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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, 1997
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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
9% Senior Notes, due 2007 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
$739,157,803 as of February 27, 1998.
As of the close of business on February 27, 1998, there were 107,843,544
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1997 --
Parts I, II, and IV of this report.
Proxy Statement for the 1998 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 1998 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. Armco is the largest domestic producer of stainless sheet and strip and
electrical steels, based on tons shipped. 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.
Armco's strategic objective is to enhance its position as a leading
domestic producer of specialty flat-rolled steels by focusing on its strong
market position, especially in the automotive chrome and electrical steel
markets. Armco intends to strengthen its position in these markets by
continuing to focus on its core specialty steel business, by utilizing its
recently upgraded and improved facilities to produce higher quality products
and by providing improved customer service.
Business Segments
The Company operates in two business segments: Specialty Flat-Rolled
Steels and Fabricated Products. Information on the amounts of revenue,
operating results and identifiable assets attributable to each of Armco's
business segments, set forth in Note 8 of the Notes to Financial Statements in
Armco's Annual Report to Shareholders for the year ended December 31, 1997, 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, 1997, 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 sheet and strip form
and the Zanesville Operations finish stainless and electrical sheet and strip.
In addition, until the end of 1997, the Mansfield Operations produced
commodity grades of carbon steel sheet, most of which was coated at a
galvanizing facility at the Dover Operations. Currently, Dover is buying
carbon steel for its galvanizing operations from other sources. The segment
also includes the results of European trading companies that buy and sell
steel and manufactured steel products.
The stainless and electrical steel industry is a relatively small but
distinct segment of the overall steel industry that represented approximately
2.4% of domestic steel tonnage but accounted for approximately 14% of domestic
steel revenues in 1997. These steels differ from basic carbon steel by their
metallurgical composition. Electrical steels have properties that make them
desirable in the generation and distribution of electricity. Stainless steels
are made with a high alloy content, which
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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
grow due to 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 sheet and
strip products that are used in a diverse range of consumer durables and
industrial applications. During the last three years, approximately 77% of
Armco's sales of specialty flat-rolled steel has been finished stainless and
electrical steels, 11% has been specialty semi-finished and 10% has been
carbon steel. The remaining sales in this segment of Armco's business are
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.
Armco is the leading producer of chrome stainless 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" finish utilized for automotive and appliance trim and 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 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-
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Oriented ("CRNO"), used for electrical motors, generators and lighting
ballasts; and TRAN COR[registered trademark]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
$188.5 million at December 31, 1997, and $205.8 million at December 31, 1996.
The decrease in 1997 was due to a reduction in carbon steel volume and lower
stainless and electrical steel prices. While substantially all of the orders
on hand at year-end 1997 are expected to be shipped in 1998, 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 175-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit and a 175-ton
vacuum degassing unit for refining molten metal that, in turn, feed two double
strand continuous casters. The melt capacity at Butler is approximately
950,000 cast tons. 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 and two z-high
mills for cold reduction, four anneal and pickle lines, stack annealing
furnaces, three bright anneal lines 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.
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. Douglas Dynamics, which is
headquartered in 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 and Fisher through
independent distributors in the United States and Canada.
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-- Sawhill Tubular manufactures a wide range of steel pipe and tubular
products for use in the non-residential construction, industrial, plumbing and
heating markets at plants in Sharon and Wheatland, Pennsylvania and Warren,
Ohio.
-- Greens Port Industrial Park consists of 500 acres on the Houston Ship
Channel and leases land, buildings and rail car storage facilities to third
parties and operates a deep water loading dock on the channel.
Armco's order backlog for its Fabricated Products segment was $24 million
at December 31, 1997 and $34 million at December 31, 1996. The 1997 backlog
included backordered snowplow and ice control products. The backlog orders
decreased this year as production kept pace with demand for snowplow and ice
control products. While substantially all of the orders in hand at year-end
1997 are expected to be shipped in 1998, such orders, as is customary in these
industries, are subject to modification, extension or cancellation.
Employees
At December 31, 1997, 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.
Competition
The Company faces intense competition from domestic and foreign steel
producers, foreign producers of components and other products and
manufacturers of competing products other than steel, including aluminum,
plastics, composites and ceramics. Competition is based primarily on price,
with factors such as reliability of supply, service and quality also being
important in certain segments.
In addition to existing competition, a carbon steel company has announced
plans to enter the specialty steel market. In late 1996, AK Steel
Corporation, an integrated steel company, announced plans to build a steel
finishing facility in Rockport, Indiana that will include equipment capable of
processing specialty steel. When completed, this facility will provide AK
Steel with substantial stainless steel processing and finishing capacity.
Increases in the production capacity and efficiency of AK Steel and other
domestic producers, together with possible new entrants into the specialty
steel market, are expected to result in intensified competition that could
exert downward pressure on price and market share.
Armco's competitors in the domestic galvanized carbon steel market
include many of the large integrated and mini-mill flat rolled producers.
Since 1989, significant flat-rolled mini-mill capacity has been constructed
and these mini-mills now compete with integrated domestic steel producers in
most flat-rolled steel markets. Mini-mills generally rely on less capital-
intensive hot metal sources, have smaller, non-unionized workforces resulting
in lower employment costs per ton shipped and are relatively free of many of
the employee, environmental and other obligations that have traditionally
burdened non-mini-mill steel producers. There is significant flat-rolled and
galvanized capacity under construction or announced with various planned
commissioning dates in the next several years. Given the increased competition
that is expected as the new capacity comes on line, the Company decided to
eliminate production of carbon steel products at its Mansfield Operations.
Armco's Dover Operations, which previously used carbon steel produced at
Mansfield, is purchasing carbon steel from other sources.
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Competition is also presented by foreign producers. Some 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. Depending on a number of market
factors, including the strength of the dollar, import levels, and the
effectiveness of U.S. trade laws, pricing of the Company's products could be
adversely affected.
Low-priced foreign imports of specialty steels were at record high
volumes for 1997, adversely affecting volume and pricing experienced by
domestic companies like Armco. As a result, industry trade groups are
gathering 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 of the outcome if cases are filed.
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 Armco's 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
A discussion of environmental matters is incorporated herein by reference
from pages 23, 29 and 37 under the captions "Environmental Matters",
"Environmental Liabilities" and "Litigation and Environmental Matters",
respectively, of the Annual Report to Shareholders for the year ended December
31, 1997.
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 $15.3
million, $13.1 million and $14 million, respectively, on research in the years
1997, 1996 and 1995.
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Discontinued Operations
Armco Financial Services Group ("AFSG")
AFSG consists of insurance companies that have ceased 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 870 at
December 31, 1996 and 713 at December 31, 1997.
Claims are paid from AFSG's investment portfolio and the related
investment income from such portfolio. The portfolio had a market value of
$174.9 million at December 31, 1997. AFSG believes the existing invested
assets, related future income and other assets will provide sufficient funds
to meet all future claims payments.
AFSG estimates that 67% 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.
There are various pending matters relating to litigation, arbitration and
regulatory affairs arising out of the runoff operations of AFSG companies,
including matters related to Northwestern National Insurance Company ("NNIC"),
a runoff company involved in, among other matters, litigation with respect to
certain reinsurance programs.
In March, 1997 a group of international companies, previously affiliated
with AFSG and sold in 1991, filed an application for voluntary liquidation in
the United Kingdom. NNIC is currently investigating its exposure with respect
to transactions entered into with these companies. Armco believes that its
investment in AFSG will not be materially affected as a result of pending
claims, contingent liabilities or matters related to this matter.
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.
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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 ("SUB"), Insurance Agreement, Pension Agreement and Program of
Hospital-Medical Benefits for Pensioners and Surviving Spouses and sought 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 remained 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. The court ordered
that the claims of the Warner plaintiffs for pension benefits in addition to
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those guaranteed by the Pension Benefit Guaranty Corporation ("PBGC") may be
brought only in the Ricke case, discussed below. Further, as a result of the
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Court's decision in Ricke concerning non-PBGC guaranteed pension benefits, the
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only claims that remained in Warner were for welfare benefits (e.g., medical
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benefits, SUB benefits, life insurance benefits, vacation pay, etc.) under
collective bargaining agreements. The parties agreed to settle all claims on
December 30, 1997. Final settlement agreements are being prepared for
execution by each plaintiff. The case will be dismissed with prejudice upon
execution of the agreements by all parties.
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 for the
purpose of recovering from Reserve Mining Company ("Reserve") assets to
satisfy Reserve's liability for pension benefit entitlements which were in
addition to those guaranteed by the PBGC. The complaint alleged that Armco
was 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 were the subject of this action were part of the class settlement of
USWA v. Armco. Approximately 1,500 members of the class signed individual
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releases (19 members who did not were plaintiffs in Warner) releasing Armco
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from all claims, liabilities, etc. based upon or which arose 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. The parties in the Ricke action agreed
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to a settlement of all issues on November 3, 1997. The case has been
dismissed with prejudice and the matter is concluded.
Cornerstones Litigation. An action was filed by Cornerstones Municipal
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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
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to add owners of some 1,500 residences within the Kingsbridge Municipal
Utility District ("Kingsbridge"). Subsequently, the Kingsbridge claims were
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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
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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 Court of Texas.
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On May 11, 1995, the Supreme Court of Texas denied plaintiffs' application for
writ of error, concluding the
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Cornerstones matter in favor of Armco. On February 22, 1996, the District
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Court of Harris County granted summary judgment in favor of Armco in the
severed Kingsbridge action. On April 10, 1996, an amended summary judgment
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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
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al. v. Armco Steel Corporation, et al., was filed in the 127th District Court
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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
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other plaintiff homeowners commenced a similar action, styled Harris W.
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Arthur, et al. v. Monsanto Company, et al., in the 133rd Judicial District
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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
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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
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filed after an effort to have the Cornerstones complaints certified as a class
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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
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before the 127th District Court. On January 28, 1997, a majority of the
homeowners in Irons were nonsuited and dismissed their claims against Armco.
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Environmental Proceedings. Most environmental actions involving Armco
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relate to alleged contamination at off-site treatment and disposal sites.
Other claims sometimes arise from contractual obligations for properties Armco
previously owned or leased and from regulatory actions. In most 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. Armco intends to assert all meritorious legal and equitable
defenses that are available to it with respect to environmental matters.
Based on Armco's analysis of the claims against it for contamination,
including the presence of other PRPs, Armco's experience in resolving similar
claims, and in some instances the type of contamination and expected
remediation costs, Armco does not believe that its liability, if any, for
these claims will materially impact 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. See information on Environmental Matters set forth on pages 23, 29
and 37 under the respective captions "Environmental Matters", "Environmental
Liabilities" and "Litigation and Environmental Matters" of the Annual Report
to Shareholders for the year ended December 31, 1997.
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. Armco has entered into a settlement with the DOJ and the
United States Environmental Protection Agency which resolves Armco's liability
regarding this matter.
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On February 27, 1995, the Ohio Environmental Protection Agency ("OEPA")
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 is working with OEPA to achieve
final resolution of this matter. No proposed penalties were included in the
NOV and Armco cannot reasonably estimate potential penalties, if any, based on
current information.
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, 1997.
Executive Officers of Armco
The executive officers of Armco as of March 17, 1998, were as follows:
<TABLE>
<CAPTION>
Years
Age as of Tenure in of Service
Name March 17, 1998 Office Office(1) with Armco
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<S> <C> <C> <C> <C>
James F. Will 59 Chairman, President and
Chief Executive Officer 1994 (2) 6
Jerry W. Albright 61 Vice President and
Chief Financial Officer 1997 1
James L. Bertsch 54 Vice President and Treasurer 1989 32
John B. Corey 54 Vice President, President - 1994 19
Douglas Dynamics, L.L.C.
John N. Davis 39 Vice President and Controller 1996 6
Gary R. Hildreth 59 Vice President, General Counsel
and Secretary 1993 27
Gary L. McDaniel 51 Vice President - Operations 1996 5
M. Dennis McGlone 48 Vice President - Commercial 1996 6
Pat J. Meneely 46 Vice President - Information
and Organizational
Effectiveness 1995 3
DeWayne W. Tuthill 61 Vice President - Purchasing,
Materials Management and
Coated Products 1998 (3) 0
- ------------------------
9
<PAGE>
<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, Meneely and Tuthill. 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 he was Vice President and Chief
Financial Officer of Cyclops Industries, Inc. Immediately prior to joining
Armco, Mr. Meneely worked as an executive consultant and held executive
positions with Sara Lee Hosiery and Wheeling-Pittsburgh Steel Corporation (a
manufacturer of steel). Mr. Tuthill previously served as Group Executive Vice
President at Wheeling-Pittsburgh Steel Corporation since October of 1995.
Having been with Wheeling-Pittsburgh since 1989, Mr. Tuthill also held the
positions of executive vice president of operations and vice president -
purchasing, traffic and raw materials.
(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, 1998, Mr. Tuthill was elected Vice President
- - Purchasing, Materials Management and Coated Products.
</TABLE>
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 27, 1998, there were 20,980 common stock shareholders of record.
Other information required by this item is incorporated herein by reference
from pages 35 and 39 of the Annual Report to Shareholders for the year ended
December 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In millions, except per share amounts)
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $1,829.3 $1,724.0 $1,559.9 $1,437.6 $1,664.0
Special charges - net (2) -- (8.8) -- (35.0) (165.5)
Income (loss) from continuing
operations 77.1 26.0 23.5 65.8 (247.5)
Income (loss) per common share
from continuing operations (3) 0.55 0.08 0.05 0.46 (2.56)
Total assets 1,881.3 1,867.8 1,896.6 1,934.9 1,904.7
Long-term debt and lease obligations 306.9 344.3 361.6 363.8 379.7
Long-term employee benefit obligations 1,178.1 1,200.2 1,165.9 1,221.9 1,249.9
Class B common stock of subsidiary (4) -- -- -- -- 9.7
- -------------------------------
<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.
10
<PAGE>
(2) Special charges primarily relate to the shutdown, sale and/or
rationalization of operating facilities.
(3) Basic and diluted earnings per share are equal.
(4) 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>
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 18-23 following the caption "Management's Discussion and
Analysis" of the Consolidated Financial Statements in the Annual Report to
Shareholders for the three years ended December 31, 1997.
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 management's estimates and beliefs and are intended to be, and are
hereby identified as, "forward-looking statements" for purposes of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These include statements in the paragraphs entitled Outlook for 1998, Armco
Financial Services Group (AFSG), Liquidity And Capital Resources,
Environmental Matters and The Year 2000 Issue in the section entitled
Management's Discussion and Analysis and in the Letter to Shareholders
contained in the Annual Report to Shareholders and in Note 1, Summary of
Significant Accounting Policies, relating to Concentration of Credit Risk;
Note 9, Litigation and Environmental Matters; and Note 11, Discontinued
Operations, relating to AFSG in the Notes to Consolidated Financial Statement
in the Annual Report to Shareholders incorporated herein by reference.
Armco cautions readers that such forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
those expected by management. These factors include, but are not limited to,
the following: risks of a downturn in the general economy or in the highly
cyclical steel industry; changes in demand for Armco's products; unplanned
plant outages, equipment failures or labor difficulties; actions by Armco's
foreign and domestic competitors; unexpected outcomes of major litigation and
contingencies; changes in U.S. trade policy and actions respecting imports;
disruptions in the supply of raw materials; actions by reinsurance companies
with which AFSG does business or foreign or domestic insurance regulators; and
changes in application or scope of environmental regulations applicable to
Armco.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 24-38 of the Annual Report to Shareholders for the year ended
December 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<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
1998 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. Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 *
2. Consolidated Balance Sheets as of December 31, 1997 and 1996 *
3. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 *
12
<PAGE>
4. Notes to Financial Statements *
5. Independent Auditors' Report *
6. Responsibility for Financial Reporting *
- ----------------
* Incorporated in this Annual Report on Form 10-K by reference to pages 24-38
of the Annual Report to Shareholders for the year ended December 31, 1997.
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). Amended Severance Benefit Agreement
10(d). 1988 Restricted Stock Plan (4)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (5)*
10(f). Executive Supplemental Deferred Compensation Plan (6)*
10(g). Pension Plan for Outside Directors (7)*
10(h). Key Management Severance Policy (8)*
10(i). Minimum Pension Plan (9)*
10(j). Stainless Steel Toll Rolling Services Agreement (10)
13
<PAGE>
10(k). Rights Agreement dated as of February 23, 1996 between Armco Inc.
and Fifth Third Bank (11)
13. Annual Report to Shareholders for the year ended December 31, 1997.
(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,
1997.)
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, 1997 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(i) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(5) 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).
(6) 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).
(7) 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).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1990.
(9) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1991.
14
<PAGE>
(10) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report
on Form 10-K for the year ended December 31, 1993.
(11) 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, 1997.
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 17,
1998.
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 17, 1998.
By JAMES F. WILL By DOROTHEA C. GILLIAM
- -------------------------------------- -------------------------------
James F. Will Dorothea C. Gilliam
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 PAULA H.J. CHOLMONDELEY By BURNELL R. ROBERTS
- ------------------------------------- ------------------------------
Paula H.J. Cholmondeley Burnell R. Roberts
Director Director
By DAVID A. DUKE By JOHN D. TURNER
- -------------------------------------- ------------------------------
David A. Duke John D. Turner
Director Director
-18-
<PAGE>
EXHIBIT INDEX
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
10(c). Amended Severance Benefit Agreement
13. Annual Report to Shareholders for the year ended December 31, 1997.
(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,
1997.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
- ------------------------
<PAGE>
, 1998
---------
CONFIDENTIAL
Dear:
Armco Inc. (the "Company") considers it essential to the best interests
of its stockholders to foster the continuous employment of its executive
management. In this connection, the Company's Board of Directors (the
"Board") has recognized that, as is the case with many publicly held
corporations, the possibility of a change in control exists and that such
possibility, and the uncertainty and questions which it may raise among
members of the Company's management, could result in the departure or
distraction of management to the detriment of the Company and its
stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of management,
including yourself, to their assigned duties without distraction in the face
of potentially disturbing circumstances arising from the possibility of a
change in control of the Company, although no such change is now contemplated.
To induce you to remain in the employ of the Company and in consideration
of the mutual promises contained in this letter, the Company agrees that you
shall receive the benefits set forth in this letter ("Agreement") if your
employment with the Company terminates in connection with or following a
"change in control" of the Company as defined in Section 2 hereof.
This Agreement when fully executed supersedes your previously existing
change in control/severance agreement with the Company dated
, and such agreement is hereby deemed null and void.
- -------------------
1. Term of Agreement. This Agreement shall commence on the date hereof
and shall continue in effect through the later of:
(a) if a change in control has occurred while this Agreement is in
effect, the fifth anniversary of the date of a change in control or, if later,
the date all benefits promised hereunder are fully paid; or
<PAGE>
(b) if no change in control has occurred, December 31, 1998; provided,
however, that commencing on January 1, 1999 and each January 1 thereafter
until a change in control shall have occurred, the term of this Agreement
shall automatically be extended for one additional year unless, not later than
September 30 immediately preceding such January 1, the Company shall have
given written notice that it does not wish to extend this Agreement.
Notwithstanding the foregoing, this Agreement shall cease to be operative and
shall be of no further force and effect if your employment terminates for any
reason prior to a "change in control".
2. Change in Control and Potential Change in Control. No benefits shall
be payable hereunder unless (i)
there shall have been a "change in control" of the Company, and (ii) your
employment by the Company shall thereafter have terminated in accordance with
the provisions of Sections 3 or 4 below.
(a) A "change in control" means and shall be deemed to have occurred if:
(1) any "person," as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities;
(2) during any period of two consecutive years (not including any period
prior to the execution of this Agreement), individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (1), (3), or (4) of this Section 2.
(a)) whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved cease for any reason to constitute at least a majority thereof;
(3) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity)
2
<PAGE>
more than 80% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as herein above defined) acquires more than 20% of the combined voting power
of the Company's then outstanding securities; or
(4) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(b) You agree that, subject to the terms and conditions of this
Agreement, in the event of a potential change in control of the Company, you
will remain in the employ of the Company for a period of six months from the
occurrence of such potential change in control of the Company. For purposes
of this agreement, a "potential change in control" of the Company shall be
deemed to have occurred if:
(1) the Company enters into an agreement, the consummation of which
would result in the occurrence of a change in control of the Company;
(2) any person (including the Company) publicly announces an intention
to take or to consider taking actions which if consummated would constitute a
change in control of the Company;
(3) any person, as defined in Section 2(a)(1) above, becomes the
beneficial owner, directly or indirectly, of securities of the Company
representing 9.5% or more of the combined voting power of the Company's then
outstanding securities; or
(4) the Board adopts a resolution to the effect that for purposes of
this Agreement, a potential change in control of the Company has occurred.
3. Termination Following Change in Control Other than for Good Reason.
You shall be entitled to the benefits described below upon the termination of
your employment for (i) Disability, (ii) Retirement, (iii) Death, or (iv)
Cause at any time in connection with or following the occurrence of a "change
in control" during the term of this Agreement.
(a) Disability. If you shall have been absent from your duties with the
Company as a result of your incapacity due to physical or mental illness then,
subject to Section 7, for a period of time equal in duration to the period
during which you qualify for salary continuation, short-term disability and/or
long term disability benefits (herein called your "covered period of
absence"):
3
<PAGE>
(1) you shall be paid salary continuation, short-term disability and/or
long term disability benefits under the Company's plans or policies;
(2) the Company may not terminate your employment on account of
Disability (or because of your absence by reason of such disability) until the
expiration of your covered period of absence and, any termination for
disability must be (i) effected by a Notice of Termination delivered not more
than 30 days prior to the date of expiration of your covered period of absence
and (ii) may not provide for a Date of Termination which is prior to the date
of expiration of your covered period of absence;
(3) upon termination of your employment because of Disability or, if
earlier, upon the expiration of your covered period of absence, you shall
qualify for and be paid long-term disability benefits under the Company's
long-term disability plan as in effect for you immediately prior to the first
date of such covered period of absence; provided such benefits shall not be
less than monthly payments which are at least equal to sixty percent of your
highest monthly base salary rate in effect prior to the first day of your
covered period of absence plus health, life, dental, vision insurance benefits
at least equal to those you would have enjoyed had you retired as of the first
day of your covered period of absence; and
(4) your covered period of absence shall be continuous service with the
Company for all purposes, including without limitation, continuous service
under the Company's employee benefit plans [as defined in Section 3(3) of the
Employee Retirement Security Act of 1974, as amended ("ERISA")], and the
Company's fringe benefit policies.
(b) Retirement. Subject to Section 7, if your employment terminates as
a result of your Retirement, you shall be entitled to receive such amounts as
provided under the Armco Inc. Noncontributory Pension Plan as amended by the
Retirement Accumulation Pension Plan, or any successor or substitute plan (the
"Pension Plan"), and any supplemental pension benefits under the Armco Inc.
Supplemental Executive Retirement Plan ("SERP"), if applicable, or any other
relevant retirement policy applicable to you. For the purposes of this
Agreement, "Retirement" shall mean your voluntary termination of employment in
accordance with the Pension Plan and SERP or in accordance with any other
retirement arrangement established with your consent with respect to you.
(c) Death. Subject to Section 7, upon your death, your successors,
heirs, distributees, devisees or legatees shall be entitled to receive an
amount equal to the value of the death benefits provided for you under any
benefit or compensation plan, program or policy of the Company.
4
<PAGE>
(d) Termination for Cause. The Company may terminate your employment
for "Cause" only by the (i) delivery of a Notice of Termination in accordance
with the terms of Section 10 and then (ii) only effective as of the Date of
Termination as defined in Section 9(d). If your employment is terminated for
Cause, the Company shall pay you your full base salary through the Date of
Termination, at the rate in effect at the time Notice of Termination is given,
and the Company shall have no further obligations to you under this Agreement.
For the purposes of this Agreement, "Cause" means the willful engaging by you
in gross misconduct materially and demonstrably injurious to the Company. A
"willful" act or omission means an act or omission by you in bad faith and
without reasonable belief that such act or omission was in or not opposed to
the best interests of the Company.
4. Termination Following Change of Control for Good Reason. You may
terminate your employment following any change in control for any Good Reason.
For the purposes of this Agreement, "Good Reason" shall mean:
(a) Change of Position. The assignment to you of any duties
inconsistent with your position with the Company at the date of the change in
control or a substantial alteration in the nature or status of your
responsibilities from those in effect immediately prior to a change in control
of the Company.
(b) Salary. A reduction in your base salary as in effect immediately
prior to the change in control; or the failure by the Company to increase your
base salary each year after the change in control by at least the same
percentage as the mean percentage increase in base salary for all elected
officers of the Company during the twenty-four months immediately preceding
the change in control.
(c) Incentive Compensation. A failure by the Company to continue the
incentive compensation plans in which you are eligible to participate as of
the change in control substantially in the form in effect immediately prior to
the change in control (collectively, the "Incentive Plans"); or the failure to
continue you as a participant in the Incentive Plans on terms at least as
beneficial to you as those terms in effect immediately prior to the change in
control; or the failure to pay you any annual installment of a previous award
under the Incentive Plans. For the purposes of this Agreement, no attempted
change of any Incentive Plans shall be effective unless you expressly elect
coverage under such changed Plan by written notice to the Company, which
notice may be revoked or amended at any time and from time to time.
(d) Other Benefits. The failure by the Company within 24 months of a
change in control to continue in effect any material benefit plan or practice
in which you participate immediately prior to the change in control of the
Company, unless an equitable arrangement is provided for (embodied in an
ongoing substitute or alternative plan) or the failure by the Company to
continue your participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms of the
5
<PAGE>
amount of benefits provided and the level of your participation relative to
other participants, as existed immediately prior to the change in control; or
the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's life
insurance, medical, health and accident, or disability plans in which you were
participating immediately prior to the change in control, the taking of any
action by the Company which would directly or indirectly materially reduce any
of such benefits, or the failure by the Company to provide you with the number
of paid vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation
policy in effect immediately prior to the change in control.
(e) Relocation.
(1) The relocation of the Company's offices at which you are principally
employed immediately prior to the change in control to a location more than 50
miles from such location, or the Company's requiring you to be based anywhere
other than the Company's offices at such location except for required travel
on the Company's business to any extent substantially consistent with your
present business travel obligations.
(2) If your employment location is changed, the failure by the Company
to pay in advance all reasonable moving expenses incurred by you relating to a
change of your principal residence; and, to indemnify you against any "loss"
(as hereinafter defined) realized upon the sale of such residence. "Loss"
shall mean the amount by which the actual sale price of such residence is less
than the higher of (x) your aggregate investment in such residence (y) the
fair market value of such residence. "Fair market value" shall mean the
average of the prices established by two real estate appraisers (one such
appraiser to be selected by each of you and the Company); provided, however,
that if there is more than a 10% differential between the prices established
by said appraisers, a third appraiser mutually agreeable to the parties shall
be selected and the fair market value shall be the average of the two highest
prices established by such real estate appraisers.
(f) Assumption. The failure of the Company to obtain the agreement of
any successor, as contemplated in Section 11, to assume and fully perform the
obligations of the Company under this Agreement.
(g) Attempted Termination. Any attempt by the Company to terminate your
employment except in accordance with Section 3. For purposes hereof, no such
purported termination shall be effective.
5. Special Severance Benefits. If your employment shall be terminated
(i) by the Company other than for Disability, Death, Retirement or Cause in
accordance with Section 3 of this Agreement or (ii) by you for Good Reason in
6
<PAGE>
accordance with Section 4 of this Agreement, then you shall be entitled to the
benefits provided below subject to the provisions of Section 5(h) below:
(a) Your full base salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given (but not less than the
highest annual rate of salary in effect for you during any month of the
twenty-four months preceding the date of the Notice of Termination), plus the
deferred portion, if any, of any awards which have been or should have been
awarded to you pursuant to the Incentive Plans but which have not yet been
paid to you; plus the amount of deferred compensation, if any, under the
Incentive Plans which has or should have accrued to your account.
(b) The Company shall also pay to you, a lump sum amount equal to the
sum of (x) any long-term incentive compensation which has been allocated or
awarded to you for a fiscal year or other measuring period preceding the Date
of Termination but which has not yet been paid and (y) a pro rata portion of
the aggregate value of all contingent long-term incentive compensation awards
for all uncompleted periods under the long-term incentive compensation plan
assuming the target has been fully achieved as of the Date of Termination.
(c) (i) Severance pay, which shall be paid not later than the tenth day
following the Date of Termination or, at your election, not later than the
tenth day following the date of the Notice of Termination, in one lump sum
equal to the sum of: (x) twenty-four month's base salary at the highest rate
of monthly salary in effect for you during any month of the twenty-four months
immediately preceding the date of the Notice of Termination, plus (y) an
amount equal to the average annual incentive bonus earned by you from the
Company during the last four (4) completed fiscal years of the Company
immediately preceding your Date of Termination, or if you were not an officer
during any or all of such prior 4 fiscal years the average of a computed
incentive you would have received had you been an officer during any such year
or years assuming 100% completion of individual performance factors and an
annual salary in each such year or years at the rate of monthly salary in
effect for you upon the effective date of your initial election as an officer
of the Company.
(ii) Within ten (10) days following the date that payment is made to
active employees of the Company, you shall receive a pro-rata payment of the
annual incentive payment you would have received for the year in which your
Date of Termination occurs. Such payment shall be (1) pro-rated based upon
your Date of Termination and (2) otherwise calculated as an employee in good
standing at your level of participation in effect prior to the Date of
Termination and assuming 100 percent completion of any individual performance
factors.
(d) In lieu of shares of common stock of the Company ("Company Shares")
issuable upon exercise of outstanding options ("Options"), if any, granted to
you under any stock option plans (which Options shall be canceled upon the
making of the
7
<PAGE>
payment referred to in this Section 5(c)), you shall receive an amount in cash
equal to the product of (1) the difference (to the extent that such difference
is a positive number and without reducing any positive difference under any
grant by the amount of any negative difference which may exist with respect to
any other grant) obtained by subtracting the per share exercise price of each
Option held by you whether or not then fully exercisable from the higher of
(A) the closing price of Company Shares as reported on the New York Stock
Exchange on the Date of Termination, or (B) the highest per share price for
Company Shares actually paid in connection with any change in control of the
Company, and (2) the number of Company Shares covered by each such option.
All awarded shares of restricted stock still subject to restrictions under
the Armco Inc. and Subsidiaries 1988 Restricted Stock Option Plan, the 1993
long-term Incentive Plan of Armco Inc. or any similar plan of Armco Inc.,
shall lapse and shall become fully vested and transferable. All outstanding
options shall be exercisable upon the occurrence of a change of control
without regard to any "waiting period" established under either the stock
option plan or the form of grant of the options (including by way of
illustration the waiting period described in the Armco Inc. and Subsidiaries
1988 Stock Option Plan, the 1993 long-term Incentive Plan of Armco Inc. or any
similar plan of Armco Inc.).
(e) For the period of one year following your Date of Termination and
through any subsequent (and additional) period of "idle time" in accordance
with Section 5(f) below, the Company shall arrange to provide you with life,
disability, sickness and accident, health, vision and dental insurance
benefits substantially similar to those which you would have been eligible to
receive immediately prior to the date of the Notice of Termination or, if
greater, the benefits which would have been available to you if you had been
eligible for immediate retirement and had elected to retire at the end of any
month during the twenty-four months immediately preceding the date of your
Notice of Termination.
(f) If you are not eligible for a pension under the Pension Plan on the
first anniversary of your Date of Termination (which first anniversary shall
be called your "Break in Service Date") and if you would have been eligible
had you accumulated up to two additional years of continuous service following
that Break in Service Date, then the Company shall place you on "idle time"
within the meaning of the Company's Policy on Involuntary Separation from
Armco Employment, as in effect on January 1, 1998, or as amended if you have
elected by written notice to the Company to be covered under such amendment,
effective as of that Break in Service Date. You will not receive idle time
pay during the idle time period but will accrue continuous service as
described in Section 5(g) below.
(g) The period from your Date of Termination through the first
anniversary of your Date of Termination, and any subsequent period of "idle
time" as described in Section 5(f) above, shall constitute continuous service
with the Company for all purposes [including but not limited to calculation of
the amount and date of commencement of the benefits to which you are entitled
under the Pension Plan and the
8
<PAGE>
SERP] under each Company "employee benefit plan", as said term is defined in
Section 3(3) of the Employee Retirement Security Act of 1974, as amended
("ERISA"), and the Company's fringe benefit policies, in the same manner and
to the same effect as if you were an active employee of the Company until the
end of such period.
(h) To the extent that any of the payments provided under paragraphs (a)
- - (g) above (the "Contract Payments") or any other portion of the Total
Payments (as defined below) will be subject to the tax imposed by Section 4999
of the Code, or any successor provision (the "Excise Tax"), the Company shall
pay to you an additional amount (the "Gross-Up Payment") such that the net
amount retained by you, after deduction of any Excise Tax on the Contract
Payments and such other Total Payments and any federal and state and local
income tax, Excise Tax and FICA and Medicare withholding taxes upon the
payment provided for by this paragraph, shall be equal to the Contract
Payments and such other Total Payments. For purposes of determining whether
any of the Contract Payments or other Total Payments will be subject to the
Excise Tax and the amount of such Excise Tax:
(1) any other payments or benefits received or to be received by you in
connection with a change in control of the Company or your termination of
employment [whether payable (i) pursuant to the terms of this Agreement or
(ii) any other plan, arrangement or agreement with the Company, by any person
(within the meaning of section 3(c)(9) of the Securities and Exchange Act of
1934 as amended) whose actions result in a change in control or any person
affiliated with the Company or such person (together with the Contract
Payments, the "Total Payments")] shall be treated as "parachute payments"
within the meaning of Section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of Section 280G(b)(1) shall be treated
as subject to the Excise Tax, unless in the opinion of tax counsel selected by
the Company's independent auditors and acceptable to you, such other payments
or benefits (in whole or in part) do not constitute parachute payments, or
such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the base amount within the meaning of
Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise
Tax,
(2) the amount of the Total Payments which shall be treated as subject
to the Excise Tax shall be equal to the lesser of (A) the total amount of the
Total Payments or (B) the amount of excess parachute payments within the
meaning of Section 280G(b)(1) (after applying clause (1) above), and
(3) the value of any non-cash benefits or any deferred payment or
benefit shall be determined by the Company's independent auditors in
accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
9
<PAGE>
For purposes of determining the amount of the Gross-Up Payment, you shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Gross-Up Payment is to be
made and state and local income taxes at the highest marginal rate of taxation
in the state and locality of your residence on the Date of Termination, net of
the maximum reduction in federal income taxes which could be obtained from
deduction of such state and local taxes (calculated by assuming that any
reduction under section 68 of the code in the amount of itemized deductions
allowable to you applies first to reduce the amount of such state and local
taxes that could otherwise be deductible by you). If the Excise Tax is
subsequently determined to be less than the amount taken into account
hereunder at the time of termination of your employment, you shall repay to
the Company at the time that the amount of such reduction in Excise Tax is
finally determined the portion of the Gross-Up Payment attributable to such
reduction (plus the portion of the Gross-Up Payment attributable to the Excise
Tax, federal and state and local income tax and FICA and Medicare withholding
taxes imposed on the Gross-Up Payment being repaid by you if such repayment
results in a reduction in Excise Tax, FICA and Medicare withholding taxes
and/or a federal and state and local income tax deduction) plus interest on
the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. If the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of the termination of your employment (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Gross-Up Payment), the Company shall make an additional
Gross-Up Payment in respect of such excess (plus any interest and penalties
payable with respect to such excess) at the time that the amount of such
excess is finally determined.
(1) no portion of the Total Payments, the receipt or enjoyment of which
you shall have effectively waived in writing prior to the date of payment of
the Contract Payments, shall be taken into account,
(2) no portion of the Total Payments shall be taken into account which,
in the opinion of tax counsel selected by the Company's independent auditors
and acceptable to you, does not constitute a "parachute payment" within the
meaning of section 280G(b)(2) of the Code (without regard to subsection
(A)(ii) thereof)
(3) the Contract Payments shall be reduced only to the extent necessary
so that the Total Payments, other than those referred to in clauses (1) and
(2), in their entirety constitute reasonable compensation for services
actually rendered within the meaning of section 280G(b)(4) of the Code, in the
opinion of the tax counsel referred to in clause (2); and
(4) the value of any non cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the Company's
10
<PAGE>
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code.
(i) The payments under Section 5 of this Agreement shall be made
promptly by the Company to you in full within the time provided in accordance
with this Agreement; provided that at any time at or prior to the payment
date, you may elect in writing to have the payments made in two, three, four
or five equal annual installments, as you specify in your written election,
with each installment to be paid promptly on the anniversary of your Date of
Termination. If you choose the installment method, the unpaid balance shall
accumulate interest from the Date of Termination calculated at a rate per
annum equal to 120% of the applicable federal rate as defined in Section
1274(d) of the Code in effect from time to time.
6. No Mitigation. You shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this Agreement
be reduced by any compensation earned by you as the result of employment by
another employer after the Date of Termination, or otherwise.
7. Adjustments for Changes in Company Plans. Any reference contained in
this Agreement to benefits under any Company Plans or Company policies,
including without limitation, the Company "employee benefit plans", as said
term is defined in Section 3(3) of ERISA, shall mean and refer to the greater
of the benefits you or your beneficiaries would have received under the
Company Plans or policies if, on the date you qualify for benefits, the
Company Plans or policies contained the same terms as in effect for you (i)
immediately prior to the change in control of the Company, (ii) immediately
prior to the date of the Notice of Termination of your employment, (iii) on
January 1, 1998, or (iv) on January 1, 1998, and as thereafter amended by any
amendment under which you, by written notice to the Company, have expressly
elected to be covered.
8. Nondisclosure of Confidential Information. You recognize and
acknowledge that the trade secrets and other similar proprietary information
of the Company as acquired and used by the Company are special, valuable and
unique assets. You shall not, except as may be necessary in the discharge of
your duties with the Company or as may be required by applicable law or
regulations, disclose any such confidential information, knowledge or data
obtained by you prior to the date of this Agreement or during the term of this
Agreement if such disclosure is materially adverse to the business of the
Company and not otherwise publicly available, unless otherwise disclosed by
the Company or other persons to third parties or recognized as standard
practice.
11
<PAGE>
9. Date of Termination. "Date of Termination" shall mean:
(a) if your employment is terminated for Disability under Section 3(a)
or Retirement under Section 3(b) of this Agreement, the 30th day following
delivery of the Notice of Termination or, if later, the date as of which your
benefits expire under the plans or policies referred to in Section 3(a)(1) of
this Agreement;
(b) if your employment is terminated by reason of your death, the last
day of the month in which your death occurs;
(c) if your employment is terminated for Good Reason under Section 4 of
this Agreement, the 90th day following delivery of the Notice of Termination;
and
(d) if your employment is terminated for Cause, the 30th day following
the delivery of the Notice of Termination; provided, that if the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination on or before such 30th day, the Date of
Termination shall be the date on which the dispute is finally determined,
either (i) by mutual written agreement of the parties or (ii) upon the
expiration of the time for appeal from a final judgment, order or decree of a
court of competent jurisdiction and no appeal therefrom having been perfected.
10. Notice of Termination. Any termination by the Company pursuant to
Sections 3(a) or (d) above or by you pursuant to Sections 3(b) or 4 above
shall be communicated by written Notice of Termination to the other party
hereto. The date of the Notice of Termination shall be the date of receipt of
the Notice by the party to whom it is given. For purposes of this Agreement,
a "Notice of Termination" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and, with respect
to Sections 3(a) and (d) above, shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of your
employment under the provision so indicated, and, with respect to Section 4
above, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination by you. A Notice of Termination
filed for Good Reason in accordance with Section 4 above shall be filed within
120 days following the date you first have actual notice of the occurrence of
the event giving rise to a Good Reason or shall be deemed to have been waived
by you; provided that no waiver of any such event shall be deemed to be a
waiver of any other similar or other event or be deemed to be a waiver of the
provision giving rise to the Good Reason.
11. Successors; Binding Agreement.
(a) The Company will require any successor entity (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement
in form and substance satisfactory
12
<PAGE>
to you, to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. If the obligations of the Company are
not assumed by operation of law or contract, the Company will arrange
alternative means of providing for such obligations, including insurance or an
escrow. As used in this Agreement, the "Company" shall mean Armco Inc. and
any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11 or which otherwise
becomes bound by all the terms and provisions hereof by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
you or your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
12. Notice. Notices and all other communications provided for herein
shall be in writing and shall be deemed to have been duly given when delivered
or mailed by United States registered mail, return receipt requested, postage
prepaid, addressed to the Company at its principal office or to you at your
address set forth on the first page of the Agreement; provided that all
notices to the Company shall be directed to the attention of the Chief
Executive Officer of the Company (or the Chairman of the Compensation
Committee of the Board of Directors if given by the Chief Executive Officer)
with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only
upon receipt.
13. Modification; Waiver. No provision hereof may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by you and a duly authorized officer of the Company (other than
you). No waiver by either party hereto of any condition or provision hereof
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any other time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly herein.
14. Validity. This Agreement shall be governed by and construed in
accordance with the law of the State of Ohio. The invalidity or
unenforceability of any provision hereof shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
13
<PAGE>
16. Resolution of Disputes. Any dispute under this Agreement (except
for disputes arising under Section 17 below) shall be submitted to binding
arbitration in Pittsburgh, Pennsylvania by three arbitrators in accordance
with the rules of the American Arbitration Association. The Company shall pay
all costs and expenses of arbitration, including your costs, expenses and
counsel fees arising in connection with any arbitration pursuant to this
Section together with interest (at the 1 month LIBOR rate) on the sum of any
severance payment due to you and withheld during the period of any dispute and
arbitration proceedings under the agreement from the tenth day following the
Date of Termination until the date such severance payments are received by
you. Judgment may be entered on the arbitrators' award in any court of
competent jurisdiction in the United States as you may approve in writing.
17. Confidentiality. You will not disclose to any person or use for the
benefit of yourself or any other person any confidential or proprietary
information of the Company without the prior written consent of an elected
officer of the Company Upon your termination of employment, you will return
to the Company all written or electronically stored memoranda, notes, plans,
records, reports or other documents of any kind or description (including all
copies in any form whatsoever) relating to the business of the Company.
Sincerely,
James F. Will
Chairman, President &
Chief Executive Officer
Agreed to this day
of , 1998
- -------------------------------------
14
<PAGE>
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1997
(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 25
through 38.
Operating Results
- -----------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,829.3 $1,724.0 $1,559.9
Special charges -- (8.8) --
Operating profit 105.4 74.7 69.0
Gain on sale of AK Steel stock -- -- 27.2
Sundry other - net (1.1) (21.1) (49.6)
Income from continuing operations 77.1 26.0 23.5
Income from discontinued operations 2.7 6.5 6.3
Extraordinary loss on retirement
of debt (3.0) -- --
Net income 76.8 32.5 29.8
Net income per common share* 0.55 0.14 0.11
- ----------------------------------------------------------------------
<FN>
* Basic and diluted earnings per share are equal.
</TABLE>
1997 vs. 1996: Armco's 1997 net sales increased 6% over 1996 primarily as a
result of higher shipments of specialty steels and tubular products. Partially
offsetting the higher shipments of specialty steel products was a decline in
prices across the stainless and electrical steel product lines, primarily due
to intense global competition.
Operating profit increased 41% in 1997 primarily as a result of lower costs in
the manufacturing operations, the consolidation of Greens Port Industrial
Park, which in the prior year was an investment held for sale, and lower
employee benefit expenses. Benefit expenses were lower as a result of
favorable investment returns on pension plan assets and lower than expected
increases in medical benefit costs.
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 LLC, Armco's snowplow and ice control products manufacturer.
Operating profit in 1996 also included nonrecurring income of $8.6 from claim
settlements, including a business interruption insurance claim.
Income from continuing operations in 1997 included a $4.0 gain on the
settlement of certain partially impaired long-term receivables. Included in
Income from continuing operations for 1996 were the above-mentioned special
charges and claim settlements and a $6.3 gain, which resulted from the
recognition of gains in connection with asset sales at Greens Port.
18 Armco Annual Report
<PAGE>
Sundry other - net expense decreased in 1997 as a result of lower expenses
related to long-term benefit obligations for former employees of Armco
facilities that have been shut down or divested. The reductions were a result
of favorable investment returns on pension plan assets and lower than expected
increases in medical benefit costs.
Income from discontinued operations consisted of additional gains on the sale
of Armco's Aerospace and Strategic Materials business segment of $2.7 in 1997
and $6.5 in 1996 related to tax settlements subsequent to the sale of the
business.
During 1997, Armco issued $150.0 of 9% Senior Notes due 2007, using the
proceeds to retire several existing debt issues. Armco recorded a $3.0
extraordinary loss upon retiring certain of this outstanding debt.
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.
Operating profit increased 8% in 1996 due to a 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 expenses.
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. The decrease in Mansfield and Dover
operating losses reflected 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.
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, LP, recognizing a gain of $27.2.
Sundry other - net expense decreased in 1996 from 1995 as a result of lower
employee benefit expenses related to facilities that have been divested or
shut down and the $6.3 gain related to Greens Port asset sales. Employee
benefit expenses were lower primarily due to increased funding of the pension
plans during 1995 and 1996 and lower interest rates on Armco's accrued other
postretirement benefit liabilities.
In 1995, Armco recognized, in income from discontinued operations, equity
income of $6.3 from National-Oilwell, a joint venture divested in January
1996.
Armco Annual Report 19
<PAGE>
Outlook for 1998: Armco expects modest volume increases and further cost
reductions in the Specialty Flat-Rolled Steels segment, but anticipates no
immediate relief from import-driven competitive pricing. Overall results for
the Fabricated Products segment are expected to be somewhat lower in 1998
compared to 1997. Favorable trends with respect to lower employee benefit
expenses should continue in 1998.
BUSINESS SEGMENT RESULTS
Specialty Flat-Rolled Steels
- ----------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $1,497.0 $1,421.2 $1,277.0
Operating profit 88.6 72.9 76.0
- ----------------------------------------------------------------------
</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.
Customer sales and shipments by major product line and annual production were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
(tons in thousands) Sales Tons Sales Tons Sales Tons
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Specialty flat-rolled* $1,103.0 757 $1,108.0 739 $1,013.3 647
Specialty semi-finished 198.8 168 133.9 97 130.5 78
Galvanized and other carbon 165.1 306 144.2 304 94.1 214
Other 30.1 -- 35.1 -- 39.1 --
- ------------------------------------------------------------------------------
Total $1,497.0 1,231 $1,421.2 1,140 $1,277.0 939
- ------------------------------------------------------------------------------
Cast production 1,448 1,439 1,153
- ------------------------------------------------------------------------------
<FN>
* The Specialty flat-rolled product line consists of automotive exhaust
stainless, specialty sheet and strip, and electrical steels.
</TABLE>
1997 vs. 1996: Customer sales in 1997 were 5% higher than in 1996 on an 8%
increase in tons shipped. A decrease in the segment's overall average sales
per ton resulted from increased shipments of lower priced specialty semi-
finished steels, partially offset by a change in the mix of carbon steel
shipments from hot bands to higher priced galvanized steel products.
A 3% reduction in average sales per ton of specialty flat-rolled products
reflected increased import competition on certain grades of chrome nickel
stainless and cold rolled non-oriented electrical steels and elimination of
most of the remaining surcharges on stainless steel. 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. Such surcharges
were minimal in 1997 and the second half of 1996.
Specialty semi-finished shipments increased substantially in 1997 over 1996,
primarily as a result of increased sales of chrome nickel hot bands. However,
a 14% reduction in average sales per ton reflected worldwide overcapacity.
Shipments of galvanized carbon steel increased in 1997, but the increased tons
were offset by the elimination of carbon hot band shipments. In the first half
of 1996, Armco exited the lower priced hot band market, shifting to higher
priced galvanized steel products and thus increasing average sales per ton by
14% in the year-to-year comparison.
Specialty Flat-Rolled Steels' 1996 operating profit included $8.6 of income
from various claim settlements, including a business interruption insurance
claim. Excluding the claim settlements, operating profit increased in 1997
primarily as a result of lower costs due to facilities upgrades, more stable
operating conditions and lower employee benefit expenses. Costs in 1996 were
adversely affected by several planned 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 substantially increased its use of
outside processors to finish some of its stainless steels, resulting in higher
costs.
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 higher operating
levels at Mansfield compared with 1995, which was a ramp-up period following a
year-long idling for installation of new equipment. The higher operating
levels were achieved despite several planned outages necessary to complete
additional equipment upgrades.
Shipments of specialty flat-rolled steel products increased 14% in 1996 over
1995 driven by strong production of North American vehicles and housing
starts. Partially offsetting the stronger demand for automotive exhaust
stainless and grain oriented electrical steels were lower shipments of non-
oriented electrical steel and specialty sheet and strip, which were both
adversely affected by import competition. Specialty semi-finished shipments
also increased in 1996, primarily in export sales. However, prices for most
stainless steel products, including semi-finished, fell in 1996 primarily due
to pressure from imported steel and reductions in raw material surcharges.
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 stainless steels and semi-finished products and
several planned outages necessary to complete equipment upgrades.
Outlook for 1998: Armco anticipates modest increases in volume and further
cost reductions for most product lines during the next twelve months. However,
during that period, excess global capacity and higher levels of import
penetration are expected to have a continued adverse effect on pricing.
Automotive exhaust stainless shipments are expected to remain strong supported
by North American vehicle sales and increased export sales. Stable housing
starts are expected to continue to stimulate demand for oriented electrical
steels, while high levels of lower-priced imports continue to adversely affect
non-oriented electrical steel product sales.
<TABLE>
[A THREE-BAR CHART APPEARS HERE]
SPECIALTY FLAT-ROLLED STEELS
SALES BY MARKET
<CAPTION>
- ----------------------------------------------------------------------
97 96 95
- ----------------------------------------------------------------------
<S> <C> <C> <C>
AUTOMOTIVE 39% 44% 40%
INDUSTRIAL & ELECTRICAL EQUIPEMENT 27% 28% 32%
SERVICE CENTERS 12% 12% 9%
OTHER/CONVERSION 22% 16% 19%
- ----------------------------------------------------------------------
</TABLE>
20 Armco Annual Report
<PAGE>
In late 1997, Armco management decided to eliminate production of carbon steel
products at its Mansfield Operations and concentrate on producing the more
profitable stainless steel products. Armco's Dover Operations, which
galvanizes carbon steel formerly produced at Mansfield, will purchase carbon
steel from other sources for galvanizing.
Low-priced foreign imports of specialty steels remained high in 1997,
adversely affecting volume and pricing experienced by domestic companies like
Armco. As a result, industry trade groups are gathering 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
of the outcome if cases are filed.
Fabricated Products
- -------------------
<TABLE>
<CAPTION
- ----------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $332.3 $302.8 $282.9
Special charges -- (8.8) --
Operating profit 41.9 22.8 22.0
- ----------------------------------------------------------------------
</TABLE>
The Fabricated Products business segment includes the results of Sawhill
Tubular, a manufacturer of steel pipe and tubing; Douglas Dynamics, a
manufacturer of snowplows and ice control products; and, effective January 1,
1997, Greens Port Industrial Park, which leases land, buildings and rail car
storage facilities and operates a deep water loading dock on the Houston Ship
Channel.
1997 vs. 1996: Customer sales increased in 1997 primarily due to higher
shipments at Sawhill Tubular and the consolidation of Greens Port. Higher
sales at Sawhill were a result of volume increases along most major product
lines.
Douglas Dynamics' and Sawhill's operating profit improved in 1997. Douglas
Dynamics' results improved due to manufacturing efficiencies achieved during
the year and reduced operating expenses following the decision in 1996 to exit
certain unprofitable product lines. The increase in Sawhill's profits was
driven by higher volume as well as lower costs.
In 1996, Armco recorded a special charge of $5.9 for an 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 assets and severance costs related to the decision to discontinue a line of
light truck equipment manufactured by Douglas Dynamics.
1996 vs. 1995: Customer sales in 1996 were 7% above 1995 levels, 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
sales prices caused by increased domestic competitive pressures and a high
level of imports.
Excluding the special charge in 1996, Douglas Dynamics' operating profit was
substantially higher than in 1995 due to increased sales and cost reductions.
Sawhill Tubular's operating profits decreased primarily as a result of higher
costs for steel hot bands.
Outlook for 1998: Douglas Dynamics' snowplow shipments are expected to be
somewhat lower in 1998. However, the actual level of sales will depend on the
level of four-wheel drive light truck sales and snowfalls in the markets
Douglas Dynamics serves.
Sawhill Tubular's sales and profitability are expected to exceed 1997's levels
due to anticipated continued higher volumes and lower costs.
DISCONTINUED OPERATIONS
Aerospace and Strategic Materials
- ---------------------------------
Armco sold its Aerospace and Strategic Materials business segment in 1985.
Pursuant to the sales agreement, Armco retained the benefit of its share of
any net proceeds of certain tax refund claims it had filed prior to the sale.
In 1996, Armco received a federal tax refund and recorded a $6.5 increase to
its gain on the sale of the segment. In 1997, Armco recognized another $2.7
gain for state and federal tax refunds.
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 since 1986 except for an immaterial amount of guaranteed
renewable accident and health business. The number of policyholders of this
business has decreased from approximately 4,000 at December 31, 1986 to 870 at
December 31, 1996 and 713 at December 31, 1997.
In March 1997, a group of international insurance companies, previously
affiliated with AFSG and sold in 1991, filed an application for voluntary
liquidation in the United Kingdom. Northwestern National Insurance Company,
one of the AFSG companies, is currently investigating its exposure with
respect to transactions entered into with these companies. Armco believes that
its investment in AFSG will not be materially affected as a result of pending
claims or contingent liabilities related to this matter.
Liquidity and Financial Resources: Claims are paid from AFSG's investment
portfolio and the related investment income from such portfolio. The portfolio
had a market value of $174.9 at December 31, 1997. 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 $88.1 at
December 31, 1997 from $102.2 at December 31, 1996. AFSG estimates that 67% 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 liquidation of AFSG will not be material
to Armco's financial condition or liquidity. However, it is possible that, due
to fluctuations in Armco's operating results, future developments could have a
material effect on the results of one or more future interim or annual
periods.
Armco Annual Report 21
<PAGE>
POSTRETIREMENT EMPLOYEE BENEFIT LIABILITIES
Armco maintains pension and other postretirement benefit plans for employees
and retirees of its current operating locations as well as for retirees of
businesses that have been shut down or divested. Each year, Armco commissions
its outside actuary to calculate the present value of future obligations
associated with these plans. With this information, and following the guidance
in Statement of Financial Accounting Standards (SFAS) No. 87, Employers'
Accounting for Pensions, and SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, Armco records the expenses and
liabilities of its retirement benefit plans. The following compares the most
current actuarially determined obligations, net of plan assets, with the
accrued liabilities recorded in Employment-related liabilities and Long-term
employee benefit liabilities in the Consolidated Balance Sheets at December
31, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Other Postretirement
Pensions Benefits
- ---------------------------------------------------------------
<S> <C> <C>
Projected benefit obligations $2,099.0 $ 755.2
Plan assets 2,106.4 --
- ---------------------------------------------------------------
Obligations greater (less)
than plan assets (7.4) 755.2
Accrued liabilities 189.4 1,037.7
- ---------------------------------------------------------------
Accrued liabilities in excess
of obligations $ 196.8 $ 282.5
- ---------------------------------------------------------------
</TABLE>
The total accrued liabilities in excess of current estimated obligations was
$479.3 for 1997. Of this amount, $419.3 relates to unrecognized net gains
which arose primarily as a result of favorable investment returns on pension
plan assets and lower than expected increases in medical benefit costs.
Unrecognized net gains to the extent they exceed 10% of the larger of the
benefit obligations or plan assets are amortized into income over the average
remaining service life of active participants, which at Armco is currently
about 15 years. The majority of the remaining difference relates to
unrecognized negative prior service costs and an unrecognized transition
obligation, which are also amortized over a long period of time. These amounts
and their effect on consolidated income are more fully described in Note 2,
Pension and Other Employee Benefits, in the Notes to the Consolidated
Financial Statements
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Armco had $194.9 of cash, cash equivalents and short-
term liquid investments, compared to $169.2 at December 31, 1996. Cash, cash
equivalents and short-term liquid investments increased $25.7 during 1997,
primarily as a result of $90.8 of cash generated from operations and proceeds
from the sale of businesses, assets and investments of $22.8, partially offset
by cash payments including $41.9 for capital expenditures, $26.6 for net debt
retirement and $17.9 for preferred stock dividends.
In September 1997, Armco issued $150.0 of 9% Senior Notes due 2007, using the
proceeds to retire $100.0 of 11-3/8% Senior Notes due 1999, $20.0 of 9.2%
Sinking Fund Debentures due 2000 and $28.5 of 8.5% Sinking Fund Debentures due
2001. Following the refinancing of its long-term debt, Armco has debt
maturities of $38.2, $7.0 and $132.2 in 1998, 1999 and 2000, respectively.
Debt maturing in 1998 includes prepayment of $22.3 of variable rate private
placement notes, and debt maturing in 2000 includes $125.0 of 9-3/8% Senior
Notes, which are callable in November 1998.
At December 31, 1997, 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 an available borrowing base of AFC's receivables. At
December 31, 1997, there were no outstanding borrowings under this credit
facility. However, $56.8 of the facility was used as support for letters of
credit and $26.6 was available for borrowing.
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, 1997, there were no outstanding borrowings under
this credit facility. Armco expects to enter into a new revolving credit
agreement to replace this facility when it expires at the end of 1998. Under
both bank credit facilities, a total of $76.6 was available for borrowing at
December 31, 1997.
Inventories increased 9% during 1997, reflecting increased production levels
at Douglas Dynamics and Sawhill Tubular. Trade receivables and payables,
primarily in the Specialty Flat-Rolled Steels segment, increased 7% and 9%,
respectively. These increases were the result of higher operating levels.
Armco anticipates that its capital expenditures for 1998 will total
approximately $60.0 to $70.0. Armco expects that its 1998 cash requirements,
including amounts for capital expenditures, debt service and preferred stock
dividends will be paid out of existing cash balances and cash generated from
operations.
On January 23, 1998, 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, 1998 to shareholders of
record on February 27, 1998. 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, 1998, to shareholders of record on
February 27, 1998. 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 near term.
<TABLE>
[A BAR GRAPH APPEARS HERE]
CASH, CASH EQUIVALENTS AND
SHORT-TERM LIQUID INVESTMENTS
$ MILLIONS
<CAPTION>
- ---------------------------------------------------------------
95 96 97
- ---------------------------------------------------------------
<C> <C> <C>
$137 $169 $195
- ---------------------------------------------------------------
<FN>
Armco's cash position grew by 15% in 1997. Armco ended the year with $195
million in cash, cash equivalents and short-term liquid investments.
</TABLE>
22 Armco Annual Report
<PAGE>
ENVIRONMENTAL MATTERS
Armco, as a U. S. manufacturer, is subject to various federal, state and local
environmental requirements. Armco estimates capital expenditures for pollution
control in its manufacturing operations will be about $30.0 for the years
1998-2002, with the largest expenditures being made in the Specialty Flat-
Rolled Steels segment. Approximately $8.0 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 current laws and regulations. The type
and magnitude of these projected expenditures can change based on changes in
applicable laws and regulations, such as recent proposals to modify air
requirements, and availability of new technologies. 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. During the period 1993 through 1997, Armco's capital
expenditures for pollution control projects amounted to approximately $36.1,
including $2.2 in 1997.
Armco has been named as a defendant, or identified as a potentially
responsible party in various pending claims regarding past 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. However, while the outcome of these matters
cannot be predicted with assurance, Armco's experience has been that in most
cases, ultimate liability is apportioned among Armco and other financially
viable parties.
Armco has been and may in the future be subject to other types of
environmental claims. These claims included contractual indemnification
related to previously divested properties. If Armco disposes of additional
properties, it may incur additional environmental exit costs. Armco accrues
such costs when a decision is made to dispose of a property or a sale is
recorded. In addition, costs may be incurred for penalties or other
requirements as a result of administrative actions by government agencies.
Periodically, there are also claims alleging property damage or personal
injury in conjunction with waste disposal sites. Armco accrues for these
matters when it is probable that a liability has been incurred and it is
possible to reasonably estimate the amount or range.
While the outcome of environmental matters cannot be predicted with assurance,
Armco believes that the ultimate liability for such matters, identified to
date, will not materially affect its consolidated financial condition or
liquidity. This belief is based on current facts and circumstances known to
Armco, including current laws and regulations as well as Armco's experience
with site redemption. However, it is possible that due to fluctuations in
Armco's operating results or changes in the facts or circumstances of these
matters, future developments with respect to such matters could have a
material effect on the results of operations of future interim or annual
periods. It is not possible to determine whether additional loss will occur or
to reasonably estimate the amount or range of any such loss.
THE YEAR 2000 ISSUE
Many financial, information and operational computer systems in use today may
not be able to appropriately interpret dates after December 31, 1999, because
such systems allow only two digits to indicate the year in a date. This could
have adverse consequences on the operations and integrity of information
processing, causing safety, operational and financial problems. Armco is in
the process of determining the extent to which its systems are year 2000
compliant. In 1997, Armco began to update or replace non-compliant systems and
anticipates that it will be able to complete this process before the year
2000. Armco also is reviewing whether its suppliers expect to be in
compliance. The financial impact of making the required changes is not
expected to be material to Armco's consolidated financial condition, liquidity
or results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management's Discussion & Analysis, in the
Notes to Consolidated Financial Statements and in the Letter to Shareholders
contained in this Annual Report, reflect management's estimates and beliefs
and are intended to be, and are hereby identified as, "forward-looking
statements" for purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These include statements in the
foregoing paragraphs entitled Outlook for 1998, Armco Financial Services Group
(AFSG), Liquidity and Capital Resources, Environmental Matters and The Year
2000 Issue; and in Note 1, Summary of Significant Accounting Policies,
relating to Concentration of Credit Risk; Note 9, Litigation and Environmental
Matters; and Note 11, Discontinued Operations, relating to AFSG.
Armco cautions readers that such forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expected by management. These factors include, but are not limited to, the
following: risks of a downturn in the general economy or in the highly
cyclical steel industry; changes in demand for Armco's products; unplanned
plant outages, equipment failures or labor difficulties; actions by Armco's
foreign and domestic competitors; unexpected outcomes of major litigation and
contingencies; changes in U.S. trade policy and actions respecting imports;
disruptions in the supply of raw materials, actions by reinsurance companies
with which AFSG does business or foreign or domestic insurance regulators, and
changes in application or scope of environmental regulations applicable to
Armco.
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 requires the display of a
new expanded measure of income with the same prominence as net income. Armco
will adopt SFAS No. 130 in 1998, but anticipates that the difference between
its reported net income and the new measure of income will be minor.
Also during 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which establishes standards for
determining reportable operating segments and the information about segments
to be reported. Armco will adopt SFAS No. 131 when required in 1998. While
Armco anticipates no material change in the composition of its Specialty Flat-
Rolled Steels segment, adoption of this standard will likely result in changes
to the Fabricated Products segment and to the discussion and disclosures for
all segments.
Armco Annual Report 23
<PAGE>
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
judgments 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/ James F. Will
James F. Will
Chairman, President and
Chief Executive Officer
/s/ Jerry W. Albright
Jerry W. Albright
Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Deloitte & 2500 One PPG Place
Touche LLP Pittsburgh, PA 15222
- --------------
[D&T LOGO]
Armco, Its Shareholders and Directors:
We have audited the accompanying consolidated balance sheets of Armco Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 9, 1998
24 Armco Annual Report
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in millions, except
per share amounts)
1997 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,829.3 $1,724.0 $1,559.9
Cost of products sold (1,623.9) (1,548.4) (1,392.7)
Selling and administrative expenses (100.0) (92.1) (98.2)
Special charges (Note 7) - (8.8) -
- ------------------------------------------------------------------------
Operating profit 105.4 74.7 69.0
Interest income 10.6 10.1 11.8
Interest expense (35.5) (36.3) (32.9)
Gain on sale of AK Steel stock
(Note 10) - - 27.2
Sundry other - net (Note 2) (1.1) (21.1) (49.6)
- ------------------------------------------------------------------------
Income before income taxes 79.4 27.4 25.5
Provision for income taxes (Note 3) (2.3) (1.4) (2.0)
- ------------------------------------------------------------------------
Income from continuing operations 77.1 26.0 23.5
Discontinued operations (Note 11)
Aerospace and Strategic Materials
Gain on disposal of business 2.7 6.5 --
National-Oilwell
Income from operations - -- 6.3
- ------------------------------------------------------------------------
Income before extraordinary loss 79.8 32.5 29.8
Extraordinary loss on retirement
of debt (Note 4) (3.0) - --
- ------------------------------------------------------------------------
Net income $76.8 $32.5 $29.8
- ------------------------------------------------------------------------
Basic and diluted earnings
per share (Note 1)
Income from continuing operations $0.55 $0.08 $0.05
Income from discontinued operations 0.03 0.06 0.06
Extraordinary loss on retirement
of debt (0.03) -- --
- ------------------------------------------------------------------------
Net income $0.55 $0.14 $0.11
- ------------------------------------------------------------------------
Cash dividends per share (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 28 through 38.
</TABLE>
Armco Annual Report 25
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
- ------------------------------------------------------------------------
<CAPTION>
(Dollars in millions, except per share amounts) 1997 1996
- ------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 1) $ 189.9 $ 168.9
Short-term liquid investments 5.0 0.3
Accounts and notes receivable
Trade (less allowance for doubtful accounts
of $4.0 in 1997 and $3.8 in 1996) 147.0 137.4
Other 9.6 12.2
Inventories (Note 1) 268.0 246.9
Other current assets 17.9 6.1
- ------------------------------------------------------------------------
Total current assets 637.4 571.8
- ------------------------------------------------------------------------
Investments
Investment in Armco Financial Services Group
(Note 11) 85.6 85.6
Other (less allowance for impairment of
$8.1 in 1997 and $12.7 in 1996) 30.3 52.4
Property, plant and equipment (net of accumulated
depreciation of $653.0 in 1997 and $597.6 in 1996)
(Note 1) 652.5 670.1
Deferred tax asset (Note 3) 319.3 325.8
Goodwill and other intangible assets (Note 1) 137.4 144.8
Other assets 18.8 17.3
- ------------------------------------------------------------------------
Total assets $1,881.3 $1,867.8
- ------------------------------------------------------------------------
LIABILITIES
Current liabilities
Trade accounts and notes payable $148.9 $136.3
Employment-related liabilities (Note 2) 126.4 115.1
Other current liabilities 72.8 79.6
Current portion of long-term debt (Note 4) 38.2 27.2
- ------------------------------------------------------------------------
Total current liabilities 386.3 358.2
- ------------------------------------------------------------------------
Long-term debt (Note 4) 306.9 344.3
Long-term employee benefit liabilities (Note 2) 1,178.1 1,200.2
Other long-term liabilities 162.5 177.1
Commitments and contingencies (Notes 1, 9 and 11)
SHAREHOLDERS' DEFICIT (Note 5)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock (authorized 150,000,000 shares of
$0.01 par value; issued and outstanding
107,129,561 in 1997 and 106,457,166 in 1996) 1.1 1.1
Additional paid-in capital 967.7 965.0
Accumulated deficit (1,305.0) (1,363.9)
Other (2.2) (0.1)
- ------------------------------------------------------------------------
Total shareholders' deficit (152.5) (212.0)
- ------------------------------------------------------------------------
Total liabilities and shareholders' deficit $1,881.3 $1,867.8
- ------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 28 through 38.
</TABLE>
26 Armco Annual Report
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
- ------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995
- ------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 76.8 $ 32.5 $ 29.8
Adjustments to reconcile net income to
net cash provided
by operating activities:
Depreciation expense 61.3 58.7 52.8
Undistributed earnings from
discontinued operations -- -- (6.3)
Net gain on sales of investments and assets (4.5) (8.9) (28.4)
Extraordinary loss on retirement of debt 3.0 -- --
Special charges -- 8.8 --
Other 6.4 6.3 10.9
Change in assets and liabilities:
Trade accounts and notes receivable (9.1) 22.8 6.1
Inventories (21.4) (33.3) (50.8)
Payables and accrued operating expenses 22.1 (13.2) 34.4
Employee benefit liabilities (13.5) (17.4) (26.4)
Other assets and liabilities - net (30.3) (13.7) (6.6)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 90.8 42.6 15.5
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses
and assets 7.7 14.0 31.5
Proceeds from the sale and maturity of
liquid investments 0.3 -- 29.7
Proceeds from the sale of investments 15.1 78.7 30.0
Purchase of liquid investments (5.0) (0.3) (6.0)
Contributions to investees - (3.0) (2.0)
Capital expenditures (41.9) (59.8) (143.3)
Other (0.2) (2.7) 0.2
- ------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (24.0) 26.9 (59.9)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt 151.1 5.5 5.0
Payments on debt (177.7) (24.3) (8.1)
Dividends paid on preferred stock (17.9) (17.9) (20.9)
Proceeds from issuance of common stock 0.1 -- 2.4
Other (1.4) (0.7) --
- ------------------------------------------------------------------------------
Net cash used in financing activities (45.8) (37.4) (21.6)
- ------------------------------------------------------------------------------
Net change in cash and cash equivalents 21.0 32.1 (66.0)
Cash and cash equivalents:
Beginning of year 168.9 136.8 202.8
- ------------------------------------------------------------------------------
End of year $ 189.9 $ 168.9 $ 136.8
- ------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 34.7 $ 35.1 $ 31.2
Income taxes 2.8 0.1 0.7
Supplemental schedule of noncash investing
and financing activities:
Debt incurred or assets exchanged directly
for property -- -- 16.2
Issuance of restricted stock 2.6 2.1 4.7
Notes receivable and stock in partial
payment for asset sales 0.3 10.6 --
- ------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 28 through 38.
</TABLE>
Armco Annual Report 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
- ---------------------------------------------------------------------------
NOTE 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 consist of
commercial paper, repurchase agreements, Eurodollar time deposits and other
money market instruments, including mutual funds.
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. The carrying amounts
for these securities approximate fair value due to the short maturities of the
instruments. At December 31, 1997 and 1996, these securities were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Cash equivalents $180.4 $139.5
Short-term liquid investments 5.0 0.3
Restricted collateral deposits 15.5 15.2
- ---------------------------------------------------------------------------
Total securities $200.9 $155.0
- ---------------------------------------------------------------------------
</TABLE>
The restricted collateral deposits are primarily invested in certificates of
deposit which mature within one year and are principally used as security for
equipment financing, self-insurance programs, and environmental and litigation
bonds. These securities are reported in Other current assets or Other
investments. The classification is determined based on the expected term of
the collateral requirement and not necessarily the maturity date of the
underlying securities.
At December 31, 1997 and 1996, Other investments also included $11.2 for
Armco's limited partnership interest in North American Stainless. It is not
practicable to estimate the fair value of this closely held limited
partnership, in which Armco's ownership interest is less than 5%. 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 approximated
fair value (Note 11). These receivables were collected by Armco during 1997.
At December 31, 1997 and 1996, 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, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $271.2 $259.0
Raw materials and supplies 25.8 21.4
Adjustment to state inventories at LIFO value (54.0) (52.8)
- ---------------------------------------------------------------------------
Total 243.0 227.6
- ---------------------------------------------------------------------------
Inventories on average cost:
Finished and semi-finished 19.9 11.9
Raw materials and supplies 5.1 7.4
- ---------------------------------------------------------------------------
Total 25.0 19.3
- ---------------------------------------------------------------------------
Total inventories $268.0 $246.9
- ---------------------------------------------------------------------------
</TABLE>
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 1997,
1996 and 1995 were $15.3, $13.1 and $14.0, 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% to 5% for buildings and 5% to 33% for
machinery and equipment.
28 Armco Annual Report
<PAGE>
Armco's property, plant and equipment balances as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 28.1 $ 26.6
Buildings 93.2 90.8
Machinery and equipment 1,156.9 1,117.5
Construction in progress 27.3 32.8
- ---------------------------------------------------------------------------
Total property, plant and equipment 1,305.5 1,267.7
Accumulated depreciation (653.0) (597.6)
- ---------------------------------------------------------------------------
Property, plant and equipment-net $ 652.5 $ 670.1
- ---------------------------------------------------------------------------
</TABLE>
Armco had commitments to purchase property, plant and equipment (including
unexpended amounts relating to projects substantially underway) totaling
approximately $19.0 at December 31, 1997.
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 1997, 1996 and 1995 was $6.5, $6.9 and $6.9,
respectively. At December 31, 1997 and 1996, accumulated amortization of
goodwill and other intangible assets was $36.5 and $35.3, respectively.
Armco assesses whether its goodwill and other intangible assets are impaired
as 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
Basic earnings per share (EPS) is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding for the year. In arriving at income available to common
shareholders, preferred stock dividends of $17.9 were deducted in each year
presented. Diluted EPS reflects the potential dilution that could occur if
dilutive securities and other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of Armco.
Average shares outstanding for basic EPS was 107 million in 1997. The
calculation of diluted EPS in 1997 included the assumed conversion of the
$3.625 Class A preferred stock into common stock, the effect of which would be
to decrease preferred dividends by $9.8 and increase average shares
outstanding by 18.3 million shares. This change had no effect on the
calculated EPS amount. Average shares outstanding for both basic and diluted
EPS was 106.6 million for 1996 and 106 million for 1995.
At December 31, 1997, 1996 and 1995, 5.4 million shares of preferred stock,
which were convertible into 22.7 million common shares, were outstanding. All
of these potential common shares were excluded from the computation of diluted
EPS for 1996 and 1995, and approximately 4.4 million of the potential common
shares were excluded for 1997 because their inclusion would have had an
antidilutive effect on EPS. At December 31, 1997, 1996 and 1995 substantially
all of the 2.2 million, 1.7 million and 1.5 million, respectively, of the
exercisable stock options and stock appreciation rights were excluded from the
computation of diluted EPS because the options' exercise prices were greater
than the average market price of the common shares.
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.
CONCENTRATION OF CREDIT RISK
Armco is primarily a producer of stainless, electrical and galvanized carbon
steels and steel products, which are sold to a number of markets, including
automotive, industrial machinery and equipment, construction, power
distribution and appliances. Armco sells domestically to customers primarily
in the Midwestern and Eastern United States, while approximately 10% of sales
are to foreign customers, primarily in Canada, Mexico and Western Europe.
Approximately 21% of trade receivables outstanding at December 31, 1997 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 1997 presentation.
Armco Annual Report 29
<PAGE>
- ---------------------------------------------------------------------------
NOTE 2 PENSION AND OTHER EMPLOYEE BENEFITS
- ---------------------------------------------------------------------------
PENSION PLANS
Armco provides noncontributory pension benefits to most employees. 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, 1997, funding
credits of $52.8 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 are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the year $ 15.4 $ 15.6 $ 13.7
Interest cost on the projected
benefit obligation 147.8 141.0 153.1
Return on plan assets
Actual (300.6) (252.1) (354.0)
Deferral 133.1 104.8 197.8
Net amortization 5.2 7.2 6.5
- ---------------------------------------------------------------------------
Net periodic pension cost $ 0.9 $ 16.5 $ 17.1
- ---------------------------------------------------------------------------
Weighted average discount rate 7.75% 7.00% 8.50%
Weighted average expected long-term rate
of return on assets 8.75% 8.00% 9.50%
Rate of future compensation increases 4.00% 4.00% 4.00%
- ---------------------------------------------------------------------------
</TABLE>
Net periodic pension cost decreased in 1997 primarily due to continued
favorable returns on pension plan assets.
The following table presents the funded status of pension plans using discount
rates of 7% and 7.75% for 1997 and 1996, respectively. The assumed rate of
future compensation increases was 4% in both years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Plans for which Plans for which
Assets Exceed Accumulated
Accumulated Benefits Total
1997 Benefits Exceed Assets All Plans
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $2,034.5 $ 15.6 $2,050.1
Nonvested benefits 28.8 0.6 29.4
- -----------------------------------------------------------------------------
Accumulated benefit obligation $2,063.3 $16.2 $2,079.5
- -----------------------------------------------------------------------------
Projected benefit obligation $2,079.7 $19.3 $2,099.0
Plan assets at fair value 2,105.2 1.2 2,106.4
- -----------------------------------------------------------------------------
Projected benefit obligation greater
(less) than plan assets (25.5) 18.1 (7.4)
Reconciliation of funded status to
recorded amounts:
Unrecognized negative prior
service (cost) 2.3 (6.5) (4.2)
Unrecognized net gain (loss) 224.3 (0.6) 223.7
Unrecognized transition obligation (27.1) (0.3) (27.4)
Amount required to recognize
minimum liability -- 4.7 4.7
- -----------------------------------------------------------------------------
Accrued pension liability $ 174.0 $ 15.4 $ 189.4
- -----------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
</TABLE>
30 Armco Annual Report
<PAGE>
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.
In addition to the defined benefit pension plans, most employees are eligible
to participate in various defined contribution plans. Total company expense
related to these plans was $6.7, $2.9 and $4.4 for 1997, 1996 and 1995,
respectively. A portion of the expense of these plans varies based on Armco's
profitability.
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. 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 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the year $ 4.1 $ 4.9 $ 5.6
Interest cost on accumulated postretirement
benefit obligation 58.3 61.8 74.7
Amortization of deferred gains and plan changes (15.0) (3.8) (3.7)
- -----------------------------------------------------------------------------
Net periodic postretirement benefit cost $47.4 $62.9 $76.6
- -----------------------------------------------------------------------------
Weighted average discount rate 7.75% 7.00% 8.50%
Current year health care trend rate - Pre-age 65 8.25% 9.25% 10.25%
Current year health care trend rate - Post-age 64 6.25% 7.25% 8.25%
Ultimate health care trend rate 5.75% 5.00% 6.50%
Weighted average trend rate 6.00% 5.60% 7.30%
- -----------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefit cost decreased in 1997 primarily due to
the decrease in the accumulated postretirement benefit obligation at the end
of 1996 resulting primarily from favorable claims experience.
Net curtailment gains of $10.2 in 1995 were not included in net periodic
postretirement benefit cost.
Total claims paid were approximately $60.0 in 1997, $55.2 in 1996 and $64.0 in
1995.
The following table presents the funded status of the postretirement benefit
plans for 1997 and 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 643.7 $ 672.0
Fully eligible active plan participants 48.7 59.7
Other active plan participants 62.8 51.5
- -----------------------------------------------------------------------------
Total 755.2 783.2
Plan assets at fair value -- --
- -----------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 755.2 783.2
Reconciliation of obligation to recorded amounts:
Unrecognized negative prior service 86.9 76.7
Unrecognized net gains 195.6 190.3
- -----------------------------------------------------------------------------
Accrued postretirement benefit liability $1,037.7 $1,050.2
- -----------------------------------------------------------------------------
Assumptions used to determine obligation:
Discount rate 7.00% 7.75%
Current year health care trend rate - Pre-age 65 7.25% 8.25%
Current year health care trend rate - Post-age 64 5.25% 6.25%
Ultimate health care trend rate 5.00% 5.75%
Weighted average trend rate 5.10% 6.00%
- -----------------------------------------------------------------------------
</TABLE>
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 for 1997 by approximately $66.0,
and increase the annual net periodic postretirement benefit cost by
approximately $5.6.
EMPLOYEE BENEFIT OBLIGATIONS OF FORMER BUSINESS UNITS
Included in employee benefit liabilities is the present value of estimated
pension and health care benefits for former employees associated with
facilities that have been divested. Sundry other-net includes costs of $2.0,
$22.1 and $38.5 in 1997, 1996 and 1995, respectively, related to these
liabilities. The decrease in costs in 1997 was primarily due to continuing
favorable investment returns on pension plan assets and favorable experience
on health care claims.
Armco Annual Report 31
<PAGE>
- ---------------------------------------------------------------------------
NOTE 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>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 77.8 $ 24.4 $ 22.8
Foreign 1.6 3.0 2.7
- -----------------------------------------------------------------------------
Total $ 79.4 $ 27.4 $ 25.5
- -----------------------------------------------------------------------------
</TABLE>
Provisions for current income taxes for Armco and consolidated subsidiaries
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U. S. federal $ 1.2 $ -- $ --
U. S. state 0.3 -- 0.8
Foreign 0.8 1.4 1.2
- -----------------------------------------------------------------------------
Total $ 2.3 $ 1.4 $ 2.0
- -----------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
applied to Income before income taxes with the provision for income taxes:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal taxes at statutory rate $ 27.8 $ 9.6 $ 8.9
State taxes, net of federal benefit 4.0 1.6 1.5
Change in deferred
tax valuation allowance (29.5) (9.8) (8.4)
- -----------------------------------------------------------------------------
Total $ 2.3 $ 1.4 $ 2.0
- -----------------------------------------------------------------------------
</TABLE>
During 1997, Armco's net operating loss carryforwards decreased by
approximately $19.0 due to taxable income generated in the year, and by $17.4
due to the elimination of loss carryforwards which were related to companies
leaving the consolidated group. Armco's capital loss carryforward decreased by
approximately $6.0 of taxable capital gains generated in the year. The
difference between pretax book income of $79.4 and 1997 taxable income is
primarily due to costs associated with employee benefits and restructuring
actions, which had been accrued for financial accounting purposes in prior
years, but actually paid in 1997; and tax basis depreciation, which exceeded
depreciation expense recorded in the financial statements.
At December 31, 1997, Armco had capital loss and net operating loss (NOL)
carryforwards for federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Year Capital
expiring loss NOL
- -----------------------------------------------------------------------------
<S> <C> <C>
1998 $ 52.4 $ 40.7
1999 -- 106.7
2000 117.4 --
2001 43.6 123.3
2004 -- 9.1
2005 -- 130.3
2006 -- 239.3
2007 -- 186.9
2008 -- 128.8
2009 -- 31.1
2010 -- 46.3
2011 -- 34.6
- -----------------------------------------------------------------------------
Total loss carryforwards $213.4 $1,077.1
- -----------------------------------------------------------------------------
</TABLE>
Armco has $731.4 in U.S. alternative minimum tax net operating losses.
Additionally, Armco has $12.7 of alternative minimum tax credits that have no
expiration.
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, 1997 and 1996, the net deferred
tax asset, included on the Consolidated Balance Sheets, was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 9.2 $ 2.7
Deferred tax asset 319.3 325.8
- -----------------------------------------------------------------------------
Net deferred tax asset $328.5 $328.5
- -----------------------------------------------------------------------------
</TABLE>
Major components of Armco's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Tax effects of:
<S> <C> <C>
Operating loss and tax credit carryforwards $ 522.2 $ 539.5
Employee benefits 556.4 565.4
Other assets (including contingencies
and accruals) 133.5 159.0
- -----------------------------------------------------------------------------
Gross deferred tax asset 1,212.1 1,263.9
Valuation allowance (593.0) (644.4)
- -----------------------------------------------------------------------------
Deferred tax asset 619.1 619.5
Property, plant and equipment (148.8) (138.4)
Other liabilities (141.8) (152.6)
- -----------------------------------------------------------------------------
Deferred tax liability (290.6) (291.0)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 328.5 $ 328.5
- -----------------------------------------------------------------------------
</TABLE>
32 Armco Annual Report
<PAGE>
Management believes it is more likely than not that Armco will generate future
taxable income sufficient to realize that portion of the tax benefit
associated with future deductible temporary differences and NOL carryforwards,
represented by the $328.5, above. Armco prepares a calculation in which it
estimates future income and schedules the future effects of temporary
differences and NOL carryforwards. Because any forecast has inherent
uncertainties and because of the structural changes Armco has undergone over
the last eight years, Armco uses what it believes to be conservative estimates
and assumptions. Considering all available evidence, both positive and
negative, Armco periodically determines if there has been a significant change
in the net deferred tax asset. During the last several years, based on
forecasts and consideration of available evidence, Armco believes that there
has been no significant change in the amount of its net deferred tax asset.
Therefore, amounts that would otherwise have been recognized as a provision
for income taxes have been offset by a change in the valuation allowance.
Armco's belief that realization of its net deferred tax asset is more likely
than not is based on, among other factors, changes in operations that have
occurred during the 1990s, as well as consideration of available tax planning
strategies. Specifically, cost savings resulting from 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. In 1997, Armco utilized approximately $19.0 of the NOL
carryforwards. This represents the first year of taxable income in the last
eight years. However, if Armco is unable to generate sufficient taxable income
in the future through operating results, increases in the valuation allowance
may be required through a charge to income. On the other hand, 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 1993 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 NOL 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.
- ---------------------------------------------------------------------------
NOTE 4 LONG-TERM DEBT AND OTHER FINANCING
- ---------------------------------------------------------------------------
LONG-TERM DEBT
At December 31, 1997 and 1996, Armco's long-term debt was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Sinking fund debentures:
8.5% due 2001 $ -- $ 35.0
9.2% due 2000 -- 25.0
Notes payable:
9% due 2007 150.0 --
9-3/8% due 2000 125.0 125.0
11-3/8% due 1999 -- 100.0
Variable rate (LIBOR plus 2.75%) due 2001 31.2 40.1
5% due 2000 15.3 20.4
Pollution control revenue bonds due 2005 - 8-1/8% 12.1 13.2
Variable rate economic development revenue bonds
due 2020 (1997 average 3.88%) 8.5 8.5
Other 3.0 4.3
- ---------------------------------------------------------------------------
Total debt 345.1 371.5
Less current maturities (38.2) (27.2)
- ---------------------------------------------------------------------------
Long-term debt $306.9 $344.3
- ---------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December
31, 2002, are as follows: 1998, $38.2; 1999, $7.0; 2000, $132.2; 2001, $2.2
and 2002, $2.3. The 1998 maturities include prepayment of $22.3 of variable
rate private placement notes payable.
At December 31, 1997, the fair value of Armco's long-term debt, including
current maturities, was approximately $347.4. 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, 1997.
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, 1996 was approximately $369.0.
Armco Annual Report 33
<PAGE>
In September 1997, Armco issued $150.0 of 9% Senior Notes due 2007, using the
proceeds to retire $100.0 of 11-3/8% Senior Notes due 1999, $20.0 of 9.2%
Sinking Fund Debentures due 2000 and $28.5 of 8.5% Sinking Fund Debentures due
2001. Armco recorded a $3.0 extraordinary loss upon retiring certain of its
outstanding debt.
At December 31, 1997 and 1996, $50.2 and $64.9, respectively, of long-term
debt, including current maturities, represented financing utilized to
construct certain of Armco's fixed assets, which are pledged as collateral on
these loans.
BANK CREDIT AGREEMENTS
At December 31, 1997, 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, 1997, there were no
outstanding borrowings under this credit facility; however, $56.8 of the
facility was used as support for letters of credit and $26.6 was available for
borrowing.
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, 1997, there were no outstanding borrowings under
this credit facility. Armco expects to enter into a new revolving credit
agreement to replace this facility when it expires at the end of 1998. Under
both bank credit facilities, a total of $76.6 was available for borrowing at
December 31, 1997.
CAPITALIZED INTEREST
Armco capitalized interest on projects during construction of $0.4, $0.8 and
$5.1 in 1997, 1996 and 1995, respectively. Capitalized interest for 1995
primarily relates to the construction of the thin-slab caster in Mansfield,
Ohio.
LONG-TERM LEASES
Rental expense under operating leases was $6.9 in 1997, $7.7 in 1996 and $7.7
in 1995. At December 31, 1997, commitments to make future minimum lease
payments for operating leases are $5.7 in 1998, $3.9 in 1999, $2.4 in 2000,
$1.8 in 2001, $2.2 in 2002 and $0.6 thereafter.
- ---------------------------------------------------------------------------
NOTE 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, 1997 and 1996, 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, 1997
and 1996.
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 $51.8125 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, 1997
and 1996.
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, 1997 and 1996.
At December 31, 1997, 1996 and 1995 the number of shares outstanding and book
value of Class A preferred stock were 4,397,231 and $137.6. At December 31,
1997, 1996 and 1995, Armco had outstanding 999,900 shares of Class B preferred
stock with a book value of $48.3.
COMMON STOCK
At December 31, 1997, 22,681,261 unissued shares of Armco's common stock were
reserved for the conversion of preferred stock and 3,510,134 unissued shares
of common stock were reserved for the exercise of stock options (Note 6).
Activity for the years 1995, 1996 and 1997 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, 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
Exercise of options 25,500 -- --
Restricted stock issued -
net of cancellations 643,013 -- 2.7
Directors' stock purchase plan 3,882 -- --
- ---------------------------------------------------------------------------
Balance, December 31, 1997 107,129,561 $1.1 $967.7
- ---------------------------------------------------------------------------
</TABLE>
SHAREHOLDER RIGHTS PLAN
In 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. 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
34 Armco Annual Report
<PAGE>
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 9-3/8% 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 currently satisfy these tests. The payment of
preferred stock dividends is prohibited if Armco is in default under the
credit facility.
At December 31, 1997, the surplus from which Armco is permitted to pay
dividends under Ohio law was $118.3. 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 1998 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 1995, 1996 and 1997 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, 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)
Net income 76.8 -- --
Preferred stock dividends declared (17.9) -- --
Foreign currency translation adjustment -- -- (1.4)
Amortization and cancellation of
deferred compensation -- -- 1.7
Deferred compensation on restricted
stock issued -- -- (2.4)
- ---------------------------------------------------------------------------
Balance, December 31, 1997 $(1,305.0) $ -- $(2.2)
- ---------------------------------------------------------------------------
</TABLE>
- ---------------------------------------------------------------------------
NOTE 6 COMMON STOCK OPTIONS
- ---------------------------------------------------------------------------
Armco shareholders adopted a common stock option plan in 1988 and a long-term
incentive plan in 1993. In addition, stock options may be granted under a 1996
long-term incentive plan. 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 1988 plan has expired as to new stock option 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, stock options generally expire 10 years after the grant date. A
1988 restricted stock plan and 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. At December 31, 1997, 2,273,884 shares of common stock
were available for granting of awards under these plans.
During 1995, 1996 and 1997, stock option activity was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Weighted Average
1995 Shares Exercise Price
- ---------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------
Outstanding at January 1 3,536,258 $ 6.80
Granted 472,201 4.13
Exercised (25,500) 4.76
Forfeited (8,700) 6.39
Expired (464,125) 10.27
- ---------------------------------------------------------------------------
Outstanding at December 31 3,510,134 6.00
- ---------------------------------------------------------------------------
Exercisable at December 31 2,161,324 6.72
- ---------------------------------------------------------------------------
</TABLE>
The following relates to the options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Exercise Price Ranges $4.09 - $7.56 $10.13 - $12.06
- ---------------------------------------------------------------------------
<S> <C> <C>
Options outstanding:
Number of shares 3,271,034 239,100
Weighted average exercise price $5.62 $11.22
Average remaining contractual life 7 years 1 year
Options exercisable:
Number of shares 1,922,224 239,100
Weighted average exercise price $6.16 $11.22
- ---------------------------------------------------------------------------
</TABLE>
Armco Annual Report 35
<PAGE>
In 1996, Armco adopted SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 provides that companies may 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 1997 would have been reduced by $1.2 to $75.6, or $.54 per
share. Net income for 1996 would have been reduced by $1.7 to $30.8, or $.12
per share and 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>
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6.25% 5.5% 7.75%
Expected volatility 35% 30% 35%
Expected life of options 5 years 5 years 5 years
Expected dividends none none none
- ---------------------------------------------------------------------------
</TABLE>
Based on the option pricing model, options granted during 1997, 1996 and 1995
had fair values of $1.72, $1.90 and $2.91 per share, respectively.
During 1997, 1996 and 1995, Armco issued to certain employees 646,013, 570,158
and 660,762 shares of common stock, subject to restrictions, with weighted-
average grant-date fair values of $4.07, $5.69 and $6.63 per share,
respectively. Total compensation cost recognized in income for stock-based
employee compensation awards was $1.6 in 1997, $1.1 in 1996 and $2.2 in 1995.
- ---------------------------------------------------------------------------
NOTE 7 SPECIAL CHARGES
- ---------------------------------------------------------------------------
In 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 1996, Armco recorded a $2.9 special charge primarily for the writedown
of assets 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.
- ---------------------------------------------------------------------------
NOTE 8 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 and finish flat-rolled stainless, electrical
and carbon steels for the automotive, industrial machinery and equipment,
construction and service center markets and international trading companies,
that buy and sell steel and manufactured steel products; and (2) Fabricated
Products, consisting of operations in Sharon and Wheatland, Pennsylvania and
Warren, Ohio that produce steel pipe and tubular products for the industrial
machinery, construction and appliance markets, 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, effective January 1, 1997, Greens Port Industrial Park, which
leases land, buildings and rail car storage facilities and operates a deep
water loading dock on a ship channel in Houston, Texas.
Armco's industry segment information is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales:
Specialty Flat-Rolled Steels $1,497.0 $1,421.2 $1,277.0
Fabricated Products 332.3 302.8 282.9
- ---------------------------------------------------------------------------
Total $1,829.3 $1,724.0 $1,559.9
- ---------------------------------------------------------------------------
Operating profit: (1)
Specialty Flat-Rolled Steels $ 88.6 $ 72.9 $ 76.0
Fabricated Products 41.9 22.8 22.0
Corporate general (25.1) (21.0) (29.0)
- ---------------------------------------------------------------------------
Total $ 105.4 $ 74.7 $ 69.0
- ---------------------------------------------------------------------------
Capital expenditures:
Specialty Flat-Rolled Steels $ 31.4 $ 55.9 $ 153.6
Fabricated Products 8.1 3.1 5.3
Corporate general 2.4 0.8 0.6
- ---------------------------------------------------------------------------
Total $ 41.9 $ 59.8 $ 159.5
- ---------------------------------------------------------------------------
Depreciation:
Specialty Flat-Rolled Steels $ 52.6 $ 50.4 $ 43.4
Fabricated Products 7.2 6.7 7.6
Corporate general 1.5 1.6 1.8
- ---------------------------------------------------------------------------
Total $ 61.3 $ 58.7 $ 52.8
- ---------------------------------------------------------------------------
Identifiable assets:
Specialty Flat-Rolled Steels $1,038.3 $1,052.1 $1,034.8
Fabricated Products 179.1 163.2 173.0
Corporate general (2) 578.3 566.9 517.7
Discontinued operations 85.6 85.6 171.1
- ---------------------------------------------------------------------------
Total $1,881.3 $1,867.8 $1,896.6
- ---------------------------------------------------------------------------
<FN>
(1) In 1996, operating profit for the Fabricated Products segment includes
special charges totaling $8.8 (See Note 7).
(2) Corporate general identifiable assets at December 31, 1997 includes $187.0
of cash and cash equivalents and net deferred tax assets of $328.5 (See Note
3).
</TABLE>
36 Armco Annual Report
<PAGE>
- ---------------------------------------------------------------------------
NOTE 9 LITIGATION AND ENVIRONMENTAL MATTERS
- ---------------------------------------------------------------------------
Armco and its subsidiaries are involved in various pending claims regarding
product liability, patent, employee benefits, 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, 1997 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 or a sale
is recorded.
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 past 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 among Armco and other financially viable parties. 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 reasonably estimated
outcomes and determines the most likely outcome for its liabilities within the
range. 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). These liabilities are not discounted. The cost 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.
At December 31, 1997, Armco had recorded on its Consolidated Balance Sheets,
$18.8 in Other current liabilities and $53.6 in Other long-term liabilities
for estimated probable costs relating to legal and environmental matters.
- ---------------------------------------------------------------------------
NOTE 10 OTHER INVESTMENTS
- ---------------------------------------------------------------------------
In 1995, Armco sold the 1,023,987 shares of AK Steel Holding Corporation
common stock it had received as a result of an initial public offering and
recapitalization of its former joint venture, Armco Steel Company, LP. The
stock was sold for a total of $27.2 and Armco recognized 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.
- ---------------------------------------------------------------------------
NOTE 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
1996, Armco and Oremet reached agreement with the Internal Revenue Service
that a previous refund of taxes and interest should not itself have been
taxable to Oremet, further increasing the net proceeds, which resulted in
Armco recording an additional $6.5 gain on the sale. In 1997, Armco received
an additional $2.7 in state and federal tax refunds.
NATIONAL-OILWELL
National-Oilwell 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. The sale was completed on January 16, 1996. 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 equaled its estimated net realizable value and no additional
equity income or gain or loss was recorded on the sale. The results of
National-Oilwell are reported as discontinued operations in the Consolidated
Statements of Income.
Armco Annual Report 37
<PAGE>
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,
1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
<S> <C>
Assets:
Invested assets $174.9
Reinsurance recoverable 96.9
Other 19.4
- ---------------------------------------------------------------------------
Total assets 291.2
- ---------------------------------------------------------------------------
Liabilities:
Losses and loss reserves (net of future investment
income of $37.3) 185.0
Other 20.6
- ---------------------------------------------------------------------------
Total liabilities 205.6
- ---------------------------------------------------------------------------
Net assets $ 85.6
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1997, AFSG's invested assets included $10.0 each of Armco's 9%
Senior Notes due 2007 and 9-3/8% Senior Notes due 2000 (Note 4).
Currently, insurance regulators having supervisory authority over the AFSG
companies retain substantial control over certain transactions, including the
payment of dividends to Armco.
In March 1997, a group of international insurance companies, previously
affiliated with AFSG and sold in 1991, filed an application for voluntary
liquidation in the United Kingdom. Northwestern National Insurance Company,
one of the AFSG runoff companies, is currently investigating its exposure with
respect to transactions entered into with these companies. Armco believes that
its investment in AFSG will not be materially affected as a result of pending
claims or contingent liabilities related to this matter.
There are various pending matters relating to litigation, arbitration and
regulatory affairs, including the above mentioned voluntary liquidation. The
ultimate liability from such matters at December 31, 1997 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.
- ---------------------------------------------------------------------------
NOTE 12 QUARTERLY INFORMATION (UNAUDITED)
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
4th 3rd 2nd 1st
1997 Year Qtr. Qtr. Qtr. Qtr.
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,829.3 $ 436.4 $ 461.3 $ 490.3 $ 441.3
Cost of products sold (1,623.9) (387.4) (402.9) (436.1) (397.5)
Income from discontinued
operation (1) 2.7 1.4 -- 1.3 --
Income before
extraordinary loss 79.8 19.2 29.7 21.5 9.4
Extraordinary loss (2) (3.0) -- (3.0) -- --
Net income 76.8 19.2 26.7 21.5 9.4
Basic earnings per share:
Income from discontinued
operation 0.03 0.01 -- 0.01 --
Income before
extraordinary loss 0.58 0.14 0.24 0.16 0.05
Extraordinary loss (0.03) -- (0.03) -- --
Net income 0.55 0.14 0.21 0.16 0.05
Diluted earnings per share:
Income from discontinued
operation 0.03 0.01 -- 0.01 --
Income before
extraordinary loss 0.58 0.14 0.22 0.16 0.05
Extraordinary loss (0.03) -- (0.02) -- --
Net income 0.55 0.14 0.20 0.16 0.05
1996
- ---------------------------------------------------------------------------
Net sales $ 1,724.0 $ 413.6 $ 429.2 $ 450.8 $ 430.4
Cost of products sold (1,548.4) (360.0) (382.8) (414.3) (391.3)
Special charges (3) (8.8) (8.8) -- -- --
Income from discontinued
operation (1) 6.5 -- 6.5 -- --
Net income (loss) 32.5 13.2 16.4 (4.0) 6.9
Basic earnings per share:
Income from discontinued
operation 0.06 -- 0.06 -- --
Net income (loss) 0.14 0.08 0.11 (0.08) 0.02
Diluted earnings per share:
Income from discontinued
operation 0.06 -- 0.06 -- --
Net income (loss) 0.14 0.08 0.11 (0.08) 0.02
- ---------------------------------------------------------------------------
<FN>
(1) See Note 11.
(2) See Note 4.
(3) See Note 7.
</TABLE>
38 Armco Annual Report
<PAGE>
<TABLE>
PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (UNAUDITED)
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Price per share:
High $ 6 3/16 $ 6 3/8 $ 4 1/8 $ 4 7/8 $ 4 5/8 $ 5 1/8 $ 6 $ 6 1/2
Low 4 1/2 3 13/16 3 3/8 3 3/8 3 5/8 4 1/8 4 3/4 5 1/4
PREFERRED STOCK
CLASS A $2.10:
Quarterly dividend
per share: $.525
Price per share:
High 26 3/16 26 23 7/8 24 24 23 5/8 24 1/4 24 1/2
Low 24 1/4 23 1/2 21 1/4 21 22 1/8 22 22 3/4 23 1/2
PREFERRED STOCK
CLASS A $3.625:
Quarterly dividend
per share: $.90625
Price per share:
High 51 3/4 52 1/8 42 7/8 43 1/4 45 1/4 47 3/8 51 1/4 52
Low 46 3/8 42 7/8 41 1/4 39 42 3/8 44 1/4 47 49 5/8
PREFERRED STOCK
CLASS B $4.50:
Quarterly dividend
per share: $1.125
Price per share:
High 51 3/16 51 3/4 49 49 1/2 47 1/2 47 5/8 49 3/4 49 3/8
Low 49 5/8 48 9/16 47 46 1/4 45 3/8 45 3/4 46 3/4 47 1/2
- --------------------------------------------------------------------------------------
</TABLE>
Armco Annual Report 39
<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 9, 1998 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, 1998.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. CONSOLIDATED BALANCE SHEETS
AND CONSOLIDATED STATEMENTS OF 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 189,900
<SECURITIES> 5,000
<RECEIVABLES> 147,000
<ALLOWANCES> 4,000
<INVENTORY> 268,000
<CURRENT-ASSETS> 637,400
<PP&E> 1,305,500
<DEPRECIATION> 653,000
<TOTAL-ASSETS> 1,881,300
<CURRENT-LIABILITIES> 386,300
<BONDS> 306,900
<COMMON> 1,100
0
185,900
<OTHER-SE> (339,500)
<TOTAL-LIABILITY-AND-EQUITY> 1,881,300
<SALES> 1,829,300
<TOTAL-REVENUES> 1,829,300
<CGS> 1,623,900
<TOTAL-COSTS> 1,623,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,500
<INCOME-PRETAX> 79,400
<INCOME-TAX> 2,300
<INCOME-CONTINUING> 77,100
<DISCONTINUED> 2,700
<EXTRAORDINARY> (3,000)
<CHANGES> 0
<NET-INCOME> 76,800
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</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 27, 1998, 107,843,544 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 27, 1998, 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 27, 1998, 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, 1997, the
amount from which Armco is permitted to pay dividends under this
provision was $118.3 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".
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, 1997, 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 it common stock. In addition, under the terms of
indentures for Armco's 9-3/8% Senior Notes due 2000, Armco can pay a
dividend on its common stock only if it meets certain financial test
described in the indentures. Armco does not currently satisfy these
tests.
Under Ohio law, at December 31, 1997, the surplus from which Armco
is permitted to pay dividends was $118.3 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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