AK Steel Holding DEF 14A 2006
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:
(as permitted by Rule 14a-6(e)(2))
x Definitive Proxy Statement
¨ Definitive Additional Materials
¨ Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
AK STEEL HOLDING CORPORATION
(Name of Registrant as Specified In Its Certificate)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
SEC 1913 (3-99)
AK STEEL HOLDING CORPORATION
703 Curtis Street
Middletown, Ohio 45043
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The 2006 Annual Meeting of Stockholders of AK Steel Holding Corporation (the Company) will be held at The Ritz-Carlton Chicago, 160 East Pearson Street at Water Tower Place, Chicago, Illinois 60611-2124, on Friday, May 19, 2006, at 1:30 p.m., Central Daylight Saving Time, for the following purposes:
The Board of Directors has fixed March 27, 2006, as the record date for the determination of stockholders entitled to receive notice of and to vote at the Annual Meeting.
Stockholders will need to present personal photo identification and an admission ticket to attend the Annual Meeting. If you are a Holder of Record, an admission ticket is attached to your proxy card for this purpose. If your shares are not registered in your name, you must bring personal photo identification and proof of stock ownership to the meeting to receive an admission ticket. Please bring either a copy of your account statement or a letter from your broker, bank or other institution reflecting the number of shares of common stock you own as of March 27, 2006. Please note that no cameras, recording devices or other electronic devices will be permitted at the meeting. For your safety, we reserve the right to inspect all packages prior to admission at the Annual Meeting.
April 17, 2006
WHETHER YOU PLAN TO ATTEND THE ANNUAL MEETING OR NOT, PLEASE MARK, DATE AND SIGN THE ENCLOSED FORM OF PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU CAN VOTE VIA THE INTERNET, BY TELEPHONE, OR BY MAILING YOUR COMPLETED AND SIGNED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED BY FURNISHING WRITTEN NOTICE TO THAT EFFECT, BY SUBMITTING A SUBSEQUENTLY DATED PROXY, OR BY SUBMITTING A SUBSEQUENT VOTE VIA THE INTERNET OR BY THE TELEPHONE. IF YOU ARE A STOCKHOLDER OF RECORD, YOU MAY ALSO ATTEND THE ANNUAL MEETING AND REVOKE YOUR PROXY IN PERSON.
AK STEEL HOLDING CORPORATION
703 Curtis Street
Middletown, Ohio 45043
This Proxy Statement is being furnished in connection with the solicitation by the Board of Directors of AK Steel Holding Corporation (the Company) of proxies to be voted at the Annual Meeting of Stockholders of the Company to be held on May 19, 2006, and at any and all adjournments thereof.
At the meeting, the Companys stockholders will vote for the election of eight directors. The affirmative vote of the holders of a plurality of the shares present in person or represented by proxy at the meeting is required for election as a director. All other matters require the favorable vote of a majority of the shares voted at the meeting in person or by proxy for approval. Each share represented by a duly executed proxy received by the Company prior to the meeting will be voted in accordance with the choices specified therein by the stockholder. If you return a signed and dated proxy card but do not indicate how the shares are to be voted, those shares will be voted as recommended by the Board of Directors. A valid proxy card also authorizes the individuals named as proxies to vote your shares in their discretion on any other matters which, although not described in the Proxy Statement, are properly presented for action at the Annual Meeting. If you indicate on your proxy card that you wish to abstain from voting on an item, your shares will not be voted on that item. Abstentions are not counted in determining the number of shares voted for or against any nominee for director or any management or stockholder proposal, but will be counted to determine whether there is a quorum present. Stockholders who execute proxies may revoke them at any time before they are voted by filing with the Company a written notice of revocation, by delivering a duly executed proxy bearing a later date, by submitting a subsequent vote via the internet or by the telephone, or by attending the meeting and voting in person.
If your shares are held through a broker or other nominee, and you do not provide voting instructions to your broker or nominee at least ten days before the Annual Meeting, the nominee has discretion to vote those shares on matters that the New York Stock Exchange (the NYSE) has determined are routine. However, a nominee cannot vote shares on non-routine matters without your instructions. If the nominee does not vote on a matter because you have failed to provide instructions, this is referred to as a broker non-vote. Broker non-votes will be treated the same as abstentions.
The Board of Directors has fixed the close of business on March 27, 2006 as the record date for the determination of stockholders entitled to notice of and to vote at the meeting. At that date, there were issued and outstanding 110,008,219 shares of common stock, which is the only class of stock outstanding. Holders of common stock are entitled to one vote for each share held on all matters that properly may come before the meeting.
ELECTION OF DIRECTORS
In accordance with the Companys by-laws, the Board of Directors has fixed the number of directors at eight, effective as of the date of the forthcoming Annual Meeting. Eight incumbent nominees will stand for election at the Annual Meeting. One incumbent director will not stand for election because he has reached the age of 72 and may not stand for election under the Companys Corporate Governance Guidelines. If elected, each of the nominees will serve as a director of the Company for a term expiring on the date of the next succeeding Annual Meeting and until his or her successor is duly elected and qualifies. If any nominee is unable to serve, or determines, prior to his or her election, that he or she will be unable to serve, proxies may be voted for another person designated by the Board of Directors. The Company has no reason to believe that any nominee will be unable to serve.
Information Concerning Nominees for Directors
Set forth below is information with respect to the eight nominees for election as directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE ELECTION OF EACH OF THE FOREGOING NOMINEES.
Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and a Public and Environmental Issues Committee. In 2005, Mr. Jenkins served as an ex-officio, non-voting member of each of these committees in his capacity as non-executive Chairman. Effective January 1, 2006, following Mr. Wainscotts election to serve as Chairman of the Board, Mr. Jenkins was elected to serve as Lead Director of the Board and ceased serving as an ex-officio member on any of these committees. At the same time, Mr. Jenkins became a regular voting member of two of the committees, as noted below.
The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling its responsibility to oversee managements conduct of the Companys financial reporting process, including: (i) overseeing the integrity of the Companys financial statements; (ii) monitoring compliance with legal and regulatory requirements; (iii) assessing the independent auditors qualifications and independence; and (iv) assessing the performance of the independent auditors and internal audit function. In fulfilling these responsibilities, the Audit Committee selects and appoints the firm of certified public accountants that will serve as the independent auditors of the Companys annual financial statements. The Committee also meets with representatives of that accounting firm to review the plan, scope and results of the annual audit, the Companys critical accounting policies and estimates and the recommendations of the independent accountants regarding the Companys internal accounting systems and controls. During 2005, the Committee consisted of Messrs. Leser (Chair) and Meyer, Mrs. Peterson and Dr. Thomson. A report of the Audit Committee is set forth on page 27. In March 2006, the Board of Directors determined that all of the Committee members are financially literate and each of Messrs. Leser and Meyer is an audit committee financial expert, as that term is defined in Item 401(h)(2) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the Exchange Act). The Audit Committee satisfies the requirements of the NYSE Rules 303A.06 and 303A.07 and Rule 10A-3 of the Exchange Act and each of its members satisfies the independence, financial literacy and other requirements of those provisions and NYSE Rule 303A.02.
The primary purpose of the Compensation Committee is to assist the Board in overseeing the Companys management compensation policies and practices, including: (i) determining and approving the compensation of the Companys Chief Executive Officer; (ii) reviewing and approving compensation levels for the Companys other executive officers; (iii) reviewing and approving management incentive compensation policies and programs; (iv) reviewing and approving equity compensation programs for employees; and (v) producing an annual report on executive compensation for inclusion in the proxy statement. During 2005, the members of the Committee were Messrs. Abdoo (Chair), Leser and Fites and Dr. Hill. Effective January 1, 2006, Mr. Jenkins became a member of the Compensation Committee. A report of the Compensation Committee is set forth beginning on page 19. All members of the Compensation Committee are outside directors as that term is defined by the Internal Revenue Code of 1986, as amended (the Code) at Section 162(m). The Compensation Committee satisfies the requirements of the NYSE Rule 303A.05 and each of its members satisfies the independence and other requirements of that rule and NYSE Rule 303A.02.
Nominating and Governance Committee
The primary purpose of the Nominating and Governance Committee is to assist the Board in: (i) identifying, screening and reviewing individuals qualified to serve as directors and recommending to the Board candidates for nomination for election at the annual meeting of stockholders or to fill Board vacancies; (ii) overseeing the Companys policies and procedures for the receipt of stockholder suggestions regarding Board composition and recommendations of candidates for nomination by the Board; (iii) developing, recommending to the Board and overseeing implementation of the Companys Corporate Governance Guidelines; and (iv) reviewing on a regular
basis the overall corporate governance of the Company and recommending improvements when necessary. During 2005, the members of the Committee were Messrs. Fites (Chair) and Abdoo and Mrs. Peterson. Effective January 1, 2006, Mr. Jenkins became a member of the Committee and replaced Mr. Fites as Chair. Mr. Fites will continue as a member of the Committee until he retires from the Board effective with the 2006 annual meeting of stockholders. The Nominating and Governance Committee satisfies the requirements of the NYSE Rule 303A.04 and each of its members satisfies the independence and other requirements of that rule and NYSE Rule 303A.02.
In fulfilling its responsibility of identifying, screening and recommending persons for nomination by the Board to serve as a director, the Committee may solicit input and/or recommendations from other members of the Board and/or independent advisors. After the Committees deliberations are completed, it reports its findings and recommendations to the Board. The Board then proposes a slate of nominees to the stockholders for election to the Board.
In addition to meeting independence requirements, nominees for the Board must not have reached their 72nd birthday at the time of their election. Nominees are selected on the basis of the following principal criteria: personal qualities and characteristics, such as judgment, integrity, reputation in the business community, and record of public service; business and/or professional expertise, experience and accomplishments; ability and willingness to devote sufficient time to the affairs of the Board and of the Company; diversity of viewpoints, backgrounds and experience from those of other nominees; the needs of the Company at the time of nomination to the Board; and the likely integration of a particular candidates skills and personality with those of other nominees in building a Board that will be effective and responsive to the needs of the Company.
The Nominating and Governance Committee will give appropriate consideration to candidates for Board membership nominated by stockholders in accordance with the Companys by-laws, or as otherwise recommended and will evaluate such candidates in the same manner as other candidates identified to the Committee. Any such recommendations may be submitted in writing to the Chairman of the Nominating and Governance Committee, c/o Secretary, AK Steel Holding Corporation, 703 Curtis Street, Middletown, Ohio 45043 and should contain whatever supporting material the stockholder considers appropriate. The Committee will also consider whether to nominate any person nominated by a stockholder pursuant to the provisions of the Companys by-laws relating to stockholder nominations as described below in Stockholder Proposals for the 2007 Annual Meeting and Nominations of Directors. No such nominee was recommended by any security holder or security holder group for election at the 2006 Annual Meeting.
Public and Environmental Issues Committee
The primary purpose of the Public and Environmental Issues Committee is to review on behalf of the Board, and to advise management with respect to, significant public policy, environmental, legal, health and safety, and trade issues pertinent to the Company and its policies. During 2005, the Committee consisted of Drs. Thomson (Chair) and Hill and Mr. Meyer.
Attendance at Meetings
During 2005, there were eight meetings of the Board of Directors. There were five meetings of the Compensation Committee, eight meetings of the Audit Committee, four meetings of the Nominating and Governance Committee and five meetings of the Public and Environmental Issues Committee. The Company does not have a formal written policy regarding director attendance at the Annual Meeting; however, directors are encouraged to attend the Annual Meeting. Eight directors were in attendance in person at the 2005 Annual Meeting. Each director is expected to make a diligent effort to attend all Board meetings and meetings of those committees of which he or she is a member. During 2005, no director attended fewer than 75% of the aggregate of the total meetings of the Board and those committees of which he or she was a member.
Compensation of Directors
During 2005, each director who was not an employee of the Company received an annual fee of $80,000 for service on the Board of Directors. One-half of the annual fee is paid in the form of restricted shares of common
stock of the Company valued at the fair market price on the date of issuance and the balance is paid in cash or, at the directors option, in the form of additional restricted shares of common stock. The restrictions on the shares of common stock paid to a director lapse on the date the director retires or otherwise completes his or her tenure on the Board. Each non-employee director who chairs a committee of the Board of Directors receives an additional annual fee of $5,000 for such service. Non-employee directors also are paid a fee of $2,000 for each Board meeting and each committee meeting they attend and are reimbursed for their expenses incurred in attending those meetings. As non-executive Chairman, Mr. Jenkins annual fee for service on the Board of Directors for 2005 was set at 2.5 times that of the other non-employee directors. Mr. Jenkins fee for each Board meeting and each committee meeting he attended in 2005 was $5,000. Effective January 1, 2006, Mr. Jenkins ended his service as non-executive Chairman and was elected to serve as Lead Director to the Board. Specifically for service in his capacity as Lead Director, Mr. Jenkins now receives an annual fee of $60,000 in addition to the above-described fees paid to all non-employee directors.
Each year directors may elect to defer any portion of their annual fee for services not paid in the form of restricted stock as well as any portion or all of the fees received for meeting attendance and serving as committee chair, pursuant to the Director Deferred Compensation Plan. One director deferred compensation under this plan during 2005. Upon first being elected to the Board, each non-employee director also is granted options under the Companys Stock Incentive Plan to purchase a total of 10,000 shares of the Companys common stock at its prevailing market price at the time of the grant. 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. An employee of the Company who serves as a director receives no additional compensation for such service.
Director Stock Ownership Guidelines
Effective July 21, 2005, upon the recommendation of the Nominating and Governance Committee, the Board adopted stock ownership guidelines for all non-employee directors. Those guidelines provide that each director should own shares of the Companys common stock equal in market value to five times the cash portion of the Boards annual retainer. (By way of example, assuming the cash portion of the Boards annual retainer is $40,000, the target ownership level for a director would be $200,000.) Then-sitting directors are expected to attain the minimum level of target ownership within a period of five years from the effective date of the policy. A new director will be expected to attain the minimum level of target ownership within a period of five years from the date he or she is first elected to the Board. All Directors are in compliance with the policy, either by already owning shares in excess of the Directors minimum target ownership level or by being on track to reach the applicable target ownership level within the compliance timeframe. For purposes of these guidelines, the term ownership includes: (a) shares of Company stock held directly by a director, (b) shares of Company stock held by a directors family member living in the same household, and (c) shares of Company restricted stock held directly by a director, whether or not yet vested. The term ownership does not include options to purchase stock.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Companys directors and officers, and persons who own beneficially more than ten percent of a registered class of the Companys equity securities, to file with the Securities and Exchange Commission initial reports of ownership of the equity securities of the Company and reports of changes in that ownership. Officers, directors and greater-than-ten-percent beneficial owners are required by Rule 16a-3(e) under the Exchange Act to furnish the Company with copies of all reports that they file pursuant to Section 16(a).
To the Companys knowledge, based upon a review of the copies of such reports furnished to the Company and written representations from its executive officers and directors that no other reports were required, all Section 16(a) filing requirements applicable to the Companys officers and directors were complied with during 2005.
Presiding Director and Communication with the Board of Directors
The Companys Chairman of the Board presides over all Board meetings, except when the Board meets in executive session. The Lead Director presides over all executive sessions of the Board.
Stockholders may send communications to the Chairman of the Board, to the Lead Director or to any one or more of the other non-employee directors by addressing such correspondence to the name(s) of any specific director(s) or to the Board of Directors as a whole, and mailing it to: Secretary, c/o AK Steel Holding Corporation, 703 Curtis Street, Middletown, Ohio 45043.
In March 2006, the Nominating and Governance Committee and the Board of Directors undertook a review of the independence of all current non-employee directors. In advance of the meetings at which the reviews occurred, each incumbent director was asked to provide the Board with full information regarding his or her business and other relationships with the Company and its affiliates, and with executive officers and their affiliates, to enable the Board to evaluate his or her independence.
Upon the recommendation of the Nominating and Governance Committee, and after considering all relevant facts and circumstances, the Board has affirmatively determined that none of the current non-management incumbent directors (that is, all of the incumbent directors except Mr. Wainscott) has a material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company) and all such non-management incumbent directors qualify as independent as that term is defined in Rule 10A-3 and Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and in NYSE Rule 303A. Directors have an affirmative obligation to inform the Board of any material changes that might impact their designation by the Board as independent. This obligation includes all business relationships between the director and/or an immediate family member on the one hand and the Company and/or its affiliates and/or executive officers on the other.
Documents Available on the Companys Website
The charters of the Audit, Compensation, and Nominating and Governance Committees, as well as the Companys Corporate Governance Guidelines, Code of Business Conduct and Ethics for AK Steel Directors, Officers and Employees and Code of Ethics for Principal Officers of AK Steel are posted on the Companys website at www.aksteel.com. These documents are also available in print by mailing a request to: Secretary, c/o AK Steel Holding Corporation, 703 Curtis Street, Middletown, Ohio 45043.
Directors and Executive Officers
The following table sets forth as of March 27, 2006, information with respect to the beneficial ownership of the Companys common stock by: (i) each executive officer of the Company named in the Summary Compensation Table on page 12, (ii) each current director and each nominee for election as a director and (iii) all current directors and executive officers of the Company as a group.
Other Beneficial Owners
The following table sets forth information with respect to each person known by the Company to own beneficially more than 5% of the outstanding common stock of the Company as of December 31, 2005 (except as otherwise indicated):
Equity Compensation Plan Information
The following table sets forth information with respect to compensation plans under which equity securities of the Company are authorized for issuance:
Summary of Cash and Other Compensation
Annual compensation paid to executive officers of the Company consists of salary, cash incentive awards under the Companys Annual Management Incentive Plan (the MIP) and, on an occasional and exceptional basis, special bonuses. Long-term compensation consists of awards of restricted stock, stock options, and performance shares under the Companys Stock Incentive Plan (the SIP) and payouts in the form of cash under the Companys Long Term Performance Plan (the LTPP).
The following table sets forth the cash compensation, as well as certain other compensation, paid or accrued by the Company for each of the past three years to the Chief Executive Officer and to each of the other four most highly compensated executive officers of the Company serving as such at December 31, 2005. For convenience, all persons named in the table are referred to as the Named Executives.
Summary Compensation Table
Pursuant to its SIP, the Company grants to its key employees, including its executive officers, options to purchase shares of its common stock. All options granted to employees under the SIP vest in three equal annual installments, on the first, second and third anniversary of the grant date. Each option must be exercised within a ten-year period of its grant date. The plan does not provide for, and the Company does not grant, stock appreciation rights.
The following table sets forth information with respect to stock options granted to the Named Executives in 2005:
Stock Option Grants in 2005
The following table provides information as to options exercised by each of the Named Executives in 2005 and the value of options held by them at year end:
Aggregated Option Exercises in 2005 and
Option Values at December 31, 2005
Long Term Incentive Awards
The fundamental purposes of the Companys LTPP are to: (i) align the interests of management more closely with those of the Companys stockholders; (ii) assist the Company in recruiting, retaining and motivating a highly talented group of individuals who will successfully manage the Company in a way which benefits all of its stakeholders; (iii) link a portion of managements compensation to the performance of the Company; and (iv) increase the focus of management on the Companys long-term performance by establishing performance goals that support long-term strategies.
In 2005 the Compensation Committee of the Board of Directors reviewed the Companys existing LTPP with its independent executive compensation consultant to evaluate the extent to which the LTPP was achieving its purposes. Based upon that review, the Compensation Committee concluded that it would enhance the probability of achieving those purposes if the LTPP were amended and restated to replace the performance metric. At that time, the metric was per-ton earnings before income taxes, depreciation and amortization (EBITDA), relative to peer companies in the steel industry. The Committee determined to modify the LTPP to: (1) change the metric from EBITDA-per-ton to a cumulative EBITDA, (2) eliminate the relative nature of the metric (i.e. the comparison to a peer group) and have it be based instead solely on the performance of the Company, and (3) go to a single award for a three-year performance period rather than divide the award between a one-year and a three-year performance period. These changes were recommended by the Compensation Committee to, and approved by, the Board of Directors on March 17, 2005, and were approved by the stockholders at the Companys 2005 annual meeting.
Under the new LTPP as revised and approved in 2005, the Compensation Committee establishes cumulative EBITDA threshold, target and maximum payout goals at the start of each three-year performance period. The threshold must be met before any payout will be made. A linear progression is used for determining the payout for achievement of a cumulative EBITDA between the threshold, target and maximum payout goals. Additionally, all payouts, if any are earned, are paid in cash. Because (1) the payout under the new LTPP is predicated solely on a three-year performance period (as opposed to a one-year and a three-year period under the previous LTPP), and (2) there was no longer an adequate peer group due to consolidation in the industry to properly and fairly apply the performance metric of the previous LTPP, the Committee established transitional one and two-year goals to be used in the first (2005) and second (2006) year of the new LTPP. Thereafter, payouts will only be made based upon three-year performance periods.
Under the new LTPP, the payout to each participating executive is determined by multiplying the executives base salary for the performance period (annualized, based upon his or her monthly rate of base salary during the last month of the performance period) against a target percentage in order to arrive at a performance award target amount (Target Amount). Each participating executive is assigned a target percentage by the Compensation Committee. Those percentages currently range from 50% to 100% for the Named Executives. For each performance period, the Committee also establishes a threshold performance goal, a target performance goal and a maximum performance goal. If the threshold goal is not achieved for a particular performance period, no award is made under the LTPP for that period. If the threshold goal is achieved, then each participating member will receive an LTPP award equal to one half of his or her Target Amount. If the target goal is achieved, then each participating member will receive an LTPP award equal to his or her Target Amount. If the maximum goal is achieved, then each participating member will receive an LTPP award equal to twice his or her Target Amount.
No payment is made to an LTPP participant who has voluntarily resigned or been discharged for cause prior to the scheduled date of payout. Upon retirement or certain other qualifying termination events, a participant is entitled under the LTPP to an amount equal to twice the amount paid or to be paid to the participant on the LTPP award date occurring during the year of his or her retirement or termination, less the amount of any LTPP award already actually made during that year. This payout is in lieu of any amounts to which the participant otherwise might have been entitled with respect to performance periods that commenced prior to, but expire after, the participants retirement or other qualifying termination event.
Long Term Incentive Awards in 2005 in the Form of Performance Shares
In addition to stock options and restricted stock awards, performance-based equity awards (performance shares) may be awarded to key employees, including executive officers, under the Companys SIP. Each grant is expressed as a target number of shares of the Companys common stock. The number of performance shares, if any, actually earned by and issued to the recipient under an award will be based upon the performance of the Company over a three-year performance period (the Performance Period). Depending upon the Companys performance with reference to the performance categories described below, a recipient ultimately may earn from zero to one hundred fifty percent of the target number of shares granted. The performance categories used to determine how many performance shares ultimately will be earned and issued are: (1) the Companys total stockholder return (TSR), defined as price appreciation plus reinvested dividends, if any, during the Performance Period relative to the TSR during that same period of the companies in the Standard & Poors 400 Midcap Index, and (2) the compounded annual growth rate (CAGR) of the price of the Companys common stock over the Performance Period, using as the base the average closing price of the Companys common stock for the last twenty trading days during the month of December. One half of the total target number of shares awarded may be earned based on the relative TSR performance and the other half may be earned based on the CAGR performance. For each performance category, levels have been established to provide threshold, target and maximum payouts as follows:
If the threshold performance level is not achieved in a performance category as of the end of the Performance Period, then none of the target shares related to that category will be earned or issued. If at least the threshold is achieved in a performance category, then shares will be earned and issued in an amount equal to the number of the awards target shares related to that category, multiplied by a percentage determined by a straight-line interpolation between the actual level of the Companys performance and the above-stated payout percentages.
The following table sets forth information with respect to performance share grants to the Named Executives in 2005:
Long Term Incentive PlansAwards in 2005
The Companys executive officers are eligible for retirement benefits under a qualified benefit plan known as the Non-Contributory Pension Plan (the NCPP). Retirement benefits are calculated under the NCPP using one of two formulas: (i) a cash balance formula (the Cash Balance Formula) or (ii) a final average pay formula (the Final Average Pay Formula). An employees eligibility for coverage under a particular formula is typically
determined by the date when he or she commenced employment with the Company. Regardless of which formula is used under the NCPP, participants are generally vested after five years of service. Participants compensation taken into account in determining benefits under either formula is subject to the compensation limits imposed by the Code. The estimates contained herein of benefits provided under the Cash Balance Formula and Final Average Pay Formula are computed on a single life annuity basis and do not reflect any reduction resulting from a Social Security offset.
Cash Balance Formula
A Cash Balance Formula participants account is credited annually with (i) a service credit based on the participants years of service and eligible compensation for that year, and (ii) an interest credit based on the participants account balance as of the beginning of the year and an interest rate as determined and defined in the Cash Balance Formula. For purposes of the Cash Balance Formula, eligible compensation generally includes the participants base salary and incentive compensation.
Four of the Named Executives (Messrs. Wainscott, Horn, Kaloski and Ferrara) and two of the Companys other executive officers participate in the Cash Balance Formula. The estimated annual benefits payable under the Cash Balance Formula upon retirement at age 65 for Mr. Wainscott is $22,196.04, for Mr. Horn is $9,862.08, for Mr. Kaloski is $6,768.60 and for Mr. Ferrara is $5,255.04. These estimates assume each Named Executive continues working for the Company until age 65, the Cash Balance Formula continues unchanged until the projection date, and regulatory limits on compensation and benefits remain constant at 2005 levels. These estimates make no assumptions of any future increases to the eligible compensation of the Named Executives.
Final Average Pay Formula
Under the Final Average Pay Formula, retirement benefits are calculated on the basis of the executive officers (i) number of years of credited service and (ii) average annual earnings during the 60 consecutive months out of the last 120 months of service that yield the highest annual compensation. One Named Executive (Mr. Gant) and one other executive officer participate in the Final Average Pay Formula. For information on Mr. Gants estimated annual benefit at retirement, see the footnote to the service credit table below.
The Companys supplemental retirement plan (the Supplemental Plan) provides (i) a make up of qualified plan benefits that were denied as a result of limitations imposed by the Code and (ii) supplemental benefits to vested participants. Vesting occurs when a participant completes a minimum of ten years of creditable service with the Company, including at least five years of service as an officer. Under the Supplemental Plan, the basic form of payment of a participants benefit is a single life annuity payment in equal monthly installments commencing on the later of the first day of the month following the participants 60th birthday or his or her employment termination date. A participant may elect to commence the monthly payments early following his or her 55th birthday, but the payments under those circumstances will be reduced to the actuarial equivalent of the regular payments based upon the participants age and certain actuarial assumptions. The Supplemental Plan was amended in 2004 provide that vesting also shall occur upon the effective date of a Change of Control (as defined in the Supplemental Plan) and to clarify that, in the event of a Change of Control, there would be no such actuarial reduction for commencement of a participants benefit before age 60 and participants would have the right to elect a lump sum form of payment rather than the annuity form of payment.
Benefits paid under the Supplemental Plan are subject to an offset for any benefit received under either the Companys qualified plans or any qualified plan provided by another employer. A participants benefit under the Supplemental Plan, prior to giving effect to such offset, is equal to the greater of:
Estimated Annual Supplemental Plan Benefits
All elected officers are eligible for coverage under the Supplemental Plan. Currently, however, not all elected officers have been selected to participate in the Supplemental Plan. The following table sets forth the estimated maximum annual retirement benefits (calculated on a straight line annuity basis without reflecting any reductions resulting from any applicable qualified benefit plan or Social Security offsets) that may become payable to a covered participant under the Supplemental Plan, assuming satisfaction of the requisite service requirements at the time of retirement:
The following table sets forth, as of December 31, 2005, the number of years of creditable service, years of service as an officer and the applicable average covered compensation for Supplemental Plan benefit calculation purposes for each of the Named Executives:
Agreements with Executive Officers
The Company does not have written employment agreements with any of the Named Executives. It does have severance agreements and change-in-control agreements with each of the Named Executives, as well as certain other executive officers and key managers. The current forms of those agreements were approved in 2004 after the Compensation Committee undertook an evaluation of its then-existing executive officer severance agreement form and concluded that the then-existing form of severance agreement for executive officers should be separated into two different agreements, one to address severance in the event of termination following a change-in-control and another with more limited benefits in the event of termination not involving a change-in-control. The level of benefits provided under each form of agreement was reduced from their pre-existing level. In addition, in both new forms of agreement, the definition of what constitutes cause for
purposes of termination was revised to make it more clearly consistent with contemporary good governance principles. A more detailed description of each form of agreement is set forth below.
The Company has entered into an agreement with each of the Named Executives that provides severance payments and other benefits in the event his employment is terminated involuntarily and without cause. The base severance benefit under such circumstances is a lump sum payment equal to the Named Executives base salary for a period of six months. In addition, if such officer executes an agreement releasing the Company from any liability for claims relating to his employment with the Company, he also is entitled to receive: (i) an additional lump sum severance payment (ranging from twelve to eighteen months of base salary); (ii) a lump sum payment based upon the Named Executives assigned target amount under the Companys MIP (ranging from one and one half to two times the target amount, reduced in each instance by any amount otherwise paid or payable under the MIP with respect to such calendar year); and (iii) continuing coverage under the Companys benefit plans, including life, health and other insurance benefits, for a specified period of time (ranging from eighteen months to two years). In consideration for these payments and other benefits, each Named Executive commits in the severance agreement to certain responsibilities, including not to compete with the Company and its affiliates for one year following termination of his employment with the Company.
The Company also has entered into an agreement with each of the Named Executives that provides severance payments and other benefits in the event of termination of employment after a change-in-control of the Company. A Named Executive typically is entitled to severance payments and other benefits under this agreement if, within twenty four months following a change-in-control of the Company, (i) his employment with the Company is involuntarily terminated without cause, or (ii) he voluntarily terminates his employment for good reason. Under one version of the termination section, however, the Named Executive also is entitled to benefits if he voluntarily terminates his employment with the Company for any reason within six months after a change-in-control.
There also are different versions of the change-in-control agreement with respect to the level of benefit payments made in the event of a change-in-control. Generally, the highest level of benefits is provided for Mr. Wainscott. In each instance, the base severance benefit is a lump sum payment equal to the Named Executives base salary for a period of six months. In addition, if such officer executes an agreement releasing the Company from any liability for claims relating to his employment with the Company, he would be entitled to receive: (i) an additional lump sum severance payment (ranging between eighteen and thirty months of base salary); (ii) a lump sum payment based upon the Named Executives assigned target amount under the Companys MIP (equal to three times the greater of the officers assigned MIP target amount for the calendar year in which the termination occurs, the actual MIP payout for the calendar year immediately preceding the calendar year of termination, or the average of the MIP payouts for the three calendar years immediately preceding the calendar year of termination, reduced in each instance by any amount otherwise paid or payable under the MIP with respect to the preceding calendar year, plus a pro rated MIP payout for the calendar year of termination); (iii) a pro-rated LTPP payment at the target level for all incomplete performance periods as of the date of termination; (iv) continuing coverage under the Companys benefit plans, including life, health and other insurance benefits, for a specified period (ranging from twenty-four to thirty-six months); (v) additional service credits toward retiree medical coverage (ranging from two to three years); (vi) the immediate vesting of all restricted stock awards to the Named Executive under the Companys SIP and the lapse of all restrictions on such awards; (vii) the right, for a period of three years, to exercise all stock options awarded to the Named Executive under the SIP, and (viii) if any portion of the required payments to such officer becomes subject to the federal excise tax on parachute payments, a gross-up payment so that the net amount retained by the Named Executive 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. In consideration for these payments and other benefits, each Named Executive commits in the change-in-control agreement to certain responsibilities, including not to compete with the Company and its affiliates for one year following termination of his employment with the Company.
Compensation Committee Report on Executive Compensation
Membership in the Committee
The Compensation Committee (the Committee) of the Board of Directors is comprised entirely of directors who are not current or former employees or officers of the Company and who meet the independence standards of the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Each member of the Committee is also an outside director for purposes of Section 162(m) of the Internal Revenue Code (the Code). There currently are five members of the Committee.
The general function of the Committee is to oversee the Companys management compensation policies and practices. Pursuant to its Charter, the Committees specific responsibilities include: (1) establishing and reviewing the Companys overall management compensation philosophy and policies, (2) reviewing and approving corporate goals and objectives relevant to CEO compensation, including annual performance objectives for the CEO, (3) evaluating at least annually the performance of the CEO against corporate goals and objectives, including the annual performance objectives for the CEO and, based on this evaluation, determining and approving the compensation of the CEO, (4) reviewing and recommending to the Board the compensation of such other executive officers or other members of management as the Board and the Committee determine is appropriate, (5) reviewing on a periodic basis the Companys management compensation programs, including any management incentive compensation plans, to determine whether they are appropriate, properly coordinated and achieve their intended purpose, and recommending to the Board any new or appropriate modifications to such plans or programs, (6) reviewing and recommending to the Board the Companys incentive and equity-based compensation plans and any appropriate modifications to such plans, and reviewing all grants of awards under such plans, (7) administering and monitoring compliance by executives with the rules and guidelines of the Companys equity-based plans, (8) reviewing and recommending to the Board any changes in employee retirement plans or programs, and other employee benefit plans and programs, (9) preparing annually the Committees report to be included in the Companys proxy statement, (10) conducting an annual self-evaluation of the performance of the Committee, including its effectiveness and compliance with its Charter, (11) reviewing and reassessing the adequacy of its Charter annually, and recommending appropriate amendments to the Board, and (12) reporting regularly to the Board on Committee findings and recommendations and any other matters the Committee deems appropriate or the Board requests, and maintaining minutes or other records of Committee meetings and activities.
In discharging these responsibilities, the Committee is empowered to inquire into any matter that it considers appropriate to carry out its responsibilities, with access to all books, records, facilities and personnel of the Company. The Committee has the power to retain outside counsel and compensation consultants or other advisors to assist it in carrying out its responsibilities. When the Committee deems it appropriate, and at its discretion, the Committee may seek ratification of its action by the Board. The Company is required to, and does, provide adequate resources to support the Committees activities, including compensation of the Committees counsel, consultants and other advisors. The Committee has the sole authority to retain, compensate, direct, oversee and terminate such counsel, compensation consultants, and other advisors hired to assist the Committee and they are accountable ultimately to the Committee.
The Committees compensation philosophy is that a compensation program should strengthen the commonality of interests between management and the Companys stockholders, while at the same time enabling the Company to attract, motivate and retain executives of high caliber and ability who will drive the Companys success. Consistent with the objective of strengthening the commonality of interests between management and the Companys stockholders, the Committee believes that a significant portion of the overall compensation package for each of the Companys executive officers should include components that link the executives
compensation to the Companys performance, including performance-based vesting provisions for a portion of the equity incentives awarded to each executive officer, and that reward executives for superior performance and provide financial consequences for below-market performance. Consistent with the objective of attracting, motivating and retaining executives of high caliber and ability who will drive the Companys success, the Committee attempts to establish an equitable and reasonable compensation package for each executive officer that reflects not only the relative performance of the Company against its peers, but also is competitive relative to the executive officers peers, both inside and outside the Company. The percentage of total compensation that is performance-based is proportional to the level of the executive.
The Committee periodically reviews the effectiveness and competitiveness of the Companys executive compensation philosophy and program with the assistance of an independent consultant.
Stockholder Approval of Severance Agreements with Senior Executives
In 2003, the Committee recommended, and the Board adopted, a policy concerning stockholder approval of certain severance agreements with the Companys senior executives. That policy currently provides that the Board should seek stockholder approval or ratification of severance agreements with its senior executives entered into on or after May 13, 2003 if such agreements require payment of benefits attributable to severance in an amount exceeding 2.99 times the sum of the senior executives annual base salary plus annual and long term incentive bonuses payable for the then-current calendar year. For purposes of this policy, the term severance agreement means an employment agreement, retirement agreement or change-in-control agreement which contains a provision for payment of benefits upon severance of employment with the Company, as well as renewals, modifications or extensions of such agreements. The term senior executive means the Chief Executive Officer, President, principal financial officer, principal accounting officer and any elected Vice President of the Company. The term benefits means lump-sum cash payments (including cash payments in lieu of medical benefits and excluding gross up payments to cover excise taxes) and the estimated present value of future periodic cash payments to be paid to a senior executive in excess of what he or she otherwise would be entitled to receive under the terms of any qualified or non-qualified company pension or employee benefit plan.
Stock Ownership Guidelines for Executive Officers
In 2005, the Committee recommended, and the Board adopted, a policy concerning stock ownership guidelines for executive officers. The policy went into effect July 21, 2005. The principal objective of the policy is to enhance the linkage between the interests of stockholders and executive management through a minimum level of stock ownership. In addition, the policys guidelines are intended to provide executive officers with direction as to when it is permissible for them to sell shares. Pursuant to the policy, each executive officer has a target ownership guideline for the Companys common stock. The guideline typically is expressed as a number of shares equal in market value to a multiple of the executive officers annual base salary. The target ownership guideline for the Companys President and Chief Executive Officer was set at a number of shares equal in market value to three times their then-annual base salary. The target ownership guideline set for other executive officers varies, and is up to one-and-one-half times his then-annual base salary. Once established, an executive officers target ownership guideline does not re-adjust automatically as a result of changes in his or her base salary or changes in the price of the Companys stock. However, the Committee may, from time to time, re-evaluate and revise a particular executive officers target ownership guideline in light of such changes. For purposes of the policy, ownership includes: (a) shares of Company stock held directly by an executive officer, (b) shares of Company stock held by an executive officers family member living in the same household, and (c) shares of Company restricted stock held directly by an executive officer, whether or not yet vested. Ownership does not include options to purchase stock. Executive officers are expected to attain the minimum level of target ownership within a period of three years from the effective date of the policy or from the date he or she is first elected as an executive officer, whichever is later. Under the policy, each executive officer annually submits a
written report confirming that he or she has reached the applicable target ownership level or a plan outlining how he or she intends to do so within the compliance timeframe. In 2005, each of the executive officers submitted a report or plan to the Committee in compliance with the requirements of the policy.
Executive Officer Compensation Elements
The key elements of the Companys executive officer compensation program are base salary, annual incentive awards under the Management Incentive Plan (MIP), long-term incentive awards under the Long Term Performance Plan (LTPP), and awards of stock options, restricted stock and performance-based equities under the Stock Incentive Plan (SIP). Each of these elements is addressed separately below.
Salary levels are assigned to positions within competitive standards based on job responsibilities and a review of the salary levels for comparable positions at other major corporations, as disclosed in compensation surveys conducted by independent consulting firms. Corporations for which compensation data are included in these surveys include various industrial companies with sales, size and scope that reasonably can be compared to those of the Company, as well as other large publicly-owned, United States-based companies in the steel industry. The Committee periodically reviews the peer group it uses to assist in determining executive compensation to evaluate whether it remains reasonable and appropriate. In 2005, the Committee conducted such a review and concluded that modifications to the peer group were appropriate. Three companies were removed from the original group of eighteen because they were no longer comparable in either the size or the nature of their business and two new companies that are deemed to be comparable were added, for a new peer group of seventeen companies. The Committee also reviews the compensation levels of the executive officers of the Company for internal consistency relative to each other.
An increase in base salary for an executive officer is based upon individual performance, Company performance, changes in job responsibility, and market compensation data and trends. The Committee does not rely on any specific formula, nor does it assign specific weights to the various factors used in determining base salaries. Strong individual performance and strong Company performance would generally result in above-market increases. Below-market increases or no increases would generally occur in years when individual performance and Company performance are below expectations.
Management Incentive Plan
The Companys Management Incentive Plan (MIP) is designed to motivate executive officers to focus on both financial and non-financial annual performance-based goals that directly impact stockholders. In 2005, the weighting of those pre-established goals for determining payment of an incentive award at target was 20% for safety, 20% for quality and 60% for financial performance. Performance against the safety goal was measured by total OSHA recordable-injury statistics. Performance against the quality goal was measured by internal rejection, internal retreat and external claims statistics. The target goals established for safety and quality reflected industry-leading performance. Performance against the financial goal was measured by pre-tax earnings. A threshold financial performance goal was set for payment of any MIP incentive award. An incentive award under the MIP is expressed as a percentage of a participants total base compensation for the year. Depending upon the extent to which prescribed targets were achieved or exceeded, in 2005 the MIP incentive award could have varied from zero to as much as 200% of base salary for the President and CEO, and from zero to as much as 100% of base salary for each of the other executive officers.
In 2005, the Company achieved the performance goals for payment of incentive awards under the MIP at the target level with respect to safety and quality. The Company did not achieve the performance goals in 2005 for payment of the financial component of the MIP and no payment was approved or made with respect to such financial component. However, the Committee did approve, and the Board ratified, the payment of incentive
awards with respect to the safety and quality components of the MIP for the 2005 performance period. Accordingly, after applying their respective target percentages, Mr. Wainscott received an MIP award for the 2005 performance period equal to 40% of his base salary and Messrs. Ferrara, Gant, Kaloski and Horn each received an MIP award for the 2005 performance period equal to 20% of his base salary.
In approving these incentive awards, the Committee exercised its discretion to waive, solely as it applied to the payment of the safety and quality components of the MIP, a threshold financial performance goal which the Committee previously had elected to set for the 2005 performance period. The Committee decided to do so because the Company had its best-ever safety and quality performances in 2005, but experienced extraordinary circumstances beyond its control that prevented it from reaching the threshold financial performance goal. Those circumstances included record-high costs for key raw materials and energy, due in part to the impact of Hurricanes Katrina and Rita, and a significant drop in steel spot market selling prices. The Committee also recognized that, despite these obstacles, in 2005 the Companys management team led the Company to record annual shipments and revenues, significantly improved the Companys liquidity and balance sheet, and made substantial progress in the goal of returning the Company to sustained profitability.
Long Term Performance Plan
The fundamental purposes of any long-term performance plan are to align the interests of management more closely with those of a companys stockholders, to assist a company in recruiting, retaining and motivating a highly talented group of managers who will successfully manage the company in a way which benefits all of its stakeholders, to link a portion of managements compensation to the performance of the company, and to increase the focus of management on the companys long-term performance by establishing performance goals that support long-term strategies. In 2005 the Committee reviewed the Companys existing Long Term Performance Plan (LTPP) with its independent executive compensation consultant to evaluate the extent to which the LTPP was achieving those purposes. At that time, the metric being used to establish goals for the LTPP was relative EBITDA-per-ton performance. Following discussions with its independent consultant, the Committee concluded that there were several reasons why using a relative EBITDA-per-ton performance metric for the LTPP was no longer appropriate. First, most of the integrated steel companies that the Company previously had used as peers no longer exist due to bankruptcies and the consolidation in the steel industry. Second, the integrated steel companies that remain are no longer adequately comparable to the Company to use as a peer group for LTPP purposes. (e.g., U.S. Steel has a significant part of its business in Eastern Europe now, Ispat Inland and ISG are now a part of Mittal Steel and it is unlikely that their EBITDA numbers will be released separately, all are much larger than the Company, and none of them have both carbon and stainless steels). Third, the Company remains at a competitive disadvantage in calculating EBITDA-per-ton due to the fact that, unlike its competitors, it continues to provide significant post-retirement pension and health care benefits to all of its retirees.
For those reasons, the Committee concluded that it would enhance the probability of achieving the purposes underlying the LTPP if the LTPP were modified to change the relative EBITDA-per-ton performance metric. Accordingly, the Committee recommended to the Board, and the Board approved, a proposal to modify the Companys LTPP to replace the relative EBITDA-per-ton performance metric with an absolute cumulative EBITDA performance metric. More specifically, the Committee modified the LTPP to: (1) change the basic metric from EBITDA-per-ton to cumulative EBITDA, (2) eliminate the relative nature of the metric (i.e. the comparison to a peer group) and have it be based instead solely on the performance of the Company, and (3) go to a single award for a three-year performance period rather than divide the award between a one-year and a three-year performance period. The Committee believed that changing to a cumulative EBITDA as the performance metric for the LTPP would establish an additional and strong incentive for management to achieve the Companys objective of sustainable profitability. In turn, that would more closely align the interests of management with the interests of the Companys stockholders. This proposed modification to the LTPP was submitted to and approved by the Companys stockholders at the annual meeting held on May 17, 2005.
Pursuant to the new LTPP, the Committee establishes cumulative EBITDA threshold, target and maximum payout goals at the start of each three-year performance period. The threshold must be met before any payout is
made. There is a linear progression of the payout for achievement of a cumulative EBITDA between the threshold, target and maximum payout goals. All payouts, if any are earned, are paid in cash. The Committee also established transitional one- and two-year goals to be used in 2005 and 2006, the first and second year of the new LTPP. The transitional goal was not met for 2005 and no payout under the LTPP was made for that transitional one-year performance period.
Stock Incentive Plan
Until last year, all grants of equities under the Companys Stock Incentive Plan (SIP) typically were in the form of stock options and restricted stock awards. In January 2005, the Board approved, upon the recommendation of the Committee, a proposal to modify the Companys SIP to authorize in addition the grant of performance-based equity awards (performance shares). This proposed modification to the SIP was submitted to and approved by the Companys stockholders at the annual meeting held on May 17, 2005.
A principal purpose of equity grants under the Companys SIP is to enhance the commonality of interests between management and the Companys stockholders by linking executive compensation to the Companys performance and to appreciation in the market price of the Companys common stock. Equity grants further are intended to encourage executives to remain in the employ of the Company. Stock options serve these purposes because they generally have a value for an executive officer only if the officer remains in the Companys employment for the period required for the option to become exercisable, and then only if the Companys stock increases above its price on the grant date of the option. This provides an incentive for the officer to remain employed by the Company and to take actions which, over time, are intended to enhance the value of the Companys stock. Restricted stock generally has a value for an executive officer only if the officer remains in the Companys employment for the period required for the stock to vest, thus providing an incentive for the officer to remain in the Companys employment. The value to the executive officer of the vested stock increases directly with the price of the Companys stock, thus providing an incentive to maximize stockholder value.
Performance shares also closely align the interests of the Companys executive officers and its stockholders by directly linking how many shares, if any, ultimately are earned by an executive officer to the performance of the Company. Each grant is expressed as a target number of shares of the Companys common stock. The number of performance shares, if any, actually earned by and issued to the Executive Officer under an award will be based upon the performance of the Company over a three-year performance period (the Performance Period). For the performance shares which are the subject of the grants awarded in January 2005, the Performance Period started January 1, 2005. Depending upon the Companys performance with reference to the performance categories described below, an executive ultimately may earn from zero to one hundred fifty percent of the target number of shares granted. The performance categories used to determine how many performance shares ultimately will be earned and issued are (1) the Companys total stockholder return (TSR), defined as price appreciation plus reinvested dividends, if any, during the Performance Period relative to the TSR during that same period of the companies in the Standard & Poors 400 Midcap Index, and (2) the compounded annual growth rate (CAGR) of the price of the Companys common stock over the Performance Period, using as the base the average closing price of the Companys common stock for the last twenty trading days during the month of December. One half of the total target number of shares awarded may be earned based on the relative TSR performance and the other half may be earned based on the CAGR performance. For each performance category, levels have been established to provide threshold, target and maximum payouts as follows:
If the threshold performance level is not achieved in a performance category as of the end of the Performance Period, then none of the target shares related to that category will be earned or issued. If at least the
threshold is achieved in a performance category, then shares will be earned and issued in an amount equal to the number of the awards target shares related to that category, multiplied by a percentage determined by a straight-line interpolation between the actual level of the Companys performance and the above-stated payout percentages.
Grants of stock options, restricted stock and performance shares were made during 2005 to each of the executive officers named in the Summary Compensation Table based upon the competitive data provided by the Committees independent compensation consultant and consideration of the executives performance and contribution to the Company. The specific grants during 2005 to each of those Named Executive Officers are set forth in the Summary Compensation Table.
2005 Compensation Process and Overall Program
As it has done historically, in 2005 the Committee engaged an independent consultant for executive compensation matters and directed the consultant to develop competitive compensation data that would reflect current conditions at the Company and in the industry, and conform to the Committees above-stated philosophy and policies with respect to executive compensation. The Committee considered and relied upon the consultants report and information in establishing base salary and determining awards of restricted stock, performance shares and stock options to individual Executive Officers for 2005. The Committee further considered the Companys performance, the individual contribution of particular members of management to that performance, the need to retain and motivate the Companys management team in the context of the continued difficult financial conditions and strong industry competition facing the Company, and the other factors. Based upon these considerations, and the report and competitive data supplied by the independent consultant retained by the Committee to review the Companys executive compensation program, the Committee believes that the compensation packages provided by the Company to its executive officers, taken as a whole, are reasonable, competitive and appropriate.
2005 Compensation of Chief Executive Officer
In developing a 2005 compensation package for Mr. Wainscott, the Committee considered the analysis and competitive compensation data supplied by an independent executive compensation consultant, the Companys performance against annual and long-term incentive award objectives, the Boards evaluation of Mr. Wainscotts individual contribution to the Companys achievements, the highly competitive nature of the steel industry, the disadvantages the Company has in competing against steel companies which either have shed or never had significant retiree pension and healthcare obligations, and the need to retain and motivate Mr. Wainscott to lead the Companys continued financial turnaround. The Committee also considered Mr. Wainscotts individual performance as CEO against specific goals and objectives which the Committee had approved for 2005 and which it used, in part, as a basis for an annual evaluation of Mr. Wainscotts performance by all of the Boards independent directors.
After giving appropriate consideration to all of these factors, in January 2005 the Committee concluded that both Mr. Wainscotts individual performance as CEO and the Companys performance in 2004 had been strong. The Committee further concluded that 2004 represented another year of substantial progress for the Company under Mr. Wainscotts leadership. Consistent with the Committees view stated above that strong individual performance and strong Company performance should generally result in above-market increases in base salary, and taking into account Mr. Wainscotts tenure as the Companys CEO and peer group competitive competition practices, Mr. Wainscotts base salary was set at $800,000 for 2005, which was an increase of $150,000 over his base salary for 2004. At the same time, Mr. Wainscott also was awarded grants under the Companys SIP as follows: 60,000 performance shares, 40,000 restricted shares and 40,000 stock options. In January 2006, Mr. Wainscott also received an MIP incentive award in the amount of $320,000 with respect to 2005 at the time the Committee approved, and the Board ratified, payment of an incentive award under the MIP for achievement by the Company in 2005 of its performance goals at the target level with respect to safety and quality. Mr. Wainscott did not receive an LTPP incentive award with respect to 2005 because no awards were earned under that Plan for that performance period.
Policy with Respect to Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code (the Code) generally places a $1,000,000 limit on the deductibility for federal income tax purposes of the annual compensation paid to a companys chief executive officer and each of its other four most highly compensated executive officers. However, qualified performance-based compensation is exempt from this deductibility limitation. Qualified performance-based compensation is compensation paid based solely upon the achievement of objective performance goals, the material terms of which are approved by the stockholders of the paying corporation. Compensation attributable to the exercise of stock options and performance shares granted under the SIP, as well as incentive awards paid under the MIP and the LTPP, are qualified performance-based compensation and thus are excluded from the $1,000,000 deductibility limit imposed by Section 162(m) of the Code. The Committee considers the anticipated tax treatment to the Company when determining executive compensation and routinely seeks to structure its executive compensation program in a way which preserves the deductibility of compensation payments and benefits. It should be noted, however, that there are many factors which are considered by the Committee in determining executive compensation, and similarly, there are many factors which may affect the deductibility of executive compensation. In order to maintain the flexibility to be able to compensate executive officers in a manner designed to promote varying corporate goals, the Committee has not adopted a strict policy that all executive compensation must be deductible under Section 162(m) of the Code.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is an employee or officer of the Company. No member of the Compensation Committee is an executive officer of another company of which an executive officer of this Company serves as a director.
COMPARATIVE PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the Companys Common Stock for the five-year period from January 1, 2001 through December 31, 2005, with the cumulative total return for the same period of (i) the Standard & Poors 500 Stock Index and (ii) a peer group consisting of Nucor Corporation and United States Steel Corporation. These comparisons assume an investment of $100 at the commencement of the period and reinvestment of dividends. In previous proxy statements the Companys peer group also included Bethlehem Steel Corporation, National Steel Corporation and the LTV Corporation, each of which has since sold its assets, pursuant to the order of a bankruptcy court, to another steel manufacturer.
Cumulative Total Returns
January 1, 2001 through December 31, 2005
(Value of $100 invested on January 1, 2001)
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors, the Audit Committee (the Committee) of the Board assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of the Company. During 2005, the Committee met eight times and discussed the interim quarterly financial results with the Companys Chief Financial Officer and its independent registered public accounting firm, Deloitte & Touche LLP, (the independent auditors) prior to public release.
In discharging its oversight responsibility as to the audit process, the Committee obtained from the independent auditors a formal written statement describing all relationships between the independent auditors and the Company that might bear on the independent auditors independence consistent with Independence Standard Board Standard No. 1, Independence Discussion with Audit Committees, discussed with the independent auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors independence. In addition, the Committee has received written material addressing Deloitte & Touche LLPs internal quality control procedures and other matters, as required by the New York Stock Exchange listing standards. The Committee also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Companys internal controls and the internal audit functions organization, responsibilities and staffing. The Committee reviewed with the Companys independent auditors and its internal auditors their respective audit plans, audit scope and identification of audit risks. The Committee has implemented a formal pre-approval process for non-audit fee spending and it seeks to limit this spending to a level that keeps the core relationship with the independent auditors focused on financial statement review and evaluation.
The Committee discussed and reviewed with the Companys independent auditors all communications required by auditing standards generally accepted in the United States of America, including those described in Statement of Auditing Standards No. 61 Communication with Audit Committees as amended and, with and without management present, discussed and reviewed the results of the independent auditors examination of the financial statements. In addition, the Committee has discussed various matters with the independent auditors related to the Companys consolidated financial statements, including all critical accounting policies and practices used, all alternative treatments for material items that have been discussed with Company management, and all other material written communications between the independent auditors and management.
The Committee has discussed and reviewed with management and the Companys independent auditors the Companys audited consolidated financial statements as of and for the year ended December 31, 2005, managements assessment of the effectiveness of the Companys internal control over financial reporting, and the independent auditors evaluation of the Companys internal control over financial reporting. Management has the responsibility for the preparation of the Companys financial statements and for establishing and maintaining adequate internal control over financial reporting and the independent auditors have the responsibility for expressing opinions on the conformity of the Companys audited consolidated financial statements with accounting principles generally accepted in the United States of America and on managements assessment of the effectiveness of the Companys internal control over financial reporting as well as their own opinion on the effectiveness of the Companys internal control over financial reporting.
Based on the above-mentioned review and discussions with management and the Companys independent auditors, the Committee recommended to the Board that the Companys audited consolidated financial statements be included in its Annual Report on Form 10-K for the year ended December 31, 2005, for filing with the Securities and Exchange Commission. The Committee also approved Deloitte & Touche LLP as the Companys independent registered public accounting firm for 2006.
THE AUDIT COMMITTEE
Lawrence A. Leser, Chair
Daniel J. Meyer
Shirley D. Peterson
Dr. James A. Thomson
PRINCIPAL ACCOUNTING FIRM FEES
The following table sets forth the aggregate fees paid or accrued by the Company to its principal accounting firm, Deloitte & Touche, LLP, for the years ended December 31, 2004 and 2005:
The Audit Committee annually approves the scope and fees payable for the year-end audit, statutory audits and employee benefit plan audits to be performed by the independent auditors for the next fiscal year. Management also defines and presents to the Audit Committee specific projects and categories of service, together with the corresponding fee estimates related to the services requested. The Audit Committee reviews these requests and, if acceptable, pre-approves the engagement of the independent auditor. The Audit Committee authorizes its Chair to pre-approve all non-audit services on behalf of the Audit Committee during periods between regularly scheduled meetings, subject to ratification by the Audit Committee at its next meeting. The companys Chief Financial Officer summarizes on an annual basis the external auditor services and fees paid for pre-approved services and reports on a quarterly basis if there are any new services being requested requiring pre-approval by the Audit Committee.
All of the services provided by Deloitte & Touche, LLP have been approved in accordance with the foregoing policies and procedures.
STOCKHOLDER PROPOSALS FOR THE 2007 ANNUAL MEETING
AND NOMINATIONS OF DIRECTORS
The Companys by-laws establish an advance notice procedure with regard to certain matters, including stockholder proposals and nominations of individuals for election to the Board of Directors. Notice of a stockholder proposal or director nomination for the 2007 Annual Meeting must be received by the Company no later than March 20, 2007 and no earlier than February 18, 2007, and must contain certain information and conform to certain requirements specified in the By-Laws. If the Chairman determines at the Annual Meeting that a stockholder proposal or director nomination was not made in accordance with the By-Laws, the Company may disregard the proposal or nomination. In addition, if a stockholder submits a proposal outside of Rule 14a-8 for the 2007 Annual Meeting, but the proposal complies with the advance notice procedure prescribed by the By-Laws, then the Companys proxy may confer discretionary authority on the persons being appointed as proxies on behalf of the Board of Directors to vote on the proposal.
If a stockholder intends to present a proposal at the 2007 Annual Meeting of Stockholders and seeks to have the proposal included in the Companys proxy materials in reliance on Rule 14a-8 under the Securities Exchange Act of 1934, the proposal must be submitted in writing and received by the Secretary of the Company no later than December 22, 2006. The proposal must also satisfy the other requirements of the rules of the Securities and Exchange Commission relating to stockholder proposals.
Any proposals, as well as any related questions, should be directed to the Secretary, AK Steel Holding Corporation, 703 Curtis Street, Middletown, Ohio 45043-0001.
The Companys audited financial statements as of and for the year ended December 31, 2005, together with the report thereon of Deloitte & Touche, LLP, independent public accountants, are included in the Companys Annual Report on Form 10-K under the Securities Exchange Act of 1934. A copy of the 2005 Annual Report on Form 10-K is included in the Companys 2005 Annual Report to Stockholders and is being furnished to stockholders together with this Proxy Statement.
The Audit Committee of the Board of Directors has selected Deloitte & Touche LLP as the Companys independent accountants for the current fiscal year. Representatives of Deloitte & Touche LLP are expected to be present at the Annual Meeting and will have an opportunity to make a statement if they so desire and will respond to appropriate questions.
This Proxy Statement and the accompanying form of proxy will be mailed to stockholders on or about April 17, 2006, together with the 2005 Annual Report to Stockholders. In addition, the Company is requesting banks, brokers and other custodians, nominees and fiduciaries to forward these proxy materials and the accompanying reports to the beneficial owners of shares of the Companys common stock held by them of record and will reimburse them for their reasonable out-of-pocket expenses for doing so. The Company has retained Georgeson Shareholder Communications Inc. to assist in the solicitation of proxies for a fee estimated to be $7,500 plus out-of-pocket expenses. Solicitation of proxies also may be made by officers and employees of the Company. The cost of soliciting proxies will be borne by the Company.
Only one proxy statement is being delivered to multiple stockholders sharing an address unless the Company has received contrary instructions from one or more of the stockholders. Upon receipt of a written request, addressed to: Secretary, AK Steel Holding Corporation, 703 Curtis Street, Middletown, Ohio, 45043, the Company will either: (i) promptly deliver a separate copy of the proxy statement to a stockholder at a shared address to which a single copy of the document has been delivered; (ii) arrange for a separate copy of the proxy statement to be delivered in the future to a stockholder at a shared address; or (iii) deliver a single copy of the
proxy statement to stockholders at a shared address to which multiple copies of the document has been delivered, as appropriate. If a stockholder seeks to arrange for a separate copy of the proxy statement to be delivered in the future to a stockholder at a shared address, the stockholder also may direct such notification to the Company directly by calling (513) 425-5595.
The Board of Directors does not know of any matters to be presented at the meeting other than those set forth in the accompanying Notice of Meeting. However, if any other matters properly come before the meeting, it is intended that the holders of proxies will vote thereon in their discretion.
By order of the Board of Directors,
David C. Horn
April 17, 2006
A. Election of Directors
1. The Board of Directors recommends a vote FOR the listed nominees.
B. Other Business
C. Authorized Signatures Sign Here This section must be completed for your instructions to be executed.
NOTE: Please sign your name(s) EXACTLY as your name(s) appear(s) on this proxy. All joint holders must sign. When signing as attorney, trustee, executor, administrator, guardian or corporate officer, please provide your FULL title.
Annual Meeting of Stockholders
Proxy Solicited on behalf of the Board of Directors of the Company for the Annual Meeting May 19, 2006
The undersigned stockholder of AK Steel Holding Corporation (the Company) hereby appoints James L. Wainscott, David C. Horn and Albert E. Ferrara, Jr., and each of them, as attorneys-in-fact and proxies, each with full power of substitution, to represent the undersigned at the Annual Meeting of Stockholders of the Company to be held on May 19, 2006, and at any adjournment thereof, with authority to vote at such meeting all shares of Common Stock of the Company owned by the undersigned on March 27, 2006, in accordance with the directions indicated herein:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION AS A DIRECTOR OF EACH OF THE EIGHT NOMINEES NAMED ON THE REVERSE SIDE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE EIGHT NOMINEES NAMED FOR ELECTION AS A DIRECTOR.
Please sign, date and return this proxy card promptly using the enclosed envelope.
(Continued and to be voted on reverse side.)