Filed pursuant to Rule 424(b)(3)
Registration No. 333-98409
PROSPECTUS
$550,000,000
AK STEEL CORPORATION
OFFER TO EXCHANGE ALL OF ITS OUTSTANDING
7 3/4% SENIOR NOTES DUE 2012, WHICH HAVE BEEN
FULLY AND UNCONDITIONALLY GUARANTEED
BY AK STEEL HOLDING CORPORATION AND
DOUGLAS DYNAMICS, L.L.C.
FOR ITS NEWLY-ISSUED
7 3/4% SENIOR NOTES DUE 2012, WHICH WILL BE
FULLY AND UNCONDITIONALLY GUARANTEED
BY AK STEEL HOLDING CORPORATION AND
DOUGLAS DYNAMICS, L.L.C.
-------------
We are offering to exchange our outstanding notes described above for the
new, registered notes described above. The terms of the new notes are identical
in all material respects to the terms of the outstanding notes to be exchanged,
except for certain transfer restrictions, registration rights and additional
interest payment provisions relating to the outstanding notes. In this document
we refer to our outstanding notes as the old notes and our new notes as the
registered notes. Any reference to notes in this prospectus refers to the old
notes and the registered notes, unless the context otherwise requires.
MATERIAL TERMS OF THE EXCHANGE OFFER
. Expires at 5:00 p.m., New York City time, on January 8, 2003, unless
extended.
. The only conditions to completing the exchange offer are that the
exchange offer not violate any applicable law or interpretation of the
staff of the Securities and Exchange Commission and that no injunction,
order or decree have been issued that would prohibit, prevent or
materially impair our ability to proceed with the exchange offer.
. All old notes that are validly tendered and not validly withdrawn will be
exchanged.
. Tenders of old notes may be withdrawn at any time prior to the expiration
of the exchange offer.
. We will not receive any cash proceeds from the exchange offer.
Each broker-dealer that receives registered notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of those registered notes. The letter
of transmittal states that, by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of registered notes received in exchange for old notes where the
old notes were acquired by that broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of
180 days after the expiration date of the exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
-------------
Consider carefully the "Risk Factors" beginning on page 12 of this
prospectus.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this prospectus is December 6, 2002
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY.................................................... 1
RISK FACTORS.......................................................... 12
FORWARD-LOOKING STATEMENTS............................................ 18
WHERE YOU CAN FIND MORE INFORMATION................................... 18
THE EXCHANGE OFFER.................................................... 19
USE OF PROCEEDS....................................................... 27
CAPITALIZATION........................................................ 28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA....................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 31
BUSINESS.............................................................. 41
MANAGEMENT............................................................ 50
Page
----
EXECUTIVE COMPENSATION................................................ 53
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS........ 60
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.................. 62
DESCRIPTION OF OTHER INDEBTEDNESS..................................... 63
DESCRIPTION OF THE REGISTERED NOTES................................... 65
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.............. 92
PLAN OF DISTRIBUTION.................................................. 93
LEGAL MATTERS......................................................... 93
EXPERT................................................................ 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-1
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This document may only be used where it is legal to sell these securities.
The information in this document may only be accurate on the date of this
document. However, we may amend or supplement this prospectus from time to time
by filing amendments or supplements as required.
i
PROSPECTUS SUMMARY
This summary highlights material information contained elsewhere in this
prospectus. It may not contain all of the information that may be important to
you. You should read the entire prospectus, including our financial statements
and related notes, before making an investment decision. The terms "AK Steel,"
"our company," "our" and "we," as used in this prospectus, refer to AK Steel
Corporation, which will be the issuer of the notes. AK Steel is a subsidiary of
AK Steel Holding Corporation, which for convenience we refer to in this
prospectus as "Holding." Holding is a New York Stock Exchange-listed company
and will fully and unconditionally guarantee the notes. AK Steel and Holding,
taken together, are referred to in this prospectus as the "Company." Unless
otherwise indicated, steel industry data contained in this prospectus are
derived from publicly available sources, including industry trade journals and
SEC filings, which we have not independently verified. You should pay special
attention to the "Risk Factors" section beginning on page 12 of this prospectus
to determine whether participating in the exchange offer and investing in the
notes is appropriate for you.
Business Overview
We are one of the largest producers of flat rolled steel in the United
States and have historically been the most profitable of the nation's major
steel producers on an operating profit per ton basis. We produce value-added
carbon steel, principally for the automotive industry, and specialty stainless
and electrical steels for a broad number of end-markets. We are the only
domestic producer of both carbon and, as a result of our 1999 acquisition of
Armco Inc., stainless and electrical steels, and are one of the leading steel
suppliers to the North American automotive industry. In 2001, we shipped 5.6
million tons of steel to our customers, and had revenues of $3.8 billion and a
net loss of $92.4 million.
Our steel operations consist of eight steelmaking and finishing plants
located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat rolled
carbon steels, including premium quality coated, cold-rolled and hot-rolled
products, flat rolled specialty stainless and electrical steels and steel
tubing products.
Our value-added flat rolled carbon steel products, which are produced at our
Middletown (Ohio), Ashland (Kentucky) and Rockport (Indiana) facilities, are
sold primarily to automotive manufacturers and to customers in the appliance,
industrial machinery and equipment and construction markets. Our stainless and
electrical steel products are produced at our Butler (Pennsylvania), Mansfield
(Ohio), Rockport (Indiana), Coshocton (Ohio) and Zanesville (Ohio) facilities.
Hot rolling and coating of a portion of our stainless steel products are also
performed at our Middletown Works. Our stainless steel products are sold
primarily to customers in the automotive industry, as well as to manufacturers
of food handling, chemical processing, pollution control and medical and health
equipment. Our 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. The steel operations also include European trading companies that buy
and sell steel and steel products and AK Tube L.L.C., which is a manufacturer
and distributor that further finishes flat rolled steel into welded steel
tubing used primarily in the automotive, large truck and construction markets.
In addition to our steel operations, we own and operate Douglas Dynamics,
L.L.C., which is the largest North American manufacturer of snowplows and salt
and sand spreaders for four-wheel drive light trucks. We also own the Greens
Port Industrial Park on the Houston, Texas ship channel, which leases land,
buildings and rail car storage facilities to third parties and operates a deep
water loading dock.
1
Steel Industry Conditions
Conditions in the United States steel industry have improved due to the
following factors.
. Reduced Domestic Capacity.
. Reduced Number of Suppliers of Automotive Quality Steel.
. Increased Capacity Utilization.
. Increased Steel Prices.
. The imposition of Section 201 Tariffs on imported steel products.
Competitive Strengths
For each of the last eight years we have had the highest operating profit
per ton of any integrated steel producer in the United States. Over the last
three years our average operating profit per ton has been $45, compared to an
operating loss for each of the four largest domestic integrated steelmakers. We
believe that the following factors have contributed to our competitive success.
. Experienced, Results-Oriented Management Team.
. Value-Added Product Mix.
. Concentration on High-End Markets.
. World-Class Facilities.
. Recognized Quality Leader.
. Intensive Safety Focus.
2
Summary of the Terms of the Exchange Offer
On June 11, 2002, we issued $550 million in aggregate principal amount of
our old notes in a private placement. We entered into a registration rights
agreement with the initial purchasers of the old notes in which we agreed to
deliver to you this prospectus. You are entitled to exchange your old notes in
the exchange offer for new notes with identical terms, except that the
registered notes will have been registered under the Securities Act of 1933 and
will not bear legends restricting their transfer. Unless you are a
broker-dealer or unable to participate in the exchange offer, we believe that
the notes to be issued in the exchange offer may be resold by you without
compliance with the registration and prospectus delivery requirements of the
Securities Act. You should read the discussions under the headings "The
Exchange Offer" and "Description of the Registered Notes" for further
information regarding the registered notes.
Registration Rights Agreement You are entitled under the registration rights
agreement to exchange your old notes for
registered notes with substantially identical
terms. The exchange offer is intended to satisfy
these rights. After the exchange offer is
complete, except as set forth in the next
paragraph, you will no longer be entitled to any
exchange or registration rights with respect to
your old notes.
The registration rights agreement requires us to
file a registration statement for a continuous
offering (in accordance with Rule 415 under the
Securities Act) on your behalf if either (1) you
would not receive freely tradable registered
notes in the exchange offer or (2) you are
ineligible to participate in the exchange offer,
and you indicate that you wish to have your old
notes registered under the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of our 7 3/4% notes due 2012, which have
been registered under the Securities Act, for
each $1,000 principal amount of our 7 3/4% notes
due 2012 that were issued on June 11, 2002 and
have not been so registered.
In order to be exchanged, an old note must be
properly tendered and accepted. All old notes
that are validly tendered and not validly
withdrawn will be exchanged.
As of this date, there are $550 million aggregate
principal amount of our unregistered 7 3/4% notes
outstanding.
We will issue the registered notes promptly after
the expiration of the exchange offer.
Resales of the Registered
Notes..................... We believe that registered notes to be issued in
the exchange offer may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act if you
meet the following conditions:
(1)the registered notes are acquired by you in
the ordinary course of your business;
(2)you are not engaging in and do not intend to
engage in a distribution of the registered
notes;
3
(3)you do not have an arrangement or
understanding with any person to participate
in the distribution of the registered notes;
and
(4)you are not an affiliate of ours, as the term
"affiliate" is defined in Rule 405 under the
Securities Act.
Our belief is based on interpretations by the
staff of the SEC, as set forth in no-action
letters of Exxon Capital Holdings Corporation
(available April 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991) and
Shearman & Sterling (available July 2, 1993). The
staff has not considered this exchange offer in
the context of a no-action letter, and we cannot
assure you that the staff would make a similar
determination with respect to this exchange offer.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any registered note without delivering a
prospectus meeting the requirements of the
Securities Act. We do not assume, or indemnify
you against, that liability.
Each broker-dealer that is issued registered
notes in the exchange offer for its own account
in exchange for old notes that were acquired by
that broker-dealer as a result of market-making
activities or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any of its resales of those
registered notes. A broker-dealer may use this
prospectus to offer to resell, resell or
otherwise transfer those registered notes.
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on January 8, 2003, unless we
decide to extend the exchange offer. We do not
intend to extend the exchange offer, although we
reserve the right to do so. We refer to this
date, as it may be extended, as the expiration
date.
Conditions to the Exchange
Offer..................... The only conditions to completing the exchange
offer are that the exchange offer not violate any
applicable law or interpretation of the staff of
the SEC and that no injunction, order or decree
have been issued that would prohibit, prevent or
materially impair our ability to proceed with the
exchange offer. See "The Exchange
Offer--Conditions."
Procedures for Tendering Old
Notes Held in the Form of
Book-Entry Interests...... The old notes were issued as global securities in
fully registered form without coupons. Beneficial
interests in the old notes, which are held by
direct or indirect participants in The Depository
Trust Company, or DTC, through certificateless
depositary interests, are shown on, and transfers
of the old notes can be made only through,
records maintained in book-entry form by DTC with
respect to its participants.
If you are a holder of an old note held in the
form of a book-entry interest and you wish to
tender your old note for exchange pursuant to the
exchange offer, you must transmit to Fifth Third
Bank, as
4
exchange agent, on or prior to the expiration of
the exchange offer either:
. a written or facsimile copy of a properly
completed and executed letter of
transmittal and all other required
documents to the address set forth on the
cover page of the letter of transmittal; or
. a computer-generated message transmitted by
means of DTC's Automated Tender Offer
Program system and forming a part of a
confirmation of book-entry transfer in
which you acknowledge and agree to be bound
by the terms of the letter of transmittal.
The exchange agent must also receive on or prior
to the expiration of the exchange offer either:
. a timely confirmation of book-entry
transfer of your old notes into the
exchange agent's account at DTC, in
accordance with the procedure for
book-entry transfers described in this
prospectus under the heading "The Exchange
Offer--Book-Entry Transfer," or
. the documents necessary for compliance with
the guaranteed delivery procedures
described below.
A form of letter of transmittal accompanies this
prospectus. By executing the letter of
transmittal or delivering a computer-generated
message through DTC's Automated Tender Offer
Program system, you will represent to us that,
among other things:
. the registered notes to be acquired by you
in exchange for your old notes are being
acquired in the ordinary course of your
business;
. you are not engaging in and do not intend
to engage in a distribution of the
registered notes;
. you do not have an arrangement or
understanding with any person to
participate in a distribution of the
registered notes; and
. you are not our affiliate.
Procedures for Tendering
Certificated Old Notes.... If you are a holder of book-entry interests in
the old notes, you are entitled to receive, in
limited circumstances, in exchange for your
book-entry interests, certificated notes in equal
principal amount to your book-entry interests.
See "Description of the Registered Notes--Form of
Registered Notes." No certificated notes are
issued and outstanding as of the date of this
prospectus, other than a single note issued to
and held by DTC. If you acquire certificated old
notes prior to the expiration of the exchange
offer, you must tender your certificated old
notes in accordance with the procedures described
in this prospectus under the heading
"The Exchange Offer--Procedures for
Tendering--Certificated Old Notes."
5
Special Procedures for
Beneficial Owner.......... If you are the beneficial owner of old notes and
the beneficial interests are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, and you wish to tender
your old notes, you should promptly contact the
person in whose name the beneficial interest in
your old notes are registered and instruct that
person to tender on your behalf. If you wish to
tender on your own behalf, you must, prior to
completing and executing the letter of
transmittal for your notes and delivering your
notes, either make appropriate arrangements to
register ownership of the old notes in your name
or obtain a properly completed bond power from
the person in whose name your old notes are
registered. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering--Procedures
Applicable to All Holders."
Guaranteed Delivery
Procedures................ If you wish to tender your old notes and:
(1)they are not immediately available;
(2)time will not permit your old notes or other
required documents to reach the exchange
agent before the expiration of the exchange
offer; or
(3)you cannot complete the procedure for
book-entry transfer on a timely basis,
you may tender your old notes in accordance with
the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for
Tendering--Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of Registered
Notes..................... Except under the circumstances described above
under "Conditions to the Exchange Offer," we will
accept for exchange any and all old notes which
are properly tendered in the exchange offer prior
to 5:00 p.m., New York City time, on the
expiration date. The registered notes to be
issued to you in the exchange offer will be
delivered promptly following the expiration date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Withdrawal.................. You may withdraw the tender of your old notes at
any time prior to 5:00 p.m., New York City time,
on the expiration date. We will return to you any
old notes not accepted for exchange for any
reason without expense to you as promptly as we
can after the expiration or termination of the
exchange offer.
Exchange Agent.............. Fifth Third Bank is serving as the exchange agent
in connection with the exchange offer.
Consequences of Failure to
Exchange.................. If you do not participate in the exchange offer,
upon completion of the exchange offer, the
liquidity of the market for your old notes could
be adversely affected. See "The Exchange
Offer--Consequences of Failure to Exchange."
Federal Income Tax
Consequences.............. The exchange of old notes for registered notes
should not be a taxable event for federal income
tax purposes. See "Certain United States Federal
Income Tax Considerations."
6
Summary of the Terms of the Registered Notes
Issuer...................... AK Steel Corporation
Securities Offered.......... 7 3/4% Senior Notes Due 2012. The registered
notes are initially being offered in the
principal amount of $550,000,000. We may, without
the consent of the holders, increase the
aggregate principal amount in the future on the
same terms and conditions and with the same CUSIP
numbers as the registered notes being offered
hereby.
Maturity.................... June 15, 2012.
Interest Payment Dates...... June 15 and December 15 of each year, commencing
December 15, 2002.
Optional Redemption......... We cannot redeem the notes before June 15, 2007,
except as described immediately below.
Thereafter, we can redeem some or all of the
notes at the redemption prices listed in the
"Description of the Registered Notes--Optional
Redemption" section of this prospectus plus
accrued interest.
Optional Redemption after
Public Equity Offerings... At any time (which may be more than once) before
June 15, 2005, we can choose to redeem up to
$192.5 million aggregate principal amount of the
notes with money that we raise in certain equity
offerings, as long as:
. we pay to holders of the notes a redemption
price of 107.750% of the principal amount of
the notes we redeem plus accrued interest;
. we redeem the notes within 60 days of
completing the related equity offering; and
. at least $357.5 million aggregate principal
amount of the notes remains outstanding after
the redemption.
Mandatory Redemption........ None.
Change in Control........... If a change in control of AK Steel occurs, we
must give holders of the notes the opportunity to
sell us their notes at a purchase price of 101%
of their principal amount plus accrued interest.
See "Description of the Registered Notes--Change
in Control Offer" section of this prospectus.
Guarantees.................. The notes will be fully and unconditionally
guaranteed by Holding and each guarantor
subsidiary. At the date of issuance of the
registered notes the only guarantor subsidiary
will be Douglas Dynamics, L.L.C. These guarantees
will be equal in right of payment with all senior
unsecured indebtedness of Holding and each
guarantor subsidiary. See "Description of the
Registered Notes--Note Guarantees."
7
Ranking..................... The notes will be senior unsecured obligations of
our company and will be equal in right of payment
with all of our outstanding senior unsecured
indebtedness. The notes will be senior in right
of payment to all of our subordinated
obligations. The notes will be effectively junior
to all of our secured obligations to the extent
of the collateral securing those obligations and
junior to creditors of AK Steel's subsidiaries to
the extent described in the "Description of the
Registered Notes--Note Guarantees" section of
this prospectus. Under the terms of the indenture
governing the notes, we may issue obligations
that are secured by eligible accounts receivable
and inventory. At September 30, 2002, $205.1
million was available for borrowings under our
$300.0 million credit facility secured by
accounts receivable, and we do not have any
borrowing arrangements secured by inventory. In
addition, the terms of the indenture permit us to
borrow up to $150.0 million of additional senior
debt at September 30, 2002.
The notes are not senior to any of our
outstanding indebtedness. Our Senior Secured
Notes due 2004, of which $187.5 million were
outstanding as of September 30, 2002, are secured
by assets with a net book value, as of September
30, 2002, of approximately $458.2 million.
At September 30, 2002, the aggregate principal
amount of our outstanding senior indebtedness was
approximately $1.4 billion, including $252.0
million of secured debt.
Material Covenants.......... The indenture governing the notes contains
covenants that limit our ability and that of our
subsidiaries to:
. create liens on our assets to service certain
debt;
. incur additional indebtedness;
. make investments;
. issue or sell equity interests of subsidiaries;
. pay dividends or distributions on, or redeem
or repurchase, capital stock;
. redeem certain subordinated obligations;
. transfer or sell assets;
. engage in transactions with affiliates;
. engage in unrelated businesses; and
. consolidate, merge or transfer substantially
all of our assets.
These covenants are subject to important
exceptions and qualifications, which are
described in the "Description of the Registered
Notes--Material Covenants" section of this
prospectus.
Registration Rights;
Liquidated Damages........ In connection with the offering of the old notes,
we granted registration rights to holders of the
old notes. We agreed to consummate an offer to
exchange the old notes for the related series of
registered notes and to take other actions in
connection with the
8
exchange offer by the date specified in the
registration rights agreement. In addition, under
some circumstances, we may be required to file a
shelf registration statement to cover resales of
the old notes held by you.
If we fail to take these actions with respect to
the old notes by the respective dates specified
in the registration rights agreement, we will pay
liquidated damages to each holder of the old
notes until all registration defaults have been
cured.
Form of Notes............... The registered notes to be issued in the exchange
offer will be represented by one or more global
securities deposited with Fifth Third Bank for
the benefit of DTC. You will not receive
registered notes in certificated form unless one
of the events set forth under the heading
"Description of the Registered Notes--Form of
Registered Notes" occurs. Instead, beneficial
interests in the registered notes to be issued in
the exchange offer will be shown on, and
transfers of these interests may be effected only
through, records maintained in book-entry form by
DTC with respect to its participants.
Use of Proceeds............. We will not receive any cash proceeds upon
completion of the exchange offer.
Risk Factors
You should consider carefully all of the information set forth in this
prospectus and, in particular, the information set forth under "Risk Factors"
before participating in the exchange offer and making an investment in the
notes.
9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(dollars in millions, except per ton data)
The summary historical consolidated financial data as of, and for the years
ended, December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from, and
should be read in conjunction with, the audited consolidated financial
statements of the Company included elsewhere in this prospectus. The summary
historical consolidated financial data as of, and for the nine months ended,
September 30, 2001 and 2002 have been derived from, and should be read in
conjunction with, the unaudited consolidated financial statements of the
Company included elsewhere in this prospectus. The Company sold its Sawhill
Tubular division on April 19, 2002. The results of Sawhill Tubular have been
reclassified to discontinued operations. (See Note 13 to Consolidated Financial
Statements.)
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Statement of Operations Data:
Net sales............................................. $4,036.6 $3,903.6 $4,184.8 $4,403.7 $3,833.4 $2,900.7 $3,226.8
Cost of products sold................................. 3,243.2 3,117.4 3,334.3 3,577.7 3,225.5 2,470.0 2,788.2
Selling and administrative expenses................... 277.9 267.8 299.9 257.9 257.6 186.1 199.7
Depreciation.......................................... 136.8 156.7 206.1 227.3 225.8 172.8 170.4
Special charges and unusual items(1).................. -- -- 99.7 -- 142.3 -- (23.9)
Operating profit (loss)(2)............................ 378.7 361.7 244.8 340.8 (17.8) 71.8 92.4
Interest expense...................................... 111.7 84.9 123.7 136.1 133.1 100.5 98.2
Other income(3)....................................... 48.4 30.1 20.8 7.9 6.1 5.2 28.2
Income (loss) from continuing operations before
income taxes and minority interest................... 315.4 306.9 141.9 212.6 (144.8) (23.5) 22.4
Income tax provision (benefit)........................ 125.5 104.5 63.9 78.6 (53.6) (8.7) 8.3
Income (loss) from continuing operations.............. 181.8 194.3 71.3 134.0 (91.2) (14.8) 14.1
Income (loss) from discontinued operations............ 5.2 1.5 7.5 (1.6) (1.2) (1.2) (6.9)
Extraordinary loss on retirement of debt.............. 1.9 -- 13.4 -- -- -- 19.9
Cumulative effect of accounting change................ -- 133.9 -- -- -- -- --
Net income (loss)..................................... 185.1 329.7 65.4 132.4 (92.4) (16.0) (12.7)
As of
As of December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and short term investments..... $ 801.0 $ 353.7 $ 54.4 $ 86.8 $ 101.0 $ 64.7 $ 243.3
Working capital....................................... 930.6 576.1 564.5 631.5 593.4 625.3 822.1
Total assets.......................................... 5,074.4 5,279.2 5,227.1 5,239.8 5,225.8 5,226.1 5,173.4
Total debt, including current portion................. 1,342.6 1,512.6 1,456.9 1,450.8 1,402.5 1,465.1 1,399.7
Total pension and postretirement benefit obligations.. 1,628.7 1,482.0 1,485.1 1,486.8 1,808.4 1,511.3 1,848.1
Stockholders' equity.................................. 1,005.3 1,262.7 1,277.8 1,319.3 1,033.3 1,249.1 1,023.4
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Other Data:
Cash flows from operating activities.................. $ 556.2 $ 229.1 $ 231.4 $ 345.2 $ 149.0 $ 30.3 $ 159.1
Cash flows from investing activities.................. (727.7) (512.0) (320.0) (191.9) (75.2) (56.7) 35.4
Cash flows from financing activities.................. 21.7 93.1 (218.5) (103.7) (78.0) (15.0) (55.3)
Ratio of earnings to fixed charges(4)................. 2.4x 2.3x 1.5x 2.5x -- -- 1.2
Operating profit per ton(5)........................... $ 65 $ 63 $ 39 $ 55 $ (3) $ 17 $ 21
Operating profit per ton, excluding unusual items(6).. 65 63 55 55 22 17 16
Capital investments................................... 675.8 802.4 334.1 135.8 108.0 65.9 64.9
Steel shipments (thousands of tons)................... 5,832 5,777 6,254 6,171 5,618 4,265 4,376
- --------
Notes appear on following page.
10
(1)In 1999, we recognized $99.7 in special charges for costs related to the
merger with Armco Inc. In 2001, Anthem Inc., our primary health insurance
provider, converted from a mutual insurance company to a corporation,
issuing shares of its common stock to certain of its long-time policy
holders. As a major policyholder, AK Steel received nearly 1.5 million
shares of Anthem common stock, recording a benefit of $49.9. Also in 2001,
we recognized a non-cash pension corridor charge of $192.2 under our method
of accounting for pension and other postretirement benefit plans. In the
nine months ended September 30, 2002, we recorded a benefit of $23.9 arising
from insurance settlements entered into with certain of our insurance
carriers net of an increase in environmental reserves. The benefit is net of
legal fees and expenses.
(2)We adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002. As a result, we stopped
amortizing goodwill effective January 1, 2002. For the years ended December
31, 1997, 1998, 1999, 2000 and 2001 and for the nine months ended September
30, 2001, operating profit included goodwill amortization charges of $3.4,
$3.4, $3.4, $3.4, $4.0 and $3.0, respectively. As required by the Statement,
we reviewed our goodwill balance as of January 1, 2002 for possible
impairment and determined that no impairment was necessary.
(3)During the nine months ended September 30, 2002, we liquidated all of the
nearly 1.5 million shares of Anthem stock we had received in 2001 and
recorded a gain of $24.1 on the sale.
(4)For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income before income taxes and minority interest,
discontinued operations and extraordinary items, the distributed income of
less than 50%-owned affiliates, plus fixed charges and (ii) fixed charges
consist of interest, whether expensed or capitalized. Fixed charges exceeded
earnings by approximately $148.0 for the year ended December 31, 2001 and
approximately $24.8 for the nine months ended September 30, 2001.
(5)The Company views operating profit per ton as an important measure of its
results and as a key benchmark by which it compares itself to its
competitors. This presentation may differ from similarly titled measures
used by other companies. The Company believes it had the highest operating
profit per ton of any domestic integrated steel producer in each of the
eight years from 1994 through 2001.
(6)Operating profit per ton, excluding unusual items, does not include charges
related to the Armco merger in 1999, the pension corridor charges in 2001,
the benefit from the receipt of shares of Anthem in 2001 and insurance
settlements received in the first nine months of 2002.
11
RISK FACTORS
You should carefully consider the risks described below before deciding to
participate in the exchange offer. This section does not describe all of the
risks applicable to us, our industry or our business, and it is intended only
as a summary of material factors. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations.
Risks Relating to our Company
Our reliance on the automotive industry may negatively affect demand for our
products and may reduce our sales and earnings in the event of a decline in
automotive production.
Our strategy depends upon continued growth in demand for premium quality
coated and cold-rolled carbon and stainless steel flat rolled products,
particularly from the automotive industry. The domestic automotive industry has
historically experienced significant fluctuations in demand, based on such
factors as general economic conditions, interest rates and consumer confidence.
In addition, strikes, lock-outs, work stoppages or other production
interruptions in the automotive industry could reduce our shipments, increase
our operating costs and reduce our earnings.
Our sales of steel directly to the automotive market accounted for
approximately 55%, 52% and 57% of our steel operations' net sales in 1999, 2000
and 2001, respectively. Our sales to General Motors Corporation, our largest
customer in each of the past three years, accounted for approximately 15%, 15%
and 18% of our steel operations' net sales in 1999, 2000 and 2001,
respectively. In addition, a substantial amount of our sales to steel
distributors and converters consists of products that are resold (in original
or modified form) to the automotive industry.
Our high level of debt may impair our ability to incur additional debt,
substantially reduce our operating flexibility and reduce our liquidity.
As we will continue to have substantial debt and debt service requirements
after the completion of the exchange offer,our high level of debt continues to
have important consequences for us, including:
. our ability to borrow additional amounts for working capital, capital
expenditures, debt service requirements or other purposes may be limited;
. a substantial portion of our cash flow from operations will be required
to make debt service payments and retiree benefit payments;
. our leverage could limit our ability to capitalize on significant
business opportunities and our flexibility to react to changes in general
economic conditions, competitive pressures and adverse changes in
government regulation;
. our leverage could place us at a competitive disadvantage with respect to
companies with which we compete; and
. we may be more vulnerable in the event of a downturn or disruption in our
business or in the economy generally.
We had total debt of approximately $1.4 billion as of September 30, 2002,
including approximately $252.0 million of secured debt, including our
industrial revenue bonds and capital lease obligations. Our obligation to make
payments on this debt, including both principal and interest payments, through
2007 is as follows: $87.3 million in the fourth quarter of 2002, $165.8 million
in 2003, $160.3 million in 2004, $92.4 million in 2005, $92.4 million in 2006,
and $209.8 million in 2007. In addition, we have substantial pension and other
postretirement benefit obligations.
12
While we expect to be able to repay the balance of our indebtedness and meet
our other obligations through cash generated from operations, we may need to
obtain new credit arrangements and other sources of financing in order to meet
our future obligations and working capital requirements and to fund our future
capital expenditures. Our ability to repay or refinance our outstanding debt
and to fund our capital expenditures and other obligations depends on our
successful financial and operating performance.
Under an accounts receivables credit facility, we sell substantially all of
our accounts receivable to a special-purpose, wholly owned subsidiary. This
subsidiary has an agreement with a group of banks that provides up to $300.0
million for revolving credit loans and letters of credit secured by the
subsidiary's receivables. This subsidiary is a separate and distinct legal
entity and has no obligation to pay any amounts due under the notes or to make
funds available for any such payment. If we default, your right to payment
under the notes will be junior to our secured indebtedness to the extent of the
collateral securing those obligations and will be effectively subordinated to
the claims of creditors under our subsidiary's credit facility to the extent of
that subsidiary's assets.
These and other factors could decrease the marketability, price and future
value of the notes and our ability to pay interest on and the principal amount
of the notes.
Our shipments and earnings could be significantly reduced by strikes or work
stoppages by our unionized employees.
Strikes or work stoppages and the resulting impact on our relationship with
our customers could reduce our shipments and our level of profitability. At
September 30, 2002, approximately 7,400 of our 10,300 employees were
represented by international or independent labor unions, under contracts with
expiration dates extending through 2006. Our unionized employees consist
primarily of hourly production workers. After a September 20, 2002 election,
the National Labor Relations Board has certified the United Auto Workers, or
UAW, as the collective bargaining representative for production and maintenance
employees at our Coshocton Works. Negotiations on that contract began on
October 30, 2002.
Our 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 we
understood, that Armco would lock out represented employees while it continued
to bargain with the union. Since September 1999, bargaining between us and the
union has continued while salaried employees and temporary replacement workers
have operated the Mansfield Works. At this time we cannot predict how or when
the Mansfield Works labor dispute will be resolved or whether such a resolution
would adversely affect our operations at the Mansfield Works.
Our earnings may be significantly reduced by increases in our raw material
and energy costs.
If our variable costs increase disproportionately to our revenues, our
earnings will be significantly reduced. We purchase carbon steel slabs, energy
and raw materials (such as steel scrap, iron ore, coal, etc.) that are
necessary for our operations at prevailing market prices, which are subject to
price fluctuations in accordance with supply and demand. At the same time,
approximately 75% of our shipments of flat rolled steel products are made to
customers under annual and multi-year contracts that, with limited exceptions
for stainless steel, do not permit price adjustments to reflect changes in
prevailing slab, raw material or energy costs. In addition, our sales to our
non-contract customers are generally made at prevailing market prices, which
may not reflect cost increases. We hedge a portion of the variable costs of
certain raw materials and natural gas through the use of forward contracts and
futures instruments. However various categories of raw materials cannot be the
subject of hedges.
As an example of a variable cost, our operations consume large amounts of
energy, particularly natural gas. Natural gas prices have been volatile in
recent years. At normal consumption levels, a $1 per million BTU change in
natural gas prices would result in an approximately $40 million change in our
annual operating results, excluding the effects of any then existing hedging
instruments.
13
Environmental regulation imposes substantial costs and limitations on our
operations.
While we believe that our facilities are and will continue to be in material
compliance with all applicable environmental laws and regulations, the risks of
substantial costs and liabilities related to compliance with these laws and
regulations are an inherent part of our business. We, like all other steel
producers, are subject to various federal, state and local environmental,
health and safety laws and regulations concerning such issues as air emissions,
wastewater discharges, solid and hazardous waste handling and disposal, and the
investigation and remediation of contamination. These laws and regulations are
increasingly stringent. It is possible that future conditions may create
substantial environmental compliance or remediation liabilities and costs. For
example, our steelmaking operations produce certain waste products, such as
electric arc furnace dust, which are classified as hazardous waste and must be
properly disposed of under applicable environmental laws. These laws can impose
clean up liability on generators of hazardous waste and other substances that
are disposed of either on or off-site, regardless of fault or the legality of
the disposal activities. Other laws may require us to investigate and remediate
contamination at our properties, including contamination that was caused in
whole or in part by previous owners of our properties. While we believe that we
can comply with environmental legislation and regulatory requirements and that
the costs of doing so have been included within our budgeted cost estimates, it
is possible that such compliance will prove to be more limiting to our
operations and more costly than anticipated.
In addition to potential clean up liability, we may become subject to
substantial monetary fines and penalties for violation of applicable laws,
regulations or administrative orders. We also are, or in the future may become,
involved in proceedings with various regulatory authorities that may require us
to pay fines, comply with more rigorous standards or other requirements or
incur capital and operating expenses for environmental compliance. At December
31, 2001, we had recorded $12.5 million in current accrued liabilities and
$36.7 million in noncurrent other liabilities on our consolidated balance
sheets for estimated probable costs relating primarily to environmental
remediation and compliance.
Declines in the value of our pension assets and increases in our pension
liabilities may reduce our future operating earnings, net worth and cash
flows.
We maintain defined benefit pension plans covering substantially all
employees. We have significant liabilities for these currently underfunded
plans. The pension plans that were over funded at the end of 2000 have been
adversely affected by a combination of unfavorable investment returns and
declining interest rates.
Our method of accounting for actuarial net gains and losses immediately
recognizes, in the fourth quarter of the year, any such gains and losses
outside a 10% corridor (as defined by accounting principles generally accepted
in the United States of America). We amortize deferred net gains and losses
inside the 10% corridor over the average remaining years of service of active
participants.
Poor performance by the equity markets and declining interest rates will
generate actuarial net losses for our pension plans in the current year. We
expect that most of these net losses will be outside of the 10% corridor and
would be recognized in the fourth quarter of 2002 as a non-cash charge against
operating results. Based on current estimates, the pension charge could have an
after-tax effect of between $300.0 million and $350.0 million.
For most of our debt covenant calculations, recognition of this year end
charge is deferred and amortized over 120 months. However, the minimum net
worth covenant requires the immediate recognition of the corridor charge.
Despite the anticipated fourth quarter corridor charge, we expect to be in
compliance with our covenants.
Based on our current assumptions, the unfavorable investment returns on
pension plan assets in 2002 will increase the expected 2003 pension expense by
approximately $38.0 million before tax. This estimate excludes any potential
2003 fourth quarter charges outside the 10% corridor.
14
Pension expense is dependent on assumptions made annually. One of the
assumptions made in determining the pension expense estimate is the expected
rate of return on plan assets. A 1% decrease in the expected rate of return on
pension plan assets would increase the projected 2003 pension expense by
approximately $23.0 million before tax. This estimate excludes any potential
fourth quarter charge outside the 10% corridor.
Under Internal Revenue Service funding regulations, we are not required to
make a cash contribution to our pension trust until 2004, at the earliest. The
amount of the required 2004 contribution, if any, will depend on the investment
performance of the pension trust assets and interest rate movements, among
other things, and accordingly, we cannot reasonably estimate an amount of
required future cash contributions into our pension trust at this time.
Our sales and earnings may be materially reduced if General Motors
Corporation elects to shift its purchases from us to other steel producers in
the future.
Shipments to General Motors Corporation, our largest customer, accounted for
approximately 15%, 15% and 18% of steel operations net sales in 1999, 2000 and
2001, respectively. If General Motors Corporation elects to shift its purchases
of steel away from us in favor of other steel producers in the future, we
believe that any material change in its purchases would need to be phased in
over at least a multi-year period and that the resulting decrease in our sales
to General Motors Corporation would be offset to a material extent by sales to
new customers and increased sales to our other existing customers. If, however,
our expectations prove incorrect, our sales and earnings would be materially
reduced.
Risks Relating to the Notes
The notes are effectively subordinated to our secured debt.
The notes will be senior obligations of the company and will rank equally
with our 9% Senior Notes Due 2007, our 8 7/8% Senior Notes Due 2008 and our
7 7/8% Senior Notes Due 2009. Similar to all of our other outstanding senior
notes, the notes will not be secured by any of our assets. Therefore, holders
of our outstanding secured debt, as well as holders of additional secured debt
that we may incur in the future, will have claims with respect to certain of
our assets that are prior to the claims of holders of the notes.
Support for the guarantees of the notes is limited by the financial condition
and net worth of the guarantors.
The notes will be fully and unconditionally guaranteed on a senior basis by
Holding and by Douglas Dynamics, L.L.C., a wholly-owned subsidiary of the
Company.
Holding derives all of its operating income and cash flow from AK Steel and
AK Steel's outstanding common stock is Holding's only asset. The indenture
governing the notes contains a covenant restricting Holding from holding assets
other than securities of AK Steel. Accordingly, Holding's ability to perform on
its guarantee will be dependent on AK Steel's financial condition and net worth.
At September 30, 2002, Douglas Dynamics, L.L.C. had total assets of $110.7
million (excluding intercompany accounts) and outstanding liabilities of $20.6
million and for the year ended December 31, 2001 it had total revenues of
$138.8 million. Accordingly, its ability to perform on its guarantee is limited
by its financial resources.
We may not be able to purchase notes upon a change in control.
Upon certain change in control events, each holder of notes may require us
to purchase its notes at a price of 101% of the principal amount thereof plus
accrued interest. Holders of all of our other outstanding senior notes have
similar rights. We cannot assure you that we will have the financial resources
necessary to purchase the notes upon a change in control.
15
If you fail to exchange your old notes, they will continue to be restricted
securities and may become less liquid.
Old notes which you do not tender or we do not accept will, following the
exchange offer, continue to be restricted securities. You may not offer or sell
untendered old notes except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We
will issue registered notes in exchange for the old notes pursuant to the
exchange offer only following the satisfaction of procedures and conditions
described elsewhere in this prospectus. These procedures and conditions include
timely receipt by the exchange agent of the old notes and of a properly
completed and duly executed letter of transmittal.
Because we anticipate that most holders of old notes will elect to exchange
their old notes, we expect that the liquidity of the market for any old notes
remaining after the completion of the exchange offer may be substantially
limited. Any old note tendered and exchanged in the exchange offer will reduce
the aggregate principal amount of the old notes outstanding. Following the
exchange offer, if you did not tender your old notes you generally will not
have any further registration rights and your old notes will continue to be
subject to transfer restrictions. Accordingly, the liquidity of the market for
any old notes could be reduced, which could impair the market prices for the
old notes.
There may be no active trading market for the registered notes to be issued
in the exchange offer.
The registered notes are a new issue of securities for which there is no
established market. We cannot assure you with respect to:
. the liquidity of any market for the registered notes that may develop,
. your ability to sell registered notes, or
. the price at which you will be able to sell the registered notes.
If a public market were to exist, the registered notes could trade at prices
that may be higher or lower than their principal amount or purchase price,
depending on many factors, including prevailing interest rates, the market for
similar notes, and our financial performance. We do not intend to list the
registered notes to be issued to you in the exchange offer on any securities
exchange or to seek approval for quotations through any automated quotation
system. No active market for the registered notes is currently anticipated.
Our failure to meet our obligations under our secured debt instruments could
reduce our earnings and liquidity.
The instruments governing our Senior Secured Notes due 2004 contain a
restrictive covenant that limits the level of debt to total capitalization. Our
ability to meet this financial ratio can be affected by events beyond our
control, and we cannot assure you that we will meet this ratio. A breach of
this ratio could result in an event of default with respect to our secured
debt. Upon the occurrence of that event of default, holders of our secured debt
could elect to declare all of that debt, together with accrued interest, to be
immediately due and payable, or could cause us to lose ownership control of the
assets that secure that debt, which would have a negative impact on our
earnings and liquidity.
Trading prices for the notes may be volatile.
Historically, the market for non-investment grade debt securities has been
subject to disruptions that have caused substantial volatility in their trading
prices. The market for the notes could be subject to similar volatility. The
trading price of the notes also could fluctuate in response to such factors as
variations in AK Steel's operating results, developments in the steel industry
and the automotive industry, general economic conditions and changes in
securities analysts' recommendations regarding our securities.
16
Risks Relating to the Steel Industry
Intense competition may continue to exert downward pressure on our pricing
and reduce our earnings.
Competition within the steel industry is intense. In the sale of flat rolled
steel we compete primarily on the basis of product quality, responsiveness to
customer needs and price with other integrated steel producers and, to a lesser
extent, mini-mills. Moreover, U.S. steel producers have historically faced
significant competition from foreign producers, which in recent years have
substantially increased their steel exports into the United States at low
prices. Due primarily to declining market prices and under-utilization of
capacity, over the past few years, more than 30 domestic steel companies have
entered bankruptcy proceedings, although some of these companies have been able
to emerge from bankruptcy reorganization with lower and more competitive cost
structures that may further increase the competitive environment in the steel
industry and contribute to further price declines.
In October 2001, the International Trade Commission, following a nearly
four-month investigation, found "serious injury" to the U.S. steel industry due
to increased imports of steel products. In March 2002, President Bush imposed
tariffs of 30%, 24% and 18% for each of the three respective years beginning
March 2002 on imports of hot-rolled, cold-rolled and coated sheet carbon steel,
as well as on imports of carbon steel slabs in excess of a specified annual
quota. These tariffs have not had, and, at present, we do not believe they will
have, a material adverse effect on our results of operations.
Our business, results of operations and financial condition could be reduced
as a result of the cyclical nature of the steel industry and the industries
we serve.
The steel industry is highly cyclical, sensitive to general economic
conditions and dependent on the condition of certain other industries. As a
result, the prices of steel and steel products may fluctuate significantly due
to many factors beyond our control. The demand for steel products is generally
affected by macroeconomic fluctuations in the United States and global markets
in which steel companies sell their products. Future economic downturns,
stagnant economies or currency fluctuations in the United States or globally
could reduce our profits and cash flows.
In addition, we are also particularly sensitive to changing conditions in,
and adverse events, including strikes and labor unrest, that may impact, the
automotive, oil and gas, gas transmission, construction, commercial equipment,
rail transportation, appliance, agricultural and durable goods industries.
These industries are significant markets for our products and are themselves
highly cyclical. A disruption or downturn in the business of any of these
industries could reduce our profits and cash flows.
17
FORWARD-LOOKING STATEMENTS
This prospectus contains some "forward-looking statements" based on our
current expectations, assumptions, estimates and projections about our business
and our industry. When used in this prospectus, the words "expect,"
"anticipate," "intend," " plan," " believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
These forward-looking statements involve risks and uncertainties, some of which
are beyond our control.
Specific factors that might cause actual results to differ from our
expectations and that may affect our ability to pay timely amounts due under
the notes or that may affect the value of the notes include, but are not
limited to:
. reduced domestic automotive production;
. risks of a downturn in the general economy and in the cyclical steel
industry;
. changes in demand for our products, including the possible need to shift
shipments to the spot market from the contract market;
. unanticipated plant outages, equipment failures or labor difficulties;
. actions by our domestic and foreign competitors, their employees and
labor unions;
. interest rate volatility and declining prices in the securities markets,
which may affect our invested pension plan assets and the calculation of
our pension and other postretirement benefit obligations and expenses;
. unanticipated increases in the prices for, or disruptions in the supply
of, raw materials and energy, particularly natural gas;
. unexpected outcomes of major litigation, environmental matters and other
contingencies;
. changes in application or scope of environmental regulations to which we
may be subject; and
. changes in United States trade policy and governmental actions with
respect to imports, particularly with respect to restrictions or tariffs
on the importation of carbon slabs.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act with respect to the registered
notes. This prospectus, which is a part of the registration statement, omits
certain information included in the registration statement and in its exhibits.
For further information relating to us and the notes, we refer you to the
registration statement and its exhibits. The descriptions of each contract and
document contained in this prospectus are summaries and qualified in their
entirety by reference to the copy of that contract or document filed as an
exhibit to the registration statement. You may read and copy the registration
statement, including its exhibits, at the SEC's Public Reading Room located at
450 Fifth Street, N.W., Washington D.C. 20549. You may obtain information on
the operation of the Public Reading Room by calling the SEC at 1-800-SEC-0300.
We also file annual, quarterly, special reports and other information with the
SEC. You may read and copy any document we file with the SEC at the address set
forth above. The SEC also maintains an Internet site (www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants like us who file electronically with the SEC. Our filings
are also available over the Internet on our website (www.aksteel.com). You can
obtain a copy of any of our filings, at no cost, by contacting us at the
following address:
AK Steel Corporation
703 Curtis Street
Middleton, OH 45043
Attention: Corporate Secretary
(513) 425-5000
To ensure timely delivery, please make your request as soon as practicable
and, in any event, no later than five business days prior to the expiration of
the exchange offer.
18
THE EXCHANGE OFFER
Purpose and Effect
We issued the old notes in a private placement on June 11, 2002. The notes
were resold by their initial purchasers to a limited number of qualified
institutional buyers, as defined under the Securities Act, and to a limited
number of persons outside the United States. In connection with the issuance,
we entered into a registration rights agreement. The registration rights
agreement requires that we file a registration statement under the Securities
Act with respect to the registered notes to be issued in the exchange offer
and, upon the effectiveness of the registration statement, offer to you the
opportunity to exchange your old notes for a like principal amount of
registered notes. The registered notes will be issued without a restrictive
legend and, except as set forth below, may be reoffered and resold by you
without registration under the Securities Act. After we complete the exchange
offer, our obligations with respect to the registration of the old notes and
the registered notes will terminate. A copy of the registration rights
agreement has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Based on an interpretation by the staff of the SEC set forth in no-action
letters, if you are not our "affiliate" within the meaning of Rule 405 under
the Securities Act or a broker-dealer referred to in the next paragraph, we
believe that registered notes to be issued to you in the exchange offer may be
offered for resale, resold and otherwise transferred by you, without compliance
with the registration and prospectus delivery provisions of the Securities Act.
This interpretation, however, is based on your representation to us that:
(1)the registered notes to be issued to you in the exchange offer are
acquired in the ordinary course of your business;
(2)you are not engaging in and do not intend to engage in a distribution of
the registered notes to be issued to you in the exchange offer; and
(3)you have no arrangement or understanding with any person to participate
in the distribution of the registered notes to be issued to you in the
exchange offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the registered notes to be issued to you in the exchange offer,
you cannot rely on this interpretation by the staff of the SEC. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives registered notes in the exchange
offer for its own account in exchange for old notes that were acquired by the
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those
registered notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have your old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to use our best efforts to keep the shelf
registration statement effective for a period of two years following the date
of original issuance of the old notes or such shorter period that will
terminate when all of the old notes covered by the shelf registration statement
have been sold pursuant to the shelf registration statement. Other than as set
forth in this paragraph, you will not have the right to require us to register
your old notes under the Securities Act. See "--Procedures for Tendering" below.
Consequences of Failure to Exchange
After we complete the exchange offer, if you have not tendered your old
notes you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
19
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of the registered notes
in exchange for each $1,000 principal amount of the old notes accepted in the
exchange offer. You may tender some or all of your old notes pursuant to the
exchange offer. However, old notes may be tendered only in integral multiples
of $1,000 in principal amount.
The form and terms of the registered notes are the same as the form and
terms of the old notes, except that the notes to be issued in the exchange
offer will have been registered under the Securities Act and will not bear
legends restricting their transfer. The registered notes will be issued
pursuant to, and entitled to the benefits of, the same indenture that also
governs the old notes. The registered notes and the old notes will be deemed
one issue of notes under the indenture.
As of the date of this prospectus, $550 million in aggregate principal
amount of the old notes are outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered holders and to others
believed to have beneficial interests in the old notes. You do not have any
appraisal or dissenters' rights in connection with the exchange offer under the
Delaware General Corporation Law or the indenture. We intend to conduct the
exchange offer in accordance with the applicable requirements of the Securities
Exchange Act of 1934, or the Exchange Act, and the applicable rules and
regulations of the SEC promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes for exchange
when, as, and if we have given oral or written notice of our acceptance to the
exchange agent. The exchange agent will act as our agent for the tendering
holders for the purpose of receiving the registered notes from us. If we do not
accept any tendered notes because of an invalid tender, the occurrence of
certain other events set forth in this prospectus or otherwise, we will return
certificates for any unaccepted notes, without expense, to the tendering holder
promptly after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer Taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "--Fees and Expenses" below.
Expiration Date; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on January
8, 2003, unless we determine, in our sole discretion, to extend the exchange
offer, in which case it will expire at the later date and time to which it is
extended. We do not intend to extend the exchange offer, although we reserve
the right to do so. If we extend the exchange offer, we will give oral or
written notice of the extension to the exchange agent and give each registered
holder notice by means of a press release or other public announcement of any
extension prior to 9:00 a.m., New York City time, on the next business day
after the scheduled expiration date. We are generally required to extend the
offering period for any material change, including the waiver of a material
condition, so at least five business days remain in the offer after the change.
In addition, generally, if there is a change in the percentage of old notes we
are seeking or a change in the price we intend to pay for the old notes, we
will keep the offer open for at least 10 business days from the date that
notice of that change is first published or given to holders of old notes.
We also reserve the right, in our sole discretion,
(1)to delay accepting any old notes or, if any of the conditions set forth
below under "--Conditions" have not been satisfied or waived, to
terminate the exchange offer by giving oral or written notice of such
delay or termination to the exchange agent, or
(2)to amend the terms of the exchange offer in any manner by complying with
Rule 14e-l(d) under the Exchange Act to the extent that rule applies.
20
We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination
or withdrawal of the exchange offer. We will notify you as promptly as we can
of any extension, termination or amendment.
Procedures for Tendering
Book-Entry Interests
The old notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held
by direct or indirect participants in DTC, are shown on, and transfers of these
interests are effected only through, records maintained in book-entry form by
DTC with respect to its participants.
If you hold your old notes in the form of book-entry interests and you wish
to tender your old notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date either:
(1)a written or facsimile copy of a properly completed and duly executed
letter of transmittal, including all other documents required by the
letter of transmittal, to the exchange agent at the address set forth on
the cover page of the letter of transmittal; or
(2)a computer-generated message transmitted by means of DTC's Automated
Tender Offer Program system and received by the exchange agent and
forming a part of a confirmation of book-entry transfer, in which you
acknowledge and agree to be bound by the terms of the letter of
transmittal.
In addition, in order to deliver old notes held in the form of book-entry
interests:
(1)a timely confirmation of book-entry transfer of such notes into the
exchange agent's account at DTC pursuant to the procedure for book-entry
transfers described below under "--Book-Entry Transfer" must be received
by the exchange agent prior to the expiration date; or
(2)you must comply with the guaranteed delivery procedures described below.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to the exchange agent before the expiration date. You should not send
the letter of transmittal or old notes to us. You may request your broker,
dealer, commercial bank, trust company, or nominee to effect the above
transactions for you.
Certificated Old Notes
Only registered holders of certificated old notes may tender those notes in
the exchange offer. If your old notes are certificated notes and you wish to
tender those notes for exchange pursuant to the exchange offer, you must
transmit to the exchange agent on or prior to the expiration date a written or
facsimile copy of a properly completed and duly executed letter of transmittal,
including all other required documents, to the address set forth below under
"--Exchange Agent." In addition, in order to validly tender your certificated
old notes:
(1)the certificates representing your old notes must be received by the
exchange agent prior to the expiration date; or
(2)you must comply with the guaranteed delivery procedures described below.
21
Procedures Applicable to All Holders
If you tender an old note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your old notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender your old notes, you
should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on your own behalf, you
must, prior to completing and executing the letter of transmittal and
delivering your old notes, either make appropriate arrangements to register
ownership of the old notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(1)old notes tendered in the exchange offer are tendered either
(A)by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery
Instructions" on such holder's letter of transmittal or
(B)for the account of an eligible institution; and
(2)the box entitled "Special Registration Instructions" on the letter of
transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution
(which includes most banks, savings and loan associations and brokerage houses)
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange Medallion Program or the Stock Exchanges Medallion
Program.
If the letter of transmittal is signed by a person other than you, your old
notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered old notes. This determination will be final and binding.
We reserve the absolute right to reject any and all old notes not properly
tendered or any old notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your old notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of old notes, neither we, the
exchange agent nor any other person will incur any liability for failure to
give this notification. Your tender will not be deemed to have been made and
your notes will be returned to you if:
(1)you improperly tender your old notes;
(2)you have not cured any defects or irregularities in your tender; and
(3)we have not waived those defects, irregularities or improper tender.
22
The exchange agent will return your notes, unless otherwise provided in the
letter of transmittal, promptly following the expiration of the exchange offer.
In addition, we reserve the right in our sole discretion to:
(1)purchase or make offers for, or offer registered notes for, any old
notes that remain outstanding subsequent to the expiration of the
exchange offer;
(2)terminate the exchange offer if any of the conditions set forth below in
"--Conditions" have not been satisfied; and
(3)to the extent permitted by applicable law, purchase notes in the open
market, in privately negotiated transactions or otherwise.
The terms of any of these purchases or offers could differ from the terms of
the exchange offer.
By tendering, you will represent to us that, among other things:
(1)the registered notes to be acquired by you in the exchange offer are
being acquired in the ordinary course of your business;
(2)you are not engaging in and do not intend to engage in a distribution of
the registered notes to be acquired by you in the exchange offer;
(3)you do not have an arrangement or understanding with any person to
participate in the distribution of the registered notes to be acquired
by you in the exchange offer; and
(4)you are not our "affiliate," as defined under Rule 405 of the Securities
Act.
In all cases, issuance of registered notes for old notes that are accepted
for exchange in the exchange offer will be made only after timely receipt by
the exchange agent of certificates for your old notes or a timely book-entry
confirmation of your old notes into the exchange agent's account at DTC, a
properly completed and duly executed letter of transmittal, or a
computer-generated message instead of the letter of transmittal, and all other
required documents. If any tendered old notes are not accepted for any reason
set forth in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than you desire to exchange, the
unaccepted or non-exchanged old notes, or old notes in substitution therefor,
will be returned without expense to you. In addition, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described below, the
non-exchanged old notes will be credited to your account maintained with DTC
promptly after the expiration or termination of the exchange offer.
Guaranteed Delivery Procedures
If you desire to tender your old notes and your old notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1)you tender through an eligible financial institution;
(2)on or prior to 5:00 p.m., New York City time, on the expiration date,
the exchange agent receives from an eligible institution, a written or
facsimile copy of a properly completed and duly executed letter of
transmittal and notice of guaranteed delivery, substantially in the form
provided by us; and
(3)the certificates for all certificated old notes, in proper form for
transfer, or a book-entry confirmation, and all other documents required
by the letter of transmittal, are received by the exchange agent within
three New York Stock Exchange trading days after the date of execution
of the notice of guaranteed delivery.
23
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1)your name and address;
(2)the amount of old notes you are tendering; and
(3)a statement that your tender is being made by the notice of guaranteed
delivery and that you guarantee that within three New York Stock
Exchange trading days after the execution of the notice of guaranteed
delivery, the eligible institution will deliver the following documents
to the exchange agent:
(A)the certificates for all certificated old notes being tendered, in
proper form for transfer or a book-entry confirmation of tender;
(B)a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C)any other documents required by the letter of transmittal.
Book-Entry Transfer
The exchange agent will establish an account with respect to the book-entry
interests at DTC for purposes of the exchange offer promptly after the date of
this prospectus. You must deliver your book-entry interest by book-entry
transfer to the account maintained by the exchange agent at DTC. Any financial
institution that is a participant in DTC's systems may make book-entry delivery
of book-entry interests by causing DTC to transfer the book-entry interests
into the exchange agent's account at DTC in accordance with DTC's procedures
for transfer.
If one of the following situations occur:
(1)you cannot deliver a book-entry confirmation of book-entry delivery of
your book-entry interests into the exchange agent's account at DTC; or
(2)you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date;
then you must tender your book-entry interests according to the guaranteed
delivery procedures discussed above.
Withdrawal Rights
You may withdraw tenders of your old notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date.
For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date.
The notice of withdrawal must:
(1)state your name;
(2)identify the specific old notes to be withdrawn, including the
certificate number or numbers and the principal amount of withdrawn
notes;
(3)be signed by you in the same manner as you signed the letter of
transmittal when you tendered your old notes, including any required
signature guarantees or be accompanied by documents of transfer
sufficient for the exchange agent to register the transfer of the old
notes into your name; and
(4)specify the name in which the old notes are to be registered, if
different from yours.
24
We will determine all questions regarding the validity, form and
eligibility, including time of receipt, of withdrawal notices. Our
determination will be final and binding on all parties. Any old notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes of
the exchange offer. Any old notes which have been tendered for exchange but
which are not exchanged for any reason will be returned to you without cost as
soon as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described under "--Procedures for Tendering" above at any
time on or prior to 5:00 p.m., New York City time, on the expiration date.
Conditions
Notwithstanding any other provision of the exchange offer and subject to our
obligations under the registration rights agreement, we will not be required to
accept for exchange, or to issue registered notes in exchange for, any old
notes and may terminate or amend the exchange offer, if at any time before the
expiration of the offer any of the following events occur:
(1)any injunction, order or decree has been issued by any court or any
governmental agency that would prohibit, prevent or otherwise materially
impair our ability to proceed with the exchange offer; or
(2)the exchange offer violates any applicable law or any applicable
interpretation of the staff of the SEC.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to them, subject to applicable law. We also
may waive, in whole or in part at any time and from time to time, any
particular condition in our sole discretion. All conditions to the offer, other
than those dependent upon receipt of necessary government approvals, must be
satisfied or waived before the expiration of the offer. If we waive a
condition, we may be required to extend the expiration date of the exchange
offer in order to comply with applicable securities laws. Our failure at any
time to exercise any of the foregoing rights will not be deemed a waiver of
these rights and these rights will be deemed ongoing rights which may be
asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
registered notes will be issued in exchange for any of those old notes, if at
the time the old notes are tendered any stop order is threatened by the SEC or
in effect with respect to the registration statement of which this prospectus
is a part or the qualification of the indenture under the Trust Indenture Act
of 1939.
The exchange offer is not conditioned on any minimum principal amount of old
notes being tendered for exchange.
Exchange Agent
We have appointed Fifth Third Bank as exchange agent for the exchange offer.
Questions, requests for assistance and requests for additional copies of the
prospectus, the letter of transmittal for your notes and other related
documents should be directed to the exchange agent addressed as follows:
By Registered or Certified Mail, by Hand
or by Overnight Courier:
Fifth Third Bank
Corporate Trust Administration
38 Fountain Square Plaza
Cincinnati, Ohio 45202
By Facsimile: (513) 534-6785 By Telephone: (513) 579-6072
The exchange agent also acts as trustee under the indenture.
25
Fees and Expenses
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offer. This solicitation is being made primarily by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offer.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection with a
tender of your old notes for exchange unless you instruct us to register
registered notes in the name of, or request that old notes not tendered or not
accepted in the exchange offer be returned to, a person other than the
registered tendering holder, in which event the registered tendering holder
will be responsible for the payment of any applicable transfer tax.
Accounting Treatment
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We are amortizing the expense of the
exchange offer over the term of the registered notes under generally accepted
accounting principles.
26
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the registered notes. In consideration for issuing the registered
notes as contemplated in this prospectus, we will receive, in exchange, an
equal number of outstanding old notes in like principal amount. The form and
terms of the registered notes are identical in all material respects to the
form and terms of the old notes. The outstanding old notes surrendered in
exchange for the registered notes will be retired and marked as cancelled and
cannot be reissued.
We used the net proceeds of approximately $538.1 million from the issuance
of the old notes, together with approximately $40.6 million of other cash on
hand, to finance the approximately $578.7 million cost of redeeming all $550
million of our previously outstanding 9 1/8% Senior Notes due 2006 on July 11,
2002 (inclusive of accrued interest on those notes through that date).
27
CAPITALIZATION
The following table sets forth our consolidated capitalization at September
30, 2002. The information presented below should be read in conjunction with
our consolidated financial statements included elsewhere in this prospectus.
At September 30, 2002
---------------------
(amounts in millions)
Cash and cash equivalents(1)............................ $ 243.3
========
Current portion of long-term debt....................... $ 77.4
Long-term debt:
Senior Secured Notes Due 2004........................ 125.0
9% Senior Notes Due 2007............................. 117.4
8 7/8% Senior Notes Due 2008......................... 33.5
7 7/8% Senior Notes Due 2009......................... 450.0
The Notes............................................ 550.0
Tax Exempt Financing Due 2008 through 2029 and other. 46.4
--------
Total long-term debt............................. 1,322.3
--------
Total debt.............................................. 1,399.7
--------
Total stockholders' equity.............................. 1,023.4
--------
Total capitalization.......................... $2,423.1
========
- --------
(1)At September 30, 2002, we had $205.1 million available for borrowings under
a $300.0 accounts receivable credit facility. There were no outstanding
borrowings under this facility and availability was affected primarily by
outstanding letters of credit.
28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(dollars in millions, except per ton data)
The selected historical consolidated financial data as of, and for the years
ended, December 31, 1997, 1998, 1999, 2000 and 2001 have been derived from, and
should be read in conjunction with, our audited consolidated financial
statements included elsewhere in this prospectus. The selected historical
consolidated financial data as of, and for the nine months ended, September 30,
2001 and 2002 have been derived from, and should be read in conjunction with,
our unaudited consolidated financial statements included elsewhere in this
prospectus. The Company sold its Sawhill Tubular division on April 19, 2002.
The results of Sawhill Tubular have been reclassified to discontinued
operations. (See Note 13 to Consolidated Financial Statements.)
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Statement of Operations Data:
Net sales............................................. $4,036.6 $3,903.6 $4,184.8 $4,403.7 $3,833.4 $2,900.7 $3,226.8
Cost of products sold................................. 3,243.2 3,117.4 3,334.3 3,577.7 3,225.5 2,470.0 2,788.2
Selling and administrative expenses................... 277.9 267.8 299.9 257.9 257.6 186.1 199.7
Depreciation.......................................... 136.8 156.7 206.1 227.3 225.8 172.8 170.4
Special charges and unusual items(1).................. -- -- 99.7 -- 142.3 -- (23.9)
Operating profit (loss)(2)............................ 378.7 361.7 244.8 340.8 (17.8) 71.8 92.4
Interest expense...................................... 111.7 84.9 123.7 136.1 133.1 100.5 98.2
Other income(3)....................................... 48.4 30.1 20.8 7.9 6.1 5.2 28.2
Income (loss) from continuing operations before
income taxes and minority interest................... 315.4 306.9 141.9 212.6 (144.8) (23.5) 22.4
Income tax provision (benefit)........................ 125.5 104.5 63.9 78.6 (53.6) (8.7) 8.3
Income (loss) from continuing operations.............. 181.8 194.3 71.3 134.0 (91.2) (14.8) 14.1
Income (loss) from discontinued operations............ 5.2 1.5 7.5 (1.6) (1.2) (1.2) (6.9)
Extraordinary loss on retirement of debt.............. 1.9 -- 13.4 -- -- -- 19.9
Cumulative effect of accounting change................ -- 133.9 -- -- -- -- --
Net income (loss)..................................... 185.1 329.7 65.4 132.4 (92.4) (16.0) (12.7)
As of
As of December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and short term investments..... $ 801.0 $ 353.7 $ 54.4 $ 86.8 $ 101.0 $ 64.7 $ 243.3
Working capital....................................... 930.6 576.1 564.5 631.5 593.4 625.3 822.1
Total assets.......................................... 5,074.4 5,279.2 5,227.1 5,239.8 5,225.8 5,226.1 5,173.4
Total debt, including current portion................. 1,342.6 1,512.6 1,456.9 1,450.8 1,402.5 1,465.1 1,399.7
Total pension and postretirement benefit obligations.. 1,628.7 1,482.0 1,485.1 1,486.8 1,808.4 1,511.3 1,848.1
Stockholders' equity.................................. 1,005.3 1,262.7 1,277.8 1,319.3 1,033.3 1,249.1 1,023.4
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
Other Data:
Cash flows from operating activities.................. $ 556.2 $ 229.1 $ 231.4 $ 345.2 $ 149.0 $ 30.3 $ 159.1
Cash flows from investing activities.................. (727.7) (512.0) (320.0) (191.9) (75.2) (56.7) 35.4
Cash flows from financing activities.................. 21.7 93.1 (218.5) (103.7) (78.0) (15.0) (55.3)
Ratio of earnings to fixed charges(4)................. 2.4x 2.3x 1.5x 2.5x -- -- 1.2
Operating profit per ton(5)........................... $ 65 $ 63 $ 39 $ 55 $ (3) $ 17 $ 21
Operating profit per ton, excluding unusual items(6).. 65 63 55 55 22 17 16
Capital investments................................... 675.8 802.4 334.1 135.8 108.0 65.9 64.9
Steel shipments (thousands of tons)................... 5,832 5,777 6,254 6,171 5,618 4,265 4,376
- --------
Notes appear on following page.
29
(1)In 1999, we recognized $99.7 in special charges for costs related to the
merger with Armco Inc. In 2001, Anthem Inc., our primary health insurance
provider, converted from a mutual insurance company to a corporation,
issuing shares of its common stock to certain of its long-time policy
holders. As a major policyholder, AK Steel received nearly 1.5 million
shares of Anthem common stock, recording a benefit of $49.9. Also in 2001,
we recognized a non-cash pension corridor charge of $192.2 under our method
of accounting for pension and other postretirement benefit plans. In the
nine months ended September 30, 2002, we recorded a benefit of $23.9 arising
from insurance settlements entered into with certain of our insurance
carriers net of an increase in environmental reserves. The benefit is net of
legal fees and expenses.
(2)We adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on January 1, 2002. As a result, we stopped
amortizing goodwill effective January 1, 2002. For the years ended December
31, 1997, 1998, 1999, 2000 and 2001 and for the nine months ended September
30, 2001, operating profit included goodwill amortization charges of $3.4,
$3.4, $3.4, $3.4, $4.0 and $3.0, respectively. As required by the Statement,
we reviewed our goodwill balance as of January 1, 2002 for possible
impairment and determined that no impairment was necessary.
(3)During the nine months ended September 30, 2002, we liquidated all of the
nearly 1.5 million shares of Anthem stock we had received in 2001 and
recorded a gain of $24.1 on the sale.
(4)For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income before income taxes and minority interest,
discontinued operations and extraordinary items, the distributed income of
less than 50%-owned affiliates, plus fixed charges and (ii) fixed charges
consist of interest, whether expensed or capitalized. Fixed charges exceeded
earnings by approximately $148.0 for the year ended December 31, 2001 and
approximately $24.8 for the nine months ended September 30, 2001.
(5)The Company views operating profit per ton as an important measure of its
results and as a key benchmark by which it compares itself to its
competitors. This presentation may differ from similarly titled measures
used by other companies. The Company believes it had the highest operating
profit per ton of any domestic integrated steel producer in each of the
eight years from 1994 through 2001.
(6)Operating profit per ton, excluding unusual items, does not include charges
related to the Armco merger in 1999, the pension corridor charges in 2001,
the benefit from the receipt of shares of Anthem in 2001 and insurance
settlements received in the first nine months of 2002.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Our principal business focus is our steel operations, which currently
consist of eight steelmaking and finishing facilities that produce flat rolled
carbon, stainless and electrical steels and steel tubing products. These
products are sold primarily to the automotive, appliance, industrial machinery
and equipment, and construction markets, as well as to distributors, service
centers and converters. We also own a snow and ice control products business,
which manufactures snowplows and salt and sand spreaders for four-wheel drive
light trucks. We also operate an industrial park on the Houston, Texas ship
channel.
On April 19, 2002, we completed the sale of our Sawhill Tubular division.
For all periods presented, the results of Sawhill Tubular are classified as
discontinued operations.
On September 30, 1999, we consummated the merger of Armco Inc. with and into
AK Steel. Armco was a leading producer of stainless and 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.
Results of Operations
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
Total steel shipments during the nine months ended September 30, 2002
increased to 4,375,600 tons from 4,264,500 tons shipped in the first three
quarters of 2001. This increase was due in part to record automotive shipments
and, to a lesser extent, the addition of AK Tube, which was acquired in the
third quarter of 2001. For the nine months ended September 30, 2002,
value-added products comprised 92% of total shipments, or approximately the
same percentage reported in the corresponding period of 2001. In the third
quarter of 2002, opportunistic marketing of hot-rolled products to take
advantage of attractive spot market prices caused shipments of this commodity
grade steel to exceed 5% of total shipments for the first time since 2000.
Total net sales for the first three quarters of 2002 and 2001 were $3,226.8
million and $2,900.7 million, respectively, and Steel Operations sales for the
same periods were $3,132.9 million and $2,799.6 million, respectively. Each of
these period-to-period increases reflects the strong sales volumes and improved
spot-market pricing experienced in the current year, as price increases
announced earlier in the year were achieved.
Consolidated operating profit for the nine months ended September 30, 2002
totaled $92.4 million compared to $71.8 million for the same period in 2001,
while Steel Operations nine-month operating profit was $65.0 million in 2002
and $41.0 million in 2001. The nine-month 2002 results included a pretax
benefit of $23.9 million arising from insurance settlements we entered into
with certain of our insurance carriers, partially offset by an increase in
environmental reserves. The settlement amount represented a negotiated dollar
value we accepted for reimbursement of past environmental and asbestos
expenditures and, to a lesser extent, to release those insurance companies from
a responsibility to reimburse us for future covered expenditures under the
policies. Other existing insurance policies covering asbestos and environmental
contingencies may serve to mitigate future covered expenditures. In addition,
we maintain reserves for future probable payments related to asbestos claim
settlements and environmental investigation, monitoring and remediation, which
do not consider the potential for insurance recoveries. If these reserves are
not adequate to cover future claims then our operating results and cash flows
may be negatively impacted. Excluding the insurance benefit, the slight
unfavorable variance for the nine-month periods was primarily due to higher
costs, including approximately $100.0 million in increased pension and other
postretirement benefit expenses. In addition, the nine-month operating profit
in 2002 includes a scheduled maintenance outage at the Middletown Works blast
furnace and other planned and unplanned maintenance work in the first quarter
of the year totaling approximately $20.0 million. These higher
31
costs were partially offset by lower natural gas costs, higher shipment
volumes, higher automotive shipments and higher spot market pricing. We
recognized $7.5 million of LIFO expense within operating profit as a result of
these net unfavorable charges to costs.
For the nine months ended September 30, 2002, Snow and Ice Control Products
recorded an operating profit of $21.0 million on sales of $83.7 million. For
the nine months ended September 30, 2001, this segment recorded an operating
profit of $25.1 million on sales of $91.6 million. The unfavorable variance in
the year over year comparison reflects lower shipments due to the very mild
winter at the beginning of 2002, partially offset by continued strong truck
sales in 2002.
In the fourth quarter of 2001, Anthem Inc., our primary health insurance
provider, converted from a mutual insurance company to a corporation, issuing
shares of its common stock to certain of its long-time policyholders. As a
major policyholder, AK Steel received approximately 1.5 million shares of
Anthem common stock as a result of this demutualization. In the first quarter
of 2002, we liquidated all of these shares for a total of $80.2 million and
recorded a gain of $24.1 million, which is included in our results of
operations for the nine months ended September 30, 2002.
On April 19, 2002, we completed the sale of our Sawhill Tubular division for
approximately $67.6 million. We retained approximately $20.3 million of Sawhill
Tubular's current operating liabilities, which we settled in due course. We
recorded a pretax loss on the sale of $10.6 million ($6.4 million after tax or
$0.06 per share). From January 1 through April 19, 2002, Sawhill Tubular
generated after-tax losses of $0.5 million. In the nine months ended September
30, 2001, Sawhill Tubular generated after-tax losses of $1.2 million.
On June 11, 2002, we issued and sold $550.0 million of 7 3/4% Senior Notes
Due 2012. Net of a discount and underwriting fees, the sale generated cash
proceeds of $538.1 million. On July 11, 2002, these proceeds, along with cash
on hand, were used to retire our $550.0 million of 9 1/8% Senior Notes Due 2006
at a total cost of $575.1 million, which included a redemption premium of $25.1
million. In the nine months ended September 30, 2002, we recognized a pretax
loss of $31.7 million ($19.9 million after tax, or $0.18 per share) for the
redemption of these notes.
We recorded a net loss for the nine months ended September 30, 2002 of $12.7
million, or $0.12 per share, compared to a net loss of $16.0 million, or $0.16
per share, reported for the first nine months of 2001. The favorable variance
was primarily due to higher spot market pricing, the insurance settlement
benefit, the gain on the sale of Anthem stock, lower natural gas costs and
higher shipment volumes, partially offset by losses on the sale of Sawhill and
from the early retirement of debt, and higher pension and healthcare costs.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Total steel shipments during 2001, inclusive of tubular products, declined
9% to 5,618,300 tons from 6,171,100 tons shipped in 2000. Although demand from
automotive and appliance contract customers increased late in 2001, shipments
for virtually all product lines were equal to or lower than in 2000. Due to
severely depressed steel pricing, we chose to forego some spot market sales
during 2001. Value-added steel products represented 93% of 2001 total
shipments, compared to 89% in 2000, while commodity hot-rolled product
shipments declined to 2% of total shipments in 2001, compared to 6% in 2000.
During 2001, net sales decreased 13% to $3,833.4 million from the $4,403.7
million reported for 2000. Steel operations contributed $3,681.7 million to
total net sales in 2001, compared to $4,276.8 million in 2000, a decrease of
14%. These declines were due primarily to lower prices in both the contract and
spot markets, which were partially offset, however, by a richer product and
market mix. Approximately 73% of AK Steel's shipments of flat rolled steel
products during 2001 were made pursuant to annual and multi-year contracts,
with the balance being made in the spot market at prevailing prices at the time
of sale.
32
Sales by the snow and ice control products business are strongly dependent
on weather conditions in its market area and the level of light trucks sales.
Strong truck sales due to aggressive marketing by automotive companies, as well
as higher snowfalls during the winter of 2000/2001 contributed to sales
increasing to $138.8 million in 2001 from $112.8 million in 2000.
The following presents, on a pro forma basis, operating profit before and
after two unusual items recorded in the fourth quarter of 2001.
2000 2001
------ ------
(in millions)
Operating profit (loss) as reported........ $340.8 $(17.8)
Pension charge............................. -- 192.2
Stock received in insurance demutualization -- (49.9)
------ ------
Pro forma operating profit................. $340.8 $124.5
====== ======
We recorded an operating loss in 2001 of $17.8 million, including an
operating loss of $66.7 million in the steel operations. Both losses included
the effects of two unusual items described below. Snow and ice control products
posted an increase in operating profit to $41.0 million in 2001 from $30.5
million in 2000, primarily due to the higher sales volumes.
Under our method of accounting for pension and other postretirement benefit
plans, we recognize into income, as a fourth quarter adjustment, any
unrecognized actuarial net gains or losses that exceed 10% of the larger of
benefit obligations or plan assets. Amounts inside this 10% corridor are
amortized over the average remaining service life of active plan participants.
Actuarial net gains and losses occur when actual experience differs from any of
the many assumptions used to value the benefit plans, or when the assumptions
change, as they may each year when a valuation is performed. During 2001, the
combination of a 6% loss on pension plan assets, and a decrease in the discount
rate from 8% to 7.25%, caused us to recognize, in the fourth quarter of 2001, a
non-cash pre-tax pension charge of $192.2 million against operating profit
(loss) and an additional $1.8 million in discontinued operations. In addition,
because the decline in asset value also led to the pension plans becoming
underfunded, we recorded a non-cash after-tax reduction in equity of
approximately $163.4 million.
In the fourth quarter of 2001, we recorded an unusual pre-tax benefit of
$49.9 million as a result of receiving approximately 1.5 million shares of
Anthem common stock. The benefit was net of a liability established for the
portion of the proceeds deemed to be healthcare plan assets. At December 31,
2001, the fair value of the stock, net of the fair value of the liability, had
risen to $68.6 million and the increase, net of tax, was recorded in other
comprehensive income.
Excluding the $192.2 million pension charge and the $49.9 million insurance
company demutualization benefit, we would have realized an operating profit of
$124.5 million, or $22 per ton shipped, in 2001 compared to an operating profit
of $340.8 million in 2000. The significant decrease in 2001 was primarily due
to lower contract pricing and severely depressed spot market pricing, which
lowered average selling prices by $38 per ton, and the 9% reduction in shipping
volume, partially offset by company-wide cost savings. Cost savings were
derived from lower market prices for purchased slabs and scrap, which saved
over $50.0 million in 2001, as well as overtime cost savings of approximately
$30.0 million, partially offset by approximately $50.0 million in higher
natural gas costs. During 2001, we recognized $37.4 million of LIFO income
within operating profit as a result of these net favorable changes in costs,
including $5.7 million of income from liquidation of LIFO layers.
During 2001, we recorded an income tax benefit of $53.6 million on a pre-tax
loss from continuing operations of $144.8 million, using a book tax rate of
37%. In 2000, we recorded $78.6 million of income tax expense on pre-tax income
from continuing operations of $212.6 million.
33
During 2001 and 2000, Sawhill Tubular recorded after-tax losses of $1.2
million and $1.6 million, respectively, which have been classified as
discontinued operations.
We recorded a net loss in 2001 of $92.4 million, or $0.87 per share,
compared to net income of $132.4 million, or $1.20 per share, for 2000.
Excluding the two unusual items, net of tax, and the loss from discontinued
operations discussed above, we would have recorded a loss of $0.4 million in
2001.
During 2001, cash flow from operating activities from continuing operations
generated $149.0 million, primarily attributable to $148.1 million of income
excluding non-cash charges for depreciation and amortization. Other non-cash
items in the 2001 net loss included the $192.2 million pension charge, the
$49.9 million benefit from the receipt of the Anthem shares, $44.2 million of
net pension and other postretirement benefit income and $52.8 million of
deferred tax credits. During 2001, $2.9 million of cash was generated by
working capital as reductions in accounts receivable were offset by inventory
increases. The decrease in accounts receivable reflected the lower sales levels
in the year, while the increase in inventories consisted largely of higher slab
purchases made in anticipation of a blast furnace maintenance outage scheduled
for the first half of 2002. Finally, $41.0 million was used to settle a key
management deferred compensation plan liability.
Cash flows used in investing from continuing operations totaled $75.2
million. Capital investments were $108.0 million and we used $41.3 million to
acquire Alpha Tube and purchase other long-term investments. We liquidated a
key management deferred compensation plan trust, generating $31.6 million, sold
our ownership interest in North American Stainless for $12.5 million and, in
the fourth quarter of 2001, received $30.0 million from AFSG Holdings, Inc.,
the holding company for our discontinued insurance and finance leasing
businesses.
Cash flows from financing activities from continuing operations resulted in
a net use of $78.0 million, including $14.2 million for dividends on common and
preferred stock and $63.2 million for scheduled debt repayments.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
During 2000, net sales were $4,403.7 million, an increase of 5% from the
$4,184.8 million reported for 1999. Steel operations contributed $4,276.8
million to total net sales, compared to $4,054.8 million for 1999, an increase
of 5%. These increases were due primarily to continued growth in the percentage
of total shipments attributable to value-added products, consisting primarily
of stainless and electrical steels and coated and cold-rolled carbon steels.
For the year 2000, value-added products comprised approximately 89% of total
shipments, compared to 81% for 1999. Partly offsetting the improved product mix
were significantly lower prices in the spot market and a temporary decline in
the percentage of sales made to the higher priced contract market.
Total steel shipments during 2000 declined slightly to 6,171,100 tons from
the 6,253,700 tons shipped in 1999, reflecting our closure, in January 2000, of
a redundant galvanizing facility in Dover, Ohio, which accounted for shipments
of almost 200,000 tons in 1999. During 2000, an 8% increase in value-added
steel shipments was a result of our move toward a richer product mix.
Operating profit in 2000 totaled $340.8 million, or $55 per ton shipped,
compared to the $244.8 million reported for 1999. Excluding the $99.7 million
merger-related special charges, 1999 operating profit was $344.5 million. Steel
operations operating profit was $300.7 million in 2000 and $201.7 million
($301.4 million excluding the special charge) in 1999. The slight decrease in
adjusted operating profit in 2000 was due primarily to substantially higher
costs in comparison to 1999 for steel scrap, purchased carbon steel slabs and,
most particularly, natural gas. To a lesser extent, operating profit fell due
to the significant decline in spot market prices and the increase in the
percentage of our sales to the spot market during the fourth quarter of 2000.
These negative factors were partly offset by increased shipments of value-added
products, which carry higher margins, higher than expected merger synergies, a
$41.5 million decrease in pension and other postretirement benefit
34
expense, which primarily resulted from higher past and expected returns on plan
assets, partially offset by higher interest expense, and other cost savings
achieved through more efficient utilization of production facilities. We
recognized $27.0 million of LIFO expense within operating profit as a result of
these net unfavorable changes in costs.
Operating profit for the snow and ice control products segment declined to
$30.5 million in 2000 from $36.1 million in 1999 on 2000 sales of $112.8
million and 1999 sales of $119.2 million. While light truck sales remained
strong in 2000, plow sales were adversely affected by below average snowfall in
our market area.
Interest expense increased in 2000 by $12.4 million over the prior year, due
primarily to an $18.9 million reduction in the amount of interest that we
capitalized as a result of the completion of construction of our Rockport Works
in the second half of 1999. This was partially offset by the retirement of
certain debt in connection with the Armco merger. Other income, consisting
primarily of interest earned on cash balances, declined in 2000 due to lower
average cash balances compared to 1999.
During 2000, we incurred $78.6 million in income tax expense, a book tax
rate of 37%. This amount included a non-cash deferred tax provision of $92.3
million, primarily attributable to accelerated tax depreciation in excess of
book, book pension credits in excess of actual funding of the pension plans,
utilization or expiration of tax loss carryovers and related changes in the
deferred tax asset valuation reserve. Partially offsetting the deferred tax
provision was a credit for current taxes of $13.7 million, which included a
$15.0 million federal tax refund that resulted from the carryback of a tax net
operating loss generated in 1999. The income tax provision for 1999 is net of
an $11.6 million recycling tax credit received from the Commonwealth of
Kentucky in that year, but which related to prior years.
Income from continuing operations for 2000 was $134.0 million, or $1.21 per
share, compared to $71.3 million, or $0.62 per share, reported for 1999.
Excluding the special charge, minority interest, and certain other
merger-related adjustments, net of tax, 1999 income from continuing operations
was $157.6 million. From this amount, income from continuing operations
decreased 15% in 2000, reflecting the lower adjusted operating income, higher
interest expense and the decline in other income.
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. 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 million, or $0.07 per share.
During 1999, we recorded a combined after-tax extraordinary loss of $13.4
million, 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.
Net income in 2000 was $132.4 million, or $1.20 per share, compared to the
$65.4 million, or $0.56 per share, reported for 1999. Excluding the special
charge, minority interest, and certain other merger-related adjustments, as
well as the income from discontinued operations and extraordinary loss, net of
tax, 1999 income was $157.6 million. From this amount, income decreased 15% in
2000, reflecting the lower adjusted operating income, higher interest expense
and the decline in other income.
Outlook
We anticipate that total fourth quarter shipments will increase
approximately 5% from third quarter levels, with continued solid performance in
the automotive markets. Spot market pricing is expected to decline as a result
of additional capacity entering the market. In addition, costs, particularly
for purchased slabs and natural gas, are expected to increase. Overall, we
expect fourth quarter operating profit, excluding the effects of an
outside-the-corridor charge for pensions and other postretirement benefits, to
be approximately $20 to $25 per
35
ton. In the longer term, pricing related to annual and multi-year contracts
currently being negotiated is expected to rise. Contract customers account for
approximately 80% of our Steel Operations' sales. Snow and Ice Control Product
sales and income for the next quarter are expected to be approximately the same
as the third quarter of this year.
Under our method of accounting for pension and other postretirement benefit
plans, we recognize into income, as a fourth quarter adjustment, any
unrecognized actuarial net gains and losses that exceed 10% of the larger of
projected benefit obligations or plan assets. Poor performance by the equity
markets and declining interest rates are expected to generate actuarial net
losses for our pension plans in the current year. In addition, other
postretirement benefit plans are expected to incur actuarial net losses
resulting from rising healthcare costs and declining interest rates. We expect
that most of the actuarial net losses generated in the current year would be
recognized in a fourth quarter 2002 non-cash charge against operating results.
Based on current estimates, the pension charge could have an after-tax effect
of between $300.0 million and $350.0 million, while the after-tax effect of the
charge related to other postretirement benefits could be between $100.0 million
and $150.0 million. Under Internal Revenue Service funding regulations, the
Company is not required to make a contribution to its pension funds until 2004,
at the earliest. The amount of the required 2004 contribution, if any, depends
on the investment performance of the pension funds and interest rate movements,
among other things and, accordingly, we cannot reasonably estimate the amount
at this time.
Liquidity and Capital Resources
Our liquidity needs are primarily for capital investments, working capital,
employee benefit obligations and debt service. At September 30, 2002, we had
$243.3 million of cash and cash equivalents. In addition, we had $205.1
available for borrowings under our $300.0 million accounts receivable purchase
credit facility. At that date, there were no outstanding borrowings under the
credit facility and availability was reduced primarily by outstanding letters
of credit.
Anticipated Debt Service
At September 30, 2002, our long-term debt, including the current portion,
totaled $1,399.7 million, consisting primarily of our senior notes that mature
in the years 2007 through 2012 and that are not subject to amortization prior
to maturity. In addition, the principal of our Senior Secured Notes Due 2004 is
repayable in four successive annual installments of $62.5 million, which
commenced in December 2001. Our obligation to make principal payments in each
of the next five years is as follows: $77.4 million in the fourth quarter of
2002, $62.5 million in 2003, $62.5 million in 2004, zero in 2005 and zero in
2006. Interest expense for 2001, net of capitalized interest of $2.8 million,
totaled $133.1 million.
Financial Covenants
The indentures and other instruments governing our senior indebtedness as
well as our accounts receivable purchase facility contain restrictions and
covenants that may limit our operating flexibility. Our senior notes indentures
impose restrictions regarding the amount of sale/leaseback transactions,
transactions by subsidiaries and with affiliates, use of proceeds from asset
sales, and some investments. Furthermore, our senior notes indentures impose
the following additional restrictions which became effective following the
completion of our consent solicitation in August, 2002:
. Maintenance of a minimum interest coverage ratio of at least 2.5 to 1.
Failure to meet this covenant will limit the amount of additional debt
we can incur. As of September 30, 2002, our ratio was 2.0x, and our
additional borrowing capacity was limited to approximately $550 million.
. Restricted payments, which consist primarily of dividends and share
repurchases, are limited to $25 million plus 50% of cumulative net
income from April 1, 2002. In addition, without regard to this
36
restriction, cumulative aggregate dividend payments of up to $50.0
million are permitted between April 1, 2002 and June 30, 2004.
The instruments governing our senior secured notes due 2004 contain the same
restriction as our senior notes indentures regarding restricted payments and
also require that we maintain a maximum leverage ratio (total debt to total
capitalization) of not more than 60%. At September 30, 2002, the leverage ratio
was 54.2%.
Our accounts receivable purchase facility may be terminated upon the
occurrence of, and failure to cure, some events, including the failure to
maintain ratios related to the level and collectibility of receivables. The
amount of availability under our accounts receivable facility fluctuates based
on the amount of our eligible receivables.
Capital Investments
We anticipate 2002 capital investments of approximately $105.0 million, all
of which are expected to be funded from available cash and cash generated from
operations. During the first nine months of 2002, we expended approximately
$64.9 million for capital investments.
Employee Benefit Obligations
As of December 31, 2001, our pension plans were 88% funded in accordance
with accounting principles generally accepted in the United States. However, no
cash contributions to the pension plans are required until at least 2004.
At December 31, 2001, our liability for postretirement benefits other than
pensions totaled $1,474.0 million. We have established a healthcare trust as a
means of prefunding a portion of this liability. The balance in the trust,
including the earnings on trust investments, as of December 31, 2001, was $87.0
million.
Dividends
Prior to 2001, AK Holding had paid quarterly dividends on its common stock
since November 15, 1995 and had paid dividends on its $3.625 cumulative
convertible preferred stock since it was issued in the fourth quarter of 1999.
The declaration and payment of cash dividends were subject to a restrictive
covenant contained in the instruments governing our senior debt. Primarily due
to dividend payments and substantial share repurchases made in 2000 and prior
years, and the impact of net losses recorded in 2001, the amount available
under this covenant was insufficient to permit the payment of dividends on
either the common or preferred stock for a portion of 2001. In that year,
quarterly common stock dividends were reduced to $0.0625 per share in the first
two quarters and suspended in the last two quarters. Preferred stock dividends
were paid in the first three quarters and suspended in the fourth quarter.
Effective as of August 8, 2002, we received the consents from the holders of
our other outstanding senior notes to amend the covenant applicable to each of
those notes to conform to the covenant applicable to our new 7 3/4% notes.
Subject to a formula that reflects cumulative earnings, the amended covenant
allows us to resume payment of dividends, in the event the Board of Directors
declares such dividends, and to redeem shares of our capital stock. In
addition, the amended covenant permits the payment of up to $50.0 million of
dividends through June 30, 2004 without regard to cumulative earnings.
On September 30, 2002, we paid preferred stock dividends in an aggregate
amount of $0.9 million, or $3.625 per share, representing third quarter
dividends and the accumulated arrearage for the three previous quarters. Also
on that date, we expended $13.1 million to redeem and retire all 259,481 shares
of our outstanding cumulative convertible preferred stock at a redemption price
of $50.3625 per share.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States. These principles permit choices among
alternatives and require numerous estimates of financial
37
matters. We believe the accounting principles chosen are appropriate under the
circumstances, and that the estimates, judgments and assumptions involved in
our financial reporting are reasonable.
Revenue from sales of products is recognized at the time title and the risks
and rewards of ownership passes. This is when the products are shipped per
customers' instructions, the sales price is fixed and determinable, and
collection is reasonably assured.
Accounting estimates are based on historical experience and information that
is available to management about current events and actions we may take in the
future. Significant items subject to estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; legal and environmental
liabilities; and assets and obligations related to employee benefit plans.
There can be no assurance that actual results will not differ from these
estimates.
We maintain an allowance for doubtful accounts for losses resulting from the
potential that some customers may be unable to make payments. While, based on
our experience, losses due to credit failures have been low, if in the future
the financial condition of some customers deteriorates affecting their ability
to pay, additional allowances may be needed. Approximately 35% of trade
receivables outstanding at December 31, 2001 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 we
believe our trade receivables will be collected, we anticipate that in the
event of default we would follow normal collection procedures.
We record a valuation allowance to reduce our deferred tax assets to an
amount that is more likely than not to be realized. In estimating levels of
future taxable income, we have considered historical results of operations in
recent years and would, if necessary, consider the implementation of prudent
and feasible tax planning strategies to generate future taxable income. If
future taxable income is less than the amount that has been assumed in
determining the deferred tax asset, then an increase in the valuation reserve
will be required, with a corresponding charge against income. On the other
hand, if future taxable income exceeds the level that has been assumed in
calculating the deferred tax asset, the valuation reserve could be reduced,
with a corresponding credit to income. Our 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. We have
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.
We are involved in a number of environmental and legal proceedings. Accruals
of probable costs have been made based on a combination of litigation and
settlement strategies. It is possible that results of operations in any future
period could be materially affected by changes in assumptions or by the
effectiveness of these strategies.
As discussed earlier in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, our method of accounting for
pensions and other postretirement benefit plans required the recognition of a
pre-tax charge of $192.2 million in the fourth quarter of 2001. Under our
method of accounting for pension and other postretirement benefit plans, we
recognize into income, as a fourth quarter adjustment, any unrecognized
actuarial net gains or losses that exceed 10% of the larger of benefit
obligations or plan assets. Amounts inside this 10% corridor are amortized over
the average remaining service life of active plan participants. We believe this
method results in faster recognition of actuarial net gains and losses than the
minimum amortization method permitted by prevailing accounting standards and
used by the vast majority of companies in the United States. Faster recognition
limits the amounts by which balance sheet assets and liabilities differ from
economic net assets or obligations related to the plans. However, faster
recognition under this method also results in the potential for highly volatile
and hard to forecast fourth quarter adjustments, similar to the one recognized
in 2001.
Under the applicable accounting standards, actuarial net gains and losses
occur when actual experience differs from any of the many assumptions used to
value the benefit plans or when the assumptions change, as
38
they may each year when a valuation is performed. The usual major sources of
actuarial gains and losses for pension plans are the differences between
expected and actual returns on plan assets and changes in the discount rate
used to value pension liabilities as of the measurement date. For other
postretirement benefit plans, differences in estimated versus actual healthcare
costs, changes in assumed healthcare cost trend rates or a change in the
difference between the discount rate and the healthcare trend rate are major
sources of actuarial gains and losses. In addition to the potential for fourth
quarter adjustments, these changes affect future quarterly net periodic benefit
expense.
Our financial statements consolidate the operations and accounts of us and
all subsidiaries in which we have a controlling interest. We also have
investments in associated companies that are accounted for under the equity
method and, because the operations of these companies are integrated with our
basic steelmaking operations, our proportionate share of their income (loss) is
reflected in our cost of products sold in the consolidated statements of
income. We have a subordinated note receivable of $35.0 million due from one of
these associated companies, which is recorded in other investments on the
consolidated balance sheets. In the first quarter of 2002, we provided a $4.0
million letter of credit to support a portion of that company's bank
indebtedness proportionate to our investment in that company. We do not
guarantee the debt of any other unconsolidated companies, have any "off balance
sheet debt" and do not have any so called "special purpose entities" that are
not included in our consolidated financial statements.
Our investment in AFSG Holdings, Inc. represents the carrying value of our
discontinued insurance and finance leasing businesses, which have been largely
liquidated. The activities of the remaining operating companies are in "runoff"
mode and the group is accounted for as a discontinued operation under the
liquidation basis of accounting, whereby future cash inflows and outflows are
considered. We are under no obligation to support the operations or liabilities
of this group.
We are a party to derivative instruments that are designated and qualify as
hedges under Statement of Financial Accounting Standards ("Statement") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and related
pronouncements. Our objective in using such instruments is to protect our
earnings and cash flows from fluctuations in the fair value of selected
commodities and currencies. For example, in the ordinary course of business, we
use cash settled commodity price swaps, with a duration of up to three years,
to hedge the price of a portion of our natural gas, nickel, aluminum and zinc
requirements. We designate these swaps as cash flow hedges and the resulting
changes in their fair value are recorded in other comprehensive income.
Subsequent gains and losses are recognized into income in the same period as
the underlying physical transaction. As of September 30, 2002, currently valued
outstanding commodity hedges would result in the reclassification into earnings
of $0.5 million in net-of-tax gains within the next twelve months. At September
30, 2002, we were not party to any derivative instruments that do not qualify
as hedges. Based on such reviews as we deem reasonable and appropriate, we
believe that all counterparties to our outstanding derivative instruments are
entities with substantial credit worthiness.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed annually for impairment. We adopted Statement No. 142 as of January 1,
2002. In the second quarter of 2002 we completed the required review, and
determined that, as of January 1, 2002, no impairment was necessary.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to establish liabilities for
legal obligations associated with the retirement of tangible long-lived assets.
We will adopt the Statement in 2003, but have yet to determine what effect, if
any, adoption will have on our financial statements.
39
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for impairment of long-lived assets to be held and
used, and of long-lived assets and components of an entity to be disposed of.
We adopted the Statement as of January 1, 2002, as required, but, except for
the requirement to reclassify the results of Sawhill Tubular division as a
discontinued operation, the Statement did not have a material effect on our
financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Statement rescinds or amends previous pronouncements related
to extinguishment of debt, intangible assets of motor carriers and accounting
for leases. The Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify their meanings
and describe their applicability under changed conditions. Generally, the
Statement applies to transactions occurring and financial statements issued
after May 15, 2002. However, a provision requiring certain gains and losses
from extinguishment of debt to be reclassified from extraordinary items is
effective January 1, 2003. As a result, in 2003 we will reclassify the 2002
loss on retirement of debt to income from continuing operations. We do not
believe adoption of the Statement will have a material effect on our financial
statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Statement could have a material
effect on our financial statements to the extent that significant exit or
disposal activities occur subsequent to adoption.
40
BUSINESS
Operations
We are a fully-integrated producer of flat-rolled carbon, stainless and
electrical steels. Our operations include those previously conducted by Armco
Inc., which merged with and into AK Steel on September 30, 1999. The merger
enhanced our steel producing capability and market position by allowing us to
combine the distinct strengths of each company's individual plants into a
unified steelmaking operation.
In addition to our steel operations, we own and operate a snow and ice
control products company and an industrial park.
Our steel operations consist of eight steelmaking and finishing plants
located 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. The steel operations also include European
trading companies that buy and sell steel and steel products and AK Tube
L.L.C., which is a manufacturer and distributor that further finishes flat
rolled steel into welded steel tubing used in the automotive and construction
markets. We are registered under an international quality standard, called ISO
9002, and certified under a quality assurance program, called QS 9000, used by
domestic automotive manufacturers and have received numerous quality awards
from many of our major customers. ISO 9002 was developed by the International
Organization for Standardization, a worldwide federation of national standards
bodies specifying quality system requirements. This standard requires a high
level of quality control at all stages of manufacturing and service. QS 9000
includes the ISO 9002 requirements as well as the quality requirements of
General Motors, Ford, DaimlerChrysler, various large truck manufacturers and
other subscribing companies for their internal and external suppliers. In
addition, we have received a number of awards for safety and, in 2001, our
Ashland Works became the first steel plant in the United States to receive
environmental certification under a system called ISO 14001. ISO 14001 is an
environmental management system developed by the International Organization for
Standardization that includes required elements that lead to improved
environmental performance.
Our snow and ice control products segment consists of Douglas Dynamics,
L.L.C., the largest North American manufacturer of snowplows, and salt and sand
spreaders for four-wheel drive light trucks. From three plants, its products
are sold under the brand names Western and Fisher through independent
distributors in the United States and Canada.
Our other operations consist of Greens Port Industrial Park on the Houston,
Texas ship channel, which leases land, buildings and rail car storage
facilities to third parties and operates a deep water loading dock on the
channel.
Customers
Our 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 coated carbon steel products
are also sold to distributors, service centers and convertors who may further
process these products or resell them without further processing.
We sell our 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. 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 our steel operations, our marketing efforts are principally
directed toward those customers, such as automotive manufacturers, who require
precise just-in-time delivery, technical support and the highest quality
flat-rolled steel. Management believes that our enhanced product quality and
delivery capabilities, and
41
our emphasis on customer technical support and product planning, are critical
factors in our 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:
Years Ended
December 31,
-------------
1999 2000 2001
---- ---- ----
Automotive............................................. 55% 52% 57%
Appliance, Industrial Machinery and Equipment, and
Construction......................................... 25% 24% 25%
Distributors, Service Centers and Convertors........... 20% 24% 18%
Our steel operations segment is a major supplier to the domestic automotive
industry, including those foreign manufacturers with plants in the United
States. Shipments to General Motors Corporation, our largest customer,
accounted for approximately 15%, 15% and 18% of steel operations net sales in
1999, 2000 and 2001, respectively. Our relationship with General Motors
Corporation is solely that of a supplier in the ordinary course of business. No
other customer accounted for more than 10% of net sales for any of these years.
If General Motors should elect to source more of its purchases of steel from
other steel producers in the future, we believe that any material change in its
purchases would need to be phased in over at least a multi-year period and that
the resulting decrease in our sales to General Motors would be offset to a
material extent by sales to new customers and increased sales to our other
existing customers. If, however, our expectations prove incorrect, our
operating results could be materially adversely affected.
We are a party to contracts with most of our major automotive and appliance
industry customers with terms that range from one to three years. These
contracts, which are typically finalized late in the year, set forth prices to
be paid for each product category during each year of their term. Except for
certain stainless steel agreements, which permit increased costs for nickel and
chrome to be passed on to the customer, these contracts do not permit price
adjustments to reflect changes in prevailing market conditions or energy and
raw material costs. Approximately 73% of our shipments of flat rolled steel
products in 2001 were made to contract customers with the balance being made in
the spot market at prevailing prices at the time of sale.
Raw Materials
The principal raw materials required for our steel 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, we routinely purchase between 10% and 15% of
our carbon steel slab requirements from other steel producers, located
primarily outside the United States, to supplement the production from our own
steelmaking facilities. Most purchases of coal, iron ore and limestone, as well
as transportation services, are made at negotiated prices under annual and
multi-year agreements. Purchases of carbon steel slabs, stainless steel scrap,
natural gas and other raw materials are made at prevailing market prices, which
are subject to price fluctuations in accordance with supply and demand. We
believe that adequate sources of supply exist for all of our raw material and
energy requirements.
Research and Development
We conduct a broad range of research and development activities aimed at
improving existing products and manufacturing processes and developing new
products and processes. We incurred research and development costs of $16.8
million in 1999, $15.3 million in 2000 and $13.9 million in 2001. We hold
numerous patents, including U.S. and foreign patents covering both processes
and products for aluminized stainless steel. Our aluminized stainless steel
patents serve primarily to protect our market share in the automotive exhaust
market, although three other suppliers are currently licensed under the
patents. The aluminized stainless steel patents will expire at various dates
between 2003 and 2013.
Employees
As of September 30, 2002, we had approximately 10,300 employees.
Approximately 7,400 employees at seven of our eleven plants are represented by
international or independent labor unions, under contracts with expiration
dates extending through 2006. After a September 20, 2002 election the National
Labor Relations Board has certified the UAW as the collective bargaining
representative for production and maintenance employees at our Coshocton Works.
Negotiations on that contract began on October 30, 2002.
42
Our 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 we
understood, that it would lock out represented employees while it continued to
bargain with the union. Since September 1999, bargaining between us and the
union has continued while salaried employees and temporary replacement workers
have operated the Mansfield Works.
Competition
We are one of the largest steel producers in North America, with shipments
equal to approximately 6% of the domestic steel market. We compete with
domestic and foreign flat-rolled carbon, stainless and electrical steel
producers (both integrated steel mills and mini-mills) and producers of
plastics, aluminum and other materials that can be used in lieu of flat-rolled
steels in manufactured products. Mini-mills generally offer a narrower range of
products than integrated steel mills but can have some competitive cost
advantages as a result of their different production processes and non-union
work force. Price, quality, delivery and service 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. Imports of
finished steel accounted for approximately 21% of the domestic steel market
demand in 1999, 22% in 2000 and 20% in 2001.
These competitive factors, along with the cyclical nature of and intense
competition within our industry, have caused downward pressure on steel prices
and have caused dozens of steel companies to seek protection under Chapter 11
of the U.S. Bankruptcy Code in the last few years.
In October 2001, the International Trade Commission, following a nearly
four-month investigation, found "serious injury" to the U.S. steel industry due
to increased imports of steel products. In March 2002, President Bush imposed
tariffs of 30%, 24% and 18% for each of the three respective years beginning
March 2002 on imports of hot-rolled, cold-rolled and coated sheet carbon steel,
some of which are sold in competition with products manufactured and sold by
us, as well as on imports of carbon steel slabs (which we purchase to
supplement our own production) in excess of a specified annual quota. These
tariffs have not had, and, at present, we do not believe they will have, a
material adverse effect on our results of operations.
Environmental Matters
We, like all other steel producers, are subject to various federal, state
and local environmental, health and safety laws and regulations concerning such
issues as air emissions, wastewater discharges, solid and hazardous waste
handling and disposal, and the investigation and remediation of contamination.
These laws and regulations are increasingly stringent. Over the past three
years, we have expended the following for environmental related capital
investments and environmental compliance costs:
Years Ended
December 31,
-----------------
1999 2000 2001
----- ----- -----
(in millions)
Environmental related capital investments $ 7.2 $10.1 $18.8
Environmental compliance costs........... 85.9 93.5 99.5
43
Except as expressly noted below, management does not anticipate any material
impact on our recurring operating costs or future profitability as a result of
our compliance with current environmental regulations. Moreover, because all
domestic steel producers operate under the same set of federal environmental
regulations, management believes that we are not competitively disadvantaged by
its need to comply with these regulations.
Environmental Remediation
We and our predecessors have been conducting steel manufacturing and related
operations for more than 100 years. Although our operating practices are
believed to have been consistent with prevailing industry standards during this
time, hazardous materials may have been released in the past at one or more
operating sites, including sites that are no longer owned by us. 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, or RCRA, which
governs the treatment, handling and disposal of hazardous waste, the United
States Environmental Protection Agency, or 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 may order the facilities to take
corrective action to remediate such releases. Our major steelmaking facilities
are subject to RCRA inspections by environmental regulators. While we 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, or CERCLA, the EPA and state environmental
authorities have conducted site investigations at certain of our 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, we could be directed to expend funds for remedial activities at
the former disposal areas. Because of the uncertain status of these
investigations, however, management cannot predict whether or when such
expenditures might be required or their magnitude.
As previously reported in Holding's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, on July 27, 2001, we received a Special
Notice Letter from the EPA requesting that we agree to conduct a Remedial
Investigation/Feasibility Study, or RI/FS, and enter into an administrative
order on consent pursuant to Section 122 of CERCLA regarding the former
Hamilton Plant of Armco located in New Miami, Ohio. The Hamilton Plant is no
longer an operating steel mill, having ceased operations in 1990, and all of
its former structures have been demolished and removed. While we do not believe
that a site-wide RI/FS is necessary or appropriate at this time, in April 2002
we entered into a mutually agreed-upon administrative order on consent to
perform such an investigation and study of the Hamilton Works site.
Environmental Proceedings
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, or POTW. Due to concentrations of ammonia and phenol in excess of these
limits in wastewater from the Middletown Works, we, 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. We 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 us 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 the petition for removal credits, we could incur additional
costs to construct pretreatment facilities at the Middletown Works.
44
On February 27, 1995, the Ohio Environmental Protection Agency, or OEPA,
issued a Notice of Violation with respect to the Zanesville Works alleging
noncompliance with both a 1993 order and various state regulations regarding
hazardous waste management. We are continuing to work with the OEPA and the
Ohio Attorney General's Office to achieve final resolution of this matter. In
addition, on October 9, 2002, AK Steel entered into an administrative consent
order with the EPA Region 5 pursuant to Section 3013 of the RCRA. Pursuant to
this consensual order, AK Steel has agreed to investigate certain areas of the
Zanesville Works.
On June 29, 2000, the United States filed a complaint on behalf of the EPA
against AK Steel in the U. S. District Court for the Southern District of Ohio,
which we refer to as the "federal action," for alleged violations of the Clean
Air Act, the Clean Water Act and the RCRA. On the same date, AK Steel filed a
Verified Complaint for Declaratory and Injunctive Relief in the Court of Common
Pleas for Butler County, Ohio, which we refer to as the "state action", against
the State of Ohio and the OEPA seeking a declaration that, among other things,
(a) AK Steel is in compliance with its operating permits for the blast furnace
and basic oxygen furnaces at its Middletown Works, which would preclude the
State of Ohio and the OEPA from taking any action to order or enforce
obligations on AK Steel with respect to those facilities, and (b) that any
emissions from the Middletown Works do not cause, or otherwise contribute to, a
public nuisance. On June 30, 2000, the State of Ohio moved to intervene in the
Federal Action. On March 29, 2001, the U.S. District Court ruled that the State
of Ohio could conditionally intervene in the Federal Action. Subsequently, Ohio
filed a conditional complaint, which included various environmental claims,
including seven air pollution claims. On May 9, 2001, AK Steel moved to dismiss
all of Ohio's claims in the Federal Action. On July 27, 2001, the Court of
Common Pleas in the State Action declared null and void two Notices of
Violation issued by the OEPA upon which certain of the air pollution claims of
the EPA and Ohio in the Federal Action were predicated. Subsequently, the court
held that that effectively concludes the State Action. AK Steel has appealed
that holding to the 12/th/ District Court of Appeals in Butler County, Ohio. On
October 17, 2001, the OEPA issued a similar new Notice of Violation, but moved
to amend its conditional complaint in the Federal Action to withdraw four of
its air pollution claims, which were predicated on the two original Notices of
Violation that were declared null and void. On September 27, 2001, the U.S.
District Court dismissed with prejudice the EPA's air pollution claim, which
had been predicated on the two voided Notices of Violation letters. In
addition, on December 19, 2001, the U.S. District Court stayed the remaining
three air pollution claims of the OEPA in the Federal Action pending resolution
of a related administrative appeal to the Ohio Environmental Review Appeals
Commission addressing the newly issued OEPA Notice of Violation. AK Steel's
motion to dismiss the OEPA claims not yet dismissed in the Federal Action
remains pending. No trial date has yet been set in the Federal Action. AK Steel
is vigorously contesting all of the remaining claims. If OEPA and/or the EPA
are completely successful in obtaining the relief they seek in the Federal
Action with respect to their air pollution claims, it could result in
significant penalties and require a substantial capital investment to install
interim pollution control equipment on the blast furnace and basic oxygen
furnaces at the Middletown Works under current federal pollution control
regulations before certain proposed new federal regulations are made final.
Once those proposed new federal regulations become final, AK Steel could be
required to make another substantial capital investment to replace the interim
pollution control equipment. Under those circumstances, the Company may
conclude that it is more cost-effective to purchase slabs than to make them at
the Middletown Works and may elect to shut down the hot end facilities of the
Middletown Works. If the EPA and OEPA are completely successful in obtaining
the relief they seek in the Federal Action with respect to their water and/or
RCRA claims, it could result in substantial penalties and an order requiring AK
Steel to investigate and remediate alleged polychlorinated biphenyl and
polycyclic aromatic hydrocarbon contamination in Monroe Ditch and Dick's Creek,
which are located on and adjacent to the Middletown Works. At this time, we are
unable to estimate the cost of an adverse outcome related to the air pollution,
water pollution or RCRA claims or the potential cost of a shutdown of the hot
end of the Middletown Works.
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring it to develop a plan for investigation of eight areas of
the Mansfield Works that allegedly could be sources of contamination. A site
investigation began in November 2000 and is continuing.
45
On June 27, 2000, the EPA issued an Emergency Order pursuant to the Safe
Drinking Water Act to AK Steel's Butler Works located in Butler, Pennsylvania
concerning discharge of nitrate/nitrite compounds to the Connoquenessing Creek,
an occasional water source for the Borough of Zelienople. On March 2, 2001, AK
Steel entered in an agreed administrative order with the EPA calling for, among
other things, a decrease in the levels of nitrates and nitrites in the treated
water discharged to waters of the Commonwealth of Pennsylvania by AK Steel's
Butler Works and for the provision of emergency drinking water for Zelienople
during certain times when it must draw drinking water from the Connoquenessing
Creek. AK Steel has taken the measures necessary to comply with that order.
On September 9, 2002, AK Steel entered into an Agreed Order with the
Commonwealth of Kentucky for certain alleged air quality violations at our
Ashland Works. This order required the adoption of certain corrective action
plans and the payment of a $175,000 penalty.
In addition to the foregoing matters, we are or may be involved in
proceedings with various regulatory authorities that may require us to pay
fines, comply with more rigorous standards or other requirements or incur
capital and operating expenses for environmental compliance. Except to the
limited extent noted above with respect to the claims in the federal action,
management believes that the ultimate disposition of the foregoing proceedings
will not have, individually or in the aggregate, a material adverse effect on
our consolidated financial condition, results of operations or cash flows.
Properties
Our corporate headquarters are located in Middletown, Ohio. Steelmaking and
finishing operations are conducted at eight facilities located in Indiana,
Kentucky, Ohio and Pennsylvania. Three fabricating plants are located in
Wisconsin, Maine and Tennessee, and an industrial park is located in Texas. All
of these facilities, except for a leased tubing facility, are owned by us.
Coke manufacturing plants, blast furnaces, basic oxygen furnaces and
continuous casters for the production of carbon steel 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 in Indiana consists of a state-of-the-art continuous cold
rolling mill, a continuous hot-dip galvanizing and galvannealing line, a
continuous carbon and stainless steel pickling line, a continuous 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.
The Butler Works in Pennsylvania, which is situated on 1,300 acres with 3.5
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 570,000
square-foot stainless steel finishing 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
1.6 million square-foot facility on a 548-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 four-stand tandem
cold rolling mill and a pickling line.
46
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.
Douglas Dynamics manufactures snow and ice control products at three plants
located in Maine, Tennessee and Wisconsin. The plants are equipped to machine,
fabricate, weld, finish and assemble components for snowplows, and salt and
sand spreaders.
AK Tube, located in Ohio, operates five electric resistance weld tube mills,
two slitters, two cut-to-length machines and various other processing equipment
housed in a 330,000 square foot leased facility.
Greens Port Industrial Park, located on approximately 650 acres on the
Houston, Texas ship channel, consists of land, buildings, rail car storage
facilities and a deep water loading dock.
Legal Proceedings
In addition to the environmental matters discussed above and the items
discussed below, there are various claims pending against us and our
subsidiaries involving product liability, reinsurance and insurance
arrangements, antitrust, patent, employee benefits and other matters arising in
the ordinary course of business. Except to the limited extent noted above with
respect to the claims in the federal action, in management's opinion, the
ultimate liability resulting from all of these claims, individually and in the
aggregate, should not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
On July 13, 2001, Orinoco Iron, C.A. filed an action against AK Steel in the
United States District Court for the Southern District of Ohio, Case No.
C-1-01-461. Orinoco and us were parties to a multi-year contract whereby
Orinoco supplied us with a form of iron ore referred to as hot briquetted iron,
or HBI. The action arose out of a dispute between Orinoco and us with respect
to the pricing formula under the supply contract. Orinoco alleged that the
pricing formula in the supply contract was appropriate as stated in the
contract and sought damages for the failure of us to pay for HBI in accordance
with that pricing formula. We alleged that the pricing formula no longer
reflected the original intent of the parties and sought an order from the court
reforming the contract to include a different pricing formula. In June 2002, we
and Orinoco mutually agreed to terminate our existing supply contract, enter
into a new five-year supply contract with a revised pricing formula, and to
settle our claims against each other. Pursuant to our settlement agreement, the
pending litigation between us and Orinoco was dismissed on or about July 15,
2002.
On June 26, 2002, seventeen individuals filed a purported class action
against us in the United States District Court for the Southern District of
Ohio, Case No. C-1-02-467. The complaint alleges that the company discriminates
against African-Americans in our hiring practices and that the company
discriminates against all of its employees by preventing our employees from
working in a racially integrated environment free from racial discrimination.
The complaint seeks various forms of declaratory, injunctive and unspecified
monetary relief (including back pay, front pay, lost benefits, lost seniority
and punitive damages) for the complaintants and the other members of their
alleged class. We intend to contest this matter vigorously.
On June 13, 2002, oral arguments were presented on the Objections to the
Special Master's Recommendations in the case of AK Steel Corporation v. Sollac,
S.A., et al., Case No. C-1-98-690,-804, United States District Court for the
Southern District of Ohio, or the Patent Case. The Patent Case involves issues
of infringement, validity and enforceability of six U.S. patents owned by us
that relate to aluminized stainless steel. We are seeking injunctive relief and
monetary damages for infringement of the aluminized stainless steel patents.
The Special Master recommended that the Court find certain claims of the
patents were valid and that the
47
Defendants did not infringe upon these valid claims. The Special Master also
recommended that certain claims of the patents were not valid for lack of
enablement. On July 30, 2002, the Trial Court adopted the Special Master's
Recommendation in the Patent Case. We plan to seek appellate review of the
Trial Court's ruling in the Court of Appeals for the Federal Circuit. There are
two additional cases in which the defendants in the Patent Case are asserting
antitrust claims against us. Those cases are Sollac, S.A., et al., v. AK Steel
Corporation, Case No. C-1-00-619, United States District Court for the Southern
District of Ohio, or the U.S. Case, and Ugine, S.A., et al. v. AK Steel
Corporation, Case No. T-1385-01, Federal Court of Canada, or the Canadian Case.
The Canadian case presents issues of infringement, validity and disparagement
related to three Canadian patents owned by us. The plaintiffs in the U.S. Case
allege that we have unlawfully monopolized the aluminized stainless steel
market. Discovery is underway and trial is currently scheduled to begin on July
7, 2003 in the U.S. Case. No trial date yet has been set in the other cases. We
continue to vigorously contest all of these claims.
During the quarter ended June 30, 2002, we entered into settlement
agreements with certain of our insurance carriers covering certain past and
future environmental and asbestos claims and/or liabilities in an amount, net
of legal fees and expenses and increases to environmental liabilities, of
approximately $23.9 million. Several insurance policies have been commuted as a
result of these settlement agreements. One of the settlements with a former
insurer, however, provides us with continued partial coverage for defense and
indemnity costs arising from non-employee asbestos claims.
In April 2000, a class action was filed in the United States District Court
for the Southern District of Ohio by Bernard Fidel and others against AK Steel
Holding Corporation and certain of its directors and officers, alleging
material misstatements and omissions in our public disclosure about our
business and operations. The defendants are vigorously defending this action.
On September 27, 2002, the court issued a ruling denying a motion we had filed
to dismiss the action. Discovery has not yet commenced and no trial date has
been set.
We currently are named as a defendant in approximately 200 lawsuits alleging
personal injury as a result of exposure to asbestos. The majority of these
suits have been filed in Texas on behalf of people who claim to have been
exposed while visiting the premises of a former Armco facility in Houston that
has been closed since 1984. Most of these lawsuits do not include a specific
dollar claim for damages and many include a number of plaintiffs and multiple
defendants. Specific dollar claims for damages have been asserted in only 61
cases, involving over 3,400 named defendants (in addition to our company) and a
total of 177 plaintiffs. A total of 12 cases involve claims of $200,000 or
less, 11 cases involve claims between $200,000 and $5 million, 32 cases involve
claims of $15 million, five cases involve claims of $20 million and one case
sets forth a claim of $50 million. In all but three cases, each involving a
claim of less than $200,000, the amount claimed is for compensatory damages and
a separate claim in an equal amount is asserted for punitive damages. Most
claimants fail to allocate their alleged claims of liability among the various
named defendants. It has been our experience, however, that, as a result of
discovery, only a small percentage of claimants ultimately identify AK Steel as
a defendant from whom they are actually seeking damages and most of these
claims ultimately are either dismissed or settled for a small fraction of the
damages initially claimed. For example, during 2001, we disposed of 26 claims
either through dismissal or settlement, with total settlement payments of
approximately $300,000, and since the beginning of 1990 we disposed of a total
of 217 claims, with total settlement payments of approximately $2 million and
we have not experienced a significant increase in the cost of settlement during
this period. In addition, only one case against AK Steel has ever proceeded to
trial and that case concluded with a verdict for the defense. We intend to
continue our practice of vigorously defending these cases. Based upon our
present knowledge, and the factors set forth above, we believe it is unlikely
that the resolution of these claims in the aggregate will have a material
adverse effect on our results of operations, cash flows or financial condition.
Predictions as to the outcome of pending litigation, particularly claims
alleging asbestos exposure, are subject to substantial uncertainties. These
uncertainties include (1) the significantly variable rate at which new claims
may be filed, (2) the impact of bankruptcies of other companies currently or
historically defending asbestos claims, (3) the uncertainties surrounding the
litigation process from jurisdiction to jurisdiction and from case to case, (4)
the type and severity of the disease alleged to be suffered by each claimant,
and (5) the potential for enactment of legislation affecting asbestos
litigation.
48
On January 2, 2002, John D. West, a former employee, filed a purported class
action in the United States District Court for the Southern District of Ohio
against the AK Steel Corporation Retirement Accumulation Pension Plan, or AK
RAPP, and the AK Steel Corporation Benefit Plans Administrative Committee, or
AK BPAC, claiming that the method used under the AK RAPP to determine lump sum
distributions is improper and that, as a result, the benefits previously paid
to plaintiff and putative class members from the AK RAPP were understated in
violation of the Employment Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986. The AK RAPP is the cash balance plan component
of the AK Steel Noncontributory Pension Plan, or AK NCPP. The AK NCPP provides
that we will indemnify members of AK BPAC from any liability and expense
incurred by reason of serving as a member of AK BPAC. On May 1, 2002, plaintiff
moved for certification of the class. On July 22, 2002, defendants opposed that
motion and also moved for entry of judgment that plaintiff's claim is time
barred. The parties have commenced discovery. No trial date has been set, but
the parties have been instructed by the Court to be prepared for trial
beginning on or after July 2003. The defendants intend to contest this matter
vigorously.
49
MANAGEMENT
The following table sets forth, as of September 30, 2002, the name, age and
principal position with us of each of our directors and executive officers. All
directors serve for a term of one year expiring at the date of the Annual
Meeting of Stockholders, which is held in May.
Name Age Positions with the Company
---- --- --------------------------
Richard M. Wardrop, Jr. 57 Chairman, Chief Executive Officer and President
Richard A. Abdoo....... 58 Director
Allen Born............. 69 Director
Donald V. Fites........ 68 Director
Bonnie G. Hill......... 60 Director
Robert H. Jenkins...... 59 Director
Lawrence A. Leser...... 67 Director
Daniel J. Meyer........ 66 Director
Eugene A. Renna........ 58 Director
James A. Thomson....... 57 Director
John G. Hritz.......... 48 Executive Vice President
James L. Wainscott..... 45 Senior Vice President and Chief Financial Officer
Michael T. Adams....... 44 Vice President, Sales and Marketing
James M. Banker........ 45 Vice President, Operations
Michael P. Christy..... 46 Vice President, Purchasing and Transportation
Thomas C. Graham, Jr... 48 Vice President, Research and Engineering
Brenda S. Harmon....... 50 Vice President, Human Resources and Secretary
J. Theodore Holmes..... 57 Vice President, Customer Service
David C. Horn.......... 50 Vice President and General Counsel
Alan H. McCoy.......... 50 Vice President, Public Affairs
Ernest E. Rummler...... 51 Vice President, Manufacturing Planning & Steel Sourcing
James W. Stanley....... 58 Vice President, Safety and Health
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. On February 8, 2002, he was again elected to also serve as
President of the Company effective March 2, 2002.
Richard Abdoo was elected a director of the Company effective April 19,
2001. Mr. Abdoo has been the Chairman, President and Chief Executive Officer of
Wisconsin Energy Corporation since May 1991. He is a director of Marshall &
Ilsey Corporation, Cobalt Corporation and Sensient Technologies Corporation. He
is a member of the American Economic Association and is a registered
professional engineer in various states.
Allen Born, a director of the Company since March 2, 1995, is Chairman of
Born Investments, LLC, a private investment firm involved in venture capital
and directional drilling for natural gas production. From November 1993 until
July 1998, he served as Chairman and Chief Executive Officer of Alumax Inc.,
and for more than five years prior thereto he served as Chairman and Chief
Executive Officer of Amax Inc. Mr. Born also is a director of Cyra
Technologies, Inc. and Inmet Mining.
Donald Fites, a director of the Company since January 1, 2000, was the
Chairman and Chief Executive Officer of Caterpillar Inc. from June 1990 until
his retirement in February 1999. He currently serves as a director of AT&T
Wireless Services, Inc., Georgia-Pacific Corporation, Exxon-Mobil Corporation,
Oshkosh Truck Corporation and Wolverine World Wide Inc. Mr. Fites also is past
chairman of the National Advisory Board of The Salvation Army, a director of
The World Methodist Council, a trustee of The Carnegie Endowment for
International Peace, a director of Valparaiso University, a member of the board
of advisors of Thayer Capital Partners and a member of The Business Council.
50
Dr. Bonnie G. Hill, a director of the Company since April 7, 1994, is
President of B. Hill Enterprises, LLC, a consulting firm specializing in
corporate governance and board organizational and public policy issues. From
February 1997 to July 2001 she was President and Chief Executive Officer of The
Times Mirror Foundation, Vice President of The Times Mirror Company, and, from
August 1998 to July 2001, Senior Vice President Communications and Public
Affairs for the Los Angeles Times. Prior thereto, she served as Dean of the
McIntire School of Commerce at the University of Virginia. She also is a
director of National Grid Group plc, Hershey Foods Corporation, The Home Depot,
Inc., ChoicePoint, Inc., and Albertson's, Inc.
Robert H. Jenkins, a director of the Company since January 24, 1996, served
as Chairman of the Board of Sundstrand Corporation from April 1997 and as
President and Chief Executive Officer of that company from September 1995, in
each case until his retirement in August 1999 following the merger of
Sundstrand Corporation with and into United Technologies Corporation in June
1999. For more than five years prior thereto, Mr. Jenkins was employed by
Illinois Tool Works as its Executive Vice President and in other senior
management positions. Mr. Jenkins also is a director of Clarcor Inc., Pella
Corporation, Sentry Insurance, Solutia, Inc. and Visteon Corporation.
Lawrence A. Leser, a director of the Company since May 17, 1995, retired as
Chairman of The E.W. Scripps Company in May 1999, having also served as its
Chief Executive Officer from July 1985 until May 1996. Mr. Leser also serves as
a director of Union Central Life Insurance Company and is a Trustee of Xavier
University.
Daniel J. Meyer, a director of the Company since January 1, 2000, retired
as Chairman and Chief Executive Officer of Milacron Inc., a Cincinnati-based
plastics processing and metalworking technologies company, in June 2001. He
currently serves as a director of The E.W. Scripps Company, Hubbell Inc.,
Broadwing Inc. and Milacron Inc.
Eugene A. Renna was elected to our board of directors effective July 22,
2002. Mr. Renna is a retired executive vice president and director of Exxon
Mobil Corporation. Prior to the merger of Exxon and Mobil, Mr. Renna was
president and chief operating officer of Mobil Corporation, and a member of
Mobil's board of directors. Mr. Renna joined Mobil in 1968 and held various
positions in financial analysis, marketing and planning. He subsequently was
named to executive positions in domestic and international marketing and
refining before being named executive vice president of Exxon Mobil Corporation
in 2001. Mr. Renna is a member of the board of the American Petroleum Institute
and of the Advisory Council of the Samuel Curtis Johnson Graduate School of
Management at Cornell University. He is also a member of the board of directors
of Fortune Brands, Inc. and Ryder System, Inc.
Dr. James A. Thomson, a director of the Company since March 18, 1996, is the
President and Chief Executive Officer of The RAND Corporation, having served in
that capacity since August 1989. He also serves as a director of Entrust
Technologies Inc. and Texas Biotechnology Corporation.
John G. Hritz was elected Executive Vice President in January 1999. He also
served as General Counsel from August 1996 until April 2001, a Senior Vice
President from May 1998, and as a Vice President from August 1996 and as
Corporate Secretary from that date until January 1999.
James L. Wainscott has been the Company's Chief Financial Officer since July
1998 and served as its Treasurer from April 1995 until April 2001. Mr.
Wainscott was elected Senior Vice President in January 2000, having previously
served as a Vice President from April 1995.
Michael T. Adams was elected Vice President, Sales and Marketing in December
2000. Mr. Adams had been Vice President, Manufacturing from July 1998 until
that date. From October 1995 until July 1998, he served as General Manager,
Manufacturing of the Company's Middletown Works.
51
James M. Banker was elected Vice President, Operations in December 2000.
From May 1999 until that date he served as Vice President, Sales and Marketing.
From April 1992 to May 1999, Mr. Banker was General Manager, Sales for the
Company.
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.
Thomas C. Graham, Jr. has been Vice President, Research and Engineering
since June 1996.
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.
J. Theodore Holmes was elected 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; General Manager, Manufacturing Planning from July 1997 to
August 1998; and General Manager, Customer Service from November 1992 to July
1997.
David C. Horn was elected Vice President and General Counsel in April 2001.
Before joining AK Steel as Assistant General Counsel in December 2000, Mr. Horn
was a partner in the Cincinnati-based law firm now known as Frost Brown Todd
LLC.
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.
Ernest E. Rummler was elected 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.
52
EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
Annual compensation paid to our executive officers consists of salary and
cash bonus awards under our Annual Management Incentive Plan. Long-term
compensation consists of restricted stock awards and stock options under our
Stock Incentive Plan and payouts in the form of cash and/or restricted stock
under our Long-Term Performance Plan.
The following table sets forth the cash compensation, as well as certain
other compensation, paid or accrued by us for each of the past three years to
the Chief Executive Officer and each of the other four most highly compensated
executive officers, or the Named Executives, serving as such at December 31,
2001.
Summary Compensation Table
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------- ------------------------ ----------
Securities All
Restricted Underlying Other
Name and Stock Stock LTIP Compen-
Principal Position Salary Bonus(1) Awards(2) Options Payouts(3) sation(4)
at 12/31/01 Year ($) ($) ($) (# of Shares) ($) ($)
------------------ ---- --------- --------- ---------- ------------- ---------- ---------
Richard M. Wardrop, Jr. 2001 1,250,000 750,000 735,000 200,000 2,125,000 2,824,388
Chairman and Chief 2000 1,200,000 2,040,000 1,457,504 400,000 2,040,000 96,121
Executive Officer(5) 1999 1,200,000 2,040,000 1,539,688 150,000 1,800,000 94,007
James L. Wareham 2001 180,000 183,750 40,000 600,000 810,894
President(6) 2000 400,000 600,000 273,282 25,000 600,000 34,028
1999 400,000 600,000 355,313 25,000 600,000 36,224
400,000
John G. Hritz 2001 415,000 124,500 183,750 40,000 425,000 336,421
Executive Vice President 2000 385,000 385,000 364,376 40,000 385,000 28,244
1999 350,000 350,000 826,251 80,000 350,000 26,313
James L. Wainscott 2001 330,000 99,000 183,750 40,000 330,000 220,475
Senior Vice President 2000 300,000 300,000 273,282 30,000 300,000 21,859
and Chief Financial 1999 215,000 215,000 236,875 20,000 215,000 15,864
Officer
David C. Horn 2001 343,750 95,813 58,250 10,000 323,750 1,346
Vice President and 2000 27,083 18,958 23,203 5,000 18,953 107
General Counsel(7)
- --------
Footnotes appear on the following page.
53
Footnotes:
(1)Amounts shown in this column represent bonuses earned under our annual
management incentive plan.
(2) The dollar value of each restricted stock award indicated in this column is
based on the average price of our common stock on the date of the award.
The amounts shown do not include the value of restricted stock awards
representing a portion of the payouts under our long-term performance plan.
All awards shown in this column were granted pursuant to our stock
incentive plan. The aggregate number of shares of restricted stock held by
the Named Executives at December 31, 2001 and the dollar value thereof
(based on the closing price of our common stock on December 31, 2001) were
as follows: for Mr. Wardrop--263,750, $3,001,475; for Mr. Wareham--62,500,
$711,250; for Mr. Hritz--74,000; $842,120; for Mr. Wainscott--45,500,
$517,790 and for Mr. Horn--7,500, $85,350. Dividends are paid on shares of
restricted stock to the extent declared and paid on our common stock.
(3) The amounts shown in this column represent bonuses earned under our
long-term performance plan. The entire amount shown for each Named
Executive for 2001 and 2000 was paid in cash. In 1999, one half of the
amount shown for each Named Executive was paid in cash and the balance in
the form of an award of restricted shares of common stock valued on the
basis of the market price of our common stock on the date of the approval
of the share issuance by the compensation committee. Those shares are in
addition to shares underlying restricted stock awards granted pursuant to
the stock incentive plan, but are subject to all of the terms and
conditions of that plan except that 20% of the shares vest on each of the
first through fifth anniversaries of the award.
(4) Amounts shown in this column include (i) imputed income arising out of a
company-provided life insurance plan, (ii) cash paid pursuant to a
company-provided medical plan, and (iii) above-market interest which was
paid upon the distribution of balances held in a deferred compensation plan
that was discontinued in 2001. The deferred compensation on which the
interest was earned was previously reported as compensation for the
respective Named Executives in the years in which that compensation was
deferred. The amounts shown in this column for 2001 were derived as
follows: (i) for Mr. Wardrop $12,637 was attributed to him for imputed
income arising out of a company-provided life insurance plan and $2,811,751
was the amount of the above-market interest paid to him upon
discontinuation in 2001 of the deferred compensation plan, (ii) for Mr.
Wareham $5,932 was attributed to him for imputed income arising out of a
company-provided life insurance plan and $804,962 was the amount of the
above-market interest paid to him upon discontinuation in 2001 of the
deferred compensation plan, (iii) for Mr. Hritz $1,402 was attributed to
him for imputed income arising out of a company-provided life insurance
plan, $200 was paid to him pursuant to a company-provided medical plan and
$334,819 was the amount of the above-market interest paid to him upon
discontinuation in 2001 of the deferred compensation plan, (iv) for Mr.
Wainscott $731 was attributed to him for imputed income arising out of a
company-provided life insurance plan, $200 was paid to him pursuant to a
company-provided medical plan and $219,544 was the amount of the
above-market interest paid to him upon discontinuation in 2001 of the
deferred compensation plan, (v) for Mr. Horn $1,146 was attributed to him
for imputed income arising out of a company-provided life insurance plan
and $200 was paid to him pursuant to a company-provided medical plan.
(5) Mr. Wardrop assumed the additional title of President effective March 2,
2002 following Mr. Wareham's retirement.
(6) Mr. Wareham was an executive officer of the company at December 31, 2001.
He retired from the company effective March 1, 2002.
(7) Mr. Horn joined the company on December 1, 2000, and was elected Vice
President and General Counsel effective April 19, 2001.
54
Stock Options
Pursuant to its stock incentive plan, we grant to our key employees,
including our executive officers, options to purchase shares of our common
stock. The plan does not provide for, and we do not grant, stock appreciation
rights.
The following table sets forth information with respect to stock options
granted to the Named Executives in 2001:
Stock Option Grants in 2001
Percent of Potential Realizable
Total Value at Assumed Annual
Options Rates of Stock Price
Options Granted to Exercise Appreciation for Option
Granted Employees Price Per Term(2)
(# of in 2001 Share Expiration -----------------------
Name shares) (%) ($)(1) Date 5% ($) 10% ($)
---- ------- ---------- --------- ---------- --------- ---------
R. M. Wardrop, Jr. 200,000 34.45 9.1875 1/18/11 1,155,594 2,928,502
J. L. Wareham..... 40,000 6.89 9.1875 1/18/11 231,119 585,700
J. G. Hritz....... 40,000 6.89 9.1875 1/18/11 231,119 585,700
J. L. Wainscott... 40,000 6.89 9.1875 1/18/11 231,119 585,700
D. C. Horn........ 10,000 1.72 11.6500 4/19/11 73,266 185,671
- --------
(1)All options provide for an exercise price equal to the fair market value of
the underlying shares as of the date of grant.
(2)The amounts shown in these columns represent the potential appreciation in
the value of the options over their stated term of ten years, based upon
assumed compounded rates of appreciation of 5% per year (equivalent to
62.89%) and 10% per year (equivalent to 159.37%), respectively. Those
amounts are not intended as forecasts of future appreciation, which is
dependent upon the actual increase, if any, in the market price of the
shares underlying the options, and there is no assurance that the amounts of
appreciation shown in these columns will be realized.
The following table provides information as to options exercised by each of
the Named Executives in 2001 and the value of options held by them at year end:
Aggregate Option Exercises in 2001 and
Option Values at December 31, 2001
Number of Unexercised Value of Unexercised
Number Options at In-the-Money Options at
of Shares December 31, 2001 December 31, 2001($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
R. M. Wardrop, Jr. -0- -0- 1,063,334 516,666 -0- 438,500
J. L. Wareham..... -0- -0- 135,001 64,999 -0- 87,700
J. G. Hritz....... -0- -0- 141,000 93,332 -0- 87,700
J. L. Wainscott... -0- -0- 45,332 66,666 -0- 87,700
D. C. Horn........ -0- -0- 1,667 13,333 3,499 6,995
- --------
(1)Calculated on the basis of the difference between the option exercise price
and the closing price of our common stock on the New York Stock Exchange on
December 31, 2001 ($11.38 per share).
Long-Term Incentive Awards
Our long-term performance plan is designed to increase our management's
focus on our longer term performance relative to that of a group of five other
steel producers--Bethlehem Steel Corporation, The LTV
55
Corporation, National Steel Corporation, Nucor Corporation and United States
Steel Corporation--and to further enhance our ability to retain the services of
our key executives.
Long-term performance is measured on the basis of what we deem to be a
critical indicator of profitability in the steel industry--operating profit per
ton of steel shipped--which, for purposes of the plan, is assessed both
annually and cumulatively over a performance period of three years, with a new
performance period commencing annually. Payouts are shown in the Summary
Compensation Table on page 53.
Payouts under the plan are made shortly following the expiration of the
applicable performance period. The payout to each participating executive is
determined by multiplying the executive's annualized base salary as of the end
of the performance period by an award percentage. A target percentage for each
executive is established at or shortly following the beginning of the
performance period, subject to the approval of the compensation committee. The
actual award percentage may be higher or lower than the target percentage,
depending upon our performance relative to that of the competitor group during
the performance period, and currently ranges from a threshold of 15% of the
target percentage to a maximum of 200% of the target percentage. An executive
would be entitled to the maximum payout only if our performance ranks first
among the competitor group both on a cumulative basis over the entire
performance period and during the last year thereof. No payment is made to an
executive who has voluntarily resigned or been discharged for cause prior to
the scheduled date of payout. Upon retirement or certain other termination
events, an executive is entitled under the plan to receive, in lieu of any
amounts to which he or she otherwise might have been entitled in respect of
performance periods that commenced prior thereto but are scheduled to expire
thereafter, a payment equal to his or her payout for the performance period
last ended prior to the date of his or her retirement or termination of
employment. Up to 50% of an executive's payout may be made in the form of an
award of shares of restricted stock, which vests with respect to 20% of the
shares on each of the first through fifth anniversaries of the award date.
Except as otherwise approved by the compensation committee, no payout is made
unless we report net income for the last year of the performance period.
The following table sets forth information with respect to potential payouts
to the Named Executives pursuant to our Long-Term Performance Plan:
Projected Long-Term Performance Plan Payouts
Number of
Shares, Performance Projected Future Payouts(2)
Units or Period Until -----------------------------
Other Maturation or Threshold Target Maximum
Name Rights(1) Payout ($) ($) ($)
---- --------- --------------- --------- --------- ---------
R. M. Wardrop, Jr. 85 1/1/01-12/31/03 159,375 1,062,500 2,125,000
J. L. Wareham(3).. 75 1/1/01-12/31/03 -- -- --
J. G. Hritz....... 50 1/1/01-12/31/03 31,875 212,500 425,000
J. L. Wainscott... 50 1/1/01-12/31/03 24,750 165,000 330,000
D. C. Horn........ 50 1/1/01-12/31/03 26,250 175,000 350,000
- --------
(1) The number set forth in this column for a Named Executive is the target
percentage specified by the compensation committee.
(2) For purposes of projecting a Named Executive's future payout, the
applicable target percentage has been multiplied against the Named
Executive's annualized base salary as of December 31, 2001. A Named
Executive's ultimate payout will be determined by multiplying the
applicable award percentage against his or her annualized base salary at
December 31, 2003, which may not be the same as that in effect at December
31, 2001.
(3) No future payouts are projected for Mr. Wareham because of his retirement
from the company effective March 1, 2002.
56
Agreements with Principal Officers
Our executive officers and certain other key managers are covered by
agreements that provide for severance payments and other benefits in the event
of termination of the employee's employment for certain reasons set forth in
the agreements, or a "triggering event", such as a diminution of the covered
employee's salary, a significant adverse change in the employee's
responsibilities or termination of the employee's employment other than for
cause (as defined in the agreements). The agreements with the executive
officers generally provide that upon the occurrence of a triggering event, an
elected officer (including each of the Named Executives) would be entitled to
(i) a lump sum severance payment equal to the salary to which that officer
would otherwise have been entitled for a period of 36 months (if the triggering
event occurs within 24 months following the occurrence of a change in control,
as defined in the agreements) or 24 months (in the case of a triggering event
occurring other than within 24 months after a change in control); (ii) a lump
sum payment under our annual management incentive plan of a sum equal to the
aggregate annual bonuses to which the officer would have been entitled for the
applicable severance payment period based upon the bonus actually received by
the employee under that plan for the year preceding the triggering event; (iii)
payment of any long-term performance plan award earned, but not yet paid, and a
lump-sum payment equal to the award paid or earned for the prior performance
period; (iv) the immediate vesting and lapse of all restrictions on shares that
were the subject of restricted stock awards to the employee under our stock
incentive plan; (v) the right, for a period of three years following the
triggering event, to exercise any stock options that were outstanding at the
date of the triggering event; and (vi) continuing coverage under our benefit
plans (including life, health and other insurance benefits) for the duration of
the applicable severance payment period. For all key managers other than
executive officers, the applicable severance period is 18 months, whether or
not the triggering event is preceded by a change in control. The agreements
with certain executive officers (including the Named Executives) also provide
that, upon either (i) an involuntary termination of employment other than for
cause (whether or not preceded by a change in control) or (ii) a voluntary
termination of employment for good reason (as defined in the agreements) within
24 months following a change in control, the officer would be entitled to a
further lump sum payment equal to (and in lieu of) all amounts to which that
officer would otherwise have been entitled under our supplemental retirement
plan (described below under "Pension Plans"), such payment to be calculated as
if he had become fully vested under the plan and had retired at age 60 (or his
then actual age, if higher). If the triggering event is preceded by a change in
control and any portion of the required payments to an elected officer becomes
subject to the federal excise tax on so-called "parachute payments," the
agreement with that officer provides for "gross-up" so that the net amount
retained by the officer, after deduction of the excise tax and any applicable
taxes on the "gross-up" payment, is not reduced as a consequence of such excise
tax. Our agreements with our executive officers (including the Named
Executives) provide to each such officer the right, exercisable only during a
thirty-day period commencing (i) immediately after the occurrence of a change
in control in the case of the Chief Executive Officer, and (ii) 180 days
following the occurrence of a change in control in the case of all other senior
executive officers, to voluntarily terminate his or her employment and obtain
the same benefits as would be available following a triggering event.
Pension Plans
Our executive officers are eligible for retirement benefits under either of
two qualified benefit plans: (i) a defined benefit plan that provides benefits
based on an employee's highest eligible earnings in any 60 consecutive months
of service during his or her last 120 consecutive months of service, or (ii) a
cash balance plan that accumulates credits based on an employee's length of
service and his or her compensation throughout that period of service. An
employee's eligibility for coverage under a particular plan is generally
determined on the basis of the date at which he or she commenced employment
with us.
Executive officers are also eligible for benefits under a supplemental
retirement plan that provides a "make up" of qualified plan benefits that may
be denied to participants in the qualified plans because of limitations imposed
by the Internal Revenue Code of 1986 as well as supplemental benefits for
employees with a minimum of ten years of service, including at least five years
of service as a member of key management. The actuarially determined present
value of an eligible participant's vested benefit under the supplemental plan
is payable in a
57
lump sum. That benefit is subject to an offset for any benefit from our
qualified plan and any other employer-provided qualified plan. A participant's
benefit under the supplemental plan, before giving effect to such offset, is
equal to the greater of:
(a)50% of his or her average covered compensation (base salary, bonus under
the annual management incentive plan and payout under the long-term
performance plan) during the relevant calculation period, or
(b)the participant's benefit under the applicable qualified plan in which
he or she participates, calculated without regard to the limitations
imposed by the Internal Revenue Code of 1986.
Estimated Annual Pension Benefits
Each of the Named Executives (other than Mr. Hritz) and three of our other
officers, participate in the cash balance plan. Mr. Hritz and six other
officers participate in the defined benefit plan. Except for Mr. Wareham, who
accrued a supplemental retirement benefit under the terms of the supplemental
plan in effect at the time of his employment, all officers also are covered
under the supplemental plan. The following table sets forth the estimated
combined annual retirement benefits (calculated on a straight life annuity
basis) that may become payable to a covered participant in the higher
compensation classifications under either of the qualified plans and the
supplemental plan, assuming satisfaction of the requisite service requirements
at time of retirement:
Estimated Maximum Benefit
----------------------------
Average
Covered Estimated
Compensation ($) Benefit ($)
---------------- -----------
800,000 400,000
1,200,000 600,000
1,600,000 800,000
3,200,000 1,600,000
4,800,000 2,400,000
The following table sets forth, as of December 31, 2001, the number of years of
creditable service and the applicable covered compensation for pension benefit
calculation purposes for each of the Named Executives:
Years of Covered
Name Service Compensation ($)
- ---- -------- ----------------
R. M. Wardrop, Jr........................................... 9.5 4,815,000
J. L. Wareham............................................... 4.8 1,600,000
J. G. Hritz................................................. 12.1 1,056,000
J. L. Wainscott............................................. 6.8 768,000
D. C. Horn.................................................. 1.1 765,000
Compensation of Directors
During 2001, each director who is not an employee of the company received an
annual fee of $37,500 for service on the Board of Directors. One-half of that
amount was paid in the form of restricted shares of our common stock valued at
its market price on the date of issuance and the balance was paid in cash or,
at the director's option, in the form of additional restricted shares of common
stock. Each director who chairs a committee of the Board of Directors received
an additional annual fee of $5,000 for such service. Non-employee directors
also were paid a fee of $1,500 for each Board meeting and each committee
meeting they attended and were reimbursed for their expenses incurred in
attending those meetings. An employee of the company who serves as a director
receives no additional compensation for such service. Upon first being elected
to the Board, each non-employee director also is granted options under our
Stock Incentive Plan to purchase a total of 10,000
58
shares of our common stock at its then prevailing market price. The options
vest on the first anniversary of the date of grant and may be exercised at any
time thereafter until the tenth anniversary of the grant date or three years
after retirement from the Board, whichever is sooner.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee are Allen Born (Chairperson), Dr.
Bonnie G. Hill, Robert H. Jenkins and Lawrence A. Leser, none of whom are
employees or officers of the company. No member of the committee is an
executive officer of a company of which an executive officer of the company
serves as a director.
59
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Management
The following table sets forth as of September 27, 2002, information with
respect to the beneficial ownership of our common stock by (i) each officer of
the company named in the summary compensation table on page 53, (ii) each
current director and (iii) all directors and executive officers of the company
as a group. To the knowledge of the company, none of our directors or executive
officers owns any shares of our preferred stock.
Shares Percentage of
Owned Outstanding
Beneficially(1) Shares(2)
--------------- -------------
Richard A. Abdoo....................... 13,473 *
Allen Born............................. 34,821 *
Donald V. Fites........................ 21,161 *
Dr. Bonnie G. Hill..................... 9,979 *
David C. Horn.......................... 23,501 *
John G. Hritz.......................... 329,081 *
Robert H. Jenkins...................... 19,749 *
Lawrence A. Leser...................... 17,401 *
Daniel J. Meyer........................ 20,661 *
Eugene A. Renna........................ 3,000 *
Dr. James A. Thomson................... 16,899 *
James L. Wainscott..................... 163,997 *
Richard M. Wardrop, Jr................. 1,898,770 1.76%
All directors and executive officers as
a group (22 persons)................. 3,401,534 3.15%
- --------
(1)Includes shares subject to stock options exercisable within 60 days.
(2)An asterisk indicates ownership of less than 1%.
60
Certain Beneficial Owners
The following table sets forth information with respect to each person known
by us to own beneficially more than five percent (5%) of our outstanding common
stock as of December 31, 2001.
Percentage
Shares of
Owned Outstanding
Name and Address of Beneficial Owner Beneficially Shares
------------------------------------ ------------ -----------
Franklin Resources, Inc.(1).............. 12,496,100 11.6%
One Franklin Parkway
San Mateo, California 94403
Salomon Smith Barney Holdings Inc.(2).... 7,073,402 6.6%
338 Greenwich Street
New York, New York 10013
Kawasaki Steel Corporation(3)............ 5,510,638 5.1%
Hibiya, Kokusai Building
2-3 Uchisaiwaicho, 2-Chome
Chiyoda-Ku, Tokyo 100 Japan
-----
(1)Based on information contained in a statement on Schedule 13G, dated
February 1, 2002, Franklin Resources. Inc. is a holding company for
subsidiaries that include investment advisers registered under the
Investment Advisers Act of 1940 having sole voting and dispositive power
with respect to an aggregate of 12,496,100 shares held by or for various
managed accounts to which they furnish advisory services.
(2)Based on information contained in a statement on Schedule 13G, dated
February 6, 2002, filed jointly by Salomon Smith Barney Holdings Inc.
("SSB Holdings") and its ultimate parent, Citigroup Inc. ("Citigroup"),
each of which is a parent holding company or control person of Salomon
Brothers Asset Management Inc. ("SBAMI"), an investment adviser
registered under the Investment Advisers Act of 1940, SSB Holdings and
Citigroup had shared voting and dispositive power with respect to an
aggregate of 7,073,402 shares held by SBAMI for the benefit of various
managed accounts for which it furnishes advisory services.
(3)Based on information furnished by the transfer agent for our common
stock.
61
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since the beginning of 2001 there has not been any transaction (or series of
similar transactions), and there is not currently any proposed transaction (or
series of similar transactions), to which either we or any of our subsidiaries
was or is to be a party in which (1) the amount involved exceeds $60,000 and
(2) any of our directors, executive officers or holders of more than five
percent (5%) of our common stock (or, to our knowledge, any member of their
immediate families) had or will have a direct or indirect material interest.
62
DESCRIPTION OF OTHER INDEBTEDNESS
The Secured Debt
We have a total of $252.2 million principal amount of secured debt
outstanding consisting of $187.5 million of Senior Secured Notes, $50.0 million
of variable rate, tax-exempt bonds and a $14.7 million capitalized lease
obligation. The Senior Secured Notes bear interest at annual rates ranging from
8.48% to 9.05%, with a weighted average rate of 8.72%. The principal is payable
in four consecutive annual installments of $62.5 million that commenced in
December 2001 with the final installment due in December 2004. The Senior
Secured Notes are secured by a first priority lien on the continuous cold mill
and hot dip galvanizing line at the Rockport Works and a first mortgage on the
approximately three acres of land upon which those two components have been
constructed. The Senior Secured Notes may be prepaid, in whole or in part, at
any time, at AK Steel's option, at 100% of their principal amount plus a
customary "make-whole" premium.
The Senior Secured Notes are subject to the terms of a Note Purchase
Agreement containing covenants substantially similar to those contained in the
indenture governing the notes offered hereby with respect to limitations on,
among other things, (i) liens, (ii) sale/leaseback transactions, (iii) the
incurrence of debt and the issuance of preferred equity interests by our
subsidiaries, (iv) transactions with affiliates, (v) dividends and other
restricted payments, (vi) sales of assets, including stock of subsidiaries,
(vii) lines of business, (viii) restrictions on distributions from our
subsidiaries and (ix) mergers and consolidations. In addition, the Note
Purchase Agreement requires that we maintain (i) Consolidated Net Worth (as
defined therein) of not less than the sum of $500.0 million plus an aggregate
amount equal to 25% of Consolidated Net Income (as defined) for each completed
fiscal year beginning after December 31, 1996 and (ii) a ratio of Consolidated
Debt (as defined) to Consolidated Capitalization (as defined) of not more than
..65 to 1.00 through December 31, 2001 and .55 to 1.00 thereafter until
repayment in full of the secured debt. The Note Purchase Agreement contains
events of default that are substantially similar to those applicable to the
notes.
The variable rate, tax-exempt bonds of $50.0 million bear interest at
variable rates ranging between 1.75% and 1.9% at September 30, 2002. The
tax-exempt obligations mature at various dates between 2008 and 2029.
The capital lease obligation consists of a $14.7 million lease assumed with
the July 2001 acquisition of Alpha Tube Corporation, now known as AK Tube. The
lease bore interest at LIBOR (London Interbank Offered Rate) plus 2%, and was
redeemed on October 9, 2002.
The 9% Notes
The 9% Notes, of which $117.4 million aggregate principal amount are
outstanding, are non-callable prior to September 15, 2002. Thereafter, the 9%
Notes are callable at our option at an initial redemption price of 104.5% of
their principal amount, declining annually thereafter to 100% beginning
September 15, 2005, together with accrued interest to the redemption date. The
terms of the 9% Notes, including covenants in the indenture relating to those
notes, are substantially similar to those applicable to the notes offered
hereby.
The 8 7/8% Notes
The 8 7/8% Notes, of which $33.5 million aggregate principal amount are
outstanding, are non-callable prior to December 1, 2003. Thereafter, the 8 7/8%
Notes are callable at our option at an initial redemption price of 104.438% of
their principal amount, declining annually thereafter to 100% beginning
December 1, 2006, together with accrued interest to the redemption date. The
terms of the 8 7/8% Notes, including covenants in the indenture relating to
those notes, are substantially similar to those applicable to the notes offered
hereby.
The 7 7/8% Notes
The 7 7/8% Notes, of which $450.0 million aggregate principal amount are
outstanding, are non-callable prior to February 15, 2004. Thereafter, the
7 7/8% Notes are callable at our option at an initial redemption price of
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103.938% of their principal amount, declining annually thereafter to 100%
beginning February 15, 2007, together with accrued interest to the redemption
date. The terms of the 7 7/8% Notes, including covenants in the indenture
relating to those notes, are substantially similar to those applicable to the
9 1/8% Notes and the notes offered hereby.
Accounts Receivable Credit Facility
A wholly-owned special purpose subsidiary of AK Steel is party to a
Receivables Purchase and Servicing Agreement with a group of banks, providing
for an aggregate financing commitment of up to $300.0 million for revolving
credit loans and letters of credit. The banks' commitments will expire
September 30, 2004. This subsidiary purchases our accounts receivable from us.
It funds those purchases with cash collections on the purchased accounts
receivable and the proceeds realized from selling interests in those accounts
receivable to the participating banks. We act as servicer of the accounts
receivable, including processing collections. At September 30, 2002, the
Company had $205.1 million available for borrowing under this credit facility
due primarily to outstanding letters of credit. At that date there were no
outstanding borrowings under the credit facility.
64
DESCRIPTION OF THE REGISTERED NOTES
AK Steel will issue the registered notes under an indenture among itself,
Holding, any Guarantor Subsidiary and Fifth Third Bank, as trustee. The terms
of the notes include those stated in the indenture and those made part of the
indenture by reference to the Trust Indenture Act of 1939. You can find the
definitions of certain terms used in this description under the subheading
"--Defined Terms."
The following description is only a summary of the material provisions of
the indenture and the related registration rights agreement. We urge you to
read the indenture and the registration rights agreement because they, and not
this description, define your rights as holders of the registered notes. You
may request copies of these documents at our address set forth under "Where You
Can Find More Information."
Brief Description of the Registered Notes and the Note Guarantees
The Notes
The registered notes are:
. senior unsecured obligations of AK Steel;
. equal in right of payment with all existing and future senior unsecured
Debt of AK Steel;
. senior in right of payment to all Subordinated Obligations;
. effectively junior to all secured obligations of AK Steel, including the
Secured Notes, to the extent of the collateral securing those
obligations; and
. fully and unconditionally, and joint and severally, guaranteed by Holding
and our Guarantor Subsidiaries.
The Note Guarantees
Each Guarantor's full and unconditional guarantee is:
. a senior unsecured obligation of that Guarantor;
. equal in right of payment with all existing and future senior unsecured
Debt of that Guarantor;
. senior in right of payment to all existing and future subordinated Debt
of that Guarantor; and
. effectively junior to all secured obligations of that Guarantor, to the
extent of the collateral securing those obligations.
At September 30, 2002, the aggregate principal amount of senior Debt of AK
Steel was approximately $1.4 billion, of which $252.0 million was secured.
Principal, Maturity and Interest
The Company initially issued notes in an aggregate principal amount of
$550.0 million. AK Steel may, subject to the terms and conditions of the
indenture but without the consent of the holders, increase such principal
amount in the future on the same terms and conditions and with the same CUSIP
numbers as the originally issued notes. The notes will mature on June 15, 2012.
The notes will be issued in denominations of $1,000 and any integral multiple
of $1,000.
Interest on the notes will accrue at the rate of 7 3/4% per annum and will
be payable semi-annually on June 15 and December 15 of each year, commencing on
December 15, 2002. AK Steel will make each interest payment to the holders of
record of the notes on the immediately preceding June 1 and December 1.
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Interest on the notes will accrue from the date of original issuance, which
we refer to as the "issue date" or, if interest has already been paid, from the
date it was most recently paid. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Additional interest may accrue on the notes in certain circumstances
pursuant to the registration rights agreement.
Optional Redemption
Except as set forth below, AK Steel will not be entitled to redeem the notes
at its option prior to June 15, 2007.
The notes will be redeemable at AK Steel's option, at any time on or after
June 15, 2007 as a whole or from time to time in part, upon not less than 30
nor more than 60 days' notice mailed to each holder of notes to be redeemed at
the holder's address appearing in the register, at the following redemption
prices (expressed as percentages of principal amount) if redeemed during the
12-month period beginning June 15 of the years indicated below:
Redemption
Year Price
---- ----------
2007........................................................ 103.875%
2008........................................................ 102.583%
2009........................................................ 101.292%
2010 and thereafter......................................... 100.000%
together in the case of any such redemption with accrued interest (if any) to
the redemption date. Notwithstanding the foregoing, at any time and on more
than one occasion prior to June 15, 2005, AK Steel may redeem up to $192.5
million aggregate principal amount of the notes with the proceeds of one or
more Public Equity Offerings, at a redemption price of 107.750% of the
principal amount thereof plus accrued interest to the redemption date;
provided, that:
(1)at least $357.5 million aggregate principal amount of the notes remains
outstanding immediately after each such redemption (other than notes
held, directly or indirectly, by AK Steel or its Affiliates); and
(2)each such redemption occurs within 60 days after the completion of the
related Public Equity Offering.
If less than all of the notes are to be redeemed, the notes will be chosen
for redemption by the trustee and the Depository on a pro rata basis or by lot
or by a method that complies with applicable legal and securities exchange
requirements.
Change in Control Offer
Under the indenture, within 30 days following any Change in Control, AK
Steel must notify the Trustee and each holder in writing of the occurrence of
the Change in Control and must make an offer to repurchase (the "Change in
Control Offer") the notes for cash at a purchase price (the "Change in Control
Payment Price") equal to 101% of the principal amount thereof plus accrued and
unpaid interest thereon to and including the Change in Control Payment Date.
The "Change in Control Payment Date" may not be earlier than 45 days nor later
than 60 days from the date the Change in Control Offer is mailed. AK Steel must
purchase all notes that are properly tendered in the Change in Control Offer
and not withdrawn in accordance with the procedures set forth in the indenture.
The Change in Control Offer must describe, among other things, the procedures
that holders must follow to accept the Change in Control Offer.
66
If a Change in Control Offer is made, there can be no assurance that AK
Steel will have funds sufficient to pay the Change in Control Payment Price for
all the notes that might be delivered by holders seeking to accept the Change
in Control Offer. See "Risk Factors--Risks Relating to our Company--Our high
level of debt may adversely affect our financial and operating flexibility."
The failure of AK Steel to repurchase notes in accordance with this provision
constitutes an Event of Default. See "--Events of Default."
AK Steel will comply with the applicable tender offer rules, including Rule
14e-1 under the Securities Exchange Act of 1934 (the "Exchange Act"), and any
other applicable securities laws or regulations in connection with a Change in
Control Offer. The existence of a holder's right to require AK Steel to
repurchase such holder's notes upon a Change in Control may deter a third party
from acquiring AK Steel in a transaction that constitutes a Change in Control.
Note Guarantees
Holding will fully and unconditionally guarantee the payment and performance
by AK Steel of the Obligations and will pay all expenses (including, without
limitation, fees and disbursements of counsel) paid or incurred by the Trustee
or the holders of the notes in enforcing their rights under that guarantee. The
full and unconditional guarantee will be a senior unsecured obligation of
Holding and will rank equally with Holding's other senior unsecured Debt.
Holding's only asset is the outstanding common stock of AK Steel, and all of
Holding's operations are conducted through AK Steel and its Subsidiaries. Under
the indenture, Holding will agree not to engage in any activities other than
owning outstanding securities of AK Steel as well as those activities
incidental to its status as a public company, and not to incur any liabilities
other than those relating to its full and unconditional guarantee of the notes
and certain other indebtedness of AK Steel as well as those liabilities
incidental to its status as a public company. See "--Material
Covenants--Restrictions on Activities of Holding."
Each Guarantor Subsidiary will be required to fully and unconditionally
guarantee the payment and performance of the Obligations on the same terms as,
and on a basis that is joint and several with, Holding's full and unconditional
guarantee. Douglas Dynamics was and is the only Guarantor Subsidiary.
Claims of creditors of AK Steel's Subsidiaries, including trade creditors,
will have priority over creditors and equity holders of AK Steel, including
holders of the notes. Although holders of the notes will be direct creditors of
any Subsidiary that guarantees the notes by virtue of that guarantee, existing
or future creditors of that Subsidiary could attempt to avoid or subordinate
guarantees of the notes, in whole or in part, under fraudulent conveyance laws.
To the extent any Subsidiary's guarantee is avoided as a fraudulent conveyance
or held unenforceable for any other reason, the holders of the notes would
cease to be creditors of that Subsidiary and would be solely creditors of AK
Steel and of any other Guarantor Subsidiary whose guarantee was not voided or
held unenforceable. Similarly, the notes will be effectively subordinated to
the creditors of AK Steel's subsidiaries to the extent those subsidiaries are
not Guarantor Subsidiaries.
Material Covenants
The indenture contains the following material covenants on the part of AK
Steel and Holding:
Commission Reports. Even if Holding ceases to be subject to the reporting
requirements of Section 13 of the Exchange Act, Holding will continue to file
with the SEC and provide the Trustee and Holders with such annual reports and
such information, documents and other reports as are specified in Section 13 of
the Exchange Act.
Limitation on Liens. AK Steel shall not, and shall not permit any
Subsidiary to, create or permit to exist any Lien upon any of its property or
assets, now owned or hereafter acquired, securing any obligation unless
concurrently with the creation of such Lien effective provision is made to
secure the notes equally and ratably with such obligation for so long as such
obligation is so secured; provided that if such obligation is a Subordinated
Obligation, the Lien securing such obligation shall be subordinated and junior
to the Lien securing the notes with the same or lesser relative priority as
such Subordinated Obligation shall have with respect to the
67
notes. The preceding restriction shall not require AK Steel or any Subsidiary
to equally and ratably secure the notes if the Lien consists of the following:
(1) Liens created by the indenture, Liens existing as of the date on
which the notes were originally issued and Liens to secure Debt in respect
of the Secured Notes as described under "Description of Outstanding
Indebtedness--The Secured Debt";
(2) Permitted Liens;
(3) Liens to secure Debt issued by AK Steel for the purpose of financing
all or a part of the purchase price of assets or property acquired or
constructed after the date on which the notes were originally issued;
provided, however, that (a) the aggregate principal amount (or accreted
value in the case of Debt issued at a discount) of Debt so issued shall not
exceed the lesser of cost or Fair Market Value, as determined in good faith
by the Board of Directors of Holding, of the assets or property so acquired
or constructed, (b) either (x) the Debt secured by such Liens shall have
been permitted to be issued under clause (5) of "--Limitation on Debt" or
(y) additional Debt secured by such Liens, at the time of determination on a
pro forma basis, would not exceed, in the case of Normal Replacement Assets,
50%, or in the case of Special Assets, 100%, of the aggregate principal
amount of Debt which AK Steel would have been permitted to issue at such
time under the Consolidated EBITDA Coverage Ratio as set forth in the first
paragraph of "--Limitation on Debt" at an interest rate equal to the rate of
interest on the additional Debt to be secured by such Liens and (c) such
Liens shall not encumber any other assets or property of AK Steel or any of
its Subsidiaries other than such assets or property or any improvement on
such assets or property and shall attach to such assets or property within
90 days of the construction or acquisition of such assets or property;
(4) Liens on the assets or property of a Subsidiary existing at the time
such Subsidiary became a Subsidiary and not issued as a result of (or in
connection with or in anticipation of) such Subsidiary becoming a
Subsidiary; provided, however, that such Liens do not extend to or cover any
other property or assets of AK Steel or any of its other Subsidiaries;
(5) Liens on the Inventory or Accounts Receivable of AK Steel or any
Significant Subsidiary that is a Restricted Subsidiary securing Debt under
any Permitted Credit Facility; provided that any Lien on Intangible Property
shall limit the rights of the holder of such Lien to the use of such
Intangible Property to manufacture, process and sell the Inventory with
respect to which such holder has a Lien;
(6) Liens securing industrial revenue or pollution control bonds issued
by AK Steel; provided, however, that (a) the aggregate principal amount of
Debt secured by such Liens shall not exceed the lesser of cost or Fair
Market Value, as determined in good faith by the Board of Directors of
Holding, of the assets or property so financed, and (b) such Liens do not
encumber any other property or assets of AK Steel or any of its Subsidiaries;
(7) Liens securing Debt issued to exchange, extend, refinance, renew,
replace, defease or refund Debt which has been secured by a Lien permitted
under the indenture and is permitted to be exchanged, extended, refinanced,
renewed, replaced, defeased or refunded under the indenture; provided,
however, that such Liens do not extend to or cover any property or assets of
AK Steel or any of its Subsidiaries not securing the Debt so exchanged,
extended, refinanced, renewed, replaced, defeased or refunded, and the
principal amount (or accreted value) of the Debt so secured is not increased
except as otherwise permitted pursuant to the indenture;
(8) Liens on the Equity Interests, assets or property of a Non-Recourse
Subsidiary securing Non-Recourse Debt; or
(9) Liens securing Debt which, together with all other Debt secured by
Liens (excluding Debt secured by Liens permitted by clauses (1) through (8)
above) at the time of determination do not exceed the greater of (x) $100.0
million and (y) 5% of Consolidated Net Tangible Assets of Holding, in each
case, at any one time outstanding; provided, however, that the Attributable
Debt in connection with Sale/Leaseback Transactions permitted under clause
(3) of "--Limitation on Sale/Leaseback Transactions" will be included in the
determination and treated as Debt secured by a Lien not otherwise permitted
by clauses (1) through (8) above.
68
For the avoidance of ambiguity, it is understood that Liens referred to in
clauses (1) through (9) of this covenant description may secure, in addition to
the principal of and premium, if any, on Debt referred to in such clauses,
interest and all other obligations on and in respect of such Debt.
Limitation on Sale/Leaseback Transactions. AK Steel shall not, and shall
not permit any Subsidiary to, enter into, Guarantee or otherwise become liable
with respect to any Sale/Leaseback Transaction unless at least one of the
following conditions is satisfied:
(1) the lease is between AK Steel and a Wholly Owned Guarantor
Subsidiary, or between Wholly Owned Guarantor Subsidiaries; provided,
however, that upon either (a) the transfer or other disposition by such
Wholly Owned Guarantor Subsidiary of any such lease to a Person other than
AK Steel or another Wholly Owned Guarantor Subsidiary or (b) the issuance,
sale, lease, transfer or other disposition of Equity Interests (including by
consolidation or merger) of such Wholly Owned Guarantor Subsidiary to a
Person other than AK Steel or another such Wholly Owned Guarantor
Subsidiary, the provisions of this clause (1) shall no longer be applicable
to such lease and such lease shall be deemed for purposes of this paragraph
to constitute the entering into of such Sale/Leaseback Transaction by the
parties thereto;
(2) AK Steel or such Subsidiary under clauses (2) through (8) of
"--Limitation on Liens" could create a Lien on the property to secure Debt
in an amount at least equal to the Attributable Debt in respect of such
Sale/Leaseback Transaction and AK Steel or such Subsidiary, as the case may
be, receives consideration at least equal to the Fair Market Value, as
determined in good faith by the Board of Directors of Holding, of the
property transferred;
(3) AK Steel or such Subsidiary could create a Lien under clause (9) of
"--Limitation on Liens" above on the property to secure Debt at least equal
to the Attributable Debt in respect of such Sale/Leaseback Transaction and
AK Steel or such Subsidiary, as the case may be, receives consideration at
least equal to the Fair Market Value, as determined in good faith by the
Board of Directors of Holding, of the property transferred; or
(4) the Sale/Leaseback Transaction is treated as an Asset Disposition and
all the conditions of "--Limitation on Sales of Assets and Equity Interests
of Subsidiaries" are satisfied with respect to such Sale/ Leaseback
Transaction (without giving effect to the exceptions for Net Available Cash
in amounts less than $25.0 million or $10.0 million, as set forth in the
last paragraph of "--Limitation on Sales of Assets and Equity Interests of
Subsidiaries").
Limitation on Debt. AK Steel shall not issue, directly or indirectly, any
Debt unless, immediately after giving effect to the issuance of such Debt and
the receipt and application of the proceeds thereof, the pro forma Consolidated
EBITDA Coverage Ratio would be greater than 2.5 to 1.0.
Notwithstanding the foregoing limitation, AK Steel may issue the following
Debt:
(1) Debt issued by AK Steel pursuant to Permitted Credit Facilities and
Guarantees by AK Steel of obligations in respect of bonds or notes (in an
aggregate principal amount not exceeding $60.0 million) payable solely from
the proceeds of (a) taxes payable by AK Steel on real or depreciable
personal property relating to the Rockport Works or (b) charges payable by
AK Steel for sewer and water services relating to the Rockport Works and, to
the extent that such taxes or charges are insufficient to make such
payments, payments under such Guarantees (provided that the payments under
such bonds or notes or such Guarantees are not required to be prefunded by
more than an aggregate amount equal to one year of debt service on such
bonds or notes and are not subject to acceleration by the express terms
thereof or otherwise);
(2) Debt issued by AK Steel owed to and held by a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Equity Interests that results in such Wholly Owned Subsidiary ceasing to
be a Wholly Owned Subsidiary or any transfer of such Debt (other than to
another Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the issuance of such Debt by AK Steel;
(3) The notes offered hereby;
69
(4) Debt (other than Debt described in clause (1) or (2) of this covenant
description) outstanding on the first date on which the notes were
originally issued;
(5) Debt issued by AK Steel, whether or not secured by a Lien,
constituting all or a part of the purchase price of assets or property
acquired or constructed after the date on which the notes were originally
issued; provided, however, that Debt issued under this clause (5) in any
calendar year shall not exceed in aggregate principal amount the sum of (a)
$50.0 million for each of 2002, 2003 and 2004, and $35.0 million for each
calendar year from and including 2005 to and including 2012 plus (b) the
excess of the aggregate principal amount otherwise permitted to be issued
under this clause (5) in all previous calendar years to and including the
calendar year in which the notes were originally issued over the aggregate
principal amount actually issued by AK Steel during such period under this
clause (5);
(6) Refinancing Debt in respect of any Debt permitted pursuant to the
first paragraph of this covenant description or any Debt permitted pursuant
to clause (3), (4) or (5) of this covenant description or this clause (6);
(7) Obligations of AK Steel pursuant to (a) interest rate swap or similar
agreements designed to protect AK Steel against fluctuations in interest
rates in respect of Debt of AK Steel to the extent the notional principal
amount of such obligation does not exceed the aggregate principal amount of
the Debt to which such interest rate contracts relate, and (b) foreign
exchange or commodity hedge, exchange or similar agreements designed to
protect AK Steel against fluctuations in foreign currency exchange rates or
commodity prices in respect of foreign exchange or commodity exposures
incurred by AK Steel in the ordinary course of its business;
(8) Debt (not otherwise permitted to be issued pursuant to clauses (1)
through (7) of this covenant description) in an aggregate principal amount
which, together with (a) any other outstanding Debt issued by AK Steel
pursuant to this clause (8) and (b) Debt issued and Preferred Equity
Interests then outstanding and issued by Subsidiaries pursuant to clause (8)
of "--Limitation on Debt and Preferred Equity Interests of Subsidiaries,"
does not exceed $100.0 million at any one time outstanding; or
(9) Permitted Guarantees.
Notwithstanding the foregoing, AK Steel shall not issue any Refinancing Debt
in respect of Subordinated Obligations unless such Refinancing Debt shall be
subordinated to the notes to at least the same extent as such Subordinated
Obligations.
Limitation on Debt and Preferred Equity Interests of Subsidiaries. AK Steel
shall not permit any Subsidiary to issue, directly or indirectly, any Debt or
Preferred Equity Interests except:
(1) Debt or Preferred Equity Interests issued to and held by AK Steel or
a Wholly Owned Subsidiary; provided, however, that (a) any subsequent
issuance or transfer of any Equity Interests that results in any such Wholly
Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or (b) any
subsequent transfer of such Debt or Preferred Equity Interests (other than
to AK Steel or a Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the issuance of such Debt or Preferred Equity Interests by the
issuer thereof;
(2) Debt or Preferred Equity Interests, other than any described in
clause (1) above, outstanding on the first date on which the notes were
originally issued;
(3) Debt or Preferred Equity Interests of a Subsidiary issued and
outstanding on or prior to the date on which such Subsidiary became a
Subsidiary (other than Debt or Preferred Equity Interests issued as
consideration in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary);
(4) Debt or Preferred Equity Interests issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund, Debt or Preferred Equity Interests referred to in clause (2) or (3)
of this covenant description; provided, however, (a) the principal amount or
liquidation value of such Debt or Preferred Equity Interests so issued shall
not exceed the principal amount of, and premiums, if any, and accrued
interest, or the liquidation value and premiums, if any, and accumulated
dividends, with
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respect to, the Debt or Preferred Equity Interests so exchanged, extended,
refinanced, renewed, replaced, defeased or refunded by application of the
net proceeds of the Debt or Preferred Equity Interests so issued and
reasonable fees, expenses, commissions and costs incurred in connection with
the issuance of such Debt or Preferred Equity Interests and (b) the Debt or
Preferred Equity Interests so issued (x) shall have a Stated Maturity later
than the Stated Maturity of the Debt or Preferred Equity Interests being
exchanged, extended, refinanced, renewed, replaced, defeased or refunded and
(y) shall have an Average Life equal to or greater than the remaining
Average Life of the Debt or Preferred Equity Interests being exchanged,
extended, refinanced, renewed, replaced, defeased or refunded;
(5) Non-Recourse Debt or Preferred Equity Interests of a Non-Recourse
Subsidiary issued after the date on which the notes were originally issued;
provided, however, that if any such Debt or Preferred Equity Interests
thereafter ceases to be Non-Recourse Debt or Preferred Equity Interests of a
Non-Recourse Subsidiary, then such event will be deemed to constitute the
issuance of such Debt or Preferred Equity Interests by the issuer thereof;
(6) Guarantees of the notes or Refinancing Debt in respect of Debt
permitted as described in clause (3) of "--Limitation on Debt" above;
(7) Guarantees issued by any Guarantor Subsidiary of any Debt issued by
AK Steel as permitted under "--Limitation on Debt" above; or
(8) Debt or Preferred Equity Interests not otherwise permitted to be
issued pursuant to clauses (1) through (7) above, which, together with (a)
any other outstanding Debt or Preferred Equity Interests issued pursuant to
this clause (8) and (b) Debt issued by AK Steel pursuant to clause (8) under
"--Limitation on Debt," does not exceed $60.0 million at any one time
outstanding.
Limitation on Restricted Payments. Holding shall not, and shall not permit
any Restricted Subsidiary to, directly or indirectly:
(1) declare or pay any dividend or make any distribution on or in respect
of, or make any distribution to the holders of, Equity Interests of Holding
(except dividends or distributions payable solely in its Non- Convertible
Equity Interests or in options, warrants or other rights to acquire its
Non-Convertible Equity interests and except dividends or distributions
payable to a Wholly Owned Guarantor Subsidiary);
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Holding;
(3) declare or pay any dividend or make any distribution on or in respect
of, or make any distribution to holders of, Equity Interests of any
Subsidiary of Holding (other than with respect to any such Equity Interests
held by Holding, AK Steel, any Wholly Owned Guarantor Subsidiary or any
Wholly Owned Non-Recourse Subsidiary) or purchase, redeem or otherwise
acquire or retire for value any Equity Interests of any Subsidiary of
Holding (other than such Equity Interests held by Holding, AK Steel, any
Wholly Owned Guarantor Subsidiary or any Wholly Owned Non-Recourse
Subsidiary);
(4) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of
acquisition); or
(5) make any Investment other than Permitted Investments (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to as a
"Restricted Payment") if:
(a) a Default shall have occurred and be continuing (or would result
therefrom);
(b) upon giving effect to such Restricted Payment, on a pro forma
basis, AK Steel is not able to issue an additional $1.00 of Debt
pursuant to the Consolidated EBITDA Coverage Ratio as set forth in the
first paragraph of "--Limitation on Debt"; or
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(c) upon giving effect to such Restricted Payment, the aggregate
amount of such Restricted Payment and all other Restricted Payments
since April 1, 2002 would exceed the sum of:
(A) 50% of the Consolidated Net Income of Holding accrued during
the period (treated as one accounting period) from April 1, 2002
through the last full fiscal quarter for which quarterly or annual
financial statements are available prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be
a deficit, minus 100% of such deficit), plus
(B) the aggregate Net Cash Proceeds received by AK Steel from the
issue or sale of its Equity Interests (other than Redeemable Equity
Interests or Exchangeable Equity Interests) subsequent to April l,
2002 (other than to a Subsidiary of AK Steel or an employee stock
ownership, plan or similar trust), plus
(C) the aggregate Net Cash Proceeds received by AK Steel from the
issue or sale of its Equity Interests (other than Redeemable Equity
Interests or Exchangeable Equity Interests) to an employee stock
ownership plan subsequent to April 1, 2002, provided, that, if such
employee stock ownership plan issues any Debt only to the extent that
any such proceeds are equal to any increase in the Consolidated Net
Worth of Holding resulting from principal repayments made by such
employee stock ownership plan with respect to Debt issued by it to
finance the purchase of such Equity Interests, plus
(D) the amount by which consolidated Debt of AK Steel is reduced
on Holding's balance sheet upon the conversion or exchange (other
than by a Subsidiary), subsequent to April l, 2002, of any Debt of AK
Steel or any of its Subsidiaries convertible or exchangeable for
Equity Interests (other than Redeemable Equity Interests or
Exchangeable Equity Interests) of AK Steel (less the amount of any
cash, or other property, distributed by AK Steel or any of its
Subsidiaries upon such conversion or exchange), plus
(E) $25.0 million.
So long as no Default has occurred that is continuing (or would result
therefrom), the foregoing limitations on Restricted Payments shall not prohibit:
(1) any purchase or redemption of Equity Interests of Holding or
Subordinated Obligations made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Equity Interests of Holding (other than
Redeemable Equity Interests or Exchangeable Equity Interests and other than
Equity Interests issued or sold to a Subsidiary or an employee stock
ownership plan); provided, however, that (a) such purchase or redemption
shall be excluded from the calculation of the amount of Restricted Payments
and (b) the Net Cash Proceeds from such sale shall be excluded from clauses
(5)(c)(B) and (5)(c)(C) of the preceding paragraph;
(2) any purchase or redemption of Subordinated Obligations (other than
Redeemable Equity Interests) made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Debt of AK Steel other than to a
Subsidiary; provided, however, that such Debt (a) shall be subordinated to
the notes to at least the same extent as the Subordinated Obligations so
exchanged, purchased or redeemed, (b) shall have a Stated Maturity later
than the Stated Maturity of the notes and (c) shall have an Average Life
greater than the remaining Average Life of the notes; provided further,
however, that such purchase or redemption shall be excluded from the
calculation of the amount of Restricted Payments;
(3) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under "--Limitation on Sales of
Assets and Equity Interests of Subsidiaries"; provided, however, that such
purchase or redemption shall be excluded from the calculation of the amount
of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with this
provision; provided, however, that at the time of payment of such
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dividend, no Default shall have occurred and be continuing (or would result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(5) any repurchase by Holding of employee stock granted under an employee
stock option plan; provided, however, that the aggregate amount of such
repurchase in any calendar year shall not exceed $1.0 million per employee
and the aggregate amount of all repurchases in any calendar year shall not
exceed $5.0 million (it being understood that the excess of any such amounts
permitted to be expended under this clause (5) during any calendar year over
the amount actually expended during such period shall not be carried
forward); provided further, however, that such repurchase shall be included
in the calculation of the amount of Restricted Payments; or
(6) any purchase, repurchase, redemption, defeasance or other acquisition
by any Non-Recourse Subsidiary of Non-Recourse Debt of such Non-Recourse
Subsidiary; provided, however, that the amount of such purchase, repurchase,
redemption, defeasance or other acquisition shall be excluded from the
calculation of the amount of Restricted Payments.
So long as none of the conditions described above in clauses (a) and (b) of
the first sentence of this covenant description exist, the foregoing
limitations on Restricted Payments shall not prohibit the declaration and
payment of one or more dividends on or before June 30, 2004 in an aggregate
amount not to exceed $50.0 million; provided, however, that all such dividends
shall be excluded from the calculation of the amount of Restricted Payments.
Limitation on Issuance and Sale of Equity Interests of Subsidiaries. AK
Steel shall not permit any Subsidiary to issue or sell any Equity Interests to
any Person, or permit any Person, in either case, other than AK Steel and its
Subsidiaries, to own or hold an interest, other than any interest owned or held
on the first date on which the notes were originally issued by a Person other
than AK Steel and its Subsidiaries, in any Equity Interests, of any Subsidiary
(other than a Non-Recourse Subsidiary or a JV Subsidiary); provided, however,
that the foregoing limitation shall not apply to (1) the sale of all but not
less than all of the Equity Interests of any Subsidiary made in accordance with
"--Limitation on Sales of Assets and Equity Interests of Subsidiaries," (2)
issuances of Preferred Equity Interests permitted pursuant to clauses (3), (5)
and (7) under the heading "--Limitation on Debt and Preferred Equity Interests
of Subsidiaries," and (3) the ownership or holding of an interest by any
Person, other than AK Steel and its Subsidiaries, in any Equity Interests of
any Subsidiary issued pursuant to clause (2) above.
Limitation on Restrictions on Distributions from Subsidiaries. AK Steel
shall not, and shall not permit any Subsidiary to, create or permit to exist or
become effective any consensual encumbrance or restriction on the ability of
any Subsidiary to (1) pay dividends or make any other distributions on its
Equity Interests or pay any Debt or other obligation owed to AK Steel or any
Subsidiary, (2) make any Investment in AK Steel or any Subsidiary or (3)
transfer any of its property or assets to AK Steel or any Subsidiary.
Notwithstanding the foregoing, AK Steel may, and may permit any Subsidiary
of AK Steel to, suffer to exist any such encumbrance or restriction:
(1) pursuant to an agreement in effect at or entered into on the first
date on which the notes were originally issued;
(2) with respect to a Subsidiary pursuant to an agreement relating to any
Debt issued by such Subsidiary on or prior to the date on which such
Subsidiary became a Subsidiary (other than Debt issued as consideration in,
or to provide all or any portion of the funds utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary) and outstanding on such date;
(3) pursuant to an agreement effecting a refinancing of Debt issued
pursuant to an agreement referred to in clause (1) or (2) or contained in
any amendment to an agreement referred to in clause (1) or (2), provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are no less favorable to the holders of
notes than encumbrances and restrictions contained in such agreements;
73
(4) consisting of customary nonassignment provisions in leases governing
leasehold interests to the extent such provisions restrict the transfer of
the lease;
(5) in the case of clause (3) of the preceding paragraph, restrictions
contained in security agreements securing Debt of a Subsidiary otherwise
permitted under the indenture, to the extent such restrictions restrict the
transfer of the property subject to such security agreements; or
(6) relating to a Non-Recourse Subsidiary.
Limitation on Sales of Assets and Equity Interests of Subsidiaries. AK
Steel shall not, and shall not permit any Subsidiary (other than Non-Recourse
Subsidiaries) to, make any Asset Disposition unless:
(1) AK Steel or such Subsidiary receives consideration at the time of
such Asset Disposition at least equal to the Fair Market Value, as
determined in good faith by the Board of Directors of Holding (including as
to the value of all non-cash consideration), of the shares and assets
subject to such Asset Disposition and at least 75% of such consideration is
in the form of cash or Cash Equivalents; and
(2) An amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by AK Steel or such Subsidiary, as the case may be,
(a) first, to the extent AK Steel elects (or is required by the terms of any
Debt), to prepay, repay or purchase Debt (other than any Redeemable Equity
Interests or Non-Recourse Debt) of AK Steel, such Subsidiary or a Wholly
Owned Guarantor Subsidiary (in each case other than Debt owed to AK Steel or
an Affiliate of AK Steel) within 60 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (b) second, to
the extent of the balance of such Net Available Cash after application in
accordance with clause (a), at AK Steel's election, to the investment by AK
Steel or such Subsidiary or any Wholly Owned Guarantor Subsidiary in assets
to replace the assets that were the subject of such Asset Disposition or an
asset that (as determined by the Board of Directors of Holding) will be used
in the business of AK Steel and the Wholly Owned Guarantor Subsidiaries
existing on the first date on which the notes were originally issued or in
businesses reasonably related thereto, in each case within the later of one
year from the date of such Asset Disposition or the receipt of such Net
Available Cash; and (c) third, to the extent of the balance of such Net
Available Cash after application in accordance with clauses (a) and (b), to
make an offer to purchase notes at par; provided, however, that in
connection with any prepayment, repayment or purchase of Debt pursuant to
clause (a) above, AK Steel shall cause the related loan commitment (if any)
to be permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased.
Notwithstanding the requirement in clause (1) above that at least 75% of
consideration consist of cash or Cash Equivalents, AK Steel and its
Subsidiaries may make one or more Asset Dispositions for which the
consideration, in addition to the non-cash consideration permitted by such
clause, consists of or includes (A) non-cash consideration, the aggregate Fair
Market Value (as determined in good faith by the Board of Directors of Holding)
of which, for all Asset Dispositions made after the date on which the notes
were originally issued, does not exceed $10.0 million, and (B) non-cash
consideration, the aggregate Fair Market Value (as determined in good faith by
the Board of Directors of Holding) of which, for all Asset Dispositions made
after the first date on which the notes were originally issued, does not exceed
$50.0 million, consisting of the cancellation of Debt of AK Steel or any
Subsidiary existing on the first date on which the notes were originally
issued; provided, however, that in connection with any such cancellation of
Debt, AK Steel or such Subsidiary shall cause the related loan commitment (if
any) to be permanently reduced in an amount equal to the principal so canceled.
Notwithstanding the provisions of clause (2) above, in the event that the
Net Available Cash resulting from any Asset Disposition is less than $25.0
million, the application of an amount equal to such Net Available Cash in
accordance with this provision may be deferred until such time as such Net
Available Cash from any prior or subsequent Asset Dispositions not otherwise
applied in accordance with this provision, is at least equal to $25.0 million.
In the event that the Net Available Cash resulting from any Asset Disposition,
after giving effect to clauses (a) and (b) above, is less than $10.0 million,
the application of such amount equal to such Net Available
74
Cash to make an offer to purchase notes in accordance with clause (c) may be
deferred until such time as such Net Available Cash, together with Net
Available Cash from any prior or subsequent Asset Dispositions not otherwise
applied in accordance with this provision, is at least equal to $10.0 million.
Pending application of Net Available Cash pursuant to this provision, such Net
Available Cash shall be invested in Cash Equivalents. To the extent any portion
of the amount of Net Available Cash remains after compliance with this
provision, and provided that all holders of notes have been given the
opportunity to tender their notes for repurchase as provided in clause (c)
above, AK Steel may use such remaining amount for general corporate purposes.
Limitation on Transactions with Affiliates. AK Steel shall not, and shall
not permit any Restricted Subsidiary to, conduct any business or enter into any
transaction or series of similar transactions (including the purchase, sale,
lease or exchange of any property or the rendering of any service) with any
Affiliate of AK Steel or any legal or beneficial owner of 5% or more of any
class of Equity Interests of Holding or with an Affiliate of any such owner
(other than a Wholly Owned Subsidiary or any employee stock ownership plan for
the benefit of AK Steel or a Subsidiary's employees) unless the terms of such
business, transaction or series of transactions are (1) set forth in writing,
(2) not less favorable to AK Steel or such Subsidiary, as the case may be, than
terms that would be obtainable at the time for a comparable transaction or
series of similar transactions in arms-length dealings with an unrelated third
Person, (3) if such business or transaction or series of transactions involves
in excess of (a) $5.0 million, the Board of Directors of Holding has, by
resolution, determined in good faith that such business or transaction or
series of transactions meets the criteria set forth in clause (2) above, and
(b) $25.0 million and as to which there are no disinterested directors, AK
Steel has obtained an opinion of a nationally recognized expert with experience
in appraising the terms and conditions of the type of business or transaction
or series of transactions stating that such business or transaction or series
of transactions is fair (from a financial point of view) to AK Steel or such
Subsidiary, as the case may be; provided, however, that the provisions of this
paragraph do not apply to performance of contractual obligations with respect
to Eveleth Mines existing as of the date of the indenture under which the notes
were originally issued.
Lines of Business. AK Steel shall be permitted to engage in any business,
either directly or through any Subsidiary, provided that AK Steel and its
Subsidiaries, taken as a whole, remain principally engaged in the same
business, or any business reasonably related thereto, in which they were
engaged on the first date on which the notes were originally issued.
Restrictions on Activities of Holding. Holding (1) shall not engage in any
activities or hold any assets other than (a) holding 100% of the Equity
Interests of AK Steel and debt securities of AK Steel that were held by Holding
at the date of the indenture and (b) those activities incidental to maintaining
its status as a public company, and (2) it will not incur any liabilities other
than liabilities relating to Holding's full and unconditional guarantee of the
notes or any Guarantees by Holding of any Permitted Credit Facility, any other
Debt of AK Steel or any Debt of any Significant Subsidiary that is Guaranteed
by AK Steel and any other obligations or liabilities incidental to holding 100%
of the Equity Interests of AK Steel and those liabilities incidental to its
status as a public company; provided, however, that, for purposes of this
covenant, the term "liabilities" shall not include any liability for the
declaration and payment of dividends on any Equity Interests of Holding; and
provided further, however, that if Holding merges into AK Steel, this covenant
shall no longer be applicable.
Designation of Non-Recourse Subsidiaries and Restricted Subsidiaries. AK
Steel may designate any of its Subsidiaries (including an existing or newly
formed or acquired Subsidiary) as a Non-Recourse Subsidiary if (1) such
Subsidiary has total assets of $1,000 or less or (2) such designation is
effective immediately upon such Person becoming a Subsidiary of either AK Steel
or any of its Restricted Subsidiaries. Unless so designated as a Non-Recourse
Subsidiary, any Person that becomes a Subsidiary of AK Steel shall be
classified as a Restricted Subsidiary. Subject to the following paragraph, the
designation as a Non-Recourse Subsidiary may be removed. The designation of a
Non-Recourse Subsidiary or the removal of such designation in compliance with
the following paragraph shall be made by the Board of Directors pursuant to a
resolution delivered to the Trustee and shall be effective as of the date
specified in the applicable resolution, which shall not be prior to the date
such resolution is delivered to the Trustee.
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AK Steel shall not, and shall not permit any of its Restricted Subsidiaries
to, take any action or enter into any transaction or series of transactions
that would result in a Person becoming a Restricted Subsidiary (whether through
an acquisition, the removal of the designation as a Non-Recourse Subsidiary or
otherwise) unless, after giving effect to such action, transaction or series of
transactions:
(1) on a pro forma basis, AK Steel could issue at least $1.00 of
additional Debt pursuant to the Consolidated EBITDA Coverage Ratio as set
forth in the first paragraph of "--Limitation on Debt";
(2) such Restricted Subsidiary could then issue, pursuant to
"--Limitation on Debt and Preferred Equity Interests of Subsidiaries," all
Debt as to which it is obligated at such time;
(3) no Default or Event of Default would occur or be continuing; and
(4) there exist no Liens with respect to the property or assets of such
Restricted Subsidiary other than Liens permitted to be incurred under
"--Limitation on Liens."
AK Steel shall not, and shall not permit any of its Restricted Subsidiaries
to, take any action or enter into any transaction or series of transactions
that would result in any such Restricted Subsidiary ceasing to be a Subsidiary
(other than a merger or consolidation with AK Steel or another Restricted
Subsidiary) unless, after giving effect to such action, transaction or series
of transactions, either:
(1) (A) neither AK Steel nor any of its Affiliates (other than a Person
that is an Affiliate by virtue of its ownership of Equity Interests or
control of AK Steel) shall own any Equity Interests of such former
Restricted Subsidiary or any successor in interest to the business thereof,
and (B) there shall not exist any Debt of such former Restricted Subsidiary
or any successor in interest to the business thereof in favor of AK Steel or
any of its Restricted Subsidiaries; or
(2) AK Steel and its Restricted Subsidiaries would be permitted to make a
Restricted Payment in the amount of the aggregate Investment (excluding (A)
any Investment to the extent of cash or the Fair Market Value of property or
assets other than cash received by AK Steel or its Restricted Subsidiary, as
the case may be, in respect of or as a repayment of such Investment, and (B)
the amount of Debt of such former Restricted Subsidiary received by AK Steel
or its Restricted Subsidiaries as part of the consideration for the
acquisition of the Equity Interests or assets of such former Restricted
Subsidiary), if any, made in such former Restricted Subsidiary after April
1, 2002.
Defined Terms
Certain terms defined in the indenture are summarized below. Reference is
made to the indenture for the formal definition of these terms, as well as
other terms used herein for which no definition is provided.
"Accounts Receivable" of any Person means any and all accounts, contract
rights, chattel paper, instruments, documents, general intangibles and other
obligations of any kind relating to the sale or lease of goods and the
rendering of services by such Person, all rights relating thereto, all deposit
accounts containing the proceeds thereof, all books and records relating
thereto and the proceeds thereof.
"Affiliate" of any specified Person means (1) any other Person that,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (2) any other Person who is a director or
officer (a) of such specified Person, (b) of any Subsidiary of such specified
Person or (c) of any Person described in clause (1) above. For purposes of this
definition, control of a Person means the power, direct or indirect, to direct
or cause the direction of the management and policies of such Person whether by
contract or otherwise and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of Equity Interests
of a Subsidiary (other than directors' qualifying shares), property or other
assets (each referred to for the purposes of this definition as a
"disposition") by AK Steel or any of its Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction, other
than:
(1) a disposition by AK Steel or a Subsidiary to AK Steel or a Wholly
Owned Guarantor Subsidiary;
76
(2) a disposition of property or assets at Fair Market Value (as
determined in good faith by the Board of Directors of Holding) in the
ordinary course of business;
(3) a disposition of obsolete assets in the ordinary course of business;
(4) a disposition that constitutes a Restricted Payment or a
Sale/Leaseback Transaction;
(5) a sale of Accounts Receivable under a Permitted Credit Facility; and
(6) a transfer of Accounts Receivable that constitutes a Permitted
Investment under clause (5) or (6) of the definition of Permitted
Investments.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as of
the date of determination, the present value (discounted at the lower of the
interest rate of such Sale/Leaseback Transaction and the interest rate borne by
the notes, compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Debt, the quotient obtained by dividing (x) the sum of the products of the
numbers of years from the date of determination to the dates of each successive
scheduled principal payment of such Debt multiplied by the amount of such
principal payment by (y) the sum of all such principal payments.
"Board of Directors" of a Person means the Board of Directors of that Person
or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means any day that is not a Saturday, a Sunday or a day on
which banking institution are required to close in the State of New York.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; and the Stated Maturity thereof shall be the date of the last
payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Cash Equivalents" means:
(1) Investments in U.S. Government Obligations maturing within 365 days
of the date of acquisition thereof;
(2) Investments in certificates of deposit or Eurodollar deposits
maturing within 365 days of the date of acquisition thereof issued by a bank
or trust company which is organized under the laws of the United States or
any state thereof and which has a combined capital and surplus of at least
$1.0 billion and rated at least A3 by Moody's Investors Service, Inc.;
(3) Investments in repurchase agreements, involving Investments in U.S.
Government Obligations or other Cash Equivalents entered into with any bank,
trust company or investment bank rated at least A- and A-1 by Standard &
Poor's and at least A3 and P-1 by Moody's Investors Service, Inc.;
(4) Investments in commercial paper maturing not more than 90 days from
the date of acquisition thereof and having one of the two highest ratings
obtainable from each of Standard & Poor's and Moody's Investors Service,
Inc. issued by a corporation (except AK Steel or an Affiliate of AK Steel)
that is organized under the laws of any state of the United States or the
District of Columbia; and
(5) Investments in money market accounts or funds whose assets consist
solely of cash or Cash Equivalents.
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"Change in Control" means the occurrence of any of the following events:
(1) any "Person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the beneficial owner (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have "beneficial ownership" of all shares that any such Person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 40% of the total
voting power of the Voting Equity Interests of Holding; provided, however,
that the Person shall not be deemed the "beneficial owner" of shares
tendered pursuant to a tender or exchange offer made by that Person or any
Affiliate of that Person until the tendered shares are accepted for purchase
or exchange;
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of Holding
(together with any new directors whose election by such Board of Directors
of Holding, or whose nomination for election by the shareholders of Holding,
as the case may be, was approved by a vote of 66 2/3% of the directors then
still in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of Holding
then in office; or
(3) Holding fails to own 100% of the Equity Interests of AK Steel;
provided, however, that it shall not be deemed a Change in Control if
Holding merges into AK Steel except that, in such case, AK Steel shall be
substituted for Holding for purposes of this definition of "Change in
Control" and this clause (3) shall no longer be applicable.
"Consolidated EBITDA Coverage Ratio" as of any date of determination means
the ratio of (x) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters ending at least 45 days prior to the
date of such determination to (y) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that:
(1) if AK Steel or any Subsidiary has issued any Debt since the beginning
of such period that remains outstanding or if the transaction giving rise to
the need to calculate the Consolidated EBITDA Coverage Ratio is an issuance
of Debt, or both, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving effect on a pro forma basis to such Debt as
if such Debt had been issued on the first day of such period and the
discharge of any other Debt repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Debt as if such discharge had
occurred on the first day of such period;
(2) if since the beginning of such period AK Steel or any Subsidiary
shall have made any Asset Disposition, the EBITDA for such period shall be
reduced by an amount equal to the EBITDA (if positive) directly attributable
to the assets that are the subject of such Asset Disposition for such
period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period, and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Debt of AK Steel
or any Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to AK Steel and its continuing Subsidiaries in connection with such
Asset Dispositions for such period (or, if the Equity Interests of any
Subsidiary are sold, the Consolidated Interest Expense for such period
directly attributable to the Debt of such Subsidiary to the extent AK Steel
and its continuing Subsidiaries are no longer liable for such Debt after
such sale);
(3) if since the beginning of such period AK Steel or any Subsidiary (by
merger or otherwise) shall have made an Investment in any Subsidiary (or any
Person that becomes a Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder, that constitutes all or substantially all
of an operating unit of a business, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect thereto
(including the issuance of any Debt) as if such Investment or acquisition
occurred on the first day of such period; and
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(4) if since the beginning of such period any Person (that subsequently
became a Subsidiary or was merged with or into AK Steel or any Subsidiary
since the beginning of such period) shall have made any Asset Disposition or
any Investment that would have required an adjustment pursuant to clause (2)
or (3) above if made by AK Steel or a Subsidiary during such period, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition or Investment
occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto,
and the amount of Consolidated Interest Expense associated with any Debt issued
in connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of AK Steel. If any Debt
bears a floating rate of interest and is being given pro forma effect, the
interest on such Debt shall be calculated as if the rate in effect on the date
of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Protection Agreement applicable to such Debt if
such Interest Rate Protection Agreement has a remaining term in excess of 12
months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of Holding and its consolidated Subsidiaries (other than Non-Recourse
Subsidiaries), including:
(1) interest expense attributable to capital leases;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest payments;
(5) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(6) net costs under Interest Rate Protection Agreements (including
amortization of fees);
(7) Preferred Equity Interests dividends or distributions in respect of
all Preferred Equity Interests held by Persons other than AK Steel or a
Wholly Owned Subsidiary;
(8) interest allocated in connection with investments in discontinued
operations; and
(9) interest actually paid by Holding or any of its consolidated
Subsidiaries (other than Non-Recourse Subsidiaries) under any guarantee of
Debt or other obligation of any other Person.
"Consolidated Net Income" means, for any period, the net income (or loss) of
Holding and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income (or loss) of any Person if such Person is not a
Subsidiary of AK Steel, except that AK Steel's equity in the net income of
any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to AK Steel or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (3)
below);
(2) any net income (or loss) of any Person acquired by AK Steel or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition;
(3) any net income of any Subsidiary if such Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the
making of distributions by such Subsidiary, directly or indirectly, to AK
Steel, except that (a) AK Steel's equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net Income
up to the aggregate amount of cash actually distributed by such Subsidiary
during such period to AK Steel or another Subsidiary as a dividend or other
distribution (subject,
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in the case of a dividend or other distribution to another Subsidiary, to
the limitation contained in this clause) and (b) AK Steel's equity in a net
loss of any such Subsidiary for such period shall be included in determining
such Consolidated Net Income.
(4) any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of AK Steel or its consolidated Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) that is not sold or
otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Equity Interests of
any Person;
(5) any net income (or loss) of any Non-Recourse Subsidiary, except that
AK Steel's equity in the net income of any such Non-Recourse Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Non-Recourse
Subsidiary during such period to AK Steel as a dividend or other
distribution;
(6) the cumulative effect of a change in accounting principles; and
(7) solely for purposes of "--Limitation on Restricted Payments," (a)
special charges, costs and other expenses (including restructuring charges
and associated investment banking, legal, accounting, printing and related
fees and expenses) (and related tax effects) recorded by Holding, AK Steel
or any Restricted Subsidiary in connection with the merger of Armco Inc.
with and into AK Steel pursuant to an Agreement and Plan of Merger dated as
of May 20, 1999, as it may be amended, among Holding, AK Steel and Armco
Inc. and any other merger or other business combination transaction
involving Holding, AK Steel or any Restricted Subsidiary, to the extent that
such charges, costs and other expenses are not permitted under generally
accepted accounting principles to be capitalized and amortized over future
periods, in each case in respect of which Holding has delivered to the
Trustee an Officer's Certificate, made in good faith by a responsible
financial or accounting Officer of Holding, at the time such special
charges, costs and other expenses are recorded, setting forth in reasonable
detail such special charges, costs and other expenses, (b) net gains or
losses from a fourth quarter (corridor) adjustment (and related tax effects)
recognized by Holding, AK Steel or any Subsidiary in accordance with its
method of recording unrecognized net actuarial gains and losses in
accounting for pensions and other postretirement benefits, provided,
however, that if any such fourth quarter adjustment shall occur, it shall be
included prospectively in Consolidated Net Income for purposes of
"--Limitation on Restricted Payments" to the following extent: its effect
(and related tax effects) shall be deferred and amortized equally over a
period of 120 months beginning January 1 of the year subsequent to the
fourth quarter adjustment and (c) any charges (and related tax effects)
recorded by Holding, AK Steel or any Subsidiary as a result of the
impairment of goodwill under generally accepted accounting principles.
"Consolidated Net Tangible Assets" of any Person means the total assets of
such Person and its consolidated Subsidiaries after deducting therefrom all
intangible assets, current liabilities (excluding any thereof which are by
their terms extendible or renewable at the option of the obligor thereon to a
time more than 12 months after the time as of which the amount thereof is being
computed) and minority interests, if any, in any assets of such Person's
Subsidiaries.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, as of the end of the most recent fiscal quarter of such
Person ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as:
(1) the par or stated value of all outstanding Equity Interests of such
Person; plus
(2) paid-in capital or capital surplus relating to such Equity Interests;
plus
(3) any retained earnings or earned surplus; less (x) any accumulated
deficit, (y) any amounts attributable to Redeemable Equity Interests and (z)
any amounts attributable to Exchangeable Equity Interests.
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"Debt" of any Person means, without duplication,
(1) the principal of and premium (if any) in respect of (a) indebtedness
of such Person for money borrowed and (b) indebtedness evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable;
(2) all Capital Lease Obligations of such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(4) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through (3)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Equity Interests
(but excluding any accrued dividends);
(6) all obligations of such Person under interest rate swap or similar
agreements, or foreign currency or commodity hedge, exchange or similar
agreements of such Person;
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons and all dividends of other Persons for the payment of which,
in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; and
(8) all obligations of the type referred to in clauses (1) through (7) of
other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property
or assets or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"domestic" means, with respect to any Person, that such Person is organized
and existing under the laws of the United States, any State thereof or the
District of Columbia.
"EBITDA" for any period means the Consolidated Net Income of Holding for
such period (but without giving effect to adjustments, accruals, deductions or
entries resulting from purchase accounting, extraordinary losses or gains and
any gains or losses from any Asset Dispositions), plus (1) the following to the
extent deducted in calculating such Consolidated Net Income: (a) income tax
expense, (b) Consolidated Interest Expense, (c) depreciation expense, (d)
amortization expense; (e) the non-cash portion of postretirement benefits other
than pensions and (f) special charges taken after December 31, 1996 in respect
of which Holding has delivered to the Trustee (x) an Officers' Certificate'
setting forth estimates, made in good faith by a responsible financial or
accounting Officer of Holding, of the cash costs estimated, at the time such
special charges are recorded, to be paid during any period for such special
charges and containing an undertaking of Holding to deliver to the Trustee, as
soon as practicable after Holding determines that such estimates are not
appropriate, a supplemental Officers' Certificate setting forth appropriate
adjustments to such estimates and (y) together with any Officers' Certificate
or supplemental Officers' Certificate referred to in clause (x), a report
prepared by Holding's independent auditors setting forth the procedures
performed by such auditors in connection with such special charges and the
related cash costs estimated to be paid during any period for such charges
minus (2) to the extent not deducted in calculating such Consolidated Net
Income, cash costs estimated to be paid during such period for special charges
taken during any period as set forth in the Officers' Certificate most recently
delivered to the Trustee in respect of such special charges pursuant to clause
(1)(f) of this definition.
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"Equity Interests" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock or other equity participations, including
partnership interests, whether general or limited, including any Preferred
Equity Interests.
"Exchangeable Equity Interests" of any Person means any Equity Interest
which is exchangeable for or convertible into another security (other than any
Equity Interest of such Person which is neither an Exchangeable Equity Interest
nor a Redeemable Equity Interest).
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly fully and unconditionally guaranteeing any Debt or other
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (l) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Debt or other obligation of
such other Person (whether such obligation to purchase or pay such Debt or
other obligation of such other Person arises by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (2) entered into for purposes of assuring in any
other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor" means Holding and any Guarantor Subsidiary.
"Guarantor Subsidiary" means (1) any domestic Restricted Subsidiary or (2)
any other Restricted Subsidiary that is a Significant Subsidiary of which 80%
or more of the total voting power of Equity Interests or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, through one
or more intermediaries, or both, by AK Steel, which in each case is a party to
the indenture or executes a supplement to the indenture pursuant to which such
Restricted Subsidiary jointly and severally fully and unconditionally
guarantees the due and punctual payment and performance of the Obligations and
assumes the other obligations of a Guarantor Subsidiary pursuant to the
indenture, in the manner provided by the indenture.
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement
designed to protect AK Steel or any Subsidiary against fluctuations in interest
rates.
"Inventory" of any Person means any and all inventory of any kind of such
Person, including without limitation any or all of the following: inventory,
merchandise, goods and other tangible personal property that are held for sale
or lease by such Person; all materials used or consumed in the business of such
Person, but excluding from the foregoing equipment of such Person; all
trademarks, servicemarks, trade names and similar intangible property owned or
used by such Person in its business, together with the goodwill of the business
symbolized thereby and all rights relating thereto ("Intangible Property"); and
all books and records relating to the foregoing and the proceeds thereof.
"Investment" in any Person means any loan or advance to, any acquisition of
Equity Interests, equity interest, obligation or other security of, or capital
contribution or other investment in, such Person.
"issue" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Equity Interests of a Person existing
at the time such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be issued by such Subsidiary at
the time it becomes a Subsidiary.
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"JV Subsidiary" means a Guarantor Subsidiary which (1) was created or became
a Subsidiary after the date on which the notes were originally issued and (2)
has not acquired any assets directly or indirectly from AK Steel or any
Subsidiary, other than (a) cash constituting a Restricted Payment or (b)
assets, in an Asset Disposition, which were acquired by AK Steel and its
Subsidiaries within one year prior to such Asset Disposition.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien or encumbrance of any
kind.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to
such properties or assets or received in any other noncash form) therefrom, in
each case net of all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial, foreign
and local taxes required to be accrued as a liability under generally accepted
accounting principles, as a consequence of such Asset Disposition, and in each
case net of all payments made on any Debt that is secured by any assets subject
to such Asset Disposition, in accordance with the terms of any lien upon or
other security agreement of any kind with respect to such assets, or which must
by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law be repaid out of the proceeds from such Asset
Disposition, and net of all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such Asset Disposition.
"Net Cash Proceeds" with respect to any issuance or sale of Equity Interests
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Convertible Equity Interests" means, with respect to any Person, any
non-convertible Equity Interests of such Person and any Equity Interests of
such Person convertible solely into non-convertible Equity Interests of such
Person; provided, however, that Non-Convertible Equity Interests shall not
include any Redeemable Equity Interests or Exchangeable Equity Interests.
"Non-Recourse Debt" means Debt or that portion of Debt (1) issued to a
Person other than Holding, AK Steel or any Subsidiary (other than a
Non-Recourse Subsidiary) and (2) no default with respect to which (including
any rights which the holders thereof may have to take enforcement action
against a Non-Recourse Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Debt of Holding, AK Steel or any Subsidiary
(other than a Non-Recourse Subsidiary) to declare a default on such other Debt
or cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"Non-Recourse Subsidiary" means a Subsidiary of AK Steel that is not a
Restricted Subsidiary.
"Normal Replacement Assets" means any assets other than Special Assets.
"Obligations" means the principal of, premium, if any, and interest on the
notes and all other amounts due and payable under the indenture and the notes
and all other obligations and liabilities of AK Steel whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter issued, which may arise under, out of or in connection with the
indenture and the notes or any other documents made, delivered or given in
connection therewith, whether on account of principal, premium, if any,
interest, reimbursement obligations, fees, indemnities, costs, expenses
(including without limitation all fees and disbursements of counsel to the
Trustee or the holders for which AK Steel has become obligated pursuant to the
terms of the indenture) or otherwise whether or not an allowable claim against
AK Steel under the Bankruptcy Law or otherwise
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enforceable against AK Steel, and including, in any event, interest and other
liabilities accruing or arising after the filing by or against AK Steel of a
petition under the Bankruptcy Law or that would have so accrued or arisen but
for the filing of such a petition.
"Permitted Credit Facility" or "Facilities" means any agreement or
agreements providing for (1) the making of a loan or loans or the advancing of
credit, (2) the sale of Accounts Receivable of AK Steel or any Significant
Subsidiary under any asset securitization facility or other financing facility
for the financing of Accounts Receivable of AK Steel or any Significant
Subsidiary or (3) the issuance of letters of credit and/or the creation of
bankers' acceptances, under which the aggregate amount that may be issued or
otherwise obtained, in the case of clauses (1), (2) and (3), is based upon
eligible Accounts Receivable and eligible Inventory and the aggregate principal
amount of Debt, or (in the case of clause (2)) aggregate Investments
outstanding, excluding Permitted Investments under clause (5) or (6) of the
definition of "Permitted Investments" in respect of any such asset
securitization facility, shall not at any time exceed the greater of (a) $75.0
million and (b) an amount equal to (w) 100% of the book value of the
consolidated Accounts Receivable of AK Steel and its Significant Subsidiaries
that are Restricted Subsidiaries or Non-Recourse Subsidiaries plus (x) 100% of
the book value (excluding last-in-first-out reserves) of the consolidated
Inventory of AK Steel and its Subsidiaries that are Restricted Subsidiaries,
minus (y) the aggregate principal amount of outstanding Debt secured by any
Accounts Receivable or Inventory of AK Steel or any of its Subsidiaries, other
than Debt outstanding under any Permitted Credit Facility, minus (z) other
outstanding Investments (other than Debt under a Permitted Credit Facility or
Debt described in clause (y) above or Permitted Investments under clauses (5)
and (6) of the definition of "Permitted Investments") under any asset
securitization or similar facility in respect of Accounts Receivable or
Inventory of AK Steel or any of its Subsidiaries.
"Permitted Guarantees" means Guarantees issued by AK Steel of up to $50.0
million aggregate principal amount of Debt at any one time outstanding issued
by another Person structured as an unincorporated joint venture, partnership,
association or limited liability company (1) in which AK Steel or any Wholly
Owned Guarantor Subsidiary owns at least 50% of the outstanding total voting
power of Equity Interests thereof and (2) that engages only in a business of
the type conducted by AK Steel on the date of the indenture or in a business
ancillary thereto.
"Permitted Investments" means:
(1) Cash Equivalents;
(2) Investments in AK Steel or a Wholly Owned Guarantor Subsidiary (or
any Person which will become a Wholly Owned Guarantor Subsidiary as a result
of such Investment);
(3) loans and reasonable advances to employees of AK Steel or its
Subsidiaries for travel, entertainment and relocation expenses in the
ordinary course of business;
(4) Investments in obligations the interest on which is excluded from
income for Federal or state income tax purposes and that have been issued or
guaranteed by any state of the United States of America, the District of
Columbia or the Commonwealth of Puerto Rico or any political subdivision,
agency, authority or instrumentality of any of the foregoing, provided, that
at the date of acquisition of any such obligation (a) its remaining life to
maturity shall be less than one year and (b) the issuer or guarantor thereof
shall have one of the two highest short-term debt ratings obtainable from
each of Standard & Poor's and Moody's Investors Service, Inc.;
(5) Investments resulting from the transfer of Accounts Receivable of AK
Steel or its Significant Subsidiaries that are Restricted Subsidiaries to a
Non-Recourse Subsidiary, the only business of which is the acquisition and
financing of such Accounts Receivable under a Permitted Credit Facility;
(6) Investments resulting from the transfer of Accounts Receivable of AK
Steel or its Significant Subsidiaries that are Guarantor Subsidiaries (or
Non-Recourse Subsidiaries) to a trust, the only purpose of which is the
acquisition and financing of such Accounts Receivable, provided that the
aggregate amount of
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outstanding Debt issued by such trust to, and outstanding Investments in
such trust made by, Persons other than AK Steel and its Significant
Subsidiaries that are Restricted Subsidiaries or Non-Recourse Subsidiaries
shall not at any time exceed the greater of (a) $75.0 million and (b) an
amount equal to (w) 85% of the book value of the consolidated Accounts
Receivable of AK Steel and its Significant Subsidiaries that are Restricted
Subsidiaries or Non-Recourse Subsidiaries plus (x) 100% of the book value
(excluding last-in-first-out reserves) of the consolidated Inventory of AK
Steel and its Subsidiaries that are Restricted Subsidiaries, minus (y) the
aggregate principal amount of outstanding Debt secured by any Accounts
Receivable or inventory of AK Steel or any of its Subsidiaries, other than
to the extent included in clause (z) below, minus (z) other outstanding
Investments (other than Investments in such trust) under any asset
securitization or similar facility in respect of Accounts Receivable or
Inventory of AK Steel or any of its Subsidiaries;
(7) Permitted Guarantees; and
(8) until December 31, 1999, Investments, not to exceed $200.0 million at
any time, in publicly traded debt obligations issued or guaranteed by a
corporation (other than AK Steel) organized under the laws of any state of
the United States of America and subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, provided that (a) such debt
obligations are acquired by AK Steel in the open market and not directly
from the issuer thereof or an affiliate of such issuer or from an
underwriter thereof, (b) such obligations, at the date of acquisition
thereof by AK Steel, shall have a remaining life to maturity of not more
than five years, shall provide for payments of principal and interest solely
in cash and shall be rated at least BB by Standard & Poor's and Ba2 by
Moody's Investors Service, Inc. and (c) not more than $15.0 million of such
Investments at any time shall consist of debt obligations issued or
guaranteed by the same corporation and not more than 20% of such Investments
at any time shall consist of debt obligations issued or guaranteed by
corporations within the same industry (as determined by Primary Standard
Industrial Classification Code).
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under workers' compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Debt) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits or cash or United
States government bonds to secure surety or appeal bonds to which such
Person is a party, or deposits as security for contested taxes or import
duties or for the payment of rent, in each case incurred in the ordinary
course of business;
(2) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings; or other Liens arising out of
judgments or awards against such Person with respect to which such Person
shall then be proceeding with an appeal or other proceedings for review or
time for appeal has not yet expired;
(3) Liens for property taxes not yet subject to penalties for non-payment
or which are being contested in good faith by appropriate proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit issued
pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of
credit do not constitute Debt;
(5) survey exceptions, encumbrances, easements or reservations of, or
rights of others for, licenses, rights of way, sewers, electric lines,
telegraph and telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to the
conduct of the business of such Person or to the ownership of its properties
which were not incurred in connection with Debt and which do not in the
aggregate materially adversely affect the value of said properties or
materially impair their use in the operation of the business of such Person;
(6) Liens securing an Interest Rate Protection Agreement so long as the
related Debt is, and is permitted to be under the indenture, secured by a
Lien on the same property securing the Interest Rate Protection Agreement;
and
85
(7) leases and subleases of real property which do not interfere with the
ordinary conduct of the business of AK Steel or any of its Subsidiaries, and
which are made on customary and usual terms applicable to similar properties.
"Preferred Equity Interests" as applied to the Equity Interests of any
Person means Equity Interests of any class or classes (however designated)
which is preferred as to the payment of dividends or distributions, or as to
the distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over Equity Interests of any other class of such
Person.
"Public Equity Offering" means an underwritten primary public offering of
common stock of Holding pursuant to an effective registration statement under
the Securities Act.
"Redeemable Equity Interests" means any Equity Interest that by its terms or
otherwise is required to be redeemed on or prior to the first anniversary of
the Stated Maturity of the notes or is redeemable at the option of the holder
thereof at any time on or prior to the first anniversary of the Stated Maturity
of the notes.
"Refinancing Debt" means Debt issued by AK Steel issued in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, any Debt of AK Steel, including Debt that is issued by AK
Steel in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund, Refinancing Debt; provided,
however, that (l) the principal amount of the Debt so issued shall not exceed
the principal amount of, and premiums, if any, and accrued interest with
respect to, the Debt so exchanged, extended, refinanced, renewed, replaced,
defeased or refunded by application of the net proceeds of the Debt so issued,
and reasonable fees, expenses, commissions and costs incurred in connection
with the issuance of such Debt and (2) the Debt so issued (a) shall not mature
prior to the Stated Maturity of the Debt so exchanged, extended, refinanced,
renewed, replaced, defeased or refunded and (b) shall have an Average Life
equal to or greater than the remaining Average Life of the Debt so exchanged,
extended, refinanced, renewed, replaced, defeased or refunded.
"Restricted Subsidiary" means any Subsidiary of AK Steel that AK Steel has
not designated as a Non-Recourse Subsidiary (or, if AK Steel has so designated
such Subsidiary, has thereafter removed such designation) pursuant to the first
paragraph of "--Material Covenants--Designation of Non-Recourse Subsidiaries
and Restricted Subsidiaries." For the avoidance of ambiguity, a Restricted
Subsidiary is any Subsidiary other than a Non-Recourse Subsidiary.
"Rockport Works" means AK Steel's flat rolled steel finishing facilities
located at Spencer County, Indiana.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby AK Steel or a Subsidiary transfers such
property to a Person and AK Steel or a Subsidiary leases it from such Person.
"Significant Subsidiary" means (1) any domestic Subsidiary of AK Steel
(other than a Non-Recourse Subsidiary) that, at the time of determination,
either (a) had assets that, as of the date of Holding's most recent quarterly
consolidated balance sheet, constituted at least 5% of Holding's total assets
on a consolidated basis as of such date, or (b) had revenues for the 12-month
period ending on the date of Holding's most recent quarterly consolidated
statement of income which constituted at least 5% of Holding's total revenues
on a consolidated basis for such period, (2) any foreign Subsidiary (other than
a Non-Recourse Subsidiary) of AK Steel that at the time of determination either
(a) had assets which, as of the date of Holding's most recent quarterly
consolidated balance sheet, constituted at least 5% of Holding's total assets
on a consolidated basis as of such date, in each case determined in accordance
with generally accepted accounting principles or (b) had revenues for the
l2-month period ending on the date of Holding's most recent quarterly
consolidated statement of income which constituted at least 5% of Holding's
total revenues on a consolidated basis for such period, or (3) any Subsidiary
(other than a Non-Recourse Subsidiary) of AK Steel that, if merged with all
Defaulting Subsidiaries of AK Steel,
86
would at the time of determination either (a) have had assets which, as of the
date of Holding's most recent quarterly consolidated balance sheet, would have
constituted at least 10% of Holding's total assets on a consolidated basis as
of such date or (b) have had revenues for the 12-month period ending on the
date of Holding's most recent quarterly consolidated statement of income which
would have constituted at least 10% of Holding's total revenues on a
consolidated basis for such period (each such determination being made in
accordance with generally accepted accounting principles). "Defaulting
Subsidiary" means any Subsidiary of AK Steel (other than a Non-Recourse
Subsidiary) with respect to which a Default has occurred.
"Special Assets" means a capital asset, or series of related capital assets,
with an aggregate purchase price in excess of $20.0 million that enhances the
competitiveness or productivity of the business of AK Steel and its
Subsidiaries or is required so that AK Steel and its Subsidiaries will be able
to remain in compliance with all material requirements of applicable law.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the principal of such security is due
and payable, including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such security at the
option of the holder thereof upon the happening of any contingency unless such
contingency has occurred).
"Subordinated Obligation" means any Debt of AK Steel (whether outstanding on
the date on which the notes were originally issued or thereafter issued) which
is subordinate or junior in right of payment to the notes.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
Equity Interests or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election
of directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, through one or more intermediaries, or both, by such
Person. Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" shall refer to a Subsidiary or Subsidiaries of AK Steel.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Equity Interests" of a corporation or other entity means all classes
of Equity Interests of a corporation or other entity then outstanding and
normally entitled to vote in the election of directors or other governing body
of such corporation or other entity.
"Wholly Owned Guarantor Subsidiary" means any Wholly Owned Subsidiary that
is a Restricted Subsidiary (whether or not a Guarantor Subsidiary). For the
avoidance of doubt, not all Wholly Owned Guarantor Subsidiaries are required to
be Guarantor Subsidiaries.
"Wholly Owned Subsidiary" of a Person means a Subsidiary of such Person
(other than a Non-Recourse Subsidiary) all the Equity Interests (other than
non-voting, money market preferred shares) of which (other than directors'
qualifying shares) are owned by such Person or another Wholly Owned Subsidiary
of such Person. Unless otherwise qualified, all references to a "Wholly Owned
Subsidiary" or to "Wholly Owned Subsidiaries" shall refer to a Wholly Owned
Subsidiary or Wholly Owned Subsidiaries of AK Steel.
Events of Default
The following will be Events of Default under the indenture:
(1) default in any payment of interest on any note when the same becomes
due and payable, and such default continues for a period of 30 days;
87
(2) default in the payment of the principal of any note when the same
becomes due and payable at its Stated Maturity, upon redemption, upon
declaration or otherwise;
(3) failure to redeem or purchase notes when required pursuant to the
indenture and the notes;
(4) failure to (a) comply with the covenant described under "--When AK
Steel or Any of Its Subsidiaries May Merge or Transfer Assets," (b) make or
consummate an Offer in accordance with the provisions of "--Material
Covenants--Limitation on Sales of Assets and Equity Interests of
Subsidiaries" or (c) make or consummate a Change in Control Offer in
accordance with the provisions of "--Change in Control Offer."
(5) failure to observe or comply with any of the agreements in the notes
or the indenture (other than those referred to in clause (1), (2), (3) or
(4) above), which continues for 60 days after there has been given to AK
Steel by the Trustee or to AK Steel and the Trustee by the holders of at
least 25% in principal amount of notes then outstanding a written notice
specifying such failure;
(6) Debt of AK Steel or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the
holders thereof because of a default, and the total amount of such Debt
unpaid or accelerated exceeds $10.0 million or its foreign currency
equivalent;
(7) any Guarantee of the notes issued by Holding or any Significant
Subsidiary ceases to be in full force and effect other than in accordance
with its terms, or Holding or any Significant Subsidiary or any Person
acting on behalf of Holding or such Significant Subsidiary shall deny or
disaffirm its obligations under its Note Guarantee;
(8) certain events in bankruptcy, insolvency or reorganization with
respect to Holding, AK Steel or any Significant Subsidiary; and
(9) any judgment or decree for the payment of money in excess of $10.0
million is rendered against Holding, AK Steel or any Significant Subsidiary
and is not discharged and either (a) an enforcement proceeding has been
commenced by any creditor upon such judgment or decree or (b) there is a
period of 60 days following such judgment during which such judgment or
decree is not discharged, waived or the execution thereof stayed.
If any Event of Default shall occur and be continuing, either the Trustee or
the holders of at least 25% in principal amount of the notes then outstanding
may accelerate the maturity of all notes and thereupon the principal of and
premium, if any, and any accrued and unpaid interest on the notes shall become
due and payable immediately; provided, that in the case of any bankruptcy,
insolvency or reorganization Event of Default, such amount shall become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder. The holders of at least a majority in principal
amount of the then outstanding notes may, under certain circumstances, rescind
such acceleration and its consequences if the rescission would not conflict
with any judgment or decree and if all Events of Default, other than the
nonpayment of accelerated principal of and premium, if any, and interest on
notes, have been cured or waived as provided in the indenture. The holders of
at least a majority in principal amount of the then outstanding notes may waive
any past default under the indenture, except a default in the payment of
principal, premium or interest on a note or default with respect to certain
covenants under the indenture.
Subject to provisions for the indemnification of the Trustee, the holders of
at least a majority in principal amount of the notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee, subject to certain limitations contained in the indenture.
No holder of any note will have any right to pursue any remedy with respect
to the indenture or the notes unless
(1) such holder shall have previously given to the Trustee written notice
of a continuing Event of Default;
88
(2) the holders of at least 25% in principal amount of the notes shall
have made written request to the Trustee to pursue the remedy;
(3) such holder shall have offered the Trustee reasonable indemnity
against any liability;
(4) the Trustee shall have failed to comply with the request within 60
days after the receipt of such request and the offer of indemnity; and
(5) no written direction inconsistent with such request shall have been
given to the Trustee during such 60-day period by the holders of at least a
majority in principal amount of the notes.
AK Steel and the Guarantors will be required to furnish to the Trustee
annually a statement as to the performance by AK Steel and such Guarantor of
certain of the obligations under the indenture and as to any default in such
performance. Upon becoming aware of any default, AK Steel and each Guarantor
will be required to deliver an Officers' Certificate to the Trustee setting
forth the details of such default and the action which Holding, AK Steel or any
Guarantor proposes to take with respect thereto.
Modification and Waiver
Amendments of the indenture or the notes may be made by AK Steel, the
Guarantors and the Trustee with the consent of the holders of at least a
majority in principal amount of the notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each note
affected thereby:
(l) reduce the amount of notes whose holders must consent to an amendment;
(2) reduce the rate or extend the interest payment time of any note;
(3) reduce the principal amount of or extend the Stated Maturity of any
note;
(4) reduce the premium payable upon redemption or change the time at
which any note may be redeemed;
(5) change the currency of payment of any note;
(6) make any change in the provisions concerning waiver of Defaults by
holders of the notes or the rights of holders to receive payments of
principal or interest;
(7) make any change in provisions regarding Change in Control; or
(8) make any change in this provision.
Without the consent of any holder of the notes, AK Steel, the Guarantors and
the Trustee may amend the indenture or the notes:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with, among other things, the provisions discussed under
"--When AK Steel or Any of Its Subsidiaries May Merge or Transfer Assets";
(3) to provide for uncertificated notes in addition to or in place of
certificated notes as provided in the indenture;
(4) to add guarantees with respect to the Securities;
(5) to add to the covenants of AK Steel or the Guarantors for the benefit
of the holders or to surrender any right or power conferred upon AK Steel or
the Guarantors in the indenture;
(6) to reflect the release or addition of a Guarantor pursuant to the
terms of the indenture;
(7) to comply with any requirements of the Commission in connection with
qualifying the indenture under the Trust Indenture Act; or
(8) to make any change that does not adversely affect the rights of any
holder of the note.
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When AK Steel or Any of Its Subsidiaries May Merge or Transfer Assets
AK Steel shall not (l) consolidate with or merge with or into any other
Person, (2) permit any other Person to consolidate with or merge into (a) AK
Steel or (b) any of its Subsidiaries in a transaction in which such Subsidiary
(or successor Person) remains (or becomes) a Subsidiary, (3) directly or
indirectly, transfer, convey, sell, lease, or otherwise dispose of all or
substantially all of its properties and assets, (4) directly or indirectly, (a)
acquire Equity Interests or other ownership interests of any other Person,
other than as a Permitted Investment as defined in clause (5) of the definition
of Permitted Investments, such that such Person becomes a Subsidiary or (b)
purchase, lease or otherwise acquire all or substantially all of the property
and assets of any Person or any existing business (whether existing as a
separate entity, subsidiary, division, unit or otherwise) of any Person, or (5)
permit any of its Subsidiaries to enter into any such transaction unless:
(a) AK Steel or such Subsidiary shall be the continuing entity or the
resulting, surviving or transferee Person (if not AK Steel or such
Subsidiary) shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
such Person shall expressly assume, by an indenture supplemental to the
indenture, executed and delivered to the Trustee, all the obligations of AK
Steel or such Subsidiary, as the case may be, under the notes and the
indenture;
(b) Immediately after giving effect to such transaction (and treating any
Debt which becomes an obligation of the resulting, surviving or transferee
Person or any Subsidiary as a result of such transaction as having been
issued by such Person or such Subsidiary at the time of such transaction),
no Default shall have occurred and be continuing;
(c) Immediately after giving effect to such transaction, on a pro forma
basis, AK Steel (or the resulting, surviving or transferee Person (if not AK
Steel)) would be able to issue at least $1.00 of Debt pursuant to the
Consolidated EBITDA Coverage Ratio set forth in the first paragraph of
"--Material Covenants--Limitation on Debt";
(d) Immediately after giving effect to such transaction, Holding shall
have Consolidated Net Worth which is not less than the Consolidated Net
Worth of Holding immediately prior to such transaction;
(e) Each Guarantor, unless it is the other party to the transactions
described above, shall expressly confirm, by an indenture supplemental to
the indenture, executed and delivered to the Trustee, that its Guarantee
shall apply to such Person's obligations under the notes; and
(f) AK Steel shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indentures (if any) comply with the indenture;
provided, however, that clauses (c) and (d) shall not apply to (x) the
consolidation or merger of any Wholly Owned Subsidiary with or into any other
Wholly Owned Subsidiary or AK Steel, (y) the transfer, conveyance, sale, lease
or other disposal (including any disposition by means of a merger,
consolidation or similar transaction) of all or substantially all of the
properties or assets of a Non-Recourse Subsidiary or a Subsidiary which is not
a Significant Subsidiary or (z) the merger of Holding into AK Steel.
If after the date on which the notes were originally issued any Person shall
become a Guarantor Subsidiary, such Person shall (1) fully and unconditionally
guarantee, by an indenture supplemental to the indenture, executed and
delivered to the Trustee, all of AK Steel's obligations under the notes on the
terms set forth in the indenture and (2) deliver to the Trustee an Opinion of
Counsel stating that such supplemental indenture has been duly authorized and
constitutes the enforceable obligations of such Person.
Defeasance
AK Steel at any time may terminate all its obligations under the notes and
the indenture ("legal defeasance"), except for certain obligations, including
those relating to the defeasance trust and obligations to register the transfer
or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes
and to maintain
90
a registrar and paying agent in respect of the notes. AK Steel at any time may
terminate its obligations under the covenants described under "--Material
Covenants" and "--Change in Control Offer" above ("covenant defeasance"). AK
Steel may exercise the legal defeasance option notwithstanding the prior
exercise of the covenant defeasance option. If AK Steel exercises the legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default. If AK Steel exercises the covenant defeasance option, payment
of the notes may not be accelerated because of certain Events of Default by AK
Steel specified in clause (4) or (5) of the first paragraph of "--Events of
Default" above.
In order to exercise its defeasance options, AK Steel must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of and premium, if any, and
interest on the notes to maturity or redemption, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
opinion of counsel to the effect that holders of the notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
defeasance had not occurred (and, in the case of legal defeasance only, such
opinion of counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable federal income tax law).
Concerning the Trustee
The Trustee may become owner or pledgee of notes and may otherwise deal with
either Holding or Affiliates of Holding with the same rights it would have if
it were not Trustee.
The indenture provides that in case an Event of Default shall occur and be
continuing, the Trustee will exercise the rights and powers vested in it by the
indenture and use the same degree of care and skill in their exercise as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
Fifth Third Bank also serves as Trustee under the indentures governing our
9 1/8% Notes and our 7 7/8% Notes.
Governing Law
The rights and duties of AK Steel, Holding and the Trustee under the
indenture, the notes, the Guarantee of the notes and the registration rights
agreement shall be governed by the laws of the State of New York.
Form of Registered Notes
The certificates representing the registered notes will be issued in fully
registered form, without coupons. Except as described in the next paragraph,
the registered notes will be deposited with, or on behalf of, DTC, and
registered in the name of Cede & Co., as DTC's nominee, in the form of a global
note. Holders of the registered notes will own book-entry interests in the
global note evidenced by records maintained by DTC.
Book-entry interests may be exchanged for certificated notes of like tenor
and equal aggregate principal amount, if
(1)DTC notifies us that it is unwilling or unable to continue as depositary
or we determine that DTC is unable to continue as depositary and we fail
to appoint a successor depositary,
(2)we provide for the exchange pursuant to the terms of the indenture, or
(3)we determine that the book-entry interests will no longer be represented
by global notes and we execute and deliver to the trustee instructions
to that effect.
As of the date of this prospectus, no certificated notes are issued and
outstanding.
91
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
considerations relating to the exchange of an old note for a registered note in
the exchange offer. It does not contain a complete analysis of all the
potential tax considerations relating to the exchange. This summary is limited
to a beneficial owner of an old note who holds the old note as a "capital
asset" (in general, an asset held for investment). Special situations, such as
the following, are not addressed:
. tax consequences to a person who may be subject to special tax treatment,
such as a partnership, tax-exempt entity, dealer in securities or
currencies, bank or other financial institution, insurance company,
regulated investment company, trader in securities that elects to use a
mark-to-market method of accounting for its securities holdings or
corporation that accumulates earnings to avoid U.S. federal income tax;
. tax consequences to a person holding a note as part of a hedge,
conversion, straddle or other risk reduction transaction;
. tax consequences to a person who holds a note through a partnership or
similar pass-through entity;
. U.S. federal gift tax, estate tax or alternative minimum tax
consequences, if any; or
. any state, local or foreign tax consequences.
The discussion below is based upon the provisions of the Internal Revenue
Code of 1986, as amended, existing and proposed Treasury regulations
promulgated thereunder, and rulings, judicial decisions and administrative
interpretations thereunder, as of the date hereof. Those authorities may be
changed, perhaps retroactively, so as to result in U.S. federal income tax
consequences different from those discussed below.
The exchange of your old note for a registered note in the exchange offer
should have no U.S. federal income tax consequences to you.
The preceding discussion of certain U.S. federal income tax considerations
of the exchange offer is for general information only and is not tax advice.
Accordingly, each investor should consult its own tax advisor as to particular
tax consequences to it of exchanging an old note for a registered note,
including the applicability and effect of any state, local or foreign tax laws,
and of any proposed changes in applicable laws.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives registered notes in the exchange offer for
its own account must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
notes. We reserve the right in our sole discretion to purchase or make offers
for, or to offer registered notes for, any old notes that remain outstanding
subsequent to the expiration of the exchange offer pursuant to this prospectus
or otherwise and, to the extent permitted by applicable law, purchase old notes
in the open market, in privately negotiated transactions or otherwise. This
prospectus, as it may be amended or supplemented from time to time, may be used
by all persons subject to the prospectus delivery requirements of the
Securities Act, including broker-dealers in connection with resales of
registered notes received in the exchange offer, where such notes were acquired
as a result of market-making activities or other trading activities and may be
used by us to purchase any notes outstanding after expiration of the exchange
offer. We have agreed that, for a period of 180 days from the date on which the
exchange offer is completed, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
We will not receive any proceeds from any sale of registered notes by
broker-dealers. Registered notes received by broker-dealers in the exchange
offer for their own account may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the registered notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such registered notes. Any
broker-dealer that resells registered notes that were received by it in the
exchange offer for its own account and any broker or dealer that participates
in a distribution of such notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of such notes
and any commissions or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 180 days from the date on which the exchange offer is
completed, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to pay all expenses
incident to the exchange offer, including the reasonable fees and expenses of
counsel to the initial purchaser of the old notes, other than commissions or
concessions of any brokers or dealers and will indemnify holders of the notes,
including any broker-dealers, against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for us by Weil,
Gotshal & Manges LLP, New York, New York.
EXPERT
The consolidated financial statements of AK Steel Holding Corporation as of
December 31, 2000 and 2001 and for each of the three years in the period ended
December 31, 2001, included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report....................................................................... F-2
Consolidated Statements of Income for the Years Ended December 31, 1999, 2000 and 2001............. F-3
Consolidated Balance Sheets as of December 31, 2000 and 2001....................................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001......... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 2000
and 2001......................................................................................... F-6
Notes to Consolidated Financial Statements......................................................... F-7
Consolidated Statements of Operations for the Three and Nine-Month Periods Ended September 30, 2001
and 2002 (Unaudited)............................................................................. F-39
Consolidated Balance Sheets--December 31, 2001 and September 30, 2002 (Unaudited).................. F-40
Condensed Consolidated Statements of Cash Flows--Nine-Month Periods Ended September 30, 2001
and 2002 (Unaudited)............................................................................. F-41
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... F-42
F-1
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, 2000 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
2000 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 30, 2002
(August 2, 2002 as to the sale of
Sawhill Tubular as described in
Note 13)
F-2
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 2000 and 2001
(dollars in millions, except per share data)
1999 2000 2001
-------- -------- --------
Net sales................................................................ $4,184.8 $4,403.7 $3,833.4
Cost of products sold (exclusive of items shown separately below)........ 3,334.3 3,577.7 3,225.5
Selling and administrative expenses...................................... 299.9 257.9 257.6
Depreciation (Note 1).................................................... 206.1 227.3 225.8
Special charges and unusual items:
Costs related to the merger with Armco Inc. (Note 10)................. 99.7 -- --
Pension charge (Note 1)............................................... -- -- 192.2
Stock received in insurance demutualization (Note 10)................. -- -- (49.9)
-------- -------- --------
Total operating costs............................................. 3,940.0 4,062.9 3,851.2
-------- -------- --------
Operating profit (loss).................................................. 244.8 340.8 (17.8)
Interest expense......................................................... 123.7 136.1 133.1
Other income............................................................. 20.8 7.9 6.1
-------- -------- --------
Income (loss) from continuing operations before income taxes and minority
interest............................................................... 141.9 212.6 (144.8)
Income tax provision (benefit) (Note 5).................................. 63.9 78.6 (53.6)
Minority interest (Note 2)............................................... 6.7 -- --
-------- -------- --------
Income (loss) from continuing operations................................. 71.3 134.0 (91.2)
Loss from discontinued operations--Sawhill (Notes 1 and 13).............. -- 1.6 1.2
Income from discontinued operations--(Note 13)........................... 7.5 -- --
-------- -------- --------
Income (loss) before extraordinary item.................................. 78.8 132.4 (92.4)
Extraordinary loss on retirement of debt, net of tax (Note 6)............ 13.4 -- --
-------- -------- --------
Net income (loss)........................................................ 65.4 132.4 (92.4)
Other comprehensive income (loss), net of tax (Note 1):
Foreign currency translation adjustment............................... (1.4) (2.1) 0.6
Derivative instrument hedges, mark to market:
Cumulative effect adjustment...................................... -- -- 27.5
Losses arising in period.......................................... -- -- (67.6)
Reclass gains included in net income.............................. -- -- 11.2
Unrealized gains on securities:
Unrealized holding gains arising during period.................... 0.7 0.1 10.2
Reclass gains included in net income.............................. (1.9) (1.4) (0.9)
Minimum pension liability adjustment.................................. 1.2 0.2 (163.4)
-------- -------- --------
Comprehensive income (loss).............................................. $ 64.0 $ 129.2 $ (274.8)
======== ======== ========
Earnings per share: (Note 1)
Basic earnings per share:
Income (loss) from continuing operations.............................. $ 0.62 $ 1.21 $ (0.86)
Income (loss) from discontinued operations............................ 0.07 (0.01) (0.01)
Extraordinary loss on retirement of debt.............................. 0.13 -- --
-------- -------- --------
Net income (loss)................................................. $ 0.56 $ 1.20 $ (0.87)
======== ======== ========
Diluted earnings per share:
Income (loss) from continuing operations.............................. $ 0.62 $ 1.21 $ (0.86)
Income (loss) from discontinued operations............................ 0.07 (0.01) (0.01)
Extraordinary loss on retirement of debt.............................. 0.13 -- --
-------- -------- --------
Net income (loss)................................................. $ 0.56 $ 1.20 $ (0.87)
======== ======== ========
See notes to consolidated financial statements.
F-3
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(dollars in millions, except per share amounts)
2000 2001
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents............................................................................. $ 86.8 $ 101.0
Accounts receivable, net (Note 1)..................................................................... 489.5 388.0
Inventories, net (Note 1)............................................................................. 801.8 904.6
Deferred tax asset (Note 5)........................................................................... 54.7 76.6
Current assets held for sale (Note 1)................................................................. 74.9 60.6
Other current assets.................................................................................. 14.1 17.0
--------- ---------
Total Current Assets............................................................................... 1,521.8 1,547.8
--------- ---------
Property, Plant and Equipment (Note 1)................................................................... 4,620.3 4,742.9
Less accumulated depreciation......................................................................... (1,763.2) (1,974.6)
--------- ---------
Property, plant and equipment, net.................................................................... 2,857.1 2,768.3
--------- ---------
Other Assets:
Investment in AFSG (Note 1)........................................................................... 85.6 55.6
Other investments..................................................................................... 114.0 154.3
Goodwill (Note 1)..................................................................................... 111.7 109.7
Other intangible assets (Note 8)...................................................................... 7.4 111.9
Prepaid pension (Note 8).............................................................................. 206.5 1.4
Deferred tax asset (Note 5)........................................................................... 242.2 393.5
Noncurrent assets held for sale (Note 1).............................................................. 28.6 24.4
Other................................................................................................. 64.9 58.9
--------- ---------
Total Assets....................................................................................... $ 5,239.8 $ 5,225.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................................................................... $ 498.3 $ 537.6
Accrued liabilities................................................................................... 262.2 270.5
Current portion of long-term debt (Note 6)............................................................ 63.2 78.0
Current portion of pension and other postretirement benefit obligations (Note 8)...................... 66.6 68.3
--------- ---------
Total Current Liabilities.......................................................................... 890.3 954.4
--------- ---------
Noncurrent Liabilities:
Long-term debt (Note 6)............................................................................... 1,387.6 1,324.5
Pension and other postretirement benefit obligations (Note 8)......................................... 1,420.2 1,740.1
Other liabilities..................................................................................... 222.4 173.5
--------- ---------
Total Noncurrent Liabilities....................................................................... 3,030.2 3,238.1
--------- ---------
Total Liabilities.................................................................................. 3,920.5 4,192.5
--------- ---------
Stockholders' Equity: (Note 3)
Preferred stock, aggregate liquidation preference over par $12.7...................................... 12.5 12.5
Common stock, authorized 200,000,000 shares of $.01 par value each; issued 2000, 115,832,859 shares,
2001, 115,987,777 shares; outstanding 2000, 107,650,372 shares; 2001, 107,713,329 shares............. 1.2 1.2
Additional paid-in capital............................................................................ 1,803.2 1,807.2
Treasury stock, common shares at cost, 2000, 8,182,487; 2001, 8,274,448 shares........................ (119.4) (120.4)
Accumulated deficit................................................................................... (373.3) (479.9)
Accumulated other comprehensive income (loss) (Note 1)................................................ (4.9) (187.3)
--------- ---------
Total Stockholders' Equity............................................................................... 1,319.3 1,033.3
--------- ---------
Total Liabilities And Stockholders' Equity............................................................... $ 5,239.8 $ 5,225.8
========= =========
See notes to consolidated financial statements.
F-4
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 2000 and 2001
(dollars in millions)
1999 2000 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss).............................................................. $ 65.4 $ 132.4 $ (92.4)
------- ------- -------
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation................................................................ 206.1 227.3 225.8
Amortization................................................................ 16.4 16.0 14.7
Deferred income taxes....................................................... 57.7 92.3 (52.8)
Costs related to the merger with Armco Inc.................................. 99.7 -- --
Pension charge.............................................................. -- -- 192.2
Stock received in insurance demutualization................................. -- -- (49.9)
(Income) loss from discontinued operations.................................. (7.5) 1.6 1.2
Extraordinary loss on retirement of debt.................................... 13.4 -- --
Other items, net............................................................ (2.4) 1.2 5.9
Changes in assets and liabilities:
Accounts and notes receivable............................................ (73.9) (6.1) 101.3
Inventories.............................................................. (141.0) (38.2) (101.3)
Current liabilities...................................................... 19.4 (31.6) 2.9
Other assets............................................................. (1.5) (2.8) 0.6
Pension asset and obligation............................................. (19.0) (55.6) (63.9)
Postretirement benefit obligation........................................ 0.5 (0.3) 19.7
Other liabilities........................................................ (1.9) 9.0 (55.0)
------- ------- -------
Total adjustments..................................................... 166.0 212.8 241.4
------- ------- -------
Net cash flows from operating activities of continuing operations........ 231.4 345.2 149.0
------- ------- -------
Cash flows from investing activities:
Capital investments............................................................ (334.1) (135.8) (108.0)
Net sale of short-term investments............................................. 6.8 -- --
Purchase of long-term investments.............................................. (0.2) (66.4) (12.0)
Purchase of a business......................................................... -- -- (29.3)
Distribution from investees.................................................... -- -- 30.2
Proceeds from the sale of investments.......................................... 4.6 3.2 44.1
Proceeds from sale of property, plant and equipment............................ 2.1 6.2 0.1
Other items, net............................................................... 0.8 0.9 (0.3)
------- ------- -------
Net cash flows from investing activities of continuing operations........ (320.0) (191.9) (75.2)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock......................................... 24.7 1.6 --
Proceeds from issuance of long-term debt....................................... 460.0 -- --
Principal payments on long-term debt........................................... (530.8) (6.0) (63.2)
Purchase of treasury stock..................................................... (1.5) (39.2) (1.0)
Purchase of preferred stock.................................................... (115.8) (2.2) --
Preferred stock dividends paid................................................. (7.6) (1.0) (0.7)
Common stock dividends paid.................................................... (35.1) (54.9) (13.5)
Underwriting discount and stock issuance expense............................... (10.8) -- --
Other items, net............................................................... (1.6) (2.0) 0.4
------- ------- -------
Net cash flows from financing activities of continuing operations........ (218.5) (103.7) (78.0)
------- ------- -------
Cash flows from discontinued operations........................................... 14.8 (17.2) 18.4
------- ------- -------
Net increase (decrease) in cash and cash equivalents.............................. (292.3) 32.4 14.2
Cash and cash equivalents, beginning of year................................... 346.7 54.4 86.8
------- ------- -------
Cash and cash equivalents, end of year......................................... $ 54.4 $ 86.8 $ 101.0
======= ======= =======
See notes to consolidated financial statements.
F-5
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
Other
Compre-
Additional hensive
Preferred Common Paid-In- Treasury Accumulated Income/
Stock Stock Capital Stock Deficit (Loss) Total
--------- ------ ---------- -------- ----------- ------- --------
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 marketable securities......... (1.2) (1.2)
Stock options exercised.......................... 31.7 31.7
Tax benefit from common stock compensation....... 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 quarter (7.6) (7.6)
Common stock $.125 cash dividend per quarter..... (35.1) (35.1)
Foreign currency translation adjustment.......... (1.4) (1.4)
Minimum pension liability........................ 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
Net income....................................... 132.4 132.4
Unrealized gain on marketable securities......... (1.3) (1.3)
Stock options exercised.......................... 4.2 4.2
Tax benefit from common stock compensation....... (0.6) (0.6)
Purchase of treasury stock....................... (39.2) (39.2)
Purchase of preferred stock...................... (2.4) 0.2 (2.2)
Preferred stock $.90625 cash dividend per quarter (1.0) (1.0)
Common stock $.125 cash dividend per quarter..... (54.9) (54.9)
Foreign currency translation adjustment.......... (2.1) (2.1)
Minimum pension liability........................ 0.2 0.2
Issuance of restricted stock, net................ 7.6 7.6
Unamortized restricted stock..................... (1.6) (1.6)
------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2000....................... 12.5 1.2 1,803.2 (119.4) (373.3) (4.9) 1,319.3
Net loss......................................... (92.4) (92.4)
Unrealized gain on marketable securities......... 9.3 9.3
Tax benefit from common stock compensation....... (0.9) (0.9)
Purchase of treasury stock....................... (1.0) (1.0)
Preferred stock $.90625 cash dividend per quarter
(first, second and third quarters only)......... (0.7) (0.7)
Common stock $.0625 cash dividend per quarter
(first and second quarters only)................ (13.5) (13.5)
Derivative instrument hedges..................... (28.9) (28.9)
Foreign currency translation adjustment.......... 0.6 0.6
Minimum pension liability........................ (163.4) (163.4)
Issuance of restricted stock, net................ 0.1 0.1
Unamortized restricted stock..................... 4.8 4.8
------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2001....................... $ 12.5 $1.2 $1,807.2 $(120.4) $(479.9) $(187.3) $1,033.3
======= ==== ======== ======= ======= ======= ========
See notes to consolidated financial statements.
F-6
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
100%-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.
On April 19, 2002, the Company completed the sale of Sawhill Tubular. In
accordance with Statement of Financial Accounting Standards ("Statement") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," issued
by the Financial Accounting Standards Board ("FASB") and as discussed below,
the results of Sawhill Tubular have been reclassified to discontinued
operations on the consolidated statements of income. The assets disposed of in
the sale have been reclassified to current and noncurrent assets held for sale
on the consolidated balance sheets. There were no material liabilities
transferred in the sale.
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 AK Steel's indebtedness for borrowed money 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 was 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, except dividends per
share, 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.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of management estimates and assumptions that affect the amounts reported.
These estimates are based on historical experience and information that is
available to management about current events and actions the Company may take
in the future. Significant items subject to estimates and assumptions include
the carrying value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; legal and environmental
liabilities; and assets and obligations related to employee benefit plans.
There can be no assurance that actual results will not differ from these
estimates.
Revenue Recognition: Revenue from sales of products is recognized at the
time title and the risks and rewards of ownership passes. This is when the
products are shipped per customers' instructions, the sales price is fixed and
determinable, and collection is reasonably assured.
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.
Supplemental Disclosure of Cash Flow Information:
1999 2000 2001
------ ------ ------
Cash paid (received) during the period for:
Interest (net of interest capitalized)......... $114.3 $127.1 $139.7
Income taxes................................... 6.2 (9.0) (1.1)
Supplemental Cash Flow Information Regarding Non-Cash Investing and
Financing Activities: The Company granted to certain employees shares of its
common stock with values, net of cancellations, of $10.8,
F-7
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
$7.6 and $0.1 in 1999, 2000 and 2001, 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 and holders of Armco's other
preferred stock issues converted their shares with a redemption value of $2.1
into common stock (Note 2).
In the fourth quarter of 2001, the Company received a distribution of shares
from Anthem Inc., its primary health insurance provider upon the
demutualization of that company. The shares had a fair value at the date of
receipt of $49.9, net of a liability established for the portion of the
proceeds deemed to be healthcare plan assets.
Accounts Receivable: The allowance for doubtful accounts was $4.7 and $7.7
at December 31, 2000 and 2001.
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.
2000 2001
------ ------
Inventories on LIFO:
Finished and semifinished..................... $665.2 $719.3
Raw materials and supplies.................... 161.2 162.1
Adjustment to state inventories at LIFO value. (47.1) (9.7)
------ ------
Total..................................... 779.3 871.7
Other inventories................................ 22.5 32.9
------ ------
Total inventories......................... $801.8 $904.6
====== ======
During 2001, liquidation of LIFO layers generated income of $5.7 in
operating profit.
Property, Plant and Equipment: Plant and equipment are depreciated under
the straight line method over their estimated lives ranging from 2 to 39 years.
The Company's property, plant and equipment balances as of December 31, 2000
and 2001 are as follows:
2000 2001
--------- ---------
Land, land improvements and leaseholds $ 132.9 $ 135.8
Buildings............................. 324.6 344.8
Machinery and equipment............... 4,054.3 4,154.1
Construction in progress.............. 108.5 108.2
--------- ---------
Total.............................. 4,620.3 4,742.9
Less accumulated depreciation......... (1,763.2) (1,974.6)
--------- ---------
Property, plant and equipment, net.... $ 2,857.1 $ 2,768.3
========= =========
The Company periodically reviews the carrying value of long-lived assets to
be held and used and long-lived assets to be disposed of when events and
circumstances warrant such a review. If the carrying value of a long-lived
asset is considered impaired, a loss is recognized based on the amount by which
the carrying value
F-8
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
exceeds the fair market value less cost to dispose for assets to be sold or
abandoned. Fair market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which requires entities to establish liabilities for
legal obligations associated with the retirement of tangible long-lived assets.
The Company will adopt the Statement in 2003, but has yet to determine what
effect, if any, adoption will have on its financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for impairment of long-lived assets to be held and
used, and of long-lived assets and components of an entity to be disposed of.
The Company adopted the Statement as of January 1, 2002. Except for
reclassifying these financial statements to reflect Sawhill Tubular as a
discontinued operation, the Company does not expect the Statement will have a
material effect on its financial statements.
Investments: The Company has investments in associated companies that are
accounted for under the equity method. Because the operations of these
companies are integrated with its basic steelmaking operations, the Company
includes its proportionate share of the income (loss) of these associated
companies in cost of products sold in its consolidated statements of income.
The Company has a note receivable of $35.0 due from an entity in which it
holds an indirect equity interest, Combined Metals of Chicago LLC. The note is
subordinate to outstanding bank indebtedness of the entity. In the first
quarter of 2002, the Company provided a $4.0 letter of credit to support a
portion of the entity's bank indebtedness proportionate to the company's
indirect equity investment.
The Company's investment in AFSG Holdings, Inc. represents the carrying
value of its discontinued insurance and finance leasing businesses, which have
been largely liquidated. The activities of the remaining operating companies
are being "runoff" and the group is accounted for as a discontinued operation
under the liquidation basis of accounting, whereby future cash inflows and
outflows are considered. In the fourth quarter of 2001, AFSG Holdings
distributed $30.0 of excess funds to the Company, which reduced the Company's
carrying value of its AFSG investment. The Company is under no obligation to
support the operations or liabilities of this group.
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. Goodwill and other intangible
assets were also 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
both goodwill and other intangible assets was $6.1 in each of the years 1999
and 2000, and $5.5 in 2001. At December 31, 2000 and 2001, accumulated
amortization of goodwill and other intangible assets was $54.8 and $39.5,
respectively.
The Company assesses whether its goodwill and other intangible assets are
impaired as required by Statement No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," based on an
evaluation of undiscounted projected cash flows through the remaining
amortization period. If an impairment exists, the amount of such impairment is
determined based on the estimated fair value of the asset. Statement No. 144
supercedes Statement No. 121 effective January 1, 2002.
F-9
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed annually for impairment. The
Company adopted Statement No. 142 as of January 1, 2002 and has begun the
transition process of identifying its reporting units, allocating goodwill and
determining fair values. The Statement allows the Company until June 30, 2002
to complete this initial stage, which determines whether impairment exists, and
until the end of the year to determine the final effect adoption will have on
its financial statements. The Company currently does not know if an impairment
will be necessary. In 2001, $4.0 of the above amortization expense was related
to goodwill.
Had the Company adopted Statement No. 142 at the beginning of 1999, income
(loss) before extraordinary item and net income (loss) would have been adjusted
as follows.
1999 2000 2001
----- ------ ------
Reported income (loss) before extraordinary item........ $78.8 $132.4 $(92.4)
Goodwill amortization, net of tax....................... 2.2 2.2 2.5
----- ------ ------
Adjusted income (loss) before extraordinary item........ 81.0 134.6 (89.9)
Extraordinary loss on retirement of debt, net of tax.... 13.4 -- --
----- ------ ------
Adjusted net income (loss).............................. $67.6 $134.6 $(89.9)
===== ====== ======
Basic and diluted earnings per share:
Reported income (loss) before extraordinary item..... $0.69 $ 1.20 $(0.87)
Goodwill amortization................................ 0.02 0.02 0.03
----- ------ ------
Adjusted income (loss) before extraordinary item..... 0.71 1.22 (0.84)
Extraordinary loss on retirement of debt, net of tax. 0.13 -- --
----- ------ ------
Adjusted net income (loss)........................... $0.58 $ 1.22 $(0.84)
===== ====== ======
Pension and Other Postretirement Benefits Accounting: Under its method of
accounting for pension and other postretirement benefit plans, the Company
recognizes into income, as a fourth quarter adjustment, any unrecognized
actuarial net gains or losses that exceed 10% of the larger of benefit
obligations or plan assets. Amounts inside this 10% corridor are amortized over
the average remaining service life of active plan participants. Actuarial net
gains and losses occur when actual experience differs from any of the many
assumptions used to value the plans. Differences between the expected and
actual returns on plan assets and changes in interest rates, which affect the
discount rates used, can have a significant impact on the calculation of
pension net gains and losses from year to year. For other postretirement
benefit plans, increases in healthcare trend rates that outpace discount rates
could cause unrecognized net losses to increase to the point that an
outside-the-corridor charge would be necessary. By immediately recognizing net
gains and losses outside the corridor, the Company's accounting method limits
the amounts by which balance sheet assets and liabilities differ from economic
net assets or obligations related to the plans. During 2001, the combination of
a 6% loss on its pension plan assets, and a decrease in discount rates from 8%
to 7.25%, caused the Company to recognize, in the fourth quarter of 2001, a
non-cash pre-tax pension charge of $192.2 in operating loss and $1.8 in
discontinued operations. In addition, because the decline in asset value also
led to the pension plans becoming underfunded, the Company recorded a non-cash
after-tax reduction in equity of approximately $163.4.
F-10
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Earnings Per Share: Reconciliation of numerators and denominators for basic
and diluted EPS computations is as follows:
1999 2000 2001
------ ------ ------
Income (loss) for calculation of basic earnings per share:
Income (loss) from continuing operations..................................... $ 71.3 $134.0 $(91.2)
Less: Preferred stock dividends.......................................... 7.6 1.0 0.9
------ ------ ------
Income (loss) from continuing operations available to common stockholders.... 63.7 133.0 (92.1)
Income (loss) from discontinued operations................................... 7.5 (1.6) (1.2)
Extraordinary loss on retirement of debt..................................... 13.4 -- --
------ ------ ------
Net income (loss) available to common stockholders........................... $ 57.8 $131.4 $(93.3)
====== ====== ======
Common shares outstanding (weighted average in millions)..................... 102.4 109.5 107.7
====== ====== ======
Basic earnings per share:
Income (loss) from continuing operations..................................... $ 0.62 $ 1.21 $(0.86)
Income (loss) from discontinued operations................................... 0.07 (0.01) (0.01)
Extraordinary loss on retirement of debt..................................... 0.13 -- --
------ ------ ------
Net income (loss)............................................................ $ 0.56 $ 1.20 $(0.87)
====== ====== ======
Income (loss) for calculation of diluted earnings per share:
Income (loss) from continuing operations..................................... $ 71.3 $134.0 $(91.2)
Less: Preferred stock dividends.......................................... 7.6 1.0 0.9
------ ------ ------
Income (loss) from continuing operations available to common stockholders.... 63.7 133.0 (92.1)
Income (loss) from discontinued operations................................... 7.5 (1.6) (1.2)
Extraordinary loss on retirement of debt..................................... 13.4 -- --
------ ------ ------
Net income (loss) available to common stockholders........................... $ 57.8 $131.4 $(93.3)
====== ====== ======
Shares (weighted average in millions):
Common shares outstanding.................................................... 102.4 109.5 107.7
Common stock options outstanding............................................. 0.5 0.1 --
------ ------ ------
Common shares outstanding as adjusted........................................ 102.9 109.6 107.7
====== ====== ======
Diluted earnings per share:
Income (loss) from continuing operations..................................... $ 0.62 $ 1.21 $(0.86)
Income (loss) from discontinued operations................................... 0.07 (0.01) (0.01)
Extraordinary loss on retirement of debt..................................... 0.13 -- --
------ ------ ------
Net income (loss)............................................................ $ 0.56 $ 1.20 $(0.87)
====== ====== ======
At the end of each year, the Company had outstanding stock options and/or
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.
1999 2000 2001
(Common shares in millions) ---- ---- ----
Stock options........................... 0.6 3.3 3.3
$3.625 convertible preferred stock...... 0.8 0.7 0.7
F-11
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
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 1999, 2000 and 2001 were $16.8, $15.3 and $13.9,
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. During 2001, 18% of
the Steel Operations' net sales were to General Motors Corporation. The Company
sells domestically to customers primarily in the Midwestern and Eastern United
States, while approximately 11% of sales are to foreign customers, primarily in
Canada, Mexico and Western Europe. Approximately 35% of trade receivables
outstanding at December 31, 2001 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.
Financial Instruments: Investments in debt securities are classified as
held-to-maturity because the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Investments in equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in other comprehensive
income. Realized gains and losses on sales of available-for-sale securities are
computed based upon initial cost adjusted for any other than temporary declines
in fair value. The Company has no investments that are considered to be trading
securities.
The carrying value of the Company's financial instruments does not differ
materially from their estimated fair value (primarily based on quoted market
prices) at the end of 2000 and 2001 with the exception of the Company's
long-term debt. At December 31, 2001, the fair value of the Company's long-term
debt, including current maturities, was approximately $1,409.7. This amount was
determined primarily from quoted market prices. The fair value estimate was
based on pertinent information available to management as of December 31, 2001.
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, 2000 was approximately $1,358.3.
The Company is a party to derivative instruments that are designated and
qualify as hedges under Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and related pronouncements. The Company's
objective in using such instruments is to protect its earnings and cash flows
from fluctuations in the fair value of selected commodities and currencies. As
of December 31, 2001 the Company had not entered into derivative instruments
that do not qualify as hedges.
In the ordinary course of business, the Company's income and cash flows may
be affected by fluctuations in the price of certain commodities used in its
production processes. The Company generally cannot recover higher energy and
raw material costs in its selling prices. For certain commodities where such
exposure exists, the Company uses cash settled commodity price swaps, with a
duration of up to three years, to hedge the price of a portion of its natural
gas, nickel, aluminum and zinc requirements. The Company designates these swaps
as cash flow hedges and the resulting changes in their fair value are recorded
in other comprehensive income. Subsequent gains and losses are recognized into
income in the same period as the underlying physical
F-12
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
transaction. As of December 31, 2001, currently valued outstanding commodity
hedges would result in the reclassification into earnings of $20.0 in
net-of-tax losses within the next twelve months.
In addition, in the ordinary course of business, the Company is subject to
risks associated with exchange rate fluctuations on monies received from its
European subsidiaries and other customers invoiced in European currencies. In
order to mitigate this risk, the Company has entered into a series of
agreements for the forward sale of euros at fixed dollar rates. The forward
contracts are entered into with durations of up to a year. A typical contract
is used as a cash flow hedge for the period from when an order is taken to when
a sale is recognized, at which time it converts into a fair value hedge of a
euro-denominated receivable. As a fair value hedge, the changes in the fair
value of the derivative and the gains or losses on the foreign-denominated
receivables are recorded currently in other income and provide an offset to one
another.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. In this documentation, the Company
specifically identifies the asset, liability, firm commitment or forecasted
transaction that has been designated as a hedged item and states how the
hedging instrument is expected to hedge the risks related to that item. The
Company formally measures effectiveness of its hedging relationships both at
the hedge inception and on an ongoing basis. The Company discontinues hedge
accounting prospectively when it determines that the derivative is no longer
effective in offsetting changes in the fair value or cash flows of a hedged
item; when the derivative expires or is sold, terminated or exercised; when it
is probable that the forecasted transaction will not occur; when a hedged firm
commitment no longer meets the definition of a firm commitment; or when
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
Accumulated Other Comprehensive Income: The components of accumulated other
comprehensive income (loss) at December 31 are as follows:
1999 2000 2001
----- ----- -------
Foreign currency translation............ $(0.6) $(2.7) $ (2.1)
Derivative instrument hedges............ -- -- (28.9)
Unrealized gain/(loss) on investments... 0.3 (1.0) 8.3
Minimum pension liability............... (1.4) (1.2) (164.6)
----- ----- -------
Total................................... $(1.7) $(4.9) $(187.3)
===== ===== =======
2. Merger with Armco Inc.
On September 30, 1999, the Company consummated the merger of Armco with and
into AK Steel. Armco was a leading producer of stainless and 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.
Effective with the merger, the Company paid cash and issued shares of its
common stock to convert the outstanding shares of two series of Armco's
convertible preferred stock. In 1999, accrued dividends of $6.7 on these two
series of preferred stock are reported as minority interest on the consolidated
statements of income.
F-13
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
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 $17.5 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 for the six months ended
June 30, 1999. Eliminations/other primarily reflects the elimination of
intercompany transactions, the additional accrual of income taxes, including
taxes on extraordinary losses and cumulative effect of the accounting change.
The adjustment in eliminations/other for stockholders' equity also includes
$210.0 of cumulative credits for revaluation of the deferred tax asset.
AK
Holding Armco Eliminations/Other Total
-------- ------ ------------------ --------
Revenues..................................... $1,348.1 $794.5 $(53.1) $2,089.5
Extraordinary loss on retirement of debt..... 12.0 2.8 (1.4) 13.4
Net income................................... 35.5 63.7 (29.9) 69.3
Stockholders' equity......................... 957.4 235.5 132.0 1,324.9
3. Stockholders' Equity
Preferred Stock: The Company's $3.625 cumulative convertible 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 $50.3625 per share until October 15, 2002,
after which, the redemption price is reduced to $50 per share. 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. At December 31, 2000 and 2001, there were
authorized, issuable and outstanding 259,481 shares of $3.625 preferred stock
with a $1 per share par value.
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: A common stock dividend of $0.125 per share was paid in each
quarter of 2000. In each of the first two quarters of 2001, the Company paid a
common stock dividend of $0.0625 per share before suspending common stock
dividends for the final two quarters. In addition, from the fourth quarter of
1999 through the third quarter of 2001, the Company paid regular quarterly
dividends of $0.90625 per share on its $3.625 preferred stock. In the fourth
quarter of 2001, the Company suspended the regular preferred stock dividend.
The declaration and payment of cash dividends on common and preferred stock is
subject to restrictions imposed by a covenant contained in the instruments
governing its outstanding senior debt. Common and preferred dividends were
reduced and ultimately suspended in 2001 because of the restrictions imposed by
this covenant. As of December 31, 2001, this covenant continues to preclude the
payment of any dividends.
The preferred stock dividends are cumulative and, as such, holders of the
$3.625 preferred stock are entitled to payment of all accrued, but unpaid
dividends, before payment of dividends to the holders of common stock. At
December 31, 2001, preferred stock dividends are in arrears $0.2 in the
aggregate or $0.90625 per share.
At its January 17, 2002 meeting, the Board of Directors did not declare a
quarterly dividend on either of its common or preferred stock because of the
covenant restriction described above.
F-14
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
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. 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). The nonqualified stock options vest at the rate of 33%
per year over three years. 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.
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 and Armco's award program. The compensation cost that has been charged
against income for the restricted stock awards issued under the SIP was $8.1,
$5.9 and $5.0 for 1999, 2000 and 2001, respectively. The Company adopted the
pro forma disclosure requirements of Statement No. 123, "Accounting for
Stock-Based Compensation." Had compensation cost for the Company's stock
compensation plans been determined based on fair value at the grant dates for
awards under these plans consistent with the methodology of Statement No. 123,
the Company's net income (loss) and earnings per share for each year would have
been reduced to the pro forma amounts indicated below:
1999 2000 2001
----- ------ ------
Net income (loss)....................... As reported $65.4 $132.4 $(92.4)
Pro forma 62.6 129.8 (94.2)
Basic earnings (loss) per share......... As reported 0.56 1.20 (0.87)
Pro forma 0.54 1.18 (0.88)
Diluted earnings (loss) per share....... As reported 0.56 1.20 (0.87)
Pro forma 0.53 1.18 (0.88)
F-15
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
The fair value of 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:
1999 2000 2001
-------- -------- ---------
Expected volatility..................... 25.2% 30.2% 33.9%
Risk free interest rates................ 5.61% 6.64% 4.87%
Expected lives.......................... 5.0 yrs. 5.0 yrs. 8.25 yrs.
Assumptions used for the calculation of the fair value of the options to
purchase Armco stock issued in 1999 included an expected volatility of 40%, a
risk free interest rate of 4.7%, an expected life of five years and the
expectation that no dividends would be paid.
A summary of the status of stock options under the SIP and Armco's plan as
of December 31, 1999, 2000 and 2001 and changes during each of those years is
presented below:
1999 2000 2001
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ------------- --------- -------- --------- -------- --------- --------
Outstanding at beginning of year........ 4,067,517 $16.27 2,883,471 $17.90 3,405,519 $17.88
Granted................................. 943,254 18.58 789,000 16.15 580,500 9.37
Exercised............................... 1,702,851 14.34 252,952 13.02 -- --
Forfeited............................... 391,658 16.97 14,000 19.27 558,000 17.51
Expired................................. 32,791 31.60 -- -- -- --
--------- --------- ---------
Outstanding at end of year.............. 2,883,471 17.90 3,405,519 17.88 3,428,019 16.50
========= ========= =========
Options exercisable at year end......... 1,956,169 15.68 2,156,047 17.60 2,215,881 18.01
The weighted average fair value per share of options granted during 1999,
2000 and 2001 were $5.68, $4.59 and $3.27, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$ 8.23 to $10.98 747,000 8.9 yrs. $ 9.48 68,010 $10.23
$10.99 to $13.72 392,724 3.2 yrs. 11.94 355,224 11.94
$13.73 to $16.46 167,332 3.4 yrs. 13.84 167,332 13.84
$16.47 to $19.21 1,164,307 6.9 yrs. 18.49 814,646 18.60
$19.22 to $21.95 513,656 4.8 yrs. 20.39 511,990 20.39
$21.96 to $24.69 418,000 7.3 yrs. 23.51 282,010 23.50
$24.70 to $27.44 25,000 7.3 yrs. 26.64 16,669 26.64
During 1999, 2000 and 2001, the Company issued to certain employees 650,973,
476,641 and 285,994 shares of common stock, subject to restrictions, with
weighted average grant-date fair values of $18.39, $12.68 and $9.26 per share,
respectively.
F-16
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
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.
The United States and foreign components of income (loss) before income
taxes consist of the following:
1999 2000 2001
------ ------ -------
United States........................... $140.0 $210.7 $(148.5)
Foreign................................. 1.9 1.9 3.7
------ ------ -------
Total................................ $141.9 $212.6 $(144.8)
====== ====== =======
Significant components of the Company's deferred tax assets and liabilities
at December 31, 2000 and 2001 are as follows:
2000 2001
------- --------
Deferred tax assets:
Net operating loss and tax credit carryforwards.......... $ 420.4 $ 514.1
Postretirement reserves.................................. 571.6 588.0
Pension reserves......................................... -- 78.5
Other reserves........................................... 124.0 104.4
Valuation reserve........................................ (139.5) (157.7)
------- --------
Total deferred assets................................ 976.5 1,127.3
------- --------
Deferred tax liabilities:
Depreciable assets....................................... (573.3) (613.9)
Inventories.............................................. (27.8) (43.3)
Pension assets........................................... (78.5) --
------- --------
Total deferred liabilities........................... (679.6) (657.2)
------- --------
Net asset............................................ $ 296.9 $ 470.1
======= ========
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 healthcare, 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.
F-17
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
At December 31, 2001, the Company had regular tax net operating loss
carryforwards for federal tax purposes expiring as follows:
Net
Operating Loss
Year Expiring Carryforward
------------- --------------
2003.................................... $ 9.1
2004.................................... 129.4
2005.................................... 244.6
2006.................................... 199.2
2007.................................... 139.8
2008.................................... 33.3
2009.................................... 44.4
2010.................................... 35.1
2019.................................... 57.6
2020.................................... 38.1
2021.................................... 219.1
--------
Total................................ $1,149.7
========
At December 31, 2001 the Company had Alternative Minimum Tax ("AMT") net
operating loss carryforwards of $717.7 which, unless utilized, will expire in
the years 2002 through 2021. In addition, at December 31, 2001, the Company had
unused AMT credit carryforwards of $70.5, which may be used to offset future
regular income tax liabilities. These credits can be carried forward
indefinitely.
The Company records a valuation allowance to reduce its deferred tax assets
to an amount that is more likely than not to be realized. In estimating levels
of future taxable income, the Company has considered historical results of
operations in recent years and would, if necessary, consider the implementation
of prudent and feasible tax planning strategies to generate future taxable
income. If future taxable income is less than the amount that has been assumed
in determining the deferred tax asset, then an increase in the valuation
reserve will be required, with a corresponding charge against income. On the
other hand, if future taxable income exceeds the level that has been assumed in
calculating the deferred tax asset, the valuation reserve could be reduced,
with a corresponding credit to income. 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.
In order to fully recognize the deferred tax asset recorded as of December
31, 2001, the Company will need to generate taxable income of approximately $1
billion over a period of approximately 20 or more years. In the short term, the
more important issue is the ability to utilize the former Armco loss carryovers
expiring in the years 2004-2010. The portion of the asset related to these
losses, net of the valuation allowance recorded, is approximately $163.0.
Realization of this portion of the asset will require taxable income of
approximately $465.0 prior to the expiration of these loss carryovers.
F-18
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Significant components of the provision (benefit) for income taxes are as
follows:
1999 2000 2001
----- ----- ------
Continuing operations:
Current:
Federal................................................ $ 2.3 $(9.7) $ (2.7)
State.................................................. 3.5 (4.9) 0.4
Foreign................................................ 0.7 0.9 1.5
Deferred:
Federal................................................ 60.8 72.1 (51.7)
State.................................................. (3.4) 20.2 (0.9)
Foreign................................................ -- -- (0.2)
----- ----- ------
Total tax provision on continuing operations........ 63.9 78.6 (53.6)
Discontinued operations....................................... -- (0.9) (0.7)
Extraordinary loss on early retirement of debt................ (8.7) -- --
----- ----- ------
Total tax provision (benefit)....................... $55.2 $77.7 $(54.3)
===== ===== ======
The reconciliation of income tax on continuing operations computed at the
U.S. federal statutory tax rates to actual income tax expense (benefit) is as
follows:
1999 2000 2001
----- ------ ------
Income (loss) at statutory rate............................. $49.0 $ 73.8 $(51.9)
State and foreign tax provisions............................ 0.8 16.2 0.8
Reduction in deferred tax asset valuation reserve........... (0.2) (84.7) 2.2
Expired net operating and capital loss carryovers........... -- 73.9 --
Non-deductible severance and merger expenses................ 14.5 -- --
Other permanent differences................................. (0.2) (0.6) (4.7)
----- ------ ------
Total tax provision (benefit) on continuing operations... $63.9 $ 78.6 $(53.6)
===== ====== ======
The Company and the Internal Revenue Service have concluded the examinations
of federal income tax returns filed for the years 1994 through 1998. The
Company's 1999 and 2000 returns 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.
The statute of limitations has lapsed with respect to Armco's federal income
tax returns for 1997 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 was in a cumulative NOL carryforward
position from 1983 through the date of the merger with the Company in September
1999. In addition, at the time of the merger, Armco had loss carryforwards that
were substantially in excess of the amounts that 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.
F-19
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
6. Long-Term Debt and Other Financing
At December 31, 2000 and 2001, the Company's long-term debt balances were as
follows:
2000 2001
-------- --------
Senior Secured Notes Due 2004 (interest rates of 8.48% to 9.05%)..... $ 250.0 $ 187.5
9 1/8% Senior Notes Due 2006......................................... 550.0 550.0
9% Senior Notes Due 2007............................................. 117.4 117.4
8 7/8% Senior Notes Due 2008......................................... 33.5 33.5
7 7/8% Senior Notes Due 2009......................................... 450.0 450.0
Tax Exempt Financing Due 2008 through 2029 (variable rates of 1.3% to
5.1% in 2001)...................................................... 50.9 50.2
Other, including unamortized discount................................ (1.0) 13.9
-------- --------
Total debt........................................................ 1,450.8 1,402.5
Less: current maturities............................................. 63.2 78.0
-------- --------
Total long-term debt.............................................. $1,387.6 $1,324.5
======== ========
At December 31, 2001, the maturities of long-term debt are as follows:
2002.................................... $ 78.0
2003.................................... 62.5
2004.................................... 62.5
2005.................................... --
2006.................................... 550.0
2007 and thereafter..................... 649.5
--------
Total................................ $1,402.5
========
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, 2000 and 2001, $1.5 and $15.5, respectively,
of long-term debt, including current maturities, represents financing used to
construct certain other fixed assets, which are pledged as collateral.
On January 14, 1999, 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, 2001, the Company had $198.4 of availability under its
$300.0 accounts receivable purchase credit facility, which expires September
30, 2004, net of $101.6 used for letters of credit.
F-20
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
7. Operating Leases
Rental expense in income (loss) from continuing operations was $24.4, $25.0
and $19.2 for 1999, 2000 and 2001, respectively.
At December 31, 2001, obligations to make future minimum lease payments were
as follows:
2002........................................................ $1.7
2003........................................................ 1.4
2004........................................................ 1.0
2005........................................................ 0.6
2006........................................................ 0.5
8. Pension and Other Postretirement Benefit Plans
The Company provides noncontributory pension benefits to most employees and
provides various healthcare and life insurance benefits to most retirees. While
the major pension plans are not fully funded, the Company would not be
obligated to make minimum funding contributions until at least 2003. Although
most retiree health and life insurance benefits are funded as claims are paid,
the Company has established a healthcare trust as a means of prefunding a
portion of these benefits.
F-21
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Pension Benefits Other Benefits
------------------ --------------------
2000 2001 2000 2001
-------- -------- --------- ---------
Change in benefit obligations:
Benefit obligations at beginning of year................. $3,229.8 $3,136.7 $ 1,412.0 $ 1,476.5
Service cost............................................. 33.9 33.3 8.3 8.7
Interest cost............................................ 239.7 239.2 105.2 113.6
Plan participants' contributions......................... -- -- 13.4 15.4
Actuarial loss/(gain).................................... (72.0) 244.1 58.7 192.4
Amendments............................................... 22.8 11.9 0.4 --
Benefits paid............................................ (317.5) (323.8) (121.5) (134.2)
-------- -------- --------- ---------
Benefit obligations at end of year....................... $3,136.7 $3,341.4 $ 1,476.5 $ 1,672.4
======== ======== ========= =========
Change in plan assets:
Fair value of plan assets at beginning of year........... $3,521.5 $3,472.4 $ 167.9 $ 161.6
Actual return on plan assets............................. 261.1 (212.8) 11.8 (8.3)
Employer contributions................................... 7.3 5.9 90.0 70.1
Plan participants' contributions......................... -- -- 13.4 15.4
Benefits paid............................................ (317.5) (323.8) (121.5) (134.2)
-------- -------- --------- ---------
Fair value of plan assets at end of year................. $3,472.4 $2,941.7 $ 161.6 $ 104.6
======== ======== ========= =========
Funded status............................................... $ 335.7 $ (399.7) $(1,314.9) $(1,567.8)
Unrecognized net actuarial loss/(gain)...................... (280.9) 331.5 (52.4) 166.5
Unrecognized prior service cost............................. 114.4 113.7 (87.0) (72.7)
Unrecognized initial net benefit obligation................. 8.2 1.9 -- --
-------- -------- --------- ---------
Net amount recognized....................................... $ 177.4 $ 47.4 $(1,454.3) $(1,474.0)
======== ======== ========= =========
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost..................................... $ 206.5 $ 1.4 $ -- $ --
Accrued benefit liability................................ (32.5) (334.4) (1,454.3) (1,474.0)
Intangible asset......................................... 2.2 108.2 -- --
Accumulated other comprehensive income................... 1.2 272.2 -- --
-------- -------- --------- ---------
Net amount recognized.................................... $ 177.4 $ 47.4 $(1,454.3) $(1,474.0)
======== ======== ========= =========
Weighted average assumptions at year end for the consolidated Company are as
follows:
Pension Benefits Other Benefits
----------------- -----------------
1999 2000 2001 1999 2000 2001
---- ----- ---- ---- ----- ----
Discount rate..................................... 7.75% 8.00% 7.25% 7.75% 8.00% 7.25%
Expected return on plan assets.................... 9.50% 10.00% 9.25% 9.50% 10.00% 9.25%
Rate of compensation increase..................... 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
For measurement purposes, healthcare costs are assumed to increase 8% during
2002, and thereafter this rate decreases 1% per year until reaching the
ultimate trend rate of 4.25% in 2006.
F-22
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
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 $42.1, $28.4 and $1.6, respectively, for 2000,
and $3,331.4, $3,262.8 and $2,931.5, respectively for 2001.
The components of net periodic benefit costs for the years 1999, 2000 and
2001 are as follows:
Pension Benefits Other Benefits
------------------------- ----------------------
1999 2000 2001 1999 2000 2001
------- ------- ------- ------ ------ ------
Components of net periodic benefit cost:
Service cost............................................. $ 35.9 $ 33.9 $ 33.3 $ 9.5 $ 8.3 $ 8.7
Interest cost............................................ 228.8 239.7 239.2 96.7 105.2 113.6
Expected return on plan assets........................... (299.0) (321.2) (332.8) (14.3) (14.0) (12.7)
Amortization of prior service cost....................... 8.8 12.9 14.3 (14.4) (14.3) (14.4)
Recognized net actuarial loss/(gain)
Annual amortization.................................. 3.2 (20.4) (18.3) (3.4) (7.7) (3.7)
Pension charge....................................... -- -- 194.0 -- -- --
Settlement curtailment loss/(gain).......................... 13.8 1.1 -- (0.7) -- --
Amortization of unrecognized initial net obligation......... 6.4 6.3 6.3 -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit cost (income).......................... $ (2.1) $ (47.7) $ 136.0 $ 73.4 $ 77.5 $ 91.5
======= ======= ======= ====== ====== ======
The fourth quarter pension charge was recorded to recognize a net actuarial
loss outside the 10% corridor under the Company's accounting for pensions and
other postretirement benefits as described in Note 1.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare plans. A one-percentage-point change in the assumed
healthcare cost trend rates would have the following effects:
One-Percentage-Point
-------------------
Increase Decrease
-------- --------
Effect on total service cost and interest cost components... $ 12.2 $ (10.9)
Effect on postretirement benefit obligation................. 139.7 (124.9)
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 $11.5 in 1999, $12.6 in 2000 and $2.2 in 2001. The 2001 expense
was significantly lower because no variable matching contribution was payable
to non-represented employees for the year.
9. Segment Information
The Company's Steel Operations currently consist of steel production and
finishing plants in Butler, Pennsylvania; Ashland, Kentucky; Coshocton,
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, 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 and a Walbridge, Ohio
manufacturer and distributor that further finishes flat rolled steel into
welded steel tubing used primarily in the automotive, large truck and
construction markets. At the beginning of 2000, a redundant galvanizing line in
Dover, Ohio was shut down (Note 10).
F-23
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
The Company's Snow and Ice Control Products segment consists of Douglas
Dynamics, L.L.C., the largest North American manufacturer of snowplows, and
salt and sand spreaders for four-wheel drive light trucks.
In addition, the Company owns and operates an industrial park on the
Houston, Texas ship channel, which is reported in Other Operations, below.
On December 18, 2001, the Company announced that it had signed a letter of
intent to sell the assets of the Sawhill Tubular Division to John Maneely
Company. The sale was completed on April 19, 2002. In accordance with Statement
No. 144, which the Company adopted on January 1, 2002, Sawhill Tubular's
results were reclassified to discontinued operations, and its assets subject to
the sale were grouped into assets held for sale in the financial presentation
below.
Accounting policies for the segments are the same as those described in the
summary of significant accounting policies in Note 1. Management evaluates the
performance of these segments based on their operating profit. All corporate
expenses and assets are included in the Steel Operations segment. Information
regarding the Company's operating segments is as follows:
1999 2000 2001
-------- -------- --------
Net Sales:
Steel Operations......................................... $4,054.8 $4,276.8 $3,681.7
Snow and Ice Control Products............................ 119.2 112.8 138.8
Other Operations......................................... 10.8 14.1 12.9
-------- -------- --------
Total................................................ $4,184.8 $4,403.7 $3,833.4
======== ======== ========
Operating Profit (Loss):
Steel Operations......................................... $ 201.7 $ 300.7 $ (66.7)
Snow and Ice Control Products............................ 36.1 30.5 41.0
Other Operations......................................... 7.0 9.6 7.9
-------- -------- --------
Total................................................ $ 244.8 $ 340.8 $ (17.8)
======== ======== ========
Depreciation:
Steel Operations......................................... $ 202.7 $ 223.8 $ 222.1
Snow and Ice Control Products............................ 2.9 2.7 2.9
Other Operations......................................... 0.5 0.8 0.8
-------- -------- --------
Total................................................ $ 206.1 $ 227.3 $ 225.8
======== ======== ========
Capital Investments:
Steel Operations......................................... $ 314.5 $ 127.2 $ 101.8
Snow and Ice Control Products............................ 7.5 5.0 3.0
Other Operations......................................... 12.1 3.6 3.2
-------- -------- --------
Total................................................ $ 334.1 $ 135.8 $ 108.0
======== ======== ========
Total Assets:
Steel Operations......................................... $5,042.1 $5,044.0 $5,039.5
Snow and Ice Control Products............................ 72.6 71.0 74.5
Assets held for sale..................................... 88.9 103.5 85.0
Other Operations......................................... 23.5 21.3 26.8
-------- -------- --------
Total................................................ $5,227.1 $5,239.8 $5,225.8
======== ======== ========
F-24
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
As a result of continued growth in the Snow and Ice Control Products
business, its operations were reclassified from Other Operations in 2001. AK
Tube L.L.C., acquired in 2001, was reclassified from Other Operations to Steel
Operations to recognize its role as a vertically integrated steel processor.
All prior periods were restated to reflect these changes.
The following presents Steel Operations' net sales by product line:
1999 2000 2001
-------- -------- --------
Carbon...................................................... $2,510.4 $2,579.9 $2,280.0
Stainless and electrical.................................... 1,544.4 1,696.9 1,375.9
Tubular..................................................... -- -- 24.1
Other....................................................... -- -- 1.7
-------- -------- --------
Total net sales.......................................... $4,054.8 $4,276.8 $3,681.7
======== ======== ========
Steel Operations net sales to General Motors Corporation, the Company's
largest customer, accounted for approximately 15%, 15% and 18% of the segment's
net sales in 1999, 2000 and 2001, 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 $263.1, $332.0 and $407.1 for 1999, 2000 and 2001, respectively.
Steel Operations operating profit (loss) in 1999 includes $99.7 of special
charges and in 2001 includes $49.9 in an unusual gain and $192.2 of the fourth
quarter pension charge (Note 10). Steel Operations operating profit (loss) also
includes income (loss) from equity companies of $2.1, $(1.4) and $0.8 for 1999,
2000 and 2001, respectively.
10. Special Charges and Unusual Items
In 1999, the Company recognized $99.7 in special charges for costs related
to the merger with Armco, 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 and $20.1 for the closure of a redundant
facility. The Company has terminated all of the 45 employees related to the
severance accrual. Approximately $54.0 of the $99.7 required the outlay of cash
in 1999, with additional cash payments of approximately $7.0 made in 2000 and
$0.5 made in 2001. With the exception of certain employee benefits and
environmental expenditures that will be funded over a long period of time, the
remainder of the special charges do not require the outlay of cash; there are
no remaining liabilities associated with the 1999 special charge.
The charge for closure of the 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,
resulted in the termination of 120 employees, the majority of which were
represented hourly production workers. The following provides details of that
portion of the special charge relating to the closure:
Asset impairments..................................................... $ 7.7
Benefit plan curtailment losses....................................... 9.7
Termination benefits.................................................. 1.0
Environmental liabilities............................................. 1.0
Other expenditures.................................................... 0.7
-----
Total.............................................................. $20.1
=====
F-25
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
In the fourth quarter of 2001, the Company's primary health insurance
provider converted from a mutual insurance company to a corporation, issuing
shares of its common stock to certain of its long-time policyholders. As a
major policyholder, AK Steel received shares of common stock, recording a
benefit of $49.9. This benefit is net of a $5.2 liability established for the
portion of the proceeds deemed to be healthcare plan assets, the value of which
was determined by multiplying the fair value of the shares times the ratio of
employee-paid premiums to total premiums paid to Anthem.
As more fully explained in Note 1 in the paragraph entitled Pension and
Other Postretirement Benefits Accounting, under its method of accounting for
pension and other postretirement benefit plans, the Company recognized, as a
fourth quarter 2001 unusual item, a non-cash pension charge of $192.2. An
additional $1.8 pension charge related to Sawhill Tubular, a discontinued
operation.
11. Commitments
The principal raw materials required for AK Steel's steel 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 annual and
multi-year agreements. Most purchases of carbon steel slabs, carbon and
stainless steel scrap, natural gas 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 energy and raw material requirements.
The Company has entered into derivative transactions to hedge the price of
natural gas and certain raw materials. As of December 31, 2001, current and
noncurrent liabilities on the consolidated balance sheets include $33.8 and
$6.0, respectively, for the fair value of these derivatives. The effect on cash
of settling these liabilities is expected to be offset by lower prices paid for
the related commodities.
At December 31, 2001, commitments for future capital investments totaled
approximately $46.7, all of which will be funded in 2002.
12. Legal, Environmental Matters and Contingencies
Domestic steel producers, including the Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of
human health and the environment.
The Company has expended the following for environmental-related capital
investments and environmental compliance:
1999 2000 2001
----- ----- -----
Environmental related capital investments......... $ 7.1 $10.1 $18.8
Environmental compliance costs.................... 85.9 93.5 99.5
In addition to the items discussed below, the Company is involved in routine
litigation, environmental proceedings, and claims pending with respect to
matters arising out of the normal conduct of the business. Except to the
limited extent noted below with respect to the claims in the Federal Action,
management believes that the ultimate disposition of the following 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.
F-26
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
AK Steel and its predecessors have been conducting steel manufacturing and
related operations for more than 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 in the past 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 may 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, AK Steel could be directed to expend funds
for remedial activities at the former disposal areas. Because of the uncertain
status of these investigations, however, management cannot predict whether or
when such expenditures might be required or their magnitude.
On July 27, 2001, AK Steel received a Special Notice Letter from the EPA
requesting that AK Steel agree to conduct a Remedial Investigation/Feasibility
Study ("RI/FS") and enter into an administrative order on consent pursuant to
Section 122 of CERCLA regarding the former Hamilton Plant of Armco located in
New Miami, Ohio. The Hamilton Plant is no longer an operating steel mill,
having ceased operations in 1990, and all of its former structures have been
demolished and removed. While AK Steel does not believe that a site-wide RI/FS
is necessary or appropriate at this time, AK Steel has offered to negotiate
with the EPA concerning the specific terms and conditions under which it would
conduct such a study. If an agreement with the EPA cannot be reached on the
specific terms and conditions of the proposed RI/FS, AK Steel intends to
contest this matter vigorously.
The Company has accrued the projected cost of the study at the Hamilton
Plant of approximately $1.0, and the study is projected to take approximately
five years to complete.
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 the petition for removal credits, AK Steel could
incur additional costs to construct pretreatment facilities at the Middletown
Works.
F-27
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
On February 27, 1995, the Ohio Environmental Protection Agency ("OEPA")
issued a Notice of Violation 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.
In addition, AK Steel is negotiating with the EPA for an order concerning these
same waste management issues.
On June 29, 2000, the United States filed a complaint on behalf of the EPA
against AK Steel in the U. S. District Court for the Southern District of Ohio
(the "Federal Action") for alleged violations of the Clean Air Act, the Clean
Water Act and the RCRA. On the same date, AK Steel filed a Verified Complaint
for Declaratory and Injunctive Relief in the Court of Common Pleas for Butler
County, Ohio (the "State Action") against the State of Ohio and the OEPA
seeking a declaration that, among other things, (a) AK Steel is in compliance
with its operating permits for the blast furnace and basic oxygen furnaces at
its Middletown Works, which would preclude the State of Ohio and the OEPA from
taking any action to order or enforce obligations on AK Steel with respect to
those facilities, and (b) that any emissions from the Middletown Works do not
cause, or otherwise contribute to, a public nuisance. On June 30, 2000, the
State of Ohio moved to intervene in the Federal Action. On March 29, 2001, the
U.S. District Court ruled that the State of Ohio could conditionally intervene
in the Federal Action. Subsequently, Ohio filed a conditional complaint, which
included various environmental claims, including seven air pollution claims. On
May 9, 2001, AK Steel moved to dismiss all of Ohio's claims in the Federal
Action. On July 27, 2001, the Court of Common Pleas in the State Action
declared null and void two Notices of Violation issued by the OEPA upon which
certain of the air pollution claims of the EPA and Ohio in the Federal Action
were predicated. Subsequently, the court held that that effectively concludes
the State Action. AK Steel has appealed that holding to the 12/th/ District
Court of Appeals in Butler County, Ohio. On October 17, 2001, the OEPA issued a
similar new Notice of Violation, but moved to amend its conditional complaint
in the Federal Action to withdraw four of its air pollution claims, which were
predicated on the two original Notices of Violation that were declared null and
void. On September 27, 2001, the U.S. District Court dismissed with prejudice
the EPA's air pollution claim, which had been predicated on the two voided
Notices of Violation letters. In addition, on December 19, 2001, the U.S.
District Court stayed the remaining three air pollution claims of the OEPA in
the Federal Action pending resolution of a related administrative appeal to the
Ohio Environmental Review Appeals Commission addressing the newly issued OEPA
Notice of Violation. AK Steel's motion to dismiss the OEPA claims not yet
dismissed in the Federal Action remains pending. No trial date has yet been set
in the Federal Action. AK Steel is vigorously contesting all of the remaining
claims. If OEPA and/or the EPA are completely successful in obtaining the
relief they seek in the Federal Action with respect to their air pollution
claims, it could result in significant penalties and require a substantial
capital investment to install interim pollution control equipment on the blast
furnace and basic oxygen furnaces at the Middletown Works under current federal
pollution control regulations before certain proposed new federal regulations
are made final. Once those proposed new federal regulations become final, AK
Steel could be required to make another substantial capital investment to
replace the interim pollution control equipment. Under those circumstances, the
Company may conclude that it is more cost-effective to purchase slabs than to
make them at the Middletown Works and may elect to shut down the hot end
facilities of the Middletown Works. If the EPA and OEPA are completely
successful in obtaining the relief they seek in the Federal Action with respect
to their water and/or RCRA claims, it could result in substantial penalties and
an order requiring AK Steel to investigate and remediate alleged
polychlorinated biphenyl and polycyclic aromatic hydrocarbon contamination in
Monroe Ditch and Dick's Creek, which are located on and adjacent to the
Middletown Works. At this time, the Company is unable to estimate the cost of
an adverse outcome related to the air pollution, water pollution or RCRA claims
or the potential cost of a shutdown of the hot end of the Middletown Works.
On September 30, 1998, Armco received an order from the EPA under Section
3013 of RCRA requiring it to develop a plan for investigation of eight areas of
the Mansfield Works that allegedly could be sources of
F-28
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
contamination. A site investigation began in November 2000 and is continuing.
The Company has accrued the projected cost of the study at the Mansfield Works
of approximately $1.4, and the study is projected to take approximately five
years to complete.
On June 27, 2000, the EPA issued an Emergency Order pursuant to the Safe
Drinking Water Act to AK Steel's Butler Works located in Butler, Pennsylvania
concerning discharge of nitrate/nitrite compounds to the Connoquenessing Creek,
an occasional water source for the Borough of Zelienople. On March 2, 2001, AK
Steel entered in an agreed administrative order with the EPA calling for, among
other things, a decrease in the levels of nitrates and nitrites in the treated
water discharged to waters of the Commonwealth of Pennsylvania by AK Steel's
Butler Works and for the provision of emergency drinking water for Zelienople
during certain times when it must draw drinking water from the Connoquenessing
Creek. AK Steel has taken and is continuing to take the measures necessary to
comply with that order.
On July 13, 2001, Orinoco Iron, C.A. ("Orinoco") filed an action against AK
Steel in the United States District Court for the Southern District of Ohio,
Case No. C-1-01-461. Orinoco and AK Steel are parties to a contract whereby
Orinoco supplies AK Steel with a form of iron ore referred to as hot briquetted
iron ("HBI"). Orinoco asserts claims for breach of contract, repudiation of
contract and breach of a covenant of good faith and fair dealing with respect
to that HBI supply contract and is seeking damages in excess of $60.0. AK Steel
has filed a response to the Complaint in which it denies Orinoco's claims and
asks the court to reform the HBI supply contract to reflect the original intent
of the parties that the price paid by AK Steel under that contract would more
closely track the world price for HBI. Discovery is underway. Trial is
tentatively scheduled for April 2003. AK Steel intends to contest Orinoco's
claims vigorously.
In April 2000, a class action was filed in the United States District Court
for the Southern District of Ohio by Bernard Fidel and others against AK Steel
Holding Corporation and certain of its directors and officers, alleging
material misstatements and omissions in the Company's public disclosure about
its business and operations. The defendants are vigorously defending this
action. Discovery is stayed pending resolution of the motion to dismiss. No
trial date has been scheduled.
A number of lawsuits alleging asbestos exposure are pending and continue to
be filed against AK Steel. The majority of these lawsuits have been filed in
Texas and relate to the former Houston Works facility. Such cases typically
involve a large number of plaintiffs claiming against a large number of
defendants. AK Steel is normally named as a defendant by a small percentage of
the plaintiffs who typically were frequenters (independent contractors,
delivery personnel, etc.) claiming that they were exposed to asbestos while
they were on the premises. In these lawsuits an amount of monetary relief is
not specific as to the Company. AK Steel is actively and vigorously defending
these cases. Based upon information currently available, management does not
believe that a material additional loss related to asbestos is reasonably
possible.
On January 2, 2002, John D. West, a former employee, filed a purported class
action in the United States District Court for the Southern District of Ohio
against the AK Steel Corporation Retirement Accumulation Pension Plan (the "AK
RAPP") and the AK Steel Corporation Benefit Plans Administrative Committee (the
"AK BPAC") claiming that the method used under the AK RAPP to determine lump
sum distributions is improper and that, as a result, the benefits previously
paid to plaintiff and putative class members from the AK RAPP were understated
in violation of the Employment Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986. The AK RAPP is the cash balance plan component
of the AK Steel Noncontributory Pension Plan
F-29
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
(the "AK NCPP"). The AK NCPP provides that the Company will indemnify members
of AK BPAC from any liability and expense incurred by reason of serving as a
member of AK BPAC. Because the action was only recently filed, the defendants
have not yet responded to the Complaint and no discovery has yet commenced. The
defendants intend to contest this matter vigorously.
At December 31, 2001, the Company had recorded $12.5 in current accrued
liabilities and $36.7 in noncurrent other liabilities on its consolidated
balance sheets for estimated probable costs relating to environmental matters.
13. Discontinued Operations
On December 18, 2001, the Company announced that it had signed a letter of
intent to sell the assets of Sawhill Tubular, a division formerly reported in
Other Operations in the segment presentation. On April 19, 2002, the Company
completed the sale of Sawhill Tubular. In accordance with Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which the
Company adopted on January 1, 2002, the results of Sawhill Tubular have been
reclassified to discontinued operations on the consolidated statements of
income. The assets disposed of in the sale transaction have been reclassified
to current and noncurrent assets held for sale on the consolidated balance
sheets. There were no material liabilities transferred in the sale transaction.
Sawhill Tubular's net sales for 1999, 2000 and 2001, were $183.5, $207.8 and
$160.7, respectively. Its pretax income (loss) for the same years were zero,
$(2.5) and $1.9, respectively.
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.
14. Consolidated Quarterly Sales and Earnings (Unaudited)
Earnings per share for each quarter and the year are calculated individually
and may not add to the total for the year.
2000
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Net sales..................... $1,105.7 $1,194.6 $1,091.2 $1,012.2 $4,403.7
Operating profit.............. 76.9 115.5 99.1 49.3 340.8
Net income.................... 26.5 49.1 41.3 15.5 132.4
Basic earnings per share... 0.24 0.44 0.38 0.14 1.20
Diluted earnings per share. 0.24 0.44 0.38 0.14 1.20
2001
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Net sales..................... $ 955.8 $ 984.2 $ 960.7 $ 932.7 $3,833.4
Operating profit (loss)....... 12.0 36.4 23.4 (89.6) (17.8)
Net income (loss)............. (12.8) 2.7 (5.9) (76.4) (92.4)
Basic earnings per share... (0.12) 0.02 (0.06) (0.71) (0.87)
Diluted earnings per share. (0.12) 0.02 (0.06) (0.71) (0.87)
F-30
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
Included in the net loss for the fourth quarter and full year of 2001 was a
pension charge of $194.0 ($122.2 net of tax) and a benefit of $49.9 ($31.4 net
of tax) for the shares received in the insurance provider's demutualization
(Note 10).
15. Supplemental Guarantor Information
AK Holding and its 100%-owned subsidiary, Douglas Dynamics, L.L.C. (the
"Guarantor Subsidiary"), fully and unconditionally, joint and severally
guarantee the interest, principal and premium, if any, payments of AK Steel's
9% Senior Notes Due 2007, 8 7/8% Senior Notes Due 2008, 7 7/8% Senior Notes Due
2009 and 7 3/4% Senior Notes Due 2012. The Company has determined that full
financial statements and other disclosures concerning AK Holding and the
Guarantor Subsidiary would not be material to investors and, accordingly, those
financial statements are not presented. The following supplemental condensed
consolidating financial statements present information about AK Holding,
AK Steel, the Guarantor Subsidiary and the Other Subsidiaries. The Other
Subsidiaries are not guarantors of the above notes.
F-31
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
STATEMENTS OF INCOME
For the Year Ended December 31, 1999
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
------- -------- ---------- ------------ ------------ ------------
Net sales.......................... $ -- $4,033.9 $119.2 $90.3 $(58.6) $4,184.8
Cost of products sold.............. 0.1 3,254.4 58.0 34.2 (12.4) 3,334.3
Selling and administrative expenses 1.2 279.8 22.2 7.3 (10.6) 299.9
Depreciation....................... -- 203.2 2.9 -- -- 206.1
Special charges.................... -- 99.7 -- -- -- 99.7
----- -------- ------ ----- ------ --------
Total operating costs........... 1.3 3,837.1 83.1 41.5 (23.0) 3,940.0
Operating profit (loss)............ (1.3) 196.8 36.1 48.8 (35.6) 244.8
Interest expense................... (2.9) 126.2 -- 26.7 (26.3) 123.7
Other income....................... -- 12.7 -- (0.6) 8.7 20.8
----- -------- ------ ----- ------ --------
Income (loss) before income taxes.. 1.6 83.3 36.1 21.5 (0.6) 141.9
Income tax provision (benefit)..... -- 62.9 0.4 0.6 -- 63.9
Minority interest.................. -- 6.7 -- -- -- 6.7
----- -------- ------ ----- ------ --------
Income (loss) from continuing
operations....................... 1.6 13.7 35.7 20.9 (0.6) 71.3
Income from discontinued
operations....................... -- 7.5 -- -- -- 7.5
Extraordinary loss on retirement of
debt............................. -- 13.4 -- -- -- 13.4
----- -------- ------ ----- ------ --------
Net income (loss).................. $ 1.6 $ 7.8 $ 35.7 $20.9 $ (0.6) $ 65.4
===== ======== ====== ===== ====== ========
For the Year Ended December 31, 2000
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
------- -------- ---------- ------------ ------------ ------------
Net sales.......................... $ -- $4,269.0 $112.8 $232.8 $(210.9) $4,403.7
Cost of products sold.............. 0.1 3,503.5 59.0 40.1 (25.0) 3,577.7
Selling and administrative expenses 1.3 358.0 20.6 7.5 (129.5) 257.9
Depreciation....................... -- 224.5 2.7 0.1 -- 227.3
----- -------- ------ ------ ------- --------
Total operating costs........... 1.4 4,086.0 82.3 47.7 (154.5) 4,062.9
Operating profit (loss)............ (1.4) 183.0 30.5 185.1 (56.4) 340.8
Interest expense................... -- 135.0 -- 43.7 (42.6) 136.1
Other income....................... -- (11.3) -- 5.8 13.4 7.9
----- -------- ------ ------ ------- --------
Income (loss) before income taxes.. (1.4) 36.7 30.5 147.2 (0.4) 212.6
Income tax provision (benefit)..... -- 77.6 0.1 0.9 -- 78.6
----- -------- ------ ------ ------- --------
Income (loss) from continuing
operations....................... (1.4) (40.9) 30.4 146.3 (0.4) 134.0
Loss from discontinued operations.. -- 1.6 -- -- -- 1.6
----- -------- ------ ------ ------- --------
Net income (loss).................. $(1.4) $ (42.5) $ 30.4 $146.3 $ (0.4) $ 132.4
===== ======== ====== ====== ======= ========
F-32
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
STATEMENTS OF INCOME
For the Year Ended December 31, 2001
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
------- -------- ---------- ------------ ------------ ------------
Net sales.......................... $ -- $3,651.4 $138.8 $333.2 $(290.0) $3,833.4
Cost of products sold.............. 0.1 3,131.1 72.4 80.6 (58.7) 3,225.5
Selling and administrative expenses 1.1 413.5 22.5 12.7 (192.2) 257.6
Depreciation....................... -- 221.8 2.9 1.1 -- 225.8
Special charges--net............... -- 142.3 -- -- -- 142.3
----- -------- ------ ------ ------- --------
Total operating costs........... 1.2 3,908.7 97.8 94.4 (250.9) 3,851.2
Operating profit (loss)............ (1.2) (257.3) 41.0 238.8 (39.1) (17.8)
Interest expense................... -- 132.1 -- 32.1 (31.1) 133.1
Other income....................... -- (20.3) 0.1 16.3 10.0 6.1
----- -------- ------ ------ ------- --------
Income (loss) before income taxes.. (1.2) (409.7) 41.1 223.0 2.0 (144.8)
Income tax provision (benefit)..... -- (56.0) 0.4 2.0 -- (53.6)
----- -------- ------ ------ ------- --------
Income (loss) from continuing
operations....................... (1.2) (353.7) 40.7 221.0 2.0 (91.2)
Loss from discontinued operations.. -- 1.2 -- -- -- 1.2
----- -------- ------ ------ ------- --------
Net income (loss).................. $(1.2) $ (354.9) $ 40.7 $221.0 $ 2.0 $ (92.4)
===== ======== ====== ====== ======= ========
F-33
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
BALANCE SHEETS
December 31, 2000
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
-------- --------- ---------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............ -- $ 80.1 $ 1.4 $ 5.3 $ -- $ 86.8
Accounts receivable.................. -- 10.0 18.0 461.5 -- 489.5
Inventories (Note 3)................. -- 768.7 15.8 14.8 2.5 801.8
Deferred tax asset................... -- 54.7 -- -- -- 54.7
Current assets held for sale......... -- 74.9 -- -- -- 74.9
Other current assets................. 0.1 13.3 0.6 0.1 -- 14.1
-------- --------- ------ ------- ------- ---------
Total Current Assets............. 0.1 1,001.7 35.8 481.7 2.5 1,521.8
-------- --------- ------ ------- ------- ---------
Property, Plant and Equipment........... -- 4,575.8 43.7 0.8 -- 4,620.3
Less accumulated depreciation........ -- (1,745.4) (17.2) (0.6) -- (1,763.2)
-------- --------- ------ ------- ------- ---------
Property, plant and equipment, net... -- 2,830.4 26.5 0.2 -- 2,857.1
-------- --------- ------ ------- ------- ---------
Other Assets:
Investment in AFSG Holdings, Inc..... -- -- -- 85.6 -- 85.6
Intercompany accounts................ 1,109.4 (461.2) 104.3 (468.5) (284.0) --
Other investments.................... -- 49.7 -- 64.3 -- 114.0
Goodwill............................. -- 104.6 2.4 4.7 -- 111.7
Other intangible assets (Note 4)..... -- 1.8 5.6 -- -- 7.4
Prepaid pension...................... -- 206.5 -- -- -- 206.5
Deferred tax asset................... -- 246.7 -- (4.5) -- 242.2
Noncurrent assets held for sale...... -- 28.6 -- -- -- 28.6
Other assets......................... -- 64.0 0.7 0.2 -- 64.9
-------- --------- ------ ------- ------- ---------
Total Assets..................... $1,109.5 $ 4,072.8 $175.3 $ 163.7 $(281.5) $ 5,239.8
======== ========= ====== ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ -- $ 488.5 $ 3.8 $ 6.0 $ -- $ 498.3
Accrued liabilities.................. -- 254.7 6.0 1.5 -- 262.2
Current portion of long-term debt.... -- 63.2 -- -- -- 63.2
Current portion of pension and OPEBs. -- 66.5 0.1 -- -- 66.6
-------- --------- ------ ------- ------- ---------
Total Current Liabilities........ -- 872.9 9.9 7.5 -- 890.3
-------- --------- ------ ------- ------- ---------
Noncurrent Liabilities:
Long-term debt....................... -- 1,387.6 -- -- -- 1,387.6
Pension and OPEBs.................... -- 1,416.2 4.0 -- -- 1,420.2
Other liabilities.................... -- 217.4 3.3 1.7 -- 222.4
-------- --------- ------ ------- ------- ---------
Total Noncurrent Liabilities..... -- 3,021.2 7.3 1.7 -- 3,030.2
-------- --------- ------ ------- ------- ---------
Total Liabilities....................... -- 3,894.1 17.2 9.2 -- 3,920.5
-------- --------- ------ ------- ------- ---------
Total Stockholders' Equity.............. 1,109.5 178.7 158.1 154.5 (281.5) 1,319.3
-------- --------- ------ ------- ------- ---------
Total Liabilities and Equity............ $1,109.5 $ 4,072.8 $175.3 $ 163.7 $(281.5) $ 5,239.8
======== ========= ====== ======= ======= =========
F-34
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
BALANCE SHEETS
December 31, 2001
AK Guarantor Other Elim- Consolidated
Holding AK Steel Subsidiary Subsidiaries inations Company
------- --------- ---------- ------------ -------- ------------
ASSETS
Current Assets: $ --
Cash and cash equivalents............ -- $ 97.2 $ 0.1 $ 3.7 $ -- $ 101.0
Accounts receivable.................. -- 11.8 23.8 352.4 -- 388.0
Inventories (Note 3)................. -- 844.4 15.9 41.4 2.9 904.6
Deferred tax asset................... -- 76.6 -- -- -- 76.6
Current assets held for sale......... -- 60.6 -- -- -- 60.6
Other current assets................. 0.1 16.1 0.5 0.3 -- 17.0
------ --------- ------ ------- ------- ---------
Total Current Assets............. 0.1 1,106.7 40.3 397.8 2.9 1,547.8
------ --------- ------ ------- ------- ---------
Property, Plant and Equipment........... -- 4,665.3 46.3 31.3 -- 4,742.9
Less accumulated depreciation........ -- (1,953.3) (19.7) (1.6) -- (1,974.6)
------ --------- ------ ------- ------- ---------
Property, plant and equipment, net... -- 2,712.0 26.6 29.7 -- 2,768.3
------ --------- ------ ------- ------- ---------
Other Assets:
Investment in AFSG Holdings, Inc..... -- -- -- 55.6 -- 55.6
Intercompany accounts................ 942.8 (639.0) 146.3 (167.0) (283.1) --
Other investments.................... -- 100.9 -- 53.4 -- 154.3
Goodwill............................. -- 101.2 2.4 6.1 -- 109.7
Other intangible assets (Note 4)..... -- 108.2 3.7 -- -- 111.9
Deferred tax asset................... -- 393.5 -- -- -- 393.5
Noncurrent assets held for sale...... -- 24.4 -- -- -- 24.4
Other assets......................... -- 58.8 1.4 0.1 -- 60.3
------ --------- ------ ------- ------- ---------
Total Assets..................... $942.9 $ 3,966.7 $220.7 $ 375.7 $(280.2) $ 5,225.8
====== ========= ====== ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ -- $ 522.0 $ 6.3 $ 9.3 $ -- $ 537.6
Accrued liabilities.................. -- 258.6 7.6 4.3 -- 270.5
Current portion of long-term debt.... -- 63.3 -- 14.7 -- 78.0
Current portion of pension and OPEBs. -- 68.2 0.1 -- -- 68.3
------ --------- ------ ------- ------- ---------
Total Current Liabilities........ -- 912.1 14.0 28.3 -- 954.4
------ --------- ------ ------- ------- ---------
Noncurrent Liabilities:
Long-term debt....................... -- 1,324.5 -- -- -- 1,324.5
Pension and OPEBs.................... -- 1,736.1 4.0 -- -- 1,740.1
Other liabilities.................... -- 167.8 3.8 1.9 -- 173.5
------ --------- ------ ------- ------- ---------
Total Noncurrent Liabilities..... -- 3,228.4 7.8 1.9 -- 3,238.1
------ --------- ------ ------- ------- ---------
Total Liabilities....................... -- 4,140.5 21.8 30.2 -- 4,192.5
------ --------- ------ ------- ------- ---------
Total Stockholders' Equity.............. 942.9 (173.8) 198.9 345.5 (280.2) 1,033.3
------ --------- ------ ------- ------- ---------
Total Liabilities and Equity............ $942.9 $ 3,966.7 $220.7 $ 375.7 $(280.2) $ 5,225.8
====== ========= ====== ======= ======= =========
F-35
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999
Guarantor Other Elim- Consolidated
AK Holding AK Steel Subsidiary Subsidiaries inations Company
---------- -------- ---------- ------------ -------- ------------
Cash flows from operating activities:
Net income (loss).............................. $ 1.6 $ 7.8 $ 35.7 $ 20.9 $(0.6) $ 65.4
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation................................. -- 203.2 2.9 -- -- 206.1
Amortization................................. -- 13.6 2.8 -- -- 16.4
Deferred income taxes........................ -- 57.7 -- -- -- 57.7
Costs related to the merger with Armco Inc... -- 99.7 -- -- -- 99.7
(Income) loss from discontinued operations... -- (7.5) -- -- -- (7.5)
Extraordinary loss on retirement of debt..... -- 13.4 -- -- -- 13.4
Other items, net............................. 0.2 (1.2) -- (1.4) -- (2.4)
Changes in assets and liabilities:
Accounts and notes receivable.............. -- 71.0 (4.4) (140.5) -- (73.9)
Inventories................................ -- (141.5) (1.6) 4.7 (2.6) (141.0)
Current liabilities........................ -- 14.7 6.5 (1.8) -- 19.4
Other assets............................... -- (2.3) 0.3 0.5 -- (1.5)
Pension asset and obligation............... -- (18.7) (0.3) -- -- (19.0)
Postretirement benefit obligation.......... -- 0.3 0.2 -- -- 0.5
Other liabilities.......................... -- (2.4) 0.4 0.1 -- (1.9)
------- ------- ------ ------- ----- -------
Total adjustments........................ 0.2 300.0 6.8 (138.4) (2.6) 166.0
------- ------- ------ ------- ----- -------
Net cash flows from operating activities... 1.8 307.8 42.5 (117.5) (3.2) 231.4
------- ------- ------ ------- ----- -------
Cash flows from investing activities:
Capital investments............................ -- (326.7) (7.4) -- -- (334.1)
Net sale of short-term investments............. -- 6.8 -- -- -- 6.8
Purchase of long-term investments.............. -- (0.2) -- -- -- (0.2)
Proceeds from the sale of investments.......... -- 4.6 -- -- -- 4.6
Proceeds from sale of property, plant and
equipment.................................... -- 2.1 -- -- -- 2.1
Other items, net............................... -- 0.9 -- (0.1) -- 0.8
------- ------- ------ ------- ----- -------
Net cash flows from investing activities... -- (312.5) (7.4) (0.1) -- (320.0)
------- ------- ------ ------- ----- -------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 24.7 -- -- -- -- 24.7
Proceeds from issuance of long-term debt....... -- 449.2 -- -- -- 449.2
Principal payments on long-term debt........... -- (530.8) -- -- -- (530.8)
Purchase of treasury stock..................... (1.5) -- -- -- -- (1.5)
Purchase of preferred stock.................... (115.8) -- -- -- -- (115.8)
Preferred stock dividends paid................. (7.6) -- -- -- -- (7.6)
Common stock dividends paid.................... (35.1) -- -- -- -- (35.1)
Intercompany activity.......................... 133.5 (225.9) (35.0) 124.2 3.2 --
Other items, net............................... -- (0.1) -- (1.5) -- (1.6)
------- ------- ------ ------- ----- -------
Net cash flows from financing activities... (1.8) (307.6) (35.0) 122.7 3.2 (218.5)
------- ------- ------ ------- ----- -------
Cash flows from discontinued operations......... -- 14.8 -- -- -- 14.8
------- ------- ------ ------- ----- -------
Net increase (decrease) in cash and cash
equivalents................................... -- (297.5) 0.1 5.1 -- (292.3)
Cash and cash equivalents, beginning of year... -- 337.5 -- 9.2 -- 346.7
------- ------- ------ ------- ----- -------
Cash and cash equivalents, end of year......... -- $ 40.0 $ 0.1 $ 14.3 $ -- $ 54.4
======= ======= ====== ======= ===== =======
F-36
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2000
Guarantor Other Elim- Consolidated
AK Holding AK Steel Subsidiary Subsidiaries inations Company
---------- -------- ---------- ------------ -------- ------------
Cash flows from operating activities:
Net income (loss).............................. $ (1.4) $ (42.5) $ 30.4 $ 146.3 $(0.4) $ 132.4
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation................................. -- 224.5 2.7 0.1 -- 227.3
Amortization................................. -- 13.3 2.7 -- -- 16.0
Deferred income taxes........................ -- 92.3 -- -- -- 92.3
Loss from discontinued operations............ -- 1.6 -- -- -- 1.6
Other items, net............................. 0.2 (0.5) (0.5) 2.0 -- 1.2
Changes in assets and liabilities:
Accounts and notes receivable.............. -- (77.9) (2.1) 73.9 -- (6.1)
Inventories................................ -- (36.8) 1.5 (2.5) (0.4) (38.2)
Current liabilities........................ -- (33.3) 0.4 1.3 -- (31.6)
Other assets............................... -- 1.0 (3.7) (0.1) -- (2.8)
Pension asset and obligation............... -- (55.6) -- -- -- (55.6)
Postretirement benefit obligation.......... -- (0.6) 0.3 -- -- (0.3)
Other liabilities.......................... -- 9.3 0.3 (0.6) -- 9.0
------ ------- ------ ------- ----- -------
Total adjustments........................ 0.2 137.3 1.6 74.1 (0.4) 212.8
------ ------- ------ ------- ----- -------
Net cash flows from operating activities... (1.2) 94.8 32.0 220.4 (0.8) 345.2
------ ------- ------ ------- ----- -------
Cash flows from investing activities:
Capital investments............................ -- (130.8) (5.0) -- -- (135.8)
Purchase of long-term investments.............. -- (30.2) -- (36.2) -- (66.4)
Proceeds from the sale of investments.......... -- 2.1 1.1 -- -- 3.2
Proceeds from sale of property, plant and
equipment.................................... -- 4.0 2.2 -- -- 6.2
Other items, net............................... -- 0.4 -- 0.5 -- 0.9
------ ------- ------ ------- ----- -------
Net cash flows from investing activities... -- (154.5) (1.7) (35.7) -- (191.9)
------ ------- ------ ------- ----- -------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 1.6 -- -- -- -- 1.6
Principal payments on long-term debt........... -- (6.0) -- -- -- (6.0)
Purchase of treasury stock..................... (39.2) -- -- -- -- (39.2)
Purchase of preferred stock.................... (2.2) -- -- -- -- (2.2)
Preferred stock dividends paid................. (1.0) -- -- -- -- (1.0)
Common stock dividends paid.................... (54.9) -- -- -- -- (54.9)
Intercompany activity.......................... 96.9 123.0 (29.0) (191.7) 0.8 --
Other items, net............................... -- -- -- (2.0) -- (2.0)
------ ------- ------ ------- ----- -------
Net cash flows from financing activities... 1.2 117.0 (29.0) (193.7) 0.8 (103.7)
------ ------- ------ ------- ----- -------
Cash flows from discontinued operations......... -- (17.2) -- -- -- (17.2)
------ ------- ------ ------- ----- -------
Net increase (decrease) in cash and cash
equivalents................................... -- 40.1 1.3 (9.0) -- 32.4
Cash and cash equivalents, beginning of year... -- 40.0 0.1 14.3 -- 54.4
------ ------- ------ ------- ----- -------
Cash and cash equivalents, end of year......... $ -- $ 80.1 $ 1.4 $ 5.3 $ -- $ 86.8
====== ======= ====== ======= ===== =======
F-37
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share amounts)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2001
Guarantor Other Elim- Consolidated
AK Holding AK Steel Subsidiary Subsidiaries inations Company
---------- -------- ---------- ------------ -------- ------------
Cash flows from operating activities:
Net income (loss).............................. $ (1.2) $(354.9) $ 40.7 $ 221.0 $ 2.0 $ (92.4)
Adjustments to reconcile net income to cash
flows from operating activities:
Depreciation................................. -- 221.8 2.9 1.1 -- 225.8
Amortization................................. -- 12.8 1.7 0.2 -- 14.7
Deferred income taxes........................ -- (52.8) -- -- -- (52.8)
Pension charge............................... -- 192.2 -- -- -- 192.2
Stock received in insurance
demutualization............................ -- (49.9) -- -- -- (49.9)
(Income) loss from discontinued operations... -- 1.2 -- -- -- 1.2
Other items, net............................. 0.2 7.0 0.3 (1.6) -- 5.9
Changes in assets and liabilities:
Accounts and notes receivable.............. -- (8.7) (6.1) 116.1 -- 101.3
Inventories................................ -- (84.3) (0.2) (16.4) (0.4) (101.3)
Current liabilities........................ -- (2.2) 4.1 1.0 -- 2.9
Other assets............................... -- (0.4) 1.0 -- -- 0.6
Pension asset and obligation............... -- (62.3) (1.6) -- -- (63.9)
Postretirement benefit obligation.......... -- 19.4 0.3 -- -- 19.7
Other liabilities.......................... -- (55.7) 0.5 0.2 -- (55.0)
------ ------- ------ ------- ----- -------
Total adjustments......................... 0.2 138.1 2.9 100.6 (0.4) 241.4
------ ------- ------ ------- ----- -------
Net cash flows from operating activities... (1.0) (216.8) 43.6 321.6 1.6 149.0
------ ------- ------ ------- ----- -------
Cash flows from investing activities:
Capital investments............................ -- (104.6) (3.0) (0.4) -- (108.0)
Purchase of long-term investments.............. -- (12.0) -- -- -- (12.0)
Purchase of a business......................... -- -- -- (29.3) -- (29.3)
Distribution from investees.................... -- 0.2 -- 30.0 -- 30.2
Proceeds from the sale of investments.......... -- 31.6 -- 12.5 -- 44.1
Proceeds from sale of property, plant and
equipment.................................... -- 0.1 -- -- -- 0.1
Other items, net............................... -- (0.1) -- (0.2) -- (0.3)
------ ------- ------ ------- ----- -------
Net cash flows from investing activities... -- (84.8) (3.0) 12.6 -- (75.2)
------ ------- ------ ------- ----- -------
Cash flows from financing activities:
Principal payments on long-term debt........... -- (63.2) -- -- -- (63.2)
Purchase of treasury stock..................... (1.0) -- -- -- -- (1.0)
Preferred stock dividends paid................. (0.7) -- -- -- -- (0.7)
Common stock dividends paid.................... (13.5) -- -- -- -- (13.5)
Intercompany activity.......................... 16.2 363.6 (41.9) (336.3) (1.6) --
Other items, net............................... -- (0.1) -- 0.5 -- 0.4
------ ------- ------ ------- ----- -------
Net cash flows from financing activities... 1.0 300.3 (41.9) (335.8) (1.6) (78.0)
------ ------- ------ ------- ----- -------
Cash flows from discontinued operations......... -- 18.4 -- -- -- 18.4
------ ------- ------ ------- ----- -------
Net increase (decrease) in cash and cash
equivalents................................... -- 17.1 (1.3) (1.6) -- 14.2
Cash and cash equivalents, beginning of year... -- 80.1 1.4 5.3 -- 86.8
------ ------- ------ ------- ----- -------
Cash and cash equivalents, end of year......... $ -- $ 97.2 $ 0.1 $ 3.7 $ -- $ 101.0
====== ======= ====== ======= ===== =======
F-38
AK STEEL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
2001 2002 2001 2002
------ -------- -------- --------
(unaudited)
Net sales........................................................... $960.7 $1,117.6 $2,900.7 $3,226.8
Cost of products sold (exclusive of items shown below).............. 818.6 933.5 2,470.0 2,788.2
Selling and administrative expenses................................. 61.9 69.9 186.1 199.7
Depreciation........................................................ 56.8 57.4 172.8 170.4
Insurance settlement (Note 5)....................................... -- -- -- (23.9)
------ -------- -------- --------
Total operating costs............................................... 937.3 1,060.8 2,828.9 3,134.4
Operating profit.................................................... 23.4 56.8 71.8 92.4
Interest expense.................................................... 33.0 31.7 100.5 98.2
Gain on sale of Anthem stock (Note 6)............................... -- -- -- 24.1
Other income........................................................ 1.5 1.5 5.2 4.1
------ -------- -------- --------
Income (loss) from continuing operations before income taxes........ (8.1) 26.6 (23.5) 22.4
Income tax provision (benefit)...................................... (3.0) 9.9 (8.7) 8.3
------ -------- -------- --------
Income (loss) from continuing operations............................ (5.1) 16.7 (14.8) 14.1
Loss from discontinued operations, net of tax (Note 9).............. 0.8 -- 1.2 0.5
Loss on sale of Sawhill Tubular, net of tax (Note 9)................ -- 0.1 -- 6.4
------ -------- -------- --------
Income (loss) before extraordinary item............................. (5.9) 16.6 (16.0) 7.2
Extraordinary loss on early retirement of debt, net of tax (Note 10) -- 19.9 -- 19.9
------ -------- -------- --------
Net loss............................................................ $ (5.9) $ (3.3) $ (16.0) $ (12.7)
====== ======== ======== ========
Earnings per share (Note 2):
Basic earnings (loss) per share:...................................
Income (loss) from continuing operations......................... $(0.05) $ 0.15 $ (0.15) $ 0.12
Loss from discontinued operations................................ 0.01 -- 0.01 --
Loss on sale of Sawhill Tubular.................................. -- -- -- 0.06
Loss on early retirement of debt................................. -- 0.18 -- 0.18
------ -------- -------- --------
Net loss......................................................... $(0.06) $ (0.03) $ (0.16) $ (0.12)
====== ======== ======== ========
Diluted earnings (loss) per share:.................................
Income (loss) from continuing operations......................... $(0.05) $ 0.15 $ (0.15) $ 0.12
Loss from discontinued operations................................ 0.01 -- 0.01 --
Loss on sale of Sawhill Tubular.................................. -- -- -- 0.06
Loss on early retirement of debt................................. -- 0.18 -- 0.18
------ -------- -------- --------
Net loss......................................................... $(0.06) $ (0.03) $ (0.16) $ (0.12)
====== ======== ======== ========
Cash dividends per common share..................................... $ -- $ -- $ 0.125 $ --
Common shares and common share equivalents outstanding
(weighted average in millions):
For basic earnings per share..................................... 107.7 107.9 107.8 107.9
For diluted earnings per share................................... 107.7 107.9 107.8 108.1
See notes to consolidated financial statements.
F-39
AK STEEL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
December 31, September 30,
2001 2002
------------ -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $ 101.0 $ 243.3
Accounts receivable.................................................................... 388.0 522.8
Inventories (Note 3)................................................................... 904.6 848.4
Deferred tax asset (Note 7)............................................................ 76.6 62.2
Current assets held for sale (Note 9).................................................. 60.6 --
Other current assets................................................................... 17.0 23.4
--------- ---------
Total Current Assets................................................................ 1,547.8 1,700.1
--------- ---------
Property, Plant and Equipment.............................................................. 4,742.9 4,783.9
Less accumulated depreciation.......................................................... (1,974.6) (2,121.0)
--------- ---------
Property, plant and equipment, net..................................................... 2,768.3 2,662.9
--------- ---------
Other Assets:
Investment in AFSG Holdings, Inc....................................................... 55.6 55.6
Other investments (Note 6)............................................................. 154.3 118.9
Goodwill (Note 4)...................................................................... 109.7 109.7
Other intangible assets (Note 4)....................................................... 111.9 111.4
Deferred tax asset (Note 7)............................................................ 393.5 354.8
Noncurrent assets held for sale (Note 9)............................................... 24.4 --
Other assets........................................................................... 60.3 60.0
--------- ---------
TOTAL ASSETS............................................................................... $ 5,225.8 $ 5,173.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................................................... $ 537.6 $ 473.2
Accrued liabilities.................................................................... 270.5 260.2
Current portion of long-term debt (Note 10)............................................ 78.0 77.4
Current portion of pension and other postretirement benefit obligations................ 68.3 67.2
--------- ---------
Total Current Liabilities........................................................... 954.4 878.0
--------- ---------
Noncurrent Liabilities:
Long-term debt (Note 10)............................................................... 1,324.5 1,322.3
Pension and other postretirement benefit obligations................................... 1,740.1 1,780.9
Other liabilities...................................................................... 173.5 168.8
--------- ---------
Total Noncurrent Liabilities........................................................ 3,238.1 3,272.0
--------- ---------
TOTAL LIABILITIES.......................................................................... 4,192.5 4,150.0
--------- ---------
Stockholders' Equity:
Preferred stock (Note 11).............................................................. 12.5 --
Common stock, authorized 200,000,000 shares of $.01 par value each; issued 2001,
115,987,777 shares, 2002, 116,290,376 shares; outstanding 2001, 107,713,329 shares,
2002, 107,894,607 shares.............................................................. 1.2 1.2
Additional paid-in capital............................................................. 1,807.2 1,810.9
Treasury stock, common shares at cost, 2001, 8,274,448 shares; 2002,
8,395,769 shares...................................................................... (120.4) (122.0)
Accumulated deficit.................................................................... (479.9) (494.1)
Accumulated other comprehensive loss (Note 12)......................................... (187.3) (172.6)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................................................................. 1,033.3 1,023.4
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................. $ 5,225.8 $ 5,173.4
========= =========
See notes to consolidated financial statements.
F-40
AK STEEL HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Nine Months Ended
September 30,
---------------
2001 2002
------ -------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(16.0) $ (12.7)
Depreciation and amortization....................................... 184.3 177.8
Extraordinary--item loss on early retirement of debt................ -- 19.9
Deferred income taxes............................................... (8.8) 59.8
Working capital..................................................... (63.4) (117.4)
Other............................................................... (65.8) 31.7
------ -------
NET CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING
OPERATIONS........................................................ 30.3 159.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments................................................. (65.9) (64.9)
Proceeds from sale of Sawhill Tubular............................... -- 62.8
Proceeds from sale of other assets and investments.................. 44.1 82.0
Purchase of business and investments................................ (29.3) (44.2)
Other............................................................... (5.6) (0.3)
------ -------
NET CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING
OPERATION......................................................... (56.7) 35.4
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuing long-term debt................................ -- 538.1
Redemption of long-term debt........................................ (0.5) (550.6)
Premium on redemption of long-term debt............................. -- (25.1)
Redemption of preferred stock....................................... -- (13.1)
Common stock dividends paid......................................... (13.5) --
Preferred stock dividends paid...................................... (0.7) (0.9)
Other............................................................... (0.3) (3.7)
------ -------
NET CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING
OPERATIONS........................................................ (15.0) (55.3)
Cash flows from discontinued operations................................ 19.3 3.1
------ -------
Net increase (decrease) in cash and cash equivalents................... (22.1) 142.3
Cash and cash equivalents, beginning of period......................... 86.8 101.0
------ -------
Cash and cash equivalents, end of period............................... $ 64.7 $ 243.3
====== =======
Supplemental disclosure of cash flow information:
Net cash paid (received) during the period for:
Interest, net of capitalized interest............................... $100.7 $ 90.7
Income taxes........................................................ 0.2 (50.3)
Supplemental disclosure of non-cash investing and financing activities:
Issuance of restricted stock........................................ $ 0.3 $ 3.3
See notes to consolidated financial statements.
F-41
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
1. Basis of Presentation
In the opinion of the management of AK Steel Holding Corporation ("AK
Holding") and AK Steel Corporation ("AK Steel", and together with AK Holding,
the "Company"), the accompanying consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the financial position of the Company as of September 30, 2002, the
results of its operations for the three and nine-month periods ended September
30, 2001 and 2002, and cash flows for the nine-month periods ended September
30, 2001 and 2002. The results of operations for the nine months ended
September 30, 2002 are not necessarily indicative of the results to be expected
for the year ending December 31, 2002. These consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of AK Holding for the year ended December 31, 2001.
As more fully described in Note 9, the Company sold the assets of its
Sawhill Tubular division on April 19, 2002. Sawhill Tubular's results and the
assets sold have been reclassified in these consolidated financial statements
to discontinued operations and assets held for sale for all periods presented
prior to the sale.
F-42
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
2. Earnings Per Share
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2001 2002 2001 2002
------ ------ ------ ------
Income (loss) for calculation of basic earnings per share:
Income (loss) from continuing operations..................... $ (5.1) $ 16.7 $(14.8) $ 14.1
Less: Preferred stock dividends and redemption premium....... 0.2 0.7 0.7 1.2
------ ------ ------ ------
Income (loss) from continuing operations available to common
stockholders............................................... (5.3) 16.0 (15.5) 12.9
Loss from discontinued operations............................ 0.8 -- 1.2 0.5
Loss on sale of Sawhill Tubular.............................. -- 0.1 -- 6.4
Loss on early retirement of debt............................. -- 19.9 -- 19.9
------ ------ ------ ------
Net loss available to common stockholders.................... $ (6.1) $ (4.0) $(16.7) $(13.9)
------ ------ ------ ------
Weighted average common shares (in millions).................... 107.7 107.9 107.8 107.9
====== ====== ====== ======
Basic earnings (loss) per share:
Income (loss) from continuing operations..................... $(0.05) $ 0.15 $(0.15) $ 0.12
Loss from discontinued operations............................ 0.01 -- 0.01 --
Loss on sale of Sawhill Tubular.............................. -- -- -- 0.06
Loss on early retirement of debt............................. -- 0.18 -- 0.18
------ ------ ------ ------
Net loss..................................................... $(0.06) $(0.03) $(0.16) $(0.12)
====== ====== ====== ======
Income (loss) for calculation of diluted earnings per share:
Income (loss) from continuing operations..................... $ (5.1) $ 16.7 $(14.8) $ 14.1
Less: Preferred stock dividends and redemption premium....... 0.2 0.7 0.7 1.2
------ ------ ------ ------
Income (loss) from continuing operations available to common
stockholders............................................... (5.3) 16.0 (15.5) 12.9
Loss from discontinued operations............................ 0.8 -- 1.2 0.5
Loss on sale of Sawhill Tubular.............................. -- 0.1 -- 6.4
Loss on early retirement of debt............................. -- 19.9 -- 19.9
------ ------ ------ ------
Net loss available to common stockholders.................... $ (6.1) $ (4.0) $(16.7) $(13.9)
====== ====== ====== ======
Weighted average common shares (in millions).................... 107.7 107.9 107.8 107.9
Common stock options outstanding............................. -- -- -- 0.2
------ ------ ------ ------
Common shares outstanding as adjusted........................ 107.7 107.9 107.8 108.1
====== ====== ====== ======
Diluted earnings (loss) per share:
Income (loss) from continuing operations..................... $(0.05) $ 0.15 $(0.15) $ 0.12
Loss from discontinued operations............................ 0.01 -- 0.01 --
Loss on sale of Sawhill Tubular.............................. -- -- -- 0.06
Loss on early retirement of debt............................. -- 0.18 -- 0.18
------ ------ ------ ------
Net loss..................................................... $(0.06) $(0.03) $(0.16) $(0.12)
====== ====== ====== ======
F-43
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
3. Inventories
Inventories are valued at the lower of cost or market. The cost of the
majority of inventories is measured on the last in, first out (LIFO) method.
Other inventories are measured principally at average cost.
December 31, September 30,
2001 2002
------------ -------------
Finished and semi-finished................... $734.9 $712.8
Raw materials................................ 179.4 152.8
------ ------
Total cost................................... 914.3 865.6
Adjustment to state inventories at LIFO value (9.7) (17.2)
------ ------
Net inventories.............................. $904.6 $848.4
====== ======
4. Accounting for Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," as of January 1, 2002. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed annually for possible impairment. During the second quarter, the
Company completed this review as of January 1, 2002 and determined that no
impairment was necessary.
As of December 31, 2001 and September 30, 2002, goodwill on the consolidated
balance sheets was $109.7, of which $107.3 related to Steel Operations and $2.4
related to Snow and Ice Control Products. On the December 31, 2001 and
September 30, 2002 consolidated balance sheets were other intangible assets of
$111.9 and $111.4, respectively. As of both dates, a $108.2 intangible asset
was necessary to record a minimum pension liability, of which $105.2 related to
the Steel Operations and $3.0 related Snow and Ice Control Products. The
remaining intangible assets as of these dates related to Snow and Ice Control
Product assets with an original value of $9.7, which are subject to
amortization over a period of up to seventeen years. Had the Company adopted
Statement No. 142 at the beginning of 2001, net loss in the indicated periods
of that year would have been adjusted as follows.
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net loss, as reported............... $ (5.9) $(16.0)
Goodwill amortization, net of tax... 0.6 1.9
------ ------
Adjusted net loss................... $ (5.3) $(14.1)
====== ======
Basic and diluted earnings per share
Net loss, as reported............ $(0.06) $(0.16)
Goodwill amortization............ 0.01 0.02
------ ------
Adjusted net loss................ $(0.05) $(0.14)
====== ======
5. Insurance Settlement
The Company is, and has been for a number of years, in the process of
remediating sites where hazardous material may have been released, including
sites no longer owned by AK Steel. In addition, a number of lawsuits alleging
asbestos exposure have been filed and continue to be filed against AK Steel.
The Company has
F-44
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
established reserves for estimated probable costs relating to asbestos claim
settlements and environmental investigation, monitoring and remediation. The
reserves do not consider the potential for insurance recoveries and if these
reserves are not adequate to meet future claims then operating results and cash
flows may be negatively impacted. In the second quarter of 2002, the Company
recorded a pretax benefit of $23.9 arising from insurance settlements entered
into by the Company with certain of its insurance carriers, partially offset by
an increase in environmental reserves. The benefit is net of legal fees and
expenses. The settlement amount represented a negotiated dollar value the
Company accepted for reimbursement of past environmental and asbestos
expenditures and, to a lesser extent, to release the insurance companies from a
responsibility to reimburse the Company for future covered expenditures under
the policies. The total amount was not expressly allocated between past and
future costs nor was it expressly allocated between environmental and asbestos,
where the carriers covered both types of claims. As a result of these
settlements, several insurance policies have been commuted. However, other
existing insurance policies covering asbestos and environmental contingencies
may serve to mitigate future covered expenditures.
6. Sale of Anthem Inc. Stock
In the first quarter of 2002, the Company liquidated all of the nearly 1.5
million shares of Anthem Inc. stock it had received in 2001 upon the
demutualization of its primary healthcare insurance provider. The stock was
sold for a total of $80.2 and the Company recorded a gain of $24.1, which is
included in its results of operations for the nine months ended September 30,
2002.
7. Income Tax Refund
On March 9, 2002, President Bush signed into law the Job Creation and Worker
Assistance Act. One of the provisions of the Act increases the net operating
loss (NOL) carryback period to five years from two years for losses generated
in tax years 2001 and 2002 and allows an NOL deduction arising in these tax
years to offset 100% of alternative minimum taxable income during the carryback
period. Application of this provision allowed the Company to claim and receive
in the second quarter of 2002 a $46.7 refund of previously paid income taxes.
In the third quarter of 2002, the Company received an additional $4.8 tax
refund related to its $31.0 voluntary pension contribution. These tax refunds
reduced the Company's deferred tax asset but did not affect reported net income
or loss.
8. Segment Information
The Company's Steel Operations primarily consist of the production,
finishing and sale of flat-rolled carbon, stainless and electrical steels and
steel tubing products. AK Tube LLC, acquired in the third quarter of 2001,
further finishes flat-rolled carbon steels into tubular products. In 2002, AK
Tube's results were reclassified to Steel Operations from Other Operations for
all periods presented. The Company also owns a Snow and Ice Control Products
business, which manufactures snowplows and salt and sand spreaders for
four-wheel drive light trucks. The Company's Other Operations consist of an
industrial park. The following presents the results of the Company's segments.
F-45
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2002 2001 2002
------ -------- -------- --------
Net sales:
Steel Operations.............. $914.5 $1,077.8 $2,799.6 $3,132.9
Snow and Ice Control Products. 42.8 36.2 91.6 83.7
Other Operations.............. 3.4 3.6 9.5 10.2
------ -------- -------- --------
Total net sales............... $960.7 $1,117.6 $2,900.7 $3,226.8
====== ======== ======== ========
Operating profit:
Steel Operations.............. $ 7.3 $ 44.1 $ 41.0 $ 65.0
Snow and Ice Control Products. 14.1 10.4 25.1 21.0
Other Operations.............. 2.0 2.3 5.7 6.4
------ -------- -------- --------
Total operating profit........ $ 23.4 $ 56.8 $ 71.8 $ 92.4
====== ======== ======== ========
9. Sale of Sawhill Tubular Division
On April 19, 2002, the Company completed the sale of its Sawhill Tubular
division for $67.6. The Company retained approximately $20.3 in current
liabilities of Sawhill Tubular and recorded a 2002 pretax loss of $10.6 ($6.4
after tax or $0.06 per share). Sawhill Tubular was previously included in Other
Operations in the Company's segment information.
The results of Sawhill Tubular have been classified as discontinued
operations in the statements of operations. The assets disposed of in the sale
transaction, consisting primarily of trade receivables, inventories and
property, plant and equipment with April 19, 2002 book values of $21.3, $36.5
and $23.1, respectively, have been classified as current and noncurrent assets
held for sale in the December 31, 2001 consolidated balance sheet. There were
no material liabilities transferred in the transaction. Results of discontinued
operations, prior to the date of sale included the following for Sawhill
Tubular:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2002 2001 2002
-------- ---- ------ -----
Net sales........... $ 39.4 $-- $120.4 $51.4
Pretax loss......... 1.4 -- 1.9 0.8
Net loss............ 0.8 -- 1.2 0.5
10. Long-Term Debt
On June 11, 2002, the Company issued and sold $550.0 of 7 3/4% Senior Notes
Due 2012. Net of a discount and underwriting fees, the sale generated cash
proceeds of $538.1. On July 11, 2002, these proceeds, along with cash on hand,
were used to retire the Company's $550.0 of 9 1/8% Senior Notes Due 2006 at a
total cash cost of $575.1, which included a redemption premium of $25.1. In the
three and nine months ended September 30, 2002, the Company recognized a pretax
loss of $31.7 ($19.9 after tax, or $0.18 per share) for the redemption of these
senior notes.
F-46
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
11. Dividends and Preferred Stock Redemption
Since the fourth quarter of 2001, a restrictive covenant contained in the
instruments governing the Company's senior notes precluded the payment of
dividends on either common or preferred stock. However, effective August 8,
2002, the Company received consents from the holders of its other outstanding
senior notes to amend the covenant applicable to each of those notes to conform
to the covenant applicable to its new 7 3/4% Senior Notes Due 2012. Subject to
a formula that reflects cumulative earnings, the amended covenant allows the
Company to resume payment of dividends, in the event the Board of Directors
declares such dividends, and to redeem shares of its outstanding capital stock.
In addition, the amended covenant permits the payment of up to $50.0 of
dividends through June 30, 2004 without regard to cumulative earnings.
On September 30, 2002, the Company paid preferred stock dividends in an
aggregate amount of $0.9, or $3.625 per share, representing current quarter
dividends and the accumulated arrearage for the three previous quarters. Also
on that date, the Company expended $13.1 to redeem and retire all 259,481
shares of its outstanding cumulative convertible preferred stock at a
redemption price of $50.3625 per share.
12. Comprehensive Income (Loss)
Comprehensive income (loss), net of tax, is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2001 2002 2001 2002
------ ----- ------ ------
Net income (loss)........................................... $ (5.9) $(3.3) $(16.0) $(12.7)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.................. 0.7 0.4 0.8 1.0
Derivative instrument hedges, mark to market:
Cumulative effect adjustment......................... -- -- 27.5 --
Gains (losses) arising in period..................... (22.6) 0.8 (65.4) 6.6
Reclass of losses (gains) included in net loss....... 7.9 0.7 (2.4) 19.9
Unrealized gains/losses on securities:
Unrealized holding losses arising in period.......... (0.7) (0.7) (1.2) (1.5)
Reclass of gains included in net income/loss......... -- -- (1.0) (11.3)
------ ----- ------ ------
Comprehensive income (loss).............................. $(20.6) $(2.1) $(57.7) $ 2.0
====== ===== ====== ======
A 40% deferred tax rate is applied to derivative instrument hedges and
unrealized gains and losses.
Accumulated other comprehensive loss is as follows:
December 31, September 30,
2001 2002
------------ -------------
Foreign currency translation................................ $ (2.1) $ (1.1)
Derivative instrument hedges................................ (28.9) (2.4)
Unrealized gains (losses) on securities..................... 8.3 (4.5)
Minimum pension liability................................... (164.6) (164.6)
------- -------
Accumulated other comprehensive loss........................ $(187.3) $(172.6)
======= =======
F-47
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
13. New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." The statement rescinds or
amends previous pronouncements related to extinguishment of debt, intangible
assets of motor carriers and accounting for leases. The statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Generally, the statement applies to transactions occurring and
financial statements issued after May 15, 2002. However, a provision requiring
certain gains and losses from extinguishment of debt to be reclassified from
extraordinary items is effective January 1, 2003. As a result, in 2003 the
Company will reclassify the 2002 loss on retirement of debt to income from
continuing operations. The Company does not believe adoption of the Statement
will have a material effect on its financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Statement could have a material effect on the
Company's financial statements to the extent that significant exit or disposal
activities occur subsequent to adoption.
14. Supplemental Guarantor Information
AK Holding and Douglas Dynamics L.L.C. (the "Guarantor Subsidiary") fully
and unconditionally, joint and severally guarantee the interest, principal and
premium, if any, payments of AK Steel's 9% Senior Notes Due 2007, 8 7/8% Senior
Notes Due 2008, 7 7/8% Senior Notes Due 2009 and 7 3/4% Senior Notes Due 2012.
The Company has determined that full financial statements and other disclosures
concerning AK Holding and the Guarantor Subsidiary would not be material to
investors and, accordingly, those financial statements are not presented. The
following supplemental consolidating financial statements present information
about AK Holding, AK Steel, the Guarantor Subsidiary and the Other
Subsidiaries. The Other Subsidiaries are not guarantors of the above notes.
F-48
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2001
Guarantor Other Consolidated
AK Holding AK Steel Subsidiary Subsidiaries Eliminations Company
---------- -------- ---------- ------------ ------------ ------------
Net sales................................... $ -- $ 900.7 $42.8 $86.3 $(69.1) $ 960.7
Cost of products sold....................... -- 786.9 22.6 20.6 (11.5) 818.6
Selling and administrative expenses......... 0.1 101.7 5.3 2.9 (48.1) 61.9
Depreciation................................ -- 55.5 0.8 0.5 -- 56.8
----- -------- ----- ----- ------ --------
Total operating costs.................... 0.1 944.1 28.7 24.0 (59.6) 937.3
Operating profit (loss)..................... (0.1) (43.4) 14.1 62.3 (9.5) 23.4
Interest expense............................ -- 32.8 -- 7.2 (7.0) 33.0
Other income (expense)...................... -- (5.7) -- 5.7 1.5 1.5
----- -------- ----- ----- ------ --------
Income (loss) before income taxes........... (0.1) (81.9) 14.1 60.8 (1.0) (8.1)
Income tax provision (benefit).............. -- (3.8) 0.2 0.6 -- (3.0)
----- -------- ----- ----- ------ --------
Income (loss) from continuing
operations................................ (0.1) (78.1) 13.9 60.2 (1.0) (5.1)
Loss from discontinued operations........... -- 0.8 -- -- -- 0.8
----- -------- ----- ----- ------ --------
Net income (loss)........................... $(0.1) $ (78.9) $13.9 $60.2 $ (1.0) $ (5.9)
===== ======== ===== ===== ====== ========
For the Three Months Ended September 30, 2002
Guarantor Other Consolidated
AK Holding AK Steel Subsidiary Subsidiaries Eliminations Company
---------- -------- ---------- ------------ ------------ ------------
Net sales................................... $ -- $1,058.2 $36.2 $80.5 $(57.3) $1,117.6
Cost of products sold....................... -- 895.6 19.0 32.1 (13.2) 933.5
Selling and administrative expenses......... 0.4 93.5 5.9 5.0 (34.9) 69.9
Depreciation................................ -- 55.8 0.9 0.7 -- 57.4
----- -------- ----- ----- ------ --------
Total operating costs.................... 0.4 1,044.9 25.8 37.8 (48.1) 1,060.8
Operating profit (loss)..................... (0.4) 13.3 10.4 42.7 (9.2) 56.8
Interest expense............................ -- 31.3 -- 5.3 (4.9) 31.7
Other income (expense)...................... -- (4.6) -- 2.8 3.3 1.5
----- -------- ----- ----- ------ --------
Income (loss) before income taxes........... (0.4) (22.6) 10.4 40.2 (1.0) 26.6
Income tax provision (benefit).............. -- 9.6 -- 0.3 -- 9.9
----- -------- ----- ----- ------ --------
Income (loss) from continuing
operations................................ (0.4) (32.2) 10.4 39.9 (1.0) 16.7
Loss on sale of Sawhill Tubular............. -- 0.1 -- -- -- 0.1
----- -------- ----- ----- ------ --------
Income (loss) before extraordinary item..... (0.4) (32.3) 10.4 39.9 (1.0) 16.6
Loss on early retirement of debt, net of tax -- 19.9 -- -- -- 19.9
----- -------- ----- ----- ------ --------
Net income (loss)........................... $(0.4) $ (52.2) $10.4 $39.9 $ (1.0) $ (3.3)
===== ======== ===== ===== ====== ========
F-49
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2001
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
------- -------- ---------- ------------ ------------ ------------
Net sales............................... $ -- $2,789.7 $91.6 $241.7 $(222.3) $2,900.7
Cost of products sold................... 0.1 2,413.4 48.4 51.7 (43.6) 2,470.0
Selling and administrative expenses..... 0.9 306.9 15.8 8.0 (145.5) 186.1
Depreciation............................ -- 170.0 2.3 0.5 -- 172.8
----- -------- ----- ------ ------- --------
Total operating costs................ 1.0 2,890.3 66.5 60.2 (189.1) 2,828.9
Operating profit (loss)................. (1.0) (100.6) 25.1 181.5 (33.2) 71.8
Interest expense........................ -- 99.8 -- 25.6 (24.9) 100.5
Other income (expense).................. -- (15.5) 0.1 13.8 6.8 5.2
----- -------- ----- ------ ------- --------
Income (loss) before income taxes....... (1.0) (215.9) 25.2 169.7 (1.5) (23.5)
Income tax provision (benefit).......... -- (10.5) 0.4 1.4 -- (8.7)
----- -------- ----- ------ ------- --------
Income (loss) from continuing operations (1.0) (205.4) 24.8 168.3 (1.5) (14.8)
Loss from discontinued operations....... -- 1.2 -- -- -- 1.2
----- -------- ----- ------ ------- --------
Net income (loss)....................... $(1.0) $ (206.6) $24.8 $168.3 $ (1.5) $ (16.0)
===== ======== ===== ====== ======= ========
For the Nine Months Ended September 30, 2002
AK Guarantor Other Consolidated
Holding AK Steel Subsidiary Subsidiaries Eliminations Company
------- -------- ---------- ------------ ------------ ------------
Net sales................................... $ -- $3,073.2 $83.7 $222.5 $(152.6) $3,226.8
Cost of products sold....................... 0.1 2,689.9 43.0 92.7 (37.5) 2,788.2
Selling and administrative expenses......... 1.2 254.4 17.0 13.6 (86.5) 199.7
Depreciation................................ -- 165.6 2.7 2.1 -- 170.4
Insurance settlement........................ -- (23.9) -- -- -- (23.9)
----- -------- ----- ------ ------- --------
Total operating costs.................... 1.3 3,086.0 62.7 108.4 (124.0) 3,134.4
Operating profit (loss)..................... (1.3) (12.8) 21.0 114.1 (28.6) 92.4
Interest expense............................ -- 97.2 -- 15.5 (14.5) 98.2
Gain on sale of Anthem stock................ -- 24.1 -- -- -- 24.1
Other income (expense)...................... -- (14.9) 0.1 7.3 11.6 4.1
----- -------- ----- ------ ------- --------
Income (loss) before income taxes........... (1.3) (100.8) 21.1 105.9 (2.5) 22.4
Income tax provision (benefit).............. -- 6.5 -- 1.8 -- 8.3
----- -------- ----- ------ ------- --------
Income (loss) from continuing operations.... (1.3) (107.3) 21.1 104.1 (2.5) 14.1
Loss from discontinued operations........... -- 0.5 -- -- -- 0.5
Loss on sale of Sawhill Tubular............. -- 6.4 -- -- -- 6.4
----- -------- ----- ------ ------- --------
Income (loss) before extraordinary item..... (1.3) (114.2) 21.1 104.1 (2.5) 7.2
Loss on early retirement of debt, net of tax -- 19.9 -- -- -- 19.9
----- -------- ----- ------ ------- --------
Net income (loss)........................... $(1.3) $ (134.1) $21.1 $104.1 $ (2.5) $ (12.7)
===== ======== ===== ====== ======= ========
F-50
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
BALANCE SHEETS
As of December 31, 2001
Guarantor Other Consolidated
AK Holding AK Steel Subsidiary Subsidiaries Eliminations Company
---------- --------- ---------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............ $ -- $ 97.2 $ 0.1 $ 3.7 $ -- $ 101.0
Accounts receivable.................. -- 11.8 23.8 352.4 -- 388.0
Inventories (Note 3)................. -- 844.4 15.9 41.4 2.9 904.6
Deferred tax asset................... -- 76.6 -- -- -- 76.6
Current assets held for sale......... -- 60.6 -- -- -- 60.6
Other current assets................. 0.1 16.1 0.5 0.3 -- 17.0
------ --------- ------ ------- ------- ---------
Total Current Assets............. 0.1 1,106.7 40.3 397.8 2.9 1,547.8
------ --------- ------ ------- ------- ---------
Property, Plant and Equipment........... 4,665.3 46.3 31.3 -- 4,742.9
Less accumulated depreciation........ -- (1,953.3) (19.7) (1.6) -- (1,974.6)
------ --------- ------ ------- ------- ---------
Property, plant and equipment, net... -- 2,712.0 26.6 29.7 -- 2,768.3
------ --------- ------ ------- ------- ---------
Other Assets:
Investment in AFSG Holdings, Inc..... -- -- -- 55.6 -- 55.6
Intercompany accounts................ 942.8 (639.0) 146.3 (167.0) (283.1) --
Other investments.................... -- 100.9 -- 53.4 -- 154.3
Goodwill............................. -- 101.2 2.4 6.1 -- 109.7
Other intangible assets (Note 4)..... -- 108.2 3.7 -- -- 111.9
Deferred tax asset................... -- 393.5 -- -- -- 393.5
Noncurrent assets held for sale...... -- 24.4 -- -- -- 24.4
Other assets......................... -- 58.8 1.4 0.1 -- 60.3
------ --------- ------ ------- ------- ---------
Total Assets..................... $942.9 $ 3,966.7 $220.7 $ 375.7 $(280.2) $ 5,225.8
====== ========= ====== ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ -- $ 522.0 $ 6.3 $ 9.3 $ -- $ 537.6
Accrued liabilities.................. -- 258.6 7.6 4.3 -- 270.5
Current portion of long-term debt.... -- 63.3 -- 14.7 -- 78.0
Current portion of pension and
OPEBs.............................. -- 68.2 0.1 -- -- 68.3
------ --------- ------ ------- ------- ---------
Total Current Liabilities........ -- 912.1 14.0 28.3 -- 954.4
------ --------- ------ ------- ------- ---------
Noncurrent Liabilities:
Long-term debt....................... -- 1,324.5 -- -- -- 1,324.5
Pension and OPEBs.................... -- 1,736.1 4.0 -- -- 1,740.1
Other liabilities.................... -- 167.8 3.8 1.9 -- 173.5
------ --------- ------ ------- ------- ---------
Total Noncurrent Liabilities..... -- 3,228.4 7.8 1.9 -- 3,238.1
------ --------- ------ ------- ------- ---------
Total Liabilities....................... -- 4,140.5 21.8 30.2 -- 4,192.5
------ --------- ------ ------- ------- ---------
Total Stockholders' Equity.............. 942.9 (173.8) 198.9 345.5 (280.2) 1,033.3
------ --------- ------ ------- ------- ---------
Total Liabilities And Equity............ $942.9 $ 3,966.7 $220.7 $ 375.7 $(280.2) $ 5,225.8
====== ========= ====== ======= ======= =========
F-51
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
BALANCE SHEETS
As of September 30, 2002
Guarantor Other Consolidated
AK Holding AK Steel Subsidiary Subsidiaries Eliminations Company
---------- --------- ---------- ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents............ $ -- $ 233.8 $ -- $ 9.5 $ -- $ 243.3
Accounts receivable.................. -- 18.9 51.4 452.5 -- 522.8
Inventories (Note 3)................. -- 787.2 22.4 40.4 (1.6) 848.4
Deferred tax asset................... -- 62.1 -- 0.1 -- 62.2
Other current assets................. 0.1 22.0 0.9 0.4 -- 23.4
------ --------- ------ ------- ------- ---------
Total Current Assets............. 0.1 1,124.0 74.7 502.9 (1.6) 1,700.1
------ --------- ------ ------- ------- ---------
Property, Plant and Equipment........... -- 4,700.4 50.9 32.6 -- 4,783.9
Less accumulated depreciation........ -- (2,095.4) (21.9) (3.7) -- (2,121.0)
------ --------- ------ ------- ------- ---------
Property, plant and equipment, net... -- 2,605.0 29.0 28.9 -- 2,662.9
------ --------- ------ ------- ------- ---------
Other Assets:
Investment in AFSG Holdings, Inc..... -- -- -- 55.6 -- 55.6
Intercompany accounts................ 916.8 (571.9) 130.0 (279.0) (195.9) --
Other investments.................... -- 48.3 -- 70.6 -- 118.9
Goodwill............................. -- 101.2 2.4 6.1 -- 109.7
Other intangible assets (Note 4)..... -- 108.1 3.3 -- -- 111.4
Deferred tax asset................... -- 354.8 -- -- -- 354.8
Other assets......................... -- 52.5 1.3 6.2 -- 60.0
------ --------- ------ ------- ------- ---------
Total Assets..................... $916.9 $ 3,822.0 $240.7 $ 391.3 $(197.5) $ 5,173.4
====== ========= ====== ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ -- $ 457.3 $ 5.5 $ 10.4 $ -- $ 473.2
Accrued liabilities.................. -- 248.4 7.2 4.6 -- 260.2
Current portion of long-term debt.... -- 62.7 -- 14.7 -- 77.4
Current portion of pension
and OPEBs.......................... -- 67.1 0.1 -- -- 67.2
------ --------- ------ ------- ------- ---------
Total Current Liabilities........ -- 835.5 12.8 29.7 -- 878.0
------ --------- ------ ------- ------- ---------
Noncurrent Liabilities:
Long-term debt.......................... -- 1,322.3 -- -- -- 1,322.3
Pension and OPEBs....................... -- 1,776.7 4.2 -- -- 1,780.9
Other liabilities....................... -- 162.9 3.7 2.2 -- 168.8
------ --------- ------ ------- ------- ---------
Total Noncurrent Liabilities..... -- 3,261.9 7.9 2.2 -- 3,272.0
------ --------- ------ ------- ------- ---------
Total Liabilities....................... -- 4,097.4 20.7 31.9 -- 4,150.0
------ --------- ------ ------- ------- ---------
Total Stockholders' Equity.............. 916.9 (275.4) 220.0 359.4 (197.5) 1,023.4
------ --------- ------ ------- ------- ---------
Total Liabilities and Equity............ $916.9 $ 3,822.0 $240.7 $ 391.3 $(197.5) $ 5,173.4
====== ========= ====== ======= ======= =========
F-52
AK STEEL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001
AK Guarantor Other Consolidated
AK Holding Steel Subsidiary Subsidiaries Eliminations Company
---------- ------- ---------- ------------ ------------ ------------
Total from operating activities of continuing
operations.................................... $ (0.8) $(141.5) $(11.1) $ 184.1 $(0.4) $ 30.3
Cash Flows from Investing Activities:
Capital investments........................ -- (64.0) (1.8) (0.1) -- (65.9)
Proceeds from sale of investments.......... -- 31.6 -- 12.5 -- 44.1
Purchase of a business..................... -- -- -- (29.3) -- (29.3)
Other...................................... -- (4.7) -- (0.9) -- (5.6)
------ ------- ------ ------- ----- ------
Total from investing activities of
continuing operations.................. -- (37.1) (1.8) (17.8) -- (56.7)
------ ------- ------ ------- ----- ------
Cash Flows from Financing Activities:
Redemption of long-term debt............... -- (0.5) -- -- -- (0.5)
Common stock dividends paid................ (13.5) -- -- -- -- (13.5)
Preferred stock dividends paid............. (0.7) -- -- -- -- (0.7)
Intercompany activity...................... 16.1 139.5 11.6 (167.6) 0.4 --
Other...................................... (1.1) -- -- 0.8 -- (0.3)
------ ------- ------ ------- ----- ------
Total from financing activities of
continuing operations.................. 0.8 139.0 11.6 (166.8) 0.4 (15.0)
Cash flow from discontinued operations......... -- 19.3 -- -- -- 19.3
------ ------- ------ ------- ----- ------
Net increase (decrease)........................ -- (20.3) (1.3) (0.5) -- (22.1)
Cash and equivalents, beginning of period...... -- 80.1 1.4 5.3 -- 86.8
------ ------- ------ ------- ----- ------
Cash and equivalents, end of period............ $ -- $ 59.8 $ 0.1 $ 4.8 $ -- $ 64.7
====== ======= ====== ======= ===== ======
For the Nine Months Ended September 30, 2002
AK Guarantor Other Consolidated
AK Holding Steel Subsidiary Subsidiaries Eliminations Company
---------- ------- ---------- ------------ ------------ ------------
Total from operating activities of continuing
operations.................................... $ (1.1) $ 165.1 $(11.2) $ 4.3 $ 2.0 $ 159.1
Cash Flows from Investing Activities:
Capital investments........................ -- (58.6) (5.1) (1.2) -- (64.9)
Purchase of long-term investments.......... -- (25.5) -- (18.7) -- (44.2)
Proceeds from sale of investments.......... -- 82.0 -- -- -- 82.0
Proceeds from sale of business............. -- 62.8 -- -- -- 62.8
Other...................................... -- 0.1 -- (0.4) -- (0.3)
------ ------- ------ ------ ----- -------
Total from investing activities of
continuing operations.................. -- 60.8 (5.1) (20.3) -- 35.4
------ ------- ------ ------ ----- -------
Cash Flows from Financing Activities:
Proceeds from issuing long-term debt....... -- 538.1 -- -- -- 538.1
Redemption of long-term debt............... -- (550.6) -- -- -- (550.6)
Premium on redemption of debt.............. -- (25.1) -- -- -- (25.1)
Redemption of preferred stock.............. (13.1) -- -- -- -- (13.1)
Preferred stock dividends.................. (0.9) -- -- -- -- (0.9)
Intercompany activity...................... 16.5 (51.4) 16.2 20.7 (2.0) --
Other...................................... (1.4) (3.4) -- 1.1 -- (3.7)
------ ------- ------ ------ ----- -------
Total from financing activities of
continuing operations.................. 1.1 (92.4) 16.2 21.8 (2.0) (55.3)
Cash flow from discontinued operations......... -- 3.1 -- -- -- 3.1
------ ------- ------ ------ ----- -------
Net increase (decrease)........................ -- 136.6 (0.1) 5.8 -- 142.3
Cash and equivalents, beginning of period...... -- 97.2 0.1 3.7 -- 101.0
Cash and equivalents, end of period............ $ -- $ 233.8 $ -- $ 9.5 $ -- $ 243.3
====== ======= ====== ====== ===== =======
F-53
[LOGO] AK STEEL