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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[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
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[ ] 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
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Commission file number 1-873-2
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ARMCO INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-0200500
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412/255-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Class A Preferred Stock, without par value New York Stock Exchange
Class B Preferred Stock, $1 par value each New York Stock Exchange
Common Stock, $.01 par value each/ New York Stock Exchange
Rights to Purchase Participating Preferred
Stock of Class A Preferred Stock New York Stock Exchange
Sinking Fund Debentures: New York Stock Exchange
9.20%, due 2000
8.50%, due 2001
11.375% Notes, due 1999 New York Stock Exchange
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) 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]
The aggregate market value of voting stock held by nonaffiliates of
Armco Inc. (assuming solely for purposes of this Form, that all members of
registrant's Board of Directors are "affiliates") was approximately
$586,171,889 as of February 28, 1997.
As of the close of business on February 29, 1996, there were 106,457,166
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1996 --
Parts I, II, and IV of this report.
Proxy Statement for the 1997 Annual Meeting of Shareholders filed with
the Commission under Rule 14a-6 of the Securities Exchange Act of 1934 in
connection with the Company's 1997 Annual Meeting of Shareholders -- Part III
of this report.
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PART I
ITEM 1. BUSINESS
General
Armco Inc. ("Armco" or the "Company") was incorporated as an Ohio
corporation in 1917 as a successor to a New Jersey corporation incorporated in
1899. Based on sales revenues, Armco is the second largest domestic producer
of stainless steels and is the largest domestic producer of electrical steels.
Armco's Sawhill Tubular Division manufactures a wide range of steel pipe and
tubing products for use in the construction, industrial and plumbing fields.
The Company also owns Douglas Dynamics, L.L.C. ("Douglas Dynamics"), the
largest North American manufacturer of snowplows for four-wheel drive pick-up
trucks and utility vehicles.
As part of its strategy to focus on the production of specialty flat-
rolled steel, Armco has continued to evaluate the growth potential and
profitability of its businesses and investments, and to rationalize or divest
those that do not represent a strategic fit or offer growth potential or
positive cash flow. In 1994, 1995 and 1996 Armco divested or otherwise
rationalized certain unprofitable or nonstrategic operations.
Business Segments
The information on the amounts of revenue, operating results and
identifiable assets attributable to each of Armco's business segments, set
forth in Note 7 of the Notes to Financial Statements in Armco's Annual Report
to Shareholders for the year ended December 31, 1996, is incorporated by
reference herein.
Additional information about Armco's business segments is set forth in
Management's Discussion and Analysis in Armco's Annual Report to Shareholders
for the year ended December 31, 1996, which is incorporated by reference
herein.
Specialty Flat-Rolled Steels Segment
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-
rolled stainless, electrical and carbon steels at manufacturing operations
located in Butler, Pennsylvania, and Coshocton, Dover, Mansfield and
Zanesville, Ohio. The Butler and Mansfield Operations produce both semi-
finished and finished stainless and electrical steels in sheet and hot band
form. The Coshocton Operations finish stainless steel in strip and sheet form
and the Zanesville Operations finish stainless and electrical strip and sheet.
In addition, the Mansfield Operations produce commodity grades of carbon steel
sheet, most of which is coated at a galvanizing facility at the Dover
Operations. The segment also includes the results of European trading
companies that buy and sell steel and manufactured steel products.
Under a plan to upgrade the facilities at Mansfield to enhance their
steel production capability and improve the operating performance of both the
Mansfield and Dover Operations, Armco installed a thin-slab caster and made
related plant modifications at Mansfield. The new state-of-the-art continuous
thin-slab caster is designed to produce three different types of steels
(stainless, electrical and carbon) with rapid switchover from one type to
another. The installation of the thin-slab caster, certain hot mill upgrades
and other modifications at the Mansfield Operations were made over a 15-month
period at a cost totaling approximately $140 million. The casting process
used at Mansfield helps to ensure consistently high quality because it
eliminates intermediate production steps and reduces the amount of rolling
required to achieve desired thickness. The new caster can produce slabs from
three to five inches thick, up to 50 inches wide, and up to 60 feet in length.
Improved results for this segment are dependent, in part, on steady
production from the Mansfield Operations. Based on fourth quarter 1996
results, Mansfield has demonstrated its ability to
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produce quality products at stable operating levels, providing this business
segment with the capacity and flexibility required to meet expected market
conditions.
The stainless and electrical steel industry is a relatively small but
distinct segment of the overall steel industry that represented approximately
2% of domestic steel tonnage but accounted for approximately 10% of domestic
steel revenues in 1996. These steels differ from basic carbon steel by their
metallurgical composition. Electrical steels have properties that make them
desirable in the generation, transportation and use of electricity. Stainless
steels are made with a high alloy content, which permits their use in
environments that demand exceptional hardness, toughness, strength and
resistance to heat, corrosion or abrasion or combinations thereof. Unlike
high-volume carbon steel, stainless and electrical steels are generally
produced in relatively small quantities utilizing special processing
techniques designed to meet more exacting specifications and tolerances.
Stainless and electrical steel products sell at higher prices and generate
higher average profit margins than carbon steel products.
Stainless steel contains elements such as chromium, nickel and molybdenum
that give it the unique qualities of resistance to rust, corrosion and heat;
high strength; good wear characteristics; natural attractiveness; and ease of
maintenance. Stainless steel is used in the automotive and aerospace
industries, and in the manufacture of food handling, chemical processing,
pollution control, medical and health equipment and other products where its
combination of strength, durability and attractiveness is desirable.
Electrical steels are iron-silicon alloys which, through special production
techniques, possess unique magnetic properties that make them desirable for
use as energy efficient material in such applications as electrical
transformers, motors and generators.
Armco expects that long-term demand for stainless steel will continue to
be positively affected by its increasing use in the manufacture of consumer
durable goods and industrial applications. Per capita stainless steel usage
in many developed countries significantly exceeds per capita usage in the
United States and Armco believes that this is an indication of the growth
potential of demand for stainless steel in the United States. In addition,
the 1990 amendments to the Clean Air Act have resulted in the increasing use
of corrosion-resistant materials in a number of applications for which
stainless steel is well suited, including industrial pollution control devices
and motor vehicle exhaust systems for use in the United States, where Armco
now has the leading market share. Another factor that Armco believes will
affect demand positively is the increasing issuance of new car bumper-to-
bumper warranties and the use of stainless steel in passenger restraint
systems and other functional components.
Armco produces flat-rolled stainless steel and electrical steel strip and
sheet products that are used in a diverse range of consumer durables and
industrial applications. During the last three years, approximately 79% of
Armco's sales of specialty flat-rolled steel has been stainless and electrical
steels, 9% has been specialty semi-finished and 8% has been carbon steel. The
remaining sales in this segment of Armco's business is primarily related to
the foreign subsidiaries that buy, warehouse, and sell specialty steel
products. Major markets served are industrial machinery and electrical
equipment, automotive, construction and service centers.
In the stainless steel market, Armco is the leading producer of chrome
grades used primarily in the domestic market for automotive exhaust
components. Stainless steel, which formerly was not used in parts of the
exhaust system other than the catalytic converter, is now used in the entire
exhaust system from manifold to tailpipe by many auto manufacturers. Armco
has developed a number of specialty grades for this application. Armco is
also known for its "bright anneal" chrome grade finishes utilized for
automotive and appliance trim and other chrome grades used for cutlery,
kitchen utensils, scissors and surgical instruments. Specialty chrome nickel
grades produced by Armco are used in household cookware, restaurant and food
processing equipment and medical equipment. Other Armco stainless products
include functional stainless steel manufactured for automotive, agricultural,
heating, air conditioning and various industrial uses.
Armco is the only United States manufacturer of a complete line of flat-
rolled electrical steel products. It is also the only domestic manufacturer
utilizing laser scribing technology. In this process, the surface of
electrical steel is etched with high-technology lasers that refine the
magnetic
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domains of the steels, resulting in superior electrical efficiency. Major
electrical product categories are: Regular Grain Oriented ("RGO"), used in
the cores of power and distribution transformers; Cold Rolled Non-Oriented
("CRNO"), used for electrical motors, generators and lighting ballasts; and
TRAN COR[registered tradmark]H, which is used in power transformers and is the
only high permeability electrical steel made domestically.
Additionally, Armco produces a full range of hot-dipped galvanized
products primarily for use in the heating, ventilation and air conditioning
("HVAC") market.
Armco's order backlog for its Specialty Flat-Rolled Steels segment was
$227.4 million at December 31, 1996, and $231.9 million at December 31, 1995.
While substantially all of the orders on hand at year-end 1996 are expected to
be shipped in 1997, such orders, as is customary in the industry, are subject
to modification, extension or cancellation.
Armco's specialty steelmaking operations are located in Pennsylvania and
Ohio, which permits cost-efficient materials flow between plants. Armco's
Butler, Pennsylvania facility, which is situated on 1,300 acres with 3.2
million square feet of buildings, continuously casts 100% of its steel. At
Butler, melting takes place in three 170-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit and a 170-ton
vacuum degassing unit for refining molten metal that, in turn, feed two double
strand continuous casters. The melt capacity at Butler was approximately
945,000 cast tons by year-end 1996. Butler operates a hot-strip mill, anneal
and pickle units and two fully-automated tandem cold-rolling mills. It also
has various intermediate and finishing operations for both stainless and
electrical steels.
The finishing plant in Coshocton, Ohio, located on 650 acres, is housed
in a 600,000 square-foot plant and has three Sendzimer mills, four anneal and
pickle lines, three bright anneal lines, two 4-high mills for cold reduction
and other processing equipment, including temper rolling, slitting and
packaging facilities.
The Mansfield, Ohio plant consists of a 1.4 million square-foot facility,
including a melt shop with two electric arc furnaces (170-ton and 120-ton), a
120-ton argon-oxygen decarburization unit, a thin-slab continuous caster, a
six-stand hot strip mill, a five-stand tandem cold rolling mill and a pickle
line.
The Dover, Ohio plant consists of a 600,000 square foot facility
including a galvanizing line, stack anneal furnaces and a temper mill.
Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on
88 acres, is a finishing plant for some of the steel produced at Butler and
Mansfield and has a Sendzimer cold-rolling mill, anneal and pickle lines, high
temperature box anneal and other decarburization and coating units.
In the fourth quarter of 1994, Armco announced an extensive capital
improvement program under which it spent $95 million over a two-year period to
upgrade and expand its stainless and electrical steel finishing facilities.
The program was initiated to reduce existing production constraints and
increase specialty steel finishing capacity by approximately 180,000 tons per
year, particularly in electrical steels, specialty strip and sheet products
and chrome stainless. The strategic facilities upgrades were completed during
1996 and Armco believes that it is now positioned to operate its plants
without major disruption throughout 1997. Armco plans to focus on improving
productivity and quality at its specialty steels operations and anticipates
further cost reductions as these improvements are made.
Fabricated Products Segment
The businesses currently included in the Fabricated Products segment are
described below:
-- Douglas Dynamics is the largest North American manufacturer of
snowplows for four-wheel drive pick-up trucks and utility vehicles. Douglas
Dynamics, which is headquartered in
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Milwaukee, Wisconsin, and has manufacturing plants in Rockland, Maine,
Milwaukee, Wisconsin and Johnson City, Tennessee, sells its snowplows and ice
control products under the names Western Products and Fisher Engineering
through independent distributors in the United States and Canada.
-- Sawhill Tubular manufactures a wide range of steel pipe and
tubular products for use in the construction, industrial and plumbing markets
at plants in Sharon and Wheatland, Pennsylvania and Warren, Ohio.
Armco's order backlog for its Fabricated Products segment was $34 million
at December 31, 1996 and $16.4 million at December 31, 1995. The segment's
backlog increased in 1996 primarily as a result of increased demand for steel
pipe and tubing. While substantially all of the orders on hand at year-end
1996 are expected to be shipped in 1997, such orders, as is customary in these
industries, are subject to modification, extension or cancellation.
Employees
At December 31, 1996, Armco had approximately 6,000 employees. Most of
Armco's domestic production and maintenance employees are represented by
international, national or independent local unions, although some operations
are not unionized.
Armco has agreements with independent unions at the specialty steel
plants in Butler, Pennsylvania and Zanesville, Ohio. In May of 1996, members
of the Zanesville Armco Independent Organization ratified a new four-year
labor agreement. In October of 1996, members of the Butler Armco Independent
Union ratified a new five-year labor agreement. Armco has agreements with the
United Steelworkers of America at Sawhill Tubular plants, and in February,
1996, employees at Sawhill's Wheatland plant ratified a new four-year
agreement.
Competition
Armco faces intense competition from within the domestic steel industry,
from manufacturers of competing products other than steel, including aluminum,
plastics, composites and ceramics, and from foreign steel producers as well as
foreign producers of components and other products. Many of these foreign
producers have lower labor costs and are subsidized by their governments.
Their decisions with regard to production and sales may be influenced more by
political and social considerations than prevailing market forces. Many
foreign steel producers continue to ship into the United States market despite
decreasing profit margins or losses. Depending on a number of market factors,
including the strength of the dollar, import levels, and the effectiveness of
our nation's trade laws, pricing of the Company's products could be adversely
affected. Competition is based primarily on price, with factors such as
reliability of supply, service and quality also being important in certain
segments.
Foreign imports of stainless strip and sheet and electrical steels
accounted for approximately 20% of apparent consumption of these products in
1996 and 1995.
In 1995, led by the Specialty Steel Industry of North America, the
industry's trade organization, a major initiative was begun with European
specialty steel producers to attempt to reach a consensus on a Multilateral
Specialty Steel Agreement ("MSSA") for specialty steel producers only. During
1996, framework terms for the MSSA were agreed to by U.S. specialty steel
producers and specialty steel producers in Europe. The outline of the
agreement has been submitted to the respective governments which are
attempting to negotiate the terms of the final agreement, although there can
be no assurance that a final agreement can be achieved.
Competition is also presented by North American producers, including the
so-called "mini-mills", which generally have smaller, non-unionized workforces
and are relatively free of many of the employee, environmental and other
obligations that traditionally have burdened steel producers. In 1995, Nucor
Corporation, a mini-mill steel company, entered the automotive chrome
stainless steel business, with the addition of an argon-oxygen decarburization
(AOD) vessel at its Crawfordsville, Indiana melt shop. Nucor produced 16,000
tons and approximately 35,000 tons in 1995 and 1996
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respectively of automotive exhaust stainless. Nucor's entry will intensify
competition in the automotive exhaust stainless market, which totals about
400,000 tons per year. Competition is also presented, to a lesser degree, by
foreign producers. Armco is currently the leading U.S. producer of automotive
exhaust stainless steel.
Raw Materials and Energy Sources
Raw materials represent a major component of production costs in the
steel industry. The principal raw materials used by Armco in the production
of steels are iron and carbon steel scrap, chrome and nickel and their
ferroalloys, stainless steel scrap, silicon, molybdenum and zinc. These
materials are purchased in the open market from various outside sources.
Since much of this purchased raw material is not covered by long-term
contracts, availability and price are subject to world market conditions.
Chrome, nickel and certain other materials in mined alloy form, can be
acquired only from foreign sources, many of them located in developing
countries that may be subject to unstable political and economic conditions
that might disrupt supplies or affect the price of these materials. A
significant portion of the chrome and nickel requirements, however, is
obtained from stainless steel scrap rather than mined alloys. While certain
raw materials have been in short supply from time to time, Armco currently is
not experiencing and does not anticipate any problems obtaining appropriate
materials in amounts sufficient to meet its production needs. Armco also uses
large amounts of electricity and natural gas in the manufacture of its
products. It is expected that such energy sources will continue to be
reasonably available in the foreseeable future.
Environmental Matters
Armco, in common with other United States manufacturers, is subject to
various federal, state and local requirements for environmental controls
relating to its operations. Armco has devoted, and will continue to devote,
significant resources to control air and water pollutants, to dispose of
wastes, and to remediate sites of past waste disposal. Armco estimates
capital expenditures for pollution control in its manufacturing operations
will aggregate about $20 million for the years 1997-2001, with the largest
expenditures being made in the Specialty Flat-Rolled Steels segment.
Approximately $7.5 million is related to control of air pollution pursuant to
regulations currently promulgated under the Clean Air Act, as amended, and
corresponding state laws. These projections, which have been prepared
internally and without independent engineering or other assistance, reflect
Armco's current analysis of probable required capital projects for pollution
control. During the period 1991 through 1996, Armco's capital expenditures
for pollution control projects aggregated approximately $35.8 million,
including $7.7 million in 1996. Statutory and regulatory requirements in this
area continue to evolve and, accordingly, the type and magnitude of
expenditures may change.
Armco has been named as a defendant, or identified as a potentially
responsible party, in various governmental proceedings regarding cleanup of
certain past waste disposal sites. Armco is also a defendant in various
private lawsuits alleging property damage and personal injury from waste
disposal sites. Joint and several liability could be imposed on Armco or
other parties for these matters; thus, theoretically, one party could be held
liable for all costs related to a site. While such governmental and private
actions are being contested, the outcome of individual matters cannot be
predicted with assurance. However, based on its experience with such cases
and a review of current claims, Armco expects that in most cases any ultimate
liability will be apportioned between Armco and other financially viable
parties.
From time to time, Armco has been and may be subject to penalties or
other requirements as a result of administrative actions by regulatory
agencies and to claims for indemnification for properties it has previously
owned or leased. In addition, environmental exit costs may be incurred if
Armco decides to dispose of additional properties. It is Armco's policy not
to accrue such costs until a decision is made to dispose of a property.
Based on current facts and circumstances known to Armco, Armco's
experience with site remediation, an understanding of current environmental
laws and regulations, environmental assessments, the existence of other
financially viable parties, expected remediation methods and the years in
which Armco is expected to make payments toward each remediation (which range
from the
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current year to 30 years or more in the future), Armco believes that the
ultimate liability for environmental remediation matters identified to date
will not materially affect its consolidated financial condition or liquidity.
However, it is possible that, due to fluctuations in Armco's results, future
developments with respect to such matters could have a material effect on the
results of operations of future interim or annual periods.
Furthermore, the identification of additional sites, changes in known
circumstances with respect to identified sites, the failure of other parties
to contribute their share of remediation costs, decisions to dispose of
additional properties and other changed circumstances may result in increased
costs to Armco, which could have a material effect on its consolidated
financial condition, liquidity and results of operations in future interim or
annual periods. However, it is not possible to determine whether additional
loss, due to changed circumstances, will occur or to reasonably estimate the
amount or range of any potential additional loss.
Statutes and regulations relating to the protection of the environment
have resulted in higher operating costs and capital investments by the
industries in which Armco operates. Although it cannot predict precisely how
changes in environmental requirements will affect its businesses, Armco does
not believe such requirements would adversely affect its competitive position.
Research and Development
Armco carries on a broad range of research and development activities
aimed at improving its existing products and manufacturing processes and
developing new products and processes. Armco's research and development
activities are carried out primarily at a central technology center located in
Middletown, Ohio. This center is engaged in applied materials research
related to iron and steel, non-ferrous materials and new materials. In
addition, the materials and metallurgy departments at each operating unit
develop and implement improvements to products and processes that are directly
connected with the activities of such operating unit. Armco spent $13.1
million, $14 million, and $12 million, respectively, on research in the years
1996, 1995 and 1994.
Other Investments
North American Stainless ("NAS")
Armco and Acerinox S.A. of Spain each previously owned a 50% partnership
interest in NAS through their respective subsidiaries, First Stainless, Inc.
and Stainless Steel Invest, Inc. In 1994, Armco's subsidiary sold 90% of its
50% equity interest in NAS to its partner for $73 million in cash. Armco
maintains a small limited partnership interest in NAS. In connection with the
transaction, Armco entered into an annual supply contract with NAS to provide
the former joint venture with semi-finished stainless steel at market prices.
Discontinued Operations
National-Oilwell
Armco, through a wholly owned subsidiary, had a 50% partnership interest
in National-Oilwell, which was formed in 1987 when Armco and USX Corporation
each contributed their oil field equipment operations to National-Oilwell in
exchange for equal interests in the new partnership. On January 16, 1996,
Armco sold its partnership interest in National-Oilwell to an entity formed by
Duff & Phelps/Inverness and First Reserve Funds along with certain members of
National-Oilwell's management. Armco received $77 million in cash and
receivables with a face value of $13 million. The receivables were recorded
at a discounted value of $10.6 million.
The terms of the NAS and National-Oilwell transactions described in
"Other Investments" and "Discontinued Operations", above, were the result of
arm's-length negotiation among the parties.
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Armco Financial Services Group ("AFSG")
AFSG consists of insurance companies that have ceased writing new
business and are being runoff. These companies have not written any new
business for retention except for an immaterial amount of guaranteed renewable
accident and health business since 1986. The number of policyholders of this
business has decreased from approximately 4,000 at December 31, 1986 to 1,007
at December 31, 1995 and 870 at December 31, 1996.
Claims are paid by using AFSG's investment portfolio and the related
investment income from such portfolio. The portfolio had a market value of
$172.3 million at December 31, 1996. The runoff companies believe the
existing invested assets, related future income and other assets will provide
sufficient funds to meet all future claims payments.
AFSG estimates that 60% of future claims will be paid in the next five
years and that substantially all of the claims will be paid by the year 2017.
The ultimate amount of the claims as well as the timing of the claims payments
are estimated based on the annual review of loss reserves performed by AFSG's
independent and consulting actuaries. While there have been no charges
recorded with respect to these companies since 1990, in the future there may
be further adverse developments with respect to the AFSG companies, which, if
not otherwise offset through favorable commutations or other actions, will
require additional charges to income. Armco does not believe that any such
charges would have a material adverse effect on its liquidity or financial
condition.
ITEM 2. PROPERTIES
Armco owns and leases property primarily in the United States. This
property includes manufacturing facilities, offices and undeveloped property.
The locations of Armco's principal plants and materially important physical
properties are described in ITEM 1. "BUSINESS". Armco believes that all its
operating facilities are being adequately maintained and are in good operating
condition.
ITEM 3. LEGAL PROCEEDINGS
There are various claims pending against Armco and its subsidiaries
involving product liability, reinsurance and insurance arrangements,
environmental, antitrust, employee benefits and other matters arising out of
the conduct of the business of Armco.
Reserve Mining Litigation. In August 1992, an action styled Warner,
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Donovan, et al. v. Armco was filed in the U.S. District Court, District of
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Minnesota by members of the United Steelworkers of America ("USWA") who
declined to participate in the USWA v. Armco settlement. The complaint
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alleges breaches of the Basic Labor Agreement, Supplemental Unemployment
Benefit Plan, Insurance Agreement, Pension Agreement and Program of Hospital-
Medical Benefits for Pensioners and Surviving Spouses and seeks an unspecified
amount of damages. On February 17, 1993, the Court granted Armco's motion to
dismiss plaintiffs' state law claims. The plaintiffs' claims based on the
labor agreements remain pending. Plaintiffs filed an amended complaint, in
response to which Armco filed a motion to dismiss certain claims therein. On
October 22, 1993, the Court granted Armco's motion. On November 8, 1993,
Armco filed an answer to the allegations in the amended complaint not subject
to the motion to dismiss.
On April 25, 1994, an action entitled Larry B. Ricke, Trustee v. Armco
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was filed in the United States District Court for the District of Minnesota by
the Trustee appointed by the Pension Benefit Guaranty Corporation ("PBGC") for
the purpose of recovering from Reserve Mining Company ("Reserve") assets to
satisfy Reserve's liability for pension benefit entitlements which are in
addition to those guaranteed by the PBGC. The complaint alleges that Armco is
liable for the unfunded nonguaranteed benefits under the Pension Plan of
Reserve in the amount of $9.2 million plus interest. The pension benefits
which are the subject of this action were part of the class settlement of USWA
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v. Armco. Approximately fifteen hundred members of the class signed
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individual releases (19 members who did not are plaintiffs in Warner, Donovan,
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et al. v. Armco Inc.) releasing Armco from
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all claims, liabilities, etc. based upon or which arise out of any Reserve
Employee Pension Benefit Plan. Armco filed a motion to dismiss the complaint
on the basis of said releases, which the court denied on March 28, 1995.
Armco filed a motion seeking interlocutory appellate review. This motion was
granted on June 6, 1995. The U.S. Court of Appeals affirmed the District's
Court's decision denying Armco's motion for summary judgment on August 13,
1996. Armco filed a petition for rehearing on September 26, 1996, which was
denied on October 21, 1996.
A joint pretrial conference with counsel for Armco and Ricke and Warner
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plaintiffs was held on November 27, 1996. All pretrial discovery for Ricke
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and Warner will be done on a consolidated basis and must be completed by
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December 31, 1997. The court further ordered that the claims of the Warner
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plaintiffs for pension benefits in addition to those guaranteed by the PBGC
may be brought only in the Ricke case. Further, as a result of the Court's
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decision in Ricke concerning non-PBGC guaranteed pension benefits, the only
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claims remaining in Warner are for welfare benefits (e.g. medical benefits,
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SUB benefits, life insurance benefits, vacation pay, etc.) under collective
bargaining agreements.
Eastern Stainless Corporation ("Eastern") Shareholder Litigation. On or
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about March 13, 1995, an action styled Pension Benefit Guaranty Corporation v.
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Armco Inc. and Eastern Stainless Corporation was filed in the United States
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District Court for the Southern District of Ohio by the PBGC as a Class B
shareholder of Eastern. The complaint was captioned as a shareholder
derivative and class action on behalf of all Class B shareholders. The
plaintiff alleged breach of fiduciary duty as well as certain other claims
arising from Armco's status as a majority shareholder of Eastern. The damages
were alleged to be in excess of $12 million. The Class B shares were
redeemable by Eastern Stainless for $1 a share, or approximately $13 million.
On March 15, 1995, Eastern was dissolved without any shareholder distribution.
In accordance with Virginia corporation law, a special independent committee
of the Board of Directors of Eastern ("Committee") was appointed to evaluate
the merits of plaintiff's derivative claims. Armco filed a motion to dismiss
the direct claims, stay the derivative claims and stay discovery pending
completion of the Committee's investigation. Plaintiff filed a motion for
class certification. The court denied Armco's motion to dismiss the direct
claims and stay discovery, and granted Armco's motion to stay the derivative
claims and plaintiff's motion for class certification. Armco filed an answer
to the complaint.
On January 31, 1996, the Committee issued a report on its review and
evaluation of the derivative claims, which concluded that the Class B
shareholders were treated fairly by Armco and Eastern and that there was no
set of circumstances or assumptions under which the maintenance of the
litigation could serve the interests of Eastern or its Class B Shareholders.
Eastern filed on March 18, 1996, a motion to dismiss the derivative claims on
the basis of the Committee's findings. At a hearing on May 29, 1996, the
Court deferred ruling on Armco's and Eastern's motion to dismiss the
derivative claims and granted plaintiff 90 days to perform discovery regarding
the Committee's investigation. In November 1996, Armco renewed its motion to
dismiss the derivative claims and filed a motion for summary judgment with
respect to the direct claims. The Court denied the motion for summary
judgment and reserved ruling on the motion to dismiss the derivative claims.
On February 3, 1997, the parties agreed on a settlement of all claims, subject
to approval of the Court. Armco expects that the Court will approve the
settlement at a fairness hearing at a future date to be set by the Court.
Cornerstones Litigation. An action was filed by Cornerstones Municipal
------------------------
Utility District ("Cornerstones") and William St. John, as representative of a
class of owners of real property situated within Cornerstones, in the District
Court of Harris County, Texas, in July 1989, seeking damages in excess of $40
million for allegedly defective pipe supplied by Armco Construction Products
for a sanitary sewer system in three residential subdivisions. In May 1991,
the Cornerstones plaintiffs amended their petition to add owners of some 1,500
------------
residences within the Kingsbridge Municipal Utility District ("Kingsbridge").
Subsequently, the Kingsbridge claims were severed into a separate action. In
-----------
January 1992, the trial court granted Armco's motion for summary judgment,
dismissing all claims asserted by the Cornerstones plaintiffs as barred by the
------------
statute of limitations. In January 1993, the Court of Appeals reversed the
dismissal. Upon Armco's petition, the Supreme Court of Texas reversed and
summary judgment in favor of Armco was reinstated by the Court of Appeals in
November 1994. In March 1995, the Cornerstones plaintiffs sought writ of
------------
error to the Supreme
-8-
<PAGE>
Court of Texas. On May 11, 1995, the Supreme Court of Texas denied
plaintiffs' application for writ of error, concluding the Cornerstones matter
------------
in favor of Armco. On February 22, 1996, the District Court of Harris County
granted summary judgment in favor of Armco in the severed Kingsbridge action.
-----------
On April 10, 1996, an amended summary judgment order was entered by the
District Court clarifying that summary judgment had been granted in favor of
Armco and against only the claims of Kingsbridge and John Kepplinger,
individually. A motion for class certification was denied by the court with
respect to the claims of the remaining homeowners in the Kingsbridge District.
The Kingsbridge homeowners have filed an appeal, which is currently pending
before the Court of Appeals in Houston, Texas.
In addition, there are three multiple-party homeowners actions that
remain pending on behalf of property owners in the Cornerstones Municipal
Utility District. The first of these actions, Vincent and Linda Adduci, et
----------------------------
al. v. Armco Steel Corporation, et al., was filed in the 127th District Court
- ---------------------------------------
of Harris County, Texas on or about April 3, 1992, by approximately 87
residents, including the lead plaintiffs, against the same defendants as in
the Cornerstones case. On or about September 11, 1992, Harris W. Arthur and
------------
other plaintiff homeowners commenced a similar action, styled Harris W.
---------
Arthur, et al. v. Monsanto Company, et al., in the 133rd Judicial District
- ------------------------------------------
Court of Harris County. On or about March 22, 1993, a third action, captioned
William C. Irons, et al. v. Turner, Collie & Braden, Inc., et al., was filed
- -----------------------------------------------------------------
in the 152nd Judicial District Court of Harris County by the lead plaintiff
and approximately 100 additional residents. All three cases are substantially
based upon the same theories as the Cornerstones case and were separately
------------
filed after an effort to have the Cornerstones complaints certified as a class
------------
action was denied by the court. These three actions each seek an unspecified
amount of damages. Arthur and Adduci have been consolidated into one case
------ ------
before the 127th District Court. On January 28, 1997, a majority of the
homeowners in Irons were nonsuited and dismissed their claims against Armco.
-----
Environmental Proceedings. Most environmental actions involving Armco
--------------------------
relate to alleged contamination at off-site treatment and disposal sites. In
many of these cases, Armco is one of several hundred companies who have been
identified as potentially responsible parties ("PRPs"). In a few instances,
Armco is one of only a few parties or is alleged to be solely liable. It is
routinely asserted that joint and several liability will be applied in such
cases; thus, a single party could be held liable for all costs related to a
site. However, Armco's experience has been that liability is apportioned on
the basis of volume and/or toxicity of materials sent to a site and Armco
expects that any ultimate liability will be apportioned among Armco and other
financially viable parties. Other claims sometimes arise from contractual
obligations for properties Armco previously owned or leased and from
regulatory actions. Armco intends to assert all meritorious legal and
equitable defenses that are available to it with respect to environmental
matters. See "Item 1- BUSINESS--Environmental Matters". The following
paragraphs provide information about unresolved environmental matters that
have been reported in previous Form 10-K or Form 10-Q filings and certain new
matters.
Armco has been one of four defendants in the case styled, Rosa Ann
--------
Barrett, et al. v. Atlantic Richfield Company, et al., which was filed in
- -----------------------------------------------------
January 1993, in the United States District Court for the Southern District of
Texas, Houston Division on behalf of certain residents near the French Limited
Site. In 1994, the court granted summary judgment against the plaintiffs,
with the exception of one property damage claim which is pending separately
before the trial court. The Barrett plaintiffs appealed to the Fifth Circuit
-------
which in a September 1996 opinion upheld the lower court's judgment against
them. Based on its experience to date with resolution of claims in this
matter, Armco does not believe its liability, if any, with regard to the
remaining claim will be material.
On July 21, 1995, the Department of Justice ("DOJ") filed a complaint in
the U.S. District Court for the Southern District of Ohio alleging Armco's
liability for remediation costs at the Fultz Landfill Superfund Site in
Byesville, Ohio. In late 1996 Armco filed a third-party complaint against
eight other PRPs. Discovery is continuing. The DOJ submitted a settlement
proposal under which three of the companies initially identified as PRPs by
the USEPA (Armco is not among them), plus their successors and certain other
companies, have agreed to undertake remediation of the site, which is
estimated to cost approximately $13 million. If this settlement is approved
by the Court, it is expected that the USEPA will continue to seek about $6
million in past costs from non-settling parties. Armco will not oppose the
settlement if the settling parties would be precluded from filing
-9-
<PAGE>
future contribution actions against Armco and other non-settling parties. No
estimate of Armco's proportionate liability can be made at this time.
On July 22, 1993, Armco received a request from the Kansas Department of
Health and Environment ("KDHE") for information regarding a former Armco
Construction Products Division plant located in Topeka, Kansas and now owned
by Contech Construction Products, Inc. ("Contech"). Armco answered KDHE's
information request in August 1993. KDHE indicated it would pursue Contech
and two other parties regarding this matter, but to Armco's knowledge, no
action has been filed. Contech claims that Armco has an indemnification
obligation under the agreement conveying the property to Contech. Based on
the type of contamination at issue and the presence of other PRPs, Armco does
not believe its liability, if any, will be material.
In December 1993, Armco and one other company received a notice of
nonbinding preliminary allocation of proportionate responsibility from the
Pennsylvania Department of Environmental Protection ("PADEP") for the William
Taylor Estate site. In December, 1996, PADEP filed an action against two
other parties for recovery of about $400,000 in past costs. Armco has been
requested by the two named defendants to voluntarily join in a settlement of
this matter and to participate in investigation and remediation of the site.
Based on current information about the type of contamination and the presence
of other PRPs, Armco does not expect its liability, if any, to be material.
On September 9, 1994, four parties who signed a USEPA Administrative
Order on Consent ("AOC") for cleanup of the Granville Solvent site in Ohio,
initiated a contribution action in the U.S. District Court for the Southern
District of Ohio against all PRPs, including Armco, who did not sign the AOC.
In 1996 decisions, the court denied plaintiffs' claim for their costs related
to litigation or negotiation of the AOC and limited their action to one for
contribution rather than joint and several liability. Based on these
decisions, and on current information about remediation costs, Armco does not
expect its liability, if any, to be material. Trial has not been scheduled,
but is expected sometime in 1997.
On February 27, 1995, the Ohio Environmental Protection Agency issued a
Notice of Violation ("NOV") to Armco's Zanesville, Ohio operations alleging
noncompliance with both a 1993 Order and various state regulations regarding
hazardous waste management. Armco has instituted appropriate corrective
measures. No proposed penalties were included in the NOV and Armco cannot
reasonably estimate potential penalties, if any, based on current information.
On December 27, 1996, the Southern Ohio Port Authority filed a complaint
against Armco and 23 other defendants seeking an estimated $3 million to
recover costs of investigation and remediation at the former Empire-Detroit
facility in Portsmouth, Ohio. Armco is preparing its answer to the complaint.
Based on the estimated costs and the presence of other PRPs. Armco does not
expect its liability, if any, to be material.
In the opinion of management, the ultimate liability, if any, resulting
from the claims described in the preceding paragraphs in this "Legal
Proceedings" section will not materially affect the consolidated financial
position or liquidity of Armco and its subsidiaries; however, it is possible
that, due to fluctuations in Armco's operating results, future developments
with respect to such matters could have a material effect on its financial
condition, liquidity and results of operations in future interim or annual
periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Armco during the fourth quarter of the year ended December 31, 1996.
-10-
<PAGE>
Executive Officers of Armco
The executive officers of Armco as of March 14, 1997, were as follows:
<TABLE>
<CAPTION>
Years
Age as of Tenure in of Service
Name March 14, 1997 Office Office (1) with Armco
- ---- -------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
James F. Will 58 Chairman, President and
Chief Executive Officer (2) 1994 (2) 5
Jerry W. Albright 60 Vice President and 1997 (3) 0
Chief Financial Officer
James L. Bertsch 53 Vice President and Treasurer 1989 31
John B. Corey 53 Vice President 1994 18
John N. Davis 38 Vice President and Controller 1996 (4) 5
Gary R. Hildreth 58 Vice President, General Counsel
and Secretary 1993 26
Gary L. McDaniel 50 Vice President - Operations 1996 4
M. Dennis McGlone 47 Vice President - Commercial 1996 5
Pat J. Meneely 45 Vice President - Information
and Organizational
Effectiveness 1995 2
Daniel E. Smigielski 47 Vice President - Purchasing &
Traffic 1996 4
- -------------------------
<FN>
(1) All officers are elected annually by the Board of Directors and hold
office until their successors are elected and qualified. Each of the officers
named above has held responsible positions with Armco or its subsidiaries
during all of the past five years, with the exceptions of Messrs. Albright,
McDaniel, Meneely and Smigielski. Prior to joining Armco, Mr. Albright was a
consultant and small business owner. Prior to that he was Assistant to the
President of Armco Inc. and prior to that Mr. Albright was Vice President and
Chief Financial Officer of Cyclops Industries, Inc. Prior to joining Armco,
Mr. McDaniel was Division Manager of Maintenance and Services at the Indiana
Harbor Works of LTV Steel Company (producer of flat-rolled and tubular carbon
steel products). Immediately prior to joining Armco, Mr. Meneely worked as an
executive consultant and held executive positions with Sara Lee Hosiery (a
manufacturer of hosiery) and Wheeling-Pittsburgh Steel Corporation (a
manufacturer of steel). Mr. Smigielski was Director, Purchasing and Traffic
at Armco's Butler Operations. Prior to that, Mr. Smigielski was Project
Director at Krupp GMBH (an engineering company specializing in steel industry
equipment and processing facilities).
(2) Effective February 1, 1996, Mr. Will was elected Chairman of the Board
in addition to the positions of President and Chief Executive Officer.
(3) Effective January 1, 1997, Mr. Albright was elected Vice President and
Chief Financial Officer. Mr. Albright was employed with Armco from 1966 until
1988, and held numerous financial positions.
(4) Effective August 1, 1996, Mr. Davis was elected Vice President and
Controller.
</TABLE>
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Armco's common stock is sold principally on the New York Stock Exchange.
At February 28, 1997, there were 22,641 common stock shareholders of record.
Other information required by this item is incorporated herein by reference
from pages 32 and 37 of the Annual Report to Shareholders for the year ended
December 31, 1996.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In millions, except per share amounts)
<CAPTION>
1996 1995 1994 1993 1992(2)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net sales $1,724.0 $1,559.9 $1,437.6 $1,664.0 $1,673.2
Special charges - net (3) (8.8) -- (35.0) (165.5) (185.1)
Income (loss) from continuing
operations 26.0 23.5 65.8 (247.5) (402.2)
Income (loss) from continuing operations
per common share 0.08 0.05 0.46 (2.56) (4.17)
Total assets (4) 1,867.8 1,896.6 1,934.9 1,904.7 1,869.9
Long-term debt and lease obligations 344.3 361.6 363.8 379.7 401.0
Long-term employee benefit
obligations (4) 1,200.2 1,165.9 1,221.9 1,249.9 541.6
Class B common stock of subsidiary (5) -- -- -- 9.7 9.3
- -----------------------------------
<FN>
(1) The information in this Item should be read in conjunction with
Armco's financial statements and the notes thereto, which are incorporated
by reference in Item 8.
(2) In April 1992, Armco acquired Cyclops Industries, Inc. in a
transaction accounted for as a purchase.
(3) Special charges primarily relate to the shutdown, sale and/or
rationalization of operating facilities.
(4) In 1993, Armco adopted SFAS Nos. 106 and 109 which increased long-
term employee benefit obligations and total assets.
(5) The Class B common stock was issued by Eastern Stainless prior to
Armco's acquisition of this 84%-owned former subsidiary of Cyclops
Industries, Inc. In 1994, Eastern Stainless reached a decision to sell
substantially all of its assets and, as a result, Armco stopped
consolidating the results of Eastern Stainless. The asset sale was
completed on March 14, 1995.
</TABLE>
-12-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain information required by this Item is incorporated herein by
reference from pages 16-21 following the caption "Management's Discussion and
Analysis" of the Consolidated Financial Statements in the Annual Report to
Shareholders for the year ended December 31, 1996.
Other
Certain statements made or incorporated by reference in this Form 10-K,
or made in press releases or in oral presentations made by Company employees,
reflect the Company's estimates and beliefs and are intended to be, and are
hereby identified as, 'forward looking statements' for the purposes of the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These include statements in the paragraphs entitled "Outlook" in the
section entitled "Management's Discussion & Analysis" of the Annual Report to
Shareholders, incorporated herein by reference.
The Company cautions readers that such forward looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those expected by the Company or expressed in the Company's forward
looking statements. These factors include, but are not limited to, the
following: (1) risks of downturns in economic conditions generally, and in the
steel industry (a highly cyclical industry) specifically; (2) changes in
customer demand for the Company's products, particularly demand from the
automobile industry; (3) unplanned plant outages or equipment failures at the
Company's facilities; (4) collective bargaining agreement negotiations,
strikes, labor stoppages or other labor difficulties (as described further in
Item 1 "Business - Employees"); (5) actions by the Company's competitors, (as
described further in Item 1 "Business - Competition"), including domestic
steel producers and foreign steel producers (many of whom have lower labor
costs and are subsidized by their governments); (6) U.S. trade policy,
including U.S. government action with respect to importers of products
competitive with the Company's (as described further in Item 1 "Business -
Competition"); (7) unforeseen material adverse developments in insurance
runoff (as described further in Item 1 "Business - Discontinued Operations"
and Item 8 - Note 11 to the Consolidated Financial Statements); (8) disruption
in the supply of raw materials needed by the Company, such as iron and carbon
steel scrap, chrome and nickel, stainless steel scrap, silicon, molybdenum and
zinc, or changes in the pricing of such raw materials; and (9) changes in the
application and scope of environmental regulations applicable to the Company.
Readers are cautioned not to place undue reliance on forward looking
statements made or incorporated by reference in this Form 10-K, or made in
press releases or in oral presentations. Such forward looking statements
reflect management's analysis only as of the date such statements are made and
the Company undertakes no obligation to revise publicly these forward looking
statements to reflect events or circumstances that arise subsequently.
Readers should carefully review the risk factors set forth above and described
elsewhere in this document and in other documents the Company files from time
to time with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 22-37 of the Annual Report to Shareholders for the year ended
December 31, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-13-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to executive officers of Armco
is contained in Part I of this report under "Executive Officers of Armco" and
is incorporated herein by reference. The information required as to directors
is incorporated herein by reference from the information set forth under the
caption "ELECTION OF DIRECTORS" in the registrant's Proxy Statement for the
1997 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as
amended (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth in the Proxy Statement under the caption
"EXECUTIVE COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The security ownership in Armco stock of directors, certain executive
officers and directors and executive officers as a group and of persons known
by Armco to be the beneficial owners of more than five percent of any class of
Armco's voting securities is incorporated herein by reference from the
information set forth in the Proxy Statement under the caption "MISCELLANEOUS
- -- Stock Ownership".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
I. Documents Filed as a Part of this Report
A. Financial Statements and Financial Statement Schedules Page
1. Statement of Consolidated Operations for the Years Ended
December 31,1996, 1995 and 1994 *
2. Statement of Consolidated Financial Position as of
December 31, 1996 and 1995 *
3. Statement of Consolidated Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 *
4. Notes to Financial Statements *
5. Independent Auditors' Report *
6. Independent Auditors' Report 19
-14-
<PAGE>
7. Financial Statement Schedule for the Years Ended
December 31, 1996, 1995 and 1994
II-- Valuation and Qualifying Accounts 20
8. Responsibility for Financial Reporting *
- ----------------------
* Incorporated in this Annual Report on Form 10-K by reference to
pages 22-37 of the Annual Report to Shareholders for the year ended
December 31, 1996.
Financial Statements and Financial Statement Schedules Omitted
The financial statements and financial statement schedules for Armco Inc.
and subsidiaries, other than those listed above, are omitted because of the
absence of conditions under which they are required, or because the
information is set forth in the notes to financial statements.
B. Exhibits
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
3(a). Articles of Incorporation of Armco Inc., as amended as of April
4, 1996 (1)
3(b). Regulations of Armco Inc. (2)
4. Armco hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of each instrument defining the rights of
holders of long-term debt of Armco and its subsidiaries, omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K.
10(a). Deferred Compensation Plan for Directors*
10(b). 1993 Long-Term Incentive Plan of Armco Inc. (3)*
10(c). Severance Agreements (4)*
10(d). 1988 Restricted Stock Plan (5)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (6)*
10(f). Executive Supplemental Deferred Compensation Plan (7)*
10(g). Pension Plan for Outside Directors (8)*
10(h). Key Management Severance Policy (9)*
10(i). Minimum Pension Plan (10)*
10(j). Stainless Steel Toll Rolling Services Agreement (11)
10(k). Equity Exchange Agreement (12)
10(l). Stock Purchase Agreement among Armco Inc., Armco Financial Services
Corporation and Vik Brothers Insurance, Inc. dated as of August 2, 1994 (13)
-15-
<PAGE>
10(m). Asset Sale Agreement By and Among Armco Inc., Eastern Stainless
Corporation, Avesta Sheffield East, Inc. and Avesta Sheffield Holding Co.
dated as of February 9, 1995 (14)
10(n). Purchase Agreement, as amended, among Oilwell, Inc., National Supply
Company, Inc., USX Corporation, Armco Inc. and NOW Holdings, Inc. (15)
10(o). Rights Agreement dated as of February 23, 1996 between Armco Inc. and
Fifth Third Bank (16)
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1996.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1996.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1996 for
the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan for
Hourly Employees will be filed by amendment as exhibits hereto, as permitted
under Rule 15d-21.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the Annual Report on Form 10-K pursuant to Item 14(c)
of Form 10-K.
- ---------------------
(1) Incorporated by reference from Exhibit 3.1 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(2) Incorporated by reference from Exhibit 3.2 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994.
(3) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference from Exhibit 10(a) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(5) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(6) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(7) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1989 (SEC File No. 001-00873).
-16-
<PAGE>
(9) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1990.
(10) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1991.
(11) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1993.
(12) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated April
7, 1994.
(13) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(14) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated March
14, 1995.
(15) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated
January 16, 1996.
(16) Incorporated by reference from Exhibit 10(p) to Armco's Form 10-K for
the year ended December 31, 1995.
- ------------------------
II. Reports on Form 8-K
No reports on Form 8-K were filed by Armco since September 30, 1996.
-17-
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED AS OF MARCH 21,
1997.
ARMCO INC.
By JAMES F. WILL
-----------------------------------------
James F. Will
Chairman of the Board, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED AS OF MARCH 21, 1997.
By JAMES F. WILL By DAVID A. DUKE
- -------------------------------------- -------------------------------
James F. Will John C. Haley
Chairman of the Board, President, Director
Chief Executive Officer
and Director
By JERRY W. ALBRIGHT By JOHN C. HALEY
- -------------------------------------- ------------------------------
Jerry W. Albright John C. Haley
Vice President and Director
Chief Financial Officer
By JOHN N. DAVIS By BRUCE E. ROBBINS
- ------------------------------------- ------------------------------
John N. Davis Bruce E. Robbins
Vice President and Controller Director
By By BURNELL R. ROBERTS
- ------------------------------------- ------------------------------
John J. Burns, Jr. Burnell R. Roberts
Director Director
By PAULA H.J. CHOLMONDELEY By JOHN D. TURNER
- -------------------------------------- ------------------------------
Paula H.J. Cholmondeley John D. Turner
Director Director
-18-
<PAGE>
Armco Inc.:
We have audited the consolidated financial statements of Armco Inc. and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, and have issued our report thereon
dated February 5, 1997. Such consolidated financial statements and report are
included in Armco's 1996 Annual Report to Shareholders and are incorporated
herein by reference. Our audits also included the consolidated financial
statement schedule of Armco Inc. and subsidiaries, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 5, 1997
-19-
<PAGE>
<TABLE>
SCHEDULE II
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in Millions)
<CAPTION>
==========================================================================================
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------
Deductions
from Reserves
Additions for Purposes
Balance at Charged to for which
Beginning Costs and Reserves were Other Balance at
Description of Year Expenses Provided Changes End of Year
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended
December 31, 1994:
Allowance for doubtful accounts $ 4.0 $0.8 $0.4 $(0.3)(B) $ 4.1
Allowance for impairment of
investments 20.0 0.1 1.4 -- 18.7
- ------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1995:
Allowance for doubtful accounts $ 4.1 $0.3 $1.0 $ 0.6 (A) $ 4.4
0.3 (B)
0.1 (C)
Allowance for impairment of
investments 18.7 -- 2.0 -- 16.7
- ------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1996:
Allowance for doubtful accounts $ 4.4 $1.4 $1.2 $(0.1)(A) $ 3.8
(0.7)(B)
Allowance for impairment of
investments 16.7 2.3 -- (6.3)(A) 12.7
- ------------------------------------------------------------------------------------------
<FN>
NOTES:
(A) Written off to the income statement.
(B) Net balances of consolidated subsidiaries purchased (divested).
(C) Collections on bad debt items.
</TABLE>
-20-
<PAGE>
EXHIBIT INDEX
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1996.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1996.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
- ------------------------
<PAGE>
<TABLE>
EXHIBIT 11
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE
(Dollars in Millions, Except Per Share Amounts)
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
I. PRIMARY
Income (loss) from continuing
operations $ 26.0 $ 23.5 $ 65.8 $(247.5) $(402.2)
Less: preferred dividends 17.9 17.9 17.8 17.8 10.3
-------- -------- -------- -------- --------
Income (loss) from continuing
operations after preferred
dividends $ 8.1 $ 5.6 $ 48.0 $(265.3) $(412.5)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles. $ 32.5 $ 29.8 $ 77.7 $(327.0) $(421.5)
Less: preferred dividends 17.9 17.9 17.8 17.8 10.3
-------- -------- -------- -------- --------
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles after
preferred dividends $ 14.6 $ 11.9 $ 59.9 $(344.8) $(431.8)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles $ 32.5 $ 29.8 $ 77.7 $(327.0) $(421.5)
Loss on extraordinary items -- -- -- (7.3) (8.4)
Cumulative effect of changes
in accounting principles -- -- -- (307.5) --
-------- -------- -------- -------- --------
Net income (loss) $ 32.5 $ 29.8 $ 77.7 $(641.8) $(429.9)
Less: preferred dividends 17.9 17.9 17.8 17.8 10.3
-------- -------- -------- -------- --------
Net income (loss) after
preferred dividends $ 14.6 $ 11.9 $ 59.9 $(659.6) $(440.2)
======== ======== ======== ======== ========
Weighted average number of
common shares 106.6 106.0 104.6 103.8 98.8
Weighted average number of
common equivalent shares (A) -- -- 0.1 * *
-------- -------- -------- -------- --------
Total shares for computation 106.6 106.0 104.7 103.8 98.8
======== ======== ======== ======== ========
Primary income (loss) per share:
Income (loss) from continuing
operations $ 0.08 $ 0.05 $ 0.46 $ (2.56) $ (4.18)
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles 0.14 0.11 0.57 (3.32) (4.37)
Loss on extraordinary items -- -- -- (0.07) (0.08)
Cumulative effect of changes
in accounting principles -- -- -- (2.96) --
Net income (loss) 0.14 0.11 0.57 (6.35) (4.45)
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE (Continued)
(Dollars in Millions, Except Per Share Amounts)
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
II. FULLY DILUTED
Income (loss) from continuing
operations $ 26.0 $ 23.5 $ 65.8 $(247.5) $(402.2)
Less: preferred dividends -- -- -- 17.8 10.3
-------- -------- -------- -------- --------
Income (loss) from continuing
operations after preferred
dividends $ 26.0 $ 23.5 $ 65.8 $(265.3) $(412.5)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles $ 32.5 $ 29.8 $ 77.7 $(327.0) $(421.5)
Less: preferred dividends -- -- -- 17.8 10.3
-------- -------- -------- -------- --------
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles
after preferred dividends $ 32.5 $ 29.8 $ 77.7 $(344.8) $(431.8)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles $ 32.5 $ 29.8 $ 77.7 $(327.0) $(421.5)
Loss on extraordinary items -- -- -- (7.3) (8.4)
Cumulative effect of changes
in accounting principles -- -- -- (307.5) --
-------- -------- -------- -------- --------
Net income (loss) $ 32.5 $ 29.8 $ 77.7 $(641.8) $(429.9)
Less preferred dividends -- -- -- 17.8 10.3
-------- -------- -------- -------- --------
Net income (loss) after
preferred dividends $ 32.5 $ 29.8 $ 77.7 $(659.6) $(440.2)
======== ======== ======== ======== ========
Weighted average number of
common shares 106.6 106.0 104.6 103.8 98.8
Weighted average number of
common equivalent shares (A) -- -- 0.1 * *
Weighted average number of
preferred shares on an
"if converted" basis 22.7 22.7 22.7 * *
-------- -------- -------- -------- --------
Total shares for computation 129.3 128.7 127.4 103.8 98.8
======== ======== ======== ======== ========
Fully diluted income (loss) per share (B):
Income (loss) from continuing
operations $ 0.20 $ 0.18 $ 0.52 $ (2.56) $ (4.18)
Income (loss) before extra-
ordinary items and cumula-
tive effect of changes in
accounting principles 0.25 0.23 0.61 (3.32) (4.37)
Loss on extraordinary items -- -- -- (0.07) (0.08)
Cumulative effect of changes in
accounting principles -- -- -- (2.96) --
Net income (loss) 0.25 0.23 0.61 (6.35) (4.45)
- -------------------
<FN>
* Antidilutive
NOTES:
(A) Common equivalent shares are included for dilutive stock options as if
the options were exercised and the proceeds used to acquire common shares of
Armco.
(B) Calculation of fully diluted income (loss) per share is submitted for
1996, 1995 and 1994 in accordance with Securities Exchange Act of 1934 Release
No. 9083, although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an antidilutive result, or is not required by footnote 2
to paragraph 13 of APB Opinion No. 15 because it results in dilution of less
than 3%.
</TABLE>
<PAGE>
EXHIBIT 13
RESTORING EARNINGS POWER . MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1996
(Dollars in millions, except per share data)
GENERAL
This discussion and analysis of Armco's financial results should be read
together with the Consolidated Financial Statements and Notes on pages 23
through 37.
Operating Results
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,724.0 $1,559.9 $1,437.6
Special charges (8.8) -- (35.0)
Operating profit 74.7 69.0 39.2
Gain on sale of investments in joint ventures
and related stock -- 27.2 62.6
Credit (provision) for income taxes (1.4) (2.0) 28.7
Income from continuing operations 26.0 23.5 65.8
Income from discontinued operations:
Aerospace and Strategic Materials 6.5 -- --
National-Oilwell -- 6.3 11.9
Net income 32.5 29.8 77.7
Net income per common share 0.14 0.11 0.57
- ------------------------------------------------------------------------------
</TABLE>
1996 vs. 1995: Net sales in 1996 were 11% higher than in 1995, primarily due
to higher shipments of automotive exhaust stainless, electrical and carbon
steels in the Specialty Flat-Rolled Steels segment. Higher sales were also
achieved by Douglas Dynamics, LLC, Armco's snowplow manufacturer, whose
results are reported in the Fabricated Products business segment.
Operating profit increased 8% in 1996 due to a significant reduction in losses
at Armco's Mansfield and Dover Operations in the Specialty Flat-Rolled Steels
segment, an increase in profits from Douglas Dynamics and lower employee
benefit costs. These improvements were offset, in part, by lower profits in
the remainder of the Specialty Flat-Rolled Steels segment, due to higher
imports and weak pricing in certain chrome nickel products plus higher sales
of less profitable carbon steel. The decrease in Mansfield and Dover operating
losses reflects improved operating practices and higher levels of production
compared with 1995, which was a ramp-up period following a year-long idling of
these facilities. Employee benefit expenses were lower in 1996 primarily as a
result of increased funding of the pension plans during 1995 and 1996 and
lower interest rates on Armco's liability for retiree health care and life
insurance benefits.
Included in the 1996 operating profit were special charges totaling $8.8 for a
loss on the sale of Armco's nonresidential construction business and a
decision to exit a line of light truck equipment manufactured by Douglas
Dynamics. Operating profit also included nonrecurring income totaling $8.6
from claim settlements, including the partial settlement of a business
interruption insurance claim.
In 1995, Armco sold all of the shares of AK Steel Holding Corporation it had
received in the initial public offering and recapitalization of Armco Steel
Company, L.P., recognizing a gain of $27.2.
Included in income from continuing operations for 1996 was the above-mentioned
special charges and claim settlements and a $6.3 gain, which resulted from the
recognition of gains previously deferred in connection with asset sales at an
industrial park owned by Armco. Armco elected to defer gains resulting from
individual asset sales at this site because of uncertainty concerning
realization of the carrying value of the remaining property. The gains were
recognized following receipt, in March 1996, of an independent appraiser's
report indicating that the remaining land, buildings and dock facilities in
the park had a market value in excess of Armco's historical cost carrying
value.
Income from discontinued operations in 1996 consisted of a $6.5 increase in
the gain on the sale of Armco's Aerospace and Strategic Materials business
segment related to a federal income tax settlement. In 1995, Armco recognized,
in income from discontinued operations, equity income of $6.3 from National-
Oilwell, a joint venture divested in January, 1996.
1995 vs. 1994: Net sales increased in 1995 over 1994 because of strong markets
and higher prices for stainless and electrical steels, and the addition of
sales from Armco's modernized facilities in Mansfield and Dover, Ohio, which
resumed operations in April 1995. The Mansfield and Dover plants, idled in
March of 1994, recorded sales which were $52.1 higher in 1995 than in 1994.
However, Armco's net sales in 1994 included $52.8 from Eastern Stainless
Corporation, which has since been divested. Excluding the results of
Mansfield, Dover and Eastern Stainless, 1995 net sales were 9% higher than
1994 sales. Increased sales for the year in the Specialty Flat-Rolled Steels
segment and by Sawhill Tubular, were partially offset by a decline in sales at
Douglas Dynamics.
During 1994, special charges totaling $35.0 were recorded for expenses
associated with idling the Mansfield and Dover Operations and for employee
benefit and other charges related to the sale of assets by Eastern Stainless.
The results of the Butler, Coshocton and Zanesville Operations in the
Specialty Flat-Rolled Steels segment exceeded 1994 operating profit by 22%. In
addition, results improved at Sawhill Tubular. However, excluding special
charges, operating profit in 1995 was down $5.2 from 1994, as higher losses
generated by the ramp-up of the Mansfield Operations and lower profits from
Douglas Dynamics more than offset the improvements.
Income from continuing operations in 1994 reflected the completion of an
initial public offering and recapitalization of Armco Steel Company, L.P., for
which Armco recognized a pretax gain of $36.5, and a $30.0 tax benefit. Also
in 1994, Armco sold 90% of its investment in North American Stainless for
$73.0 in cash, recognizing a $26.1 gain.
16
<PAGE>
Outlook: With reasonably firm demand in most product lines, Armco's expanded
capacity and improved productivity should allow its Specialty Flat-Rolled
Steels segment to compete for more of the available market. Armco expects 1997
sales in the Fabricated Products segment to approximate 1996 levels; however,
an expected decrease in operating profit on snowplows will be only partially
offset by improved profits anticipated in the tubular business.
BUSINESS SEGMENT RESULTS
Specialty Flat-Rolled Steels
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $1,421.2 $1,277.0 $1,114.4
Special charges -- -- (35.0)
Operating profit 72.9 76.0 40.5
- ------------------------------------------------------------------------------
</TABLE>
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-rolled
stainless, electrical and carbon steels at plants in Butler, Pennsylvania, and
Coshocton, Dover, Mansfield and Zanesville, Ohio. The segment also includes
the results of international trading companies that buy and sell steel and
manufactured steel products. Through September 30, 1994, the segment included
stainless steel plate products, which were produced by Eastern Stainless
Corporation, Armco's former 84%-owned subsidiary in Baltimore, Maryland. Armco
stopped consolidating its results on that date following a decision by Eastern
Stainless to sell substantially all of its assets to a third party.
Customer sales and shipments by major product line and annual production were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(tons in thousands) Sales Tons Sales Tons Sales Tons
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Specialty flat-rolled* $1,108.0 739 $1,013.3 647 $ 875.3 604
Specialty semi-finished 133.9 97 130.5 78 80.2 64
Stainless plate -- -- -- -- 52.8 22
Galvanized and other carbon 144.2 304 94.1 214 62.1 125
Other 35.1 -- 39.1 -- 44.0 --
- ------------------------------------------------------------------------------
Total $1,421.2 1,140 $1,277.0 939 $1,114.4 815
- ------------------------------------------------------------------------------
Cast production 1,439 1,153 947
- ------------------------------------------------------------------------------
<FN>
* The Specialty flat-rolled product line consists of automotive exhaust
stainless, specialty strip and sheet, and electrical steels.
</TABLE>
1996 vs. 1995: Customer sales in 1996 exceeded 1995 levels primarily due to
higher sales of automotive exhaust stainless, electrical and galvanized
steels. A 21% increase in shipped tons was made possible by progressively
higher operating levels at Mansfield in the second half of 1996. The higher
operating levels were achieved despite several planned outages necessary to
complete equipment upgrades.
Average sales per ton in 1996 was lower than in the prior year, primarily due
to higher import penetration in a number of product lines, increased sales of
lower-priced carbon products, and the elimination of raw material price
surcharges on certain stainless steels. Armco and other specialty steel
producers add raw material surcharges to the price of their product to
compensate for higher costs incurred when the price of key raw materials such
as nickel, chromium or molybdenum rises above certain levels. In 1996, raw
material prices fell below these levels.
Automotive exhaust stainless shipments reached record levels in 1996, as the
Mansfield Operations shipped significantly more of this product line than in
the prior year. Strong production of North American cars and light trucks, and
increased use of stainless in exhaust systems stimulated current year demand.
Shipments of electrical steel products increased as a result of generally good
market conditions and some easing of capacity constraints. Driven by housing
starts, demand remained strong for grain oriented electrical steel used in
utility distribution transformers. However, shipments of non-oriented
electrical steel used in motors and generators suffered under pressure from
imports, which increased substantially in the second half of the year.
Specialty strip and sheet shipments declined slightly in the year-to-year
comparison due to softer market conditions and increased import penetration.
Average sales per ton were lower in 1996 compared to 1995 as a result of the
elimination of raw material surcharges and base price erosion, resulting from
an increased level of imports.
Specialty semi-finished shipments increased in 1996, primarily due to export
sales. A reduction in average sales per ton reflected worldwide market
softness and the elimination of raw material surcharges. Sales of specialty
semi-finished products have also been adversely affected by import
competition.
Armco's carbon steel shipments increased in 1996 compared to 1995. In the
first half of 1996, Armco exited the lower-priced carbon hot band market,
shifting the carbon steel product mix to more galvanized steel thereby
increasing average sales per ton in the year-to-year comparison.
During 1996, operating profit for this segment was lower than in 1995 due to
price erosion on specialty strip and sheet and specialty semi-finished
products and several planned equipment outages, including outages necessary to
upgrade Armco's finishing facilities as part of the strategic facilities plan.
The outages and the subsequent process of restarting and returning these
facilities to full capability contributed to higher costs and lower yields. To
meet demand during this period, Armco used outside processors to finish some
of its stainless steels, resulting in increased costs.
Specialty Flat-Rolled Steels' 1996 operating profit included $8.6 of income
from various claims settlements, including the partial settlement of a
business interruption insurance claim for a 1995 unplanned outage. The outage
resulted in the use of alternative and more costly product routings, and lost
sales.
Operating profit in 1996 also included a $39.5 loss from the Mansfield and
Dover Operations, compared to a loss of $104.2 in 1995 while Mansfield was
ramping up. The 1996 loss was due, in part, to a number of planned and
unplanned equipment outages and to higher than expected operating costs.
17
<PAGE>
RESTORING EARNINGS POWER
<TABLE>
[NINE BAR CHARTS APPEAR HERE]
SPECIALTY FLAT-ROLLED STEELS - SALES - BY MARKET
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Automotive 44% 40% 39%
Industrial and Electrical Equipment 28% 32% 34%
Service Centers 12% 9% 12%
Other 16% 19% 15%
- ------------------------------------------------------------------------------
SPECIALTY FLAT-ROLLED STEELS - SALES - BY PRODUCT LINE
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Specialty flat-rolled 78% 79% 78%
Specialty semi-finished 9% 10% 7%
Stainless plate 0% 0% 5%
Galvanized and other carbon 10% 7% 6%
Other 3% 4% 4%
- ------------------------------------------------------------------------------
SPECIALTY FLAT-ROLLED STEELS - TONS SHIPPED
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Specialty flat-rolled 65% 68% 74%
Specialty semi-finished 8% 9% 8%
Stainless plate 0% 0% 3%
Galvanized and other carbon 27% 23% 15%
- ------------------------------------------------------------------------------
</TABLE>
1995 vs. 1994: The Mansfield and Dover Operations were idled from March 1994
through the first quarter of 1995, although Dover began limited operations
early in the first quarter of 1995. By mid-year, the Dover plant was fully
operational. With the completion of its new thin-slab caster and modernized
hot strip mill, Mansfield restarted in April 1995. The restart was hampered by
process control system difficulties and the failure of the refractory lining
and a skid in the new walking beam furnace. The furnace problems necessitated
an unscheduled 17-day outage.
Customer sales in 1995 increased 15% over 1994 sales, as demand for most
products remained strong throughout the year. Pricing also remained strong as
a result of raw material surcharges on products containing nickel, chromium
and molybdenum, January 1995 price increases for electrical steel and
industry-wide price increases for chrome nickel products.
Armco's shipments of automotive exhaust stainless increased in 1995,
principally as a result of continued strength in North American car and light
truck production and increased use of stainless steel in exhaust systems.
Shipments of electrical steel remained at a high level, sustained by strong
demand for both grain oriented and non-oriented electrical steels. Armco's
orders for non-oriented electrical steel were further increased in 1995 by a
54-day strike at a major domestic competitor; however, Armco's ability to ship
this product was limited by capacity constraints.
The increase in Armco's shipments of specialty strip and sheet was primarily
attributable to broad-based increases in the automotive, consumer and
industrial markets, especially in the first half of 1995, as well as the
strike mentioned above. In the second half, demand slowed due to normal
seasonal factors as well as liquidation of customer inventories.
Specialty semi-finished shipments, which consist of hot bands and slabs, grew
22% in 1995 on strong demand from North American customers.
Customer sales for the segment were also affected by the idling and restart of
the Mansfield and Dover Operations and by the divestment of Eastern Stainless.
Sales by Mansfield and Dover increased by $52.1 in 1995. Eastern Stainless
sales of $52.8 were recognized in 1994, before Armco stopped consolidating the
results of this business as a result of the divestment.
During 1994, Armco recognized a $20.0 special charge related to its decision
to idle and restructure the Mansfield and Dover, Ohio plants, while installing
a new thin-slab continuous caster. The special charge consisted of $11.2 for
employee benefits, primarily group insurance and supplemental unemployment
benefits, and $8.8 to write down inventories and fixed assets.
In 1994, Eastern Stainless decided to sell substantially all of its assets for
cash and the assumption of certain liabilities and Armco recognized a $15.0
special charge related to that decision. On March 14, 1995, the transaction
was completed. Net liabilities not assumed by the buyer or satisfied by the
sale proceeds were assumed by Armco. On the date of sale, the net liabilities
assumed by Armco, including amounts recorded at the establishment of the $15.0
special charge, totaled $53.0.
Specialty Flat-Rolled Steels operating profit in 1995 was almost double that
of 1994. Included in the 1995 operating results was a $104.2 operating loss
from the Mansfield and Dover Operations, primarily as a result of the startup
problems described above. The 1994 Specialty Flat-Rolled Steels operating
profit included losses of $86.0 from the Mansfield and Dover Operations,
primarily as a result of the idling. The remaining operations in this segment
realized a 22% increase in operating profit from 1994 to 1995.
Outlook: The strategic facilities upgrades were completed during 1996 and
Armco believes that it is now positioned to operate its plants without major
disruptions throughout 1997. Armco plans to focus on improving productivity
and quality at its specialty flat-rolled steels operations and anticipates
further cost reductions as these improvements are made.
Improved results for this segment are dependent, in part, on steady production
from the Mansfield Operations. Based on fourth quarter 1996 results, Mansfield
has demonstrated its ability to produce quality products at stable operating
levels, providing this business segment with the capacity and flexibility
required to meet expected market conditions.
Automotive exhaust stainless sales are expected to remain strong supported by
North American vehicle sales and an increase in the average amount of
stainless steel used in each vehicle. Stable housing starts are expected to
continue to stimulate demand for oriented electrical steels, while
18
<PAGE>
high levels of lower-priced imports continue to adversely affect non-oriented
product sales. In the near term, worldwide oversupply and higher levels of
import penetration are expected to have a continued adverse effect on pricing
for specialty strip and sheet and specialty semi-finished products. Prices and
demand for Armco's galvanized steels, however, are expected to remain stable
through the first half of 1997.
Low-priced foreign imports of specialty steels increased in 1996, adversely
affecting volume and pricing experienced by domestic companies like Armco. As
a result, industry trade groups have begun to gather data to determine whether
there are grounds for trade cases against some foreign producers. However, no
trade cases have been filed to date and there can be no assurance that
sufficient grounds will be found to warrant future filing of trade cases or,
in the event, trade cases are filed, that a favorable result will be obtained.
Fabricated Products
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $302.8 $282.9 $323.2
Special charges (8.8) -- --
Operating profit 22.8 22.0 30.9
- ------------------------------------------------------------------------------
</TABLE>
The Fabricated Products business segment includes the results of Sawhill
Tubular, a manufacturer of steel pipe and tubing, and Douglas Dynamics, a
manufacturer of snowplows and ice control products.
1996 vs. 1995: Customer sales in this segment were 7% above last year's level,
largely due to higher sales at Douglas Dynamics. Snowplow shipments in 1996
were the second highest achieved in Douglas Dynamics' history, due to near
record snowfalls and strong light truck sales. Although Sawhill Tubular's
shipment volumes increased in the year-to-year comparison, this was offset by
lower prices caused by increased domestic competitive pressures and a high
level of imports.
In 1996, Armco recorded a special charge of $5.9 for the estimated loss on the
sale of its nonresidential construction business. In 1996, Armco negotiated an
agreement to sell the business and the sale was effective January 1, 1997. The
charge primarily relates to the writedown of assets and recognition of
additional employee benefit liabilities.
Also in 1996, Armco recorded a $2.9 special charge primarily for the writedown
of inventories and severance costs related to the decision to discontinue a
line of light truck equipment manufactured by Douglas Dynamics. Excluding
this special charge, Douglas Dynamics' operating profit was substantially
higher than 1995. Increased sales and cost reductions related to the
elimination of production outsourcing were partially offset by higher fixed
manufacturing, administrative and selling costs, primarily related to the
introduction of new products.
Sawhill Tubular recorded a decrease in operating profits primarily as a result
of higher costs for steel hot bands compared to product selling prices.
1995 vs. 1994: Customer sales decreased by 12% in 1995 compared to 1994
primarily as a result of eliminating the sales of Bowman Metal Deck, a
manufacturer of steel roof and floor decking, which was sold in December 1994,
and lower sales by Douglas Dynamics. The severe winter weather in early 1994
led to the best sales year in Douglas Dynamics' history; however, the mild
winter preceding the 1995 selling season resulted in lower annual snowplow
sales. Sawhill Tubular sales were 3% higher than 1994.
Lower operating profit in 1995 resulted from the reduced sales at Douglas
Dynamics, which was partially offset by Sawhill Tubular's return to
profitability. Douglas Dynamics cut operating costs by reducing manpower to
match lower order backlog, decreasing the amount of production previously
performed by outside parties and periodically ceasing production to control
inventory levels. However, these actions could not fully offset the effects of
the lower sales volume of snowplows and other equipment sales, and higher
expenses related to new product development. Sawhill Tubular's return to
profitability was driven by increased sales, complemented by operational
improvements and cost reduction programs, which not only led to improved
results, but also brought about reductions in inventories.
Outlook: Sales at Douglas Dynamics are expected to be lower in 1997 compared
to 1996, as the snowplow industry continues to experience its normal cyclical
change in volume. During this downturn, Armco expects to maintain market share
and margins, but still anticipates a decrease in operating profits.
Sales at Sawhill Tubular in 1997 are anticipated to be above 1996 levels,
reflecting increased volume and stable, though depressed, pricing. Higher
sales and a reduction in manufacturing costs are expected to result in
improved operating profit.
DISCONTINUED OPERATIONS
Aerospace and Strategic Materials
Oregon Metallurgical Corporation (Oremet), formerly 80% owned by Armco, was
part of the Aerospace and Strategic Materials business segment that Armco sold
in 1985. Prior to the sale, Armco filed a suit on behalf of Oremet in the U.S.
Claims Court, claiming refunds and interest on federal and state taxes.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any proceeds of this action, net of taxes imposed on Oremet and the buyer. In
1988, as a result of a favorable settlement with the Internal Revenue Service
(IRS), Armco recorded a $15.2 net of tax adjustment to the gain on the sale of
this business segment. In 1996, Armco and Oremet reached agreement with the
IRS that the 1988 refund of taxes and interest should not itself have been
taxable to Oremet, further increasing the net proceeds, resulting in Armco
recording an additional $6.5 gain on the sale.
National-Oilwell
National-Oilwell, which sells oil field tubular pipe, and produces and sells
drilling and production equipment and process pumps used in the world's oil
and gas services industry, was a joint venture equally owned by subsidiaries
of Armco and USX Corporation.
Armco and USX reached a definitive agreement, dated September 22, 1995, to
sell their respective partnership interests in National-Oilwell to an entity
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell
management. The sale was completed on January 16, 1996. For its 50% interest,
Armco received $77.0 in cash, and receivables with a face value of $13.0. The
receivables were recorded at a discounted value of $10.6. After recording $2.1
for recognition of deferred foreign translation losses and miscellaneous
expenses, no gain or loss was recognized on the transaction.
19
<PAGE>
RESTORING EARNINGS POWER
Armco Financial Services Group (AFSG)
AFSG consists of insurance companies that have stopped writing new business
and are being liquidated. These companies have not written any new business
for retention except for an immaterial amount of guaranteed renewable accident
and health business since 1986. The number of policyholders of this business
has decreased from approximately 4,000 at December 31, 1986 to 1,007 at
December 31, 1995 and 870 at December 31, 1996.
Liquidity and Financial Resources: Claims are paid by using AFSG's investment
portfolio and the related investment income from such portfolio. The portfolio
had a market value of $172.3 at December 31, 1996. AFSG believes the existing
invested assets, related future income and other assets will provide
sufficient funds to meet all future claims payments.
AFSG's loss reserves net of reinsurance recoverables decreased to $102.2 at
December 31, 1996 from $118.7 at December 31, 1995. AFSG estimates that 60% of
the claims will be paid in the next five years and that substantially all of
the claims will be paid by the year 2017. The ultimate amount of the claims as
well as the timing of the claims payments are estimated based on an annual
review of loss reserves performed by AFSG's independent and consulting
actuaries.
Outlook: Armco management continues to believe, based on current facts and
circumstances and the opinions of outside counsel and advisors, that future
charges, if any, resulting from the runoff of AFSG will not be material to
Armco's financial condition or liquidity. However, it is possible that due to
fluctuations in Armco's results, future developments could have a material
effect on the results of one or more future interim or annual periods.
OTHER INVESTMENTS
Armco Steel Company, L.P. (ASC)
On April 7, 1994, ASC, a limited partnership 50% owned by a subsidiary of
Armco, completed an initial public offering and recapitalization. As part of
this transaction, the business and assets of ASC were transferred to AK Steel
Holding Corporation, a newly formed, publicly traded company. In exchange for
its interest in ASC, Armco received 1,023,987 shares of AK Steel common stock,
representing approximately four percent of the outstanding shares. The number
of shares received and other terms of the restructuring and recapitalization
were determined by arm's-length negotiations.
As a result of the transaction, in 1994 Armco recognized a nonrecurring pretax
gain of $36.5, primarily as a result of its release from certain obligations
to make future cash payments to the former joint venture and recognition of
deferred pension curtailment gains established at ASC's formation. In light of
this transaction, Armco also concluded that the realizable amount of its
deferred tax asset had increased and so recorded a tax benefit of $30.0.
In 1995, Armco sold all of the AK Steel common stock it had received as a
result of the initial public offering and recapitalization for a total of
$27.2, recognizing a gain of the same amount.
Under a toll-rolling agreement that is in effect through the year 2002, AK
Steel hot rolls stainless steel for Armco.
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS
through their respective subsidiaries, First Stainless, Inc. and Stainless
Steel Invest, Inc. NAS operates a state-of-the-art chrome nickel stainless
steel finishing plant in Carrollton, Kentucky. In 1994, Armco's subsidiary
sold 90% of its 50% equity interest in NAS to its partner for $73.0 in cash
and Armco recorded a $26.1 gain on the sale. Armco decided to sell most of its
investment in NAS because NAS needed cash infusions from its partners to
expand its operations, while Armco chose to use its resources to support its
core business operations. In connection with the transaction, Armco entered
into an annual supply contract with NAS to provide the former joint venture
with semi-finished stainless steel at market prices.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Armco had $168.9 of cash and cash equivalents, compared
to $136.8 at December 31, 1995. Cash and cash equivalents increased $32.1
during 1996, primarily as a result of net proceeds of $77.0 from the sale of
National-Oilwell, $15.7 of net proceeds from the sale of other assets and
investments, and cash generated from operations. Partially offsetting these
inflows were cash payments, which included $59.8 for capital expenditures,
$41.2 for pension plan funding, $24.3 of principal payments on debt and $17.8
for preferred stock dividends.
Inventories increased 14% during 1996, reflecting increased production levels
in the Specialty Flat-Rolled Steels segment. Trade receivables and payables,
primarily in the Specialty Flat-Rolled Steels segment, declined 16% and 8%,
respectively. The decrease in receivables was the result of timelier customer
payments and lower product prices. The decline in payables primarily reflects
lower prices for purchased raw materials and reduced capital expenditures.
At December 31, 1996, Armco had in place two bank credit facilities, totaling
$170.0. Under a receivables facility, Armco sells substantially all its trade
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In
January 1996, AFC entered into a five-year revolving credit agreement with a
group of banks providing up to $120.0 for revolving credit loans and letters
of credit secured by AFC's receivables. At December 31, 1996, there were no
outstanding borrowings under this credit facility; however, $69.9 of the
facility was used as support for letters of credit.
In January 1996, Armco entered into a three-year revolving credit agreement
with a group of banks providing up to $50.0 for revolving credit loans secured
by Armco's inventories. The credit agreement subjects Armco to certain
restrictions and covenants related to, among other things, minimum working
capital, minimum net income, current ratio and interest coverage ratio
requirements. At December 31, 1996, there were no outstanding borrowings under
this credit facility.
Armco has debt maturities of $27.2 and $27.4 in 1997 and 1998, respectively.
In 1999 and 2000, $127.5 and $157.6, respectively, will come due, primarily as
a result of the maturity of the $100.0, 11.375% Senior Notes due 1999 and the
$125.0, 9.375% Senior Notes due 2000.
20
<PAGE>
Armco anticipates that its capital expenditures for 1997 will total
approximately $70.0, of which approximately $18.5 relates to finishing
facilities expansion projects. Armco expects that its 1997 cash requirements,
including amounts for debt service, preferred stock dividends and capital
expenditures, will be paid out of existing cash balances and cash generated
from operations.
On January 24, 1997, Armco's Board of Directors declared the regular quarterly
dividends of $.525 per share on the $2.10 cumulative convertible preferred
stock, Class A, and $.90625 per share on the $3.625 cumulative convertible
preferred stock, Class A, each payable March 31, 1997 to shareholders of
record on February 28, 1997. The Board of Directors also declared the regular
quarterly dividend of $1.125 per share on the $4.50 cumulative convertible
preferred stock, Class B, payable April 1, 1997, to shareholders of record on
February 28, 1997. Payment of dividends on Armco's common stock is currently
prohibited under the terms of certain of Armco's debt instruments and under
the terms of its inventory credit facility. Armco does not anticipate paying a
common stock dividend in the foreseeable future.
ENVIRONMENTAL MATTERS
Armco, in common with other United States manufacturers, is subject to various
federal, state and local requirements for environmental controls relating to
its operations. Armco has devoted, and will continue to devote, significant
resources to control air and water pollutants, to dispose of wastes and to
remediate sites of past waste disposal. Armco estimates capital expenditures
for pollution control in its manufacturing operations will be about $20.0 for
the years 1997-2001, with the largest expenditures being made in the Specialty
Flat-Rolled Steels segment. Approximately $7.5 is related to control of air
pollution pursuant to regulations currently promulgated under the Clean Air
Act, as amended, and corresponding state laws. These projections, which have
been prepared internally and without independent engineering or other
assistance, reflect Armco's analysis of both current and expected regulations.
During the period 1991 through 1996, Armco's capital expenditures for
pollution control projects amounted to approximately $35.8, including $7.7 in
1996. Statutory and regulatory requirements in this area continue to evolve
and, accordingly, the type and magnitude of expenditures may change.
Armco has been named as a defendant, or identified as a potentially
responsible party, in various governmental proceedings regarding cleanup of
certain past waste disposal sites. Armco is also a defendant in various
private lawsuits alleging property damage and personal injury from waste
disposal sites. Joint and several liability could be imposed on Armco or other
parties for some of these matters; thus, theoretically, one party could be
held liable for all costs related to a site. While such governmental and
private actions are being contested, the outcome of individual matters cannot
be predicted with assurance. However, based on its experience with such cases
and a review of current claims, Armco expects that in most cases any ultimate
liability will be apportioned between Armco and other financially viable
parties.
From time to time, Armco has been and may be subject to penalties or other
requirements as a result of administrative actions by regulatory agencies and
to claims for indemnification for properties it has previously owned or
leased. In addition, environmental exit costs may be incurred if Armco decides
to dispose of additional properties. It is Armco's policy not to accrue such
costs until a decision is made to dispose of a property.
Based on current facts and circumstances known to Armco, Armco's experience
with site remediation, an understanding of current environmental laws and
regulations, environmental assessments, the existence of other financially
viable parties, expected remediation methods and the years in which Armco is
expected to make payments toward each remediation (which range from the
current year to 30 years or more in the future), Armco believes that the
ultimate liability for environmental remediation matters identified to date,
will not materially affect its consolidated financial condition or liquidity.
However, it is possible that, due to fluctuations in Armco's operating
results, future developments with respect to such matters could have a
material effect on the results of operations of future interim or annual
periods.
Furthermore, the identification of additional sites, changes in known
circumstances with respect to identified sites, the failure of other parties
to contribute their share of remediation costs, decisions to dispose of
additional properties and other changed circumstances may result in increased
costs to Armco, which could have a material effect on its consolidated
financial condition, liquidity and results of operations in future interim or
annual periods. However, it is not possible to determine whether additional
loss, due to changed circumstances, will occur or to reasonably estimate the
amount or range of any potential additional loss.
Statutes and regulations relating to the protection of the environment have
resulted in higher operating costs and capital investments by the industries
in which Armco operates. Although it cannot predict precisely how changes in
environmental requirements will affect its businesses, Armco does not believe
such requirements would affect its competitive position.
On October 10, 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 96-1, Environmental Remediation Liabilities. The Statement provides
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. Armco intends to adopt the Statement, when required in 1997, but
does not expect the adoption to have a material effect on its Statements of
Consolidated Financial Position or Consolidated Income.
21
<PAGE>
RESTORING EARNINGS POWER . OPINION
Responsibility for Financial Reporting
Armco's management prepared the financial statements presented in this Annual
Report in accordance with generally accepted accounting principles in the
United States. These principles require choices among alternatives and
numerous estimates of financial matters. Armco believes the accounting
principles chosen are appropriate in the circumstances, and the estimates and
judgements involved in Armco's financial reporting are reasonable and
conservative.
Armco's management is responsible for the integrity and objectivity of the
financial information presented in this Annual Report. Armco maintains a
system of internal accounting control and a program of internal audits. They
are designed to provide reasonable assurance that the financial reports are
fairly presented and that Armco employees comply with stated policies and
procedures, including policies on the ethical conduct of business. Armco
continually reviews and updates its policies and system of internal accounting
control as businesses and business conditions change.
Management and the Audit Review Committee of the Board of Directors
recommended, and the Board of Directors approved, the hiring of Deloitte &
Touche LLP as independent auditors for Armco. Deloitte & Touche LLP expresses
an informed professional opinion on Armco's financial statements.
The Audit Review Committee, composed solely of independent outside directors,
oversees Armco's public financial reporting. The Audit Review Committee meets
periodically with management, Deloitte & Touche LLP and Armco's internal
auditors, both individually and jointly, to discuss internal accounting
control and financial reporting matters. Deloitte & Touche LLP and Armco's
internal auditors have free access to the Audit Review Committee to discuss
any matters.
We believe Armco's internal control system, combined with the activities of
the internal and independent auditors and the Audit Review Committee, provides
you reasonable assurance of the integrity of our financial reporting.
/s/ J. F Will /s/ Jerry W. Albright
James F. Will Jerry W. Albright
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
Deloitte &
Touche LLP 2500 One PPG Place
- ------------- Pittsburgh, PA 15222
[Deloitte & Touche LLP LOGO]
Armco, Its Shareholders and Directors:
We have audited the statement of consolidated financial position of Armco Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Armco Inc. and subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 5, 1997
22
<PAGE>
RESTORING EARNINGS POWER . INCOME
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
For the years ended December 31, 1996, 1995 and 1994
(Dollars in millions, except per share amounts)
<CAPTION>
- ----------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,724.0 $1,559.9 $1,437.6
Cost of products sold (1,549.7) (1,392.7) (1,267.0)
Selling and administrative expenses (90.8) (98.2) (96.4)
Special charges (Note 8) (8.8) -- (35.0)
- ----------------------------------------------------------------------------
Operating profit 74.7 69.0 39.2
Interest income 10.1 11.8 10.5
Interest expense (36.3) (32.9) (33.8)
Gain on sale of investments in joint ventures
and related stock (Note 10) -- 27.2 62.6
Sundry other-net (Note 2) (21.1) (49.6) (41.4)
- ----------------------------------------------------------------------------
Income before income taxes 27.4 25.5 37.1
Credit (provision) for income taxes (Note 3) (1.4) (2.0) 28.7
- ----------------------------------------------------------------------------
Income from continuing operations 26.0 23.5 65.8
Discontinued operations (Note 11) -
Aerospace and Strategic Materials
Gain on disposal of business 6.5 -- --
National-Oilwell
Income from operations (net of income taxes
of $0.1 in 1995 and $1.0 in 1994) -- 6.3 11.9
- ----------------------------------------------------------------------------
Net income $ 32.5 $ 29.8 $ 77.7
- ----------------------------------------------------------------------------
Income per share-primary (Note 1)
Income from continuing operations $ 0.08 $ 0.05 $ 0.46
Income from discontinued operations 0.06 0.06 0.11
- ----------------------------------------------------------------------------
Net income $ 0.14 $ 0.11 $ 0.57
- ----------------------------------------------------------------------------
Dividends on preferred stock (Note 5)
$2.10 Class A $ 2.10 $ 2.10 $ 2.10
$3.625 Class A 3.625 3.625 3.625
$4.50 Class B 4.50 4.50 4.50
- ----------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37.
</TABLE>
23
<PAGE>
RESTORING EARNINGS POWER . FINANCIAL POSITION
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1996 and 1995
(Dollars in millions, except per share amounts)
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 1) $ 168.9 $ 136.8
Accounts and notes receivable
Trade (less allowance for doubtful accounts of
$3.8 in 1996 and $4.4 in 1995) 137.4 162.8
Other 12.2 6.6
Inventories (Note 1) 246.9 216.2
Investment in National-Oilwell (Note 11) -- 85.5
Other 6.4 5.9
- ------------------------------------------------------------------------------
Total current assets 571.8 613.8
- ------------------------------------------------------------------------------
Investments
Investment in Armco Financial Services Group (Note 11) 85.6 85.6
Other (less allowance for impairment of $12.7 in
1996 and $16.7 in 1995) (Note 1) 52.4 37.2
Property, plant and equipment (net of accumulated deprec-
iation of $597.6 in 1996 and $539.8 in 1995) (Note 1) 670.1 668.5
Deferred tax asset - net (Note 3) 325.8 326.1
Goodwill and other intangible assets (Note 1) 144.8 145.9
Other assets 17.3 19.5
- ------------------------------------------------------------------------------
Total assets $1,867.8 $1,896.6
- ------------------------------------------------------------------------------
Liabilities
Current liabilities
Trade accounts payable $ 136.3 $ 148.2
Employment-related liabilities (Note 2) 115.1 172.4
Other accruals 79.6 72.6
Current portion of long-term debt (Note 4) 27.2 25.8
- ------------------------------------------------------------------------------
Total current liabilities 358.2 419.0
- ------------------------------------------------------------------------------
Long-term debt (Note 4) 344.3 361.6
Long-term employee benefit obligations (Note 2) 1,200.2 1,165.9
Other liabilities 177.1 180.5
Commitments and contingencies (Notes 1, 4, 9 and 11)
- ------------------------------------------------------------------------------
Shareholders' deficit (Note 5)
Preferred stock
Class A 137.6 137.6
Class B 48.3 48.3
Common stock (authorized 150,000,000 shares of
$.01 par value; issued and outstanding
106,457,166 in 1996 and 106,102,560 in 1995) 1.1 1.1
Additional paid-in capital 965.0 963.0
Accumulated deficit (1,363.9) (1,378.5)
Other (0.1) (1.9)
- ------------------------------------------------------------------------------
Total shareholders' deficit (212.0) (230.4)
- ------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $1,867.8 $1,896.6
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37.
</TABLE>
24
<PAGE>
RESTORING EARNINGS POWER . CASH FLOWS
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 32.5 $ 29.8 $ 77.7
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 58.7 52.8 48.8
Undistributed earnings from discontinued operations - (6.3) (11.9)
Net gain on sales of investments and facilities (8.9) (28.4) (64.3)
Deferred income tax benefit - - (30.0)
Special charges 8.8 - 35.0
Other 6.3 10.9 12.4
Change in assets and liabilities:
Trade accounts and notes receivable 22.8 6.1 (9.9)
Inventory (33.3) (50.8) 12.4
Payables and accrued operating expenses (13.2) 34.4 (1.8)
Employee benefits obligations (17.4) (26.4) 20.2
Other assets and liabilities - net (13.7) (6.6) (30.1)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 42.6 15.5 58.5
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses
and assets 14.0 31.5 19.9
Proceeds from the sale and maturity of
liquid investments - 29.7 -
Proceeds from the sale of investments 78.7 30.0 89.4
Purchase of liquid investments (0.3) (6.0) (24.5)
Purchase of investments (0.1) (1.2) (8.8)
Contributions to investees (3.0) (2.0) (7.7)
Capital expenditures (59.8) (143.3) (86.9)
Other (2.6) 1.4 2.4
- ------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 26.9 (59.9) (16.2)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt 5.5 5.0 15.0
Principal payments on debt (24.3) (8.1) (24.3)
Proceeds from issuance of common stock - 2.4 2.8
Dividends paid on preferred stock (17.8) (20.9) (14.8)
Other (0.8) - (1.7)
- ------------------------------------------------------------------------------
Net cash used in financing activities (37.4) (21.6) (23.0)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 32.1 (66.0) 19.3
Cash and cash equivalents:
Beginning of year 136.8 202.8 183.5
- ------------------------------------------------------------------------------
End of year $168.9 $136.8 $202.8
- ------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 35.1 $ 31.2 $ 31.1
Income taxes 0.1 0.7 0.7
Supplemental schedule of noncash investing and
financing activities:
Debt incurred or assets exchanged directly
for property - 16.2 9.5
Issuance of restricted stock 2.1 4.7 2.5
Notes receivable and stock in partial payment
for asset sales 10.6 - 7.7
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37.
</TABLE>
25
<PAGE>
RESTORING EARNINGS POWER . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying financial statements consolidate the accounts of Armco and
all subsidiaries in which Armco has a controlling interest.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
Armco considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents which consist
primarily of commercial paper, repurchase agreements, Eurodollar time deposits
and money market mutual funds are stated at amortized cost plus accrued
interest, which approximates fair value.
Under the definitions provided in Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, Armco has securities which have been classified as held to
maturity and are, therefore, recorded at amortized cost. At December 31, 1996
and 1995, the securities were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash equivalents $ 139.5 $ 130.1
Restricted collateral deposits 15.5 15.1
- ------------------------------------------------------------------------------
Total securities $ 155.0 $ 145.2
- ------------------------------------------------------------------------------
</TABLE>
The restricted collateral deposits are primarily invested in certificates of
deposit which mature within one year and are principally for equipment
financing, self-insurance programs, and environmental and litigation bonds.
These securities are primarily reported in Other investments. The
classification as long-term is based on the expected term of the collateral
requirement and not necessarily the maturity date of the underlying
securities.
Also included in Other investments at December 31, 1996 were receivables from
the sale of National-Oilwell, recorded at a discounted value of $10.6, which
approximates fair value. At December 31, 1996 and 1995, Other investments
included $11.2 and $8.2, respectively, for Armco's limited partnership
interest in North American Stainless (Note 10). It is not practicable to
estimate the fair value of this closely held limited partnership, where
Armco's ownership interest is approximately 5%. At December 31, 1996 and 1995,
Armco had no material investments in derivative financial instruments.
Inventories
Inventories are valued at the lower of cost or market. Cost of inventories at
most domestic operations is measured on the LIFO -- Last In, First Out --
method. Other inventories are measured principally at average cost. Inventory
balances as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $ 259.0 $ 226.8
Raw materials and supplies 21.4 24.8
Adjustment to state inventories at LIFO value (52.8) (57.3)
- ------------------------------------------------------------------------------
Total 227.6 194.3
- ------------------------------------------------------------------------------
Inventories on average cost:
Finished and semi-finished 11.9 15.5
Raw materials and supplies 7.4 6.4
- ------------------------------------------------------------------------------
Total 19.3 21.9
- ------------------------------------------------------------------------------
Total inventories $ 246.9 $ 216.2
- ------------------------------------------------------------------------------
</TABLE>
Liquidation of LIFO inventory layers caused by certain inventory reductions
(reduced)/increased net income by $(0.1) in 1996, $0.3 in 1995 and $3.6 or
$.03 per share in 1994.
Research and Development Costs
Armco conducts a broad range of research and development activities. These
activities are aimed at improving existing products and manufacturing
processes and developing new products and processes. Research and development
costs are recorded as expense when incurred. The amounts incurred in 1996,
1995 and 1994 were $13.1, $14.0 and $12.0, respectively.
Property, Plant and Equipment
Depreciation is computed using the straight-line method based on the estimated
useful lives of the related assets. Leasehold improvements are depreciated
over the shorter of the life of the related asset or the life of the lease.
Generally, Armco depreciates its property, plant and equipment at annual rates
of 5% for land improvements, 3% - 5% for buildings and 5% - 33% for machinery
and equipment.
Armco's property, plant and equipment balances as of December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 26.6 $ 26.6
Buildings 90.8 88.4
Machinery and equipment 1,117.5 1,039.4
Construction in progress 32.8 53.9
- ------------------------------------------------------------------------------
Total property, plant and equipment 1,267.7 1,208.3
Accumulated depreciation (597.6) (539.8)
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 670.1 $ 668.5
- ------------------------------------------------------------------------------
</TABLE>
During 1996, 1995 and 1994, Armco expended $153.9, $124.7 and $109.9,
respectively, for maintenance and repair of its property, plant and equipment.
The increase in spending in 1996 and 1995 is largely attributable to expenses
related to major facility upgrades and the restart in 1995 of the Mansfield
Operations, which was idled in 1994.
26
<PAGE>
Armco has commitments to purchase property, plant and equipment (including
unexpended amounts relating to projects substantially under way) amounting to
approximately $16.7 at December 31, 1996.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets primarily include goodwill recorded in
connection with the acquisition of Cyclops Industries, Inc. on April 24, 1992.
This goodwill is being amortized using the straight-line method over 40 years.
Also included are goodwill and intangible assets acquired in the purchase of
Douglas Dynamics, LLC on July 2, 1991. These assets are being amortized over
their estimated useful lives, the majority of which do not exceed 17 years.
Annual amortization expense for 1996, 1995 and 1994 was $6.9. At December 31,
1996 and 1995, accumulated amortization of goodwill and other intangible
assets was $35.3 and $28.4, respectively.
Armco assesses whether its goodwill and other intangible assets are impaired
when required by SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, based on an evaluation of
undiscounted projected cash flows through the remaining amortization period.
If an impairment exists, the amount of such impairment is calculated based on
the estimated fair value of the asset.
Earnings Per Share
Primary earnings per share is computed by deducting the amount of dividends on
preferred stock from income. This amount is divided by the weighted average
number of common shares outstanding during the year, plus common equivalent
shares outstanding if the common equivalent shares are dilutive. Common
equivalent shares include dilutive stock options as if the options were
exercised and the proceeds used to acquire common shares. Dilutive stock
options give the right to buy shares at a price which is less than current
market price. The fully diluted per share amounts are not presented in 1996,
1995 and 1994 because such amounts are antidilutive.
Environmental Liabilities
Armco has participated in or funded various cleanup efforts at sites where its
facilities have disposed of wastes, including sites located on its own
properties. Costs related to these efforts are accrued when it is probable
that a liability has been incurred and the amount of that liability can be
reasonably estimated. It is Armco's policy not to accrue environmental exit
costs with respect to ongoing businesses until a decision is made to dispose
of the property.
Concentrations of Credit Risk
Armco is primarily a producer of stainless, electrical and carbon steels and
steel products, which are sold to a number of markets, including automotive,
industrial machinery and equipment, construction, power generation and
appliances. Armco sells domestically to customers primarily in the midwestern
and eastern United States, while 10% of sales are to foreign customers
primarily in Canada, Mexico and western Europe. Approximately 24% of trade
receivables outstanding at December 31, 1996 are due from businesses that
supply the U.S. automotive industry. Except in a few situations where the risk
warrants it, Armco does not require collateral on trade receivables; and while
it believes its trade receivables will be collected, Armco anticipates that in
the event of default it would follow normal collection procedures. Overall,
credit risk related to Armco's trade receivables is limited due to the large
number of customers in differing industries and geographic areas.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to
conform to the 1996 presentation.
2 PENSION AND OTHER EMPLOYEE BENEFITS
Pension Plans
Armco provides noncontributory pension benefits for most employees. The
benefits for most hourly represented employees are based on a fixed dollar
amount per year of service. Effective January 1, 1995, a cash balance program
was established and the pension benefits under the previous formulas were
locked and frozen for most nonrepresented employees. Under the cash balance
program, future increases in earnings will not apply to prior service and lump
sum distributions are available.
The qualified plans have been funded to meet the minimum funding requirements
of the Employee Retirement Income Security Act of 1974. During 1996 and 1995,
contributions of $41.2 and $54.8, respectively, which exceeded the minimum
funding requirements, were made to the plans. As of December 31, 1996, funding
credits of $53.8 were available to offset future minimum funding requirements.
The components of net periodic pension cost, including amounts related to
divested units and assumptions used to determine such expenses, were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the year $ 15.6 $ 13.7 $ 19.1
Interest cost on the projected benefit
obligation 141.0 153.1 149.3
Actual loss (return) on plan assets (252.1) (354.0) 21.9
Net amortization and deferral 112.0 204.3 (163.7)
- ------------------------------------------------------------------------------
Net periodic pension cost $ 16.5 $ 17.1 $ 26.6
- ------------------------------------------------------------------------------
Weighted average discount rate 7.00% 8.50% 7.25%
Weighted average expected long-term rate
of return on assets 8.00% 9.50% 8.25%
Rate of future compensation increases 4.00% 4.00% 4.00%
- ------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost decreased in 1995 primarily due to changes in the
pension provisions for most nonrepresented employees and the higher discount
rate. Net periodic pension expense in 1994 includes $1.5, which was charged to
previously established accruals for divested units.
Net curtailment and settlement losses on pensions of $5.2 in 1994, mainly for
reductions in the work force, were primarily recorded as special charges. A
curtailment loss of $1.7 was recorded in 1995. Curtailment and settlement
losses are not included in the net periodic pension cost above. Certain units
that were previously identified for disposal had hourly employees
participating in multi-employer pension and welfare plans. The total expense
for contributions to those programs, of $1.1 in 1996, $1.7 in 1995, and $2.4
in 1994, are not included in net periodic pension cost shown above.
27
<PAGE>
RESTORING EARNINGS POWER
The following table presents the funded status of pension plans using discount
rates of 7.75% and 7% at December 31, 1996 and 1995, respectively. The assumed
rate of future compensation increases was 4% in both years. Plan assets are
primarily invested in U.S. and foreign equities and debt securities issued by
the U.S. government, U.S. corporations and foreign entities. The funded status
of the pension plans improved during 1996 as a result of favorable investment
returns, the increase in the discount rate, and discretionary contributions to
the plans by Armco.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Plans for which Plans for which
Assets Exceed Accumulated
Accumulated Benefits Total
1996 Benefits Exceed Assets All Plans
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $1,242.3 $ 705.6 $1,947.9
Nonvested benefits 33.2 8.2 41.4
- ------------------------------------------------------------------------------
Accumulated benefit obligation $1,275.5 $ 713.8 $1,989.3
- ------------------------------------------------------------------------------
Projected benefit obligation $1,283.5 $ 716.8 $2,000.3
Plan assets at fair value 1,316.1 691.4 2,007.5
- ------------------------------------------------------------------------------
Projected benefit obligation greater
(less) than plan assets (32.6) 25.4 (7.2)
Reconciliation of funded status to
recorded amounts:
Unrecognized negative prior service (cost) 4.0 (8.5) (4.5)
Unrecognized net gain 148.6 82.3 230.9
Unrecognized transition obligation (29.7) (4.0) (33.7)
Amount required to recognize minimum
liability -- 8.2 8.2
- ------------------------------------------------------------------------------
Accrued pension liability $ 90.3 $ 103.4 $ 193.7
- ------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefits $ 3.8 $2,015.8 $2,019.6
Nonvested benefits 0.1 54.7 54.8
- ------------------------------------------------------------------------------
Accumulated benefit obligation $ 3.9 $2,070.5 $2,074.4
- ------------------------------------------------------------------------------
Projected benefit obligation $ 5.2 $2,097.5 $2,102.7
Plan assets at fair value 4.9 1,908.6 1,913.5
- ------------------------------------------------------------------------------
Projected benefit obligation greater than
plan assets 0.3 188.9 189.2
Reconciliation of funded status to recorded
amounts:
Unrecognized negative prior service -- 7.6 7.6
Unrecognized net gain (loss) (0.8) 56.6 55.8
Unrecognized transition obligation -- (40.0) (40.0)
Amount required to recognize minimum
liability -- 2.9 2.9
- ------------------------------------------------------------------------------
Accrued pension liability (benefit) $ (0.5) $ 216.0 $ 215.5
- ------------------------------------------------------------------------------
</TABLE>
Retiree Health Care and Life Insurance Benefits
In addition to providing pension benefits, Armco provides various health care
and life insurance benefits to most retirees. Most employees become eligible
for these benefits when they retire. Retiree health and life insurance
benefits are funded as claims are paid.
The components of the net periodic postretirement benefit cost and assumptions
used to determine such expenses were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the year $ 4.9 $ 5.6 $ 8.5
Interest cost on accumulated postretirement
benefit obligation 61.8 74.7 66.8
Amortization of plan changes (3.8) (3.7) (1.4)
- ------------------------------------------------------------------------------
Net periodic postretirement benefit cost $62.9 $76.6 $73.9
- ------------------------------------------------------------------------------
Weighted average discount rate 7.00% 8.50% 7.25%
Current year health care trend rate - Pre-age 65 9.25% 10.25% 11.25%
Current year health care trend rate - Post-age 64 7.25% 8.25% 8.25%
Ultimate health care trend rate 5.00% 6.50% 5.25%
Weighted average trend rate 5.60% 7.30% 6.25%
- ------------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefit cost in 1996 decreased primarily due to
the lower discount rate and additional plan amendments.
Net curtailment gains (losses) on postretirement benefits of $10.2 in 1995 and
$(0.8) in 1994 were not included in net periodic postretirement benefit cost.
Total claims paid were approximately $55.2 in 1996, $64.0 in 1995 and $62.6 in
1994.
The following table shows the funded status of the postretirement benefit
plans and the amounts recognized in the Statement of Consolidated Financial
Position as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 672.0 $ 753.5
Fully eligible active plan participants 59.7 84.2
Other active plan participants 51.5 77.4
- ------------------------------------------------------------------------------
Total 783.2 915.1
Plan assets at fair value -- --
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 783.2 915.1
Reconciliation of obligation to recorded amounts:
Unrecognized negative prior service 76.7 49.2
Unrecognized net gains 190.3 78.3
- ------------------------------------------------------------------------------
Accrued postretirement benefit liability $1,050.2 $1,042.6
- ------------------------------------------------------------------------------
Assumptions used to determine obligation:
Discount rate 7.75% 7.00%
Current year health care trend rate - Pre-age 65 8.25% 9.25%
Current year health care trend rate - Post-age 64 6.25% 7.25%
Ultimate health care trend rate 5.75% 5.00%
Weighted average trend rate 6.00% 5.60%
- ------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
The accumulated postretirement benefit obligation decreased in 1996 primarily
due to favorable claims experience, use of Medicare risk HMO's beginning in
1996, and certain changes in retiree benefit programs.
The current year health care trend rates are assumed to decrease one
percentage point per year until they reach the ultimate rate. A one percentage
point increase in the assumed health care trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
approximately $70.0, and increase the annual net periodic postretirement
benefit cost by approximately $7.0.
Employee Benefit Obligations of Former Business Units
Armco has recorded, in its employee benefit obligations, the present value of
estimated pension and health care benefits for former employees associated
with facilities that have been divested. Sundry other-net includes interest
costs of $22.1, $38.5 and $35.8 in 1996, 1995 and 1994, respectively, related
to these liabilities. The decrease in costs in 1996 was primarily due to
increased funding of the pension plans during 1995 and 1996 and lower interest
rates on Armco's accrued other postretirement benefit obligations.
3 INCOME TAXES
Armco files a consolidated U. S. federal income tax return. This return
includes all domestic companies 80% or more owned by Armco and the
proportionate share of Armco's interest in partnership investments. State tax
returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to Armco and its domestic subsidiaries.
The United States and foreign components of Income before income taxes consist
of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $24.4 $22.8 $ 36.0
Foreign 3.0 2.7 1.1
- ------------------------------------------------------------------------------
Total $27.4 $25.5 $ 37.1
- ------------------------------------------------------------------------------
</TABLE>
Provisions (credits) for income taxes for Armco and consolidated subsidiaries
are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U. S. state $ -- $ 0.8 $ 0.8
Foreign 1.4 1.2 0.5
- ------------------------------------------------------------------------------
Total 1.4 2.0 1.3
Deferred:
U.S. federal -- -- (27.3)
U. S. state -- -- (2.7)
- ------------------------------------------------------------------------------
Total -- -- (30.0)
- ------------------------------------------------------------------------------
Provision (credit) for income taxes $ 1.4 $ 2.0 $(28.7)
- ------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
applied to pretax book income with the provision for income taxes in the
Statement of Consolidated Income for the year 1996:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Federal taxes at statutory rate $ 9.6
State income taxes, net of federal benefit 1.6
Reduction in deferred tax valuation allowance (9.8)
- ------------------------------------------------------------------------------
Provision for income taxes $ 1.4
- ------------------------------------------------------------------------------
</TABLE>
During 1996, Armco's capital loss carryforward increased by $45.0 due to a tax
loss associated with the sale of National-Oilwell (Note 11). Net operating
loss carryforwards increased due to the $43.0 net operating loss for tax
purposes incurred in 1996. The difference between the pretax book income of
$27.4 and the 1996 tax loss of $43.0 is primarily due to costs associated with
employee benefits, pensions and restructuring actions, which had been accrued
for financial accounting purposes in prior years, but actually paid in 1996.
Tax basis depreciation for the year, which exceeded depreciation expense
recorded on the books, was another key factor contributing to the tax loss.
In 1994, the income tax benefit recognized of $28.7 was primarily the result
of decreasing the beginning balance of the deferred tax asset valuation
allowance by $30.0 due to the effects, including the elimination of Armco
Steel Company's (ASC) (Note 10) estimated future taxable losses, that the
initial public offering and recapitalization of ASC had on management's
assessment of the amount of deferred tax asset that is more likely than not to
be realized in the future.
At December 31, 1996, Armco had capital and net operating loss (NOL)
carryforwards for federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Capital
expires losses NOL
- ------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 56.0 $ 59.7
1999 -- 106.7
2000 117.4 --
2001 45.0 123.3
2004 -- 9.1
2005 -- 130.3
2006 -- 239.3
2007 -- 186.9
2008 -- 133.3
2009 -- 35.4
2010 -- 53.5
2011 -- 43.0
- ------------------------------------------------------------------------------
Total loss carryforwards $218.4 $1,120.5
- ------------------------------------------------------------------------------
</TABLE>
Armco has $797.0 in U.S. alternative minimum tax net operating losses.
Additionally, Armco has $11.4 of alternative minimum tax credits that have no
expiration.
29
<PAGE>
RESTORING EARNINGS POWER
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss
and tax credit carryforwards. At December 31, 1996 and 1995, the net deferred
tax asset, included in the Statement of Consolidated Financial Position, was
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 2.7 $ 2.4
Deferred tax asset 325.8 326.1
- ------------------------------------------------------------------------------
Net deferred tax asset $328.5 $328.5
- ------------------------------------------------------------------------------
</TABLE>
Major components of Armco's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Tax effects of:
Operating loss and tax credit carryforwards $ 539.5 $ 480.6
Employee benefits 565.4 576.9
Other assets (incl. contingencies and accruals) 159.0 214.0
- ------------------------------------------------------------------------------
Gross deferred tax asset 1,263.9 1,271.5
Valuation allowance (644.4) (669.1)
- ------------------------------------------------------------------------------
Deferred tax asset 619.5 602.4
Property, plant and equipment (138.4) (132.0)
Other liabilities (152.6) (141.9)
- ------------------------------------------------------------------------------
Deferred tax liabilities (291.0) (273.9)
- ------------------------------------------------------------------------------
Net deferred tax asset $ 328.5 $ 328.5
- ------------------------------------------------------------------------------
</TABLE>
Even though Armco has incurred tax losses for the past seven fiscal years,
management believes that it is more likely than not that Armco will generate
taxable income sufficient to realize a portion of the tax benefit associated
with future deductible temporary differences and NOL carryforwards prior to
their expiration. This belief is based upon, among other factors, changes in
operations that have occurred during the last five years, as well as
consideration of available tax planning strategies. Specifically, cost savings
associated with new capital investments are being realized and are expected to
continue to improve operating results. Armco has operated in a highly cyclical
industry and, consequently, has had a history of generating and then utilizing
significant amounts of NOL carryforwards. During the years 1987-1989, Armco
utilized approximately $350.0 of NOL carryforwards. However, management
believes that a valuation allowance is appropriate given the current estimates
of future taxable income. If Armco is unable to generate sufficient taxable
income in the future through operating results, increases in the valuation
allowance will be required through a charge to income. However, if Armco
achieves sufficient profitability to utilize a greater portion of the deferred
tax asset, the valuation allowance will be reduced through a credit to income.
United States income tax returns of Armco for 1992 and prior years have been
subject to examination by the Internal Revenue Service and are closed to
assessments. However, the NOL carryforwards from some of these years remain
open to adjustment. Armco has been in a cumulative net operating loss
carryforward position since 1983 and believes that it has sufficient loss
carryforwards in excess of any potential audit adjustments that might be made
by the Internal Revenue Service for any open years.
4 LONG-TERM DEBT AND OTHER FINANCING
Long-Term Debt
At December 31, 1996 and 1995, Armco's long-term debt, less current
maturities, was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Sinking fund debentures:
8.5% due 2001 $ 28.5 $ 35.0
9.2% due 2000 20.0 25.0
Notes payable:
9.375% due 2000 125.0 125.0
11.375% due 1999 100.0 100.0
Variable rate (LIBOR plus 2.75%) due 2001 31.2 38.6
5.0% due 2000 15.3 20.4
Pollution control revenue bonds due 2005 - 8.125% 12.1 13.2
Variable rate economic development revenue bonds
due 2020 (1996 average 3.71%) 8.5 --
Other 3.7 4.4
- ------------------------------------------------------------------------------
Total $344.3 $361.6
- ------------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December
31, 2001, are as follows: 1997, $27.2; 1998, $27.4; 1999, $127.5; 2000,
$157.6; and 2001, $15.7.
At December 31, 1996, the fair value of Armco's long-term debt, including
current maturities, was approximately $369.0. This amount was determined by
calculating a value based on cash flow yield to maturity and comparing that
amount to market information where possible. The fair value estimate was based
on pertinent information available to management as of December 31, 1996.
Management is not aware of any significant factors that would materially alter
this estimate since that date. The fair value of Armco's long-term debt,
including current maturities, at December 31, 1995 was approximately $385.4.
At December 31, 1996 and 1995, $38.2 and $45.5, respectively, of long-term
debt, including current maturities, represented financing utilized to
construct the thin-slab caster at the Mansfield, Ohio facility. The caster is
pledged as collateral on these loans. At December 31, 1996 and 1995, $26.7 and
$29.6, respectively, of long-term debt, including current maturities, was
financing utilized to construct a cold rolling mill at Armco's Butler,
Pennsylvania facility. The cold rolling mill is pledged as collateral on this
loan.
30
<PAGE>
Bank Credit Agreements
At December 31, 1996, Armco had in place two bank credit facilities, totaling
$170.0. Under a receivables facility, Armco sells substantially all its trade
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In
January 1996, AFC entered into a five-year revolving credit agreement with a
group of banks providing up to $120.0 for revolving credit loans and letters
of credit secured by AFC's receivables. At December 31, 1996, there were no
outstanding borrowings under this credit facility; however, $69.9 of the
facility was used as support for letters of credit.
In January 1996, Armco entered into a three-year revolving credit agreement
with a group of banks providing $50.0 for revolving credit loans secured by
Armco's inventories. This credit agreement subjects Armco to certain
restrictions and covenants related to, among other things, minimum working
capital, minimum net income, current ratio and interest coverage ratio
requirements. At December 31, 1996, there were no outstanding borrowings under
this credit facility.
Capitalized Interest
Armco capitalized interest on projects during construction of $0.8, $5.1 and
$4.5 in 1996, 1995 and 1994, respectively. Capitalized interest for 1995 and
1994 primarily relates to the construction of the thin-slab caster in
Mansfield, Ohio.
Long-Term Leases
Rental expense under operating leases was $7.7 in 1996, $7.7 in 1995 and $7.2
in 1994. At December 31, 1996, commitments to make future minimum lease
payments for operating leases are $7.6 in 1997, $5.2 in 1998, $3.4 in 1999,
$2.1 in 2000, $1.4 in 2001 and $1.7 in the year 2002 and thereafter.
5 SHAREHOLDERS' DEFICIT
Preferred Stock
Armco has outstanding two classes of preferred stock. The two classes rank
equally with respect to dividend payments, redemption and liquidation rights.
The preferred stock ranks senior to Armco's common stock with respect to
dividends and upon liquidation. At December 31, 1996 and 1995, there were
authorized and issuable in series, 6,697,231 shares of Class A preferred stock
with no par value and 5,000,000 shares of $1 par value Class B preferred
stock.
Armco has two series of Class A preferred stock outstanding. The $2.10 Class A
preferred stock pays cumulative dividends at the annual rate of $2.10 per
share. Shareholders of the $2.10 Class A preferred stock have one vote per
share and each share is convertible into 1.27 shares of Armco's common stock.
This series of Class A preferred stock may be redeemed at Armco's option for
$40 per share, plus accrued but unpaid dividends. The $2.10 Class A preferred
stock had a total involuntary liquidation value of $25.5 at December 31, 1996
and 1995.
The $3.625 Class A preferred stock pays cumulative dividends at the annual
rate of $3.625 per share. Shareholders of this series of Class A preferred
stock are entitled to one vote per share and each share is convertible into
6.78 shares of Armco's common stock. The $3.625 Class A preferred stock may be
redeemed at Armco's option at a current price of $52.175 per share, plus
accrued but unpaid dividends. This price declines at 12-month intervals, to
$50 per share on and after October 15, 2002. The $3.625 preferred Class A
stock had a total involuntary liquidation value of $135.0 at December 31, 1996
and 1995.
Armco's outstanding series of Class B preferred stock is nonvoting and pays
cumulative dividends at the annual rate of $4.50 per share. Each share is
convertible into 2.22 shares of Armco's common stock. The Class B preferred
stock may be redeemed at Armco's option for $50 per share, plus accrued but
unpaid dividends. The Class B preferred stock had a total involuntary
liquidation value of $50.0 at December 31, 1996 and 1995.
At December 31, 1996, 1995 and 1994, the number of shares outstanding and book
value of Class A preferred stock were 4,397,231 and $137.6. At December 31,
1996, 1995 and 1994, Armco had outstanding 999,900 shares of Class B preferred
stock with a book value of $48.3.
Common Stock
At December 31, 1996, 22,681,261 unissued shares of Armco's common stock were
reserved for the conversion of preferred stock and 3,536,258 unissued shares
of common stock were reserved for the exercise of stock options and other
stock awards (Note 6).
Activity for the years 1994, 1995 and 1996 related to Armco's common stock was
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Additional
Paid-in
Shares Par Value Capital
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 104,122,974 $ 1.0 $ 951.1
Exercise of options 29,378 -- 0.2
Restricted stock issued -
net of cancellations 512,260 0.1 2.4
Issued for employee savings plan 424,534 -- 2.6
- ------------------------------------------------------------------------------
Balance, December 31, 1994 105,089,146 1.1 956.3
Exercise of options 108,962 -- 0.5
Restricted stock issued -
net of cancellations 587,596 -- 4.1
Issued for employee savings plan 314,544 -- 2.1
Directors' stock purchase plan 2,312 -- --
- ------------------------------------------------------------------------------
Balance, December 31, 1995 106,102,560 1.1 963.0
Exercise of options 3,100 -- --
Restricted stock issued -
net of cancellations 347,313 -- 2.0
Directors' stock purchase plan 4,193 -- --
- ------------------------------------------------------------------------------
Balance, December 31, 1996 106,457,166 $ 1.1 $ 965.0
- ------------------------------------------------------------------------------
</TABLE>
Shareholder Rights Plan
On February 23, 1996, Armco adopted a Shareholder Rights Plan designed to
deter coercive takeover tactics and prevent an acquirer from gaining control
of Armco without offering a fair price to all of Armco's shareholders. This
plan replaces the plan adopted by Armco in 1986, which expired in 1996.
31
<PAGE>
RESTORING EARNINGS POWER
Under the terms of the plan, preferred stock purchase rights were distributed
as a dividend at the rate of one right for each share of common stock held as
of the close of business on June 26, 1996. Until the rights become
exercisable, common stock issued will also have one right attached. Each right
will entitle shareholders to buy one two-hundredth of a share of a currently
unissued series of Class A participating preferred stock of Armco at an
exercise price of $20. Each right will thereafter entitle the holder to
receive upon exercise, common stock or, in certain circumstances, preferred
stock or other securities or assets of the company having a value of $40. The
rights will be exercisable only if a person or group acquires beneficial
ownership of 20% or more of Armco's common stock or announces a tender or
exchange offer, after which such person or group would beneficially own 20% or
more of the common stock or if the Board of Directors declares any person to
be an "adverse person" as defined in the plan. A total of 750,000 shares of
Class A participating preferred stock have been reserved for issuance upon
exercise of the rights.
Armco, except as otherwise provided in the plan, will generally be able to
redeem the rights at $0.0025 per right at any time during a ten-day period
following public announcement that a 20% position in Armco has been acquired
or after the effective date the Board of Directors declares any person to be
an "adverse person." During this ten-day period, Armco may also extend the
time during which it may redeem the rights. The rights are not exercisable
until the expiration of the redemption period. The rights will expire on
June 26, 2006.
Dividends
Under the terms of the inventory credit facility (Note 4), Armco cannot pay
cash dividends on its common stock. In addition, under the terms of indentures
for Armco's 11.375% Senior Notes due 1999 and 9.375% Senior Notes due 2000,
Armco can pay a dividend on its common stock only if it meets certain
financial tests described in the indentures. Armco does not expect to satisfy
these tests and, therefore, Armco does not expect to be able to pay a common
stock dividend or repurchase its capital stock in the near future. The payment
of preferred stock dividends is prohibited if Armco is in default under the
credit facility.
Under Ohio law, at December 31, 1996, the surplus from which Armco is
permitted to pay dividends was $89.3. Under the terms of Ohio law, Armco is
currently not permitted to purchase shares of its capital stock.
The Board of Directors at its January 1997 meeting declared the regular
quarterly dividends payable on both series of Armco's Class A preferred stock
and on its Class B preferred stock.
Accumulated Deficit and Other Shareholders' Equity (Deficit)
Activity for the years 1994, 1995 and 1996 related to Armco's accumulated
deficit and other shareholders' equity (deficit) was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Net Unrealized
Accumulated Gains on
Deficit Equity Securities Other
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1993 $(1,450.3) $ -- $ (0.8)
Net income 77.7 -- --
Preferred stock dividends declared (17.8) -- --
Adjustment to net unrealized gains -- 31.6 --
Foreign currency translation adjustment -- -- 0.5
Deferred compensation on restricted
stock issued -- -- (2.7)
- ------------------------------------------------------------------------------
Balance, December 31, 1994 (1,390.4) 31.6 (3.0)
Net income 29.8 -- --
Preferred stock dividends declared (17.9) -- --
Sale of equity securities -- (31.6) --
Foreign currency translation adjustment -- -- 1.1
Amortization and cancellation of
deferred compensation -- -- 2.1
Deferred compensation on restricted
stock issued -- -- (2.1)
- ------------------------------------------------------------------------------
Balance, December 31, 1995 (1,378.5) -- (1.9)
Net income 32.5 -- --
Preferred stock dividends declared (17.9) -- --
National-Oilwell foreign currency
translation (Note 11) -- -- 1.4
Foreign currency translation adjustment -- -- (0.4)
Amortization and cancellation of
deferred compensation -- -- 2.0
Deferred compensation on restricted
stock issued -- -- (1.2)
- ------------------------------------------------------------------------------
Balance, December 31, 1996 $(1,363.9 ) $ -- $ (0.1 )
- ------------------------------------------------------------------------------
</TABLE>
6 COMMON STOCK OPTIONS
Armco shareholders adopted Common Stock Option Plans in 1983 and 1988. In
addition, stock options may be granted under the 1993 and 1996 long-term
incentive plans. These plans provide for granting options to purchase common
stock for not less than 100% of the market price on the date the option is
granted. The 1983 and 1988 Plans have expired as to new grants. For
outstanding options containing stock appreciation rights, the excess of the
market price of the stock over the option price is accrued. The vesting period
for stock options granted under the long-term incentive plans is two years
from the date of grant and, although they may terminate earlier under certain
conditions, all stock options generally expire 10 years after the grant date.
The long-term incentive plans also provide for issuing stock, subject to
restrictions as to sale and forfeiture over a three to five-year period. As of
December 31, 1996, 2,686,640 shares of common stock were available for
granting of awards under the long-term incentive plans.
32
<PAGE>
During 1994, 1995 and 1996, stock option activity was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Weighted Average
1994 Shares Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 3,015,774 $ 8.98
Granted 464,000 4.75
Exercised (42,389) 4.98
Forfeited (23,750) 7.38
Expired (316,139) 12.57
- ------------------------------------------------------------------------------
Outstanding at December 31, 3,097,496 8.05
- ------------------------------------------------------------------------------
Exercisable at December 31, 2,241,996 8.85
- ------------------------------------------------------------------------------
1995
- ------------------------------------------------------------------------------
Outstanding at January 1, 3,097,496 $ 8.05
Granted 1,019,333 6.58
Exercised (347,646) 5.06
Forfeited (56,566) 6.23
Expired (519,100) 10.20
- ------------------------------------------------------------------------------
Outstanding at December 31, 3,193,517 7.58
- ------------------------------------------------------------------------------
Exercisable at December 31, 1,524,536 9.10
- ------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------
Outstanding at January 1, 3,193,517 $ 7.58
Granted 947,158 5.24
Exercised (3,100) 4.94
Forfeited (159,645) 6.15
Expired (441,672) 9.38
- ------------------------------------------------------------------------------
Outstanding at December 31, 3,536,258 6.80
- ------------------------------------------------------------------------------
Exercisable at December 31, 1,741,811 7.66
- ------------------------------------------------------------------------------
</TABLE>
The following relates to the options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Exercise Price Ranges
$4.56 - $7.56 $10.13 - $13.69
- ------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding:
Number of shares 2,984,758 551,500
Weighted average exercise price $5.90 $11.65
Average remaining contractual life 7 years 2 years
Options exercisable:
Number of shares 1,190,311 551,500
Weighted average exercise price $5.82 $11.65
- ------------------------------------------------------------------------------
</TABLE>
In 1996, Armco adopted SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 provides that companies may choose to change their method of
accounting for stock options to a fair value method using an option pricing
model. Armco uses the intrinsic value approach specified in Accounting
Principle Board Opinion No. 25 in accounting for stock options and did not
change from this method upon adoption of the new standard. Had Armco changed
its accounting method, its net income for 1996 would have been reduced by $1.7
to $30.8, or $.12 per share. Net income for 1995 would have been reduced by
$1.3 to $28.5, or $.10 per share. These pro forma adjustments were calculated
using the Black-Scholes option pricing model to value all stock options
granted since January 1, 1995, under the following assumptions in each year:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Risk free interest rate 5.5% 7.75%
Expected volatility 30% 35%
Expected life of options 5 years 5 years
Expected dividends none none
- ------------------------------------------------------------------------------
</TABLE>
Based on the option pricing model, options granted during 1996, 1995 and 1994
had fair values of $1.90, $2.91 and $1.93 per share, respectively.
During 1996, 1995 and 1994, Armco issued to certain employees 570,158, 660,762
and 534,060 shares of common stock, subject to restrictions, with weighted-
average grant-date fair values of $5.69, $6.63 and $4.75 per share,
respectively. Total compensation cost recognized in income for stock-based
employee compensation awards was $1.1 in 1996, $2.2 in 1995 and $1.3 in 1994.
33
<PAGE>
RESTORING EARNINGS POWER
7 SEGMENT INFORMATION
The following are Armco's business segments: (1) Specialty Flat-Rolled Steels,
consisting of plants in Butler, Pennsylvania and Coshocton, Dover, Mansfield
and Zanesville, Ohio that produce flat-rolled stainless, electrical and carbon
steels for the automotive, industrial machinery and equipment, construction
and service center markets; international trading companies, that buy and sell
steel and manufactured steel products; and, until September 30, 1994, a
stainless steel plate producer; and (2) Fabricated Products, consisting of
operations in Sharon and Wheatland, Pennsylvania and Warren, Ohio that produce
steel tubular products for the industrial machinery, construction and
appliance markets, as well as plants in Milwaukee, Wisconsin, Rockland, Maine
and Johnson City, Tennessee, that manufacture snowplows and ice control
equipment for light trucks, including four-wheel drive pickup trucks and
utility vehicles.
Armco's industry segment information is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales:
Specialty Flat-Rolled Steels $1,421.2 $1,277.0 $1,114.4
Fabricated Products 302.8 282.9 323.2
- ------------------------------------------------------------------------------
Total $1,724.0 $1,559.9 $1,437.6
- ------------------------------------------------------------------------------
Operating profit: (1)
Specialty Flat-Rolled Steels $72.9 $76.0 $40.5
Fabricated Products 22.8 22.0 30.9
Corporate general (21.0) (29.0) (32.2)
- ------------------------------------------------------------------------------
Total $ 74.7 $ 69.0 $ 39.2
- ------------------------------------------------------------------------------
Capital expenditures:
Specialty Flat-Rolled Steels $ 55.9 $ 153.6 $ 89.4
Fabricated Products 3.1 5.3 6.2
Corporate general 0.8 0.6 0.8
- ------------------------------------------------------------------------------
Total $ 59.8 $ 159.5 $ 96.4
- ------------------------------------------------------------------------------
Depreciation:
Specialty Flat-Rolled Steels $ 50.4 $ 43.4 $ 40.2
Fabricated Products 6.7 7.6 6.6
Corporate general 1.6 1.8 2.0
- ------------------------------------------------------------------------------
Total $ 58.7 $ 52.8 $ 48.8
- ------------------------------------------------------------------------------
Identifiable assets:
Specialty Flat-Rolled Steels $1,052.1 $1,034.8 $ 871.0
Fabricated Products 163.2 173.0 190.9
Corporate general (2) 566.9 517.7 696.4
Discontinued operations 85.6 171.1 176.6
- ------------------------------------------------------------------------------
Total $1,867.8 $1,896.6 $1,934.9
- ------------------------------------------------------------------------------
<FN>
(1) In 1996, operating profit for the Fabricated Products segment includes
special charges totaling $8.8. In 1994, operating profit for the Specialty
Flat-Rolled Steels segment includes special charges totaling $35.0. (See Note
8).
(2) Corporate general identifiable assets at December 31, 1996 includes $163.0
of cash and cash equivalents and deferred tax assets of $328.5 (See Note 3).
</TABLE>
During 1996 and 1995, operations in the Specialty Flat-Rolled Steels segment
sold $2.5 and $5.6, respectively, of its products to the Fabricated Products
segment. Sales from the Fabricated Products segment to the Specialty Flat-
Rolled Steels segment were not material. Sales between foreign and domestic
companies are also not material. Intersegment sales are eliminated in
consolidation and prices generally approximate cost.
8 SPECIAL CHARGES
In the fourth quarter of 1996, Armco recognized a special charge of $5.9 to
record a change in the estimated loss on the sale of its nonresidential
construction business. In 1993, Armco decided to exit this business, along
with several other operations. Armco continued to operate the construction
business while attempting to complete a sale. In 1996, Armco negotiated a sale
agreement and the business was sold effective January 1, 1997. Based on the
agreement, the 1996 charge primarily relates to the writedown of certain
assets and recognition of additional employee benefit liabilities.
Also in the fourth quarter of 1996, Armco recorded a $2.9 special charge
primarily for the writedown of inventory and severance costs related to its
decision to discontinue a line of light truck equipment manufactured by
Armco's snowplow and ice control equipment business.
In 1994, Armco recorded a special charge of $20.0 for expenses associated with
the temporary idling and restructuring of its steelmaking facilities in
Mansfield and Dover, Ohio. The decision to idle the facilities came after the
failure of a key piece of equipment at the Mansfield plant crippled
production, and management undertook a study to determine if losses could be
reduced by idling the facilities. These facilities were idled commencing in
March 1994. The Dover plant started limited production in early 1995 and by
mid-year was fully operational. The Mansfield plant remained idle until
construction of a new thin-slab continuous caster and renovation of its hot
strip mill were completed late in the first quarter of 1995. The special
charge consisted of $11.2 for employee benefits, primarily group insurance and
supplemental unemployment benefits; and $8.8 to write down inventories and
fixed assets. Reserves established for these charges have been used for their
intended purpose.
Also in 1994, Armco recognized a charge of $15.0 related to a decision by
Eastern Stainless Corporation to sell substantially all of its assets to
Avesta Sheffield Holding Company, a stainless steel plate manufacturer, for
cash and the assumption of certain liabilities. The sale closed on March 14,
1995. Approximately $8.6 of the charge was to cover increases in pension and
other employee benefit obligations, $1.8 was for the writedown of assets and
$4.6 was for operating losses, transaction fees and expenses. At December 31,
1996, the nonemployee benefit reserves had been used for their intended
purposes, while the pension and other employee benefit liabilities will be
paid out over many years.
34
<PAGE>
9 LITIGATION AND ENVIRONMENTAL MATTERS
There are various claims pending involving Armco and its subsidiaries
regarding product liability, patent, employee benefits, antitrust,
environmental matters, reinsurance and insurance arrangements, and other
matters arising out of the conduct of Armco's business. The actual liability
for legal claims against Armco at December 31, 1996 cannot be determined; but
in Armco's opinion, based on current facts and circumstances, the ultimate
liability resulting from such claims will not materially affect its
consolidated financial position or liquidity. However, it is possible that due
to fluctuations in Armco's operating results, future developments with respect
to such matters could have a material effect on the results of operations in
future interim or annual periods.
Like other manufacturers, Armco is subject to various environmental laws.
These laws necessitate expenditures to meet environmental compliance
requirements at Armco's facilities and to remediate sites where contamination
has occurred. Compliance costs are either expensed as they are incurred or,
when appropriate, are recorded as capital expenditures. Environmental exit
costs are accrued when a decision is made to dispose of a property.
Armco is a defendant or a potentially responsible party in proceedings
alleging liability for remediation, property damage or personal injury related
to certain past waste disposal sites. Armco has also received claims for
indemnification for some properties it has previously owned or leased. In most
cases involving waste disposal sites, Armco is one of many potentially
responsible parties. In these cases, joint and several liability could be
imposed on Armco or other parties; thus, theoretically, one party could be
held liable for all costs related to a site. However, based on its experience
and a review of current claims, Armco believes that any ultimate liability
will be apportioned between Armco and other financially viable parties,
generally on the basis of volume and/or toxicity of wastes disposed at the
specific sites. While such actions are being contested, the outcome of
individual matters cannot be predicted with assurance. Armco accrues its
estimate of remediation and other costs for sites where it is probable that a
liability has been incurred and the amount can be reasonably estimated.
In establishing reserves, Armco assesses the range of possible liability and
determines the most likely outcome for its liabilities within the range of
reasonably estimated outcomes. Costs are estimated based on experience with
site remediation, an understanding of current environmental laws and
regulations, environmental assessments, the existence of other financially
viable parties, expected remediation methods and the years in which Armco is
expected to make payments toward each remediation (which range from the
current year to 30 years or more in the future). Liabilities are not
discounted. These estimates are reviewed quarterly to assess changed
conditions, including current interpretation of environmental laws and
regulations. Adjustments are made if changed conditions have a significant
effect on cost estimates. Reserves have not been adjusted for expected
recoveries from insurers or other parties.
The recorded amounts are currently believed by management to be sufficient.
However, such estimates could significantly change in future periods to
reflect new laws or regulations, advances in technologies, additional sites
requiring remediation, new requirements at existing sites and Armco's share of
liability at multi-party sites. It is not possible to determine whether
additional loss, due to such changed circumstances, will occur or to
reasonably estimate the amount or range of any potential additional loss.
Armco believes, based on current facts and circumstances known to Armco, that
the ultimate liability for pending claims, contingent liabilities and
environmental matters identified to date will not materially affect its
consolidated financial condition or liquidity. However, it is possible that,
due to fluctuations in Armco's operating results, future developments with
respect to such matters could have a material effect on the results of
operations in future interim or annual periods.
At December 31, 1996, Armco had recorded, in its Statement of Consolidated
Financial Position, $17.5 in Other accruals and $67.0 in Other liabilities for
estimated probable costs relating to legal and environmental matters.
10 OTHER INVESTMENTS
Armco Steel Company, L.P. (ASC)
On April 7, 1994, ASC, a limited partnership 50% owned by a subsidiary of
Armco, completed an initial public offering and recapitalization. As part of
this transaction, the business and assets of ASC were transferred to AK Steel
Holding Corporation, a newly formed, publicly traded company. In exchange for
its interest in ASC, Armco received 1,023,987 shares of AK Steel common stock,
representing approximately four percent of the outstanding shares. The number
of shares received and other terms of the restructuring and recapitalization
were determined by arm's-length negotiations.
As a result of the transaction, in 1994 Armco recognized a nonrecurring pretax
gain of $36.5, primarily as a result of its release from certain obligations
to make future cash payments to the former joint venture and recognition of
deferred pension curtailment gains established at ASC's formation. At the same
time, Armco reevaluated its deferred tax asset position in light of this
transaction and concluded that the amount of deferred tax asset, for which
realization of a future benefit was more likely than not, had increased by
$30.0. This amount was recorded as a tax benefit.
In 1995, Armco sold all of the shares in AK Steel it had received as a result
of the initial public offering and recapitalization for a total of $27.2,
recognizing a gain of the same amount.
Under a toll-rolling agreement that is in effect through the year 2002, AK
Steel hot rolls stainless steel for Armco.
35
<PAGE>
RESTORING EARNINGS POWER
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS
through their respective subsidiaries, First Stainless, Inc. and Stainless
Steel Invest, Inc. In 1994, First Stainless, Inc. sold 90% of its 50% equity
interest in NAS to its partner for $73.0 in cash, recording a $26.1 gain on
the sale. In connection with the transaction, Armco entered into an annual
supply contract with NAS to provide the former joint venture with semi-
finished stainless steel at market prices.
11 DISCONTINUED OPERATIONS
Aerospace and Strategic Materials
Oregon Metallurgical Corporation (Oremet), formerly 80% owned by Armco, was
part of the Aerospace and Strategic Materials business segment that Armco sold
in 1985. Prior to the sale, Armco filed a suit on behalf of Oremet in the U.S.
Claims Court, claiming refunds and interest on federal and state taxes.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any proceeds of this action, net of taxes imposed on Oremet and the buyer. In
1988, as a result of a settlement with the Internal Revenue Service (IRS),
Armco recorded a $15.2 net of tax adjustment to its gain on the sale of this
business segment. In 1996, Armco and Oremet reached agreement with the IRS
that the 1988 refund of taxes and interest should not itself have been taxable
to Oremet, further increasing the net proceeds, and resulting in Armco
recording an additional $6.5 gain on the sale.
National-Oilwell
National-Oilwell, which sells oil field tubular pipe, and produces and sells
drilling and production equipment and process pumps used in the world's oil
and gas services industry, was a joint venture equally owned by subsidiaries
of Armco and USX Corporation.
Armco and USX reached a definitive agreement, dated September 22, 1995, to
sell their respective partnership interests in National-Oilwell to an entity
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell
management. The sale was completed on January 16, 1996. For its 50% interest,
Armco received $77.0 in cash, and receivables with a face value of $13.0. The
receivables were recorded at a discounted value of $10.6. After recording $2.1
for recognition of deferred foreign translation losses and miscellaneous
expenses, no gain or loss was recognized on the transaction.
Armco recognized equity income from National-Oilwell until September 22, 1995,
when the definitive agreement was signed. After that date, Armco's investment
in National-Oilwell was equal to its estimated net realizable value and no
additional equity income was recorded. The results of National-Oilwell are
reported as discontinued operations in the Statement of Consolidated Income.
Armco Financial Services Group (AFSG)
AFSG consists of insurance companies that have stopped writing new business
and are being liquidated. These companies are accounted for as discontinued
operations under the liquidation basis of accounting, whereby all future cash
inflows and outflows are considered. Armco believes, based on current facts
and circumstances, including the opinion of outside actuaries, that future
changes in estimates of net losses relating to the ultimate liquidation of
AFSG will not be material to Armco's financial position or liquidity. The
following sets forth AFSG's summarized financial information at December 31,
1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Invested assets $172.3
Reinsurance recoverable 107.4
Other 18.2
- ------------------------------------------------------------------------------
Total assets 297.9
- ------------------------------------------------------------------------------
Liabilities:
Losses and loss reserves (net of future investment
income of $45.3) 184.9
Other 27.4
- ------------------------------------------------------------------------------
Total liabilities 212.3
- ------------------------------------------------------------------------------
Net assets $ 85.6
- ------------------------------------------------------------------------------
</TABLE>
Currently, insurance regulators having supervisory authority over the AFSG
companies retain substantial control over certain transactions, including the
payment of dividends to Armco.
There are various pending matters relating to litigation, arbitration and
regulatory affairs, including matters related to Northwestern National
Insurance Company, an AFSG company currently involved in, among other matters,
litigation with respect to certain reinsurance programs. The ultimate
liability from such matters at December 31, 1996 cannot be determined; but, in
Armco's opinion, based on current facts and circumstances and the views of
outside counsel and advisors, any liability resulting will not materially
affect Armco's financial position or liquidity. However, it is possible that
due to fluctuations in Armco's results, future developments with respect to
changes in the ultimate liability could have a material effect on future
interim or annual results of operations.
36
<PAGE>
12 QUARTERLY INFORMATION (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
4th 3rd 2nd 1st
1996: Year Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,724.0 $ 413.6 $ 429.2 $ 450.8 $ 430.4
Cost of products sold (1,549.7) (360.0) (381.2) (415.6) (392.9)
Special charges (1) (8.8) (8.8) -- -- --
Income from discontinued
operation (2) 6.5 -- 6.5 -- --
Net income (loss) 32.5 13.2 16.4 (4.0) 6.9
Per share:
Income from discontinued
operation 0.06 -- 0.06 -- --
Net income (loss) 0.14 0.08 0.11 (0.08) 0.02
- ------------------------------------------------------------------------------
1995:
- ------------------------------------------------------------------------------
Net sales $ 1,559.9 $ 396.8 $ 404.1 $ 390.6 $ 368.4
Cost of products sold (1,392.7) (358.9) (364.1) (342.0) (327.7)
Gain on sale of
stock (3) 27.2 -- -- 25.9 1.3
Income from discontinued
operation (2) 6.3 -- 2.0 2.8 1.5
Net income (loss) 29.8 (8.4) (0.1) 35.9 2.4
Per share:
Income from discontinued
operation 0.06 -- 0.02 0.03 0.01
Net income (loss) 0.11 (0.12) (0.04) 0.30 (0.02)
- ------------------------------------------------------------------------------
<FN>
(1) See Note 8.
(2) See Note 11.
(3) See Note 10.
</TABLE>
<TABLE>
PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------
1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
1996 price per share: High $ 6 1/2 $ 6 $ 5 1/8 $ 4 5/8
Low 5 1/4 4 3/4 4 1/8 3 5/8
1995 price per share: High 7 1/4 7 1/2 7 3/4 6 1/2
Low 6 1/8 6 5 7/8 5 3/8
- ------------------------------------------------------------------------------
Preferred Stock Class A $2.10
Quarterly dividend per share: .525
1996 price per share: High 24 1/2 24 1/4 23 5/8 24
Low 23 1/2 22 3/4 22 22 1/8
1995 price per share: High 23 3/8 24 1/8 26 1/4 25 3/8
Low 20 22 1/4 22 7/8 23 3/8
- ------------------------------------------------------------------------------
Preferred Stock Class A $3.625
Quarterly dividend per share: .90625
1996 price per share: High 52 51 1/4 47 3/8 45 1/4
Low 49 5/8 47 44 1/4 42 3/8
1995 price per share: High 54 1/4 56 1/4 57 3/4 51 7/8
Low 48 3/8 48 49 3/8 47 5/8
- ------------------------------------------------------------------------------
Preferred Stock Class B $4.50
Quarterly dividend per share: 1.125
1996 price per share: High 49 3/8 49 3/4 47 5/8 47 1/2
Low 47 1/2 46 3/4 45 3/4 45 3/8
1995 price per share: High 46 3/4 49 1/4 50 3/8 49 1/4
Low 41 1/2 45 5/8 48 5/8 47
- ------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
Exhibit 21
ARMCO INC.
SUBSIDIARIES
<CAPTION>
State/Country of
Name Incorporation
---- ------------------
<S> <S>
AFSG Holdings, Inc. Delaware
Armco Financial Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco Funding Corporation Delaware
Armco Insurance Group Inc. Delaware
Armco Limited United Kingdom
Armco Management Corporation Delaware
Armco Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Compass Insurance Company Delaware
Douglas Dynamics, L.L.C. Delaware
FSA Services Corp. Delaware
Materials Insurance Company Cayman Islands
Northwestern National Insurance Company Wisconsin
of Milwaukee, Wisconsin
Talbico, Inc. New York
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-24258, 33-24259, 33-60405, 33-54351, 33-54353, 33-54355,
33-65946, and 333-01687 and in Post-Effective Amendment No. 1 to
Registration Statement Nos. 33-20852 and 33-20853 of Armco Inc. on Form
S-8 of our reports dated February 5, 1997 on the consolidated financial
statements and financial statement schedule of Armco Inc. and
subsidiaries appearing in and incorporated by reference in this Annual
Report on Form 10-K of Armco Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. STATEMENT OF CONSOLIDATED
FINANCIAL POSITION AND STATEMENT OF CONSOLIDATED INCOME
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 168,900
<SECURITIES> 0
<RECEIVABLES> 149,600
<ALLOWANCES> 3,800
<INVENTORY> 246,900
<CURRENT-ASSETS> 571,800
<PP&E> 1,267,700
<DEPRECIATION> 597,600
<TOTAL-ASSETS> 1,867,800
<CURRENT-LIABILITIES> 358,200
<BONDS> 344,300
<COMMON> 1,100
0
185,900
<OTHER-SE> (399,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,867,800
<SALES> 1,724,000
<TOTAL-REVENUES> 1,724,000
<CGS> 1,549,700
<TOTAL-COSTS> 1,549,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,300
<INCOME-PRETAX> 27,400
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 26,000
<DISCONTINUED> 6,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,500
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.25
</TABLE>
<PAGE>
Exhibit 99
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of Armco Inc. ("Armco") consists of (i)
150,000,000 shares of Common Stock, par value $.01 per share ("Armco
Common Stock"), of which, at February 28, 1997, 106,457,166 shares were
issued and outstanding; (ii) 6,697,231 shares of Class A Preferred Stock,
no par value ("Class A Preferred Stock"), issuable in series, of which,
at February 28, 1997, 1,697,231 shares of Armco $2.10 Cumulative
Convertible Preferred Stock ("$2.10 Preferred Stock") were issued and
outstanding and 2,700,000 shares of $3.625 Cumulative Convertible
Preferred Stock ("$3.625 Preferred Stock") were issued and outstanding;
and of which 750,000 shares had been designated Participating Preferred
Stock (the "Participating Preferred Stock"), none of which were issued;
and (iii) 5,000,000 shares of Class B Preferred Stock, par value $1 per
share ("Class B Preferred Stock"), issuable in series, of which, at
February 28, 1997, 999,900 shares of $4.50 Cumulative Convertible
Preferred Stock ("$4.50 Preferred Stock") were issued and outstanding.
The Class A Preferred Stock and the Class B Preferred Stock are sometimes
referred to herein as the "Armco Preferred Stock." No class of
authorized capital stock of Armco, including the Armco Common Stock, has
preemptive or other subscription rights.
Armco is authorized to issue the Armco Preferred Stock in one or
more series with such designations, powers, preferences and rights, and
qualifications, limitations or restrictions thereon, as are permitted
under Armco's Amended Articles of Incorporation and as shall be stated in
the resolutions providing for the issue thereof as may be adopted by the
Armco Board of Directors. The Class A Preferred Stock and the Class B
Preferred Stock rank equally, whether or not dividend rates, dividend
payment dates, redemption or liquidation prices per share of any series
of Class A Preferred Stock differ from those of the Class B Preferred
Stock, and the holders of Class A Preferred Stock and Class B Preferred
Stock shall be entitled to the receipt of dividends and of the amounts
distributable upon liquidation, dissolution or winding up, in proportion
to their respective rates or liquidation prices, without preference or
priority one over the other. Shares of Class A Preferred Stock which
shall have been purchased, redeemed or otherwise acquired by Armco,
including shares which have been converted or exchanged into another
class or series of capital stock or other securities of Armco, shall be
deemed retired and shall not be reissued or resold. Shares of Class B
Preferred Stock purchased, redeemed or otherwise acquired by Armco will
be restored to the status of authorized but unissued shares of Class B
Preferred Stock, without designation as to series, and may thereafter be
issued by the Armco Board of Directors.
Each issued and outstanding share of Armco Preferred Stock is
currently convertible into shares of Common Stock -- each $2.10 Preferred
Stock share into 1.27 shares, each $4.50 Preferred Stock share into 2.22
shares and each $3.625 Preferred Stock share into 6.78 shares; provided,
that the conversion rights of any shares of Armco Preferred Stock called
for redemption shall terminate at the close of business on the business
day (or on the fifth day, in the case of the $3.625 Preferred Stock)
preceding the date fixed for redemption, unless default shall be made in
payment of the redemption price. The number of shares of Armco Common
Stock into which such Armco Preferred Stock shares are convertible is
subject to adjustment under certain circumstances, such as splits or
combinations of the Armco Common Stock or dividends on the Armco Common
Stock paid in Armco Common
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Stock or non-cash assets. In addition, under certain circumstances
involving a Change of Control (as defined in the terms of the $3.625
Preferred Stock), each issued and outstanding share of the $3.625
Preferred Stock may be converted, at the option of the holder, for a
limited period into a number of shares of Armco Common Stock determined
by formula. These special conversion rights of the $3.625 Preferred
Stock may deter certain mergers, tender offers or other takeover
attempts.
On February 23, 1996, the Armco Board of Directors adopted a
Stockholder Rights Plan and declared a dividend distribution of one
preferred stock purchase right for each outstanding share of Armco Common
Stock to stockholders of record at the close of business on June 26,
1996. Each Right, when exercisable, entitles the registered holder to
purchase from Armco a unit consisting of one two-hundredths of a share of
Participating Preferred Stock. Prior to the earlier of the Rights
Distribution Date and the Expiration Date (each as hereinafter defined),
one Right will be distributed with each share of Armco Common Stock
issued. See "Preferred Stock Purchase Rights." Armco's prior existing
Stockholder Rights Plan expired on June 26, 1996.
The documents defining the terms of the Armco Common Stock, the
Rights and the Armco Preferred Stock are available for inspection upon
request at the office of the Secretary of Armco. Such documents are also
on file with and available for inspection at the Securities and Exchange
Commission, 450 Fifth Street N.W., Washington, D.C. 20549, and the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The statements set forth below are only summaries of such terms and
provisions and reference should be made to such documents and instruments
for complete statements of such terms and provisions.
Dividend Rights
Subject to the prior rights of the holders of Armco Preferred Stock
to receive dividends in cash at the rate provided for, and subject to any
restrictions or limitations contained in the express terms and provisions
of any shares of Armco Preferred Stock, dividends may be declared and
paid upon the Armco Common Stock, as and when determined by the Armco
Board of Directors, out of funds legally available therefor. At the
April 23, 1993, annual meeting, Armco's shareholders voted to reduce the
par value of Armco's common stock to $0.01 per share from $1.00 per
share. As a result, $102.7 million was transferred from Armco's stated
capital account for its common stock to additional paid-in capital,
increasing surplus from which Armco is permitted, under Ohio law, to pay
dividends on its common and preferred stock issues. Armco is
incorporated in Ohio. In addition, the corporate statute of Ohio
provides that Ohio corporations that recognize immediately the full
amount of their transition obligation under Statement of Financial
Accounting Standards ("SFAS"), SFAS 106, as Armco did, could increase the
amount available for payment of dividends by adding to the corporation's
surplus at the time of the dividend the amount of the difference between
the reduction in the corporation's surplus that resulted from the
immediate recognition of the SFAS 106 transition obligation and the
amount of the transition obligation that would have been recognized at
the time of the dividend had the corporation elected to amortize its
recognition of such transition obligation. At December 31, 1996, the
amount from which Armco is permitted to pay dividends under this
provision was $89.3 million.
The express terms and provisions of the $4.50 Preferred Stock
provide that the holders of shares of $4.50 Preferred Stock are entitled
to receive cumulative dividends at the annual rate of $4.50 per share
before cash dividends are paid on the Armco Common Stock. The express
terms and provisions of the $3.625 Preferred Stock provide that the
holders of shares of $3.625 Preferred Stock are entitled to receive
cumulative dividends at the annual
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rate of $3.625 per share before cash dividends are paid on the Armco
Common Stock. The express terms and provisions of the $2.10 Preferred
Stock provide that the holders of shares of $2.10 Preferred Stock are
entitled to receive cumulative dividends at the annual rate of $2.10 per
share before cash dividends are paid on the Armco Common Stock. If Armco
has failed to pay any accrued cumulative dividends on any shares of Armco
Preferred Stock or has not paid or declared and provided for the
dividends on outstanding shares of Armco Preferred Stock for the then
current dividend period, Armco may not purchase or redeem any shares of
Armco Common Stock. See "Dividend Payment Restrictions".
As defined by the Internal Revenue Service, Armco did not have
"current earnings or profits" in 1996. Accordingly, all dividend
distributions paid in 1996 should be considered a return of capital
and/or capital gain, depending on the holder's tax basis in the stock.
Similarly, any dividends paid by Armco on its stock in 1997 will be
taxable as ordinary income only to the extent of Armco's "earnings and
profits."
Voting Rights
Except as otherwise required by law, the holders of Armco Common
Stock, as well as the holders of Class A Preferred Stock, are entitled at
all times to one vote for each share of such stock owned by them. Except
as set forth below, the holders of Class B Preferred Stock are not
entitled to vote on any matter.
If proper and timely notice is given by any shareholder before the
time fixed for holding a meeting for the election of directors that such
shareholder desires to cumulate his votes at such election, and if an
announcement of the giving of such notice is made upon the convening of
the meeting, each shareholder shall have the right to cumulate his votes
and give one candidate as many votes as equal the number of directors to
be elected multiplied by the number of votes to which he is entitled, or
to distribute them on the same principle among as many candidates as such
shareholder sees fit.
Shareholders who are entitled to vote in the election of directors
generally may nominate director candidates for election. Such
shareholders must deliver written notice thereof to the Secretary of
Armco not later than (i) with respect to an election to be held at any
annual meeting of shareholders, 90 days prior to the date one year from
the date of the immediately preceding annual meeting of shareholders, and
(ii) with respect to an election to be held at any special meeting of
shareholders for the election of directors, the close of business on the
tenth day following the date on which notice of such meeting is first
given to shareholders. The provision relating to director nomination may
have the effect of delaying, deferring or preventing a change in control
of Armco.
In the event of a default in the payment of the equivalent of six
quarterly dividends payable to holders of the Class A Preferred Stock or
the Class B Preferred Stock, the respective holders of the outstanding
shares of the Class A Preferred Stock or the Class B Preferred Stock, as
the case may be, voting as a class, are entitled to elect two additional
directors to serve on the Armco Board of Directors until such default is
cured. In addition, as a prerequisite to the adoption of (i) any
amendment of the Armco Amended Articles of Incorporation (the "Armco
Articles") materially altering any existing provision of the Class A
Preferred Stock or the Class B Preferred Stock, such amendment must
receive the affirmative approval of at least two-thirds of the
outstanding shares of the Class A Preferred Stock or the Class B
Preferred Stock, as the case may be, voting as a class, and (ii) any
amendment of the Armco Articles which increases the authorized number of
shares of the Class A Preferred Stock or the Class B Preferred Stock or
creates any class of shares which ranks equally with or prior to the
Class A Preferred Stock or the Class B Preferred Stock, such amendment
must
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receive the affirmative approval of a majority of the outstanding shares
of the Class A Preferred Stock or the Class B Preferred Stock, as the
case may be, voting as a class.
Liquidation Rights
In the event of any voluntary or involuntary liquidation of Armco,
the holders of shares of the $4.50 Preferred Stock will be entitled to
receive from the assets of Armco, prior to any payment to the holders of
Armco Common Stock, the sum of $50 per share, plus dividends accrued and
unpaid to the date of payment. In the event of the voluntary liquidation
of Armco, the holders of shares of the $2.10 Preferred Stock will be
entitled to receive from the assets of Armco, prior to any payment to the
holders of Armco Common Stock, the sum of $40 per share, plus dividends
accrued and unpaid to the date of payment. In the event of the
involuntary liquidation of Armco, the holders of shares of the $2.10
Preferred Stock similarly will be entitled to receive from the assets of
Armco the sum of $15 per share, plus dividends accrued and unpaid to the
date of payment, prior to any distribution to holders of Armco Common
Stock. In the event of any voluntary or involuntary liquidation of
Armco, the holders of shares of the $3.625 Preferred Stock will be
entitled to receive from the assets of Armco, prior to any payment to the
holders of Armco Common Stock, the sum of $50 per share, plus dividends
accrued and unpaid to the date of payment. After such payments to the
holders of Armco Preferred Stock, any remaining assets available for
distribution to common shareholders will be distributed to the holders of
the Armco Common Stock pro rata in accordance with their respective
shares.
Redemptions
Shares of the $2.10 Preferred Stock may be redeemed at Armco's
option for a purchase price of $40 per share, plus dividends accrued and
unpaid to the date of redemption. Shares of the $3.625 Preferred Stock
may be redeemed at Armco's option on or after October 15, 1996 for a
purchase price per share starting at $52.1750 and declining, at 12-month
intervals, to $50 on and after October 15, 2002, plus dividends accrued
and unpaid to the date of redemption. Shares of the $4.50 Preferred
Stock may be redeemed at Armco's option for a purchase price of $50 per
share, plus dividends accrued and unpaid to the date of redemption.
Notice of any redemption of shares of Armco Preferred Stock shall be
given not less than thirty days prior to the date fixed for redemption to
the holders of record of the shares to be redeemed by mail to the
respective addresses of such holders as the same shall appear on the
stock books of Armco and, if the Armco Board of Directors so determines,
by publication of notice in the manner prescribed by the Board of
Directors.
Dividend Payment and Stock Purchase Restrictions
Armco has restrictive covenants under various loan agreements
relating to the payment of dividends on, or the purchase of, its capital
stock. At December 31, 1996, Armco and Armco Funding Corporation had two
credit facilities with a group of banks to provide for borrowings up to
$170 million on a revolving credit basis with security provided by
certain of Armco's receivables and inventories. Under a receivables
purchase agreement, Armco sells substantially all its trade receivables
to a wholly owned subsidiary, Armco Funding Corporation. These
receivables are used to secure a $120 million facility between Armco
Funding Corporation and the banks. This facility has a five-year term
and expires in the year 2000. Under an inventory credit facility, Armco
has a revolving credit agreement with a group of banks providing $50
million for revolving credit loans secured by Armco's inventories. This
facility has a three-year term and expires in 1998. The inventory credit
agreement subjects Armco to certain restrictions and covenants related
to, among other things, minimum level requirements relating to working
capital, net income, current ratio and interest coverage ratio. The
inventory credit facility permits the payment of dividends on the
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outstanding $4.50 Preferred Stock, the outstanding $3.625 Preferred Stock
and the outstanding $2.10 Preferred Stock so long as Armco is not in
default under the credit facility.
Under the terms of the inventory credit facility, Armco cannot pay
cash dividends on its common stock. In addition, under the terms of the
indentures for Armco's 11.375% Senior Notes due 1999, and 9.375% Senior
Notes due 2000, Armco can pay a dividend on the Armco Common Stock if it
meets certain financial tests described in the indentures. Armco does
not expect to satisfy these tests described in such indentures during the
remainder of 1997. In addition to preventing Armco from paying dividends
on the Armco Common Stock, the inability to meet such financial tests
prohibits Armco from repurchasing its capital stock.
Under Ohio law, at December 31, 1996, the surplus from which Armco
is permitted to pay dividends was $89.3 million. Under the terms of Ohio
law, Armco is currently not permitted to purchase shares of its capital
stock.
Preferred Stock Purchase Rights
The Rights are issued under a Rights Agreement between Armco and
Fifth Third Bank. Each Right entitles the registered holder to purchase
a unit consisting of one two-hundredths of a share (a "Unit") of
Participating Preferred Stock at a purchase price of $20.00 per Unit,
subject to adjustment.
The Rights are attached to all Armco Common Stock certificates
representing shares outstanding, and no separate Rights Certificates were
distributed. The Rights will separate from the Armco Common Stock and a
distribution date will occur upon the earliest of (i) ten business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 20% or more of the outstanding
shares of Armco Common Stock (the "Stock Acquisition Date") or (ii) ten
business days following the commencement of a tender offer or exchange
offer that would if consummated result in a person or group beneficially
owning 20% or more of such outstanding shares of Armco Common Stock or
(iii) ten business days after the Board of Directors of the Company shall
declare any Person to be an "Adverse Person," upon a determination that
such person, alone or together with its affiliates and associates, has or
will become the beneficial owner of 10% or more of the outstanding shares
of Armco Common Stock (provided that any such determination shall not be
effective until such Person has become the Beneficial Owner of 10% or
more of the outstanding shares of Armco Common Stock) and a determination
by at least a majority of the "Continuing Directors" (who generally are
those directors who were directors of Armco on February 23, 1996 or who
subsequently became directors and whose elections or nominations were
approved by a majority of the continuing directors, including
consultation with such persons as such directors shall deem appropriate,
that (a) such beneficial ownership by such person is intended to cause,
is reasonably likely to cause or will cause the Company to repurchase the
Armco Common Stock beneficially owned by such person or to cause pressure
on the Company take action or enter into a transaction or series of
transactions intended to provide such person with short-term financial
gain under circumstances where the Board of Directors determines that the
best long-term interests of the Company and its stockholders would not be
served by taking such action or entering into such transactions or series
of transactions at the time or (b) such beneficial ownership is causing
or is reasonably likely to cause a material adverse impact (including,
but not limited to, impairment) of relationships with customers or
impairment of the Company's ability to maintain its competitive position)
on the business or prospects of the Company or (c) such beneficial
ownership otherwise is determined to be not in the best interests of the
Company and its
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stockholders, employees, customers and communities in which the Company
and its subsidiaries do business.
However, the Board of Directors may not declare a person to be an
Adverse Person if, prior to the time that the person acquired 10% or more
of the shares of Armco Common Stock then outstanding, such person
provided to the Board of Directors in writing a statement of the person's
purpose and intentions in connection with the proposed acquisition of
Armco Common Stock, together with any other information reasonably
requested of the person by the Board of Directors, and the Board of
Directors, based on such statement and reasonable inquiry and
investigation as it deems appropriate, determines to notify and notifies
such person in writing that it will not declare the person to be an
Adverse Person; provided, however, that the Board of Directors may
expressly condition in any manner a determination not to declare a person
an Adverse Person on such conditions as the Board of Directors may
select, including, without limitation, such person's not acquiring more
than a specified amount of stock and/or on such person's not taking
actions inconsistent with the purposes and intentions disclosed by such
person in the statement provided to the Board of Directors. In the event
that the Board of Directors should at any time determine, upon reasonable
inquiry and investigation, that such person has not met or complied with
any conditions specified by the Board of Directors, the Board of
Directors may at any time thereafter declare the person to be an Adverse
Person.
Until the Distribution Date (i) the Rights will be evidenced by the
Armco Common Stock certificates and will be transferred with and only
with such Armco Common Stock certificates, (ii) new Armco Common Stock
certificates issued after June 26, 1996 will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender
for transfer of any certificates for Armco Common Stock outstanding will
also constitute the transfer of the Rights associated with the Armco
Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on June 26, 2006, unless earlier redeemed
by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Armco Common
Stock as of the close of business on the Distribution Date and,
thereafter, the separate Rights Certificates alone will represent the
Rights. Except for certain issuances in connection with outstanding
options and convertible securities and as otherwise determined by the
Board of Directors, only shares of Armco Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that the Board of Directors determines that a person is
an Adverse Person or, at any time following the Distribution Date, a
persons becomes the beneficial owner of 25% or more of the then-
outstanding shares of Armco Common Stock, each holder of a Right will
thereafter have the right to receive at the time specified in the Rights
Agreement, (x) upon exercise and payment of the exercise price, Armco
Common Stock (or, in certain circumstances, cash, property or other
securities of Armco) having a value equal to two times the exercise price
of the Right or (y) at the discretion of the Board of Directors, upon
exercise and without payment of the exercise price, Armco Common Stock
(or, in certain circumstances, cash, property or other securities of
Armco) having a value equal to the difference between the exercise price
of the Right and the value of the consideration which would be payable
under clause (x). Notwithstanding the foregoing, following the
occurrence of any of the events set forth in this paragraph, all Rights
that are, or (under circumstances specified in the Rights Agreement)
were, beneficially owned by any Acquiring Person or Adverse Person will
be null and void. However, Rights are not exercisable following the
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occurrence of either of the events set forth above until such time as the
Right are no longer redeemable by Armco as set forth by Armco.
In the event that, at any time following the Stock Acquisition Date,
(i) Armco is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation (other
than a merger which follows an offer described in second preceding
paragraph), or (ii) 50% or more of the Company's assets or earning power
is sold or transferred, each holder of a Right (except Rights which
previously have been voided) shall thereafter have the right to receive,
upon exercise, common stock of the acquiring company having a value equal
to two times the exercise price of the Right. The events set forth are
hereinafter referred to as the "Triggering Events."
The Purchase Price payable, and the number of Units of Preferred
stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution
(i) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Preferred Stock, (ii) if holders of the
Preferred Stock are granted certain rights or warrants to subscribe for
Preferred Stock or convertible securities at less than the current market
price of the Preferred Stock, or (iii) upon the distribution to holders
of the Preferred Stock of evidences of indebtedness or assets (excluding
regular quarterly cash dividends) or of subscription rights or warrants
(other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the
Purchase Price. No fractional Units will be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the
Preferred Stock on the last trading date prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in
part, at a price of $0.0025 per Right, at any time until 10 business days
following the Stock Acquisition Date; provided, however, that with
certain exceptions the Company shall be so entitled to redeem the Rights
only if the Board of Directors then consists of a majority of Continuing
Directors. Moreover, redemption would not be permitted after 10 business
days following the effective date of any declaration by the Board of
Directors that any persons an Adverse Person. After the redemption
period has expired, the Company's right of redemption may be reinstated
if an Acquiring Person or Adverse Person reduces his beneficial ownership
to less than 105 of the outstanding shares of Armco Common Stock in a
transaction or series of transactions not involving the Company and there
are no other Acquiring Persons or Adverse Persons. Immediately upon the
action of the Board of Directors ordering redemption of the Rights, the
Rights will terminate and the only right of the holders of Rights will be
to receive the $0.0025 redemption price.
Until a Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends. While the distribution of the
Rights will not be taxable to stockholders or to the Company,
stockholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for stock (or
other consideration) of the Company or for common stock of the acquiring
company as set forth above.
Other than those provisions relating to the principal economic terms
of the Rights, any of the provisions of the Rights Agreement may be
amended by the Board of Directors of the Company prior to the
Distribution Date. After the Distribution Date, the provisions of the
Rights Agreement may be amended by the Board in order to cure any
ambiguity, to make changes which do not adversely affect the interests of
holders of Rights (excluding the interests of any Acquiring Person or
Adverse Person), or to shorten or lengthen any time
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period under the Rights Agreement; provided, however, that no amendment
to adjust the time period governing redemption shall be made when the
Rights are not redeemable; and provided further, that any amendment to
the redemption provision shall be effective only if the Board of
Directors consists of a majority of Continuing Directors.
Participating Preferred Stock
The Participating Preferred Stock purchasable upon exercise of the
Rights will be non-redeemable and will rank in parity with all other
series of Armco Preferred Stock as to the payment of dividends and
distribution of assets. Each share of Participating Preferred Stock will
be entitled to receive a preferential quarterly dividend equal to the
greater of (i) $75 or (ii), subject to certain adjustments, 200 times all
dividends or other distributions, other than a dividend payable in shares
of Armco Common Stock or a subdivision of the outstanding shares of Armco
Common Stock, declared on the Armco Common Stock, since the last dividend
payment date. In the event of any liquidation of Armco, the holders of
the Participating Preferred Stock will receive a preferred liquidation
payment of $7,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, and, if greater, will be entitled to
receive an aggregate liquidation payment equal to 200 times the payment
made per share of Armco Common Stock, subject to certain adjustments.
Each share of Participating Preferred Stock will have one vote. The
Participating Preferred Stock is not convertible into Armco Common Stock
or any other security of Armco, and is not redeemable. The foregoing
rights of the Participating Preferred Stock are protected against
dilution in the event additional shares of Armco Preferred Stock or other
capital stock are issued pursuant to a stock split, stock dividend or
similar recapitalization.
Miscellaneous
The Armco Common Stock has no conversion rights, and there are no
redemption or sinking fund provisions applicable thereto.
The Fifth Third Bank is transfer agent and registrar for the Armco
Common Stock, $2.10 Preferred Stock, $3.625 Preferred Stock and $4.50
Preferred Stock.
The Armco Common Stock, $2.10 Preferred Stock, $3.625 Preferred
Stock and $4.50 Preferred Stock are traded on the New York Stock
Exchange, the principal market therefor. In addition, the Armco Common
Stock is traded on the Midwest Stock Exchange and other regional
exchanges.
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