<PAGE>1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1994
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File No. 1-873-2
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ARMCO INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-0200500
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415
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(Address of principal executive offices, Zip Code)
(412) 255-9800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at July 31, 1994: 104,692,152
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ARMCO INC.
INDEX
Page
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Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
June 30, 1994 and December 31, 1993 2
Condensed Statement of Consolidated Operations and
Retained Deficit -
Three and Six Months Ended June 30, 1994 and 1993 3
Condensed Statement of Consolidated Cash Flows -
Six Months Ended June 30, 1994 and 1993 4
Notes to Condensed Consolidated Financial Statements 5-10
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 11-17
Segment Report 18
Part II. Other Information
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 22
Exhibits
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<TABLE> <PAGE>3
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(Dollars in millions) June 30, December
31,
1994 1993
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 152.1 $ 183.5
Receivables, less allowance for doubtful accts 186.2 185.1
Inventories (Note 2) 177.2 205.5
Net assets held for sale 27.5 30.9
Other (Note 4) 44.1 20.4
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Total current assets 587.1 625.4
Investments
Investment in National-Oilwell (Note 5) 88.4 83.9
Investment in North American Stainless (Note 5) 50.3 43.8
Investment in AFSG (Note 6) 97.1 97.1
Other, less allowance for impairment 29.5 44.3
Property, plant and equipment 1,023.5 983.0
Accumulated depreciation (479.2) (455.2)
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Property, plant and equipment - net 544.3 527.8
Deferred tax asset 338.5 295.6
Goodwill and other intangible assets 159.7 162.6
Other assets 20.4 24.2
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Total assets $1,915.3 $1,904.7
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts and notes payable $ 110.1 $ 119.6
Employee benefit obligations 137.0 98.3
Accrued salaries and wages 30.1 28.7
Other accrued liabilities 93.7 98.1
Current portion of long-term debt
and lease obligations 2.7 8.3
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Total current liabilities 373.6 353.0
Long-term debt and lease obligations,
less current portion 381.9 379.7
Long-term employee benefit obligations 1,265.4 1,270.9
Other liabilities 138.8 204.5
Commitments and contingencies (Notes 6 and 9)
Class B common stock of subsidiary,
redemption values $12.7 and $13.2 9.9 9.7
Shareholders' deficit (Note 8)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.0 1.0
Additional paid-in capital 953.5 951.1
Retained deficit (1,416.5) (1,450.3)
Unrealized gain on equity securities 26.1 -
Other (4.3) (0.8)
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Total shareholders' deficit (254.3) (313.1)
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Total liabilities and shareholders' deficit $1,915.3 $1,904.7
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<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE> <PAGE>4
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
AND RETAINED DEFICIT
(Unaudited)
(Dollars and shares in millions
except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales $354.9 $ 454.1 $ 734.5 $ 880.7
Cost of products sold (316.3) (405.6) (663.0) (792.8)
Selling and administrative expenses (24.6) (31.5) (48.4) (63.0)
Special charge (Note 3) - - (20.0) -
- -----------------------------------------------------------------------------
Operating profit 14.0 17.0 3.1 24.9
Interest income 1.9 1.3 3.8 2.9
Interest expense (8.4) (10.6) (17.3) (21.4)
Sundry other - net (10.4) (11.1) (21.1) (16.8)
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Loss before income taxes (2.9) (3.4) (31.5) (10.4)
Credit for income
taxes (Notes 4 and 10) 29.8 2.2 29.6 9.1
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Income (loss) from Armco and
consolidated subsidiaries 26.9 (1.2) (1.9) (1.3)
Equity in losses of Armco Steel
Company, L.P. (Note 4) - - - (17.9)
Gain on investment in
Armco Steel Company, L.P. (Note 4) 36.5 - 36.5 -
Equity in income (loss) of
equity companies (Note 5) 6.5 (0.2) 8.1 (3.3)
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Income (loss) from continuing
operations 69.9 (1.4) 42.7 (22.5)
Discontinued operations
-Worldwide Grinding Systems
Income from operations - 10.1 - 9.2
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Income (loss) before cumulative
effect of accounting changes 69.9 8.7 42.7 (13.3)
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits and
income taxes (Note 11) - - - (307.5)
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Net income (loss) 69.9 8.7 42.7 (320.8)
Retained deficit,
beginning of period (1,482.0) (1,124.7) (1,450.3) (790.7)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
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Retained deficit, end of period $(1,416.5) $(1,120.4) $(1,416.5) $(1,120.4)
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Weighted average number of
common and common equivalent
shares outstanding-primary 104.6 104.2 104.4 103.7
Net income (loss) applicable
to common stock $ 65.5 $ 4.3 $ 33.8 $(329.7)
Per share of common stock-primary
Income (loss) from continuing
operations $ 0.63 $ (0.06) $ 0.32 $ (0.30)
Income from discontinued
operations - 0.10 - 0.09
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Income (loss) before cumulative
effect of accounting changes 0.63 0.04 0.32 (0.21)
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits and
income taxes - - - (2.97)
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Net income (loss) per share
- primary $ 0.63 $ 0.04 $ 0.32 $ (3.18)
Net income (loss) per share
- fully dilutive 0.55 * * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525 $ 1.050 $ 1.050
$3.625 Class A 0.906 0.906 1.813 1.813
$4.50 Class B 1.125 1.125 2.250 2.250
<FN>
* Antidilutive or dilution less than 3%
See Notes to Condensed Consolidated Financial Statements
</TABLE>
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<TABLE> <PAGE>5
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions) Six Months Ended
June 30,
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1994 1993
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 42.7 $ (320.8)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and lease-right amortization 24.6 28.1
Income from discontinued operations - (9.2)
Gain on sales of investments and facilities (67.2) (0.9)
Equity in undistributed (earnings) losses
of associated companies (5.7) 21.4
Special charge 20.0 -
Cumulative effect of accounting changes - 307.5
Other 3.5 5.8
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (8.2) (39.9)
Inventory 28.2 (14.1)
Payables and accrued expenses 10.9 (8.1)
Other assets and liabilities - net (28.1) 20.0
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Net cash provided by (used in) operating
activities 20.7 (10.2)
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Cash flows from investing activities:
Net proceeds from the sale of businesses
and asset 1.8 12.9
Proceeds from the sale and maturity of
marketable securities - 1.8
Proceeds from the sale of investments 15.9 4.5
Purchase of marketable securities - (0.1)
Purchase of investments (8.3) (0.9)
Contributions to equity investees (6.1) (4.6)
Capital expenditures (41.0) (17.5)
Net cash used in discontinued operations (2.5) (43.4)
Other 2.7 0.2
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Net cash used in investing activities (37.5) (47.1)
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Cash flows from financing activities:
Proceeds from drawdown of construction debt 7.5 -
Principal payments on debt (10.9) (5.2)
Change in notes payable (0.8) (2.4)
Dividends paid (8.9) (8.9)
Other (1.7) 0.9
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Net cash used in financing activities (14.8) (15.6)
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Effect of exchange rate changes on cash and
cash equivalents 0.2 (2.6)
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Net change in cash and cash equivalents (31.4) (75.5)
Cash and cash equivalents:
Beginning of year 183.5 171.3
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End of period $152.1 $ 95.8
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 17.3 $ 22.1
Income taxes 0.1 1.6
Supplemental schedule of noncash investing and
financing activities:
Issuance of restricted stock 2.5 0.1
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<PAGE>6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions,
except per share amounts)
1. The condensed consolidated financial statements of Armco Inc. (Armco)
should be read in conjunction with the financial statements in Armco's
Annual Report to Shareholders for the year ended December 31, 1993.
In the opinion of Armco's management, the accompanying condensed
consolidated financial statements contain all adjustments, which were
of a normal recurring nature, necessary to present fairly, in all
material respects, the financial position as of June 30, 1994, the
results of operations for the three and six months ended June 30, 1994
and 1993 and cash flows for the six months ended June 30, 1994 and
1993. The results of operations for the three and six months ended
June 30, 1994 are not necessarily indicative of the results to be
expected for the year 1994.
2. Armco's inventories are valued at the lower of cost or market. Cost
of inventories at most of Armco's domestic operations is measured on
the LIFO - Last In, First Out - method. Other inventories are valued
principally at average cost.
<TABLE>
June 30, December 31,
Inventories on LIFO: 1994 1993
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<S> <C> <C>
Finished and semi-finished $ 158.0 $ 190.8
Raw materials and supplies 26.9 21.5
Less - Adjustment to state
inventories at LIFO value (36.5) (38.5)
-------- --------
Total 148.4 173.8
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Inventories on average cost:
Finished and semi-finished 11.2 14.1
Raw materials and supplies 17.6 17.6
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Total 28.8 31.7
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Total inventories $ 177.2 $ 205.5
======== ========
</TABLE>
3. In the six months ended June 30, 1994, Armco recorded a special charge
of $20.0 for expenses associated with the temporary idling and
restructuring of its Empire-Detroit steelmaking facilities in
Mansfield and Dover, Ohio. These facilities are to be idled until
completion of construction of a new thin-slab continuous caster at the
Mansfield facility, scheduled for the second quarter of 1995.
Approximately two-thirds of the charge is associated with group
insurance, workers' compensation and other benefits for employees
while the plant is idled. The remaining third of the charge relates
to inventory writedowns and work force reductions. The liabilities
related to this charge are recorded primarily in the current portion
of employee benefit obligations in the Condensed Statement of
Consolidated Financial Position.
4. On April 7, 1994, Armco Steel Company, L.P. (ASC), a fifty percent
owned joint venture limited partnership between subsidiaries of Armco
and Kawasaki Steel Corporation, completed an initial public offering
and recapitalization. As part of this transaction, the business and
assets of ASC were transferred to AK Steel Corporation (AK Steel), a
newly formed, publicly traded company. In exchange for its interest
in ASC, Armco received 1,023,987 shares of stock in AK Steel with a
June 30, 1994 market value of $26.1, recorded in Other current assets
with a corresponding credit in Unrealized gain in equity securities.
The stock represents about four percent of the outstanding AK Steel
shares. In addition, Armco was released from certain obligations to
make future cash payments to the former joint venture. The number of
shares received and other terms of the restructuring and
recapitalization were determined by arm's-length negotiations.
As a result of the transaction, in the three and six months ended June
30, 1994, Armco recognized nonrecurring gains totaling $66.5, or $.64
per share, primarily as a result of its release from certain
obligations, as discussed above, recognition of deferred pension
curtailment gains established at ASC's formation and a tax benefit
related to the effect of this transaction on Armco's deferred tax
asset position. Of the $66.5, a $30.0 tax benefit is recorded in
Credit for income taxes and $36.5 is recognized as a Gain on
investment in Armco Steel Company, L.P. In
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<PAGE>7
addition, should Armco decide to sell its shares in AK Steel,
following the 180-day waiting period included in the transaction
agreement, it would recognize a gain equal to the net proceeds
received upon such sale.
Losses incurred by ASC during the first quarter of 1993 reduced
Armco's investment in ASC to zero, after which Armco stopped recording
its equity in losses of the joint venture.
5. Armco and Acerinox S.A. of Spain each own a 50% partnership interest
in North American Stainless (NAS) through their respective
subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc.
On July 18, 1994, Armco announced the signing of a letter of intent to
sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco
expects to record a gain of approximately $27.0 on completion of the
sale, which is expected to occur in the third quarter of this year.
In the second quarter of 1994, Armco and Acerinox, together invested
an additional $12.1 in NAS. Armco is currently limited, under its
debt agreements, as to the amount of contributions it can make to its
joint venture partnerships.
In the three and six months ended June 30, 1994, National-Oilwell,
Armco's oil field equipment joint venture with USX, sold certain
productive assets and lines of business. In the three and six month
periods, Armco recognized $4.4 in equity income related to the net
gain on these sales.
6. Armco Financial Services Group (AFSG) consists primarily of insurance
companies which Armco intends to sell and which continue underwriting
activities (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being
liquidated (runoff companies).
Armco signed a definitive agreement, dated August 2, 1994, to sell the
AFSG companies to be sold. The agreement is subject to a number of
conditions, including approvals by regulatory authorities. The
proceeds from the sale of these businesses have been pledged as
security for certain note obligations due to the runoff companies and
will be retained in the investment portfolio of the runoff companies.
Armco's investment in the AFSG companies to be sold is recorded at net
realizable value, or $73.9 at June 30, 1994. These businesses are
accounted for as discontinued operations and, as such, Armco does not
recognize, in its financial statements, AFSG's results of operations.
The following presents the summarized results of operations and
financial condition of the AFSG companies to be sold:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
Results of Operations 1994 1993 1994 1993
--------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned $54.3 $57.1 $108.2 $115.6
Losses and loss adjustment
expenses (40.9) (44.5) (85.6) (87.2)
Underwriting expenses (20.7) (21.2) (41.8) (43.4)
------ ------ ------ ------
Underwriting loss (7.3) (8.6) (19.2) (15.0)
Investment income 7.3 10.3 14.6 20.7
Other income (expenses) (0.1) 1.1 (0.1) (0.2)
------ ------ ------ ------
Income (loss) before
effect of accounting change (0.1) 2.8 (4.7) 5.5
Cumulative effect of accounting
change for postretirement benefits - - - (14.0)
------ -------- ------- -------
Net income (loss) $ (0.1) $ 2.8 $ (4.7) $ (8.5)
======= ======== ======== ========
</TABLE>
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<PAGE>8
<TABLE>
June 30, Dec. 31,
Financial Condition 1994 1993
------------------- ------- -------
<S> <C> <C>
Assets:
Invested assets $408.4 $440.7
Receivables 88.4 87.7
Other assets 40.4 43.0
------ ------
Total assets 537.2 571.4
Liabilities:
Property and casualty reserves 399.0 398.3
Payables and other liabilities 30.5 37.2
----- -----
Total liabilities 429.5 435.5
------ -----
Net assets 107.7 135.9
Net income not recognized (5.7) (10.4)
Unrealized investment (gain) loss
not recognized 10.2 (13.3)
Loss on disposal of business (45.0) (45.0)
Net liabilities to be retained 6.7 6.7
------ ------
Armco's investment $ 73.9 $ 73.9
======= ======
</TABLE>
The runoff companies are accounted for by Armco as discontinued
operations under the liquidation basis of accounting whereby all
future cash inflows and outflows are considered. Armco believes,
based on current facts and circumstances, including the opinion of
outside actuaries, that future changes in estimates of net
losses relating to the ultimate liquidation of the runoff companies
will not be material to Armco's financial position or liquidity. As
of June 30, 1994 and December 31, 1993, Armco's investment in the net
assets of the runoff companies was $23.2.
There are various matters pending which involve AFSG, relating to
litigation, arbitration and regulatory affairs, including matters
related to Northwestern National Insurance Company, a runoff company
currently involved in, among other matters, arbitration and litigation
with respect to certain reinsurance programs. The ultimate liability
from such matters at June 30, 1994 cannot be determined; but in
Armco's opinion, based on current facts and circumstances and the
views of outside counsel and advisors, any liability resulting will
not materially affect Armco's financial condition or liquidity.
However, it is possible that due to fluctuations in Armco's results,
future developments with respect to changes in the ultimate liability
could have a material effect on future interim or annual results of
operations.
7. Armco has in place an agreement with a group of banks to provide a
credit facility for borrowings up to $170.0 on a revolving credit
basis until December 31, 1995, secured by certain of Armco's
receivables and inventories. At June 30, 1994, Armco had no
borrowings outstanding under the agreement, but had utilized $83.8 of
the credit facility as support for letters of credit.
As amended in the second quarter of 1994, the credit agreement
requires Armco to maintain a minimum working capital of $150.0 from
May 1, 1994 through August 31, 1994, dropping to $130.0 from September
1, 1994 through December 31, 1994. At June 30, 1994, Armco's working
capital, as defined, was $212.7. In addition, Armco must maintain
cumulative net income greater than zero for the year 1994, increasing
by $10.0 per quarter in 1995, and meet certain ratio requirements.
Noncompliance with any of these covenants or the occurrence of any
other event of default could result in the lending banks terminating
their commitments under the credit agreement and/or accelerating the
payment of amounts due thereunder.
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<PAGE>9
8. Under the terms of the credit agreement (Note 7), Armco is not
permitted to pay cash dividends on its common stock. The payment of
dividends on preferred stock is prohibited if Armco is in default
under the credit agreement.
Under the terms of the indentures for Armco's 11.375% Senior Notes Due
1999 and 9.375% Senior Notes Due 2000, Armco cannot pay a dividend on
its common stock or repurchase its capital stock, unless it meets
certain financial tests described in the indentures. Armco does not
expect to be able to meet these tests in the near term.
Armco is incorporated in the State of Ohio and is permitted to pay
dividends on its common and preferred stock only to the extent that it
has surplus as defined in the corporate statute of Ohio. At June 30,
1994, the amount from which Armco is permitted to pay dividends was
$123.3.
At its July 1994 meeting, the Board of Directors declared the regular
quarterly dividends payable on Armco's $2.10 Cumulative Convertible
Class A, $3.625 Cumulative Convertible Class A and $4.50 Cumulative
Convertible Class B preferred stock issues.
9. A subsidiary of LTV Steel Company and First Taconite Company, a
subsidiary of Armco, each owned a 50% interest in the properties and
assets of Reserve Mining Company (Reserve Mining), a Minnesota
partnership that produced taconite iron ore pellets and which filed
for reorganization under Chapter 11 in 1986. On August 17, 1989,
Cyprus Northshore Mining Corporation (Cyprus), a wholly owned
subsidiary of Cyprus Minerals Company, purchased the assets of Reserve
Mining. On that date, Armco and First Taconite Company entered into
an agreement with the State of Minnesota, the Reserve Mining Company
bankruptcy trustee and Cyprus, whereby Cyprus agreed to operate the
Reserve Mining facility and, upon the purchase by AK Steel (formerly
ASC) of certain quantities of iron ore pellets produced by the
facility, or upon an approved modification to a tailings disposal site
closure plan by the state as provided in the agreement, Cyprus agreed
to assume closure and perpetual maintenance obligations of the
tailings disposal site. Cyprus continues to operate the facility.
In the second quarter of 1994, the Pension Benefit Guaranty
Corporation (PBGC) filed suit seeking a judgment against Armco for the
liability of Reserve Mining for the alleged underfunded amount of
guaranteed benefits to be paid by the PBGC. On June 30, 1994, Armco
settled this litigation. Under the agreement, Armco paid the PBGC
$10.0 in connection with the Reserve Mining pension liability and
agreed to contribut $17.5 to the Armco Inc. Pension Agreements Plan.
These amounts had been previously accrued.
In connection with the formation of ASC, ASC assumed and agreed to
satisfy and indemnify Armco against certain obligations and
liabilities related to the business and assets transferred to ASC
including, among other things, environmental-related costs and
obligations, employee benefit obligations, and liabilities under
certain long-term supply contracts. As part of the recapitalization
which resulted in the formation of AK Steel (Note 4), AK Steel assumed
such obligations and indemnification of Armco.
NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as
well as a revolving bank credit facility totaling $40.0, of which
$39.0 was used as of June 30, 1994. At December 31, 1993 and March
31, 1994, NAS was not in compliance with certain covenants contained
in these loan agreements. Lenders have agreed to waive compliance
with those covenants as of December 31, 1993 and March 31, 1994 and,
in the second quarter of 1994, agreed to amendments to the covenants
which bring the joint venture back into compliance.
Armco provides a $7.4 letter of credit to secure 50% of NAS debt
service payments. This letter of credit will be released if the
proposed sale of 90% of Armco's interest is completed (Note 5).
Armco has entered into certain contracts, which mature over the next
two years, related to nickel, a commodity used in the production of
stainless steel. These contracts involve the cash settlement of the
difference between the market price of nickel at maturity and the
contract
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<PAGE>10
price. Gains and losses related to outstanding contracts are
recognized in income currently. Based on market values at June 30,
1994, contracts with a nominal amount of $7.0 would require Armco to
pay a total of $1.5 during 1994 and 1995. Such amount has been
accrued in the financial statements.
There are various claims pending involving Armco and its subsidiaries
regarding product liability, antitrust, patent, employee benefits,
environmental and hazardous waste matters, reinsurance and insurance
arrangements (Note 6), and other matters arising out of the conduct of
Armco's business. Armco believes that the ultimate liability from
pending claims and contingent liabilities will not materially affect
the consolidated financial condition or liquidity of Armco; however,
it is possible that due to fluctuations in Armco's results, future
developments with respect to such matters could have a material effect
on the results of operations in future interim or annual periods.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, certain analogous state laws, and the federal
Resource Conservation and Recovery Act, past disposal of wastes,
whether on-site or at other locations, may result in the imposition of
cleanup obligations by federal or state regulatory authorities or
other potentially responsible parties, even when the wastes were
disposed of in accordance with applicable laws and requirements in
existence at the time of disposal. The federal government has
asserted that joint and several liability applies in hazardous waste
litigation and courts have held that, absent proof that damages are
allocable or subject to allocation, joint and several liability will
be applied. Armco has been named as a defendant, or identified as a
potentially responsible party, in various proceedings wherein the
federal government seeks reimbursement for, or compulsory clean-up of,
hazardous waste sites. Armco has been required to perform or fund
such cleanup or participate in cleanup with others at a number of
sites at which its facilities disposed of wastes in the past and may,
from time to time, be required to remediate or join with others in the
remediation of other locations as these sites are identified by
federal or state authorities. Armco is also a party to various
private lawsuits with respect to alleged property damages and personal
injury from waste disposal sites. In addition, environmental exit
costs with respect to Armco's ongoing businesses, which costs it is
Armco's policy not to accrue until a decision is made to dispose of a
property, may be incurred if Armco makes a decision to dispose of
additional properties. These costs include remediation and closure
costs such as for cleanup of soil contamination, closure of waste
treatment facilities and monitoring commitments. While Armco believes
that the ultimate liability for the environmental remediation matters
identified to date, including the cleanup, closure, and monitoring of
waste sites, will not materially affect its consolidated financial
condition or liquidity, the identification of additional sites,
increases in remediation costs with respect to identified sites, the
failure of other potentially responsible parties to contribute their
share of remediation costs, decisions to dispose of additional
properties and other changed circumstances may result in increased
costs to Armco, which could have a material effect on its financial
condition, liquidity and results of operations.
At June 30, 1994, Armco had recorded on its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of
$79.8, of which $17.1 was classified as current.
10. In the six months ended June 30, 1993, Armco recognized income of $6.0
as the result of a settlement of state income taxes related to a
former Armco subsidiary. Of the total amount, $2.4 was recorded in
Credit for income taxes and $3.6, representing interest on the
settlement, was recorded in Sundry other - net. In addition, Armco
reversed a federal tax reserve of $4.3 as a result of the resolution
of certain tax issues. This amount was recorded in Credit for income
taxes.
11. Effective January 1, 1993, Armco adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), which
required accrual of the estimated cost of these benefits during the
years an employee is actively employed, rather than the previous
practice of expensing these benefits on a pay-as-you-go
basis after the participant is retired. Armco elected to recognize
immediately the
-9-
<PAGE>11
cumulative effect of this obligation and as a result
recognized a net of tax charge of $440.0, or $4.25 per share, as of
January 1, 1993.
Armco adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109) effective January 1, 1993.
The cumulative effect of adopting SFAS 109, excluding a tax benefit of
$170.3 for the cumulative effect of adoption of SFAS 106, was a
benefit of $135.6, or $1.31 per share, as of January 1, 1993.
Effective January 1, 1993, Armco adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" and recorded $3.1, or $.03 per share, of
expense for the cumulative effect of establishing additional
liabilities for certain short-term and long-term disability benefit
plans.
12. Information relating to Armco's industry segments can be found on page
18.
- --------------------------------
-10-
<PAGE>12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
-------------------------------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Dollars in millions, except per share data)
GENERAL
- -------
Armco's results in the second quarter and first six months of 1994 and
1993 were as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 354.9 $ 454.1 $ 734.5 $ 880.7
Operating profit 14.0 17.0 3.1 24.9
Income (loss) before cumulative
effect of accounting changes 69.9 8.7 42.7 (13.3)
Net income (loss) 69.9 8.7 42.7 (320.8)
</TABLE>
Sales in the three and six months ended June 30, 1994 decreased 22%
and 17%, respectively, from the same periods in 1993, primarily
because of the absence in 1994 of businesses that were sold or are no
longer consolidated and the idling of operations at the Empire-Detroit
Steel Division (Empire-Detroit) in the second quarter of this year.
The businesses which have been sold or are no longer consolidated in
Armco's financial statements represented $68.2 and $132.6 of sales in
the second quarter and first six months, respectively, of 1993.
Excluding those businesses from 1993, sales would have decreased 8%
and 2% in the second quarter and first six months, respectively, of
1994 versus 1993, primarily as a result of the actions taken at
Empire-Detroit.
The second quarter operating profit was primarily attributable to
strong performances at Armco Advanced Materials Company, Coshocton
Stainless and Douglas Dynamics, Inc., partially offset by losses at
Empire-Detroit. (see Business Segment Results). Operating profit for
the three and six months ended June 30, 1993 included $7.7 and $13.0,
respectively, from businesses which Armco has sold or no longer
consolidates.
Net income in the second quarter and first six months of 1994 included
a $66.5 gain recognized as a result of the completion of an initial
public offering by Armco's former joint venture, Armco Steel Company,
L.P. (ASC). In the same periods, Armco recognized $4.4 in equity
income representing half of a net gain realized by National-Oilwell on
the sale of certain production equipment and lines of business held by
that joint venture. Net income for the first six months of 1994 also
included a $20.0 special charge for expenses related to the temporary
idling and restructuring of Empire-Detroit's steelmaking facilities.
In the second quarter of 1993, Armco reported net income of $8.7,
which included $4.6 in nonrecurring federal tax credits and $10.1 of
income from Worldwide Grinding Systems, a business which was divested
in the second half of 1993. The net loss in the six months ended June
30, 1993 included a cumulative effect charge of $307.5 for adopting
new accounting standards for postretirement and postemployment
benefits and income taxes, $9.2 of income from Worldwide Grinding
Systems, federal and state tax-related credits of $14.9, and an equity
loss of $17.9 from ASC.
-11-
<PAGE>13
BUSINESS SEGMENT RESULTS
- ------------------------
Specialty Flat-Rolled Steel
- ---------------------------
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 269.2 $ 274.8 $ 532.4 $ 535.7
Operating profit 34.7 24.7 64.8 44.6
Shipments (000s of net tons) 174 178 351 347
Production (000s of net tons) 226 247 438 491
Capability utilization 105% 98% 102% 98%
</TABLE>
Customer sales and tons shipped decreased by 2% in the second quarter
of 1994 versus 1993, as increases driven by demand for automotive
chrome stainless, electrical steel and stainless strip were offset by
declines in shipments in stainless flat plate and slabs, and chrome
nickel stainless sheet. The restructuring activity at Eastern
Stainless Corporation continues as Eastern's management searches for
ways to reduce losses.
For the first six months of 1994 compared to 1993, customer sales were
relatively flat on a small increase in shipments. A decrease in slab
sales due to closing the melt shop at Eastern Stainless Corporation
more than offset increased sales of stainless sheet and strip and
electrical steel. A work stoppage at Allegheny Ludlum in the second
quarter of 1994 increased demand for Armco products. The strike has
since been settled.
Operating profit increased 40% and 45%, respectively, for the second
quarter and first six months of 1994 versus 1993. In spite of a fire,
which caused an 11-day unplanned caster outage, production at the
Butler, Pennsylvania melt facility set new records in 1994,
significantly reducing the cost of products shipped from Armco
Advanced Materials Company and Coshocton Stainless Division. In
addition, reduced low-margin export sales and higher prices for
electrical steels bolstered operating profit in the segment.
Raw steel production of 226,000 tons in the second quarter of 1994 was
down 9% compared to the same period of 1993, due to the closing of the
Eastern Stainless Corporation melt shop in July 1993. However,
Butler's production in the quarter was 5% higher than production in
the second quarter of 1993. Butler's cast steel production capacity
is estimated to be 860,000 tons in 1994, versus 850,000 tons in 1993.
Outlook: Operating results are expected to continue to improve
relative to 1993 as a result of continued strong market conditions,
scheduled price increases and improved production efficiencies. Order
rates for stainless sheet and strip, particularly for the automotive
industry, are expected to remain strong through the remainder of the
year. Demand for oriented electrical steel for distribution
transformers and cold rolled non-oriented electrical steel for motors
and generators is also expected to remain strong. Expansion of sales
of these products, however, may be constrained by Butler's melting
capacity.
Through the first four months of 1994, imports of all specialty flat-
rolled steel products increased sharply compared with a year ago.
Imports of stainless sheet and strip increased 24% from the period
January through April 1993 to the same period in 1994, while domestic
shipments rose only 7%. The sharper increase in imports vis-a-vis
shipments caused import penetration to jump from 22.6% to 25.2%.
Imports of stainless plate were 44% higher in the first four months of
1994 than in 1993, while domestic shipments were only 5% higher. As a
result, import penetration of plate increased from 13.5% to 17.8%.
Electrical steel domestic shipments and imports declined approximately
4% for the four month period ended April 30, 1994 compared to the same
period in 1993, with import penetration holding at a little over
18.5%.
With respect to grain-oriented electrical steel, in 1993, Armco and a
domestic competitor, as well as several labor unions representing work
forces at specialty steelmaking plants, filed countervailing and
-12-
<PAGE>14
anti-dumping petitions against Italy. There was also an anti-dumping
duty petition filed against Japan, in which Armco was not a party. In
October 1993, the International Trade Commission (ITC) issued a
preliminary finding of injury. On January 25, 1994, the U.S.
Department of Commerce announced a preliminary countervailing duty
margin of 23.14% on imports of grain-oriented electrical steel from
Italy. On February 3, the Department of Commerce announced
preliminary anti-dumping duties of 5.62% against Italy and 31.08%
against Japan. Subsequently, the Department of Commerce announced a
final countervailing duty margin of 24.42% and anti-dumping duties of
60.79% on imports of grain-oriented electrical steel from Italy. The
anti-dumping duty of 31.08% against Japan did not change. On May 18,
1994, the ITC gave a positive injury determination on the Italian
countervailing and Japanese anti-dumping petitions. On July 29, 1994,
the ITC ruled in favor of the petitioners in the Italian anti-dumping
case.
Other Steel and Fabricated Products
- -----------------------------------
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 85.7 $ 179.3 $ 202.1 $ 345.0
Special charge - - (20.0) -
Operating profit (loss) (13.1) 2.4 (47.2) 0.3
</TABLE>
Net sales decreased by 52% and 41% in the second quarter and first six
months, respectively, of 1994 compared to the same periods in 1993.
The shortfall was due to the absence, in 1994, of businesses that were
sold or no longer consolidated. Those businesses represented $68.2
and $132.6 in sales in the second quarter and first six months,
respectively, of 1993. Excluding those sales from the comparison, net
sales in the second quarter of 1994 would have been 23% less than in
the second quarter of 1993, primarily due to the idling of operations
at Empire-Detroit, partially offset by higher snowplow shipments at
Douglas Dynamics.
Contributing to the increased operating losses for this segment were
operating losses at Empire-Detroit of $17.9 and $59.5 in the second
quarter and first six months of 1994, respectively, compared to losses
of $7.9 and $16.0 in the same periods, respectively, in 1993. The
1994 year-to-date loss at Empire-Detroit included a special charge of
$20.0 in connection with expenses related to the temporary idling and
restructuring of Empire-Detroit's steelmaking facilities in Mansfield
and Dover, Ohio. These facilities will be idled until the installation
of a new thin-slab continuous caster at the Mansfield facility is
completed, currently scheduled for the second quarter of 1995.
Excluding the special charge, Empire-Detroit's operating loss was
reduced from $21.6 in the first quarter of 1994 to $17.9 in the second
quarter. Losses at Empire-Detroit in the first quarter of 1994
reflected the loss of the main drive motor in the blooming mill at
Mansfield in early March, increases in scrap prices of nearly $50 per
ton over prices a year ago without a corresponding increase in selling
prices and operational inefficiencies due to the extreme cold weather.
The lower losses in the second quarter are due to idling the
facilities.
Douglas Dynamics had a significant increase in operating profit due to
higher sales of snowplows as a result of record snowfalls last winter,
low customer inventory and continued strong demand for four-wheel
drive vehicles. Sawhill Tubular showed slight losses on a year-to-
date basis, reflecting continued operational difficulties experienced
with new equipment at the Sharon, Pennsylvania plant, as well as
higher hot band costs.
Outlook: Empire-Detroit is expected to incur operating losses until
the start-up of the thin-slab caster in the second quarter of 1995.
However, losses should drop below the level seen in the first half of
1994 as the full benefits of idling are realized.
Douglas Dynamics' sales and earnings are expected to grow further in
1994, driven by strong demand for four-wheel drive vehicles,
distributors' need to replace inventory, a price increase effective
with orders received after June 30, 1994 and sales of new products.
-13-
<PAGE>15
DISCONTINUED OPERATIONS
- -----------------------
Armco Financial Services Group
- ------------------------------
The Armco Financial Services Group consists primarily of insurance
companies which Armco intends to sell and which continue underwriting
activities (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being
liquidated (runoff companies).
Armco signed a definitive agreement, dated August 2, 1994, to sell the
AFSG companies to be sold. The sale is subject to a number of
conditions, including approvals by regulatory authorities. Armco
accounts for these businesses as discontinued operations and, as such,
does not recognize, in is financial statements, AFSG's results of
operations. Armco has an investment in the AFSG companies to be sold
of $73.9 at June 30, 1994. Proceeds from the sale will remain
committed to the support of Armco's runoff insurance subsidiaries.
AFSG companies to be sold
Direct written premiums in the second quarter and first six months of
1994 were $52.5 and $106.2, which was 6% and 5% lower than the second
quarter and first six months, respectively, of 1993. Soft markets in
commercial lines plus the decision to exit the Southwest Region
(Texas) in 1993 reduced commercial lines writings.
The loss from underwriting was $7.3 in the second quarter of 1994
compared to an $8.6 loss in the second quarter of 1993. Losses
incurred were down as a result of both a decline in the earned premium
base and focused attention to improve personal auto profitability.
The underwriting loss for the first half of 1994 was $19.2 or $4.2
more than the same period in 1993. Lower losses incurred in the
second quarter of 1994 were offset by a $5.0 increase in underwriting
loss primarily due to losses associated with the first quarter 1994
winter storms in the Northeast and Midwest.
Net investment income, including realized gains, in the second quarter
of 1994 was $7.3, a decrease of $3.0 or 29% from the second quarter of
1993. The decline in investment income was primarily a result of $0.3
in realized losses in 1994 compared to $1.8 in realized gains in 1993
and a decline in investment yield of the base portfolio, due to the
erosion of market interest rates over the last two years.
The net loss in the first six months of 1994 was $4.7, which was $3.8
less than the $8.5 loss recorded in the first half of 1993. The net
loss in 1993 included a one-time charge of $14.0 for the full
postretirement benefit transition obligation, recognized upon adoption
of Statement of Financial Accounting Standards No. 106.
Liquidity and Financial Position: At June 30, 1994 and December 31,
1993, the companies to be sold had total assets of $537.2 and $571.4,
respectively, including cash and invested assets of $408.4 and $440.7.
Net assets at June 30, 1994 were $107.7, which was $28.2 below the
December 31, 1993 balance of $135.9. The lower net assets were due to
1994 unrealized losses totaling $23.5 as a result of an increase in
market interest rates which reduced the market value of the bond
portfolio.
Insurance premiums and interest are the AFSG companies' primary
sources of cash. Total cash used by operating activities during the
first six months of 1994 was $5.2, compared to $1.8 used in the first
half of 1993. The increase in cash used in 1994 is primarily due to a
$7.8 drop in premiums collected and a $1.3 decline in interest
received. In the first six months of 1993, investing activities
provided $13.7 and financing activities used $2.8 for payment on a
note.
Outlook: Earnings for the property and casualty industry are expected
to remain flat in 1994. Pricing for normal commercial lines remains
soft. There is some expectation that firming of prices will occur in
1994 as interest rates stabilize and capital gain opportunities
lessen. Operating income for the AFSG companies to be sold is
expected to improve modestly in 1994, despite significant catastrophe
losses incurred in the first quarter. However, the increase in long-
term market interest rates during the first half of 1994 is expected
to limit capital gain opportunities. As a result, net income for AFSG
companies to be sold is expected to decline compared to 1993.
-14-
<PAGE>16
Runoff companies
No charges have been recorded with respect to the runoff companies
since the second quarter of 1990. Armco management continues to
believe that future charges, if any, resulting from the runoff
companies will not be material to Armco's financial position or
liquidity. However, it is possible that due to fluctuations in
Armco's results, future developments could have a material effect on
the results of operations in one or more future interim or annual
periods.
EQUITY AND OTHER INVESTMENTS
- ----------------------------
Armco Steel Company, L.P. (ASC)
- -------------------------------
ASC was an equally owned limited partnership, formed in 1989, between
subsidiaries of Armco and Kawasaki Steel Corporation. Losses incurred
by ASC in subsequent years through 1993 reduced Armco's investment to
zero, after which Armco stopped recording its equity in profits or
losses related to the operations of ASC.
On April 7, 1994, ASC completed an initial public offering and
recapitalization. As part of this transaction, the business and
assets of ASC were transferred to AK Steel Corporation (AK Steel), a
newly formed, publicly traded company. In exchange for its interest
in ASC, Armco received 1,023,987 shares of stock in AK Steel with a
market value, based on the initial offering price, of approximately
$24.0. The stock represents approximately four percent of the
outstanding shares of AK Steel. In addition, Armco was released from
certain obligations to make future cash payments to the former joint
venture. The number of shares received and other terms of the
restructuring and recapitalization were determined by arm's-length
negotiations.
As a result of the transaction, Armco recognized a nonrecurring gain
in the second quarter of 1994 totaling $66.5, or $0.64 per share,
primarily as a result of release from certain obligations discussed
above, recognition of deferred pension curtailment gains established
at ASC's formation and a $30.0 tax benefit related to the effect of
this transaction on Armco's deferred tax asset position. In addition,
should Armco decide to sell its shares in AK Steel, following the 180-
day waiting period included in the transaction agreement, it would
recognize a gain equal to the net proceeds received upon such sale.
At June 30, 1994, the stock held by Armco had a market value of $26.1.
AK Steel currently hot rolls stainless steel for Armco under a toll
rolling agreement, which is in effect through the year 2002.
National-Oilwell
Armco's equity in the income of National-Oilwell was $4.4 and $4.1 in
the second quarter and first six months of 1994 compared to equity
losses of $0.2 and $1.5 in the comparable 1993 periods. Included in
the second quarter equity income was a $4.4 net gain on the disposal
of assets associated with businesses which National-Oilwell is
exiting. Absent these gains, the joint venture would have broken even
for the quarter. In the first quarter of 1994, National-Oilwell
completed the divestiture of its unprofitable wellhead business, for
which Armco recognized a $5.0 charge against its equity income in the
fourth quarter of 1993. Improved demand for National-Oilwell core
products is anticipated over the next twelve months as oil and gas
prices begin to strengthen.
National-Oilwell maintains its own cash and credit lines and funds its
own operations, liabilities and capital expenditures. National-
Oilwell has a $96.0 credit facility which matures on March 31, 1995.
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each own a 50% partnership interest
in North American Stainless (NAS) through their respective
subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc.
On July 18, 1994, Armco announced the signing of a letter of intent to
sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco
expects to record a gain of approximately $27.0 on completion of the
sale, which is expected to occur in the third quarter of this year.
In connection with the
-15-
<PAGE>17
transaction, Armco will enter into a supply contract with NAS to
provide NAS with semi-finished stainless steel.
Armco's equity income from its 50% interest in NAS was $0.5 for the
second quarter of 1994 and $0.1 for the first six months of 1994,
compared to losses of $0.3 and $2.1 in the second quarter and first
six months, respectively, of 1993. NAS shipped approximately 29,000
prime tons of product in the second quarter of 1994, operating at
close to 90% capability. Orders for chrome nickel stainless products
continue to grow, in particular, in advance of the 5% price increase
effective May 1, 1994 and as a result of the recent Allegheny Ludlum
strike. The strike has since ended. NAS continues to gain market
share and is expected to be profitable for the year.
NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as
well as a revolving bank credit facility totaling $40.0, of which
$39.0 was used as of June 30, 1994. At December 31, 1993 and March
31, 1994, NAS was not in compliance with certain covenants contained
in these loan agreements. Lenders agreed to waive compliance with
these covenants as of December 31, 1993 and March 31, 1994 and, during
the second quarter of 1994, agreed to amendments to the covenants,
which bring the joint venture back into compliance.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1994, Armco had $152.1 of cash and cash equivalents
compared to $183.5 at December 31, 1993. Total cash and cash
equivalents decreased $31.4 during the first six months of 1994,
primarily due to capital expenditures for the thin-slab caster at
Empire-Detroit's Mansfield, Ohio facility. Net cash used in investing
activities, including capital expenditures, was $37.5. Cash generated
by operating activities was $20.7, while financing activities used
$14.8, primarily for preferred stock dividends.
In addition to the cash on hand, Armco has a $170.0 revolving credit
facility that matures on December 31, 1995. At June 30, 1994, $83.8
of the credit facility was used as support for letters of credit and
$86.2 was available. As amended in the second quarter of 1994, the
credit agreement requires Armco to maintain a minimum working capital
of $150.0 from May 1, 1994 through August 31, 1994, dropping to $130.0
from September 1, 1994 through December 31, 1994. At June 30, 1994,
Armco's working capital, as defined, was $212.7. Beginning January 1,
1994, a cumulative net income test, as defined, became effective,
which requires Armco to have a minimum cumulative net income greater
than zero for the year 1994, increasing by $10.0 per quarter in 1995.
In addition, Armco must meet certain ratio requirements.
Noncompliance with any of these covenants or the occurrence of any
other event of default could result in the lending banks terminating
their commitments under the amended credit agreement and/or
accelerating the payments of amounts due thereunder.
On June 30, 1994, Armco settled a lawsuit with the Pension Benefit
Guaranty Corporation (PBGC) related to the alleged underfunding of
guaranteed benefits under Reserve Mining Company's pension plan (see
Note 9 of the Notes to Condensed Consolidated Financial Statements).
Under the settlement, on June 30, 1994, Armco paid $10.0 to the PBGC
in connection with the Reserve Mining pension liability and, on July
15, 1994, made a $17.5 contribution to the Armco Inc. Pension
Agreements Plan. Both amounts had been accrued for in Armco's
financial statements. In the third quarter of 1994, Armco expects to
realize approximately $73.0 on the sale of most of its interest in
NAS, as discussed above. Except for capital projects and normal
operating expenditures, Armco has no significant amounts of debt or
other cash commitments due through the remainder of the year.
Armco anticipates that its capital expenditures for 1994 will be
approximately $100.0, including $40.0 for normal ongoing maintenance,
environmental and expansion capital as well as about $60.0 of
expenditures on the $100.0 thin-slab caster project at the Mansfield,
Ohio plant, which was discussed in the Other Steel and Fabricated
Products section. Financing for a significant portion of this project
has been obtained, and installation of the caster is expected to be
completed in the second quarter of 1995.
On July 15, 1994, Armco's Board of Directors declared the regular
quarterly dividends of $.525 per share on the $2.10 Cumulative
Convertible Preferred Stock, Class A, and $.90625 per share on the
-16-
<PAGE>18
$3.625 Cumulative Convertible Preferred Stock, Class A, each payable
September 30, 1994 to shareholders of record on August 26, 1994. The
Board of Directors also declared the regular quarterly dividend of
$1.125 per share on the $4.50 Cumulative Convertible Preferred Stock,
Class B, payable October 3, 1994, to shareholders of record on August
26, 1994. Payment of dividends on Armco's common stock is currently
prohibited under the terms of certain of Armco's debt instruments.
Under the terms of the amended credit agreement, Armco is not
permitted to pay dividends on its common stock.
-17-
<PAGE>19
<TABLE>
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
1994 1993
------------- -----------------------------
2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Specialty Flat-Rolled Steel:
Customer sales $269.2 $263.2 $225.5 $240.3 $274.8 $260.9
Operating profit 34.7 30.1 12.2 18.7 24.7 19.9
Other Steel and Fabricated Products:
Customer sales 85.7 116.4 138.0 179.5 179.3 165.7
Special charges - (20.0) - (165.5) - -
Operating profit (loss) (13.1) (34.1) (11.8) (172.0) 2.4 (2.1)
Corporate General (7.6) (6.9) (10.6) (7.4) (10.1) (9.9)
- -----------------------------------------------------------------------------
Total operating profit (loss) 14.0 (10.9) (10.2) (160.7) 17.0 7.9
- -----------------------------------------------------------------------------
Interest income 1.9 1.9 1.4 0.7 1.3 1.6
Interest expense (8.4) (8.9) (10.3) (11.0) (10.6) (10.8)
Sundry other - net (10.4) (10.7) (6.5) (12.8) (11.1) (5.7)
Credit (provision) for
income taxes 29.8 (0.2) (0.2) (1.6) 2.2 6.9
- -----------------------------------------------------------------------------
Income (loss) of Armco and
consolidated subsidiaries 26.9 (28.8) (25.8) (185.4) (1.2) (0.1)
Equity in losses of Armco Steel
Company, L.P. - - (10.0) - - (17.9)
Gain on investment in Armco
Steel Company, L.P. 36.5 - - - - -
Equity in income (loss) of other
equity companies 6.5 1.6 (9.9) (2.6) (0.2) (3.1)
- -----------------------------------------------------------------------------
Income (loss) from continuing
operations 69.9 (27.2) (45.7) (188.0) (1.4) (21.1)
Discontinued operations
- Worldwide Grinding Systems
Income (loss) from
operations - - - 5.0 10.1 (0.9)
Loss on disposal of business - - - (40.0) - -
- AFSG companies to be sold
Loss on disposal of business - - (45.0) - - -
- -----------------------------------------------------------------------------
Income (loss) before extraordinary
items and cumulative effect of
accounting changes 69.9 (27.2) (90.7) (223.0) 8.7 (22.0)
Extraordinary items - - (7.3) - - -
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits
and income taxes - - - - - (307.5)
- -----------------------------------------------------------------------------
Net income (loss) $ 69.9 $(27.2) $(98.0) $(223.0) $ 8.7 $(329.5)
==============================================================================
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-18-
<PAGE>20
Part II. Other Information
Item 1. Legal Proceedings
-----------------
There are various claims pending against Armco and its subsidiaries
involving product liability, antitrust, patent, insurance arrangements,
environmental and hazardous waste matters, employee benefits and other
matters arising out of the conduct of the business of Armco as previously
described in Armco's Annual Report on Form 10-K for the year ended
December 31, 1993 (the Form 10-K) and Armco's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994 (the Form 10-Q).
As previously discussed in the Form 10-K and Form 10-Q, on or about April 7,
1994, an action was filed in the United States District Court for the
District of Minnesota by the Pension Benefit Guaranty Corporation (PBGC), on
its own behalf as statutory trustee of the Pension Plan for Reserve Mining
Company (Reserve Mining). The PBGC sought judgment against Armco for the
liability of Reserve Mining, a Minnesota partnership between a subsidiary of
Armco and a subsidiary of LTV Steel Company, for the alleged underfunded
amount of guaranteed benefits to be paid by the PBGC. On June 30, 1994,
Armco settled this litigation. Under the settlement agreement, Armco paid
the PBGC $10.0 million in connection with the Reserve Mining pension
liability, and on July 15, 1994, Armco contributed $17.5 million in cash to
the Armco Inc. Pension Agreements Plan, of which all amounts had been
previously accrued.
An action entitled Larry B. Ricke, Trustee v. Armco was filed on April 25,
--------------------------------
1994 in the United States District Court for the District of Minnesota by
the Trustee appointed by the PBGC for the purpose of recovering from Reserve
Mining assets to satisfy Reserve Mining's liability for pension benefit
entitlements which are in addition to those guaranteed by the PBGC. As
previously discussed in the Form 10-Q, the complaint alleges that Armco is
liable for the unfunded nonguaranteed benefits under the Pension Plan of
Reserve Mining in the amount of $9.2 million plus interest. The pension
benefits which are the subject of this action were part of the class
settlement of United Steelworkers of America v. Armco. Approximately 1,500
---------------------------------------
members of the class signed individual releases (the 19 members who did not
are plaintiffs in the Warner, Donovan, et al. v. Armco litigation) releasing
--------------------------------
Armco from all claims, liabilities, etc. based upon or which arise out of
any Reserve Mining Employee Pension Benefit Plan. Armco believes these
releases bar the claims of the Trustee. A motion for summary judgment will
be filed on or before August 26, 1994.
As previously discussed in the Form 10-K, an action entitled Adamson, Harold
---------------
E., et al. v. Armco was filed in July 1992 in the United States District
- -------------------
Court for the District of Minnesota by former Reserve Mining salaried
employees seeking damages arising from the welfare benefit plans of Reserve
Mining. Plaintiff's counsel has estimated the amount of such claims to be
approximately $12.0 million. Armco filed a Motion to Dismiss this action on
the basis of the statute of limitations. On February 17, 1993, the Court
dismissed plaintiffs' state law, ERISA and fiduciary claims with prejudice
and plaintiffs' independent fiduciary claims without prejudice. On October
22, 1993, the Court granted Armco's motion to dismiss in its entirety. On
November 22, 1993, plaintiffs filed a notice of appeal on the February 17
and October 22 decisions. The appeal was argued before the Eighth Circuit
Court of Appeals on June 13, 1994. No decision has been rendered to date.
As previously discussed in the Form 10-K, as a condition to the settlement
of the Avalos v. Atlantic Richfield Company, (ARCO), et al. action, about
----------------------------------------------------
300 individuals who were not represented by counsel or who had only recently
had counsel appear on their behalf and who did not wish to settle their
claims were severed from that action and transferred to a separate action
styled Rosa Ann Barrett, et al. v. ARCO, et al. in the United States
----------------------------------------
District Court for the Southern District of Texas, Houston Division. In
June 1994, the court granted summary judgment against all but two of the
Barrett plaintiffs on the basis that they had not established a factual
basis for their claims. Final judgment has not been entered, but is
expected in this case. On December 13, 1993, Rhonda Sills, on behalf of
herself and two of her children, sued the same defendants as in the Avalos
------
action. In January 1994, a suit on behalf of Rod Luke Chambers and about 30
other plaintiffs was filed against the ARCO defendants. These suits are
based on the same theories as those asserted in the Avalos case and seek an
------
unspecified amount of damages. Armco believes
-19-
<PAGE>21
the Barrett, Sills and Chambers lawsuits are not well-founded and,
-------------- --------
accordingly, no liability has As previously discussed in the Form 10-K, on
February 2, 1994, the Missouri Department of Natural Resources (Missouri
DNR) issued a Notice of Violation to GS Technologies, Inc. (GS Technologies)
for failure to obtain permits prior to the construction/modification of ten
processes or pieces of equipment. These changes were made before the Kansas
City facility was sold to GS Technologies as part of Armco's sale of its
Worldwide Grinding Systems Division in late 1993. Full settlement of the
Notice of Violation has been reached with Missouri DNR, which will require
payment of $28,000 in penalties. Settlement documents are being drafted.
As previously discussed in the Form 10-K, on or about July 31, 1990, the
State of Connecticut filed an action entitled Leslie Carothers, Commissioner
------------------------------
of Environmental Protection v. Cyclops Corporation, Detroit Strip Division
- --------------------------------------------------------------------------
in the Connecticut State Superior Court, Judicial District of Hartford/New
Britain at Hartford, seeking certain penalties and a permanent injunction
against Cyclops Corporation to restrain it from discharging wastewater into
the waters of the State of Connecticut without a permit. The claims involve
a closed facility in Hamden, Connecticut. Armco, as successor to Cyclops
Corporation, and the State of Connecticut have signed a Consent Order under
which Armco agreed to perform certain remedial investigations and
activities. The penalty claim in the litigation has been resolved by
payment of $60,000 in penalties.
As previously discussed in the Form 10-K, in September 1992, National Supply
Company, Inc., a wholly owned subsidiary of Armco (National Supply) and a
50% general partner in National-Oilwell, received a letter from the United
States Environmental Protection Agency, which asserted that National Supply
and/or National-Oilwell is a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to the Odessa Drum Company, Inc. Superfund site, located in Odessa,
Ector County, Texas. Armco executed an agreement for de minimis settlement.
----------
Total payment is expected to be less than $1,000.
The estimated remediation costs for the Fultz Landfill Superfund Site
reported in the Form 10-K have been revised from $22.0 million to $15.0
million. Armco continues to be one of four main PRP's, at this site but the
Department of Justice has agreed to use its offices to bring other
appropriate parties into the case.
The total liability on the foregoing claims and those other claims described
under ITEM 3. LEGAL PROCEEDINGS in the Form 10-K or under Item 1 in the
Forms 10-Q is not determinable; but in the opinion of management, the
ultimate liability resulting will not materially affect the consolidated
financial condition or liquidity of Armco and its subsidiaries; however, it
is possible that due to fluctuations in the Company's results, future
developments with respect to changes in the ultimate liability could have a
material effect on future interim or annual results of operations.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. The following is an index of the exhibits included in the Form
10-Q:
Exhibit 10 Stock Purchase Agreement among Armco, Armco
Financial Services Corporation and Vik Brothers
Insurance, Inc. Dated as of August 2, 1994, Sale of
Stock of Northwestern National Holding Company, Inc.
Exhibit 11 Computation of Income (Loss) Per Share
-20-
<PAGE>22
B. The following Reports on Form 8-K were filed by Armco since March
31, 1994.
<TABLE>
Report Date Description
----------- -----------
<S> <S>
April 7, 1994 Reporting that Armco would record
nonrecurring gains in the second quarter
as a result of the initial public offering
and recapitalization of its former joint
venture ASC (now publicly owned and
renamed AK Steel Holding Corporation)
which was completed on April 7, 1994.
April 7, 1994 Reporting the pro forma financial
information on the completed initial
public offering and recapitalization of
ASC. As part of the transaction, the
business and assets of ASC were
transferred to AK Steel Holding
Corporation, a newly formed and
publicly traded company. In exchange for
its interest in ASC, Armco received
1,023,987 shares of stock in AK Steel
Holding Corporation with a market value,
based on the initial public offering
price, of approximately $24.0 million. In
addition, Armco was released from certain
obligations to make future cash payments
to the former joint venture.
June 30, 1994 Reporting that Armco settled the Reserve
Mining litigation with the PBGC. Under
the terms of the agreement, Armco was to
pay the PBGC $10.0 million in connection
with the Reserve Mining pension liability
and contribute $17.5 million in cash to
the Armco Inc. Pension Agreements Plan on
July 15, 1994.
July 15, 1994 Reporting that Armco signed a letter of
intent to sell most of its interest in
North American Stainless (NAS), a 50-
percent joint venture with Acerinox S.A.
of Spain (Acerinox). Under the terms of
the letter of intent, Armco will sell 90%
of its equity interest to Acerinox and
will retain a five percent ownership
interest in the venture and would continue
to supply NAS with chrome nickel stainless
steel coils for a period after the sale.
</TABLE>
-21-
<PAGE>23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on behalf of the registrant by the following
duly authorized persons.
Armco Inc.
--------------------------------
(Registrant)
Date August 12, 1994 /s/ D. G. Harmer
- -------------------- -------------------------------
D. G. Harmer
Vice President and Chief
Financial Officer
Date August 12, 1994 /s/ P. G. Leemputte
- -------------------- -------------------------------
P. G. Leemputte
Controller
-22-
<PAGE>
EXHIBIT 10
Stock Purchase Agreement
among
Armco Inc.,
Armco Financial Services Corporation
and
Vik Brothers Insurance, Inc.
---------------------------
Dated as of August 2, 1994
---------------------------
Sale of Stock
of
Northwestern National Holding Company, Inc.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITION OF TERMS............................. 2
1. Certain Definitions......................... 2
1.1. Affiliate............................ 2
1.2. Annual Statement..................... 2
1.3. Business Day......................... 2
1.4. Closing and Closing Date............. 3
1.5. Closing Reserves..................... 3
1.6. Code................................. 3
1.7. Company.............................. 3
1.8. Consolidated Group................... 3
1.9. Escrow Account....................... 3
1.10. Existing Pledge...................... 3
1.11. Final Loss Amount.................... 3
1.12. Financial Statements................. 3
1.13. GAAP................................. 4
1.14. GAAP Financial Statement............. 4
1.15. GAAP Quarterly Statement............. 4
1.16. Hazardous Material................... 5
1.17. HSR Act.............................. 5
1.18. Insurance Subsidiary................. 5
1.19. knowledge............................ 5
1.20. Leased Real Property................. 5
1.21. Liens or Encumbrances................ 6
1.22. Material Adverse Effect.............. 6
1.23. 1992 Annual Statement................ 6
1.24. 1992 Consolidated Annual Statement... 6
1.25. NNIC................................. 6
1.26. Other Seller's Agreements............ 6
1.27. Owned Real Property.................. 6
1.28. Permitted Liens...................... 7
1.29. Person............................... 7
1.30. Pre-Closing Periods.................. 8
1.31. Property............................. 8
1.32. Purchase Price....................... 8
1.33. Purchaser Reinsurance Contracts...... 8
1.34. Quarterly Statement.................. 8
1.35. Shares............................... 8
1.36. Statutory Accounting Principles...... 9
1.37. subsidiary........................... 9
1.38. Tax or Taxes......................... 9
1.39. Tax Returns.......................... 9
-i-
<PAGE>
ARTICLE II. PURCHASE AND SALE OF SHARES................... 10
2.1. Purchase and Sale....................... 10
2.2. Purchase Price.......................... 10
2.3. Renewal Commission...................... 10
2.4. Statutory Surplus Adjustment............ 13
2.5. Certain Assumed Liabilities............. 18
2.6. Closing................................. 19
2.7. Transactions to be Effected at
Closing............................... 19
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ARMCO........ 20
3. Representations and Warranties of Armco........ 20
3.1. Organization, Standing and Authority
of Armco............................... 20
3.2. Execution and Delivery.................. 21
3.3. Consents and Approvals.................. 22
3.4. No Breach............................... 22
3.5. Armco as Common Parent.................. 22
3.6. Brokerage............................... 23
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLER.... 23
4. Representations and Warranties of the Seller.. 23
4.1. Due Incorporation and Authority......... 23
4.2. Outstanding Capital Stock, Options or
Other Rights......................... 24
4.3. Transfer of the Shares.................. 25
4.4. Organization and Qualification.......... 26
4.5. No Violation of Company Instruments..... 26
4.6. Financial Statements.................... 27
4.7. Absence of Undisclosed Liabilities...... 28
4.8. Assets................................. 29
4.9. Events Since December 31, 1993......... 38
4.10. Insurance Claims and Assessments........ 40
4.11. Judgments, Decrees and Orders in
Restraint of Business................ 41
4.12. Litigation and Proceedings.............. 41
4.13. Permits, Licenses and Franchises........ 42
4.14. Relationships With Affiliates,
Officers and Directors............. 42
4.15. Labor Disputes; Compliance.............. 43
4.16. Other Sale Arrangement.................. 43
4.17. Employee Benefit Plans.................. 44
4.18. Questionable Payments................... 48
4.19. Consents................................ 48
4.20. Contracts and Binding Commitments....... 49
4.21. Threats of Cancellation................. 52
-ii-
<PAGE>
4.22. Reinsurance............................. 53
4.23. Operations Insurance.................... 53
4.24. Taxes................................... 55
4.25. Accounts; Directors and Officers........ 59
4.26. Compliance with Applicable Law.......... 59
4.27. Conflict of Interest.................... 60
4.28. Broker's, Finder's or Similar Fees...... 60
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.. 60
5. Representations and Warranties of the Purchaser.. 60
5.1. Due Incorporation and Authority......... 61
5.2. Consents................................ 62
5.3. No Breach............................... 62
5.4. Actions and Proceedings................. 63
5.5. Broker's, Finder's or Similar Fees...... 64
5.6. Purchase for Investment................. 64
ARTICLE VI. CONDUCT PENDING CLOSING DATE................... 65
6.1. Operations in the Ordinary Course....... 65
6.2. Restrictions............................ 66
6.3. Related Matters......................... 69
6.4. Sale of Portfolio Securities........... 69
6.5. Regulatory Filings...................... 70
6.6. Interim Financial Statements and
Reports............................... 70
6.7. Access to Properties, Books and
Records............................... 71
6.8. Replacement Insurance................... 72
ARTICLE VII. COVENANTS AND AGREEMENTS 72
7. Covenants and Agreements................ 72
7.1. Confidentiality; Return of Documents.... 72
7.2. Fees and Expenses....................... 73
7.3. Company Employee Benefit Plans.......... 74
7.4. Payment of Debts and Intercompany
Receivables........................... 75
7.5. Agreement Not to Compete................ 76
7.6. Taxes................................... 76
7.7. The Seller's Access to Records.......... 88
7.8. Future Assessments...................... 89
7.9. Disclaimer of Other Representations
and Warranties....................... 91
7.10. Further Assurances...................... 92
7.11. Proposition 103 and Other Excess
Profit Laws........................... 92
-iii-
<PAGE>
7.12. Reinsurance............................. 93
7.13. Reinsurance Support..................... 94
7.14. Trademark Assignment.................... 94
7.15. Severance and Other Costs............... 95
7.16. Escrow Agreement........................ 95
7.17. Supplements to Schedules................ 96
ARTICLE VIII. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY.................................... 97
8.1. Survival of Representations and
Warranties and Indemnities.............. 97
8.2. Indemnity............................... 98
ARTICLE IX. CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO
CLOSE........................................... 105
9.1. Covenants............................... 105
9.2. Governmental Consents................... 105
9.3. No Litigation........................... 106
9.4. Legislation............................. 106
9.5. Delivery of Documents................... 106
9.6. Opinion of Counsel...................... 106
9.7. Certified Resolutions................... 106
9.8. Continued Accuracy of Representations
and Warranties........................ 107
9.9. Other Approvals......................... 107
9.10. Other Consents.......................... 107
9.11. No Adverse Change....................... 108
9.12. Resignation of Directors................ 108
9.13. Release of Existing Pledge.............. 108
ARTICLE X. CONDITIONS TO THE OBLIGATION OF ARMCO AND THE SELLER
TO CLOSE....................................... 108
10.1. Covenants............................... 108
10.2. Governmental Consents................... 109
10.3. No Litigation........................... 109
10.4. Legislation............................. 109
10.5. Payment and Delivery of Documents....... 109
10.6. Opinion of Counsel...................... 110
10.7. Certified Resolutions................... 110
10.8. Continued Accuracy of Representations
and Warranties......................... 110
-iv-
<PAGE>
ARTICLE XI.TERMINATION, AMENDMENT AND WAIVER................ 110
11.1. Termination............................. 110
11.2. Effect of Termination................... 112
11.3. Amendment............................... 112
11.4. Extension; Waiver....................... 112
ARTICLE XII. MISCELLANEOUS................................. 112
12.1. Notices................................. 112
12.2. Interpretation.......................... 113
12.3. Governing Law........................... 114
12.4. Publicity............................... 114
12.5. Assignment; Binding Effect.............. 114
12.6. Entire Agreement; Third Party
Beneficiaries.......................... 114
12.7. Construction............................ 115
12.8. Counterparts............................ 115
-v-
<PAGE>
This STOCK PURCHASE AGREEMENT made and entered into this 2nd day
of August, 1994 by and among Armco Inc., an Ohio corporation ("Armco"),
Armco Financial Services Corporation, a Delaware corporation (the "Seller"),
and Vik Brothers Insurance, Inc., an Indiana corporation (the "Purchaser"):
W I T N E S E T H
WHEREAS, Armco is the beneficial and record owner of all of the
issued and outstanding shares of capital stock of the Seller; and
WHEREAS, the Seller is the beneficial and record owner
of all of the issued and outstanding shares of common stock (the "Shares")
of Northwestern National Holding Company, Inc., a Delaware corporation (the
"Company"); and
WHEREAS, the Seller wishes to sell to the Purchaser and the
Purchaser wishes to buy from the Seller the Shares on the terms and
conditions set forth in this Stock Purchase Agreement (the "Agreement");
NOW, THEREFORE, in reliance upon the representations and
warranties contained herein and in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, agree as follows:
<PAGE>
ARTICLE I.
DEFINITION OF TERMS
1. Certain Definitions. As used in this Agreement,
-------------------
the following terms have the following meanings unless the context requires
otherwise:
1.1. "Affiliate" means a Person directly or indirectly
----------
controlling, controlled by or under common control with the Person of which
it is an Affiliate. For the purposes of Section 4.17, "controlling,
controlled by or under common control with" shall be determined under
Section 414(b) and (c) of the Internal Revenue Code of 1986, as amended.
The Company and its subsidiaries shall be considered Affiliates of the
Seller with respect to the period ending on the Closing Date and Affiliates
of the Purchaser with respect to the period commencing the day after the
Closing Date for purposes of this Agreement.
1.2. "Annual Statement" for an Insurance Subsidiary
----------------
means the annual convention statement of such Insurance Subsidiary, relating
to a specified year or date, prepared in accordance with Statutory
Accounting Principles and filed by such Insurance Subsidiary with the
insurance department of such Insurance Subsidiary's domiciliary state,
including all notes, schedules and exhibits thereto.
1.3. "Business Day" means a day on which the Seller,
------------
the Purchaser and national banks doing business in New York City are open
for business.
-2-
<PAGE>
1.4. "Closing" and "Closing Date" have the meanings
------- ------------
set forth in Section 2.6.
1.5. "Closing Reserves" has the meaning set forth in
----------------
Section 2.3
1.6. "Code" means the Internal Revenue Code of 1986,
----
as amended.
1.7. "Company" means Northwestern National Holding
--------
Company, Inc., a Delaware corporation.
1.8. "Consolidated Group" means the affiliated group
------------------
(as defined in Section 1504 of the Code) of corporations of which the
Company is a member and of which Armco is the common parent.
1.9. "Escrow Account" has the meaning set forth in
--------------
Section 7.16.
1.10. "Existing Pledge" means the pledge and
---------------
assignment of the Shares to Northwestern National Insurance Company of
Milwaukee, Wisconsin ("NNIC") as security for the payment by the Seller of
certain promissory notes of the Seller, in the aggregate principal amount of
$72.6 million, to NNIC.
1.11. "Final Loss Amount" has the meaning set forth in
-----------------
Section 2.3.
1.12. "Financial Statements" means, collectively, the
-------------------
1993 GAAP Financial Statements, the 1992 Annual Statements, the
-3-
<PAGE>
1993 Annual Statements, the 1992 Consolidated Annual Statement and the 1993
Consolidated Annual Statement.
1.13. "GAAP" or "generally accepted accounting
---- -----------------------------
principles" means the accounting principles generally used and
- ----------
recognized from time to time within the United States which have substantial
support from authoritative agencies or bodies, including the Securities and
Exchange Commission, the American Institute of Certified Public Accountants,
the Financial Accounting Standards Board and general industry practice,
which principles have been applied in a consistent manner throughout the
periods involved.
1.14. "GAAP Financial Statement" means, as of a
------------------------
certain date or for a year ended on a certain date, the audited consolidated
balance sheet of the Company and its subsidiaries as of such date and the
audited consolidated statements of income, stockholder's equity and cash
flows of the Company and its subsidiaries for the year ended on such date,
including the related notes and auditor's report thereon.
1.15. "GAAP Quarterly Statement" means, as of a
------------------------
certain date or for a fiscal quarter ended on a certain date, the
consolidated balance sheet of the Company and its subsidiaries as of such
date and the consolidated statements of income, stockholder's equity and
cash flows of the Company and it subsidiaries for the quarter ended on such
date, including notes thereon.
-4-
<PAGE>
1.16. "Hazardous Material" has the meaning set forth
------------------
in Section 4.8.
1.17. "HSR Act" means the Hart-Scott-Rodino Antitrust
-------
Improvements Act of 1976, as amended, and the rules promulgated thereunder.
1.18. "Insurance Subsidiary" means each of
--------------------
Northwestern National Casualty Company, a Wisconsin stock insurance company
("NNCC"), Northwestern National Lloyds Insurance Company, a Texas Lloyds
insurance company ("NNLC"), Northwestern National County Mutual Insurance
Company, a Texas mutual insurance company ("NNCM"), NN Insurance Company, a
Wisconsin stock insurance company ("NN Insurance"), Pacific National
Insurance Company, a California stock insurance company ("PNIC"), Pacific
Automobile Insurance Company, a California stock insurance company ("PAIC"),
and Statesman Insurance Company, an Indiana stock insurance company
("Statesman").
1.19. "knowledge" means, with respect to the Seller
----------------
and the Company, the knowledge of the Seller's or the Company's current
officers after having made due inquiry of the appropriate individuals
employed by the Seller, the Company and the Company's subsidiaries.
1.20. "Leased Real Property" means all real property
--------------------
reflected in the Company's balance sheet included in its 1993 Consolidated
Annual Statements as being leased by the Company or
-5-
<PAGE>
one of its subsidiaries, a list of which is set forth in Schedule 1.20.
1.21. "Liens or Encumbrances" means any lien, pledge,
---------------------
mortgage, security interest, claim, lease, charge, option, right of first
refusal, easement, servitude, transfer restriction under any shareholder or
similar agreement, encumbrance or any other similar restriction or
limitation.
1.22. "Material Adverse Effect" means an effect which
-----------------------
is materially adverse to the business, financial condition or results of
operations of the Company, any Insurance Subsidiary or any other material
subsidiary of the Company.
1.23. "1992 Annual Statement" and "1993 Annual
--------------------- ------------
Statement" have the respective meanings set forth in Section 4.6.
- ---------
1.24. "1992 Consolidated Annual Statement" and
----------------------------------
"1993 Consolidated Annual Statement" have the respective meanings
----------------------------------
set forth in Section 4.6.
1.25. "NNIC" has the meaning set forth in Section 7.13.
----
1.26. "Other Seller's Agreements" means each agreement
-------------------------
to be executed in connection with the transactions contemplated hereunder to
which Seller is a party.
1.27. "Owned Real Property" means all real property
-------------------
reflected in the Company's balance sheet included in its 1993
-6-
<PAGE>
Consolidated Annual Statement as being owned by the Company or one of its
subsidiaries, which consists of the property located at 8450 Westfield
Boulevard, Indianapolis, Indiana.
1.28. "Permitted Liens" means those Liens or
---------------
Encumbrances affecting real or personal property which (i) are listed in
Schedule 1.28 or are otherwise approved in writing by Purchaser, (ii) are
for taxes, assessments or other governmental charges, or the claims of
materialmen, carriers, landlords or like persons, all of which are not yet
due or payable or which are being contested in good faith by appropriate
proceedings and for which an appropriate reserve has been established, (iii)
are zoning, building or other similar governmental restrictions, (iv) are
easements, covenants, rights-of-way or other similar restrictions, (v) arise
in the ordinary course of business including, Liens or Encumbrances arising
from pledges of securities required pursuant to state insurance law or
insurance regulatory requirements or pertaining to funds held or deposits
made for the benefit of ceding companies or retrocessionaires; provided that
--------
none of the items described above, together with all such other items,
materially impairs the value or interferes with or prohibits the present use
or operation of the Property by the Company or its subsidiaries.
1.29. "Person" means any individual, corporation,
------
partneship, firm, joint venture, association, joint stock
-7-
<PAGE>
company, trust, unincorporated organization, governmental or regulatory
authority or other entity.
1.30. "Pre-Closing Period" means all tax periods ending
------------------
on or before the Closing Date and, with respect to any tax period that
includes but does not end on the Closing Date, the portion of such period
that ends on and includes the Closing Date.
1.31. "Property" means real, personal or mixed property,
--------
tangible or intangible.
1.32. "Purchase Price" means the aggregate purchase
--------------
price described in Section 2.2.
1.33. "Purchaser Reinsurance Contracts" has the
-------------------------------
meaning set forth in Section 2.3.
1.34. "Quarterly Statement" of an Insurance
-------------------
Subsidiary, as of a certain date, or for a fiscal quarter ended on such
date, means the quarterly convention statement prepared in accordance with
Statutory Accounting Principles and filed by such Insurance Subsidiary with
the insurance department of such Insurance Subsidiary's domiciliary state,
including all notes, schedules and exhibits thereto.
1.35. "Shares" means all of the issued and outstanding
------
capital stock of Northwestern National Holding Company, Inc.
-8-
<PAGE>
consisting of 1,000 shares of common stock, par value $10.00 per share.
1.36. "Statutory Accounting Principles" means the accounting
-------------------------------
procedures and practices prescribed or permitted by the department of
insurance of the state of domicile of an Insurance Subsidiary and used by
that Insurance Subsidiary in the preparation of its 1993 Annual Statement
and used by the Company in the preparation of the 1993 Consolidated Annual
Statement.
1.37. "subsidiary" means a corporation of which 50% or
----------
more of the voting control is owned directly or indirectly by another
entity.
1.38. "Tax" or "Taxes" means any Federal, state,
--- -----
local, foreign or other income, premium, profits, estimated, franchise,
license, impost, transfer, sales, use, ad valorem, customs, payroll,
withholding, employment, wage, occupation, value added, property (real or
personal), excise or other taxes, fees, duties, assessments, withholdings or
governmental charges of any nature (including interest, penalties or
additions to such items).
1.39. "Tax Returns" means all returns, reports,
-----------
estimates, declarations, information returns and statements of any nature
regarding Taxes for any period required to be filed by Armco, the Seller,
the Company or its subsidiaries and relating
-9-
<PAGE>
to the income, properties or operations of the Company or its subsidiaries.
ARTICLE II.
PURCHASE AND SALE OF SHARES
2.1. Purchase and Sale. Upon the terms and subject to
-----------------
the conditions set forth in this Agreement, the Seller shall sell, assign,
transfer, convey and deliver to the Purchaser and the Purchaser shall
purchase from the Seller, on the Closing Date, the Shares.
2.2. Purchase Price. The Purchase Price for the
--------------
Shares to be paid by the Purchaser at the Closing shall be $70 million less
the $3.5 million paid with respect to the debt incurred in connection with
the acquisition of Statesman, subject to the post-closing adjustments and
payments set forth in Section 2.4 ("Purchase Price"), payable in the manner
specified in Section 2.7.
2.3. Renewal Commission.
------------------
(a) Subject to the adjustments set forth below, the
Purchaser agrees to pay the Seller a renewal commission (the "Renewal
Commission") 90 days following the third anniversary of the Closing Date
equal to $15 million. Such Renewal Commission (i) shall be reduced (but not
to an amount less than zero) by the amount by which the Final Loss Amount
shall exceed the Closing Reserves and (ii) is subject to set-off pursuant to
Section 8.2. To the extent the Paid Portion (defined below) of the Final
Loss
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<PAGE>
Amount includes offsets for reinsurance amounts not yet received, a
corresponding amount of Renewal Commission, otherwise due, shall not be due
and payable until 10 Business Days after such amounts are collected by the
Company. To the extent that the Renewal Commission, or any portion thereof,
shall not be paid when due, the Purchaser shall pay interest on the unpaid
amount of such Renewal Commission from the date on which such amount becomes
due and payable to the date of payment at the per annum rate equal to the
prime rate announced by The Chase Manhattan Bank, N.A., New York, New York
in effect from time to time during such period. Such Renewal Commission
shall be increased by one-half (50%) of the amount by which the Closing
Reserves exceed the Final Loss Amount. To the extent reinsurance
recoverables, treated as uncollectible in the calculation of the Final Loss
Amount, are received by the Purchaser or its subsidiaries prior to the
fourth anniversary of the Closing Date and to the extent the receipt of such
reinsurance recoverables would have caused a corresponding increase in the
Renewal Commission, such amounts shall be remitted to the Seller.
(b) The "Final Loss Amount" shall mean the consolidated
(combined) losses and loss adjustment expenses with respect to losses
incurred prior to the Closing Date ("Pre-Closing Losses") comprised of (i)
the amounts paid by the Insurance Subsidiaries from the Closing Date (less
amounts actually received or considered collectible under statutory
accounting principles under reinsurance contracts, treaties or
-11-
<PAGE>
agreements reflected in the Closing Balance Sheet and salvage and
subrogation) to the third anniversary of the Closing Date ("Paid Portion")
and (ii) the amount of the reserves for unpaid losses and loss adjustment
expenses of the Insurance Subsidiaries as of the third anniversary of the
Closing Date with respect to Pre-Closing Losses ("Reserved Portion"). The
Reserved Portion is to be calculated by the Company in accordance with
statutory accounting principles and accepted actuarial practices (i) giving
effect to reinsurance recoverables considered collectible under Statutory
Accounting Principles under any reinsurance contracts, treaties or
agreements reflected in the calculation of those amounts for purposes of the
Closing Balance Sheet (which shall not include any reinsurance contract,
treaty or agreement (the "Purchaser Reinsurance Contracts") entered into at
the request or direction of the Purchaser pursuant to Section 7.12 or
otherwise), (ii) excluding the effect of any reinsurance contract, treaty or
agreement entered into or modified on or after the Closing Date and (iii)
giving effect to salvage and subrogation in a manner consistent with the
Closing Balance Sheet. Such Reserved Portion shall be certified by an
independent actuary satisfactory to the Purchaser and the Seller
("Independent Actuary") as being, in its opinion, a reasonable estimation of
the unpaid ultimate losses and loss adjustment expenses for Pre-Closing
Losses in accordance with statutory accounting principles and accepted
actuarial practices, given the instructions set forth above. If the
Independent Actuary concludes that the
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<PAGE>
Reserved Portion is not a reasonable estimation of such unpaid ultimate
losses and loss adjustment expenses in accordance with the foregoing
standards, the Independent Actuary shall calculate a reserve amount for Pre-
Closing Losses, certifying that such amount is its best estimation of the
unpaid ultimate losses and loss adjustment expenses for Pre-Closing Losses
in accordance with statutory accounting principles and accepted actuarial
practices, given the instructions above, and such amount shall become the
Reserved Portion of the Final Loss Amount. The Purchaser and the Seller
shall each pay one-half of the fees and expenses of Independent Actuary.
(c) "Closing Reserves" shall mean the sum of (i) $15 million
plus (ii) the reserves for losses and loss adjustment expenses, less
reinsurance recoverables and salvage and subrogation, as shown on the
Closing Balance Sheet.
2.4. Statutory Surplus Adjustment.
---------------------------
(a) Following the Closing, the Seller and the Purchaser
shall cooperate with the Company in the preparation of a consolidated
balance sheet of the Company and its subsidiaries as of the Closing Date in
accordance with the terms hereof (the "Closing Balance Sheet"). Except for
the insurance reserves and except for the instructions set forth below, the
Closing Balance Sheet shall be prepared in accordance with, Statutory
Accounting Principles (including the methodologies, allocations and
assumptions used by the Company in the preparation of the 1993 Consolidated
Annual Statement); provided that no effect shall be given
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<PAGE>
to any accounting principles adopted or required subsequent to the 1993
Consolidated Annual Statement. The insurance reserves in the Closing
Balance Sheet shall be calculated by the Company on an accounting and
actuarial basis consistent with the Company's 1992 Consolidated Annual
Statement (except with respect to the treatment of salvage and subrogation,
which shall be treated on a basis consistent with the 1993 Consolidated
Annual Statement). The Closing Balance Sheet shall be prepared by the
Company and shall include a schedule and calculation of the consolidated
(combined) statutory capital and surplus in the Closing Balance Sheet
adjusted to eliminate the effects of (i) any financial reinsurance which has
the effect of increasing the consolidated (combined) statutory capital and
surplus of the Company and its subsidiaries in force subsequent to June 30,
1993, (ii) any capital gains realized from June 30, 1993 until the Closing
Date (other than gains included in subparagraph (iv) below) or capital
losses realized at the direction of the Purchaser (within the 30 days
immediately prior to the Closing Date) by the Company and its subsidiaries
as a result of the sale of portfolio securities, (iii) any Purchaser
Reinsurance Contracts, (including transaction and other expenses related
thereto), in each case to the extent included in such consolidated
(combined) statutory capital and surplus, and (iv) the net realized capital
losses of $542,575 arising out of the combination of NNCC and Statesman.
The adjustment to the Closing Balance Sheet set forth in clauses (i), (ii)
(except for tax payments on gains or losses
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<PAGE>
from Purchaser directed securities transactions) and (iv) above shall not be
adjusted to reflect any tax consequences resulting therefrom. The
consolidated (combined) statutory capital and surplus of the Company and its
subsidiaries as shown on the Closing Balance Sheet, as adjusted in
accordance with this section, is the "Closing Statutory Surplus". The
Closing Balance Sheet shall identify the amount of the liabilities to be
assumed pursuant to Section 2.5.
(b) Each of the parties shall have access to the books and
records of the Company for purposes of the review of the Closing Balance
Sheet and the Seller shall have the right, at its expense, to place up to
two representatives at the Company's facilities to review the preparation of
the Closing Balance Sheet. Within 120 days of the Closing Date, the Company
shall deliver such Closing Balance Sheet (including the calculation of
Closing Statutory Surplus) to the Seller and the Purchaser. Subject to
section (c) below, if the Closing Statutory Surplus calculated in accordance
with this Section is less than $96.5 million, the amount of the difference
between $96.5 million and such Closing Statutory Surplus shall be paid by
the Seller to the Purchaser within 16 Business Days of the delivery of the
Closing Balance Sheet and the calculation of the Closing Statutory Surplus.
Subject to Section (c) below, if such Closing Statutory Surplus calculated
in accordance with this Section is greater than $96.5 million, the amount of
the difference, up to a total of $3.5 million, between such Closing
Statutory Surplus and $96.5
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<PAGE>
million shall be paid by the Purchaser to the Seller within 16 Business Days
of delivery of the Closing Balance Sheet and the calculation of the Closing
Statutory Surplus. Such payment by the Seller or the Purchaser shall be
made, together with interest from the Closing Date to the date of payment on
the amount of such difference at the per annum rate equal to the prime rate
announced by The Chase Manhattan Bank, N.A., New York, New York in effect
from time to time during such period, by wire transfer of immediately
available funds to a bank account designated by the payee.
(c) In the event that the Seller or Purchaser disagrees with
such determination by the Company of the Closing Statutory Surplus, such
party shall notify the other party of such disagreement within 15 Business
Days of receipt of the Closing Balance Sheet and shall further identify in
such notice the items in the Closing Balance Sheet (including the
calculation of Closing Statutory Surplus) to which it objects; provided,
however, that any challenges to the insurance reserves by either party will
be restricted to determining that such reserves were calculated as stated
above and not as to the adequacy of the reserve amount. If such notice is
not given, the Closing Balance Sheet, and the calculation of the Closing
Statutory Surplus, shall be final and binding as between the parties. If
the Seller or the Purchaser timely delivers the notice setting forth the
disagreement and the items to which it objects, the Seller and the Purchaser
shall have 15 Business Days to resolve the dis-
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<PAGE>
agreement and the payment obligation pursuant to paragraph (b) above shall
be suspended until the disagreement is resolved by the parties or by the
Accounting Firm (as defined below). If the disagreement is unable to be
resolved within such 15-day period, the Seller and the Purchaser agree to
retain a nationally recognized accounting firm (the "Accounting Firm"), to
arbitrate and resolve the disputed items in the Closing Balance Sheet and
the calculation of the Closing Statutory Surplus within 60 days of such
retention. The Seller and the Purchaser shall designate the Accounting Firm
prior to the Closing. The Accounting Firm shall make such determination as
an arbitrator by reviewing the disputed items in the Closing Balance Sheet
and the Closing Statutory Surplus, such underlying documentation as it deems
appropriate, and such written materials as shall be presented to it by
either the Seller or the Purchaser within 30 days of its retention. On or
before the 60th day after its retention, the Accounting Firm shall deliver a
written report to the Seller and the Purchaser (i) stating whether each
disputed item is calculated as required by Section 2.4(a), (ii) for any
disputed items not calculated in accordance with the provisions of Section
2.4(a) restating the disputed items in accordance with Section 2.4(a) and
providing the corresponding adjustment to the Closing Statutory Surplus, and
(iii) stating the amount of the Closing Statutory Surplus, as adjusted to
reflect such adjustments, if any. For the purposes of this engagement, the
Accounting Firm shall assume that all items not being disputed are fairly
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<PAGE>
presented in accordance with Statutory Accounting Principles and as required
by Section 2.4(a). The Closing Statutory Surplus so stated by the
Accounting Firm as provided in clause (iii) above shall be final and binding
on the parties hereto and shall be the "Closing Statutory Surplus" for all
purposes of this Agreement and for the determination of any payment pursuant
to Section 2.4(b). The fees and expenses of the Accounting Firm shall be
borne equally by the Seller and the Purchaser.
(d) The amount of any post-closing payment pursuant to
Section 2.4(c) shall be paid within 10 Business Days of the delivery by the
Accounting Firm of its report to the Seller and the Purchaser, together with
interest from the Closing Date to the date of payment on the payment amount
at the per annum rate equal to the prime rate announced by The Chase
Manhattan Bank, N.A., New York, New York in effect from time to time during
such period, by wire transfer of immediately available funds to a bank
account designated by the payee.
2.5. Certain Assumed Liabilities. On such date after
---------------------------
the delivery of the Closing Balance Sheet as any adjustment to the Purchase
Price based on the Closing Statutory Surplus would be payable pursuant to
Section 2.4, the Company shall pay to a segregated escrow account,
acceptable to Purchaser and Seller, to be maintained specifically to fund
such assumed liabilities, as directed by the Seller, an amount, together
with interest from the Closing Date on such amount at the rate provided in
Section 2.4 for payments made thereunder, equal to the amount of the
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<PAGE>
liabilities (that are of a type described in Schedule 2.5 hereto) which are
both (i) included on the Closing Balance Sheet on a basis consistent with
the 1993 Consolidated Annual Statement (except as set forth in Schedule 2.5)
and (ii) assumed by either the Seller or Armco or for which the Company or
the Purchaser is indemnified by the Seller or Armco. When the liabilities
transferred above have been satisfied in full, any amounts remaining in such
trust accounts shall be released to the Seller or Armco, as directed by the
Seller.
2.6. Closing. The Closing of the sale and transfer of the
-------
Shares (the "Closing") will take place at 10:00 a.m. on September 30, 1994
or such other date as the parties mutually agree, provided that the
conditions precedent to Closing set forth in this Agreement have been
satisfied or waived (the "Closing Date"), at the office of Schnader,
Harrison, Segal & Lewis, 1600 Market Street, Philadelphia, Pennsylvania
19103.
2.7. Transactions to be Effected at Closing. At the Closing:
--------------------------------------
(a) The Seller shall deliver to the Purchaser (i) one or
more certificates representing the Shares free and clear of any Liens or
Encumbrances, including the Existing Pledge, which shall be released at
Closing, duly endorsed in blank or accompanied by duly executed instruments
of transfer, or registered in the name of the Purchaser, and (ii) all
documents
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<PAGE>
and instruments expressly required by this Agreement to be delivered by the
Seller at the Closing.
(b) The Purchaser shall (i) pay $66.5 million to the
Seller, by wire transfer of immediately available funds to such account or
accounts as the Seller shall designate to the Purchaser prior to the
Closing, and (ii) deliver to the Seller all documents and instruments
expressly required by this Agreement to be delivered by the Purchaser at the
Closing.
(c) The Seller shall either pay $5 million to the Escrow
Account or shall provide a letter of credit acceptable to the Purchaser (the
"Letter of Credit") in favor of the Purchaser in an amount of $5 million to
support payments, if any, required to be made by the Seller on account of
the Seller's indemnification obligations under this Agreement.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF ARMCO
3. Representations and Warranties of Armco. Armco
---------------------------------------
represents and warrants to the Purchaser as follows:
3.1. Organization, Standing and Authority of Armco.
---------------------------------------------
Armco is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Ohio, and is in good standing as a
foreign corporation in all jurisdictions in which its failure to qualify or
be in good standing would adversely affect the consummation or the validity
of the transactions provided for in this Agreement. Armco has all requisite
corpo-
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<PAGE>
rate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby to be consummated by Armco.
3.2. Execution and Delivery. The execution, delivery
----------------------
and performance by Armco of this Agreement and the consummation of the
transactions contemplated hereby to be consummated by Armco have been duly
and validly authorized by all necessary corporate action on the part of
Armco, and no other corporate proceedings on the part of Armco are necessary
to authorize the execution, delivery and performance by Armco of this
Agreement or the consummation of the transactions contemplated hereby to be
consummated by Armco. This Agreement has been executed and delivered by
Armco and (assuming that such agreement is a valid and binding obligation of
the Purchaser) constitutes the valid and binding obligation of Armco,
enforceable against Armco in accordance with its terms, except that (i) such
enforceability may be subject to bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, rehabilitation, liquidation,
conservatorship, receivership or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
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<PAGE>
3.3. Consents and Approvals. The execution and
----------------------
delivery by Armco of this Agreement, the performance by Armco of its
obligations hereunder and the consummation by Armco of the transactions
contemplated hereby to be consummated by Armco do not require Armco to
obtain any consent, approval, authorization or action of, or make any filing
with or give any notice to, any public, governmental or judicial authority
except (a) as set forth in Schedule 3.3; (b) such as have been duly obtained
or made, as the case may be, and are in full force and effect on the Closing
Date; or (c) such filings made with governmental agencies such as the
Securities and Exchange Commission, which are (i) part of the regular
disclosure obligations of Armco and (ii) available as public documents.
3.4. No Breach. The execution, delivery and
---------
performance of this Agreement by Armco and the consummation of the
transactions contemplated hereby by Armco or the Seller in accordance with
the terms and conditions hereof will not violate, conflict with, or result
in the breach of any provision of the Articles of Incorporation, Regulations
or other charter or organizational document of Armco.
3.5. Armco as "Common Parent". Armco is the "common
-------------
parent" of an "affiliated group" of corporations (as those terms are used in
section 1504(a) of the Code and the Treasury Regulations promulgated under
section 1502 of the Code) that includes the Company and each of its
subsidiaries.
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<PAGE>
3.6. Brokerage. Except for The Chase Manhattan Bank,
---------
N.A. (whose fees will be paid by Armco or the Seller), no broker or finder
has acted directly or indirectly for Armco or the Seller or the Company, and
neither the Company nor any of its subsidiaries has incurred any obligation
to pay any brokerage or finder's fee or other commission in connection with
the transactions contemplated by this Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
4. Representations and Warranties of the Seller. The
--------------------------------------------
Seller represents and warrants to the Purchaser as follows:
4.1. Due Incorporation and Authority. The Seller is
-------------------------------
a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has the requisite corporate power and
authority to execute and deliver this Agreement and each of the Other
Seller's Agreements, to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance by the Seller of this Agreement and each
of the Other Seller's Agreements, and the consummtion by the Seller of the
transactions contemplated hereby and thereby, have been duly and validly
authorized by all necessary corporate action and no other corporate
proceedings on the part of the Seller are necessary to authorize the
execution, delivery and performance by the Seller of this Agreement and each
of the Other
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<PAGE>
Seller's Agreements, or the consummation of the transactions contemplated
hereby and thereby. This Agreement has been duly and validly executed and
delivered by the Seller and (assuming this Agreement is a valid and binding
obligation of the Purchaser) constitutes a valid and binding obligation of
the Seller, enforceable against it in accordance with its terms, except that
(i) such enforceability may be subject to bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, rehabilitation, liquidation,
conservatorship, receivership or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. Each of the Company and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its state of incorporation and has the requisite
corporate power and authority to own, lease and operate its assets and
businesses and to carry on its businesses as now conducted.
4.2. Outstanding Capital Stock, Options or Other
-------------------------------------------
Rights. The outstanding capital stock of the Company consists of
- ------
1,000 shares of common stock, par value $10.00 per share. No other class of
capital stock or equity interest of the Company is authorized or
outstanding. All of the outstanding Shares are owned of record and
beneficially by the Seller and constitute 100 percent of the issued and
outstanding shares of capital stock of
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<PAGE>
the Company. All of the Shares are duly authorized, validly issued, fully
paid and nonassessable. Except for the corporations listed in Schedule 4.2,
the Company has no other subsidiaries and does not beneficially own more
than five percent of any Person. Except as set forth in Schedule 4.2, the
Company owns 100% of the issued and outstanding shares of capital stock of
the corporations listed in Schedule 4.2 free and clear of all Liens or
Encumbrances. There is no outstanding right, subscription, warrant, call,
unsatisfied preemptive right, option or other agreement of any kind to
purchase or otherwise to receive from Armco, the Seller, the Company or its
subsidiaries any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the capital stock or any other security or equity
interest of the Company or its subsidiaries, and there is no outstanding
security of any kind convertible into such capital stock or other equity
interest of the Company or its subsidiaries.
4.3. Transfer of the Shares. Except for the Existing
-----------------------
Pledge, the Seller owns beneficially and of record, free and clear of any
Liens or Encumbrances, all of the Shares. Upon delivery of the payment for
such Shares as herein provided and release of the Existing Pledge, the
Seller will convey good title thereto, free and clear of any Liens or
Encumbrances, other than the requirements of the Federal and state
securities laws and state insurance laws with respect to limitations on the
subsequent transfer thereof and other than any Liens or Encumbrances
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<PAGE>
thereon that may have been imposed or consented to by the Purchaser.
4.4. Organization and Qualification. The Seller has
-------------------------------
delivered to the Purchaser true and complete copies of the Articles or
Certificate of Incorporation and Bylaws or comparable instruments, in each
case, as in effect on the date hereof, of the Company and each of its
subsidiaries. Each of the Company and its subsidiaries is duly qualified or
licensed in all jurisdictions in which the conduct of its business requires
such qualification or license and the failure so to qualify or be licensed
would have a Material Adverse Effect.
4.5. No Violation of Company Instruments. Subject to
-----------------------------------
the approval of the respective Insurance Commissioners of the States of
Wisconsin, Indiana, California, Texas and Michigan and the expiration of the
waiting period under the HSR Act, the execution and delivery of this
Agreement do not, and the sale of the Shares pursuant to this Agreement will
not, violate any provision of the Articles of Incorporation or Bylaws of the
Company or its subsidiaries, or any provision of, or result in the
acceleration of any obligation under, any mortgage, note, lien, lease,
franchise, license, permit, agreement, instrument, order, arbitration award,
judgment or decree or in the termination of any license, franchise, lease,
permit or other instrument to which the Company or any of its subsidiaries
is a party or by which it is bound, except for such as to which requisite
waivers
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<PAGE>
or consents either have been (or will be prior to the Closing) obtained by
the Company or the obtaining of which has been waived by the Purchaser.
4.6. Financial Statements.
--------------------
(a) The Seller has heretofore delivered to the Purchaser a
copy of GAAP Financial Statements for the years ended December 31, 1993 and
1992, together with all exhibits and schedules thereto ("1993 GAAP Financial
Statements"). Such 1993 GAAP Financial Statements present fairly, in all
material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 1993 and 1992 and their consolidated
results of operations and cash flows for the years then ended in accordance
with generally accepted accounting principles applied consistently in all
material respects to the immediately preceding fiscal year except as set
forth in the notes thereto and in the auditor's report thereon.
(b) The Seller has heretofore delivered to the Purchaser a
copy of the Annual Statement of each Insurance Subsidiary filed for the year
ended December 31, 1992 ("1992 Annual Statements") and for the year ended
December 31, 1993 (the "1993 Annual Statements"). Each such 1992 Annual
Statement was prepared in accordance with statutory accounting principles
and presents fairly, in all material respects, the statutory financial
condition of such Insurance Subsidiary as of December 31, 1992, and the
statutory results of the operations of such Insurance Subsidiary for the
year then ended. Each such 1993 Annual
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<PAGE>
Statement was prepared in accordance with Statutory Accounting Principles
and presents fairly, in all material respects, the statutory financial
condition of such Insurance Subsidiary as of December 31, 1993, and the
statutory results of the operations of such Insurance Subsidiary for the
year then ended.
(c) The Seller has heretofore delivered to the Purchaser a
copy of the consolidated (combined) annual convention statement of the
Company and the Insurance Subsidiaries filed with the Insurance Department
of the State of Wisconsin, including all notes, schedules and exhibits
thereto, for each of the years ended December 31, 1992 and 1993 (the "1992
Consolidated Annual Statement" and "1993 Consolidated Annual Statement,"
respectively). The 1992 Consolidated Annual Statement was prepared in
accordance with statutory accounting principles. The 1993 Consolidated
Annual Statement was prepared in accordance with Statutory Accounting
Principles. Each of such 1992 Consolidated Annual Statement and 1993
Consolidated Annual Statement presents fairly, in all material respects, the
consolidated (combined) statutory financial condition of the Company and the
Insurance Subsidiaries as of December 31, 1992 and 1993, respectively, and
the consolidated (combined) statutory results of the operations of the
Company and the Insurance Subsidiaries for the year then ended.
4.7. Absence of Undisclosed Liabilities. Except as
----------------------------------
set forth in Schedule 4.7 or to the extent reflected or reserved against in
the 1993 GAAP Financial Statements, the Company and
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<PAGE>
its subsidiaries, as of the date of the balance sheet contained in the 1993
GAAP Financial Statements, had no liabilities of any nature, whether
accrued, absolute or contingent, including, without limitation, liabilities
for Taxes, which were required to be disclosed or provided for under
generally accepted accounting principles or which would have a Material
Adverse Effect. Except as set forth in Schedule 4.7, since the date of the
balance sheet contained in the 1993 GAAP Financial Statements, neither the
Company nor any of its subsidiaries has incurred or become subject to any
material obligations or liabilities of any nature, whether accrued,
absolute, contingent or otherwise other than obligations and liabilities
incurred in the normal and ordinary course of business consistent with past
practices. The Seller represents that the total amount paid or to be paid
by the Company or its subsidiaries, directly or indirectly (whether as
dividends to its parent or otherwise), since October 1, 1993 with respect to
any debt incurred in connection with the acquisition of Statesman does not
exceed $3.5 million and such debt has been paid in full.
4.8. Assets.
------
(a) Investments. The Company and its subsidiaries have
-----------
good and marketable title to all of their investments, including all bonds,
stocks and other securities in their investment portfolios, all as reflected
in the 1993 Annual Statements delivered to the Purchaser prior to the date
of this Agreement, free and clear of all Liens and Encumbrances (other than
Permitted Liens), except such as are reflected in such 1993 Annual
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<PAGE>
Statements, and except for restrictions in respect of deposits with state
regulatory authorities. Investments required to be reflected at market
value pursuant to GAAP are shown in the GAAP Financial Statements and the
GAAP Quarterly Statements on the basis of their respective market values.
(b) Owned Real Property.
--------------------
(i) Schedule 4.8(b)(i) hereto contains a true, correct
and complete list of all Owned Real Property.
(ii) The Company or its subsidiary is the holder of
good, indefeasible and marketable fee simple title to its Owned Real
Property free and clear of all Liens or Encumbrances except for Permitted
Liens.
(iii) There are no leases, subleases, tenancies,
licenses or other occupancy rights affecting any portion of the Owned Real
Property except as set forth in Schedule 4.8(b)(iii), true and correct
copies of which have been delivered or made available to the Purchaser.
(iv) The use and occupancy of the Owned Real Property
is in compliance with all applicable laws, regulations, statutes,
ordinances, judgments, decrees or orders including without limitation, those
governing zoning, subdivision, land development, erosion and drainage
control, sewage collection and disposal, use, occupancy, building, fire,
safety and environmental, except where the failure to be so in compliance
would not reasonably be expected to have a material adverse impact on the
use, occupancy or operation of such Owned Real Property. Except
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<PAGE>
as set forth in Schedule 4.8(b)(iv), the Seller, the Company, NNCC and
Statesman have received no notice from any governmental entity advising of a
violation of any applicable building code, environmental, zoning,
subdivision, land development or land use laws, regulations or ordinances or
any other applicable local, state or Federal laws, regulations or ordinances
affecting the Owned Real Property, which violation would reasonably be
expected to have a material adverse impact on the use, occupancy or
operation of such Owned Real Property.
(v) The Seller, the Company, NNCC and Statesman have no knowledge
of any environmental, zoning, land use regulation or other legal proceedings
which have been instituted and which would reasonably be expected to have a
material adverse impact on the present use, occupancy or operation of such
Owned Real Property.
(vi) The Seller, the Company, NNCC and Statesman have no
knowledge of and have not received any notice of any pending or contemplated
condemnation proceedings affecting the Owned Real Property, or any part
thereof.
(vii) The Seller, the Company, NNCC and Statesman have no
knowledge of and have not received any notice of any existing or proposed
assessments for public improvements imposed or to be imposed upon the Owned
Real Property.
(viii) The Seller has heretofore delivered or made available to
the Purchaser true, correct and complete copies of all material permits,
approvals, licenses and certificates
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<PAGE>
which are required for the current development, use and occupancy of the
Owned Real Property by the Company and its subsidiaries and are in the
possession of the Company. The Seller has delivered or made available to
the Purchaser true and complete copies of all surveys, deeds, title reports,
mortgages, recorded documents with respect to Permitted Liens, maps, plans
and blueprints of the Owned Real Property and the improvements thereon or
relating to the proposed development of the Owned Real Property in the
possession of the Company.
(ix) Schedule 4.8(b)(ix) hereto contains a list of all
material service, maintenance and construction contracts relating to the
Owned Real Property, true and correct copies of which have been made
available to the Purchaser by the Seller.
(x) There are no outstanding agreements of sale with third
parties to purchase any portion of the Owned Real Property and no person has
an option to purchase any portion of the Owned Real Property.
(xi) Except as set forth in Schedule 4.8(b)(xi), the Seller,
the Company, NNCC and Statesman do not use, treat, store or dispose of, and
have not permitted any other party to use, treat, store or dispose of,
whether temporarily or permanently, any Hazardous Materials (as defined
below) at, on or beneath the Owned Real Property in violation of any
Federal, state or local law, regulation or ordinance. Except as set forth
in Schedule 4.8(b)(xi), the Seller, the Company, NNCC and
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Statesman have no knowledge of the presence, use, treatment, storage,
release or disposal of any Hazardous Materials at, on or beneath the Owned
Real Property which has created or might reasonably be expected to create
any liability of owners or occupants of the Owned Real Property under any
Federal, state or local law or regulation or which would require remediation
or reporting to a governmental agency, in either case which would reasonably
be expected to have a material adverse impact on the use, occupancy or
operation of such Owned Real Property. For the purpose of this Agreement,
"Hazardous Materials" shall include, but not be limited to, substances
defined as "extremely hazardous substances", "hazardous substances",
"hazardous materials", "hazardous waste" or "toxic substances" in the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. Section 6901, et seq.; the Emergency Planning
and Community Right-To-Know Act, 42 U.S.C. Sections 11001-11050; the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; in
similar statutes promulgated by the states in which the Property is located;
and in the regulations adopted and publications promulgated pursuant to such
laws. Except as noted in the Underground Tank Closure Program Final Report
issued by ATEC Associates, Inc. (ATEC Project No. 21-04295), Final Account
of Asbestos Abatement issued by SEAR Corporation (SEAR Project No. 91-0316),
Phase I Environmental Site Assessment issued by ATEC Associates, Inc. (ATEC
Project No. 21-07235), Asbestos
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<PAGE>
Investigation Report issued by ATEC Environmental Consultants (ATEC Project
No. 21-09151) and Asbestos Abatement Monitoring and Air Sampling Report
issued by ATEC Environmental Consultants (ATEC Project No. 21-19160), to the
knowledge of the Seller, the Company, NNCC and Statesman, no asbestos or
PCBs are contained in or stored on the Owned Real Property and there are no
storage tanks for petroleum or any other Hazardous Materials located in, on
or under the Owned Real Property.
(c) Leased Real Property.
--------------------
(i) Schedule 1.20 hereto contains a true and correct list of
all Leased Real Property. True, correct and complete copies of all material
leases relating to such Leased Real Property (the "Leases") have been
delivered or made available to the Purchaser.
(ii) The Company and its subsidiaries are in compliance with
the material terms and provisions of the Leases and neither the Seller nor
the Company has received any notice of any default under any Lease.
(iii) Except as set forth in Schedule 4.8(c)(iii), the Company
and its subsidiaries have not entered into any subleases of the Leased Real
Property or granted any licenses or occupancy rights with respect to the
Leased Real Property.
(iv) Schedule 4.8(c)(iv) hereto contains a true, correct and
complete list of all security deposits in excess of $5,000 held by the
lessors under the Leases.
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<PAGE>
(v) The Company and its subsidiaries have not granted any
Liens or Encumbrances (other than Permitted Liens) on the Leased Real
Property, including without limitation, leasehold mortgages of the Leased
Real Property.
(vi) The use and occupancy of the Leased Real Property is in
compliance, in all material respects, with all applicable laws, regulations,
statutes, ordinances, judgments, decrees or orders including without
limitation, those governing zoning, subdivision, land development, erosion
and drainage control, sewage collection and disposal, use, occupancy,
building, fire, safety and environmental matters. Except as set forth in
Schedule 4.8(c)(vi), the Seller, the Company and its subsidiaries have not
received any notice from any governmental entity advising of a violation of
any applicable building code, environmental, zoning, subdivision, land
development or land use laws, regulations or ordinances or any other
applicable local, state or Federal laws, regulations or ordinances affecting
the Leased Real Property which violation would reasonably be expected to
have a material adverse impact on the use, occupancy or operation of such
Leased Real Property.
(vii) The Seller, the Company and its subsidiaries have no
knowledge or have not received any notice of any existing or proposed
assessments for public improvements imposed or to be imposed upon the Leased
Real Property.
(viii) The Seller has heretofore delivered or made available
to the Purchaser true, correct and complete copies
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<PAGE>
of all material permits, approvals, licenses and certificates which are
required for the present use and occupancy of the Leased Real Property to
the extent that such are in the possession of the Seller, the Company or any
of its subsidiaries.
(ix) Schedule 4.8(c)(ix) hereto contains a list of all
material service, maintenance and construction contracts relating to the
Leased Real Property, true and correct copies of which have been delivered
or made available to the Purchaser by the Seller to the extent that such are
in the possession of the Seller, the Company or any of its subsidiaries.
(x) Except as set forth in Schedule 4.8(c)(x), the Seller, the
Company and its subsidiaries do not use, treat, store or dispose of, or have
not permitted any other party to use, treat, store or dispose of, whether
temporarily or permanently, any Hazardous Materials at, on or beneath the
Leased Real Property in violation of any Federal, state or local law,
regulation or ordinance. Except as set forth in Schedule 4.8(c)(x), the
Seller, the Company and its subsidiaries have no knowledge of the presence,
use, treatment, storage, release or disposal of any Hazardous Materials at,
on or beneath the Leased Real Property which has created or might reasonably
be expected to create any liability of owners or occupants of the Leased
Real Property under any Federal, state or local law or regulation or which
would require remediation or reporting to a governmental agency in either
case which would reasonably be expected to have a material adverse impact on
the use, occupancy or operation of
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<PAGE>
such Leased Real Property. Except as set forth in Schedule 4.8(c)(x), to
the knowledge of the Seller, the Company and its subsidiaries, no asbestos
or PCBs are contained in or stored on the Leased Real Property and there are
no storage tanks for petroleum or any other Hazardous Materials located in,
on or under the Leased Real Property.
(d) Other Property. Each of the Company and its
--------------
subsidiaries has good and valid title to all material personal property
reflected as owned by such Person in the 1993 Consolidated Annual Statements
and that acquired in the normal and ordinary course of business since
December 31, 1993, except for property disposed of in the normal and
ordinary course of business since December 31, 1993, free and clear of all
Liens or Encumbrances except for (i) Liens or Encumbrances listed on
Schedule 4.8(d) or (ii) Permitted Liens. Schedule 4.8(d)(i) contains a
schedule of all equipment, vehicles and other tangible personal property of
the Company and its subsidiaries having an individual value of $10,000 or
more. The Company and its subsidiaries do not have any leasehold or other
such interest in any material tangible personal property which require
annual payments in excess of $10,000 in any year except as reflected in
Schedule 4.8(d)(i).
(e) Intangible Property. The Company owns or
-------------------
exclusively holds all rights to, free and clear of all liens, claims or
restrictions, the Marks listed on Schedule 4.8(e). The Company's
subsidiaries do not own or have rights to any Marks.
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<PAGE>
The Company has not received any notice with respect to any alleged
infringement or unlawful use of any trademark, service mark, trade name,
copyright or other intangible property right owned or alleged to be owned by
others.
4.9. Events Since December 31, 1993. Except as
------------------------------
required or permitted by this Agreement or disclosed in the 1993
Consolidated Annual Statement or in Schedule 4.9, since December 31, 1993
there has not been:
(a) any change in the business and accounting policies or
practices of the Company or its subsidiaries, including, without limitation,
underwriting, the calculation and establishment of reserves and other
valuation methods, investment or claims adjustment policies and practices or
change in any activity which (i) has had the effect of accelerating the
recording and billing of premiums or accounts receivable or retarding the
payment of expenses in connection with any accounts or business of the
Company and its subsidiaries or (ii) has had the effect of altering,
modifying or changing the historic financial or accounting practices or
policies of the Company and its subsidiaries;
(b) any damage, destruction or loss (whether or not covered
by insurance) which has had a Material Adverse Effect;
(c) any direct or indirect redemption or other acquisition by
the Company or any of its subsidiaries of any shares of capital stock of the
Company or its subsidiaries of any
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<PAGE>
class, or any declaration, setting aside or payment of any dividend or other
distribution in respect of any class of capital stock of the Company or its
subsidiaries.
(d) any bonus, stay-put, employment, termination,
consultation, incentive or deferred compensation agreement between the
Company or its subsidiaries and any of its Affiliates, directors, officers
or other employees or consultants of the Company or its subsidiaries;
(e) any indebtedness incurred by the Company or any of its
subsidiaries for borrowed money or any commitment to borrow money entered
into or any guarantee given by the Company or any of its subsidiaries;
(f) any amendments to the articles of incorporation, bylaws
or other charter or organizational document of the Company or any of its
subsidiaries, including any merger with or into, or consolidation with any
Person;
(g) any change in the business, operations or financial
condition of the Company or its subsidiaries which has had a Material
Adverse Effect;
(h) any sale, lease, abandonment or other disposition by the
Company or any subsidiary of any material interest in property, other than
in the ordinary course of business;
(i) any general increase in salaries payable to employees,
any change in the employment terms or conditions or terminations of
executive or management employees, or any increase in the compensation
payable or to become payable by the
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<PAGE>
Company or any of its subsidiaries to any officer, or other managing
employee (other than under the terms of existing employment agreements);
(j) the creation of any Liens or Encumbrances (other than
Permitted Liens) in all or any material portion of the assets, properties or
rights of the Company or its subsidiaries;
(k) any single capital expenditure in excess of $25,000 made
by the Company and its subsidiaries;
(l) any amendment, modification, alteration or termination of
any contract, agreement or license to which the Company or a subsidiary is a
party, which would result in or have a Material Adverse Effect; or
(m) any waiver of any rights of material value or any
cancellation of any material claims, debts or accounts receivable, other
than in the ordinary course of business, owing to the Company and its
subsidiaries.
4.10. Insurance Claims and Assessments. Except
--------------------------------
as set forth in Schedule 4.10 (which amounts have been accrued as a
liability of the Company), no claim or assessment has been received by the
Company or any Insurance Subsidiary from (i) any state insurance guaranty
association in connection with that association's insolvency or other
similar fund or (ii) any coastal reinsurance pool, fair plan, assigned risk
plan or other residual market mechanisms, which claim or assessment is
outstanding and remains unrecorded.
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<PAGE>
4.11. Judgments, Decrees and Orders in Restraint
------------------------------------------
of Business. Except as set forth in Schedule 4.11, the Company
- -----------
and its subsidiaries are not a party to or subject to any judgment or decree
or order entered in any suit, arbitration or proceeding brought by a
governmental agency or, to the knowledge of the Seller or the Company, by
any other Person enjoining or restricting the Company or its subsidiaries in
respect of any (a) business practice, (b) the acquisition of any property or
(c) the conduct of business in any area, including any regulatory
restrictions on writing insurance.
4.12. Litigation and Proceedings. Except as set
--------------------------
forth in Schedule 4.12, there are no actions, suits, arbitrations,
investigations or legal, administrative or other proceedings pending or, to
the knowledge of the Seller or the Company, threatened against the Company
or any of its subsidiaries, at law or in equity or before or by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or before any arbitrator of any kind,
other than claims for benefits and other amounts payable under, and within
the limits of, policies of insurance issued by the Company and its
subsidiaries and other than interest, court costs and attorney fees in
connection therewith. There is no material default on the part of the
Company or any of its subsidiaries with respect to any judgment, order,
writ, injunction, decree, award, rule or regulation of any court,
arbitration, governmental department, commission, bureau, board, agency or
instrumentality.
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<PAGE>
4.13. Permits, Licenses and Franchises. Except as
--------------------------------
set forth in Schedule 4.13, the Company and each of its subsidiaries has
all permits, licenses, franchises and other authorizations necessary to, and
has complied in all material respects with all laws applicable to, the
conduct of its business and operations in the manner and in the areas in
which such business and operations are presently being conducted, and all
such permits, licenses, franchises and authorizations are in full force and
effect and, to the knowledge of the Seller or the Company, valid. Each
Insurance Subsidiary has been duly authorized by the relevant state
insurance regulatory authorities to write the insurance that it is currently
writing in the respective states in which it does business. The Company and
its subsidiaries have not engaged in any activity which would cause
revocation or suspension of any such permit, license, franchise or
authorization, and no action or proceeding looking to or contemplating the
revocation or suspension of any thereof is pending or, to the knowledge of
the Seller or the Company, threatened.
4.14. Relationships With Affiliates, Officers and
--------------------------------------------
Directors. Except as disclosed in Schedule 4.14 or as expressly
- ---------
provided for or permitted by this Agreement, Armco and the Seller have not,
and no Affiliate (other than the Company and its subsidiaries), officer or
director of Armco, the Seller or the Company has, entered into any contract
or agreement with the Company or any of its subsidiaries in excess of
$10,000, which will be binding on the Company or any of its subsidiaries
follow-
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<PAGE>
ing the Closing, except for contracts or agreements that are cancelable at
will by the Company or its subsidiary without penalty.
4.15. Labor Disputes; Compliance. No general
--------------------------
work stoppage or other similar labor dispute in respect of the Company or
any of its subsidiaries is pending or, to the knowledge of the Seller or the
Company, threatened and no application for certification of a collective
bargaining agent is pending or, to the knowledge of the Seller or the
Company, threatened. No employees are covered by a collective bargaining
agreement with the Company or its subsidiaries. The Company and its
subsidiaries have complied in all material respects with all laws applicable
to it relating to the employment and safety of labor, including provisions
relating to wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, and all applicable occupational safety
and health acts, laws and regulations. Other than as reflected in the
Financial Statements or as set forth in Schedule 4.15, the Company and its
subsidiaries are not liable for any arrears in wages or any taxes or
penalties for failure to comply with any of the foregoing.
4.16. Other Sale Arrangement. Armco, the Seller
----------------------
and the Company are not obligated or liable, contingently or otherwise, for
or in respect of negotiations, letters of intent or commitments for the sale
of all, substantially all or a material portion of the assets of the Company
and its subsidiaries or the
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<PAGE>
sale of the Shares of the Company to any Person other than the Purchaser.
4.17. Employee Benefit Plans.
----------------------
(a) (1) Other than the plans and programs listed and
described in Schedule 4.17(a) (hereinafter referred to as the "Company
Employee Benefit Plans"), (A) the Company and its subsidiaries do not
sponsor or maintain and are not under any present or future obligation to
contribute to any employee benefit plan within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("Employee Benefit Plan"), (B) no employee or former employee of the Company
or its subsidiaries currently participates in any Employee Benefit Plan
sponsored or maintained by or to which contributions are, or in the future
are to be, made by the Company or its subsidiaries, the Seller or any
Affiliate of the Seller, and (C) there are no other deferred compensation,
bonus, stock option, stock purchase and other employee benefit or fringe
benefit plans or arrangements of any kind or nature sponsored, maintained or
contributed to by the Company or any of its subsidiaries or which the
Company or any subsidiary is under a present or future obligation to
sponsor, maintain or contribute to or in which any employee of the Company
or any subsidiary is a participant.
(2) Neither the Company nor any of its subsidiaries is or has
been a sponsor of, a contributor to, or under an obligation to contribute to
any multiemployer plan
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<PAGE>
within the meaning of Section 3(37) of ERISA. Except as set forth in
Schedule 4.17(a)(2), no event or events have occurred that have resulted in
or will result in partial or complete withdrawal by the Seller or any of its
Affiliates from a multiemployer plan.
(b) (1) To the extent applicable to a Company Employee Benefit
Plan, or other benefit plan maintained by or to which contributions have
been made by the Seller or its Affiliates ("Affiliate Plan"), there does not
exist any accumulated funding deficiency or underpayment of a required
installment within the meaning of Section 412 of the Code or Section 302 of
ERISA; nor has there been issued a waiver or variance of the minimum funding
standards imposed by the Code with respect to any such plan; nor has any
lien been created under Section 302(f) of ERISA or security been required
under Section 307 of ERISA; nor are there any excise taxes due or hereafter
to become due under Section 4971 of the Code with respect to the funding of
any such plan for any plan year or other fiscal period ending on or before
the Closing Date.
(2) All obligations to contribute or pay any expenses with
respect to any Company Employee Benefit Plan for any plan year or other
fiscal period ending on or before the Closing Date have been paid or
accrued.
(3) Each Company Employee Benefit Plan that is intended to be
qualified under Section 401(a) or 403(a) of the Code has received a
favorable determination letter from the
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<PAGE>
Internal Revenue Service to that effect after 1985 and will remain so
qualified from and after the date of such determination letter if amended on
or before December 31, 1994 to include all required provisions.
(4) Each Company Employee Benefit Plan and related trust
agreement or annuity contract (or any other funding instrument) complies
currently, and has complied in the past on a timely basis, in all material
respects, with all applicable Federal, state, local and/or other
governmental laws and ordinances, orders, rules and regulations including
the requirements of ERISA and the Code, and has been administered in
accordance with its terms. Neither the Company nor any Affiliate has
received any written claim or notice that any such plan is not in
compliance.
(5) The Company and each other employer which is a sponsor of
or makes contributions to a Company Employee Benefit Plan (or has been a
sponsor of or has made contributions to such plan) is in compliance in all
material respects with the requirements of all applicable Federal, state,
local and/or other governmental laws and ordinances, orders, rules and
regulations applicable to such plan including the Code and ERISA.
(6) Except as set forth in Schedule 4.17(b)(6), with respect
to each Company Employee Benefit Plan and Affiliate Plan subject to Title IV
of ERISA, (A) there has not occurred any "reportable event" within the
meaning of Section
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<PAGE>
4043(b) of ERISA, or the regulations thereunder, with respect to which the
30-day notice requirement has not been waived under applicable regulations,
and (B) the PBGC has not instituted or threatened a proceeding to terminate
same. All PBGC premiums due on or before the Closing from the Company or
any of its subsidiaries have been paid in full, including late fees,
interest and penalties, if and to the extent applicable.
(7) There have been no amendments to any defined benefit
pension plan (as defined in Section 414(j) of the Code) listed in Schedule
4.17(b)(7) hereto which would increase the total present value of vested and
nonvested benefits thereunder since the valuation date set forth in the most
recent Schedule B relating thereto that has been filed with the Internal
Revenue Service, a copy of which has been furnished to the Purchaser (the
"Schedule B"). There has been no material adverse change in the assets,
liabilities or financial position of any such plan since the valuation date
set forth in the Schedule B.
(8) Neither the Company nor any of its subsidiaries has any
liability under Section 4062, 4063 or 4064 of ERISA.
(9) Except as set forth in the Medical Plan Summary Plan
Description dated 6-89, with Summaries of Material Modifications dated 11-
89, 1-91, 6-92, 3-93 and 4-93, the Dental Plan Summary Plan Description
dated 6-89, with Summaries of Material Modifications dated 11-89, 12-90, 3-
93 and 4-93, and the Northwestern National Insurance Group Executive Life
Insurance
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<PAGE>
Plan, a true and complete copy of each of which has been delivered to the
Purchaser, the Company and its subsidiaries have no obligation and have made
no promise or undertaking, written or oral, to pay any part of the cost of
the medical, dental, death or other benefits for their employees after they
retire.
4.18. Questionable Payments. To the knowledge of
---------------------
the Seller or the Company, neither the Company nor any of its subsidiaries,
directors, officers, agents, employees or other persons acting on behalf of
the Company or any subsidiary has used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, or made any direct or indirect unlawful payments to
government officials or employees from corporate funds, or established or
maintained any unlawful funds.
4.19. Consents. Except as set forth in Schedule
--------
4.19, no consent, authorization, order or approval of, or filing or
registration with, any governmental commission, board or other regulatory
body will be required for or in connection with the execution and delivery
of this Agreement by the Seller or the consummation by the Seller of the
transaction contemplated hereby, other than (i) filings under the insurance
holding company statutes, regulations and practices in states and
jurisdictions in which the Insurance Subsidiaries are admitted to write
insurance; (ii) notifications and filings under the HSR Act, and (iii)
filings made with governmental agencies such as
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<PAGE>
the Securities and Exchange Commission as part of the ongoing public
disclosure obligations of Armco or the Seller. Except as set forth in
Schedule 4.19(a), no consent of any other party to a mortgage, note, lease,
franchise, agreement, license or permit of the Company or any of its
subsidiaries will be required for or in connection with the execution and
delivery of this Agreement by the Seller or the consummation by the Seller
of the transactions contemplated hereby other than the release of the
Existing Pledge.
4.20. Contracts and Binding Commitments.
--------------------------------
(a) Schedule 4.20 contains a list of all of the following
contracts, arrangements or agreements (true and complete copies or, if none
exist, written descriptions or identification of which have been made
available to the Purchaser) to which the Company or any subsidiary is a
party or by which any of the assets or properties of the Company or any
subsidiary are bound and which are material to the operations of the Company
and its subsidiaries (such listed contracts herein referred to as the
"Contracts"), as such Contracts may have been amended, modified or
supplemented to the date hereof:
(i) all employment, bonus, incentive or deferred
compensation, termination, stayput, agency, brokerage, consultation or
representation Contracts or similarly binding arrangements of any type
(including without limitation loans or advances) (where the potential
liability of the Company or its subsidiaries exceeds $10,000) with any
current or former em-
-49-
<PAGE>
ployee, managing general agent, agent (other than insurance agents),
consultant, representative, officer or director of the Company or its
subsidiaries, and to the extent not set forth in the Contract, the name,
position and rate of compensation of each such Person and the expiration
date of each such Contract, as well as all leave, layoff or severance
practices and policies of the Company and its subsidiaries;
(ii) all Contracts or similarly binding arrangements
with any Person containing any provision or covenant limiting the ability of
the Company or any of its subsidiaries to engage in any line of business or
compete with any Person or limiting the ability of any Person to compete
with the Company and its subsidiaries following the Closing;
(iii) all partnership, joint venture or profit sharing
Contracts with any Person excluding contingent commission or other similar
arrangements with agents and brokers in the ordinary course of business;
(iv) all Contracts representing obligations for
borrowed money or the direct or indirect guarantee or securing of any
obligation for, or Contract to service the repayment of, borrowed money or
any other liability in respect of indebtedness for borrowed money of any
other Person, including without limitation, any Contract relating to (A) the
maintenance of compensating balances that are not terminable by the Company
without penalty upon not more than 30 days' notice, (B) any lines of credit,
(C) the payment for property, products or services
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<PAGE>
which are not conveyed, delivered or rendered, (D) any obligation to keep-
well, make-whole or maintain working capital or earnings levels or perform
similar requirements or (E) the guarantee of any lease or other similar
periodic payments to be made by any other Person other than any such
Contract for an amount less than $50,000;
(v) all Contracts relating to the future acquisition or
disposition of any investment in any Person or of any interest in any
business enterprise (other than the disposition or acquisition of portfolio
securities in the ordinary course of business) and all Contracts requiring
the Company or any subsidiary to purchase any security having a value
individually, or in the aggregate of $10,000;
(vi) all reinsurance pools pursuant to which the
Company or any subsidiary has assumed reinsurance risks, and all assigned
risk plans, fair plans, workers compensation pools or other residual
insurance market mechanism in which the Company or any subsidiary is
participating;
(vii) each standard form of insurance agent agreement;
(viii) all Contracts relating to computer software
licensing or data processing services representing nonterminable future
liabilities in excess of $10,000;
(ix) all Contracts between the Company or any of its
subsidiaries and Armco, the Seller or their Affiliates;
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<PAGE>
(x) all Contracts relating to licenses of trademarks,
trade names, service marks or other similar property rights.
(xi) all other contracts material to the operations of
the business of the Company and its subsidiaries; and
(xii) any power of attorney which is presently
effective and outstanding other than the powers of attorney which exist as a
matter of law or which have been granted pursuant to requirements of
applicable state insurance regulatory authorities.
(b) The Company and its subsidiaries are not in material
breach of, or default under any of the Contracts and, to the knowledge of
the Seller and the Company, no other party to any Contract is claiming that
the Company or its subsidiaries are in material breach or default. The sale
of the Shares pursuant to this Agreement will not result in the termination
of any of the Contracts under the express terms thereof, will not require
further consents of any party thereto (other than those that will have been
obtained on or before the Closing Date) and will not bring into operation
any other provision thereof nor result in a breach or default thereunder.
4.21. Threats of Cancellation. Except as disclosed
------------------------
in Schedule 4.21, since January 1, 1993 through the date hereof, no
policyholder, or Persons writing or selling insurance business, which in
either case individually or in the aggregate accounted
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<PAGE>
for five percent or more of the premium income of the Company and its
Insurance Subsidiaries for the year ended December 31, 1993 has terminated
or, to the knowledge the Seller or the Company, threatened to terminate its
relationship with the Company or its Insurance Subsidiaries.
4.22. Reinsurance. Schedule 4.22 lists the
-----------
reinsurance treaties, agreements or arrangements to which the Company or any
Insurance Subsidiary is a party. There exists no financial reinsurance
which has the effect of increasing the consolidated (combined) statutory
capital and surplus of the Company and its subsidiaries. Receivables due to
or payable by the Company or its Insurance Subsidiaries pursuant to such
reinsurance treaties, agreements and arrangements have been properly
recorded in the books and records of the Company and its Insurance
Subsidiaries and reflected in 1993 Annual Statements of the appropriate
Insurance Subsidiaries and the GAAP Financial Statements of the Company. No
notice of intended cancellation has been received by the Company or its
Insurance Subsidiaries from any reinsurer and no reinsurer has a right to
retroactively experience rate or otherwise retroactively require additional
premiums except as disclosed in Schedule 4.22(a).
4.23. Operations Insurance.
--------------------
(a) Schedule 4.23 contains a true and complete list, as
of the date hereof, of all material liability, property, workers
compensation, directors and officers liability, and other
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similar insurance contracts that insure the business, operations or affairs
of the Company and its subsidiaries and that (i) have been issued to the
Company or its subsidiaries (including without limitation the names and
addresses of the insurers, the expiration dates thereof and the annual
premiums and payment terms thereof) or (ii) are held by Armco, the Seller or
by any Affiliate of Armco or the Seller for the benefit of the Company or
its subsidiaries and that will not continue to be applicable to the Company
or its subsidiaries following the Closing. All such insurance referred to
in (i) above is in full force and effect as of the Closing Date.
(b) The Company and its subsidiaries have not failed to
give any material notice or present any material claim under any insurance
policy or surety bond in due and timely fashion. The Seller has delivered
or made available to the Purchaser the Company's most recently available
information on: (i) accidents, casualties or damages occurring on or to the
properties or assets of the Company and its subsidiaries; and (ii) claims by
the Company and its subsidiaries for damages, reimbursement of losses,
contribution or indemnification under any insurance policy and settlements
or negotiations or settlements relating thereto. The Seller has provided or
made available to the Purchaser all workers' compensation ratings and
unemployment insurance ratings and contributions of the Company and its
subsidiaries with respect to the employees.
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<PAGE>
4.24. Taxes.
-----
(a) Except as set forth in Schedule 4.24, all Tax
Returns, other than those which are not material to the Company and its
subsidiaries, required to be filed in respect of the Company and its
subsidiaries either individually or on a consolidated basis that are due
(after giving effect to any extensions) on or prior to the Closing Date have
been (or will have been by the Closing Date) filed in accordance with all
applicable laws. All such Tax Returns set forth with reasonable accuracy all
material items required to be set forth therein. The Company and its
subsidiaries have (or will have by the Closing Date) paid, accrued or
otherwise adequately reserved liabilities for the payment of all Taxes,
whether or not yet due and payable and whether or not disputed, in respect
of the periods covered by Tax Returns which are due on or before the Closing
Date, and have (or will have by the Closing Date) accrued or otherwise
adequately reserved liabilities for the payment of all Taxes with respect to
periods up to and including the Closing Date, for which Tax Returns have not
yet been filed. As of the Closing Date, the Company and its subsidiaries
will not have any material liability for any Taxes in excess of the amounts
paid or accrued or the reserves established including any material Tax
liability resulting from the Company and its subsidiaries being a member of
or leaving the Consolidated Group.
(b) The Company and its subsidiaries and the Consolidated
Group have made all withholdings of Taxes required
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to be made under all applicable Federal, state, local and foreign tax laws
and regulations, and such withholdings have either been paid to the
respective governmental agencies or set aside in accounts for such purpose
or accrued and entered upon the books of the Company and its subsidiaries.
(c) There have been delivered to the Purchaser true and
complete copies of all those portions of income and franchise Tax Returns
for taxable years 1990, 1991 and 1992 (including the relevant portions of
all consolidated, combined and unitary tax returns and reports) with respect
to the Company and its subsidiaries. The 1993 Tax Returns (or relevant
portions thereof) will be delivered to the Purchaser after they are filed.
(d) No deficiencies, adjustments or changes in assessments
for any Taxes in respect of the Company or its subsidiaries have been
assessed or, to the knowledge of Armco or the Seller, proposed or asserted
against the Company, its subsidiaries or the Consolidated Group. The
statute of limitations for assessment of Federal income tax against the
Consolidated Group has expired for all taxable years ending on or before
December 31, 1988. Schedule 4.24(d) sets forth for each taxable year ending
after December 31, 1988 the current status of any examination being
conducted by the Internal Revenue Service or any other taxing authority
relating to the Company or the Consolidated Group. There are no
deficiencies in Federal income Tax outstanding against any member of the
Consolidated Group. Except as described on Schedule 4.24(d), there is no
action, suit, proceed-
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<PAGE>
ing, audit, investigation or claim pending, or to the knowledge of the
Seller, threatened in respect of any Taxes for which the Company and its
subsidiaries may become liable in its own right or as a member of the
Consolidated Group, or as a transferee of the assets of, or successor to,
any entity.
(e) Except as set forth in Schedule 4.24(e), neither the
Seller, the Company, nor any other member of the Consolidated Group has
executed or filed with the Internal Revenue Service or any other taxing
authority any agreement or other document extending the period of assessment
or collection of any Taxes for which the Company and its subsidiaries may be
liable either directly or as a member of the Consolidated Group.
(f) Except as set forth in Schedule 4.24(f), the Insurance
Subsidiaries qualify as insurance companies under the Code and neither
Armco, the Seller, the Company nor any Insurance Subsidiary has received any
notice or other communication relating to or affecting such qualification of
the Insurance Subsidiaries as insurance companies.
(g) Except as set forth in Schedule 4.24(g) which attaches
copies thereof, the Company and its subsidiaries are not a party to, is
bound by, or has any obligation under any tax sharing or similar agreement.
(h) The Company and its subsidiaries are members of an
affiliated group that is eligible to file a consolidated return with the
Seller and Armco for Federal income tax purposes. No other entity is or has
since the date set forth in Schedule
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4.24(h) been eligible to file a consolidated return with the Company and its
subsidiaries, and neither the Company nor its subsidiaries had filed or
consented to the filing of any Federal or state consolidated return with any
entity not a member of the existing Consolidated Group.
(i) The aggregate amount of consolidated net operating
losses within the meaning of Section 172 of the Code and Treas. Reg. Section
1.1502-21(f), of the Consolidated Group apportioned to the Company and its
subsidiaries for all tax years ending on or prior to December 31, 1992,
pursuant to Treas. Reg. Section 1.1502-79(a) is set forth in Schedule
4.24(i). Armco and the Seller, not later than September 30, 1994, shall
update Schedule 4.24(i) to show the amount of consolidated net operating
losses of the Consolidated Group apportioned to the Company and its
subsidiaries for the taxable year ended December 31, 1993, pursuant to
Treas. Reg. Section 1.1502-79(a). The apportioned net operating losses
shown on Schedule 4.24(i) for all taxable years ending on or before December
31, 1993 shall be referred to herein as the "Represented Operating Losses".
(j) Neither the Company nor any subsidiary is a partner in
any partnership.
(k) Except as set forth in Schedule 4.24(k), no adjustment
to taxable income by reason of a change of accounting method is required in
respect of any taxable year of the Company and its subsidiaries as to which
the applicable statute of limitations has not yet expired.
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<PAGE>
(l) None of Armco, the Seller, the Company or its
subsidiaries has filed a consent pursuant to Section 341(f) of the Code, or
agreed to have Section 341(f)(2) of the Code apply to any disposition of a
subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by
the Seller, the Company or its subsidiaries.
4.25. Accounts; Directors and Officers. Schedule
--------------------------------
4.25 sets forth a list of all accounts holding assets of the Company and its
subsidiaries together with the names and address of the applicable financial
institution or other depository, the account number and the names of all
persons authorized to draw thereon or who have access thereto and all safe
deposit boxes of the Company and its subsidiaries. Attached as Schedule
4.25(a) is a true and complete list, as of the date of this Agreement,
showing the names of all of the officers and directors of the Company and
its subsidiaries.
4.26. Compliance with Applicable Law. Except as
------------------------------
set forth in Schedule 4.26, the Company and its subsidiaries are presently
complying in all material respects, in respect of its business, with all
applicable laws (whether statutory or otherwise), rules, regulations,
orders, ordinances, judgments, decrees, orders, writs and injunctions of all
governmental authorities (Federal, state, local, foreign or otherwise) and
the Seller, the Company and its subsidiaries have not received notification
from any governmental authority of any asserted
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present or past failure to so comply which has not been resolved or
otherwise settled.
4.27. Conflict of Interest. To the knowledge of
--------------------
the Seller and the Company, no person who is a director or officer of the
Company or its subsidiaries nor any person who is a member of the immediate
family of such director or officer, (i) has any direct or indirect material
interest in any entity that does business with the Company or its
subsidiaries, or (ii) has any contractual relationship with the Company or
its subsidiaries other than as an employee (other than in the ordinary
course).
4.28. Broker's, Finder's or Similar Fees. Except for
----------------------------------
the fee payable by Armco and the Seller to The Chase Manhattan Bank, N.A.,
there are no brokerage commissions, finder's fees or similar fees or
commissions payable in connection with the transactions contemplated hereby
based on any agreement, arrangement or understanding with Armco or the
Seller, or any action taken by Armco or the Seller. The Purchaser, the
Company and its subsidiaries shall have no obligation or responsibility for
the payment of said fee.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
5. Representations and Warranties of the
-------------------------------------
Purchaser. The Purchaser represents and warrants to Armco and
- ---------
the Seller as follows:
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5.1. Due Incorporation and Authority. The
-------------------------------
Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Indiana, and has all requisite power
and authority to own, lease and operate its assets and business and to carry
on its business as now being and as heretofore conducted. The Purchaser has
all requisite corporate power and authority to execute and deliver this
Agreement and each other agreement required to be executed and delivered by
the Purchaser pursuant hereto, to perform its obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by the Purchaser of this
Agreement and each other agreement required to be executed and delivered by
the Purchaser pursuant hereto, and the consummation by the Purchaser of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no other corporate
proceedings on the part of the Purchaser are necessary to authorize the
execution, delivery and performance by the Purchaser of this Agreement and
each of the other agreements contemplated by this Agreement, or the
consummation of the transactions contemplated hereby and thereby. This
Agreement has been duly and validly executed and delivered by the Purchaser
and (assuming this Agreement is a valid and binding obligation of the Seller
and Armco) constitutes a valid and binding obligation of the Purchaser,
enforceable against it in accordance with its terms, except that (i) such
enforceability may be subject to
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bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium,
rehabilitation, liquidation, conservatorship, receivership or other similar
laws now or hereafter in effect relating to creditors' rights generally and
(ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
5.2. Consents. No consent, authorization, order
--------
or approval of, or filing or registration with, any governmental commission,
board or other regulatory body will be required for or in connection with
the execution and delivery of this Agreement by the Purchaser or the
consummation by the Purchaser of the transactions contemplated herein,
except for (i) filings under the insurance holding company statutes,
regulations and practices in states and jurisdictions in which the Insurance
Subsidiaries are admitted to write insurance; and (ii) notifications and
filings under the HSR Act.
5.3. No Breach. Except as set forth in
---------
Schedule 5.3 the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby in accordance with
the terms hereof will not (a) violate, conflict with or result in the breach
of any provision of the Articles of Incorporation or Bylaws of the
Purchaser; (b) (i) require any consent, approval or notice under, (ii)
violate, conflict with or result in the breach of any of the terms of, (iii)
result in a
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<PAGE>
material modification of the effect of, (iv) constitute a default under or
(v) give rise to any right of termination, cancellation or acceleration
under, any contract or other agreement to which the Purchaser is a party or
by or to which it or any of its assets may be bound or subject, the impact
of which, individually or in the aggregate, would be materially adverse to
the business, operations or financial condition of the Purchaser;
(c) violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory agency binding upon the Purchaser
or upon the securities, assets or business of the Purchaser, the violation
of which would have a material adverse effect on the business, operations or
financial condition of the Purchaser; or (d) to the knowledge of the
Purchaser, violate any statute, law, rule or regulation of any jurisdiction
or governmental or regulatory agency as relates to the Purchaser or to the
securities, assets or business of the Purchaser, which violation would have
a material adverse effect on the business, operations or financial condition
of the Purchaser.
5.4. Actions and Proceedings. To the knowledge of the
Purchaser, except as set forth in Schedule 5.4 and other than outstanding
orders, judgments, injunctions, awards or decrees of any court, governmental
or regulatory agency or arbitration tribunal relating to insurance claims
made in connection with policies of insurance underwritten or assumed (as in
the case of reinsurance) by the Purchaser in the ordinary course of
business, there are no outstanding orders, judgments, injunctions, awards
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or decrees of any court, governmental or regulatory agency or arbitration
tribunal against or involving the Purchaser or against or involving any of
its present directors, officers or employees in their capacities as such
that individually or in the aggregate, are likely to prevent the Purchaser
from consummating the transactions contemplated hereby in accordance with
the terms hereof, or could affect the validity or enforceability of this
Agreement. To the knowledge of the Purchaser, except as disclosed on
Schedule 5.4(a), there are no actions, suits or claims or legal,
administrative, regulatory or arbitration proceedings or investigations
pending or threatened against or involving the Purchaser or any of its
present directors or officers, in their capacities as such, or its assets
that, individually or in the aggregate, are likely to prevent the Purchaser
from consummating the transactions contemplated hereby in accordance with
the terms hereof, or could affect the validity or enforceability of this
Agreement.
5.5. Broker's, Finder's or Similar Fees. There
----------------------------------
are no brokerage commissions, finder's fees or similar fees or commissions
payable in connection with the transactions contemplated hereby based on any
agreement, arrangement or understanding with the Purchaser, or any action
taken by the Purchaser.
5.6. Purchase for Investment.
-----------------------
(a) Armco and the Seller have provided the Purchaser and its
financial advisors, legal counsel and independent
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auditors and actuaries with access to the books, records, facilities and
personnel of the Company and its subsidiaries in order for the Purchaser to
investigate the business, affairs and properties of the Company and its
subsidiaries to make an informed investment decision to enter into this
Agreement and to purchase the Shares. Such access and investigation shall
not derogate from or in any way affect the rights of Purchaser with respect
to a breach of the representations, warranties and covenants made by Armco
or the Seller to the Purchaser in this Agreement.
(b) None of Armco, the Seller or any agent or other party
acting on behalf of either thereof has made any representation or warranty
to the Purchaser with respect to the prospects of the Company or any of its
subsidiaries or their respective businesses or the markets in which any of
them operates.
(c) The Purchaser represents that it is acquiring the Shares
for its own account for investment and not with a view to the resale or
distribution and will not sell or transfer such Shares in violation of the
Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
ARTICLE VI.
CONDUCT PENDING CLOSING DATE
6.1. Operations in the Ordinary Course. Subsequent to
---------------------------------
the date of this Agreement and prior to the Closing Date and except as
herein provided, the Seller agrees that it shall cause the Company and its
subsidiaries to carry on its business
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<PAGE>
diligently and only in the ordinary course and in a normal manner consistent
with past practice. The Seller shall maintain the corporate existence and
powers of the Company and its subsidiaries and shall use its reasonable best
efforts, and shall cause the Company and its subsidiaries to use their
reasonable best efforts, to (i) preserve intact the business organization of
the Company and its subsidiaries; (ii) preserve the material relationships
of the Company and its subsidiaries with their agents, customers and others
having business relations with them (except insofar as such relationships
are terminated in the ordinary course of business); and (iii) maintain all
of the material properties of the Company and its subsidiaries in customary
repair, order and condition. Prior to and including the Closing Date and
except as otherwise provided in this Agreement, the Seller shall cause the
Company and its subsidiaries to maintain insurance coverages and their
books, accounts and records in the usual manner on a basis consistent with
prior years and to comply in all material respects with all laws, ordinances
and regulations of governmental authorities applicable to the Company and
its subsidiaries.
6.2. Restrictions. Except as permitted or
-----------
required by this Agreement, prior to the Closing Date and without the prior
written consent of the Purchaser, the Seller agrees that it shall not cause
(nor will it permit) the Company or any of its subsidiaries to:
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(a) change its business and accounting policies or
practices, including without limitation, underwriting, the calculation and
establishment of reserves and other valuation methods, and investment or
claims adjustment policies and practices;
(b) incur any indebtedness for borrowed money or any other
liability or obligation (absolute or contingent) other than in the ordinary
and usual course of business or grant any Liens or Encumbrances (other than
Permitted Liens) in any asset of the Company or its subsidiaries;
(c) grant or promise to grant to any of its officers,
directors, managerial personnel or other employees or agents, any new or
increased salary, commission, fee or other benefit or enter into any bonus,
stayput, employment, termination, consultation, incentive or deferred
compensation agreement with any of its employees, directors, officers,
consultants or other Affiliates;
(d) hire any new employees;
(e) appoint any new agents except in the ordinary course of
business;
(f) authorize aggregate capital expenditures in excess of
$250,000;
(g) authorize, issue or sell any security of the Company or
any of its subsidiaries, grant any option, warrant or any other right to
purchase or convert any obligation into any
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security of the Company or any of its subsidiaries except in accordance with
this Agreement;
(h) directly or indirectly redeem or acquire any shares of
capital stock of the Company or any of its subsidiaries or declare or pay
any dividend on, or make any other distribution in respect of any class of
capital stock of the Company or its subsidiaries;
(i) amend the articles of incorporation or bylaws of the
Company or its subsidiaries or enter into any contract to merge or
consolidate with any other Person, acquire all or substantially all of the
assets of any other Person, or sell or otherwise dispose of, or contract to
sell or otherwise dispose of, any material part of its assets;
(j) enter into any new leases for real property;
(k) enter into any contract which would be required to be
listed pursuant to Section 4.20 of this Agreement if such contract was in
effect on the date this Agreement was signed or enter into any other
material contract;
(l) forfeit, abandon, modify, waive, terminate or otherwise
change rights, duties or obligations under any material Contracts other than
in the ordinary course of business;
(m) enter into any transaction with Armco, the Seller or its
Affiliates; or
(n) make any investments in noninvestment grade securities,
equity securities or nonmarketable securities.
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<PAGE>
6.3. Related Matters. The Seller shall report the fact of
---------------
the resignation of any managerial or executive employee, or material agent
or consultant of the Company or its subsidiaries to the Purchaser, within
three Business Days of the Company or its subsidiaries receiving notice of
any such resignation.
6.4. Sale of Portfolio Securities. During the period
---------------------------
commencing with the date of this Agreement and ending on the Closing Date,
the Seller shall not cause or permit the Company or any of its subsidiaries
to sell securities from its portfolio except as may be required to generate
cash to satisfy obligations as they become due. The Seller agrees that it
and the Company will consult with the Purchaser concerning the investments
in securities by the Company and its subsidiaries pending the Closing. The
Seller agrees to cause the Company and its subsidiaries to sell securities
in their respective portfolios and reinvest the proceeds of such sales as
the Purchaser shall from time to time direct during the period of
approximately 30 days prior to the Closing Date. Such investments shall be
limited to investment grade securities. Gains or losses resulting from, and
any expenses of, the transactions consummated at the direction of the
Purchaser shall not be included in the calculation of the Closing Statutory
Surplus. Any sales and reinvestments pursuant to this Section shall comply
with applicable insurance company laws and regulations and shall be in
accordance with good industry practice.
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<PAGE>
6.5. Regulatory Filings. Each party shall duly make all
------------------
regulatory filings required to be made with respect to this Agreement and
the transactions contemplated hereby, including filings under the HSR Act,
and shall use its reasonable best efforts to obtain or assist to obtain all
approvals of regulatory authorities and any other approvals required to
carry out the transactions contemplated hereby. The Purchaser shall make
its Form A or other required filings with the insurance regulatory
authorities by September 30, 1994. The Seller shall promptly deliver to the
Purchaser copies of all insurance regulatory reports, available to the
Seller or its subsidiaries, that may be filed with respect to the Company or
any of the Insurance Subsidiaries with insurance regulatory authorities.
6.6. Interim Financial Statements and Reports.
---------------------------------------
(a) Through the Closing Date, the Seller shall provide to
the Purchaser as promptly as practicable, but in no event later than 45 days
after the end of each quarter, (i) copies of the most recent Quarterly
Statements filed by each of the Insurance Subsidiaries which shall present
fairly, in all material respects, the statutory financial condition as of
the date presented and statutory results of operations for the quarter then
ended of such Insurance Subsidiaries in conformity with Statutory Accounting
Principles applied on a consistent basis, subject to normal year-end
adjustments and (ii) copies of the most recent GAAP Quarterly Statements
prepared by the Company which shall present fairly, in all the material
respects, the
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consolidated financial position as of the date presented and consolidated
results of operations and cash flows of the Company and its subsidiaries for
the quarter then ended in accordance with generally accepted accounting
principles applied on a consistent basis, subject to normal year-end
adjustments.
(b) The Seller shall provide to the Purchaser, as promptly
as practicable after receipt by the Seller or the Company, through the
Closing Date (i) the management reports prepared by the independent auditors
of the Company and its subsidiaries, (ii) the monthly management and
financial reports prepared by the Company and its subsidiaries for internal
use and (iii) all examination reports by any insurance departments.
6.7. Access to Properties, Books and Records. Prior to
----------------------------------------
the Closing Date, upon reasonable notice, the Seller shall, and shall cause
the Company and its subsidiaries to, give the Purchaser and its agents, at
Purchaser's expense, access at all reasonable times to the properties, books
and records, employees, agents, accountants and actuaries of the Company and
its subsidiaries and furnish to the Purchaser and its agents such documents,
financial and operating data and other information (including, without
limitation, information concerning loss reserves) with respect to the
businesses and properties of the Company and its subsidiaries as the
Purchaser or its agents shall from time to time reasonably request. As part
of its investigation, the Purchaser, at its expense, may conduct
environmental audits, for the use of the Purchaser, of the Owned Real
Property
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and certain Leased Real Property. Armco, the Seller, the Company and their
employees shall cooperate and assist the Purchaser in the conduct of such
environmental audits. Such inspection shall not derogate from or in any way
affect the rights of the Purchaser with respect to a breach of the
representations, warranties and covenants made by Armco and the Seller to
the Purchaser in this Agreement. The Purchaser shall also have the right to
place up to two representatives at the Company's facilities on a full-time
basis prior to the Closing, at the Purchaser's expense, to observe and
facilitate the transition following the signing of this Agreement.
6.8. Replacement Insurance. Armco and the Seller will
---------------------
cooperate with the Purchaser in obtaining, at the Purchaser's expense,
replacement insurance policies, effective as of the Closing Date, affording
coverage to the Company and its subsidiaries comparable to that afforded by
the policies listed in Schedule 6.8, which policies are not issued directly
to the Company and its subsidiaries.
ARTICLE VII.
COVENANTS AND AGREEMENTS
7. Covenants and Agreements. The parties covenant and agree
as follows:
7.1. Confidentiality; Return of Documents. All information
provided pursuant hereto shall be subject to certain confidentiality
agreements executed by the parties and all
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documents (and copies thereof) provided to the other parties shall be
promptly returned upon termination of this Agreement, and each party shall
be entitled to injunctive relief to enforce the provisions of the
confidentiality agreements referred to above and of this Section.
7.2. Fees and Expenses.
-----------------
(a) If the transactions contemplated hereby are
consummated, the parties shall each bear their respective fees and expenses.
If this Agreement is terminated (1) by the Purchaser pursuant to Section
11.1(c); (2) by Armco and the Seller other than pursuant to Section 11.1(a),
(b) or (e), or other than pursuant to Section 11.1(d) (if attributable to a
reason other than the failure of Armco or the Seller to satisfy a condition
under Article IX); or (3) pursuant to Section 11.1(d) as a result of the
failure of Armco or the Seller to satisfy a condition under Article IX, the
Seller shall pay to the Purchaser within 10 Business Days after receipt of
the written demand from the Purchaser (i) a fee equal to $1 million and
(ii) $250,000 to reimburse the Purchaser for its reasonable out-of-pocket
expenses incurred in connection with the due diligence review and
negotiations with respect to this Agreement and the transactions
contemplated hereby.
(b) If this Agreement is terminated for any reason or if the
transactions contemplated hereby are not consummated on or before
December 31, 1994 (unless extended by the parties), the Purchaser shall
promptly pay and reimburse the
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<PAGE>
Company for expenses, including any payments for Taxes, incurred by the
Seller, Armco, the Company or any of its subsidiaries arising out of, or by
reason of, any Purchaser Reinsurance Contracts or the sale of securities as
directed by the Purchaser pursuant to Section 6.4.
(c) The amounts payable upon termination of this Agreement
as set forth in this Section 7.2 shall be the exclusive remedy of the
parties with respect to such termination and no party shall have any further
monetary liability to the other parties in connection with this Agreement or
the transactions contemplated thereby upon such termination.
Notwithstanding the above, if this Agreement shall not have been properly
terminated, a party may seek injunctive or other equitable relief to enforce
the terms of this Agreement.
7.3. Company Employee Benefit Plans.
------------------------------
(a) Effective as of the Closing Date, the Company and its
subsidiaries shall withdraw completely from participation in or sponsorship
of all Company Employee Benefit Plans and related trusts. The Seller shall
cause the Company to file and give any and all required notices to
employees, governmental agencies or other Persons to effect the withdrawal
of the Company and its subsidiaries from, or termination of, all Company
Employee Benefit Plans as of the Closing Date.
(b) Armco and the Seller shall assume all obligations and
pay, satisfy or settle all claims, pursuant to the Company Employee Benefit
Plans, whether arising before or after the
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<PAGE>
Closing Date, with respect to participants whether or not employees or
former employees, including without limitation pension benefits previously
accrued and medical, death, disability or other benefits being provided to
retired or other former employees or other participants. Armco and the
Seller shall indemnify the Purchaser, the Company and its subsidiaries for
any amounts paid on or after the Closing Date by the Company or its
subsidiaries in connection with any Company Employee Benefit Plan, including
any benefits and any taxes, damages or expenses including attorney fees.
(c) The Company and its subsidiaries shall provide
reasonable assistance and information to the Seller in its administration of
the Company Employee Benefit Plans.
7.4. Payment of Debts and Intercompany Receivables. If any
--------------------------------------------
receivables (not including amounts under reinsurance arrangements) from
Armco or its Affiliates are included in the assets of the Company and its
subsidiaries, or if any payables (not including amounts under reinsurance
arrangements) of the Company or its subsidiaries to Armco or its Affiliates
are included in the liabilities of the Company and its subsidiaries, such
receivables or payables shall be paid prior to the Closing Date unless
otherwise provided by this Agreement. If such amounts cannot be calculated
until the preparation of the Closing Balance Sheet, an estimate of such
amount shall be paid prior to the Closing Date, with any adjustment to be
paid within five
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business days of the final determination of the Closing Balance Sheet.
7.5. Agreement Not to Compete. The parties acknowledge
------------------------
and agree that on or prior to the Closing Date, Armco, the Seller and the
Purchaser will enter into the Agreement Not to Compete and for Federal
income tax purposes will report such agreement as having a fair market value
of $100,000.
7.6. Taxes.
-----
(a) Tax Returns. The applicable income, deductions and
-----------
credits of the Company and its subsidiaries for the period beginning January
1 of the year in which the Closing takes place up to and including the
Closing Date (the "Short Period") will be included in the consolidated
Federal income tax returns, and the consolidated state income tax returns of
Armco set forth on Schedule 7.6(a) for such calendar year, and Armco shall
pay any Taxes (excluding any deferred Taxes) attributable to such period.
The income, deductions and credits with respect to the Company and its
subsidiaries for the Short Period will be determined on the basis of the
appropriate permanent records (including any deduction under Code Section
832(c)(4)), or if the portion of any item of income or deduction cannot be
determined from the permanent records, in accordance with Treasury
Regulations 1.1502-76(b)(4)(ii). Accordingly, the Purchaser agrees that it
shall cause the Company to furnish on a timely basis to the Seller, at no
cost to the Seller, such information and
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documents as the Seller may reasonably request to enable Armco and the
Seller to prepare and file its consolidated Federal and state income Tax
Returns for the Short Period. Armco agrees that, subject to extensions duly
obtained, it shall make timely payment of its Taxes for all taxable periods
ending on or before the Closing Date. The Purchaser and the Company shall
be responsible for filing all Tax Returns for periods ending after the
Closing Date and, subject to Section 7.6(j), the Purchaser shall pay or
cause to be paid all Taxes due for such periods. The Purchaser agrees not
to make, or permit to be made, any election pursuant to Code Section 338(g),
and further agrees not to take, or permit to be taken, any action resulting
in a deemed election pursuant to Code Section 338(g) (or any similar
provision under state law). Armco, the Seller and the Purchaser agree that
they shall not make a joint election pursuant to Code Section 338(h)(10).
Seller shall furnish Purchaser with an affidavit, stating, under the
penalties of perjury, the Seller's United States tax identification number
and that the Seller is not a foreign person in accordance with the
provisions of Section 1445(b)(2) of the Code and the regulations promulgated
thereunder.
(b) Cooperation and Exchange of Information. Each
---------------------------------------
party shall provide each other with such cooperation and information as
either of them reasonably may request of the other in filing any Tax Return,
amended return or claim for refund, determining a liability for taxes or a
right to refund of taxes
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or in conducting any audit or other proceeding in respect of Taxes. Such
cooperation and information shall include providing copies of all relevant
portions of Tax Returns relating to the Company and its subsidiaries,
together with accompanying schedules and related workpapers, documents
relating to rulings or other determinations by taxing authorities and
records concerning the ownership and tax basis of property, which either
party may possess. Each party shall make its employees available on a
mutually convenient basis to provide explanation of any documents or
information provided hereunder. Notwithstanding the foregoing, neither
party shall be required unreasonably to prepare any document, or determine
any information not then in its possession, in response to a request under
this Section. Except as otherwise provided in this Agreement, the party
requesting assistance hereunder shall reimburse the other for any reasonable
out-of-pocket costs incurred in providing any Tax Return, document or other
written information, and shall compensate the other for any reasonable costs
(excluding wages and salaries) of making employees available, upon receipt
of reasonable documentation of such costs. Each party will retain all Tax
Returns, schedules and workpapers and all material records or other
documents relating thereto, until the expiration of the statute of
limitations (including extensions) of the taxable years to which such
returns and other documents relate and, unless such returns and other
documents are offered to the other party, until the final determination of
any payments which may be required in respect of
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such years under this Agreement. Any information obtained under this
Section shall be kept confidential, except as may be otherwise necessary in
connection with the filing of Tax Returns or claims for refund or in
conducting any audit or other proceeding. Without limiting the generality of
the foregoing, the Purchaser and the Company shall reasonably prepare and
provide to the Seller and Armco any Federal, state and local tax information
requested by Armco for Armco's use in preparing the Tax Returns for which
Armco is responsible. This information shall be completed by the Purchaser
and the Company within 90 days after receiving written request from Armco.
(c) Tax Proceedings. In the event the Purchaser, or the
---------------
Company receives notice, whether orally or otherwise, of any pending Tax
examination, claim, settlement, proposed adjustment or related matter that
may affect Armco or the Seller, or in the event Armco or the Seller receives
any such notice which may affect the Purchaser, the Company or its
subsidiaries, the party receiving such notice shall notify the other party
in writing as soon as reasonably practicable. Armco shall be entitled at
its expense to contest, control, compromise, settle or appeal all
proceedings with respect to the Company's Taxes for periods ending on or
before the Closing Date, provided that the Purchaser shall have the right to
participate in and employ its own counsel, at its expense, with respect to
any such proceeding that the Purchaser reasonably believes may cause the
Purchaser, the Company or its subsidiaries to incur any liability for
payment of
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Taxes and Armco shall consult in good faith with the Purchaser with regard
to any such proceeding. The Purchaser agrees that it will cooperate fully
and will cause the Company to cooperate fully with Armco in the defense
against or compromise of any claim asserted in any such proceeding.
(d) Indemnification. (i) Armco and the Seller shall be
---------------
responsible for and shall indemnify and hold the Purchaser, the Company and
its subsidiaries harmless from all liability for all Taxes attributable or
related to any period ending prior to or on the Closing Date, including the
portion of the Short Period ending on the Closing Date for which the Company
and its subsidiaries are included in any Tax Return of Armco but only to the
extent such liability exceeds the amount of tax liabilities or reserves set
forth on the Closing Balance Sheet; provided, however, that the Purchaser
-----------------
shall indemnify the Seller and Armco for all Taxes imposed on them
(determined without regard to any available net operating Loss Carryovers or
other tax benefits) as a result of any election made, or deemed to have been
made by the Purchaser, under Code Section 338(g) (or any similar provision
of state or local law). Armco or the Seller shall pay all Taxes imposed or
assessed against the Company and its subsidiaries, whether directly or as a
member of the Consolidated Group, for any period ending on or before the
Closing Date, but only to the extent such liability exceeds the amount of
tax liabilities or reserves set forth on the Closing Balance Sheet. The
Purchaser and the Company shall be responsible for and shall
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indemnify and hold Armco and the Seller harmless from, and the Purchaser or
the Company shall pay all Taxes with respect to the Company and its
subsidiaries attributable or related to periods ending after the Closing
Date, except as otherwise set forth in Section 7.6(j).
(ii) Armco and Seller hereby agree, from and after the
Closing date, to defend, indemnify, and hold the Purchaser, harmless from,
against and in respect of any Loss (as defined in Section 8.2(e)) which may
accrue to or be sustained by the Purchaser, the Company or its subsidiaries
for the full amount of such Loss arising out of, as a result of or in
respect of:
(1) any error, misstatement, omission or inaccuracy
or breach in or of any representation or warranty of Armco or the Seller
contained in Section 4.24, or under any schedule, certificate, agreement,
instrument or other document delivered pursuant thereto; or
(2) any failure of Armco or the Seller or its
subsidiaries duly to perform or observe any term, provision, instrument,
covenant or agreement to be performed or observed by Armco or the Seller
under this Section 7.6, or any schedule, certificate, agreement or other
document entered into or delivered pursuant hereto.
(e) Refunds. Except as provided in Section 7.6(h), Armco
------
or the Seller shall be entitled to all refunds of
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Taxes of the Company and its subsidiaries with respect to the Pre-Closing
Period (and any interest thereon) unless (i) any such refunds are carried as
an asset on the Closing Balance Sheet or (ii) result from the carryback of
net operating losses or capital losses of the Company or its subsidiaries,
in which event any such refund shall be the property of the Company, but
only to the extent attributable to the income of the Company or its
subsidiaries for the carryback period. The Company shall pay to Armco or
the Seller, within five Business Days after receipt thereof, any such
refunds received by the Company, other than a refund to which the Company is
entitled pursuant to the preceding sentence. If Armco or the Seller receives
a refund to which the Company or its subsidiaries are entitled, Armco or the
Seller shall pay any such refund to the Company within five Business Days
after receipt thereof. The Purchaser shall be entitled to all refunds of
Taxes of the Company and its subsidiaries attributable to periods ending
after the Closing Date. Armco or the Seller shall pay to the Purchaser,
within five Business Days after receipt thereof, any such refunds received
by Armco or the Seller.
(f) Tax-Sharing Agreements. Effective on the Closing Date,
----------------------
all Tax Sharing Agreements (as defined below), whether or not written, to
which the Company or any of its subsidiaries on the one hand and Armco or
any of its Affiliates on the other hand are parties, shall be terminated
with respect to the Company and its subsidiaries and as between the Company
and its subsidiaries on the one hand, and Armco and its Affil-
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iates on the other hand, such agreements shall be of no further force and
effect, and as between them, no party shall have any further rights or
obligations with respect to any taxable period.
(g) No Adverse Action. Neither the Seller nor Armco shall
-----------------
(i) exercise its authority as agent of the Company and its subsidiaries
under Treasury Regulation Section 1.1502-77 (or any comparable provision of
state, local or foreign Tax law), or (ii) file any election or take any
other similar action, including without limitation, amending any Tax Return
or agreeing to any determination or audit, if such exercise or action is
likely to have a Material Adverse Effect for any period ending after the
Closing Date without having first received the consent of the Purchaser,
which consent shall not be unreasonably withheld.
(h) Loss Carryovers. (i) Notwithstanding the provisions of
---------------
(1) any tax sharing agreements among Armco and its Affiliates (including,
but not limited to, the Tax Sharing Agreement among Armco, Northwestern
National Casualty Company, Statesmen Insurance Company, and NN Insurance
Company dated January 1, 1991, the Tax Sharing Agreement between Armco and
Northwestern National Lloyds Insurance Company dated January 1, 1992 and the
Tax Sharing Agreement among Armco, Pacific National Insurance Company and
Pacific Auto Insurance Company dated January 1, 1992) (collectively, "Tax
Sharing Agreements") and (2) any other agreement between the parties, Armco
and the Seller agree to waive (except as otherwise permitted by Sec-
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<PAGE>
tion 7.6(h)(ii)) any right they may have under the Internal Revenue Code
(including, but not limited to, the right to make an election under Treasury
Regulation Section 1.1502-20(g)) to reattribute to itself or any other
entity any consolidated net operating losses of the Consolidated Group that
are apportioned to the Company or its subsidiaries pursuant to Treas. Reg.
Section 1.1502-79(a) as a result of Purchaser's purchase of the Shares (the
"Apportioned Operating Losses"). Except as permitted in Section 7.6(h)(ii),
Armco and the Seller also agree that they shall not, and their Affiliates
shall not, utilize any of the Apportioned Operating Losses to offset any
taxable income of any member of the Consolidated Group other than the
Company or its subsidiaries for any taxable year of the Consolidated Group
ending on or prior to December 31, 1994. After December 31, 1994, Armco and
its Affiliates shall use only those Apportioned Operating Losses required to
be used under Treasury regulations. If Armco or its Affiliates utilize any
Apportioned Operating Losses, the Purchaser's sole remedy shall be as set
forth in paragraph (iv) below.
(ii) Notwithstanding paragraph (i) above, Armco shall be
entitled to reattribute to itself Apportioned Operating Losses in an amount
equal to the lesser of (1) the amount of such Apportioned Operating Losses
or (2) the total of (x) the aggregate taxable income or gain of the Company
and its subsidiaries attributable to Pre-Closing Periods resulting from
Purchaser Reinsurance Contracts plus (y) the aggregate taxable
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income or gain of the Company and its subsidiaries attributable to Pre-
Closing Periods resulting from the sale of securities pursuant to Section
6.4, less (z) the excess, if any, of (I) the amount of consolidated net
operating losses of the Consolidated Group that would have been apportioned
to the Company or its subsidiaries pursuant to Treas. Reg. Section 1.1502-
79(a) as a result of the Purchaser's purchase of the Shares if there had
been no items of income or gain from the Purchaser Reinsurance Contracts or
sales of securities pursuant to Section 6.4, over (II) the Apportioned
Operating Losses. The Purchaser shall cause the Company and its
subsidiaries to assign and deliver to Armco any statement prepared by or on
behalf of Armco pursuant to Treas. Reg. Section 1.1502-20(g)(5) relating to
such reattribution and attach or cause the Company or any subsidiary to
attach a copy of such statement to the appropriate income tax return
pursuant to Treas. Reg. Section 1.1502-20(g)(5)(ii). Notwithstanding any
provision herein to the contrary, the Purchaser shall have no right to cause
the Seller or Armco to enter into Purchaser Reinsurance Contracts or the
sale of securities described in Section 6.4 if the total of (x) plus (y)
above exceeds the sum of $25.5 million plus an amount equal to the
consolidated net operating losses of the Consolidated Group that is
apportioned to the Company and its subsidiaries for the taxable year ended
December 31, 1993, pursuant to Treas. Reg. Section 1.1502-79(a).
(iii) The Seller shall notify the Company in writing
within 60 days after the filing of any return, amended
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<PAGE>
return or any other document with the Internal Revenue Service in which any
portion of the Apportioned Operating Losses are utilized by Armco or any
other member of the Consolidated Group. The Seller shall notify the Company
in writing within 60 days after its receipt of notice from the Internal
Revenue Service of the final adjustment of Apportioned Operating Losses. In
making any of the notifications required herein, the Seller shall disclose
the amount of the Apportioned Operating Losses which have been either
utilized or adjusted.
(iv) Notwithstanding anything to the contrary in this
Agreement, the Purchaser's sole remedy in the event (A) the Represented
Operating Losses exceeds the Apportioned Operating Losses, or (B) there is a
breach of the covenant set forth in the last sentence of Section 7.6(h)(i)
shall be the right to obtain payment from Armco or Seller of the actual
increase in federal income tax liability resulting solely from such excess
or such breach; provided, however, that the covenant set forth in the last
-------- -------
sentence of Section 7.6(h)(i) shall not be treated as having been breached
to the extent that Armco reduced the amount of Apportioned Operating Losses
it was entitled to reattribute pursuant to Section 7.6(h)(ii) by the amount
of Apportioned Operating Losses that were utilized by Armco.
(i) Timing Differences. As used in this Section 7.6(i),
------------------
the term "Seller Tax Period" shall mean any tax period ending on or prior to
the Closing Date, and the term "Purchaser Tax Period" shall mean a taxable
period ending after the Closing
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<PAGE>
Date. If as a result of an audit or other proceeding concerning the
liability of the Company and its subsidiaries for Taxes, there is an
adjustment as a result of which there should be both a net tax benefit for
the Seller Tax Periods and a net tax detriment for Purchaser Tax Periods or
both a net tax detriment for Seller's Tax Periods and a net tax benefit for
Purchaser's Tax Periods, then Armco and the Seller shall pay to the
Purchaser or the Purchaser shall pay to Armco and the Seller, as the case
may be, the amount of net tax benefits actually derived as a result of such
adjustments up to an amount equal to the net tax detriment actually incurred
by Armco and the Seller or the Purchaser, as the case may be. A net tax
benefit shall be deemed actually derived when the party entitled to such net
tax benefit receives an actual refund of tax or a reduction of tax otherwise
due and payable. A net tax detriment shall be deemed actually incurred when
the party liable for such net tax detriment makes an additional or increased
tax payment or suffers a reduction in an actual tax refund payment.
Payments under this section shall be made without interest within 30 days
after the later of the date the net tax benefit is actually derived or the
date the net tax detriment is actually incurred.
(j) Taxable Year Not Terminating at Closing Date. If for
--------------------------------------------
any state, local or foreign tax purposes, the taxable year of the Company
and its subsidiaries does not terminate on the Closing Date, Taxes of the
Company and its subsidiaries attributable to, arising out of, or with
respect to the Short Period
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<PAGE>
shall be allocated to and shall be the responsibility of Armco and the
Seller to the extent such Taxes exceed the amounts that the Company and its
subsidiaries have paid, accrued or otherwise adequately reserved therefor
prior to the Closing Date. For purposes of this Section 7.6(j), Taxes of
the Company and its subsidiaries attributable to, arising out of, or with
respect to the Short Period shall be determined on the basis set forth in
Section 7.6(a). Armco and the Seller agree to indemnify and hold the
Purchaser and the Company harmless from and against all Taxes allocated to
and the responsibility of Armco and the Seller under this Section 7.6(j).
(k) The Seller agrees to pay any stock transfer taxes in
connection with the transfer of the Shares to the Purchaser.
7.7. The Seller's Access to Records.
------------------------------
(a) The Purchaser agrees that after the Closing Date it
shall, and shall cause the Company to, (i) provide Armco and the Seller with
reasonable access to the employees of the Purchaser and the Company having
knowledge of and responsibility for such books and records (including
information stored on electronic data processing systems) and (ii) retain
the books and records of the Company (including backup media for electronic
data processing systems) for a period of at least seven years from the
Closing Date in a responsible manner and at a location reasonably accessible
and (iii) allow Armco and the Seller to examine and make copies of the books
and records pertaining to
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the business conducted by the Company pertinent to this Agreement and the
transactions contemplated hereby, for reasonable business purposes including
without limitation the preparation and examination of Tax Returns and
financial statements and conduct of any litigation or regulatory dispute
resolution, whether pending or threatened, concerning the business of the
Company and its subsidiaries pertinent to this Agreement and the
transactions contemplated hereby. Access to and copying of such books and
records shall be restricted to normal business hours, shall be at Armco's
and the Seller's expense and shall not unreasonably interfere with the
business operations of the Purchaser or the Company. If requested by Armco
or the Seller immediately prior to the end of the seven-year period, the
Purchaser will cause the Company to retain such books and records (at
Seller's expense) for a reasonable extended period of time.
(b) The Purchaser shall provide to the Seller the Annual
Statements for the Company and each of the Insurance Subsidiaries for each
of 1994, 1995 and 1996 and the relevant portions of the Purchaser's Tax
Return with respect to the Company and its subsidiaries for 1994.
7.8. Future Assessments.
------------------
(a) The Seller agrees that any state insurance guaranty
association assessments made against the Insurance Subsidiaries prior to the
Closing Date for any period prior to the Closing Date shall either be paid
by Insurance Subsidiaries prior to the Closing Date or reflected on the
Closing Balance Sheet, or, if paid by Insurance Subsidiaries after the
Closing Date and not reflected in the Closing Balance
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Sheet, shall be reimbursed in full by the Seller.
(b) The Purchaser and the Seller agree that any refund,
distribution or assessment received from or made against any Insurance
Subsidiary by any coastal reinsurance pool, fair plan, assigned risk plan or
other residual market mechanisms within three (3) years after the Closing
Date on account of experience during a period identified by the pool or
plan, shall (i) be for the account of the Seller when the period begins
before and ends on or before the Closing Date and (ii) be prorated between
the Seller and the Purchaser when the period begins before and ends after
the Closing Date. The basis for such proration shall be as set forth in
subsection (c), below.
(c) Any proration required by this section shall be on the
following basis:
(i) The Seller's portion of any proration shall be
based on the number of days prior to the Closing Date in the period on which
the refund, distribution or assessment is based divided by the total number
of days in such period. The Seller shall have no entitlement to or
responsibility for the remaining portion of such refund, distribution or
assessment.
(ii) In determining the number of days in any
proration period and the number of days chargeable to the Seller on the one
hand or to the Company on the other, there shall be excluded portions of
such period in which the Insurance Subsidi-
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ary was not writing in the jurisdiction in question the type of insurance
which caused it to be entitled to the refund or distribution or subject to
the assessment.
(d) The Purchaser shall promptly notify the Seller of any
assessment, threatened assessment or any proceeding and inquiry that may
result in an assessment relating in whole or in part to the period before
the Closing Date and the Purchaser shall give the Seller the opportunity to
challenge any portion of such assessment as may relate to the period before
the Closing Date. Notwithstanding such challenge, to the extent the Company
or its Insurance Subsidiaries shall have paid or is required to pay such
assessment, the Seller shall be required to pay the entire amount of the
assessment attributable to the period prior to the Closing Date to the
Company; provided that if the Seller is successful in such challenge, it
shall be reimbursed the portion of its assessment which is not required to
be paid or which is reimbursed to the Company or its Insurance Subsidiaries.
Notwithstanding anything to the contrary in any other provision of this
Section, the Seller shall not be liable for an assessment to the extent such
assessment is reflected on the Closing Balance Sheet.
7.9. Disclaimer of Other Representations and Warranties.
---------------------------------------------------
The parties agree that no party hereto makes nor has made any warranties or
representations, with respect to the transactions contemplated hereby, other
than those expressly set forth in this Agreement, including the exhibits and
schedules attached
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hereto. The parties agree that Armco and the Seller make no warranties or
representations with respect to the adequacy of the reserves for unpaid
losses or loss adjustment expenses of any Insurance Subsidiaries.
7.10. Further Assurances. Armco and Seller agree that they
------------------
will from time to time at and subsequent to the Closing Date, at the request
of Purchaser and without further consideration, execute and deliver such
other instruments of conveyance, assignment and transfer and take such other
actions as Purchaser may reasonably request in order more effectively to
convey, assign, transfer to and vest in the Purchaser the Shares and the
right to operate the business of the Company and its subsidiaries.
7.11. Proposition 103 and Other Excess Profit Laws.
--------------------------------------------
(a) The Seller shall be responsible for the payment of any
liability of the Company and its Insurance Subsidiaries incurred within
three years after the Closing Date under California's Proposition 103, the
Florida Excess Profit law, or any other excess profits or similar laws in
existence prior to the Closing Date relating to operations or premium
written prior to the Closing Date to the extent such liabilities are not
reflected on the Closing Balance Sheet. The Purchaser agrees that it and
the Insurance Subsidiaries will not initiate any proceeding with respect to
such assessments, unless required by good business purposes and only after
prior notification to
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the Seller. The Purchaser agrees that neither it, the Company nor its
subsidiaries shall settle assessments or liabilities covered by this Section
without the prior consent of the Seller, which consent will not be
unreasonably withheld. The Purchaser shall control all litigation or
administrative proceedings concerning such matters at its own expense;
provided that the Seller may participate in such litigation or
administrative proceedings, at Seller's own expense.
(b) In the event the Company or the Insurance Subsidiaries,
after such litigation or administrative proceedings, are required to make
one or more payments to policyholders, the state, or some other entity, and
the Seller has consented to such payment or payments, the Purchaser shall
cause such payments to be made; provided that the amount of any such payment
shall be first paid to the Company or the Insurance Subsidiary by the Seller
to the extent such liability was not reflected in the Closing Balance Sheet.
7.12. Reinsurance. Immediately prior to, or simultaneously
-----------
with, the Closing, the Purchaser may direct the Insurance Subsidiaries to
enter into reinsurance treaties or arrangements with reinsurers designated
by the Purchaser; provided that all fees and similar expenses of such
reinsurance shall be the responsibility of Purchaser and, if paid by the
Company or its subsidiaries and such payment affects the Purchase Price,
shall be reflected as an adjustment to the Purchase Price in favor of
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the Seller. Such reinsurance shall be disregarded in the preparation of the
Closing Balance Sheet.
7.13. Reinsurance Support. Prior to the Closing, the
-------------------
Seller and the Company shall enter into an agreement whereby the Seller
shall provide, or shall cause Northwestern National Insurance Company of
Milwaukee, Wisconsin ("NNIC") to provide, financial support for the
obligations of NNIC to NNCC under reinsurance contracts issued by NNIC.
Such support shall take the form, acceptable to the Purchaser, of either a
letter of credit or an escrow account (in the form of a secured "Funds
Withheld Account") for the benefit of NNCC in an amount equal to $20
million. A portion of such letter of credit or escrow account equal to $10
million shall remain in effect until the 15th anniversary of the Closing
Date. Another portion of such letter of credit or escrow account equal to
$10 million shall remain in effect until the earlier to occur of (i) the
novation or other complete release of NNCC with respect to all insurance
policies covering Celanese Corporation or its affiliates or (ii) the 15th
anniversary of the Closing Date. All interest earned on funds in the escrow
account shall be paid quarterly to the Seller. The Seller shall cause the
reinsurance arrangements between NNIC and NNCC to be amended, effective as
of the Closing, to provide both NNCC and NNIC with a right of setoff and to
suspend the payment obligations to the extent that claims of setoff are
outstanding.
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7.14. Trademark Assignment. On or prior to the Closing,
-------------------
the parties shall enter into the Trademark Assignment Agreement covering
trademarks and service marks used by the Company and its subsidiaries.
7.15. Severance and Other Costs. The Seller agrees to
-------------------------
reimburse and indemnify the Purchaser for the full amount of any payment
made by the Company and its subsidiaries in connection with the termination
of the employment of the Chairman of the Board of Directors of the Company
pursuant to agreements with the Company or any of its subsidiaries in effect
at the Closing Date as set forth on Schedule 7.15. The Seller shall
reimburse and indemnify the Purchaser for one-half (50%) of the payments
made by the Company and its subsidiaries pursuant to any employment, bonus,
stay-put, termination, incentive or deferred compensation, consultation or
similar agreement with any other officer or other key employee executed
prior to the Closing Date as set forth on Schedule 7.15 in connection with
the termination of such officer or employee before the third anniversary of
the Closing Date. The Seller shall pay the Purchaser such termination or
severance costs within 20 Business Days following the written demand of the
Purchaser.
7.16. Escrow Agreement. If the Seller shall not elect to
-----------------
provide the Letter of Credit as set forth in Section 2.7, then on or prior
to the Closing, the Seller and the Purchaser shall enter into an escrow
agreement ("Escrow Agreement") which shall
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provide for an escrow account ("Escrow Account") with an independent third
party acceptable to the Seller and the Purchaser. At the Closing, the
Seller may elect to procure the Letter of Credit acceptable to the Purchaser
or shall deposit $5 million of the Purchase Price in the Escrow Account to
fund any claims of the Purchaser (i) under any covenant, agreement or other
provision in this Agreement or (ii) resulting from a breach of any
representation or warranty of the Seller or Armco in this Agreement. The
Letter of Credit shall remain in effect, or if the Escrow Account is chosen,
such funds shall remain in the Escrow Account, until the second anniversary
of the Closing, provided, however, that any amounts required to satisfy
claims pending at the second anniversary would remain available until such
claims are settled. No claim shall be valid, or be deemed to be pending,
with respect to any matter which would otherwise be the subject of a claim
to be funded out of the Escrow Account unless such claim is asserted in
writing prior to the second anniversary of the Closing, specifying in
reasonable detail the covenant or agreement under which indemnification is
sought or the representation or warranty that allegedly has been breached
and, in each case, furnishing the basis for such allegation. Any such
Escrow Agreement shall provide that at the end of the two-year period, funds
on which no claims are pending shall be released to the Seller. Any
interest earned on funds in the Escrow Account shall follow the principal of
such funds.
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7.17. Supplements to Schedules. The Seller may at any time
------------------------
or from time to time after the date hereof, but not later than 10 Business
Days prior to the Closing Date, supplement or amend the Schedules required
to be furnished by the Seller under this Agreement with respect to any
matter arising after the date hereof which, if existing or occurring at the
date hereof, would have been required to be set forth or described in such
Schedules. Other than an amendment to Schedules 4.8(d)(i) and 4.10 which
shall not be treated as a breach, the Purchaser may treat any material
supplement or amendment to a schedule as a breach of a representation or
warranty by the Seller and any such supplement or amendment to such
Schedules shall be disregarded for the purpose of determining the
satisfaction of the conditions set forth in Article IX hereof; provided,
---------
however, that any matter arising after the date hereof and disclosed in an
- -------
amended or supplemented Schedule pursuant to this Section shall not form the
basis for any Loss (as defined in Article VIII) by the Purchaser if the
transactions contemplated hereby are consummated.
ARTICLE VIII.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNITY
8.1 Survival of Representations and Warranties and
----------------------------------------------
Indemnities. Except to the extent otherwise provided, all representations
- -----------
and warranties of the parties under this Agreement or in any exhibit,
schedule, certificate or other document
-97-
<PAGE>
delivered pursuant hereto shall survive the Closing Date for a period of two
years ending on the second anniversary of the Closing Date. All agreements,
covenants and contractual undertakings shall survive the Closing Date until
such provisions are satisfied. All provisions shall survive the Closing
Date subject to the foregoing terms and conditions regardless of any
investigation at any time made by or on behalf of the parties or of any
information the parties may have with respect to the other parties, the
Company and its subsidiaries and the transactions contemplated hereby.
8.2. Indemnity.
---------
(a) Subject to the provisions of this Section, the
Seller hereby agrees, from and after the Closing date, to defend, indemnify,
and hold the Purchaser, harmless from, against and in respect of any Loss
(as hereinafter defined) which may accrue to or be sustained by the
Purchaser, the Company or its subsidiaries for the full amount of such Loss
arising out of, as a result of or in respect of:
(i) any error, misstatement, omission or inaccuracy in
any representation or warranty of Armco or the Seller or the breach of any
warranty of Armco or the Seller under this Agreement, or under any schedule,
certificate, agreement, instrument or other document delivered pursuant
thereto; or
(ii) any failure of Armco or the Seller or its
subsidiaries duly to perform or observe any term, provision, instrument,
covenant or agreement to be performed or observed by
-98-
<PAGE>
the Company and its subsidiaries, prior to the Closing, or the Seller or its
subsidiaries pursuant to this Agreement, or any schedule, certificate,
agreement or other document entered into or delivered pursuant hereto.
(b) Subject to the provisions of this Section, Armco
hereby agrees, from and after the Closing Date, to defend, indemnify, and
hold the Purchaser harmless from, against and in respect of any Loss
(hereinafter defined) which may accrue to or be sustained by the Purchaser
for the full amount of such Loss arising out of, as a result of or in
respect of:
(i) any error, misstatement, omission or inaccuracy in
any representation or warranty of Armco or the breach of any warranty of
Armco under this Agreement, or under any schedule, certificate, agreement,
instrument or other document delivered pursuant thereto; or
(ii) any failure of Armco duly to perform or observe any
term, provision, instrument, covenant or agreement to be performed or
observed by Armco pursuant to this Agreement, or any schedule, certificate,
agreement or other document entered or delivered pursuant hereto.
(c) Subject to the provisions of this Section, the
Purchaser hereby agrees, from and after the Closing Date, to defend,
indemnify, and hold the Seller harmless from, against and in respect of any
Loss (hereinafter defined) which may accrue to or be sustained by the Seller
for the full amount of such Loss arising out of, as a result of or in
respect of:
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<PAGE>
(i) any error, misstatement, omission or inaccuracy in
any representation or warranty of the Purchaser or the breach of any
warranty of the Purchaser under this Agreement, or under any schedule,
certificate, agreement, instrument or other document delivered pursuant
thereto; or
(ii) any failure of the Purchaser duly to perform or
observe any term, provision, instrument, covenant or agreement to be
performed or observed by the Purchaser or the Company after the Closing
pursuant to this Agreement, or any schedule, certificate, agreement or other
document entered or delivered pursuant hereto.
(d) The indemnification and hold harmless
("Indemnification") obligations under this Agreement to which any party is
entitled from any other party pursuant to this Section with respect to
breaches of representations or warranties shall become effective only after
the cumulative amount of such Loss exceeds in the aggregate $500,000, and
such liability shall be limited to such cumulative amounts as exceed
$500,000.
(e) For purposes of this Agreement, "Loss" shall be deemed
to mean and include any and all losses, liabilities, costs, reasonable
expenses, judgments, assessments, penalties, damages, deficiencies, suits,
actions, claims, proceedings, demands, causes of action, economic loss, and
attorneys' fees and expenses and court costs and interest incident thereto.
A Loss shall be measured net of any insurance recovery in respect of such
Loss and such Loss shall not include any incidental or
-100-
<PAGE>
consequential damages (including any loss of anticipated profits).
(f) Notwithstanding anything to the contrary herein, the
indemnity obligation of the Seller with respect to a breach of a
representation or warranty shall be limited to an aggregate of $14 million,
payable exclusively as follows: (i) first, from the Escrow Account or the
Letter of Credit, as the case may be; (ii) o the extent the amount of the
indemnity obligation exceeds the amounts available from the Escrow Account
or the Letter of Credit, as the case may be, directly from the Seller, but
not more than an aggregate of $2 million, and (iii) by set-off against any
amount due from the Purchaser to the Seller on account of the Renewal
Commission.
(g) In order for a party seeking indemnification
("Indemnified Party") to be entitled to any Indemnification provided for
under this Agreement, such Indemnified Party must give a written demand for
Indemnification to the party against which Indemnification is sought
("Indemnifying Party") as soon as reasonably practicable after the
Indemnified Party has knowledge of the material facts underlying the
Indemnification demand. Such demand must set forth with reasonable
specificity the factual and legal basis or bases of the Indemnification
claim and must state as nearly as practicable the amount of Indemnification
sought. The Indemnifying Party shall admit or deny liability for such
Indemnification within 30 days of such demand.
-101-
<PAGE>
(h) The parties' indemnification obligations under this
Section 8.2 are independent of, and in addition to, any payments made
pursuant to Sections 2.3 and 2.4 and Article VII of this Agreement, it being
understood and agreed that a party's indemnification obligations hereunder
do not apply to any losses or claims that may be imposed on, sustained,
incurred or suffered by or asserted, as applicable, against another party
directly or indirectly relating to any matter that is the subject of
Sections 2.3, 2.4 and 4.24 or Article VII. Indemnification obligations
under this Section 8.2 are the exclusive remedy for matters covered under
this Section. Armco and the Seller shall not be required to indemnify the
Purchaser or the Company for amounts that are accrued in the Closing Balance
Sheet; provided such amounts are not assumed by Armco or the Seller pursuant
to Section 2.5.
(i) Third Party Procedures. (1) The Indemnified Party,
-----------------------
promptly upon receipt of notice of the commencement of any action by a third
party against the Indemnified Party in respect of which Indemnification may
be sought hereunder, shall notify the Indemnifying Party in writing of the
commencement thereof. Upon receipt of notice of the commencement of any such
action, the Indemnifying Party shall assume control of the defense,
compromise or settlement thereof (with counsel reasonably satisfactory to
the Indemnified Party) at the Indemnifying Party's expense. Nothing herein
shall be construed so as to give any insurance carrier a right of
subrogation for claims paid except as
-102-
<PAGE>
such right would otherwise exist in the absence of this Section. Further,
nothing herein shall be construed to create any rights enforceable by any
person not a party to this Agreement.
(2) The Indemnified Party shall be entitled to
participate in the defense of any action and to be represented by counsel of
its own selection at the expense of the Indemnified Party. If the attorneys
provided for the defense of the Indemnified Party by the Indemnifying Party
withdraw from or are removed by court order from the Indemnified Party's
representation, then the cost of counsel selected by the Indemnified Party
shall be part of its Loss, and the Indemnified Party shall have the right in
all respects to conduct its own defense. If the Indemnified Party otherwise
retains its own counsel, the cost thereof shall be borne by the Indemnified
Party.
(3) As to cases in which the Indemnifying Party has
assumed and is providing the defense for the Indemnified Party, the control
of such defense and the right to reach settlement in such action shall be
vested in the Indemnifying Party. Except with the written consent of the
Indemnified Party (which consent shall not be unreasonably withheld), no
Indemnifying Party shall consent to entry of any judgment or enter into any
settlement, in respect of any third party claim which provides for anything
other than money damages or other money payments for which the Indemnified
Party is entitled to indemnification hereunder (subject to the limitations
specified in this Section 8.2) or which does not include as a term thereof
the giving
-103-
<PAGE>
by the claimant or plaintiff to the Indemnified Party of a release from all
liability in respect of such third party claim. If the Indemnified Party,
without the prior written consent of the Indemnifying Party (which consent
shall not be unreasonably withheld), consents to the entry of any judgment
or enters into any settlement with respect to a third party claim which is
being defended by the Indemnifying Party, the Indemnifying Party shall be
discharged from any such liability. As to any action, the party which is
controlling such action shall provide to the other party reasoable
information (including reasonable advance notice of all proceedings in
respect thereto) regarding the conduct of the action and the right to attend
all proceedings and depositions in respect thereto through its agents and
attorneys, and the right to discuss the action with counsel for the party
controlling such action.
(4) If within 30 days after receipt by the
Indemnifying Party of notice from the Indemnified Party as to the
commencement of any action in respect of which Indemnification is sought
hereunder, the Indemnifying Party has not notified the Indemnified Party
that the Indemnifying Party assumes the defense of such action or has not
actually assumed such defense, then the Indemnified Party shall have the
right to defend such action and to proceed immediately against the
Indemnifying Party to enforce all Indemnification rights hereunder
(including but not limited to the costs of defense). The Indemnification
obligations of the Indemnifying Party with respect to such action shall,
however, in
-104-
<PAGE>
no way be diminished by virtue of the exercise by the Indemnified Party of
its rights under this Section, and the fact that the Indemnified Party shall
have defended, settled or compromised such action pursuant to Section 8.2(i)
shall not, in any circumstances, be deemed to constitute any waiver, release
or exoneration of the Indemnifying Party from its indemnification
obligations, regardless of the outcome of such action.
ARTICLE IX.
CONDITIONS TO THE OBLIGATION OF
THE PURCHASER TO CLOSE
The obligation of the Purchaser to consummate the purchase
of the Shares contemplated by this Agreement is subject to the satisfaction
on or prior to the Closing Date of the following conditions:
9.1. Covenants. Armco and the Seller shall have performed
---------
and complied in all material respects with all covenants and agreements
required by this Agreement to be performed or complied with by them on or
prior to the Closing Date.
9.2. Governmental Consents. The applicable waiting period
--------------------
under the HSR Act shall have expired and all consents, authorizations,
orders or approvals of and filings with, any governmental commission, board
or any regulatory body which are required (as set forth in Schedule 9.2) for
or in connection with the execution and delivery of this Agreement and the
consummation
-105-
<PAGE>
of the transactions contemplated hereby shall have been obtained or made.
9.3. No Litigation. No litigation shall be pending or
-------------
overtly threatened which challenges consummation of the transactions
contemplated hereby or which is against one of the parties hereto and, if
decided adversely to such party, would have a Material Adverse Effect.
9.4. Legislation. No Federal, state, local or foreign
-----------
statute, rule or regulation shall have been enacted which prohibits the
consummation of the transactions contemplated hereby.
9.5. Delivery of Documents. The Seller shall have tendered
---------------------
to the Purchaser one or more certificates representing the Shares, duly
endorsed in blank or accompanied by duly executed instruments of transfer to
the Purchaser, certificates representing shares of the Company's
subsidiaries, and all organizational documents, minute books and stock
ledgers of the Company and the subsidiaries and agreements and other
documents required to be delivered hereunder by Armco and the Seller to the
Purchaser at Closing. All such documents shall be reasonably satisfactory
to the Purchaser and its counsel.
-106-
<PAGE>
9.6. Opinion of Counsel. Armco and the Seller shall have
------------------
furnished the Purchaser with an opinion of Arnold & Porter, counsel for the
Seller, dated the Closing Date, in form satisfactory to the Purchaser.
9.7. Certified Resolutions. Each of Armco and the Seller
---------------------
shall have furnished the Purchaser with certified copies of resolutions duly
adopted by their respective Boards of Directors authorizing and approving
the execution and delivery of this Agreement and authorizing the sale of the
Shares pursuant to this Agreement.
9.8. Continued Accuracy of Representations and Warranties.
----------------------------------------------------
The respective representations and warranties of Armco and the Seller,
contained in this Agreement, shall be true in all material respects on and
as of the Closing Date with the same effect as though such representations
and warranties had been made on and as of such date except for changes in
the ordinary course of business and except for changes caused by the
consummation of the transactions contemplated by this Agreement, and the
Purchaser shall have received at the Closing a corporate certificate from
each of Armco and the Seller dated the Closing Date and executed by the
President or any Vice President of Armco and the Seller, as appropriate,
containing a representation and warranty to that effect.
9.9. Other Approvals. The Company and its subsidiaries
---------------
shall hold all approvals and licenses necessary to enable it to continue to
carry on its business as presently conducted after consummation of the sale
of the Shares, and no such approval (or any license or permit granted to the
Company or its subsidiaries) shall have been withdrawn or suspended.
-107-
<PAGE>
9.10. Other Consents. All consents, waivers or approvals
--------------
of third parties necessary to permit the consummation of the transactions
contemplated hereby, which if not obtained would individually or in the
aggregate have a Material Adverse Effect, shall have been obtained.
9.11. No Adverse Change. No material adverse change in
-----------------
the business, results of operations, or financial condition of the Company
and its subsidiaries shall have occurred since December 31, 1993.
9.12. Resignation of Directors. Resignations from all of
------------------------
the directors of the Company and its subsidiaries shall have been delivered
to the Purchaser.
9.13. Release of Existing Pledge. The Existing Pledge
---------------------------
shall have been released by NNIC and the Shares shall be free and clear of
all Liens or Encumbrances.
ARTICLE X.
CONDITIONS TO THE OBLIGATION OF ARMCO AND THE SELLER TO CLOSE
The obligation of Armco and the Seller to consummate the
sale of the Shares contemplated by this Agreement is subject to the
satisfaction on or prior to the Closing Date of the following conditions:
10.1. Covenants. The Purchaser shall have performed and
----------
complied in all material respects with all covenants and
-108-
<PAGE>
agreements required by this Agreement to be performed or complied with by it
on or prior to the Closing Date.
10.2. Governmental Consents. The applicable waiting
---------------------
period under the HSR Act shall have expired and all consents,
authorizations, orders or approvals of, and filings or registrations with,
any governmental commission, board or regulatory body which are required (as
set forth on Schedule 10.2) for or in connection with the execution and
delivery of this Agreement and the consummation of the transaction
contemplated hereby shall have been obtained or made.
10.3. No Litigation. No litigation shall be pending or
--------------
overtly threatened which challenges consummation of the transactions
contemplated hereby or which is against one of the parties hereto and, if
decided adversely to such party, would have a Material Adverse Effect.
10.4. Legislation. No Federal, state, local or foreign
-----------
statute, rule or regulation shall have been enacted which prohibits the
consummation of the transactions contemplated hereby.
10.5. Payment and Delivery of Documents. The Purchaser
---------------------------------
shall have delivered or tendered to the Seller the Purchase Price, together
with all agreements and other documents required to be delivered hereunder
to Armco and the Seller at
-109-
<PAGE>
Closing. All such documents shall be reasonably satisfactory to Armco and
the Seller and their counsel.
10.6. Opinion of Counsel. The Purchaser shall have
------------------
furnished Armco and the Seller with an opinion of Schnader, Harrison, Segal
& Lewis, counsel for the Purchaser, dated the Closing Date, in form
satisfactory to the Seller.
10.7. Certified Resolutions. The Purchaser shall have
---------------------
furnished Armco and the Seller with a certified copy of resolutions duly
adopted by its Board of Directors authorizing and approving the execution
and delivery of this Agreement and authorizing the purchase of the Shares.
10.8. Continued Accuracy of Representations and
----------------------------------------
Warranties. The representations and warranties of the Purchaser contained
- ----------
in this Agreement shall be true in all material respects on and as of the
Closing Date with the same effect as though such representations and
warranties had been made on and as of such date except for changes in the
ordinary course of business, and Armco and the Seller shall have received at
the Closing a corporate certificate from the Purchaser dated the Closing
Date and executed by the President or any Vice President of the Purchaser
containing a representation and warranty to that effect.
-110-
<PAGE>
ARTICLE XI.
TERMINATION, AMENDMENT AND WAIVER
11.1. Termination. This Agreement may be terminated at
------------
any time prior to the Closing as follows:
(a) By mutual consent of the parties;
(b) By Armco and the Seller if there has been a material
breach of any representaion, warranty, covenant or agreement set forth in
this Agreement on the part of the Purchaser, and such material breach has
not been cured within a reasonable period after notice thereof and has not
been waived by Armco and the Seller;
(c) By the Purchaser if there has been a material breach of
any representation, warranty, covenant or agreement set forth in this
Agreement on the part of Armco or the Seller, and such material breach has
not been cured within a reasonable period after notice thereof and has not
been waived by the Purchaser;
(d) By any party if the Closing shall not have occurred by
December 31, 1994, provided, that if approval of the transactions
contemplated hereby are pending before the appropriate regulatory
authorities at December 31, 1994 and all other conditions to the Closing set
forth in Article IX and Article X could otherwise be satisfied on such date,
such termination date shall be extended until the earlier of March 31, 1995
and 15 Business Days following the date on which such regulatory proceedings
are completed;
-111-
<PAGE>
(e) By any party if the transactions contemplated hereby
shall violate a non-appealable final order, decree or judgment of any court
or governmental body having competent jurisdiction or shall be prohibited by
an applicable state or Federal statute or regulation.
11.2. Effect of Termination. In the event this Agreement
----------------------
is terminated, the obligations set forth herein (other than the obligations
of the parties and their representatives, agents, employees, successors and
assigns under Sections 7.1, 7.2 and 11.2) shall terminate and except as
specifically provided for in Section 7.2, no party shall have any further
liability to the other parties whatsoever.
11.3. Amendment. This Agreement may not be amended except
---------
by an instrument in writing signed on behalf of all of the parties hereto.
11.4. Extension; Waiver. At any time prior to the
-----------------
Closing, the parties may, in the manner and to the extent legally allowed,
(i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto and (ii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set
forth in a written instrument signed on behalf of such party.
-112-
<PAGE>
ARTICLE XII.
MISCELLANEOUS
12.1. Notices. All notices or other communications
-------
hereunder shall be in writing and shall be deemed given (i) upon delivery if
delivered personally, (ii) three days after mailing by registered or
certified mail (return receipt requested), or (iii) upon receipt if sent by
an overnight delivery service or sent by facsimile transmission to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Purchaser, to:
Vik Brothers Insurance, Inc.
1000 Lenox Drive
Lawrenceville, NJ 08468
Telecopier Number: (609) 895-3277
Attention: Stephen J. Greenberg
(b) If to Armco or the Seller, to:
Armco Inc.
One Oxford Centre
301 Grant Street
Pittsburgh, PA 15219
Telecopier Number: (412) 255-9805
Attention: John B. Corey
Vice President, Asset
Management and Business Development
12.2. Interpretation. When a reference is made in this
--------------
Agreement to a section, schedule or exhibit, such reference shall be to a
section, schedule or exhibit of this Agreement unless otherwise indicated or
unless the context shall otherwise require. The table of contents and
headings contained in this
-113-
<PAGE>
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall
be deemed to be followed by the words "without limitation."
12.3. Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of New York.
12.4. Publicity. So long as this Agreement is in effect,
---------
no party shall issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without the consent of the other parties, unless, in the opinion
of counsel, such announcement is required by the provisions of applicable
law or regulations or by any governmental entity having jurisdiction over
such party.
12.5. Assignment; Binding Effect. Neither this Agreement
--------------------------
nor any of the rights, interests or obligations hereunder shall be assigned
by any of the parties hereto without the prior written consent of the other
parties, except the Purchaser may assign this Agreement to its Affiliates
without prior written consent; provided, however, that any such assignment
will not relieve the Purchaser of its obligations or liabilities hereunder.
This Agreement will be binding upon, inure to the
-114-
<PAGE>
benefit of and be enforceable by the parties and their respective successors
and permitted assigns.
12.6. Entire Agreement; Third Party Beneficiaries. This
-------------------------------------------
Agreement (including exhibits, schedules and documents referred to herein)
constitutes the entire agreement between the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter
hereof and is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
12.7. Construction. This Agreement is the result of arms
------------
length negotiations between the parties hereto and has been prepared jointly
by the parties. In applying and interpreting the provisions of this
Agreement, there shall be no presumption that the Agreement was prepared by
any one party or that the Agreement shall be construed in favor of or
against any one party.
-115-
<PAGE>
12.8. Counterparts. This Agreement may be executed in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this
Agreement on the date first above written.
ARMCO INC.
By:/s/ John B. Corey
-------------------------------------
Vice President
ARMCO FINANCIAL SERVICES CORPORATION
By:/s/ John B. Corey
-------------------------------------
Vice President
VIK BROTHERS INSURANCE, INC.
By:/s/ Alexander M. Vik
-------------------------------------
Chairman
-116-
<PAGE>
<TABLE>
EXHIBIT 11
ARMCO INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(Unaudited)
(Dollars and shares in millions
except per share amounts)
Three Months Ended Six Months Ended
PRIMARY June 30, June 30,
--------------- ---------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
stock (After preferred dividends of
$4.4 for the three months ended June 30,
1994 and 1993; and $8.9 for the six
months ended June 30, 1994 and 1993):
Income (loss) from continuing operations $65.5 $ (5.8) $ 33.8 $ (31.4)
Income from discontinued operations - 10.1 - 9.2
- ------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting changes 65.5 4.3 33.8 (22.2)
Cumulative effect of changes in
accounting for certain postretirement and
postemployment benefits and income taxes - - - (307.5)
- ------------------------------------------------------------------------------
Net income (loss) $ 65.5 $ 4.3 $ 33.8 $(329.7)
- ------------------------------------------------------------------------------
Weighted average number of common shares 104.5 103.9 104.3 103.7
Weighted average number of common
equivalent shares 0.1 0.3 0.1 -
- ------------------------------------------------------------------------------
Average common shares outstanding as
adjusted 104.6 104.2 104.4 103.7
- ------------------------------------------------------------------------------
Income (loss) per share:
Income (loss) from continuing operations $0.63 $(0.06) $ 0.32 $(0.30)
Income from discontinued operations - 0.10 - 0.09
- ------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting changes 0.63 0.04 0.32 (0.21)
Cumulative effect of changes in
accounting for certain postretirement and
postemployment benefits and income taxes - - - (2.97)
- ------------------------------------------------------------------------------
Net income (loss) per share $ 0.63 $ 0.04 $ 0.32 $(3.18)
- ------------------------------------------------------------------------------
FULLY DILUTED*
Net income (loss) applicable to common
stock(After preferred dividends of $8.9
for the six months ended June 30, 1993):
Income (loss) from continuing operations $69.9 $ (1.4) $ 42.7 $ (31.4)
Income from discontinued operations - 10.1 - 9.2
- ------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting changes 69.9 8.7 42.7 (22.2)
Cumulative effect of changes in
accounting for certain postretirement
and postemployment benefits and
income taxes - - - (307.5)
- ------------------------------------------------------------------------------
Net income (loss) $ 69.9 $ 8.7 $ 42.7 $(329.7)
- ------------------------------------------------------------------------------
Weighted average number of common shares 104.5 103.9 104.3 103.7
Weighted average number of common
equivalent shares 0.1 0.3 0.1 **
Weighted average number of preferred
shares on an "if converted" basis 22.7 22.7 22.7 **
- ------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 127.3 126.9 127.1 103.7
- ------------------------------------------------------------------------------
Income (loss) per share:
Income (loss) from continuing
operations $ 0.55 $ (0.01) $ 0.34 $ (0.30)
Income from discontinued operations - 0.08 - 0.09
- ------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting changes $ 0.55 0.07 0.34 (0.21)
Cumulative effect of changes in
accounting for postretirement
and postemployment benefits and
income taxes - - - (2.97)
- ------------------------------------------------------------------------------
Net income (loss) per share $ 0.55 $ 0.07 $ 0.34 $ (3.18)
- ------------------------------------------------------------------------------
Shares of stock outstanding at June 30
Common 104.6 103.9
Preferred - $2.10 Class A 1.7 1.7
Preferred - $3.625 Class A 2.7 2.7
Preferred - $4.50 Class B 1.0 1.0
<FN>
* Calculation of fully diluted loss per share for all periods except the
three months ended June 30, 1994 is submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083, although it is contrary to paragraph 40
of APB Opinion No. 15 because it produces an antidilutive result, or is not
required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it
results in dilution of less than 3%.
** Antidilutive
</TABLE>
