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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
TO .
COMMISSION FILE NO. 1-13696.
AK STEEL HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1401455
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
45043
703 CURTIS STREET, MIDDLETOWN, OHIO (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (513) 425-5000.
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
COMMON STOCK $.01 PAR VALUE
7% CONVERTIBLE PREFERRED STOCK, STOCK NEW YORK STOCK EXCHANGE
APPRECIATION NEW YORK STOCK EXCHANGE
INCOME LINKED SECURITIES NEW YORK STOCK EXCHANGE
10 3/4% SENIOR NOTES DUE 2004
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for 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. [X]
Aggregate market value of the registrant's voting stock held by non-
affiliates at January 31, 1997: $892,704,833.
At January 31, 1997 there were 26,742,320 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the annual meeting of stockholders
to be held May 15, 1997, (the "1996 Proxy Statement"), which will be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year ended December 31, 1996.
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AK STEEL HOLDING CORPORATION
TABLE OF CONTENTS
PAGE
----
Item 1 --Business........................................................ 1
Item 2 --Properties...................................................... 4
Item 3 --Legal Proceedings............................................... 5
Item 4 --Submission of Matters to a Vote of Security Holders............. 6
Item 5 --Market for Registrant's Common Equity and Related Stockholder
Matters................................................................. 6
Item 6 --Selected Financial Data......................................... 8
Item 7 --Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 9
Item 8 --Financial Statements and Supplementary Data..................... 13
Item 9 --Changes in and Disagreements with Accountants................... 32
Item 10--Directors and Executive Officers of the Registrant.............. 32
Item 11--Executive Compensation.......................................... 35
Item 12--Security Ownership of Certain Beneficial Owners and Management.. 35
Item 13--Certain Relationships and Related Transactions.................. 35
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 10-
K....................................................................... 35
i
PART I
ITEM 1--BUSINESS.
GENERAL
AK Steel Holding Corporation, through its wholly-owned subsidiary, AK Steel
Corporation (collectively, the "Company"), is a fully-integrated producer of
flat rolled steel. The Company concentrates on the production of premium
quality coated, cold rolled and hot rolled carbon steel primarily for sale to
the automotive, appliance, construction and manufacturing markets. The Company
also cold rolls and aluminum coats stainless steel for automotive industry
customers. During 1996, the Company's shipments totalled 4,382,500 tons, of
which 2,683,600 tons, or approximately 61%, consisted of value-added coated
and cold rolled carbon steel products, including approximately 75,000 tons of
aluminum coated stainless steel.
The Company has earned a reputation, particularly among high-end customers,
for consistent product quality and superior service, receiving numerous
customer quality awards. In August 1996, the Company earned registration under
the ISO 9002 international quality standard and certification under the QS
9000 quality assurance program used by domestic automotive manufacturers.
The Company currently conducts operations at its Middletown Works in
Middletown, Ohio, and its Ashland Works in Ashland, Kentucky. In November
1996, the Company announced its plans to construct its Rockport Works, a
state-of-the-art finishing facility to be located on a currently undeveloped
1,700 acre site in Spencer County, Indiana, near the Ohio River community of
Rockport. For further information with respect to these facilities, see Item
2--Properties.
CUSTOMERS
The Company's principal customers are in the automotive, appliance,
construction and manufacturing markets. The Company also sells its products to
distributors and converters.
The Company's marketing efforts are principally directed toward those
customers whose exacting requirements for on-time delivery, technical support
and the highest quality coated and cold rolled products justify commensurate
pricing. The Company believes that its enhanced product quality and delivery
capabilities, and its emphasis on customer technical support and product
planning, are critical factors in its ability to serve this segment of the
market.
The following table sets forth the percentage of the Company's net sales
attributable to various markets:
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
Automotive........................................ 47% 50% 55%
Appliance, Construction and Manufacturing......... 16% 16% 15%
Distributors and Converters....................... 37% 34% 30%
Consistent with management's strategy of concentrating on the high-end of
the flat rolled carbon steel market, shipments to the automotive market have
increased steadily in recent years. A major factor contributing to this
increase has been the growth in the number of U.S.-based plants of foreign
automotive manufacturers, whose production of cars and light trucks in North
America has increased from 1.2 million vehicles in 1989 to 2.4 million
vehicles in 1996. The Company supplies coated, cold rolled and hot rolled
steel to nearly all of these producers and is a major supplier to General
Motors, Ford and Chrysler. Shipments to General Motors, the Company's largest
customer, accounted for approximately 22%, 20% and 17% of net sales in 1994,
1995 and 1996, respectively. No other customer accounted for more than 10% of
net sales for any of these years.
1
The appliance, construction and manufacturing markets consist principally of
the home appliance market, heating, ventilation and air conditioning market
and lighting industries. Shipments to these markets accounted for
approximately 15% of net sales in 1996.
Distributors and converters, the third category of the Company's primary
markets, purchase primarily hot rolled and cold rolled products and may
process these further or simply sell them directly to third parties. Sales
generally are made on a spot market basis, with quality and delivery
capability also being factors in obtaining orders.
Rockport Works, when it begins operations in 1998 and becomes fully
operational in late 1999, will enable the Company to substantially increase
its production of the premium grades of coated and cold rolled steel most
desired by its high-end customers, particularly the automotive market. In
addition, Rockport Works will enable the Company to further penetrate the
market for flat rolled stainless steel, which is associated with higher
margins, less cyclicality and more favorable growth characteristics than the
carbon steel market.
RAW MATERIALS
The principal raw materials and commodities required in the Company's
manufacturing operations are coal, iron ore, electricity, natural gas, oxygen,
scrap metal, limestone and other commodity materials, all of which are
purchased at competitive or prevailing market prices. Adequate sources of
supply exist for all of the Company's raw material requirements.
As more fully described herein under Item 2--Properties, following start-up
of production at the Rockport Works in 1999, the Company expects to supplement
its own production of carbon steel hot band with purchases from third parties
and to satisfy its stainless steel hot band requirements for the Rockport
Works in a similar manner. Management believes adequate sources of supply
exist and will continue to exist for both types of material, but intends to
enter into long-term contracts with several producers to assure availability.
EMPLOYEES
As of December 31, 1996, the Company had approximately 5,800 active
employees, of whom approximately 57% were represented by the Armco Employees
Independent Federation, Inc. (the "AEIF"), 19% by the United Steelworkers of
America (the "USWA") and 6% by the Oil, Chemical and Atomic Workers Union (the
"OCAW"). The AEIF represents all hourly employees and certain nonexempt
salaried employees at the Middletown Works. The USWA represents hourly
steelmaking employees and certain nonexempt salaried employees at the Ashland
Works. The OCAW represents hourly employees at the Ashland Works coke
manufacturing facility. In 1994, the USWA sought to become the collective
bargaining representative of the hourly employees at the Middletown Works, but
a majority of those employees voted to retain the AEIF as their
representative. No assurance can be given that the USWA will not seek to
represent the Middletown Works' employees at some future date.
The Company's agreement with the AEIF is effective through February 29,
2000. The agreement with OCAW expires October 1, 1997. The expiration date of
its agreement with the USWA is presently the subject of dispute, with the
Company asserting that the agreement is effective until March 30, 2000 and the
USWA asserting that the agreement will expire March 28, 1997. No prediction
can be made as to whether or when this dispute will be resolved or as to the
possible consequences thereof.
COMPETITION
Competition within the steel industry is intense. In the sale of flat rolled
carbon steel the Company competes primarily on the basis of product quality,
responsiveness to customer needs and price with other integrated steel
producers and, to a lesser extent, mini-mills. Mini-mills have increased their
ability to produce higher quality products, which has enabled them to become
more competitive with integrated steel producers and, in periods of weak
demand, has increased pressure on prices and margins. Moreover, U.S. carbon
steel producers have
2
historically faced significant competition from foreign producers, although
the weakness of the U.S. dollar relative to certain foreign currencies has
dampened this competition in the United States in recent years. The highly
competitive nature of the industry, combined with excess production capacity
for non-premium grades of hot rolled and cold rolled carbon steel, may in the
future exert downward pressure on prices.
Upon completion of Rockport Works, the Company will substantially expand its
capacity to cold roll and finish stainless steel. The stainless steel sector
is highly competitive and has seen significant capacity additions,
particularly in overseas markets. Generally, imports have been a far more
significant factor in the stainless steel market than the carbon steel market,
representing 23% and 22% of the domestic flat rolled stainless steel market in
1994 and 1995, respectively. In part, the higher level of imports of stainless
steel is a reflection of its substantially higher margins, which significantly
reduce the relative impact of shipping costs on the producer. There has been
an increase in the capacity of foreign producers in recent years, resulting in
downward pressure on domestic prices. It is difficult to predict the amount of
stainless steel that will be imported into the U.S. in the future. Increased
domestic and foreign production capacity and growth in imports will likely
result in greater competition and have a negative impact on prices. The
ability of the Company to operate profitably in this environment will depend
on its ability to produce high quality stainless steel at a cost that is equal
to or below that of the other principal producers.
ENVIRONMENTAL MATTERS
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
The Company has expended the following for environmental related capital
investments and environmental compliance:
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
(IN MILLIONS)
Environmental related capital investments........... $ 26.7 $ 19.1 $ 6.1
Environmental compliance costs...................... 46.4 51.7 53.6
The Clean Air Act Amendments of 1990 (the "Amendments") imposed new
standards designed to reduce air emissions. The Amendments have directly
affected many of the Company's operations, particularly its coke oven
batteries. As of December 31, 1996, the Company has incurred $67.3 million in
capital investments to bring its coke operations into compliance with the
Amendments' requirements. The Company does not expect capital investments for
compliance with these requirements to be material in the near future.
The Company does not anticipate any material impact on its future recurring
operating costs or profitability as a result of its compliance with current
environmental regulations. Moreover, the Company believes that since all
domestic steel producers operate under the same set of environmental
regulations, the Company is under no competitive disadvantage resulting from
compliance with such regulations.
Environmental Remediation
The Company and its predecessors have been conducting steel manufacturing
and related operations for over 90 years. Although the Company believes that
its predecessors utilized operating practices that were standard in the
industry at the time, hazardous materials may have been released in or under
currently- or previously-operated sites. Although the Company does not have
sufficient information to estimate its potential liability in connection with
any potential future remediation, it believes that if any such remediation is
required, it will occur over an extended period of time.
Pursuant to the Resource Conservation and Recovery Act ("RCRA"), which
governs the treatment, handling and disposal of hazardous waste, the United
States Environmental Protection Agency ("EPA") and
3
authorized state environmental agencies may conduct inspections of RCRA-
regulated facilities to identify areas where there have been releases of
hazardous waste or hazardous constituents into the environment and order the
facilities to take corrective action to remediate such releases. The
Middletown Works and the Ashland Works are subject to RCRA inspections by
environmental regulators. While the Company cannot predict the future actions
of these regulators, the potential exists for required corrective action at
these facilities.
Under the authority of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), EPA and state environmental
authorities have conducted site investigations at certain of the Company's
facilities, portions of which previously had been used for disposal of
currently regulated materials. While the results of these investigations are
still pending, the Company could, in the future, be directed to incur costs
for remedial activities at the former disposal areas. Given the uncertain
status of these investigations, however, the Company currently is unable to
predict if and when such costs might arise or, if they should arise, their
magnitude.
Environmental Proceedings
In May 1996, an action was commenced against the Company in the United
States District Court, Southern District of Ohio, Western Division, on behalf
of eleven named plaintiffs seeking declaratory and injunctive relief and both
compensatory and punitive damages as a consequence of an underground coke oven
gas line leak at the Middletown Works.
Under the authority of CERCLA, the Kentucky Department of Environmental
Protection conducted a comprehensive review of the waste management control
systems and handling practices at the Ashland Works coke department and
steelmaking facility in July, August and September 1991. As a result of this
inspection, the Kentucky Natural Resources and Environmental Protection
Cabinet instituted an administrative proceeding against the Company in
November 1993, alleging certain regulatory violations. The Company is
vigorously contesting these allegations. To date, the EPA has not indicated
whether it will seek additional penalties for these or other alleged
violations as a result of the above inspection.
In March 1991, the Ohio Environmental Protection Agency notified the Company
that it had referred to the Ohio Attorney General for potential enforcement
action certain alleged violations of Ohio's hazardous waste regulations at the
Middletown Works. Although the Company believes it has a strong basis for
contesting the alleged violations, it is in the process of negotiating a
consent order with the Ohio Attorney General that will address the State's
concerns.
In addition to the foregoing matters, the Company is or may be involved in
legal proceedings with various regulatory authorities that may require the
Company to pay fines relating to violations of environmental laws and
regulations, comply with more rigorous standards or other requirements, and
incur capital and operating expenses to meet such obligations.
The Company does not believe that the ultimate disposition of the foregoing
proceedings, individually or in the aggregate, will have a material adverse
effect on its financial condition, results of operations or cash flows.
ITEM 2--PROPERTIES.
The Company's corporate headquarters are located in Middletown, Ohio. The
Company currently conducts operations at its Middletown Works in Middletown,
Ohio, and its Ashland Works in Ashland, Kentucky. Coke manufacturing plants,
blast furnaces, basic oxygen furnaces and continuous casters are located at
both of these facilities. The Company's hot rolling mill, cold rolling mill,
pickling lines, annealing facilities and temper mills as well as four of its
coating lines are located at the Middletown Works, and one additional coating
line is located at the Ashland Works. All of these facilities are owned and
together comprise approximately 3,700 acres of land. They are well maintained,
considered adequate for their intended purposes and operating at full
capacity.
The Rockport Works, to be located on a currently undeveloped 1,700 acre site
in Spencer County, Indiana near the Ohio river community of Rockport, will
consist of a state-of-the-art continuous cold rolling mill, a hot
4
dip galvanizing and galvannealing line, a continuous carbon and stainless
steel pickling line, a stainless steel annealing and pickling line, hydrogen
annealing facilities and a temper mill. Together with the Company's existing
tandem cold mill, the Rockport Works continuous cold rolling mill, when fully
operational in 1999, will enable the Company to cold roll all of the carbon
steel hot band it produces, as well as additional quantities of carbon steel
hot band that it will purchase from other producers. All of this material will
be pickled, cold reduced and either annealed, tempered and shipped as cold
rolled product or galvanized or galvannealed and shipped as coated product.
The Rockport Works facility will also enable the Company to substantially
increase its shipments of Series 400 stainless steel, which is sold for use in
automotive exhaust systems, and to cold roll and ship Series 300 stainless
steel, which is used in restaurant and kitchen equipment and medical
appliances, as well as the oil refining, chemical production and food
processing industries. Both of these products are associated with
substantially higher margins than coated carbon steel. Hot rolled stainless
steel coils in both series will be purchased from other producers for
processing at the Rockport Works. The Company believes that there is and, for
the foreseeable future, there will be an adequate supply of hot rolled
stainless steel coils available for purchase in the open market.
The required investment for construction and equipping of the Rockport
Works, including acquisition and development of the site and all required
support facilities, is expected to approximate $1.1 billion. To effectively
manage equipment lead times and requirements during the construction period,
and to reduce overall project risks, construction and start-up of the various
major components of the facility will be independent of each other and will be
staggered over a period of approximately three years. Funding requirements for
the project, which began in the first quarter of 1997, will peak between the
second half of 1997 and the first half of 1998 and will decline steadily
thereafter through the end of 1999.
The first production component to begin commercial operation will be the
galvanizing line, which is projected to be at full production of anticipated
customer shipment levels of approximately 800,000 tons per year, beginning in
December 1998. The continuous cold mill is scheduled to achieve its targeted
production of cold rolled carbon steel in March 1999. The hydrogen annealing
facilities and the temper mill are expected to be capable of supporting
approximately 600,000 tons per year of cold rolled product shipments by June
1999. The continuous carbon and stainless steel pickling line is scheduled to
be at its targeted production level in September 1999. Lastly, the continuous
stainless steel annealing and pickling line is scheduled to be at its targeted
annual customer shipment levels of 200,000 tons of Series 400 stainless and
185,000 tons of Series 300 stainless in December 1999. The staggered start-up
of the various components of the new facility should also enable the Company
to begin generating revenue from the Rockport Works prior to the end of the
construction period.
ITEM 3--LEGAL PROCEEDINGS.
In addition to the items discussed below, the Company is also involved in
routine litigation, environmental proceedings, and claims pending with respect
to matters arising out of the normal conduct of the business. In management's
opinion, the ultimate liability resulting from all claims, individually or in
the aggregate, will not materially affect the Company's consolidated financial
position, results of operations or cash flows.
As a result of a 1991 inspection of the Ashland Works' cokemaking operations
by the EPA and the Kentucky Department of Environmental Protection alleging
mishandling of certain regulated materials, the Company has entered into non-
binding mediation with the Kentucky Cabinet for Natural Resources.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewaters prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits at the Middletown Works, the Company, through the Middletown POTW,
petitioned the EPA for "removal credits," a type of compliance exemption,
based on the Middletown POTW's satisfactory treatment of the Company's
wastewater for ammonia and phenol. The EPA declined to review the Company's
application on the grounds
5
that it had not yet promulgated new sludge management rules. The Company
thereupon sought and obtained from the Federal District Court for the Southern
District of Ohio an injunction prohibiting the EPA from instituting enforcement
action against the Company for noncompliance with the pretreatment limitations,
pending the EPA's promulgation of the applicable sludge management regulations.
Although the Company is unable to predict the outcome of this matter, if the
EPA eventually refuses to grant the Company's request for removal credits, the
Company could incur additional costs to construct pretreatment facilities at
the Middletown Works.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the Company's
Middletown Works and all hourly employees of independent contractors working at
the facility since June 1992. The complaint has twice been amended to add three
additional plaintiffs. The plaintiffs allege negligence and intentional tort
and seek compensatory and punitive damages in an unspecified amount for alleged
dangerous working conditions at the Company's Middletown Works. In April 1996,
plaintiffs moved to certify a class action. The Company has vigorously opposed
this motion and has filed motions to dismiss the suit in whole and in part. In
September 1996, all pending motions were argued to the Court. No rulings have
been rendered to date.
In April 1996, an action was filed in the United States District Court,
Southern District of Ohio by a number of former employees of the Company
seeking certain pension and postretirement benefits which they allege were
wrongly denied them when the Company outsourced their positions.
In May 1996, an action was filed in the United States District Court,
Southern District of Ohio by several plaintiffs under the citizen action suit
provisions of federal environmental laws alleging violations of those laws as
well as state claims in connection with the accidental release of coke oven gas
from the Company's Middletown Works in January 1996. The Company has filed a
motion to dismiss all federal claims and the matter has been fully briefed and
presented to the Court, where a decision is now pending.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been listed on the New York Stock Exchange
since April 5, 1995 (symbol: AKS). From March 30, 1994 to April 4, 1995 the
Common Stock was traded on the Nasdaq Stock Market. The table below sets forth,
for the calendar quarters indicated, the reported high and low sale prices of
the Common Stock:
1995 HIGH LOW
---- ------- -------
First Quarter............................................... $32 1/4 $21 1/2
Second Quarter.............................................. $28 7/8 $24 1/2
Third Quarter............................................... $34 3/8 $27 1/4
Fourth Quarter.............................................. $35 5/8 $28 1/2
1996 HIGH LOW
---- ------- -------
First Quarter............................................... $ 41 $ 33
Second Quarter.............................................. $44 1/8 $37 7/8
Third Quarter............................................... $42 7/8 $35 3/4
Fourth Quarter.............................................. $42 1/2 $34 3/4
As of January 31, 1997, there were 26,742,320 shares of Common Stock
outstanding and held of record by 187 stockholders. Because many of these
shares were held by depositories, brokers and other nominees, the number of
record holders is not representative of the number of beneficial holders.
6
On October 9, 1995, the Board of Directors approved a plan to repurchase,
from time to time, up to $100.0 million of its outstanding equity securities.
This initial program was completed in April 1996. The Company repurchased
637,435 shares of Common Stock for $21.5 million, an average of $33.62 per
share to be held as treasury stock at cost. In addition, the Company purchased
and retired 1,563,700 shares of Convertible Preferred Stock, Stock
Appreciation Income Linked Securities ("SAILS"), for $52.3 million at an
average of $33.43 per share in 1995 and 707,600 shares of the SAILS for $26.3
million at an average of $37.16 per share in 1996.
On May 15, 1996, the Board of Directors approved a plan to repurchase, from
time to time, up to $100.0 million of its outstanding equity securities. As of
December 31, 1996, the Company had repurchased and retired 362,600 shares of
the SAILS for $12.8 million, an average of $35.36 per share under that plan.
The Company has paid quarterly dividends on its Common Stock since November
15, 1995. Dividends at the rate of $0.15 per share were paid on February 15,
May 15, and August 15, 1996 and a dividend of $0.20 per share was paid on
November 15, 1996. The Company has paid and intends to continue to pay
dividends on the SAILS in accordance with the terms thereof. The declaration
and payment of cash dividends is subject to restrictions imposed by the
instruments governing its senior debt. At December 31, 1996, the Company had
adequate amounts available for the payment of cash dividends.
7
ITEM 6--SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data for each of
the five years in the period ended December 31, 1996 have been derived from
the Company's audited consolidated financial statements. The selected
historical consolidated financial data presented herein are qualified in their
entirety by, and should be read in conjunction with, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
(1)
Net sales..................... $1,404.5 $1,594.5 $2,016.6 $2,257.3 $2,301.8
Cost of products sold......... 1,318.6 1,380.3 1,655.2 1,768.1 1,846.5
Selling and administrative ex-
penses....................... 118.6 111.2 113.7 116.5 114.7
Depreciation.................. 87.3 73.5 70.7 74.6 76.1
Special charges and unusual
items (2).................... 379.3 17.6 (15.9) -- --
-------- -------- -------- -------- --------
Total operating costs......... 1,903.8 1,582.6 1,823.7 1,959.2 2,037.3
Operating profit (loss) (2)... (499.3) 11.9 192.9 298.1 264.5
Interest expense.............. 46.4 58.1 48.2 35.6 39.8
Other income.................. 3.1 3.5 7.3 19.0 12.3
-------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
items........................ (542.6) (42.7) 152.0 281.5 237.0
Provision (benefit) for income
taxes (3).................... (10.6) -- (120.5) 12.9 91.1
-------- -------- -------- -------- --------
Income (loss) before extraor-
dinary items................. (532.0) (42.7) 272.5 268.6 145.9
Extraordinary items (4)....... (12.1) -- (14.9) -- --
-------- -------- -------- -------- --------
Net income (loss)............. $ (544.1) $ (42.7) $ 257.6 $ 268.6 $ 145.9
======== ======== ======== ======== ========
Primary earnings per share:
Income before extraordinary
items...................... n/a n/a $ 10.19 $ 9.56 $ 5.07
Extraordinary items......... n/a n/a (.57) -- --
Net income.................. n/a n/a 9.62 9.56 5.07
Fully diluted earnings per
share:
Income before extraordinary
items...................... n/a n/a 8.30 8.14 4.70
Extraordinary items......... n/a n/a (.45) -- --
Net income.................. n/a n/a 7.85 8.14 4.70
Cash dividend per common
share........................ n/a n/a -- .15 .65
AS OF DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (1)
Cash, cash equivalents and
short-term investments....... $ 1.2 $ 144.2 $ 261.8 $ 312.8 $ 739.3
Working capital (deficit)..... (14.9) 55.9 443.5 489.8 1,005.1
Total assets.................. 1,425.0 1,518.7 1,933.2 2,115.5 2,650.8
Current portion of long-term
debt......................... 104.6 130.8 -- -- --
Long-term debt (excluding cur-
rent portion)................ 563.3 598.6 330.0 325.0 875.0
Current portion of pension and
postretirement benefit
obligations.................. 59.1 93.8 110.3 0.1 0.1
Long-term pension and
postretirement benefit
obligations (excluding
current portion)............. 785.6 922.8 638.3 655.7 564.9
Partners' capital
(deficit)/stockholders' eq-
uity (5)..................... (449.7) (586.2) 449.0 674.2 777.0
8
- --------
(1) AK Steel Holding and AK Steel were formed effective March 29, 1994, as a
result of the recapitalization (see Note 1 to Consolidated Financial
Statements) of Armco Steel Company, L.P. (the "Partnership"), which was a
joint venture of Armco Inc. and Kawasaki Steel Corporation. Accordingly,
data for years prior to 1994 are derived from the financial statements of
the Partnership.
(2) The operating loss for 1992 includes special charges of $379.3 million
relating to the restructuring of the Company's operating facilities, the
shutdown of its hot-rolling mill at the Ashland Works, workforce
reductions and related costs, as well as the write-off of the Company's
investment in Eveleth Expansion Company ("Eveleth"). The operating profit
for 1993 includes special charges and unusual items of $17.6 million
relating to fixed asset write offs and related disposal costs as well as
other miscellaneous charges. The operating profit for 1994 includes gain
of $15.9 million from the sale of the Company's equity interests in
Southwestern Ohio Steel, L.P. ("SOS") and Nova Steel Processing ("Nova").
(3) Includes a tax benefit of $120.3 million in 1994 associated with
recognition of the deferred tax asset related to postretirement benefits.
(4) The extraordinary item of $12.1 million in 1992 related to charges
associated with compliance with the Coal Retiree Benefit Act. The
extraordinary item of $14.9 million in 1994 consisted of charges
associated with the prepayment of certain outstanding debt.
(5) Partners' deficit at December 31, 1993, and stockholders' equity at
December 31, 1994, reflect reductions to equity of $113.2 million and
$39.3 million (net of tax), respectively, related to the establishment of
an additional pension plan liability. As of December 31, 1995, the Company
had fully funded its pension plan liability on an accumulated benefit
obligation basis and eliminated the reduction to stockholders' equity.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company concentrates on the production of premium quality coated, cold
rolled and hot rolled carbon steel primarily for sale to the automotive,
appliance, construction and manufacturing markets. The Company also cold rolls
and aluminum coats stainless steel for automotive industry customers. In 1996,
the Company had net sales of $2.3 billion and net income of $145.9 million.
At the core of the Company's profitability is an experienced, results-
oriented management team whose efforts are focused on increasing the
efficiency of its operations and on the quality of its product while
continually striving to improve safety and health in the workplace. Among
other measures, the Company has rationalized its facilities, enhanced the
productivity and maintenance of its equipment and renegotiated its key
material and supply contracts. As a result, operating costs have been reduced
significantly and product quality and reliability have been improved, enabling
the Company to increase its sales of value-added coated and cold rolled
products and steadily widen the gap by which its operating income per ton
leads the other five major integrated producers.
1996 COMPARED TO 1995
Net sales increased 2% in 1996 over 1995. Flat rolled product sales
increased 5.0% or $108.2 million. However, due to the shutdown of two of the
coke oven batteries at the Company's Middletown Works in December of 1995,
sales of merchant coke decreased $58.8 million. A decline in flat rolled steel
prices during 1996 for sales made on a contract basis, which account for
approximately 70% of sales, was more than offset by an increase in flat rolled
tonnage shipped coupled with an improving product mix and series of price
increases on non-contract sales. The following table sets forth the percentage
of the Company's net sales attributable to various markets for the years
indicated:
YEARS ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- --------
Automotive.............. 47% 50% 55%
Appliance, Construction
and Manufacturing...... 16% 16% 15%
Distributors and Con-
verters................ 37% 34% 30%
9
Sales of higher margin coated products in 1996 were 15% higher than in 1995.
This increase was largely attributable to improved productivity of the
Company's coating facilities as a result of significant capital investments
during 1995. The emphasis on production of coated products resulted in a
decrease in sales of cold rolled products, as an increased percentage of the
output from the Company's Middletown Works cold rolling mill was allocated to
its coating facilities in order to maximize shipments of coated products.
Operating profit in 1996 totalled $264.5 million, or $60 per ton shipped,
compared to $298.1 million or $74 per ton shipped in 1995. The reduction was
primarily due to reduced selling prices, increased raw material costs and an
unplanned blast furnace outage at the Middletown Works in December 1996. The
Company continues to emphasize productivity gains and quality enhancements as
the primary components of its cost reduction efforts. Manhours per net ton
shipped continued to improve, declining to 3.02 for the year of 1996 from 3.26
for 1995.
Interest expense in 1996 increased 11%, or $4.2 million, over 1995,
reflecting a reduction of $3.0 million in capitalized interest and the
issuance in December 1996 of $550.0 million of 9 1/8% Senior Notes Due 2006
(the "9 1/8% Notes").
The total income tax provision was $91.1 million, the components of which
are described in Note 3 to the Consolidated Financial Statements herein.
Net income for 1996 totalled $145.9 million compared to $268.6 million for
the same period of 1995. Because the Company attained full book taxpayer
status in 1996, its book tax rate was 38.4% compared to 4.7% for 1995. On a
comparably taxed basis, net income for 1995 would have been $173.5 million.
Earnings per fully diluted share for 1996 were $4.70, compared to a reported
$8.14 ($5.26 on a comparably taxed basis) for 1995.
1995 COMPARED TO 1994
Net sales for 1995 exceeded those for 1994 by approximately 12%. This
increase reflects an increase in shipments from 3,875,000 tons in 1994 to
4,051,000 tons in 1995, higher average selling prices and an improved product
mix. Net sales to affiliates decreased due to the sale of SOS and Nova in
1994.
The following table sets forth the percentage of the Company's net sales to
various markets for the indicated years.
1993 1994 1995
---- ---- ----
Automotive.................................................... 42% 47% 50%
Appliance, Construction and Manufacturing..................... 14% 16% 16%
Distributors and Converters................................... 44% 37% 34%
The Company's shipment mix continued to show improvement. The high-end
market segments automotive, appliance, manufacturing and construction
accounted for 55% of tons shipped for 1995, an increase of 3% compared to
1994. Shipments to the automotive market increased nearly 15% to 1.6 million
tons. Coated and uncoated cold rolled steel, both high-end products, accounted
for 65% of tons shipped compared to 56% in 1994. In addition, the Company
completed capital improvement projects on its Middletown Works continuous
caster, electrogalvanizing line and hot dip galvanizing line which have
increased the capacity to produce value-added products for the high-end
market.
Output at each of the Company's major production units continued to improve
during 1995. Significant productivity gains occurred at the continuous
casters, cold strip mill and several coating lines. Manhours per ton shipped
improved to 3.26 during 1995, compared to 3.78 in 1994, despite a more labor
intensive value-added product mix.
Primarily as a result of increased shipments and higher average selling
prices, as well as continued cost reductions and productivity improvement
efforts, operating profit for 1995 increased 68% to $298.1 million
10
compared to 1994 operating profit of $177.0 million (excluding unusual items
recorded in 1994) or $74 per ton in 1995 compared to $46 per ton in 1994.
Interest expense decreased 26%, or $12.6 million reflecting the full effect
in 1995 of the Company's recapitalization at the beginning of the second
quarter of 1994. Other income increased 160%, or $11.7 million, primarily due
to interest income on short-term investments.
The total income tax provision for 1995 was $12.9 million, the components of
which are described in Note 3 of the accompanying consolidated financial
statements included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended December 31, 1996
On December 17, 1996, the Company completed arrangements for $800.0 million
of debt financing for the construction of its previously announced Rockport
Works. (See Item 2--Properties.) The Company issued $550.0 million of its 9
1/8% Notes and entered into definitive agreements for the private sale
beginning in June of 1997 of an aggregate of $250.0 million of Senior Secured
Notes Due 2004 (the "Secured Notes"), which will be collateralized by the hot
dip galvanizing and galvannealing line and the continuous cold mill at the
Rockport Works. Pending completion of these facilities (presently anticipated
for December 1998 and March 1999, respectively), the Company is prohibited
from granting liens on its inventories.
At December 31, 1996, the Company had $739.3 million in cash, cash
equivalents and short term investments and $119.4 million of financing
available under its $125.0 million accounts receivable purchase credit
facility. During 1996 cash flow from operations generated $86.3 million. Cash
flows from net income were partially offset as the Company contributed a total
of $100.0 million to a trust established to prefund health care benefits for
both active and retired employees, contributed $25.0 million to its pension
trust and paid profit sharing bonuses of $34.6 million.
Cash flows used in investing activities totalled $185.1 million of which
$53.6 million was associated with the Rockport Works.
Cash flows from financing activities generated $484.9 million as the net
proceeds from the issuance of $550.0 million of the 9 1/8% Notes were
partially offset as the Company paid cash dividends of $28.7 million and
utilized $39.2 million for open market purchases of its equity securities
during 1996.
Anticipated Debt Service
The Company's long term debt at December 31, 1996, totalled $875.0 million,
and consisted of $325.0 million principal amount of its 10 3/4% Senior Notes
Due 2004 (the "10 3/4% Notes") and $550.0 million principal amount of its 9
1/8% Notes, neither of which is subject to amortization prior to maturity.
During 1997, the Company will issue $250.0 million aggregate principal amount
of its Secured Notes, which will be repayable in four successive annual
installments of $62.5 million commencing in December 2001. After giving effect
to the issuance of the Secured Notes, the Company will have outstanding an
aggregate of $1,125.0 million of long term debt. Interest expense for 1996
totalled $39.8 million and is expected to total $89.7 million in 1997 and
$107.6 million in 1998 through 2001 and to decline ratably thereafter to $90.7
million in 2004. For financial reporting purposes, a portion of the interest
on the 9 1/8% Notes and the Secured Notes during the construction period of
Rockport Works will be capitalized and amortized over a period of years.
Capital Investments
In addition to the projected $1.1 billion cost of constructing and equipping
Rockport Works, the Company anticipates annual capital investments of
approximately $100.0 million to maintain the competitiveness and efficiency of
its existing facilities and to assure its compliance with applicable safety
and environmental
11
standards. Capital investments excluding Rockport Works totalled $88.0 million
during 1996. At December 31, 1996, commitments for future capital investments,
excluding Rockport Works but including those made to assure environmental
compliance, totalled approximately $41.0 million, all of which will be funded
in 1997. In addition, at December 31, 1996, the Company had outstanding
commitments for the constructing and equipping of Rockport Works under
contracts aggregating $420.9 million; however, the Company's maximum aggregate
liability in the event of cancellation of these contracts is limited to $33.9
million. Peak capital investment is expected to occur between the second half
of 1997 and the first half of 1998, declining steadily thereafter until final
completion of the facility in December of 1999. The Company will use
approximately $300.0 million of its own cash and cash generated from
operations to supplement the financing of the Rockport Works.
Employee Benefit Obligations
The Company's pension plans are fully funded on an accumulated benefit
obligation basis in accordance with generally accepted accounting principles
as of December 31, 1996. Funding levels in the near term (three to five years)
are expected to be minimal. The Company also has available a pension funding
credit balance of $342.0 million that can be used to meet future pension
funding requirements, if any, although there are no present plans to do so.
At December 31, 1996, the Company's liability for postretirement benefits
other than pensions totalled $564.9 million. Effective June 30, 1995, the
Company established a health care trust as a means of prefunding this
liability. As of December 31, 1996, the Company had contributed approximately
$170.0 million to this trust. Effective January 1, 1996, the Company began
paying benefits from the trust, but it has reimbursed the trust for current
benefit payments. Together with the earnings on trust investments, the balance
of the trust at December 31, 1996, was $194.8 million which is equivalent to
approximately 2 1/2 years of active and retiree health care benefit payments.
The Company's current liquidity needs are primarily for capital investment
and working capital requirements. After giving effect to the Notes and the
Secured Notes, the Company believes it will have adequate resources to address
its operating, capital investment, employee benefit and debt service
requirements from cash flow from operations, cash, cash equivalents and
permitted borrowings in the near term. In the event of unanticipated
reductions in cash flow from operations, the Company would seek additional
debt or equity financing, although there can be no assurance that such
financing will be available when needed or, if available, will be obtainable
on terms that are favorable to the Company. See Note 11 of the accompanying
Financial Statements for a discussion of environmental matters.
Year Ended December 31, 1995
The Company's cash, cash equivalents and short-term investment position
increased by $51.0 million during 1995. Cash flow from operations generated
$300.1 million. The Company contributed $93.0 million to its pension trust and
$70.0 million to the health care benefits trust, made capital investments of
$175.7 million and used $73.8 million for open market purchases of its equity
securities.
Year Ended December 31, 1994
The Company's cash, cash equivalents and short-term investment position
increased by $117.6 million during 1994. Cash flow from operating activities
totalled $153.9 million. During 1994, the Company generated $979.0 million
from financing activities, consisting primarily of the net proceeds of the
initial public offering of its Common Stock, the public offering of its 10
3/4% Notes and the public offering of its 7.0% Convertible Preferred Stock.
The Company repaid $629.4 million of outstanding debt, contributed $315.7
million to its pension trust and made capital investments of $87.5 million.
12
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
AK STEEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................. 14
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996........................................................... 15
Consolidated Balance Sheets as of December 31, 1995 and 1996............. 16
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996..................................................... 17
Consolidated Statements of Stockholders' Equity for the Years Ended De-
cember 31, 1994, 1995 and 1996.......................................... 18
Notes to Consolidated Financial Statements............................... 19
13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AK Steel Holding Corporation:
We have audited the accompanying consolidated balance sheets of AK Steel
Holding Corporation and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 22, 1997
14
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1994 1995 1996
-------- -------- --------
Net Sales:
Customers....................................... $1,848.0 $2,205.0 $2,280.0
Affiliates (Note 7)............................. 168.6 52.3 21.8
-------- -------- --------
Total Net Sales............................... 2,016.6 2,257.3 2,301.8
Operating Costs:
Cost of products sold (Notes 1, 7 and 11)....... 1,655.2 1,768.1 1,846.5
Selling and administrative expenses............. 113.7 116.5 114.7
Depreciation (Note 1)........................... 70.7 74.6 76.1
Special charges and unusual items (Note 9)...... (15.9) -- --
-------- -------- --------
Total Operating Costs......................... 1,823.7 1,959.2 2,037.3
-------- -------- --------
Operating Profit.................................. 192.9 298.1 264.5
Interest Expense (Note 4)......................... 48.2 35.6 39.8
Other Income...................................... 7.3 19.0 12.3
-------- -------- --------
Income Before Income Taxes and Extraordinary
Item............................................. 152.0 281.5 237.0
Current income tax provision (Note 3)............. -- 6.2 3.8
Deferred income tax provision (benefit) (Note 3).. (120.5) 6.7 87.3
-------- -------- --------
Income Before Extraordinary Item.................. 272.5 268.6 145.9
Extraordinary Item (Note 10)...................... (14.9) -- --
-------- -------- --------
Net Income........................................ 257.6 268.6 145.9
Preferred Stock Dividends (Note 2)................ 4.0 15.3 11.1
-------- -------- --------
Net Income Applicable to Common Shareholders...... $ 253.6 $ 253.3 $ 134.8
======== ======== ========
Earnings per common and common equivalent share:
(Note 2)
Primary earnings per share:
Income before extraordinary item.............. $ 10.19 $ 9.56 $ 5.07
Extraordinary item............................ (.57) -- --
Net income.................................... 9.62 9.56 5.07
Fully diluted earnings per share:
Income before extraordinary item.............. 8.30 8.14 4.70
Extraordinary item............................ (.45) -- --
Net income.................................... 7.85 8.14 4.70
Cash dividends per common share................. -- .15 .65
See notes to consolidated financial statements.
15
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(DOLLARS IN MILLIONS)
1995 1996
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents (Note 1)....................... $ 137.0 $ 523.1
Short-term investments................................... 175.8 216.2
Accounts receivable--net (Notes 1 and 4)................. 217.0 260.3
Inventories--net (Note 1)................................ 340.7 360.9
Deferred taxes (Note 3).................................. 14.8 --
Other.................................................... 1.9 5.2
-------- --------
Total Current Assets................................... 887.2 1,365.7
-------- --------
Property, plant and equipment (Note 1):
Land, land improvements and leaseholds................... 44.5 46.2
Buildings................................................ 81.2 82.3
Machinery and equipment.................................. 1,258.4 1,350.6
Construction in progress................................. 67.5 112.2
-------- --------
Total.................................................. 1,451.6 1,591.3
Less accumulated depreciation............................ (478.0) (552.7)
-------- --------
Property, plant and equipment--net....................... 973.6 1,038.6
Prepaid pension (Note 6)................................... 138.8 153.3
Other (Notes 3 and 6)...................................... 115.9 93.2
-------- --------
Total Assets........................................... $2,115.5 $2,650.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................... $ 255.9 $ 239.8
Accrued salary and wages................................. 76.8 68.4
Other accruals (Note 2).................................. 64.6 52.3
Current portion of long-term debt (Note 4)............... -- --
Current portion of pension obligation (Note 6)........... 0.1 0.1
Current portion of postretirement benefit obligation
(Note 6)................................................ -- --
-------- --------
Total Current Liabilities.............................. 397.4 360.6
-------- --------
Noncurrent Liabilities:
Long-term debt (Note 4).................................. 325.0 875.0
Pension obligation (Note 6).............................. -- --
Postretirement benefit obligation (Note 6)............... 655.7 564.9
Deferred taxes (Note 3).................................. -- 13.4
Other liabilities........................................ 63.2 59.9
Commitments and contingencies (Notes 4, 8 and 11)........ -- --
-------- --------
Total Noncurrent Liabilities........................... 1,043.9 1,513.2
-------- --------
Total Liabilities...................................... 1,441.3 1,873.8
-------- --------
Stockholders' Equity:
Preferred stock--Authorized 25,000,000 shares of $.01 par
value each; issued--7,479,674 shares; outstanding--1995,
5,915,974 shares; 1996, 4,845,774 shares (Note 2)....... 0.1 0.1
Common stock--Authorized 75,000,000 shares of $.01 par
value each; issued--1995, 26,476,297 shares; 1996,
27,258,834 shares; outstanding--1995, 25,838,862 shares;
1996, 26,619,950 shares (Note 2)........................ 0.3 0.3
Additional paid-in capital............................... 715.0 708.9
Treasury stock--common shares at cost--1995, 637,435
shares, 1996, 638,884 shares (Note 2)................... (21.5) (21.5)
Retained earnings........................................ (19.7) 89.2
-------- --------
Total Stockholders' Equity................................. 674.2 777.0
-------- --------
Total Liabilities and Stockholders' Equity................. $2,115.5 $2,650.8
======== ========
See notes to consolidated financial statements.
16
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN MILLIONS)
1994 1995 1996
------ ------ ------
Cash flows from operating activities:
Net income........................................... $257.6 $268.6 $145.9
------ ------ ------
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation....................................... 70.7 74.6 76.1
Loss on retirement of debt......................... 14.9 -- --
Special charges and unusual items.................. (15.9) -- --
Deferred income taxes.............................. (120.5) 6.7 87.3
Other--net......................................... 20.3 2.3 3.5
Changes in Assets and Liabilities:
Accounts and notes receivable.................... (99.1) 32.4 (42.4)
Inventories...................................... (67.9) (17.6) (20.2)
Current liabilities.............................. 59.2 67.5 (36.2)
Other assets..................................... (13.5) (30.5) (19.1)
Pension obligation............................... (272.4) (75.6) (14.4)
Postretirement benefit obligation................ 16.4 (19.8) (90.8)
Other liabilities................................ (3.7) (8.5) (3.4)
------ ------ ------
Total Adjustments.............................. (411.5) 31.5 (59.6)
------ ------ ------
Net cash flows from operating activities......... (153.9) 300.1 86.3
------ ------ ------
Cash flows from investing activities:
Capital investments.................................. (87.5) (175.7) (141.6)
Net purchase of short-term investments............... -- (175.8) (40.4)
Proceeds from sale of property, plant and equipment.. 4.3 5.8 0.3
Proceeds from sale of Eveleth notes.................. 7.7 7.7 --
Advances to investees................................ (17.1) (5.5) (5.4)
Proceeds--asset sales................................ 46.1 10.5 2.0
Other................................................ (0.3) (1.2) --
------ ------ ------
Net cash flows from investing activities......... (46.8) (334.2) (185.1)
------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock............... 430.9 8.1 16.6
Proceeds from issuance of preferred stock............ 223.1 -- --
Principal payments on long-term debt................. (629.4) (5.0) --
Proceeds from issuance of long-term debt............. 325.0 -- 550.0
Purchase of treasury stock........................... -- (21.5) --
Purchase of preferred stock.......................... -- (52.3) (39.2)
Preferred stock dividends paid....................... -- (16.1) (11.7)
Common stock dividends paid.......................... -- (3.9) (17.0)
Debt prepayment fees................................. (14.9) -- --
Underwriting discount and stock issuance expense..... (13.3) -- (13.8)
Other--net........................................... (3.1) -- --
------ ------ ------
Net cash flows from financing activities......... 318.3 (90.7) 484.9
------ ------ ------
Net increase (decrease) in cash and cash equivalents... 117.6 (124.8) 386.1
Cash and cash equivalents, beginning of period....... 144.2 261.8 137.0
------ ------ ------
Cash and cash equivalents, end of period............. $261.8 $137.0 $523.1
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)............... $ 42.4 $ 33.7 $ 36.3
Income taxes....................................... 0.1 4.2 5.8
Supplemental schedule of noncash investing and fi-
nancing activities:
Seller financed capital investments................ 5.0 -- --
Value of shares of common stock issued in exchange
for debt, services rendered and Partnership inter-
ests during the Recapitalization (Note 1)......... 102.0 -- --
See notes to consolidated financial statements.
17
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
ADDITIONAL
PREFERRED COMMON PAID-IN- TREASURY RETAINED
STOCK STOCK CAPITAL STOCK EARNINGS TOTAL
--------- ------ ---------- -------- -------- -------
Balance, December 31,
1993, Partners' Defi-
cit................... $(586.2) $(586.2)
Minimum accumulated
benefit obligation--
net of tax
(Notes 3 and 6)....... 28.5 28.5
Net Income............. 257.6 257.6
Preferred stock issued,
7,479,674 shares at
$.01 par value each... $0.1 $222.2 222.3
Common stock issued,
26,061,399 shares at
$.01 par value each... $0.3 534.1 534.4
Cash dividend--
Preferred stock $.538
cash dividend in
fourth quarter....... (4.0) (4.0)
Unamortized restricted
stock (Note 2)........ (3.6) (3.6)
---- ---- ------ ------ ------- -------
Balance, December 31,
1994.................. 0.1 0.3 752.7 (304.1) 449.0
Minimum accumulated
benefit obligation--
net of tax
(Notes 3 and 6)....... 39.3 39.3
Net income............. 268.6 268.6
Stock options exer-
cised................. 8.1 8.1
Tax benefit from exer-
cise of stock options
(Note 3).............. 1.1 1.1
Purchase of stock...... (48.0) $(21.5) (4.3) (73.8)
Cash dividend:
Preferred stock $.538
cash dividend per
quarter.............. (15.3) (15.3)
Common stock $.15 cash
dividend in fourth
quarter.............. (3.9) (3.9)
Issuance of restricted
stock--net............ 2.1 2.1
Unamortized restricted
stock (Note 2)........ (1.0) (1.0)
---- ---- ------ ------ ------- -------
Balance, December 31,
1995.................. 0.1 0.3 715.0 (21.5) (19.7) 674.2
Net income............. 145.9 145.9
Stock options exer-
cised................. 16.6 16.6
Tax benefit from exer-
cise of stock options
(Note 3).............. 4.1 4.1
Tax benefit from
vesting of restricted
stock................. 0.3 0.3
Purchase of stock...... (30.3) (8.9) (39.2)
Cash dividend:
Preferred stock $.538
cash dividend per
quarter.............. (11.1) (11.1)
Common stock $.15 cash
dividend per quarter,
$.20 in fourth quar-
ter.................. (17.0) (17.0)
Issuance of restricted
stock--net............ 4.3 4.3
Unamortized restricted
stock (Note 2)........ (1.1) (1.1)
---- ---- ------ ------ ------- -------
Balance, December 31,
1996.................. $0.1 $0.3 $708.9 $(21.5) $ 89.2 $ 777.0
==== ==== ====== ====== ======= =======
See notes to consolidated financial statements.
18
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--AK Steel Holding Corporation ("AK Holding") and its
wholly-owned subsidiary AK Steel Corporation ("AK Steel," collectively the
"Company") were formed effective March 29, 1994 as a result of the
recapitalization of Armco Steel Company, L.P. ("the Partnership"). The
recapitalization occurred on April 7, 1994, effective as of March 29, 1994, in
a series of transactions (collectively, the "Recapitalization"), pursuant to
which (i) Armco Inc. ("Armco") and a subsidiary of Kawasaki Steel Corporation
("Kawasaki"), the limited partners of the Partnership and the owners of all of
the outstanding shares of AK Steel (the general partner of the Partnership),
transferred to AK Holding solely in exchange for Common Stock of AK Holding
(the "Common Stock"), all of the shares of AK Steel and their limited
partnership interests in the Partnership, (ii) AK Holding transferred to AK
Steel the limited partnership interests in the partnership that it acquired
from Armco and the Kawasaki subsidiary and, thereupon, AK Steel as owner of
the entire equity interest in the Partnership, succeeded by operation of law
to the assets and business of the Partnership, (iii) AK Holding consummated a
public offering of $458.4 of its Common Stock and AK Steel consummated a
public offering of $325.0 principal amount of its 10 3/4% Senior Notes Due
2004 (the "Senior Notes"), (iv) proceeds from the public offerings of the
Common Stock and Senior Notes were applied to repay $619.5 of indebtedness of
the Company, to fund a $100.0 contribution to the Company's pension trust with
the remaining $63.9 used for expenses, fees, and general corporate purposes,
and (v) AK Holding issued to an affiliate of Kawasaki additional shares of
Common Stock in exchange for a $100.0 subordinated note of the Company
previously held by that affiliate.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates.
Actual results could differ from those estimates.
The results of operations and financial position of AK Steel approximates
the results of operations and financial position of AK Holding.
For comparison purposes certain 1994 and 1995 items have been reclassified
to conform with 1996 classifications.
The Company consists of the operations and accounts of the Middletown Works,
Ashland Works, Headquarters, AKSR Investments Inc. ("AKR") and AKS
Investments, Inc. and its group of wholly-owned subsidiaries, (the "AKSII
Group"). Effective December 31, 1996, AKR, formerly a Delaware Corporation,
was reorganized as an Ohio limited liability company. The Company is an
integrated steel producer of carbon flat rolled steel for the automotive,
appliance, manufacturing and other markets. The Company has one major customer
that accounted for 22%, 20% and 17% of its net sales in 1994, 1995 and 1996,
respectively.
Employees--As of December 31, 1996, the Company had approximately 5,800
active employees, of whom approximately 57% were represented by the Armco
Employees Independent Federation, Inc. (the "AEIF"), 19% by the United
Steelworkers of America (the "USWA") and 6% by the Oil, Chemical and Atomic
Workers Union (the "OCAW"). The AEIF represents all hourly employees and
certain nonexempt salaried employees at the Middletown Works. The USWA
represents hourly steelmaking employees and certain nonexempt salaried
employees at the Ashland Works. The OCAW represents hourly employees at the
Ashland Works coke manufacturing facility. In 1994, the USWA sought to become
the collective bargaining representative of the hourly employees at the
Middletown Works, but a majority of those employees voted to retain the AEIF
as their representative. No assurance can be given that the USWA will not seek
to represent the Middletown Works' employees at some future date.
The Company's agreement with the AEIF is effective through February 29,
2000. The agreement with OCAW expires October 1, 1997. The expiration date of
its agreement with the USWA is presently the subject of
19
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
dispute, with the Company asserting that the agreement is effective until
March 30, 2000 and the USWA asserting that the agreement will expire March 28,
1997. No prediction can be made as to whether or when this dispute will be
resolved or as to the possible consequences thereof.
Cash Equivalents--Cash equivalents include short-term, highly liquid
investments that are readily convertible to known amounts of cash and are of
an original maturity of three months or less.
Fair Value of Financial Instruments--The carrying value of the Company's
financial instruments does not differ materially from their estimated fair
value (quoted market prices) in 1995 and 1996 with the exception of the 10
3/4% Senior Notes, whose fair value approximates $363.2 and $354.2 at December
31, 1995 and 1996, respectively.
Accounts receivable--The allowance for doubtful accounts was $2.5 and $1.5
at December 31, 1995 and 1996, respectively.
Inventories--Inventories are valued at the lower of cost or market. The cost
of the majority of inventories is measured on the last in, first out ("LIFO")
method. Other inventories are measured principally at average cost.
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Inventories on LIFO:
Finished and semifinished....................... $192.3 $220.4
Raw materials and supplies...................... 156.4 160.4
Adjustment to state inventories at LIFO value... (15.7) (27.3)
------ ------
Total......................................... 333.0 353.5
Other inventories................................. 7.7 7.4
------ ------
Total inventories............................. $340.7 $360.9
====== ======
There was no liquidation of LIFO inventory layers in 1994, 1995 or 1996.
Investments--The Company has investments in associated companies (joint
ventures and an entity that the Company does not control). These investments
are accounted for under the equity method. Because these companies are
directly integrated in the basic steelmaking facilities, the Company includes
its proportionate share of the income (loss) of these associated companies in
cost of products sold.
Through November, Virginia Horn Taconite Company ("Virginia Horn"), a member
of the AKSII Group, owned a 56% equity interest in Eveleth Expansion Company
("Eveleth"), a partnership that produces iron ore pellets, which equates to a
35% interest in Eveleth Mines. The Company records its proportionate share of
the gains/(losses) of Eveleth in the Company's cost of goods sold which were
($10.2), ($0.2) and $5.4 in 1994, 1995 and 1996, respectively. In addition,
the Company had fully impaired its investment in Eveleth to recognize the
Company's estimate of the net realizable value of the fixed assets of Eveleth.
In December 1996, under a restructuring of Eveleth Mines, Virginia Horn
increased its ownership interest in Eveleth Mines LLC ("Evtac"), a newly
formed Minnesota limited liability company, to 40%. In connection with such
investment, Virginia Horn has certain commitments to Evtac. Because, under
Eveleth's member control agreement, Virginia Horn does not control Evtac, the
investment is accounted for under the equity method.
Property, Plant and Equipment--Plant and equipment are depreciated under the
straight line method over their estimated lives ranging from 3 to 31 years.
Maintenance and repair expenses for 1994, 1995 and 1996 were $325.6, $322.9
and $334.8 respectively.
20
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2. STOCKHOLDERS' EQUITY
Preferred Stock--In October 1994, the Company completed the public offering
of 7,479,674 shares of its Convertible Preferred Stock, Shared Appreciation
Income Linked Securities (the "SAILS") which constitute a series of the
Company's Preferred Stock and rank prior to the Common Stock as to payment of
dividends and distribution of assets upon liquidation.
The SAILS earn dividends at a rate of 7% per annum of the stated value of
$30.75 per share. The dividends are cumulative from the date of original
issuance on October 15, 1994, and are payable quarterly in arrears.
The shares of SAILS are convertible into shares of Common Stock at the
option of the holder at any time prior to the mandatory conversion date of
October 15, 1998, and, unless previously redeemed, are convertible into .8621
of a share of Common Stock, equivalent to a conversion price of $35.67 per
share of Common Stock, subject to adjustment upon certain events.
On the mandatory conversion date, unless previously redeemed or converted,
each of the shares of SAILS will convert into one share of Common Stock and,
at the option of the Company, the right to receive cash or Common Stock (based
on current market price) equal to all accrued and unpaid dividends.
At any time on or after October 16, 1997 until immediately prior to the
mandatory conversion date, the Company may redeem any or all of the
outstanding SAILS.
The holders of the SAILS will not have voting rights except as required by
law and except as follows: (i) in the event that dividends on the SAILS or any
other series of Preferred Stock with like voting rights are in arrears and
unpaid for six quarterly dividend periods, and in certain other circumstances,
the holders of SAILS (voting separately as a class with holders of all other
series of outstanding Preferred Stock with like voting rights) will be
entitled to vote, on the basis of one vote for each of the SAILS, for the
election of two directors of the Company, such directors to be in addition to
the number of directors constituting the Board of Directors immediately prior
to the accrual of such right, and (ii) the holders of the SAILS will have
voting rights with respect to certain alterations of the Company's Certificate
of Incorporation and certain other matters, voting on the same basis or
separately as a series.
Common Stock--In April 1994, the Company consummated a public offering of
its $.01 par value Common Stock. The holders of Common Stock will be entitled
to receive dividends when and as dividends are declared by the Board of
Directors out of funds legally available. The holders of Common Stock are
entitled to one vote per share and are not entitled to preemptive or
subscription rights.
Dividends--The Company has paid quarterly dividends on its Common Stock
since November 15, 1995. Dividends at the rate of $0.15 per share were paid on
February 15, May 15, and August 15, 1996 and a dividend of $0.20 per share was
paid on November 15, 1996. The Company has paid and intends to continue to pay
dividends on the SAILS in accordance with the terms thereof. The declaration
and payment of cash dividends is subject to restrictions imposed by the
instruments governing its senior debt. At December 31, 1996, the Company had
adequate amounts available for the payment of cash dividends.
Stock Repurchase Plans--On October 9, 1995, the Board of Directors approved
a plan to repurchase from time to time up to $100.0 of its outstanding equity
securities. As of December 31, 1995, the Company had repurchased 637,435
shares of Common Stock for $21.5, an average of $33.62 per share to be held as
treasury stock at cost. In addition, the Company purchased and retired
1,563,700 shares of the SAILS for $52.3 at an average of $33.43 per share in
1995 and 707,600 shares of the SAILS for $26.3 at an average of $37.16 per
share in 1996, which completed the program.
21
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
On May 15, 1996, the Board of Directors approved a plan to repurchase from
time to time up to $100.0 of its outstanding equity securities. As of December
31, 1996, the Company had repurchased and retired 362,600 shares of the SAILS
for $12.8, an average of $35.36 per share under that plan.
Shareholder Rights Plan--On January 23, 1996, the Board of Directors adopted
a Shareholder Rights Plan pursuant to which the Board declared a dividend of
one Preferred Share Purchase Right (collectively, the "Rights") for each share
of Common Stock outstanding at the close of business on February 5, 1996. The
Rights are generally not exercisable until 10 days after any person or group
of affiliated or associated persons acquires beneficial ownership of 20% or
more of the Company's voting stock or announces a tender offer that could
result in the acquisition of 30% or more of such voting stock. Each Right,
should it become exercisable, will entitle the holder to buy 1/100th of a
share of a new series of the Company's Preferred Stock, designated as Series A
Junior Preferred Stock (the "Preferred Stock"), at an exercise price of $130.
Unless the Rights are sooner redeemed, if any person or group of affiliated
or associated persons, with certain exceptions, becomes the beneficial owner
of 20% or more of the Company's voting stock (other than pursuant to a tender
offer or exchange offer for all outstanding shares of the Company's Common
Stock that is approved by the Board of Directors with the approval of the
Continuing Directors (as defined in the Rights Plan) after taking into account
the long term value of the Company and all other factors they consider
relevant), each Right not owned by the acquirer would become exercisable for a
fraction of a share of the Company's Preferred Stock having a market value
equal to two times the exercise price of the Right.
In addition, unless the Rights are sooner redeemed or the transaction is
approved by the Board of Directors and the Continuing Directors, if the
Company were to be acquired in a merger or other business combination (in
which any share of the Company's Common Stock are changed into or exchanged
for other securities or assets), or if more than 50% of the Company's assets
or earning power were to be sold in one or a series of related transactions,
the holders of the Rights would be entitled, after the Rights become
exercisable, to buy, for each Right, such number of shares of Common Stock of
the acquiring company as have a market value equal to two times the exercise
price of the Right.
The Rights are redeemable, in whole but not in part, at the option of the
Board of Directors with the approval of a majority of the Continuing
Directors, at any time prior to the earlier of (i) the close of business on
the tenth day after a public announcement of an acquisition of beneficial
ownership of 20% or more of the Company's voting stock by any person or group
of affiliated or associated persons (or at such later date as may be
authorized by the Board of Directors and a majority of the Continuing
Directors) or (ii) at any time prior to January 23, 2006, their final
expiration date.
Common Stock Options--On January 13, 1994, the stockholders of the Company
approved the AK Steel Holding Corporation 1994 Stock Incentive Plan (the
"SIP"). The SIP, which is administered by the Compensation Committee of the
Board of Directors, permits the granting of Nonqualified Stock Options and
Restricted Stock to directors and to executive and key management employees of
the Company. This plan was amended by the Board of Directors on January 18,
1996 with approval by the stockholders on May 15, 1996. Under the original
SIP, 2,300,000 shares were reserved for issuance of which 1,916,667 shares
were reserved for stock options and 383,333 were reserved for restricted stock
awards. Under this plan as amended, the maximum number of shares reserved was
increased to 3,900,000 and the imposition of separate maximum limitations on
the number of shares available for grant of stock options and restricted stock
was eliminated. The exercise price of each option equals the market price of
the Company's Common Stock on the date of the grant. Both the restricted stock
awards and the stock options have a maximum term of 10 years and may not be
exercised earlier than six months following the date of grant (or such other
term as may be specified in the award agreement). Generally, twenty-five
percent of the shares of restricted stock awarded shall vest two years after
the grant date
22
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
and an additional twenty-five percent shall vest on the third, fourth and
fifth anniversaries of the grant date. The nonqualified stock options vest
thirty three percent per year over three years.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
this plan. The compensation cost that has been charged against income for the
restricted stock awards issued under the plan was $0.9 for 1995 and $3.2 for
1996. The Company has adopted the pro forma disclosure requirements of
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", in the fourth quarter of 1996. Had compensation
cost for the Company's SIP been determined based on the fair value at the
grant dates for awards under the plan consistent with the method of SFAS No.
123, the Company's net income and earnings per share for 1995 and 1996 would
have been reduced to the pro forma amounts indicated below:
1995 1996
------ ------
Net income (millions)............................. As reported $268.6 $145.9
Pro forma $268.2 $144.1
Primary earnings per share........................ As reported $ 9.56 $ 5.07
Pro forma $ 9.54 $ 5.01
Fully diluted earnings per share.................. As reported $ 8.14 $ 4.70
Pro forma $ 8.14 $ 4.64
The fair value of the options is estimated on the grant date using a Black-
Scholes option pricing model considering the $.80 per share annual dividend
beginning the fourth quarter of 1996 and the prior annual dividend of $.60 per
share along with the following weighted average assumptions:
1995 1996
-------- --------
Expected volatility...................................... 22.3% 20.5%
Risk free interest rates................................. 6.03% 6.40%
Expected lives........................................... 5.0 yrs. 5.0 yrs.
A summary of the status of the Company's option plans as of December 31,
1995 and 1996 and changes during the year is presented below:
1995 1996
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
STOCK OPTIONS SHARES PRICE SHARES PRICE
------------- --------- ---------- --------- ----------
Outstanding at beginning of
year............................ 1,380,000 $23.88 1,438,992 $25.16
Granted.......................... 427,000 $27.98 359,000 $39.72
Exercised........................ 346,675 $23.51 692,665 $23.91
Forfeited........................ 21,333 $25.07 -- --
Outstanding at end of year....... 1,438,992 $25.16 1,105,327 $30.68
Options exercisable at year end.. 546,668 $23.84 398,006 $27.93
Weighted average fair value of
options granted during the
year............................ 427,000 $ 7.06 359,000 $10.74
WEIGHTED WEIGHTED
AVERAGE AVERAGE
GRANT DATE GRANT DATE
RESTRICTED STOCK SHARES FAIR VALUE SHARES FAIR VALUE
---------------- --------- ---------- --------- ----------
Granted during year.............. 99,223 $28.04 161,622 $39.89
23
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
The following table summarizes information about stock options outstanding
at December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
-------- ------------ ----------- -------- ------------ --------
$23.50 to $33.49......................... 746,327 7.87 years $26.32 351,006 $26.30
$33.50 to $43.49......................... 359,000 9.38 years $39.72 47,000 $40.10
--------- -------
Total.................................. 1,105,327 398,006
========= =======
Earnings Per Common Share--The computation of earnings per common share and
common equivalent shares is based upon the weighted average number of common
shares outstanding plus (in periods in which they have a dilutive effect)
common share equivalents from stock options using the treasury stock method.
Net income was reduced for preferred dividends. The fully diluted per share
computation assumes conversion of the SAILS into Common Stock using the if-
converted method and that the stock is outstanding the full year. The weighted
average number of common shares and common equivalent shares used to compute
earnings per share is:
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------- ---------- ----------
Weighted average:
For earnings per common and common
equivalent share:
Common shares outstanding................. 26,064,733 26,232,806 26,354,278
Common equivalent shares.................. 276,834 346,305 238,480
Treasury stock............................ -- (63,908) --
---------- ---------- ----------
For primary earnings per share............ 26,341,567 26,515,203 26,592,758
For earnings per share assuming full
dilution................................. 32,826,287 32,987,506 31,077,452
3. INCOME TAXES
The Company and its subsidiaries file a consolidated federal tax return.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1995 and 1996 are as follows:
1995 1996
------- -------
Deferred tax assets:
Net operating loss carryovers.............................. $ 51.3 $ 45.0
Postretirement reserves.................................... 252.5 210.5
Other reserves............................................. 60.5 46.7
Valuation reserve.......................................... (15.4) (13.2)
------- -------
Total deferred assets.................................... 348.9 289.0
------- -------
Deferred tax liabilities:
Depreciable assets......................................... (177.1) (208.3)
Inventories................................................ (45.2) (33.1)
Pension assets............................................. (57.2) (63.3)
------- -------
Total deferred liabilities............................... (279.5) (304.7)
------- -------
Net asset (liability).................................... $ 69.4 $ (15.7)
======= =======
24
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the consolidated financial statements in different years than
recognized in the tax returns. The postretirement benefit difference includes
amounts expensed in the consolidated financial statements for health care,
life insurance and other postretirement benefits which become deductible in
the tax return upon payment or funding in qualified trusts. Other temporary
differences represent principally various expenses accrued for financial
reporting purposes which are not deductible for tax reporting purposes until
paid. The depreciable assets temporary difference represents generally tax
depreciation in excess of financial statement depreciation. The inventory
difference relates primarily to differences in the LIFO reserve, reduced by
tax overhead capitalized in excess of book amounts. At December 31, 1995, the
Company had a regular tax net operating loss ("NOL") carryforward of $96.4 and
an alternative minimum tax ("AMT") loss carryforward of $28.2 generated in
1994. At December 31, 1996, the regular tax NOL carryover remaining was $77.2
and the AMT carryover was zero. This loss will expire in 2009 if not used by
then.
Significant components of the provision for income taxes are as follows:
1994 1995 1996
------- ----- -----
Current:
Federal.............................................. -- $ 5.9 $ 3.8
State................................................ -- 0.3 --
Deferred:
Federal.............................................. $(105.5) 4.8 77.9
State................................................ (15.0) 1.9 9.4
------- ----- -----
Total tax provision/(benefit)...................... $(120.5) $12.9 $91.1
======= ===== =====
The 1995 and 1996 tax provisions include $1.1 and $4.4 of expense that
results from allocating the income tax benefit associated with stock option
exercises and restricted stock vesting directly to additional paid-in-
capital.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
1994 1995 1996
------- ------- -----
Income at statutory rate.......................... $ 48.0 $ 98.5 $83.0
State tax provision............................... -- 17.4 9.4
Reduction in deferred tax asset valuation re-
serve............................................ (168.9) (106.1) (2.2)
Income earned by the Partnership prior to Recapi-
talization....................................... (3.6) -- --
Losses limited by Internal Revenue Code Section
382 and other permanent differences.............. 4.0 3.1 0.9
------- ------- -----
Tax provision/(benefit)......................... $(120.5) $ 12.9 $91.1
======= ======= =====
4. LONG-TERM DEBT AND OTHER FINANCING
On December 17, 1996, the Company completed arrangements for $800.0 of debt
financing for the construction of its Rockport Works. The Company issued
$550.0 of 9 1/8% Senior Notes Due 2006 and entered into definitive agreements
for the private sale beginning in June of 1997 of an aggregate of $250.0 of
Senior Secured Notes Due 2004 (the "Secured Notes"), which will be
collateralized by the hot dip galvanizing and galvannealing line and the
continuous cold mill at the Rockport Works. Pending completion of these
facilities (presently anticipated for December 1998 and March 1999,
respectively), the Company is prohibited from granting liens on its
inventories.
25
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
On December 1, 1994, the Company entered into a Receivables Purchase
Agreement with AKR. On the same date, AKR entered into a Receivables Purchase
and Servicing Agreement (the "Purchase Agreement") with a group of six banks.
Under the Purchase Agreement, the total commitment of the banks is $125.0,
including up to $40.0 in letters of credit. The Company sold substantially all
of its accounts receivable to AKR and will sell additional receivables to AKR
as they are generated. AKR will fund its purchase of receivables from cash
collections on the purchased receivables and proceeds from selling interests
in the receivables to the participating banks. The banks' commitments expire
on December 1, 2000. The Company acts as servicer of the receivables sold and
will make billings and collections in the ordinary course of business.
As of December 31, 1996, no funded interest was sold to the participating
banks, although $5.6 in letters of credit had been issued. At December 31,
1996, AKR had a sufficient pool of eligible receivables that could be sold to
utilize the available capacity of the participating banks' commitments.
At December 31, 1995 and 1996, the Company's long-term debt, less current
maturities, was as follows:
1995 1996
------ ------
Senior Notes Due 2004.......................................... $325.0 $325.0
Senior Notes Due 2006.......................................... -- 550.0
------ ------
Total........................................................ $325.0 $875.0
====== ======
At December 31, 1996, the maturities of long-term debt are as follows:
1997.................................................................. --
1998.................................................................. --
1999.................................................................. --
2000.................................................................. --
2001.................................................................. --
2002 and thereafter................................................... $875.0
------
Total............................................................... $875.0
======
The Company has no involvement with derivative financial instruments.
The Company capitalized interest on projects under construction of $2.7,
$4.7 and $1.7 during 1994, 1995 and 1996, respectively.
5. OPERATING LEASES
Rental expense was $10.3, $14.1 and $12.6 for 1994, 1995 and 1996,
respectively.
At December 31, 1996, obligations to make future minimum lease payments were
as follows:
1997.................................................................. $ 0.9
1998.................................................................. 0.7
1999.................................................................. 0.2
2000.................................................................. --
2001.................................................................. --
------
Total lease obligations............................................. $ 1.8
======
26
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
6. EMPLOYEE AND RETIREE BENEFIT PLANS
Pension Plans--The Company provides noncontributory pension benefits to all
employees. Benefits are based on the highest of several calculations including
years of service and earnings in the highest 60 consecutive months in the last
120 months prior to retirement, a minimum amount per year of service, or a
combination of both. The qualified plans are funded in accordance with the
minimum funding requirements of the Employee Retirement Income Security Act of
1974, as amended, with additional amounts contributed at the Company's
discretion. The Company's pension contributions for 1995 and 1996 were $93.0
and $25.0, respectively.
The details of the net periodic pension expense for 1994, 1995 and 1996 are
as follows:
1994 1995 1996
------ ------- ------
Economic assumptions:
Discount rate................................... 7.50% 8.75% 7.25%
Expected long-term rate of return on assets..... 8.50% 9.50% 9.00%
Rate of future compensation increases........... 4.00% 4.00% 4.00%
Pension cost:
Cost of benefits earned during the period....... $ 14.9 $ 12.9 $ 16.2
Interest cost on the projected benefit obliga-
tion........................................... 86.6 88.3 90.1
Actual return on plan assets.................... 11.0 (263.6) (85.0)
Net amortization and deferral................... (70.1) 181.5 (8.2)
------ ------- ------
Net periodic pension expense.................. $ 42.4 $ 19.1 $ 13.1
====== ======= ======
The assumptions used to determine the plans' funded status are as follows:
1995 1996
---- ----
Economic assumptions:
Discount rate.................................................. 7.25% 8.00%
Rate of future compensation increases.......................... 4.00% 4.00%
The funded status of the plans reconciled with amounts recognized in the
Company's Consolidated Balance Sheets at December 31, 1995 and 1996 are as
follows:
1995 1996
-------- --------
Actuarial present value of benefit obligations:
Vested benefits....................................... $1,145.6 $1,115.2
Nonvested benefits.................................... 45.2 44.7
-------- --------
Accumulated benefit obligation........................ $1,190.8 $1,159.9
======== ========
Projected benefit obligation.......................... $1,247.2 $1,210.9
Plan assets at fair value............................. 1,215.6 1,255.7
-------- --------
Reconciliation of funded status to recorded amounts:
Unfunded (overfunded) projected benefit obligation.... 31.6 (44.8)
Unrecognized prior service............................ (68.1) (61.5)
Unrecognized net loss................................. (101.4) (46.9)
Unrecognized net obligation........................... (.9) --
-------- --------
Prepaid pension cost.................................. $ (138.8) $ (153.2)
======== ========
The mix of pension assets held in the pension trust are as follows:
Equities................................................................. 56%
Fixed income securities.................................................. 42%
Cash and cash equivalents................................................ 2%
27
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Retiree Health Care and Life Insurance Benefits--In addition to providing
pension benefits, the Company provides certain health and life insurance
benefits for retirees. Most employees become eligible for these benefits at
retirement. For 1994, 1995 and 1996, claims paid for retiree health and life
insurance benefits amounted to $34.8, $36.2 and $37.4, respectively.
The Company records health care costs per SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
accrual of retiree medical and life insurance benefits as these benefits are
earned rather than recognition of these costs as claims are paid. In 1994,
1995 and 1996 the excess of total postretirement benefit expense recorded
under SFAS No. 106 over the Company's former method of accounting for these
benefits was $16.2, $21.2 and $2.1, respectively.
Effective June 30, 1995, the Company established a Welfare Benefit Master
Plan and Trust (the "Trust") for the purpose of paying medical and life
insurance benefits to employees of the Company, retired former employees and
their eligible dependents. Effective January 1, 1996, the Company began paying
benefits from the Trust; however, the Company has continued to reimburse the
Trust for these payments. The Company may continue to reimburse the Trust for
these payments at its discretion, although no funding obligation exists.
The Company has announced changes in the retiree medical coverage for the
non-represented salary group effective December 31, 1996. The Company's
portion of the health insurance premium for post 1983 salaried retirees will
be capped at 1996 levels. This change will apply to all current and future
retirees. In addition, for post 1996 retirees in this group only, the Company
provided health benefit will be reduced by six percent for each year of
retirement prior to age 62. These changes reduced the accumulated
postretirement benefit obligation for the Company at January 1, 1996 by
approximately $45.0 and the related annual expense for 1996 by approximately
$7.0.
The following sets forth the plans' funded status, reconciled with amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1995
and 1996.
1995 1996
------ ------
Accumulated postretirement benefit obligation:
Retirees............................................... $414.1 $450.6
Fully eligible active plan participants................ 75.9 75.8
Other active plan participants......................... 117.0 103.4
------ ------
Total accumulated postretirement benefit obligation.. 607.0 629.8
Fair value of plan assets................................ 45.5 136.9
------ ------
Accumulated postretirement benefit obligation in excess
of plan assets.......................................... 561.5 492.9
Prior service credit not yet recognized in net periodic
postretirement benefit cost............................. 32.8 28.9
Unrecognized net gain.................................... 61.4 43.1
------ ------
Accrued postretirement benefit cost...................... $655.7 $564.9
====== ======
1994 1995 1996
----- ------ ------
The components of postretirement benefit costs are as
follows:
Service cost--benefits attributed to service during the
period................................................ $ 6.1 $ 5.6 $ 5.1
Interest cost on accumulated postretirement benefit ob-
ligation.............................................. 44.9 52.6 44.8
Actual return on plan assets........................... -- (4.5) (4.7)
Net of other components................................ -- 3.7 (5.7)
----- ------ ------
Net periodic postretirement benefit cost............... $51.0 $ 57.4 $ 39.5
===== ====== ======
28
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
For measurement purposes, health care costs are assumed to increase 7.50% in
1997 grading down by 1.00% yearly to a constant level of 5.00% annual increase
for pre-65 benefits and 5.00% in 1997 with a constant rate of 5.00% for post-
65 benefits. In concluding that health care trend rates will decrease at a
rate of 1.00% per year, the Company has considered future rates of inflation,
recent movements toward managed health care programs in negotiated contracts
and the trend among larger companies toward the formation of coalitions in an
effort to reduce health care costs. The Company has finalized negotiations
with health care providers in the Cincinnati-Dayton corridor and has
implemented a managed care program for the Ashland location. The Company is
also evaluating Medicare risk contracts for its retired employees. A one (1)
percentage point increase in the assumed health care cost trend rate for each
year would increase the accumulated postretirement benefit obligation as of
January 1, 1997 by $61.3 and the aggregate of the service cost and interest
cost components of net period benefit cost for the year then ended by $5.5.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 8.00% for 1995 and 1996,
respectively.
7. RELATED PARTY TRANSACTIONS
On May 4, 1995, Armco Inc. ("Armco") announced it had completed the sale of
1,023,987 shares of the Company's Common Stock. With the completion of the
sale, Armco no longer owns any of the Company's stock. Sales to Armco and its
affiliates amounted to $53.1 and $32.2 during 1994 and 1995, respectively. In
addition, the Company charged Armco approximately $14.9 and $18.8 during 1994
and 1995 for its rolling services. The Company purchased stainless material in
the amount of $30.1 and $51.2 in 1994 and 1995, respectively.
The Company sold its interest in Southwestern Ohio Steel L.P. ("SOS") on
December 30, 1994. In 1994, the Company's sales to SOS were $110.2 and the
Company purchased processing services and other material of $3.7.
In the ordinary course of business, National Material Limited Partnership,
of which Cyrus Tang, a director of the Company, is President and Chief
Executive Officer, sells scrap to, and purchases steel from, the Company.
During 1994, 1995 and 1996 sales amounted to $5.4, $20.3 and $21.8 and
purchases amounted to $0.3, $0.4 and $0.6 respectively.
8. COMMITMENTS
The principal raw materials and commodities required in the Company's
manufacturing operations are coal, iron ore, electricity, natural gas, oxygen,
scrap metal, limestone and other commodity materials, all of which are
purchased at competitive or prevailing market prices. Adequate sources of
supply exist for all of the Company's raw material requirements.
At December 31, 1996, commitments for future capital investments, excluding
Rockport Works but including those made to assure environmental compliance,
totalled approximately $41.0, all of which will be funded in 1997. In
addition, at December 31, 1996, the Company had outstanding commitments for
the constructing and equipping of Rockport Works under contracts aggregating
$420.9; however, the Company's maximum aggregate liability in the event of
cancellation of these contracts is limited to $33.9.
9. SPECIAL CHARGES AND UNUSUAL ITEMS
On December 30, 1994, the Company sold its 50% equity interest in SOS and
49.15% equity interest in Nova Steel Processing to its former joint venture
partner in the two companies, Itochu Corporation, for $43.0. The sale resulted
in a gain of $15.9 which is included in Special charges and unusual items in
the Consolidated Statements of Income for the period ended December 31, 1994.
29
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
10. EXTRAORDINARY ITEM
In connection with the Recapitalization, during the second quarter of 1994
the Company repaid a total of $619.5 of long-term debt. This early repayment
resulted in an extraordinary loss of $14.9.
11. LEGAL, ENVIRONMENTAL MATTERS AND CONTINGENCIES
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
The Company has expended the following for environmental related capital
investments and environmental compliance:
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
(IN MILLIONS)
Environmental related capital investments....... $ 26.7 $ 19.1 $ 6.1
Environmental compliance costs.................. 46.4 51.7 53.6
The Clean Air Act Amendments of 1990 (the "Amendments") imposed new
standards designed to reduce air emissions. The Amendments have directly
affected many of the Company's operations, particularly its coke oven
batteries. As of December 31, 1996, the Company has incurred $67.3 in capital
investments to bring its coke operations into compliance with the Amendments'
requirements. The Company does not expect capital investments for compliance
with these requirements to be material in the near future.
In addition to the items discussed below, the Company is also involved in
routine litigation, environmental proceedings, and claims pending with respect
to matters arising out of the normal conduct of the business. In management's
opinion, the ultimate liability resulting from all claims, individually or in
the aggregate, will not materially affect the Company's consolidated financial
position, results of operations or cash flows.
As a result of a 1991 inspection of the Ashland Works' cokemaking operations
by the United States Environmental Protection Agency ("EPA") and the Kentucky
Department of Environmental Protection alleging mishandling of certain
regulated materials, the Company has entered into non-binding mediation with
the Kentucky Cabinet for Natural Resources.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewaters prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits at the Middletown Works, the Company, through the Middletown POTW,
petitioned the EPA for "removal credits," a type of compliance exemption,
based on the Middletown POTW's satisfactory treatment of the Company's
wastewater for ammonia and phenol. The EPA declined to review the Company's
application on the grounds that it had not yet promulgated new sludge
management rules. The Company thereupon sought and obtained from the Federal
District Court for the Southern District of Ohio an injunction prohibiting the
EPA from instituting enforcement action against the Company for noncompliance
with the pretreatment limitations, pending the EPA's promulgation of the
applicable sludge management regulations. Although the Company is unable to
predict the outcome of this matter, if the EPA eventually refuses to grant the
Company's request for removal credits, the Company could incur additional
costs to construct pretreatment facilities at the Middletown Works.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the
30
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Company's Middletown Works and all hourly employees of independent contractors
working at the facility since June 1992. The complaint has twice been amended
to add three additional plaintiffs. The plaintiffs allege negligence and
intentional tort and seek compensatory and punitive damages in an unspecified
amount for alleged dangerous working conditions at the Company's Middletown
Works. In April 1996, plaintiffs moved to certify a class action. The Company
has vigorously opposed this motion and has filed motions to dismiss the suit
in whole and in part. In September 1996, all pending motions were argued to
the Court. No rulings have been rendered to date.
In April 1996, an action was filed in the United States District Court,
Southern District of Ohio by a number of former employees of the Company
seeking certain pension and postretirement benefits which they allege were
wrongly denied them when the Company outsourced their positions.
In May 1996, an action was filed in the United States District Court,
Southern District of Ohio by several plaintiffs under the citizen action suit
provisions of federal environmental laws alleging violations of those laws as
well as state claims in connection with the accidental release of coke oven
gas from the Company's Middletown Works in January 1996. The Company has filed
a motion to dismiss all federal claims and the matter has been fully briefed
and presented to the Court where a decision is now pending.
In May 1996, an action was commenced against the Company in the United
States District Court, Southern District of Ohio, Western Division, on behalf
of eleven named plaintiffs seeking declaratory and injunctive relief and both
compensatory and punitive damages as a consequence of an underground coke oven
gas line leak at the Middletown Works.
12. CONSOLIDATED QUARTERLY SALES AND EARNINGS (UNAUDITED)
Each quarter and the year are calculated individually and may not add to the
total for the year.
1995
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
Net sales.......................... $610.4 $595.9 $524.3 $526.7 $2,257.3
Gross profit....................... 125.0 135.7 120.4 108.1 489.2
Net income......................... 68.3 78.4 67.2 54.7 268.6
Primary earnings per share......... 2.44 2.81 2.37 1.94 9.56
Fully diluted earnings per share... 2.08 2.39 2.02 1.68 8.14
1996
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
Net sales.......................... $558.9 $575.4 $559.3 $608.2 $2,301.8
Gross profit....................... 114.4 119.0 119.0 102.9 455.3
Net income......................... 37.0 38.5 39.7 30.7 145.9
Primary earnings per share......... 1.31 1.34 1.40 1.05 5.07
Fully diluted earnings per share... 1.20 1.24 1.28 .99 4.70
31
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the name, age and principal position with the
Company of each of its executive officers and directors:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Richard M. Wardrop, Jr. ............. 51 Director, Chairman of the Board, Chief
Executive Officer and President
Mark G. Essig........................ 39 Executive Vice President--Commercial
Richard E. Newsted................... 39 Senior Vice President, Chief Financial Officer
Thomas C. Graham, Jr. ............... 42 Vice President--Research and Design Engineering
John G. Hritz........................ 42 Vice President, General Counsel and Secretary
Alan H. McCoy........................ 45 Vice President--Public Affairs
Ronald S. Mulhauser.................. 61 Vice President--Purchasing and Transportation
James W. Stanley..................... 52 Vice President--Safety and Health
James L. Wainscott................... 39 Vice President and Treasurer
James F. Walsh....................... 43 Vice President--Manufacturing
Donald B. Korade..................... 54 Controller
Allen Born........................... 63 Director
John A. Georges...................... 65 Director
Dr. Bonnie Guiton Hill............... 55 Director
Robert H. Jenkins.................... 53 Director
Lawrence A. Leser.................... 61 Director
Robert E. Northam.................... 66 Director
Cyrus Tang........................... 67 Director
James A. Thomson, Ph.D. ............. 52 Director
Richard M. Wardrop, Jr. was elected Chairman of the Board effective January
27, 1997. Mr. Wardrop was elected a director of the Company on March 2, 1995
and on May 17, 1995 he was elected Chief Executive Officer in addition to his
role as President. He had been President and Chief Operating Officer of the
Company since April 7, 1994, having previously served from June 1992 as Vice
President--Manufacturing of the Partnership. Prior to joining the Partnership,
Mr. Wardrop served from January 1992 to May 1992 as Corporate Vice President,
Engineering & Purchasing, of Washington Steel Corporation, from July 1990 to
December 1991 as Consultant to the President for Quigley Company, Inc., a
subsidiary of Pfizer, Inc., and from February 1988 to June 1990 as General
Manager, Mon Valley Works, U.S. Steel Corporation.
Mark G. Essig has been Executive Vice President--Commercial since April
1994. Mr. Essig joined the Partnership in July 1992 as Vice President,
Employee Relations and Assistant to the President and was named Vice
President, Sales and Marketing in April 1993. Mr. Essig was Vice President and
Chief Financial Officer of Washington Steel Corporation from July 1991 to June
1992.
Richard E. Newsted has been Senior Vice President, Chief Financial Officer
of the Company since August 1994. In addition, he was Treasurer from August
1994 through March 1995. From January 1993 until June 1994, Mr. Newsted was
Vice President, Chief Financial Officer and Secretary and from May 1991 to
December 1992, Vice President, Finance and Treasurer of National Steel
Corporation.
Thomas C. Graham, Jr. joined the Company as its Vice President--Research and
Design Engineering in June 1996. From early 1994 until that date, he was
General Manager Sales--Construction for National Steel Corporation, having
previously held various positions in Project Engineering, Process and
Technology, and Operations Management at that company.
32
John G. Hritz has been Vice President, General Counsel and Secretary since
August 1996. Mr. Hritz joined the Company in 1989 as counsel in the law
department, and was named Assistant General Counsel in 1993 and Assistant
Secretary in 1994. Since June 1996, Mr. Hritz also has had responsibility for
the Company's employee and labor relations.
Alan H. McCoy was elected Vice President--Public Affairs in January 1997.
Since March 1994 he served as General Manager--Public Relations. Prior to that
Mr. McCoy held various positions within the Public Relations Department.
Ronald S. Mulhauser has been Vice President--Purchasing and Transportation
of the Company since August 1994. For more than ten years prior to joining the
Company, Mr. Mulhauser held various purchasing and management positions with
U.S. Steel Corporation.
James W. Stanley was named Vice President--Safety and Health in January
1996. Prior to joining the Company, Mr. Stanley held various management
positions with the U.S. Department of Labor's Occupational Safety and Health
Administration since its inception in 1971.
James L. Wainscott was named Vice President and Treasurer in April 1995. For
more than ten years prior to joining the Company, Mr. Wainscott held various
financial positions with National Steel Corporation.
James F. Walsh was named Vice President--Manufacturing in January 1996. Mr.
Walsh joined the Partnership in January 1993 as Manager, Maintenance
Technology, and in April 1994 was named General Manager, Middletown Works. He
was elected Vice President--Research and Design Engineering in August 1995.
From 1987 to 1993 Mr. Walsh held various management positions at Qualimatrix,
Inc.
Donald B. Korade has been Controller since September 1995. Mr. Korade was
Assistant Controller--Financial Accounting from June 1989 until September
1995.
Allen Born was elected a director of the Company on March 2, 1995. He is
Chairman and Chief Executive Officer of Alumax Inc. having served in that
position since November 1993. For more than five years prior thereto he served
as Chairman and Chief Executive Officer of Amax Inc. Mr. Born also is a
director of Amax Gold Inc., Cyprus-Amax Minerals Company, the National Mining
Association, the Aluminum Association and the International Primary Aluminum
Institute.
John A. Georges has been a director of the Company since April 7, 1994. He
is Senior Managing Director of Windward Capital Partners, LLP. He is also the
Retired Chairman and Chief Executive Officer of International Paper Company,
having served in that position from 1985 to March 1996. He is also a director
of International Paper Company, Ryder System Inc., and Warner-Lambert Company.
Mr. Georges is a member of The Business Council and a member of the Trilateral
Commission. He is President of the University of Illinois Foundation.
Dr. Bonnie Guiton Hill has been a director of the Company since April 7,
1994. She was Dean of the McIntire School of Commerce at the University of
Virginia from July 1992 to January 1997. She served as Secretary of the State
and Consumer Services Agency for the State of California from April 1991 to
June 1992. From September 1990 to March 1991, Dr. Hill was the President and
Chief Executive Officer of Earth Conservation Corporation. From April 1989 to
September 1990, she served as Director of the United States Office of Consumer
Affairs and Special Advisor to the President for Consumer Affairs, and has
previously served as the Assistant Secretary of the United States Department
of Education and as Vice-Chair of the United States Postal Rate Commission.
She also is a director of Niagara Mohawk Corporation, Hershey Foods
Corporation, Louisiana-Pacific Corporation, Crestar Financial Corporation and
the NASD Regulations Board.
Robert H. Jenkins was elected a director of the Company effective January
24, 1996. He is President and Chief Executive Officer of Sundstrand
Corporation having been named to this position in September 1995. For more
than five years prior thereto, Mr. Jenkins was employed by Illinois Tool Works
as its Executive Vice
33
President and in other senior management positions. Mr. Jenkins also serves as
a member of the boards of trustees of the Manufacturers Alliance and the
National Association of Manufacturers.
Lawrence A. Leser was elected a director of the Company on May 17, 1995 and
is Chairman of the E.W. Scripps Company. Mr. Leser was elected Chairman in
August 1994 and was also Chief Executive Officer of the E.W. Scripps Company
from July 1985 to May 1996. Mr. Leser also serves as a director of Union
Central Life Insurance Company and is a Trustee of Xavier University and a
member of the National Advisory Board of Chase Manhattan Bank.
Robert E. Northam has been a director of the Company since April 7, 1994. He
retired as Executive Vice President and Chief Financial Officer of J.C. Penney
Company, Inc. in January 1996, having served in that position since February
1982. He also served in the office of the chairman of J.C. Penney Company,
Inc. from June 1992 until his retirement. Mr. Northam also serves as a
director of Best Products Company, Inc.
Cyrus Tang has been a director of the Company since April 7, 1994. Since
1971, he has served as President and Chief Executive Officer of Tang
Industries, Inc., which, together with its affiliates of which National
Materials Limited Partnership is one, operates various businesses, including
steel distribution and processing, metal stamping and fabrication, ferrous and
non-ferrous scrap trading and processing, aluminum die casting, extrusions and
recycling, wood and steel office furniture manufacturings and pharmaceuticals.
James A. Thomson, Ph.D., was elected a director of the Company on March 18,
1996. He is the President and Chief Executive Officer of The Rand Corporation,
having served in that capacity since August 1989. He also serves as a director
of Texas Biotechnology. Dr. Thomson is a member of the Council on Foreign
Relations in New York, the International Institute for Strategic Studies in
London, the governing board of the Los Angeles World Affairs Council, and the
Council of Economic Advisors to the Governor of California.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Audit and Finance Committee, a
Compensation Committee, a Public Affairs Committee and a Nominating and
Governance Committee. The Board may establish such additional committees as it
deems advisable.
The functions of the Audit and Finance Committee are to recommend to the
Board of Directors the appointment of the independent public accountants of
the Company, review and approve the scope and fees of the annual audit and
review the results thereof with the Company's independent accountants. The
Audit and Finance Committee also assists the Board in fulfilling its fiduciary
responsibilities relating to accounting and reporting policies, practices and
procedures, and reviews the continuing effectiveness of the Company's business
ethics and conflicts of interest policies. The current members of the Audit
and Finance Committee are Mr. Georges (Chairperson), Mr. Northam, Mr. Tang,
and Mr. Born.
The functions of the Compensation Committee are to review and recommend to
the Board of Directors compensation of the principal officers, review the
duties and responsibilities of the Company's principal officers, review
compensation and personnel policies, administer the Company's Stock Incentive
Plan (as described below) and certain other employee benefit plans, and review
and make recommendations to the Board with respect to the Company's incentive
compensation plans, pension and savings plans and its employee retirement and
benefit policies and plans. The current members of the Compensation Committee
are Mr. Northam (Chairperson), Mr. Born, Mr. Leser and Dr. Hill.
The functions of the Public Affairs Committee are to review and make
recommendations to the Board of Directors regarding the Company's policies and
practices related to public affairs, including its policies with respect to
environmental compliance, employee safety and health, and equal employment
opportunities. The current members of the Public Affairs Committee are Dr.
Hill (Chairperson), Mr. Georges, Mr. Jenkins and Dr. Thomson.
34
The functions of the Nominating and Governance Committee are to review and
make recommendations to the Board of Directors regarding the size,
organization, membership requirements, compensation and other practices and
policies of the Board. The current members of the Nominating and Governance
Committee are Mr. Leser (Chairperson), Mr. Tang, Mr. Jenkins and Dr. Thomson.
ITEM 11--EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the 1996 Proxy Statement,
and is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be furnished pursuant to this item will be set
forth under the caption "Stock Ownership" in the 1996 Proxy Statement, and is
incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to Note 7
of the Notes to Consolidated Financial Statements.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K.
(a) The list of financial statements filed as part of this report is
submitted as a separate section, the index to which is located on page 13.
(b) Reports on Form 8-K filed during the fourth quarter of 1996 were:
New Carbon and Stainless Steel Finishing Facility... November 21, 1996
Blast Furnace Outage................................ December 3, 1996
Financing for Rockport Works........................ December 19, 1996
(c) Exhibits:
List of exhibits begins on next page.
35
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of the Company, filed with the Secretary
of State of the State of Delaware on December 20, 1993, as amended
(incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (No. 33-74432) ("Registration No.
33-74432")).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit
3.2 to Registration No. 33-74432).
3.3 Certificate of Designations, Preferences, Rights and Limitations of
7%, Convertible Preferred Stock, Stock Appreciation Income Linked
Securities (incorporated herein by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (No. 33-86678)
("Registration No. 33-86678")).
4.1 Indenture, dated as of December 17, 1996, relating to the Company's 9
1/8% Senior Notes Due 2006 (including form of Notes) (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (No. 333-19781) ("Registration No. 333-19781").
4.2 Indenture, dated as of April 1, 1994, relating to the Company's 10
3/4% Senior Notes Due 2004 (the "1994 Indenture") (incorporated herein
by reference to Exhibit 4.3 to the Company's Registration Statement on
Form S-1, No. 33-83792 ("Registration No. 33-83792")).
4.3 Supplemental Indenture, dated as of September 21, 1994, to the 1994
Indenture (incorporated herein by reference to Exhibit 4.4 to
Registration No. 33-83792).
4.4 Supplemental Indenture, dated as of December 11, 1996, to the 1994
Indenture (incorporated herein by reference to Exhibit 4.4 to
Registration No. 333-19781).
4.5 Form of Note Purchase Agreement, dated as of December 17, 1996, with
respect to the Company's Senior Secured Notes Due 2004 (incorporated
herein by reference to Exhibit 4.5 to Registration No. 333-19781).
10.1 Joint Venture Termination Agreement, dated April 6, 1994, among Armco,
Inc., Kawasaki, Kawasaki Steel Corporation, Kawasaki Steel
Investments, Inc., the Partnership, AJV Investments Corp., KSCA,
Incorporated and the Company (incorporated herein by reference to
Exhibit 10.1 to Registration No. 33-83792).
10.2 Employment Contract, dated as of April 4, 1994, between the Company
and Thomas C. Graham (incorporated herein by reference to Exhibit
10.13 to Registration No. 33-83792).
10.3 Supplemental Agreement No. 1 to Employment Agreement with Thomas C.
Graham (incorporated herein by reference to Exhibit 10.27 to the
Company's Quarterly Report on Form 10-Q for the period ended September
30, 1995).
10.4 Form of Executive Officer Severance Agreement (incorporated herein by
reference to Exhibit 10.4 to Registration No. 333-19781).
10.5 Annual Management Incentive Plan (incorporated herein by reference to
Exhibit 10.15 to Registration No. 33-83792).
10.6 1994 Stock Incentive Plan, as amended May 15, 1996 and November 21,
1996 (incorporated herein by reference to Exhibit 10.6 to Registration
No. 333-19781).
10.7 Executive Minimum and Supplemental Retirement Plan (incorporated
herein by reference to Exhibit 10.17 to Registration No. 33-83792).
10.8 Registration Rights Agreement, dated as of April 7, 1994, among the
Company and certain subsidiaries of Kawasaki (incorporated herein by
reference to Exhibit 10.19 to Registration No. 33-83792).
10.9 Registration Agreement, dated as of April 7, 1994, between the Company
and Thomas C. Graham (incorporated herein by reference to Exhibit
10.22 to Registration No. 33-38792).
10.10 Receivables Purchase Agreement, dated as of December 1, 1994, by and
between AK Steel and AK Acquisition Receivables Ltd., as successor to
AK Steel Receivables, Inc. (incorporated herein by reference to
Exhibit 10.23 to Registration No. 33-86678).
36
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.11 Purchase and Servicing Agreement, dated as of December 1, 1994, among
AK Acquisition Receivables Ltd., as successor to AK Steel Receivables
Inc., AK Steel, the institutions from time to time party thereto and
PNC Bank, Ohio, National Association (incorporated herein by
reference to Exhibit 10.24 to Registration No. 33-86678) .
10.11(a) Amendment No. 1 to the Purchase and Servicing Agreement, dated as of
November 17, 1995, among AK Steel, AK Acquisition Receivables Ltd.,
as successor to AK Steel Receivables, Inc., the purchasers party
thereto and PNC Bank, Ohio, National Association (incorporated herein
by reference to Exhibit 10.11(a) to Registration No. 333-19781).
10.11(b) Consent, Amendment and Assumption Agreement to the Receivables
Purchase Agreement and the Purchase and Servicing Agreement, dated as
of December 31, 1996, among the Company, AK Steel Receivables Inc.,
AK Acquisition Receivables Ltd., AKSR Investments, Inc., the
purchasers party thereto and PNC Bank, Ohio, National Association
(incorporated herein by reference to Exhibit 10.11(b) to Registration
No. 333-19781).
10.12 Letter Agreement dated July 31, 1995, between the Company and
Kawasaki (incorporated herein by reference to Exhibit 10 to Post-
Effective Amendment No. 2 on Form S-3 to the Company's Registration
Statement on Form S-1, Registration No. 33-86678).
10.13 Deferred Compensation Plan for Management (incorporated herein by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1995).
10.14 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.30 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1995).
10.15 Exchange and Registration Rights Amendment, dated as of December 17,
1996, among the Company, CS First Boston Corporation and Goldman,
Sachs & Co. (incorporated herein by reference to Exhibit 10.16 to
Registration No. 333-19781).
11.0 Statement re Computation of Per Share Earnings.
23.1 Consent of Deloitte & Touche LLP.
37
EXHIBIT 11.0
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
See Notes 2 and 12 of the accompanying Notes to Consolidated Financial
Statements.
38
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No.
2 to Registration Statement No. 33-84578 of AK Steel Holding Corporation on
Form S-8 of our report dated January 22, 1997, appearing in this Annual Report
on Form 10-K of AK Steel Holding Corporation for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 31, 1997
39
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF MIDDLETOWN, STATE OF
OHIO, ON FEBRUARY 4, 1997.
AK STEEL HOLDING CORPORATION
/s/ Richard E. Newsted
By: _________________________________
RICHARD E. NEWSTED SENIOR VICE
PRESIDENT, CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Richard M. Wardrop, Jr. Chairman of the February 4,
- ------------------------------------- Board, Chief 1997
RICHARD M. WARDROP, JR. Executive Officer
and President
/s/ Richard E. Newsted Senior Vice February 4,
- ------------------------------------- President, Chief 1997
RICHARD E. NEWSTED Financial Officer
/s/ Donald B. Korade Controller February 4,
- ------------------------------------- 1997
DONALD B. KORADE
Director February 4,
- ------------------------------------- 1997
ALLEN BORN
/s/ John A. Georges Director February 4,
- ------------------------------------- 1997
JOHN A. GEORGES
/s/ Bonnie Guiton Hill Director February 4,
- ------------------------------------- 1997
DR. BONNIE GUITON HILL
/s/ Robert H. Jenkins Director February 4,
- ------------------------------------- 1997
ROBERT H. JENKINS
/s/ Lawrence A. Leser Director February 4,
- ------------------------------------- 1997
LAWRENCE A. LESER
/s/ Robert E. Northam Director February 4,
- ------------------------------------- 1997
ROBERT E. NORTHAM
/s/ Cyrus Tang Director February 4,
- ------------------------------------- 1997
CYRUS TANG
/s/ James A. Thomson Director February 4,
- ------------------------------------- 1997
JAMES A. THOMSON, PH.D.
40