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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
OR
[_]Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
Commission File No. 1-13696.
AK STEEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 31-1401455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Curtis Street, Middletown, Ohio 45043
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (513) 425-5000.
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
<S> <C>
Common Stock $.01 Par Value New York Stock Exchange
$3.625 Cumulative Convertible Preferred New York Stock Exchange
Stock $1 Par Value
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES NO X .
Aggregate market value of the registrant's voting stock held by non-
affiliates at February 22, 2000: $973,443,172.
At February 22, 2000 there were 111,181,904 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the
registrant's definitive proxy statement for the annual meeting of stockholders
(the "2000 Proxy Statement"), which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
ended December 31, 1999.
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AK Steel Holding Corporation
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 5
Item 3. Legal Proceedings.............................................. 6
Item 4. Submission of Matters to a Vote of Security Holders............ 7
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters........................................................ 9
Item 6. Selected Financial Data........................................ 10
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 11
Item 8. Financial Statements and Supplementary Data.................... 18
Item 9. Changes in and Disagreements with Accountants.................. 42
Item 10. Directors and Executive Officers of the Registrant............. 42
Item 11. Executive Compensation......................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management. 43
Item 13. Certain Relationships and Related Transactions................. 43
Exhibits, Financial Statement Schedules and Reports on Form 10-
Item 14. K.............................................................. 43
</TABLE>
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PART I
Item 1. Business.
General
AK Steel Holding Corporation ("AK Holding"), through its wholly-owned
subsidiary, AK Steel Corporation ("AK Steel" and, together with AK Holding,
the "Company"), is a fully-integrated producer of flat-rolled carbon,
stainless and electrical steels. Its operations include those previously
conducted by Armco Inc. ("Armco"), which merged with and into AK Steel on
September 30, 1999 in a transaction accounted for as a pooling of interests.
The merger is expected to enhance AK Steel's steel producing capability and
market position by allowing it to combine the distinct strengths of each
company's individual plants into a unified steelmaking operation. In addition
to its flat-rolled steel manufacturing and finishing operations ("Steel
Operations"), the Company owns and operates Sawhill Tubular, a manufacturer of
a wide range of steel pipe and tubing products; Douglas Dynamics, L.L.C., the
largest North American manufacturer of snowplows and ice control products for
four-wheel drive light trucks; and the Greens Port Industrial Park on the
Houston, Texas ship channel. During 1999, AK Steel's steel shipments,
including both flat-rolled and tubular products, totaled 6,541,000 tons, of
which 82% consisted of value-added coated and cold-rolled carbon steel
products, finished stainless and electrical steels and tubular products.
Operations
The Company's principal business focus is its Steel Operations. They consist
of eight steelmaking and finishing plants in Indiana, Kentucky, Ohio and
Pennsylvania that produce flat-rolled carbon steels, including premium quality
coated, cold-rolled and hot-rolled products, and specialty stainless and
electrical steels that are sold in slab, hot band, and sheet and strip form.
These products are sold primarily to the domestic automotive, appliance,
industrial machinery and equipment, and construction markets, as well as to
distributors, service centers and convertors. The Steel Operations also
include European trading companies that buy and sell steel and steel products.
AK Steel is registered under the ISO 9002 international quality standard and
certified under the QS 9000 quality assurance program used by domestic
automotive manufacturers and has received numerous quality awards from many of
its major customers. Additional information about the Company's Steel
Operations is set forth in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in Note 9 to the
Consolidated Financial Statements, which is set forth in Item 8.
AK Steel's other operations consist of its Sawhill Tubular division, Douglas
Dynamics, L.L.C. and Greens Port Industrial Park. Sawhill Tubular, with three
plants located in Ohio and Pennsylvania, manufactures a wide range of steel
pipe and tubing products for the non-residential construction, industrial,
plumbing and heating markets. Douglas Dynamics manufactures snowplows and ice
control products for four-wheel drive light trucks at plants in Maine,
Tennessee and Wisconsin. Its products are sold under the brand names Western
and Fisher through independent distributors in the United States and Canada.
Greens Port Industrial Park, which consists of approximately 650 acres on the
Houston, Texas ship channel, leases land, buildings and rail car storage
facilities to third parties and operates a deep water loading dock on the
channel.
Customers
AK Steel's flat-rolled carbon steel products are sold primarily to
automotive manufacturers and to customers in the appliance, industrial
machinery and equipment, and construction markets, consisting principally of
manufacturers of home appliances, heating ventilation and air conditioning
equipment and lighting products. Hot-rolled, cold-rolled and semi-finished
steel products are also sold to distributors, service centers and convertors
who may further process these products or resell them without further
processing.
AK Steel sells its stainless steel products primarily to customers in the
automotive industry, as well as to manufacturers of food handling, chemical
processing, pollution control and medical and health equipment.
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Electrical steels, which are iron-silicon alloys with unique magnetic
properties, are sold primarily to manufacturers of power transmission and
distribution transformers, electrical motors and generators, and lighting
ballasts.
In conducting its Steel Operations, AK Steel's marketing efforts are
principally directed toward those customers, such as automotive manufacturers,
who require precise on-time delivery, technical support and the highest
quality flat-rolled steel. Management believes that AK Steel's enhanced
product quality and delivery capabilities, and its emphasis on customer
technical support and product planning, are critical factors in its ability to
serve this segment of the market. The following table sets forth the
percentage of the Steel Operations net sales attributable to various markets:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Automotive................................................... 51% 54% 55%
Appliance, Industrial Machinery and Equipment, and
Construction................................................ 23% 25% 25%
Distributors, Service Centers and Convertors................. 26% 21% 20%
</TABLE>
AK Steel's shipments to the automotive market have increased steadily in
recent years, consistent with management's strategy of concentrating on the
high-end markets for flat-rolled steel. A major factor contributing to this
increase has been the growth in the number of U.S.-based plants of foreign
automotive manufacturers. AK Steel's Steel Operations segment supplies
products to all of these producers and is a major supplier to General Motors,
Ford Motor Company and DaimlerChrysler AG. Shipments to General Motors, AK
Steel's largest customer, accounted for approximately 11%, 12% and 15% of
Steel Operations net sales in 1997, 1998 and 1999, respectively. No other
customer accounted for more than 10% of net sales for any of these years.
AK Steel is party to agreements with all of its major automotive and most
appliance industry customers with terms that range from one to three years.
These agreements, which are typically finalized late in the year, set forth
prices to be paid for each product category during each year of their term,
and, except for nickel and chrome, where surcharges may be passed on to the
customer, do not permit adjustment to reflect changes in prevailing market
conditions or raw material costs. During 1999, approximately 75% of AK Steel's
sales of flat-rolled steel products were made pursuant to these agreements,
with the balance being made at market prices at the time of sale.
Raw Materials
The principal raw materials required for AK Steel's manufacturing operations
are carbon and stainless steel scrap, iron ore, coal, electricity, natural
gas, oxygen, chrome, nickel, silicon, molybdenum, zinc, limestone and other
commodity materials. In addition, AK Steel purchases carbon steel slabs from
other steel producers to supplement the production from its own steelmaking
facilities. Purchases of coal, iron ore and limestone, as well as
transportation services, are made at negotiated prices under multi-year
agreements. Purchases of carbon steel slabs, stainless steel scrap and other
raw materials are made at prevailing market prices, which are subject to
fluctuation in accordance with supply and demand. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for information
with respect to the anticipated impact of rising raw materials prices on 2000
operations. AK Steel believes that adequate sources of supply exist for all of
its raw material requirements.
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Employees
As of December 31, 1999, the Company had approximately 11,500 employees.
Approximately 8,000 employees at nine of AK Steel's fourteen plants are
represented by international, national or independent unions, under contracts
with expiration dates extending through 2006. Labor contracts covering
employees at the following plant locations expire in 2000.
<TABLE>
<CAPTION>
% of Total Contract
Location/Union Employees Expiration Date
-------------- ---------- ---------------
Ashland Works
-------------
<S> <C> <C>
United Steelworkers of America.............. 8% September 1, 2000
<CAPTION>
Zanesville Works
----------------
<S> <C> <C>
Zanesville-Armco Independent Organization,
Inc........................................ 2% May 20, 2000
<CAPTION>
Sawhill Tubular
---------------
<S> <C> <C>
United Steelworkers of America (Wheatland,
Pennsylvania).............................. 1% January 31, 2000
United Steelworkers of America (Warren,
Ohio)...................................... 1% September 30, 2000
</TABLE>
On February 5, 2000, represented employees at Sawhill Tubular's Wheatland
plant ratified a new 5-year collective bargaining agreement.
AK Steel's Mansfield Works was one of the facilities owned and operated by
Armco prior to its merger with AK Steel on September 30, 1999. On September 1,
1999, the contract between Armco and the United Steelworkers of America
covering approximately 600 hourly workers, including 100 on layoff status, at
the Mansfield Works expired. Because of production slowdowns, vandalism and
threats of violence on the part of union members, Armco informed the union,
and the Company understood, that it would lock out represented employees while
it continued to bargain with the union. Since early September 1999, the
Mansfield Works has been operated by salaried employees and temporary
replacement workers.
On November 6, 1999, AK Steel announced that it would permanently close the
Dover Works and its redundant galvanizing line effective January 29, 2000. The
plant employs approximately 120 workers. Production at the plant ceased on
December 17, 1999.
Competition
AK Steel competes with domestic and foreign flat-rolled carbon, stainless
and electrical steel producers and producers of plastics, aluminum and other
materials that can be used in lieu of flat-rolled steels in manufactured
products. Price, service, quality and delivery are the primary competitive
factors and vary in relative importance according to the category of product
and customer requirements.
Domestic steel producers face significant competition from foreign producers
who typically have lower labor costs. In addition, many foreign steel
producers are owned, controlled or subsidized by their governments and their
decisions with respect to production and sales may be influenced more by
political and economic policy considerations than by prevailing market
conditions.
On June 10, 1998, Armco and other domestic producers of flat-rolled
stainless sheet and strip products filed petitions with the U.S. Department of
Commerce and the U.S. International Trade Commission ("ITC") charging eight
foreign countries with violations of U.S. trade laws. On May 20, 1999, the
Department of Commerce ("DOC") announced antidumping and countervailing duties
on imports of certain stainless steel products of up to 59% and on July 7,
1999, the ITC voted affirmatively that foreign stainless steel imports have
injured the domestic industry. These rulings triggered the imposition of
tariffs, which should result in higher prices for foreign flat-rolled
stainless steel and lower imports.
In mid-1999, the DOC and the ITC began to review existing antidumping and
countervailing duties involving Italian and Japanese producers of electrical
steel, to determine whether these protections should be
3
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extended for another five years. Their deliberations are expected to extend
into 2001, during which time the current protections will remain in place. The
failure to obtain or extend meaningful tariff protections for products similar
to those produced and sold by AK Steel could adversely affect prices and
reduce profit margins for those products.
Environmental Matters
Domestic steel producers, including AK Steel, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
Over the past three years, AK Steel has expended the following for
environmental related capital investments and environmental compliance costs:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1998 1999
------------------------
(in millions)
<S> <C> <C> <C>
Environmental related capital investments.......... $ 6.5 $20.2 $ 7.2
Environmental compliance costs..................... 85.0 98.2 115.1
</TABLE>
Management does not anticipate any material impact on AK Steel's recurring
operating costs or future profitability as a result of its compliance with
current environmental regulations. Moreover, because all domestic steel
producers operate under the same set of federal environmental regulations,
management believes that AK Steel is not competitively disadvantaged by its
need to comply with these regulations.
Environmental Remediation
AK Steel and its predecessors have been conducting steel manufacturing and
related operations for approximately 100 years. Although their operating
practices are believed to have been consistent with prevailing industry
standards during this time, hazardous materials may have been released at one
or more operating sites, including sites that are no longer owned by AK Steel.
Potential remediation expenditures have been estimated for those sites where
future remediation efforts are probable based on identified conditions,
regulatory requirements or contractual obligations arising from the sale of a
business.
Pursuant to the Resource Conservation and Recovery Act ("RCRA"), which
governs the treatment, handling and disposal of hazardous waste, the United
States Environmental Protection Agency ("EPA") and authorized state
environmental agencies may conduct inspections of RCRA regulated facilities to
identify areas where there have been releases of hazardous waste or hazardous
constituents into the environment and order the facilities to take corrective
action to remediate such releases. The Company's major steelmaking facilities
are subject to RCRA inspections by environmental regulators. While the Company
cannot predict the future actions of these regulators, the potential exists
for required corrective action at these facilities.
Under authority conferred by the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the EPA and state environmental
authorities have conducted site investigations at certain of AK Steel's
facilities, portions of which previously had been used for disposal of
materials that are currently subject to regulation. While the results of these
investigations are still pending, in the future AK Steel could be directed to
expend funds for remedial activities at the former disposal areas. Given the
uncertain status of these investigations, however, management is unable to
predict if and when such expenditures might be required or their magnitude.
Environmental Proceedings
Under the authority of CERCLA, the Kentucky Department of Environmental
Protection conducted a comprehensive review of the waste management control
systems and handling practices at the Ashland Works coke department and
steelmaking facility in July, August and September 1991. As a result of this
inspection, the
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Kentucky Natural Resources and Environmental Protection Cabinet instituted an
administrative proceeding against the Company in November 1993, alleging
certain regulatory violations. AK Steel has entered into non-binding mediation
with the Kentucky Natural Resources and Environmental Protection Cabinet.
In 1991, the Ohio Environmental Protection Agency ("OEPA") notified AK Steel
that it had referred to the Ohio Attorney General for potential enforcement
action certain alleged violations of Ohio's water discharge and hazardous
waste regulations at the Middletown Works. Although management believes that
AK Steel has a strong basis for contesting the alleged violations, it is in
the process of negotiating a consent order with the Ohio Attorney General that
will address the state's concerns.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewater prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits in wastewater from the Middletown Works, AK Steel, through the
Middletown POTW, petitioned the EPA for "removal credits," a type of
compliance exemption, based on the Middletown POTW's satisfactory treatment of
the wastewater for ammonia and phenol. The EPA declined to review the petition
on the grounds that it had not yet promulgated new sludge management rules. AK
Steel thereupon sought and obtained from the United States District Court for
the Southern District of Ohio an injunction prohibiting the EPA from
instituting enforcement action against AK Steel for noncompliance with the
pretreatment limitations, pending the EPA's promulgation of the applicable
sludge management regulations. Management is unable to predict the outcome of
this matter. However, if the EPA eventually refuses to grant petition for
removal credits, AK Steel could incur additional costs to construct
pretreatment facilities at the Middletown Works.
On February 27, 1995, the OEPA issued a Notice of Violation ("NOV") with
respect to the Zanesville Works alleging noncompliance with both a 1993 order
and various state regulations regarding hazardous waste management. AK Steel
is continuing to work with the OEPA and the Ohio Attorney General's Office to
achieve final resolution of this matter. No proposed penalties were included
in the NOV and management is unable to estimate potential penalties, if any,
based on current information.
Subsequent to a multi-media inspection of Middletown Works during the fall
of 1996, USEPA Region V notified AK Steel that legal proceedings had been
initiated alleging violations of Clean Air Act and Clean Water Act
regulations. The Company is in discussions with Region V and the Department of
Justice concerning these matters.
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring Armco to develop a plan for investigation of eight
areas of the Mansfield Works that allegedly could be sources of contamination.
On October 30, 1998, Armco filed a complaint in the United States District
Court for the Northern District of Ohio seeking pre-enforcement review. On
April 1, 1999, the Court dismissed the complaint on the basis that the statute
did not allow pre-enforcement review of agency orders. Thereafter, Armco filed
a motion for reconsideration, which is still pending. In July 1999, Armco
submitted to the USEPA a work plan for investigation that is currently under
review. In December 1999, the USEPA Region V requested additional information
to be supplied in support of the Modified Investigation Plan submitted by
Armco in July 1999.
In addition to the foregoing matters, the Company is or may be involved in
proceedings with various regulatory authorities that may require the Company
to pay fines, comply with more rigorous standards or other requirements or
incur capital and operating expenses for environmental compliance. Management
believes that the ultimate disposition of the foregoing proceedings will not
have, individually or in the aggregate, a material adverse effect on the
Company's consolidated financial condition, results of operations or cash
flows.
Item 2. Properties.
The Company's corporate headquarters are located in Middletown, Ohio.
Steelmaking and finishing operations are conducted at eight facilities in
Indiana, Kentucky, Ohio and Pennsylvania. Fabricating plants are located in
Pennsylvania, Ohio, Wisconsin, Maine and Tennessee, and an industrial park is
located in Houston, Texas. All of these facilities are owned by the Company.
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Coke manufacturing plants, blast furnaces, basic oxygen furnaces and
continuous casters are located at the Ashland Works in Kentucky and the
Middletown Works in Ohio. A hot rolling mill, cold rolling mill, pickling
lines, annealing facilities and temper mills as well as four coating lines are
located at the Middletown Works, and one additional coating line is located at
the Ashland Works. Together, these facilities are located on approximately
5,400 acres of land.
The Rockport Works consists of a state-of-the-art continuous cold rolling
mill, a hot-dip galvanizing and galvannealing line, a continuous carbon and
stainless steel pickling line, a stainless steel annealing and pickling line,
hydrogen annealing facilities and a temper mill. The 1.7 million square-foot
plant is located on a 1,700-acre site in Spencer County, Indiana.
The Butler Works in Pennsylvania, which is situated on 1,300 acres with 3.2
million square feet of buildings, produces stainless and electrical steel.
Melting takes place in three electric arc furnaces that feed an argon-oxygen
decarburization unit and a vacuum degassing unit for refining molten metal.
These units feed two double strand continuous casters. The Butler Works also
includes a hot rolling mill, annealing and pickling units and two fully-
automated tandem cold rolling mills. It also has various intermediate and
finishing operations for both stainless and electrical steels.
The Coshocton Works in Ohio, located on 650 acres, consists of a 600,000
square-foot plant, containing three Sendzimer mills and two Z-high mills for
cold reduction, four annealing and pickling lines, ten bell annealing
furnaces, three bright annealing lines and other processing equipment,
including temper rolling, slitting and packaging facilities.
The Mansfield Works in Ohio, which produces stainless steel, consists of a
1.4 million square-foot facility on a 445-acre site and includes a melt shop
with two electric arc furnaces, an argon-oxygen decarburization unit, a thin-
slab continuous caster, a six-stand hot rolling mill, a five-stand tandem cold
rolling mill and a pickling line.
The Zanesville Works in Ohio, with 508,000 square feet of buildings on 88
acres, is a finishing plant for some of the stainless and electrical steel
produced at the Butler Works and Mansfield Works and has a Sendzimer cold
rolling mill, annealing and pickling lines, high temperature box anneal and
other decarburization and coating units.
The Dover Works in Ohio is a 600,000 square foot facility, which includes a
48-inch carbon steel galvanizing line, bell annealing furnaces and a temper
mill. On November 6, 1999, AK Steel issued a notice of its intention to close
the Dover Works and the facility ceased production on December 17, 1999.
Item 3. Legal Proceedings.
In addition to the items discussed below, there are various claims pending
against the Company 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 the
Company. In management's opinion, the ultimate liability resulting from all
claims, individually or in the aggregate, will not materially affect the
Company's consolidated financial position, results of operations or cash
flows.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the Company's
Middletown Works and all hourly employees of independent contractors working
at the facility since June 1992. The complaint has twice been amended to add
additional named plaintiffs. The plaintiffs allege negligence and intentional
tort and seek compensatory and punitive damages in an unspecified amount for
alleged dangerous working conditions at the Company's Middletown Works. In
March 1997, the Court granted plaintiffs' motion to certify a class. The
Company's appeal of this decision to the Ohio Supreme Court was denied on
July 29, 1998. On November 2, 1998, the Company filed motions in the trial
court for an order vacating class certification and for partial summary
judgment on the grounds of federal preemption. Both motions are pending. The
Court of Common Pleas has set a trial date of June 2000.
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On January 20, 1998, judgment against AK Steel in the amount of $6.5 million
was entered by the United States District Court for the Southern District of
Ohio, following a jury trial in a disability discrimination lawsuit brought by
a former employee. On January 30, 1998, AK Steel moved for judgment in its
favor as a matter of law, reduction of the damages and a new trial. Subsequent
to December 31, 1999, the court reduced the jury verdict to $1.5 million. The
Company subsequently filed a motion for relief from that judgment, which is
pending.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter 1999.
Executive Officers
The following table sets forth the name, age and principal position with the
Company of each of its executive officers as of February 22, 2000:
<TABLE>
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
Richard M. Wardrop, Jr.. 54 Chairman of the Board and Chief Executive Officer
James L. Wareham........ 60 President
John G. Hritz........... 45 Executive Vice President, General Counsel
Richard E. Newsted...... 42 Executive Vice President, Commercial
James L. Wainscott...... 42 Senior Vice President, Treasurer and Chief Financial Officer
Michael T. Adams........ 42 Vice President, Manufacturing
James M. Banker......... 43 Vice President, Sales and Marketing
Michael P. Christy...... 43 Vice President, Purchasing and Transportation
Thomas C. Graham, Jr.... 45 Vice President, Research and Engineering
Brenda S. Harmon........ 48 Vice President, Human Resources and Secretary
J. Theodore Holmes...... 55 Vice President, Customer Service
Donald B. Korade........ 57 Vice President and Controller
Alan H. McCoy........... 48 Vice President, Public Affairs
Gary L. McDaniel........ 53 Vice President, Operations
M. Dennis McGlone....... 50 Vice President, Commercial
Ernest E. Rummler....... 48 Vice President, Manufacturing Planning & Steel Sourcing
James W. Stanley........ 55 Vice President, Safety and Health
</TABLE>
Richard M. Wardrop, Jr. has been Chairman of the Board since January 1997.
He has been a director since March 1995 and Chief Executive Officer since May
1995. Mr. Wardrop also served as President of the Company from April 1994
until March 1997. From June 1992 to April 1994, Mr. Wardrop served as Vice
President, Manufacturing of the Company's predecessor, Armco Steel Company,
L.P.
James L. Wareham has been President since March 1997. Prior to joining the
Company, Mr. Wareham was Chairman, President and Chief Executive Officer of
Wheeling Pittsburgh Steel Corporation as well as President of WHX Corporation,
the parent company of Wheeling Pittsburgh Steel Corporation.
John G. Hritz was named Executive Vice President, General Counsel in January
1999. From May 1998 until that date, Mr. Hritz was Senior Vice President,
General Counsel and Secretary of the Company, having previously served as Vice
President, General Counsel and Secretary from August 1996 until May 1998. Mr.
Hritz joined the Company in November 1989 as Counsel in the Law Department,
and was named Assistant General Counsel in May 1993 and Assistant Secretary in
January 1994. Since June 1996, Mr. Hritz also has had responsibility for the
Company's employee and labor relations and environmental affairs.
Richard E. Newsted was named Executive Vice President, Commercial in July
1998. Mr. Newsted previously served as Executive Vice President, Chief
Financial Officer from May 1997 to July 1998, as Senior Vice President, Chief
Financial Officer from August 1994 to May 1997 and, additionally, as Treasurer
from
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August 1994 through March 1995. From January 1993 until June 1994, Mr. Newsted
was Vice President, Chief Financial Officer and Secretary of National Steel
Corporation.
James L. Wainscott has been the Company's Treasurer since April 1995 and its
Chief Financial Officer since July 1998. Mr. Wainscott was named a Senior Vice
President in January 2000, having previously served as a Vice President from
April 1995. For more than ten years prior to joining the Company in 1995, Mr.
Wainscott held various financial positions with National Steel Corporation.
Michael T. Adams was named Vice President, Manufacturing in July 1998. From
October 1995 until that date, Mr. Adams served as General Manager,
Manufacturing of the Company's Middletown Works, having previously held
various manufacturing and engineering positions within the Company.
James M. Banker was named Vice President, Sales and Marketing effective May
1, 1999. From April 1992 until that date, Mr. Banker served as General
Manager, Sales for the Company. Prior thereto, Mr. Banker held a number of
positions in the Company's commercial organization.
Michael P. Christy has been Vice President, Purchasing and Transportation
since November 1998. From January 1998 until that date, Mr. Christy had been
Vice President, Purchasing and Financial Analysis. Mr. Christy was named
Director, Purchasing and Financial Analysis in May 1997 after having served as
Director, Financial Planning and Analysis since June 1996. Prior to that Mr.
Christy held various positions in finance, planning and operations at National
Steel Corporation.
Thomas C. Graham, Jr. has been Vice President, Research and Engineering
since June 1996. From early 1994 until that date, he was General Manager
Sales, Construction for National Steel Corporation, having previously held
various positions in project engineering, process and technology, and
operations at that company.
Brenda S. Harmon has been Vice President, Human Resources since January
1998. She assumed the additional responsibilities of Corporate Secretary in
March 1999. Mrs. Harmon had been General Manager, Human Resources since
September 1996, after having been named Corporate Manager, Human Resources in
March 1995. Prior to that Mrs. Harmon held various positions within the
Company's Human Resources Department.
J. Theodore Holmes was named Vice President, Customer Service in January
2000. From May 1999 until that date, Mr. Holmes was Director, Customer
Service. Mr. Holmes was Director, Customer Service & Product Administration
from August 1998 to May 1999. From July 1997 to August 1998, Mr. Holmes served
as General Manager, Manufacturing Planning. From November 1992 to July 1997,
Mr. Holmes was General Manager, Customer Service.
Donald B. Korade was named Vice President and Controller in November 1999.
From September 1995 until that date, Mr. Korade served as Controller of the
Company. Mr. Korade was Assistant Controller, Financial Accounting from June
1989 until September 1995.
Alan H. McCoy has been Vice President, Public Affairs since January 1997.
From March 1994 until that date, Mr. McCoy served as General Manager, Public
Relations. Prior thereto, Mr. McCoy held various positions within the
Company's Public Relations Department.
Gary L. McDaniel was named Vice President, Operations in November 1999. From
September 1995 until the merger with Armco, Mr. McDaniel served as Vice
President, Operations of Armco and was made an elected officer in January
1996. Mr. McDaniel joined Armco in March 1993 as Vice President, Operations
for Armco Advanced Material Company, a wholly owned subsidiary of Armco, and
served as Vice President & General Manager of Armco from February 1994 until
September 1995.
M. Dennis McGlone was named Vice President, Commercial in November 1999.
From January 1996 until the merger with Armco, Mr. McGlone served as Vice
President, Commercial of Armco. From June 1993 until
8
<PAGE>
January 1996, he served as Senior Vice President--Commercial of Armco. From
January 1992 until June 1993, Mr. McGlone was President of Coshocton
Stainless, a unit of Cyclops Corporation which was acquired by Armco in April
1992.
Ernest E. Rummler was named Vice President, Manufacturing Planning & Steel
Sourcing in January 2000. From August 1998 until that date, Mr. Rummler served
as Director, Manufacturing Planning & Steel Sourcing. From July 1997 until
August 1998, Mr. Rummler was General Manager, Customer Service, and from June
1992 until July 1997, he was General Manager, Manufacturing Planning.
James W. Stanley has been Vice President, Safety and Health since January
1996. Prior to joining the Company, Mr. Stanley held various management
positions with the U.S. Department of Labor's Occupational Safety and Health
Administration since its inception in 1971.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
AK Holding's common stock has been listed on the New York Stock Exchange
since April 5, 1995 (symbol: AKS). The table below sets forth, for the
calendar quarters indicated, the reported high and low sale prices of the
common stock:
<TABLE>
<CAPTION>
1998 High Low
---- ---- ----
<S> <C> <C>
First Quarter........................................... $21 5/8 $16 1/16
Second Quarter.......................................... $22 3/16 $16 11/16
Third Quarter........................................... $18 7/8 $13 5/8
Fourth Quarter.......................................... $23 3/4 $14 1/2
<CAPTION>
1999 High Low
---- ---- ----
<S> <C> <C>
First Quarter........................................... $24 3/8 $19 11/16
Second Quarter.......................................... $29 5/8 $22 1/8
Third Quarter........................................... $24 1/2 $16 5/8
Fourth Quarter.......................................... $19 1/16 $13 3/4
</TABLE>
As of February 22, 2000, there were 111,181,904 shares of common stock
outstanding and held of record by 18,189 stockholders. Because many of these
shares were held by depositories, brokers and other nominees, the number of
record holders is not representative of the number of beneficial holders.
On September 30, 1999, upon the effectiveness of the merger of Armco with
and into AK Steel, the 2,700,000 outstanding shares of Armco's $3.625
convertible preferred stock were converted into the right to receive a like
number of shares of a substantially identical new series of cumulative
convertible preferred stock of AK Holding. However, in accordance with change-
of-control provisions applicable to Armco's preferred stock, holders had the
right, during a 45-day period starting September 30, 1999, to convert each new
preferred share they received into 3.009 shares of AK Holding common stock. A
total of 2,392,069 shares of preferred stock were converted during this
period. After the 45-day period, the stated conversion ratio of the preferred
stock reverted to 2.6 shares of AK Holding common stock per share of preferred
stock. During the fourth quarter of 1999, those shares traded at prices
between a high of $54 7/16 and a low of $45 7/8. At December 31, 1999, 307,931
shares of the $3.625 preferred stock remained outstanding.
AK Holding has paid quarterly dividends on its common stock since November
15, 1995. In 1998, a dividend of $0.125 per share was paid on February 17, May
15, August 17 and November 16. In 1999, a dividend of $0.125 per share was
paid on February 15, May 17, August 16 and November 15. The declaration and
payment of cash dividends is subject to restrictions imposed by the
instruments governing its senior debt. At December 31, 1999, AK Holding had
adequate amounts available for the payment of cash dividends.
9
<PAGE>
Item 6. Selected Financial Data.
The following selected historical consolidated financial data for each of
the five years in the period ended December 31, 1999 have been derived from
the Company's audited consolidated financial statements after giving effect to
the merger of Armco with and into AK Steel (See Note 1 below). The selected
historical consolidated financial data presented herein are qualified in their
entirety by, and should be read in conjunction with, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (1)
Net sales........................ $3,733.9 $3,930.9 $4,176.6 $4,029.7 $4,284.8
Cost of products sold............ 2,960.7 3,194.0 3,363.3 3,226.5 3,419.8
Selling and administrative
expenses........................ 293.8 278.1 288.0 278.0 309.8
Depreciation..................... 127.4 134.8 141.0 161.2 210.7
Special charges and unusual items
(2)............................. -- 8.8 -- -- 99.7
-------- -------- -------- -------- --------
Total operating costs............ 3,381.9 3,615.7 3,792.3 3,665.7 4,040.0
-------- -------- -------- -------- --------
Operating profit................. 352.0 315.2 384.3 364.0 244.8
Interest expense................. 68.5 76.1 111.7 84.9 123.7
Other income..................... 25.5 25.4 48.4 30.3 20.8
-------- -------- -------- -------- --------
Income before income taxes and
minority interest............... 309.0 264.5 321.0 309.4 141.9
Provision (benefit) for income
taxes........................... (370.0) 169.7 127.5 105.5 63.9
Minority interest................ 8.1 8.1 8.1 8.1 6.7
-------- -------- -------- -------- --------
Income from continuing
operations...................... 670.9 86.7 185.4 195.8 71.3
Discontinued operations.......... 6.3 4.1 1.6 -- 7.5
-------- -------- -------- -------- --------
Income before extraordinary item
and cumulative effect of an
accounting change............... 677.2 90.8 187.0 195.8 78.8
Extraordinary loss on retirement
of debt......................... -- -- 1.9 -- 13.4
Cumulative effect of a change in
accounting (3).................. -- -- -- 133.9 --
-------- -------- -------- -------- --------
Net income....................... $ 677.2 $ 90.8 $ 185.1 $ 329.7 $ 65.4
======== ======== ======== ======== ========
Basic earnings per share:
Income from continuing
operations.................... $ 6.93 $ 0.71 $ 1.75 $ 1.86 $ 0.62
Discontinued operations........ 0.07 0.04 0.02 -- 0.07
Extraordinary losses........... -- -- 0.02 -- 0.13
Cumulative effect of an
accounting change............. -- -- -- 1.33 --
-------- -------- -------- -------- --------
Net income..................... $ 7.00 $ 0.75 $ 1.75 $ 3.19 $ 0.56
Diluted earnings per share:
Income from continuing
operations.................... $ 5.92 $ 0.70 $ 1.68 $ 1.82 $ 0.62
Discontinued operations........ 0.06 0.04 0.01 -- 0.07
Extraordinary losses........... -- -- 0.02 -- 0.13
Cumulative effect of an
accounting change............. -- -- -- 1.24 --
-------- -------- -------- -------- --------
Net income..................... $ 5.98 $ 0.74 $ 1.67 $ 3.06 $ 0.56
Cash dividend per common share
(not adjusted for merger)....... $ 0.075 $ 0.325 $ 0.425 $ 0.50 $ 0.50
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (1)
Cash, cash equivalents and short-
term investments................. $ 449.5 $ 908.5 $ 801.0 $ 353.7 $ 54.4
Working capital................... 746.0 1,263.7 930.6 576.1 564.5
Total assets...................... 4,447.0 4,710.4 5,074.4 5,248.5 5,201.5
Current portion of long-term debt. 26.3 27.2 40.8 116.9 5.9
Long-term debt (excluding current
portion)......................... 686.6 1,219.3 1,301.8 1,395.7 1,451.0
Current portion of pension and
postretirement benefit
obligations...................... 118.8 65.8 68.0 65.5 68.8
Long-term pension and
postretirement benefit
obligations (excluding current
portion)......................... 1,798.4 1,596.2 1,560.7 1,385.8 1,390.7
Stockholders' equity.............. 836.0 877.7 1,005.3 1,262.7 1,277.8
</TABLE>
- --------
(1) Armco was merged into AK Steel on September 30, 1999 in a transaction
accounted for as a pooling of interests. Accordingly, except with respect
to cash dividends per common share, these consolidated financial data
reflect the Company's results and financial position as if Armco and AK
Steel had been combined for all periods presented.
(2) The 1996 special charges relate to the divestiture of certain businesses
and product lines. The 1999 special charge relates to expenses incurred as
a result of the merger with Armco.
(3) In 1998, the Company changed its accounting for pensions and other
postretirement benefits recognizing a cumulative effect of a change in
accounting.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(Dollars in millions, except per share and per ton amounts)
Merger with Armco
On September 30, 1999, Armco was merged with and into AK Steel pursuant to
an Agreement and Plan of Merger dated May 20, 1999. Upon the effectiveness of
the merger, each outstanding share of Armco common stock was converted into
the right to receive .3829 shares of AK Holding common stock. In addition, the
outstanding shares of two of Armco's three series of convertible preferred
stock were converted into the right to receive cash in an amount equal to
their redemption value plus accrued dividends, subject to the right of holders
to convert those shares into shares of common stock. AK Holding paid $116.5 in
cash, including one month's dividends, and issued 28,331 shares of its common
stock to holders of those preferred shares. The outstanding shares of the
third series of Armco preferred stock were converted into the right to receive
a like number of shares of a substantially identical new series of convertible
preferred stock of AK Holding with an annual dividend rate of $3.625 per
share. However, in accordance with change-of-control provisions applicable to
that series of Armco preferred stock, holders had the right, during a 45-day
period starting September 30, 1999, to convert each of their shares into 3.009
shares of AK Holding common stock. A total of 2,392,069 shares of that series
were converted during this 45-day period.
In 1999, the Company recognized pre-tax special charges, merger-related
costs and pension and other postretirement benefit-related charges totaling
$117.2. Special charges totaled $99.7 and included $28.5 of expenses incurred
for investment banking, legal, accounting and other transaction fees, $51.1
for employee severance and certain required payments under the change-of-
control provisions contained in Armco's employee benefit plans and $20.1 for
closure of the galvanizing plant in Dover, Ohio. On November 6, 1999, the
Company announced the closure of this redundant facility effective January 29,
2000. On December 17, 1999, production ceased at the plant. Approximately
$54.0 of the $99.7 required the outlay of cash in 1999 and the Company
anticipates additional payments of approximately $10.0 in 2000. The remainder
of the special charges do not require the outlay of cash. In addition to the
special charges, merger-related costs and the impact of a change in accounting
for pension and other postretirement benefit plans totaled $17.5. This amount
primarily relates to
11
<PAGE>
$12.8 of additional expense related to adopting the Armco method of accounting
for pensions and other postretirement benefits, which is more fully described
in Note 8 to the Consolidated Financial Statements. The Company expects to
incur an additional $20.0 to $25.0 of merger-related charges in 2000.
Operations Overview
AK Steel's principal business focus is its Steel Operations, which consist
of eight steelmaking and finishing plants that produce flat-rolled carbon
steels, including premium quality coated cold-rolled and hot-rolled products,
and specialty stainless and electrical steels that are sold in slab, hot band,
and sheet and strip form. These products are sold primarily to the domestic
automotive, appliance, industrial machinery and equipment, and construction
markets, as well as to distributors, service centers and convertors. The
Company's other operations include Sawhill Tubular, a manufacturer of a wide
range of steel pipe and tubing products; Douglas Dynamics, L.L.C., the largest
North American manufacturer of snowplows and ice control products for four-
wheel drive light trucks; and an industrial park on the Houston, Texas ship
channel.
None of the Company's operations experienced business disruptions as a
result of the changeover to the year 2000 and the Company does not anticipate
any Year 2000 problems in the future.
1999 Compared to 1998
Consolidated Results
Consolidated net sales totaled $4,284.8 in 1999 versus $4,029.7 in 1998.
Shipments totaling 6,541,000 tons in 1999 were 469,000 tons above 1998 levels.
Operating profit of $244.8 in 1999 included special charges, merger-related
costs and the impact of a change in accounting for pension and other
postretirement benefit plans totaling $117.2, which resulted from the merger
with Armco. Operating profit for the year, excluding these items and $6.1 of
goodwill amortization, was $368.1, or $56 per ton shipped. Operating profit of
$364.0 in 1998 included $17.0 of income resulting from the accounting change
and $6.1 of goodwill amortization. Excluding the income and goodwill expense,
1998 operating profit was $353.1, or $58 per ton.
Interest expense totaled $123.7 in 1999, an increase of $38.8 over 1998. The
increase was due, for the most part, to a reduction in the amount of interest
that was capitalized as a result of the completion of construction of the
Rockport Works.
During the first quarter of 1999, the Company recorded a deferred income tax
credit of $11.6 related to prior years for the Commonwealth of Kentucky
recycling credit.
Certain of Armco's former businesses included operations in foreign
countries. At the time of their sale or closure, some of these operations had
outstanding tax issues in those countries. Following consultation with
advisors in those countries in 1999, Armco determined that it had resolved
most of these issues and reversed a majority of the related reserves,
recognizing income from discontinued operations of $7.5, or $0.07 per share.
During 1999, the Company recorded a combined after-tax extraordinary loss of
$13.4, or $0.13 per share, due to the early redemption of AK Steel's 10 3/4%
Senior Notes Due 2004 and Armco's 9 3/8% Senior Notes Due 2000.
Following the merger of AK Steel and Armco, but effective as of January 1,
1998, the Company conformed the AK Steel and Armco methods of amortizing
unrecognized net gains and losses related to their obligations for pensions
and other postretirement benefits, including conforming the measurement dates
for actuarial valuations. Under the conformed method, the Company recognizes
immediately into income unrecognized net gains and losses that exceed 10% of
the larger of benefit obligations or plan assets (the "corridor"), and
amortizes amounts inside the 10% corridor over the average remaining service
life of active participants
12
<PAGE>
(approximately 15 years). This method accelerates the recognition into income
of events that have occurred and, therefore, may increase the sensitivity of
the Company's results of operations to external market volatility. In 1998,
the Company recognized net-of-tax income of $133.9, or $1.33 per share ($1.24
per diluted share) for the cumulative effect of this accounting change. In
addition, the accounting change increased 1998 income from continuing
operations by $11.2, or $0.11 per share ($0.10 per diluted share) and
decreased income from continuing operations in 1999 by $7.0 or $0.07 per
share, which is included in the merger-related expenses discussed above under
"Merger with Armco."
Net income for 1999 totaled $65.4, or $0.56 per share, compared to 1998 net
income of $329.7, or $3.19 per share ($3.06 per diluted share). Net income in
1999 included $117.2 ($87.3 net of tax) of special charges, other merger-
related costs and the impact of the change in accounting, as well as $7.5 of
income from discontinued operations and a $13.4 net-of-tax loss on retirement
of debt. Net income in 1998 included $133.9 for the cumulative effect of an
accounting change and $11.2 of net-of-tax income for the ongoing effect of the
accounting change. Excluding these items in both years, net income in 1999 was
$158.6, or $1.47 per share ($1.45 per diluted share), compared to 1998 net
income of $184.6, or $1.74 per share ($1.71 per diluted share). The decrease
in year-to-year income was primarily due to higher interest expense, partially
offset by lower income taxes.
Steel Operations
Net sales attributable to the Steel Operations totaled $3,977.4 in 1999, a
6% increase over 1998. Steel shipments of 6,254,000 tons in 1999 exceeded 1998
shipments by 477,000 tons. Value-added flat-rolled steel products constituted
82% of 1999 shipments, compared to 75% in 1998. Of the total net sales
attributable to the Steel Operations, 55% and 54% were to the automotive
industry in 1999 and 1998, respectively.
In 1999 and 1998, Steel Operations recorded operating profit of $201.7 and
$333.8, respectively. Excluding merger-related costs, the impact of the change
in accounting for pension and other postretirement benefit plans and $3.3 of
goodwill amortization, the Steel Operations' operating profit was $322.2, or
$52 per ton in 1999, compared to 1998 operating profit of $320.1 or $55 per
ton, which excludes $17.0 of pre-tax income attributable to the changes in
accounting methods and $3.3 of goodwill amortization.
On September 1, 1999, the labor contract with represented workers at Armco's
Mansfield Works expired and Armco informed the union, and the Company
understood, that it would lock out represented employees while it continued to
bargain with the union. Following the lockout of those workers, incremental
costs were incurred to operate the facility with temporary replacement workers
and to provide protective security. The incremental costs associated with
operating the Mansfield Works are estimated to have reduced operating profit
from Steel Operations by approximately $21.0 in 1999, of which $17.0 occurred
in the fourth quarter, and, if the lockout continues, are expected to reduce
operating income by $10.0 to $12.0 for the first quarter of 2000. Beyond the
first quarter, the effect of the lockout on quarterly earnings is expected to
continue to diminish.
On November 6, 1999, the Company announced the permanent closure of its
Dover Works effective January 29, 2000. The plant ceased production on
December 17, 1999.
Other Operations
Net sales derived from the Company's other operations totaled $307.4 in 1999
compared to $287.6 in 1998. Operating profit attributable to these operations
was $43.1 in 1999 and $30.2 in 1998. Snowplow shipments increased in 1999 due
to increased snowfalls in key market areas and strong sales of four-wheel
drive light trucks.
1998 Compared to 1997
Consolidated Results
Consolidated net sales totaled $4,029.7 in 1998 versus $4,176.6 in 1997.
Shipments of 6,072,000 tons in 1998 were 69,000 tons (1.1%) below 1997 levels.
13
<PAGE>
Excluding income for the effect of the 1998 accounting change and goodwill
amortization, operating profit was $353.1, or $58 per ton shipped in 1998,
compared to $390.8, or $64 per ton shipped in 1997. The 1997 operating profit
including $6.5 of goodwill amortization was $384.3.
Interest expense totaled $84.9 in 1998, $26.8 less than in 1997. The
decrease was primarily related to the higher capitalization of interest
associated with the construction of the Rockport Works, partially offset by an
increase in outstanding debt, primarily to fund the Rockport Works
construction. Capitalized interest increased by $38.2 in 1998 compared to
1997.
Net income for 1998 totaled $329.7, or $3.19 per share ($3.06 per diluted
share), including $133.9, or $1.33 per share ($1.24 per diluted share) for the
cumulative effect of an accounting change, compared to $185.1, or $1.75 per
share ($1.67 per diluted share) for 1997.
Steel Operations
Net sales derived from Steel Operations totaled $3,742.1 in 1998 compared to
$3,844.3 in 1997. Steel shipments in 1998 totaled 5,777,000 tons, or 55,000
tons less than in 1997, primarily due to lower shipments of semi-finished
stainless and electrical steels.
Excluding $17.0 of income representing the effect of the accounting change
and $3.3 of goodwill amortization, operating profit attributable to Steel
Operations totaled $320.1, or $55 per ton shipped in 1998 compared to $346.3,
or $59 per ton shipped in 1997, which also excludes $3.3 of goodwill
amortization. Operating results in 1998 were negatively impacted $20.0 to
$30.0 by a work stoppage at General Motors (AK Steel's largest customer) and a
planned twenty-day blast furnace outage at the Middletown Works. In addition,
the Company realized lower selling prices, particularly for its carbon hot-
rolled, stainless sheet and strip and stainless semi-finished products. Record
levels of imported hot-rolled steel eroded the market price for non-contract
spot steel sales.
Other Operations
Net sales derived from the Company's other operations totaled $287.6 in 1998
compared to $332.3 in 1997. Operating profit attributable to these operations
were $30.2 in 1998 and $41.3 in 1997. The decline in net sales and operating
profit were primarily due to lower snowfalls in the winter of 1997/1998, that
adversely affected snowplow sales, as well as a general oversupply in the
market for tubular products.
Impact of Raw Material Costs and Sales Revenue on Anticipated Year 2000
Results
Late in 1999, prevailing market prices for most raw materials used in the
steel manufacturing process began to escalate sharply. Unlike many of the key
raw materials used by the Company, such as iron ore, coal and limestone, for
which the Company has long-term contracts, carbon steel slabs and scrap, as
well as certain blast furnace additives, can only be acquired on a spot basis
and there is no organized market that would enable the Company to hedge its
exposure to rising prices.
Prices for steel scrap, which the Company melts and recycles in its basic
steel manufacturing operations, are expected to average about $35 per ton
higher in 2000 than in 1999. Carbon steel slabs, which the Company purchases
from other steel producers to supplement its own production, are expected to
cost approximately $60 per ton more in 2000 than in 1999. The Company
purchases about 1.5 million tons annually of carbon scrap and, as a result of
the increased finishing capabilities of its Rockport Works, expects to
purchase approximately 700,000 tons of carbon steel slabs in 2000. The
increased costs of these materials, as well as other raw materials, are
expected to result in an overall increase of approximately $100.0 in the
Company's raw material costs in 2000 compared to 1999.
Approximately 75% of the Company's steel sales are made pursuant to
relatively long-term agreements (one to three years), primarily with the major
automotive manufacturers. Consistent with customary industry practice,
14
<PAGE>
the Company's long-term sales agreements with carbon steel customers do not
provide for price escalation in the event of rising raw material costs. During
the past few years, selling prices have been under pressure as a result of
imports, domestic increases in capacity and intensified efforts by automotive
producers to reduce their own manufacturing costs. The Company estimates that,
on average, in 2000 its selling prices under these agreements will be
approximately 1% lower than in 1999, although the decrease will be partly
offset by projected increases in the percentage of total shipments
attributable to higher priced, higher margin value-added cold-rolled, coated
and stainless products. Because of increased demand, the Company expects to
realize an average price increase of 5% in its spot market sales. On balance,
the Company expects that it will realize an overall increase of 3% to 4% in
average selling price for steel products in 2000.
Although the Company's operating costs in 2000 are expected to benefit from
realized cost-based synergies of its merger with Armco and continuing
improvements in productivity, these benefits will be materially offset by the
anticipated increase in the Company's raw material costs and lower pricing on
long-term sales agreements.
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 from certain tax refund claims for periods prior to the sale.
In 1997, Armco recognized a net-of-tax increase of $1.6, or $0.02 per share
($0.01 per diluted share) in its gain on the sale of the segment as a result
of state and federal tax refunds.
AFSG
The Company's investment in the Armco Financial Services Group ("AFSG")
represents the net assets of Armco's discontinued insurance and finance
leasing businesses, which have been largely liquidated. These companies,
including Northwestern National Insurance Company ("NNIC"), are being "run
off." Except for an immaterial amount of guaranteed renewable accident and
health insurance business, these companies have not written any new business
for retention since 1986.
In March 1997, North Atlantic Insurance Company, a group of international
insurance companies previously affiliated with AFSG but sold in 1991, filed an
application for voluntary liquidation in the United Kingdom. As a result,
certain claims have been asserted against NNIC by insureds of North Atlantic.
NNIC is defending these claims as well as pursuing related claims against
third parties and North Atlantic.
Effective September 30, 1999, the Wisconsin Office of the Commissioner of
Insurance ordered NNIC to enter into a restructuring agreement with Armco
Financial Services Corporation ("AFSC") and Armco Insurance Group, Inc.
("AIGI"). AIGI is the parent company of NNIC. AFSC is the parent company of
AIGI and an indirect subsidiary of the Company. Pursuant to the restructuring
agreement, AFSC and AIGI prepaid notes owed to NNIC and contributed certain
collateral to NNIC in exchange for the termination and release of their
obligations to NNIC. This order and restructuring agreement releases all of
NNIC's direct and indirect parent companies from any obligation to provide
further financial support to NNIC.
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, including matters related to the
voluntary liquidation of North Atlantic, will not be material to the Company's
financial condition, results of operations or cash flows.
Liquidity and Capital Resources
At December 31, 1999, the Company had $54.4 in cash and cash equivalents. In
addition, net of $121.3 used to support letters of credit, the Company had
$178.7 of availability under its accounts receivable purchase
15
<PAGE>
facility. On October 1, 1999, following the Armco merger, the total size of
this facility was increased to $300.0 from $200.0 and its expiration date was
extended to September 30, 2004. Simultaneously, a $70.0 inventory-based
facility was eliminated.
During 1999, cash flow from operations generated $249.3, attributed
primarily to $453.4 of income excluding noncash charges for depreciation,
taxes, special charges and extraordinary items, offset by the impact of
working capital items. Working capital cash usage included $127.4 of inventory
increases, primarily due to the build-up of stainless steel inventories at the
Rockport Works and $74.8 of accounts receivable increases, primarily due to an
extension of payment terms by a major customer.
Cash flows used in investing totaled $323.1. Capital investments used
$337.2, including $21.4 in capitalized interest. In addition, the Company had
net proceeds from the sale or liquidation of assets and investments of $13.5.
Cash flows from financing activities resulted in a net use of $218.5. On
January 14, 1999, Armco used approximately $113.0 to redeem its 9 3/8% Senior
Notes Due 2000. On February 10, 1999, AK Steel issued $450.0 of its 7 7/8%
Senior Notes Due 2009. The net proceeds from the sale of these notes were
approximately $442.1 after deduction of the discount to initial purchasers and
other offering expenses. AK Steel used $338.1 of the net proceeds to redeem
its 10 3/4% Senior Notes Due 2004 on April 1, 1999 and the remaining $104.0
was used for general corporate purposes. In addition, the Company paid $116.5,
including one month's dividends, in cash and issued 28,331 shares to holders
of two series of convertible preferred stock of Armco that were extinguished
pursuant to the merger agreement. The Company also generated $24.7 of cash
from the sale of common stock, including 500,000 treasury shares that were
sold in order to facilitate the treatment of the Armco merger as a "pooling of
interests" for accounting purposes.
Upon the effectiveness of the merger, the Company assumed Armco's long-term
debt, including its 9% Senior Notes Due 2007 and 8 7/8% Senior Notes Due 2008,
which together totaled $225.0 principal amount. The indentures governing these
notes provided that upon the occurrence of a change of control, such as the
merger, holders had the right to require the Company to purchase the notes in
whole or in part at 101% of their principal amount plus accrued interest. On
October 28, 1999, the Company commenced offers to the holders of these notes
to purchase the notes in accordance with the change-of-control provisions of
the indentures. In addition, the Company offered to pay $17.50 per $1,000
principal amount of the 9% Senior Notes and $20.00 per $1,000 principal amount
of 8 7/8% Senior Notes to holders who waived their right to require the
purchase of their notes. The Company paid $32.9 plus accrued interest to
retire $32.6 principal amount of the 9% Senior Notes and an additional $1.7 to
holders who waived their rights to require the purchase of those notes. The
Company also paid $41.8 plus accrued interest to retire $41.4 principal amount
of the 8 7/8% Senior Notes and an additional $0.7 to holders who waived their
rights to require the purchase of those notes. At December 31, 1999, there
remained outstanding $117.4 principal amount of the 9% Senior Notes and $33.6
principal amount of the 8 7/8% Senior Notes.
During 1999, the Company paid regular dividends of $7.6 on preferred stock
and $35.1 on common stock.
Anticipated Debt Service
The Company's long-term debt at December 31, 1999, totaled $1,456.9,
consisting primarily of senior notes that mature in the years 2006 through
2009 and that are not subject to amortization prior to maturity. In addition,
the Company's Senior Secured Notes Due 2004 are repayable in four successive
annual installments of $62.5 commencing in December 2001. The Company's
obligation to make principal payments in each of the next five years is as
follows: $5.9 in 2000, $63.3 in 2001, $63.3 in 2002, $62.5 in 2003 and $62.5
in 2004. Interest expense for 1999, net of capitalized interest of $21.4,
totaled $123.7.
16
<PAGE>
Capital Investments
The Company anticipates ongoing annual capital investments of approximately
$175.0 to $200.0 to maintain the competitiveness and efficiency of its
existing facilities and to assure its compliance with applicable safety and
environmental standards. At December 31, 1999, commitments for future capital
investments, including those to ensure environmental compliance, totaled
approximately $84.1, all of which is expected to be funded in 2000 from
available cash and cash generated from operations.
Employee Benefit Obligations
As of December 31, 1999, the Company's pension plans are fully funded in
accordance with generally accepted accounting principles. Funding levels in
the near term (three to five years) are expected to be minimal. The Company
also has available a pension funding credit balance of $400.5 that can be used
to meet future funding requirements.
At December 31, 1999, the Company's liability for postretirement benefits
other than pensions totaled $1,454.6. The Company has established a health
care trust as a means of prefunding this liability. The balance of the trust,
including the earnings on the trust investments, as of December 31, 1999, was
$188.8, which was equivalent to approximately one year of active and retiree
health care payments.
New Accounting Standard
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). The effective date of SFAS No. 133 has
since been delayed and the Company intends to adopt the new standard when
required in 2001. The Company does not expect that SFAS No. 133 will have a
material effect on its financial statements; however, its effect, if any, will
depend on the Company's exposure to derivative instruments at the time of
adoption and thereafter.
Forward-Looking Statements
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. In
particular, these include statements in the forgoing paragraphs entitled, Raw
Materials, Environmental Matters, Legal Proceedings, Impact of Raw Material
Costs and Sales Revenue on Anticipated Year 2000 Results, Discontinued
Operations with respect to AFSG, Liquidity and Capital Resources, and New
Accounting Standard. In addition, these include statements in the Notes to
Consolidated Financial Statements in the paragraphs entitled, Concentration of
Credit Risk, Income Taxes, Commitments, Legal, Environmental Matters and
Contingencies, and Discontinued Operations with respect to AFSG.
The Company cautions readers that such forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those currently expected by management. In addition to those noted in the
statements themselves, 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; volatility in financial markets, which may affect
invested pension plan assets and the calculation of benefit plan liabilities
and expenses; changes in demand for the Company's products; unplanned plant
outages, equipment failures or labor difficulties; actions by the Company's
foreign and domestic competitors; unexpected outcomes of major litigation and
contingencies; changes in United States trade policy and actions with respect
to 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 the Company.
17
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
In the ordinary course of business, the Company's market risk is limited to
changes in interest rates. The Company manages interest rate risk through
strategies utilized in current operations and issuing substantially all fixed
rate debt as a source of financing operations. The fair value of this debt as
of December 31, 1999 is $1,445.2. A reduction in prevailing interest rates of
1% would result in an increase in the total fair value of long-term debt of
approximately $80.0. The fair value was determined from quoted prices and
discounted cash flows. The increase in total fair value due to an assumed
decline in interest rates was calculated based on a change in the rate used to
discount total future principal and interest payments.
Item 8. Financial Statements and Supplementary Data.
AK Steel Holding Corporation and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. 19
Consolidated Statements of Income for the Years Ended December 31, 1997,
1998 and 1999............................................................ 20
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. 21
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999...................................................... 22
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999 ........................................ 23
Notes to Consolidated Financial Statements................................ 24
</TABLE>
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
AK Steel Holding Corporation:
We have audited the accompanying consolidated balance sheets of AK Steel
Holding Corporation and Subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, in 1998 the
Company changed its method of amortizing unrecognized net gains and losses
related to its obligations for pensions and other postretirement benefits.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 19, 2000
19
<PAGE>
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1998 and 1999
(dollars in millions, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $4,176.6 $4,029.7 $4,284.8
Cost of products sold............................ 3,363.3 3,226.5 3,419.8
Selling and administrative expenses.............. 288.0 278.0 309.8
Depreciation (Note 1)............................ 141.0 161.2 210.7
Special charges (Note 10)........................ -- -- 99.7
-------- -------- --------
Total operating costs......................... 3,792.3 3,665.7 4,040.0
-------- -------- --------
Operating profit................................. 384.3 364.0 244.8
Interest expense................................. 111.7 84.9 123.7
Other income..................................... 48.4 30.3 20.8
-------- -------- --------
Income from continuing operations before income
taxes and minority interest..................... 321.0 309.4 141.9
Income tax provision (Note 5).................... 127.5 105.5 63.9
Minority interest (Note 2)....................... 8.1 8.1 6.7
-------- -------- --------
Income from continuing operations................ 185.4 195.8 71.3
Discontinued operations (Note 14)................ 1.6 -- 7.5
-------- -------- --------
Income before extraordinary item and cumulative
effect of a change in accounting................ 187.0 195.8 78.8
Extraordinary loss on retirement of debt, net of
tax (Note 6).................................... 1.9 -- 13.4
Cumulative effect of a change in accounting, net
of tax (Note 8)................................. -- 133.9 --
-------- -------- --------
Net income....................................... 185.1 329.7 65.4
Other comprehensive income, net of tax:
Foreign currency translation adjustment........ (1.4) 0.3 (1.4)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period................................ 2.1 (0.5) (1.2)
Less: reclassification for gains included in
net income................................... 0.2 1.0 1.9
Minimum pension liability adjustment........... -- (2.6) 1.2
-------- -------- --------
Comprehensive income............................. $ 185.6 $ 325.9 $ 62.1
======== ======== ========
Earnings per share: (Note 1)
Basic earnings per share:
Income from continuing operations............. $ 1.75 $ 1.86 $ 0.62
Discontinued operations....................... 0.02 -- 0.07
Extraordinary loss on retirement of debt...... 0.02 -- 0.13
Cumulative effect of a change in accounting... -- 1.33 --
-------- -------- --------
Net income.................................... $ 1.75 $ 3.19 $ 0.56
======== ======== ========
Diluted earnings per share:
Income from continuing operations............. $ 1.68 $ 1.82 $ 0.62
Discontinued operations....................... 0.01 -- 0.07
Extraordinary loss on retirement of debt...... 0.02 -- 0.13
Cumulative effect of a change in accounting... -- 1.24 --
-------- -------- --------
Net income.................................... $ 1.67 $ 3.06 $ 0.56
======== ======== ========
Cash dividends per common share (Based on actual
outstanding shares, not adjusted for the
merger)......................................... $ 0.425 $ 0.50 $ 0.50
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(dollars in millions)
<TABLE>
<CAPTION>
1998 1999
ASSETS --------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (Note 1)..................... $ 346.7 $ 54.4
Short-term liquid investments.......................... 7.0 --
Accounts receivable, net (Note 1)...................... 441.1 507.2
Inventories, net (Note 1).............................. 680.9 797.6
Deferred tax asset (Note 5)............................ 11.5 64.5
Other current assets................................... 9.9 8.8
--------- ---------
Total Current Assets.................................. 1,497.1 1,432.5
--------- ---------
Property, Plant and Equipment (Note 1)................... 4,268.9 4,573.5
Less accumulated depreciation.......................... (1,395.9) (1,585.7)
--------- ---------
Property, plant and equipment, net..................... 2,873.0 2,987.8
--------- ---------
Other Assets:
Investment in AFSG (Note 14)........................... 85.6 85.6
Other investments...................................... 53.6 51.7
Goodwill and other intangible assets................... 128.6 121.3
Prepaid pension (Note 8)............................... 106.5 122.4
Deferred tax asset (Note 5)............................ 431.0 328.0
Other.................................................. 73.1 72.2
--------- ---------
Total Assets.......................................... $ 5,248.5 $ 5,201.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 441.1 $ 496.0
Accrued liabilities.................................... 297.5 297.3
Current portion of long-term debt (Note 6)............. 116.9 5.9
Current portion of pension and other postretirement
benefits obligation (Note 8).......................... 65.5 68.8
--------- ---------
Total Current Liabilities............................. 921.0 868.0
--------- ---------
Noncurrent Liabilities:
Long-term debt (Note 6)................................ 1,395.7 1,451.0
Postretirement benefit obligation (Note 8)............. 1,385.8 1,390.7
Other liabilities...................................... 283.3 214.0
--------- ---------
Total Noncurrent Liabilities.......................... 3,064.8 3,055.7
--------- ---------
Total Liabilities..................................... 3,985.8 3,923.7
--------- ---------
Stockholders' Equity: (Note 3)
Preferred stock........................................ 130.4 14.9
Common stock, authorized 200,000,000 shares of $.01 par
value each; issued 1998, 105,186,208 shares; 1999,
115,048,490 shares; outstanding 1998, 100,340,709
shares; 1999, 110,640,088 shares...................... 1.1 1.2
Additional paid-in capital............................. 1,692.0 1,793.6
Treasury stock, common shares at cost, 1998, 4,845,499;
1999, 4,408,402 shares................................ (87.8) (80.2)
Accumulated deficit.................................... (472.7) (450.0)
Accumulated other comprehensive income (loss) (Note 1). (0.3) (1.7)
--------- ---------
Total Stockholders' Equity............................... 1,262.7 1,277.8
--------- ---------
Total Liabilities and Stockholders' Equity............... $ 5,248.5 $ 5,201.5
========= =========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999
(dollars in millions)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 185.1 $ 329.7 $ 65.4
------- ------- -------
Adjustments to reconcile net income to cash flows
from operating activities:
Depreciation..................................... 141.0 161.2 210.7
Amortization..................................... 15.8 16.1 16.4
Deferred income taxes............................ 78.8 71.8 57.7
Special charges.................................. -- -- 99.7
Income from discontinued operations.............. (1.6) -- (7.5)
Extraordinary loss on retirement of debt......... 1.9 -- 13.4
Cumulative effect of a change in accounting...... -- (133.9) --
Other items, net................................. (3.3) 5.5 (2.4)
Changes in assets and liabilities:
Accounts and notes receivable.................. 6.1 (47.6) (74.8)
Inventories.................................... (25.8) (48.9) (127.4)
Current liabilities............................ 203.1 (59.7) 19.4
Other assets................................... 4.3 10.2 (0.9)
Pension obligation............................. (7.1) (50.6) (19.0)
Postretirement benefit obligation.............. (24.2) (7.4) 0.5
Other liabilities.............................. (19.4) (16.1) (1.9)
------- ------- -------
Total adjustments............................ 369.6 (99.4) 183.9
------- ------- -------
Net cash flows from operating activities....... 554.7 230.3 249.3
------- ------- -------
Cash flows from investing activities:
Capital investments............................... (678.4) (805.2) (337.2)
Net (purchase)/sale of short-term investments..... (46.4) 255.9 6.8
Purchase of long-term investments................. (26.5) (1.0) (0.2)
Proceeds from the sale of investments............. 15.5 31.2 4.6
Proceeds from sale of property, plant and
equipment........................................ 8.5 10.1 2.1
Advances to investees............................. (3.0) (6.1) --
Other items, net.................................. -- 0.3 0.8
------- ------- -------
Net cash flows from investing activities....... (730.3) (514.8) (323.1)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock............ 7.1 2.0 24.7
Proceeds from issuance of long-term debt.......... 273.6 221.9 460.0
Principal payments on long-term debt.............. (177.7) (51.2) (530.8)
Purchase of treasury stock........................ (26.7) (39.6) (1.5)
Purchase of preferred stock....................... (3.2) -- (115.8)
Preferred stock dividends paid.................... (20.1) (9.8) (7.6)
Common stock dividends paid....................... (23.8) (29.7) (35.1)
Underwriting discount and stock issuance expense.. (6.1) (0.2) (10.8)
Other items, net.................................. (1.4) (0.3) (1.6)
------- ------- -------
Net cash flows from financing activities....... 21.7 93.1 (218.5)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (153.9) (191.4) (292.3)
Cash and cash equivalents, beginning of period.... 692.0 538.1 346.7
------- ------- -------
Cash and cash equivalents, end of period.......... $ 538.1 $ 346.7 $ 54.4
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
<TABLE>
<CAPTION>
Additional Accum-
Preferred Common Paid-In- Treasury ulated
Stock Stock Capital Stock Deficit Other Total
--------- ------ ---------- -------- ------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996, previously re-
ported................. $ 0.1 $0.3 $ 708.9 $(21.5) $ 89.2 $ 777.0
Armco pooling of inter-
ests................... 130.4 0.2 963.9 (995.7) 1.9 100.7
------- ---- -------- ------ ------- ----- --------
Balance, December 31,
1996................... 130.5 0.5 1,672.8 (21.5) (906.5) 1.9 877.7
Net income.............. 185.1 185.1
Unrealized gain on mar-
ketable securities..... 2.0 2.0
Stock options exercised. 7.0 7.0
Two-for-one common stock
split.................. 0.5 (0.5) --
Tax benefit from exer-
cise of stock options.. 1.2 1.2
Tax benefit from vesting
of restricted stock.... 0.1 0.1
Purchase of stock....... (26.7) (26.7)
Redemption of preferred
stock.................. (0.1) (2.9) (0.2) (3.2)
Preferred stock $.538
cash dividend per quar-
ter.................... (7.7) (7.7)
Preferred stock $.90625
cash dividend per quar-
ter.................... (9.8) (9.8)
Common stock $.10 cash
dividend per quarter,
$.125 in fourth quar-
ter.................... (23.8) (23.8)
Translation adjustment.. (1.4) (1.4)
Issuance of restricted
stock, net............. 8.9 8.9
Unamortized restricted
stock.................. (4.1) (4.1)
------- ---- -------- ------ ------- ----- --------
Balance, December 31,
1997................... 130.4 1.0 1,682.5 (48.2) (762.9) 2.5 1,005.3
Net income.............. 329.7 329.7
Unrealized gain on mar-
ketable securities..... (0.5) (0.5)
Stock options exercised. 2.0 2.0
Tax benefit from exer-
cise of stock options.. 0.2 0.2
Tax benefit from vesting
of restricted stock.... 0.2 0.2
Purchase of stock....... (39.6) (39.6)
Preferred stock $.90625
cash dividend per quar-
ter.................... (9.8) (9.8)
Common stock $.125 cash
dividend per quarter... (29.7) (29.7)
Translation adjustment.. 0.3 0.3
Minimum pension liabili-
ty..................... (2.6) (2.6)
Issuance of restricted
stock, net............. 0.1 8.5 8.6
Unamortized restricted
stock.................. (1.4) (1.4)
------- ---- -------- ------ ------- ----- --------
Balance, December 31,
1998................... 130.4 1.1 1,692.0 (87.8) (472.7) (0.3) 1,262.7
Net income.............. 65.4 65.4
Unrealized gain on mar-
ketable securities..... (1.2) (1.2)
Stock options exercised. 31.7 31.7
Tax benefit from exer-
cise of stock options.. 5.5 5.5
Purchase of treasury
stock.................. (1.5) (1.5)
Sale of treasury stock.. (1.1) 9.1 8.0
Conversion of preferred
stock to common stock.. (115.5) 0.1 115.4 --
Conversion of minority
interest preferred
stock.................. (62.3) (62.3)
Conversion of minority
interest to common
stock.................. 2.1 2.1
Preferred stock $.90625
cash dividend per quar-
ter.................... (7.6) (7.6)
Common stock $.125 cash
dividend per quarter... (35.1) (35.1)
Translation adjustment.. (1.4) (1.4)
Minimum pension liabili-
ty..................... 1.2 1.2
Issuance of restricted
stock, net............. 10.8 10.8
Unamortized restricted
stock.................. (0.5) (0.5)
------- ---- -------- ------ ------- ----- --------
Balance, December 31,
1999................... $ 14.9 $1.2 $1,793.6 $(80.2) $(450.0) $(1.7) $1,277.8
======= ==== ======== ====== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation: AK Steel Holding Corporation ("AK Holding") and its
wholly-owned subsidiary AK Steel Corporation ("AK Steel," and together with AK
Holding, the "Company") were formed effective March 29, 1994 as a result of
the recapitalization of Armco Steel Company, L.P.
There is no summarized financial information included for AK Steel because
there is no substantial difference in the operations of AK Steel and AK
Holding and because the debt of AK Steel is fully and unconditionally
guaranteed by AK Holding. AK Holding has no independent operations.
As described more fully in Note 2, the Company completed a transaction on
September 30, 1999, whereby Armco Inc. ("Armco") merged with and into AK
Steel, and AK Steel became the surviving company. The transaction is accounted
for as a pooling of interests and, therefore, the consolidated financial
statements presented herein reflect the combined financial position, results
of operations and cash flows of Armco and the Company as if they had been
combined for all periods presented. Prior to September 30, 1999, AK Steel and
Armco, in the normal course of business, entered into certain transactions for
the purchase and conversion of material. These intercompany transactions have
been eliminated in the accompanying financial statements. All references to
the number of common shares outstanding and per share amounts have given
effect to the Armco merger.
These financial statements consolidate the operations and accounts of the
Company and all subsidiaries in which the Company has a controlling interest.
Further information about operating segments is included in Note 9.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates.
Actual results could differ from those estimates.
Revenue Recognition: Revenue from sales of products is recognized at the
time products are shipped to the customer. Revenue from services performed is
recognized when the service is provided to the customer.
Cash Equivalents: Cash equivalents include short-term, highly liquid
investments that are readily convertible to known amounts of cash and are of
an original maturity of three months or less.
<TABLE>
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Interest.......................................... $128.0 $138.4 $135.7
Interest capitalized.............................. (21.2) (59.4) (21.4)
Income taxes...................................... 45.5 25.7 6.2
</TABLE>
Supplemental Cash Flow Information Regarding Noncash Investing and Financing
Activities: The Company granted to certain employees shares of its common
stock with values, net of cancellations, of $8.9, $8.6 and $10.8 in 1997, 1998
and 1999, respectively, under its restricted stock award programs (Note 4).
During 1999, holders of the Company's $3.625 cumulative convertible preferred
stock converted their shares with a total redemption value of $115.5 into
common stock (Note 3) and holders of Armco's other preferred stock issues
converted their shares with a redemption value of $2.1 into common stock (Note
2).
Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments does not differ materially from their estimated fair
value (primarily based on quoted market prices) in 1998 and 1999 with the
exception of the Company's long-term debt. At December 31, 1999, the fair
value of the Company's long-term debt, including current maturities, was
approximately $1,445.2. This amount was determined by calculating
24
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
a value based on discounted future cash flows and quoted market prices, where
possible. The fair value estimate was based on pertinent information available
to management as of December 31, 1999. Management is not aware of any
significant factors that would materially alter this estimate since that date.
The fair value of the Company's long-term debt, including current maturities,
at December 31, 1998 was approximately $1,556.7.
Accounts Receivable: The allowance for doubtful accounts was $4.9 and $4.5
at December 31, 1998 and 1999.
Inventories: Inventories are valued at the lower of cost or market. The cost
of the majority of inventories is measured on the last in, first out ("LIFO")
method. Other inventories are measured principally at average cost and consist
mostly of foreign inventories and certain raw materials.
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Inventories on LIFO:
Finished and semifinished............................ $ 526.7 $ 620.1
Raw materials and supplies........................... 184.2 175.5
Adjustment to state inventories at LIFO value........ (54.9) (22.8)
--------- ---------
Total.............................................. 656.0 772.8
Other inventories...................................... 24.9 24.8
--------- ---------
Total inventories.................................. $ 680.9 $ 797.6
========= =========
Investments: The Company has investments in associated companies (joint
ventures and an entity that the Company does not control). These investments
are accounted for under the equity method. Because these companies are
directly integrated in the basic steelmaking facilities, the Company includes
its proportionate share of the income (loss) of these associated companies in
cost of products sold.
Property, Plant and Equipment: Plant and equipment are depreciated under the
straight line method over their estimated lives ranging from 2 to 40 years.
The Company's property, plant and equipment balances as of December 31, 1998
and 1999 are as follows:
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Land, land improvements and leaseholds................. $ 119.5 $ 137.5
Buildings.............................................. 250.9 333.8
Machinery and equipment................................ 3,236.7 3,965.7
Construction in progress............................... 661.8 136.5
--------- ---------
Total................................................ 4,268.9 4,573.5
Less accumulated depreciation.......................... (1,395.9) (1,585.7)
--------- ---------
Property, plant and equipment, net..................... $ 2,873.0 $ 2,987.8
========= =========
</TABLE>
Goodwill and Other Intangible Assets: Goodwill and other intangible assets
primarily consist of goodwill recorded in connection with Armco's 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 other intangibles assets acquired in Armco's purchase of Douglas
Dynamics, L.L.C. on July 2, 1991. These assets are being amortized over their
estimated useful lives, the majority of which do not exceed 17 years.
Amortization expense for 1997, 1998 and 1999 was $6.5, $6.1 and $6.1,
respectively. At December 31, 1998 and 1999, accumulated amortization of
goodwill and other intangible assets was $42.6 and $48.7, respectively.
The Company assesses whether its goodwill and other intangible assets are
impaired as required by Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and
25
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
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: The reconciliation of the numerators and denominators of
the basic and diluted EPS computations is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Income for calculation of basic earnings per share:
Income from continuing operations........................ $185.4 $195.8 $71.3
Less: Preferred stock dividends.......................... 17.5 9.8 7.6
------ ------ -----
Income from continuing operations available to common
stockholders............................................ 167.9 186.0 63.7
Income from discontinued operations...................... 1.6 -- 7.5
Extraordinary loss on retirement of debt................. 1.9 -- 13.4
Cumulative effect of a change in accounting.............. -- 133.9 --
------ ------ -----
Net income available to common stockholders.............. $167.6 $319.9 $57.8
====== ====== =====
Common shares outstanding (weighted average in millions)... 96.2 100.6 102.4
====== ====== =====
Basic earnings per share:
Income from continuing operations........................ $ 1.75 $ 1.86 $0.62
Discontinued operations.................................. 0.02 -- 0.07
Extraordinary loss....................................... 0.02 -- 0.13
Cumulative effect of a change in accounting.............. -- 1.33 --
------ ------ -----
Net income............................................... $ 1.75 $ 3.19 $0.56
====== ====== =====
Income for calculation of diluted earnings per share:
Income from continuing operations........................ $185.4 $195.8 $71.3
Less: Preferred stock dividends.......................... -- -- 7.6
------ ------ -----
Income from continuing operations available to common
stockholders............................................ 185.4 195.8 63.7
Discontinued operations.................................. 1.6 -- 7.5
Extraordinary loss....................................... 1.9 -- 13.4
Cumulative effect of a change in accounting.............. -- 133.9 --
------ ------ -----
Net income available to common stockholders.............. $185.1 $329.7 $57.8
====== ====== =====
Shares (weighted average in millions):
Common shares outstanding................................ 96.2 100.6 102.4
Assumed conversion of preferred stock.................... 13.4 7.0 --
Common stock options outstanding......................... 0.4 0.3 0.5
------ ------ -----
Common shares outstanding as adjusted.................... 110.0 107.9 102.9
====== ====== =====
Diluted earnings per share:
Income from continuing operations........................ $ 1.68 $ 1.82 $0.62
Discontinued operations.................................. 0.01 -- 0.07
Extraordinary loss....................................... 0.02 -- 0.13
Cumulative effect of a change in accounting.............. -- 1.24 --
------ ------ -----
Net income............................................... $ 1.67 $ 3.06 $0.56
====== ====== =====
</TABLE>
26
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
At the end of each year, the Company had outstanding exercisable stock
options and convertible preferred stock whose exercise or conversion could,
under certain circumstances, further dilute earnings per share. The following
shares of potentially issuable common stock were not included in the above
weighted average shares outstanding because to do so would have had an
antidilutive effect on earnings per share for the years presented.
<TABLE>
<CAPTION>
(Common shares in millions) 1997 1998 1999
- --------------------------- ---- ---- ----
<S> <C> <C> <C>
Stock options.................................................... 1.0 2.4 0.6
$3.625 convertible preferred stock............................... -- -- 0.8
</TABLE>
Research and Development Costs: The Company conducts a broad range of
research and development activities aimed at improving existing products and
manufacturing processes and developing new products and processes. Research
and development costs are recorded as expense when incurred. Research and
development costs incurred in 1997, 1998 and 1999 were $19.3, $18.6 and $16.8,
respectively.
Concentrations of Credit Risk: The Company is primarily a producer of flat-
rolled carbon, stainless and electrical steels and steel products, which are
sold to a number of markets, including automotive, industrial machinery and
equipment, construction, power distribution and appliances. The Company sells
domestically to customers primarily in the Midwestern and Eastern United
States, while approximately 6% of sales are to foreign customers, primarily in
Canada, Mexico and Western Europe. Approximately 47% of trade receivables
outstanding at December 31, 1999 are due from businesses associated with the
U.S. automotive industry. Except in a few situations where the risk warrants
it, collateral is not required on trade receivables; and while it believes its
trade receivables will be collected, the Company anticipates that in the event
of default it would follow normal collection procedures. Overall, credit risk
related to trade receivables is limited due to the large number of customers
in differing industries and geographic areas.
Accumulated Other Comprehensive Income: The components of accumulated other
comprehensive income (loss) at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Foreign currency translation............................. $0.5 $ 0.8 $(0.6)
Unrealized gain on investments........................... 2.0 1.5 0.3
Minimum pension liability................................ -- (2.6) (1.4)
---- ----- -----
Total.................................................. $2.5 $(0.3) $(1.7)
==== ===== =====
</TABLE>
New Accounting Standards: In 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). The effective
date of SFAS No. 133 has since been delayed and the Company intends to adopt
the new standard when required in 2001. The Company does not expect that SFAS
No. 133 will have a material effect on its financial statements; however, its
effect, if any, will depend on the Company's exposure to derivative
instruments at the time of adoption and thereafter.
Reclassifications: Certain amounts in the prior year financial statements
have been reclassified to conform to the 1999 presentation.
2. Merger with Armco Inc.
On September 30, 1999, the Company consummated the merger of Armco with and
into AK Steel pursuant to an Agreement and Plan of Merger dated May 20, 1999.
Armco was a leading producer of stainless and
27
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
electrical steels and, in addition, owned and operated a manufacturer of steel
pipe and tubing products, a manufacturer of snowplows and ice control products
for four-wheel drive light trucks, and an industrial park on the Houston,
Texas ship channel. Upon the effectiveness of the merger, each outstanding
share of Armco common stock was converted into the right to receive .3829
shares of AK Holding common stock. Based on the number of these rights
tendered through December 31, 1999, AK Holding issued 41,616,577 shares of its
common stock. In addition, the outstanding shares of one of Armco's three
series of convertible preferred stock were converted into the right to receive
a like number of shares of a substantially identical new series of cumulative
convertible preferred stock of AK Holding, which is described more fully in
Note 3.
Lastly, the Company paid $116.5, including one month's dividends, in cash
and issued 28,331 shares of its common stock to convert the outstanding shares
of the two remaining series of Armco's convertible preferred stock. For
periods prior to the merger, dividends on these two series of preferred stock
are reported as minority interest on the Consolidated Statements of Income.
Prior to December 31, 1999, the $55.5 book value of these preferred stock
issues is included in other liabilities on the Consolidated Balance Sheets.
Historically, Armco did not provide for federal income taxes at full
statutory rates. However, to reflect its book tax rate in income from
continuing operations on a combined basis, the Company accrued additional
income tax expense of $34.6 for 1997, $37.9 for 1998 and $17.5 for the first
six months of 1999.
As more fully discussed in Note 8, the Company conformed the AK Steel and
Armco methods of amortizing unrecognized net gains and losses related to its
obligations for pensions and other postretirement benefits. In 1998, the
Company recognized income of $133.9 (net of tax), or $1.24 per diluted share,
for the cumulative effect of this accounting change. In addition, the
accounting change increased 1998 income from continuing operations by $11.2
and decreased 1999 income from continuing operations by $7.0 ($3.5 for the
first six months of 1999).
The following presents a reconciliation of previously reported results of AK
Holding and Armco to the results of the merged Company. Eliminations/other
primarily reflects the elimination of intercompany transactions, the
additional accrual of income taxes, including taxes on extraordinary losses
and cumulative and current year effects of the accounting change. The
adjustment in eliminations/other for stockholders' equity also includes
cumulative credits for revaluation of the deferred tax asset of $369.7 in
1997, $335.2 in 1998 and $210.0 in 1999.
<TABLE>
<CAPTION>
AK Elimination/
Holding Armco Other Total
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
For the year 1997:
Revenues............................ $2,440.5 $1,829.3 $ (93.2) $4,176.6
Extraordinary loss on retirement of
debt............................... -- 3.0 (1.1) 1.9
Net income.......................... 150.9 76.8 (42.6) 185.1
Shareholders equity................. 879.6 (152.5) 278.2 1,005.3
For the year 1998:
Revenues............................ $2,393.6 $1,706.5 $ (70.4) $4,029.7
Cumulative effect of an accounting
change............................. -- 237.5 (103.6) 133.9
Net income.......................... 114.5 347.1 (131.9) 329.7
Shareholders equity................. 929.5 178.7 154.5 1,262.7
Six months ended June 30, 1999:
Revenues............................ $1,314.8 $ 876.1 $ (53.1) $2,137.8
Extraordinary loss on retirement of
debt............................... 12.0 2.8 (1.4) 13.4
Net income.......................... 35.5 63.7 (29.9) 69.3
Shareholders equity................. 957.4 235.5 132.0 1,324.9
</TABLE>
28
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
3. Stockholders' Equity
Preferred Stock: On September 30, 1999, upon the effectiveness of the merger
with Armco, the 2,700,000 outstanding shares of Armco's $3.625 convertible
preferred stock were converted into the right to receive a like number of
shares of a substantially identical new series of cumulative convertible
preferred stock of the Company with an annual dividend rate of $3.625 per
share. However, in accordance with the change of control provisions of Armco's
$3.625 preferred stock issue, holders of that stock had the right, during a
45-day period starting September 30, 1999, to convert their shares into 3.009
shares of AK Holding common stock. Holders of 2,392,069 converted their shares
during the 45-day window period. At December 31, 1999, there were authorized
and issuable 307,931 shares of $3.625 preferred stock with a $1 per share par
value, all of which were outstanding.
The Company's new $3.625 preferred stock ranks senior to its common stock
with respect to dividends and upon liquidation. The holders of this preferred
stock are entitled to one vote per share with respect to all matters to be
voted upon by the stockholders of the Company. Each share may be converted, at
the holder's option, into 2.6 shares of the Company's common stock. At the
Company's option, each share of preferred stock may be redeemed at a price of
$51.0875 until October 15, 2000. This price, then, is reduced at twelve-month
intervals until it reaches $50 per share on and after October 15, 2002. Upon
dissolution, liquidation or winding up of the Company, whether voluntary or
involuntary, holders of the $3.625 preferred stock are entitled to a payment
of $50 per share plus accrued but unpaid dividends before payments can be made
to the holders of common stock. On December 31, 1999, the Company paid the
regular quarterly dividend of $0.90625 per share on its $3.625 cumulative
convertible preferred stock.
Common Stock: The holders of common stock are entitled to receive dividends
when and as declared by the Board of Directors out of funds legally available
for distribution. The holders have one vote per share in respect of all
matters and are not entitled to preemptive rights.
Dividends: The Company has paid quarterly dividends on its common stock
since November 15, 1995. In 1998, a dividend of $0.125 per share was paid on
February 17, May 15, August 17 and November 16. In 1999, a dividend of $0.125
per share was paid on February 15, May 17, August 16 and November 15. The
declaration and payment of cash dividends is subject to restrictions imposed
by instruments governing its senior debt. At December 31, 1999, the Company
had adequate amounts available for the payment of cash dividends.
Stockholder Rights Plan: On January 23, 1996, the Board of Directors adopted
a Stockholder Rights Plan pursuant to which it has issued one Preferred Share
Purchase Right (collectively, the "Rights") for each share of common stock
outstanding. The Rights are generally not exercisable unless, and no sooner
than 10 business days after, any person or group acquires beneficial ownership
of 20% or more of the Company's voting stock or announces a tender offer that
could result in the acquisition of 30% or more of such voting stock. In
addition, each Right entitles the holder, upon occurrence of certain specified
events, to purchase 1/200th of a share of Series A Junior Preferred Stock
("Junior Preferred Stock") at an exercise price of $65 per share. Each share
of Junior Preferred Stock, if and when issued, will entitle the holder to 200
votes in respect of all matters submitted to a vote of the holders of common
stock. Upon the occurrence of certain events, holders of the Rights would be
entitled to purchase either shares of the Company or an acquiring entity at
half of market value. The Rights are redeemable, under certain circumstances,
at any time prior to their expiration on January 23, 2006.
4. Common Stock Compensation
AK Steel Holding Corporation's Stock Incentive Plan (the "SIP") permits the
granting of nonqualified stock options and restricted stock awards to
directors, officers and key management employees of the Company.
29
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
These nonqualified option and restricted stock awards may be granted with
respect to an aggregate maximum of 11 million shares through the period ending
December 31, 2007. The exercise price of each option may not be less than the
market price of the Company's common stock on the date of the grant. Stock
options have a maximum term of 10 years and may not be exercised earlier than
six months following the date of grant (or such other term as may be specified
in the award agreement). Generally, 25% of the shares covered by a restricted
stock award vest two years after the date of the award and an additional 25%
vest on the third, fourth and fifth anniversaries of the date of the award.
The nonqualified stock options vest at the rate of 33% per year over three
years.
Prior to the merger, Armco maintained plans under which stock options and
restricted stock awards were granted. Effective with the merger, Armco's stock
options were converted into options to purchase the Company's common stock,
adjusting the option price and number of shares by the same .3829 ratio used
to convert outstanding shares of Armco common stock at the time of the merger.
In addition, all unvested options vested. Other provisions of these options
were similar to those of the Company and did not change. All outstanding
restricted stock awards of Armco vested upon the effectiveness of the merger
and the shares were converted into the Company's common stock.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
the SIP. The compensation cost that has been charged against income for the
restricted stock awards issued under the SIP and Armco's award program was
$4.3, $4.7 and $8.1 for 1997, 1998 and 1999, respectively. The Company adopted
the pro forma disclosure requirements of SFAS No. 123, "Accounting for Stock-
Based Compensation" in 1996. Had compensation cost for the Company's SIP and
Armco's plan been determined based on the fair value at the grant dates for
awards under these plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share for 1996, 1997 and 1998 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -----
<S> <C> <C> <C> <C>
Net income..................................... As reported $185.1 $329.7 $65.4
Pro forma $183.1 $327.4 $62.6
Basic earnings per share....................... As reported $ 1.75 $ 3.19 $0.56
Pro forma $ 1.72 $ 3.16 $0.54
Diluted earnings per share..................... As reported $ 1.68 $ 3.06 $0.56
Pro forma $ 1.66 $ 3.04 $0.53
</TABLE>
The fair value of the options to purchase shares of AK Holding common stock
is estimated on the grant date using a Black-Scholes option pricing model
considering the appropriate dividend rates along with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected volatility..................................... 21.0% 20.1% 25.2%
Risk free interest rates................................ 6.40% 5.67% 5.61%
Expected lives.......................................... 5.0yrs. 5.0yrs. 5.0yrs.
</TABLE>
The fair value of options to purchase Armco stock included the expectation
that no dividends would be paid on the stock along with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected volatility..................................... 35.0% 40.0% 40.0%
Risk free interest rates................................ 6.25% 5.50% 4.70%
Expected lives.......................................... 5.0yrs. 5.0yrs. 5.0yrs.
</TABLE>
30
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
A summary of the status of stock options and restricted stock awards under
the SIP and Armco's plan as of December 31, 1997, 1998 and 1999 and changes
during each of those years is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ------------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 3,564,687 $16.26 3,558,350 $16.36 4,067,517 $16.27
Granted................. 734,806 $17.51 820,291 $16.31 943,254 $18.58
Exercised............... 500,098 $14.18 142,416 $14.07 1,702,851 $14.34
Forfeited............... 63,331 $12.01 97,373 $17.81 391,658 $16.97
Expired................. 177,714 $26.81 71,335 $23.06 32,791 $31.60
--------- --------- ---------
Outstanding at end of
year................... 3,558,350 $16.36 4,067,517 $16.27 2,883,471 $17.90
========= ========= =========
Options exercisable at
year end............... 2,014,595 $16.04 2,570,283 $15.98 1,956,169 $15.68
Weighted average fair
value of options
granted during the
year................... 734,806 $ 4.88 820,291 $ 5.18 943,254 $ 5.68
<CAPTION>
Restricted Stock Awards
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Granted during year..... 580,242 $15.75 611,324 $16.31 650,973 $18.39
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.98 to $13.71.......... 588,796 4.6 yrs. $11.94 588,796 $11.94
$13.72 to $16.46.......... 425,009 3.8 yrs. $14.04 425,009 $14.04
$16.47 to $19.20.......... 711,010 7.8 yrs. $18.79 348,696 $18.80
$19.21 to $21.95.......... 671,656 5.6 yrs. $20.33 587,000 $20.31
$21.96 to $24.69.......... 462,000 9.3 yrs. $23.52 6,668 $22.91
$24.70 to $27.44.......... 25,000 9.3 yrs. $26.64 -- --
</TABLE>
5. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. This return includes all domestic companies 80% or more owned by the
Company and the proportionate share of the Company's interest in partnership
investments. State tax returns are filed on a consolidated, combined or
separate basis depending on the applicable laws relating to the Company and
its domestic subsidiaries. Armco will file a final federal income tax return
and final state returns for the short period ending September 30, 1999, the
date of the merger with the Company.
The United States and foreign components of income before income taxes
consist of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
United States........................................... $319.4 $307.2 $140.0
Foreign................................................. 1.6 2.2 1.9
------ ------ ------
Total................................................. $321.0 $309.4 $141.9
====== ====== ======
</TABLE>
31
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and tax credit carryforwards............. $ 485.6 $ 510.1
Postretirement reserves..................................... 567.5 569.7
Other reserves.............................................. 138.2 131.2
Valuation reserve........................................... (210.7) (210.5)
------- -------
Total deferred assets..................................... 980.6 1,000.5
------- -------
Deferred tax liabilities:
Depreciable assets.......................................... (427.6) (512.4)
Inventories................................................. (59.5) (47.2)
Pension assets.............................................. (51.0) (48.4)
------- -------
Total deferred liabilities................................ (538.1) (608.0)
------- -------
Net asset................................................. $ 442.5 $ 392.5
======= =======
</TABLE>
Temporary differences represent the cumulative taxable or deductible amounts
recorded in the consolidated financial statements in different years than
recognized in the tax returns. The postretirement benefit difference includes
amounts expensed in the consolidated financial statements for health care,
life insurance and other postretirement benefits, which become deductible in
the tax return upon payment or funding in qualified trusts. Other temporary
differences represent principally various expenses accrued for financial
reporting purposes which are not deductible for tax reporting purposes until
paid. The depreciable assets temporary difference represents generally tax
depreciation in excess of financial statement depreciation. The inventory
difference relates primarily to differences in the LIFO reserve, reduced by
tax overhead capitalized in excess of book amounts.
At December 31, 1999, the Company had a federal tax capital loss
carryforward of $46.0 expiring in 2000. Also at December 31, 1999, the Company
had regular tax net operating loss carryforwards for federal tax purposes
expiring as follows:
<TABLE>
<CAPTION>
Net
Operating Loss
Year Expiring Carryforward
------------- --------------
<S> <C>
2000...................................................... $ 123.3
2003...................................................... 9.1
2004...................................................... 129.4
2005...................................................... 243.1
2006...................................................... 199.2
2007...................................................... 139.8
2008...................................................... 33.3
2009...................................................... 44.4
2010...................................................... 35.1
2019...................................................... 114.0
--------
Total................................................... $1,070.7
========
</TABLE>
32
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
At December 31, 1999 the Company had Alternative Minimum Tax ("AMT") net
operating loss carryforwards of $616.7 which will expire in the years 2000
through 2009 unless previously utilized. In addition, at December 31, 1999,
the Company had unused AMT credit carryforwards of $42.9, which may be used to
offset future regular income tax liabilities. These credits can be carried
forward indefinitely.
The Company's ability to utilize Armco's net operating loss, capital loss,
and tax credit carryforwards as of the date of the merger will be limited by
Section 382 of the Internal Revenue Code. The Company has recorded a valuation
reserve for those carryforward amounts that are expected to expire prior to
being used as a result of the limits imposed by Section 382.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Continuing operations:
Current:
Federal............................................ $ 46.6 $ 29.7 $ 2.3
State.............................................. 1.6 2.9 3.5
Foreign............................................ 0.8 1.1 0.7
Deferred:
Federal............................................ 66.7 60.4 60.8
State.............................................. 11.8 11.4 (3.4)
------ ------ -----
Total tax provision on continuing operations..... 127.5 105.5 63.9
Discontinued operations................................ 1.1 -- --
Extraordinary losses on early retirement of debt....... (1.2) -- (8.7)
Cumulative effect of a change in accounting............ -- 89.0 --
------ ------ -----
Total tax provision.............................. $127.4 $194.5 $55.2
====== ====== =====
</TABLE>
The reconciliation of income tax on continuing operations computed at the
U.S. federal statutory tax rates to actual income tax expense is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Income at statutory rate.............................. $111.8 $107.5 $49.0
State and foreign tax provisions...................... 14.2 15.4 0.8
Reduction in deferred tax asset valuation reserve..... -- (2.5) (0.2)
Tax exempt state/local interest income................ (4.6) (2.8) --
Non-taxable anti-trust damage recoveries.............. -- (3.7) --
Non-deductible severance and merger expenses.......... -- -- 14.5
Other permanent differences........................... 6.1 (8.4) (0.2)
------ ------ -----
Total tax provision on continuing operations...... $127.5 $105.5 $63.9
====== ====== =====
</TABLE>
The federal income tax returns of the Company and its subsidiaries for 1994
and 1995 have been examined by the Internal Revenue Service and are closed to
assessments. The federal returns for the years 1996-1998 are currently under
examination. In addition, in the normal course of business the state and local
tax returns of the Company and its subsidiaries are routinely subjected to
examination by various taxing jurisdictions. However, the Company believes
that the outcomes of these examinations will not have any material adverse
impact on the Company's financial position, results of operations or cash
flows.
33
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
The statute of limitations has lapsed with respect to Armco's federal income
tax returns for 1995 and prior years, and as a result these returns are closed
to assessments of additional tax. However, the NOL carryforwards from these
years remain open to adjustment. Armco has been in a cumulative NOL
carryforward position since 1983. In addition, Armco has loss carryforwards
that are substantially in excess of the amounts which are expected to be used
each year after the merger, because of the limits on the loss utilization
imposed by Section 382. Consequently, the Company believes that any IRS audit
adjustments to the loss carryforwards would not be sufficient to reduce the
carryovers below the amounts for which a deferred tax benefit has been
provided.
6. Long-Term Debt and Other Financing
At December 31, 1998 and 1999, the Company's long-term debt was as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Senior Secured Notes Due 2004 (interest rates of 8.48% to
9.05%)................................................... $ 250.0 $ 250.0
9 3/8% Senior Notes Due 2004.............................. 111.0 --
10 3/4% Senior Notes Due 2004............................. 325.0 --
9 1/8% Senior Notes Due 2006.............................. 550.0 550.0
9% Senior Notes Due 2007.................................. 150.0 117.4
8 7/8% Senior Notes Due 2008.............................. 75.0 33.6
7 7/8% Senior Notes Due 2009.............................. -- 450.0
Tax Exempt Financing Due 2008 through 2029 (variable rates
of 2.61% to 4.53% in 1999)............................... 42.4 51.7
Other, including unamortized discount..................... 9.2 4.2
-------- --------
Total debt............................................ 1,512.6 1,456.9
Less: current maturities.................................. 116.9 5.9
-------- --------
Total long-term debt.................................. $1,395.7 $1,451.0
======== ========
</TABLE>
At December 31, 1999, the maturities of long-term debt are as follows:
<TABLE>
<S> <C>
2000................................................................ $ 5.9
2001................................................................ 63.3
2002................................................................ 63.3
2003................................................................ 62.5
2004................................................................ 62.5
2005 and thereafter................................................. 1,199.4
--------
Total........................................................... $1,456.9
========
</TABLE>
The proceeds of the Senior Secured Notes Due 2004 were used for the
construction of the Rockport Works and the notes are collateralized by
Rockport's hot-dip galvanizing and galvannealing line and its continuous cold
mill. In addition, at December 31, 1998 and 1999, $13.2 and $7.4,
respectively, of long-term debt, including current maturities, represents
financing used to construct certain of Armco's fixed assets, which are pledged
as collateral.
During 1997, Armco recorded an extraordinary loss of $3.0 ($1.9 after tax,
or approximately $0.02 per share) upon retiring certain of its outstanding
debt.
34
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
On December 15, 1998, Armco issued $75.0 of 8 7/8% Senior Notes Due 2008
priced at 99.196% of their principal amount. On January 14, 1999, using the
proceeds of this issue and other available funds, Armco redeemed the entire
$111.0 outstanding principal amount of its 9 3/8% Senior Notes Due 2000 at a
price of 101.75% of their principal amount. The redemption resulted in an
extraordinary loss of $2.8 ($1.7 after taxes, or $0.02 per share).
On February 10, 1999, AK Steel issued $450.0 principal amount of 7 7/8%
Senior Notes Due 2009 at 99.623% of their principal amount. On April 1, 1999,
AK Steel used $338.1 of the net proceeds from the sale of these notes to
finance the redemption of its 10-3/4% Senior Notes Due 2004 at a price of
104.031% of their principal amount. The redemption resulted in an
extraordinary loss of $19.3 ($11.7 after taxes, or $0.11 per share).
At December 31, 1999, net of $121.3 used to support letters of credit, the
Company had $178.7 of availability under its accounts receivable purchase
facility. On October 1, 1999, following the Armco merger, the total size of
this facility was increased to $300.0 from $200.0 and its expiration date was
extended to September 30, 2004.
7. Operating Leases
Rental expense was $20.2, $21.3 and $25.2 for 1997, 1998 and 1999,
respectively.
At December 31, 1999, obligations to make future minimum lease payments were
as follows:
<TABLE>
<S> <C>
2000.................................................................... $2.2
2001.................................................................... 1.6
2002.................................................................... 1.3
2003.................................................................... 1.1
2004.................................................................... 0.9
</TABLE>
8. Pension and Other Postretirement Benefit Plans
The Company provides noncontributory pension benefits to most employees and
provides various health care and life insurance benefits to most retirees. At
December 31, 1999, pension funding credits of $400.5 were available to offset
future minimum funding requirements under the Employee Retirement Income
Security Act of 1974. Although most retiree health and life insurance benefits
are funded as claims are paid, the Company has established a health care trust
as a means of prefunding a portion of these benefits.
Effective January 1, 1998, the Company conformed the AK Steel and Armco
methods of amortizing unrecognized net gains and losses related to obligations
for pensions and other postretirement benefits and conformed the measurement
dates for actuarial valuations. In 1998, the Company recognized net of tax
income of $133.9, or $1.33 per share ($1.24 on a diluted basis), as a
cumulative effect of this accounting change. At the time it originally adopted
the standards governing the accounting for pensions and other postretirement
benefits, the Company chose to use the minimum amortization method, whereby
unrecognized net gains and losses, to the extent they exceeded 10% of the
larger of the benefit obligations or plan assets (the "corridor"), were
amortized over the average remaining service life of active participants
(approximately 15 years). Under the new accounting method, the Company
recognizes into income, as a fourth quarter adjustment, any unrecognized net
gains and losses that exceed the 10% corridor, and amortizes amounts inside
the corridor over the average remaining service life of active participants.
Adoption of the new method increased 1998 income from continuing operations by
approximately $11.2, or $0.11 per share ($0.10 per diluted share), and
decreased 1999 income from continuing operations by approximately $7.0, or
$0.07 per share.
35
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ --------------------
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefits obligation:
Benefit obligation at beginning of
year............................. $3,371.1 $3,482.2 $ 1,419.3 $ 1,461.9
Service cost...................... 33.2 35.9 9.8 9.5
Interest cost..................... 232.2 228.8 99.0 96.7
Plan participants' contributions.. -- -- 9.0 10.3
Actuarial loss/(gain)............. 137.7 (280.5) 54.1 (59.7)
Amendments........................ 15.0 45.1 (18.0) --
Benefits paid..................... (307.0) (293.7) (111.3) (111.2)
Curtailments...................... -- 4.6 -- 2.3
Settlements....................... -- 6.1 -- --
Special termination benefits...... -- 1.3 -- 2.2
-------- -------- --------- ---------
Benefit obligations at end of
year............................. $3,482.2 $3,229.8 $ 1,461.9 $ 1,412.0
======== ======== ========= =========
Change in plan assets:
Fair value of plan assets at
beginning of year................ $3,528.8 $3,478.8 $ 187.0 $ 172.9
Actual return on plan assets...... 254.2 333.4 14.0 21.2
Employer contributions............ 2.8 15.9 74.2 74.7
Plan participants' contributions.. -- -- 9.0 10.3
Settlements....................... -- (12.9) -- --
Benefits paid..................... (307.0) (293.7) (111.3) (111.2)
-------- -------- --------- ---------
Fair value of plan assets at end
of year........................ $3,478.8 $3,521.5 $ 172.9 $ 167.9
======== ======== ========= =========
Funded status....................... $ (3.4) $ 291.7 $(1,289.0) $(1,244.1)
Unrecognized net actuarial
loss/(gain)........................ 26.4 (288.3) (43.6) (107.8)
Unrecognized prior service cost..... 68.2 104.4 (117.2) (102.7)
Unrecognized initial net benefit
obligation......................... 21.0 14.6 -- --
-------- -------- --------- ---------
Net amount recognized........... $ 112.2 $ 122.4 $(1,449.8) $(1,454.6)
======== ======== ========= =========
Amounts recognized in the
consolidated balance sheets
consist of:
Prepaid benefit cost.............. $ 106.5 $ 122.4 $ -- $ --
Accrued benefit liability......... (1.5) (4.9) (1,449.8) (1,454.6)
Intangible asset.................. 4.6 3.5 -- --
Accumulated other comprehensive
income........................... 2.6 1.4 -- --
-------- -------- --------- ---------
Net amount recognized........... $ 112.2 $ 122.4 $(1,449.8) $(1,454.6)
======== ======== ========= =========
</TABLE>
During the periods prior to the merger, Armco and AK Steel used different
assumptions in the preparation of this information. Weighted average
assumptions at year end for the consolidated Company are as follows:
<TABLE>
<CAPTION>
Pension
Benefits Other Benefits
---------------- ----------------
1997 1998 1999 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate.......................... 7.20% 6.85% 7.75% 7.30% 6.85% 7.75%
Expected return on plan assets......... 9.25% 8.75% 9.50% 9.25% 8.75% 9.50%
Rate of compensation increase.......... 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
</TABLE>
36
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
For measurement purposes, health care costs are assumed to increase 4.75%
during 2000 and all future years for pre-65 benefits and post-65 benefits.
The components of net periodic benefit costs for the years 1997, 1998 and
1999, excluding the cumulative effect of a change in accounting method
recorded in 1998, are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------- ----------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost.............. $ 29.0 $ 33.2 $ 35.9 $ 8.9 $ 9.8 $ 9.5
Interest cost............. 240.7 232.2 228.8 107.0 99.0 96.7
Expected return on plan
assets................... (285.3) (313.4) (299.0) (11.0) (14.9) (14.3)
Amortization of prior
service cost............. 7.5 7.8 8.8 (11.2) (12.9) (14.4)
Recognized net actuarial
loss/(gain).............. (1.4) (9.5) 3.2 (7.6) (7.7) (3.4)
Settlement curtailment
loss/(gain).............. 0.4 -- 13.8 -- -- (0.7)
Amortization of
unrecognized net
obligation............... 6.3 6.3 6.4 -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit
cost (income).......... $ (2.8) $ (43.4) $ (2.1) $ 86.1 $ 73.3 $ 73.4
======= ======= ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with an accumulated benefit obligation
in excess of plan assets were $41.5, $31.4 and $1.3, respectively, for 1998
and $33.5, $26.2 and $1.3, respectively, for 1999.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
One-Percentage-Point
---------------------
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on total service cost and interest cost
components........................................ $ 11.4 $ (10.3)
Effect on postretirement benefit obligation........ 126.3 (111.3)
</TABLE>
In addition to defined benefit pension plans, most employees are eligible to
participate in various defined contribution plans. Total expense related to
these plans was $10.4 in 1997, $11.6 in 1998 and $11.5 in 1999.
9. Segment Information
The Company's Steel Operations consists of steel production and finishing
plants in Butler, Pennsylvania; Ashland, Kentucky; Coshocton, Dover,
Mansfield, Middletown, and Zanesville, Ohio; and Rockport, Indiana that
produce flat-rolled steels, including premium quality coated, cold-rolled and
hot-rolled carbon steel, and specialty stainless and electrical steels
produced in slab, hot band, and sheet and strip form. Steel products are
primarily for sale to the domestic automotive, appliance, industrial machinery
and equipment, and construction markets. Steel Operations also include
European trading companies that buy and sell steel and manufactured steel
products.
In addition, the Company owns and operates Sawhill Tubular, a manufacturer
of a wide range of steel pipe and tubing products; Douglas Dynamics, L.L.C.,
the largest North American manufacturer of snowplows and ice control products
for four-wheel drive light trucks; and an industrial park on the Houston,
Texas ship channel. These businesses are included in Other Operations, below.
37
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
Accounting policies for the Steel Operations are the same as those described
in the summary of significant accounting policies in Note 1. Management
evaluates the performance of the Steel Operations based on its operating
profit. All "Corporate" expenses and assets are reflected in the Steel
Operations segment.
Information regarding the Company's operating segment is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Steel Operations................................ $3,844.3 $3,742.1 $3,977.4
Other Operations................................ 332.3 287.6 307.4
-------- -------- --------
Total......................................... $4,176.6 $4,029.7 $4,284.8
======== ======== ========
Operating Profit:
Steel Operations................................ $ 343.0 $ 333.8 $ 201.7
Other Operations................................ 41.3 30.2 43.1
-------- -------- --------
Total......................................... $ 384.3 $ 364.0 $ 244.8
======== ======== ========
Depreciation:
Steel Operations................................ $ 133.8 $ 153.7 $ 202.7
Other Operations................................ 7.2 7.5 8.0
-------- -------- --------
Total......................................... $ 141.0 $ 161.2 $ 210.7
======== ======== ========
Capital Expenditures:
Steel Operations................................ $ 670.3 $ 797.8 $ 314.5
Other Operations................................ 8.1 7.4 22.7
-------- -------- --------
Total......................................... $ 678.4 $ 805.2 $ 337.2
======== ======== ========
Total Assets:
Steel Operations................................ $4,895.3 $5,068.2 $5,016.5
Other Operations................................ 179.1 180.3 185.0
-------- -------- --------
Total......................................... $5,074.4 $5,248.5 $5,201.5
======== ======== ========
</TABLE>
Steel Operations operating profit in 1999 includes $99.7 of special charges
(Note 10). Steel Operations operating profit also includes income (loss) from
equity companies of $(0.7), $(1.0) and $2.1 for the years 1997, 1998 and 1999,
respectively.
Steel Operations net sales to General Motors, the Company's largest
customer, accounted for approximately 11%, 12% and 15% of the segment's net
sales in 1997, 1998 and 1999, respectively. No other customer accounted for
more than 10% of segment net sales for any of these years.
Steel Operations net sales to customers located outside the United States
totaled $215.1, $246.3 and $263.1 for 1997, 1998 and 1999, respectively.
10. Special Charges
In 1999, the Company recognized $99.7 in special charges for merger-related
costs, including $28.5 of expenses incurred for banking, legal, accounting and
other transaction fees, $51.1 for employee severance and certain required
payments under the change-of-control provisions contained in Armco's employee
benefit plans
38
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
and $20.1 for the closure of a redundant facility. Approximately $54.0 of the
$99.7 required the outlay of cash in 1999. The Company anticipates additional
cash payments of approximately $10.0 in 2000. The remainder of the special
charges do not require the outlay of cash.
The charge for closure of a redundant facility relates to the shutdown of
the carbon steel galvanizing plant in Dover, Ohio. The plant ceased production
on December 17, 1999. The announced closure, effective January 29, 2000, will
result in the termination of 120 employees, the majority of which are
represented hourly production workers. Most cash expenditures related to the
Dover closure are expected to be paid in 2000 and are recorded in other
accruals in the Consolidated Balance Sheets. The following provides details of
that portion of the special charge relating to the closure:
<TABLE>
<S> <C>
Asset impairments..................................................... $ 6.7
Termination benefits.................................................. 10.7
Environmental liabilities............................................. 2.0
Other expenditures.................................................... 0.7
-----
Total............................................................... $20.1
=====
</TABLE>
11. Related Party Transactions
The Company, in the ordinary course of business, sells steel to and
purchases scrap from National Material Limited Partnership, of which a
director of the Company is President and Chief Executive Officer. During 1997,
1998 and 1999 sales amounted to $29.4, $13.6 and $21.0 and purchases amounted
to $1.4, $2.4 and $1.1, respectively.
12. Commitments
The principal raw materials required for AK Steel's manufacturing operations
are carbon and stainless steel scrap, iron ore, coal, electricity, natural
gas, oxygen, chrome, nickel, silicon, molybdenum, zinc, limestone and other
commodity materials. In addition, AK Steel purchases carbon steel slabs from
other steel producers to supplement the production from its own steelmaking
facilities. Purchases of coal, iron ore and limestone, as well as
transportation services, are made at negotiated prices under multi-year
agreements. Purchases of carbon steel slabs, stainless steel scrap and other
raw materials are made at prevailing market prices, which are subject to
fluctuation in accordance with supply and demand. AK Steel believes that
adequate sources of supply exist for all of its raw material requirements.
At December 31, 1999, commitments for future capital investments, including
those made to assure environmental compliance, totaled approximately $84.1,
all of which will be funded in 2000.
13. Legal, Environmental Matters and Contingencies
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
39
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
The Company has expended the following for environmental related capital
investments and environmental compliance:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Environmental related capital investments................ $ 6.5 $20.2 $ 7.1
Environmental compliance costs........................... 85.0 98.2 115.1
</TABLE>
In addition to the items discussed below, the Company is also involved in
routine litigation, environmental proceedings, and claims pending with respect
to matters arising out of the normal conduct of the business. In management's
opinion, the ultimate liability resulting from all claims, individually or in
the aggregate, will not materially affect the Company's consolidated financial
position, results of operations or cash flows.
Under the authority of the Comprehensive Environmental Response,
Compensation and Liability Act, the Kentucky Department of Environmental
Protection conducted a comprehensive review of the waste management control
systems and handling practices at the Ashland Works coke department and
steelmaking facility in July, August and September 1991. As a result of this
inspection, the Kentucky Natural Resources and Environmental Protection
Cabinet instituted an administrative proceeding against the Company in
November 1993, alleging certain regulatory violations. The Company has entered
into non-binding mediation with the Kentucky Cabinet for Natural Resources and
Environmental Protection.
Federal regulations promulgated pursuant to the Clean Water Act impose
categorical pretreatment limits on the concentrations of various constituents
in coke plant wastewaters prior to discharge into publicly owned treatment
works ("POTW"). Due to concentrations of ammonia and phenol in excess of these
limits at the Middletown Works, the Company, through the Middletown POTW,
petitioned the EPA for "removal credits," a type of compliance exemption,
based on the Middletown POTW's satisfactory treatment of the Company's
wastewater for ammonia and phenol. The EPA declined to review the Company's
application on the grounds that it had not yet promulgated new sludge
management rules. The Company thereupon sought and obtained from the Federal
District Court for the Southern District of Ohio an injunction prohibiting the
EPA from instituting enforcement action against the Company for noncompliance
with the pretreatment limitations, pending the EPA's promulgation of the
applicable sludge management regulations. Although the Company is unable to
predict the outcome of this matter, if the EPA eventually refuses to grant the
Company's request for removal credits, the Company could incur additional
costs to construct pretreatment facilities at the Middletown Works.
In January 1996, an action was filed in the Court of Common Pleas of Butler
County, Ohio on behalf of four named plaintiffs who purport to represent a
class of plaintiffs consisting of all hourly employees at the Company's
Middletown Works and all hourly employees of independent contractors working
at the facility since June 1992. The complaint has twice been amended to add
additional named plaintiffs. The plaintiffs allege negligence and intentional
tort and seek compensatory and punitive damages in an unspecified amount for
alleged dangerous working conditions at the Company's Middletown Works. In
March 1997, the Court granted plaintiffs' motion to certify a class. The
Company's appeal of this decision to the Ohio Supreme Court was denied on
July 29, 1998. On November 2, 1998, the Company filed motions in the trial
court for an order vacating class certification and for partial summary
judgment on the grounds of federal preemption. Both motions are pending. The
Court of Common Pleas has set a trial date of June 2000.
On January 20, 1998, judgment against AK Steel in the amount of $6.5 was
entered by the United States District Court for the Southern District of Ohio,
following a jury trial in a disability discrimination lawsuit brought by a
former employee. On January 30, 1998, AK Steel moved for judgment in its favor
as a matter of law, reduction of the damages and a new trial. Subsequent to
December 31, 1999, the court reduced the jury verdict to $1.5. The Company
subsequently filed a motion for relief from that judgment, which is pending.
40
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
At December 31, 1999, the Company had recorded $10.2 in current accrued
liabilities and $40.4 in noncurrent other liabilities on its Consolidated
Balance Sheets for estimated probable costs relating to environmental matters.
14. Discontinued Operations
Foreign Operations: Certain of Armco's former businesses included operations
in foreign countries. At the time of their sale or closure, some of these
operations had unresolved tax issues in those countries. Following
consultation with local country advisors in 1999, Armco determined that it had
resolved most of these issues and reversed a majority of the related reserves,
recognizing income of $7.5, or $0.07 per share, in 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 from certain tax refund
claims for periods prior to the sale. In 1997, Armco recognized a $1.6, or
$0.02 per share ($0.01 per share on a diluted basis), increase to its gain on
the sale of the segment for state and federal tax refunds.
AFSG: The Company's investment in the Armco Financial Services Group
("AFSG") represents the net assets of Armco's discontinued insurance and
finance leasing businesses, which have been largely liquidated. These
companies, including Northwestern National Insurance Company ("NNIC"), are
being "run off." Except for an immaterial amount of guaranteed renewable
accident and health insurance business, these companies have not written any
new business for retention since 1986. AFSG is accounted for as a discontinued
operation under the liquidation basis of accounting, whereby future cash
inflows and outflows are considered.
In March 1997, North Atlantic Insurance Company, a group of international
insurance companies previously affiliated with AFSG but sold in 1991, filed an
application for voluntary liquidation in the United Kingdom. As a result,
certain claims have been asserted against NNIC by insureds of North Atlantic.
NNIC is defending these claims as well as pursuing related claims against
third parties and North Atlantic.
Effective September 30, 1999, the Wisconsin Office of the Commissioner of
Insurance ordered NNIC to enter into a restructuring agreement with Armco
Financial Services Corporation ("AFSC") and Armco Insurance Group, Inc.
("AIGI"). AIGI is the parent company of NNIC. AFSC is the parent company of
AIGI and an indirect subsidiary of the Company. Pursuant to the restructuring
agreement, AFSC and AIGI prepaid notes owed to NNIC and contributed certain
collateral to NNIC in exchange for the termination and release of their
obligations to NNIC. This order and restructuring agreement releases all of
NNIC's direct and indirect parent companies from any obligation to provide
further financial support to NNIC.
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, including matters related to the
voluntary liquidation of North Atlantic, will not be material to the Company's
financial condition, results of operations or cash flows.
41
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
15. Consolidated Quarterly Sales and Earnings (Unaudited)
Earnings per share for each quarter and the year are calculated individually
may not add to the total for the year.
<TABLE>
<CAPTION>
1998
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $1,009.0 $1,043.8 $ 959.7 $1,017.2 $4,029.7
Gross profit.................. 191.2 205.9 178.7 233.5 809.3
Income before cumulative
effect....................... 43.8 58.3 30.1 63.6 195.8
Basic earnings per share.... 0.41 0.56 0.28 0.61 1.86
Diluted earnings per share.. 0.40 0.54 0.28 0.59 1.82
Net income.................... 177.7 58.3 30.1 63.6 329.7
Basic earnings per share.... 1.74 0.56 0.28 0.61 3.19
Diluted earnings per share.. 1.64 0.54 0.28 0.59 3.06
<CAPTION>
1999
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... $1,024.3 $1,113.5 $1,055.5 $1,091.5 $4,284.8
Gross profit.................. 203.8 219.1 216.1 232.0 871.0
Income (loss) before
extraordinary loss........... 41.3 41.4 2.4 (6.3) 78.8
Basic earnings per share.... 0.39 0.38 0.00 (0.06) 0.69
Diluted earnings per share.. 0.38 0.38 0.00 (0.06) 0.69
Net income (loss)............. 39.6 29.7 2.4 (6.3) 65.4
Basic earnings per share.... 0.37 0.27 0.00 (0.06) 0.56
Diluted earnings per share.. 0.37 0.27 0.00 (0.06) 0.56
</TABLE>
As a result of the pooling of interests with Armco, 1998 and 1999 quarterly
financial information was restated. Income before extraordinary loss and net
income in the third quarter of 1999 differs by $3.9 from amounts previously
reported due to the reallocation of pension and other postretirement benefit
expense that resulted from the change in accounting related to the pooling of
interests with Armco.
Item 9. Changes in and Disagreements with Accountants.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to the Company's Executive Officers is set forth in
Part I of this Annual Report pursuant to General Instruction G of Form 10-K.
The information required to be furnished pursuant to this item with respect to
Directors of the Company will be set forth under the caption "Election of
Directors" in the Company's proxy statement (the "2000 Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by
the Company's Board of Directors for use at the Annual Meeting of Stockholders
and is incorporated herein by reference.
42
<PAGE>
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in millions, except per share amounts)
The information required to be furnished pursuant to this item with respect
to compliance with Section 16(a) of the Exchange Act will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the 2000 Proxy Statement,
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be furnished pursuant to this item will be set
forth under the caption "Stock Ownership," in the 2000 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to this item will be set
forth under the captions "Certain Relationships and Transactions" in the 2000
Proxy Statement, and is incorporated herein by reference. See also Note 11 of
the Notes to Consolidated Financial Statements included in Item 8 hereof.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.
(a) The list of financial statements filed as part of this report is
submitted as a separate section, the index to which is located on page 18.
Financial statement schedules are omitted because of the absence of the
conditions under which they are required or because the information is set
forth in the financial statements or notes thereto.
(b) Reports on Form 8-K filed during the fourth quarter of 1999 were:
<TABLE>
<S> <C>
Armco Acquisition Completed...................................... October 4
Board of Directors Declares Common Stock Dividends............... October 6
Modification of Senior Note Indentures........................... October 21
Earnings Release................................................. October 22
Offer to Repurchase Debt......................................... October 29
October Financial Results........................................ November 16
Three New Vice Presidents Named.................................. November 23
76-Month Labor Agreement Ratified at Middletown Works............ December 8
Dover, Ohio Plant to Close January 29, 2000...................... December 9
Change-of-Control Repurchase Offer for Two Senior Notes
Completed....................................................... December 9
</TABLE>
(c) Exhibits:
List of exhibits begins on next page.
43
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Company, filed with the Secretary
of State of the State of Delaware on December 20, 1993, as amended
(incorporated herein by reference to Exhibit 3.1.1 to the Company's
Current Report on Form 8-K, as filed with the Commission on May 27,
1998).
3.2 By-laws of the Company (incorporated herein by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (Registration
No. 33-74432), as filed with the Commission on January 26, 1994).
3.3 Certificate of Designations, Preferences, Rights and Limitations of
Series A Junior Preferred Stock (included in Exhibit 10.16).
*3.4 Certificate of Designations of Series B $3.625 Cumulative Convertible
Preferred Stock.
4.1 Indenture, dated as of October 1, 1992, relating to the Company's 9%
Senior Notes Due 2007 (the "1992 Indenture") (incorporated herein by
reference to Exhibit 4 to the Registration Statement of Armco Inc. on
Form S-3 (Registration No. 33-51806), as filed with the Commission on
September 9, 1992).
4.2 Supplemental Indenture No. 2, dated as of September 1, 1997, to the
1992 Indenture (incorporated herein by reference to Exhibit 4.4 to the
Registration Statement of Armco Inc. on Form S-4 (Registration No.
333-36691), as filed with the Commission on September 30, 1997).
4.3 Supplemental Indenture No. 3, dated as of July 30, 1999, to the 1992
Indenture (incorporated herein by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.4 Supplemental Indenture No. 4, dated as of September 30, 1999, to the
1992 Indenture (incorporated herein by reference to Exhibit 4.4 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.5 Supplemental Indenture No. 5, dated as of October 1, 1999, to the 1992
Indenture (incorporated herein by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.6 Indenture, dated as of November 1, 1993, relating to the Company's 8-
7/8% Senior Notes Due 2008 (the "1993 Indenture") (incorporated herein
by reference to Exhibit 4 to the Registration Statement of Armco Inc.
on Form S-3 (Registration No. 33-50205), as filed with the Commission
on September 9, 1993).
4.7 Supplemental Indenture No. 2, dated as of December 15, 1998, to the
1993 Indenture (incorporated herein by reference to Exhibit 4.3 to the
Registration Statement of Armco Inc. on Form S-4 (Registration No.
333-71203), as filed with the Commission on January 26, 1999).
4.8 Supplemental Indenture No. 3, dated as of July 30, 1999, to the 1993
Indenture (incorporated herein by reference to Exhibit 4.8 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.9 Supplemental Indenture No. 4, dated as of September 30, 1999, to the
1993 Indenture (incorporated herein by reference to Exhibit 4.9 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.10 Supplemental Indenture No. 5, dated as of October 1, 1999, to the 1993
Indenture (incorporated herein by reference to Exhibit 4.10 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.11 Indenture, dated as of December 17, 1996, relating to the Company's 9-
1/8% Senior Notes Due 2006 (the "1996 Indenture") (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-4 (Registration No. 333-19781), as filed with the Commission on
January 14, 1997).
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.12 First Supplemental Indenture, dated as of August 6, 1999, to the 1996
Indenture (incorporated herein by reference to Exhibit 4.11 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.13 Second Supplemental Indenture, dated as of October 1, 1999, to the
1996 Indenture (incorporated herein by reference to Exhibit 4.12 to
the Company's Current Report on Form 8-K, as filed with the Commission
on October 21, 1999).
4.14 Indenture, dated as of February 10, 1999, relating to the Company's 7-
7/8% Senior Notes Due 2009 (the "1999 Indenture") (incorporated herein
by reference to Exhibit 1 to the Company's Current Report on Form 8-K,
as filed with the Commission on February 17, 1999).
4.15 First Supplemental Indenture, dated as of August 6, 1999, to the 1999
Indenture (incorporated herein by reference to Exhibit 4.13 to the
Company's Current Report on Form 8-K, as filed with the Commission on
October 21, 1999).
4.16 Second Supplemental Indenture, dated as of October 1, 1999, to the
1999 Indenture (incorporated herein by reference to Exhibit 4.14 to
the Company's Current Report on Form 8-K, as filed with the Commission
on October 21, 1999).
4.17 Form of Note Purchase Agreement, dated as of December 17, 1996,
relating to the Company's Senior Secured Notes, Series A-E, Due 2004
(incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-4 (Registration No. 333-19781), as
filed with the Commission on January 14, 1997).
4.18 Supplemental Agreement, dated as of July 28, 1999, amending the Note
Purchase Agreements, dated as of December 17, 1996, relating to the
Company's Senior Secured Notes, Series A-E, Due 2004 (incorporated
herein by reference to Exhibit 4.15 to the Company's Current Report on
Form 8-K, as filed with the Commission on October 21, 1999).
4.19 Guarantee Agreement, dated as of September 30, 1999, by Douglas
Dynamics, L.L.C. pursuant to the Note Purchase Agreements, dated as of
December 17, 1996, as amended, relating to the Company's Senior
Secured Notes, Series A-E, Due 2004 (incorporated herein by reference
to Exhibit 4.16 to the Company's Current Report on Form 8-K, as filed
with the Commission on October 21, 1999).
10.1 Form of Executive Officer Severance Agreement (incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.2 Form of Executive Officer Severance Agreement--Richard M. Wardrop, Jr.
(incorporated herein by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.3 Form of Executive Officer Severance Agreement--James L. Wareham
(incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).
10.4 Annual Management Incentive Plan (incorporated herein by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
10.5 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
10.6 Executive Minimum and Supplemental Retirement Plan (incorporated
herein by reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 (Registration No. 33-83792), as filed with the
Commission on September 8, 1994).
10.7 Registration Rights Agreement, dated as of April 7, 1994, among the
Company and certain subsidiaries of Kawasaki (incorporated herein by
reference to Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Registration No. 33-83792), as filed with the Commission on
September 8, 1994).
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.8 Receivables Purchase Agreement, dated as of December 1, 1994, between
AK Steel and AK Acquisition Receivables Ltd., as successor to AK Steel
Receivables, Inc. (incorporated herein by reference to Exhibit 10.23
to Amendment No. 1 to the Company's Registration Statement on Form S-1
(Registration No. 33-86678), as filed with the Commission on January
25, 1995).
10.9 Purchase and Servicing Agreement, dated as of December 1, 1994, among
AK Acquisition Receivables Ltd., as successor to AK Steel Receivables,
Inc., AK Steel, the institutions from time to time party thereto and
PNC Bank, Ohio, National Association (incorporated herein by reference
to Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-86678), as filed with the
Commission on January 25, 1995).
10.10 Amendment No. 1, dated as of November 17, 1995, to the Purchase and
Servicing Agreement, dated as of December 1, 1994, among AK Steel, AK
Acquisition Receivables Ltd., as successor to AK Steel Receivables,
Inc., the purchasers party thereto and PNC Bank, Ohio, National
Association (incorporated herein by reference to Exhibit 10.11(a) to
the Company's Registration Statement on Form S-4 (Registration No.
333-19781), as filed with the Commission on January 14, 1997).
10.11 Consent, Amendment and Assumption Agreement, dated as of December 31,
1996, to the Receivables Purchase Agreement and the Purchase and
Servicing Agreement, among the Company, AK Steel Receivables Inc., AK
Acquisition Receivables Ltd., AKSR Investments, Inc., the purchasers
party thereto and PNC Bank, Ohio, National Association (incorporated
herein by reference to Exhibit 10.11(b) to the Company's Registration
Statement on Form S-4 (Registration No. 333-19781), as filed with the
Commission on January 14, 1997).
10.12 Third Consent and Amendment Agreement, dated as of July 10, 1997, to
the Purchase and Servicing Agreement, dated as of December 1, 1994,
among AK Steel, AK Steel Receivables Ltd. and PNC Bank, Ohio, National
Association (incorporated herein by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997).
10.13 Letter Agreement dated July 31, 1995, between the Company and Kawasaki
(incorporated herein by reference to Exhibit 10 to Post-Effective
Amendment No. 2 on Form S-3 to the Company's Registration Statement on
Form S-1 (Registration No. 33-86678), as filed with the Commission on
August 1, 1995).
10.14 Deferred Compensation Plan for Management (incorporated herein by
reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.15 Deferred Compensation Plan for Directors (incorporated herein by
reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.16 Rights Agreement, dated as of January 23, 1996, between the Company
and the Bank of New York as predecessor to Fifth Third Bank, as Rights
Agent, with respect to the Company's Stockholder Rights Plan
(incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A under the Securities Exchange Act of 1934, as
filed with the Commission on February 5, 1996).
10.17 Substitution of The Fifth Third Bank as Successor Rights Agent and
Amendment No. 1, dated September 15, 1997, to Rights Agreement dated
as of January 23, 1996 (incorporated herein by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K, as filed with the
Commission on September 15, 1997).
10.18 Instrument of Resignation, Appointment and Acceptance, dated as of
September 15, 1997, with respect to resignation of The Bank of New
York as Trustee and the appointment of The Fifth Third Bank as
Successor Trustee under the 1996 Indenture (incorporated herein by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K,
dated September 15, 1997).
10.19 Long Term Performance Plan (incorporated herein by reference to
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.20 First Amendment, dated July 17, 1997, to Executive Minimum and
Supplemental Retirement Plan (incorporated herein by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.21 Second Amendment, dated September 18, 1997, to Executive Minimum and
Supplemental Retirement Plan (incorporated herein by reference to
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
*11 Statement re: Computation of Per Share Earnings.
*12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
*21 Subsidiaries of the Company.
*23 Independent Auditors' consent.
*27 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Middletown, State of
Ohio, on February 24, 2000.
AK Steel Holding Corporation
/s/ James L. Wainscott
By: _________________________________
James L. Wainscott
Senior Vice President, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard M. Wardrop, Jr. Chairman of the Board and February 24, 2000
______________________________________ Chief Executive Officer
Richard M. Wardrop, Jr.
/s/ James L. Wareham President February 24, 2000
______________________________________
James L. Wareham
/s/ James L. Wainscott Senior Vice President, February 24, 2000
______________________________________ Treasurer and Chief
James L. Wainscott Financial Officer
/s/ Donald B. Korade Vice President and February 24, 2000
______________________________________ Controller
Donald B. Korade
/s/ Allen Born Director February 24, 2000
______________________________________
Allen Born
/s/ Donald V. Fites Director February 24, 2000
______________________________________
Donald V. Fites
/s/ John A. Georges Director February 24, 2000
______________________________________
John A. Georges
/s/ Dr. Bonnie G. Hill Director February 24, 2000
______________________________________
Dr. Bonnie G. Hill
/s/ Robert H. Jenkins Director February 24, 2000
______________________________________
Robert H. Jenkins
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lawrence A. Leser Director February 24, 2000
______________________________________
Lawrence A. Leser
/s/ Daniel J. Meyer Director February 24, 2000
______________________________________
Daniel J. Meyer
/s/ Robert E. Northam Director February 24, 2000
______________________________________
Robert E. Northam
/s/ Cyrus Tang Director February 24, 2000
______________________________________
Cyrus Tang
/s/ Dr. James A. Thomson Director February 24, 2000
______________________________________
Dr. James A. Thomson
</TABLE>
49
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF DESIGNATIONS
OF
SERIES B $3.625 CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
AK STEEL HOLDING CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
_________________________________
AK Steel Holding Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), in
-----------
accordance with the provisions of Section 151 of such law DOES HEREBY CERTIFY
that, pursuant to the authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation, as amended (the "Certificate of
--------------
Incorporation"), the Board of Directors adopted the following resolution:
- -------------
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of preferred stock of the Corporation be, and hereby is,
created and that the powers designations, preferences and relative,
participating, optional or other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereon, are as follows:
Section 1. Designation. The series of preferred stock established hereby
shall be created out of the authorized shares of the Corporation's existing
class of Preferred Stock (as defined in the Certificate of Incorporation) and
shall be designated as the "Series B $3.625 Cumulative Convertible Preferred
------------------------------------------------
Stock." The number of shares constituting such series shall be 2,700,000 and are
- -----
referred to herein as the "$3.625 Preferred Stock."
----------------------
Section 2. Future Increase or Decrease of Class and Series.
(a) For so long as any shares of $3.625 Preferred Stock are outstanding,
the Corporation shall not, without the affirmative vote of the holders of a
majority of the outstanding $3.625 Preferred Stock, increase the authorized
number of shares of Preferred Stock or create any class or series of capital
stock which ranks equally with or prior to the $3.625 Preferred Stock.
<PAGE>
(b) The number of authorized shares of $3.625 Preferred Stock may be
increased (but not above the number of authorized shares of Preferred Stock) or
decreased (but not below the number of shares of $3.625 Preferred Stock then
outstanding) by the Board of Directors, in its sole discretion, without the
consent of the holders of outstanding shares of $3.625 Preferred Stock.
Section 3. Stock Ranking Junior to $3.625 Preferred Stock. Whenever
reference is made herein to stock or shares "ranking junior to the $3.625
Preferred Stock" such reference shall mean and include the Common Stock, the
Series A Junior Preferred Stock and any other authorized class of the
Corporation's capital stock in respect of which the rights of the holders as to
the payment of dividends and as to distributions in the event of dissolution,
liquidation or winding up of the Corporation are subordinate to the rights of
the holders of the $3.625 Preferred Stock.
Section 4. Dividends.
(a) Holders of outstanding shares of $3.625 Preferred Stock shall be
entitled to receive, subject to the rights of holders of any class of stock of
the Corporation or series thereof ranking senior to the $3.625 Preferred Stock
in respect of dividends and distribution, when and as declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends at the rate of $3.625 per share per annum and no
more, payable in cash quarterly in equal installments on the last day of each
March, June, September and December. Dividends shall be cumulative, whether or
not earned, and shall accrue on each share of $3.625 Preferred Stock from
September 30, 1999, except that dividends on shares of $3.625 Preferred Stock
issued after the first date of issue of any shares of $3.625 Preferred Stock
shall accrue on each such share from the quarterly dividend payment date next
preceding the date of issue of each such share; provided, that
(i) if the date of issue is a quarterly dividend payment date or a
date between the record date for the determination of holders of $3.625
Preferred Stock entitled to receive a quarterly dividend and the payment
date for such quarterly dividend, such dividends shall be cumulative and
shall accrue from such quarterly dividend payment date, and
(ii) if any shares of $3.625 Preferred Stock are issued at a time
when cumulative dividends are in arrears on previously issued shares of
$3.625 Preferred Stock, dividends on such newly issued shares shall be
cumulative and shall accrue in an amount equal to the dividends accrued and
unpaid on such previously issued shares of $3.625 Preferred Stock.
(b) Dividends payable on $3.625 Preferred Stock for any period less than a
full quarter shall be computed on the basis of a 360-day year.
(c) Accumulations of dividends shall not bear interest.
2
<PAGE>
Section 5. Restrictions on Payment of Dividends. So long as any $3.625
Preferred Stock shall be outstanding, the Corporation shall not declare or pay
any dividend or make any distribution on, or purchase, or cause to be purchased,
or redeem, any stock ranking junior to the $3.625 Preferred Stock, nor shall any
money be paid or set aside or made available for a purchase fund or sinking fund
for the purchase or redemption of any shares of such junior stock unless
(i) accrued dividends for all past dividend periods on all
outstanding shares of $3.625 Preferred Stock shall have been paid and the
dividend on all outstanding shares of $3.625 Preferred Stock for the then
current quarterly dividend period shall have been paid or declared and
provided for; and
(ii) the net assets of the Corporation shall not thereby be reduced
below the aggregate preferential amounts to which the then outstanding
shares of $3.625 Preferred Stock would be entitled upon the involuntary
liquidation, dissolution or winding up of the Corporation.
Section 6. Rights Upon Default in Payment of Dividends. If the Corporation
shall have failed to pay, or declare and set apart for payment, when due,
dividends on all outstanding shares of $3.625 Preferred Stock in an amount equal
to six quarterly dividends upon such shares, the number of Directors of the
Corporation shall be increased by two at the first annual meeting of the
stockholders of the Corporation held thereafter, and at such meeting and at each
subsequent annual meeting until dividends payable for all past quarterly
dividend periods on all outstanding shares of $3.625 Preferred Stock shall have
been paid, or declared and set apart for payment, in full, the holders of the
outstanding shares of $3.625 Preferred Stock shall have the right, voting as a
separate class, to elect such two additional members of the Board of Directors
to hold office until the annual meeting of shareholders held next after their
election and the election and qualification of their successors or until such
payment, or such declaration and setting apart for payment, in full, whichever
period is shorter; provided, that during any period of time in which the holders
of shares of $3.625 Preferred Stock shall have the right to elect two Directors
of the Corporation as set forth in this Section 6, the voting right conferred
upon the holders of $3.625 Preferred Stock by Section 8 shall be suspended with
respect to the election of Directors, but shall otherwise continue in effect.
Upon such payment, or such declaration and setting apart for payment, in full,
the terms of the two additional Directors so elected shall forthwith terminate,
and the number of Directors of the Corporation shall be reduced by two and the
right of the holders of shares of $3.625 Preferred Stock to vote pursuant to
this Section 6 shall cease, subject to increase in the number of Directors as
aforesaid and to revesting of such voting right in the event of each and every
additional failure in the payment of dividends in an amount equal to six
quarterly dividends as aforesaid.
Section 7. Liquidation Rights. Upon any dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, before any
distribution or payment is made to the holders of any class of stock ranking
junior to the $3.625 Preferred Stock, the holders of $3.625 Preferred Stock
shall be entitled to be paid in cash
3
<PAGE>
Fifty Dollars ($50.00) per share plus an amount equal to all dividends thereon
accrued and unpaid computed to the date on which payment thereof is made
available. If the net assets of the Corporation shall be insufficient to permit
the payment to holders of all outstanding shares of $3.625 Preferred Stock of
the full amount to which they are entitled, the entire net assets of the
Corporation shall be distributed ratably to the holders of all outstanding
shares of $3.625 Preferred Stock in proportion to the amounts to which they are
respectively entitled. After payment to holders of the $3.625 Preferred Stock
of the full preferential amounts aforesaid, the holders of the $3.625 Preferred
Stock, in their capacity as such, shall have no right or claim to any of the
remaining assets of the Corporation, which remaining assets shall be distributed
among the holders of shares ranking junior to the $3.625 Preferred Stock in
accordance with their respective rights thereto. The sale, lease or conveyance
of all the property and assets of the Corporation to, or the merger or
consolidation of the Corporation into or with, any other corporation shall not
be deemed to be a liquidation, dissolution or winding up of the Corporation for
the purposes of this Section 7.
Section 8. Voting Rights. The holders of $3.625 Preferred Stock shall be
entitled at all times to one vote for each share of $3.625 Preferred Stock in
respect of all matters to be voted upon by stockholders of the Corporation
generally, including the election of Directors, and shall vote, without regard
to class or series (except as required pursuant to Sections 2(a), 6 or 9
hereof), together with the holders of each other class and series of capital
stock of the Corporation entitled to vote.
Section 9. Amendments Materially Altering Provisions of Outstanding
$3.625 Preferred Stock. The Corporation shall not adopt, without the affirmative
vote of holders of two-thirds of the outstanding shares of $3.625 Preferred
Stock, voting as a separate class, any amendment to the Certificate of
Incorporation that materially alters any existing rights of the holders of the
outstanding $3.625 Preferred Stock.
Section 10. Preemptive Rights. No holder of $3.625 Preferred Stock shall,
as such holder, have any preemptive right in, or preemptive right to subscribe
to, any additional $3.625 Preferred Stock or any shares of any other class of
stock, or any bonds, debentures or other securities convertible into or
exchangeable for shares of stock of any class or series.
Section 11. Prohibitions Against Reissue or Resale. All shares of $3.625
Preferred Stock that are purchased, redeemed, converted, exchanged or otherwise
acquired by the Corporation shall be retired and none of such shares shall be
reissued or resold.
Section 12. Redemption. At the option of, and to the extent fixed by, the
Board of Directors, the Corporation may redeem at any time, or from time to
time, shares of $3.625 Preferred Stock, as a whole or in part, at the following
redemption prices, plus in each case, accrued and unpaid dividends thereon to
the date fixed by the Board of Directors for redemption:
4
<PAGE>
If redeemed prior to October 15, 1999, $51.4500, and if redeemed during the
twelve-month period commencing October 15:
Amount
Year Per Share
---- ----------
1999 $ 51.0875
2000 $ 50.7250
2001 $ 50.3625
2002 and thereafter $ 50.0000;
provided, that not less than thirty days prior to the date fixed for any such
redemption, a notice of the time and place thereof shall be given to the holders
of record of the shares of $3.625 Preferred Stock so to be redeemed by mailing a
copy of such notice to such holders at their respective addresses as the same
appear on the books of the Corporation and, if the Board of Directors shall so
determine, by publication of notice in such manner as may be prescribed by
resolution of the Board of Directors. Notice of every redemption shall state
the redemption date; the number of shares of $3.625 Preferred Stock to be
redeemed and, if less than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such holder; the
redemption price; the place or places where certificates for such shares are to
be surrendered for payment of the redemption price; the then current conversion
rate; and the date the conversion right terminates. In case of redemption of
less than all of the outstanding shares of $3.625 Preferred Stock, the
redemption shall be made pro rata or the shares to be redeemed shall be chosen
by lot in such manner as may be prescribed by resolution of the Board of
Directors.
At any time after notice of redemption has been given in the manner herein
prescribed, the Corporation may deposit with any bank or trust company having
capital and surplus of at least $5,000,000 that shall be named in such notice,
in trust for the holders of the shares so to be redeemed, the amount of the
aggregate redemption price payable on the date fixed for redemption to the
respective orders of such holders upon endorsement to the Corporation or
otherwise as may be required and surrender of the certificates for such shares.
Upon deposit of the aggregate redemption price, as aforesaid, or, if no such
deposit is made, upon said redemption date (unless the Corporation shall default
in making payment of the redemption price as set forth in said notice) such
holders shall cease to be stockholders with respect to said shares and shall be
entitled only to receive the redemption price on or after the date fixed for
redemption, without interest thereon, upon endorsement, if required, and
surrender of the certificates for such shares as aforesaid; provided, however,
that no such deposit in trust shall be deemed to terminate any conversion rights
to which any such holder may otherwise be entitled. Any funds so deposited by
the Corporation and unclaimed at the end of six years from the date fixed for
such redemption shall be repaid by such bank or trust company to the Corporation
upon its request, after which repayment the holders of such shares so called for
redemption shall look only to the Corporation for payment of the redemption
price thereof. Any funds so deposited which shall not be required for such
redemption because
5
<PAGE>
of the exercise subsequent to the date of such deposit of any right of
conversion shall be returned to the Corporation forthwith. Any interest accrued
on any funds so deposited shall belong to the Corporation and shall be paid to
it from time to time.
If at any time the Corporation shall have failed to pay accrued dividends
in full on the outstanding $3.625 Preferred Stock, thereafter and until such
dividends shall have been paid in full or declared and set apart for payment in
full, the Corporation shall not redeem any shares of $3.625 Preferred Stock
(except pursuant to a redemption of all of the shares of $3.625 Preferred Stock
then outstanding) or, directly or indirectly, purchase any shares of $3.625
Preferred Stock. Subject to the foregoing, any shares of $3.625 Preferred Stock
may be purchased by the Corporation.
The shares of $3.625 Preferred Stock shall not be entitled to the benefit
of any sinking fund to be applied to the purchase or redemption thereof.
Section 13. Conversion Rights.
(i) The shares of $3.625 Preferred Stock shall be convertible at the
option of the respective holders thereof, at any time after the date of issue,
into shares of Common Stock of the Corporation (hereinafter, "Common Stock"), as
------------
such shares may be constituted on the Conversion Date (as hereinafter defined),
at the rate of 2.60 shares of Common Stock for each share of $3.625 Preferred
Stock, subject to adjustment as provided herein and to the provisions of
subsection (ix) of this Section 13; provided that, as to any shares of $3.625
Preferred Stock that shall have been called for redemption, the conversion right
shall terminate at the close of business on the fifth day preceding the date
fixed for redemption unless default shall be made in the payment of the
redemption price plus accrued and unpaid dividends.
(ii) The holder of a share or shares of $3.625 Preferred Stock may exercise
the foregoing conversion right as to any of such shares by delivering to the
Corporation during regular business hours, at the office of the transfer agent
for the $3.625 Preferred Stock or at such other place as may be designated by
the Corporation, the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank (or to the Corporation, if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for Common Stock are to be issued. Conversion shall be deemed to
have been effected on the date when such certificate or certificates have been
so received by the Corporation or its transfer agent, and such date is referred
to herein as the "Conversion Date." As promptly as practicable thereafter, the
---------------
Corporation shall issue and deliver to or upon the written order of such holder,
a certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check, cash, scrip certificate or other
adjustment, at the election of the Corporation, in respect of any fraction of a
share as provided in subparagraph (iv) below. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a holder of Common Stock of record on the Conversion Date unless the
transfer books of the Corporation are closed on that date, in which event such
person
6
<PAGE>
shall be deemed to have become a holder of Common Stock of record on the next
succeeding date on which the transfer books are open, but the conversion rate
shall be that in effect on the Conversion Date.
(iii) No payment or adjustment shall be made for dividends accrued but
unpaid (even though the record date, but not the payment date, with respect
thereto shall have preceded the Conversion Date) on any shares of $3.625
Preferred Stock converted (or for dividends on any shares of Common Stock
issuable on conversion), but until all dividends accrued and unpaid on such
shares of $3.625 Preferred Stock up to the quarterly dividend payment date next
preceding the Conversion Date shall have been paid to the converting holder or
to his assigns, or declared and set apart for such payment, in full, no dividend
shall be paid or set apart for payment or declared on the Common Stock or on any
other class of stock of the Corporation ranking as to dividends junior to the
$3.625 Preferred Stock and no payments shall be made with respect to any
purchase or acquisition of, or to any sinking fund with respect to, any class of
stock of the Corporation ranking as to dividends or distribution of assets on a
parity with or junior to the $3.625 Preferred Stock.
(iv) The Corporation shall not be required to issue any fraction of a
share of Common Stock upon conversion of any share or shares of $3.625 Preferred
Stock. If more than one share of $3.625 Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis of the
total number of shares of $3.625 Preferred Stock so surrendered. If any
fractional interest in a share of Common Stock would be deliverable upon
conversion of the $3.625 Preferred Stock, the Corporation shall make an
adjustment therefor in cash unless its Board of Directors shall have determined
to adjust fractional interests by issuance of scrip certificates or in some
other manner. Adjustment in cash shall be made on the basis of the current
market value of one share of Common Stock, which shall be taken to be the last
reported sale price of the Common Stock on the New York Stock Exchange on the
last business day before the Conversion Date, or, if there was no reported sale
price of the Common Stock on the New York Stock Exchange on the last business
day before the Conversion Date, or if there was no reported sale on that day,
the mean between the closing bid and asked quotations on that Exchange on that
day or, if the Common Stock was not then listed on that Exchange, the mean
between the lowest bid and the highest asked quotations in the over-the-counter
market on that day.
(v) The issuance of Common Stock upon conversion of shares of $3.625
Preferred Stock shall be without charge to the converting holder for any fee,
expense or tax in respect thereof, but the Corporation shall not be required to
pay any fee, expense or tax that may be payable in respect of any transfer
involved in the issuance and delivery of shares of Common Stock in any name
other than that of the holder of record on the books of the Corporation of the
shares of $3.625 Preferred Stock converted, and the Corporation shall not, in
any such case, be required to issue or deliver any certificate for shares of
Common Stock unless and until the person requesting the issuance thereof shall
have
7
<PAGE>
paid to the Corporation the amount of such fee, expense or tax or shall have
established to the satisfaction of the Corporation that such fee, expense or tax
has been paid.
(vi) The conversion rate provided in subsection (i) shall be subject to the
following adjustments, which shall be made to the nearest one-hundredth of a
share of Common Stock or, to the next lower one-hundredth:
(A) If the Corporation shall pay to the holders of its Common Stock a
dividend in shares of Common Stock or in securities convertible into Common
Stock, the conversion rate in effect immediately prior to the record date
fixed for the determination of the holders of Common Stock entitled to such
dividend shall be proportionately increased, effective immediately
following such record date.
(B) If the Corporation shall split the outstanding shares of its
Common Stock into a greater number of shares or combine the outstanding
shares of its Common Stock into a smaller number of shares, the conversion
rate in effect immediately prior to such action shall be proportionately
increased in the case of a split or decreased in the case of a combination,
effective immediately following such action.
(C) If the Corporation shall issue to the holders of its Common
Stock, as a class, rights or warrants to subscribe for or purchase shares
of its Common Stock at a price less than the Current Market Price (as
defined below) of the Common Stock at the record date fixed for the
determination of the holders of Common Stock entitled to such rights or
warrants, the conversion rate in effect immediately prior to the record
date shall be increased, effective immediately following such record date,
to an amount determined by multiplying that conversion rate by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately prior to the record date plus the number of additional shares
of Common Stock so offered for subscription or purchase upon the exercise
of such rights or warrants and the denominator of which is the number of
shares of Common Stock outstanding immediately prior to the record date
plus the number of shares of Common Stock that the aggregate subscription
or purchase price of the total number of shares so offered would purchase
at the Current Market Price of the Common Stock as of the record date. The
term "Current Market Price" of the Common Stock at any record date shall
--------------------
mean the average of the daily last reported sale prices per share of the
Common Stock on the New York Stock Exchange during the twenty (20)
consecutive business days commencing with the thirtieth (30th) business day
before that record date, provided, that if there was no reported sale on
any such day or days there shall be substituted the mean between the
closing bid and asked quotations on that Exchange on that day or days, and,
provided further, that if the Common Stock was not listed on that Exchange
on any such day or days there shall be substituted the mean between the
lowest bid and the highest asked quotations on the over-the-counter market
on that day or days.
8
<PAGE>
(D) If the Corporation shall distribute to the holders of its Common
Stock any evidences of its indebtedness, or any rights or warrants to
subscribe for any security other than its Common Stock, or any other assets
(excluding dividends and distributions in cash to the extent permitted by
law), the conversion rate in effect immediately prior to the record date
fixed for the determination of the holders of Common Stock entitled to such
distribution shall be increased, immediately following the record date, to
an amount determined by multiplying such conversion rate by a fraction, the
numerator of which is the Current Market Price of the Common Stock at the
record date and the denominator of which is such Current Market Price less
the fair market value (as determined by the Board of Directors, whose
determination, in the absence of fraud, shall be conclusive) of the amount
of evidences of indebtedness, rights or warrants, or other assets
(excluding cash dividends and distributions as aforesaid) so distributed in
respect of one share of Common Stock.
No adjustment of the conversion rate in respect of this subsection (vi)
shall be made unless the adjustment would require a change of at least 1% in the
conversion rate, but any such adjustment shall be carried forward and taken into
account in a subsequent adjustment, if any.
Whenever the conversion rate is adjusted pursuant to this subsection (vi)
the Corporation shall promptly place on file at the office of the transfer agent
for the $3.625 Preferred Stock a statement signed by the Chairman, the President
or any Vice President of the Corporation and by its Treasurer or an Assistant
Treasurer showing in detail the facts requiring such adjustment and the
conversion rate after such adjustment, and shall cause the transfer agent to
mail copies of such statement to the holders of record of the $3.625 Preferred
Stock.
(vii) The Corporation may make such reductions in the conversion rate, in
addition to those required by subsection (vi), above, as it considers to be
advisable in order that any event treated for Federal income tax purposes as a
dividend of stock or stock rights shall not be taxable to the recipients.
(viii) In case of any reclassification or change of the outstanding shares
of Common Stock (except a split or combination of shares) or in case of any
consolidation or merger to which the Corporation is a party (except a merger in
which the Corporation is the surviving corporation and which does not result in
any reclassification of or change in the outstanding Common Stock except a split
or combination of shares) or in case of any sale or conveyance to another
corporation of all or substantially all of the property of the Corporation,
effective provision shall be made by the Corporation or the successor or
purchasing corporation (a) so that the holder of each share of $3.625 Preferred
Stock then outstanding shall thereafter have the right to convert such share of
$3.625 Preferred Stock into the kind and amount of stock or other securities or
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such share of $3.625 Preferred Stock might have been converted immediately
prior thereto, and (b) so that there shall be
9
<PAGE>
subsequent adjustments of the conversion rate which shall be equivalent, as
nearly as practicable, to the adjustments provided for in subsection (vi) above.
The provisions of this subsection (viii) shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales or conveyances.
(ix) The $3.625 Preferred Stock will initially be issuable in exchange for
shares of the Class A $3.625 Cumulative Convertible Preferred Stock (the
"Predecessor Preferred Stock") of Armco Inc. ("Armco") as a result of the merger
--------------------------- -----
of Armco with and into AK Steel Corporation (the "Merger"). The Merger will
------
constitute a "Change of Control" of Armco under the terms of the Predecessor
Preferred Stock. Accordingly, in order to give effect to the change of control
provisions of the Predecessor Preferred Stock, holders of shares of the $3.625
Preferred Stock who receive such shares in exchange for shares of the
Predecessor Preferred Stock, will have the right and option, until the
expiration of 45 days after the date of the Merger, to convert each such share
of $3.625 Preferred Stock into the number of shares of Common Stock determined
by dividing the redemption price then in effect (as set forth in Section 12
hereof) with respect to optional redemption by the Corporation by $16.98.
(x) Shares of Common Stock issued upon conversion of shares of $3.625
Preferred Stock shall be issued as fully paid shares and shall be nonassessable
by the Corporation. The Corporation shall at all times reserve and keep
available, free from preemptive rights, for the purpose of effecting the
conversion of $3.625 Preferred Stock, such number of its duly authorized shares
of Common Stock as shall be sufficient to effect the conversion of all
outstanding shares of $3.625 Preferred Stock.
Section 14. Change of Control. If there occurs a "Change of Control" (as
defined below) with respect to the Corporation, each share of $3.625 Preferred
Stock may be converted, at the option of the holder thereof at any time from the
date of such Change of Control until the expiration of 45 days after the date of
a notice by the Corporation to all holders of the outstanding shares of $3.625
Preferred Stock of the occurrence of the Change of Control, into the number of
shares of Common Stock determined by dividing the redemption price then in
effect (as set forth in Section 12) with respect to optional redemption by the
Corporation by the greater of (a) the average of the daily last reported sale
prices per share of the Common Stock on the New York Stock Exchange for the last
five trading days before the Change of Control, provided that if there was no
reported sale on any such day or days there shall be substituted the mean
between the closing bid and asked quotations for the Common Stock on the New
York Stock Exchange on that day or days, and provided further that if the Common
Stock was not listed on the New York Stock Exchange on any such day or days
there shall be substituted the mean between the lowest bid and the highest asked
quotations for the Common Stock on the over-the-counter market on that day or
days, or (b) $10.45. Upon a Change of Control, the Corporation may elect to pay
holders of the $3.625 Preferred Stock exercising their conversion rights an
amount equal to the applicable redemption price plus any accrued and unpaid
dividends. If the Change of Control involves a consolidation, merger or sale of
assets of the Corporation, the holders of the $3.625 Preferred Stock exercising
their conversion rights will be entitled to receive the same consideration as
received for the
10
<PAGE>
number of shares of Common Stock into which their shares of $3.625 Preferred
Stock would have been converted pursuant to their special conversion rights.
A "Change in Control" of the Corporation will be deemed to have occurred
-----------------
(a) if as a result of a transaction or series of related transactions pursuant
to a tender offer or otherwise, any person or entity (or group within the
meaning of Section 13d-3 of the Securities Exchange Act of 1934), (i) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934), directly or indirectly, of 50% or more of the
Corporation's outstanding voting securities or (ii) acquires 50% or more of the
Corporation's assets, or (b) if the Corporation consolidates with or merges into
or sells or transfers substantially all of its assets to another person and, as
a result thereof, the existing shareholders of the Corporation immediately prior
thereto hold less than 50% of the combined voting power of the shares, interest,
participations or other equivalents in the equity interest of such other person.
[Signatures on Following Page]
11
<PAGE>
IN WITNESS WHEREOF, AK Steel Holding Corporation has caused this
Certificate of Designations to be signed by James L. Wainscott, its Vice
President, Treasurer and Chief Financial Officer, this 30th day of September,
----
1999.
AK STEEL HOLDING CORPORATION
By: /s/ James L. Wainscott
-------------------------
James L. Wainscott,
Vice President, Treasurer
and Chief Financial Officer
12
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
See Notes 1 and 15 of the accompanying Notes to Consolidated Financial
Statements included in Item 8.
<PAGE>
EXHIBIT 12
AK STEEL HOLDING CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
--------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax Income $309.0 $264.5 $321.0 $309.4 $141.9
Interest expense 68.5 76.1 111.7 84.9 123.7
Interest factor in rent expense 2.6 2.5 2.6 2.5 3.0
Undistributed income from equity companies (6.1) (0.4) 0.9 1.5 (1.4)
--------------------------------------------------------------
Total earnings $374.0 $342.7 $436.2 $398.3 $267.2
Total combined fixed charges $136.0 $129.4 $177.8 $173.8 $173.9
Ratio of earnings to combined fixed charges 2.8 2.6 2.5 2.3 1.5
Combined fixed charges:
Preferred dividends $ 55.2 $ 48.3 $ 42.3 $ 27.0 $ 25.8
Interest expense 68.5 76.1 111.7 84.9 123.7
Capitalized interest credit 9.7 2.5 21.2 59.4 21.4
Interest factor in rent expense 2.6 2.5 2.6 2.5 3.0
--------------------------------------------------------------
Total combined fixed charges $136.0 $129.4 $177.8 $173.8 $173.9
</TABLE>
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
AK STEEL HOLDING CORPORATION SUBSIDIARIES
State/Country of
Name Incorporation
- ---- -------------
<S> <C>
Advanced Materials Processing Inc. Delaware
AFSG Holdings, Inc. Delaware
AH Management, Inc. Delaware
AH (UK) Inc. Delaware
AK Asset Management Company Delaware
AK Steel Receivables Ltd. Ohio
AK Steel Corporation Delaware
AK Steel Foreign Sales Corporation Barbados
AKS Hydroform Ohio
AKS Investments, Inc. Ohio
AKS Coating Inc. Ohio
AKSR Investments, Inc. Ohio
Armco Advanced Materials, Inc. Delaware
Armco BV Holland Netherlands
Armco Europe Limited United Kingdom
Armco Financial Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco GMBH Germany
Armco Grundstucksverwaltungs GMBH Germany
Armco Insurance Group Inc. Delaware
Armco Limited United Kingdom
Armco Management Corporation Delaware
Armco Merchandising SA Belgium Belgium
Armco Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Armco Properties, Inc. Delaware
Armco SA Spain
Armco S.A.R.L. France
Armco SMM SRL Italy Italy
Compass Insurance Company New York
DDI Holding, Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Douglas Dynamics, L.L.C. Delaware
Eveleth Mines L.L.C. (EVTAC) Minnesota
Everest International, Inc. Ohio
Feralloy/Armco Specialty Processing Company Delaware
First Stainless, Inc. Delaware
First Taconite Company Delaware
FSA Services Corp. Delaware
Materials Insurance Company Cayman Islands
Northwestern National Insurance Company of Milwaukee, Wisconsin Wisconsin
Rockport Inc. Ohio
Rockport Roll Shop L.L.C. Delaware
Vicksmetal/Armco Associates Delaware
Virginia Horn Taconite Company Minnesota
</TABLE>
2
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-60151, Post-Effective Amendment No. 2 to Registration Statement No. 333-
04505 and Post-Effective Amendment No. 5 to Registration Statement No. 33-84578
of AK Steel Holding Corporation on Form S-8 of our report dated January 19,
2000, appearing in this Annual Report on Form 10-K of AK Steel Holding
Corporation for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AK STEEL
HOLDING CORPORATION'S 1999 ANNUAL FINANCIAL STATEMENTS AND CERTAIN INTERIM
SCHEDULES RESTATED TO REFLECT THE MERGER WITH ARMCO INC. INFORMATION EXTRACTED
FROM THE ANNUAL FINANCIAL STATEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-31-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 538 347 54
<SECURITIES> 263 7 0
<RECEIVABLES> 398 446 512
<ALLOWANCES> 5 5 5
<INVENTORY> 525 681 798
<CURRENT-ASSETS> 1,848 1,497 1,433
<PP&E> 3,525 4,269 4,574
<DEPRECIATION> 1,280 1,396 1,586
<TOTAL-ASSETS> 5,074 5,249 5,202
<CURRENT-LIABILITIES> 917 921 868
<BONDS> 1,302 1,396 1,451
0 0 0
130 130 15
<COMMON> 1 1 1
<OTHER-SE> 874 1,132 1,262
<TOTAL-LIABILITY-AND-EQUITY> 5,074 5,249 5,202
<SALES> 4,177 4,030 4,285
<TOTAL-REVENUES> 4,177 4,030 4,285
<CGS> 3,363 3,227 3,420
<TOTAL-COSTS> 3,792 3,666 4,040
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 112 85 124
<INCOME-PRETAX> 321 309 142
<INCOME-TAX> 128 106 64
<INCOME-CONTINUING> 185 196 71
<DISCONTINUED> 2 0 8
<EXTRAORDINARY> (2) 0 (13)
<CHANGES> 0 134 0
<NET-INCOME> 185 330 65
<EPS-BASIC> 1.75 3.19 0.56
<EPS-DILUTED> 1.67 3.06 0.56
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AK STEEL
HOLDING CORPORATION'S 1999 ANNUAL FINANCIAL STATEMENTS AND CERTAIN INTERIM
SCHEDULES RESTATED TO REFLECT THE MERGER WITH ARMCO INC. INFORMATION EXTRACTED
FROM THE ANNUAL FINANCIAL STATEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 0 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 0 0 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 0 0
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0
<SALES> 1,009 2,053 3,012
<TOTAL-REVENUES> 1,009 2,053 3,012
<CGS> 818 1,656 2,437
<TOTAL-COSTS> 924 1,864 2,760
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 23 42 62
<INCOME-PRETAX> 70 161 210
<INCOME-TAX> 24 55 72
<INCOME-CONTINUING> 44 102 132
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 134 134 134
<NET-INCOME> 178 236 266
<EPS-BASIC> 1.74 2.29 2.57
<EPS-DILUTED> 1.64 2.18 2.46
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AK STEEL
HOLDING CORPORATION'S 1999 ANNUAL FINANCIAL STATEMENTS AND CERTAIN INTERIM
SCHEDULES RESTATED TO REFLECT THE MERGER WITH ARMCO INC. INFORMATION EXTRACTED
FROM THE ANNUAL FINANCIAL STATEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-1999
<PERIOD-END> MAR-31-1999 JUN-30-1999 SEP-30-1999
<CASH> 644 293 129
<SECURITIES> 11 25 74
<RECEIVABLES> 501 529 578
<ALLOWANCES> 5 5 5
<INVENTORY> 654 646 704
<CURRENT-ASSETS> 1,859 1,563 1,568
<PP&E> 4,359 4,436 4,516
<DEPRECIATION> 1,446 1,494 1,546
<TOTAL-ASSETS> 5,631 5,307 5,293
<CURRENT-LIABILITIES> 1,125 786 888
<BONDS> 1,530 1,528 1,528
0 0 0
130 130 130
<COMMON> 1 1 1
<OTHER-SE> 1,229 1,252 1,135
<TOTAL-LIABILITY-AND-EQUITY> 5,631 5,307 5,293
<SALES> 1,024 2,138 3,193
<TOTAL-REVENUES> 1,024 2,138 3,193
<CGS> 821 1,715 2,555
<TOTAL-COSTS> 944 1,967 2,981
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 31 60 89
<INCOME-PRETAX> 53 118 138
<INCOME-TAX> 10 38 53
<INCOME-CONTINUING> 41 75 78
<DISCONTINUED> 0 8 8
<EXTRAORDINARY> (2) (13) (13)
<CHANGES> 0 0 0
<NET-INCOME> 40 69 72
<EPS-BASIC> 0.37 0.64 0.64
<EPS-DILUTED> 0.36 0.63 0.63
</TABLE>
