assets, based on their relative fair values. F-11




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data) The amounts recorded for the net assets acquired follows: Bethlehem
    
    Acme
    
    LTVAcquired assets:Receivables, net
    
    $
    379.2
    
    
    $
    
    
    
    $
    Inventories
    
    
    730.3
    
    
    
    
    
    
    
    52.4Prepaids and other current assets
    
    
    5.1
    
    
    
    
    
    
    
    3.2Assets held for sale
    
    
    85.7
    
    
    
    
    
    
    
    30.4Intangible assets
    
    
    26.5
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    602.8
    
    
    
    67.9
    
    
    
    135.2Other noncurrent assets
    
    
    15.4
    
    
    
    
    
    
    
    13.61,845.0
    
    
    
    67.9
    
    
    
    234.8Acquired liabilities:Current portion of long term debt and capital
lease obligations
    
    
    32.7
    
    
    
    
    
    
    
    Accounts payable
    
    
    251.4
    
    
    
    
    
    
    
    Accrued expenses and other current liabilities
    
    
    130.1
    
    
    
    3.9
    
    
    
    64.8Long term debt and capital lease obligations
    
    
    358.9
    
    
    
    
    
    
    
    Long term environmental liabilities
    
    
    144.0
    
    
    
    3.1
    
    
    
    86.6Long term pension and retiree benefits
    
    
    82.5
    
    
    
    
    
    
    
    Other long term obligations
    
    
    7.8
    
    
    
    
    
    
    
    1,007.4
    
    
    
    7.0
    
    
    
    151.4Net assets recorded
    
    
    837.6
    
    
    
    60.9
    
    
    
    83.4Value of stock issued
    
    
    (15.0
    )
    
    
    
    
    
    
    Cash paid, net
    
    $
    822.6
    
    
    $
    60.9
    
    
    $
    83.4
  See Note 4, Income Taxes,regarding federal income tax issues related to
the acquisition of the Bethlehem assets.Intangible assets consist of $5.5 assigned to patents with an estimated
useful life of 16 years and $21.0 assigned to favorable supply contracts
that were being amortized over the term of the associated contracts
ranging from one to four years. ISG recognized $11.3 of expense during
2003 related to these intangibles. At December 31, 2003, the remaining
balance of these intangible assets was reduced to zero through a provision
for deferred federal income taxes.(3)
    
    Stock CompensationThe Company recognizes compensation expense for its stock compensation
program in accordance with the fair value method of SFAS No. 123,
Accounting for Stock-Based Compensation, which requires the recognition of
expense for stock based compensation on their fair value on the measurement
date.ISGs Key Employees Incentive Stock Option Plan provides that common stock
options may be granted to key employees and officers with exercise prices
at no less than the market value on the F-12




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  grant date. Outstanding options
vest in four equal annual installments and expire six years after date
of grant. The Companys initial public offering of common stock on
December 12, 2003 caused vesting of certain options to be accelerated in
2003. If there is a change of control of 50% or more of the voting stock of
the Company, all remaining unvested options will vest immediately. At
December 31, 2003, there were no additional shares available for future
grants. The fair value of options granted in 2003 was determined to be
zero. The fair value of the options granted in 2002 is $9.4, of which,
$3.3 and $2.9 were recognized as compensation expense during 2003 and 2002.
These fair values were determined on the measurement date using the
Black-Scholes option-pricing model under the following assumptions:
risk-free rate of return of 3.04%; dividend yield of 0%; and the options
are anticipated to be exercised upon vesting. 2003
    
    2002Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageShares
    
    Price
    
    Shares
    
    PriceOptions outstanding at beginning of the year
    
    
    7,167,600
    
    
    $
    2.76
    
    
    
    
    
    
    $
    Granted
    
    
    1,038,940
    
    
    
    25.55
    
    
    
    7,464,440
    
    
    
    2.76Exercised
    
    
    (72,400
    )
    
    
    2.76
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    (760,200
    )
    
    
    2.76
    
    
    
    (296,840
    )
    
    
    2.76Options outstanding at end of period
    
    
    7,373,940
    
    
    $
    5.97
    
    
    
    7,167,600
    
    
    $
    2.76Options exercisable at end of period
    
    
    2,619,975
    
    
    $
    2.76
    
    
    
    
    
    
    $
    
  ISG has a Stock Appreciation Rights Plan (stock rights) for certain key
employees that provides employees a cash payment after vesting for the
difference between the stock rights price and the market value of the stock
on the date of exercise, with the award limited to 200% of the stock rights
price. Stock rights vest in four substantially equal installments and
expire five years after grant. The Company granted 188,481 and 1,248,900
stock rights and recognized compensation expense of $2.5 and $0.5 during
2003 and 2002.  (4)
    
    Income TaxesThe components of the (benefit) provision for income taxes follows: 2003
    
    2002(Benefit)
provision:CurrentFederal
    
    $
    (42.5
    )
    
    $
    42.5State
    
    
    (1.9
    )
    
    
    8.7Deferred
    
    
    20.5
    
    
    
    (5.3
    )Total
    
    $
    (23.9
    )
    
    $
    45.9
 F-13




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  A reconciliation of the statutory U.S. tax rate to the recorded effective
tax rate follows: 2003
    
    2002Taxes at statutory rate
    
    
    (35.0)
    %
    
    
    35.0
    %Benefits of acquired tax attributes
    
    
    (11.7
    )
    
    
    Depletion
    
    
    (2.8
    )
    
    
    State and local income taxes net of federal effect
    
    
    (1.5
    )
    
    
    4.6Other
    
    
    0.7
    
    
    
    0.7Tax
    
    
    (50.3)
    %
    
    
    40.3
    %
  Significant components of deferred income tax assets and (liabilities) follow: December 31,2003
    
    2002Temporary
differences - assets (liabilities):Plant and equipment
    
    $
    378.2
    
    
    $
    State deferred income taxes
    
    
    163.7
    
    
    
    Environmental liabilities
    
    
    76.3
    
    
    
    22.8Capitalized leases
    
    
    65.8
    
    
    
    Compensation and benefits
    
    
    48.1
    
    
    
    2.0Accruals and reserves
    
    
    45.0
    
    
    
    2.5Vacation accruals
    
    
    26.2
    
    
    
    3.8Inventories
    
    
    16.1
    
    
    
    2.5Joint ventures
    
    
    15.4
    
    
    
    Other
    
    
    18.3
    
    
    
    14.6Total assets
    
    
    853.1
    
    
    
    48.2Prepaid expenses
    
    
    (9.7
    )
    
    
    LIFO inventories
    
    
    (5.0
    )
    
    
    (2.2
    )Other
    
    
    (3.5
    )
    
    
    (0.2
    )Plant and equipment
    
    
    
    
    
    
    (40.5
    )Total liabilities
    
    
    (18.2
    )
    
    
    (42.9
    )Net operating loss carryforwards
    
    
    399.6
    
    
    
    AMT credit carryfoward
    
    
    25.8
    
    
    
    Valuation allowance
    
    
    (1,260.3
    )
    
    
    Net deferred tax asset
    
    $
    
    
    
    $
    5.3
  Temporary differences represent the cumulative taxable or deductible
amounts recorded in the consolidated financial statements in different
years than recognized in the income tax returns. F-14




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  The acquisition of the Bethlehem assets was structured as a tax-free
reorganization under Internal Revenue Code (IRC) Section 368 (a)(1)(G). The
historic tax attributes of Bethlehem are, therefore, carried over to the
ISG consolidated federal income tax return. These tax attributes are
composed principally of net operating loss (NOL) carryforwards, alternative minimum tax (AMT) credit carryforwards and temporary
differences related to the tax basis of property, plant and equipment. The
net deferred tax assets acquired related to these tax attributes were not
recognized at the date of acquisition because there were a number of
required actions related to, among other matters, Bethlehems plan of
liquidation under federal bankruptcy law. During the fourth quarter of
2003, among other events, the Bankruptcy Court confirmed Bethlehems plan of liquidation, which
subsequently became effective on December 31, 2003. Accordingly, in the
fourth quarter, we determined that it was appropriate to recognize the
acquired net deferred tax assets and any related valuation allowance.IRC Section 382 restricts any excess tax depreciation and other deductions
attributable to Bethlehems higher historic tax basis for five years and
limits the annual utilization of Bethlehems NOL
carryforwards. Realization of these future tax benefits is subject to our
ability to generate sufficient future taxable income and agreement by the
Internal Revenue Service to the transaction structure. We estimate the
deferred tax assets acquired from Bethlehem to be about $1,300.SFAS No. 109, Accounting for Income Taxes, requires that we record a
valuation allowance when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
sufficient future taxable income during periods in which those temporary
differences become deductible and before the expiration of the NOL
carryforwards. Because of ISGs two-year existence, limited financial
performance and cumulative tax loss from inception, it is managements
judgment that SFAS No. 109 requires the recording of a full valuation
allowance for net deferred tax assets that resulted in a $5.3 provision for
deferred income taxes for 2003. The requirement for this valuation
allowance will be evaluated on a regular basis in light of the changing
evidence. In addition, generally accepted accounting principles require
that we recognize any tax benefits of the Bethlehem acquisition realized in
2003 through the income statement only after writing off any remaining
intangible assets acquired from Bethlehem. Accordingly, in the fourth
quarter of 2003, we wrote off $15.2 of intangible assets as a
provision for deferred income taxes.In the future, if it is determined that it is more likely than not that the
deferred tax assets will be realized based upon the available evidence,
including actual taxable results and other sources of future taxable
income, we will reduce the valuation allowance by providing a federal
income tax benefit in that year.At December 31, 2003, ISG had regular tax NOL carryforwards of about $1,060
acquired from Bethlehem as limited by IRC Section 382, and with about $80
arising in 2003, AMT loss carryforwards acquired from Bethlehem of about
$1,300 and AMT credit carryforwards acquired from Bethlehem of
approximately $25. The NOL and AMT loss carryforwards will expire in
varying amounts from 2005 through 2023 if we are unable to generate
sufficient amounts of taxable income in the future. Approximately $630 of
the NOL carryforwards expire between 2005 and 2008. AMT credits can be
carried forward indefinitely. F-15




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  (5)
    
    Income (loss) per ShareThe following table presents calculations of income (loss) per share of common stock: 2003
    
    2002Net (loss) income
    
    $
    (23.5
    )
    
    $
    68.1Deemed dividend on the conversion of Class B common stock
    
    
    (73.6
    )
    
    
    Net (loss) income applicable to common stock
    
    $
    (97.1
    )
    
    $
    68.1Weighted average number of shares of common stock outstanding -
Basic
    
    
    77.1
    
    
    
    66.5Incremental shares issuable upon assumed conversion
    
    
    
    
    
    
    2.4Total shares -Diluted
    
    
    77.1
    
    
    
    68.9(Loss)
income per share:Basic
    
    $
    (1.26
    )
    
    $
    1.02Diluted
    
    $
    (1.26
    )
    
    $
    0.99
  The basic and diluted loss per share are the same for 2003 because
incremental shares issuable upon conversion are anti-dilutive.The Class B common stock was issued in 2003 for cash and in connection with
the acquisition of the Bethlehem assets. It was identical in all respects
to common stock, except that it contained an automatic conversion to common
stock upon ISGs initial public offering at a conversion ratio per share
equal to (1) $92,500, divided by (2) the product of (a) the price per share
paid by the public in the initial public offering multiplied by (b) 0.7,
divided by (3) 3,620. Upon the completion of the
offering on December 12, 2003, therefore, the Class B common stock
automatically converted into 8,759,929 shares of common stock at the $28
per share price of the public offering. The conversion of the Class B
common stock resulted in a one-time deemed dividend to the holders of the
Class B common stock of $73.6. The deemed dividend was recognized on the
balance sheet as a reclassification from retained earnings to paid in
capital in excess of par value. This transaction had no impact on cash
flows or net income. The deemed dividend, however, is required to be
treated similar to a preferred stock dividend in the calculation of loss per share of common stock by deducting it from net
loss to arrive
at net loss applicable to common stock, increasing the 2003 loss
per common share by $0.95 from $0.31 to $1.26.(6)
    
    Comprehensive Income (Loss)The Company has financial instruments that are designated as cash flow
hedges for natural gas, the effective portion of the change in value of
these financial instruments is reported as a component of other
comprehensive income and is reclassified into earnings in the same period
during which the hedged transactions affect earnings. At December 31,
2003, the Company recognized $5.0 in both prepaid expenses and in other comprehensive income related to the cash flow hedges. Total
comprehensive loss was $18.5 for the year ended December 31, 2003. F-16




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  (7)
    
    Long-term Debt and Capital Lease ObligationsComponents of long-term debt and capital leases follow: December 31,2003
    
    2002Debt - Notes and loans:Credit Facilities, Tranche B, LIBOR plus 3.5%, Due May 2007
    
    $
    266.8
    
    
    $
    G. E. Facility, Variable, Due May 2006
    
    
    
    
    
    
    60.7Columbus Coatings financing, Variable, Due August 2008
    
    
    57.8
    
    
    
    PBGC convertible note, 6%, Due May 2007
    
    
    35.0
    
    
    
    Coal Act Subordinated Note, 9%, Due September 2005
    
    
    7.0
    
    
    
    Industrial Revenue Bonds, 5.8%, Due May 2007
    
    
    4.9
    
    
    
    6.0Acme Steel Promissory Note, 7.75%, Due October 2007
    
    
    2.8
    
    
    
    2.8Total debt
    
    
    374.3
    
    
    
    69.5Current portion
    
    
    (11.5
    )
    
    
    (1.1
    )Total long-term debt
    
    $
    362.8
    
    
    $
    68.4Capital lease obligations:Coke oven battery, approximately 5%, payable 2004-2014
    
    $
    174.2
    
    
    $
    Wide slab caster, 9.86%, payable 2004-2005
    
    
    39.2
    
    
    
    Iron ore vessel, 13%, payable 2004-2009
    
    
    21.9
    
    
    
    Other
    
    
    12.7
    
    
    
    Total capital lease obligations
    
    
    248.0
    
    
    
    Current portion
    
    
    (35.3
    )
    
    
    Total long-term capital lease obligations
    
    $
    212.7
    
    
    $
    
  The maturities of long-term debt and required capital lease payments at
December 31, 2003 follows: 2004
    
    $
    46.82005
    
    
    63.42006
    
    
    32.12007
    
    
    345.62008
    
    
    37.42009 and beyond
    
    
    97.0Total
    
    $
    622.3
  ISG had a $200.0 Revolving Credit Facility with GE Capital Commercial
Finance (GE Facility) that was replaced on May 7, 2003. The GE Facility
was collateralized by the inventory and accounts receivable of ISG with
interest payable at the option of ISG at the prime rate plus 1.25% F-17




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  or LIBOR plus 2.75%. During the second quarter 2003, $3.7 of debt
issuance costs was expensed related to the early termination of this credit
facility.In connection with the Bethlehem acquisition, the Company entered into new
$1.0 billion credit facilities (Credit Facilities) that are collateralized
by inventory, accounts receivable, real property and capital stock. The
new Credit Facilities consist of a three-year $350.0 revolving credit
facility, a two-year $250.0 tranche A term loan facility and a four-year
$400.0 tranche B term loan facility. A total of $700.1 was borrowed under
the facilities at May 7, 2003. Borrowings under the revolving credit
facility are subject to overall leverage ratios and bear interest, at the
option of ISG, at a floating rate equal to either LIBOR plus a margin
ranging from 2.00% to 3.50% per annum or the Prime rate plus a margin
ranging from 1.00% to 2.50% per annum. Borrowings under the tranche A term
loan bore interest at a floating rate equal to either LIBOR plus 3.25% per
annum or the Prime rate plus 2.25% per annum. The borrowings under the
tranche B term loan bear interest at a floating rate equal to either LIBOR
plus 3.50% per annum or the Prime rate plus 2.50% per annum. In October
2003, we amended certain covenants, increasing the interest rates by 0.5
percentage points. Commitment fees are payable quarterly for the unused
portion of the total loan commitment with the rates ranging from 0.25% to
0.50% per annum. The Company is subject to various financial covenants
including a minimum borrowing availability, limitations on capital
expenditures, minimum fixed charges coverage, maximum leverage ratios,
minimum net worth and minimum earnings before interest, taxes, depreciation
and amortization (EBITDA) as defined in the agreement governing the Credit
Facilities. The revolving credit facility may be withdrawn if a material
adverse effect or event of default has occurred and the Company is unable
to remedy the event in a timely manner as defined in the agreement.On December 18, 2003, the tranche A term loan was repaid in full and the
$132.1 of the tranche B term loan was repaid using a portion of the
proceeds from ISGs initial public offering of common stock as required by
the Credit Facilities. The amounts repaid are not eligible to be borrowed again
during the remaining term of the Credit Facilities.At December 31, 2003, based on outstanding letters of credit, eligible
accounts receivable, and inventories, the Company had unused borrowing
capacity under the revolving credit facility of $239.1 and the weighted
average interest rate on all outstanding borrowings under the facilities
was
5.178% per annum. Payments of dividends are restricted by the minimum
fixed charges coverage ratio which includes dividend payments as a
component. Amounts available for payment of dividends and other restricted
payments at December 31, 2003 were $52.5.Also in connection with the Bethlehem acquisition, ISG assumed a credit
facility from Columbus Coatings Corporation, a subsidiary of Bethlehem.
Borrowings under the facility bore interest at a floating rate equal to
LIBOR plus 5.0% per annum. The facility was paid in full on August 8,
2003, when ISG entered into a new loan agreement with GE Capital
Corporation for $60.0. The loan bears interest at the greater of 5.75% per
annum or the Eurodollar base rate plus a margin of 4.25% per annum.
Monthly principal payments are $0.5 and increase to $1.7 beginning
September 15, 2006 through maturity.The convertible note to the Pension Benefit Guaranty Corporation
(PBGC) requires semi-annual interest payments beginning January 1, 2004,
and the principal is due in full on May 6, 2007. The note is convertible,
at the PBGCs option, into 29,240.55 shares of ISGs common stock F-18




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INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  for each $1 of principal and accrued interest outstanding. At December 31,
2003, the note was eligible to be converted into 1,064,015 shares of ISG
common stock.The Coal Act subordinated note to the United Mine Workers of America
1992 Benefit Plan and the UMWA Combined Benefit Fund was paid in full in
January 2004.The industrial development bonds bear interest at 5.8% and require monthly
sinking fund payments of $0.1 for principal and interest beginning in
December 2002. These bonds are secured by the Cleveland plant facilities.The promissory note payable to Acme was paid in full in January 2004.The amounts included in property, plant and equipment for capital leases
were $179.4 (net of $11.3 of accumulated amortization) at December 31,
2003. The capital lease on a coke oven battery at the Burns Harbor
facility requires payments in 2004 based on the cost and amount of coke
production, which is estimated to be $25.6 and minimum monthly payments of
$0.5 beginning in January 2005 with additional payments based on coke
production. The capital lease on the slab caster at the Sparrows Point
facility requires quarterly payments of $2.3 in 2004 with the balance due
in 2005. The capital lease on an ore vessel requires monthly payments of
$0.5.The Company believes that the carrying amount of its long-term debt at
December 31, 2003 approximates fair market value.(8)
    
    ContingenciesISG is subject to various legal actions and contingencies in the normal
course of conducting business. ISG recognizes liabilities for such matters
when a loss is likely and the amount can be reasonably estimated. The
effect of the ultimate outcome of these matters on future results of
operations and liquidity cannot be predicted with any certainty. While the
resolution of these matters may have a material effect on the results of
operations of a particular quarter or year, the Company believes that the
ultimate resolution of such matters in excess of liabilities recorded will
not have a material adverse effect on its competitive position or financial
position.ISG 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 environmental media such as soils and groundwater. If, in the
future, the Company is required to investigate and remediate any currently
unknown contamination and wastes at plant sites, ISG could be required to
record additional liabilities.Undiscounted environmental liabilities related to the acquisition of the
net assets from Bethlehem, Acme and LTV in the amount of $337.6 were
recorded at their fair value based on their net present
value determined using an 8% discount rate, resulting in recorded
environmental liabilities of $216.2 at the acquisition dates. F-19




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  The table below represents the amounts recorded for environmental liabilities discounted at 8%: 2003
    
    2002Beginning balance
    
    $
    56.4
    
    
    $
    Liabilities recognized at acquisition
    
    
    159.0
    
    
    
    57.2Accretion and changes in estimates and timing of spending
    
    
    1.0
    
    
    
    3.5Spending for remediation
    
    
    (8.0
    )
    
    
    (4.3
    )Total
    
    
    208.4
    
    
    
    56.4Total current portion included in other current liabilties
    
    
    (47.2
    )
    
    
    (11.9
    )Long term balance at year end
    
    $
    161.2
    
    
    $
    44.5
  The 2003 current portion includes $13.5 related to assets held for sale.Environmental expenditures related to these liabilities for the next five
years and thereafter are expected to be: 2004
    
    $
    47.22005
    
    
    25.72006
    
    
    37.02007
    
    
    19.82008
    
    
    17.12009 and thereafter
    
    
    168.6Total - undiscounted
    
    $
    315.4
  These accrued environmental liabilities relate principally to locations in
Lackawanna, New York; Sparrows Point, Maryland; Western Pennsylvania;
Johnstown, Pennsylvania; Indiana Harbor, Indiana; Burns Harbor, Indiana;
and Cleveland, Ohio.At Lackawanna, we own a site where an integrated steel facility operated
until 1983 and a coke oven operated until 2001. The Company anticipates
performing a corrective measures study and implementing the likely required
corrective measures after approval by appropriate environmental
authorities. The estimated undiscounted cost for continuation of required
studies and likely remediation and post remediation activities is $72.At Sparrows Point, ISG assumed the comprehensive multimedia pollution
prevention agreement entered into by Bethlehem in 1997. The agreement
requires, among other matters, compliance, closure and post-closure care of
two landfills, a site wide investigation that is nearing completion of a
facilities investigation under the Resource Conservation and Recovery Act
(RCRA) and continuation of certain remediation systems. The estimated
undiscounted cost to comply with this agreement and likely remediation
required excluding capital expenditures is $43.Idled mining operations located in western Pennsylvania near Johnstown will
require the prevention of acid mine drainage from discharging into surface
waters. To comply with these obligations, the Company will pump and treat
acid mine drainage from five closed mines and one coal refuse F-20




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  disposal
area. The estimated undiscounted cost of the treatment combined with the
establishment
of required financial assurance for the long-term operation and maintenance
of facilities at the mines is $32.We own a large former integrated steelmaking site in Johnstown,
Pennsylvania. Although subject to RCRA corrective action, no comprehensive
environmental investigations have been performed at this site to date. The
site has been razed and there are a number of historic waste disposal
facilities located at the site that are subject to state regulation and
historic operations that may have caused groundwater contamination. We
estimate undiscounted costs associated with the future investigations and likely
remediation of the site that can be estimated to be $23.Our Indiana Harbor facility is under an administrative order requiring
development and implementation of a monitoring program to assess soil and
groundwater conditions associated with 14 solid waste management units. It
is not possible to estimate the costs of monitoring and remediation that
may be required as a result of this investigation. There is an area of
fuel contamination and solid waste landfill at the facility that requires
remediation, closure and post closure care. The undiscounted cost of these
activities combined with the cost of other administratively required site
assessments and investigative studies that can be estimated is $22.At Burns Harbor, air pollution control dusts and sludges in piles on the
ground are likely to require offsite disposal, although alternative means
are currently being evaluated. The estimated undiscounted cost of the
corrective action combined with the costs to complete certain other studies
and likely corrective actions is $22.An integrated steel facility has operated at our Cleveland facility since
the early part of the 20th century. As a result, soil and groundwater
contamination exists that will likely require remediation. No corrective
action has been demanded by any government authority and no comprehensive
investigation of any of the facilities has been performed. Nevertheless, a
large permitted solid waste landfill at the site will likely require
closure and post-closure care in the future. The estimated undiscounted
cost for this landfill combined with the other study costs and likely
remediation requirements is $14.There are a number of other facilities and properties, which ISG owns
across the United States which present incidental environmental
liabilities. The undiscounted cost of future investigations and likely
remediation at these sites is estimated to be $16.We are spending about $4 per year to properly dispose of contaminated PCB
equipment and asbestos material that periodically deteriorates. The
estimated undiscounted cost of such future disposal is $48. This amount
does not include costs to dispose of all such material in our facilities
upon closure or dismantling.ISG purchased only selected assets of Bethlehem, Acme and LTV through sales
in bankruptcy proceedings. The sales orders issued by the U.S. Bankruptcy
Courts having jurisdiction over each transaction explicitly provide that
the sellers retained asbestos-related liability, and that ISG shall not be
deemed as a successor to any seller with respect to asbestos-related
liabilities or any other matter. Despite the foregoing, it is possible
that future claims with respect to historic asbestos exposure might be
directed at us. The Company considers the risk of incurring liability as
the result of such claims extremely remote. F-21




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per hour and share data)  In 2003, the Company spent approximately $90 for recurring costs to manage
hazardous substances and pollution in ongoing operations. Spending for
environmental compliance related capital
expenditures to limit or monitor pollutants was $5 in 2003 and the Company
expects to spend an average of $38 per year for capital expenditures
through 2008 to meet environmental standards.ISG has guaranteed the debt of a joint venture in the amount
of $2.5 and has guaranteed a joint ventures operating lease with
annual payments of $6.6 through 2008 and one monthly payment of $0.6
in 2009.Other contingent liabilities with respect to product warranties and other
matters arise in the normal course of business. In the opinion of
management, any such unrecognized matters, would not have a material effect
on the Companys financial position, results of operations, or cash flows.(9)
    
    Pension and Other Postretirement Benefit PlansUnder ISGs labor agreement with the United Steelworkers of America (USWA),
the Company and the USWA established defined contribution benefit trusts to
fund pensions and retiree medical and death benefits for retirees and
dependents from USWA represented bargaining units of LTV, Bethlehem and
ISG. Contributions to the pension trust are an annual amount per employee
for 2003 and 2002 and $1.50 per hour paid for 2003. The related expense
was $45.0 ($25.9 based on hours paid and $19.1 based on number of
employees) for 2003 and $7.6 (based on the number of employees) for 2002.
About $5.8 was paid in 2003 and about $47.0 is expected to be paid in 2004
for prior years. Contributions to the retiree medical and death benefits
trust are based on ISGs quarterly EBITDA and certain overtime hours worked
as defined in the agreement beginning in 2003. Related 2003 expense was
$4.3, which will be paid in 2004.ISG also has a defined benefit retiree medical and death benefit plans
covering USWA employees who are eligible to retire under the current labor
agreements. The Company does not intend to provide similar retiree medical
benefits for employees who retire after the current labor agreement
expires. ISG is not required to pre-fund any benefits and expects any
benefits to be paid in 2004 to be minimal.The accumulated postretirement benefit obligation and net periodic
postretirement benefit costs presented below do not reflect the effects of
the recently passed legislation Medicare Prescription Drug, Improvement
and Modernization Act of 2003. We have not completely assessed the
impact of this Act to determine if the currently existing plan will be
modified and what financial impact, if any, it may have on our future
expenses and obligations.In the Bethlehem acquisition, ISG acquired a 62.3% interest in Hibbing
Taconite Company (Hibbing), an iron ore mining joint venture that is pro
rata consolidated in ISGs consolidated financial statements. Hibbing
maintains a noncontributory defined benefit pension plan for hourly and
salary employees with benefits based on years of service and compensation.
Hibbing funds the pension plans within statutory guidelines. Hibbing also
provides retiree medical and death benefits to most full-time employees
with 30 years of service or employees who are 60 years of age with 15 years
of service. ISGs prorated required contribution to the plan based on net
tons produced in 2003 will be $1.0 in 2004. F-22




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  ISGs consolidated pension and other postemployment benefits information,
at our measurement date of December 31, follows: Pension
    
    Other Benefits2003
    
    2003
    
    2002Change in benefit obligation:Postretirement
benefit obligation at Bethlehem purchase date / beginning of period
    
    $
    74.1
    
    
    $
    32.3
    
    
    $
    32.2Service cost
    
    
    1.5
    
    
    
    2.9
    
    
    
    Interest cost
    
    
    3.0
    
    
    
    5.8
    
    
    
    0.1Benefits paid
    
    
    (1.7
    )
    
    
    (0.7
    )
    
    
    Plan changes (primarily additional employees from acquisition)
    
    
    (2.7
    )
    
    
    89.5
    
    
    
    Net actuarial losses / other
    
    
    2.5
    
    
    
    12.0
    
    
    
    Postretirement benefit obligation at end of year
    
    
    76.7
    
    
    
    141.8
    
    
    
    32.3Change in plan assets:Fair value of plan assets at Bethlehem purchase date
    
    
    51.1
    
    
    
    10.1
    
    
    
    Actual return on plan assets
    
    
    6.1
    
    
    
    1.2
    
    
    
    Net company contributions
    
    
    2.1
    
    
    
    
    
    
    
    Benefits paid
    
    
    (1.7
    )
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    
    57.6
    
    
    
    11.3
    
    
    
    Funded status of plan:Unfunded obligation
    
    
    19.1
    
    
    
    130.5
    
    
    
    32.3Unrecognized actuarial gain / (loss)
    
    
    5.8
    
    
    
    (12.3
    )
    
    
    Unrecognized prior service cost
    
    
    
    
    
    
    (72.4
    )
    
    
    (32.0
    )Net amount recognized in the balance sheet
    
    $
    24.9
    
    
    $
    45.8
    
    
    $
    0.3
  The accumulated benefit obligation for pensions at
December 31, 2003 was $68.7. Weighted average assumptions as of December 31 follow:Discount
rate - ISG
    
    
    n/a
    
    
    
    6.00
    %
    
    
    6.50
    %Discount
rate - Hibbing
    
    
    6.25
    %
    
    
    6.25
    %
    
    
    n/aExpected
long-term return on plan assets - Hibbing
    
    
    8.50
    %
    
    
    8.50
    %
    
    
    n/aAverage rate
of compensation increase - Hibbing
    
    
    4.11
    %
    
    
    n/a
    
    
    
    n/aProjected health care cost trend rate in 2004
    
    
    n/a
    
    
    
    10.00
    %
    
    
    10.00
    %Ultimate
trend rate - ISG
    
    
    n/a
    
    
    
    5.50
    %
    
    
    5.50
    %Ultimate
trend rate - Hibbing
    
    
    n/a
    
    
    
    5.00
    %
    
    
    n/aYear
ultimate trend rate is achieved - ISG
    
    
    n/a
    
    
    
    2013
    
    
    
    2012Year
ultimate trend rate is achieved - Hibbing
    
    
    n/a
    
    
    
    2009
    
    
    
    n/a
 F-23




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data) Pension
    
    Other Benefits2003
    
    2003
    
    2002Net periodic post retirement benefit cost:Service cost
    




    $
    1.5
    
    
    $
    2.8
    
    
    $
    Interest cost
    




    
    3.0
    
    
    
    5.8
    
    
    
    0.1Expected return on plan assets
    




    
    (2.8
    )
    
    
    (0.7
    )
    
    
    Amortization of unrecognized prior service cost / other
    




    
    0.5
    
    
    
    11.4
    
    
    
    0.2Total net periodic postretirement benefit cost
    




    $
    2.2
    
    
    $
    19.3
    
    
    $
    0.3The plan asset allocations and target allocations are:Pension Assets
    
    Other Benefits2004
    
    
    
    
    
    2004Target
    
    2003
    
    Target
    
    2003Asset category:Equity securities
    
    
    70.0
    %
    
    
    74.5
    %
    
    
    65.0
    %
    
    
    67.1
    %Debt securities
    
    
    25.0
    
    
    
    20.5
    
    
    
    35.0
    
    
    
    32.9Real estate
    
    
    5.0
    
    
    
    5.0
    
    
    
    0.0
    
    
    
    0.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  The expected return on plan assets represents the weighted average expected
returns for each asset category. Expected returns are based on historical
performance adjusted for current trends.  A one-percentage-point increase or decrease in assumed health care cost
trend rates would have the following effects: Increase
    
    DecreaseEffect on total of service and interest cost components
    
    $
    1.1
    
    
    $
    (0.9
    )Effect on accumulated postretirement benefit obligation
    
    
    18.1
    
    
    
    (15.2
    )
  As a result of the Bethlehem acquisition, ISG is required to provide
lifetime medical coverage under the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA) to Bethlehems retirees and their
surviving spouses. Upon a retirees death, his or her surviving spouse and
dependent children may elect coverage up to an additional 36 months. ISG
charges the participants a premium to participate in this program, and
individuals who leave the program may not re-enter. Persons with ongoing
illnesses or a high expectation of using healthcare services are more
likely to enroll in this program than others. COBRA regulations preclude
the use of a factor to reflect this phenomenon in establishing premiums.
Therefore, ISG is likely to incur healthcare costs in excess of the premium
amounts received from the participants. Accordingly, we recorded an
actuarial
liability of $50.9 in connection with the Bethlehem acquisition.
Differences between our future experience and the actuarially expected
amounts will be amortized over the expected remaining lives of the
participants. F-24




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  In connection with COBRA, the following amounts were recorded: Liability recognized at acquisition
    
    $
    50.9Interest cost on the liability
    
    
    2.0Premiums received in excess of healthcare claims and expenses
    
    
    1.5Balance: December 31, 2003
    
    $
    54.4
  The amounts recorded in our balance sheet for pension, other postretirement
benefits and COBRA are: 2003
    
    2002Pensions
    
    $
    24.9
    
    
    $
    Other postretirement benefits
    
    
    45.8
    
    
    
    0.3COBRA
    
    
    54.4
    
    
    
    Total
    
    
    125.1
    
    
    
    0.3Current portion
    
    
    (24.1
    )
    
    
    (0.3
    )Long-term pension and other retiree benefits
    
    $
    101.0
    
    
    $
    
  (10)
    
    Commitments  As part of the acquisition of the assets of LTV, ISG assumed a five-year
supply contract to provide hot rolled bands to United States Steel
Corporation (U.S. Steel) at predetermined prices. At inception, the U.S.
Steel supply contract was scheduled to provide a total of 2,250,000 net
tons through March 2006. The contracted selling prices to U.S. Steel were
below the current market prices. Accordingly, ISG recorded a liability
that is being amortized to income as the products are shipped representing
the net present value of the difference between the contract prices and
current market prices. In November 2003, the contract was modified as part
of an asset swap agreement with U.S. Steel that was accounted for as a
nonmonetary transaction. The revised contract is in effect until March 1,
2006 and requires ISG to provide U.S. Steel with up to 840,000 net tons of
hot rolled bands at prices below current market price. The recorded
liability of $15.0 at December 31, 2003 is being amortized into income as
the products are shipped.  We have entered into various supply agreements for services, natural gas
transportation, industrial gases and certain raw materials that contain
minimum annual requirements. Based upon prices in effect at December 31,
2003, the following table presents firm commitments relating to these
agreements for the next five years and thereafter: F-25




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data) 2004
    
    $
    198.02005
    
    
    239.42006
    
    
    216.12007
    
    
    207.52008
    
    
    207.32009 and thereafter
    
    
    825.3$
    1,893.6
  The Company leases certain manufacturing equipment, office space and
computer equipment under non-cancelable leases that expire at various dates
through 2018. Rental expenses on operating leases were $23.8 for the year
ended December 31, 2003 and $0.2 for the period ended December 31, 2002.
Future minimum operating lease payments under non-cancelable operating
leases in effect at December 31, 2003 are as follows: 2004
    
    $
    34.62005
    
    
    33.42006
    
    
    24.02007
    
    
    21.12008
    
    
    20.42009 and thereafter
    
    
    83.1$
    216.6
  (11)
    
    Related Parties  The Company has transactions in the normal course of business with various
related parties. Approval by a majority of ISGs disinterested directors is
required to approve any transactions between ISG and a 5% or greater
stockholder.  Wilbur L. Ross is a director of the Company and is a principal of WL Ross
and Co., which manages two funds that beneficially own 32.9% of ISGs
common stock at December 31, 2003. During the year ended December 31, 2003
and period ended December 31, 2002, the Company incurred $5.9 and $6.2 for
fees and out-of-pocket expenses associated with financial advisory
services.  Cleveland-Cliffs Inc. is a beneficial owner of 5.7% of ISGs common stock
as of December 31, 2003 and the Chairman and Chief Executive Officer was a
director of ISG from ISGs inception until February 2004. The Company has
a 15-year supply agreement with Cleveland-Cliffs to purchase all of its
iron ore pellet requirements for use in certain of ISGs blast furnaces at
prices that are adjusted annually for changes in the producer price index
and ISGs average realized hot rolled band selling prices. The supply
agreement can be extended beyond the initial term with the consent of both
parties or can be terminated at the end of the initial term with a two-year
advance termination notice. During the year ended December 31, 2003 and
for the period ended December
31, 2002, the Company purchased iron ore pellets for $236.1 and $119.7,
respectively, under this agreement. Under the Bethlehem acquisition, ISG
assumed an agreement to sell iron ore pellets to Cleveland-Cliffs that
resulted in sales of approximately $20.7 since the date of acquisition. F-26




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  Park Corporation, whose Chairman and Chief Executive Officer served as a
director of ISG from June 2002 to May 5, 2003, beneficially owned 9.0% of
ISGs common stock as of December 31, 2003 through Georgia Financial LLC,
its whollyowned subsidiary. The Park Corporation provided $6.4 of
supplies and services to ISG during 2003. Under the Bethlehem acquisition,
ISG assumed an agreement that resulted in approximately $6.9 of ingot sales
to Park Corporation since the date of acquisition. All transactions with
Park Corporation were at market prices.  GE Capital is a stockholder of ISG. The Company has various capital lease
arrangements financed through GE Capital and a $60.0 credit agreement for
Columbus Coatings Company. Since the date of acquisition, the Company made
lease payments of approximately $1.5 to GE Capital and principal payments
of $2.1 under the credit agreement with Columbus Coatings Company.  At December 31, 2003, ISG had a $4.6 account receivable from
Cleveland-Cliffs, a $1.3 account receivable from Park Corporation, a $4.0
account payable to Park Corporation and a $57.8 debt to GE Capital under a
credit agreement with Columbus Coatings Company.  (12)
    
    Quarterly Information (Unaudited)  The following is a summary of the unaudited quarterly results of operations
for the year ended December 31, 2003 and the period from inception,
February 22, 2002, through December 31, 2002. Quarter Ended3/29/2003
    
    6/28/2003
    
    9/27/2003
    
    12/31/2003Revenue
    
    $
    461.7
    
    
    $
    1,005.1
    
    
    $
    1,184.9
    
    
    $
    1,418.3Cost of sales
    
    $
    451.5
    
    
    $
    982.4
    
    
    $
    1,125.3
    
    
    $
    1,277.7Net (loss) income
    
    $
    (2.3
    )
    
    $
    (27.5
    )
    
    $
    (18.6
    )
    
    $
    24.9Net (loss) income
applicable to common stock
    
    $
    (2.3
    )
    
    $
    (27.5
    )
    
    $
    (18.6
    )
    
    $
    (48.7
    )Income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    (0.41
    )
    
    $
    (0.24
    )
    
    $
    (0.57
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.41
    )
    
    $
    (0.24
    )
    
    $
    (0.57
    )
 Quarter Ended6/29/2002
    
    9/28/2002
    
    12/31/2002Revenue
    
    $
    71.4
    
    
    $
    363.7
    
    
    $
    498.0Cost of sales
    
    $
    74.7
    
    
    $
    287.8
    
    
    $
    392.8Net (loss) income
    
    $
    (9.5
    )
    
    $
    34.5
    
    
    $
    43.1Income (loss) per share:Basic
    
    $
    (0.15
    )
    
    $
    0.53
    
    
    $
    0.63Diluted
    
    $
    (0.15
    )
    
    $
    0.51
    
    
    $
    0.62
 F-27




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##### Table of Contents



INTERNATIONAL STEEL GROUP INC. Notes to Consolidated Financial Statements December 31, 2003 and 2002 (Dollars in millions, except per share data)  (13)
    
    Subsequent Event (Unaudited) On February 19, 2004, we entered into and agreement to acquire most of the
assets of the Weirton Steel Corporation for about $255 million, which includes
assuming certain liabilities. Closing is subject to bankruptcy court approval,
anti-trust matters and customary closing conditions. The process of obtaining
bankruptcy court approval will include the solicitation by Weirton of competing
offers for its assets, and there can be no assurance that this transaction will
be consummated. F-28




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##### Table of Contents



The Board of Directors and Stockholders
International Steel Group Inc.: Under date of March 9, 2004, we reported on the consolidated balance sheets of
International Steel Group Inc. and subsidiaries (Company) as of December 31,
2003 and 2002, and the related consolidated statements of operations,
stockholders equity and cash flows for the year ended December 31, 2003 and
the period from inception, February 22, 2002, through December 31, 2002, as
contained in this annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement Schedule II-Valuation and Qualifying
Accounts. This financial statement schedule is the
responsibility of the Companys management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
presents
fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Cleveland, Ohio
March 11, 2004 F-29




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##### Table of Contents



International Steel Group Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts AdditionsBalance at
    
    Charged toBeginning
    
    Costs and
    
    Charges to
    
    
    
    
    
    Balance atClassification
    
    of Period
    
    Expenses
    
    Other
    
    Deductions
    
    End of Period(Dollars in millions)Allowances for receivablesDecember 31, 2002
    
    $
    
    
    
    
    16.2
    
    
    
    
    
    
    
    (8.9
    )
    
    $
    7.3December 31, 2003
    
    $
    7.3
    
    
    
    96.6
    
    
    
    26.2
    (a)
    
    
    (93.5
    )
    
    $
    36.6Valuation allowance for net deferred tax assetDecember 31, 2003
    
    $
    
    
    
    
    5.3
    
    
    
    1,278.9
    (a)
    
    
    (23.9
    )
    
    $
    1,260.3
  (a)
    
    Balance established as a result of Bethlehem acquisition. F-30