<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED December 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
----------- -----------
Commission file number 1-873-2
-------
ARMCO INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0200500
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415
------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412/255-9800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Class A Preferred Stock, without par value New York Stock Exchange
Class B Preferred Stock, $1 par value each New York Stock Exchange
Common Stock, $.01 par value each New York Stock Exchange
Rights to Purchase Participating Preferred
Stock of Class A Preferred Stock New York Stock Exchange
Sinking Fund Debentures: New York Stock Exchange
9.20%, due 2000
8.50%, due 2001
11.375% Notes, due 1999 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of Armco
Inc. (assuming solely for purposes of this Form, that all members of
registrant's Board of Directors are "affiliates") was approximately
$823,600,836 as of February 28, 1995.
As of the close of business on February 28, 1995, there were 105,845,473
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1994 --
Parts I, II, and IV of this report.
Proxy Statement for the 1995 Annual Meeting of Shareholders filed with
the Commission under Rule 14a-6 of the Securities Exchange Act of 1934 in
connection with the Company's 1995 Annual Meeting of Shareholders -- Part III
of this report.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Armco Inc. ("Armco" or the "Company") was incorporated as an Ohio
corporation in 1917 as a successor to a New Jersey corporation incorporated in
1899. Based on sales revenues, Armco is the second largest domestic producer
of stainless flat-rolled steels and is the largest domestic producer of
electrical steels. The Company owns a 50% partnership interest in National-
Oilwell, a distributor of oil country tubular goods and a manufacturer of
drilling, production and other oil and gas equipment that operates a network
of oil field supply stores throughout North America. Armco also owns Douglas
Dynamics, Inc., the largest North American manufacturer of snowplows for four-
wheel drive pick-up trucks and utility vehicles and provides insurance
services through businesses it intends to sell or liquidate.
As part of its strategy to focus on the production of specialty flat-
rolled steel, Armco has continued to evaluate the growth potential and
profitability of its businesses and investments, and to rationalize or divest
those that do not represent a strategic fit or offer growth potential or
positive cash flow. In 1992, 1993 and 1994, Armco divested or otherwise
rationalized several unprofitable or non-strategic operations.
On January 28, 1994, Armco signed a letter of intent to sell its ongoing
insurance operations to Vik Brothers Insurance, Inc. ("Vik Brothers"), a
privately owned property and casualty insurance holding company. On August 2,
1994, Armco and Vik Brothers signed a definitive agreement, subject to a
number of conditions, including approvals by regulatory authorities. Under
the terms of the agreement, Armco would be paid approximately $65 million at
closing and $15 million in three years, subject to potential adjustment for
adverse experience in certain insurance reserves. As a result of
restructuring certain obligations arising from the 1992 merger plan for the
insurance companies that are being liquidated, any proceeds from the sale are
pledged as security for certain note obligations due to these insurance
companies and would be retained in the investment portfolio of these
companies.
In April 1994, Armco Steel Company, L.P. ("ASC"), a carbon steel joint
venture with Kawasaki Steel Corporation ("Kawasaki"), completed an initial
public offering and recapitalization. As part of this transaction, the
business and assets of ASC were transferred to a newly formed company named AK
Steel Holding Corporation ("AK Steel"). In the recapitalization, Armco
received 1,023,987 shares of common stock of AK Steel and was released from
certain obligations to make future cash payments to the former joint venture.
In August 1994, Armco sold its conversion business plant in Bridgeville,
Pennsylvania, and, in September 1994, sold, to its partner, Acerinox S.A., 90%
of its investment in North American Stainless ("NAS"), a 50-percent joint
venture that finishes chrome nickel flat-rolled stainless steel. Armco,
through its subsidiary, First Stainless, Inc., maintains a five percent
limited partnership interest in NAS and Armco will supply NAS with chrome
nickel stainless steel coils on an annual contract basis at market rates.
In October 1994, Armco announced that Eastern Stainless Corporation
("Eastern Stainless"), an 84%-owned subsidiary of Armco, and Avesta Sheffield
Holding Company ("Avesta Sheffield") reached an agreement in principle for the
sale of all of the assets of Eastern Stainless to Avesta Sheffield for cash
and the assumption of certain liabilities. A definitive agreement for the
sale was signed on February 9, 1995, and on March 14, 1995, Eastern Stainless,
Armco and Avesta Sheffield completed the sale. The cash proceeds of the sale
were applied to the satisfaction of the Eastern Stainless obligations not
assumed by Avesta Sheffield, Armco assumed the net liabilities of Eastern
Stainless not assumed by Avesta Sheffield or satisfied by the cash proceeds
and Eastern Stainless was dissolved without any shareholder distribution.
1
<PAGE>
In December 1994, Armco sold its Bowman Metal Deck division, a producer
of carbon steel roof, floor and bridge deck, its Tex-Tube division, a
manufacturer of electric welded steel pipe, and its Armco Stainless & Alloy
Products plant in Baltimore, Maryland.
Business Segments
The information on the amounts of revenue, operating results and
identifiable assets attributable to each of Armco's business segments, set
forth in Note 8 of the Notes to Financial Statements in Armco's Annual Report
to Shareholders for the year ended December 31, 1994, is incorporated by
reference herein.
Additional information about Armco's business segments and equity
investments is set forth in Management's Discussion and Analysis in Armco's
Annual Report to Shareholders for the year ended December 31, 1994, which is
incorporated by reference herein.
Specialty Flat-Rolled Steel
Plants in Armco's Specialty Flat-Rolled Steel business segment produce
and finish stainless and electrical steel sheet and strip. Its principal
manufacturing plants are in Butler, Pennsylvania, and Zanesville, Ohio, where
Armco produces flat-rolled stainless and electrical steel sheet and strip
products, and in Coshocton, Ohio, where Armco finishes premium quality flat-
rolled stainless steel in sheet and strip form. Stainless steel plate
products were finished at Eastern Stainless, which was sold on March 14, 1995.
The segment also includes the results of European trading companies which buy
and sell steel and manufactured steel products. Following the start-up of a
new thin-slab continuous caster being installed at Armco's Mansfield, Ohio
facilities, the segment will also include sales of specialty steels produced
by, and the related operating results of, the Mansfield facilities.
The specialty steel industry is a relatively small but distinct segment
of the overall steel industry that represented approximately 2% of domestic
steel tonnage but accounted for approximately 10% of domestic steel revenues
in 1994. Specialty steels refer to alloy tool steel, electrical steel and
stainless sheet, strip, plate, bar, rod and wire products. Specialty steels
differ from basic carbon steel by their metallurgical composition. They are
made with a high alloy content, which enables their use in environments that
demand exceptional hardness, toughness, strength and resistance to heat,
corrosion or abrasion or combinations thereof. Unlike high-volume carbon
steel, specialty steel is generally produced in relatively small quantities
utilizing special processing techniques designed to meet more exacting
specifications and tolerances.
Stainless steel, which represents the largest part of the specialty steel
market, contains elements such as chromium, nickel and molybdenum that give it
the unique qualities of resistance to rust, corrosion and heat; high strength;
good wear characteristics; natural attractiveness; and ease of maintenance.
Stainless steel is used in the automotive and aerospace industries, and in the
manufacture of food handling, chemical processing, pollution control, medical
and health equipment and other products where its combination of strength,
durability and attractiveness is desirable. Electrical steels are iron-
silicon alloys and, through special production techniques, possess unique
magnetic properties that make them desirable for use as energy efficient core
material in such applications as electrical transformers, motors and
generators.
Armco expects that the demand for stainless steel will continue to be
positively affected by its increasing use in the manufacture of consumer
durable goods and industrial applications. Per capita stainless steel usage
in many highly developed countries significantly exceeds per capita usage in
the United States and Armco believes that this is an indication of the growth
potential of demand for stainless steel in the United States. In addition,
the 1990 amendments to the Clean Air Act have resulted in the increasing use
of corrosion-resistant materials in a number of applications for which
stainless steel is well suited, including industrial pollution control devices
and motor vehicle exhaust systems for use in the United States, where Armco
now has the leading market share. Another factor that Armco believes will
affect demand positively is the increasing issuance of new car bumper-to-
bumper warranties and the use of stainless steel in passenger restraint
systems. Stainless steel products
2
<PAGE>
generate higher average profit margins than carbon steel products and,
depending on the stainless grade, sell at average prices of three to five
times those of carbon steel.
Armco produces flat-rolled stainless steel and alloy electrical steel
sheet and strip products that are used in a diverse range of consumer durables
and industrial applications. Since the acquisition of Cyclops Industries,
Inc. in April 1992, approximately 70% of Armco's sales of specialty flat-
rolled steel has been stainless steel and 30% has been electrical steel.
Major markets served are industrial machinery and electrical equipment,
automotive, construction and service centers.
In the stainless steel market, Armco is the leading domestic producer of
chrome grades used primarily in the domestic market for automotive exhaust
components. Stainless steel, which formerly was not used in parts of the
exhaust system other than the catalytic converter, is now used in the entire
exhaust system from manifold to tailpipe by many auto manufacturers. Armco
has developed a number of specialty grades for this application, many of which
are patented. Armco is also known for its "bright anneal" chrome grade
finishes utilized for automotive and appliance trim and other chrome grades
used for cutlery, kitchen utensils, scissors and surgical instruments.
Specialty chrome nickel grades produced by Armco are used in household
cookware, restaurant and food processing equipment and medical equipment.
Other Armco stainless products include functional stainless steel
manufactured for automotive, agricultural, heating, air conditioning and other
manufacturing uses. Before the sale of Eastern Stainless in March 1995,
Armco's stainless products also included stainless steel plate, principally in
flat plate form, for use in industrial applications where high resistance to
heat, stress or corrosion is required.
Armco is the only United States manufacturer of a complete line of flat-
rolled electrical steel products and is the sole domestic producer of certain
high permeability oriented electrical steels. It is also the only domestic
manufacturer utilizing laser scribing technology. In this process, the
surface of electrical steel is etched with high-technology lasers which refine
the magnetic domains of the steel resulting in superior electrical efficiency.
Major electrical product categories are: Regular Grain Oriented ("RGO"), used
in the cores of energy-efficient power and distribution transformers; Cold
Rolled Non-Oriented ("CRNO"), used for electrical motors and lighting
ballasts; and TRAN COR[registered trademark]H, which is used in power
transformers and is the only high permeability electrical steel made
domestically.
Armco had trade orders on hand for its Specialty Flat-Rolled Steel
segment (excluding Eastern Stainless) of $187.3 million at December 31, 1994,
and $142.1 million at December 31, 1993. The backlog increased in 1994 due to
stronger demand and an improving economy. While substantially all of the
orders on hand at year-end 1994 are expected to be shipped in 1995, such
orders, as is customary in the industry, are subject to modification,
extension or cancellation.
Armco's specialty steelmaking operations are concentrated in Pennsylvania
and Ohio, which permits cost-efficient materials flow between plants. Armco's
Butler, Pennsylvania facility, which is situated on 1,300 acres with 3.2
million square feet of buildings, continuously casts 100% of its steel. At
Butler, melting takes place in three 165-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit for refining
molten metal that, in turn, feeds two double strand continuous casters. The
melt capacity at Butler was approximately 875,000 tons by year-end 1994.
Butler also operates a hot-strip mill, anneal and pickle units and a fully-
automated tandem cold-rolling mill. It also has various intermediate and
finishing operations for both stainless and electrical steels.
Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on
88 acres, is a dedicated finishing plant for some of the steel produced at the
Butler facility and has a Sendzimer cold-rolling mill, anneal and pickle
facilities, high temperature box anneal and other decarburization and coating
units.
3
<PAGE>
The finishing plant in Coshocton, Ohio, located on 650 acres, is housed
in a 500,000 square-foot plant and has three Sendzimer mills, four anneal and
pickle facilities, three "bright anneal" lines, two 4-high mills for cold
reduction and other processing equipment, including temper rolling, slitting
and packaging facilities.
Following the startup of a new thin-slab continuous caster being
installed at Armco's Mansfield, Ohio facilities, which is expected to be
completed early in the second quarter of 1995, the Mansfield facilities will
melt and finish specialty steels, including automotive chrome. Production of
specialty steel at Mansfield is expected to begin in the third quarter of
1995. Sales of these specialty steel products and the related operating
results will be reported in the Specialty Flat-Rolled Steel segment.
In the fourth quarter of 1994, Armco announced an expanded capital
improvement program under which it will spend up to $95 million over the next
two years to upgrade and expand its specialty steel finishing facilities. The
program is intended to reduce existing production constraints, increasing
specialty steel finishing capacity by approximately 180,000 tons per year,
particularly in electrical steels, specialty sheet and strip products, and
non-automotive chrome stainless. About $60 million of this total will be
spent to upgrade existing equipment at the Butler, Coshocton, Mansfield and
Zanesville plants. The remaining $35 million of investment is targeted for
proposed new pickling and box annealing facilities. In addition to increasing
revenues as a result of expanded finishing capacity, the capital improvements
are expected to provide quality improvements and significant annual cost
savings.
Other Steel and Fabricated Products
The businesses currently included in the Other Steel and Fabricated
Products segment are described below:
-- Carbon steel operations at Mansfield, Ohio produce commodity grades
of carbon steel sheet, much of which is coated at a dedicated galvanizing
facility at Dover, Ohio. Under a plan to upgrade the facilities at Mansfield
to enhance their steel production capability and improve the operating
performance of both the Mansfield and Dover, Ohio operations, Armco has begun
installing a thin-slab caster and related plant modifications at Mansfield.
Installation is expected to be completed early in the second quarter of 1995.
The caster is designed to produce carbon steels, and functional grades of
chrome stainless steels and nonoriented grades of electrical steels. The
sales of these stainless and electrical steels and the related operating
results will be reported in the Specialty Flat-Rolled Steel segment. The
Mansfield plant currently consists of a 1.4 million square-foot facility,
including a melt shop with two electric arc furnaces (170-ton and 100-ton), a
100-ton argon-oxygen decarburization unit, a six-stand hot strip mill, a five-
stand tandem cold rolling mill and a newly retrofitted Sendzimer mill for
chrome stainless finishing. In the second quarter of 1994, Armco idled the
Mansfield and Dover production facilities. The Mansfield plant is expected to
remain idled until the thin-slab caster is completed. The Dover plant resumed
limited production in early 1995. Armco recognized a special charge of $20
million in the first quarter of 1994 for the cost of benefits to employees on
layoff and other costs of idling the facilities, as well as costs associated
with planned permanent work force reductions.
-- Douglas Dynamics, Inc. is the largest North American manufacturer of
snowplows for four-wheel drive pick-up trucks and utility vehicles. Douglas
Dynamics, Inc., which is headquartered in Milwaukee, Wisconsin, has snowplow
manufacturing plants in Rockland, Maine, Milwaukee, Wisconsin and Johnson
City, Tennessee and sells its snowplows and other light truck equipment
through independent distributors throughout the United States and Canada.
-- Sawhill Tubular produces steel pipe and tubing, electric welded and
mandrel-drawn steel tubing and electric-resistance welded steel pipe at its
plants in Pennsylvania and Ohio.
Armco had trade orders on hand for its Other Steel and Fabricated
Products segment of $38.6 million at December 31, 1994 and $73.0 million at
December 31, 1993. The segment's backlog decreased in 1994 primarily as a
result of the idling of the Mansfield and Dover facilities. While
4
<PAGE>
substantially all of the orders on hand at year-end 1994 are expected to be
shipped in 1995, such orders, as is customary in these industries, are subject
to modification, extension or cancellation.
Employees
At December 31, 1994, Armco had approximately 5,500 employees in its
continuing operations and approximately 1,500 employees in its insurance and
discontinued operations. Most of Armco's domestic production and maintenance
employees are represented by international, national or independent local
unions, although some operations are not unionized.
Armco has agreements with the local unions at the specialty steel plants
in Butler, Pennsylvania and Zanesville, Ohio which terminate September 30,
1996, and June 30, 1996, respectively. In June 1993, the United Steelworkers
of America ("USWA") employees at Armco's Mansfield and Dover, Ohio plants
ratified new six-year contracts, which became effective September 1, 1993. In
the second half of 1994, the USWA employees and management at the Mansfield
and Dover plants reached local agreements which provide for additional
improvements in manning levels and work practices.
Competition
Armco faces intense competition from within the domestic steel industry,
from manufacturers of competing products other than steel, including aluminum,
plastics, composites and ceramics, and from foreign steel producers as well as
foreign producers of components and other products. Many of these foreign
producers have lower labor costs and many are owned, controlled or subsidized
by their respective governments. Their decisions with regard to production
and sales may be influenced more by political and social considerations than
prevailing market forces. Many foreign steel producers continue to ship into
the United States market despite decreasing profit margins or losses.
Depending on a number of market factors, including the strength of the dollar,
import levels, and the effectiveness of our nation's trade laws, pricing of
the Company's products could be adversely affected. Competition is based
primarily on price, with factors such as reliability of supply, service and
quality also being important in certain segments.
Import penetration for stainless sheet and strip was 23.4% in 1994
compared to 23.9% in 1993. Import penetration of electrical steels was 20.3%
in 1994 compared to 22.7% in 1993.
In 1993, Armco, Allegheny Ludlum Corporation, the USWA and the
independent unions at Armco's plants in Butler, Pennsylvania and Zanesville,
Ohio filed a petition requesting that the U.S. government impose both
antidumping and countervailing duties on imports of grain-oriented electrical
steel from Italy. In addition, Allegheny Ludlum Corporation and the USWA
petitioned the U.S. government to assess antidumping duties on imports of
grain-oriented electrical steel from Japan. In 1994, the Department of
Commerce announced a countervailing duty margin of 24.42% and anti-dumping
duties of 60.79% on imports of oriented electrical steel from Italy, and an
anti-dumping duty of 31.08% against Japan. Primarily as a result of the
imposition of these duties, imports of oriented electrical steel from these
countries were severely curtailed during the latter half of 1994 and Armco was
able to improve its position in the market and maintain firmer prices. The
foreign producers have filed appeals with the court of international trade.
Control of unfairly traded foreign steel products was made more difficult
when, in 1994, the U.S. government agreed to the General Agreement on Tariffs
and Trade (or GATT). This agreement weakened existing U.S. trade laws by
making it more difficult to win trade cases filed against foreign countries or
companies believed to be unfairly selling in the U.S. marketplace.
Competition is also presented by the so-called "mini-mills", which
generally have smaller, non-unionized work-forces and are relatively free of
many of the employer, environmental and other obligations that traditionally
have burdened steel producers. Nucor Corporation, a mini-mill steel company,
has announced its intention to enter the automotive chrome stainless steel
business, with the addition of an argon-oxygen-decarburization (AOD) vessel at
its Crawfordsville, Indiana melt shop. Production is scheduled to begin in
the second quarter of 1995, with targeted shipments of 50,000
5
<PAGE>
tons in 1995 and 100,000 tons in 1996. Nucor Corporation's entry will
intensify competition in the automotive chrome stainless market, which totals
about 400,000 tons per year. Armco is currently the leading U.S. producer of
automotive chrome stainless steel.
Raw Materials and Energy Sources
Raw material prices represent a major component of per ton production
costs in the specialty steel industry. The principal raw materials used by
Armco in the production of specialty steels are iron and steel scrap,
molybdenum, chrome and nickel, and their ferroalloys, stainless steel scrap,
silicon and zinc. These materials are purchased in the open market from
various outside sources. Since much of this purchased raw material is not
covered by long-term contracts, availability and price are subject to world
market conditions. Chrome and nickel and certain other materials in mined
alloy form can be acquired only from foreign sources, many of them located in
developing countries that may be subject to unstable political and economic
conditions that might disrupt supplies or affect the price of these materials.
A significant portion of the chrome and nickel requirements, however, is
obtained from stainless steel scrap rather than mined alloys. While certain
raw materials have been in short supply from time to time, Armco currently is
not experiencing and does not anticipate any problems obtaining appropriate
materials in amounts sufficient to meet its production needs. Armco also uses
large amounts of electricity and natural gas in the manufacture of its
products. It is expected that such energy sources will continue to be
reasonably available in the foreseeable future. Compliance with the Clean Air
Act, as amended in November 1990, may increase the operating costs of the
utilities providing services to Armco's facilities, and in turn may result in
increased costs to Armco for utility services.
Environmental Matters
Armco, in common with other United States manufacturers, is subject to
various federal, state and local requirements for environmental controls
relating to its operations. Armco has devoted, and will continue to devote,
significant resources to control air and water pollutants, to dispose of
wastes, and to remediate sites of past waste disposal. Armco estimates capital
expenditures for pollution control in its manufacturing operations will be
about $27 million for the years 1995-1998, with the largest expenditures being
made in the Specialty Flat-Rolled Steel segment. Approximately $14 million is
related to control of air pollution pursuant to regulations currently
promulgated under the Clean Air Act, as amended, and corresponding state laws.
These projections, which have been prepared internally and without independent
engineering or other assistance, reflect Armco's current analysis of probable
required capital projects for pollution control. During the period 1991
through 1994, Armco's capital expenditures for pollution control projects
amounted to approximately $10 million including $7 million in 1994. Statutory
and regulatory requirements in this area continue to evolve and, accordingly,
the type and magnitude of expenditures may change.
Armco has been named as a defendant, or identified as a potentially
responsible party, in various governmental proceedings regarding cleanup of
certain past waste disposal sites. Armco is also a defendant in various
private lawsuits alleging property damage and personal injury from waste
disposal sites. Joint and several liability could be imposed on Armco or other
parties for these matters, thus, theoretically, one party could be held liable
for all costs related to a site. While such governmental and private actions
are being contested, the outcome of individual matters cannot be predicted
with assurance. However, based on its experience with such cases and a review
of current claims, Armco expects that in most cases any ultimate liability
will be apportioned between Armco and other financially viable parties.
From time to time, Armco has been and may be subject to penalties or
other requirements as a result of administrative actions by regulatory
agencies and to claims for indemnification for properties it has previously
owned or leased. In addition, environmental exit costs may be incurred if
Armco decides to dispose of additional properties. It is Armco's policy not
to accrue such costs until a decision is made to dispose of a property.
Based on current facts and circumstances known to Armco, Armco's
experience with site remediation, an understanding of current environmental
laws and regulations, environmental
6
<PAGE>
assessments, the existence of other financially viable parties, expected
remediation methods and the years in which Armco is expected to make payments
toward each remediation (which range from the current year to 30 years or more
in the future), Armco believes that the ultimate liability for environmental
remediation matters identified to date will not materially affect its
consolidated financial condition or liquidity. 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 of
future interim or annual periods.
Furthermore, the identification of additional sites, changes in known
circumstances with respect to identified sites, the failure of other 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 consolidated
financial condition, liquidity and results of operations in future interim or
annual periods. However, it is not possible to determine whether additional
loss, due to changed circumstances, will occur or to reasonably estimate the
amount or range of any potential additional loss.
Statutes and regulations relating to the protection of the environment
have resulted in higher operating costs and capital investments by the
industries in which Armco operates. Although it cannot predict precisely how
changes in environmental requirements will affect its businesses, Armco does
not believe such requirements would affect its competitive position.
Research and Development
Armco carries on a broad range of research and development activities
aimed at improving its existing products and manufacturing processes and
developing new products and processes. Armco's research and development
activities are carried out primarily at a central research and technology
laboratory located in Middletown, Ohio. This laboratory is engaged in applied
materials research related to iron and steel, non-ferrous materials and new
materials. In addition, the materials and metallurgy departments at each
operating unit develop and implement improvements to products and processes
that are directly connected with the activities of such operating unit.
Armco spent $14.6 million, $12.9 million and $24.0 million, respectively,
on research in the years ended December 31, 1994, 1993 and 1992 (including
$0.9 million, $3.9 million and $9.4 million, respectively, funded by
affiliates, primarily ASC, which is no longer an affiliate, in 1993 and 1992).
Equity and Other Investments
Armco Steel Company, L.P.
ASC was a joint venture limited partnership formed in 1989 by Armco and
Kawasaki. With plants located in Middletown, Ohio and Ashland, Kentucky, ASC
produced primarily high strength, low carbon flat-rolled steel. These
products were supplied to the automotive, appliance and manufacturing markets,
as well as to the construction industry and independent steel distributors and
service centers.
In April 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. In the recapitalization, Armco received
1,023,987 shares, or 4.2%, of the AK Steel common stock and 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.
7
<PAGE>
Armco Financial Services Group
AFSG currently consists primarily of insurance companies that Armco
intends to sell (the "AFSG companies to be sold") and companies that have
ceased writing new business and are being liquidated (the "runoff companies").
The AFSG companies to be sold provide multiple-line casualty insurance,
including personal and commercial automobile, workers' compensation,
homeowners, multiperil, personal and commercial property and general liability
insurance, and consist primarily of Northwestern National Casualty Company
("NNCC"), Pacific National Insurance Company and Statesman Insurance Company
("Statesman").
On January 28, 1994, Armco signed a letter of intent to sell its ongoing
insurance operations to Vik Brothers Insurance, Inc., a privately owned
property and casualty insurance holding company. On August 2, 1994, Armco and
Vik Brothers signed a definitive agreement, subject to a number of conditions,
including approvals by regulatory authorities. The sale is expected to close
by April 7, 1995. Under the terms of the agreement, Armco would be paid
approximately $65.0 million at closing and $15 million in three years, subject
to potential adjustment for adverse experience in certain insurance reserves.
As a result of restructuring certain obligations arising from the 1992 merger
plan for the runoff companies, any proceeds from the sale are pledged as
security for certain note obligations due to the runoff companies and would be
retained in the investment portfolio of the AFSG runoff companies.
The insurance business is highly competitive. Many of the competitors of
the AFSG companies to be sold offer more diversified lines of insurance and
have substantially greater financial resources. In addition, the insurance
regulators having supervisory authority over Armco's insurance operations
retain substantial control over certain corporate transactions, including the
sale of the AFSG companies to be sold and the liquidation of the runoff
companies. They also have broad powers to interpret statutory accounting
requirements and to initiate rehabilitation and liquidation proceedings.
The liability for unpaid losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an amount, based
on past experience, for losses incurred but not reported. Such liability is
necessarily based on estimates and, while management believes that the amount
is fairly stated, the ultimate liability may be in excess of or less than the
amount provided. The methods for making such estimates and for establishing
the resulting liability are continually reviewed and any adjustments resulting
therefrom are reflected currently in the earnings of the AFSG companies to be
sold. The liability for unpaid losses and loss adjustment expenses is not
discounted.
The AFSG companies to be sold estimate losses for reported claims on an
individual case basis. Case reserves are based on experience with a
particular type of risk and the available information surrounding each
individual claim. Case reserves are reviewed on a regular basis. As
additional facts become available, the case reserves are adjusted as
necessary. The stability of the case reserving process is monitored through
comparison with ultimate settlement.
The estimates of losses for incurred but not reported claims (IBNR), as
well as additive reserves for reported claims, are developed primarily from an
analysis of historical patterns of the development of paid and incurred losses
(dollars and claim counts) by accident year for each line of business.
Salvage and subrogation estimates are developed from patterns of actual
recoveries.
Allocated loss adjustment expense reserves are developed from an analysis
of historical patterns of the development of paid allocated loss adjustment
expenses to incurred losses, by accident year, by line of business. These
historical patterns are then applied to projected ultimate losses for each
line of business.
Unallocated loss adjustment expense reserves are developed utilizing a
cost accounting system. The cost accounting system is based on historical
costs modified for anticipated changes in operations and selections of
alternative costs.
8
<PAGE>
In December 1992, the Financial Accounting Standards Board issued SFAS
No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." The statement establishes the conditions required
for a contract to be accounted for as reinsurance and prescribes accounting
and reporting standards for those contracts. The AFSG companies to be sold
adopted SFAS No. 113 in 1993. Prior to the adoption of the new statement,
assets and liabilities were reported net of the effects of reinsurance.
Subsequent to the adoption of the new statement, ceded reinsurance balances
due from unaffiliated insurers are reported separately as assets. Ceded
reinsurance balances due from affiliated insurers continue to be reported in
liabilities. As permitted by the statement, prior period financial
statements have been restated.
Loss and loss adjustment expense reserves are stated at management's
estimate of the ultimate cost of settling all incurred but unpaid claims.
Loss and loss adjustment expense reserves are not discounted.
Activity with respect to loss and loss adjustment expense reserves for
the last three years is as follows:
<TABLE>
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Liability for losses and LAE gross of
reinsurance recoverables, at
beginning of year $297,553 $284,309 $276,251
Reinsurance recoverables on unpaid
losses and LAE, at beginning of year 26,644 18,352 16,975
-------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverables, at
beginning of year 270,909 265,957 259,276
-------- -------- --------
Add:
Provision for unpaid losses and
LAE for claims occurring in the
current year, net of reinsurance 169,406 171,834 185,225
Increase in estimated losses and LAE
for claims occurring in prior
years, net of reinsurance 455 5,294 10,852
-------- -------- --------
Incurred losses and LAE during the
current year, net of reinsurance 169,861 177,128 196,077
-------- -------- --------
Deduct losses and LAE payments for
claims, net of reinsurance,
occurring during:
Current year 72,636 73,529 82,288
Prior years 96,832 98,647 107,108
-------- -------- --------
169,468 172,176 189,396
Liability for unpaid losses and LAE,
net of reinsurance recoverables,
at end of year 271,302 270,909 265,957
Reinsurance recoverables on unpaid
losses and LAE, at end of year 37,121 26,644 18,352
-------- -------- --------
Liability for unpaid losses and LAE,
gross of reinsurance recoverables,
at end of year $308,423 $297,553 $284,309
======== ======== ========
</TABLE>
9
<PAGE>
The following table reconciles reserves determined in accordance with
accounting principles and practices prescribed or permitted by insurance
statutory authorities (Statutory reserve) to reserves determined in accordance
with generally accepted accounting principles ("GAAP") at December 31, as
follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Statutory reserve for losses and
loss expenses $308,765 297,930 $291,832
Salvage and subrogation -- -- (7,523)
Postretirement and postemployment benefits (342) (377) --
-------- -------- --------
GAAP reserve for losses and loss expenses $308,423 $297,553 $284,309
======== ======== ========
</TABLE>
Effective on January 1, 1993 the AFSG companies to be sold adopted a new
statutory accounting principle allowing the recognition of salvage and
subrogation recoverable in the determination of the statutory reserve for
losses and loss expenses. Prior year financial statements have not been
restated for the change in accounting principle.
Effective on January 1, 1993, the AFSG companies to be sold adopted
Statement of Financial Accounting Standards ("SFAS") No. 106 and SFAS No. 112
pertaining to postretirement and postemployment benefits. The new accounting
principles were adopted for both statutory and GAAP reporting purposes.
However, certain differences exist between statutory and GAAP accounting
principles that resulted in larger unallocated loss adjustment expense
reserves for statutory reporting purposes.
The following table presents a calendar year runoff of the reserve for
losses and loss adjustment expenses for the years 1985 through 1994. The top
line of the table shows the reserve for losses and loss adjustment expenses
recorded as of December 31 for each of the indicated years. This reserve
represents the estimated amount of losses and loss expenses for claims arising
in all years that are unpaid at the balance sheet date, including losses and
loss adjustment expenses that had been incurred but not yet reported. Each
column shows the reserve amount at the indicated calendar year end and
cumulative data on payments and the re-estimated reserves for all accident
years making up that calendar year end reserve. The last entry for each
calendar year in the lower section of the table represents the incurred loss
and loss expense developed, subsequent to the balance sheet date, through
1994. The estimates are increased or decreased as more information concerning
the frequency and severity of claims becomes available. The deficiency
depicted for a given year is cumulative for that year and all prior years.
The following table shows a $50 million deficiency in 1990 and a $36
million deficiency in 1991 on unpaid losses and LAE gross of reinsurance
recoverables. The AFSG companies to be sold experienced a significant number
of large losses in 1990 and 1991, predominantly in multi-peril and commercial
auto. The deficiencies that occurred in 1990 and 1991 are a result of
additional unprecedented developments on these large losses. In addition,
approximately $13 million of the deficiency for 1990 pertains to additional
development and reserve strengthening that occurred on the 1990 and prior
accident year loss and loss expense reserves of Statesman, a company acquired
in October 1990. The AFSG companies to be sold implemented new reserving
procedures to improve the future adequacy of reserve levels.
The AFSG companies to be sold limit the maximum net loss which can arise
from large risks by reinsuring (ceding) certain levels of risks with other
reinsurers. The table also shows the deficiency on net loss and loss expense
reserves, which is significantly lower than the deficiency in the table above.
Significant development on large losses exceeding the AFSG companies to be
sold net retention during 1990 and 1991 resulted in a significantly smaller
impact on reserve adequacy on a net of reinsurance basis.
10
<PAGE>
<TABLE>
(Dollars in Millions)
<CAPTION>
Year Ended 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for losses and
loss expenses $37 $172 $179 $198 $215 $250 $276 $284 $298 $308
Cumulative amount paid as of:
One year later 19 63 61 60 79 109 114 102 102
Two years later 30 100 91 98 127 169 176 165
Three years later 37 119 114 124 157 209 221
Four years later 38 132 129 139 178 239
Five years later 40 142 138 153 196
Six years later 41 149 148 166
Seven years later 42 154 154
Eight years later 43 158
Nine years later 44
Ten years later
Reserve re-estimated as of:
End of Year 37 172 179 198 215 250 276 284 298 308
One year later 45 176 179 176 209 265 292 296 306
Two years later 47 181 160 175 215 278 305 296
Three years later 50 164 163 177v219 290 312
Four years later 45 168 165 180 226 300
Five years later 46 169 168 187 237
Six years later 45 170 173 196
Seven years later 45 175 178
Eight years later 48 180
Nine years later 49
Ten years later
</TABLE>
<TABLE>
<CAPTION>
Year Ended 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative redundancy
(deficiency) on unpaid
losses and LAE, gross
of reinsurance
recoverables ($12) ($8) $1 $2 ($22) ($50) ($36) ($12) ($8) --
(Deficiency) redundancy
on ceded unpaid losses
and loss expenses (5) (12) (7) (10) (12) (19) (16) (11) (8) --
--- ---- --- ---- ---- ---- --- ---- --- --
(Deficiency) redundancy
net of reinsurance
recoverables ($7) $4 $8 $12 ($10) ($31) ($20) ($1) ($0) --
==== == == === ===== ===== ===== ==== ==== ==
</TABLE>
The table does not present accident or policy year development data which
readers may be more accustomed to analyzing; therefore, analysis of the effect
of loss and loss expense reserving on any particular accident year cannot be
discerned. The table reflects adjustments to income in each year for all
prior years. Conditions and trends that have affected development of the
reserve in the past may not occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
The runoff companies estimate that 60% of future claims will be paid in
the next five years and that substantially all of the claims will be paid by
the year 2017. The ultimate amount of the claims as well as the timing of the
claims payments are estimated based on the annual review of loss reserves
performed by the runoff companies' independent and consulting actuaries.
While there have been no charges recorded with respect to the runoff companies
since 1990, in the future there may be further adverse developments with
respect to the runoff companies, which, if not otherwise offset through
favorable commutations or other actions, will require additional charges to
income.
11
<PAGE>
National-Oilwell
Armco, through a wholly owned subsidiary, has a 50% partnership interest
in National-Oilwell, which was formed in 1987 when Armco and USX Corporation
each contributed their oil field equipment operations to National-Oilwell in
exchange for equal interests in the new partnership. National-Oilwell is a
distributor of oil country tubular goods, a manufacturer of drilling,
production and other oil and gas equipment, and an operator of satellite
repair and service centers and also operates a network of oil field supply
stores throughout North America through which it distributes products to the
oil and gas industries worldwide. National-Oilwell has operations in the
United States, Canada, the United Kingdom, Venezuela, Australia and Singapore.
National-Oilwell operates in a highly competitive environment. National-
Oilwell is not considered a core business of Armco and, as such, Armco
continues to consider various options with respect to its investment in this
business.
ITEM 2. PROPERTIES
Armco owns and leases property primarily in the United States. This
property includes manufacturing facilities, offices and undeveloped property.
The locations of Armco's principal plants and materially important physical
properties are described in ITEM 1. "BUSINESS" and are used by the Specialty
Flat-Rolled Steel and Other Steel and Fabricated Product businesses. Armco
believes that all its operating facilities are being adequately maintained and
are in good operating condition.
All of Armco's principal plants and properties are held in fee. Portions
of the Houston plant, shutdown in 1983, are leased from the Gulf Coast Waste
Disposal Authority (Texas). Armco has an option to purchase the leased
facilities at the end of the lease period.
ITEM 3. LEGAL PROCEEDINGS
There are various claims pending against Armco and its subsidiaries
involving product liability, patent, insurance arrangements, environmental,
antitrust, hazardous waste, employee benefits and other matters arising out of
the conduct of the business of Armco.
Reserve Mining Litigation. On July 17, 1992, Armco was sued in the
-------------------------
United States District Court, District of Minnesota, Fifth Division, by a
group of former salaried employees of Reserve Mining Company ("Reserve"), a
joint venture between a subsidiary of Armco and LTV Corporation ("LTV") that
produced iron ore pellets. The complaint in Adamson, et al. v. Armco alleges
------------------------
that Armco is liable for certain unpaid welfare benefits, including vacation,
severance, supplemental layoff, life insurance and health insurance benefits.
While Armco cannot determine the possible exposure, if any, from this lawsuit,
plaintiffs preliminarily calculated the benefits at about $12 million. On
February 17, 1993, the Court dismissed state law, ERISA and fiduciary claims
with prejudice and plaintiffs' independent fiduciary claims without prejudice.
Plaintiffs filed an amended complaint, in response to which Armco filed a
motion to dismiss. 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. On January 5,
1995, the judgment of the District Court was affirmed by the Eighth Circuit
Court of Appeals. Plaintiffs filed a Petition for Rehearing on February 1,
1995. On March 24, 1995, the Petition for Rehearing was denied by the Court.
In August 1992, an action styled Warner, Donovan, et al. v. Armco Inc.
-------------------------------------
was filed in the U.S. District Court, District of Minnesota by members of the
United Steelworkers of America ("USWA")
12
<PAGE>
who declined to participate in the USWA v. Armco settlement. The complaint
-------------------------
alleges breaches of the Basic Labor
Agreement, Supplemental Unemployment Benefit Plan, Insurance Agreement,
Pension Agreement and Program of Hospital-Medical Benefits for Pensioners and
Surviving Spouses and seeks an unspecified amount of damages. On February 17,
1993, the Court granted Armco's motion to dismiss plaintiffs' state law
claims. The plaintiffs' claims based on the labor agreements remain pending.
Plaintiffs filed an amended complaint, in response to which Armco filed a
motion to dismiss certain claims therein. On October 22, 1993, the Court
granted Armco's motion. On November 8, 1993, Armco filed an answer to the
allegations in the amended complaint not subject to the motion to dismiss.
Discovery is in progress.
On April 25, 1994, an action entitled Larry B. Ricke, Trustee v. Armco
--------------------------------
was filed in the United States District Court for the District of Minnesota by
the Trustee appointed by the Pension Benefit Guaranty Corporation ("PBGC") for
the purpose of recovering from Reserve assets to satisfy Reserve's liability
for pension benefit entitlements which are in addition to those guaranteed by
the PBGC. The complaint alleges that Armco is liable for the unfunded
nonguaranteed benefits under the Pension Plan of Reserve in the amount of $9.2
million plus interest. The pension benefits which are the subject of this
action were part of the class settlement of USWA v. Armco. Approximately
-------------
fifteen hundred members of the class signed individual releases (19 members
who did not are plaintiffs in Warner, Donovan, et al. v. Armco Inc.) releasing
-------------------------------------
Armco from all claims, liabilities, etc. based upon or which arise out of any
Reserve Employee Pension Benefit Plan. Armco filed a Motion to Dismiss the
complaint on the basis of said releases which the court denied on March 28,
1995. Armco is considering whether to pursue an appeal of this ruling.
While Armco's management believes that it has substantial defenses
against these Reserve-related claims, if these creditors and other Reserve
creditors are successful in such claims, Armco could become liable for these
and other Reserve nondebt obligations in an amount which could be substantial.
Eastern Stockholder Litigation. On or about March 13, 1995, an action
-------------------------------
entitled Pension Benefit Guaranty Corporation vs. Armco Inc. and Eastern
----------------------------------------------------------------
Stainless Corporation was filed in the United States District Court for the
---------------------
Southern District of Ohio by the PBGC as a Class B shareholder of Eastern
Stainless. The complaint is captioned as a shareholder derivative and class
action on behalf of all Class B shareholders. The plaintiffs allege breach of
fiduciary duty as well as certain other claims arising from Armco's status as
a majority shareholder in Eastern Stainless. The damages are alleged to be in
excess of $12 million. The Class B shares were redeemable by Eastern
Stainless for $1 a share or approximately $13 million. On March 15, 1995,
Eastern Stainless was dissolved without any shareholder distribution. Armco
believes that it has substantial defenses available to it with respect to the
complaint.
CRS Litigation. On October 31, 1990, a third-party complaint was served
---------------
on Armco in the Circuit Court of Montgomery County, Maryland by the owner of a
6.3 mile potable water tunnel designed by defendant, CRS Sirrine ("CRS") and
its predecessor companies, and constructed by Armco and Clevecon Inc.
("Clevecon"). Armco built 3.4 miles of the tunnel; Clevecon built the
remaining 2.9 miles. No portion of the tunnel, which was completed in early
1984, has ever been functional. Washington Suburban Sanitary Commission filed
suit against CRS seeking damages in the amount of $200 million. CRS filed
third-party complaints against Armco and Clevecon seeking damages to the
extent of any liability of CRS attributable to Armco's or Clevecon's
negligence or negligent misrepresentation in connection with the installation
of the potable water tunnel and the third-party defendants' alleged defective
workmanship in connection with the same. Armco's motion to dismiss or, in the
alternative, for summary judgment was denied by the Court. CRS subsequently
settled the claims against it by Washington Suburban Sanitary Commission and
continued to prosecute its third-party claims against Armco and Clevecon.
Oral argument on Armco's re-filed summary judgment motion was held on January
3, 1994. The circuit court denied Armco's summary judgment motion and the
case proceeded to trial. On January 28, 1994, a directed verdict was entered
by the court in favor of Armco. On January 9, 1995, the Court of Special
Appeals of Maryland affirmed, per curiam, Armco's directed verdict against
CRS. CRS has petitioned the Maryland Court of Appeals (the state's highest
court) for discretionary leave to appeal the judgment of the Court of Special
Appeals and Armco has filed a response in opposition.
13
<PAGE>
Cornerstones Litigation. An action was filed by Cornerstones Municipal
------------------------
Utility District ("Cornerstones") and William St. John, as representative of a
class of owners of real property situated within Cornerstones, in the District
Court of Harris County, Texas, in July 1989, alleging that Armco Construction
Products supplied defective pipe for a sanitary sewer system in three
residential subdivisions. The petition sought in excess of $40 million in
damages. On May 29, 1991, plaintiffs filed a Third Amended Petition adding
Kingsbridge Municipal Utility District ("Kingsbridge") and John Keplinger, as
representative of a class of owners of real property situated within
Kingsbridge, as additional plaintiffs. The residents of Kingsbridge made
similar allegations and sought certification of the class of Kingsbridge
homeowners in an effort to recover damages for an allegedly faulty sanitary
sewer system in four residential subdivisions. The amended petition sought in
excess of $40 million in damages on behalf of the Kingsbridge and the
Cornerstones plaintiffs. On January 13, 1992, the Court granted Armco's
Motion for Summary Judgment and dismissed all of the Cornerstones plaintiffs'
claims on the basis of the statute of limitations. The plaintiffs appealed
the decision to the Fourteenth Court of Appeals. On May 21, 1992, since
defendants had not moved for summary judgment against Kingsbridge, the Court
of Appeals dismissed Kingsbridge from the appeal. In January 1993, the Court
of Appeals reversed the dismissal of the Cornerstones action and remanded it
to the trial court. In May 1993, the Supreme Court of Texas granted Armco's
application for leave to appeal the judgment of the Court of Appeals and heard
argument on the matter on September 14, 1993. On November 24, 1993, the
Supreme Court reversed the judgment of the Court of Appeals and remanded the
case to the lower court for disposition of unaddressed issues. On remand, in
an opinion filed on November 10, 1994, the Court of Appeals reinstated the
trial court's grant of summary judgment in favor of Armco on the basis that
the Cornerstones claims are barred by the statute of limitations. On December
8, 1994, the Court of Appeals denied plaintiffs' petition for rehearing. On
March 1, 1995, the Cornerstones plaintiffs filed an application for writ of
error to the Supreme Court of Texas. Armco is preparing a response in
opposition. The Kingsbridge action remains pending before the trial court.
In addition, there are three multiple-party homeowners actions which
remain pending on behalf of property owners in the Cornerstones Municipal
Utility District. The first of these actions, Vincent and Linda Adduci, et
-----------------------------
al. v. Armco Steel Corporation, et al., was filed in the 127th District Court
--------------------------------------
of Harris County, Texas on or about April 3, 1992, by approximately 87
residents, including the lead plaintiffs, against the same defendants as in
the Cornerstones case. On or about September 11, 1992, Harris W. Arthur and
------------
other plaintiff homeowners commenced a similar action, styled Harris W.
---------
Arthur, et al. v. Monsanto Company, et al., in the 133rd Judicial District
------------------------------------------
Court of Harris County. On or about March 22, 1993, a third action, captioned
William C. Irons, et al. v. Turner, Collie & Braden, Inc., et al., was filed
-----------------------------------------------------------------
in the 152nd Judicial District Court of Harris County by the lead plaintiff
and approximately 100 additional residents. All three cases are substantially
based upon the same theories as the Cornerstones case and were separately
------------
filed after an effort to have the Cornerstones complaints certified as a class
------------
action was denied by the court. These three actions each seek an unspecified
amount of damages.
Armco Chile Prodein, S.A. Litigation. On or about November 15, 1991,
-------------------------------------
Armco and Armco Chile Prodein, S.A. ("Armco Chile") were sued for damages in
the United States District Court for the Southern District of Alabama by a
maritime cargo carrier. The plaintiff's claims were based upon allegations of
fraud, negligent misrepresentation, negligent interference with contractual
relations and wrongful arrest. Plaintiff's allegations arose out of a series
of transactions in which it was engaged by Armco Chile to transport fiberglass
reinforced pipe from Jacksonville, Florida to Talcahuano, Chile. The
plaintiff made three such shipments of pipe. After discovering damage to the
first and second shipments of pipe, which defendants contended was due to
negligence by plaintiff, Armco Chile arrested, pursuant to Chilean law, the
vessel which plaintiff utilized to carry the third shipment of pipe. The
plaintiff alleged, among other things, that the arrest was wrongful and that
the alleged wrongful arrest resulted in such severe damage to the plaintiff's
business interests and reputation that the plaintiff went out of business.
The plaintiff's experts claimed that the damages suffered by plaintiff range
from $38 million to $47 million. Both Armco and Armco Chile filed motions for
summary judgment. On January 25, 1993, the court granted summary judgment
discharging Armco and subsequently denied plaintiff's motions for
reconsideration of the summary judgment granted to Armco. On April 30, 1993,
a jury verdict on plaintiff's wrongful arrest and lost profits claims was
14
<PAGE>
rendered in favor of the plaintiff and against Armco Chile in the amount of
$10,500,000. Judgment on the verdict was entered by the Court on May 7, 1993.
Thereafter, Armco Chile filed a motion seeking judgment as a matter of law or,
alternatively, for a new trial. On October 12, 1993, finding that the jury's
verdict on liability and damages was against the weight of the evidence, the
trial court granted the defendant's post-trial motion, entering judgment in
favor of Armco Chile against the plaintiff. The court also granted Armco's
motion for a conditional new trial in the event the judgment was overturned on
appeal. The plaintiff appealed this ruling to the Eleventh Circuit Court of
Appeals. On September 12, 1994, the Eleventh Circuit Court of Appeals
affirmed per curiam the ruling of the district court. The plaintiff filed a
petition for rehearing en banc which was denied by the Eleventh Circuit of
Appeals on November 14, 1994. The time for filing a petition for writ of
certiorari to the U.S. Supreme Court has expired.
Environmental Proceedings. Some of Armco's operations are subject to
--------------------------
consent orders or judgments under local, state or federal environmental laws
and regulations which require Armco to comply with certain discharge standards
and to add certain pollution abatement equipment. Armco has received a number
of notices identifying Armco as a potentially responsible party under federal
or state laws imposing liability for costs in connection with alleged releases
of hazard substances from various waste treatment or disposal sites. It is
routinely asserted that joint and several liability will be applied; thus, a
single party could be held liable for all costs related to a site. However,
Armco's experience has been that liability is usually apportioned on the basis
of volume and/or toxicity of materials sent to a site. In many cases, Armco
is one of several hundred parties. In a few instances, Armco is one of only a
few parties or solely liable. In most instances, Armco expects that any
ultimate liability will be apportioned between Armco and other financially
viable parties. Armco has also received some claims for indemnification for
properties it previously owned or leased. Armco intends to assert all
meritorious legal and equitable defenses which are available to it with
respect to environmental matters. See "Item 1- BUSINESS--Environmental
Matters". The following paragraphs provide information about unresolved
environmental matters that have been reported in previous 10-K or 10-Q filings
and certain new matters.
On July 31, 1989, the United States filed a civil action in the United
States District Court for the Southern District of Texas, Houston Division,
against 85 parties under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") for cost recovery and injunctive
relief associated with the French Limited Superfund site (the "French Limited
Site") near Crosby, Texas. Concurrently, the United States government filed a
Consent Decree requiring the defendants to reimburse the United States in the
amount of $1.3 million, to pay certain future oversight costs and to undertake
remedial action at the French Limited Site. The Decree was approved and
entered by the court. The remedy outlined in the Decree has been implemented
and remediation is expected to be complete in 1996. Armco's estimated
remaining share of costs, which is fully accrued, is approximately $1.3
million.
Armco was one of four remaining defendants in several class actions filed
on behalf of residents near the French Limited Site; these actions were
settled in late 1992 and dismissed with prejudice. Approximately 300
individuals who chose not to settle in the original actions were joined in the
case, Rosa Ann Barrett, et al. v. Atlantic Richfield Company ("ARCO"), et al.,
-----------------------------------------------------------------------
which was in the United States District Court for the Southern District of
Texas, Houston Division ("Houston"). On June 20, 1994, the court granted
summary judgment against all but two of the Barrett plaintiffs on the grounds
-------
that they had not established a factual basis for their personal injury
claims. Settlement of the claims of the two remaining plaintiffs subsequently
was finalized, and Armco's share of the settlement was $1,356. On September
20, 1994, the court entered a final order denying plaintiffs' motion for
rehearing or new trial and dismissing all of plaintiffs' claims in this case.
The Barrett plaintiffs filed a notice of appeal on October 19, 1994. In
-------
another case, which was filed in the Houston court, Rhonda Sills v. ARCO, et.
-------------------------
al., which also alleged personal injury, the court entered its order granting
---
summary judgment against the plaintiffs on October 17, 1994. Plaintiffs filed
a notice of appeal on February 6, 1995. In the case styled John D. Bertling,
-----------------
et al. v. ARCO, et al., which was filed in the Houston Court in May 1994 and
----------------------
raised claims of business losses, Mr. Bertling has accepted a settlement offer
made by Armco and two other defendants. Armco's share of the settlement is
$4,244.36.
15
<PAGE>
Armco and Traverse Bay Area Intermediate School District ("TBA") entered
into a Consent Decree with the State of Michigan in May 1994, resolving claims
of contamination of TBA property. Under the Consent Decree, Armco paid
$528,070 for past costs; and will pay 60% of additional state oversight costs
as well as for part of the site remediation. Armco's share of the remediation
cost is expected to be about $530,000.
An action styled The United States of America, State of Maryland v.
--------------------------------------------------
Azrael, et al. v. Armco Steel Corporation, et al. was filed in the United
-------------------------------------------------
States District Court for the District of Maryland pursuant to Section 107 of
CERCLA to recover monies expended by the United States and the State of
Maryland in response to a release and threatened release (federal allegation)
and an imminent and substantial danger to the public health or welfare
presented by the release or substantial threat of release (state allegation)
of hazardous substances from a waste disposal site at the intersection of Kane
and Lombard Streets in Baltimore, Maryland. Armco was served with a third-
party complaint on April 19, 1991. The third-party complaint alleges that
Armco arranged for the disposal and/or treatment or arranged with a
transporter for transport for disposal or treatment of hazardous waste to the
Kane and Lombard site. A determination has not been made as to how much waste,
if any, Armco sent to the site. Based on settlement discussions to date,
Armco expects to settle the suit at an amount that is not material.
On or about September 29, 1989, the United States filed a civil action in
the United States District Court for the District of Minnesota under CERCLA
for declaratory relief and cost recovery associated with the Arrowhead
Refining Superfund site (the "Arrowhead Site") in Hermantown, Minnesota,
naming Armco as a defendant. The current estimated cost to clean up the
Arrowhead Site is about $20 million. Armco settled the case with the United
States Environmental Protection Agency ("USEPA") and other potentially
responsible parties (PRP's") for payment of $4,988,920 in November 1994 (which
is in addition to $2.4 million Armco paid in prior years and credit for $2.5
million which was previously paid by LTV). Armco expects no further payment
requirements for remediation of this site.
On July 19, 1993, Armco received a request from USEPA under Section 3007
of the Resource Conservation and Recovery Act ("RCRA") for information as part
of an ongoing investigation into compliance with a Consent Agreement and Final
Order dated October 27, 1988, (the "Consent Order") relating to two inactive
waste surface impoundments located at the former E.G. Smith plant in
Cambridge, Ohio. Armco had sold the Flour City Cambridge, Ohio plant in
February, 1993, but retained title to 21.5 acres of the Cambridge facility,
including the surface impoundments. Armco submitted a revised closure plan for
this site in September 1993. Armco has established reserves which it believes
will be adequate to cover the required closure. The Department of Justice
notified Armco in March 1994 that it was prepared to file a complaint in this
matter alleging that there was non-compliance with the Consent Order in about
1989 and 1990. A tentative settlement with the Department of Justice has been
reached but a consent order implementing the settlement has not yet been
negotiated. A penalty of $100,000 is expected; other costs are not expected
to be material.
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 USEPA, which asserted that National Supply
and/or National-Oilwell was a PRP under CERCLA with respect to the Odessa
Drum Company, Inc. Superfund site located in Odessa, Ector County, Texas.
Armco settled this matter for $119.
Armco is one of four companies that are identified by the USEPA as PRP's
at the Fultz Landfill Superfund site in Byesville, Ohio; Armco received the
initial CERCLA information request about this site in 1985. USEPA's estimate
for remediation costs is about $15 million. Armco is negotiating jointly with
USEPA and the Department of Justice to settle its liability. The initial
proposal from the Department of Justice was unacceptable to Armco and Armco is
preparing a counter proposal. The outcome of negotiations or litigation can
not be determined at this time, however, even if Armco were to have accepted
the Department of Justice's initial proposal, the amount which would be
expected to be paid out over the next several years would not be material to
Armco.
16
<PAGE>
Armco received a unilateral order in September 1994 from USEPA to
complete remediation of contaminated soil on certain property in New Boston,
Ohio which had been sold to New Boston Industrial Corporation several years
ago. Prior to the sale, the salvage contractor hired by the current owner
(which was then occupying the property as a tenant) engaged in intentional
conduct which resulted in contamination. Armco and the current owner have
collected $825,000 on a $1 million performance bond which had been obtained to
secure the contractor's performance. These funds were used for remediation
and oversight of the cleanup. Armco is conducting the remaining cleanup which
is estimated to cost about $5.2 million; all contaminated soil which had
previously been excavated has been shipped off-site; additional soil samples
will be taken to determine whether additional excavation is necessary. Armco
is seeking contribution from other PRPs, but no estimate as to the amount of
such contribution can be made at this time.
In July of 1990, Eastern Stainless Corporation entered into a Consent
Order with the Maryland Department of Environment to resolve a complaint
alleging various violations of environmental requirements. This Order was
followed by a voluntary Consent Judgment on April 17, 1992 and an amendment of
the Consent Judgment in August of 1993. Pursuant to the Order and Judgment,
Eastern Stainless spent a total of about $5.4 million in 1991 through 1994 on
various pollution prevention projects. In addition, Eastern Stainless paid a
$0.3 million penalty. Armco believes Eastern Stainless was in compliance with
the Consent Judgment at the time Eastern Stainless was sold to Avesta
Sheffield, Inc. By Court Order, dated March 10, 1995, Avesta was substituted
for Eastern Stainless as the responsible party under the Consent Order, and
Armco expects to have no further liability in regard to the Consent Judgment.
On July 22, 1993, Armco received a request from the Kansas Department of
Health and Environment ("KDHE") for information regarding a former Armco
Construction Products Division plant located in Topeka, Kansas and now owned
by Contech Construction Products, Inc. ("Contech"). Armco answered KDHE's
information request in August 1993 and KDHE has indicated it will pursue
Contech and two other parties regarding this matter. Armco is working with
Contech to resolve any indemnification obligation Armco may have under the
agreement conveying the property to Contech. Based on the type of
contamination at issue and the presence of other potentially responsible
parties, Armco does not believe its liability will be material.
In December 1993, Armco and one other company received a notice of
nonbinding preliminary allocation of proportionate responsibility from the
Pennsylvania Department of Environmental Resources ("PADER") for the William
Taylor Estate site. PADER has decided to conduct additional investigations at
this site. Based on current information about type of contamination and the
presence of other potentially responsible parties, Armco does not expect its
liability to be material.
On February 16, 1994, the Missouri Department of Natural Resources and
the USEPA jointly issued a Part B permit to the Kansas City facility under
RCRA. Armco petitioned the Environmental Appeals Board for review of most of
such permit provisions. The appeal was resolved through negotiation. Armco
is initiating the investigation and remediation required under the revised
permit which was issued in November, 1994. Initial investigation costs may
reach $1 million; there is not sufficient information regarding soil and
groundwater conditions to reasonably estimate remediation costs at the present
time.
The Malitovsky Drum Superfund site in Pittsburgh, Pennsylvania, in which
Armco was a named PRP was resolved through entry of a Consent Decree on
February 21, 1995, in the U.S. District Court for the Western District of
Pennsylvania. Armco had previously deposited $118,333 in a PRP trust fund as
its share of liability in this matter. No further liability is anticipated
for this matter.
On January 18, 1994, Armco received a 104(e) request for information
under CERCLA from USEPA regarding shipments to the Granville Solvents site in
Ohio. In August 1994, USEPA entered into an Administrative Order on Consent
("AOC") with a number of potentially responsible parties at the Granville
Solvents Site in Ohio. Armco did not sign the AOC because the terms were
deemed unacceptable. Issues of particular concern were stipulated penalties
for migration of contaminants,
17
<PAGE>
lack of specificity as to what remediation would be required at the site and
lack of a meaningful procedure to resolve disputes between the parties and
USEPA. Four of the signatories to the AOC, who claim to have an assignment of
rights by other companies who signed the AOC, initiated a contribution action
on September 9, 1994, in the U.S. District Court for the Southern District of
Ohio against all the potentially responsible parties, including Armco, who did
not sign the AOC. Armco made a settlement offer to all the AOC signatories
under which Armco would pay about 15% of remediation costs, which are
currently estimated at $5 million. This offer was rejected by the plaintiffs
and has been withdrawn. A scheduling order for discovery is being developed.
On February 27, 1995, the Ohio Environmental Protection Agency issued a
Notice of Violation ("NOV") to Armco's Zanesville, Ohio facility alleging
noncompliance with both a 1993 Order and various state regulations regarding
hazardous waste management. Armco is reviewing the NOV, implementing
appropriate corrective measures and preparing a response. No proposed
penalties were included in the NOV and Armco cannot reasonably estimate
potential penalties based on current information.
In the opinion of management, the ultimate liability resulting from the
claims described in the preceding paragraphs in the "Legal Proceedings"
section will not materially affect the consolidated financial position or
liquidity of Armco and its subsidiaries; however, it is possible that due to
fluctuations in Armco's operating results, future developments with respect to
such matters could have a material effect on its financial condition,
liquidity and results of operations in future interim or annual periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Armco during the fourth quarter of the year ended December 31, 1994.
Executive Officers of Armco
The executive officers of Armco as of March 15, 1995, were as follows*:
<TABLE>
<CAPTION>
Years
Age as of Tenure in of Service
Name March 15, 1995 Office Office (1) with Armco
---- -------------- ------ ----------- ----------
<S> <C> <C> <C> <C>
James F. Will 56 President and 1994 3
Chief Executive Officer
James L. Bertsch 51 Vice President and 1989 29
Treasurer
John B. Corey 51 Vice President - 1994 16
Asset Management and
Strategic Planning (2)
David G. Harmer 51 Vice President and 1993 2
Chief Financial Officer
David A. Higbee 52 Vice President - 1994 29
Diversified Businesses
Gary R. Hildreth 56 Vice President, General 1993 24
Counsel and Secretary
Peter G. Leemputte 37 Vice President and 1993 2
Controller (3)
<FN>
*Mr. Robert M. Visokey, Executive Vice President - Steel Operations died on
March 14, 1995.
-------------------------
18
<PAGE>
(1) All officers are elected annually by the Board of Directors and hold
office until their successors are elected and qualified. Each of the officers
named above has held responsible positions with Armco or its subsidiaries
during the past five years, with the exceptions of Messrs. Will, Harmer,
Leemputte and Higbee. Immediately prior to joining Armco, Mr. Will was
President and Chief Executive Officer of Cyclops Industries, Inc. (a
manufacturer of flat-rolled carbon and stainless steel products). Mr. Harmer
was Vice President and Controller of FMC Corporation (a broad-based chemicals
and manufacturing company). Mr. Leemputte was project manager for Gemini
Consulting (specializing in the development and application of leading edge
business concepts and practices). Prior to that, Mr. Leemputte held various
controlling positions at FMC Corporation. Mr. Higbee was President of
National-Oilwell.
(2) Effective March 1, 1995, Mr. Corey was named Vice President - Asset
Management and Strategic Planning. He had previously been Vice President -
Asset Management and Business Development since March 1, 1994.
(3) Effective March 1, 1995, Mr. Leemputte was named Vice President and
Controller. He had previously been Controller since September 1, 1993.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
from pages 38, 45 and 48 of the Annual Report to Shareholders for the year
ended December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In millions, except per share amounts)
<CAPTION>
1994 1993 1992 (2) 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $1,437.6 $1,664.0 $1,673.2 $1,204.0 $1,342.3
Special charges - net (3) (35.0) (165.5) (185.1) (48.7) --
Income (loss) from continuing
operations 77.7 (256.2) (419.3) (160.6) (75.8)
Income (loss) from continuing
operations per common share 0.57 (2.64) (4.35) (1.91) (0.95)
Total assets (4) 1,934.9 1,904.7 1,869.9 1,765.0 2,182.6
Long-term debt and lease
obligations 363.8 379.7 401.0 350.7 354.2
Long-term employee benefit
obligations (4) 1,255.3 1,270.9 541.6 362.3 352.3
Class B common stock of
subsidiary (5) -- 9.7 9.3 -- --
Cash dividends declared per
common share -- -- -- -- .40
<FN>
-------------------------------
(1) The information in this Item should be read in conjunction with
Armco's financial statements and the notes thereto, which are incorporated
by reference in Item 8.
(2) In April 1992, Armco acquired Cyclops Industries, Inc. in a
transaction accounted for as a purchase.
(3) Special charges - net primarily relate to the shutdown, sale and/or
rationalization of operating facilities.
19
<PAGE>
(4) In 1993, Armco adopted SFAS Nos. 106 and 109 which increased long-term
employee benefits and total assets.
(5) The Class B common stock was issued by Eastern Stainless prior to
Armco's acquisition of this 84%-owned former subsidiary of Cyclops
Industries, Inc. In 1994, Eastern Stainless was identified for sale, and
as a result, Armco ceased to include Eastern Stainless in its
consolidation. The sale of Eastern Stainless was completed on March 14,
1995.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
from pages 12-22 following the caption "Management's Discussion and Analysis"
of the Consolidated Financial Statements in the Annual Report to Shareholders
for the year ended December 31, 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 23-43 of the Annual Report to Shareholders for the year ended
December 31, 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to executive officers of Armco
is contained in Part I of this report under "Executive Officers of Armco" and
is incorporated herein by reference. The information required as to directors
is incorporated herein by reference from the information set forth under the
caption "ELECTION OF DIRECTORS" in the registrant's Proxy Statement for the
1995 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as
amended (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth in the Proxy Statement under the caption
"EXECUTIVE COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership in Armco stock of directors, certain executive
officers and directors and executive officers as a group and of persons known
by Armco to be the beneficial owners of more than five percent of any class of
Armco's voting securities is incorporated herein by reference from the
information set forth in the Proxy Statement under the caption "MISCELLANEOUS
-- Stock Ownership".
20
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
I. Documents Filed as a Part of this Report
A. Financial Statements and Financial Statement Schedules Page
1. Statement of Consolidated Operations for the Years Ended
December 31, 1994, 1993 and 1992 *
2. Statement of Consolidated Financial Position as of December 31,
1994 and 1993 *
3. Statement of Consolidated Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992 *
4. Notes to Financial Statements *
5. Independent Auditors' Report *
6. Independent Auditors' Report 26
7. Financial Statement Schedule for the Years Ended
December 31, 1994, 1993 and 1992
II-- Valuation and Qualifying Accounts 27
8. Responsibility for Financial Reporting *
9. National-Oilwell Consolidated Financial Statements
and Financial Statement Schedules as of
December 31, 1994 and 1993 and for
the years ended December 31, 1994, 1993 and 1992 28 - 43
10. Armco Financial Services Group companies to be sold
Consolidated Financial Statements and Financial Statement
Schedules as of December 31, 1994 and 1993 and for
the years ended December 31, 1994, 1993 and 1992 44 - 72
---------------
* Incorporated in this annual report on Form 10-K by reference to pages
23-43 of the Annual Report to Shareholders for the year ended December
31, 1994.
21
<PAGE>
Financial Statements and Financial Statement Schedules Omitted
The financial statements and financial statement schedules for Armco Inc.
and consolidated subsidiaries, and for Armco Financial Services Group
companies to be sold and National-Oilwell, other than those listed above, are
omitted because of the absence of conditions under which they are required, or
because the information is set forth in the notes to financial statements.
B. Exhibits
The following is an index of the exhibits included in the Form 10-K
Annual Report.
3(a). Articles of Incorporation of Armco Inc., as amended as of May 12, 1993
(1)
3(b). Regulations of Armco Inc. (2)
4. Armco hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of each instrument defining the rights of
holders of long-term debt of Armco and its subsidiaries, omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K.
10(a). Deferred Compensation Plan for Directors*
10(b). 1993 Long-Term Incentive Plan of Armco Inc. (3)*
10(c). Severance Agreements (4)*
10(d). 1988 Restricted Stock Plan (5)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (6)*
10(f). Executive Supplemental Deferred Compensation Plan (7)*
10(g). Pension Plan for Outside Directors (8)*
10(h). Rights Agreement dated as of June 27, 1986 between Armco Inc. and
Fifth Third Bank, as successor to Harris Trust and Savings Bank, as amended as
of June 24, 1988 (9)
10(i). Key Management Severance Policy (10)*
10(j). Minimum Pension Plan (11)*
10(k). Stainless Steel Toll Rolling Services Agreement (12)
10(l) Equity Exchange Agreement (13)
10(m) Stock Purchase Agreement among Armco Inc., Armco Financial Services
Corporation and Vik Brothers Insurance, Inc. (14)
10(n) Asset Sale Agreement By and Among Armco Inc., Eastern Stainless
Corporation, Avesta Sheffield East, Inc. and Avesta Sheffield Holding Co.
dated as of February 9, 1995 (15)
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1994.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1994.)
22
<PAGE>
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
28. Schedule P - Analysis of Losses and Loss Expenses
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1994 for
the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan for
Hourly Employees will be filed by amendment as exhibits hereto, as permitted
under Rule 15d-21.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the Form 10-K pursuant to Item 14(c) of Form 10-K.
______________________
(1) Incorporated by reference from Exhibit 4.2 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(2) Incorporated by reference from Exhibit 3.2 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994.
(3) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference from Exhibit 10(a) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(5) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(6) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(7) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1989 (SEC File No. 001-00873).
(9) Incorporated by reference from Exhibit 1 to Armco's Form 8-A dated July
7, 1986 and Exhibit 1.1 to Armco's Form 8 dated July 11, 1988 (SEC File No.
001-00873).
(10) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1990.
(11) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1991.
(12) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1993.
(13) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated April
7, 1994.
23
<PAGE>
(14) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(15) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated March
14, 1995.
------------------
II. Reports on Form 8-K
The following reports on Form 8-K were filed by Armco since September
30, 1994:
Report Date Description
----------- -----------
October 3, 1994 Reporting that Armco, Eastern Stainless, an 84%-
owned subsidiary of Armco, and Avesta Sheffield
reached an agreement in principle for the sale of
all of the assets of Eastern Stainless to Avesta
Sheffield for cash and the assumption of certain
liabilities.
March 14, 1995 Reporting that on March 14, 1995, Armco, Eastern
Stainless, an 84%-owned subsidiary of Armco, and
Avesta Sheffield completed the sale of substantially
all of the assets of Eastern Stainless to Avesta
Sheffield and providing pro forma financial
information with respect to the sale. Also
reporting that a minority shareholder of Eastern
Stainless filed a complaint against Armco and
Eastern Stainless seeking various relief based upon
Armco's relationship with Eastern Stainless.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized as of March 31,
1995.
ARMCO INC.
By JAMES F. WILL
-------------------------------
James F. Will
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 31, 1995.
By JAMES F. WILL By PAUL H. HENSON
------------------------------- -------------------------------
James F. Will Paul H. Henson
President, Director
Chief Executive Officer
and Director
By DAVID G. HARMER By
------------------------------- -------------------------------
David G. Harmer John H. Ladish
Vice President and Director
Chief Financial Officer
By PETER G. LEEMPUTTE By BRUCE E. ROBBINS
------------------------------- -------------------------------
Peter G. Leemputte Bruce E. Robbins
Vice President and Controller Director
By By BURNELL R. ROBERTS
------------------------------- -------------------------------
John J. Burns, Jr. Burnell R. Roberts
Director Director
By DAVID A. DUKE By JOHN D. TURNER
------------------------------- -------------------------------
David A. Duke John D. Turner
Director Director
By JOHN C. HALEY
-------------------------------
John C. Haley
Director
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Armco Inc.:
We have audited the consolidated financial statements of Armco Inc. and
consolidated subsidiaries as of December 31, 1994 and 1993, and for each of
the three years in the period ended December 31, 1994, and have issued our
report thereon dated February 3, 1995, which report includes an explanatory
paragraph for changes in Armco Inc.'s methods of accounting for postretirement
benefits other than pensions, income taxes, certain investments in debt and
equity securities, and postemployment benefits; such consolidated financial
statements and report are included in your 1994 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of Armco Inc. and consolidated
subsidiaries, listed in Item 14. This consolidated financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 3, 1995
26
<PAGE>
<TABLE>
SCHEDULE II
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Millions)
<CAPTION>
==========================================================================================
Column A Column B Column C Column D Column E
------------------------------------------------------------------------------------------
Deductions
from Reserves
Additions for Purposes
Balance at Charged to for which
Beginning Costs and Reserves were Other Balance at
Description of Year Expenses Provided Changes End of Year
------------------------------------------------------------------------------------------
For the Year Ended December 31, 1992:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $11.9 $0.8 $10.6 $(0.1)(A) $5.1
3.1 (B)
Allowance for impairment of
investments.................. 31.7 0.6 5.0 1.0 28.3
------------------------------------------------------------------------------------------
For the Year Ended December 31, 1993:
Allowance for doubtful accounts $ 5.1 $0.3 $0.8 $(0.6)(B) $4.0
Allowance for impairment of
investments.................. 28.3 -- 0.4 (7.9)(B) 20.0
------------------------------------------------------------------------------------------
For the Year Ended December 31, 1994:
Allowance for doubtful accounts $4.0 $0.8 $0.4 $(0.3)(B) $4.1
Allowance for impairment of
investments................. 20.0 0.1 1.4 -- 8.7
------------------------------------------------------------------------------------------
<FN>
NOTES:
(A) Represents foreign currency translation adjustment and reclassifications.
(B) Net balances of consolidated subsidiaries purchased (divested).
</TABLE>
27
[LOGO]ERNST & YOUNG LLP *One Houston Center *Phone: 713 750 1500
Suite 2400 713 750 1501
1221 McKinney Street
Houston, Texas 77010-2007
Report of Independent Auditors
------------------------------
Partners
National-Oilwell
We have audited the accompanying consolidated balance sheets of National-
Oilwell and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, partners' capital, and cash flows for
each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National-Oilwell
and subsidiaries at December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
January 26, 1995
28
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
--------------------
1994 1993.
--------- ---------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 9,418 $ 6,016
Trade receivables, less allowance for doubtful
accounts of $ 1,023 for 1994 and $3,048 for
1993 97,425 99,312
Inventories (Note 3) 124,096 153,059
Receivable from owners, net (Note 11) 847 763
Other receivables 4,096 3,400
Prepaid expenses 2,444 4,036
Assets held for sale, net 1,675 29,874
--------- ---------
Total current assets 240,001 296,460
Property, plant, and equipment, net (Note 4) 22,397 35,472
Deferred taxes (Note 9) 1,959 3,016
Other assets 3,947 8,531
--------- ---------
Total assets $268,304 $343,479
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Cash overdrafts $ 9,846 $ 8,751
Notes payable (Note 5) -0- 56,816
Accounts payable-trade 50,494 43,000
Deferred credits 1,506 3,288
Accrued salaries and wages 4,492 4,076
Other accrued liabilities 21,853 25,787
--------- ---------
Total current liabilities 88,191 141,718
Long-term debt (Note 5) -0- 13,000
Employee benefit obligations 4,958 4,945
Insurance accruals 8,524 8,463
Other liabilities 4,743 4,677
--------- ---------
Total liabilities 106,416 172,803
Commitments and contingencies (Note 6)
Partners' capital:
Owners capital 169,784 176,904
Cumulative foreign currency translation adjustment (7,896) (6,228)
--------- ---------
Total partners' capital 161,888 170,676
--------- ---------
Total liabilities and partners' capital $268,304 $343,479
========= =========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
29
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1993 1992
---------- ---------- ---------
($ in thousands)
<S> <C> <C> <C>
Net Revenues $562,053 $627,281 $569,911
Cost of Revenues 482,423 547,401 509,306
---------- ---------- ---------
Gross Profit 79,630 79,880 60,605
Selling, general, and administrative expenses 55,109 66,021 72,160
Other operating expenses 9,313 13,370 14,783
Special charges/(credits)(Note 10) (13,916) 8,565 5,200
---------- ---------- ---------
Operating Income/(Loss) 29,124 (8,076) (31,538)
Interest expense and other financial costs (5,777) (8,277) (5,924)
Interest income 1,046 1,001 1,134
Other-income (expense) 528 (240) 941
---------- ---------- ---------
Income/(Loss) Before Income Taxes and
Cumulative Effect of Changes In Accounting
Principles 24,921 (15,592) (35,387)
Foreign income taxes (Note 9)
Current 132 978 475
Deferred 909 893 401
---------- ---------- ---------
Provision for income taxes 1,041 1,871 876
---------- ---------- ---------
Income/(Loss) Before Cumulative Effect of
Changes in Accounting Principles 23,880 (17,463) (36,263)
Cumulative effect of changes in accounting
principles on years prior to 1992
(Notes 8 and 9) -0- -0- 1,136
---------- ---------- ---------
Net Income/(Loss) $ 23,880 $(17,463) $(35,127)
========== ========== =========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
30
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<CAPTION>
Cumulative
Foreign
Currency Total
Partners' Translation Partners'
Capital Adjustment Capital
--------- --------- ---------
($ in thousands)
<S> <C> <C> <C>
Balance at December 31,1991 $229,494 $ 6,260 $235,754
Net loss (35,127) -0- (35,127)
Translation adjustment -0- (8,081) (8,081)
--------- --------- ---------
Balance at December 31, 1992 194,367 (1,821) 192,546
Net loss (17,463) -0- (17,463)
Translation adjustment -0- (4,407) (4,407)
--------- --------- ---------
Balance at December 31, 1993 176,904 (6,228) 170,676
Net income 23,880 -0- 23,880
Translation adjustment -0- (1,668) (1,668)
Cash distribution (31,000) -0- (31,000)
--------- --------- ---------
Balance at December 31, 1994 $169,784 $ (7,896) $161,888
========= ========= =========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
31
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- ---------- ---------
($ in thousands)
Cash flow from operating activities:
<S> <C> <C> <C>
Net income(loss) $ 23,880 $ (17,463) $ (35,127)
Adjustments to reconcile net income/
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 6,027 10,721 12,233
Provision for losses on accounts receivable 545 1,237 465
Provision for deferred income taxes 909 893 401
(Gain) loss on sale of property, plant,
and equipment (910) (867) 207
Foreign currency transaction (gain) loss 54 160 (905)
Cumulative effect of changes in
accounting principles -0- -0- (1,136)
Special charges/(credits) (13,916) 8,565 5,200
Changes in operating assets and liabilities:
Decrease (increase) in receivables 491 (5,245) 8,447
Decrease in inventories 12,483 19,558 46,232
Decrease (increase) in other assets 4,287 (3,453) (1,197)
Increase (decrease) in accounts payable 7,614 (21,423) 3,068
Decrease in other liabilities (3,913) (7,172) (5,253)
-------- ---------- ----------
Net cash provided (used) by operating
activities 37,551 (14,489) 32,635
Cash flow from investing activities:
Purchases of property, plan and
equipment (3,604) (1,967) (4,941)
Proceeds from sales of property,
plant and equipment 1,731 4,947 626
Proceeds from sales of product lines 69,821 -0- -0-
Other investments 251 (108) (609)
-------- ---------- ----------
Net cash provided (used) by
investing activities 68,199 2,872 (4,924)
Cash flow from financing activities:
Proceeds from revolving lines of
credit and long-term debt 54,503 64,386 101,148
Principal payments on revolving lines
of credit and long-term debt (124,345) (51,052) (138,969)
Principal payments under capital
lease obligations (911) (996) (862)
Cash distribution to partners (31,000) -0- -0-
-------- ---------- ----------
Net cash (used) provided by financing
activities (101,753) 12,338 (38,683)
Effect of exchange rate changes on cash - loss (595) (154) (782)
-------- ---------- ----------
Increase (decrease) in cash and equivalents 3,402 567 (11,754)
Cash and cash equivalents at beginning of year 6,016 5,449 17,203
-------- ---------- ----------
Cash and cash equivalents at end of year $ 9,418 $ 6,016 $ 5,449
======== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
32
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. Organization and Basis of Presentation
National-Oilwell ("Company") is a partnership organized under the laws of
Delaware. The partnership was formed in April 1987 to consolidate the
oilfield manufacturing and distribution operations of Armco Inc. ("Armco") and
USX Corporation ("USX"). National-Oilwell is a general partnership between
National Supply Company, Inc., a wholly-owned subsidiary of Armco and Oilwell,
Inc., a wholly-owned subsidiary of USX. Each of the partners has a 50%
interest in the partnership. All references to the Company in these financial
statements are synonymous with National-Oilwell as previously described.
The Company distributes an extensive line of oilfield supplies, oilfield
equipment and tubular products and designs and manufactures a variety of
oilfield equipment for use in oil and gas drilling, completion and production
activities. The Oilfield Distribution segment is comprised of the
Distribution Services and Tubular Distribution business units. This segment
distributes products through a large network of oilfield supply stores and
also procures and distributes oil country tubular goods manufactured by third
parties. The Oilfield Equipment segment consists of the Drilling Systems and
Equipment and Pumping Systems business units. This segment designs and
manufactures drilling equipment, marine equipment, and an extensive line of
pumps used in a variety of oil and gas and industrial applications.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Substantially all of the Company's subsidiaries
have elected a December 31 year-end. All significant intercompany
transactions and balances have been eliminated in consolidation.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
improvements which extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with
any resulting gain or loss reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of individual
items.
Inventories
Inventories consist of (a) standardized oilfield products and oil country
tubular goods, (b) manufactured equipment and (c) spare parts for the
manufactured equipment. Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) or average cost method of valuing
inventories.
Foreign Currency
The functional currency for the Company's Canadian, United Kingdom, Australian
and Venezuelan subsidiaries is the local currency. The cumulative effects of
translating the balance sheet accounts from the functional currency into the
U.S. dollar at current exchange rates are included in cumulative foreign
currency translation adjustment in partners' equity. The U.S. dollar is used
as the functional currency for the Singapore subsidiary. For all operations,
gains or losses from remeasuring foreign currency transactions into the
functional currency are included in income.
33
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Concentration of Credit Risk
The Company grants credit to its customers which are primarily in the oil and
gas industry. The Company performs periodic credit evaluations of its
customers' financial conditions and generally does not require collateral.
Receivables are generally due within 30 days. The Company maintains reserves
for potential losses and such losses have consistently been within
management's expectations.
Income Taxes
The Company provides for income taxes under the liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax reporting basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
Company made income tax payments of $557,000, $392,000 and $573,000 during the
years ended December 31, 1994, 1993 and 1992, respectively.
Revenue Recognition
Revenue from the sale of products is recognized upon passage of title to the
customer, which in most cases coincides with shipment of the related products.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. Cash equivalents
include only those investments having a maturity of three months or less at
the time of purchase. The book values of these financial instruments are
considered to be representative of their respective fair values. See Note 5
for the terms and carrying values of the Company's various debt instruments.
Research and Development Costs
Research and development costs are expensed as incurred. During 1994, 1993
and 1992, research and development costs were $579,000, $1,115,000, and
$2,077,000, respectively.
Reclassifications
Certain amounts from the prior year financial statements have been
reclassified to conform with the 1994 presentation.
3. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1993
--------- ---------
(In thousands)
<S> <C> <C>
Raw Materials and Supplies $ 12,486 $ 23,016
Work in Process 5,112 12,855
Finished Goods 106,498 117,188
--------- ---------
Total $124,096 $153,059
--------- ---------
<FN>
Foreign inventories are approximately 20% of total inventories at December 31,
1994 and 1993.
</TABLE>
34
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. Property, Plant, and Equipment
Property, plant, and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------- -------
(In thousands)
<S> <C> <C>
Land and improvements $ 5,718 $ 7,755
Buildings 10,772 14,820
Machinery and equipment 53,886 83,157
Other, including computer equipment and
furniture and fixtures 21,366 24,128
------- -------
Total 91,742 129,860
Less accumulated depreciation and amortization (69,345) (94,388)
------- -------
Net $ 22,397 $ 35,472
------- -------
</TABLE>
Equipment included in gross assets acquired under capital leases totaled -0-
at December 31, 1994 and $3,379,000 at December 31, 1993. Related
amortization included in the accumulated depreciation and amortization balance
totaled -0-, and $2,105,000 at December 31, 1994 and 1993, respectively.
5. Notes Payable
At December 31, 1994, the Company had bank lines of credit totaling
approximately $50 million, of which $20 million had been utilized for letters
of credit with no loans outstanding. The primary revolving credit agreement
(the Credit Agreement) expires in March 1995 and is secured by inventory,
receivables, property, plant and equipment, and the stock of the Company's
subsidiaries. The Credit Agreement contains certain financial covenants
relative to net worth, leverage ratio, working capital and cash flow. The
Company has complied with all covenants. A weekly borrowing base formula is
used to determine credit availability. The interest rate in the Credit
Agreement fluctuates with short-term interest rates. The interest rate in
effect at December 31, 1994 was 10.25%. A commitment fee of 1/2% per annum is
charged on the unused portion of the Credit Agreement. The weighted average
interest rate was approximately 8.5% and 8.0% for 1994 and 1993, respectively.
Interest paid was $3,444,000 during 1994, $3,693,000 during 1993 and
$4,943,000 during 1992.
During the year, the Credit Agreement was amended to allow for the sale of
certain production equipment product lines with the resultant adjustments to
the financial covenants. Other amendments and consents were processed during
the year as appropriate.
The Company is currently negotiating a new revolving credit facility (the
"Revolver"). The Revolver is expected to consist of a three-year
nonamortizing credit facility which includes a sub-facility for issuance of
letters of credit.
In October 1994, the Company paid all outstanding principal and interest due
to the Company's two owners relative to each of their $6,500,000 subordinated
notes due March 1995.
35
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. Commitments and Contingencies
Commitments
The Company leases land, buildings and storage facilities, vehicles, and data
processing equipment under operating leases extending through the year 2004.
The Company's annual lease commitments for operating leases at December 31,
1994 were as follows:
<TABLE>
<CAPTION>
Operating
Leases
-------
(In thousands)
<S> <C>
1995 $ 6,850
1996 4,944
1997 3,557
1998 2,569
1999 1,003
Thereafter 6,646
-------
Total $25,569
-------
</TABLE>
Rent expense for the years ended December 31, 1994, 1993 and 1992 was
$8,691,000, $10,372,000 and $11,325,000, respectively.
Contingencies
The Company is the subject of, or a party to, various claims, regulatory
agency audits, and pending or threatened legal actions involving a variety of
matters. The total liability on these matters at December 31, 1994 cannot be
determined; however, in the opinion of management, any ultimate liability
resulting, to the
extent not otherwise provided for, should not materially affect the financial
position, liquidity, or results of operations of the Company.
7. Pension Plans
The Company and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. The two largest are considered
defined-contribution pension plans and cover most of the domestic employees
and employees of the Canadian subsidiary. Contributions to the plans are
based on employees' years of service equating to a percentage of current
earnings. For the years ended December 31, 1994, 1993 and 1992, domestic
pension expense for the defined-contribution plan was $1,745,000, $1,812,000
and $1,888,000 respectively, and the funding is current. Pension expense of
the foreign operations for the defined-contribution plan totaled $169,000 for
1994, $193,000 for 1993, and $154,000 for 1992.
National-Oilwell (U.K.) Ltd., the Company's U.K. subsidiary, has a defined-
benefit pension plan covering substantially all employees in that country.
Benefits paid to retirees are based upon age at retirement, years of credited
service, and average compensation. Contributions to the plan are determined
by an independent actuary on the basis of annual valuations. The U.K. pension
plan assets are invested primarily in U.K. and overseas equities, U.K.
government securities, overseas bonds, and cash deposits. There are no
unamortized prior service costs. The plan assets at fair market value were
$27,389,000 at December 31, 1994 and $30,666,000 at December 31, 1993. The
projected benefit obligation was $20,630,000 at December 31, 1994 and
$22,440,000 at December 31, 1993. Net periodic pension cost recognized as
(income)/expense for the years ended December 31, 1994, 1993 and 1992 was
($69,000), $699,000 and $986,000, respectively.
36
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. Other Postretirement Benefit Plans
In addition to the Company's defined-contribution and defined-benefit pension
plans, the Company has defined-benefit postretirement plans covering most of
the domestic employees. One plan provides life insurance benefits for most
domestic employees. The other plan provides medical and life benefits for
former hourly employees associated with a discontinued manufacturing facility
and medical benefits for their spouses. The medical plan allows for basic or
optional coverage. The basic component is noncontributory and the optional
coverage rates are based upon pro rata level of cost sharing between the
Company and its retirees. The life insurance plans are noncontributory. None
of the plans were amended during 1994, 1993 or 1992. The Company's policy is
to fund the cost of postretirement health care and life benefits as they are
incurred.
In 1992, the Company adopted Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The Company elected immediate recognition of the transition obligation at
January 1, 1992 as a cumulative effect of a change in accounting principle.
The effect of adopting the new rules increased 1992 net periodic
postretirement benefit cost for the above defined-benefit plans by $195,000
and the cumulative effect adjustment as of January 1, 1992 increased net loss
by $3,337,000. The following table shows the plans' combined funded status
reconciled with amounts recognized in the Company's Consolidated Balance Sheet
at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
Medical/Life Plans
---------------------
1994 1993
------- -------
(In thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $ 786 $ 1,006
Fully eligible active plan participants 1,244 2,501
Other active plan participants 129 156
------- -------
Accumulated postretirement benefit cost 2,159 3,663
Benefit obligation recorded on the balance sheet 3,861 3,765
------- -------
Unrecognized net gain $1,702 $ 102
------- -------
</TABLE>
The recorded benefit obligation in excess of the accumulated postretirement
benefit obligation represents unrecognized gains. The 1994 actuarial
valuation for the medical and life benefit plan related to the discontinued
manufacturing facility includes a change in assumption related to cost-sharing
considerations with participants' current employers. The resulting
unrecognized gain is being amortized over the average remaining service period
of active plan participants.
Net periodic retirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Medical/Life Plans
-------------------------------
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Service cost $ 15 $ 13 $ 12
Interest cost 161 240 232
Amortization of cumulative
unrecognized net (gain)loss (37) -0- -0-
------- ------- -------
Net periodic postretirement
benefit cost $139 $253 $244
------- ------- -------
</TABLE>
37
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The annual assumed rate of increase in the per capita cost of covered benefits
(i.e., health care cost trend rate) for the medical plan is 10.0% for 1995,
9.5% for 1996, decreasing by 0.5% per year to 5.5% by 2005, and 5.5% per year
thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation for the medical plan as of December 31, 1994 by $61,000,
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1994 by $6,000.
The weighted-average discount rate used to determine the accumulated
postretirement benefit obligation was approximately 8% at December 31, 1994
and 7% at December 31, 1993.
9. Income Taxes
As a partnership, the Company is not subject to U.S. federal taxes on its
income. The general partners include in their federal and state tax returns
the partnership's results of operations. Accordingly, no provision for U.S.
federal income taxes has been made by the Company.
The Company adopted the liability method of accounting for income taxes as
required by the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1992. The cumulative
effect of adopting Statement 109 decreased net loss by $4,473,000 in 1992
(there was no pretax effect of adopting the Statement).
The geographical sources of income (loss) before income taxes and cumulative
effect of changes in accounting principles were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
United States $22,840 $(16,446) $(26,880)
Foreign 2,081 854 (8,507)
------- ------- -------
Income/(loss) Before Income Taxes and
Cumulative Effect of Changes in
Accounting Principles $24,921 $(15,592) $(35,387)
------- ------- -------
</TABLE>
Tax rates related to foreign income range from 30% to 50%.
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1994 1993
------- -------
(In thousands)
Deferred tax assets:
<S> <C> <C>
Book over tax depreciation $ 1,729 $ 3,644
Product warranty accruals 2,887 1,267
Net operating loss carryforwards 7,268 7,257
Other 508 1,296
------- -------
Total deferred tax assets $12,392 $13,464
Valuation allowance for deferred
tax assets (9,887) (9,428)
------- -------
$ 2,505 $ 4,036
------- -------
Deferred tax liabilities:
Tax over book depreciation $ 346 $ 666
Other 200 354
------- -------
Total deferred tax liabilities $ 546 $ 1,020
------- -------
Net deferred tax assets $ 1,959 $ 3,016
------- -------
</TABLE>
38
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The income tax liability of the Company's foreign and domestic subsidiaries is
reflected in the Company's financial statements. Deferred income taxes,
attributable to the foreign subsidiaries, result primarily from temporary
differences in depreciation and other expenses for tax and financial statement
purposes. At December 31, 1994, the Company had tax loss carryforwards
available at certain foreign subsidiaries totaling $21 million. The tax loss
carryforwards have no expiration date; however, they are only available
against income arising from the same line of business.
10. Special Charges/(Credits)
Special charges/(credits) consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Sales of product lines $(15,648) $ 10,000 $ -0-
Employee termination benefits 3,207 -0- 4,520
Exit costs 610 365 1,980
Reversal of prior year reserves (2,085) (1,800) (1,300)
------- ------- -------
Total $(13,916) $ 8,565 $ 5,200
------- ------- -------
</TABLE>
Sales of Product Lines
1994
----
The Company completed the sales of certain production equipment product lines
not considered part of its core businesses under asset sales agreements during
the last half of 1994. Sale of the fluid control systems, rod pump, sucker
rod, and hydraulic product lines resulted in a gain of $15.6 million.
Proceeds received in 1994 totaled approximately $41.0 million and were used to
reduce debt. As a result of the sales, the Company will no longer manufacture
these products but will continue as a distributor. It is estimated future
revenues will be reduced by approximately $18.0 million due to these product
line sales; however, the impact on net income in 1994, as well as in
subsequent years, was not and is not expected to be significant.
1993
----
During 1993, the Company implemented a business strategy to focus on its core
businesses and divest marginal or unprofitable product lines. In the
fourth quarter of 1993, the Company recorded a $10.0 million charge for
the estimated loss on the sale of its wellhead business under an asset sales
agreement signed in December 1993. This charge included an $8.5 million
writedown of inventories and property, plant and equipment to estimated net
realizable values and $1.5 million for transition and other direct costs of
disposal. Proceeds from the wellhead business sale of $28.7 million, which
closed in January 1994, were used to reduce debt. There were no significant
costs expensed in 1994 related to the disposition of this product line.
Employee Termination Benefits
1994
----
In conjunction with the formal announced shutdown of the Stockport, England,
plant on January 9, 1995, the Company expensed approximately $3.2 million in
1994 relating to employee termination benefits. These benefits are calculated
pursuant to the terms of the United Kingdom preexisting employee benefit plan.
Benefit payments of $1.2 million were paid in the fourth quarter of 1994
related to the termination of 77 employees. Approximately $0.5 million of
these benefit payments were accrued in 1992. The remaining reserve of $2.5
million is for 115 employees and will be paid in 1995.
39
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
1992
----
The majority of the employee termination benefits in 1992 related to the
Company's United Kingdom operations. In connection with the closing of the
London, England, office and the rationalization of the Company's subsea
wellhead manufacturing efforts in the United Kingdom, the Company recorded
employee termination benefits of $3.8 million in 1992 related to approximately
225 employees. Approximately 77, 124, and 20 employees were actually
terminated in 1994, 1993 and 1992, respectively, with the actual cost charged
against the reserve. As of December 31, 1994, the reserve for these employee
terminations is -0-.
Exit Costs
1994
----
The consolidation of the Company's Houston, Texas, manufacturing operations
resulted in exit costs of $0.6 million in 1994. These costs primarily
included equipment relocation costs and lease termination costs. The
remaining liability at December 31, 1994 represents $0.2 million for lease
termination costs related to abandoned facilities.
1993 and 1992
-------------
The 1992 decision to close the Company's New Iberia, Louisiana, oilfield
equipment manufacturing facility resulted in exit costs of approximately $0.9
million which primarily consisted of inventory writedowns and relocation of
machinery and equipment. The plant closure was completed in 1993 for a total
cost of approximately $1.3 million. Accordingly, the reserve for this plant
closure was -0- at December 31, 1993.
Exit costs in 1992 also included $1.1 million in the U.K. related to lease
termination costs as a result of management's plans to vacate the London,
England, and Aberdeen, Scotland, wellhead sales, service and administrative
offices. The remaining reserve at December 31, 1994 of approximately $0.3
million represents the future lease costs of the Aberdeen, Scotland, office.
Reversal of Reserves
The reversal of reserves in 1994, 1993, and 1992 were recorded as credits to
special charges. These items primarily relate to an $18.5 million reserve
initially recorded in 1991 to accrue for the estimated loss on the shutdown
and disposition of the plant and related machinery and equipment at
Garland, Texas. The $1.3 million reversal primarily relates to excess
transition expense accruals no longer needed when the plant shutdown was
completed in 1992. The $1.8 million reversal primarily related to excess
machinery, equipment and inventory relocation accruals no longer needed after
movement to the Company's other facilities was completed in 1993. The $2.1
million reversal primarily related to excess accruals for potential demolition
and environmental cleanup no longer needed when the facility was finally sold
in 1994.
11. Related Party Transactions
The Company maintains ongoing business relationships with Armco Inc. and USX
Corporation, the parent companies of the general partners, and their
subsidiaries. Significant related party transactions with these companies
included:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Revenues $10,495 $14,361 $14,503
Purchases 30,704 39,000 16,522
Receivables 4,578 4,400 4,946
Payables 3,731 3,637 6,868
</TABLE>
40
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
At December 31, 1994, the Company leases office space for its headquarters
facility, as well as other operating locations, from the parent companies or
their subsidiaries. Future minimum lease payments applicable to these leasing
agreements total $5,031,000. Rental expense to related parties totaled
$1,342,000, $1,165,000 and $1,203,000 for 1994, 1993 and 1992, respectively,
and is excluded from purchases.
A $31 million cash distribution was made to the owners in December 1994.
12. Business Segments and Geographic Areas
The Company's operations consist of two segments, the oilfield distribution
segment and the oilfield equipment segment. The oilfield distribution segment
distributes an extensive line of oilfield supplies, oilfield equipment and
tubular products. The oilfield equipment segment designs and manufactures a
variety of oilfield equipment for use in oil and gas drilling, completion and
production activities. Intersegment sales and transfers are accounted for at
commercial prices.
During the years ended December 31, 1994, 1993 and 1992, no single customer
accounted for 10% or more of consolidated revenues.
Summarized financial information with respect to business segments and
geographic areas is as follows:
Business Segments (in thousands)
<TABLE>
<CAPTION>
Oilfield Oilfield
Distribution Equipment (1) Corporate Elimination Total
------------ --------- --------- ----------- ---------
1994
----
<S> <C> <C> <C> <C> <C>
Revenues from:
Unaffiliated customers $431,047 $131,006 --- --- $562,053
Intersegment sales --- 77,321 --- $(77,321) ---
--------- --------- --------- --------- ---------
Total revenues 431,047 208,327 --- (77,321) 562,053
--------- --------- --------- --------- ---------
Operating income (loss) 12,101 19,921 $ (2,898) --- 29,124
Capital expenditures 1,520 1,570 514 --- 3,604
Depreciation and amortization 2,229 3,288 510 --- 6,027
Identifiable assets 167,584 106,034 --- (5,314) 268,304
1993
----
Revenues from:
Unaffiliated customers $475,311 $151,970 --- --- $627,281
Intersegment sales --- 93,700 --- $(93,700) ---
--------- --------- --------- --------- ---------
Total revenues 475,311 245,670 --- (93,700) 627,281
--------- --------- --------- --------- ---------
Operating income (loss) 18,926 (24,694) $ (2,308) --- (8,076)
Capital expenditures 319 1,422 226 --- 1,967
Depreciation and amortization 2,202 8,112 407 --- 10,721
Identifiable assets 194,518 159,226 --- (10,265) 343,479
1992
----
Revenues from:
Unaffiliated customers $431,193 $138,718 --- --- $569,911
Intersegment sales --- 101,300 --- $(101,300) ---
--------- --------- --------- --------- ---------
Total revenues 431,193 240,018 --- (101,300) 569,911
--------- --------- --------- --------- ---------
Operating income (loss) 1,200 (29,835) $ (2,903) --- (31,538)
Capital expenditures 321 4,319 301 --- 4,941
Depreciation and amortization 2,077 9,713 443 --- 12,233
Identifiable assets 170,878 212,105 --- (11,100) 371,883
<FN>
(1) Operating income/(loss) of the oilfield equipment segment includes special charges/(credits)
of $(13,916), $8,565 and $5,200 for 1994, 1993 and 1992, respectively.
</TABLE>
41
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Geographic Areas (in thousands)
<TABLE>
<CAPTION>
United United
States Canada Kingdom Other Elimination Total
------ ------ ------- ----- ----------- -----
1994
----
<S> <C> <C> <C> <C> <C> <C>
Revenues from:
Unaffiliated customers $442,555 $73,052 $29,708 $ 16,738 --- $562,053
Interarea sales 26,144 579 9,726 106 $(36,555) ---
--------- -------- -------- --------- --------- --------
-
Total revenues 468,699 73,631 39,434 16,844 (36,555) 562,053
--------- -------- -------- --------- --------- --------
-
Operating income (loss) 27,166 1,872 (314) 400 --- 29,124
Export sales of U.S. --- 1,436 635 102,265 --- 104,336
Identifiable assets 186,634 34,567 32,136 14,967 --- 268,304
1993
----
Revenues from:
Unaffiliated customers $485,988 $68,766 $49,419 $ 23,108 --- $627,281
Interarea sales 33,750 552 8,395 961 $(43,658) ---
--------- -------- -------- --------- --------- --------
-
Total revenues 519,738 69,318 57,814 24,069 (43,658) 627,281
--------- -------- -------- --------- --------- --------
-
Operating income (loss) (4,865) (321) (3,980) 1,090 ---
(8,076)
Export sales of U.S. --- 1,386 389 115,464 --- 117,239
Identifiable assets 257,597 29,662 39,391 16,829 --- 343,479
1992
----
Revenues from:
Unaffiliated customers $433,694 $53,163 $57,739 $ 25,315 --- $569,911
Interarea sales 34,834 2,759 6,678 2,442 $(46,713) ---
--------- -------- -------- --------- --------- --------
-
Total revenues 468,528 55,922 64,417 27,757 (46,713) 569,911
--------- -------- -------- --------- --------- --------
-
Operating income (loss) (18,745) (586) (11,973) (234) ---
(31,538)
Export sales of U.S. --- 615 313 81,145 --- 82,073
Identifiable assets 278,764 33,604 42,030 17,485 --- 371,883
</TABLE>
Corporate general and administrative expense related to worldwide
manufacturing and other support functions benefit both United States and
international operations. An allocation has been made to each business
segment and geographic area based on an estimate of the corporate effort
attributable to the respective business segment or geographic area. The
expenses allocated totaled approximately $18,000, $21,700 and $24,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
42
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
13. Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
1994
Revenues $129,357 $132,030 $161,186 $139,480 $562,053
Gross profit 18,265 19,604 23,875 17,886 79,630
Special charges/(credits) (1,500) (9,515) 312 (3,213) (13,916)
Income before income taxes 475 10,176 5,361 8,909 24,921
Net income 463 9,938 5,242 8,237 23,880
1993
Revenues $143,350 $177,754 $148,517 $157,660 $627,281
Gross profit 19,270 23,268 18,431 18,911 79,880
Special charges/(credits) --- --- --- 8,565 8,565
Income (loss) before
income taxes (1,150) 1,014 (3,564) (11,892) (15,592)
Net income (loss) (1,660) 464 (3,901) (12,366) (17,463)
</TABLE>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
Armco Inc.:
We have audited the statement of consolidated net assets of Armco Financial
Services Group - Companies to be Sold as of December 31, 1994 and 1993 and the
related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1994. Our audits also included
Financial Statement Schedule I, Summary of Investments - Other than
Investments in Related Parties; Schedule II, Condensed Financial Information;
Schedule IV, Reinsurance; Schedule V, Valuation and Qualifying Accounts; and
Schedule VI, Supplemental Information Concerning Property-Casualty Insurance
Operations. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Armco Financial Services Group -
Companies to be Sold at December 31, 1994 and 1993 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
As discussed in Notes 3 and 7 to the consolidated financial statements,
effective January 1, 1993 the Company changed its method of accounting for
reinsurance contracts and postretirement benefits other than pensions. As
discussed in Note 1 to the consolidated financial statements, effective
December 31, 1993 the Company changed its method of accounting for investments
in debt securities.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
March 15, 1995
44
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
Statement of Consolidated Net Assets
As of December 31, 1994 and 1993
(Dollars in thousands)
<CAPTION>
ASSETS: 1994 1993
-------- --------
Investments (Notes 1, 2):
Fixed Maturity Investments:
<S> <C> <C>
Held to maturity $ 39,309 $ 38,077
Available for sale 317,406 379,849
Equity securities - 1
Cash equivalents 42,128 21,953
---------- ---------
Total Investments 398,843 439,880
---------- ---------
Cash 1,621 826
Accrued investment income 5,703 5,988
Premium balances receivable less allowance for
doubtful accounts of $1,562 and $1,757 55,074 53,707
Prepaid reinsurance premiums 3,066 3,118
Reinsurance receivable (Note 3) 37,933 28,038
Deferred policy acquisition costs (Note 1) 19,934 19,712
Property and equipment net of accumulated
depreciation of $9,041 and $7,914 6,786 7,299
Due from affiliates (Note 5) 90 803
Goodwill net of amortization of $732 and
$549 (Note 1) 6,579 6,762
Other assets (Note 7) 4,893 5,267
--------- ---------
TOTAL ASSETS $540,522 $571,400
========= =========
LIABILITIES AND NET ASSETS:
LIABILITIES:
Reserve for losses and loss adjustment
expenses (Notes 3, 4) $308,423 $297,553
Unearned premiums (Note 3) 94,854 95,992
Dividends to policyholders 4,578 4,755
Reinsurance premiums payable 834 1,247
Accrued expenses 8,000 8,580
Postretirement and postemployment benefits
(Note 7) 16,768 15,347
Other liabilities 10,813 9,234
Note payable (Note 8) - 2,800
--------- ---------
TOTAL LIABILITIES 444,270 435,508
--------- ---------
NET ASSETS (Note 9) 96,252 135,892
--------- ---------
TOTAL LIABILITIES AND NET ASSETS $540,522 $571,400
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
45
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
Statement of Consolidated Operations
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
REVENUES:
<S> <C> <C> <C>
Net premiums earned (Note 3) $216,269 $227,693 $239,886
Net investment income (Note 2) 29,921 32,543 34,057
Net realized gain (loss) on investments (Note 2) (497) 11,150 10,082
--------- --------- ---------
Total Revenues 245,693 271,386 284,025
EXPENSES:
Losses and loss adjustment expenses (Notes 3, 4) 169,861 177,128 196,077
Policyholder dividends (Note 1) 2,579 2,414 2,966
Policy acquisition costs (Note 1) 45,837 46,456 49,912
Other expenses (Notes 5, 7) 33,939 34,814 37,853
--------- --------- ---------
Total Expenses 252,216 260,812 286,808
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (6,523) 10,574 (2,783)
INCOME TAX (BENEFIT) PROVISION (Note 6) 52 223 (166)
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (6,575) 10,351 (2,617)
--------- --------- ---------
Cumulative effect on prior years of a
change in accounting principle for
postretirement benefits (Note 7) - (14,000) -
--------- --------- ---------
NET LOSS $ (6,575) $ (3,649) $ (2,617)
========= ========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
46
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
Statement of Consolidated Cash Flows
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (6,575) $ (3,649) $ (2,617)
--------- --------- ---------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,660 2,063 1,507
(Gain) loss on sale of fixed maturity
investments, net 498 (11,150) (9,816)
Gain on sale of stock, net (1) - (266)
(Gain) loss on sale of property and equipment (4) 35 -
Changes in:
Accrued investment income 285 548 (452)
Premium balances receivable (1,367) 5,153 (906)
Reinsurance recoverable on paid losses - - (495)
Reinsurance receivable (9,895) (7,660) (4,100)
Deferred policy acquisition costs (222) 15 2,381
Due to/from affiliates 713 (839) 207
Prepaid reinsurance premiums 52 (67) 38
Other assets 356 (466) 384
Insurance reserves 9,732 7,708 8,740
Policyholder dividends payable (177) (905) (330)
Reinsurance premiums payable (413) (924) (228)
Accrued expenses (580) (578) 46
Postretirement and postemployment benefits 1,421 15,347 -
Other liabilities 1,579 (1,755) 609
--------- --------- ---------
Total adjustments 3,637 6,525 (2,681)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (2,938) 2,876 (5,298)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of fixed maturity investments:
Available for sale 63,147 - -
All other - 270,567 195,154
Proceeds from maturities of fixed maturity
investments:
Held to maturity 2,675 - -
All other - 7,318 71,422
Proceeds from sales of equity securities 2 - 454
Purchase of fixed maturity investments:
Held to maturity (3,134) (40,674) -
Available for sale (35,224) (225,852) -
All other - - (269,216)
Purchase of property and equipment (766) (737) (1,184)
Proceeds from sales of property and equipment 8 13 -
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 26,708 10,635 (3,370)
--------- --------- ---------
</TABLE>
(continued)
47
<PAGE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
<TABLE>
Consolidated Statement of Cash Flows
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Principal payments on note payable (2,800) (2,800) (5,600)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (2,800) (2,800) (5,600)
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 20,970 10,711 (14,268)
CASH AND CASH EQUIVALENTS At
BEGINNING OF YEAR 22,779 12,068 26,336
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 43,749 $ 22,779 $ 12,068
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for income taxes $ 98 $ 150 $ 58
Cash paid for interest 125 408 831
<FN>
See notes to consolidated financial statements.
</TABLE>
48
<PAGE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Armco Financial Services Group - Companies to be Sold (AFSG - Companies to be
Sold or the Company) consists of the net assets of Armco Inc.'s (Armco)
insurance companies which Armco intends to sell and which continue
underwriting activities. These activities principally represent the
transactions of Northwestern National Holding Company, Inc. (NNHC), which is a
wholly owned subsidiary of Armco Financial Services Corporation (AFSC), which
is a wholly owned subsidiary of Armco. Prior to 1993, Armco accounted for the
operating results of the AFSG companies to be sold under the cost recovery
method, whereby net income was not recognized until realized through a sale of
the businesses, while net losses were charged against income as incurred.
Armco now presents these businesses as discontinued operations.
NNHC owns 100% of the common and preferred stock of Northwestern National
Casualty Company and its wholly owned subsidiaries, NN Insurance Company and
SICO, Inc. and its wholly owned subsidiary, Statesman Insurance Company
(Statesman), and Statesman's wholly owned subsidiary Timeco, Inc.
(collectively, SICO) (collectively, NNCC), Pacific National Insurance Company
and its wholly owned subsidiary, Pacific Automobile Insurance Company
(collectively, PNIC), and Certified Finance Corporation (CFC). CFC had not
commenced operations as of December 31, 1994.
Principles of Consolidation - The consolidated financial statements include
the accounts of NNHC and its subsidiaries NNCC, PNIC and CFC (collectively,
the Company). Significant intercompany accounts and transactions have been
eliminated.
Business Segment - The Company operates in a single business segment, property
and casualty insurance.
Basis of Presentation - The accompanying financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP) which
vary from statutory reporting practices prescribed for insurance companies by
regulatory authorities (see Note 9).
Investments - Fixed maturity investments include bonds and mortgage-backed
securities. Fixed maturity investments which the Company has the positive
intent and ability to hold to maturity ("held to maturity") are reported at
amortized cost. Fixed maturity investments which are available for sale
("available for sale") are reported at market value. Equity securities are
common stocks which are reported at market value. The difference between cost
and market value of fixed maturity investments available for sale is reflected
as a component of net assets. Short-term investments (cash equivalents) are
reported at cost which approximates market value.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The statement requires fixed
maturity investments which are available for sale to be recorded at market
value. The Company adopted SFAS No. 115 on December 31, 1993 and reclassified
certain investments from the "held to maturity" class into the "available for
sale" class on the same date. The financial statement effect of adopting the
statement was to increase investments by $13,321,000 and net assets by
$13,321,000. Amounts reported in the Statement of Consolidated Cash Flows for
1993 are based on the classification of securities prior to the adoption of
SFAS No. 115.
Investment income consists primarily of interest which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method based on estimated principal payments. Realized
capital gains and losses, calculated as the difference between proceeds and
book value, are determined by specific identification of the investments sold.
49
<PAGE>
Recognition of Premium Revenues - Premiums, net of reinsurance ceded, are
earned on a pro rata basis over the term of the policy.
Deferred Policy Acquisition Costs - Policy acquisition costs that vary with
and are directly related to the production of premiums are deferred and
amortized over the terms of the policies to which they relate. Amortization
for the years ended December 31, 1994, 1993 and 1992 was $45,837,000 ,
$46,456,000 and $49,912,000, respectively. The Company does not include
anticipated investment income when assessing the recoverability of deferred
policy acquisition costs.
Depreciation - Depreciation on property and equipment is provided primarily on
the straight-line basis over the estimated useful lives of the respective
assets. Depreciation periods range from 3 to 10 years for personal property
and from 5 to 40 years for real property.
Goodwill - Goodwill, which represents the excess of cost over the fair value
of net assets of acquired subsidiaries, is amortized on a straight-line basis
over periods not exceeding 40 years. The Company assesses whether its
goodwill is impaired at each balance sheet date based on an evaluation of
undiscounted projected cash flows through the remaining amortization period.
If an impairment is determined, the amount of such impairment is calculated
based on the estimated fair value of the asset.
Cash Flow - For purposes of reporting cash flows, the Company considers all
highly liquid short-term investments purchased with maturities of three months
or less to be cash equivalents.
Insurance Liabilities - The liability for unpaid losses and loss adjustment
expenses includes an amount determined from loss reports and individual cases
and an amount, based on past experience, for losses incurred but not reported.
Such liability is necessarily based on estimates and, while management
believes that the amount is fairly stated, the ultimate liability may be in
excess of or less than the amount provided. The methods for making such
estimates and for establishing the resulting liability are continually
reviewed and any adjustments resulting therefrom are reflected in earnings
currently. The Company does not discount the liability for unpaid losses and
loss adjustment expenses. The liability for losses and loss adjustment
expenses is reported net of a receivable for salvage and subrogation of
$8,033,000, $7,746,000 and $7,523,000 at December 31, 1994, 1993 and 1992,
respectively.
Participating Policy Contracts - Participating business represents
approximately 13%, 14% and 13% of total premiums in force at December 31,
1994, 1993 and 1992, respectively. Participating business is composed
entirely of workers' compensation policies. The amount of dividends to be
paid on these policies is determined based on the provisions of the individual
policies. Dividend expense for the years ended December 31, 1994, 1993 and
1992, was $2,579,000, $2,414,000 and $2,966,000, respectively.
50
<PAGE>
2. INVESTMENTS
The amortized cost and market value of the Company's fixed maturity
investments as of December 31, 1994 that are designated as held to maturity
are as follows:
<TABLE>
<CAPTION>
Gross Gross
1994 Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $35,352 $ - $(2,715) $32,637
Mortgage-backed securities $ 3,957 - (457) 3,500
-------- -------- -------- --------
Total fixed maturity investments
held to maturity $39,309 $ - $(3,172) $36,137
========= ======== ======== ========
</TABLE>
The amortized cost and market value of the Company's fixed maturity
investments as of December 31, 1994 that are designated as available for sale
are as follows:
<TABLE>
<CAPTION>
Gross Gross
1994 Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $ 53,405 $ 153 $ (4,842) $ 48,716
Corporate securities 176,037 374 (11,391) 165,020
Mortgage-backed securities 89,928 913 (2,783) 88,058
Other debt securities 17,780 7 (2,175) 15,612
-------- -------- -------- --------
Total fixed maturity investments
available for sale $337,150 $1,447 $(21,191) $317,406
========= ======== ======== =========
</TABLE>
51
<PAGE>
The amortized cost and market value of the Company's fixed maturity
investments as of December 31, 1993 that are designated as held to maturity
are as follows:
<TABLE>
<CAPTION>
Gross Gross
1993 Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $33,100 $1,091 $(240) $33,951
Corporate securities 1,000 1 - 1,001
Mortgage-backed securities 3,977 40 (90) 3,927
-------- -------- -------- --------
Total fixed maturity investments
available for sale $38,077 $1,132 $(330) $38,879
========= ======== ======== =========
</TABLE>
The amortized cost and market value of the Company's fixed maturity
investments as of December 31, 1993 that are designated as available for sale
are as follows:
<TABLE>
<CAPTION>
Gross Gross
1993 Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $ 48,399 $ 2,204 $ (452) $ 50,151
Corporate securities 189,579 7,273 (1,604) 195,248
Mortgage-backed securities 110,933 6,432 (450) 116,915
Other debt securities 17,617 436 (518) 17,535
-------- -------- -------- --------
Total fixed maturity investments
available for sale $366,528 $16,345 $(3,024) $379,849
========= ======== ======== =========
</TABLE>
Net assets decreased by $33,065,000 from December 31, 1993 to December 31,
1994 due to unrealized losses on fixed maturity investments designated as
available for sale.
The amortized cost and market value of the Company's fixed maturity
investments at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
52
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
(Dollars in Thousands) Amortized Market Amortized Market
Cost Value Cost Value
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,106 $ 9,009 $ 2,069 $ 2,057
Due after one year through
five years 83,799 80,561 13,690 12,885
Due after five years
through ten years 43,672 40,535 5,588 5,286
Due after ten years 110,645 99,243 14,005 12,409
--------- ---------- --------- ---------
247,222 229,348 35,352 32,637
Mortgage-backed securities 89,928 88,058 3,957 3,500
--------- ---------- --------- ---------
$337,150 $317,406 $ 39,309 $ 36,137
========= ========== ========== =========
</TABLE>
Proceeds from fixed maturity investment sales and gross realized gains and
losses during 1994 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Proceeds Proceeds Gross Gross
from from Realized Realized
Sales Maturities Gains Losses
-------- ------- ----- ------
<S> <C> <C> <C> <C>
Available for sale $63,147 $ - $322 $(820)
Held to maturity - 2,675 - -
-------- ------- ----- ------
$63,147 $2,675 $322 $(820)
======== ======= ===== ======
</TABLE>
Proceeds from fixed maturity investment sales and gross realized gains and
losses during 1993 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Proceeds Proceeds Gross Gross
from from Realized Realized
Sales Maturities Gains Losses
--------- ------- -------- ------
<S> <C> <C> <C> <C>
Available for sale $212,834 $7,318 $10,520 $(498)
Held to maturity 57,733 - 1,209 (81)
--------- ------- -------- ------
$270,567 $7,318 $11,729 $(579)
========= ======= ======== ======
</TABLE>
53
<PAGE>
Proceeds from sales and maturities of investments during 1992 were
$267,030,000. Gross gains of $11,060,000 and gross losses of $978,000 were
realized on those sales.
At December 31, 1994 and 1993, the Company's fixed maturity investments
carried at amortized cost of
$53,169,000 and $52,845,000, respectively, were on deposit with regulatory
authorities.
Total investment income, investment expense and net investment income for the
years ended December 31, 1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
INVESTMENT INCOME:
<S> <C> <C> <C>
Fixed maturity investments $29,581 $32,485 $33,693
Short-term investments 977 416 761
-------- -------- --------
Total investment income 30,558 32,901 34,454
Investment expense (637) (358) (397)
-------- -------- --------
Net investment income $29,921 $32,543 $34,057
======== ======== ========
</TABLE>
3. REINSURANCE ACTIVITY
The Company limits the maximum net loss which can arise from large risks or
risks in concentrated areas of exposure by reinsuring (ceding) certain levels
of risks with other insurers, either on an automatic basis or under general
reinsurance contracts known as "treaties" or by negotiation on substantial
individual risks.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. In the event that reinsuring companies are unable to meet
their obligations under the agreements, the Company would continue to have
primary liability to policyholders for losses incurred. The Company evaluates
the financial condition of its reinsurers and evaluates concentrations of
credit risk when determining reinsurance placements. At December 31, 1994
reinsurance receivables of $28,674,000 and prepaid reinsurance premiums of
$2,014,000 were associated with a single reinsurer. The Company has never
suffered a significant loss due to reinsurers being unable to meet their
obligations.
54
<PAGE>
The following tables summarize amounts related to reinsurance assumed and
ceded as of December 31, 1994, 1993 and 1992 and for the years then ended,
respectively.
<TABLE>
Premium Activity:
(Dollars in Thousands)
<CAPTION>
1994 1993
-------------------------- ---------------------------
Written Earned Unearned Written Earned Unearned
------- ------ -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Direct $200,929 $202,108 $82,804 $209,791 $215,075 $83,983
Assumed:
Unaffiliated 7,640 7,744 1,938 6,786 6,173 2,042
Affiliated 21,094 20,949 10,112 20,761 21,626 9,967
Ceded:
Unaffiliated (14,473) (14,525) (3,066) (15,241) (15,174) (3,118)
Affiliated (7) (7) - (7) (7) -
--------- --------- -------- --------- --------- -------
Net $215,183 $216,269 $91,788 $222,090 $227,693 $92,874
========= ========= ======== ========= ======== ========
<CAPTION>
1992
------------------------------
Written Earned Unearned
------- ------ --------
<S> <C> <C> <C>
Direct $222,541 $223,543 $89,267
Assumed:
Unaffiliated 3,855 4,156 1,429
Affiliated 24,461 25,200 10,832
Ceded:
Unaffiliated (12,963) (13,002) (3,051)
Affiliated (11) (11) -
--------- --------- --------
Net $237,883 $239,886 $98,477
========= ========= ========
</TABLE>
<TABLE>
Loss and Loss Adjustment Expense (LAE) Activity:
(Dollars in Thousands)
<CAPTION>
1994 1993
-------------------------- ---------------------------
Incurred Liability For Incurred Liability For
Loss & LAE Loss & LAE Loss & LAE Loss & LAE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Direct $166,316 $273,631 $175,232 $262,345
Assumed:
Unaffiliated 5,008 11,581 4,774 12,795
Affiliated 16,192 28,746 11,137 30,993
Ceded:
Unaffiliated (17,568) (37,121) (13,781) (26,644)
Affiliated (87) (5,535) (234) (8,580)
--------- --------- --------- ---------
Net $169,861 $271,302 $177,128 $270,909
========= ========= ========= =========
<CAPTION>
1992
-------------------------------
Incurred Liability For
Loss & LAE Loss & LAE
---------- ----------
<S> <C> <C>
Direct $184,620 $242,866
Assumed:
Unaffiliated 3,781 12,052
Affiliated 20,280 40,681
Ceded:
Unaffiliated (11,590) (18,352)
Affiliated (1,014) (11,290)
--------- ---------
Net $196,077 $265,957
========= =========
</TABLE>
55
<PAGE>
In December 1992, the FASB issued SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." The statement
establishes the conditions required for a contract to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. The Company adopted SFAS No. 113 on January 1, 1993. Prior to the
adoption of the new statement, assets and liabilities were reported net of the
effects of reinsurance. Subsequent to the adoption of the new statement,
ceded reinsurance balances due from unaffiliated insurers are reported
separately as assets. Ceded reinsurance balances due from affiliated insurers
continue to be reported in liabilities. As permitted by the statement, prior
period financial statements have been restated.
4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and
ending reserve balances for unpaid losses and loss adjustment expenses, on a
gross of reinsurance basis, to the gross amounts reported in the Company's
Statement of Consolidated Net Assets.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Liability for losses and LAE, gross of
reinsurance recoverables, at beginning of year $297,553 $284,309 $276,251
Reinsurance recoverables on unpaid losses and
LAE, at beginning of year 26,644 18,352 16,975
--------- --------- --------
Liability for losses and LAE, net of reinsurance
recoverables, at beginning of year 270,909 265,957 259,276
-------- --------- --------
Add:
Provision for unpaid losses and LAE for claims
occurring in the current year, net of
reinsurance 169,406 171,834 185,225
Increase in estimated losses and LAE for claims
occurring in prior years, net of reinsurance 455 5,294 10,852
--------- --------- --------
Incurred losses and LAE during the current year,
net of reinsurance 169,861 177,128 196,077
--------- --------- --------
Deduct losses and LAE payments for claims, net
of reinsurance, occurring during:
Current year 72,636 73,529 82,288
Prior years 96,832 98,647 107,108
--------- --------- --------
169,468 172,176 189,396
--------- --------- --------
Liability for unpaid losses and LAE, net of
reinsurance recoverables, at end of year 271,302 270,909 265,957
Reinsurance recoverables on unpaid losses and
LAE, at end of year 37,121 26,644 18,352
--------- --------- --------
Liability for unpaid losses and LAE, gross of
reinsurance recoverables, at end of year $308,423 $297,553 $284,309
========= ========= =========
</TABLE>
56
<PAGE>
The preceding reconciliation shows that a deficiency of $455,000, $5,294,000
and $10,852,000 emerged in 1994, 1993 and 1992, respectively, on prior
accident year claims. These deficiencies resulted primarily from settling
case basis reserves for private passenger auto liability established in prior
years for amounts more than were expected. A portion of the increases in
ultimate incurred losses and LAE for those years also pertains to charges for
future unallocated loss adjustment expenses on claims already incurred.
The Company's exposure to environmental and asbestos-related claims has
generally involved insureds that are a peripheral defendant with de minimus
exposure. In establishing the liability for losses and loss adjustment
expenses related to environmental and asbestos claims, management considers
facts currently known and the current state of the law and coverage
litigation. Case reserves have been established when sufficient information
has developed to indicate the involvement of a specific insurance policy. In
addition, liabilities have been established to cover additional exposures on
both known and unasserted claims, and costs related to litigation. The
methodology for estimating incurred but not reported reserves is based on
historical claim development information by line of business and accident
year, without segregation of environmental and asbestos-related claim data.
Estimates of the liabilities are reviewed and updated continually.
5. TRANSACTIONS WITH AFFILIATES
The Company has entered into a number of agreements or arrangements with
affiliated companies in connection with intercompany services. The net
amounts charged to operations during 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Service fees $ 21 $ 32 $ 29
Other 600 635 737
------ ------ ------
$ 621 $ 667 $ 766
====== ====== ======
</TABLE>
The net amount due from affiliates at December 31, 1994 and 1993, which
includes fees and assessments paid by the Company on behalf of affiliates,
were $90,000 and $803,000, respectively.
6. INCOME TAXES
Armco and the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109) effective January 1,
1993. SFAS No. 109 requires an asset and liability approach for financial
accounting. Armco accounted for the operating results of the AFSG - Companies
to be Sold under the cost recovery method, whereby net income is not
recognized until realized through a sale of the business, while net losses are
charged against income as incurred. These businesses are now presented as
discontinued operations with a portion of the consolidated Armco federal tax
provision/benefit being allocated to the Company in accordance with the
intraperiod tax allocation provisions of SFAS No. 109. In 1994, Armco's total
federal income tax benefit was allocated to its continuing operations because
it related primarily to changes in circumstances that caused a change in
judgment about the realization of deferred tax assets in future years. In
1993, because Armco was in a consolidated net operating loss position for both
financial reporting and federal income tax purposes, no federal income tax
provision or benefit was allocated to the Company. Because Armco accounts for
the Company as an investment which it intends to sell, the cumulative effect
of adopting SFAS No. 109 and the deferred federal tax assets and liabilities
applicable to the Company are recorded on the books of Armco, rather than by
the Company.
57
<PAGE>
The Company and its subsidiaries file state income tax returns in several
states on both a separate company and combined basis. A provision (benefit)
of $52,000, $223,000 and $(166,000) is reported in the Statement of
Consolidated Operations for the years ended December 31, 1994, 1993 and 1992,
respectively. The entire 1994 provision represents a current year state
income tax provision of $52,000. The 1993 provision includes a current year
state income tax provision of $224,000 and adjustments to prior years state
income taxes of $(1,000). The 1992 benefit includes a current year state
income tax provision of $27,000 and a refund from prior year state income
taxes of $(193,000).
7. PENSION, PROFIT SHARING AND BENEFIT PLANS
Armco sponsors a separate noncontributory, trusteed retirement plan covering
substantially all of the Company's employees. Pension costs relating to this
retirement plan are computed based on accepted actuarial methods. It is the
Company's policy to fund pension costs as they accrue, but, in no event at
less than the amount required by, nor more than the maximum amount allowable
under, the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
The following table sets forth the retirement plan's funded status and amounts
recognized in the financial statements of the Company at December 31, 1994,
1993 and 1992:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations: Accumulated benefit obligation,
including vested benefits of $28,076 for 1994,
$28,833 for 1993 and $23,148 for 1992 $ 29,134 $ 29,592 $ 23,498
========= ========= =========
Projected benefit obligation for service
rendered to date $(30,464) $(31,761) $(26,474)
Plan assets at market value 33,967 36,412 33,520
--------- --------- ---------
Plan assets in excess of projected benefit
obligation 3,503 4,651 7,046
Unrecognized net (gain) loss 1,209 532 (1,754)
Unrecognized net asset at December 31, being
amortized over 15 years (2,191) (2,504) (2,817)
Unrecognized prior service cost 22 31 39
--------- --------- ---------
Prepaid pension cost $ 2,543 $ 2,710 $ 2,514
========= ========= =========
Net periodic pension benefit for 1994, 1993
and 1992 included the following components:
Service cost -- benefits earned during the
period $ 1,004 $ 825 $ 792
Interest cost on projected benefit obligation 2,391 2,141 2,030
Actual return on plan assets 492 (4,735) (1,894)
Net amortization and deferral (3,720) 1,573 (1,259)
--------- --------- ---------
Net periodic pension expense (benefit) $ 167 $ (196) $ (331)
========= ========= =========
</TABLE>
58
<PAGE>
The following assumptions were used in determining the actuarial present value
of the projected benefit obligation as of December 31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Settlement rate 8.50% 7.25% 8.00%
Increase in future compensation levels 4.00% 4.00% 5.00%
Long-term rate of return on assets 9.50% 8.25% 8.75%
</TABLE>
The Company, along with other affiliates, has a benefit plan which provides
medical and dental benefits for eligible retired employees. Substantially,
all employees become eligible for these benefits if they reach normal
retirement age while working for the Company. These benefits are funded as
claims are paid. In December 1990, the FASB issued SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The standard
requires the accrual of expense for these benefits during the years the
employee is actively employed. The Company adopted SFAS No. 106 on January 1,
1993. The cumulative effect of the accounting change resulted in a decrease
in 1993 income of $14,000,000.
The following table sets forth the benefit plan's funded status and amounts
recognized in the balance sheets of the companies participating in the plan as
of December 31, 1994 and 1993.
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
-------- --------
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $11,914 $12,789
Fully eligible active plan participants 714 876
Other active plan participants 7,400 7,637
-------- --------
Total 20,028 21,302
Plan assets at fair value - -
-------- --------
Accumulated postretirement benefit obligation in
excess of plan assets $20,028 $21,302
Unrecognized transition obligation - -
Unrecognized prior service cost - -
Unrecognized gain (loss) 1,300 (937)
-------- --------
Accrued postretirement benefit liability $21,328 $20,365
======== ========
</TABLE>
The accrued postretirement benefit liability applicable solely to the Company
was $16,081,000 and $14,633,000 as of December 31, 1994 and December 31, 1993,
respectively.
Net postretirement benefit cost for 1994 and 1993 includes the following
components:
<TABLE>
<S> <C> <C>
Service cost $ 793 $ 154
Interest cost on accumulated postretirement
benefit obligation 1,191 1,492
Actual return on plan assets - -
Net amortization and deferral - -
-------- --------
Net periodic postretirement benefit cost 1,984 1,646
Recognition of transition obligation - 14,000
-------- --------
Net postretirement benefit cost $ 1,984 $15,646
======== ========
</TABLE>
Net postretirement benefit cost applicable solely to the Company for the years
ended December 31, 1994 and December 31, 1993 was $1,912,000 and $15,174,000,
respectively.
59
<PAGE>
The following table sets forth key assumptions used in reporting year-end
disclosures.
<TABLE>
<CAPTION>
1994 1993
------------------------- -------------------------
Non-Medicare Medicare Non-Medicare Medicare
Eligible Eligible Eligible Eligible
Participants Participants Participants Participants
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Annual increase in per
capita cost of covered
benefits (*) 11.50% 11.50% 11.25% 8.25%
Ultimate annual increase
in per capita cost of
covered benefits 6.50% 6.50% 5.25% 5.25%
Weighted average discount
rate used in calculation
of accumulated postretirement
benefit obligation 8.50% 8.50% 7.25% 7.25%
<FN>
(*) The rate is assumed to decrease 1.0% per year until it reaches the
ultimate rate and remains level thereafter.
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the plan's
accumulated postretirement benefit obligation as of December 31, 1994 by
$2,228,000, and the aggregate service cost and interest cost components of the
plan's net periodic postretirement benefit cost for the year by $372,000.
The Company also has a noncontributory, trusteed profit sharing plan. Annual
contributions to the plan (limited to a maximum of 15% of participating
salaries) are based upon operating results of the Company. No expense was
recorded for the years ended December 31, 1994, 1993 and 1992.
The Company provides medical, dental and life insurance benefits to eligible
participants on long-term disability, at no cost to the participant. Prior to
1993, the Company expensed these benefits on a pay-as-you-go basis. In
December 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires recognition of an
employer's obligation to provide benefits to former and inactive employees
after employment but before retirement. The Company adopted SFAS No. 112 in
1993. The cumulative effect of the accounting change, reported on the
Statement of Consolidated Operations as a component of other expenses,
resulted in a decrease in 1993 income of $715,000. The liability for
postemployment benefits at December 31, 1994 and 1993 were $686,000 and
$715,000, respectively.
8. NOTE PAYABLE
As partial financing of the acquisition of SICO, the Company entered into a
$14,000,000 term loan agreement with a local bank in 1990. Under the terms of
the loan agreement, the Company was required to make principal payments of
$700,000 at each quarter end. On March 31, 1994, the Company made a principal
payment of $700,000. On April 18, 1994, the outstanding balance of $2,100,000
was repaid in full.
60
<PAGE>
9. NET ASSETS
NNHC depends on dividends from its subsidiaries to service debt and pay
expenses. The payment of shareholder dividends by insurance companies without
the prior approval of the state insurance regulators is limited to formula
amounts based on net investment income, and capital and surplus determined in
accordance with statutory accounting principles. At December 31, 1994,
approximately $2.1 million of dividends are available without prior regulatory
approval.
On April 25, 1994, NNHC contributed to NNCC all of the issued and outstanding
capital stock of SICO, Inc. and its subsidiaries.
NNCC paid dividends to NNHC of $795,000, $3,170,000 and $3,896,500 during the
years ended December 31, 1994, 1993 and 1992, respectively.
In accordance with the terms of an order dated April 10, 1985 of the Insurance
Commissioner of the State of California (the Commissioner), PNIC may not pay
any dividend or other distribution unless the dividend is approved by the
Commissioner. PNIC received approval for and paid dividends to NNHC of
$1,000,000 during the year ended December 31, 1992.
SICO paid dividends to NNHC of $2,110,000 during the year ended
December 31, 1994 and $1,500,000 during the year ended December 31, 1992.
The Company prepares statutory-basis financial statements in accordance with
accounting practices prescribed by domiciliary insurance departments.
Prescribed statutory accounting practices include state laws, regulations and
general administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners (NAIC). The following
information has been prepared on the basis of prescribed statutory accounting
principles which differ from GAAP. The principal differences relate to
deferred acquisition costs and assets not admitted for statutory reporting.
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Statutory net income (loss) $(5,009) $ 9,704 $ 245
Statutory policyholders' surplus 99,671 108,734 94,212
</TABLE>
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments. In developing
the fair value of financial instruments, the Company uses available market
quotes and data, provided by external pricing services, as well as valuation
methodologies where appropriate. As considerable judgment is required in
interpreting market data and performing valuation methodologies, the fair
value estimates presented below are not necessarily indicative of the amounts
the Company might pay or receive in actual current market transactions.
Furthermore, as a number of the Company's significant assets and liabilities
are excluded from the provisions of SFAS No. 107, the disclosures below do not
reflect the Company's statement of net assets on a fair value basis, nor the
fair value of the Company as a whole.
61
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1994 December 31, 1993
-------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
Financial Assets:
<S> <C> <C> <C> <C>
Fixed maturity investments $356,715 $353,543 $417,926 $418,728
Equity securities - - 1 1
Cash and cash equivalents 43,749 43,749 22,779 22,779
Accrued investment income 5,703 5,703 5,988 5,988
Premium balances receivable 55,074 55,074 53,707 53,707
Financial Liabilities:
Other liabilities 10,813 10,813 9,234 9,234
Note payable - - 2,800 2,800
</TABLE>
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments:
Financial Assets
Fair values for fixed maturity investments are based on quoted market prices.
Equity securities are valued based on quoted market prices.
Cash and cash equivalents are highly liquid investments with maturities of
less than three months; carrying value approximates fair value.
Accrued investment income is valued at carrying value as it is short-term in
nature.
Insurance premium balances receivable are generally collected on a monthly
basis. Due to the short-term nature of these receivables, their carrying
value approximates fair value.
Financial Liabilities
The Company's insurance reserves are specifically excluded from the provisions
of SFAS No. 107.
Other financial liabilities are valued at their carrying value due to their
short-term nature. As permitted under SFAS No. 107, other financial
liabilities exclude postretirement and postemployment benefit obligations for
purposes of this disclosure.
The fair value of the Company's note payable is based on current rates offered
to the Company for debt of the same remaining maturities.
62
<PAGE>
11. COMMITMENTS
The Company leases certain office facilities and equipment under operating
leases. Minimum rental commitments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
1995 2,933
1996 2,119
1997 1,774
1998 376
1999 216
Thereafter 58
------
$7,476
======
</TABLE>
Total rental expense was $2,541,000, $2,512,000 and $2,291,000 in 1994, 1993
and 1992, respectively.
12. LITIGATION
The Company is involved in various lawsuits that have arisen from the normal
conduct of business. These proceedings are handled by corporate and outside
counsel. It is the opinion of management that the outcome of these
proceedings will not have a material effect on the Company's financial
condition or liquidity; 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.
13. PENDING TRANSACTION
On August 2, 1994, Armco entered into a definitive purchase agreement to sell
the Company to Vik Brothers Insurance, Inc., a privately held, Raleigh, North
Carolina based property and casualty insurance holding company. The sale is
expected to close by April 7, 1995. In connection with the transaction, Vik
would pay approximately $65 million at closing, and approximately $15 million,
in three years, reduced by a potential adjustment for adverse experience in
insurance reserves.
63
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE I
Summary of Investments - Other than Investments in Related Parties
As of December 31, 1994
(Dollars in thousands)
<CAPTION>
Amount at
which shown
Market in the
Type of Investment Cost Value balance sheet
------------------------------------------------------------------------------
FIXED MATURITY INVESTMENTS:
Bonds:
<S> <C> <C> <C>
United States Government and government
agencies and authorities $117,785 $108,824 $111,996
Public utilities 17,778 15,612 15,612
All other corporate bonds 240,896 229,107 229,107
-------- -------- --------
TOTAL FIXED MATURITIES 376,459 353,543 356,715
-------- -------- --------
SHORT-TERM INVESTMENTS 42,128 42,128 42,128
-------- -------- --------
TOTAL INVESTMENTS $418,587 $395,671 $398,843
======== ======== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
64
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - SCHEDULE II
COMPANIES TO BE SOLD (Parent Only)
Condensed Financial Information
Condensed Statements of Net Assets as of December 31, 1994 and 1993
(Dollars in thousands)
<CAPTION>
ASSETS: 1994 1993
-------- --------
Investments:
<S> <C> <C>
Equity securities at market value (cost $1) $ - $ 1
Investments in stock of subsidiaries accounted for on
the equity method 89,673 131,943
Cash 2 5
Other assets 6,579 6,802
-------- --------
TOTAL ASSETS $96,254 $138,751
======== ========
LIABILITIES AND NET ASSETS:
LIABILITIES:
Other liabilities $ 2 $ 59
Note payable - 2,800
-------- --------
TOTAL LIABILITIES 2 2,859
-------- --------
NET ASSETS 96,252 135,892
-------- --------
TOTAL LIABILITIES AND NET ASSETS $96,254 $138,751
======== ========
<FN>
See notes to condensed financial information.
</TABLE>
65
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - SCHEDULE II
COMPANIES TO BE SOLD (Parent Only)
Condensed Financial Information
Condensed Statements of Operations for the Years Ended December 31, 1994, 1993
and 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
REVENUES:
<S> <C> <C> <C>
Net investment income $ 1 $ - $ -
------- ------- -------
Total Revenues 1 - -
------- ------- -------
EXPENSES:
Interest expense 91 299 728
Other expenses 185 216 230
------- ------- -------
Total Expenses 276 515 958
------- ------- -------
LOSS - BEFORE EQUITY IN NET INCOME (LOSS)
OF SUBSIDIARIES (275) (515) (958)
EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES (6,300) 10,866 (1,659)
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE (6,575) 10,351 (2,617)
------- ------- -------
Cumulative effect on prior years of a change
in accounting principle for postretirement
benefits - (14,000) -
------- ------- -------
NET LOSS $(6,575) $(3,649) $(2,617)
======== ======== =======
<FN>
See notes to condensed financial information.
</TABLE>
66
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - SCHEDULE II
COMPANIES TO BE SOLD (Parent Only)
Condensed Financial Information
Condensed Statements of Cash Flows for the Years Ended December 31, 1994, 1993
and 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (6,575) $ (3,649) $ (2,617)
Gain on sale of investments (1) - -
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in net (income) loss of subsidiaries 6,300 (11,560) 1,659
Cumulative effect of accounting changes - 14,000 -
Dividends received from subsidiaries 2,905 3,170 6,396
Amortization 183 183 183
Changes in:
Other assets 40 23 (7)
Other liabilities (57) 583 (107)
-------- -------- --------
Total adjustments 9,370 6,399 8,124
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,795 2,750 5,507
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of equity securities 2 - -
-------- -------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2 - -
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable (2,800) (2,800) (5,600)
-------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES (2,800) (2,800) (5,600)
-------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS (3) (50) (93)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5 55
148
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2 $ 5 $ 55
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 125 $ 408 $ 831
<FN>
See notes to condensed financial information.
</TABLE>
67
<PAGE>
ARMCO FINANCIAL SERVICES GROUP - SCHEDULE II
COMPANIES TO BE SOLD (Parent Only)
Condensed Financial Information
Notes to Condensed Financial Information for the Years Ended December 31,
1994, 1993 and 1992
1. The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements of the AFSG - Companies
to be Sold.
2. Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1994 1993
-------- --------
<S> <C> <C>
Note payable $0 $2,800
== ======
</TABLE>
As partial financing of the acquisition of SICO, the Company entered into a
$14,000,000 term loan agreement with a local bank in 1990. Under the terms of
the loan agreement, the Company was required to make principal payments of
$700,000 on March 31 and each quarter end thereafter until repaid in full. On
March 31, 1994, the Company made a principal payment of $700,000. On
April 18, 1994, the outstanding balance of $2,100,000 was repaid in full.
3. NNHC depends on dividends from its subsidiaries to service debt and pay
expenses. The payment of shareholder dividends by insurance companies without
the prior approval of the state insurance regulators is limited to formula
amounts based on net investment income, and capital and surplus determined in
accordance with statutory accounting principles. At December 31, 1994,
approximately $2.1 million of dividends are available without prior regulatory
approval.
On April 25, 1994, NNHC contributed to NNCC all of the issued and outstanding
capital stock of SICO, Inc. and its subsidiaries.
NNCC paid dividends to NNHC of $795,000 , $3,170,000 and $3,896,500 during the
years ended December 31, 1994, 1993 and 1992, respectively.
In accordance with the terms of an order dated April 10, 1985 of the Insurance
Commissioner of the State of California (the Commissioner), PNIC may not pay
any dividend or other distribution unless the dividend is approved by the
Commissioner. PNIC received approval for and paid dividends to NNHC of
$1,000,000 during the year ended December 31, 1992.
SICO paid dividends to NNHC of $2,110,000 during the year ended
December 31, 1994 and $1,500,000 during the year ended December 31, 1992.
4. In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The statement requires fixed
maturity investments which are available for sale to be recorded at market
value. The Company adopted SFAS No. 115 on December 31, 1993.
68
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE IV
Reinsurance
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
Assumed Percentage
Property and Liability Insurance Ceded from of Amount
Premium Earned for the Years Ended Direct to Other Other Net Assumed
December 31, Amount Companies Companies Amount to Net
-------- --------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
1994 $202,108 $14,532 $28,693 $216,269 13.3%
======== ======= ======= ========
1993 $215,075 $15,181 $27,799 $227,693 12.2%
======== ======= ======= ========
1992 $223,543 $13,013 $29,356 $239,886 12.2%
======== ======= ======= ========
</TABLE>
69
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE V
Valuation and Qualifying Accounts
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
Amounts -
Charged
Balance at (Credited) to Balance
Beginning Costs and at End
For the Years Ended December 31, of Period Expense of Period
1994:
<S> <C> <C> <C>
Allowance for doubtful accounts $1,757 $ (195) $1,562
====== ======= ======
Accumulated depreciation on
property & equipment $7,914 $1,127 $9,041
====== ======= ======
Amortization of goodwill $ 549 $ 183 $ 732
====== ======= ======
1993:
Allowance for doubtful accounts $1,790 $ (33) $1,757
====== ======= ======
Accumulated depreciation on
property & equipment $6,577 $1,337 $7,914
====== ======= ======
Amortization of goodwill $ 366 $ 183 $ 549
====== ======= ======
1992:
Allowance for doubtful accounts $1,409 $ 381 $1,790
====== ======= ======
Accumulated depreciation on
property & equipment $5,469 $1,108 $6,577
====== ======= ======
Amortization of goodwill $ 183 $ 183 $ 366
====== ======= ======
</TABLE>
70
<PAGE>
<TABLE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE VI
Supplemental Information Concerning Property/Casualty Insurance Operations
For the Years Ended December 31, 1994, 1993 and 1992
(Dollars in thousands)
<CAPTION>
As of December 31
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 19,934 $ 19,712 $ 19,727
Reserves for losses and loss adjustment
expenses 308,423 297,553 284,309
Unearned premiums 94,854 95,992 101,528
As of December 31
1994 1993 1992
-------- -------- --------
Earned premiums $216,269 $227,693 $239,886
Net investment income 29,424 43,693 44,139
Loss and loss adjustment expenses incurred:
Current year 169,406 171,834 185,225
Prior years 455 5,294 10,852
Amortization of policy acquisition costs 45,837 46,456 49,912
Paid loss and loss adjustment expenses 164,366 172,089 189,396
Net premiums written 215,183 222,090 237,882
</TABLE>
71
<PAGE>
ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD
Disclosure of Certain Data on Loss and Loss Expense Reserves
The liability for unpaid losses and loss adjustment expenses includes an
amount determined from loss reports and individual cases and an amount, based
on past experience, for losses incurred but not reported. Such liability is
necessarily based on estimates and, while management believes that the amount
is fairly stated, the ultimate liability may be in excess of or less than the
amount provided. The methods for making such estimates and for establishing
the resulting liability are continually reviewed and any adjustments resulting
therefrom are reflected in earnings currently. The Company does not discount
the liability for unpaid losses and loss adjustment expenses.
AFSG - Companies to be sold estimates losses for reported claims on an
individual case basis. Case reserves are based on experience with a
particular type of risk and the available information surrounding each
individual claim. Case reserves are reviewed on a regular basis. As
additional facts become available, the case reserves are adjusted as
necessary. The stability of the case reserving process is monitored through
comparison with ultimate settlement.
The estimates of losses for incurred but not reported claims (IBNR), as well
as additive reserves for reported claims, are developed primarily from an
analysis of historical patterns of the development of paid and incurred losses
(dollars and claim counts) by accident year for each line of business.
Salvage and subrogation estimates are developed from patterns of actual
recoveries.
Allocated loss adjustment expense reserves are developed from an analysis of
historical patterns of the development of paid allocated loss adjustment
expenses to incurred losses, by accident year, for each line of business.
These historical patterns are then applied to projected ultimate losses for
each line of business.
Unallocated loss adjustment expense reserves are developed utilizing a cost
accounting system. The cost accounting system is based on historical costs
modified for anticipated changes in operations and selections of alternative
costs.
In December 1992, the FASB issued SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration contracts." The statement
establishes the conditions required for a contract to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. The Company adopted SFAS No. 113 in 1993. Prior to the adoption
of the new statement, assets and liabilities were reported net of the effects
of reinsurance. Subsequent to the adoption of the new statement, ceded
reinsurance balances due from unaffiliated insurers are reported separately as
assets. Ceded reinsurance balances due from affiliated insurers continue to
be reported in liabilities. As permitted by the statement, prior period
financial statements have been restated.
Loss and loss adjustment expense reserves are stated at management's estimate
of the ultimate cost of settling all incurred but unpaid claims. Loss and
loss adjustment expense reserves are not discounted.
72
<PAGE>
EXHIBIT INDEX
The following is an index of the exhibits included in the Form 10-K
Annual Report.
3(a). Articles of Incorporation of Armco Inc., as amended as of May 12, 1993
(1)
3(b). Regulations of Armco Inc. (2)
4. Armco hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of each instrument defining the rights of
holders of long-term debt of Armco and its subsidiaries, omitted pursuant to
Item 601(b)(4)(iii) of Regulation S-K.
10(a). Deferred Compensation Plan for Directors*
10(b). 1993 Long-Term Incentive Plan of Armco Inc. (3)*
10(c). Severance Agreements (4)*
10(d). 1988 Restricted Stock Plan (5)*
10(e). Executive Supplemental Deferred Compensation Plan Trust (6)*
10(f). Executive Supplemental Deferred Compensation Plan (7)*
10(g). Pension Plan for Outside Directors (8)*
10(h). Rights Agreement dated as of June 27, 1986 between Armco Inc. and
Fifth Third Bank, as successor to Harris Trust and Savings Bank, as amended as
of June 24, 1988 (9)
10(i). Key Management Severance Policy (10)*
10(j). Minimum Pension Plan (11)*
10(k). Stainless Steel Toll Rolling Services Agreement (12)
10(l) Equity Exchange Agreement (13)
10(m) Stock Purchase Agreement among Armco Inc., Armco Financial Services
Corporation and Vik Brothers Insurance, Inc. (14)
10(n) Asset Sale Agreement By and Among Armco Inc., Eastern Stainless
Corporation, Avesta Sheffield East, Inc. and Avesta Sheffield Holding Co.
dated as of February 9, 1995 (15)
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1994.
(Filed for information only, except for those portions that are specifically
incorporated in this Form 10-K Annual Report for the year ended December 31,
1994.)
<PAGE)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
28. Schedule P - Analysis of Losses and Loss Expenses
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1994 for
the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan for
Hourly Employees will be filed by amendment as exhibits hereto, as permitted
under Rule 15d-21.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the Form 10-K pursuant to Item 14(c) of Form 10-K.
______________________
(1) Incorporated by reference from Exhibit 4.2 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(2) Incorporated by reference from Exhibit 3.2 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994.
(3) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993.
(4) Incorporated by reference from Exhibit 10(a) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(5) Incorporated by reference from Exhibit 10(i) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1988 (SEC File No. 001-00873).
(6) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(7) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988 (SEC File No. 001-00873).
(8) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1989 (SEC File No. 001-00873).
(9) Incorporated by reference from Exhibit 1 to Armco's Form 8-A dated July
7, 1986 and Exhibit 1.1 to Armco's Form 8 dated July 11, 1988 (SEC File No.
001-00873).
(10) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1990.
(11) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1991.
(12) Incorporated by reference from Exhibit 10(s) to Armco's Annual Report on
Form 10-K for the year ended December 31, 1993.
(13) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated April
7, 1994.
<PAGE>
(14) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994.
(15) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated March
14, 1995.
<PAGE>
Exhibit 10(a)
ARMCO INC.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
1. Name and Purpose
This Plan shall be known as the Armco Inc. Deferred Compensation Plan
for Directors ("Plan"). This Plan is established by Armco Inc.
("Armco") to provide any member of the Board of Directors of Armco who
is not an employee of Armco or any subsidiary of Armco ("Eligible
Director") with an opportunity to defer compensation to be earned as a
Director.
2. Term
The Plan shall be effective on October 1, 1981 and shall remain in
effect until terminated by action of those members of the Board of
Directors of Armco who are not Eligible Directors ("Disinterested
Directors").
3. Participants
Any Eligible Director shall become a Participant upon filing an Election
to defer a Director's Fee in the manner hereinafter provided.
4. Director's Fee
For all purposes of this Plan, any compensation for services rendered as
a Director or as a member of any committee of the Board of Directors
which would normally be paid during any month in the ordinary course of
business shall be aggregated hereunder and shall be referred to as a
"Director's Fee."
5. Election to Defer
An Eligible Director may elect during any month to defer the payment of
all or any specified portion of any subsequent month's Director's Fee by
delivering to the Secretary a written election form, signed by the
Eligible Director, in the form of Election to Defer attached as Exhibit
A or in such other form as the Disinterested Directors may from time to
time approve ("Election").
6. Effect of Election to Defer
Each Election shall be effective with respect to the Director's Fee for
any month following the month in which the Election is delivered to the
Secretary. Each Election shall continue in full force and effect until
the first to occur of the first day of the month next following the date
the Election expires by its terms, the date the Election is canceled by
a written notice delivered to the Secretary, the date a new Election is
filed, the date the Participant ceases to an Eligible Director or the
date of termination of an Election shall have no effect on any
Director's right to receive payment of a Director's Fee deferred while
such Election was in effect.
7. Deferred Director's Fee Account
There shall be established for each Participant one or more hypothetical
Deferred Director's Fee accounts ("Account") which shall be maintained
for accounting purposes only and to which any Deferred Director's Fee
and any hypothetical earnings thereon shall be credited
1
<PAGE>
and accounted for. The Director's Fee for any month for which the
Election is in effect shall be credited to the Participant's Account as
of the first day of the month following the month for which it is
deferred.
(a) Interest Option: Unless the Participant otherwise directs in his
Election, the balance in the Participant's Account will be
hypothetically invested at an interest rate equal to the 90-day Treasury
bill rate in effect on the first day of each quarter. Interest will be
credited at the end of each quarter. Director's Fees credited to the
Account during a quarter will be deemed to earn interest at the rate in
effect at the beginning of each quarter, with interest commencing on the
first day of the month on which the Director's Fee is credited to the
Account.
(b) Stock Equivalent Option: Any Participant may, in his Election,
direct that all or a specified portion of each Deferred Director's Fee
be hypothetically invested in Armco's Common Stock (rounded to the
nearest 1/1000th of a share) at the average of the highest and lowest
price per share reported on the New York Stock Exchange - Composite
Transactions for the day as of which the Director's Fee is credited to
the Account or, if no transactions are reported for such day, the first
business day immediately following such date for which transactions in
Armco's Common Stock are reported ("Stock Equivalents"). The
Participant's Account shall also be credited with such dividends as
would have been paid if the Stock Equivalents credited to such Account
had been held in Armco Common Stock on the dividend payment date. Such
hypothetical dividends shall be accounted for as additional Stock
Equivalents at the average of the highest and lowest price per share
reported on the New York Stock Exchange - Composite Transactions on the
first business day immediately following the dividend payment date for
which transactions in Armco's Common Stock are reported. Appropriate
adjustments shall be made to the number of Stock Equivalents in any
Account to reflect any stock split, stock dividend or other
recapitalization affecting Armco's Common Stock.
Once a Deferred Director's Fee is hypothetically invested under either
the Interest Option or the Stock Equivalent Option described above, such
hypothetical investment shall be deemed to continue until distribution
is made to the Participant.
8. Accounting and Reporting
Each Participant's Account will be valued as of the last day of any
month and shall be reported to the Participant not less often than
annually.
9. Payment
The value of a Participant's Account shall be paid in cash in a lump sum
or in annual installments as the Participant may have directed upon
filing his most recent Election. In the absence of such a direction,
payment shall be made in lump sum at such time as the Disinterested
Directors shall determine but not before the date of the Participant
ceases to be an Eligible Director not later than the close of the year
following the year in which the Director ceases to be an Eligible
Director. Annual installments over a period not to exceed five years
may be elected in which case the amount of each payment shall be that
fraction of the value of the Participant's Account determined by
multiplying the value of the Participant's Account as of the last day of
the month preceding the month in which payment is to be made by a
fraction, the numerator of which is one (1) and the denominator of which
is the total number of installments then remaining to be paid.
2
10. Designated Beneficiary
A Director may designate, in the form of Designation of Beneficiary
attached as Exhibit B or in such other form as the Disinterested
Directors may approve, the person or persons, trust or trusts or other
entity to whom the balance of any Participant's Account is to be paid if
the Participant dies before receiving payment of all amounts credited to
such Account. A beneficiary designation will be effective only after
the signed designation is delivered to the Secretary while the Director
is alive and will cancel and supersede all beneficiary designations
signed and filed earlier. If the Director fails to designate a
beneficiary as provided above, or if all designated beneficiaries of the
Director predecease the Director or if each surviving designated
beneficiary is legally prohibited to take, the remaining unpaid amount
shall be paid in one lump sum to the legal representative of the estate
of the Director.
11. Participant's Rights Unsecured
The right of any Participant to receive any sum under the provisions of
the Plan shall be an unsecured claim against the general assets of
Armco.
12. Nonassignability
The right of a Participant to the payment of any portion of his Account
shall not be assigned, transferred, pledged or encumbered or be subject
in any manner to alienation or anticipation. Any such anticipation
shall immediately void any right to any sum the Participant may have had
hereunder and any such sum shall thereafter be paid to such person on
behalf of such Participant as the Disinterested Directors shall
determine. Any such payment shall fully satisfy Armco's obligations to
such Participant under this Plan.
13. Withholding Taxes
Armco shall cause to be deducted from the amount of any payment under
the Plan, any taxes lawfully required to be withheld by any federal,
state or local government.
14. Amendment, Modification or Termination of the Plan
The Disinterested Directors shall take any action authorized to be taken
by them hereunder by unanimous written consent or by a vote of the
majority of such Directors, and may, at any time, or from time to time,
terminate, amend or modify the Plan. No such action shall entitle any
Participant to a distribution or accelerate in any way a Participant's
right to receive a distribution of his Account except as may be
expressly provided by the Disinterested Directors at the time such
action is taken.
15. Governing Law
The provisions of this Plan shall be interpreted and construed in
accordance with the laws of the State of Ohio.
3
<PAGE>
Exhibit A
ARMCO INC.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
Election to Defer
To: The Secretary
Armco Inc.
Under the provisions of the Armco Inc. Deferred Compensation Plan for
Directors ("Plan"), the terms and provisions of which are hereby
expressly incorporated herein by this reference, I elect to defer
payment of % of the aggregate compensation which may be payable to
------
me for services rendered as a member of the Board of Directors of Armco
Inc. during each month following the month in which this form is
received by the Secretary through the first day of the month next
following the date I cease to be an Eligible Director or this Election
is canceled or expires as provided in the Plan.
I hereby direct that % of the compensation deferred for each such
-------
month be hypothetically invested in Armco Common Stock and be accounted
for as Stock Equivalents under the terms of the Plan and that the
balance of each such month's Deferred Director's Fee by hypothetically
invested in accordance with the Interest Option.
The amount held in my Account shall be paid to me (choose one) (i)
------
in a lump sum; (ii) in annual installments, (insert a whole number
------
not to exceed five). Payment shall be made on or installments shall
commence on (choose one):
the first day of the month following the month in which my
-------
services as a Director terminate;
the first day of January of the calendar year following the year
-------
in which my services as a Director terminate; or
the first day of , 19 .
------- ------- -------
I understand and agree that payment may not commence on a date which is
later than the first day of the calendar year in which my 72nd birthday
occurs nor earlier than the date I cease to be a Director of or employed
by Armco Inc. in any capacity.
If I die before receiving all of the sums due me, I understand that any
unpaid balance in my Account shall be paid to my Designated Beneficiary
in a single payment.
Date:
------------------------ ------------------------------
Director
Received on the day of , 19 on behalf of Armco
--------- ---------- ---
Inc.
By ------------------------------
Secretary
<PAGE>
Exhibit B
ARMCO INC.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
Designation of Beneficiary
To: The Secretary
Armco Inc.
If on the date of my death there remains any amount payable to me under
the terms of the Armco Inc. Deferred Compensation Plan for Directors
("Plan"), I hereby direct that such amount be paid in single payment to
the following primary beneficiary: *
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
If the named primary beneficiary predeceases me, I hereby direct that
such amount be paid in a single payment to the following contingent
beneficiary: *
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
I understand that if the primary and contingent beneficiaries shall
predecease me or are otherwise unable to take, payment shall be made to
my estate.
This supersedes any previous beneficiary designation made by me with
respect to sums payable to me under the Plan. I reserve the right to
change the beneficiary in accordance with the terms of the Plan.
Date: , 19 ----------------------------------
---------- ---- Signature
*If a natural person, provides the full legal name, present address and
legal relationship to you, if any. If a trust or other entity, please
provide the full legal name, principal office, type of entity and proper
mailing address. If more than one primary or contingent beneficiary is
named, the share to be taken by each must be specified.
<PAGE>
<TABLE>
EXHIBIT 11
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE
(Dollars in Millions, Except Per Share Amounts)
<CAPTION>
Year Ended December 31
------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
I. PRIMARY
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations................... $ 77.7 $ (256.2) $ (419.3) $ (160.6) $ (75.8)
Less: preferred dividends..... 17.8 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
after preferred dividends.... $ 59.9 $ (274.0) $ (429.6) $ (168.7) $ (83.9)
=========== ========== ========== ========== ==========
Income (loss) before extraordinary items
and cumulative effect of changes in
accounting principles........ $ 77.7 $ (327.0) $ (421.5) $ (336.5) $ (85.2)
Less: preferred dividends..... 17.8 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
items and cumulative effect of changes
in accounting principles after preferred
dividends.................... $ 59.9 $ (344.8) $ (431.8) $ (344.6) $ (93.3)
=========== ========== ========== ========== ==========
Income (loss) before extraordinary items
and cumulative effect of changes in
accounting principles........ $ 77.7 $ (327.0) $ (421.5) $ (336.5) $
(85.2)
Loss on extraordinary items.... -- (7.3) (8.4) -- (4.3)
Cumulative effect of changes in
accounting principles........ -- (307.5) -- -- --
----------- ---------- ---------- ---------- ----------
Net income (loss).............. $ 77.7 $ (641.8) $ (429.9) $ (336.5) $ (89.5)
Less: preferred dividends..... 17.8 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Net income (loss) after preferred
dividends.................... $ 59.9 $ (659.6) $ (440.2) $ (344.6) $ (97.6)
=========== ========== ========== ========== ==========
Weighted average number of
common shares................ 104,597,228 103,837,743 98,813,185 88,491,503 88,462,818
Weighted average number of
common equivalent shares (A). 128,740 * * * *
----------- ---------- ---------- ---------- ----------
Total shares for computation 104,725,968 103,837,743 98,813,185 88,491,503 88,462,818
=========== ========== ========== ========== ==========
Primary income (loss) per share:
Income (loss) from continuing
operations................... $ .57 $ (2.64) $ (4.35) $ (1.91) $ (0.95)
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting principles .57 (3.32) (4.37) (3.89) (1.05)
Loss on extraordinary items.... -- (0.07) (0.08) -- (0.05)
Cumulative effect of changes in
accounting principles........ -- (2.96) -- -- --
Net income (loss).............. .57 (6.35) (4.45) (3.89) (1.10)
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER SHARE -
(Continued)
(Dollars in Millions, Except Per Share Amounts)
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------
-
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
I. FULLY DILUTED INCOME PER SHARE
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations................... $ 77.7 $ (256.2) $ (419.3) $ (160.6) $ (75.8)
Less: preferred dividends..... -- 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations
after preferred dividends.... $ 77.7 $ (274.0) $ (429.6) $ (168.7) $ (83.9)
=========== ========== ========== ========== ==========
Income (loss) before extraordinary items
and cumulative effect of changes in
accounting principles........ $ 77.7 $ (327.0) $ (421.5) $ (336.5) $ (85.2)
Less: preferred dividends..... -- 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
items and cumulative effect of changes
in accounting principles after preferred
dividends.................... $ 77.7 $ (344.8) $ (431.8) $ (344.6) $ (93.3)
=========== ========== ========== ========== ==========
Income (loss) before extraordinary items
and cumulative effect of changes in
accounting principles........ $ 77.7 $ (327.0) $ (421.5) $ (336.5) $
(85.2)
Loss on extraordinary items.... -- (7.3) (8.4) -- (4.3)
Cumulative effect of changes in
accounting principles........ -- (307.5) -- -- --
----------- ---------- ---------- ---------- ----------
Net income (loss).............. $ 77.7 $ (641.8) $ (429.9) $ (336.5) $ (89.5)
Less: preferred dividends..... -- 17.8 10.3 8.1 8.1
----------- ---------- ---------- ---------- ----------
Net income (loss) after preferred
dividends.................... $ 77.7 $ (659.6) $ (440.2) $ (344.6) $ (97.6)
=========== ========== ========== ========== ==========
Weighted average number of
common shares................ 104,597,228 103,837,743 98,813,185 88,491,503 88,462,818
Weighted average number of
common equivalent shares (A). 154,049 * * * *
Weighted average number of
preferred shares on an "if
converted" basis............. 22,681,261 * * * *
----------- ---------- ---------- ---------- ----------
Total shares for computation 127,432,538 103,837,743 98,813,185 88,491,503 88,462,818
=========== ========== ========== ========== ==========
Primary income (loss) per share:
Income (loss) from continuing
operations................... $ .61 $ (2.64) $ (4.35) $ (1.91) $ (0.95)
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting principles .61 (3.32) (4.37) (3.89) (1.05)
Loss on extraordinary items.... -- (0.07) (0.08) -- (0.05)
Cumulative effect of changes in
accounting principles........ -- (2.96) -- -- --
Net income (loss).............. .61 (6.35) (4.45) (3.89) (1.10)
<FN>
_________
* Antidilutive
NOTES:
(A) Common equivalent shares are included for dilutive stock options as if
the options were exercised
and the proceeds used to acquire common shares of Armco.
(B) Calculation of fully diluted income (loss) per share is submitted for
1994 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%.
</TABLE>
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1994
(Dollars in millions, except per share and per ton data)
GENERAL
This discussion and analysis of Armco's 1994 financial results should be read
together with the Consolidated Financial Statements and Notes on pages 24
through 43.
A summary of Armco's results for 1994, 1993, and 1992 is shown below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,437.6 $1,664.0 $1,673.2
Special charges - net (35.0) (165.5) (185.1)
Operating profit (loss) 39.2 (146.0) (157.3)
Gain on sale of investments in
joint ventures 62.6 -- --
Credit for income taxes 28.7 7.3 34.0
Equity in income (loss) of
equity companies 15.3 (43.7) (255.5)
Income (loss) from continuing
operations 77.7 (256.2) (419.3)
Income (loss) from discontinued
operations
Worldwide Grinding Systems -- (25.8) 0.4
AFSG companies to be sold -- (45.0) (2.6)
Income (loss) before extraordinary
losses and cumulative effect of
accounting changes 77.7 (327.0) (421.5)
Net income (loss) $ 77.7 $ (641.8) $ (429.9)
-------------------------------------------------------------------------
</TABLE>
Year-to-year results are not directly comparable due to the divestiture of
certain businesses in 1992, 1993 and 1994 and to the acquisition of Cyclops
Industries, Inc. (Cyclops) on April 24, 1992.
[Two pie charts]
Titled: ARMCO INC.-CONSOLIDATED 1994 SALES
% BY MARKETS
Automotive 31%
Industrial & Electrical 28%
Service Centers 15%
Construction 8%
Appliance, Utensils & Cutlery 2%
Other 16%
% BY PRODUCTS
Sheet & Strip 66%*
Pipe & Tubing 13%
Semi-Finished 5%
Plate 4%
Construction Products 2%
Other 10%
*Includes stainless, electrical and carbon steels
Special Charges/Divestments
During 1994, Armco recognized a $20.0 special charge related to its decision
to idle and restructure its Mansfield and Dover, Ohio plants. Until March
1994, Armco planned to operate these facilities while installing a new thin-
slab continuous caster. In that month, a blooming mill motor in Mansfield
failed, crippling the production capability of both plants. Armco decided,
based on its estimate of the time it would take to repair the equipment and
resume production, and the forecast of continued losses being generated by
the two operations, that it would keep the plants idle until the start-up of
the thin-slab caster, scheduled for early in the second quarter of 1995. The
special charge consisted of $13.5 for employee benefits, primarily group
insurance and supplemental unemployment benefits; and $6.5 to writedown
inventories and fixed assets. During 1994, employee benefit payments
totaling $7.5 were made with an additional $2.5 expected in the first quarter
of 1995. The remaining liability primarily relates to longer-term employee
benefits. To begin rebuilding its customer base, the Dover plant resumed
limited production in early 1995. It is purchasing cold rolled steel which
had not been previously available because of tight market conditions.
Eastern Stainless Corporation (Eastern Stainless) has been faced with a
decline in market demand and selling prices for certain of its products,
increased production costs and intense competition from both foreign and
domestic sources. As a result, it has experienced substantial losses during
the last three years while sales volume continued to fall. In the third
quarter of 1994, Eastern Stainless decided to sell substantially all of its
assets to Avesta Sheffield Holding Company (Avesta Sheffield), for cash and
the assumption of certain liabilities. In the third quarter of 1994, Armco
recognized a $15.0 special charge related to the Eastern Stainless decision.
Any cash received on the sale will be used by Eastern Stainless to satisfy
normal operating and employee benefit obligations not assumed by Avesta
Sheffield. The net liabilities not assumed by Avesta Sheffield or satisfied
by the sale proceeds will be retained by Armco. At December 31, 1994 and
1993, most of these liabilities, totaling approximately $50.0 and $40.0,
respectively, were recorded on Armco's Statement of Consolidated Financial
Position, primarily in Long-term employee benefit obligations. Upon
completion of the proposed transaction, scheduled for March 14, 1995, Eastern
Stainless will have no assets remaining as a corporate legal entity and will
be dissolved without any shareholder distribution. The proposed transaction
is subject to approval by the Eastern Stainless shareholders. Since Armco
owns approximately 84% of the voting stock of Eastern Stainless and intends
to vote in favor of the proposed transaction, approval by the shareholders is
assured.
Of the total charge of $15.0, $9.0 relates to employee benefit obligations,
and $3.2, $1.8 and $1.0 relate to losses through the date of disposal,
writedown of assets, and transaction fees and expenses, respectively. While
no significant payments have been made related to these amounts, $2.4 of the
reserve for losses was used in 1994.
Also in 1994, Armco signed a definitive agreement to sell the Armco Financial
Services Group (AFSG) companies to be sold. Armco had previously signed a
letter of intent to sell these businesses and, in 1993, recorded a charge of
$45.0 to write down its investment in the companies to be sold to its revised
estimate of net realizable value.
Armco also announced the completion of an initial public offering and
recapitalization of Armco Steel Company, L.P. (ASC), its carbon steel joint
venture with Kawasaki Steel Corporation.
12 ARMCO INC.
<PAGE>
[Photograph of Pete Leemputte appears here]
"We continued to take aggressive action to realign our internal cost
structure. Our success is evident. Selling and administrative expenses in
1994 accounted for 6.7% of each sales dollar, down substantially from 8.2% in
1992. One of our most important actions was developing new salaried
retirement and medical programs. Contributions to salaried retirement plans
will now be tied more closely to company performance, helping to prevent
steep increases in future legacy costs." --Pete Leemputte, Vice President and
Controller
As a result of the sale of its interest in the joint venture to a newly
formed company named AK Steel Holding Corporation (AK Steel), Armco
recognized a pretax gain of $36.5, and was able to recognize a $30.0 tax
benefit related to its deferred tax asset position.
In the third quarter of 1994, Armco sold 90% of its investment in North
American Stainless (NAS) for $73.0 in cash, recognizing a $26.1 gain.
Armco's decision to sell most of its interest in this previously 50%-owned
partnership reflected Armco's desire to use its resources to fund the capital
needs of its core businesses as opposed to investing additional capital in
the joint venture's capacity expansion program.
In the fourth quarter of 1994, Armco sold its metal deck business for a small
gain and completed the divestiture of a tubing plant and conversion
businesses, which, in 1993, had been identified for disposal.
In 1993, consistent with its strategy to focus on the production of specialty
flat-rolled steel, Armco sold its Worldwide Grinding Systems segment, its
Brazilian sheet and strip operations, a welded tubing operation and a portion
of its nonresidential construction business. Armco also announced plans to
dispose of certain other businesses in the Other Steel and Fabricated
Products segment and signed a letter of intent to sell the AFSG companies to
be sold. In conjunction with the plans for disposal of these businesses,
Armco recorded charges totaling $250.5 in 1993, which included special
charges of $165.5 reflected in the operating losses of the Other Steel and
Fabricated Products segment, a $45.0 charge for expenses and losses
associated with the proposed sale of the AFSG companies to be sold and $40.0
as a loss on the disposal of the Worldwide Grinding Systems segment. The
total charges included $128.1 for the excess of carrying value of net assets
over anticipated proceeds on disposal, $72.6 for employee benefit costs, and
$28.1 for estimated losses through the dates of disposal. Other components
of the charges were expenses related to provisions for legal and
environmental matters and recognition of previously deferred foreign currency
translation adjustments, partially offset by pension curtailment gains. Most
of the charges were either non-cash or will be paid over a long period. The
employee benefit charges primarily relate to long-term retirement benefits
that will be paid over many years. The reserve for future losses was, for
the most part, utilized during 1994 and a small remainder of the
miscellaneous reserves is held for final settlement of transaction fees,
property maintenance and outstanding tax issues.
In conjunction with Armco's decision to dispose of certain businesses in the
Other Steel and Fabricated Products segment after September 30, 1993, Armco
stopped recording, as a component of continuing operations, the sales, costs
and expenses of these businesses. At December 31, 1994, only two small
businesses have not been divested. All results for the Worldwide Grinding
Systems businesses and the AFSG companies to be sold are presented as
discontinued operations.
In 1992, Armco recorded special charges, totaling $185.1, associated with a
series of restructuring actions undertaken to reduce costs, improve
profitability and strengthen Armco's competitive position. The total special
charge of $185.1 included $114.0 for employee benefit costs and $39.9 for
continuing losses and excess carrying value of net assets over the
anticipated proceeds on disposal, with the remainder primarily for provisions
for legal and environmental matters and the recognition of previously
deferred foreign currency translation adjustments. These restructuring
actions have been completed except for the payment of retirement benefits,
which will occur over a period of many years. (See discussions in "Business
Segment Results," "Discontinued Operations," and "Equity Companies," below.)
Adoption of Major Accounting Standards
Effective January 1, 1993, Armco recorded a charge of $440.0, or $4.24 per
share, net of taxes, for the adoption of Statement of Financial Accounting
Standards No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions (SFAS No. 106). This accounting standard requires the accrual
of expense for postretirement benefits during the years an employee is
actively employed, rather than the former practice of expensing the benefits
on an as-incurred basis when the participant is retired.
Also effective January 1, 1993, Armco recorded a cumulative effect credit of
$135.6, or $1.31 per share, excluding the tax benefit related to the adoption
of SFAS No. 106, for the adoption of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS No. 109). As a result
of the adoption of SFAS No. 109, Armco has recorded, at December 31, 1994, a
deferred tax asset of $328.5, net of a valuation allowance of $701.3. The
ultimate realization of this asset depends on Armco's ability to generate
sufficient taxable income in the future. As of December 31, 1994, Armco had
capital and net operating loss (NOL) carryforwards of approximately $1,174.3,
expiring between 1998 and 2009, with almost 80% expiring after the year 2000.
Even though Armco has incurred book and tax losses for three of the past four
years, management believes that it is more likely than not that it will
generate taxable income sufficient to realize the recognized portion of the
tax benefit associated with future deductible temporary differences and NOL
and tax credit carryforwards prior to their expiration. This belief is based
upon, among other factors, changes in operations that have occurred during
the past three years, as well as consideration of available tax planning
strategies. Specifically, cost savings associated with Armco's acquisition
of Cyclops and capital investments are being realized, and are anticipated to
continue to improve operating results. Business restructurings undertaken in
the last three years
ARMCO INC. 13
<PAGE>
included the sale of non-strategic units, some of which have been
unprofitable. In addition, Armco expects to begin to recognize the
operational benefits of the new thin-slab caster in Mansfield, Ohio and the
recently announced $95.0 capital improvement program in 1995 and 1996,
respectively. Armco has operated in a highly cyclical industry and
consequently has had a history of generating and then utilizing significant
amounts of NOL carryforwards. During the years 1987-1989, Armco utilized
approximately $350.0 of NOL carryforwards. Management believes that the
valuation allowance noted above is appropriate given the current projections
of taxable income. If Armco is unable to generate sufficient taxable income
in the future through operating results, increases in the valuation allowance
will be required through a charge to expense. However, if Armco achieves
sufficient profitability to utilize a greater portion of the total deferred
tax asset, the valuation allowance will be reduced through a credit to
income.
In 1993, Armco adopted Statement of Financial Accounting Standard No. 112,
Employers' Accounting for Postemployment Benefits, recording an expense of
$3.1 or $.03 per share for the cumulative effect of establishing additional
liabilities for short-term and long-term disability plans.
[Two pie charts]
Title: ARMCO INC.-SPECIALTY FLAT-ROLLED STEEL MARKET SHARE*
STAINLESS SHEET AND STRIP
Armco 24%**
Allegheny Ludlum 21%
J&L Specialty Steel 17%
Washington Steel/Lukens 8%
North American Stainless 7%
Imports 23%
ELECTRICAL STEEL
Armco 45%
Warren Consolidated Industries 19%
Allegheny Ludlum 16%
Imports 20%
*Management estimates
**Includes automotive chrome and specialty sheet and strip
Operating Results
1994 vs. 1993: Net sales in 1994 were substantially lower than in 1993 as a
result of the absence, in 1994, of businesses that were sold or identified
for divestment in the third quarter of 1993, and as a result of the idling of
operations at the Mansfield and Dover, Ohio plants in the first quarter of
1994. The businesses that were sold or identified for divestment, and are
therefore no longer consolidated, accounted for $189.4 of the sales reported
in 1993, and sales from the Mansfield and Dover plants were $151.1 lower in
1994 than 1993 largely as a result of the idling. Partially offsetting these
reductions was a 5% increase in net sales from the Specialty Flat-Rolled
Steel business segment and a significant increase from Douglas Dynamics, Inc.
(Douglas Dynamics), Armco's snowplow and light truck equipment manufacturing
subsidiary.
Operating profit in 1994 improved over 1993 as a result of lower special
charges, as well as strong performances from the Butler, Pennsylvania and
Coshocton and Zanesville, Ohio plants of the Specialty Flat-Rolled Steel
segment and Douglas Dynamics. Partially offsetting these improvements were
deteriorating results at Sawhill Tubular, losses of $85.5 at the idled plants
and a $4.5 charge to increase environmental and litigation reserves.
In 1994, income from continuing operations reflected the improvement in
operating profit and pretax gains of $36.5 for the initial public offering
and recapitalization of ASC, and $26.1 for the sale of 90% of Armco's equity
investment in NAS. Equity in income (loss) from equity companies was $15.3
of income in 1994 compared to a $43.7 loss in 1993 as a result of improved
performance by National-Oilwell and NAS. In addition, after recording a loss
of $27.9 in 1993, Armco stopped recognizing the results from its investment
in ASC when, following several years of losses, Armco's investment in that
joint venture was reduced to zero. (See "Equity Companies" below.)
1993 vs. 1992: Armco's net sales declined slightly because of the sale or
the identification for divestment of a number of businesses in the Other
Steel and Fabricated Products segment. The decline was almost entirely
offset by improved sales in the Specialty Flat-Rolled Steel segment and
Douglas Dynamics, as well as by the impact of a full year of results from the
former Cyclops businesses.
Operating losses declined because of improved performance in the Specialty
Flat-Rolled Steel segment and at Douglas Dynamics, and because of a reduction
in special charges. Special charges of $165.5, taken in the third quarter of
1993, were associated with the decision to dispose of a number of businesses
within the Other Steel and Fabricated Products segment. Excluding special
charges, operating profit declined slightly in 1993 compared to 1992, as
improvements in the Specialty Flat-Rolled Steel segment were more than offset
by increased losses at the Mansfield and Dover plants, costs associated with
the start-up of a new stretch mill at Sawhill Tubular, losses on certain
contracts at a nonresidential construction company and approximately $29.3 of
additional expense related to the adoption of SFAS No. 106.
The loss from continuing operations in 1993 compared to the prior year
declined due to reduced special charges and reduced losses from equity
investments. Armco's net loss from equity investments was $43.7 in 1993
compared to $255.5 in 1992. The reduction was primarily due to the fact that
Armco stopped recording losses in ASC after Armco's investment in ASC was
reduced to zero. Armco's net loss for 1993 included $14.9 of tax refunds and
accrual reversals, compared to $52.1 in 1992. The net loss for 1993 was
increased by the cumulative effect of the adoption of three new accounting
standards, the net effect of which was a charge of $307.5 recorded in the
first quarter.
Outlook: Assuming the continuation of a strong domestic economy, Armco's
results are expected to improve in 1995 compared to 1994 as a result of
operational improvements in its Specialty Flat-Rolled Steel segment and the
anticipated successful start-up of the new thin-slab caster in Mansfield.
14 ARMCO INC.
<PAGE>
BUSINESS SEGMENT RESULTS
Specialty Flat-Rolled Steel
Armco's Specialty Flat-Rolled Steel businesses produce and finish stainless
and electrical steel sheet and strip at plants in Butler, Pennsylvania, and
Coshocton and Zanesville, Ohio. Stainless steel plate products are finished
at Eastern Stainless, Armco's 84%-owned subsidiary in Baltimore, Maryland,
which Armco stopped consolidating as of September 30, 1994 in anticipation of
the sale of its assets. The segment also includes the results of European
trading companies which buy and sell steel and manufactured steel products.
The Specialty Flat-Rolled Steel segment's results appear below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $1,048.5 $1,001.5 $ 885.5
Special charges (15.0) -- (37.6)
Operating profit 126.3 75.5 21.4
Shipments (tons 000s) 690 653 571
Raw steel production (tons 000s) 875 882 793
Capability utilization 102% 94% 84%
-------------------------------------------------------------------------
</TABLE>
1994 vs. 1993: The Butler and Zanesville plants operated at full capacity in
1994, forcing limits on production of certain product lines. Armco benefited
from the strong economy and success in a trade case, which limited imports of
certain electrical steels in the year. Customer sales and tons shipped
increased by 5% and 6%, respectively, in 1994 versus 1993, primarily
reflecting increases in automotive chrome stainless, oriented electrical
steel and stainless sheet and strip, partially offset by declines in chrome
nickel stainless, non-oriented electrical and Eastern Stainless plate, as
well as the elimination of Eastern Stainless sales from Armco's consolidated
results beginning in the fourth quarter of the year. The reduction in non-
oriented electrical steel was primarily due to capacity constraints. While
prices across most product lines strengthened in 1994 compared to 1993,
average sales dollars per ton was lower due to a change in product mix as
automotive chrome and semi-finished product sales displaced sales of higher
priced chrome nickel products. Beginning in 1993, chrome nickel finishing
and sales moved from the Butler plant to NAS.
[Two pie charts]
Title: SPECIALTY FLAT-ROLLED STEEL SEGMENT-1994 SALES
% BY MARKETS
Automotive 41%
Industrial & Electrical Equipment 36%
Service Centers 9%
Appliance, Utensils & Cutlery 3%
Other 11%
% BY PRODUCTS
Sheet & Strip 85%
Semi-Finished 7%
Plate 5%
Other 3%
Operating profit increased 67% in 1994 versus 1993. Included in operating
profit for 1994 is a $15.0 special charge related to a decision by Eastern
Stainless to sell substantially all of its assets to a stainless steel plate
manufacturer, Avesta Sheffield. Eastern Stainless had sales of $52.8 and an
operating loss of $5.9 during the first nine months of 1994 after which, due
to the decision to sell the assets of the business, Armco ceased to
consolidate its results of operations.
During 1994, the Butler melt facility continued to run at full capacity, as
raw steel production totaled 875,000 tons, an increase of 8% over 1993 Butler
production.
Excluding the special charge, operating profit in 1994 increased to $205 per
ton from $116 per ton in 1993. Improvements in yield and productivity and
higher capacity utilization reduced the operating cost per ton, while the
expected synergies between the melting and finishing facilities, which teamed
up after the acquisition of Cyclops, were more fully realized. Although
average price per ton was down slightly due to changes in product mix,
overall improved pricing was realized across all major product lines in 1994.
Excluding the special charge, operating profit in 1994 was 13% of sales, a
five percentage point increase over the prior year.
1993 vs. 1992: The 13% increase in customer sales reflects a 14% increase in
volume due to a full year of shipments from Coshocton and Eastern Stainless
and increased demand for specialty steels, particularly from the automotive
chrome markets. Average prices declined slightly reflecting a change in
product mix as strong demand for automotive chrome and increased sales of
chrome nickel semifinished product to NAS caused reduced shipments of higher
priced, finished chrome nickel products. In addition, lower raw material
costs and increased foreign imports, which rose 62%, 26% and 40% for
stainless sheet and strip, stainless plate and electrical steels,
respectively, during 1993 compared to 1992, put pressure on pricing. Exports
declined to 4% of total tons shipped in 1993 from the Specialty Flat-Rolled
Steel segment compared to 6% in 1992, as Armco shifted some melting capacity
from export markets to more profitable domestic markets.
[Bar chart]
Title: SPECIALTY FLAT-ROLLED STEEL* ON-TIME SHIPMENT PERFORMANCE
1992 71%
1993 86%
1994 92%
Armco's overall on-time delivery performance rose from 86% in 1993 to 92% in
1994. For some products on-time deliveries exceeded 95%.
*Excludes Eastern Stainless Corporation
Operating profit increased because of improvements in operating practices and
cost savings relating to synergies from the Cyclops acquisition, in addition
to the absence of special charges such as those incurred in 1992. Operating
profit excluding special charges was $116 per ton, or 8% of sales, in 1993
compared to $103 per ton, or 7% of sales, in 1992. In 1993, due to the
adoption of SFAS No. 106, operating profit included approximately $20.1 of
additional postretirement benefits expense over the previous, as-incurred
basis. Were it not for that increase, the operating profit margins would
have improved more significantly in the period-to-period comparisons.
Key to Armco's strategy of acquiring Cyclops to enhance its role as a leading
domestic producer of specialty flat-rolled steel, was supplying the steel
feedstock for the former Cyclops stainless steel finishing facility in
Coshocton, from Armco's world-class
ARMCO INC. 15
<PAGE>
melt shop in Butler, thereby increasing the utilization of the Butler
facility and providing Coshocton with an improved source of supply.
Raw steel production in this segment during 1992 and the first half of 1993
included output from the Eastern Stainless melt shop. However, as part of a
plan to restructure its operations, Eastern Stainless closed its melt shop in
July 1993, purchasing its feedstock needs, at lower cost, from Butler.
In 1993, the steelmaking capability at the Butler plant increased to 850,000
tons per year from 750,000 tons per year in 1992, primarily as a result of
improved operating practices. Production at the Butler plant increased 15%
in 1993 compared to 1992, with the majority of the increase due to supplying
feedstock to Coshocton, Eastern Stainless and NAS, and the balance due to
increased demand for steel products by external customers.
Outlook: Demand for specialty flat-rolled steel in 1995 is expected to
remain strong, though a slightly slower growth rate is expected in 1995 than
experienced in 1994. Automotive chrome stainless sheet is expected to
continue to do well as automobile production levels appear to be up in the
near term and the trend towards usage of more chrome stainless product in
emission systems continues. However, demand for automobiles could soften
later in the year due to higher interest rates. 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
and import pressure on electrical steels should be lower as markets in Europe
and Asia strengthen. The 1994 year-end backlog for all products is up 31%
from the prior year end. A 5%-7% price increase on electrical steels,
effective at the beginning of 1995, was announced in 1994. Price increases
in other specialty sheet and strip markets have been announced and are
scheduled to take effect in the first quarter of 1995. In addition, prices
will be subject to surcharges, which are in effect for Armco products
containing molybdenum, nickel and chrome. Armco expects to continue to
compete as a low-cost, high-quality producer and to retain its position in
the marketplace.
[Photograph of John Bauer appears here]
"Two years of hard work in the foreign trade area showed benefits for Armco
in 1994. Electrical steel trade cases brought against foreign producers for
sale of subsidized goods and for dumping into domestic markets were decided
in our favor. The rulings have had a very positive effect on our electrical
steel business." -- John Bauer, Director-Corporate Affairs
The Specialty Flat-Rolled Steel segment will also benefit from the sale of
Eastern Stainless, which not only eliminates the losses generated by this
subsidiary, but releases some of Butler's capacity, used to supply Eastern
Stainless' operation, to produce more value-added products for other Armco
finishing facilities and external customers.
Results for this segment should also be favorably affected by the start-up of
the new thin-slab continuous caster in Mansfield, scheduled for early in the
second quarter of 1995. The Mansfield operations, while currently reported
in the Other Steel and Fabricated Products segment, will, in addition, melt
and finish specialty steels, including automotive chrome, expanding Armco's
currently constrained melt capacity. Sales of these specialty steel products
will be reported in the Specialty Flat-Rolled Steel business segment.
Production of specialty steel at Mansfield is expected to begin in the third
quarter of 1995.
[Photograph of Art Mellon appears here]
"Engineering played a key part in the development of Armco's marketing and
facilities plan. We helped evaluate each product and the equipment used to
produce it and recommended the most economical ways to upgrade capacity. But
the hard work isn't over. In 1995, while beginning construction on numerous
projects, we also must plan for 1996 projects." -- Art Mellon, Vice President
of Engineering and Technology, Steel Operation
In the fourth quarter of 1994, Armco announced an expanded capital
improvement program under which it will spend up to $95.0 over the next two
years to upgrade and expand its specialty steel finishing facilities. The
program is intended to reduce existing production constraints, increasing
specialty steel finishing capacity by approximately 180,000 tons per year,
particularly in electrical steels, specialty sheet and strip products, and
non-automotive chrome stainless. About $60.0 of this total will be spent to
upgrade existing equipment at the Butler, Coshocton, Mansfield and Zanesville
plants. The remaining $35.0 of investment is targeted for proposed new
pickling and box annealing facilities. In addition to increasing revenues as
a result of expanded finishing capacity, the capital improvements are
expected to provide quality improvements and significant annual cost savings.
With respect to 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 anti-dumping petitions
against Italy. There was also an anti-dumping duty petition filed against
Japan, in which Armco was not a filing party. In 1994, the Department of
Commerce announced a countervailing duty margin of 24.42% and anti-dumping
duties of 60.79% on imports of oriented electrical steel from Italy, and an
anti-dumping duty of 31.08% against Japan. Primarily as a result of he
imposition of these duties, imports of oriented electrical steel from these
countries were severely curtailed during the latter half of 1994 and Armco
was able to improve its position in the market and maintain firmer prices.
The foreign producers have filed appeals with the court of international
trade.
[Bar chart]
Title: STAINLESS STEEL SHEET AND STRIP U.S. CONSUMPTION (Tons in thousands)
Apparent Import Penetration
Year Consumption % of Consumption
1990 1,064 15.3
1991 1,047 16.1
1992 1,188 17.8
1993 1,342 23.9
1994 1,546 23.4
Source: SSINA
Over the last two decades, the compounded annual growth rate for stainless
steel consumption in the U.S. has been about 4%. In recent years,
consumption has grown at rates more than three times historical levels.
Favorable economic indicators, combined with the low life cycle cost of
stainless, bode well for continued strong demand. However, import
penetration is at record levels and consumed a substantial part of 1994
market growth.
16 ARMCO INC.
<PAGE>
Other Steel and Fabricated Products
At December 31, 1994, the Other Steel and Fabricated Products business
segment included the shipments and production from Armco's carbon steel
plants in Mansfield and Dover, Ohio, as well as the results of Sawhill
Tubular and Douglas Dynamics, a snowplow and light truck equipment
manufacturer. At various times during the three-year period ended December
31, 1994, the segment included other businesses which have since been
divested or identified for divestment. During 1992 and 1993, Armco took
actions to restructure and/or divest several businesses in this segment that
did not represent a strategic fit or offer growth potential or generate
positive cash flow, resulting in significant special charges in those years.
The Other Steel and Fabricated Products segment's results appear below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $ 389.1 $ 662.5 $ 787.7
Special charges (20.0) (165.5) (129.8)
Operating loss (54.9) (183.5) (128.5)
-----------------------------------------------------------------------
</TABLE>
1994 vs. 1993: Net sales decreased by 41% in 1994 compared to 1993 primarily
due to the absence, in 1994, of businesses that were sold or are no longer
consolidated and the idling of operations at Mansfield and Dover. Those
businesses sold or identified for divestment represented $189.4 in sales in
the first nine months of 1993, before Armco stopped consolidating their
results. In addition, primarily as a result of the temporary idling and
restructuring of the steelmaking and finishing facilities in Mansfield and
Dover, 1994 sales were down an additional $151.1 from last year. Excluding
the no longer consolidated businesses from 1993 and adjusting for the reduced
sales at the idled facilities, segment sales would have increased 21% in 1994
versus 1993. Record setting sales at Douglas Dynamics, including a
significant increase in snowplow shipments in 1994, accounted for much of
that sales increase.
The 1994 Other Steel and Fabricated Products operating loss includes a
special charge of $20.0 in connection with the idling and restructuring of
the steelmaking and finishing facilities in this segment. Including the
special charge, these facilities had a 1994 operating loss of $85.5. The
Mansfield facility will be idled until completion of the new thin-slab
continuous caster, scheduled for early in the second quarter of 1995. The
Dover plant restarted operations on a limited basis in early 1995, purchasing
cold rolled coils for galvanizing.
During 1994, Sawhill Tubular continued to experience problems with the
integration of the continuous weld process and the stretch reduction mill,
which was brought on-line in 1993. Throughout most of 1994, lower than
anticipated yields and quality problems, along with higher operating costs,
caused a further deterioration in operating results, despite a 9% increase in
sales. However, during the latter part of 1994 and into 1995, considerable
improvement in operations was realized.
The operating loss in 1993 included $165.5 of special charges to cover
estimated losses and reserve requirements for the ultimate disposal of a
number of businesses. Absent the special charges from 1994 and 1993, the
increase in the operating loss for 1994 was primarily attributable to higher
losses at the Mansfield and Dover operations. While higher than last year's
losses, the losses generated by these steelmaking facilities in 1994 were
lower than expected had the plants continued to operate during the
installation of the thin-slab caster. Partially offsetting these losses was
a significant increase in operating profit at Douglas Dynamics due to higher
sales of snowplows as a result of near record snowfalls last winter, low
customer inventory and continued strong demand for four-wheel drive vehicles.
[Photograph of Fred O'Brien appears here]
"In 1994, Armco management continued to meet with Wall Street analysts on a
regular basis. We know that their perspective is positive for both the
specialty steel industry in general and Armco's efforts to focus on its core
business in particular. They are following our initiatives for 1995 very
closely." -- Fred O'Brien, Assistant Treasurer and Director of Investor
Relations.
1993 vs. 1992: Customer sales decreased by 16% in 1993 compared to 1992
primarily due to divestment and restructuring of businesses within the
segment. Divestments that affect the comparison included Southwestern Ohio
Steel (SOS) (sold in August 1992), Armco do Brasil (sold in September 1993),
Miami Industries (sold in October 1993) and E. G. Smith (sold in February
1993). In addition, the results of other businesses identified for
divestment are no longer recorded as a component of Armco's Statement of
Consolidated Operations from the dates indicated. Those businesses included
stainless bar, rod and wire (December 31, 1992), the conversion systems
business (September 30, 1993), a nonresidential construction business
(September 30, 1993) and a welded tubing operation (September 30, 1993). The
decrease was partially offset by increased sales at Douglas Dynamics and by a
full year of shipments from the Mansfield and Dover plants and Sawhill
Tubular (all acquired as part of the Cyclops acquisition in April 1992).
Operating profit, excluding special credits and charges, declined in 1993
primarily because of the divestiture of SOS and E.G. Smith, as well as the
costs associated with the start-up of the stretch reduction mill at Sawhill
Tubular, higher scrap prices for the steelmaking facilities and losses on
certain contracts at the remaining nonresidential construction operation.
These declines were partially offset by improvements at Douglas Dynamics and
the elimination of losses due to the restructuring of the stainless bar, rod
and wire businesses at the end of 1992.
Outlook: The Mansfield and Dover operations are expected to incur operating
losses through most of 1995. During early 1995, losses at Mansfield are
expected to increase from the level experienced in late 1994 largely as a
result of expenses related to the preparation for start-up of the thin-slab
caster, including expenses to train employees on the new equipment. Even
after the initial
ARMCO INC. 17
<PAGE>
start-up of the caster, and assuming the start-up proceeds as planned, these
facilities are not expected to return to profitability until the fourth
quarter of 1995. As discussed above, a portion of the recently announced
capital expenditure program will be directed at upgrading equipment at
Mansfield to improve its rolling, pickling and annealing operations. Though
the new caster and the new capital expenditures program are intended to
benefit Mansfield's specialty steelmaking capabilities, improvements in the
carbon steel operations are also expected.
[Bar chart]
Title: PER PERSON CONSUMPTION OF STAINLESS STEEL IN U.S. VERSUS
INTERNATIONAL MARKETS (Pounds per person in 1993)
Japan 31
Germany 30
South Korea 28
Finland 27
Italy 24
U.S.A. 16
1994* 17
1995* 18
Source: SSINA
*U.S.A. estimate
Domestic consumption of stainless steel, which has lagged behind other
industrialized nations, is expected to increase steadily in the years to come
and increase demand for many Armco products.
In June 1993, United Steelworkers of America (USWA) employees at the
Mansfield and Dover plants ratified new, six-year contracts, which became
effective September 1, 1993. These contracts provided for a 25% reduction in
work force, a change in work rules that allow for a more efficient use of the
new caster technology and an increase in employee health care cost sharing,
partially offset by benefit and wage increases toward the end of the
contracts. In the second half of 1994, the USWA employees and management at
the two facilities reached local agreements, which provide for additional
improvements in manning levels and work practices. These local initiatives
should further enhance the ability of the Mansfield and Dover plants to be
cost-competitive steel producers following the start-up of the caster.
In the fourth quarter of 1994, Armco sold Bowman Metal Deck Products
(Bowman). Bowman, with annual sales of approximately $30.0, is a producer of
carbon steel roof, floor and bridge deck. Also in the fourth quarter, Armco
sold tubing and conversion plants, whose results of operations had not been
consolidated since September 1993.
Douglas Dynamics' sales and earnings are expected to remain strong in 1995,
driven by strong demand for four-wheel drive vehicles, distributors' need to
replace inventory and sales of new products, including a line of truck-
mounted salt and sand spreaders and a truck bed lift system. To help meet
demand, Douglas Dynamics must outsource some of its production processes and
has begun to use available production capacity at Armco's facility in Johnson
City, Tennessee, for manufacturing certain snowplow parts.
Armco has been reviewing the operations and prospects of Sawhill Tubular to
determine how to return this business to profitability and how it fits into
Armco's future. Armco is currently holding preliminary discussions for the
potential sale of one of the three Sawhill Tubular plants, a small cold-drawn
tubing facility.
DISCONTINUED OPERATIONS
Worldwide Grinding Systems
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1993 1992
-----------------------------------------------------------------------
<S> <C> <C>
Income from operations $ 14.2 $ 0.4
Loss on disposal of business (40.0) --
-----------------------------------------------------------------------
</TABLE>
As part of Armco's strategy to focus on its specialty steel businesses, Armco
sold, on September 28, 1993, its Worldwide Grinding Systems' 50% interest in
several wire drawing operations for $33.0 in cash to Leggett & Platt
Incorporated, its partner in these joint ventures. On November 11, 1993,
Armco completed the sale of the balance of its Worldwide Grinding Systems
segment to an investment firm, Bain Capital, in partnership with members of
the operations' management. In this latter transaction, Armco received
approximately $75.0 after certain purchase price adjustments. The 1992
results included a special charge of $19.1 for closing a foundry and reducing
work force. Armco's results for 1993 and 1992 present Worldwide Grinding
Systems in discontinued operations.
Armco Financial Services Group (AFSG)
The Armco Financial Services Group consists primarily of insurance companies
that Armco intends to sell and which continue underwriting policies (AFSG
companies to be sold), and companies that have stopped writing new business
and are being liquidated (runoff companies). Armco accounts for both of
these businesses as discontinued operations and, as such, does not recognize,
in its consolidated financial statements, their results of operations.
AFSG Companies to be Sold
Prior to December 31, 1993, Armco's investment in the AFSG companies to be
sold was stated at an amount equal to Armco's estimate of its net realizable
value. The net realizable value was based on an assumption that Armco would
retain the AFSG companies to be sold until the insurance business had
recovered from weak market conditions. In January 1994, after further
evaluation of its various alternatives and even though the insurance market
remained weak, Armco signed a letter of intent to sell the AFSG companies to
be sold to Vik Brothers Insurance Inc. (Vik Brothers), a privately held,
North Carolina-based property and casualty insurance holding company. On
August 2, 1994, Armco and Vik Brothers signed a definitive agreement, subject
to a number of conditions, including approvals by regulatory authorities.
The sale is expected to close by March 31, 1995. Armco recorded a $45.0
charge in the fourth quarter of 1993 in connection with its decision to enter
into this transaction. The charge was primarily taken to reduce Armco's
investment in the AFSG companies to be sold to its estimated net realizable
value of $73.9, based on the negotiated sale price. Under terms of the
agreement, Armco will be paid approximately $65.0 at the closing and $15.0 in
three years, subject to potential adjustment for adverse experience in
certain insurance reserves. As a result of restructuring certain
18 ARMCO INC.
<PAGE>
obligations arising from a 1992 merger plan for the runoff companies, the
proceeds from the sale have been pledged as security for certain note
obligations due to the runoff insurance companies and will be retained in the
investment portfolio of the AFSG runoff companies.
The following sets forth the results of the AFSG companies to be sold for the
years ended December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in income (loss) $ --(1) $ 10.4 $ (2.6)
Deferred income --(1) (10.4) --
Cumulative effect of SFAS 106 -- (14.0) --
Premiums earned 216.3 227.7 239.9
Underwriting loss (35.9) (32.1) (46.2)
Net investment income (including
Realized gains (losses)) 29.4 43.7 44.1
Realized gains (losses) (0.5) 11.2 10.1
------------------------------------------------------------------------
</TABLE>
(1)At December 31, 1993, Armco reduced its investment in these businesses to
its estimated net realizable value based on the proposed transaction. As a
result, effective January 1, 1994, Armco stopped recording the income or loss
generated by the AFSG companies to be sold to the extent that such amounts do
not impact the estimate of net realizable value.
1994 vs. 1993: In 1994, direct premiums written and premiums earned declined
4% and 5%, respectively, from 1993 levels. Soft market conditions,
rationalization efforts, including agency management activities and
tightening of underwriting guidelines, contributed to the lower premiums.
Underwriting loss increased 12%, primarily due to an increase in incurred
losses. A severe winter in the mideastern United States, and a number of
unusually large commercial property losses were the primary causes for higher
than anticipated incurred losses. The increase in interest rates lowered
market values in the investment portfolio, causing Net investment income to
drop $14.3, of which $11.7 was due to a decrease in net realized gains.
1993 vs. 1992: Operations for 1993 resulted in income before the cumulative
effect of an accounting change, as losses and underwriting expenses were
reduced. The adoption of SFAS 106 in the first quarter of 1993 resulted in a
charge of $14.0. This charge reduced Armco's investment in the AFSG
companies to be sold and was included in the total cumulative effect of
accounting changes recorded by Armco. Prior to December 31, 1993, Armco
accounted for these operations under the cost recovery method, whereby net
income is not recognized until realized through a sale of the businesses,
while net losses are charged against income as incurred.
Direct premiums written and premiums earned declined due to a continuing soft
market in business insurance, as well as the shutdown of the Southwest Region
office as of January 1, 1993. Lower incurred losses, worker's compensation
pool expenses and loss adjustment expenses resulted in reduced losses from
underwriting. Net investment income, including realized gains, declined
slightly on lower market interest rates.
Liquidity and Financial Position: At December 31, 1994, the AFSG companies
to be sold had total assets of $540.5, including cash and invested assets of
$400.5. Cash and invested assets declined $40.2 from December 31, 1993,
primarily as a result of a decrease in the market value of the investment
portfolio. The decrease was due to rising interest rates. The investment
portfolio of the AFSG companies to be sold consists primarily of investment
grade bonds.
Insurance premiums and interest are the companies' primary sources of cash.
Operating activities used $3.7 in 1994 compared to $2.3 provided in 1993.
The decrease in cash provided is primarily due to reduced premium collections
of $12.9 and reduced interest received of $3.3, offset by a reduction in loss
payments of $6.1 and reduced general underwriting expenses of $1.4.
Investing activities provided $27.5 in 1994 compared to providing $11.4 in
1993. Financing activities used $2.8 in 1994 and 1993.
Outlook: As discussed above, Armco has signed a definitive agreement to sell
the AFSG companies to be sold. Finalization of the disposition is subject to
a number of conditions, including approval by regulatory authorities. Armco
expects that the transaction will close in March of 1995; however, if the
proposed transaction is not consummated, Armco intends to seek another buyer
and complete a sale of these businesses in 1995. Armco believes there are
several interested buyers available.
Armco expects results from the AFSG companies to be sold to improve in 1995.
Due to a continued soft market, premiums written are expected to remain flat;
however, incurred losses are expected to decrease. Overall, results are
expected to improve through agency management activities, elimination of
unprofitable classes of business, and reduced operating expenses resulting
from previous reengineering of key underwriting and policy issuing functions.
Runoff Companies
The runoff insurance companies have not written any new business for
retention except for an immaterial amount of guaranteed renewable accident
and health business. The number of policyholders of this business has
decreased from approximately 4,000 at December 31, 1986 to about 1,200 as of
December 31, 1994. No charges have been recorded with respect to the runoff
companies since the second quarter of 1990.
Liquidity and Financial Resources: Claims are paid by using the investment
portfolio of the runoff companies and the related investment income from such
portfolio. The portfolio had a market value of $115.8 at December 31, 1994.
The runoff companies believe the existing invested assets, related future
income and other assets will provide sufficient funds to meet all future
claims payments.
The loss reserves of the runoff companies net of reinsurance recoverables
decreased from $498.3 at December 31, 1986 to $125.2 at December 31, 1994.
The runoff companies estimate that 60% of the claims will be paid in the next
five years and that substantially all of the claims will be paid by the year
2017. The ultimate amount of the claims as well as the timing of the claims
payments
ARMCO INC. 19
<PAGE>
are estimated based on an annual review of loss reserves performed by the
runoff companies' independent and consulting actuaries.
Outlook: Armco management continues to believe, based on current facts and
circumstances and the views of outside counsel and advisors, that future
charges, if any, resulting from the runoff companies will not be material to
Armco's financial condition 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 one or more future interim or annual periods.
EQUITY COMPANIES
Armco's equity in the net income (loss) of equity companies in 1994, 1993 and
1992 is shown below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C>
National-Oilwell $ 9.8 $(11.0) $ (19.4)
Armco Steel Company, L.P -- (27.9) (234.1)
North American Stainless 0.1 (6.4) --
Other 5.4 1.6 (2.0)
------------------------------------------------------------------------
Total $15.3 $(43.7) $(255.5)
------------------------------------------------------------------------
</TABLE>
National-Oilwell
National-Oilwell is a general partnership joint venture equally owned by
subsidiaries of Armco and USX Corporation. National-Oilwell sells oil field
tubular pipe, and produces and sells drilling and production equipment and
process pumps used in the world's oil and gas services industry. Armco does
not consider National-Oilwell part of its core business and, therefore,
continues to evaluate options with respect to its investment in this joint
venture.
1994 vs. 1993: Included in the National-Oilwell equity income in 1994 were
net gains of $6.4 on the disposal of assets, some of which were associated
with businesses which National-Oilwell is exiting. 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 equity income in
the fourth quarter of 1993. Despite the flat market in 1994, Armco's equity
in the results of National-Oilwell, excluding special charges and credits,
improved over 1993 primarily due to the restructuring actions taken during
the last three years. During 1994, National-Oilwell paid Armco a $15.5
dividend.
1993 vs. 1992: Improvement in 1993 compared to 1992 was primarily the result
of National-Oilwell's increased revenues and implementation of previously
announced actions to restructure the company. Included in Armco's 1993
equity in the losses from National-Oilwell was $5.0, representing half of
National-Oilwell's writedown of its wellhead business assets, which National-
Oilwell sold in the first quarter of 1994. The 1992 equity in losses for
National-Oilwell included a $3.3 charge for restructuring and
rationalization.
National-Oilwell maintains its own cash and credit lines and funds its own
operations, liabilities and capital expenditures. National-Oilwell has
worldwide credit facilities totaling approximately $50.0. The primary
facility matures on March 22, 1995, and is expected to be replaced with a new
agreement on or before that date.
Outlook: National-Oilwell's forecast for 1995 assumes a flat oil field
market but a significant increase in operating profit. The expected
improvement is due to benefits expected from the rationalization and
restructuring efforts undertaken over the last three years.
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. In 1993, Armco contributed $19.4 to ASC for hot strip
mill improvements designed to enhance ASC's ability to roll certain gauges of
chrome nickel stainless steel for Armco.
1993 vs. 1992: ASC's business improved dramatically in 1993, including a 14%
increase in customer sales and improved operating performance due to
continuing efforts to reduce costs, the move to 100% continuous casting,
improved productivity, lower raw material contract prices, salaried work
force reductions and the rationalization of less productive, higher cost
operations. Net operating profit of $13.9 in 1993 versus a net operating
loss of $499.3 in 1992, included special charges of $19.6 in 1993 and $379.3
in 1992. These charges were related to the restructuring efforts. In 1993
and 1992, ASC recorded net losses of $40.7 and $544.1, respectively.
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, a newly formed, publicly traded company.
In exchange for its interest in ASC, Armco received 1,023,987 shares of AK
Steel common stock, representing approximately four percent of the
outstanding shares. Due to the level of ownership interest, Armco does not
account for AK Steel under the equity method and, as a result, Armco's future
results will not be affected by AK Steel's future net income or loss. 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 this transaction, Armco recognized a nonrecurring pretax gain
in 1994 of $36.5, primarily as a result of the release from certain
obligations, discussed above, and recognition of deferred pension curtailment
gains established at ASC's formation. At the same time, Armco reevaluated
its deferred tax asset position in light of this transaction and concluded
that the amount of deferred tax asset, for which realization of a future
benefit is more likely than not, had increased by $30.0 In addition, should
Armco decide to sell its shares in AK Steel, it would recognize a gain equal
to the net proceeds received upon such sale. At December 31, 1994, the stock
held by Armco had a market
20 ARMCO INC.
<PAGE>
value of $31.5. The market value of this stock was $26.1 as of January 31,
1995.
AK Steel currently hot rolls stainless steel for Armco under a toll-rolling
agreement, which is in effect through the year 2002. AK Steel continues to
purchase stainless steel from Armco's Butler facility.
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS
through their respective subsidiaries, First Stainless, Inc. and Stainless
Steel Invest, Inc. In the third quarter of 1994, Armco's subsidiary sold 90%
of its 50% equity interest in NAS to its partner for $73.0 in cash and Armco
recorded a $26.1 gain on the sale. Armco decided to sell most of its
investment in NAS because NAS needed cash infusions from its partners to
expand its operation, while Armco wanted to use its resources to support its
core business operations. Through First Stainless, Inc., Armco maintains a
5% limited partnership interest in NAS. In connection with the transaction,
Armco entered into an annual supply contract with NAS to provide the former
joint venture with semi-finished stainless steel at market prices.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, Armco had $202.8 of cash and cash equivalents compared
to $183.5 at December 31, 1993. In addition, at the end of 1994, Armco had
$25.8 of short-term liquid investments. Armco held no short-term liquid
investments at December 31, 1993. Net cash used for investing activities was
$31.7, including $86.9 in capital expenditures, $16.0 used for businesses
held for sale and $24.5 for the purchase of short-term liquid investments,
partially offset by $109.3 in proceeds on the sale of assets and investments.
The capital expenditure number excludes $9.3 financed by debt incurred
directly for the construction of the thin-slab caster. Cash generated by
operating activities was $74.0, including a $15.5 dividend from National-
Oilwell, while financing activities used $23.7, primarily for preferred stock
dividends and payment of debt.
In addition to the cash on hand, Armco has a $170.0 revolving credit facility
that expires on December 31, 1995. At December 31, 1994, $85.4 of the credit
facility was used as support for letters of credit and $84.6 was available.
Borrowings under the credit facility are secured by certain of Armco's
inventory and receivables. As amended in the fourth quarter of 1994, the
credit agreement requires that Armco be in compliance with several covenants
and meet certain ratio requirements. Based on its current financial
condition and internal forecasts through the end of 1995, Armco believes that
it will remain in compliance with all covenants.
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. Reserve Mining was a Minnesota
general partnership between a subsidiary of Armco and a subsidiary of LTV
Corporation. Reserve Mining filed for reorganization under the U.S.
Bankruptcy Code on July 16, 1986. 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. The amount paid to the PBGC was accrued in a
previous year and the $17.5 contribution was accrued in the normal course of
recording pension liabilities.
[Photograph of Jim Bertsch appears here]
"We enter 1995 with a strong liquid position and no significant debt
maturities until 1999. We should be in good shape to fund our capital
programs, working capital needs and pension funding requirements from cash on
hand, proceeds from the additional planned asset sales and our improving cash
flow from operating earnings." -- Jim Bertsch, Vice President and Treasurer
Armco anticipates that its capital expenditures for 1995 will be
approximately $125.0, including approximately $43.0 of the $95.0 expanded
capital improvement program, discussed above in the Specialty Flat-Rolled
Steel section, and approximately $50.0 for expenditures to complete the thin-
slab caster project at the Mansfield, Ohio plant, which was discussed above
in the Other Steel and Fabricated Products section and the remainder for
normal replacement, environmental and expansion programs. Financing for a
significant portion of the thin-slab caster project has been obtained, and
installation of the caster is expected to be completed early in the second
quarter of 1995.
Armco has debt maturities of $10.5 coming due in 1995 with no major amounts
coming due until 1999. In addition, Armco expects to contribute from $15.0
to $55.0 to its major pension funds in 1995 and, with the start-up of
operations in Mansfield, will need to invest approximately $50.0 in
additional working capital at that plant. The cash requirements, including
amounts for capital expenditures, will be paid out of existing cash balances,
cash generated from operations and proceeds from the sale of assets,
including the possible sale of Armco's investment in AK Steel.
On January 27, 1995, Armco's Board of Directors declared the regular
quarterly dividends of $.525 per share on the $2.10 cumulative convertible
preferred stock, Class A, and $.90625 per share on the $3.625 cumulative
convertible preferred stock, Class A, each payable March 31, 1995 to
shareholders of record on March 3, 1995. The Board of Directors also
declared the regular quarterly dividend of $1.125 per share on the $4.50
cumulative convertible preferred stock, Class B, payable April 3, 1995, to
shareholders of record on March 3, 1995. Payment of dividends on Armco's
common stock is currently prohibited under the terms of certain of Armco's
debt instruments and under the terms of the amended bank credit agreement.
Armco does not anticipate paying a common stock dividend in the foreseeable
future.
ARMCO INC. 21
<PAGE>
ENVIRONMENTAL MATTERS
Armco, in common with other United States manufacturers, is subject to
various federal, state and local requirements for environmental controls
relating to its operations. Armco has devoted, and will continue to devote,
significant resources to control air and water pollutants, to dispose of
wastes, and to remediate sites of past waste disposal. Armco estimates
capital expenditures for pollution control in its manufacturing operations
will be about $27.0 for the years 1995-1998, with the largest expenditures
being made in the Specialty Flat-Rolled Steel segment. Approximately $14.0
is related to control of air pollution pursuant to regulations currently
promulgated under the Clean Air Act, as amended, and corresponding state
laws. These projections, which have been prepared internally and without
independent engineering or other assistance, reflect Armco's current analysis
of probable required capital projects for pollution control. During the
period 1991 through 1994, Armco's capital expenditures for pollution control
projects amounted to approximately $10.0, including $7.0 in 1994. Statutory
and regulatory requirements in this area continue to evolve and, accordingly,
the type and magnitude of expenditures may change.
Armco has been named as a defendant, or identified as a potentially
responsible party, in various governmental proceedings regarding cleanup of
certain past waste disposal sites. Armco is also a defendant in various
private lawsuits alleging property damage and personal injury from waste
disposal sites. Joint and several liability could be imposed on Armco or
other parties for these matters, thus, theoretically, one party could be held
liable for all costs related to a site. While such governmental and private
actions are being contested, the outcome of individual matters cannot be
predicted with assurance. However, based on its experience with such cases
and a review of current claims, Armco expects that in most cases any ultimate
liability will be apportioned between Armco and other financially viable
parties.
From time to time, Armco has been and may be subject to penalties or other
requirements as a result of administrative actions by regulatory agencies and
to claims for indemnification for properties it has previously owned or
leased. In addition, environmental exit costs may be incurred if Armco
decides to dispose of additional properties. It is Armco's policy not to
accrue such costs until a decision is made to dispose of a property.
[Photograph of Gary Hildreth appears here]
"Armco is committed to being a responsible corporate citizen. To ensure that
we continue to comply with environmental policy, focus on early preventive
action and effectively address any necessary remediation activities, we
appointed a director of environmental affairs in 1994. From 1995 to 1998,
Armco expects to spend $27 million on environmental capital expenditures." --
Gary Hildreth, Vice President, General Counsel and Secretary
Based on current facts and circumstances known to Armco, Armco's experience
with site remediation, an understanding of current environmental laws and
regulations, environmental assessments, the existence of other financially
viable parties, expected remediation methods and the years in which Armco is
expected to make payments toward each remediation (which range from the
current year to 30 years or more in the future), Armco believes that the
ultimate liability for environmental remediation matters identified to date,
will not materially affect its consolidated financial condition or liquidity.
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 of future interim or annual periods.
Furthermore, the identification of additional sites, changes in known
circumstances with respect to identified sites, the failure of other 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 consolidated
financial condition, liquidity and results of operations in future interim or
annual periods. However, it is not possible to determine whether additional
loss, due to changed circumstances, will occur or to reasonably estimate the
amount or range of any potential additional loss.
Statutes and regulations relating to the protection of the environment have
resulted in higher operating costs and capital investments by the industries
in which Armco operates. Although it cannot predict precisely how changes in
environmental requirements will affect its businesses, Armco does not believe
such requirements would affect its competitive position.
22 ARMCO INC.
<PAGE>
Responsibility for Financial Reporting
Armco's management prepared the financial statements presented in this Annual
Report in accordance with generally accepted accounting principles in the
United States. These principles require choices among alternatives and
numerous estimates of financial matters. We believe the accounting principles
chosen are appropriate in the circumstances, and the estimates and judgements
involved in Armco's financial reporting are reasonable and conservative.
Armco's management is responsible for the integrity and objectivity of the
financial information presented in this Annual Report. We maintain a system of
internal accounting control and a program of internal audits. They are
designed to provide reasonable assurance that the financial reports are fairly
presented and that Armco employees comply with our stated policies and
procedures, including policies on the ethical conduct of business. We
continually review and update our policies and system of internal accounting
control as our businesses and business conditions change.
Management and the Audit Review Committee of the Board of Directors
recommended, and the Board of Directors approved, the hiring of Deloitte &
Touche LLP as independent auditors for the Company. Deloitte & Touche LLP
expresses an informed professional opinion on Armco's financial statements.
The Audit Review Committee, composed solely of independent outside directors,
oversees Armco's public financial reporting. The Audit Review Committee meets
periodically with management, Deloitte & Touche LLP, and Armco's internal
auditors, both individually and jointly, to discuss internal accounting
control and financial reporting matters. Deloitte & Touche LLP and Armco's
internal auditors have free access to the Audit Review Committee to discuss
any matters.
We believe Armco's internal control system, combined with the activities of
the internal and independent auditors and the Audit Review Committee, provides
you reasonable assurance of the integrity of our financial reporting.
/s/ J. F. WILL /s/ DAVID G. HARMER
James F. Will David G. Harmer
President and Vice President and
Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
Deloitte &
Touche LLP [LOGO]
2500 One PPG Place
Pittsburgh, PA 15222
Armco, Its Shareholders and Directors:
We have audited the statement of consolidated financial position of Armco Inc.
and consolidated subsidiaries as of December 31, 1994 and 1993 and the related
consolidated statements of operations and of cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Armco Inc. and consolidated
subsidiaries at December 31, 1994 and 1993 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 1, 2 and 4 to the financial statements, in 1993 Armco
Inc. changed its methods of accounting for postretirement benefits other than
pensions, income taxes, certain investments in debt and equity securities, and
postemployment benefits.
/s/ DELOITTE & TOUCHE LLP
February 3, 1995
ARMCO INC. 23
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1994 and 1993
(Dollars in millions, except per share amounts)
<CAPTION>
------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 1) $ 202.8 $ 183.5
Short-term liquid investments (Note 1) 25.8 --
Accounts and notes receivable
Trade (less allowance for doubtful accounts of
$4.1 for 1994 and $4.0 for 1993) 164.9 166.1
Other 18.4 19.0
Inventories (Note 1) 165.5 205.5
Net assets held for sale (Notes 1 and 9) 25.6 30.9
Other 46.0 20.4
------------------------------------------------------------------------------
Total current assets 649.0 625.4
------------------------------------------------------------------------------
Investments (Note 1)
Investment in National-Oilwell (Note 11) 79.5 83.9
Investment in AFSG (Note 3) 97.1 97.1
Other (less allowance for impairment of $18.7 for
1994 and $20.0 for 1993) 39.9 88.1
Property, plant and equipment (Note 1)
Land 25.8 26.0
Buildings 72.1 78.8
Machinery and equipment 858.6 843.1
Construction in progress 107.7 35.1
------------------------------------------------------------------------------
Total property, plant and equipment 1,064.2 983.0
Accumulated depreciation (499.6) (455.2)
------------------------------------------------------------------------------
Property, plant and equipment-net 564.6 527.8
Deferred tax asset (Note 4) 321.8 295.6
Goodwill and other intangible assets (Note 1) 156.4 162.6
Other assets 26.6 24.2
------------------------------------------------------------------------------
Total assets $1,934.9 $1,904.7
------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements on pages 28 through 43.
24 ARMCO INC.
<PAGE>
<CAPTION>
------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Current liabilities
Accounts and notes payable
Trade $ 116.3 $ 108.6
Other 6.3 11.0
Accrued taxes 7.2 7.7
Accrued salaries and wages 32.7 28.7
Current portion of employee benefit obligations
(Note 2) 133.8 98.3
Other accruals 83.6 90.4
Current portion of long-term debt (Note 5) 10.5 8.3
------------------------------------------------------------------------------
Total current liabilities 390.4 353.0
------------------------------------------------------------------------------
Long-term debt (Note 5) 363.8 379.7
Long-term employee benefit obligations (Note 2) 1,255.3 1,270.9
Other liabilities 143.9 204.5
Commitments and contingencies (Notes 1, 3, 5 and 10)
Class B common stock of subsidiary, redemption value of
$0 and $13.2 at December 31, 1994 and 1993 (Note 12) -- 9.7
------------------------------------------------------------------------------
Shareholders' deficit (Note 6)
Preferred stock
Class A--authorized 6,697,231 shares of no par
value, issuable in series. Series issued:
$2.10 cumulative convertible (involuntary
liquidation value $25.5 in 1994 and 1993) and
$3.625 cumulative convertible (involuntary
liquidation value $135.0 in 1994 and 1993) 137.6 137.6
Class B--authorized 5,000,000 shares of $1 par
value, issuable in series. Series issued: $4.50
cumulative convertible (involuntary liquidation
value $50.0 in 1994 and 1993) 48.3 48.3
Common stock--authorized 150,000,000 shares of
$.01 par value; issued and outstanding
105,089,146 for 1994 and 104,122,974 for 1993 1.1 1.0
Additional paid-in capital 956.3 951.1
Retained deficit (1,390.4) (1,450.3)
Unrealized gain on equity securities (Note 1) 31.6 --
Other (3.0) (0.8)
------------------------------------------------------------------------------
Total shareholders' deficit (218.5) (313.1)
------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 1,934.9 $1,904.7
------------------------------------------------------------------------------
</TABLE>
ARMCO INC. 25
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED OPERATIONS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in millions, except per share amounts)
<CAPTION>
----------------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,437.6 $1,664.0 $1,673.2
Cost of products sold (1,267.0) (1,519.5) (1,509.8)
Selling and administrative expenses (96.4) (125.0) (135.6)
Special charges - net (Note 9) (35.0) (165.5) (185.1)
---------------------------------------------------------------------------
Operating profit (loss) 39.2 (146.0) (157.3)
Interest income 10.5 5.0 9.6
Interest expense (33.8) (42.7) (44.6)
Gain on sale of investments in joint ventures
(Note 11) 62.6 -- --
Sundry other-net (Note 2) (44.8) (36.1) (5.5)
---------------------------------------------------------------------------
Income (loss) before income taxes 33.7 (219.8) (197.8)
Credit for income taxes (Note 4) 28.7 7.3 34.0
---------------------------------------------------------------------------
Income (loss) from Armco and consolidated
subsidiaries 62.4 (212.5) (163.8)
Equity in losses of Armco Steel Company, L.P.
(Note 11) -- (27.9) (234.1)
Equity in income (loss) of other equity
companies (Note 11) 15.3 (15.8) (21.4)
----------------------------------------------------------------------------
Income (loss) from continuing operations 77.7 (256.2) (419.3)
Discontinued operations -
Worldwide Grinding Systems (Note 13)
Income from operations (Net of taxes of
$2.6 in 1993 and $1.6 in 1992) -- 14.2 0.4
Loss on disposal of business -- (40.0) --
AFSG companies to be sold (Note 3)
Loss from operations (Net of a tax
benefit of $0.2 in 1992) -- -- (2.6)
Loss on disposal of business -- (45.0) --
----------------------------------------------------------------------------
Income (loss) before extraordinary losses and
cumulative effect of accounting changes 77.7 (327.0) (421.5)
Extraordinary losses (Notes 5 and 11) -- (7.3) (8.4)
Cumulative effect of changes in accounting
for postretirement and postemployment
benefits and income taxes (Notes 2 and 4) -- (307.5) --
----------------------------------------------------------------------------
Net income (loss) $ 77.7 $ (641.8) $ (429.9)
----------------------------------------------------------------------------
Per share
Income (loss) per share-primary (Note 1)
Income (loss) from continuing operations $ .57 $ (2.64) $ (4.35)
Loss from discontinued operations -- (.68) (.02)
Income (loss) before extraordinary losses and
cumulative effect of accounting changes .57 (3.32) (4.37)
Extraordinary losses -- (.07) (.08)
Cumulative effect of accounting changes -- (2.96) --
Net income (loss) $ .57 $ (6.35) $ (4.45)
Dividends (Note 6)
Preferred stock
$2.10 Class A $ 2.10 $ 2.10 $ 2.10
$3.625 Class A 3.63 3.63 .84
$4.50 Class B 4.50 4.50 4.50
----------------------------------------------------------------------------
<FN>
See Notes to Financial Statements on pages 28 through 43.
</TABLE>
26 ARMCO INC.
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 77.7 $(641.8) $(429.9)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and lease-right amortization 48.8 53.2 46.7
Loss from discontinued operations -- 70.8 2.2
Net gain on sales of investments and
facilities (64.3) (3.2) (0.9)
Deferred income tax benefit (30.0) -- --
(Gain) loss on retirement of debt (0.3) 7.3 2.3
Equity in losses and undistributed
(earnings) of associated companies (1.6) 45.1 261.8
Dividends received in excess of undistri-
buted (earnings) of associated companies 5.7 -- --
Special charges 35.0 165.5 185.1
Cumulative effect of accounting changes -- 307.5 --
Other 12.2 30.1 14.3
Change in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts receivable (7.6) (28.5) 7.6
Inventory 12.4 0.8 (20.7)
Payables and accrued expenses (1.8) (19.6) (64.1)
Other assets and liabilities - net (12.2) (18.7) (83.7)
------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 74.0 (31.5) (79.3)
------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses
and assets 19.9 188.6 38.9
Proceeds from the sale and maturity of
liquid investments -- 2.0 28.1
Proceeds from the sale of investments 89.4 20.4 3.2
Purchase of liquid investments (24.5) -- (7.0)
Purchase of investments (8.8) (0.6) (8.7)
Contributions to equity investees (7.7) (22.4) (8.0)
Capital expenditures (86.9) (53.9) (59.4)
Acquisitions, net of cash acquired -- -- (103.3)
Net cash provided by (used in) discontinued
operations and businesses held for sale (16.0) (20.7) 32.9
Other 2.9 (2.5) (8.2)
------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (31.7) 110.9 (91.5)
------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt 15.0 125.0 100.0
Principal payments on debt (24.3) (165.7) (195.6)
Change in notes payable (0.8) (3.7) 1.0
Proceeds from issuance of common stock 2.8 2.1 0.4
Proceeds from issuance of preferred stock -- -- 130.4
Dividends paid on preferred stock (14.8) (18.2) (10.3)
Other (1.6) (1.3) 0.9
------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (23.7) (61.8) 26.8
------------------------------------------------------------------------
Effect of exchange rate changes on cash 0.7 (5.4) (10.3)
------------------------------------------------------------------------
Net change in cash and cash equivalents 19.3 12.2 (154.3)
Cash and cash equivalents:
Beginning of year 183.5 171.3 325.6
------------------------------------------------------------------------
End of year $ 202.8 $ 183.5 $ 171.3
------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 31.1 $ 44.5 $ 39.6
Income taxes 0.7 2.7 2.1
Supplemental schedule of noncash investing and financing activities:
Debt incurred or assets exchanged directly
for property 9.5 -- --
Issuance of restricted stock 2.5 0.1 3.9
Notes receivable and stock in partial pay-
ment for asset sales 7.7 -- --
Acquisition of a business:
Fair value of assets acquired -- -- 687.6
Liabilities assumed -- -- (470.2)
Cash paid - current year -- -- (104.5)
Cash paid - prior year -- -- (4.0)
Stock issued -- -- (78.9)
Debt issued to retire preferred stock of
Cyclops Corporation -- -- (30.0)
Contribution of investment to equity investee -- -- (9.1)
------------------------------------------------------------------------
<FN>
See Notes to financial statements on pages 28 through 43.
</TABLE>
ARMCO INC. 27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in millions, except per share amounts)
-----------------------------------------------------------------------------
1: SUMMARY OF ACCOUNTING POLICIES
-----------------------------------------------------------------------------
Consolidation
The accompanying financial statements include the accounts of Armco and all
subsidiaries in which Armco has a controlling interest. The Worldwide
Grinding Systems segment (Note 13) and the Armco Financial Services Group
(AFSG) (Note 3) are included in discontinued operations.
On April 24, 1992, Armco completed the acquisition of Cyclops Industries, Inc.
(Cyclops), including its subsidiary, Eastern Stainless Corporation (Note 12).
Armco paid $103.3 in cash, issued $30.0 of debt and 14.3 million shares of its
common stock valued at $78.9 for the businesses acquired. The acquisition was
accounted for using the purchase method of accounting. As of April 25, 1992,
Armco began including the former Cyclops units in its financial statements.
Had Armco acquired Cyclops on January 1, 1992, the combined Armco and Cyclops
businesses would have generated net sales of $1,974.6, a loss before
extraordinary items of $437.1 and a net loss of $445.5 or $4.41 per share for
the twelve months ended December 31, 1992. Cyclops was a producer of flat-
rolled stainless and carbon steels, tubular steel products and special alloys,
and operated businesses which design, fabricate and erect nonresidential
construction products.
Investments
Armco has investments in associated companies (joint ventures, partnerships
and companies in which Armco has a 20% or more interest, but does not
control). These investments, including National-Oilwell, the former Armco
Steel Company, L.P. (ASC) and North American Stainless (NAS), are accounted
for by the equity method, whereby Armco's portion of their financial results
are recorded as pretax equity income (loss). However, in 1994, Armco disposed
of its investment in ASC and most of its investment in NAS, and as a result,
no longer accounts for these businesses under the equity method (Note 11).
Armco considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents, which consist
primarily of commercial paper, bank repurchase agreements and money market
mutual funds, are stated at amortized cost plus accrued interest, which
approximates market value.
In 1993, Armco adopted Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, which
provides guidance as to when it is appropriate to report certain invested
assets at fair market value. Under the definitions provided in this
Statement, Armco has invested assets of $239.6 and $203.0 at December 31, 1994
and 1993, respectively, which have been classified as held to maturity and
are, therefore, recorded at amortized cost. At December 31, 1994, these
invested assets, which generally mature within one year, include $195.0 of
cash equivalents, $24.8 of commercial paper in Short-term liquid investments,
stated at cost plus accrued interest, which approximates market value, and
$14.8 of collateral deposits, described below. At December 31, 1994,
investments of $32.3, which primarily consisted of the 1,023,987 shares of AK
Steel common stock with a December 31, 1994 market value of $31.5 (Note 11),
were classified as available for sale. The AK Steel common stock is recorded
in Other current assets with a corresponding credit in Unrealized gain on
equity securities in the Statement of Consolidated Financial Position.
At December 31, 1994, the Other investments in the Statement of Consolidated
Financial Position included $18.0 of restricted collateral deposits and an
investment of $6.7 representing Armco's 5% limited partnership interest in NAS
(Note 11). The collateral deposits are primarily invested in certificates of
deposits which mature within one year and are primarily for equipment
financing, self-insurance programs and environmental and litigation bonds.
The classification as long-term is based on the expected term of the
collateral requirement and not necessarily the maturity date of the underlying
securities. At December 31, 1993, Other investments included $43.8 for the
investment in NAS and $26.2 of financial instruments, of which $22.1 were
restricted collateral deposits. At December 31, 1994, Armco had no
investments in derivative financial instruments.
Statement of Cash Flows
In accordance with SFAS No. 95, Statement of Cash Flows, cash flows from
Armco's operations in foreign countries are calculated based on their
reporting currencies. As a result of this and the sale of businesses during
the year, amounts related to changes in assets and liabilities reported on the
Statement of Consolidated Cash Flows will not necessarily agree to changes in
the corresponding balances on the Statement of Consolidated Financial
Position. The effect of exchange rate changes on cash balances held in
foreign currencies is reported on a separate line below Cash flows from
financing activities.
Translation of Foreign Currency
Assets and liabilities of international operations are translated at current
exchange rates, and related revenues and expenses are translated at average
rates of exchange in effect during the year. Cumulative translation
adjustments are recorded as a separate component of shareholders' equity.
Assets and liabilities of international operations in hyperinflationary
economies are translated at historical rates, and translation adjustments
relating to such operations are included in Sundry other-net with transaction
gains and losses. Armco reports interest income and interest expense net of
related translation losses and gains to approximate the real rate of interest
earned or expensed by its businesses operating in hyperinflationary economies.
Foreign currency losses recognized in Sundry other-net were zero, $5.9 and
$11.6 in 1994, 1993 and 1992, respectively.
Inventories
Inventories are valued at the lower of cost or market. Cost of inventories at
most domestic operations is measured on the LIFO -- Last In, First Out --
method. Other inventories are measured principally
28 ARMCO INC.
<PAGE>
at average cost. Inventory balances as of December 31, 1994 and 1993 were:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1994 1993
-----------------------------------------------------------------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $158.7 $190.8
Raw materials and supplies 24.8 21.5
Adjustment to state inventories at LIFO value (41.1) (38.5)
-----------------------------------------------------------------
Total 142.4 173.8
-----------------------------------------------------------------
Inventories on average cost:
Finished and semi-finished 14.8 14.1
Raw materials and supplies 8.3 17.6
-----------------------------------------------------------------
Total 23.1 31.7
-----------------------------------------------------------------
Total inventories $165.5 $205.5
-----------------------------------------------------------------
</TABLE>
Liquidation of LIFO inventory layers caused by certain inventory reductions
increased net income for 1994 by $3.6, or $.03 per share, in the Other Steel
and Fabricated Products segment.
Research and Development Costs
Armco conducts a broad range of research and development activities, including
programs for its affiliated companies. These activities are aimed at
improving existing products and manufacturing processes and developing new
products and processes. Research and development costs are recorded as
expense when incurred, reduced by amounts funded by affiliates. The amounts
incurred for 1994, 1993 and 1992 were $14.6, $12.9 and $24.0, respectively,
including $0.9, $3.9 and $9.4, respectively, funded by affiliates.
Property, Plant and Equipment
Depreciation and amortization are computed using the straight-line method
based on the estimated useful lives of the related assets. Leasehold
improvements are amortized over the shorter of the life of the related asset
or the life of the lease. Generally, Armco depreciates its property, plant
and equipment at annual rates of 5% for land improvements, 3% - 5% for
buildings and 5% - 33% for machinery and equipment.
During 1994, 1993 and 1992, Armco expended $109.9, $125.1 and $129.6,
respectively, for maintenance and repair of its property, plant and equipment.
Armco has committed to purchase property, plant and equipment (including
unexpended amounts relating to projects substantially under way) amounting to
approximately $79.5 at December 31, 1994.
Net Assets Held For Sale
Net assets held for sale in the Statement of Consolidated Financial Position
consists of the lower of cost or net realizable value of net assets in
businesses which have been identified for divestment (Note 9).
Goodwill and Other Intangible Assets
Goodwill and other intangible assets primarily include goodwill recorded in
connection with the effect of adoption of SFAS No. 106 in 1993 on the
acquisition of Cyclops on April 24, 1992. This asset is being amortized using
the straight-line method over 40 years. Also included are goodwill and
intangible assets acquired in the purchase of Douglas Dynamics, Inc. on July
2, 1991. These assets are being amortized over their estimated useful lives,
the majority of which do not exceed 17 years. Amortization expense for 1994,
1993 and 1992 was $6.9, $7.0 and $3.7, respectively. At December 31, 1994 and
1993, accumulated amortization of goodwill and other intangible assets was
$21.5 and $14.6, respectively.
Armco assesses whether its goodwill and other intangible assets are impaired
at each balance sheet date based on an evaluation of undiscounted projected
cash flows through the remaining amortization period. If an impairment is
determined, the amount of such impairment is calculated based on the estimated
fair value of the asset.
Earnings Per Share
Primary earnings per share is computed by deducting the amount of dividends on
preferred stock from income (added to a loss). This amount is then divided by
the weighted average number of common shares outstanding during the year, plus
common equivalent shares outstanding if the common equivalent shares are
dilutive. Common equivalent shares include dilutive stock options as if the
options were exercised and the proceeds used to acquire common shares.
Dilutive stock options give the right to buy shares at a price which is less
than current market price. The fully diluted per share amounts are not
presented in
1994, 1993 and 1992 because such amounts are antidilutive.
Environmental Liabilities
Armco has participated in or funded various cleanup efforts at sites where its
facilities have disposed of wastes, including sites located on its own
properties. Costs related to these efforts are accrued when it is probable
that a liability has been incurred and the amount of that liability can be
reasonably estimated. It is Armco's policy not to accrue environmental exit
costs with respect to ongoing businesses until a decision is made to dispose
of the property.
Concentrations of Credit Risk
Armco is primarily a producer of stainless, electrical and carbon steels and
steel products, which are sold to a number of markets, including industrial
machinery and equipment, automotive, construction, power generation and
appliances. Armco sells domestically to customers primarily in the midwestern
and eastern United States, while a small amount of foreign sales are primarily
made to customers in western Europe. Approximately 25% of trade receivables
outstanding at December 31, 1994 are due from businesses which supply the U.S.
automobile industry and another 19% are the result of sales to NAS. Armco
does not require collateral on trade receivables; and while it believes its
trade receivables will be collected, Armco anticipates that in the event of
default it would follow normal collection procedures. Overall, credit risk
related to Armco's trade receivables is limited due to the large number of
customers in differing industries and geographic areas.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to
conform to the 1994 presentation.
ARMCO INC. 29
<PAGE>
-----------------------------------------------------------------------------
2: PENSION AND OTHER EMPLOYEE BENEFITS
-----------------------------------------------------------------------------
Pension Plans
Armco provides noncontributory pension benefits for most employees. Prior to
1993, benefits for most nonrepresented and certain represented employees were
primarily based on years of service and earnings in the highest 60 consecutive
months in the last 120 months prior to the date of retirement or a minimum
amount per year of service, whichever is higher. As a result of the labor
negotiations in 1993, the benefits for most hourly represented employees are
now based on a fixed dollar amount per year of service. Also effective January
1, 1995, a new cash balance program was established and the pension benefits
under the previous formulas were locked and frozen for most nonrepresented
employees. Under the new cash balance program, future increases in earnings
will not apply to prior service and certain lump sum payments are available.
The qualified plans have been funded to meet the minimum funding requirements
of the Employee Retirement Income Security Act of 1974. During years prior to
1993, Armco made cash contributions which in total exceeded the minimum
required contributions. No contributions were made during 1993. During 1994,
contributions of $17.7 were made, of which $17.5 were required by a settlement
with the Pension Benefit Guaranty Corporation (PBGC). Under the agreement with
the PBGC, the $17.5 cannot be used to offset future minimum funding
requirements until after 1999. As of December 31, 1994, funding credits of
$3.8 were currently available to offset future minimum funding requirements.
On April 24, 1992, Armco assumed the former Cyclops pension plans. These
plans had projected benefit obligations of $431.4 and plan assets with a
market value of $323.6. The unfunded projected benefit obligation of $107.8
was recorded upon acquisition. Effective October 31, 1992, all qualified
Cyclops pension plans, with the exception of plans for certain Eastern
Stainless Corporation employees, were merged into the Armco pension plans.
Economic assumptions and net periodic pension expense by component, including
amounts related to divested units, were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 8.0 % 8.0 %
Weighted average expected long-term
rate of return on assets 8.25% 8.75% 8.75%
Rate of future compensation increases 4.0 % 5.0 % 5.0 %
Cost of benefits earned during
the period $ 19.1 $ 20.4 $ 21.5
Interest cost on the projected
benefit obligation 149.3 150.3 137.0
Actual loss (return) on plan assets 21.9 (256.9) (108.3)
Net amortization and deferral (163.7) 115.1 (32.8)
-----------------------------------------------------------------------
Net periodic pension expense $ 26.6 $ 28.9 $ 17.4
-----------------------------------------------------------------------
</TABLE>
Expense increased in 1993 primarily due to lower than expected investment
returns in 1992, inclusion of Cyclops for the full year, closing facilities
and force reductions. The net periodic expense shown above includes $1.5 in
1994 and $3.7 in 1993, for divested units, which was charged to previously
established accruals.
Net curtailment and settlement losses on pensions of $5.2 in 1994, $23.8 in
1993 and $44.6 in 1992 for reductions in the work force were primarily
recorded as special charges and are not included in net periodic pension
expense. Certain former Cyclops units which were identified for disposal in
1993 had hourly employees participating in multi-employer pension and welfare
plans. The total expense for contributions to those programs was $2.4 in
1994, $1.7 in 1993 and $2.1 in 1992, which is not included in net periodic
pension expense shown above.
The following table presents the funded status of pension plans using discount
rates of 8.50% and 7.25%, respectively, at December 31, 1994 and 1993. The
assumed rate of future compensation increases was 4% in both years. The funded
status of the pension plans improved during 1994, primarily as a result of the
increase in the discount rate. The change in the plan for nonrepresented
employees decreased the projected benefit obligation by $29.0.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Plans for which Plans for which
Assets Exceed Accumulated
Accumulated Benefits Total
1994 Benefits Exceed Assets All Plans
------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C> <C>
Vested benefits $ 31.4 $1,789.4 $1,820.8
Nonvested benefits 1.3 46.1 47.4
------------------------------------------------------------------------------
Accumulated benefits 32.7 1,835.5 1,868.2
Projected benefit obligation 33.5 1,857.6 1,891.1
Plan assets at fair value (1) 38.7 1,686.4 1,725.1
------------------------------------------------------------------------------
Unfunded (overfunded) projected
benefit obligation (5.2) 171.2 166.0
Reconciliation of funded status to recorded amounts:
Unrecognized negative prior service -- 6.9 6.9
Unrecognized net gain (loss) (0.1) 127.0 126.9
Unrecognized net asset (obligation) 1.0 (49.1) (48.1)
Amount required to recognize minimum
liability -- 4.0 4.0
------------------------------------------------------------------------------
Accrued pension liability (benefit) $ (4.3) $ 260.0 $ 255.7
------------------------------------------------------------------------------
<FN>
(1) The mix of pension assets held at December 31, 1994 was 50% equities, 43%
fixed income securities and 7% short-term securities.
</TABLE>
30 ARMCO INC.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Plans for which Plans for which
Assets Exceed Accumulated
Accumulated Benefits Total
1993 Benefits Exceed Assets All Plans
------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C> <C>
Vested benefits $ 34.9 $2,014.2 $2,049.1
Nonvested benefits 1.7 46.8 48.5
------------------------------------------------------------------------------
Accumulated benefits 36.6 2,061.0 2,097.6
Projected benefit obligation 41.5 2,115.9 2,157.4
Plan assets at fair value (1) 45.5 1,864.9 1,910.4
------------------------------------------------------------------------------
Unfunded (overfunded) projected benefit
obligation (4.0) 251.0 247.0
Reconciliation of funded status to recorded amounts:
Unrecognized prior service -- (20.8) (20.8)
Unrecognized net gain (loss) (1.3) 73.0 71.7
Unrecognized net asset (obligation) 2.5 (56.1) (53.6)
Amount required to recognize minimum
liability -- 5.0 5.0
------------------------------------------------------------------------------
Accrued pension liability (benefit) $ (2.8) $ 252.1 $ 249.3
------------------------------------------------------------------------------
<FN>
(1) The mix of pension assets held at December 31, 1993 was 50% equities, 44%
fixed income securities and 6% short-term securities.
</TABLE>
Retiree Health Care and Life Insurance Benefits
In addition to providing pension benefits, Armco provides certain health care
and life insurance benefits for most retirees. Most employees become eligible
for these benefits when they retire. Retiree health and life insurance
benefits are funded as claims are paid. During 1993, the company announced
changes in the plans for certain nonrepresented employees and retirees which
require either higher retiree contributions or an alternative managed care
program. Also during 1993, new managed care programs were negotiated with
most of Armco's represented hourly employees which will be applicable to
future retirements. Also under a new retiree welfare program for
nonrepresented employees, effective for new retirements on or after January 1,
1995, the retirees will contribute a higher share of future increases in
health care costs, ranging from 50% to the full cost of future increases.
Effective January 1, 1993, Armco implemented the immediate recognition method
of adopting SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. The standard requires the accrual of expense for 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 when
the participant retired. The cumulative effect of recognizing this obligation
resulted in a net of tax charge of $440.0 or $4.24 per share as of January 1,
1993.
The components of the net periodic postretirement benefit expense in 1994 and
1993, including amounts related to divested units but, excluding the
cumulative effect of adoption in 1993, were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Cost of benefits earned during the period $9.3 $12.2
Interest cost on accumulated postretirement
benefit obligation 68.0 80.6
Amortization of plan changes (1.4) 1.7
---------------------------------------------------------------------------
Net periodic postretirement benefit expense $75.9 $94.5
Assumptions used to determine postretirement benefit expense were:
Weighted average discount rate 7.25% 8.0%
Current year health care trend rate - Pre-age 65 11.25% 13.0%
Current year health care trend rate - Post-age 64 8.25% 10.0%
Ultimate health care trend rate 5.25% 6.0%
Weighted average trend rate 6.25% 7.0%
---------------------------------------------------------------------------
</TABLE>
The cost of benefits earned decreased in 1994 due to plan amendments and the
divestment of operating units.
The net periodic expense shown above includes $2.4 in 1994 and $9.6 in 1993,
for divested units, which was charged to previously established accruals. Net
curtailment gains (losses) on postretirement benefits of $(0.8) in 1994 and
$4.4 in 1993 were not included in net periodic postretirement benefit expense.
The current year health care trend rates are assumed to decrease one percent
per year until they reach the ultimate rate. A one percent increase in the
assumed health care trend rate would increase the accumulated postretirement
benefit obligation as of January 1, 1994 by approximately $90.0, and increase
the annual net periodic postretirement benefit cost by approximately $9.5.
The expense for postretirement benefits under the previous pay-as-you-go
method reduced net income by $49.6 in 1992. This amount was less than the
approximate claims cost for these programs, since under the previous
accounting method a portion of the claim amounts ($7.1 in 1992) was charged to
reserves established on previous divestments. Total incurred claims costs
were approximately $63.6 in 1994, $64.9 in 1993 and $56.7 in 1992. As part of
the formation of Cyclops, an unrelated company retained the liability for
postretirement benefits for former Cyclops employees retiring before July,
1987.
ARMCO INC. 31
<PAGE>
The following table shows the funded status of the postretirement benefit
plans and the amounts recognized in the Statement of Consolidated Financial
Position as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
1994 1993
---------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $738.1 $734.5
Fully eligible active plan participants 72.1 82.2
Other active plan participants 116.7 156.2
---------------------------------------------------------------------------
Total 926.9 972.9
Plan assets at fair value -- --
---------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 926.9 972.9
Reconciliation of obligation to recorded amounts:
Unrecognized negative prior service 39.0 23.2
Unrecognized net gains 88.6 47.4
---------------------------------------------------------------------------
Accrued postretirement benefit liability $1,054.5 $1,043.5
---------------------------------------------------------------------------
Assumptions used to determine obligation:
Discount rate 8.5% 7.25%
Current year health care trend rate - Pre-age 65 11.5% 11.25%
Current year health care trend rate - Post-age 64 8.5% 8.25%
Ultimate health care trend rate 6.5% 5.25%
Weighted average trend rate 7.5% 6.25%
</TABLE>
The current year health care trend rates are assumed to decrease one percent
per year until they reach the ultimate rate. The change in the plan for
nonrepresented employees decreased the December 31, 1994 accumulated
postretirement benefit obligation by $23.0.
Employee Benefit Obligations of Former Business Units
Armco has recorded, in its employee benefit obligations, the present value of
estimated pension and health care benefits for former employees associated
with facilities which have been or are being divested. Sundry other-net
includes interest costs related to these liabilities of $35.8, $23.8 and $13.2
in 1994, 1993 and 1992, respectively, related to these liabilities. The
increase in costs from 1993 to 1994 was primarily due to the addition of
retirees from Worldwide Grinding Systems and other units divested in 1993,
partially offset by lower interest rate. The increase from 1992 to 1993 was
also due to an increase in retirees from divested units.
Postemployment Benefits
Effective January 1, 1993, Armco adopted SFAS 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.
-----------------------------------------------------------------------------
3: ARMCO FINANCIAL SERVICES GROUP (AFSG)
-----------------------------------------------------------------------------
AFSG currently consists primarily of insurance companies which Armco intends
to sell and which continue underwriting activities (AFSG companies to be sold)
and companies that have stopped writing new business and are being liquidated
(runoff companies). Armco previously announced its intention to dispose of or
liquidate all of the AFSG companies.
AFSG Companies to be Sold
In January 1994, after further evaluation of its various alternatives and even
though the insurance market remained weak, Armco signed a letter of intent to
sell the AFSG companies to be sold to Vik Brothers Insurance Inc. (Vik
Brothers), a privately held, North Carolina-based property and casualty
insurance holding company. On August 2, 1994, Armco and Vik Brothers signed a
definitive agreement, subject to a number of conditions, including approvals
by regulatory authorities. The sale is expected to close by March 31, 1995.
Armco recorded a $45.0 charge in the fourth quarter of 1993 in connection with
its decision to enter into this transaction. The charge was primarily taken
to reduce Armco's investment in the AFSG companies to be sold to its estimated
net realizable value of $73.9. Under terms of the agreement Armco will be
paid approximately $65.0 at the closing and $15.0 in three years, subject to
potential adjustment for adverse experience in certain insurance reserves. As
a result of restructuring certain obligations arising from a 1992 merger plan
for the runoff companies, the proceeds from the sale have been pledged as
security for certain note obligations due to the runoff insurance companies
and will be retained in the investment portfolio of the AFSG runoff companies.
Prior to 1993, Armco accounted for the operating results of the AFSG companies
to be sold under the cost recovery method, whereby net income was not
recognized until realized through a sale of the businesses, while net losses
were charged against income as incurred. These businesses are now presented
as discontinued operations.
The following sets forth the summarized statement of financial condition and
results of operations for the AFSG companies to be sold at December 31, 1994
and 1993, and for the years ended December 31, 1994, 1993 and 1992:
32 ARMCO INC.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Financial condition
Assets:
Invested assets $ 400.5 $ 440.7
Receivables 98.7 87.7
Other 41.3 43.0
------------------------------------------------------------------------
Total assets 540.5 571.4
------------------------------------------------------------------------
Liabilities:
Property and casualty reserves 407.8 398.3
Payables and other liabilities 36.4 37.2
------------------------------------------------------------------------
Total liabilities 444.2 435.5
------------------------------------------------------------------------
Net assets $ 96.3 $ 135.9
Amounts to reconcile to Armco investment:
Net income (3.8) (10.4)
Unrealized investment (gain) loss 19.7 (13.3)
Loss on disposal of businesses (45.0) (45.0)
Net liabilities retained 6.7 6.7
------------------------------------------------------------------------
Armco investment $ 73.9 $ 73.9
------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Results of operations
Premiums earned $ 216.3 $ 227.7 $ 239.9
Losses and loss adjustment expenses (169.9) (177.1) (196.1)
Underwriting expenses (82.3) (82.7) (90.0)
------------------------------------------------------------------------------
Underwriting loss (35.9) (32.1) (46.2)
Investment income 29.4 43.7 44.1
Other expenses (0.1) (1.2) (0.5)
Income (loss) before cumulative
effect of change in accounting
for postretirement benefits (6.6) 10.4 (2.6)
Cumulative effect of change in
accounting for post retirement benefits -- (14.0) --
------------------------------------------------------------------------------
Net loss $ (6.6) $ (3.6) $ (2.6)
------------------------------------------------------------------------------
</TABLE>
During 1993, the AFSG companies to be sold adopted SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109,
Accounting for Income Taxes, SFAS No. 112, Employers' Accounting for
Postemployment Benefits, SFAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts and SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Upon
adoption of SFAS No. 106, the AFSG companies to be sold recorded a net of tax
charge of $14.0 for the cumulative effect of this accounting change. This
amount is included in Cumulative effect of changes in accounting on Armco's
Statement of Consolidated Operations. The effects of adoption of SFAS No. 109
and SFAS No. 112 were not material. SFAS No. 113 requires that reinsurance
receivables and prepaid insurance premiums be reported as assets and
eliminates the practice of reporting assets and liabilities relating to
reinsurance contracts net of the effects of reinsurance. Adoption of SFAS No.
113 by the AFSG companies to be sold did not result in a charge to earnings.
Based on market values, invested assets at December 31, 1994 consist primarily
of investment grade bonds: U.S. Treasury securities (21%); corporate bonds
(45%); mortgage-backed securities (23%) and cash and short-term investments
(11%). The market value of invested assets at December 31, 1994 and 1993 was
$397.3 and $441.5, respectively. Investment income included a net realized
loss of $0.5 for 1994 and net realized gains of $11.2 and $10.1 for 1993 and
1992, respectively.
Property and casualty reserves include amounts determined from loss reports
and individual cases and an amount, based upon past experience, for losses
incurred but not reported. Such amounts are necessarily based upon estimates
and, while management believes the amounts are fairly stated, the ultimate
liability may be in excess of or less than the amount provided. The methods
for making such estimates and for establishing the resulting liability are
continually reviewed and any adjustments are reflected in current earnings.
Policy acquisition costs that vary with and are directly related to the
production of premiums are deferred and amortized over the terms of the
policies. Amortization for the years ended December 31, 1994, 1993 and 1992
was $45.8, $46.5 and $49.9.
The AFSG companies to be sold limit their exposure to loss by ceding
(reinsuring) certain levels of risk with other insurers. In the event that
all or any of the reinsuring companies might be unable to meet their
obligations under the reinsurance agreements, the AFSG companies to be sold
would be liable for such obligations. At December 31, 1994, reinsurance ceded
balances totaled $45.7.
Participating business represents approximately 13.4%, 14.5% and 13.2% of
total premiums in force at December 31, 1994, 1993 and 1992. The amount of
dividends to be paid on these policies is based upon the individual policies.
Policyholder dividend expense for the years ended December 31, 1994, 1993 and
1992 was $2.6, $2.4 and $3.0, respectively.
The amount of statutory policyholders' surplus at December 31, 1994 and 1993
was $99.7 and $108.7, respectively.
Runoff Companies
The runoff companies are accounted for as discontinued operations under the
liquidation basis of accounting, whereby all future cash inflows and outflows
are considered. Armco believes, based on current facts and circumstances,
including the opinion of outside actuaries, that future changes in estimates
of net losses relating to the ultimate liquidation of the runoff companies
will not be material to Armco's financial position or liquidity. The
following sets forth summarized financial information at December 31, 1994 for
the runoff companies:
ARMCO INC. 33
<PAGE>
<TABLE>
-----------------------------------------------------
<S> <C>
Assets:
Invested assets $115.8
Reinsurance recoverable 165.7
Other 17.2
-----------------------------------------------------
Total assets 298.7
-----------------------------------------------------
Liabilities:
Losses and loss reserves (net of future
investment income of $35.5) 236.9
Other 38.6
Total liabilities 275.5
-----------------------------------------------------
Net assets $ 23.2
-----------------------------------------------------
</TABLE>
Currently, insurance regulators having supervisory authority over the AFSG
insurance operations retain substantial control over certain transactions,
including the sale of the AFSG companies to be sold and the payment of
dividends to Armco.
In 1992, regulatory authorities approved a merger plan which permitted Armco
to merge a runoff insurance company with a statutory surplus impairment into
another of Armco's runoff companies, curing the impairment. The merger plan
contemplated that Armco would cause the surviving company to be runoff and to
maintain its statutory surplus at not less than $10.0. During 1993, regulatory
authorities allowed Armco to restructure and secure certain obligations
arising from the 1992 merger plan, and Armco was released from its surplus
maintenance agreement.
There are various pending matters relating to litigation, arbitration and
regulatory affairs, including matters related to Northwestern National
Insurance Company, a runoff company currently involved in, among other
matters, litigation with respect to certain reinsurance programs. The
ultimate liability from such matters at December 31, 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 position or liquidity. However, it is
possible that due to fluctuations in Armco's results, future developments with
respect to changes in the ultimate liability could have a material effect on
future interim or annual results of operations.
-----------------------------------------------------------------------------
4: INCOME TAXES
-----------------------------------------------------------------------------
Armco files a consolidated U. S. federal income tax return. This return
includes all domestic companies 80% or more owned by Armco and the
proportionate share of Armco's interest in partnership investments. State tax
returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to Armco and its domestic subsidiaries.
The United States and foreign components of Income (loss) before income taxes,
including Armco's portion of the income (loss) of equity companies for 1994,
1993 and 1992 of $15.3, $(43.7) and $(255.5),
respectively, consist of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 44.3 $(276.4) $(463.3)
Foreign 4.7 12.9 10.0
-------------------------------------------------------------------
Total $ 49.0 $(263.5) $(453.3)
-------------------------------------------------------------------
</TABLE>
Income tax credits (provisions) for Armco and consolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U. S. federal $ -- $ 4.2 $ 29.4
U. S. state (0.8) 4.9 (0.3)
Foreign (0.5) (1.8) (2.6)
-------------------------------------------------------------------
Total (1.3) 7.3 26.5
-------------------------------------------------------------------
Deferred:
U.S. federal 27.3 -- 4.4
U. S. state 2.7 -- 1.6
Foreign -- -- 1.5
-------------------------------------------------------------------
Total 30.0 -- 7.5
-------------------------------------------------------------------
Total credit for income taxes $ 28.7 $ 7.3 $ 34.0
-------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
applied to pretax book income with the credit for income taxes in the
Statement of Consolidated Operations for the year 1994:
<TABLE>
-------------------------------------------------------------------
<S> <C>
Federal taxes at statutory rate $ (17.2)
State income taxes, net of federal benefit (2.9)
Reduction in valuation allowance 20.1
Decrease in beginning balance of valuation allowance 30.0
Other (1.3)
-------------------------------------------------------------------
Credit for income taxes $ 28.7
-------------------------------------------------------------------
</TABLE>
During 1994, Armco's tax effected future deductible temporary differences
declined by $26.2 as a result of payments in 1994 for costs primarily
associated with employee benefits and restructuring actions that had been
accrued for financial accounting purposes in prior years. This deferred tax
benefit had been previously offset by an equal amount of valuation allowance.
The reversal of these temporary differences and the utilization of capital
loss carryforward tax benefits of $10.7, for book purposes, resulted in an
additional deferred tax benefit of $16.8 that can be carried forward. For
financial reporting purposes, management concluded that realization of the
future tax benefit of this net operating loss carryforward was not likely, so
an equal valuation allowance was recorded. The net tax effect of these
transactions resulted in a reduction in the valuation allowance during 1994 of
$20.1, which offset the federal and state income tax effect at statutory rates
on pretax book income.
The income tax benefit of $28.7 recognized in 1994 is primarily the result of
decreasing the beginning balance of the valuation allowance by $30.0 due to
the effects, including the elimination of ASC's estimated future taxable
losses, that the initial public offering
34 ARMCO INC.
<PAGE>
and recapitalization of ASC had on management's assessment of the amount of
deferred tax asset that is more likely than not to be realized in the future.
In 1993, Armco recorded income from tax benefits of $4.9 in Credit for income
taxes on the Statement of Consolidated Operations; and income of $5.8, related
to interest, in Sundry other - net, for settlements of state income tax
issues. 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. In 1992, Armco recognized income of $39.1 as the result of
a settlement with the Internal Revenue Service on two federal tax refund
claims. Of the total amount recognized, $16.2, representing the tax refunds,
was recorded in Credit for income taxes and $22.9, representing interest on
the claims, was recorded in Sundry other-net. In addition, Armco adjusted
certain income tax reserves resulting in a $13.0 benefit for income taxes,
primarily in the fourth quarter of 1992
At December 31, 1994, Armco had capital and net operating loss (NOL)
carryforwards for federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Year
Expires Amount
-------------------------------------------------------------------
<S> <S> <C>
Capital losses: 1998 $ 63.6
-------------------------------------------------------------------
Net operating losses: 1998 $ 63.0
1999 128.8
2000 13.5
2001 143.2
2002 3.0
2004 9.1
2005 131.4
2006 247.1
2007 193.5
2008 137.0
2009 41.1
-------------------------------------------------------------------
Total NOL carryforward $1,110.7
-------------------------------------------------------------------
</TABLE>
Included in the $1,110.7 NOL carryforward is $63.1 from separate return years
of Armco subsidiaries for years prior to their inclusion in the consolidated
group. These losses are subject to limitations regarding the offset of
Armco's future taxable income and will expire if not used in the period 1998-
2005. Armco has $840.0 in U.S. alternative minimum tax net operating losses.
Additionally, Armco has $12.1 of alternative minimum tax credits which have no
expiration.
Armco adopted SFAS No. 109, Accounting for Income Taxes, effective January 1,
1993. The cumulative effect of adopting SFAS No. 109, excluding a tax benefit
of $170.3 for the cumulative effect of adoption of SFAS No. 106, was a benefit
of $135.6 or $1.31 per share as of January 1, 1993.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss
and tax credit carryforwards. At December 31, 1994 and 1993, the total net
deferred tax assets of $328.5 and $298.5, respectively, were included in the
Statement of Consolidated Financial Position as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 8.0 $ 5.9
Deferred tax asset 321.8 295.6
Other accruals -- (1.5)
Other liabilities (1.3) (1.5)
----------------------------------------------------------------------
Total net deferred tax asset $ 328.5 $ 298.5
----------------------------------------------------------------------
</TABLE>
Significant components of Armco's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
1994 1993
----------------------------------------------------------------------
<S> <C> <C>
Tax effects of:
Operating loss and tax credit carryforwards $ 488.7 $ 497.0
Employee benefits 602.8 615.3
Property, plant and equipment (148.0) (142.5)
Other (includes contingencies and other accruals) 86.3 104.9
----------------------------------------------------------------------
Subtotal 1,029.8 1,074.7
Valuation allowance (701.3) (776.2)
----------------------------------------------------------------------
Total net deferred tax asset $ 328.5 $ 298.5
----------------------------------------------------------------------
</TABLE>
Even though Armco has incurred tax losses for the past five fiscal years,
management believes that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit associated
with future deductible temporary differences and NOL carryforwards prior to
their expiration. This belief is based upon, among other factors, changes in
operations that have occurred during the last three years, as well as
consideration of available tax planning strategies. Specifically, cost
savings, associated with Armco's acquisition of Cyclops and new capital
investments, are being realized and are anticipated to continue to improve
operating results. This improvement was particularly evident in 1994's
operating results in comparison with prior years. Armco has operated in a
highly cyclical industry and consequently has had a history of generating and
then utilizing significant amounts of NOL carryforwards. During the years
1987-1989, Armco utilized approximately $350.0 of NOL carryforwards. However,
management believes that a valuation allowance is appropriate given the
current estimates of future taxable income. If Armco is unable to generate
sufficient taxable income in the future through operating results, increases
in the valuation allowance will be required through a charge to expense.
However, if Armco achieves sufficient profitability to utilize a greater
portion of the deferred tax asset, the valuation allowance will be reduced
through a credit to income.
United States income tax returns of Armco for the year 1990 and prior years
have been subject to examination by the Internal Revenue Service and are
closed to assessments. However, the NOL carryforwards from some of these
years remain open to adjustment. Armco has been in a cumulative net operating
loss carryforward position since 1983 and believes that it has sufficient loss
carryforwards in excess of any potential audit adjustments that might be made
by the Internal Revenue Service for any open years.
ARMCO INC. 35
<PAGE>
-----------------------------------------------------------------------------
5: LONG-TERM DEBT AND OTHER FINANCING
-----------------------------------------------------------------------------
Long-Term Debt
At December 31, 1994 and 1993 Armco's long-term debt, less current maturities,
was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Sinking fund debentures:
8.5% due 2001 $ 39.8 $ 48.0
9.2% due 2000 30.0 35.0
8.7% due 1995 -- 7.9
8.0% Eastern Stainless Corporation due 2003 -- 13.4
Notes payable:
9.375% due 2000 125.0 125.0
11.375% due 1999 100.0 100.0
7.875% due 1995-1996 3.5 5.3
Variable rate (LIBOR plus 2.75%) due 1996-2001 44.6 29.6
5.0% due 2000 6.7 --
Pollution control revenue bonds - 8.125% 14.2 15.0
Other -- 0.5
------------------------------------------------------------------------
Total $363.8 $379.7
------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December
31, 1999, are as follows: 1995, $10.5; 1996, $25.4; 1997, $23.2; 1998, $21.6
and 1999, $121.7.
The fair market value of Armco's long-term debt, including current maturities,
is approximately $347.6. This value was determined by calculating a value
based on cash flow yield to maturity and comparing that amount to market
information where possible. The fair market value estimate is based on
pertinent information available to management as of December 31, 1994.
Management is not aware of any significant factors that would alter this
estimate after that date. The fair market value of Armco's long-term debt,
including current maturities, at December 31, 1993 was approximately $392.8.
As a result of Eastern Stainless Corporation's decision to sell substantially
all of its assets for cash and the assumption of certain liabilities (Note
12), Armco's Statement of Consolidated Financial Position no longer includes
the Eastern Stainless Corporation 8% sinking fund debentures due 2003 in Long-
term debt. However, Armco continues to guarantee this debt, which has a face
value of $15.5.
During 1994, construction loan commitments provided $24.3 of financing in
connection with the continuous caster at the Mansfield facility. Armco has a
commitment for an additional $16.2 of financing related to construction of the
caster. The caster is pledged as collateral on these loans. At December 31,
1994 and 1993, long-term debt included $29.6 of financing utilized to
construct a cold rolling mill at Armco's Butler, Pennsylvania facility,
included in the Specialty Flat-Rolled Steel segment. Effective February 28,
1994, Armco signed an agreement which restructured the payment terms to ten
semi-annual installments beginning in 1996. The cold rolling mill is pledged
as collateral on this loan.
In the fourth quarter of 1993, Armco issued $125.0 of 9.375% Senior Notes due
November 1, 2000. The proceeds, together with approximately $16.6 of Armco's
cash, were used for the retirement of the following debt issues: $30.0 of 11%
notes maturing in 1997 due to the AFSG runoff companies from Douglas Dynamics,
Inc., $5.0 of the 7.875% bonds maturing in 2005 and $2.0 of the 8.7%
debentures due in 1995. In addition, $88.0 of the 13.5% Notes due 1994 were
defeased when Armco placed $99.9 in a trust to pay principal and interest when
due. The early extinguishment of debt resulted in an extraordinary loss of
$7.3 or $.07 per share in the fourth quarter of 1993. In 1992, Armco
purchased $32.5 face value of its long-term debt obligations resulting in an
extraordinary loss of $2.3 or $.02 per share.
Bank Credit Agreement
In the fourth quarter of 1993, Armco entered into an amended credit 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. As of the end of 1994, Armco had
utilized $85.4 of the credit facility for letters of credit.
As amended in the fourth quarter of 1994, the credit agreement subjects Armco
to certain restrictions and covenants related to, among other things, minimum
working capital, a cumulative net income test and certain ratio requirements.
Capitalized Interest
Armco capitalized interest on projects during construction of $4.5, $1.2 and
$1.1 in 1994, 1993 and 1992, respectively. Capitalized interest for 1994
primarily relates to the construction of the thin-slab caster in Mansfield,
Ohio.
Long-Term Leases
Rental expense under operating leases was $7.2 in 1994, $11.3 in 1993 and
$14.1 in 1992. At December 31, 1994, commitments to make future minimum lease
payments for operating leases were $8.5 in 1995, $6.3 in 1996, $4.3 in 1997,
$3.1 in 1998, $2.1 in 1999 and $3.5 in the year 2000 and thereafter. During
this period, future minimum subleases to be received total $1.7.
36 ARMCO INC.
<PAGE>
-----------------------------------------------------------------------------
6: SHAREHOLDERS' DEFICIT
-----------------------------------------------------------------------------
Preferred Stock
Armco has outstanding two classes of preferred stock. The two classes rank
equally with respect to dividend payments, redemption and liquidation rights.
The preferred stock ranks senior to Armco's common stock with respect to
dividends and upon liquidation.
Armco has two series of Class A preferred stock outstanding. The $2.10 Class
A preferred stock pays cumulative dividends at the annual rate of $2.10 per
share. Shareholders of the $2.10 Class A preferred stock have one vote per
share and each share is convertible into 1.27 shares of Armco's common stock.
This series of Class A preferred stock may be redeemed at Armco's option for
$40 per share, plus accrued but unpaid dividends.
The $3.625 Class A preferred stock pays cumulative dividends at the annual
rate of $3.625 per share. Shareholders of this series of Class A preferred
stock are entitled to one vote per share and each share is convertible into
6.78 shares of Armco's common stock. The $3.625 Class A preferred stock may
be redeemed at Armco's option on or after October 15, 1995 at prices starting
at $52.5375, plus accrued but unpaid dividends, and declining, at 12-month
intervals, to $50 on and after October 15, 2002.
Armco's outstanding series of Class B preferred stock is nonvoting and pays
cumulative dividends at the annual rate of $4.50 per share. Each share is
convertible into 2.22 shares of Armco's common stock. The Class B preferred
stock may be redeemed at Armco's option for $50 per share, plus accrued but
unpaid dividends.
Activity for the years 1992, 1993 and 1994 related to Armco's preferred stock
was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Class A Class B
---------------- ----------------
Shares Amount Shares Amount
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1991 1,697,256 $ 7.2 999,900 $48.3
$3.625 preferred stock
issued 2,700,000 130.4 -- --
------------------------------------------------------------------------------
Balance,
December 31, 1992 4,397,256 137.6 999,900 48.3
Conversion to Armco
common stock (25) -- -- --
------------------------------------------------------------------------------
Balance,
December 31, 1993 4,397,231 137.6 999,900 48.3
------------------------------------------------------------------------------
Balance,
December 31, 1994 4,397,231 $137.6 999,900 $48.3
------------------------------------------------------------------------------
</TABLE>
Common Stock
At December 31, 1994, 22,681,261 unissued shares of Armco's common stock were
reserved for the conversion of preferred stock and 3,097,496 unissued shares
of common stock were reserved for the exercise of stock options (Note 7).
Activity for the years 1992, 1993 and 1994 related to Armco's common stock was
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Additional
Paid-in
Shares Par Value Capital
------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance,
December 31, 1991 88,485,610 $88.5 $777.3
Exercise of options 103,980 0.1 0.3
Restricted stock issued 645,000 0.6 3.3
Issued for business
acquisition 14,277,543 14.3 64.6
------------------------------------------------------------------------------
Balance,
December 31, 1992 103,512,133 103.5 845.5
Exercise of options 585,458 0.2 2.8
Restricted stock issued 26,000 -- 0.1
Par value reduction -- (102.7) 102.7
Other (617) -- --
------------------------------------------------------------------------------
Balance,
December 31, 1993 104,122,974 1.0 951.1
Exercise of options 29,378 -- 0.2
Restricted stock issued 512,260 0.1 2.4
Issued for employee
savings plan 424,534 -- 2.6
------------------------------------------------------------------------------
Balance,
December 31, 1994 105,089,146 $1.1 $956.3
------------------------------------------------------------------------------
</TABLE>
Shareholder Rights Plan
On June 27, 1986, Armco adopted a Shareholder Rights Plan designed to deter
coercive takeover tactics and to prevent an acquirer from gaining control of
Armco without offering a fair price to all of Armco's shareholders.
Under the terms of the plan, preferred stock purchase rights were distributed
as a dividend at the rate of one right for each share of common stock held as
of the close of business on July 7, 1986.
ARMCO INC. 37
<PAGE>
Until the rights become exercisable, common stock issued will also have one
right attached. Each right will entitle shareholders to buy one two-hundredth
of a share of a currently unissued series of Class A participating preferred
stock of Armco at an exercise price of $35. Each right will thereafter
entitle the holder to receive upon exercise, common stock or, in certain
circumstances, preferred stock or other securities or assets of the company
having a value of $70. The rights will be exercisable only if a person or
group acquires beneficial ownership of 20% or more of Armco's common stock or
announces a tender or exchange offer, after which such person or group would
beneficially own 30% or more of the common stock. A total of 650,000 shares
of Class A participating preferred stock have been reserved for issuance upon
exercise of the rights.
Armco, except as otherwise provided in the plan, will generally be able to
redeem the rights at one cent per right at any time during a ten-day period
following public announcement that a 20% position in Armco has been acquired.
During this ten-day period, Armco may also extend the time during which it may
redeem the rights. The rights are not exercisable until the expiration of the
redemption period. The rights will expire on June 26, 1996.
Dividends
Under the terms of the amended credit agreement (Note 5), Armco cannot pay
cash dividends on its common stock. In addition, under the terms of
indentures for Armco's 11.375% Senior Notes due 1999 and 9.375% Senior Notes
due 2000, Armco can pay a dividend on its common stock only if it meets
certain financial tests described in the indentures. Armco does not expect to
satisfy these tests in the near future, and therefore, Armco does not expect
to be able to pay a common stock dividend or repurchase its capital stock.
The payment of preferred stock dividends is prohibited if Armco is in default
of the credit agreement.
In 1993, as a result of reducing the par value of Armco's common stock, $102.7
was transferred from Armco's stated capital account for its common stock to
Additional paid-in capital, increasing surplus from which Armco is permitted,
under Ohio law, to pay dividends on its common and preferred stock issues.
Armco is incorporated in Ohio. In addition, effective March 31, 1993, the
corporate statute of Ohio was amended to provide that Ohio corporations that
recognize immediately the full amount of their transition obligation under
SFAS No. 106, as Armco did, could increase the amount available for payment of
dividends by a surplus adjustment. The surplus adjustment allows a
corporation to add to its available surplus, at the time of the dividend, an
amount equal to the difference between the reduction in the corporation's
surplus that resulted from the immediate recognition of the SFAS No. 106
transition obligation and the reduction that would have been recognized had
the corporation elected to amortize its transition obligation. At December
31, 1994, the amount from which Armco is permitted to pay dividends under this
provision was $143.8.
Under the terms of Ohio law, Armco is currently not permitted to purchase
shares of its capital stock.
The Board of Directors at its January 1995 meeting declared the regular
quarterly dividends payable on both series of Armco's Class A preferred stock
and on its Class B preferred stock.
Retained Deficit and Other Shareholders' Equity (Deficit)
Activity for the years 1992, 1993 and 1994 related to Armco's retained deficit
and other shareholders' equity (deficit) was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Net Unrealized
Retained Gains on
Deficit Equity Securities Other
------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance,
December 31, 1991 $ (350.5) $ 0.2 $(11.6)
Net loss (429.9) -- --
Preferred stock dividends declared (10.3) -- --
Adjustment to net unrealized
gains -- (0.2) --
Foreign currency translation
adjustment -- -- 9.7
------------------------------------------------------------------------------
Balance,
December 31, 1992 (790.7) -- (1.9)
Net loss (641.8) -- --
Preferred stock dividends declared (17.8) -- --
Foreign currency translation
adjustment -- -- 1.1
------------------------------------------------------------------------------
Balance,
December 31, 1993 (1,450.3) -- (0.8)
Net income 77.7 -- --
Preferred stock dividends declared (17.8) -- --
Adjustment to net unrealized
gains -- 31.6 --
Foreign currency translation
adjustment -- -- 0.5
Deferred compensation on restricted
stock issued -- -- (2.7)
------------------------------------------------------------------------------
Balance,
December 31, 1994 $(1,390.4) $31.6 $ (3.0)
------------------------------------------------------------------------------
</TABLE>
-----------------------------------------------------------------------------
7: COMMON STOCK OPTIONS
-----------------------------------------------------------------------------
Armco shareholders adopted Common Stock Option Plans in 1977, 1983 and 1988.
In addition, stock options may be granted under the 1993 Long-Term Incentive
Plan. These plans provide generally for granting options to purchase common
stock for not less than 100% of the market price on the date the option is
granted. The 1977, 1983 and 1988 Plans have expired as to new grants. For
outstanding options containing stock appreciation rights, the excess of the
market price of the stock over the option price is accrued. Although they may
terminate earlier under certain conditions, stock options generally expire 10
years after they are granted. Options relating to 2,963,000 shares of stock
were available for granting at December 31, 1994 under the 1993 Long-Term
Incentive Plan.
38 ARMCO INC.
<PAGE>
On April 24, 1992, stock options granted to Cyclops employees and directors
prior to the acquisition were converted into Armco stock options with the same
terms and conditions as the original grants. The Cyclops options provided for
purchase of common stock for not less than 100% of the market price on the
date the options were granted, and generally expire five years after the date
of grant. However, options converted for members of the Cyclops board of
directors expired on April 24, 1993.
The following is summarized information relating to Armco common stock
options:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Number Option Price
of Shares Per Share
------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding December 31
1994 3,097,496 $3.24-13.69
1993 3,015,774 3.24-19.38
1992 3,741,252 3.24-19.38
------------------------------------------------------------------------------
Options exercisable December 31
1994 2,241,996 $3.24-13.69
1993 2,429,274 3.24-19.38
1992 3,741,252 3.24-19.38
------------------------------------------------------------------------------
Options exercised (including stock
appreciation rights)
1994 42,389 $3.24-5.94
1993 717,398 3.24-7.00
1992 119,580 3.24-5.94
------------------------------------------------------------------------------
</TABLE>
-----------------------------------------------------------------------------
8: SEGMENT INFORMATION
-----------------------------------------------------------------------------
Armco's business segments include: (1) Specialty Flat-Rolled Steel, which
includes businesses that produce electrical and stainless steel sheet and
strip for the industrial machinery and equipment, automotive, construction and
service center markets; international trading companies, that buy and sell
steel and manufactured steel products and, until September 30, 1994, a
stainless steel plate producer; and (2) Other Steel and Fabricated Products,
which, at December 31, 1994, included operations that produce carbon sheet and
strip, and tubular products for the industrial machinery, construction and
appliance markets, and a manufacturer of snowplows for four-wheel drive pickup
trucks and utility vehicles and other light truck equipment. During the
second quarter of 1994, Armco idled the carbon sheet and strip plants until
the completion of a new thin-slab caster, scheduled for early in the second
quarter of 1995. At various times during the three-year period ended December
31, 1994, the Other Steel and Fabricated Products segment also included other
businesses which have since been divested or identified for disposal (Note 9).
Such businesses included producers of stainless steel bar, rod and wire and
high temperature superalloys, and providers of nonresidential construction
products and services, and steel cutting, slitting, leveling, blanking and
other services.
Armco's industry segment information is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales:
Specialty Flat-Rolled Steel $1,048.5 $1,001.5 $ 885.5
Other Steel and Fabricated
Products 389.1 662.5 787.7
-----------------------------------------------------------------------
Total $1,437.6 $1,664.0 $1,673.2
-----------------------------------------------------------------------
Intersegment sales: (1)
Specialty Flat-Rolled Steel $ 0.1 $ 11.1 $ 7.1
Other Steel and Fabricated
Products 0.4 52.0 2.9
-----------------------------------------------------------------------
Special charges-net:
Specialty Flat-Rolled Steel $ (15.0) $ -- $ (37.6)
Other Steel and Fabricated
Products (20.0) (165.5) (129.8)
Corporate general -- -- (17.7)
-----------------------------------------------------------------------
Total $ (35.0) $ (165.5) $ (185.1)
-----------------------------------------------------------------------
Operating profit (loss): (2)
Specialty Flat-Rolled Steel $ 126.3 $ 75.5 $ 21.4
Other Steel and Fabricated
Products (54.9) (183.5) (128.5)
Corporate general (32.2) (38.0) (50.2)
-----------------------------------------------------------------------
Total $ 39.2 $ (146.0) $ (157.3)
-----------------------------------------------------------------------
Capital expenditures:
Specialty Flat-Rolled Steel $ 26.5 $ 17.1 $ 34.1
Other Steel and Fabricated
Products 69.1 36.0 24.1
Corporate general 0.8 0.8 1.2
-----------------------------------------------------------------------
Total $ 96.4 $ 53.9 $ 59.4
-----------------------------------------------------------------------
Depreciation and lease-right amortization:
Specialty Flat-Rolled Steel $ 29.8 $ 30.1 $ 27.0
Other Steel and Fabricated
Products 17.0 21.0 17.2
Corporate general 2.0 2.1 2.5
-----------------------------------------------------------------------
Total $ 48.8 $ 53.2 $ 46.7
-----------------------------------------------------------------------
Identifiable assets:
Specialty Flat-Rolled Steel $ 552.5 $ 614.3 $ 626.0
Other Steel and Fabricated
Products 384.9 380.9 570.9
Corporate general (3) 900.4 812.4 400.4
Discontinued operations 97.1 97.1 272.6
-----------------------------------------------------------------------
Total $1,934.9 $1,904.7 $1,869.9
-----------------------------------------------------------------------
<FN>
(1) Prices generally approximate cost. Intersegment sales are eliminated in
consolidation. Sales between foreign and domestic companies are not material.
(2) Operating profit (loss) includes the effects of Special charges-net.
(3) Corporate general identifiable assets in 1994 included $219.5 of cash and
liquid investments, $79.5 for the investment in National-Oilwell, current and
noncurrent deferred tax assets of $329.8 and goodwill and other intangible
assets of $130.1.
In 1992, the last year in which they were a significant portion of Armco's
results, foreign subsidiaries accounted for $228.0 of net sales, $19.7 of the
net loss and $127.4 of identifiable assets.
</TABLE>
ARMCO INC. 39
<PAGE>
-----------------------------------------------------------------------------
9: SPECIAL CHARGES
-----------------------------------------------------------------------------
In the first quarter of 1994, Armco recorded a special charge of $20.0 for
expenses associated with the temporary idling and restructuring of its
steelmaking facilities in Mansfield and Dover, Ohio. The decision to idle the
facilities came after the failure of a key piece of equipment at the Mansfield
plant crippled production, and management undertook a study to determine if
continuing losses could be reduced by idling the facilities. These facilities
have been idled since the second quarter of 1994, and the Mansfield plant is
expected to remain idle until construction of the new thin-slab continuous
caster is completed. The Dover operation started limited production in early
1995. Completion of the caster is scheduled for early in the second quarter
of 1995. The special charge consisted of $13.5 for employee benefits,
primarily group insurance and supplemental unemployment benefits; and $6.5 to
writedown inventories and fixed assets. During 1994, employee benefit
payments totaling $7.5 were made and an additional $2.5 are expected in the
first quarter of 1995. The remaining liability is recorded in Long-term
employee benefit obligations in the Statement of Consolidated Financial
Position.
In the third quarter of 1994, Armco recognized a charge of $15.0 related to a
decision by Eastern Stainless Corporation (Eastern Stainless) to sell
substantially all of its assets to Avesta Sheffield Holding Company (Avesta
Sheffield), a stainless steel plate manufacturer, for cash and the assumption
of certain liabilities. Approximately $9.0 of the charge is to cover
increases in pension and other employee benefit obligations, $1.8 is for the
writedown of assets, $3.2 is estimated for losses through the date of disposal
and $1.0 relates to transaction fees and expenses. No significant payments
have been made related to these amounts, though $2.4 of the reserve for losses
was used in 1994.
Armco will retain those net liabilities of Eastern Stainless that are not
assumed by Avesta Sheffield or satisfied by the sale proceeds. Those
liabilities are expected to total approximately $50.0. Upon completion of the
proposed transaction, scheduled for March 14, 1995, Armco anticipates that
Eastern Stainless will have no assets remaining as a corporate legal entity
and will be dissolved without any shareholder distribution. The proposed
transaction is subject to approval by the Eastern Stainless shareholders.
Since Armco owns approximately 84% of the Eastern Stainless voting stock and
intends to vote in favor of the proposed transaction, shareholder approval is
assured. The assets and liabilities to be sold to Avesta Sheffield are
recorded in Net assets held for sale in the Statement of Consolidated
Financial Position. The liabilities related to the charge are recorded
primarily in the Current portion of employee benefit obligations and Other
accruals.
In 1993, as part of its strategy to focus on the production of specialty flat-
rolled steel, Armco sold its Brazilian operations and decided to exit a number
of domestic businesses, recording special charges totaling $165.5. Of the
total, $15.0 related to the sale of Armco do Brasil S.A. and the remainder was
associated with the ultimate disposal of a nonresidential construction
business, a tubing plant, the stainless bar, rod and wire businesses, and the
conversion systems business. The special charges primarily include $52.1 for
the excess of carrying value of net assets over anticipated proceeds on
disposal, $78.0 for employee benefit costs and $29.5 for estimated losses
through the dates of disposal. Other components of the charges were expenses
related to provisions for legal and environmental matters and recognition of
previously deferred foreign currency translation adjustments, partially offset
by pension curtailment gains. Most of the charges were either non-cash or
will be paid over a long period. The employee benefit charges primarily
relate to long-term retirement benefits that will be paid over many years.
The reserves for future losses were, for the most part, utilized during 1994
and a small remainder of the miscellaneous reserves is held for final
settlement of transaction fees and property maintenance.
In 1992, Armco recorded special charges, totaling $185.1, associated with a
series of restructuring actions undertaken to reduce costs, improve
profitability and strengthen Armco's competitive position. These charges
included: $37.6 to close the Eastern Stainless melt shop and reduce salaried
work force at Armco's Specialty Flat-Rolled Steel operations; $32.6 related to
the sale of Armco's Venezuelan operations and closing a fabricating plant in
Heidelberg, Pennsylvania; and $101.4 to downsize plants in Baltimore, Maryland
and Bridgeville, Pennsylvania, and sell the Cytemp Specialty Steel plant in
Titusville, Pennsylvania. Armco also recognized a charge of $17.7 to
restructure corporate functions. Additional special charges - net in the
Other Steel and Fabricated Products segment in 1992 included a $5.4 gain on
the sale of Southwestern Ohio Steel and SOS Leveling Co., Inc. and $1.2 to
increase a reserve for the planned divestment of VSX Corporation. The total
special charge of $185.1 included $114.0 for employee benefit costs related to
the restructurings, $39.9 for continuing losses and excess carrying value of
net assets over the anticipated proceeds on disposal, with the remainder
comprised primarily of provisions for legal and environmental matters and the
recognition of previously deferred foreign currency translation adjustments.
These restructuring actions have been completed except for the payment of
retirement benefits, which will occur over a period of many years.
40 ARMCO INC.
<PAGE>
-----------------------------------------------------------------------------
10: LITIGATION AND ENVIRONMENTAL MATTERS
-----------------------------------------------------------------------------
First Taconite Company, a subsidiary of Armco, and a subsidiary of LTV
Corporation 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 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 and Armco
expects that either the purchase of such specified quantities or the approved
modification will occur in 1995.
There are various claims pending involving Armco and its subsidiaries
regarding product liability, patent, antitrust, environmental and hazardous
waste matters, reinsurance and insurance arrangements, and other matters
arising out of the conduct of Armco's business. In addition, Armco is involved
with various claims against Reserve Mining. If the claimants are successful in
such claims, Armco could become liable for these non-debt obligations in an
amount that could be substantial. The actual liability for legal claims
against Armco at December 31, 1994 cannot be determined; but in Armco's
opinion, based on current facts and circumstances, the ultimate liability
resulting from such claims will not materially affect its consolidated
financial position or liquidity. However, it is possible that due to
fluctuations in Armco's results, future developments with respect to such
matters could have a material effect on the results of operations of future
interim or annual periods.
Costs for compliance with statutes and regulations relating to environmental
protection are included in operating expense, except for capital expenditures,
which are included in property, plant and equipment with appropriate
depreciation. It is Armco's policy to accrue environmental exit costs when a
decision is made to dispose of a property. Armco has been named as a defendant
or identified as a potentially responsible party in various proceedings
regarding remediation of certain past waste disposal sites. Armco is also a
defendant in various private lawsuits alleging property damage and personal
injury related to some of its disposal sites, and has received claims for
indemnification for certain properties it has previously owned or leased. In
most cases involving waste disposal sites, Armco is one of many potentially
responsible parties. In these cases, joint and several liability could be
imposed on Armco or other parties, thus one party could be held liable for all
costs related to a site. However, based on its experience and a review of
current claims, Armco believes that in most cases any ultimate liability will
be apportioned between Armco and other financially viable parties, generally
on the basis of volume and/or toxicity of wastes disposed at the specific
sites. While such actions are being contested, the outcome of individual
matters cannot be predicted with assurance.
Reserves to cover costs related to environmental requirements, remediation of
identified off-site and on-site disposal sites, and other environmental
proceedings are established when it is probable that a liability has been
incurred and the amount of that liability can be reasonably estimated. In
establishing reserves, Armco assesses the range of possible liability and
determines the most likely outcome for each matter or, if that cannot be
determined, the lowest liability in the range of reasonably estimated
outcomes. Costs are estimated based on experience with site remediation, an
understanding of current environmental laws and regulations, environmental
assessments, the existence of other financially viable parties, expected
remediation methods and the years in which Armco is expected to make payments
toward each remediation (which range from the current year to 30 years or more
in the future). Liabilities are not discounted. These estimates are reviewed
quarterly to assess changed conditions, including current interpretation of
environmental laws and regulations. Adjustments are made if changed conditions
have a significant effect on cost estimates. Reserves have not been adjusted
for expected recoveries from insurers or other parties.
Based on current facts and circumstances known to Armco, and its most recent
assessment of individual sites for the purpose of preparing cost estimates
related to its environmental reserves, Armco believes that the ultimate
liability for environmental matters identified to date, will not materially
affect its consolidated financial condition or liquidity. 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 of future interim or annual periods.
Furthermore, the identification of additional sites, changes in known
circumstances with respect to identified sites, the failure of other 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 consolidated
financial condition, liquidity and results of operations in future interim or
annual periods. However, it is not possible to determine whether additional
loss, due to changed circumstances, will occur or to reasonably estimate the
amount or range of any potential additional loss.
In 1994, Armco recorded a $4.5 charge in Cost of products sold on the
Statement of Consolidated Operations to increase environmental and litigation
reserves. At December 31, 1994, Armco had recorded, in its Statement of
Consolidated Financial Position, $21.1 in Other accruals and $58.6 in Other
liabilities for estimated probable costs relating to legal and environmental
matters.
ARMCO INC. 41
<PAGE>
-----------------------------------------------------------------------------
11: EQUITY COMPANIES
-----------------------------------------------------------------------------
National-Oilwell
Effective April 1, 1987, Armco exchanged the business and certain net assets
of its oil field business for a 50% interest in National-Oilwell, a joint
venture equally owned by subsidiaries of Armco and USX Corporation (USX). USX
also transferred its oil field equipment and services operation to the joint
venture. National-Oilwell sells oil field tubular pipe, and produces and
sells drilling and production equipment, and process pumps used in the world's
oil and gas services industry. Armco does not consider National-Oilwell part
of its core business and, therefore, continues to evaluate options with
respect to its investment in this joint venture.
Armco's equity income in the joint venture for 1994 included net gains of $6.4
due to the sale of certain productive assets and lines of business. 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. Armco's equity
losses in 1992 included $3.3 for its portion of the charges recorded for the
shutdown and rationalization of certain of National-Oilwell's manufacturing
facilities.
The following is summarized financial information for National-Oilwell at
December 31, 1994, 1993 and 1992, and for the years then ended:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 240.0 $ 296.5 $ 291.1
Noncurrent assets 28.3 47.0 80.8
Current liabilities 88.2 141.7 147.9
Noncurrent liabilities 18.2 31.1 31.4
Net sales 562.1 627.3 569.9
Gross profit 79.6 79.5 60.6
Special credits (charges) 13.9 (8.2) (5.2)
Operating profit (loss) 29.1 (8.1) (31.5)
Income (loss) before cumulative
effect of accounting change 23.9 (17.5) (36.3)
Net income (loss) 23.9 (17.5) (35.1)
-----------------------------------------------------------------------
</TABLE>
Armco received a cash dividend from National-Oilwell of $15.5 in 1994.
National-Oilwell maintains its own cash and credit lines and funds its own
operations, liabilities and capital expenditures. National-Oilwell has
worldwide credit facilities totaling approximately $50.0. The primary
facility matures on March 22, 1995, and is expected to be replaced with a new
agreement on or before that date.
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 Holding Corporation (AK Steel), a newly formed,
publicly traded company. In exchange for its interest in ASC, Armco received
1,023,987 shares of AK Steel common stock, representing approximately four
percent of the outstanding shares. Due to the level of ownership interest,
Armco does not account for AK Steel under the equity method of accounting,
and, as a result, Armco's results will not be affected by AK Steel's future
net income or loss. 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 this transaction, Armco recognized a nonrecurring pretax gain
in 1994 of $36.5, primarily as a result of the release from certain
obligations, discussed above, and recognition of deferred pension curtailment
gains established at ASC's formation. At the same time, Armco reevaluated its
deferred tax asset position in light of this transaction and concluded that
the amount of deferred tax asset, for which realization of a future benefit is
more likely than not, had increased by $30.0. In addition, should Armco
decide to sell its shares in AK Steel, it would recognize a gain equal to the
net proceeds received upon such sale. At December 31, 1994, the stock held by
Armco had a market value of $31.5. The market value of this stock was $26.1
as of January 31, 1995.
In 1992, ASC recorded an extraordinary charge of $12.1 to establish an
estimated liability for retiree benefits under the Coal Industry Retiree
Health Benefit Act, signed into law during the year. This resulted in Armco
recording a charge in Extraordinary losses of $6.1.
Under a toll-rolling agreement which is in effect through the year 2002, AK
Steel hot rolls stainless steel for Armco. AK Steel continues to purchase
stainless steel from Armco's Butler facility.
North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS
through their respective subsidiaries, First Stainless, Inc. and Stainless
Steel Invest, Inc. In the third quarter of 1994, First Stainless, Inc. sold
90% of its 50% equity interest in NAS to its partner for $73.0 in cash and
Armco recorded a $26.1 gain on the sale. Through its subsidiary, First
Stainless, Inc., Armco maintains a 5% limited partnership interest in NAS. In
connection with the transaction, Armco entered into an annual supply contract
with NAS to provide the former joint venture with semi-finished stainless
steel at market prices.
42 ARMCO INC.
<PAGE>
-----------------------------------------------------------------------------
12: EASTERN STAINLESS CORPORATION
-----------------------------------------------------------------------------
Armco owns all of the Class A common stock of Eastern Stainless, representing
approximately 84% of the outstanding voting rights. Eastern Stainless Class B
common stock, which is publicly traded, has the remaining voting rights.
In 1994, Eastern Stainless announced a decision to sell substantially all of
its assets to Avesta Sheffield for cash and the assumption of certain
liabilities (Notes 5 and 9). The Eastern Stainless assets and liabilities to
be sold are recorded in Net assets held for sale in Armco's Statement of
Consolidated Financial Position. Eastern Stainless had sales of $52.8 and an
operating loss of $5.9 during the first nine months of 1994.
The payment of dividends on, or the redemption of, Eastern Stainless' Class A
common shares and its Class B common shares is subject to certain covenants
contained in agreements entered into by Eastern Stainless or Armco. In the
event of liquidation, dissolution or winding up of Eastern Stainless,
voluntary or involuntary, the holders of the Class B common stock are entitled
to be paid out of Eastern Stainless' assets an amount in cash equal to $1 per
share plus accrued and unpaid fixed and participating dividends or, if
sufficient assets are not available for such distributions, a pro-rated share
of such lesser amount as may be available, before any distribution to Armco.
Upon completion of the proposed transaction, Armco anticipates that Eastern
Stainless will have no assets remaining as a corporate legal entity and that
it will be dissolved without any distributions to the Class A or Class B
shareholders.
-----------------------------------------------------------------------------
13: WORLDWIDE GRINDING SYSTEMS - DISCONTINUED OPERATIONS
-----------------------------------------------------------------------------
Armco's former Worldwide Grinding Systems segment consisted of foreign and
domestic businesses that produced grinding balls and rods, abrasion-resistant
castings, liners, process control systems and carbon wire rods. Armco also
participated in grinding system and wire rod joint ventures in the United
States and certain foreign countries through this segment.
On September 28, 1993, Armco completed the sale of a 50% joint venture
interest in several wire-drawing operations and received $33.0 in net cash
proceeds. On November 11, 1993, Armco sold the remaining businesses in this
segment for $75.0, including certain post closing adjustments, and
accordingly, the results of this segment are reported as discontinued
operations. Armco recorded a charge of $40.0 for losses and expenses
associated with the decision to dispose of this segment, including $5.8 to
recognize previously unrealized foreign translation losses.
Net sales for the segment were $300.7 in the nine months ended September 30,
1993, and $400.4 in 1992. These amounts are not included in Armco's
consolidated net sales. Income from operations in 1992 includes a charge of
$19.1 to close unprofitable European foundry operations and reduce salaried
work force at the Worldwide Grinding Systems plant in Kansas City, Missouri.
-----------------------------------------------------------------------------
14: QUARTERLY INFORMATION (Unaudited)
-----------------------------------------------------------------------------
The following is quarterly information for Armco for 1994 and 1993:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
4th 3rd 2nd 1st
1994 Year Qtr. Qtr. Qtr. Qtr.
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,437.6 $ 335.1 $ 368.0 $ 354.9 $ 379.6
Cost of products
sold (1,267.0) (287.5) (316.5) (316.3) (346.7)
Special charges (1) (35.0) -- (15.0) -- (20.0)
Gain on investments
in joint ventures 62.6 -- 26.1 36.5 --
Net income (loss) 77.7 9.6 25.4 69.9 (27.2)
Per share:
Net income (loss) 0.57 0.05 0.20 0.63 (0.30)
1993:
-----------------------------------------------------------------------------
Net sales $1,664.0 $ 363.5 $ 419.8 $ 454.1 $ 426.6
Cost of products
sold (1,519.5) (341.7) (385.0) (405.6) (387.2)
Special charges (1) (165.5) -- (165.5) -- --
Income (loss) from
discontinued
operations (70.8) (45.0) (35.0) 10.1 (0.9)
Income (loss) before
extraordinary items and
accounting changes (327.0) (90.7) (223.0) 8.7 (22.0)
Extraordinary losses (7.3) (7.3) -- -- --
Cumulative effect of
accounting changes (307.5) -- -- -- (307.5)
Net income (loss) (641.8) (98.0) (223.0) 8.7 (329.5)
Per share:
Income (loss) before
extraordinary items and
accounting changes (3.32) (0.92) (2.19) 0.04 (0.25)
Extraordinary losses (0.07) (0.07) -- -- --
Cumulative effect of
accounting changes (2.96) -- -- -- (2.97)
Net income (loss) (6.35) (0.99) (2.19) 0.04 (3.22)
-----------------------------------------------------------------------------
<FN>
(1) See Note 9.
Effective in the first quarter of 1993, Armco adopted three new accounting
standards described in Notes 2 and 4.
In the fourth quarter of 1994, Armco recognized $1.6 in gains on the sale of
various assets and $2.0 for its equity portion of National-Oilwell's gains on
the sale of certain productive assets and businesses.
In the fourth quarter of 1993, Armco recognized extraordinary losses related
to the early retirement of debt of $7.3 or $.07 per share.
</TABLE>
ARMCO INC. 43
<PAGE>
<TABLE>
Price Range and Dividends of Armco Stock (Unaudited)
<CAPTION>
Common Stock 1993 Price per share 1994 Price per share
------------------------------------------- -------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $8-3/8 $8 $7-1/2 $6-3/8 $6-7/8 $6-3/8 $6-5/8 $7-3/8
Low $6 $6-5/8 $6 $4-7/8 $4-5/8 $4-1/2 $5-1/2 $5-7/8
Preferred Stock
<CAPTION>
Class A $2.10 1993 Price per share 1994 Price per share
------------------------------------------- -------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $27-1/2 $26-5/8 $26-7/8 $25-7/8 $29 $25 $24-1/8 $23-3/4
Low $21 $24-1/8 $25-3/8 $23-5/8 $23-1/8 $23-1/2 $23 $19-3/4
Dividend per share: Dividend per share:
.525 .525 .525 .525 .525 .525 .525 .525
<CAPTION>
Class A $3.625 1993 Price per share 1994 Price per share
------------------------------------------- -------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $65-1/4 $65-1/4 $61 $56-3/4 $58-7/8 $54-1/2 $54 $54-1/2
Low $55-1/4 $58-3/8 $55-1/4 $51 $49 $46 $51-5/8 $47-1/2
Dividend per share: Dividend per share:
.90625 .90625 .90625 .90625 .90625 .90625 .90625 .90625
<CAPTION>
Class B $4.50 1993 Price per share 1994 Price per share
------------------------------------------- -------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd 3rd Qtr. 4th Qtr.
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $49-1/2 $49-7/8 $50-3/4 $50-3/4 $51-7/8 $49-1/2 $47-3/4 $46-3/8
Low $42-1/8 $47-3/4 $49-1/8 $49 $48 $46-1/2 $45-7/8 $41
Dividend per share: Dividend per share:
1.125 1.125 1.125 1.125 1.125 1.125 1.125 1.125
</TABLE>
48 ARMCO INC.
<TABLE>
<PAGE>
Exhibit 21
ARMCO INC.
SUBSIDIARIES
State/Country of
Name Incorporation
------- -----------------
<S> <C>
Advanced Materials Processing, Inc. Delaware
AH (UK) Inc. Delaware
AJV Investments Corp. Delaware
Armco Advanced Materials, Inc. Delaware
Armco Argentina S.A. Argentina
Armco Caribbean Corporation Puerto Rico
Armco Chile Productos de Ingenieria S.A. (Prodein) Chile
Armco da Amazonia Ltda. Brazil
Armco Finance (U.K.) Limited United Kingdom
Armco Financial Holdings Corporation Delaware
Armco Financial Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco GmbH Germany
Armco Grundstucksverwaltungs GmbH Germany
Armco Insurance Group Inc. Delaware
Armco Investment Management, Inc. Delaware
Armco Limited United Kingdom
Armco Management Corporation Delaware
Armco Merchandising Limited United Kingdom
Armco Merchandising S.A. Belgium
Armco Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Armco Participacoes e Empreendimentos Ltda. Brazil
Armco Resources Pty. Ltd. Australia
Armco S.A. Spain
Armco SARL France
Armco SMM srl Italy
Armco Steel Corporation Ohio
</TABLE>
<PAGE>
<TABLE>
State/Country of
Name Incorporation
------- -----------------
<S> <C>
Armco Wire Company Delaware
Black River Lime Company Ohio
Certified Finance Corporation Texas
Compass Insurance Company Delaware
Cyclops, Inc. Delaware
Cyclops International Limited United Kingdom
Delvelesson Limited United Kingdom
Dorcan International Corporation S.A. Uruguay
Douglas Dynamics, Inc. Wisconsin
Everest International, Inc. Ohio
Exim Overseas Inc Ohio
FSA Services Corp. Delaware
First Stainless, Inc. Delaware
First Taconite Company Delaware
Flour City Architectural Metals, Inc. Delaware
Insurance Management Corporation Texas
Inversiones Armco S.A. (IASA) Chile
Materials Insurance Company Cayman Islands
NN Insurance Company Wisconsin
National Supply Company, Inc. Delaware
The National Supply Company of Mexico, S.A. Mexico
New Village Homes, Ltd. Delaware
Northern Land Company Minnesota
Northwestern National Casualty Company Wisconsin
Northwestern National County Texas
Mutual Insurance Company of Texas
Northwestern National Holding Company, Inc. Delaware
Northwestern National Insurance Company Wisconsin
of Milwaukee, Wisconsin
Northwestern National Lloyds Insurance Company Texas
Oweco Limited Scotland
Pacific Automobile Insurance Company California
</TABLE>
<PAGE>
<TABLE>
State/Country of
Name Incorporation
------- -----------------
<S> <C>
Pacific National Insurance Company California
PROCNE Corp. Ohio
Reserve Mining Company Minnesota
Shalmet-US, Inc. Delaware
SICO, Inc. Indiana
Statesman Insurance Company Indiana
Strata Energy, Inc. Ohio
Talbico, Inc. New York
Timeco, Inc. Indiana
VSX Corporation Delaware
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-24258, 33-24259, 33-47468, 33-54351, 33-54353, 33-54355, and 33-
65946 and in Post-Effective Amendment No. 1 to Registration Statement
Nos. 33-20852 and 33-20853 of Armco Inc. on Form S-8 of our reports
dated February 3, 1995 on the financial statements and financial
statement schedule of Armco Inc. and consolidated subsidiaries and our
report dated March 15, 1995 on the financial statements and financial
statement schedules of Armco Financial Services Group - Companies to be
Sold, appearing in and incorporated by reference in this Annual Report
on Form 10-K of Armco Inc. for the year ended December 31, 1994.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 28, 1995
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-24258, 33-24259, 33-47468, 33-54351, 33-
54353, 33-54355 and 33-65946) of Armco, Inc. of our report dated January
26, 1995, with respect to the consolidated financial statements of
National-Oilwell and subsidiaries included in the Armco, Inc. Annual
Report (Form 10-K) for the year ended December 31, 1994.
Ernst & Young LLP
Houston, Texas
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 202,800
<SECURITIES> 0
<RECEIVABLES> 187,400
<ALLOWANCES> 4,100
<INVENTORY> 165,500
<CURRENT-ASSETS> 649,000
<PP&E> 1,064,200
<DEPRECIATION> 499,600
<TOTAL-ASSETS> 1,934,900
<CURRENT-LIABILITIES> 390,400
<BONDS> 363,800
<COMMON> 957,400
0
185,900
<OTHER-SE> (1,361,800)
<TOTAL-LIABILITY-AND-EQUITY> 1,934,900
<SALES> 1,437,600
<TOTAL-REVENUES> 1,437,600
<CGS> 1,267,000
<TOTAL-COSTS> 1,267,000
<OTHER-EXPENSES> 35,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,800
<INCOME-PRETAX> 33,700
<INCOME-TAX> (28,700)
<INCOME-CONTINUING> 77,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,700
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.61
<FN>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ARMCO INC. STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND
CONSOLIDATED OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES
Notes to Schedule P
(1) The Parts of Schedule P:
Part 1 -- detailed information on losses and loss expenses.
Part 2 -- history of incurred losses and allocated expenses.
Part 3 -- history of loss an allocated expense payments.
Part 4 -- history of bulk and incurred-but-not reported reserves.
Part 5 -- history of claims.
Part 6 -- history of premiums earned.
Schedule P Interrogatories
(2) Lines of business A through H, R and S are groupings of the lines of
business used in Page 14, the state page.
(3) Reinsurance A,B, C, and D (lines 11 to 0) are:
Reinsurance A = nonproportional property (1988 and subsequent)
Reinsurance B = nonproportional liability (1988 and subsequent)
Reinsurance C = financial lines (1988 and subsequent)
Reinsurance D = old Schedule 0 line 30 (1987 and prior)
SCHEDULE P - PART 1 - SUMMARY
(000 omitted)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct and Direct and Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed Assumed Ceded Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 2,771 2,365 1,198 1,055 9 87 635 X X X X
2. 1985... 183,143 132,945 50,198 121,925 89,417 15,108 11,677 1,559 4,413 40,352 X X X X
3. 1986... 237,661 72,541 165,120 49,368 (18,306) (1,978) (8,698) 9,077 17,489 91,883 X X X X
4. 1987... 208,464 25,783 182,680 102,427 9,394 9,458 790 3,396 11,951 113,652 X X X X
5. 1988... 247,425 33,421 214,004 133,220 19,685 10,967 1,207 3,869 13,310 136,604 X X X X
6. 1989... 282,498 37,848 244,650 169,196 20,023 13,282 1,067 4,720 14,455 175,843 X X X X
7. 1990... 278,766 18,614 260,153 165,377 4,007 12,828 168 6,160 14,930 188,960 X X X X
8. 1991... 265,384 14,707 250,677 153,422 5,902 10,396 96 4,205 13,666 171,485 X X X X
9. 1992... 252,899 13,158 239,740 124,555 4,306 6,964 156 3,336 12,027 139,086 X X X X
10. 1993... 241,779 15,754 226,025 99,937 2,218 5,157 91 2,539 9,913 112,717 X X X X
11. 1994... 231,898 14,832 217,065 63,990 1,554 2,385 26 1,903 7,632 72,427 X X X X
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 1,186,188 140,564 85,764 7,615 40,772 119,872 1,243,645 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 8,999 7,056 1,566 1,123 706 620 177 2,649 X X X X
2. 1985... 451 380 953 815 734 667 16 293 X X X X
3. 1986... 11,520 4,357 1,433 (84) 672 (518) 23 466 10,336 X X X X
4. 1987... 1,253 60 778 186 575 29 94 2,454 X X X X
5. 1988... 3,312 351 1,577 289 710 175 236 5,196 X X X X
6. 1989... 5,258 179 2,726 451 1,836 403 416 9,607 X X X X
7. 1990... 12,580 3,497 3,643 862 2,971 99 604 15,439 X X X X
8. 1991... 17,355 2,816 5,762 1,293 6,822 721 903 26,732 X X X X
9. 1992... 19,225 7 11,918 1,970 7,922 1,688 1,470 38,558 X X X X
10. 1993... 37,508 4,657 22,017 2,971 9,263 250 1,977 2,583 63,493 X X X X
11. 1994... 57,283 4,878 32,545 3,175 11,679 350 2,918 3,785 96,888 X X X X
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 174,743 28,237 84,919 13,051 43,889 1,369 8,033 10,751 271,644 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,385 263
2. 1985... 143,601 102,957 40,644 78.4 77.4 81.0 209 83
3. 1986... 78,970 (23,249) 102,219 33.2 (32.0) 61.9 8,680 1,656
4. 1987... 126,536 10,430 116,106 60.7 40.5 63.6 1,785 669
5. 1988... 163,333 21,532 141,800 66.0 64.4 66.3 4,249 946
6. 1989... 207,169 21,719 185,450 73.3 57.4 75.8 7,354 2,252
7. 1990... 212,932 8,534 204,399 76.4 45.8 78.6 11,864 3,575
8. 1991... 208,324 10,107 198,218 78.5 68.7 79.1 19,008 7,724
9. 1992... 184,082 6,438 177,644 72.8 48.9 74.1 29,167 9,391
10. 1993... 186,378 10,168 176,209 77.1 64.5 78.0 51,897 11,596
11. 1994... 179,298 9,982 169,315 77.3 67.3 78.0 81,775 15,114
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 218,374 53,270
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
72
<PAGE>
SCHEDULE P - PART 2 - SUMMARY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 Incurred Losses and Allocated Expenses Reported At Year End (000 omitted) Development
Years in Which -------------------------------------------------------------------------------------------------------------
Losses 2 3 4 5 6 7 8 9 10 11 12 13
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 One Year Two Year
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 21,392 29,403 29,997 30,397 30,803 32,089 31,395 31,190 31,935 32,381 446 1,191
2. 1985....... 36,373 34,363 35,104 37,119 36,352 36,625 36,194 36,139 36,159 36,215 55 75
3. 1986....... X X X X 89,274 85,369 86,439 77,794 80,931 81,698 82,947 83,821 84,264 443 1,318
4. 1987....... X X X X X X X X 105,374 100,983 101,348 100,569 101,918 103,376 104,007 104,062 55 685
5. 1988....... X X X X X X X X X X X X 129,174 128,066 126,314 125,665 125,919 127,161 128,254 1,093 2,334
6. 1989....... X X X X X X X X X X X X X X X X 164,547 164,154 167,044 169,201 169,390 170,579 1,189 1,377
7. 1990....... X X X X X X X X X X X X X X X X X X X X 178,800 182,929 187,289 188,499 188,865 367 1,576
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X 187,052 185,877 186,254 183,650 (2,604) (2,227)
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 173,221 170,305 164,147 (6,158) (9,074)
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 160,747 163,713 2,996 X X X X
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 157,898 X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
12. Totals............................................................................................... (2,149) (2,744)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3 - SUMMARY
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
12 13
Number of Number of
1 Cumulative Paid Losses and Allocated Expenses Reported At Year End (000 omitted) Claims Claims
Years in Which ----------------------------------------------------------------------------------------- Closed Closed
Losses 2 3 4 5 6 7 8 9 10 11 With Loss Without Loss
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Payment Payment
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000 11,854 19,278 23,142 27,206 28,083 28,092 28,689 29,361 29,910 X X X X X X X X
2. 1985....... 14,317 24,050 28,227 31,696 33,693 35,044 35,513 35,682 35,832 35,939 X X X X X X X X
3. 1986....... X X X X (52,566) (2,193) 26,309 43,941 54,595 62,295 67,993 71,217 74,394 X X X X X X X X
4. 1987....... X X X X X X X X 37,479 63,163 76,330 86,722 92,100 95,541 99,988 101,701 X X X X X X X X
5. 1988....... X X X X X X X X X X X X 48,345 80,355 96,210 108,220 115,013 118,990 123,294 X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X 64,541 109,151 132,291 146,664 155,229 161,389 X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X 79,057 127,462 151,494 165,581 174,030 X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X 76,562 123,017 144,222 157,820 X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 73,544 110,580 127,058 X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 65,662 102,804 X X X X X X X X
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 64,795 X X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4 - SUMMARY
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 Bulk and Incurred But Not Reported Reserves on Losses and Allocated Expenses at Year End (000 omitted)
Years in Which -----------------------------------------------------------------------------------------------------------
Losses 2 3 4 5 6 7 8 9 10 11
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 2,308 2,067 62 1,182 913 1,598 1,144 879 614 528
2. 1985....... 6,812 1,479 921 1,746 809 752 326 284 199 206
3. 1986....... X X X X 38,727 24,296 19,796 9,135 8,522 5,604 3,809 3,175 2,707
4. 1987....... X X X X X X X X 25,400 15,680 10,037 4,383 2,359 1,907 1,214 1,167
5. 1988....... X X X X X X X X X X X X 38,340 18,122 9,595 4,972 2,987 2,525 1,998
6. 1989....... X X X X X X X X X X X X X X X X 45,705 19,931 10,175 7,835 5,394 4,111
7. 1990....... X X X X X X X X X X X X X X X X X X X X 47,933 21,208 12,049 7,929 5,752
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X 55,812 26,806 18,993 11,290
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 50,834 29,430 17,870
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 43,855 28,059
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 40,698
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1A - HOMEOWNERS/FARMOWNERS
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X (2) 7 (8) (3) X X X X
2. 1985... 16,563 9,404 7,159 10,731 6,652 816 320 74 574 5,149 2
3. 1986... 17,239 4,294 12,945 3,082 (1,598) (157) (658) 354 1,441 6,621 7
4. 1987... 13,129 898 12,231 6,726 304 454 1 151 1,075 7,950 19
5. 1988... 12,122 701 11,420 6,972 271 317 5 69 1,521 8,534 339
6. 1989... 11,449 719 10,730 6,306 52 334 68 1,052 7,641 4,421
7. 1990... 10,921 758 10,163 7,022 3 371 189 833 8,223 4,502
8. 1991... 11,302 669 10,633 7,969 (0) 350 80 779 9,098 3,518
9. 1992... 12,106 837 11,269 8,582 409 54 650 9,641 4,969
10. 1993... 12,061 1,488 10,573 8,463 68 418 0 61 538 9,352 4,634
11. 1994... 11,496 1,109 10,386 7,876 284 8 386 8,546 5,101
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 73,728 5,752 3,603 (332) 1,108 8,842 80,752 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 13 13 26 1
2. 1985...
3. 1986...
4. 1987...
5. 1988... 15 0 15 1
6. 1989... 25 1 26 1
7. 1990... 50 1 51 2
8. 1991... 386 89 10 11 486 10
9. 1992... 582 146 28 17 746 21
10. 1993... 460 312 128 10 32 932 51
11. 1994... 1,854 1,039 326 68 115 3,334 417
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 3,384 1,351 690 116 191 5,616 504
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13 13
2. 1985... 12,122 6,972 5,149 73.2 74.1 71.9
3. 1986... 4,365 (2,256) 6,621 25.3 (52.5) 51.1
4. 1987... 8,254 305 7,950 62.9 33.9 65.0
5. 1988... 8,826 276 8,549 72.8 39.4 74.9 15 0
6. 1989... 7,719 52 7,667 67.4 7.2 71.4 25 1
7. 1990... 8,277 3 8,274 75.8 0.4 81.4 50 1
8. 1991... 9,584 (0) 9,584 84.8 (0.0) 90.1 386 100
9. 1992... 10,387 10,387 85.8 92.2 582 164
10. 1993... 10,352 68 10,284 85.8 4.6 97.3 772 160
11. 1994... 11,880 11,880 103.3 114.4 2,893 441
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,736 881
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
<TABLE>
<CAPTION>
(000 omitted)
-----------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were ------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported -
Losses Were and Ceded (2-3) Direct Direct Subrogation Expense (5-6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 72 72 13 13 0 (0) (0) X X X X
2. 1985... 26,594 14,595 11,998 21,972 11,549 1,453 647 452 1,369 12,597 39
3. 1986... 31,640 8,915 22,725 10,668 (4,996) (339) (826) 704 2,782 18,933 110
4. 1987... 30,212 3,847 26,365 24,895 2,492 1,248 128 300 2,589 26,112 363
5. 1988... 36,791 6,257 30,534 27,766 4,602 1,512 234 344 2,903 27,345 1,600
6. 1989... 41,228 8,576 32,652 32,506 6,350 1,620 199 392 2,656 30,233 8,684
7. 1990... 40,804 1,242 39,562 32,502 197 1,436 4 444 2,873 36,610 8,523
8. 1991... 37,805 691 37,114 28,148 1,128 366 2,295 31,571 7,428
9. 1992... 41,324 440 40,884 26,108 774 309 1,649 28,531 10,763
10. 1993... 39,580 508 39,072 20,184 601 (0) 285 1,275 21,060 9,419
11. 1994... 38,499 854 37,645 9,663 357 150 843 10,864 7,871
-----------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 234,485 20,266 9,803 399 3,745 21,232 244,855 X X X X
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------------------ 21 22 23 24
Case Basis Bulk + IBNR Case Basis Bulk + IBNR Total Number of
------------------------------------------------------------------------------ Net Claims
13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding-
and Loss and Direct
Direct Direct Direct Direct Subrogation Expenses Expenses and
and Assumed Ceded and Assumed Ceded and Assumed Ceded and Assumed Ceded Anticipated Unpaid Unpaid Assumed
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 37 37 18 18
2. 1985... 30 15 6 6 27 4
3. 1986... 2,626 2,550 9 2 87 5
4. 1987... 111 63 29 3 177 6
5. 1988... 320 12 112 38 9 453 10
6. 1989... 190 310 69 75 21 590 23
7. 1990... 794 306 100 376 47 43 1,418 48
8. 1991... 1,964 746 100 673 104 107 3,390 98
9. 1992... 4,255 1,396 100 975 263 219 6,744 235
10. 1993... 7,429 3,552 100 1,051 320 446 12,378 636
11. 1994... 14,295 415 5,421 100 1,208 412 746 21,154 2,425
-----------------------------------------------------------------------------------------------------------------------------------
12. Totals. 32,050 3,017 11,743 500 4,560 1,288 1,601 46,437 3,490
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Net Balance
Total Losses and Loss and Loss Expense Percentage Discount for Time Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------ -----------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18
2. 1985... 24,835 12,211 12,624 93.4 83.7 105.2 15 12
3. 1986... 15,749 (3,272) 19,020 49.8 (36.7) 83.7 76 11
4. 1987... 28,908 2,620 26,288 95.7 68.1 99.7 111 66
5. 1988... 32,633 4,836 27,798 88.7 77.3 91.0 332 121
6. 1989... 37,372 6,549 30,823 90.6 76.4 94.4 500 90
7. 1990... 38,329 301 38,029 93.9 24.2 96.1 1,000 419
8. 1991... 35,061 100 34,961 92.7 14.5 94.2 2,610 780
9. 1992... 35,376 100 35,276 85.6 22.7 86.3 5,551 1,194
10. 1993... 34,538 100 34,438 87.3 19.7 88.1 10,881 1,497
11. 1994... 32,533 515 32,018 84.5 60.3 85.1 19,201 1,954
-------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 40,276 6,161
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 2 2 1 0 3 X X X X
2. 1985... 17,348 12,199 5,150 9,609 6,007 1,441 1,087 34 375 4,331 7
3. 1986... 24,583 5,873 18,710 (1,704) (10,008) (728) (1,077) 471 1,580 10,233 20
4. 1987... 21,057 184 20,873 11,316 263 939 62 134 1,208 13,138 53
5. 1988... 28,706 3,032 25,674 14,222 946 1,558 71 259 1,058 15,822 160
6. 1989... 32,567 3,970 28,597 23,167 2,849 2,259 233 444 1,388 23,731 4,435
7. 1990... 29,318 1,282 28,035 16,170 113 1,465 2 233 1,335 18,855 4,403
8. 1991... 27,867 986 26,880 19,066 1,246 1,260 30 164 1,371 20,421 4,111
9. 1992... 24,994 745 24,250 10,966 66 639 7 94 1,159 12,690 3,609
10. 1993... 23,284 863 22,421 9,562 383 648 10 100 959 10,776 3,540
11. 1994... 22,152 700 21,452 3,594 118 50 688 4,400 2,835
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 115,969 1,867 9,601 424 1,985 11,121 134,400 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 3 3 32 32 3 3
2. 1985... 45 30 2 2 13 13 15 2
3. 1986... 597 452 25 0 0 0 6 176 6
4. 1987... 23 8 1 31
5. 1988... 435 9 12 456 8
6. 1989... 234 43 107 9 392 8
7. 1990... 847 180 64 32 1,122 31
8. 1991... 1,063 1 632 100 765 48 56 2,415 42
9. 1992... 1,818 (8) 1,501 200 819 117 118 4,064 87
10. 1993... 6,853 451 2,614 266 852 129 301 9,904 267
11. 1994... 6,421 500 4,063 200 1,252 100 148 374 11,311 674
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 18,339 1,428 9,108 800 3,875 116 442 909 29,886 1,125
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
2. 1985... 11,485 7,139 4,346 66.2 58.5 84.4 15
3. 1986... (223) (10,633) 10,410 (0.9) (181.0) 55.6 171 6
4. 1987... 13,494 325 13,169 64.1 176.3 63.1 30 1
5. 1988... 17,294 1,016 16,277 60.2 33.5 63.4 444 12
6. 1989... 27,206 3,083 24,123 83.5 77.6 84.4 277 116
7. 1990... 20,092 115 19,977 68.5 9.0 71.3 1,026 96
8. 1991... 24,213 1,377 22,836 86.9 139.6 85.0 1,594 821
9. 1992... 17,020 266 16,754 68.1 35.7 69.1 3,127 937
10. 1993... 21,789 1,110 20,680 93.6 128.7 92.2 8,751 1,153
11. 1994... 16,511 800 15,711 74.5 114.3 73.2 9,785 1,526
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 25,219 4,668
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1D - WORKERS' COMPENSATION
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 1,442 1,250 79 55 2 76 292 X X X X
2. 1985... 33,475 25,911 7,563 26,161 21,478 1,762 1,212 50 538 5,772 15
3. 1986... 32,438 8,654 23,784 15,367 (367) 264 (182) 2,397 3,504 19,684 214
4. 1987... 31,372 2,096 29,276 19,729 372 1,617 18 1,006 2,189 23,145 102
5. 1988... 45,908 207 45,701 29,800 426 2,167 18 933 3,433 34,956 544
6. 1989... 60,067 3,022 57,045 38,332 333 2,647 16 876 4,137 44,767 14,714
7. 1990... 56,728 2,049 54,679 37,828 358 3,015 31 2,071 4,413 44,867 13,624
8. 1991... 54,391 1,127 53,265 29,336 240 1,623 3 508 4,145 34,861 11,964
9. 1992... 51,079 820 50,258 20,632 27 1,267 0 377 3,833 25,705 11,971
10. 1993... 54,777 887 53,890 17,543 738 153 3,139 21,419 9,858
11. 1994... 53,312 842 52,470 7,755 228 32 2,113 10,096 7,527
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 243,925 24,117 15,406 1,170 8,405 31,520 265,563 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 3,860 3,226 1,072 634 187 170 33 1,122 217
2. 1985... 179 149 559 430 94 71 11 193 3
3. 1986... 5,142 1,229 952 145 126 42 238 5,043 195
4. 1987... 793 60 437 10 66 1,245 43
5. 1988... 1,736 101 811 50 63 137 123 2,582 88
6. 1989... 3,183 179 780 100 431 328 174 4,289 239
7. 1990... 7,033 2,557 1,060 150 563 52 248 6,198 386
8. 1991... 8,619 1,957 1,632 200 790 490 372 9,256 513
9. 1992... 7,242 3,773 300 1,047 699 618 12,379 700
10. 1993... 12,154 2,235 7,689 375 1,867 150 917 998 19,948 926
11. 1994... 15,659 1,847 12,179 375 2,263 150 878 1,308 29,038 1,869
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 65,601 13,539 30,943 2,760 7,442 584 3,501 4,189 91,293 5,179
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,072 50
2. 1985... 29,305 23,340 5,964 87.5 90.1 78.9 159 34
3. 1986... 25,594 868 24,726 78.9 10.0 104.0 4,720 322
4. 1987... 24,840 450 24,390 79.2 21.5 83.3 1,170 76
5. 1988... 38,133 595 37,538 83.1 287.3 82.1 2,396 186
6. 1989... 49,683 628 49,056 82.7 20.8 86.0 3,685 605
7. 1990... 54,161 3,096 51,065 95.5 151.1 93.4 5,386 811
8. 1991... 46,517 2,401 44,117 85.5 213.1 82.8 8,094 1,162
9. 1992... 38,411 327 38,084 75.2 39.9 75.8 10,714 1,665
10. 1993... 44,127 2,760 41,368 80.6 311.0 76.8 17,233 2,715
11. 1994... 41,506 2,372 39,134 77.9 281.6 74.6 25,617 3,421
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 80,246 11,048
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
77
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1E - COMMERCIAL MULTIPLE PERIL
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 152 69 98 132 2 51 X X X X
2. 1985... 35,108 30,506 4,601 21,497 19,534 2,571 2,225 56 270 2,579 3
3. 1986... 50,068 17,572 32,496 2,572 (3,407) (30) (2,163) 1,122 2,018 10,130 14
4. 1987... 42,073 7,507 34,566 14,318 2,469 2,147 140 96 1,428 15,284 20
5. 1988... 43,207 7,524 35,683 22,538 9,202 2,545 488 364 1,118 16,510 81
6. 1989... 46,286 6,442 39,844 23,777 4,299 3,092 310 923 1,314 23,573 5,006
7. 1990... 50,181 3,232 46,948 27,841 3,249 3,240 43 611 1,504 29,294 6,933
8. 1991... 51,070 2,875 48,195 29,868 2,958 3,471 58 874 1,490 31,813 7,814
9. 1992... 48,689 3,332 45,357 25,892 2,985 2,184 135 453 1,511 26,467 7,772
10. 1993... 47,325 4,678 42,647 20,641 1,654 1,609 57 238 1,264 21,803 8,378
11. 1994... 47,608 4,691 42,916 15,994 1,389 724 21 108 959 16,268 7,818
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 205,090 44,402 21,652 1,445 4,845 12,878 193,772 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 901 842 13 13 2 2 1 61 4
2. 1985... 30 20 4 4 1 1 0 10 1
3. 1986... 334 (684) 0 1 2 2 17 1,036 9
4. 1987... 304 95 5 404 2
5. 1988... 26 51 112 2 191 3
6. 1989... 845 83 499 17 1,444 24
7. 1990... 1,397 327 1,092 35 2,851 33
8. 1991... 1,977 718 100 2,108 57 56 4,759 82
9. 1992... 3,379 15 2,039 300 2,723 171 121 7,947 156
10. 1993... 5,714 858 3,679 1,000 2,770 100 313 182 10,388 388
11. 1994... 14,079 1,771 4,577 1,200 3,771 100 461 342 19,698 1,856
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 28,985 2,820 11,492 2,618 13,175 205 1,002 780 48,789 2,558
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 60 1
2. 1985... 24,372 21,783 2,589 69.4 71.4 56.3 10 0
3. 1986... 4,915 (6,251) 11,166 9.8 (35.6) 34.4 1,018 17
4. 1987... 18,297 2,609 15,688 43.5 34.8 45.4 304 100
5. 1988... 26,391 9,690 16,701 61.1 128.8 46.8 77 114
6. 1989... 29,627 4,610 25,018 64.0 71.5 62.8 928 516
7. 1990... 35,437 3,292 32,145 70.6 101.8 68.5 1,724 1,127
8. 1991... 39,688 3,116 36,572 77.7 108.4 75.9 2,595 2,164
9. 1992... 37,849 3,435 34,414 77.7 103.1 75.9 5,103 2,844
10. 1993... 35,859 3,668 32,191 75.8 78.4 75.5 7,535 2,852
11. 1994... 40,446 4,481 35,966 85.0 95.5 83.8 15,685 4,013
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 35,039 13,750
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X
2. 1985... (249) (249) 382 382 66 66
3. 1986... 1,158 986 171 27 (80) 30 (90) 65 292
4. 1987... 231 43 188 0 1 2 3
5. 1988... (330) (437) 107
6. 1989... 119 119 1 4 5 2
7. 1990... 174 46 128 13 13
8. 1991... 102 102
9. 1992... 73 73
10. 1993... 60 60
11. 1994... 52 52
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 410 302 97 (24) 84 313 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 0 0
2. 1985... 0 0
3. 1986... 0 0
4. 1987...
5. 1988...
6. 1989...
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 1 1
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
2. 1985... 448 448 (180.2) (180.2)
3. 1986... 122 (170) 292 10.6 (17.2) 170.5
4. 1987... 3 3 1.4 1.7
5. 1988...
6. 1989... 5 5 4.1 4.1
7. 1990... 13 13 7.5 10.2
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS-MADE
NONE
SCHEDULE P - PART 1G - SPECIAL LIABILITY
NONE
80, 81
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 1,113 976 963 819 19 300 X X X X
2. 1985... 14,989 12,756 2,233 11,971 10,982 5,160 4,713 6 364 1,800 9
3. 1986... 29,480 12,500 16,980 6,575 189 (1,047) (2,163) 629 2,880 10,382 77
4. 1987... 25,255 6,826 18,429 8,434 2,186 2,105 338 43 1,120 9,135 40
5. 1988... 25,085 8,180 16,905 6,915 1,180 1,943 169 91 1,044 8,552 91
6. 1989... 25,132 7,119 18,013 8,168 1,707 2,303 162 86 1,167 9,770 1,864
7. 1990... 26,731 7,783 18,948 6,500 67 2,150 85 405 1,262 9,761 1,967
8. 1991... 25,100 6,255 18,845 7,055 1,361 1,736 2 130 1,211 8,639 1,951
9. 1992... 22,156 5,657 16,499 4,433 560 837 (0) 84 1,145 5,856 1,528
10. 1993... 21,560 5,379 16,181 1,472 417 37 875 2,764 1,438
11. 1994... 19,680 4,948 14,732 986 84 10 758 1,827 999
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 63,623 19,207 16,650 4,126 1,521 11,845 68,786 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 4,168 2,938 402 398 429 380 129 1,412 47
2. 1985... 157 157 334 324 479 441 48 2
3. 1986... 2,794 818 438 (181) 425 (485) 191 3,695 61
4. 1987... 23 334 186 407 19 596 3
5. 1988... 781 250 695 239 423 90 1,499 6
6. 1989... 778 1,510 351 730 195 2,861 22
7. 1990... 2,372 940 1,767 612 863 240 3,689 55
8. 1991... 3,303 858 2,019 793 2,351 297 6,319 85
9. 1992... 1,864 3,141 1,070 2,145 22 361 6,440 83
10. 1993... 4,696 1,115 4,003 1,230 2,505 50 574 9,433 153
11. 1994... 2,927 317 4,371 1,300 2,579 52 568 8,828 201
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 23,861 7,393 19,014 6,322 13,335 336 123 2,663 44,821 718
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,234 178
2. 1985... 18,464 16,616 1,848 123.2 130.3 82.7 10 38
3. 1986... 12,256 (1,821) 14,077 41.6 (14.6) 82.9 2,594 1,100
4. 1987... 12,442 2,710 9,732 49.3 39.7 52.8 171 426
5. 1988... 11,890 1,839 10,051 47.4 22.5 59.5 987 513
6. 1989... 14,850 2,219 12,631 59.1 31.2 70.1 1,937 925
7. 1990... 15,154 1,703 13,450 56.7 21.9 71.0 2,587 1,103
8. 1991... 17,971 3,013 14,958 71.6 48.2 79.4 3,671 2,648
9. 1992... 13,925 1,630 12,295 62.9 28.8 74.5 3,935 2,505
10. 1993... 14,542 2,345 12,197 67.4 43.6 75.4 6,355 3,079
11. 1994... 12,272 1,617 10,655 62.4 32.7 72.3 5,681 3,147
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 29,160 15,661
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1H - SECTION 2 - OTHER LIABILITY - CLAIMS MADE
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X
2. 1985...
3. 1986...
4. 1987...
5. 1988... 66 66 1 1
6. 1989... 321 321 9 21 1 30 10
7. 1990... 508 40 469 77 38 3 115 13
8. 1991... 583 115 469 18 10 3 28 13
9. 1992... 576 101 474 18 24 3 42 19
10. 1993... 216 20 196 0 8 8 5
11. 1994... 528 55 473 3
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 121 102 9 223 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989...
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994... 3 3 1
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 3 3 1
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
2. 1985...
3. 1986...
4. 1987...
5. 1988... 1 1 0.9 0.9
6. 1989... 30 30 9.4 9.4
7. 1990... 115 115 22.6 24.5
8. 1991... 28 28 4.7 5.9
9. 1992... 42 42 7.3 8.9
10. 1993... 8 8 3.5 3.9
11. 1994... 3 3 0.6 5.5
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE,
EARTHQUAKE, GLASS, BURGLARY AND THEFT)
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 15 (0) 40 14 (0) 55 X X X X
2. 1993... 6,859 865 5,994 3,390 113 152 4 27 650 4,075 X X X X
3. 1994... 5,009 704 4,305 1,310 12 62 1 82 561 1,921 X X X X
------------------------------------------------------------------------------------------------------------------------------------
4. Totals X X X X X X X X X X X X 4,716 125 254 5 123 1,211 6,051 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 50 3 2 7 62 5
2. 1993... 89 97 24 37 247 3
3. 1994... 650 25 402 59 229 1,316 47
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. 789 25 502 85 273 1,625 55
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 53 9
2. 1993... 4,439 118 4,322 64.7 13.6 72.1 186 61
3. 1994... 3,275 37 3,237 65.4 5.3 75.2 1,028 288
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,266 358
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1J - AUTO PHYSICAL DAMAGE
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X (117) (1) 118 164 3 5 X X X X
2. 1993... 33,768 1,017 32,751 18,517 560 1,627 1,207 20,284 16,795
3. 1994... 32,025 880 31,145 16,685 154 520 4 1,458 1,323 18,371 14,049
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X 35,085 153 1,198 4 3,250 2,532 38,659 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 130 45 82 400 10 267 12
2. 1993... 106 62 59 238 12 240 22
3. 1994... 1,376 252 160 899 87 1,875 480
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. 1,612 359 301 1,537 109 2,381 514
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 175 92
2. 1993... 20,523 20,523 60.8 62.7 168 71
3. 1994... 20,403 157 20,245 63.7 17.9 65.0 1,628 247
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,971 410
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
85
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1K - FIDELITY/SURETY
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X (22) 6 5 5 28 (28) X X X X
2. 1993... 4 2 2 X X X X
3. 1994... 3 1 2 X X X X
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X (22) 6 5 5 28 (28) X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 13 13 (23) 23 (23) 13
2. 1993...
3. 1994...
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. 13 13 (23) 23 (23) 13
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X (23)
2. 1993...
3. 1994...
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X (23)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X (9) (1) (10) X X X X
2. 1993... 503 503 149 7 2 156 X X X X
3. 1994... 568 568 125 6 6 130 X X X X
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X 264 12 8 276 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1993...
3. 1994... 142 7 1 150
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. 142 7 1 150
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X
2. 1993... 156 156 31.0 31.0
3. 1994... 280 280 49.3 49.3 142 8
------------------------------------------------------------------------------------------------------------------------------------
4. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 142 8
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1M - INTERNATIONAL
NONE
SCHEDULE P - PART 1N - REINSURANCE A
NONE
SCHEDULE P - PART 1O - REINSURANCE B
NONE
SCHEDULE P - PART 1P - REINSURANCE C
NONE
SCHEDULE P - PART 1Q - REINSURANCE D
NONE
88, 89, 90, 91, 92
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
(000 omitted)
------------------------------------------------------------------------------------------------------------------------------------
1 Premiums Earned Loss and Loss Expense Payments
--------------------------------------------------------------------------------------------------------
Years 2 3 4 Loss Payments Allocated Loss 9 10 11 12
in Which Expense Payments Number of
Premiums Were --------------------------------------- Salvage Unallocated Total Claims
Earned and Direct Net 5 6 7 8 and Loss Net Paid Reported-
Losses Were and Ceded (2 - 3) Direct Direct Subrogation Expense (5 - 6 + 7 Direct and
Incurred Assumed and Assumed Ceded and Assumed Ceded Received Payments - 8 + 10) Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X 37 36 (0) 1 X X X X
2. 1985... 1,871 1,754 117 2,043 1,770 1,096 1,042 19 347 2
3. 1986... 3,259 772 2,487 (2,813) (2,542) 143 (1,502) 149 397 1,770 8
4. 1987... 3,283 97 3,186 627 406 22 6 171 1,181
5. 1988... 3,138 67 3,071 144 89 7 82 315
6. 1989... 3,585 101 3,484 264 119 6 71 454 118
7. 1990... 4,202 315 3,887 489 356 3 96 941 199
8. 1991... 3,563 173 3,390 440 78 5 106 624 155
9. 1992... 2,859 60 2,799 72 36 1 69 178 96
10. 1993... 1,783 48 1,735 15 1 8 6 22 57
11. 1994... 967 48 920 3 1 0 3 27
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X 1,282 (773) 2,361 (402) 184 1,018 5,836 X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Losses Unpaid Allocated Loss Expenses Unpaid
------------------------------------------------------------------
Case Basis Bulk + IBNR Case Basis Bulk + IBNR 21 22 23 24
------------------------------------------------------------------ Number of
13 14 15 16 17 18 19 20 Salvage Unallocated Total Claims
Direct Direct Direct Direct and Loss Net Losses Outstanding-
and and and and Subrogation Expenses and Expenses Direct and
Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 18 10 46 46 66 64 1 10 2
2. 1985... 10 10 54 54 141 141 2
3. 1986... 13 (20) 40 (50) 110 (78) 11 322 6
4. 1987...
5. 1988...
6. 1989...
7. 1990... (0) 0 (0) (0) 15
8. 1991... 15 9 15 2 41 9
9. 1992... 28 29 29 0 5 90 10
10. 1993... 5 10 6 2 23 4
11. 1994... 18 98 53 0 16 185 9
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. 106 287 50 420 128 1 36 671 57
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Total Losses and Loss and Loss Expense Percentage Discount for Time Net Balance Sheet Reserves
Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount
------------------------------------------------------------------------------- --------------------------
25 26 27 28 29 30 31 32 Inter-Company 34 35
Pooling Loss
Direct Direct Loss Participation Losses Expenses
and Assumed Ceded Net and Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8 3
2. 1985... 3,363 3,017 347 179.8 172.0 296.4
3. 1986... (2,099) (4,192) 2,093 (64.4) (543.0) 84.1 124 199
4. 1987... 1,203 22 1,181 36.7 22.7 37.1
5. 1988... 315 315 10.0 10.2
6. 1989... 454 454 12.7 13.0
7. 1990... 941 941 22.4 24.2 (0) 0
8. 1991... 665 665 18.7 19.6 24 17
9. 1992... 267 267 9.3 9.5 57 33
10. 1993... 45 45 2.5 2.6 15 8
11. 1994... 188 188 19.5 20.5 116 69
------------------------------------------------------------------------------------------------------------------------------------
12. Totals. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 342 328
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
93
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 1R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
NONE
SCHEDULE P - PART 1S - FINANCIAL GUARANTY AND MORTGAGE GUARANTY
NONE
94, 95
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 2A - HOMEOWNERS/FARMOWNERS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development
------------------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11 12 13
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 One Year Two Year
Incurred
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... 2,975 6,346 6,084 5,159 4,966 4,789 4,556 4,546 4,591 4,608 17 62
2. 1985.... 4,707 4,716 5,204 4,885 4,733 4,657 4,569 4,567 4,576 4,575 (1) 8
3. 1986.... X X X X 6,863 6,353 5,466 5,298 5,012 5,061 5,060 5,110 5,181 71 121
4. 1987.... X X X X X X X X 8,170 7,513 7,156 7,065 6,859 6,834 6,868 6,875 7 41
5. 1988.... X X X X X X X X X X X X 7,761 7,325 7,005 6,898 6,892 6,972 7,028 56 136
6. 1989.... X X X X X X X X X X X X X X X X 6,828 6,922 6,577 6,572 6,607 6,614 7 42
7. 1990.... X X X X X X X X X X X X X X X X X X X X 7,901 7,525 7,652 7,559 7,440 (119) (212)
8. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X 9,433 9,392 8,958 8,794 (164) (598)
9. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,539 9,940 9,719 (220) 180
10. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,244 9,714 (530) X X X X
11. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,379 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
12. Totals (877) (220)
-----------------
</TABLE>
SCHEDULE P - PART 2B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
<TABLE>
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... 5,738 5,238 5,428 5,751 5,366 5,414 5,222 5,221 5,221 5,216 (5) (5)
2. 1985.... 11,343 10,605 11,009 11,522 11,363 11,477 11,272 11,250 11,270 11,249 (21) (1)
3. 1986.... X X X X 20,049 16,902 16,686 15,941 16,178 16,026 16,261 16,198 16,236 39 (25)
4. 1987.... X X X X X X X X 23,950 23,300 22,812 23,330 23,468 23,586 23,740 23,697 (44) 111
5. 1988.... X X X X X X X X X X X X 24,728 24,332 23,945 24,308 24,616 24,828 24,886 58 270
6. 1989.... X X X X X X X X X X X X X X X X 26,833 26,167 26,963 28,000 28,249 28,146 (103) 146
7. 1990.... X X X X X X X X X X X X X X X X X X X X 32,388 33,745 34,547 35,202 35,113 (89) 566
8. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X 31,046 31,494 32,974 32,559 (415) 1,065
9. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 32,762 32,745 33,408 663 646
10. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 32,952 32,717 (235) X X X X
11. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30,429 X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------
12. Totals (152) 2,773
------------------
</TABLE>
SCHEDULE P - PART 2C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... 4,659 6,047 6,244 6,383 5,884 5,388 5,232 5,230 5,239 5,233 (7) 3
2. 1985.... 4,579 3,743 3,817 4,308 4,038 4,039 3,986 4,002 3,984 3,971 (13) (31)
3. 1986.... X X X X 8,204 8,873 9,668 8,492 9,084 8,781 8,994 8,666 8,824 158 (170)
4. 1987.... X X X X X X X X 11,596 11,145 10,798 11,606 11,832 11,686 11,932 11,961 29 275
5. 1988.... X X X X X X X X X X X X 14,369 13,127 14,058 14,480 14,487 14,607 15,207 601 720
6. 1989.... X X X X X X X X X X X X X X X X 19,461 20,571 22,129 22,788 22,664 22,726 62 (62)
7. 1990.... X X X X X X X X X X X X X X X X X X X X 17,064 17,099 18,010 18,386 18,611 224 601
8. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X 21,558 21,925 23,142 21,409 (1,733) (516)
9. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 16,974 16,907 15,477 (1,430) (1,497)
10. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,277 19,419 2,142 X X X X
11. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 14,648 X X X X X X X X
--------------------------------------------------------------------------------------------------------------------------------
12. Totals 32 (679)
------------------
</TABLE>
SCHEDULE P - PART 2D - WORKERS' COMPENSATION
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... 4,401 4,458 4,585 4,781 5,372 6,719 6,116 6,096 6,009 6,092 83 (4)
2. 1985.... 4,922 4,811 4,846 5,519 5,484 5,619 5,529 5,497 5,432 5,416 (17) (81)
3. 1986.... X X X X 16,485 18,993 21,332 19,373 21,046 20,138 19,546 20,476 20,984 508 1,438
4. 1987.... X X X X X X X X 20,495 21,865 22,437 21,981 21,996 22,367 22,201 22,135 (66) (232)
5. 1988.... X X X X X X X X X X X X 34,629 35,815 33,977 34,051 33,881 34,281 33,983 (298) 102
6. 1989.... X X X X X X X X X X X X X X X X 44,944 44,044 43,491 44,771 44,537 44,746 209 (25)
7. 1990.... X X X X X X X X X X X X X X X X X X X X 39,839 43,413 45,408 46,673 46,404 (270) 996
8. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X 39,869 39,094 39,077 39,599 522 505
9. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 38,430 37,568 33,633 (3,935) (4,797)
10. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 36,850 37,231 381 X X X X
11. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 35,713 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
12. Totals (2,883) (2,100)
------------------
</TABLE>
SCHEDULE P - PART 2E - COMMERCIAL MULTIPLE PERIL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... 1,598 1,918 2,089 2,255 2,159 2,092 2,196 2,187 2,241 2,332 91 145
2. 1985.... 2,235 2,347 2,276 2,450 2,311 2,185 2,158 2,160 2,186 2,319 132 159
3. 1986.... X X X X 10,894 8,807 8,408 8,283 8,153 8,738 9,122 9,426 9,130 (295) 8
4. 1987.... X X X X X X X X 12,969 11,276 11,848 11,881 12,957 14,207 14,075 14,255 180 48
5. 1988.... X X X X X X X X X X X X 15,063 14,360 14,325 14,230 14,561 15,051 15,581 530 1,020
6. 1989.... X X X X X X X X X X X X X X X X 22,046 21,860 22,509 22,426 22,979 23,686 707 1,260
7. 1990.... X X X X X X X X X X X X X X X X X X X X 30,643 30,895 31,444 30,698 30,606 (93) (838)
8. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X 37,428 36,530 35,251 35,026 (225) (1,504)
9. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 34,369 32,935 32,782 (153) (1,587)
10. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30,040 30,745 705 X X X X
11. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 34,665 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
12. Totals 1,578 (1,289)
------------------
</TABLE>
96
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 2F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development
--------------------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11 12 13
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 One Year Two Year
Incurred
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986... X X X X 73 (96) 183 468 227 227 227 227 227 0
4. 1987... X X X X X X X X 81 20 9 1 1 1 1 1 (0)
5. 1988... X X X X X X X X X X X X 73 14
6. 1989... X X X X X X X X X X X X X X X X 34 1 1 1 1 1 (0)
7. 1990... X X X X X X X X X X X X X X X X X X X X 100
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------------
12. Totals (0)
--------------------
</TABLE>
SCHEDULE P - PART 2F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS MADE
<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
--------------------------------------------------------------------------------------------------------------------------------
12. Totals
------------------
</TABLE>
SCHEDULE P - PART 2G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT
(ALL PERILS), BOILER AND MACHINERY)
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
---------------------------------------------------------------------------------------------------------------------------------
12. Totals
-----------------
</TABLE>
SCHEDULE P - PART 2H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 1,210 4,659 4,685 4,792 5,860 6,344 7,342 7,221 7,951 8,214 263 993
2. 1985... 1,162 1,178 1,038 1,576 1,591 1,773 1,792 1,738 1,767 1,484 (283) (254)
3. 1986... X X X X 12,442 12,825 11,042 7,406 8,403 10,052 10,041 10,789 11,006 217 964
4. 1987... X X X X X X X X 10,244 8,473 9,462 7,912 7,829 7,718 8,643 8,593 (50) 875
5. 1988... X X X X X X X X X X X X 9,254 10,030 9,931 8,941 8,705 8,755 8,917 162 212
6. 1989... X X X X X X X X X X X X X X X X 11,885 10,433 11,549 10,644 10,958 11,269 311 625
7. 1990... X X X X X X X X X X X X X X X X X X X X 10,949 11,334 10,584 11,124 11,948 824 1,364
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 13,481 13,373 13,990 13,451 (540) 77
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,830 11,345 10,790 (556) (41)
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,622 10,748 126 X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,330 X X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
12. Totals 473 4,816
------------------
</TABLE>
SCHEDULE P - PART 2H - SECTION 2 - OTHER LIABILITY - CLAIMS MADE
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X 5 2 1 1 1 1 1 (0)
6. 1989... X X X X X X X X X X X X X X X X 25 23 40 39 35 30 (5) (9)
7. 1990... X X X X X X X X X X X X X X X X X X X X 82 85 94 115 115 21
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 76 33 33 28 (5) (5)
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 77 43 42 (1) (35)
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 46 8 (38) X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
12. Totals (49) (29)
-------------------
</TABLE>
97
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 2I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE,
EARTHQUAKE, GLASS, BURGLARY AND THEFT)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development
------------------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11 12 13
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 One Year Two Year
Incurred
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,703 1,581 1,347 (234) (1,356)
2. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,514 3,634 120 X X X X
3. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,447 X X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
4. Totals (114) (1,356)
-------------------
</TABLE>
SCHEDULE P - PART 2J - AUTO PHYSICAL DAMAGE
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,717 2,171 1,939 (232) (778)
2. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18,903 19,304 401 X X X X
3. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18,836 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
4. Totals 169 (778)
------------------
</TABLE>
SCHEDULE P - PART 2K - FIDELITY/SURETY
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... X X X X X X X X X X X X X X X X X X X X X X X X X X X X (51) (10) (51) (41) 0
2. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
3. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
4. Totals (41) 0
------------------
</TABLE>
SCHEDULE P - PART 2L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 92 48 18 (30) (74)
2. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 158 156 (2) X X X X
3. 1994.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 279 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
4. Totals (32) (74)
------------------
</TABLE>
SCHEDULE P - PART 2M - INTERNATIONAL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...
2. 1985....
3. 1986....
4. 1987....
5. 1988....
6. 1989.... NONE
7. 1990....
8. 1991....
9. 1992....
10. 1993....
11. 1994....
---------------------------------------------------------------------------------------------------------------------------------
12. Totals
------------------
</TABLE>
98
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 2N - REINSURANCE A
NONE
SCHEDULE P - PART 2O - REINSURANCE B
NONE
SCHEDULE P - PART 2P - REINSURANCE C
NONE
SCHEDULE P - PART 2Q - REINSURANCE D
NONE
99
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 2R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development**
---------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11 12 13
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 One Year Two Year
Incurred
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. (148) (148) 44 496 449 468 391 391 539 549 10 158
2. 1985... 39 34 34 34 34 34 34 41 41 328 287 287
3. 1986... X X X X 1,544 501 1,930 1,481 1,774 1,655 2,449 1,915 1,685 (231) (764)
4. 1987... X X X X X X X X 2,130 1,407 1,208 1,216 1,417 1,445 1,011 1,011 (434)
5. 1988... X X X X X X X X X X X X 1,387 611 679 357 346 233 233 (0) (112)
6. 1989... X X X X X X X X X X X X X X X X 1,304 1,106 774 978 383 383 (0) (595)
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,746 1,104 1,840 971 845 (126) (995)
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 1,246 1,348 726 557 (169) (790)
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 816 155 193 38 (622)
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 140 37 (104) X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 172 X X X X X X X X
------------------------------------------------------------------------------------------------------------------------
12. Totals (295) (3,869)
---------------
</TABLE>
SCHEDULE P - PART 2R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS MADE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------
12. Totals
-----------------
</TABLE>
SCHEDULE P - PART 2S - FINANCIAL GUARANTY/MORTGAGE GUARANTY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1993... NONE
3. 1994...
------------------------------------------------------------------------------------------------------------------------
4. Totals
-----------------
</TABLE>
100
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 3A - HOMEOWNERS/FARMOWNERS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
1 Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) 12 13
---------------------------------------------------------------------------------------- Number of Number of
Years in Which Claims Claims
Losses Were 2 3 4 5 6 7 8 9 10 11 Closed Closed
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 With Loss Without
Payment Loss Payment
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 1,877 3,143 3,836 4,311 4,399 4,423 4,546 4,591 4,596
2. 1985... 2,576 3,896 4,071 4,335 4,464 4,506 4,563 4,561 4,561 4,575 1 1
3. 1986... X X X X 324 3,142 4,168 4,514 4,613 4,858 4,893 5,052 5,181 2 5
4. 1987... X X X X X X X X 4,340 6,395 6,514 6,749 6,804 6,808 6,857 6,875 9 10
5. 1988... X X X X X X X X X X X X 4,578 6,091 6,579 6,778 6,859 6,957 7,013 284 53
6. 1989... X X X X X X X X X X X X X X X X 4,555 5,992 6,183 6,339 6,580 6,589 4,086 320
7. 1990... X X X X X X X X X X X X X X X X X X X X 5,007 6,667 7,377 7,466 7,390 4,163 336
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 6,116 7,894 8,205 8,319 3,099 408
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,386 8,565 8,991 4,523 423
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,022 8,814 4,108 469
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,160 4,015 661
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 1,801 3,608 4,549 5,036 5,177 5,198 5,198 5,198 5,198
2. 1985... 2,854 6,739 8,867 9,966 10,698 10,953 11,158 11,195 11,247 11,228 28 7
3. 1986... X X X X (5,017) 6,575 10,566 12,723 14,127 15,235 15,531 15,908 16,151 83 22
4. 1987... X X X X X X X X 7,934 15,472 18,808 21,530 22,263 23,169 23,388 23,523 277 80
5. 1988... X X X X X X X X X X X X 8,567 16,024 20,333 22,517 23,632 24,270 24,442 1,225 365
6. 1989... X X X X X X X X X X X X X X X X 9,589 18,953 23,854 25,851 27,019 27,577 7,125 1,524
7. 1990... X X X X X X X X X X X X X X X X X X X X 13,500 25,426 31,030 33,092 33,738 6,730 1,588
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 11,839 21,188 26,930 29,276 5,182 1,386
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 12,411 22,335 26,883 6,257 1,352
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,326 20,785 5,419 1,225
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,020 2,895 771
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 2,606 3,896 4,325 5,193 5,221 5,226 5,229 5,229 5,233
2. 1985... 850 2,136 2,747 3,448 3,645 3,899 3,968 3,983 3,984 3,956 3 2
3. 1986... X X X X (10,051) (2,657) 2,475 5,502 7,139 8,134 8,641 8,504 8,653 11 3
4. 1987... X X X X X X X X 2,237 5,417 7,983 9,233 10,359 10,967 11,267 11,930 37 16
5. 1988... X X X X X X X X X X X X 3,375 6,727 9,502 11,735 13,131 13,870 14,763 106 46
6. 1989... X X X X X X X X X X X X X X X X 4,584 11,834 16,366 19,425 20,801 22,343 3,588 793
7. 1990... X X X X X X X X X X X X X X X X X X X X 4,616 9,930 13,501 15,314 17,520 3,550 707
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 4,123 13,980 17,136 19,050 2,902 777
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,025 8,505 11,531 2,466 631
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,497 9,817 2,336 550
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,711 1,613 319
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3D - WORKERS' COMPENSATION
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 1,649 2,726 3,578 4,092 4,470 4,194 4,406 4,787 5,003
2. 1985... 1,274 2,714 3,495 4,213 4,807 5,078 5,102 5,168 5,212 5,234 12
3. 1986... X X X X (17,289) (5,749) 2,573 7,053 9,501 11,320 13,046 14,267 16,180 15 4
4. 1987... X X X X X X X X 4,808 11,353 15,388 17,528 19,024 19,869 20,549 20,955 44 15
5. 1988... X X X X X X X X X X X X 7,063 17,067 22,431 26,566 28,866 30,298 31,524 396 60
6. 1989... X X X X X X X X X X X X X X X X 9,359 21,709 30,312 35,639 38,511 40,630 13,104 1,275
7. 1990... X X X X X X X X X X X X X X X X X X X X 9,984 23,591 31,599 36,842 40,454 11,147 1,357
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 9,198 20,100 26,476 30,716 7,226 1,143
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,527 18,184 21,872 7,111 1,059
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,166 18,281 5,549 677
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,983 3,228 385
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3E - COMMERCIAL MULTIPLE PERIL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 710 1,365 1,693 1,911 1,994 2,171 2,182 2,223 2,272
2. 1985... 897 1,509 1,742 1,885 2,122 2,185 2,158 2,160 2,179 2,309 2
3. 1986... X X X X (6,062) (617) 2,000 3,714 5,401 6,758 7,793 7,999 8,112 4 1
4. 1987... X X X X X X X X 4,570 7,070 8,178 10,383 11,289 12,118 13,607 13,856 9 9
5. 1988... X X X X X X X X X X X X 5,652 9,812 11,187 12,700 13,588 14,170 15,392 62 16
6. 1989... X X X X X X X X X X X X X X X X 9,157 15,241 17,801 19,335 21,106 22,259 3,729 1,214
7. 1990... X X X X X X X X X X X X X X X X X X X X 12,617 20,709 24,728 27,116 27,790 4,976 1,717
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 15,629 23,880 27,447 30,323 5,006 1,972
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,826 22,392 24,956 4,753 2,002
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13,590 20,539 4,647 2,544
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,309 3,525 1,906
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
101
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 3F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1 Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) 12 13
---------------------------------------------------------------------------------------- Number of Number of
Years in Which Claims Claims
Losses Were 2 3 4 5 6 7 8 9 10 11 Closed Closed
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 With Loss Without Loss
Payment Payment
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X (384) (256) (244) (198) 227 227 227 227 227
4. 1987... X X X X X X X X 1 1 1 1 1 1 1
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 1 1 1 1 1 1 1
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS- MADE
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT
(ALL PERILS), BOILER AND MACHINERY)
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 3,297 4,593 4,871 6,372 6,132 6,188 6,438 6,650 6,931
2. 1985... 153 247 470 1,018 1,135 1,553 1,681 1,691 1,724 1,436 5 2
3. 1986... X X X X (20,851) (13,229) (6,206) (1,068) 1,706 3,656 5,268 6,609 7,502 6 10
4. 1987... X X X X X X X X 650 1,661 3,553 5,166 5,890 6,064 7,772 8,015 16 21
5. 1988... X X X X X X X X X X X X 973 2,240 3,717 5,372 6,289 6,762 7,508 55 30
6. 1989... X X X X X X X X X X X X X X X X 1,063 2,214 4,457 6,703 7,831 8,603 1,301 532
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,044 3,011 4,760 7,105 8,499 1,249 536
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 1,356 3,512 5,382 7,428 936 445
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,190 2,632 4,711 707 288
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,044 1,889 622 289
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,070 405 131
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3H - SECTION 2 - OTHER LIABILITY - CLAIMS MADE
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X 1 1 1 1 1 1
6. 1989... X X X X X X X X X X X X X X X X 11 21 23 24 30 30 2 8
7. 1990... X X X X X X X X X X X X X X X X X X X X 24 55 72 115 115 5 7
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 4 28 28 28 2 7
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15 42 42 2 15
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8 8 0 4
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 0 0 0
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
102
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 3I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE,
EARTHQUAKE, GLASS, BURGLARY AND THEFT)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
1 Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) 12 13
-------------------------------------------------------------------------------------- Number of Number of
Years in Which Claims Claims Closed
Losses Were 2 3 4 5 6 7 8 9 10 11 Closed With Without
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Loss Payment Loss Payment
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 1,238 1,293 X X X X X X X X
2. 1993 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,514 3,424 X X X X X X X X
3. 1994 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,360 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3J - AUTO PHYSICAL DAMAGE
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 1,680 1,682 55,600 3,402
2. 1993 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,393 19,077 13,411 825
3. 1994 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,048 10,293 767
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3K - FIDELITY/SURETY
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 (28) X X X X X X X X
2. 1993 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
3. 1994 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 28 18 X X X X X X X X
2. 1993 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 103 156 X X X X X X X X
3. 1994 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 130 X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3M - INTERNATIONAL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior
2. 1985
3. 1986
4. 1987
5. 1988
6. 1989 NONE
7. 1990
8. 1991
9. 1992
10. 1993
11. 1994
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
103
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
--------------------------------------------------------------------------------
SCHEDULE P PART 3N REINSURANCE A
NONE
SCHEDULE P PART 3O REINSURANCE B
NONE
SCHEDULE P PART 3P REINSURANCE C
NONE
SCHEDULE P PART 3Q REINSURANCE D
NONE
--------------------------------------------------------------------------------
104
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 3R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 Cumulative Paid Losses and Allocated Expenses at Year End (000 Omitted) 12 13
----------------------------------------------------------------------------------------- Number of Number of
Years in Which 2 3 4 5 6 7 8 9 10 11 Claims Claims
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Closed Closed
Incurred With Loss Without Loss
Payment Payment
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 0 24 404 431 539 539 539 539 540
2. 1985... 26 34 34 34 34 34 41 34 41 328
3. 1986... X X X X (1,636) (793) (638) 627 836 1,076 1,544 1,626 1,373 1 1
4. 1987... X X X X X X X X 101 196 358 609 941 1,011 1,011 1,011
5. 1988... X X X X X X X X X X X X 49 72 121 149 222 233 233
6. 1989... X X X X X X X X X X X X X X X X 62 159 293 375 383 383 83 35
7. 1990... X X X X X X X X X X X X X X X X X X X X 144 348 786 826 845 124 53
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 132 388 421 518 86 46
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 71 73 108 48 31
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1 16 37 14
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3 10 5
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 3S - FINANCIAL GUARANTY/MORTGAGE GUARANTY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1993... NONE
3. 1994...
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
105
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 4A - HOMEOWNERS/FARMOWNERS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED)
--------------------------------------------------------------------------------------------------------------------
Years in Which
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 624 1,326 131 (26) 111 89 4
2. 1985... 715 209 558 266 92 59
3. 1986... X X X X 1,756 1,030 575 336 120 18 8 0
4. 1987... X X X X X X X X 1,210 742 357 119 17 0
5. 1988... X X X X X X X X X X X X 1,405 276 127 43 15 0
6. 1989... X X X X X X X X X X X X X X X X 1,228 349 68 22 0
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,308 206 144 21
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 1,246 611 237 89
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,104 430 146
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,316 440
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,365
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 557 306 1 307 170 191 24 23 23 18
2. 1985... 2,348 271 107 417 225 238 41 19 8 6
3. 1986... X X X X 4,788 2,363 1,963 974 421 58 65 9 9
4. 1987... X X X X X X X X 4,096 2,086 1,038 548 173 157 80 63
5. 1988... X X X X X X X X X X X X 5,426 2,379 861 474 264 250 124
6. 1989... X X X X X X X X X X X X X X X X 5,916 1,349 527 543 349 379
7. 1990... X X X X X X X X X X X X X X X X X X X X 5,947 2,701 958 869 582
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 6,765 2,577 2,035 1,319
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,352 3,001 2,271
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,253 4,503
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,529
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 419 161 (5) 563 309 104
2. 1985... 960 261 33 424 169 77 8 3 0 0
3. 1986... X X X X 4,059 2,598 2,179 805 597 98 17 5 25
4. 1987... X X X X X X X X 3,008 2,098 755 550 89 31 11 8
5. 1988... X X X X X X X X X X X X 5,653 1,692 731 408 150 68 9
6. 1989... X X X X X X X X X X X X X X X X 5,064 2,363 1,294 664 446 150
7. 1990... X X X X X X X X X X X X X X X X X X X X 6,529 2,283 1,291 487 244
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 6,661 2,788 3,090 1,297
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,385 3,807 2,119
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,576 3,200
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5,015
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4D - WORKERS' COMPENSATION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 405 102 (68) 207 175 851 799 765 542 455
2. 1985... 1,056 287 59 287 154 253 166 215 131 152
3. 1986... X X X X 3,569 3,061 3,965 3,124 3,519 2,486 1,429 1,125 891
4. 1987... X X X X X X X X 4,774 3,261 1,971 1,499 1,032 713 372 447
5. 1988... X X X X X X X X X X X X 12,005 6,385 3,188 2,109 1,116 890 824
6. 1989... X X X X X X X X X X X X X X X X 15,257 7,937 3,199 2,547 1,608 1,111
7. 1990... X X X X X X X X X X X X X X X X X X X X 13,287 6,136 2,640 2,332 1,473
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 17,006 6,276 3,905 2,222
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,355 8,809 4,520
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 16,019 9,031
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13,917
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4E - COMMERCIAL MULTIPLE PERIL
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 115 100 (33) 44 1
2. 1985... 607 262 107 181 67 0
3. 1986... X X X X 6,630 2,662 1,781 955 163 40 (1)
4. 1987... X X X X X X X X 4,165 1,554 1,078 331 36 179 134 95
5. 1988... X X X X X X X X X X X X 4,728 1,872 1,039 185 302 256 163
6. 1989... X X X X X X X X X X X X X X X X 6,125 2,386 1,624 1,199 904 582
7. 1990... X X X X X X X X X X X X X X X X X X X X 8,739 4,425 3,224 2,067 1,419
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 12,187 6,611 3,959 2,726
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,492 6,360 4,462
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,854 5,349
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,048
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
106
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 4F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED)
-----------------------------------------------------------------------------------------------------------------
Years in Which
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986... X X X X 91 22 71 116
4. 1987... X X X X X X X X 40 19 8
5. 1988... X X X X X X X X X X X X 48 14
6. 1989... X X X X X X X X X X X X X X X X 34
7. 1990... X X X X X X X X X X X X X X X X X X X X 100
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS MADE
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT
(ALL PERILS), BOILER AND MACHINERY)
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 334 134 107 138 102 363 317 91 49 53
2. 1985... 438 206 96 179 112 125 111 47 43 48
3. 1986... X X X X 14,757 11,474 8,064 2,676 3,180 2,811 1,979 1,880 1,528
4. 1987... X X X X X X X X 5,983 4,795 4,497 1,121 843 676 618 555
5. 1988... X X X X X X X X X X X X 6,401 5,043 3,149 1,634 1,089 1,061 879
6. 1989... X X X X X X X X X X X X X X X X 8,415 4,890 3,328 2,465 2,087 1,889
7. 1990... X X X X X X X X X X X X X X X X X X X X 7,324 5,171 3,260 2,052 2,018
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 8,578 7,027 5,716 3,577
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,249 6,271 4,215
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,268 5,278
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5,650
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4H - SECTION 2 - OTHER LIABILITY - CLAIMS MADE
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
107
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 4I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE,
EARTHQUAKE, GLASS, BURGLARY AND THEFT)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED)
1 ------------------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11
Losses Were
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,794 245 5
2. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 406 121
3. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 462
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4J - AUTO PHYSICAL DAMAGE
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 958 372 127
2. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30 121
3. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 412
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4K - FIDELITY/SURETY
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X (23)
2. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
3. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. X X X X X X X X X X X X X X X X X X X X X X X X X X X X 92 20
2. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 55
3. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 149
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4M - INTERNATIONAL
<TABLE>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
--------------------------------------------------------------------------------
SCHEDULE P - PART 4N - REINSURANCE A
NONE
SCHEDULE P - PART 4O - REINSURANCE B
NONE
SCHEDULE P - PART 4P - REINSURANCE C
NONE
SCHEDULE P - PART 4Q - REINSURANCE D
NONE
--------------------------------------------------------------------------------
109
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 4R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED)
1 ----------------------------------------------------------------------------------------------------------
Years in Which 2 3 4 5 6 7 8 9 10 11
Losses Were 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Incurred
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 2
2. 1985... 13
3. 1986... X X X X 1,017 644 1,278 249 576 150 358 207 278
4. 1987... X X X X X X X X 1,382 901 350 197 166 151
5. 1988... X X X X X X X X X X X X 1,239 516 487 124 45
6. 1989... X X X X X X X X X X X X X X X X 1,104 809 172 401
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,313 434 535 70
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 805 641 160 24
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 536 55 58
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 78 16
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 151
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
<TABLE>
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 4S - FINANCIAL GUARANTY/MORTGAGE GUARANTY
<TABLE>
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1993... NONE
3. 1994...
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
110
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5A - HOMEOWNERS/FARMOWNERS
<TABLE>
<CAPTION>
SECTION 1
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X 2 2 2 2
4. 1987... X X X X X X X X 6 8 8 9
5. 1988... X X X X X X X X X X X X 276 280 282 284
6. 1989... X X X X X X X X X X X X X X X X 1,554 4,066 4,085 4,096 4,099 4,099
7. 1990... X X X X X X X X X X X X X X X X X X X X 3,537 4,110 4,150 4,161 4,164
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2,353 3,068 3,095 3,100
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,720 4,510 4,525
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,580 4,112
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,022
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 35 12 4 1 1
2. 1985... 15 6 5 3 1
3. 1986... X X X X 12 13 7 4 5
4. 1987... X X X X X X X X 23 13 8 4 2
5. 1988... X X X X X X X X X X X X 51 20 9 3 1 2
6. 1989... X X X X X X X X X X X X X X X X 297 32 17 6 2 1
7. 1990... X X X X X X X X X X X X X X X X X X X X 277 42 15 7 2
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 286 45 15 10
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 337 44 21
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 325 51
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 417
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2 2 2 2
3. 1986... X X X X 7 7 7 7
4. 1987... X X X X X X X X 1 18 18 19 19
5. 1988... X X X X X X X X X X X X 2 336 336 337 339
6. 1989... X X X X X X X X X X X X X X X X 1,565 2,110 4,413 4,419 4,421 4,421
7. 1990... X X X X X X X X X X X X X X X X X X X X 4,139 4,466 4,494 4,500 4,502
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2,902 3,497 3,518 3,518
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,312 4,955 4,969
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,211 4,634
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5,101
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
111
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
<TABLE>
<CAPTION>
SECTION 1
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 16 23 26 28 28
3. 1986... X X X X 39 67 74 78 82
4. 1987... X X X X X X X X 161 230 247 267 274
5. 1988... X X X X X X X X X X X X 909 1,133 1,186 1,213 1,224
6. 1989... X X X X X X X X X X X X X X X X 5,851 8,590 9,083 9,195 9,257 9,282
7. 1990... X X X X X X X X X X X X X X X X X X X X 7,120 9,869 10,341 10,472 10,620
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 5,011 7,354 7,727 8,364
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,187 8,390 8,722
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5,281 7,274
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,529
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 43 24 19 19 13 1
2. 1985... 48 38 15 8 6 4
3. 1986... X X X X 75 56 26 16 5 5
4. 1987... X X X X X X X X 249 110 71 26 16 6
5. 1988... X X X X X X X X X X X X 616 264 98 42 17 10
6. 1989... X X X X X X X X X X X X X X X X 2,082 745 210 99 44 23
7. 1990... X X X X X X X X X X X X X X X X X X X X 2,903 642 225 93 48
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2,188 588 212 98
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,223 603 235
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,194 636
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,425
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 1 5 35 35 35 39
3. 1986... X X X X 18 22 102 104 105 110
4. 1987... X X X X X X X X 46 59 355 359 359 363
5. 1988... X X X X X X X X X X X X 475 517 1,576 1,586 1,591 1,600
6. 1989... X X X X X X X X X X X X X X X X 7,941 10,737 11,269 11,333 11,355 11,375
7. 1990... X X X X X X X X X X X X X X X X X X X X 11,925 12,868 13,055 13,094 12,896
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 8,322 9,662 9,779 10,345
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,450 10,664 10,763
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,301 9,419
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,871
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
112
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
<TABLE>
<CAPTION>
SECTION 1
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 3 3 3 3 3
3. 1986... X X X X 2 6 9 11 11
4. 1987... X X X X X X X X 22 28 30 34 34
5. 1988... X X X X X X X X X X X X 74 97 104 104 105
6. 1989... X X X X X X X X X X X X X X X X 2,571 3,771 3,952 4,013 4,041 4,056
7. 1990... X X X X X X X X X X X X X X X X X X X X 2,750 3,738 3,899 3,953 4,009
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2,279 3,124 3,276 3,356
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,998 2,683 2,809
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,071 2,661
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,814
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 32 19 12 4 2 1
2. 1985... 18 5 3 4 2 2
3. 1986... X X X X 43 42 15 13 12 8
4. 1987... X X X X X X X X 66 47 26 13 6 1
5. 1988... X X X X X X X X X X X X 201 185 79 39 20 10
6. 1989... X X X X X X X X X X X X X X X X 607 334 148 77 32 11
7. 1990... X X X X X X X X X X X X X X X X X X X X 902 282 126 65 36
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 910 306 124 48
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 733 241 87
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 687 267
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 675
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2 2 5 5 5 7
3. 1986... X X X X 14 14 14 20
4. 1987... X X X X X X X X 7 7 51 52 53 53
5. 1988... X X X X X X X X X X X X 47 54 151 152 152 160
6. 1989... X X X X X X X X X X X X X X X X 3,081 4,828 4,964 4,981 4,985 5,001
7. 1990... X X X X X X X X X X X X X X X X X X X X 4,039 4,755 4,823 4,837 4,935
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 3,638 4,257 4,311 4,526
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,084 3,556 3,640
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,148 3,542
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,837
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
112
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5D - WORKERS' COMPENSATION
<TABLE>
<CAPTION>
SECTION 1
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 9 10 11 12
3. 1986... X X X X 4 7 11 13 14
4. 1987... X X X X X X X X 18 30 37 40 41
5. 1988... X X X X X X X X X X X X 296 341 369 384 390
6. 1989... X X X X X X X X X X X X X X X X 7,207 11,593 12,337 12,804 13,030 13,189
7. 1990... X X X X X X X X X X X X X X X X X X X X 7,211 10,255 10,961 11,412 11,804
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 6,382 8,972 9,585 10,039
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,931 9,233 9,925
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,003 7,979
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5,069
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 482 542 444 406 301 220
2. 1985... 97 97 74 44 14 3
3. 1986... X X X X 128 426 319 264 226 195
4. 1987... X X X X X X X X 253 257 147 113 73 43
5. 1988... X X X X X X X X X X X X 722 815 481 277 184 88
6. 1989... X X X X X X X X X X X X X X X X 1,752 1,606 1,047 642 384 239
7. 1990... X X X X X X X X X X X X X X X X X X X X 2,791 1,826 1,227 769 386
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2,398 1,547 960 513
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,299 1,302 700
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,783 926
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,869
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 16 14 14 15
3. 1986... X X X X 2 2 27 28 29 214
4. 1987... X X X X X X X X 20 26 60 60 60 102
5. 1988... X X X X X X X X X X X X 214 232 454 458 460 544
6. 1989... X X X X X X X X X X X X X X X X 6,897 13,984 14,504 14,636 14,675 14,714
7. 1990... X X X X X X X X X X X X X X X X X X X X 10,613 13,108 13,407 13,526 13,624
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 9,438 11,615 11,832 11,964
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,947 11,719 11,971
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,372 9,858
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,527
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
114
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5E - COMMERCIAL MULTIPLE PERIL
<TABLE>
<CAPTION>
SECTION 1
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2 2 2 2
3. 1986... X X X X 2 3 3 4 4
4. 1987... X X X X X X X X 4 6 6 8 9
5. 1988... X X X X X X X X X X X X 50 57 61 62 62
6. 1989... X X X X X X X X X X X X X X X X 2,753 4,210 4,344 4,394 4,416 4,425
7. 1990... X X X X X X X X X X X X X X X X X X X X 3,928 5,255 5,434 5,515 5,535
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 4,197 5,566 5,756 5,814
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,947 5,278 5,412
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,068 5,255
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,963
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 62 123 129 140 209 5
2. 1985... 34 22 17 6 2 1
3. 1986... X X X X 51 49 20 7 7 9
4. 1987... X X X X X X X X 92 56 39 13 5 2
5. 1988... X X X X X X X X X X X X 185 129 62 28 13 3
6. 1989... X X X X X X X X X X X X X X X X 698 342 152 81 36 29
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,248 420 200 77 36
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 1,406 455 207 88
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,354 373 169
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,602 396
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,865
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2 2 2 3
3. 1986... X X X X 4 5 5 14
4. 1987... X X X X X X X X 5 5 18 18 18 20
5. 1988... X X X X X X X X X X X X 31 31 77 78 78 81
6. 1989... X X X X X X X X X X X X X X X X 3,575 5,682 5,835 5,853 5,859 5,897
7. 1990... X X X X X X X X X X X X X X X X X X X X 6,226 7,366 7,477 7,517 7,597
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 6,876 8,018 8,138 8,334
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,537 7,688 8,153
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,474 8,664
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,907
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
115
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5F - MEDICAL MALPRACTICE - OCCURRENCE
<TABLE>
<CAPTION>
SECTION 1A
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 1 1 1 1 1 1
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2A
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 1
2. 1985... 1 1
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3A
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 2 2 2 2 2 2
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
116
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5F - MEDICAL MALPRACTICE - CLAIMS-MADE
NONE
117
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5H - OTHER LIABILITY - OCCURRENCE
SECTION 1A
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 4 5 5 5
3. 1986... X X X X 2 4 4 5 5
4. 1987... X X X X X X X X 4 7 12 13 14
5. 1988... X X X X X X X X X X X X 39 46 52 54 55
6. 1989... X X X X X X X X X X X X X X X X 794 1,202 1,270 1,311 1,327 1,336
7. 1990... X X X X X X X X X X X X X X X X X X X X 859 1,178 1,253 1,290 1,343
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 785 1,132 1,200 1,238
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 671 934 985
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 628 853
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 581
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2A
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 135 124 107 105 77 48
2. 1985... 42 65 25 48 4 2
3. 1986... X X X X 61 166 128 69 60 61
4. 1987... X X X X X X X X 64 57 35 27 11 3
5. 1988... X X X X X X X X X X X X 107 93 48 23 11 6
6. 1989... X X X X X X X X X X X X X X X X 202 199 113 46 36 22
7. 1990... X X X X X X X X X X X X X X X X X X X X 313 192 118 59 57
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 331 150 120 88
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 269 125 89
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 280 160
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 205
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 3A
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2 2 7 7 7 9
3. 1986... X X X X 4 4 17 17 17 77
4. 1987... X X X X X X X X 13 15 36 37 37 40
5. 1988... X X X X X X X X X X X X 38 39 83 85 85 91
6. 1989... X X X X X X X X X X X X X X X X 1,150 1,734 1,842 1,876 1,891 1,915
7. 1990... X X X X X X X X X X X X X X X X X X X X 1,411 1,824 1,921 1,951 2,049
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 1,440 1,845 1,952 2,040
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,146 1,451 1,586
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,136 1,472
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,011
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
118
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5H - OTHER LIABILITY - CLAIMS MADE
<TABLE>
<CAPTION>
SECTION 1B
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 2 2
7. 1990... X X X X X X X X X X X X X X X X X X X X 5 5
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 2 18
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2 41
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 20
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2B
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 1
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... a X X X X X X X X X X X X X X X X X X X X X X X 1
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3B
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X 2
6. 1989... X X X X X X X X X X X X X X X X 11 10
7. 1990... X X X X X X X X X X X X X X X X X X X X 12 13
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 10 13
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18 19
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13 5
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
119
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 5R - PRODUCTS LIABILITY - OCCURRENCE
<TABLE>
<CAPTION>
SECTION 1A
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS CLOSED WITH LOSS PAYMENT DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X 1
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 34 70 79 81 82 82
7. 1990... X X X X X X X X X X X X X X X X X X X X 74 108 114 120 128
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 47 77 91 94
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 28 42 50
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30 39
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 12
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 2A
-----------------------------------------------------------------------------------------------------------------------------
1 NUMBER OF CLAIMS OUTSTANDING DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000 13 9 16 15 7 2
2. 1985... 6 4 2 3 2 2
3. 1986... X X X X 6 3 5 6 6 6
4. 1987... X X X X X X X X 19 11 5 2
5. 1988... X X X X X X X X X X X X 5 4 4 2
6. 1989... X X X X X X X X X X X X X X X X 9 11 11 8
7. 1990... X X X X X X X X X X X X X X X X X X X X 24 17 22 20 14
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 42 19 12 10
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 19 15 10
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7 4
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9
-----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SECTION 3A
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE NUMBER OF CLAIMS REPORTED DIRECT AND ASSUMED AT YEAR END
Years ------------------------------------------------------------------------------------------------------------
in Which
Premiums Were
Earned and
Losses Were 2 3 4 5 6 7 8 9 10 11
Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985... 2
3. 1986... X X X X 2 2 2 8
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X 52 104 110 114 119 118
7. 1990... X X X X X X X X X X X X X X X X X X X X 102 158 182 199 209
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X 110 145 160 189
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 54 83 101
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 45 59
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 28
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
120
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
-------------------------------------------------------------------------------
SCHEDULE P - PART 5R - PRODUCTS LIABILITY - CLAIMS-MADE
NONE
-------------------------------------------------------------------------------
121
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 6C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
SECTION 1
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,743 22,842
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,133
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 587 839
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 585
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 6D - WORKERS' COMPENSATION
SECTION 1
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in ----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 28,814 52,827
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 31,022
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,246 1,369
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,196
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
122
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 6E - COMMERCIAL MULTIPLE PERIL
SECTION 1
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 23,730 46,992
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 24,419
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,490 5,127
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,714
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 6H - OTHER LIABILITY - OCCURRENCE
SECTION 1A
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 12,414 29,090
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,179
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2A
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,913 7,349
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,186
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
123
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 6H - OTHER LIABILITY - CLAIMS-MADE
SECTION 1B
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior...... 000
2. 1985.......
3. 1986....... X X X X
4. 1987....... X X X X X X X X
5. 1988....... X X X X X X X X X X X X
6. 1989....... X X X X X X X X X X X X X X X X
7. 1990....... X X X X X X X X X X X X X X X X X X X X
8. 1991....... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X (3) 470
11. 1994....... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 228
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2B
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior......
2. 1985.......
3. 1986.......
4. 1987.......
5. 1988....... NONE
6. 1989.......
7. 1990.......
8. 1991.......
9. 1992.......
10. 1993.......
11. 1994.......
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 6M - INTERNATIONAL
SECTION 1
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior......
2. 1985.......
3. 1986.......
4. 1987.......
5. 1988.......
6. 1989....... NONE
7. 1990.......
8. 1991.......
9. 1992.......
10. 1993.......
11. 1994.......
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in -----------------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior......
2. 1985.......
3. 1986.......
4. 1987.......
5. 1988.......
6. 1989....... NONE
7. 1990.......
8. 1991.......
9. 1992.......
10. 1993.......
11. 1994.......
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
124
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
-------------------------------------------------------------------------------
SCHEDULE P - PART 6N - REINSURANCE A
NONE
SCHEDULE P - PART 60 - REINSURANCE B
NONE
-------------------------------------------------------------------------------
125
<PAGE>
Form 2
COMBINED ANNUAL STATEMENT FOR THE YEAR 1994 OF
ARMCO FINANCIAL SERVICES GROUP-COMPANIES TO BE SOLD
SCHEDULE P - PART 6R - PRODUCTS LIABILITY - OCCURRENCE
SECTION 1A
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in ----------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 442 2,528
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 941
--------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2A
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in ----------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior.. 000
2. 1985...
3. 1986... X X X X
4. 1987... X X X X X X X X
5. 1988... X X X X X X X X X X X X
6. 1989... X X X X X X X X X X X X X X X X
7. 1990... X X X X X X X X X X X X X X X X X X X X
8. 1991... X X X X X X X X X X X X X X X X X X X X X X X X
9. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X
10. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 56 77
11. 1994... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
--------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE P - PART 6R - PRODUCTS LIABILITY - CLAIMS-MADE
SECTION 1B
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED DIRECT AND ASSUMED AT YEAR END (000 OMITTED)
Years in ----------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
--------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 2B
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
1 CUMULATIVE PREMIUMS EARNED CEDED AT YEAR END (000 OMITTED)
Years in ----------------------------------------------------------------------------------------------------
Which Premiums
Were Earned 2 3 4 5 6 7 8 9 10 11
and Losses
Were Incurred 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Prior..
2. 1985...
3. 1986...
4. 1987...
5. 1988...
6. 1989... NONE
7. 1990...
8. 1991...
9. 1992...
10. 1993...
11. 1994...
--------------------------------------------------------------------------------------------------------------------
</TABLE>
126
<PAGE>
Exhibit 99
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of Armco Inc. ("Armco") consists of (i)
150,000,000 shares of Common Stock, par value $.01 per share ("Armco
Common Stock"), of which, at February 28, 1995, 105,845,473 shares were
issued and outstanding; (ii) 6,697,231 shares of Class A Preferred Stock,
no par value ("Class A Preferred Stock"), issuable in series, of which,
at February 28, 1995, 1,697,231 shares of Armco $2.10 Cumulative
Convertible Preferred Stock ("$2.10 Preferred Stock") were issued and
outstanding and 2,700,000 shares of $3.625 Cumulative Convertible
Preferred Stock ("$3.625 Preferred Stock") were issued and outstanding;
and of which 650,000 shares had been designated Participating Preferred
Stock (the "Participating Preferred Stock"), none of which were issued;
and (iii) 5,000,000 shares of Class B Preferred Stock, par value $1 per
share ("Class B Preferred Stock"), issuable in series, of which, at
February 28, 1995, 999,900 shares of $4.50 Cumulative Convertible
Preferred Stock ("$4.50 Preferred Stock") were issued and outstanding.
The Class A Preferred Stock and the Class B Preferred Stock are sometimes
referred to herein as the "Armco Preferred Stock." No class of
authorized capital stock of Armco, including the Armco Common Stock, has
preemptive or other subscription rights.
Armco is authorized to issue the Armco Preferred Stock in one or
more series with such designations, powers, preferences and rights, and
qualifications, limitations or restrictions thereon, as are permitted
under Armco's Amended Articles of Incorporation and as shall be stated in
the resolutions providing for the issue thereof as may be adopted by the
Armco Board of Directors. The Class A Preferred Stock and the Class B
Preferred Stock rank equally, whether or not dividend rates, dividend
payment dates, redemption or liquidation prices per share of any series
of Class A Preferred Stock differ from those of the Class B Preferred
Stock, and the holders of Class A Preferred Stock and Class B Preferred
Stock shall be entitled to the receipt of dividends and of the amounts
distributable upon liquidation, dissolution or winding up, in proportion
to their respective rates or liquidation prices, without preference or
priority one over the other. Shares of Class A Preferred Stock which
shall have been purchased, redeemed or otherwise acquired by Armco,
including shares which have been converted or exchanged into another
class or series of capital stock or other securities of Armco, shall be
deemed retired and shall not be reissued or resold. Shares of Class B
Preferred Stock purchased, redeemed or otherwise acquired by Armco will
be restored to the status of authorized but unissued shares of Class B
Preferred Stock, without designation as to series, and may thereafter be
issued by the Armco Board of Directors.
Each issued and outstanding share of Armco Preferred Stock is
currently convertible into shares of Common Stock -- each $2.10 Preferred
Stock share into 1.27 shares, each $4.50 Preferred Stock share into 2.22
shares and each $3.625 Preferred Stock share into 6.78 shares; provided,
that the conversion rights of any shares of Armco Preferred Stock called
for redemption shall terminate at the close of business on the business
day (or on the fifth day, in the case of the $3.625 Preferred Stock)
preceding the date fixed for redemption, unless default shall be made in
payment of the redemption price. The number of shares of Armco Common
Stock into which such Armco Preferred Stock shares are convertible is
subject to adjustment under certain circumstances, such as splits or
combinations of the Armco Common Stock or dividends on the Armco Common
Stock paid in Armco Common Stock
-1-
<PAGE>
or non-cash assets. In addition, under certain circumstances involving a
Change of Control (as defined in the terms of the $3.625 Preferred
Stock), each issued and outstanding share of the $3.625 Preferred Stock
may be converted, at the option of the holder, for a limited period into
a number of shares of Armco Common Stock determined by formula. These
special conversion rights of the $3.625 Preferred Stock may deter certain
mergers, tender offers or other takeover attempts.
On June 27, 1986, the Armco Board of Directors declared a dividend
distribution of one Armco Preferred Stock Purchase Right (a "Right") for
each outstanding share of Armco Common Stock, payable to holders of Armco
Common Stock of record at the close of business on July 7, 1986. Each
Right, when exercisable, entitles the registered holder to purchase from
Armco a unit consisting of one two-hundredth of a share of Participating
Preferred Stock. Prior to the earlier of the Rights Distribution Date
and the Expiration Date (each as hereinafter defined), one Right will be
distributed with each share of Armco Common Stock issued. See "Preferred
Stock Purchase Rights."
The documents defining the terms of the Armco Common Stock, the
Rights and the Armco Preferred Stock are available for inspection upon
request at the office of the Secretary of Armco. Such documents are also
on file with and available for inspection at the Securities and Exchange
Commission, 450 Fifth Street N.W., Washington, D.C. 20549, and the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The statements set forth below are only summaries of such terms and
provisions and reference should be made to such documents and instruments
for complete statements of such terms and provisions.
Dividend Rights
Subject to the prior rights of the holders of Armco Preferred Stock
to receive dividends in cash at the rate provided for, and subject to any
restrictions or limitations contained in the express terms and provisions
of any shares of Armco Preferred Stock, dividends may be declared and
paid upon the Armco Common Stock, as and when determined by the Armco
Board of Directors, out of funds legally available therefor. At the
April 23, 1993, annual meeting, Armco's shareholders voted to reduce the
par value of Armco's common stock to $0.01 per share from $1.00 per
share. As a result, $102.7 million was transferred from Armco's stated
capital account for its common stock to additional paid-in capital,
increasing surplus from which Armco is permitted, under Ohio law, to pay
dividends on its common and preferred stock issues. Armco is
incorporated in Ohio. In addition, effective March 31, 1993, the
corporate statute of Ohio was amended to provide that Ohio corporations
that recognize immediately the full amount of their transition obligation
under Statement of Financial Accounting Standards ("SFAS"), SFAS 106, as
Armco did, could increase the amount available for payment of dividends
by adding to the corporation's surplus at the time of the dividend the
amount of the difference between the reduction in the corporation's
surplus that resulted from the immediate recognition of the SFAS 106
transition obligation and the amount of the transition obligation that
would have been recognized at the time of the dividend had the
corporation elected to amortize its recognition of such transition
obligation. At December 31, 1994, the amount from which Armco is
permitted to pay dividends under this provision was $143.8 million.
The express terms and provisions of the $4.50 Preferred Stock
provide that the holders of shares of $4.50 Preferred Stock are entitled
to receive cumulative dividends at the annual rate of $4.50 per share
before cash dividends are paid on the Armco Common Stock. The express
terms and provisions of the $3.625 Preferred Stock provide that the
holders of shares of $3.625 Preferred Stock are entitled to receive
cumulative dividends at the annual rate of $3.625 per share before cash
dividends are paid on the Armco Common Stock. The
-2-
<PAGE>
express terms and provisions of the $2.10 Preferred Stock provide that
the holders of shares of $2.10 Preferred Stock are entitled to receive
cumulative dividends at the annual rate of $2.10 per share before cash
dividends are paid on the Armco Common Stock. If Armco has failed to pay
any accrued cumulative dividends on any shares of Armco Preferred Stock
or has not paid or declared and provided for the dividends on outstanding
shares of Armco Preferred Stock for the then current dividend period,
Armco may not purchase or redeem any shares of Armco Common Stock. See
"Dividend Payment Restrictions".
Any dividends paid by Armco on its capital stock in 1995 will be
taxable as ordinary income only to the extent of Armco's 1995 "earnings
and profits". Dividends paid in 1995 in excess of Armco's "earnings and
profits" will be considered a return of capital and/or capital gain,
depending on the holder's tax basis in the capital stock.
Voting Rights
Except as otherwise required by law, the holders of Armco Common
Stock, as well as the holders of Class A Preferred Stock, are entitled at
all times to one vote for each share of such stock owned by them. Except
as set forth below, the holders of Class B Preferred Stock are not
entitled to vote on any matter.
If proper and timely notice is given by any shareholder before the
time fixed for holding a meeting for the election of directors that such
shareholder desires to cumulate his votes at such election, and if an
announcement of the giving of such notice is made upon the convening of
the meeting, each shareholder shall have the right to cumulate his votes
and give one candidate as many votes as equal the number of directors to
be elected multiplied by the number of votes to which he is entitled, or
to distribute them on the same principle among as many candidates as such
shareholder sees fit.
Shareholders who are entitled to vote in the election of directors
generally may nominate director candidates for election. Such
shareholders must deliver written notice thereof to the Secretary of
Armco not later than (i) with respect to an election to be held at any
annual meeting of shareholders, 90 days prior to the date one year from
the date of the immediately preceding annual meeting of shareholders, and
(ii) with respect to an election to be held at any special meeting of
shareholders for the election of directors, the close of business on the
tenth day following the date on which notice of such meeting is first
given to shareholders. The provision relating to director nomination may
have the effect of delaying, deferring or preventing a change in control
of Armco.
In the event of a default in the payment of the equivalent of six
quarterly dividends payable to holders of the Class A Preferred Stock or
the Class B Preferred Stock, the respective holders of the outstanding
shares of the Class A Preferred Stock or the Class B Preferred Stock, as
the case may be, voting as a class, are entitled to elect two additional
directors to serve on the Armco Board of Directors until such default is
cured. In addition, as a prerequisite to the adoption of (i) any
amendment of the Armco Amended Articles of Incorporation (the "Armco
Articles") materially altering any existing provision of the Class A
Preferred Stock or the Class B Preferred Stock, such amendment must
receive the affirmative approval of at least two-thirds of the
outstanding shares of the Class A Preferred Stock or the Class B
Preferred Stock, as the case may be, voting as a class, and (ii) any
amendment of the Armco Articles which increases the authorized number of
shares of the Class A Preferred Stock or the Class B Preferred Stock or
creates any class of shares which ranks equally with or prior to the
Class A Preferred Stock or the Class B Preferred Stock, such amendment
must receive the affirmative approval of a majority of the outstanding
shares of the Class A Preferred Stock or the Class B Preferred Stock, as
the case may be, voting as a class.
-3-
<PAGE>
Liquidation Rights
In the event of any voluntary or involuntary liquidation of Armco,
the holders of shares of the $4.50 Preferred Stock will be entitled to
receive from the assets of Armco, prior to any payment to the holders of
Armco Common Stock, the sum of $50 per share, plus dividends accrued and
unpaid to the date of payment. In the event of the voluntary liquidation
of Armco, the holders of shares of the $2.10 Preferred Stock will be
entitled to receive from the assets of Armco, prior to any payment to the
holders of Armco Common Stock, the sum of $40 per share, plus dividends
accrued and unpaid to the date of payment. In the event of the
involuntary liquidation of Armco, the holders of shares of the $2.10
Preferred Stock similarly will be entitled to receive from the assets of
Armco the sum of $15 per share, plus dividends accrued and unpaid to the
date of payment, prior to any distribution to holders of Armco Common
Stock. In the event of any voluntary or involuntary liquidation of
Armco, the holders of shares of the $3.625 Preferred Stock will be
entitled to receive from the assets of Armco, prior to any payment to the
holders of Armco Common Stock, the sum of $50 per share, plus dividends
accrued and unpaid to the date of payment. After such payments to the
holders of Armco Preferred Stock, any remaining assets available for
distribution to common shareholders will be distributed to the holders of
the Armco Common Stock pro rata in accordance with their respective
shares.
Redemptions
Shares of the $2.10 Preferred Stock may be redeemed at Armco's
option for a purchase price of $40 per share, plus dividends accrued and
unpaid to the date of redemption. Shares of the $3.625 Preferred Stock
may be redeemed at Armco's option on or after October 15, 1995 for a
purchase price per share starting at $52.5375 and declining, at 12-month
intervals, to $50 on and after October 15, 2002, plus dividends accrued
and unpaid to the date of redemption. Shares of the $4.50 Preferred
Stock may be redeemed at Armco's option for a purchase price of $50 per
share, plus dividends accrued and unpaid to the date of redemption.
Notice of any redemption of shares of Armco Preferred Stock shall be
given not less than thirty days prior to the date fixed for redemption to
the holders of record of the shares to be redeemed by mail to the
respective addresses of such holders as the same shall appear on the
stock books of Armco and, if the Armco Board of Directors so determines,
by publication of notice in the manner prescribed by the Board of
Directors.
Dividend Payment and Stock Purchase Restrictions
Armco has restrictive covenants under various loan agreements
relating to the payment of dividends on, or the purchase of, its capital
stock. Under the terms of Armco's existing $170.0 million revolving
credit facility, Armco's most restrictive loan agreement in this regard,
cash dividends cannot be paid on Armco Common Stock. This Armco credit
agreement permits the payment of dividends on the outstanding $4.50
Preferred Stock, the outstanding $3.625 Preferred Stock and the
outstanding $2.10 Preferred Stock so long as Armco is not in default
under the credit agreement. The existing Armco revolving credit facility
currently is scheduled to terminate on December 31, 1995.
Under the terms of the indentures for Armco's 11.375% Senior Notes
due 1999, and 9.375% Senior Notes due 1999, Armco can pay a dividend on
the Armco Common Stock if it meets certain financial tests described in
the indentures. Armco does not expect to satisfy these tests described
in such indentures during the remainder of 1995. In addition to
preventing Armco from paying dividends on the Armco Common Stock, the
inability to meet such financial tests prohibits Armco from repurchasing
its capital stock.
-4-
<PAGE>
Under Ohio law, Armco is permitted to purchase shares of its capital
stock only to the extent it has a capital surplus. At December 31, 1994,
Armco had no capital surplus.
Preferred Stock Purchase Rights
The Rights are issued under a Rights Agreement between Armco and
Fifth Third Bank. Each Right entitles the registered holder to purchase
for $35.00 (as such amount may be adjusted in accordance with the terms
of the Rights Agreement, the "Exercise Price") from Armco, a unit
consisting of one two-hundredth of a share, subject to adjustment, of
Participating Preferred Stock. The Rights are currently evidenced by the
certificates representing the Armco Common Stock and each outstanding
share of Armco Common Stock is, and each share of Armco Common Stock
issued prior to the earlier of the Rights Distribution Date and the
Expiration Date, as defined below, will be, accompanied by a Right.
Except as may otherwise be subsequently determined by the Armco Board of
Directors, no shares of Armco Common Stock issued on or after such date
will be accompanied by, nor will the holder of such share of Armco Common
Stock be entitled to receive, any Right. The Rights currently may be
transferred only with the Armco Common Stock and the surrender for
transfer of any certificate for Armco Common Stock will also constitute
the transfer of the Rights associated with the Armco Common Stock
represented by such certificate.
Upon the earlier of the following (the "Rights Distribution Date")
(i) ten days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Armco Common Stock (the "Stock Acquisition Date")
or (ii) ten business days following the date that a tender or exchange
offer is first published or sent if it would result in a person or group
beneficially owning 30% or more of such outstanding shares of Armco
Common Stock, the Rights will become exercisable and separate Rights
certificates will be issued. Except as otherwise determined by the Armco
Board of Directors, only shares of Armco Common Stock issued prior to the
earlier of the Rights Distribution Date and the Expiration Date, as
defined below, will be issued with Rights.
The Rights are not exercisable until the Rights Distribution Date
and will expire at the earlier of the close of business on June 26, 1996
(the "Final Expiration Date") and the time at which the Rights are
redeemed by Armco as described below (the earlier of such times is
referred to as the "Expiration Date").
In the event that (i) Armco is the surviving corporation in a merger
with an Acquiring Person and the Armco Common Stock is not changed or
exchanged, (ii) a person or entity becomes the beneficial owner of 30% or
more of the then outstanding shares of Armco Common Stock (except
pursuant to an offer for all the outstanding shares of Armco Common Stock
at a price and on terms determined by a majority of the members of the
Armco Board of Directors who are not officers of Armco and who are not
affiliated with an Acquiring Person to be in the best interests of Armco
or in a transaction of the type described in section (i) of the following
paragraph), (iii) an Acquiring Person engages in one or more "self-
dealing" transactions as set forth in the Rights Agreement or (iv) during
such time as there is an Acquiring Person, an event occurs which results
in such Acquiring Person's ownership interest being increased by more
than 1%, then each holder of a Right will have the right to receive, upon
exercise (which shall not be permitted until such time as the Rights are
no longer redeemable by Armco as set forth below), Armco Common Stock
(or, in certain circumstances, preferred stock, cash, property, other
Armco securities or a combination thereof), having a value equal to two
times the exercise price of the Right. Following the occurrence of any
such event described above, all Rights that are, or (under certain
-5-
<PAGE>
circumstances specified in the Rights Agreement) were, beneficially owned
by any Acquiring Person will be null and void.
In the event that, at any time following the Stock Acquisition Date,
(i) Armco enters into a merger or other business combination transaction
in which Armco is not the surviving corporation or in which Armco is the
surviving corporation and all or part of the then outstanding shares of
Armco Common Stock are exchanged for cash, property, stock or other
securities of an entity other than Armco (other than such a merger or
transaction in which holders of Armco Common Stock receive the same price
as in a tender offer or exchange offer approved by a majority of the
members of the Armco Board of Directors who are not officers of Armco and
who are not affiliated with an Acquiring Person to be in the best
interests of Armco) or (ii) 50% or more of Armco's assets or earning
power is sold or transferred, then each holder of a then valid Right will
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of
the Rights.
Armco may redeem the Rights in whole, but not in part, at a price of
$.01 per Right, payable in cash, shares of Armco Common Stock or other
form of consideration deemed appropriate by the Armco Board of Directors,
at any time until ten days following the Stock Acquisition Date.
Thereafter, Armco's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding
shares of Armco Common Stock in a transaction or series of transactions
not involving Armco and there is no other Acquiring Person. Under
certain circumstances, the decision to redeem the Rights requires the
concurrence of a majority of the Continuing Directors (those members of
the Armco Board of Directors who were members of the Armco Board of
Directors prior to June 27, 1986, and any person, other than an Acquiring
Person or affiliate thereof, subsequently elected to the Armco Board of
Directors who is recommended or approved by a majority of such members).
Immediately upon the action of the Armco Board of Directors ordering
redemption of the Rights, the Rights will terminate and the only right of
the holders of Rights will be to receive the $.01 redemption price.
Until a Right is exercised, the holder thereof, as such, will have
no rights as a shareholder of Armco, including, without limitation, the
right to vote or to receive dividends. Holders of Rights may, depending
upon the circumstances, recognize taxable income in the event that the
Rights become exercisable as set forth above.
Prior to the Rights Distribution Date, the Armco Board of Directors
may amend any provisions of the Rights Agreement, including the terms
governing the Rights, other than the price at which Armco can redeem the
Rights, the Final Expiration Date, the Exercise Price and the number of
one two-hundredth of a share of Participating Preferred Stock for which a
Right is exercisable. After the Rights Distribution Date, such terms may
be amended (in certain circumstances, only with the concurrence of the
Continuing Directors) only for limited purposes and to limited effects.
At any time when the Rights are not redeemable, no amendment shall be
made to adjust the time period governing redemption.
Participating Preferred Stock
The Participating Preferred Stock purchasable upon exercise of the
Rights will be non-redeemable and will rank in parity with all other
series of Armco Preferred Stock as to the payment of dividends and
distribution of assets. Each share of Participating Preferred Stock will
be entitled to receive a preferential quarterly dividend equal to the
greater of (i) $75 or (ii),subject to certain adjustments, 200 times all
dividends or other distributions, other than a dividend payable in shares
of Armco Common Stock or a subdivision of the outstanding shares of Armco
Common Stock, declared on the Armco Common Stock, since the last
-6-
<PAGE>
dividend payment date. In the event of any liquidation of Armco, the
holders of the Participating Preferred Stock will receive a preferred
liquidation payment of $7,000 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, and, if greater, will be
entitled to receive an aggregate liquidation payment equal to 200 times
the payment made per share of Armco Common Stock, subject to certain
adjustments. Each share of Participating Preferred Stock will have one
vote. The Participating Preferred Stock is not convertible into Armco
Common Stock or any other security of Armco, and is not redeemable. The
foregoing rights of the Participating Preferred Stock are protected
against dilution in the event additional shares of Armco Preferred Stock
or other capital stock are issued pursuant to a stock split, stock
dividend or similar recapitalization.
Miscellaneous
The Armco Common Stock has no conversion rights, and there are no
redemption or sinking fund provisions applicable thereto.
The Fifth Third Bank is transfer agent and registrar for the Armco
Common Stock, $2.10 Preferred Stock, $3.625 Preferred Stock and $4.50
Preferred Stock.
The Armco Common Stock, $2.10 Preferred Stock, $3.625 Preferred
Stock and $4.50 Preferred Stock are traded on the New York Stock
Exchange, the principal market therefor. In addition, the Armco Common
Stock is traded on the Midwest Stock Exchange and other regional
exchanges.
-7-
