Acme is a fully integrated producer of steel. Acme's line of products is concentrated on the manufacture of flat-rolled steels, including sheet and strip steel. In the flat-rolled steel market, Acme specializes in producing carbon steels, especially mid- and high-carbon, alloy, and high-strength low-alloy steels. The principal markets served by Acme include automotive, agricultural, industrial, fastener, pipe and tube, processor, and tool manufacturing industries. The Company's Steel Fabricating Segment has historically consumed approximately 30-40 percent of Acme's steel production. However, with increased capacity from the New Facility consumption is expected to be approximately 25 percent. Acme's focus on external customers is centered around customers whose demand levels and metallurgical requirements are for the small production quantities available from Acme's facilities. Acme's sales represented about 42, 44, and 45 percent of total Company sales in 1997, 1996, and 1995, respectively.

Acme's facilities are located in Riverdale and Chicago, Illinois, and include the following plant facilities: coke ovens, blast furnaces, pigging machines, basic oxygen furnaces, ladle metallurgical facility, continuous caster, hot strip mill, pickle lines, cold mills, annealing furnaces, slitter lines, and cut-to-length lines.

Acme is the smallest integrated steel producer in the U.S. with a current annual hot band shipping capability of approximately 970,000 tons (see discussion under this section entitled New Facility). This compares with total U.S. shipments of flat rolled steel products of approximately 68 million tons.

Competitive Conditions for the Steel Making Segment

General Steel Market

U.S. steel producers face intensive competition from integrated steel producers, mini-mills and foreign producers (often government subsidized).

U.S. Despite significant reductions in raw steel production capacity by major U.S. producers over the last two decades, the U.S. industry continues to be adversely affected, from time to time, by excess world capacity. According to the AISI, annual U.S. raw steel production capacity was reduced from approximately 154 million tons in 1982 to approximately 121,400 million tons in 1997. This reduction resulted in higher utilization rates. Average utilization of U.S. industry capacity improved from approximately 61 percent in the 1982 to 1986 period to approximately 83 percent in the 1987 to 1991 period, to approximately 89 percent in 1993, to 93 percent in 1994 and 1995, and to 91 percent in 1996, and 89 percent in 1997. Recent improved production efficiencies and new minimill capacity also have begun to increase overall production capacity in the United States. Excess production capacity exists in certain product lines in U.S. markets and, to a greater extent, worldwide. Increased industry overcapacity, coupled with economic recession, would intensify an already competitive environment.

Over the last decade, extensive downsizings have necessitated costly restructuring charges that, when combined with highly competitive market conditions, have resulted at times in substantial losses for some U.S. integrated steel producers. A number of U.S. integrated steel producers have gone through bankruptcy reorganization. These reorganizations have resulted in somewhat reduced capital costs for these producers and may permit them to price their steel products at levels below those which they could have otherwise maintained.

Non-U.S. U.S. steel producers face significant competition from certain non-U.S. steel producers who may have lower labor costs. In addition, U.S. steel producers may be adversely affected by fluctuations in the relationship between the U.S. dollar and foreign currencies. Furthermore, some non-U.S. steel producers have been owned, controlled or subsidized by their governments, and their decisions with respect to production and sales may be, or may have been in the past, influenced more by political and economic policy considerations than by prevailing market conditions. Some non-U.S. producers of steel and steel products have continued to ship into the U.S. market despite decreasing profit margins or losses. If certain relevant U.S. trade laws are weakened, world demand for steel eases or the U.S. dollar strengthens, an increase in the market share of imports may occur, which could adversely affect the pricing of the Company's products. The costs for current and future environmental compliance may place U.S. steel producers, including the Company, at a competitive disadvantage with respect to non-U.S. steel producers, which may not be subject to environmental requirements as stringent as those in the United States.

Over the long term, steel prices will be set by the lowest cost producers and the lowest costs will be attained through the implementation of new technologies. The flat rolled steel market provides strong evidence of this downward trend in real steel prices due in part to decreasing costs. Recently developed thin slab casting technologies, such as that utilized in the New Facility, have allowed some mini-mill producers and other steel producers to enter certain sectors of the flat rolled market which have traditionally been supplied by integrated producers. Technological innovation is likely to continue in the steel industry and producers will be required to achieve significant, sustainable cost reductions to succeed. The Company's investment of approximately $400 million (excluding capitalized interest and certain internal costs) in the New Facility is expected to enable it to remain competitive.

Special Grade Market

This component of the flat-rolled market represents the mid-carbon, high-carbon, high-strength low-alloy and alloy markets. The total annual market is approximately 3 million tons, of which Acme's share is estimated to be 6 to 7 percent. Acme's principal customer markets are agricultural, industrial, tools, conversion, automotive components and construction.

Low Carbon Hot Rolled Market

Low carbon hot rolled products comprise approximately 20 percent to 25 percent of the U.S. Steel market, or approximately 24 million tons per year, of which the majority is in low-carbon sheet and strip. Acme Steel's share is estimated by management to be less than 4 percent. The key end users are automotive OEMs, automotive stampers, can and container manufacturers, the construction industry, appliance makers, tubing manufacturers and steel service centers.

Acme's Competitive Position

For commercial sales to unaffiliated customers, Acme currently competes in the low-, mid- and high-carbon and alloy steel markets. Acme has numerous competitors composed principally of steel service centers, a substantial portion of which use imported steel and, to a lesser extent, other small integrated mills.

Acme Steel faces the same challenges as the rest of the steel industry. The primary factors which have affected competition include price, quality, delivery performance and customer service. The Company believes that the New Facility will significantly enhance its ability to compete in each of these areas. In addition, the Company believes it is able to differentiate itself from its competitors by focusing on niche marketing and targeting customers with small order sizes and special metallurgical requirements such as high carbon, alloy and HSLA steel.

The New Facility

In September 1996, the Company completed construction of the New Facility, a new continuous thin slab caster/hot strip mill complex at Acme Steel's Riverdale, Illinois plant. The New Facility, which cost approximately $400 million (excluding capitalized interest and certain internal costs), allows Acme Steel to build on its strengths as a low cost producer of high quality liquid steel by significantly increasing its overall efficiency and reducing its finished steel production costs. The Company continued to run the old ingot making operations while the New Facility was being brought on line. In June 1997, the Company completed the decommissioning of its ingot making operations. The Company anticipates that the New Facility will reduce Acme Steel's cash manufacturing costs by approximately 19 percent, or $70 per shipped ton. The New Facility has reduced the average production time transforming raw steel into flat rolled steel coils from ten days to 90 minutes by eliminating the extra re-heating and rolling necessary in the old ingot-based process. Currently, the New Facility is operating at approximately 85 percent of its designed capability and is ramping up toward optimal production utilization, which is expected during the second half of 1998. The New Facility, once fully operational, is expected to increase Acme Steel's shipping capability by 35 percent, to approximately 970,000 tons per year.