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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, 1995
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[ ] 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
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Commission file number 1-873-2
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ARMCO INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-0200500
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415
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(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
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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
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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
$770,963,308 as of February 29, 1996.
As of the close of business on February 29, 1996, there were 106,550,937
shares of Common Stock outstanding.
Documents incorporated by reference herein include:
Annual Report to Shareholders for the year ended December 31, 1995 --
Parts I, II, and IV of this report.
Proxy Statement for the 1996 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 1996 Annual Meeting of Shareholders -- Part III
of this report.
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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. Armco's Sawhill Tubular Division manufactures a wide range
of steel pipe and tubing products for use in the construction, industrial and
plumbing fields. The Company also owns Douglas Dynamics, L.L.C. ("Douglas
Dynamics"), the largest North American manufacturer of snowplows for four-
wheel drive pick-up trucks and utility vehicles.
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 1993, 1994 and 1995, Armco divested or otherwise
rationalized several unprofitable or nonstrategic operations.
On March 14, 1995, Armco, Eastern Stainless Corporation ("Eastern
Stainless"), an 84%-owned subsidiary of Armco, and Avesta Sheffield Holding
Co. ("Avesta Sheffield") completed the sale of substantially all of the assets
of Eastern Stainless to Avesta Sheffield for consideration consisting of
approximately $10.1 million in cash and the assumption by Avesta Sheffield of
certain liabilities of Eastern Stainless. The cash proceeds were used by
Eastern Stainless to satisfy part of the liabilities not assumed by Avesta
Sheffield in the transaction. The net liabilities not assumed by Avesta
Sheffield or satisfied by the sale proceeds were assumed by Armco.
On April 7, 1995, Armco completed the sale of Northwestern National
Holding Company, Inc. and its subsidiaries, the AFSG companies to be sold, to
Vik Brothers Insurance, Inc., a privately held property and casualty insurance
holding company. The proceeds from the sale consisted of $64.2 million in
cash at the closing and an additional $15 million to be received in 1998,
subject to an adjustment based on a reserve analysis at that time. The cash
proceeds have been retained by Armco's unconsolidated runoff insurance
subsidiaries and pledged as security for certain note obligations.
On January 16, 1996, Armco sold its partnership interest in National-
Oilwell, a joint venture engaged in the oil and gas service business, which
was equally owned by subsidiaries of Armco and USX Corporation, to an entity
formed by Duff & Phelps/Inverness and First Reserve Funds along with certain
members of National-Oilwell's management. Armco received $77 million in cash
and receivables with a face value of $13 million. The receivables will be
recorded at a discounted value of $10.6 million. The terms of all the above
transactions were the result of arm's-length negotiation among the parties.
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 7 of the Notes to Financial Statements in Armco's Annual Report
to Shareholders for the year ended December 31, 1995, 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, 1995, which is
incorporated by reference herein.
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Specialty Flat-Rolled Steels
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-
rolled stainless, electrical and carbon steels at manufacturing operations
located in Butler, Pennsylvania, and Coshocton, Dover, Mansfield and
Zanesville, Ohio. The Butler and Mansfield Operations produce and finish
stainless and electrical steels in sheet and hot band form. The Coshocton
Operations finish stainless steel in strip and sheet form and the Zanesville
Operations finish stainless and electrical strip and sheet. In addition, the
Mansfield Operations produce commodity grades of carbon steel sheet, much of
which is coated at a dedicated galvanizing facility at the Dover Operations.
The segment also includes the results of European trading companies that buy
and sell steel and manufactured steel products. Stainless steel plate
products were finished at Eastern Stainless, which was sold on March 14, 1995.
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 Operations, Armco installed a thin-slab caster and made
related plant modifications at Mansfield. The new state-of-the-art continuous
thin-slab caster is designed to produce three different types of steels
(stainless, electrical and carbon) with rapid switchover from one type to
another. The installation of the thin-slab caster, certain hot mill upgrades
and other modifications at the Mansfield Operations were made over a 15-month
period at a cost totaling approximately $140 million. The casting process
used at Mansfield helps to ensure consistently high quality because it
eliminates intermediate production steps and reduces the amount of rolling
required to achieve desired thickness. The new caster can produce slabs from
three to five inches thick, up to 50 inches wide, and up to 60 feet in length.
The Mansfield and Dover Operations were idled from late in the first
quarter of 1994 through the first quarter of 1995, although Dover began
limited operations early in the first quarter of 1995. By mid-year, the Dover
plant was fully operational. During the idle period, these operations sold
only on-hand coil inventory. With the completion of its new thin-slab caster
and modernized hot strip mill, Mansfield restarted in April 1995. The restart
was hampered by process control system difficulties and, in the third quarter,
by the failure of the refractory lining and a skid in the new walking beam
furnace. The furnace problems necessitated an unscheduled 17-day outage,
halting the steel melting and casting operations. Early in the first quarter
of 1996, the Mansfield facility was operating at approximately 70% of
capacity.
The stainless and electrical 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 1995. Stainless and electrical steels refer to alloy tool
steel, electrical steel and stainless strip and sheet products. These steels
differ from basic carbon steel by their metallurgical composition. They are
made with a high alloy content, which permits 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, stainless and electrical steel is generally produced in relatively
small quantities utilizing special processing techniques designed to meet more
exacting specifications and tolerances.
Stainless steel 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 which, 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
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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 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
strip and sheet products that are used in a diverse range of consumer durables
and industrial applications. During the last three years, approximately 62%
of Armco's sales of specialty flat-rolled steel has been stainless steel, 24%
has been electrical steel and 10% has been carbon steel. The remaining sales
in this segment of Armco's business is primarily related to the foreign
subsidiaries that buy, warehouse, and sell specialty steel products. Major
markets served are industrial machinery and electrical equipment, automotive,
construction and service centers.
In the stainless steel market, Armco is the leading 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.
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 that refine
the magnetic domains of the steels, resulting in superior electrical
efficiency. Major electrical product categories are: Regular Grain Oriented
("RGO"), used in the cores of power and distribution transformers; Cold Rolled
Non-Oriented ("CRNO"), used for electrical motors and lighting ballasts; and
TRAN COR[registered tradmark]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 Steels
segment of $231.9 million at December 31, 1995, and $188.7 million at December
31, 1994. The backlog increased in 1995 primarily due to the start up of the
Mansfield and Dover Operations. While substantially all of the orders on hand
at year-end 1995 are expected to be shipped in 1996, 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 170-ton electric arc furnaces that feed
the world's largest (175-ton) argon-oxygen decarburization unit and a 170-ton
vacuum degassing unit for refining molten metal that, in turn, feed two double
strand continuous casters. The melt capacity at Butler was approximately
940,000 tons cast by year-end 1995. Butler also operates a hot-strip mill,
anneal and pickle units and two fully-automated tandem cold-rolling mills. It
also has various intermediate and finishing operations for both stainless and
electrical steels.
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The finishing plant in Coshocton, Ohio, located on 650 acres, is housed
in a 500,000 square-foot plant and has three Sendzimer mills, three 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.
The Mansfield, Ohio plant currently consists of a 1.4 million square-foot
facility, including a melt shop with two electric arc furnaces (170-ton and
120-ton), a 120-ton argon-oxygen decarburization unit, a thin-slab continuous
caster, a six-stand hot strip mill, a five-stand tandem cold rolling mill and
a newly retrofitted pickle line.
The Dover, Ohio plant produces a full range of galvanized products and is
a principal supplier to the heating, ventilating, air conditioning (HVAC)
market with its Reeves TiteKote[registered trademark] product. It also
supplies galvanized products to the automotive, construction, appliance and
service center markets.
Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on
88 acres, is a finishing plant for some of the steel produced at Butler and
Mansfield and has a Sendzimer cold-rolling mill, anneal and pickle facilities,
high temperature box anneal and other decarburization and coating units.
In the fourth quarter of 1994, Armco announced an expanded capital
improvement program under which it would spend up to $95 million over a two-
year period to upgrade and expand its stainless and electrical 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 strip and
sheet products and chrome stainless. Armco expects to have the projects
scheduled under this program completed by mid-1996.
Fabricated Products
The businesses currently included in the Fabricated Products segment are
described below:
-- Douglas Dynamics is the largest North American manufacturer of
snowplows for four-wheel drive pick-up trucks and utility vehicles. Douglas
Dynamics, which is headquartered in Milwaukee, Wisconsin, and has
manufacturing plants in Rockland, Maine, Milwaukee, Wisconsin and Johnson
City, Tennessee, sells its snowplows and other light truck equipment and
accessories under the names Western Products, Fisher Engineering and Douglas
Dynamics through independent distributors throughout the United States and
Canada.
-- Sawhill Tubular manufactures a wide range of steel pipe and tubular
products for use in the construction, industrial and plumbing markets at
plants in Sharon and Wheatland, Pennsylvania and Warren, Ohio. Sawhill
Tubular operates a stretch reduction mill, continuous welding mills and
finishing and galvanizing facilities.
Armco had trade orders on hand for its Fabricated Products segment of
$16.4 million at December 31, 1995 and $38.6 million at December 31, 1994.
The segment's backlog decreased in 1995 primarily as a result of reduced
demand in the snowplow and steel pipe and tubing businesses. While
substantially all of the orders on hand at year-end 1995 are expected to be
shipped in 1996, such orders, as is customary in these industries, are subject
to modification, extension or cancellation.
Employees
At December 31, 1995, Armco had approximately 5,900 employees in its
continuing operations and approximately 200 employees in its insurance and
other 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,
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respectively. In June 1993, employees represented by the United Steelworkers
of America ("USWA") 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 that 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 are subsidized by their 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 strip and sheet was 20% in 1995 compared
to 23% in 1994. Import penetration of electrical steels was 21% in 1995
compared to 20% in 1994.
In 1992, when the voluntary steel import restraint agreements (VRAs)
program was discontinued, President Bush committed to negotiating a
Multilateral Steel Agreement ("MSA") aimed at controlling steel industry
subsidies around the world. However, to date no MSA has been concluded. In
1995, led by the Specialty Steel Industry of North America, the industry's
trade organization, a major initiative was begun with European specialty steel
producers to attempt to reach a consensus on an MSA for specialty steel
producers only. By the end of 1995, considerable progress had been made
toward developing a framework Multilateral Specialty Steel Agreement, or MSSA,
aimed at controlling specialty steel industry subsidies. It is hoped that
during 1996 the terms of the MSSA can be finalized and the agreement extended
to all specialty steel producers worldwide, although there can be no assurance
that such consensus can be achieved.
Competition is also presented by the so-called "mini-mills", which
generally have smaller, non-unionized workforces and are relatively free of
many of the employee, environmental and other obligations that traditionally
have burdened steel producers. Nucor Corporation, a mini-mill steel company,
in 1995 entered the automotive chrome stainless steel business, with the
addition of an argon-oxygen decarburization (AOD) vessel at its
Crawfordsville, Indiana melt shop. In 1995, Nucor produced 16,000 tons of
automotive chrome stainless with targeted shipments of 60,000 to 70,000 tons
for 1996. Nucor'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 Raw Materials and Energy Sources
Raw Materials and Energy Sources
Raw material prices represent a major component of per ton production
costs in the steel industry. The principal raw materials used by Armco in the
production of steels are iron and carbon 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, 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
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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.
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 $29 million for the years 1996-2000, with the largest
expenditures being made in the Specialty Flat-Rolled Steels segment.
Approximately $5 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 1995, Armco's capital expenditures
for pollution control projects amounted to approximately $28.1 million,
including $18.1 million in 1995. 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 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.
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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 million, $12 million, and $9.4 million, respectively, on
research in the years ended December 31, 1995, 1994 and 1993, of which $.9
million and $3.9 million was funded by affiliates, primarily ASC, which is no
longer an affiliate, in 1994 and 1993, respectively.
Other Investments
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 1994, Armco's subsidiary sold 90% of its 50% equity
interest in NAS to its partner for $73 million in cash. 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.
Armco Steel Company, L.P. ("ASC")
ASC was a joint venture limited partnership formed in 1989 by Armco and
Kawasaki Steel Corporation. 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 Holding Corporation ("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. On May 4, 1995, Armco announced that it
had completed a series of trades resulting in the sale of 1,023,987 shares of
AK Steel. As a result of the sales, Armco realized total net proceeds of
$27.2 million. With the completion of these transactions, Armco no longer
owns any stock in AK Steel.
Discontinued Operations
National-Oilwell
Armco, through a wholly owned subsidiary, had 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. On January 16, 1996,
Armco sold its partnership interest in National-Oilwell to an entity formed by
Duff & Phelps/Inverness and First Reserve Funds along with certain members of
National-Oilwell's management. Armco received $77 million in cash and
receivables with a face value of $13 million. The receivables will be
recorded at a discounted value of $10.6 million.
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Armco Financial Services Group ("AFSG")
Prior to April 7, 1995, AFSG consisted primarily of insurance companies
that Armco intended to sell (the "AFSG companies to be sold") and companies
that have ceased writing new business and are being liquidated (the "runoff
companies").
On April 7, 1995, Armco completed the sale of Northwestern National
Holding Company, Inc. and its subsidiaries, the AFSG companies to be sold, to
Vik Brothers Insurance, Inc., a privately held property and casualty insurance
holding company. The proceeds from the sale consisted of $64.2 million in
cash at the closing and an additional $15 million to be received in 1998. The
latter amount is subject to potential adjustment for adverse experience in
certain insurance reserves. Substantially all of these proceeds were pledged
as security for certain note obligations due to the runoff companies and have
been retained in the investment portfolio of those companies.
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 1,007 at December 31, 1995.
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 $188 million at December 31, 1995. 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 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. Armco expects that any such charges would not have a material adverse
effect on its financial condition.
The terms of the NAS, ASC, National-Oilwell and AFSG transactions
described in "Other Investments" and "Discontinued Operations", above, were
the result of arm's-length negotiation among the parties.
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 Steels and Fabricated Products businesses. Armco believes that
all its operating facilities are being adequately maintained and are in good
operating condition.
ITEM 3. LEGAL PROCEEDINGS
There are various claims pending against Armco and its subsidiaries
involving product liability, patent, reinsurance and insurance arrangements,
environmental, antitrust, employee benefits and other matters arising out of
the conduct of the business of Armco.
Reserve Mining Litigation. 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") who
declined to participate in the USWA v. Armco settlement.
-------------
8
<PAGE>
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. Further proceedings
in this case have been stayed pending the decision in the Ricke case discussed
below. -----
On April 25, 1994, an action entitled Larry B. Ricke, Trustee v. Armco
--------------------------------
Inc. 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 Mining Company ("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 filed a motion seeking
interlocutory appellate review. This motion was granted on June 6, 1995.
Oral argument was held on December 11, 1995. No decision has been rendered.
Eastern Stainless Corporation ("Eastern") Stockholder Litigation. On or
-----------------------------------------------------------------
about March 13, 1995, an action styled Pension Benefit Guaranty Corporation v.
---------------------------------------
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. The complaint is captioned as a shareholder
derivative and class action on behalf of all Class B shareholders. The
plaintiff alleges breach of fiduciary duty as well as certain other claims
arising from Armco's status as a majority shareholder in Eastern. 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 was dissolved without any shareholder distribution.
In accordance with Virginia corporation law, a special independent committee
of the Board of Directors of Eastern ("Committee") was appointed to evaluate
the merits of plaintiff's derivative claims under the business judgment rule.
Armco filed a motion to dismiss the direct claims, stay the derivative claims
and stay discovery pending completion of the Committee's investigation.
Plaintiff filed a motion for class certification. The court denied Armco's
motion to dismiss the direct claims and stay discovery, and granted Armco's
motion to stay the derivative claims and plaintiff's motion for class
certification. The court issued a preliminary pre-trial order setting the
case for non-binding summary jury trial for November 18, 1996. Trial on the
merits is currently set for January 6, 1997. Armco has filed an answer to the
complaint and discovery is in progress.
On January 31, 1996, the Committee issued a report on its review and
evaluation of the derivative claims, which concluded that the Class B
shareholders were treated fairly by Armco and Eastern and that there is no set
of circumstances or assumptions under which the maintenance of the litigation
can serve the interests of Eastern or its Class B Shareholders. Eastern filed
on March 18, 1996, a Motion to Dismiss the derivative claims on the basis of
the Committee's findings.
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, seeking damages in excess of $40
million for allegedly defective pipe supplied by Armco Construction Products
for a sanitary sewer system in three residential subdivisions. In May 1991,
the Cornerstones plaintiffs amended their petition to add owners of some 1,500
------------
residences within the Kingsbridge Municipal Utility District ("Kingsbridge").
Subsequently, the Kingsbridge claims were severed into a separate action. In
-----------
January 1992, the trial court granted Armco's motion for summary judgment,
dismissing
9
<PAGE>
all claims asserted by the Cornerstones plaintiffs as barred by the
------------
statute of limitations. In January 1993, the Court of Appeals reversed the
dismissal. Upon Armco's petition, the Supreme Court of Texas reversed and
summary judgment in favor of Armco was reinstated by the Court of Appeals in
November 1994. In March 1995, the Cornerstones plaintiffs sought writ of
------------
error to the Supreme Court of Texas. On May 11, 1995, the Supreme Court of
Texas denied plaintiffs' application for writ of error, concluding the
Cornerstones matter in favor of Armco. On February 22, 1996, the District
- ------------
Court of Harris County entered summary judgment in favor of Armco in the
severed Kingsbridge action. The plaintiffs in Kingsbridge have thirty days in
----------- -----------
which to appeal the court's ruling.
In addition, there are three multiple-party homeowners actions that
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.
Environmental Proceedings. Most environmental actions involving Armco
--------------------------
relate to alleged contamination at off-site treatment and disposal sites. In
many of these cases, Armco is one of several hundred companies who have been
identified as potentially responsible parties ("PRPs"). In a few instances,
Armco is one of only a few parties or solely liable. It is routinely asserted
that joint and several liability will be applied in such cases; thus, a single
party could be held liable for all costs related to a site. However, Armco's
experience has been that liability is apportioned on the basis of volume
and/or toxicity of materials sent to a site and Armco expects that any
ultimate liability will be apportioned among Armco and other financially
viable parties. Other claims sometimes arise from contractual obligations for
properties Armco previously owned or leased and from regulatory actions.
Armco intends to assert all meritorious legal and equitable defenses that 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 Form 10-K
or Form 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 including Armco under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") for cost recovery and
injunctive relief associated with the French Limited Superfund site near
Crosby, Texas. In January 1996, the United States Environmental Protection
Agency ("USEPA") certified that the required remediation work had been
completed.
Armco is one of four defendants in the case styled, Rosa Ann Barrett, et
--------------------
al. v. Atlantic Richfield Company, et al., which was filed in January 1993, in
- -----------------------------------------
the United States District Court for the Southern District of Texas, Houston
Division on behalf of certain residents near the French Limited Site. On June
20, 1994, the court granted summary judgment against most plaintiffs. The
case is now on appeal before the Fifth Circuit with the exception of one
litigant whose case is before the trial court. Armco filed its brief in the
appellate case on March 4, 1996. Based on its experience to date with
resolution of claims in this matter, Armco does not believe its liability with
regard to the remaining claims will be material.
Armco is subject to a Consent Agreement and Final Order ("CAFO") dated
October 27, 1988, relating to two inactive surface impoundments located at the
former E.G. Smith plant in Cambridge, Ohio. 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 CAFO in 1989 and 1990.
A consent order to resolve this matter has been negotiated. The consent order
requires Armco to pay a
10
<PAGE>
penalty of $100,000 and to expend $200,000 on a study to reduce the
environmental effects of pickling with nitric acid. If Armco does not
implement the results of the study an additional payment up to $100,000 may be
required.
Armco is one of four companies that are identified by the USEPA as PRPs
at the Fultz Landfill Superfund site in Byesville, Ohio. Armco received the
initial CERCLA information request about this site in 1985. Armco estimates
past and future remediation costs at about $12 million. Settlement
discussions with USEPA were unsuccessful and on July 21, 1995, the Department
of Justice filed a complaint alleging Armco's liability for remediation costs
in the U.S. District Court for the Southern District of Ohio. In February
1996, the court granted Armco's motion to file a third-party complaint against
other PRPs. Armco has initiated discovery to identify additional parties who
disposed of hazardous waste at the site.
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. KDHE has indicated it will pursue Contech
and two other parties regarding this matter. Contech claims that Armco has an
indemnification obligation under the agreement conveying the property to
Contech. Based on the type of contamination at issue and the presence of
other PRPs, Armco does not believe its liability, if any, 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 Protection ("PADEP") for the William
Taylor Estate site. PADEP has indicated that it intends to conduct additional
investigations at this site. Based on current information about the type of
contamination and the presence of other PRPs, Armco does not expect its
liability, if any, to be material.
On February 16, 1994, the Missouri Department of Natural Resources and
the USEPA jointly issued a Part B permit for Armco's Kansas City facility
under the Resource Conservation and Recovery Act. Armco petitioned the
Environmental Appeals Board for review of most of such permit provisions. The
appeal was resolved and Armco is in compliance with the permit issued in
November 1994. No additional legal action is anticipated regarding this
matter.
On September 9, 1994, four parties who signed an USEPA Administrative
Order on Consent ("AOC") for cleanup of the Granville Solvent site in Ohio,
initiated a contribution action in the U.S. District Court for the Southern
District of Ohio against all PRPs, including Armco, who did not sign the AOC.
In a March 19, 1996 decision, the court denied plaintiffs' claim for their
costs related to litigation or negotiation of the AOC. Based on this recent
decision and on current information about remediation costs, Armco does not
expect its liability, if any, to be material.
On February 27, 1995, the Ohio Environmental Protection Agency issued a
Notice of Violation ("NOV") to Armco's Zanesville, Ohio operations alleging
noncompliance with both a 1993 Order and various state regulations regarding
hazardous waste management. Armco has instituted appropriate corrective
measures. No proposed penalties were included in the NOV and Armco cannot
reasonably estimate potential penalties, if any, based on current information.
In the opinion of management, the ultimate liability, if any, resulting
from the claims described in the preceding paragraphs in this "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.
11
<PAGE>
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, 1995.
Executive Officers of Armco
The executive officers of Armco as of March 15, 1996, were as follows:
<TABLE>
<CAPTION>
Years
Age as of Tenure in of Service
Name March 15, 1996 Office Office (1) with Armco
- ---- -------------- ------ ----------- -----------
<S> <C> <C> <C> <C>
James F. Will 57 Chairman, President and
Chief Executive Officer (2) 1994 (2) 4
James L. Bertsch 52 Vice President and Treasurer 1989 30
John B. Corey 52 Vice President (3) 1994 (3) 17
David G. Harmer 52 Vice President and
Chief Financial Officer 1993 3
David A. Higbee 53 Vice President (4) 1994 (4) 30
Gary R. Hildreth 57 Vice President, General Counsel
and Secretary 1993 25
Peter G. Leemputte 38 Vice President and Controller 1993 3
Gary L. McDaniel 49 Vice President - Operations 1996 3
M. Dennis McGlone 46 Vice President - Commercial 1996 4
Pat J. Meneely 44 Vice President - Information
and Organizational
Effectiveness 1995 1
Daniel E. Smigielski 46 Vice President - Purchasing &
Traffic 1996 3
- -------------------------
<FN>
(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,
Higbee, Leemputte, McDaniel, McGlone, Meneely and Smigielski. 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. Higbee
was President of National-Oilwell. 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. Prior to joining Armco, Mr.
McDaniel was Division Manager of Maintenance and Services at the Indiana
Harbor Works of LTV Steel Company (producer of flat-rolled and tubular carbon
steel products). Immediately prior to joining Armco, Mr. McGlone was Vice
President at Coshocton (an operating division of Cyclops Industries, Inc.)
Mr. Meneely was Vice President, Information Systems and CIO at Sara Lee
Hosiery (a
12
<PAGE>
manufacturer of hosiery). Prior to that, Mr. Meneely was Vice President,
Administration and Vice President, Information Services at Wheeling-Pittsburgh
Steel Corporation (a manufacturer of steel). Mr. Smigielski was Director,
Purchasing and Traffic at Armco's Butler Operations. Prior to that, Mr.
Smigielski was Project Director at Krupp GMBH (an engineering company
specializing in steel industry equipment and processing facilities).
(2) Effective February 1, 1996, Mr. Will was elected Chairman of the Board
in addition to the position of President and Chief Executive Officer.
(3) Effective January 1, 1996, Mr. Corey was named Vice President. He had
previously been Vice President - Asset Management and Strategic Planning since
March 1, 1995.
(4) Effective January 1, 1996, Mr. Higbee was named Vice President. He
had previously been Vice President - Diversified Businesses since March 1,
1994.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Armco's common stock is sold principally on the New York Stock Exchange.
At February 29, 1996, there were 25,768 common stock shareholders of record.
Other information required by this item is incorporated herein by reference
from pages 41 and 46 of the Annual Report to Shareholders for the year ended
December 31, 1995.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
(In millions, except per share amounts)
<CAPTION>
1995 1994 1993 1992 (2) 1991
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales $1,559.9 $1,437.6 $1,664.0 $1,673.2 $1,204.0
Special charges - net (3) -- (35.0) (165.5) (185.1) (48.7)
Income (loss) from continuing
operations 23.5 65.8 (247.5) (402.2) (147.2)
Income (loss) from continuing operations
per common share 0.05 0.46 (2.56) (4.17) (1.75)
Total assets (4) 1,896.6 1,934.9 1,904.7 1,869.9 1,765.0
Long-term debt and lease obligations 361.6 363.8 379.7 401.0 350.7
Long-term employee benefit
obligations (4) 1,165.9 1,221.9 1,249.9 541.6 362.3
Class B common stock of subsidiary (5) -- -- 9.7 9.3 --
- -----------------------------------
<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 primarily relate to the shutdown, sale and/or
rationalization of operating facilities.
(4) In 1993, Armco adopted SFAS Nos. 106 and 109 which increased long-
term employee benefit obligations and total assets.
13
<PAGE>
(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 reached a decision to sell
substantially all of its assets and, as a result, Armco stopped
consolidating the results of Eastern Stainless. The asset sale 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 20-23, 25 and 27-29 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, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
from pages 30-46 of the Annual Report to Shareholders for the year ended
December 31, 1995.
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
1996 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".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
<PAGE>
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 31,1995, 1994 and 1993 *
2. Statement of Consolidated Financial Position as of
December 31, 1995 and 1994 *
3. Statement of Consolidated Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 *
4. Notes to Financial Statements *
5. Independent Auditors' Report *
6. Independent Auditors' Report 20
7. Financial Statement Schedule for the Years Ended
December 31, 1995, 1994 and 1993
II-- Valuation and Qualifying Accounts 21
8. Responsibility for Financial Reporting *
9. National-Oilwell Consolidated Financial Statements
and Financial Statement Schedules as of
December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 22 - 36
- ----------------------
* Incorporated in this Annual Report on Form 10-K by reference to pages 30-46
of the Annual Report to Shareholders for the year ended December 31, 1995.
Financial Statements and Financial Statement Schedules Omitted
The financial statements and financial statement schedules for Armco Inc.
and subsidiaries 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 Annual Report
on Form 10-K.
3(a). Articles of Incorporation of Armco Inc., as amended as of May 12,
1993 (1)
3(b). Regulations of Armco Inc. (2)
15
<PAGE>
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 February 23, 1996 between Armco Inc.
and Fifth Third Bank
10(h) Rights Agreement dated as 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. dated as of August 2, 1994. (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)
10(o). Purchase Agreement, as amended, among Oilwell, Inc., National
Supply Company, Inc., USX Corporation, Armco Inc. and NOW Holdings, Inc. (16)
10(p). Rights Agreement dated as of February 23, 1996 between Armco Inc.
and Fifth Third Bank
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1995.
(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,
1995.)
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
16
<PAGE>
The annual reports (Form 11-K) for the year ended December 31, 1995 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 Annual Report on 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.
(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.
(16) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated
January 16, 1996.
- ----------------------------
17
<PAGE>
II. Reports on Form 8-K
The following reports on Form 8-K were filed by Armco since September 30,
1995:
Report Date Description
----------- -----------
December 18, 1995 Reporting that the sale of Armco's
Greens Port Industrial Park property
was terminated on December 18, 1995.
January 16, 1996 Reporting that Armco sold its partnership
interest in National-Oilwell, a joint
venture engaged in the oil and gas
service business that was equally
owned by subsidiaries of Armco and USX
Corporation.
February 23, 1996 Reporting that Armco adopted a
Stockholder Rights Plan and declared a
dividend distribution of one preferred
stock purchase right for each outstanding
share of common stock of Armco to
stockholders of record at the close of
business on June 26, 1996.
18
<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 27,
1996.
ARMCO INC.
By JAMES F. WILL
-----------------------------------------
James F. Will
Chairman of the Board, 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 27, 1996.
By JAMES F. WILL By JOHN C. HALEY
- -------------------------------------- -------------------------------
James F. Will John C. Haley
Chairman of the Board, President, Director
Chief Executive Officer
and Director
By DAVID G. HARMER By
- -------------------------------------- ------------------------------
David G. Harmer Paul H. Henson
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 JOHN J. BURNS, JR. By BURNELL R. ROBERTS
- ------------------------------------- ------------------------------
John J. Burns, Jr. Burnell R. Roberts
Director Director
By PAULA H.J. CHOLMONDELEY By JOHN D. TURNER
- -------------------------------------- ------------------------------
Paula H.J. Cholmondeley John D. Turner
Director Director
By DAVID A. DUKE
- -----------------------------------
David A. Duke
Director
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Armco Inc.:
We have audited the consolidated financial statements of Armco Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, and have issued our report thereon
dated February 5, 1996, 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 1995 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of Armco Inc. and 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 5, 1996
20
<PAGE>
<TABLE>
SCHEDULE II
ARMCO INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(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, 1993:
<S> <C> <C> <C> <C> <C>
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 - 18.7
- ------------------------------------------------------------------------------------------
For the Year Ended December 31, 1995:
Allowance for doubtful accounts $ 4.1 $0.3 $1.0 $0.6 (A) $ 4.4
0.3 (B)
0.1 (C)
Allowance for impairment of
investments.................. 18.7 - 2.0 - 16.7
- ------------------------------------------------------------------------------------------
<FN>
NOTES:
(A) Written off to the income statement.
(B) Net balances of consolidated subsidiaries purchased (divested).
(C) Collections on bad debt items.
</TABLE>
21
<PAGE>
EXHIBIT INDEX
The following is an index of the exhibits included in the Annual Report
on Form 10-K.
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 February 23, 1996 between Armco Inc.
and Fifth Third Bank
10(h) Rights Agreement dated as 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. dated as of August 2, 1994. (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)
10(o). Purchase Agreement, as amended, among Oilwell, Inc., National
Supply Company, Inc., USX Corporation, Armco Inc. and NOW Holdings, Inc. (16)
10(p). Rights Agreement dated as of February 23, 1996 between Armco Inc.
and Fifth Third Bank
11. Computation of Income (Loss) Per Share
13. Annual Report to Shareholders for the year ended December 31, 1995.
(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,
1995.)
<PAGE>
21. List of subsidiaries of Armco Inc.
23. Independent Auditors' Consents
27. Financial Data Schedule
99. Description of Armco Capital Stock
The annual reports (Form 11-K) for the year ended December 31, 1995 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 Annual Report on 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.
(14) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1994.
<PAGE>
(15) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated
March 14, 1995.
(16) Incorporated by reference from Exhibit 2 to Armco's Form 8-K dated
January 16, 1996.
- ----------------------------
<PAGE>
[LOGO] Ernst & Young LLP *One Houston Center *Phone: 713 750 1500
Suite 2400 Fax 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, 1995 and 1994, and the related
consolidated statements of operations, partners' capital, and cash flows for
each of the three years in the period ended December 31, 1995. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of National-Oilwell and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
January 31, 1996
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
22
<PAGE>
NATIONAL-OILWELL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
($ in thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 65,452 $ 9,418
Trade receivables, less allowance for doubtful
accounts of $ 4,015 for 1995 and $1,023 for 1994 73,257 97,425
Inventories (Note 3) 120,686 124,096
Receivable from owners, net (Note 11) - 847
Other receivables 1,729 4,096
Prepaid expenses 2,322 2,444
Assets held for sale, net 2,221 1,675
-------- --------
Total current assets 265,667 240,001
Property, plant and equipment, net (Note 4) 18,877 22,397
Deferred taxes (Note 9) 1,450 1,959
Other assets 2,584 3,947
-------- --------
Total assets $288,578 $268,304
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Cash overdrafts $ 3,350 $ 9,846
Notes payable (Note 5) 9,128 -
Accounts payable-trade 60,423 50,494
Accounts payable to owners, net (Note 11) 2,892 -
Deferred credits 7,500 1,506
Accrued salaries and wages 3,071 4,492
Other accrued liabilities 11,066 21,853
-------- --------
Total current liabilities 97,430 88,191
Employee benefit obligations 4,529 4,958
Insurance accruals 6,201 8,524
Other liabilities 2,406 4,743
-------- --------
Total liabilities 110,566 106,416
Commitments and contingencies (Note 6)
Partners' capital:
Owners capital 185,506 169,784
Cumulative foreign currency translation adjustment (7,494) (7,896)
-------- --------
Total partners' capital 178,012 161,888
-------- --------
Total liabilities and partners' capital $288,578 $268,304
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
23
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
($ in thousands)
<S> <C> <C> <C>
Revenues $545,803 $562,053 $627,281
Cost of revenues 474,791 482,423 547,401
-------- -------- --------
Gross Profit 71,012 79,630 79,880
Selling, general, and administrative expenses 51,198 55,109 66,021
Other operating expenses 6,033 9,313 13,370
Special charges/(credits) (Note 10) (8,458) (13,916) 8,565
-------- -------- --------
Operating Income/(Loss) 22,239 29,124 (8,076)
Interest expense and other financial costs (2,358) (5,777) (8,277)
Interest income 1,097 1,046 1,001
Other - income (expense) (1,401) 528 (240)
-------- -------- --------
Income/(Loss) Before Foreign Income Taxes 19,577 24,921 (15,592)
Foreign income taxes (Note 9)
Current 568 132 978
Deferred 1,369 909 893
-------- -------- --------
Provision For Foreign Income Taxes 1,937 1,041 1,871
-------- -------- --------
Net Income/(Loss) $17,640 $23,880 $(17,463)
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
24
<PAGE>
<TABLE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<CAPTION>
Cumulative
Foreign
Currency Total
Partners' Translation Partners'
Capital Adjustment Capital
--------- ----------- ----------
($ in thousands)
<S> <C> <C> <C>
Balance at December 31, 1992 $194,367 $(1,821) $192,546
Net loss (17,463) - (17,463)
Translation adjustment - (4,407) (4,407)
--------- ----------- ----------
Balance at December 31, 1993 176,904 (6,228) 170,676
Net income 23,880 - 23,880
Translation adjustment - (1,668) (1,668)
Distribution (31,000) - (31,000)
--------- ----------- ----------
Balance at December 31, 1994 169,784 (7,896) 161,888
Net income 17,640 - 17,640
Translation adjustment - 402 402
Distribution (1,918) - (1,918)
--------- ----------- ----------
Balance at December 31, 1995 $185,506 $(7,494) $178,012
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
25
<PAGE>
NATIONAL-OILWELL
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 17,640 $ 23,880 ($17,463)
Adjustments to reconcile net income/(loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization 3,595 6,027 10,721
Provision for losses on accounts receivable 2,855 545 1,237
Provision for deferred income taxes 1,369 909 893
Gain on ordinary sale of property,
plant, and equipment (662) (910) (867)
Foreign currency transaction (gain) loss 1,170 54 160
Special charges/(credits) (8,458) (13,916) 8,565
Changes in operating assets and liabilities:
Decrease (increase) in receivables 24,583 491 (5,245)
Decrease in inventories 2,205 12,483 19,558
Decrease (increase) in other assets (4,730) 4,287 (3,453)
Increase (decrease) in accounts payable 6,959 7,614 (21,423)
Decrease in other liabilities (4,856) (3,913) (7,172)
-------- -------- --------
Net cash provided (used) by operating
activities 41,670 37,551 (14,489)
-------- -------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment (4,764) (3,604) (1,967)
Proceeds from sales of property, plant and
equipment 6,865 1,731 4,947
Proceeds from sales of product lines 6,944 69,821 -
Other (218) 251 (108)
-------- -------- --------
Net cash provided (used) by investing
activities 8,827 68,199 2,872
-------- -------- --------
Cash flow from financing activities:
Proceeds from revolving lines of credit and
long-term debt 53,172 54,503 64,386
Principal payments on revolving lines of
credit and long-term debt (44,044) (124,345) (51,052)
Principal payments under capital lease
obligations - (911) (996)
Cash distribution to partners (1,918) (31,000) -
-------- -------- --------
Net cash provided (used) by financing
activities 7,210 (101,753) 12,338
-------- -------- --------
Effect of exchange rate losses on cash (1,673) (595) (154)
Increase in cash and equivalents 56,034 3,402 567
Cash and cash equivalents at beginning of year 9,418 6,016 5,449
-------- -------- --------
Cash and cash equivalents at end of year $65,452 $9,418 $6,016
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
26
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Organization and Basis of Presentation
As of December 31, 1995, National-Oilwell ("Company") was a general
partnership organized under the laws of Delaware between National Supply
Company, Inc. ("NSC") and Oilwell, Inc. ("OI"). Each of the partners held a
50% interest in the partnership. All references to the Company in these
financial statements are synonymous with National-Oilwell as previously
described. Effective January 9, 1996, the Company converted from a general
partnership to a Delaware limited partnership, and on January 17, 1996, NSC
and OI sold their interest in the Company to NOW Holdings, Inc. (See Note 13).
The Company is a distributor and manufacturer of products for the oilfield
services industry. 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 Distribution segment is comprised
of the Distribution Services and Tubular Distribution business units. This
segment distributes standardized oilfield products through its 116
distribution service centers located throughout oil and gas producing regions
in North America, and is also one of the largest distributors of oil country
tubular goods ("OCTG") to oil and gas operators and drilling contractors in
North America. In addition, the Company conducts distribution activities in
certain major oil and gas producing regions outside of North America,
including the United Kingdom, South America, the Middle East and the Pacific
Rim, through six international distribution facilities.
The Equipment segment consists of the Drilling Systems & Equipment and Pumping
Systems business units. This segment is a leader in the design, manufacture
and sale of certain drilling rig components and is a major designer and
manufacturer of other drilling equipment items used in the assembly of new
drilling rigs. Additionally, this segment designs and manufactures an
extensive line of centrifugal and reciprocating pumps used in a variety of
oilfield applications. Under its Mission-Fluid King ("MFK") brand name, it
also supplies a wide variety of fluid end accessories and expendable pump
parts serving the oil and gas drilling market.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. 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 methods.
27
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Foreign Currency
The functional currency for the Company's Canadian, United Kingdom and
Australian 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' capital. The U.S. dollar is used
as the functional currency for the Singapore and Venezuelan subsidiaries. For
all operations, gains or losses from remeasuring foreign currency transactions
into the functional currency are included in income.
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 condition 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 has provided 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 $332,000, $557,000 and $392,000 during the
years ended December 31, 1995, 1994 and 1993, respectively.
As a partnership, the Company was not subject to U.S. federal or state taxes
on its income. The general partners included in their federal and state tax
returns the partnership's results of operations during 1995. Accordingly, no
provision for U.S. federal or state income taxes was made by the Company for
1995.
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).
Research and Development Costs
Research and development costs are expensed as incurred. During 1995, 1994
and 1993, research and development costs were $417,000, $579,000 and
$1,115,000, respectively.
Use of Estimates
Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Reclassifications
Certain amounts from the prior year financial statements have been
reclassified to conform with the 1995 presentation.
28
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. Inventories
<TABLE>
Inventories consist of:
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Raw materials and supplies $ 11,528 $ 12,486
Work in process 4,842 5,112
Finished goods 104,316 106,498
-------- --------
Total $120,686 $124,096
======== ========
</TABLE>
Foreign inventories are approximately 21% and 20% of total inventories at
December 31, 1995 and 1994, respectively.
4. Property, Plant and Equipment
<TABLE>
Property, plant and equipment consist of:
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Land and improvements $ 2,509 $ 5,718
Buildings 10,404 10,772
Machinery and equipment 31,139 53,886
Other, including computer equipment
and furniture and fixtures 19,079 21,366
-------- --------
Total 63,131 91,742
Less accumulated depreciation
and amortization (44,254) (69,345)
-------- --------
Net $ 18,877 $ 22,397
======== ========
</TABLE>
5. Notes Payable
At December 31, 1995, the Company had bank lines of credit totaling
$60,000,000, of which $13,075,000 had been utilized for letters of credit with
an additional $9,128,000 in loans outstanding. The primary revolving credit
agreement (Credit Agreement) was renewed in February, 1995 for three years,
and was secured by inventory, receivables and the stock of the Company's
subsidiaries. The Credit Agreement contained certain financial covenants
relative to net worth, leverage ratio, capital spending, interest coverage and
fixed charges. The Company had complied with all covenants while that credit
agreement was in effect. A monthly borrowing base formula was used to
determine credit availability. The interest rate in the Credit Agreement
fluctuated with short-term interest rates. The interest rate in effect at
December 31, 1995 was 9 1/8%. A commitment fee of 1/2% per annum was charged
on the unused portion of the Credit Agreement. The weighted average interest
rate was approximately 9.0% and 8.5% for 1995 and 1994, respectively.
Interest paid was $144,000 during 1995, $3,444,000 in 1994 and $3,693,000
during 1993.
During the year, consent agreements were executed to allow for Canadian
preference share redemptions, sale of certain Wilson-Snyder assets,
reallocation of the US and Canadian facility, security filings and certain
intercompany debt cancellations.
A new credit agreement, contingent upon the change in ownership, was executed
as of December 29, 1995, and was funded on January 17, 1996. (See Note 13).
29
<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 various dates up
to the year 2015. The Company's annual lease commitments for operating leases
at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
(In thousands)
<S> <C>
1996 $ 6,372
1997 4,046
1998 1,796
1999 1,312
2000 1,159
Thereafter 6,096
---------
Total $20,781
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$9,714,000, $8,691,000 and $10,372,000, 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, 1995 cannot be
determined; however, in the opinion of management, any ultimate liability, to
the extent not otherwise provided for, should not materially affect the
financial position, liquidity or results of operations of the Company.
Environmental
The Company's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry in
general, as well as by environmental and safety regulations that specifically
apply to the Company's business. Laws and regulations protecting the
environment have generally become more stringent in recent years and the
Company believes the trend of more expansive and stricter environmental laws
will continue. Although the Company has not incurred material costs in
connection with its compliance with such laws, there can be no assurance that
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could not result in additional, presently
unquantifiable, costs or liabilities to the Company.
7. Pension Plans
The Company and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. The defined-contribution pension
plans 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, 1995, 1994 and 1993, domestic pension expense for the defined-
contribution plan was $1,332,000, $1,745,000 and $1,812,000, respectively, and
the funding is current. Pension expense of the foreign operations for the
defined-contribution plan totaled $180,000 for 1995, $169,000 for 1994 and
$193,000 for 1993.
The Company's UK subsidiary has a defined-benefit pension plan whose
participants are primarily retired and terminated employees who are no longer
accruing benefits. The UK pension plan assets are invested primarily in UK
and overseas equity securities, UK government securities, overseas bonds and
cash deposits.
30
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The plan assets at fair market value were $32,104,000 at December 31, 1995 and
$27,389,000 at December 31, 1994. The projected benefit obligation was
$23,131,000 at December 31, 1995 and $20,630,000 at December 31, 1994. Net
periodic pension cost/(benefit) recognized as expense/(income) for the years
ended December 31, 1995, 1994 and 1993 was $379,000, ($69,000) and $699,000,
respectively.
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. The
Company's policy is to fund the cost of postretirement health care and life
benefits as they are incurred.
The following table shows the plans' combined funded status reconciled with
amounts recognized in the Company's Consolidated Balance Sheets at December
31, 1995 and 1994:
<TABLE>
<CAPTION>
Medical/Life Plans
--------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $2,204 $ 786
Fully eligible active plan participants 91 1,244
Other active plan participants 130 129
-------- --------
Accumulated postretirement benefit cost 2,425 2,159
Unrecognized net gain $1,284 $1,702
-------- --------
Benefit obligation recorded on the balance sheet $3,709 $3,861
======== ========
</TABLE>
The recorded benefit obligation in excess of the accumulated postretirement
benefit obligation represents unrecognized gains which are being amortized
over the average remaining service period of active plan participants.
<TABLE>
Net periodic retirement benefit cost includes the following components:
<CAPTION>
Medical/Life Plans
----------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Service cost $ 8 $ 15 $ 13
Interest cost 164 161 240
Amortization of cumulative unrecognized
net (gain)/loss (58) (37) -
-------- -------- --------
Net periodic postretirement benefit cost $114 $139 $253
======== ======== ========
</TABLE>
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 9.5% for 1996,
9.0% for 1997, 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, 1995 by $273,000,
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1995 by $17,000.
31
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. Income Taxes
<TABLE>
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<CAPTION>
December 31
--------------------
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Book over tax depreciation $1,153 $1,729
Product warranty accruals 1,205 2,887
Net operating loss carryforwards 6,780 7,268
Other 1,070 508
-------- --------
Total deferred tax assets 10,208 12,392
Valuation allowance for deferred tax assets (8,310) (9,887)
-------- --------
1,898 2,505
Deferred tax liabilities:
Tax over book depreciation 448 346
Other - 200
-------- --------
Total deferred tax liabilities 448 546
-------- --------
Net deferred tax assets $1,450 $1,959
======== ========
</TABLE>
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.
10. Special Charges/(Credits)
<TABLE>
Special charges/(credits) consist of the following:
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sales of product lines $(5,491) $(15,648) $10,000
Sale of property, plant, and equipment (3,726) - -
Employee termination benefits 495 3,207 -
Exit costs 264 610 365
Reversal of prior year reserves - (2,085) (1,800)
-------- -------- --------
Total $(8,458) $(13,916) $ 8,565
======== ======== ========
</TABLE>
Sales of Product Lines
1995
- ----
The Company completed the sale of the Wilson-Snyder centrifugal pump and
switch valve business in the second quarter of 1995. Proceeds of
approximately $6.9 million from that sale resulted in a gain of $5.5 million.
The Company retained the Wilson-Snyder reciprocal pump business for industrial
and slurry pump market applications.
1994
- ----
The Company completed the sales of certain production equipment product lines
not considered part of its core businesses under asset sales agreements during
1994. Sale of the fluid control systems, rod pump,
32
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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.
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.
Sale of Property, Plant and Equipment
1995
- ----
The Company completed the sale of certain property, plant and equipment from
the Stockport, England and Red Deer, Alberta, Canada plant closures. Sale of
the Red Deer plant facility, which ceased operations in 1992, was completed in
the second quarter of 1995 with a gain of approximately $0.3 million. The
Stockport East Works property sale in the second quarter of 1995 and the
Stockport machine tool sale in the fourth quarter of 1995 resulted in gains of
approximately $1.8 million and $1.6 million, respectively.
Employee Termination Benefits
1995
- ----
The Stockport, England plant shutdown resulted in an additional $0.5 million
in employee termination expense in 1995. Most of this expense was to pay for
services which extended beyond the anticipated closure of the facility.
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 was for 115 employees and was paid in 1995.
Exit Costs
1995
- ----
Most of these exit costs resulted from the 1994 sale of the production
equipment product lines. The costs were primarily due to relocation of
machine tools, inventory and manufacturing processes which were retained from
the production equipment product line facilities that had been sold.
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
- ----
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
33
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
relocation of machinery and equipment. The plant closure was completed in
1993 for a total cost of approximately $1.3 million. Accordingly, no reserve
for this plant closure existed at December 31, 1993.
Reversal of Reserves
The reversal of reserves in 1994 and 1993 were recorded as credits to special
charges/(credits). 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 $1.8 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 NSC and OI, and their subsidiaries.
Significant related party transactions with these companies included:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenues $ 9,084 $10,495 $14,361
Purchases 36,414 30,704 39,000
Receivables 3,478 4,578 4,400
Payables 6,370 3,731 3,637
</TABLE>
At December 31, 1995, the Company leased 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 $3,322,000. Rental expense to related parties totaled
$1,184,000, $1,342,000 and $1,165,000 for 1995, 1994 and 1993, respectively,
and is excluded from purchases.
Cash distributions of $1.9 million and $31.0 million were made to the owners
in 1995 and 1994, respectively.
12. Business Segments and Geographic Areas
The Company's operations consist of two segments, the Distribution segment and
the Equipment segment. The Distribution segment distributes an extensive line
of oilfield supplies, oilfield equipment and tubular products. The 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.
For the year ended December 31, 1995, one major oil company accounted for
12.5% of consolidated revenues. Except for 1995 revenues from that customer,
no single customer accounted for 10% or more of consolidated revenues during
the years ended December 31, 1995, 1994 and 1993.
34
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
Summarized financial information with respect to business segments and
geographic areas is as follows:
Business Segments (in thousands)
<CAPTION>
Distribution Equipment (1) Corporate (2) Elimination Total
------------ ------------ ------------ ------------ ------------
1995
- ----
<S> <C> <C> <C> <C> <C>
Revenues from:
Unaffiliated customers $432,292 $113,511 --- --- $545,803
Intersegment sales --- 33,006 --- $(33,006) ---
------------ ------------ ------------ ------------ ------------
Total revenues 432,292 146,517 --- (33,006) 545,803
------------ ------------ ------------ ------------ ------------
Operating income (loss) 9,435 15,670 (2,866) --- 22,239
Capital expenditures 1,157 3,540 67 --- 4,764
Depreciation and amortization 1,662 1,899 34 --- 3,595
Identifiable assets 128,321 93,287 69,761 (2,791) 288,578
1994
- ----
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 1,832 1,728 44 --- 3,604
Depreciation and amortization 2,564 3,455 8 --- 6,027
Identifiable assets 162,170 99,298 12,150 (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 455 1,491 21 --- 1,967
Depreciation and amortization 2,370 8,349 2 --- 10,721
Identifiable assets 188,312 153,030 12,402 (10,265) 343,479
<FN>
(1) Operating income/(loss) of the oilfield equipment segment includes special
charges/(credits) of $(8,458), $(13,916) and $8,565 for 1995, 1994 and 1993,
respectively.
(2) Corporate identifiable assets in 1995 included $65.5 million of cash and
cash equivalents.
</TABLE>
35
<PAGE>
NATIONAL-OILWELL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
<TABLE>
Geographic Areas (in thousands)
<CAPTION>
United United Elim-
States Canada Kingdom Other ination Total
-------- -------- -------- -------- -------- --------
1995
- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues from:
Unaffiliated customers $430,671 $59,390 $35,776 $19,966 --- $545,803
Interarea sales 34,416 878 16,285 233 $(51,812) ---
-------- -------- -------- -------- -------- --------
Total revenues 465,087 60,268 52,061 20,199 (51,812) 545,803
-------- -------- -------- -------- -------- --------
Operating income (loss) 18,707 2,003 (1,383) 2,912 --- 22,239
Export sales of U.S. --- 1,700 1,539 80,075 --- 83,314
Identifiable assets 228,817 23,851 17,789 18,121 --- 288,578
1994
- ----
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
</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 $12,000, $18,000 and $21,700 for the
years ended December 31, 1995, 1994 and 1993, respectively.
13. Subsequent Event
On January 16, 1996, the Company was sold to a group of private investors on a
leveraged buyout basis. The purchase price of $180 million was financed by
existing Company cash and a new debt arrangement. As a result of this
ownership change, a new credit agreement became effective on January 17, 1996,
consisting of a revolving credit line totaling $120 million and term debt of
$55 million. The sellers have retained $20 million of the term debt.
Approximately $67 million of the revolving credit line was utilized to
consummate the transaction. The new company, NOW Holdings, Inc., is a
Delaware corporation.
36
<PAGE>
Exhibit 10(p)
EXECUTION DRAFT
- ------------------------------------------------------------------------------
ARMCO INC.
and
FIFTH THIRD BANK
Rights Agent
----------------------------------------
Rights Agreement
Dated as of February 23, 1996
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
1. Certain Definitions 1
2. Appointment of Rights Agent 6
3. Issue of Rights Certificates 6
4. Form of Rights Certificates 8
5. Countersignature and Registration 10
6. Transfer, Splitup, Combination and
Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or
Stolen Rights Certificates 10
7. Exercise of Rights; Purchase
Price; Expiration Date of Rights 12
8. Cancellation and Destruction of
Rights Certificates 14
9. Reservation and Availability of
Capital Stock 15
10. Preferred Stock Record Date 17
11. Adjustment of Purchase Price,
Number and Kind of Shares or
Number of Rights 17
12. Certificate of Adjusted Purchase
Price or Number of Shares 31
13. Consolidation, Merger or Sale
or Transfer of Assets or Earning
Power 31
14. Fractional Rights and Fractional
Shares 34
15. Rights of Action 36
16. Agreement of Rights Holders 36
17. Rights Certificate Holder Not Deemed
a Stockholder 37
<PAGE>
18. Concerning the Rights Agent 38
19. Merger or Consolidation or Change of
Name of Rights Agent 38
20. Duties of Rights Agent 39
21. Change of Rights Agent 42
22. Issuance of New Rights Certificates 43
23. Redemption and Termination 44
24. Notice of Certain Events 46
25. Notices 47
26. Supplements and Amendments 48
27. Successors 49
28. Determinations and Actions by
the Board of Directors, etc. 49
29. Benefits of This Agreement 50
30. Severability 50
31. Governing Law 50
32. Counterparts 50
33. Descriptive Headings 51
Exhibit A -- Form of Rights Certificate
Exhibit B -- Form of Summary of Rights
- ii -
<PAGE>
RIGHTS AGREEMENT
----------------
RIGHTS AGREEMENT, dated as of February 23, 1996 (the "Agreement"),
between Armco Inc., an Ohio corporation (the "Company"), and Fifth Third Bank,
an Ohio banking corporation (the "Rights Agent").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, on February 23, 1996 (the "Rights Dividend Declaration Date"),
the Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each share of Common Stock (as hereinafter
defined) of the Company outstanding at the close of business on June 26, 1996
(the "Record Date"), and has authorized the issuance of one Right (as such
number may hereinafter be adjusted pursuant to the provisions of Section 11(o)
hereof) for each share of Common Stock of the Company issued between the
Record Date (whether originally issued or delivered from the Company's
treasury) and the Distribution Date (as hereinafter defined), each Right
initially representing the right to purchase one two-hundredths of a share of
Preferred Stock upon the terms and subject to the conditions hereinafter set
forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
-------------------
following terms have the meanings indicated:
(a) "Act" shall mean the Securities Act of 1933.
(b) "Adverse Person" shall mean any Person declared to be an
Adverse Person by the Board of Directors upon determination that the criteria
set forth in Section 11(a)(ii)(B) apply to such Person.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and in effect on the date of this Agreement.
<PAGE>
(d) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the shares of Common Stock then
outstanding, but shall not include the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company,
or any Person organized, appointed or established by the Company for or
pursuant to the terms of any such plan.
(e) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding (whether or not in writing) or
upon the exercise of conversion rights, exchange rights, rights, warrants or
options, or otherwise; provided, however, that a Person shall not be deemed
--------
the "Beneficial Owner" of, or to "beneficially own," (A) securities tendered
pursuant to a tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities are accepted
for purchase or exchange, or (B) securities issuable upon exercise of Rights
at any time prior to the occurrence of a Triggering Event, or (C) securities
issuable upon exercise of Rights from and after the occurrence of a Triggering
Event which Rights were acquired by such Person or any of such Person's
Affiliates or Associates prior to the Distribution Date or pursuant to
Section 3(a) or Section 22 hereof (the "Original Rights") or pursuant to
Section 11(i) hereof in connection with an adjustment made with respect to any
Original Rights;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act as in effect on the date
of this Agreement), including pursuant to any agreement, arrangement or
understanding, whether or not in writing;
- 2 -
<PAGE>
provided, however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," any security under this subparagraph (ii) as a
result of an agreement, arrangement or understanding to vote such security if
such agreement, arrangement or understanding: (A) arises solely from a
revocable proxy given in response to a public proxy or consent solicitation
made pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act, and (B) is not also then
reportable by such Person on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy as described
in the proviso to subparagraph (ii) of this paragraph (e)) or disposing of any
voting securities of the Company; provided, however, that nothing in this
--------
paragraph (e) shall cause a person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to "beneficially own," any
securities acquired through such person's participation in good faith in a
firm commitment underwriting until the expiration of forty days after the date
of such acquisition.
(f) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of Pennsylvania are
authorized or obligated by law or executive order to close.
(g) "Close of business" on any given date shall mean 5:00 P.M.,
Pittsburgh, Pennsylvania time, on such date; provided, however, that if such
--------
date is not a Business Day it shall mean 5:00 P.M., Pittsburgh, Pennsylvania
time, on the next succeeding Business Day.
(h) "Common Stock" shall mean the common stock, $0.01 par value,
of the Company, except that "Common Stock" when used with reference to any
Person other than the Company shall mean the capital stock of such Person with
the greatest aggregate voting power, or
- 3 -
<PAGE>
the equity securities or other equity interest having power to control or
direct the management, of such Person.
(i) "Common stock equivalents" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(j) "Continuing Director" shall have the meaning set forth in
Section 23(a)(i) hereof.
(k) "Current market price" shall have the meaning set forth in
Section 11(d)(i) hereof.
(l) "Current Value" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(m) "Distribution Date" shall have the meaning set forth in
Section 3(a) hereof.
(n) "Exchange Act" shall have the meaning set forth in
Section 1(d) hereof.
(o) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(p) "Final Expiration Date" shall mean the close of business on
June 26, 2006.
(q) "Person" shall mean any individual, firm, corporation,
partnership, company or other entity.
(r) "Preferred Stock" shall mean shares of the Company's Class A
Preferred Stock, designated as Participating Preferred Stock, without par
value, and, to the extent that there is not a sufficient number of shares of
Preferred Stock authorized to permit the full exercise of the Rights, any
other series of such Preferred Stock of the Company designated for such
purpose containing terms substantially similar to the terms of the Class A
Preferred Stock.
(s) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(t) "Purchase Price" shall have the meaning set forth in
Section 4(a) hereof.
(u) "Record Date" shall have the meaning set forth in the
WHEREAS clause at the beginning of this Agreement.
- 4 -
<PAGE>
(v) "Redemption Price" shall have the meaning set forth in
Section 23(a) hereof.
(w) "Rights" shall have the meaning set forth in the WHEREAS
clause at the beginning of this Agreement.
(x) "Rights Certificates" shall have the meaning set forth in
Section 3(a) hereof.
(y) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii)(A) or (B) hereof.
(z) "Section 11(a)(ii) Trigger Date" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(aa) "Section 13 Event" shall mean any event described in
clause (x), (y) or (z) of Section 13(a) hereof.
(bb) "Spread" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(cc) "Stock Acquisition Date" shall mean the first date of a
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person
has become such.
(dd) "Subsidiary" shall mean, with reference to any Person, any
corporation, partnership, company or other entity of which an amount of voting
securities sufficient to elect at least a majority of the directors, managers,
trustees or similar persons, of such entity is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such Person.
(ee) "Substitution Period" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(ff) "Trading Day" shall have the meaning set forth in
Section 11(d)(i) hereof.
(gg) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights
(who, in
- 5 -
<PAGE>
accordance with Section 3 hereof, shall prior to the Distribution Date also be
the holders of the Common Stock) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates.
----------------------------
(a) Until the earliest of (i) the close of business on the tenth
Business Day after the Stock Acquisition Date, (ii) the close of business on
the tenth Business Day after the date that a tender or exchange offer by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
organized, appointed or established by the Company for or pursuant to the
terms of any such plan) is first published or sent or given within the meaning
of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act
as in effect on the date hereof, if upon consummation thereof, such Person
would be the Beneficial Owner of 20% or more of the shares of Common Stock
then outstanding or (iii) the close of business on the tenth Business Day
after the Board of Directors of the Company determines, pursuant to the
criteria set forth in Section 11(a)(ii)(B) hereof, that a Person is an Adverse
Person (the earliest of (i), (ii) and (iii) being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for the
Common Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable
after the Distribution Date, upon the wirtten direction of the Company, the
Rights Agent will send by first-class, insured, postage prepaid mail, to each
record holder of the Common Stock as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Company, one or more rights certificates, in substantially the form of
Exhibit A hereto (the "Rights Certificates"), evidencing one Right for each
share of Common Stock so held, subject to adjustment as provided herein. The
Company will prepare and execute and the Rights Agent will countersign such
Rights Certificates
- 6 -
<PAGE>
as provided in Section 5 hereof. In the event that an adjustment in the
number of Rights per share of Common Stock has been made pursuant to
Section 11(o) hereof, at the time of distribution of the Right Certificates,
the Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates.
(b) As promptly as practicable following the Record Date, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock,
in substantially the form attached hereto as Exhibit B, by first-class,
postage prepaid mail, to each record holder of the Common Stock as of the
close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for the Common Stock
outstanding as of the Record Date, until the Distribution Date, the Rights
will be evidenced by such certificates for the Common Stock and the registered
holders of the Common Stock shall also be the registered holders of the
associated Rights. Until the earlier of the Distribution Date or the
Expiration Date, the transfer of any certificates representing shares of
Common Stock in respect of which Rights have been issued shall also constitute
the transfer of the Rights associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common
Stock which are issued after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date. Certificates representing such
shares of Common Stock shall also be deemed to be certificates for Rights, and
shall bear the following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights Agreement between Armco
Inc. (the "Company") and Fifth Third Bank (the "Rights Agent") dated as of
February 23, 1996 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the
principal offices of the Company. Under certain circumstances, as set
- 7 -
<PAGE>
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person, an Adverse Person or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held by or
on behalf of such Person or by any subsequent holder, may become null and
void.
With respect to such certificates containing the foregoing legend, until
the earlier of (i) the Distribution Date or (ii) the Expiration Date, the
Rights associated with the Common Stock represented by such certificates shall
be evidenced by such Certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the
transfer of any of such certificates shall also constitute the transfer of the
Rights associated with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
---------------------------
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit A hereto and may have such
marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required
to comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Rights may from time to time be listed, or to conform to usage. Subject to
the provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall be dated as of the Record Date and on their face
shall entitle the holders thereof to purchase such number of one
two-hundredths of a share of Preferred Stock
- 8 -
<PAGE>
as shall be set forth therein at the price set forth therein (such exercise
price per one two-hundredths of a share, the "Purchase Price"), but the amount
and type of securities purchasable upon the exercise of each Right and the
Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by any Person
known to be: (i) an Acquiring Person, an Adverse Person or any Associate or
Affiliate of an Acquiring Person or an Adverse Person; (ii) a transferee of an
Acquiring Person or an Adverse Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person or Adverse Person becomes
such; or (iii) a transferee of an Acquiring Person or an Adverse Person (or of
any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person or Adverse Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person or Adverse Person (or from any such
Associate or Affiliate) to holders of equity interests in such Acquiring
Person or Adverse Person (or in any such Associate or Affiliate) or to any
Person with whom such Acquiring Person or Adverse Person (or any such
Associate or Affiliate) has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect
avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant
to Section 6 or Section 11 hereof upon transfer, exchange, replacement or
adjustment of any other Rights Certificate referred to in this sentence, shall
when issued contain (to the extent feasible in the circumstances) the
following legend, modified as applicable to apply to such Person:
The Rights represented by this Rights Certificate are or
were beneficially owned by a Person who was or became an [Acquiring] [Adverse]
Person or an Affiliate or Associate of an [Acquiring] [Adverse] Person (as
such terms are defined in the Rights Agreement). Accordingly, this Rights
Certificate and the Rights represented hereby may become null and void in the
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<PAGE>
circumstances specified in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration.
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the
Rights Agent and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights
Agent and issued and delivered by the Company with the same force and effect
as though the person who signed such Rights Certificates had not ceased to be
such officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the execution
of such Rights Certificate, shall be a proper officer of the Company to sign
such Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep
or cause to be kept, at its office designated as the appropriate place for
surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the
Rights Certificates, the number of Rights evidenced on its face by each of the
Rights Certificates and the certificate number and the date of each of the
Rights Certificates.
Section 6. Transfer, Splitup, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
- ----------------------------------------------------------------------
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the close of business on the Distribution
Date, and at or prior to the close of business on the Expiration Date, any
Rights Certificate or Certificates
- 10 -
<PAGE>
may be transferred, split up, combined or exchanged for another Rights
Certificate or Certificates, entitling the registered holder to purchase a
like number of one two-hundredths of a share of Preferred Stock (or, following
a Triggering Event, Common Stock, other securities, cash or other assets, as
the case may be) as the Rights Certificate or Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.
Any registered holder desiring to transfer, split up, combine or exchange any
Rights Certificate or Certificates shall make such request in writing
delivered to the Rights Agent, and shall surrender the Rights Certificate or
Certificates to be transferred, split up, combined or exchanged at the office
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to
the transfer of any such surrendered Rights Certificate until the registered
holder shall have completed and signed the certificate contained in the form
of assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to
Section 4(b), Section 7(e) and Section 14 hereof, countersign and deliver to
the Person entitled thereto a Rights Certificate or Rights Certificates, as
the case may be, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, splitup, combination or exchange of Rights
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Rights Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental
thereto, and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
- 11 -
<PAGE>
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
------------------------------------------------------
Rights.
- ------
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the office of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of
one two-hundredths of a share of Preferred Stock (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) the Final Expiration Date, or
(ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the earlier of (i) and (ii) being herein referred to as the
"Expiration Date").
(b) The Purchase Price for each two-hundredths of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be $20.00
and shall be subject to adjustment from time to time as provided in Sections
11 and 13(a) hereof and shall be payable in accordance with paragraph (c)
below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so
exercised, of the Purchase Price per one two-hundredths of a share of
Preferred Stock (or other shares, securities, cash or other assets, as the
case may be) to be purchased as set forth below and an amount equal to any
applicable transfer tax, the Rights Agent shall, subject to Section 20(k)
hereof thereupon promptly (i)(A) requisition from any transfer agent of the
shares of Preferred Stock (or make available, if the Rights Agent is the
transfer agent for such shares) certificates for the total number of one
two-hundredths of a share of Preferred Stock to be purchased and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) if the Company shall have elected to deposit the total number
of shares of Preferred Stock issuable upon exercise of the Rights
- 12 -
<PAGE>
hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one two-hundredths of a share
of Preferred Stock as are to be purchased (in which case certificates for the
shares of Preferred Stock represented by such receipts shall be deposited by
the transfer agent with the depositary agent) and the Company will direct the
depositary agent to comply with such request, (ii) requisition from the
Company the amount of cash, if any, to be paid in lieu of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Rights Certificate, registered in such name or
names as may be designated by such holder, and (iv) after receipt thereof,
deliver such cash, if any, to or upon the order of the registered holder of
such Rights Certificate. The payment of the Purchase Price (as such amount
may be reduced pursuant to Section 11(a)(iii) hereof) may be made in cash or
by certified bank check or money order payable to the order of the Company.
In the event that the Company is obligated to issue other securities
(including Common Stock) of the Company, pay cash and/or distribute other
property pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities, cash and/or other
property are available for distribution by or on behalf of the Rights Agent,
if and when appropriate.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of,
the registered holder of such Rights Certificate, registered in such name or
names as may be designated by such holder, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person, an Adverse Person or an
Associate or Affiliate of an Acquiring Person or an Adverse Person, (ii) a
transferee of an Acquiring Person or an Adverse Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person or
Adverse Person becomes such, or (iii) a transferee of an Acquiring Person or
an Adverse Person (or of any such Associate or Affiliate)
- 13 -
<PAGE>
who becomes a transferee prior to or concurrently with the Acquiring Person or
Adverse Person becoming such and receives such Rights pursuant to either
transfer (whether or not for consideration) from the Acquiring Person or
Adverse Person (or from any such Associate or Affiliate) to holders of equity
interests in such Acquiring Person or Adverse Person (or in any such Associate
or Affiliate) or to any Person with whom the Acquiring Person or Adverse
Person (or any such Associate or Affiliate) has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a
transfer which the Board of Directors of the Company has determined (whether
before or after such transfer) is part of a plan, arrangement or understanding
which has as a primary purpose or effect the avoidance of this Section 7(e),
shall become null and void without any further action and no holder of such
Rights shall have any rights whatsoever with respect to such Rights, whether
under any provision of this Agreement or otherwise. The Company shall use all
reasonable efforts to insure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no liability to any
holder of Rights Certificates or other Person as a result of its failure to
make any determinations with respect to an Acquiring Person or Adverse Person
or any of their respective Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any
purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner)
or Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
---------------------------------------------------
All Rights Certificates surrendered for the purpose of exercise, transfer,
splitup, combination or exchange shall, if surrendered to the Company or any
of its agents, be delivered to the Rights Agent for cancellation or in
canceled form, or, if surrendered to the Rights Agent, shall be canceled by
it, and no Rights Certificates shall be issued in lieu thereof except as
expressly permitted by any of the
- 14 -
<PAGE>
provisions of this Agreement. The Company shall deliver to the Rights Agent
for cancellation, and the Rights Agent shall so cancel, any other Rights
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Rights Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
---------------------------------------------
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of
shares of Preferred Stock (and, following the occurrence of a Triggering
Event, Common Stock and/or other securities) that, as provided in this
Agreement, including Section 11(a)(iii) hereof, will be sufficient to permit
the exercise in full of all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon
as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the
Distribution Date, as the case may be, a registration statement under the Act,
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective
as soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting
- 15 -
<PAGE>
the requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the date of the
expiration of the Rights. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the
Rights. The Company may temporarily suspend, for a period of time not to
exceed ninety (90) days after the date set forth in clause (i) of the first
sentence of this Section 9(c), the exercisability of the Rights in order to
prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction, unless the requisite qualification in such jurisdiction shall
have been obtained and until a registration statement has been declared
effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all one two-hundredths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of
the Purchase Price), be duly and validly authorized and issued and fully paid
and nonassessable.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one two-hundredths of a
share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of a number of one two-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) in respect
of a name other than that of, the registered holder of the Rights Certificates
evidencing Rights surrendered for exercise or to issue or deliver any
certificates for a
- 16 -
<PAGE>
number of one two-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have
been paid (any such tax being payable by the holder of such Rights Certificate
at the time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name any
---------------------------
certificate for a number of one two-hundredths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon
the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
--------
date of such surrender and payment is a date upon which the Preferred Stock
(or Common Stock and/or other securities, as the case may be) transfer books
of the Company are closed, such Person shall be deemed to have become the
record holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate, as such, shall not be
entitled to any rights of a stockholder of the Company with respect to shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
-----------------------------------------------------------
Number of Rights. The Purchase Price, the number and kind of shares covered
- ----------------
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date
of this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of
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<PAGE>
Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine
the outstanding Preferred Stock into a smaller number of shares, or (D) issue
any shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e) hereof,
the Purchase Price in effect at the time of the record date for such dividend
or of the effective date of such subdivision, combination or reclassification,
and the number and kind of shares of Preferred Stock or capital stock, as the
case may be, issuable on such date, shall be proportionately adjusted so that
the holder of any Right exercised after such time shall be entitled to
receive, upon payment of the Purchase Price then in effect, the aggregate
number and kind of shares of Preferred Stock or capital stock, as the case may
be, which, if such Right had been exercised immediately prior to such date and
at a time when the Preferred Stock transfer books of the Company were open, he
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination or reclassification. If an event
occurs which would require an adjustment under both this Section 11(a)(i) and
Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
(ii) In the event:
(A) any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, or any Person organized, appointed or established by the Company for
or pursuant to the terms of any such plan), alone or together with its
Affiliates and Associates, shall, at any time after the Rights Dividend
Declaration Date, become the Beneficial Owner of 25% or more of the shares of
Common Stock then outstanding, unless the event causing the 25% threshold to
be crossed is a transaction set forth in Section 13(a) hereof or
(B) subject to the requirements of this Section 11(a)(ii), the
Board of Directors of the Company shall declare any Person to be an Adverse
Person, upon (x) a determination that such
- 18 -
<PAGE>
Person, alone or together with its Affiliates and Associates, has or will, at
any time after the Rights Dividend Declaration Date, become the Beneficial
Owner of 10% or more of the outstanding shares of Common Stock (provided that
any such determination may not be effective until such Person has become the
Beneficial Owner of 10% or more of the outstanding shares of Common Stock) and
(y) a determination by at least a majority of the Continuing Directors, after
reasonable inquiry and investigation, including consultation with such persons
as such directors shall deem appropriate, that (a) such Beneficial Ownership
by such Person is intended to cause, is reasonably likely to cause or will
cause the Company to repurchase the Common Stock beneficially owned by such
Person or to cause pressure on the Company to take action or enter into a
transaction or series of transactions which would provide such Person with
short-term financial gain under circumstances where the Board of Directors
determines that the best longterm interests of the Company and its
stockholders, but for the actions and possible actions of such Person, would
not be served by taking such action or entering into such transactions or
series of transactions at that time or (b) such Beneficial Ownership is
causing or reasonably likely to cause a material adverse impact (including,
but not limited to, impairment of relationships with customers or impairment
of the Company's ability to maintain its competitive position) on the business
or prospects of the Company, or (c) such beneficial ownership otherwise is
determined to be not in the best interests of the Company and its
stockholders, employees, customers and communities in which the Company and
its Subsidiaries do business,
then, promptly following the first occurrence of a Section 11(a)(ii) Event,
proper provision shall be made so that each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the right to
receive, upon exercise thereof at the thencurrent Purchase Price in accordance
with the terms of this Agreement, in lieu of a number of one two-hundredths of
a share of Preferred Stock, such number of shares of Common Stock of the
Company as shall equal the result obtained by (x) multiplying the then-current
Purchase Price by the then-number of one two-hundredths of a share of
Preferred Stock for which a
- 19 -
<PAGE>
Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event, and (y) dividing that product (which, following such
first occurrence, shall thereafter be referred to as the "Purchase Price" for
each Right and for all purposes of this Agreement) by 50% of the current
market price (determined pursuant to Section 11(d) hereof) per share of Common
Stock on the date of such first occurrence (such number of shares, the
"Adjustment Shares"). Notwithstanding the provisions of Section 11(a)(ii)(B)
hereof, the Board of Directors of the Company may not declare a Person to be
an Adverse Person if, prior to the time that such Person acquired 10% or more
of the shares of Common Stock then outstanding, such Person provided to the
Board of Directors in writing a statement of such Person's purpose and
intentions in connection with the proposed acquisition of Common Stock,
together with any other information reasonably requested of such Person by the
Board of Directors, and the Board of Directors, based on such statement and
reasonable inquiry and investigation, including consultation with such Persons
as such directors shall deem appropriate, determines to notify and notifies
such Person in writing that it will not declare such Person to be an Adverse
Person; provided, however, that the Board of Directors
-------- -------
may expressly condition in any manner a determination not to declare a Person
an Adverse Person on such conditions as the Board of Directors may select,
including, without limitation, such Person's not acquiring more than a
specified amount of Common Stock and/or on such Person's not taking actions
inconsistent with the purposes and intentions disclosed by such Person in the
statement provided to the Board of Directors. In the event that the Board of
Directors should at any time determine, upon reasonable inquiry and
investigation, including consultation with such Persons as such directors
shall deem appropriate, that such Person has not met or complied with any
condition specified by the Board of Directors pursuant to the preceding
sentence, the Board of Directors may at any time thereafter declare such
Person to be an Adverse Person pursuant to the provisions of this
Section 11(a)(ii).
(iii) In the event that the number of shares of Common
Stock which are authorized by the Company's Articles of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
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<PAGE>
Company shall: (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (2)
the Purchase Price (such excess, the "Spread"), and (B) with respect to each
Right, make adequate provision to substitute for the Adjustment Shares, upon
payment of the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of preferred stock
which the Board of Directors of the Company has deemed to have the same value
as shares of Common Stock (such shares of preferred stock, "common stock
equivalents")), (4) debt securities of the Company, (5) other assets, or (6)
any combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board of
Directors of the Company based upon the advice of one or more investment or
financial advisors selected by the Board of Directors of the Company;
provided, however, if the Company shall not have made adequate provision to
- --------
deliver value pursuant to clause (B) above within thirty (30) days following
the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the
date on which the Company's right of redemption pursuant to Section 23(a)
expires (the later of (x) and (y) being referred to herein as the
"Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to
deliver, upon the surrender for exercise of a Right and without requiring
payment of the Purchase Price, shares of Common Stock (to the extent
available) and then, if necessary, cash, which shares and/or cash have an
aggregate value equal to the Spread. If the Board of Directors of the Company
shall determine in good faith that it is likely that sufficient additional
shares of Common Stock could be authorized for issuance upon exercise in full
of the Rights, the thirty (30) day period set forth above may be extended to
the extent necessary, but not more than ninety (90) days after the
Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder
approval for the authorization of such additional shares (such period, as it
may be extended, the "Substitution Period"). To the extent that the Company
determines that some action need be taken pursuant to the first and/or second
sentences of this Section 11(a)(iii), the Company (x) shall provide, subject
to Section 7(e) hereof, that such action shall apply uniformly to all
outstanding Rights, and (y) may suspend the exercisability of the Rights until
the expiration of the Substitution Period in order to seek any authorization
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<PAGE>
of additional shares and/or to decide the appropriate form of distribution to
be made pursuant to such first sentence and to determine the value thereof.
In the event of any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii),
the value of the Common Stock shall be the current market price (as determined
pursuant to Section 11(d) hereof) per share of the Common Stock on the
Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent"
shall be deemed to have the same value as the Common Stock on such date.
(iv) In lieu of issuing shares of Common Stock in
accordance with subparagraph (ii) of this Section 11(a), the Company may with
respect to each Right, if a majority of members of the Board of Directors and
a majority of the Continuing Directors determine that such action is in the
best interests of the Company and not contrary to the interests of the holders
of Rights, make adequate provision to substitute for the Adjustment Shares,
(x) upon the surrender for exercise of a Right and payment of the applicable
Purchase Price, (1) cash, (2) a reduction in Purchase Price, (3) Common Stock,
or other equity securities of the Company (including without limitation common
stock equivalents), (4) debt securities of the Company, (5) other assets or
(6) any combination of the foregoing having an aggregate value equal to the
Adjustment Value where such aggregate value has been determined by the Board
of Directors of the Company based upon the advice of one or more investment or
financial advisers selected by the Board of Directors of the Company or (y)
upon the surrender for exercise of a Right and without requiring payment of
the Purchase Price, (1) cash, (2) Common Stock or other equity securities of
the Company (including, without limitation, common stock equivalents), (3)
debt securities of the Company, (4) other assets or (5) any combination of the
foregoing, having an aggregate value equal to the Spread where such aggregate
value has been determined by the Board of Directors of the Company based upon
the advice of one or more investment or financial advisors selected by the
Board of Directors of the Company.
(b) In case the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Preferred Stock entitling
them to subscribe for or purchase (for a period expiring within
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<PAGE>
forty-five (45) calendar days after such record date) Preferred Stock (or
shares having the same rights, privileges and preferences as the shares of
Preferred Stock ("equivalent preferred stock")) or securities convertible into
Preferred Stock or equivalent preferred stock at a price per share of
Preferred Stock or per share of equivalent preferred stock (or having a
conversion price per share, if a security convertible into Preferred Stock or
equivalent preferred stock) less than the current market price (as determined
pursuant to Section 11(d) hereof) per share of Preferred Stock on such record
date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the number of
shares of Preferred Stock outstanding on such record date, plus the number of
shares of Preferred Stock which the aggregate offering price of the total
number of shares of Preferred Stock and/or equivalent preferred stock so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional shares of
Preferred Stock and/or equivalent preferred stock to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be
paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on
the Rights Agent and the holders of the Rights. Shares of Preferred Stock
owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed, and in the event that
such rights or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price which would then be in effect if such record
date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of
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<PAGE>
indebtedness, cash (other than a regular quarterly cash dividend out of the
earnings or retained earnings of the Company), assets (other than a dividend
payable in Preferred Stock, but including any dividend payable in stock other
than Preferred Stock) or subscription rights or warrants (excluding those
referred to in Section 11(b) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, less
the fair market value (as determined in good faith by the Board of Directors
of the Company, whose determination shall be described in a statement filed
with the Rights Agent) of the portion of the cash, assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to a share of Preferred Stock and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
share of Preferred Stock. Such adjustments shall be made successively
whenever such a record date is fixed, and in the event that such distribution
is not so made, the Purchase Price shall be adjusted to be the Purchase Price
which would have been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) and Section 11(a)(iv) hereof,
the "current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such Common
Stock for the thirty (30) consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date, and for purposes of
computations made pursuant to Section 11(a)(iii) and Section 11(a)(iv) hereof,
the "current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such Common
Stock for the ten (10) consecutive Trading Days immediately following such
date; provided, however, that in the event that the current market price per
--------
share of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into shares of such Common Stock (other than the
Rights), or (B) any subdivision, combination or reclassification of such
Common Stock, and prior to the expiration of the
- 24 -
<PAGE>
requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth
above, after the ex-dividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, and
in each such case, the "current market price" shall be properly adjusted to
take into account ex-dividend trading. The closing price for each day shall
be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New
York Stock Exchange or, if the shares of Common Stock are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common
Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the
shares of Common Stock are not quoted by any such organization, the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the Common Stock selected by the Board of Directors of the
Company. If on any such date no market maker is making a market in the Common
Stock, the fair value of such shares on such date as determined in good faith
by the Board of Directors of the Company shall be used. The term "Trading
Day" shall mean a day on which the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading is open for
the transaction of business or, if the shares of Common Stock are not listed
or admitted to trading on any national securities exchange, a Business Day.
If the Common Stock is not publicly held or not so listed or traded, "current
market price" per share shall mean the fair value per share as determined in
good faith by the Board of Directors of the Company, whose determination shall
be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"current market price" per share of
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<PAGE>
Preferred Stock shall be determined in the same manner as set forth above for
the Common Stock in clause (i) of this Section 11(d) (other than the last
sentence thereof). If the current market price per share of Preferred Stock
cannot be determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause (i) of
this Section 11(d), the "current market price" per share of Preferred Stock
shall be conclusively deemed to be an amount equal to 200 (as such number may
be appropriately adjusted for such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock occurring after the date of
this Agreement) multiplied by the current market price per share of the Common
Stock. If neither the Common Stock nor the Preferred Stock is publicly held
or so listed or traded, "current market price" per share of the Preferred
Stock shall mean the fair value per share as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the "current market price" of
one two-hundredth of a share of Preferred Stock shall be equal to the "current
market price" of one share of Preferred Stock divided by 200.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Purchase Price; provided, however, that any adjustments which by reason of
--------
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest ten-thousandth
of a share of Common Stock or other share or one-millionth of a share of
Preferred Stock, as the case may be. Notwithstanding the first sentence of
this Section 11(e), any adjustment required by this Section 11 shall be made
no later than the earlier of (i) three (3) years from the date of the
transaction which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock other
than Preferred Stock, thereafter the number of
- 26 -
<PAGE>
such other shares so receivable upon exercise of any Right and the Purchase
Price thereof shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i),
(j) and (l), and the provisions of Sections 7, 9, 10, 13 and 14 hereof with
respect to the Preferred Stock shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right
to purchase, at the adjusted Purchase Price, the number of one two-hundredths
of a share of Preferred Stock purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall
thereafter evidence the right to purchase, at the adjusted Purchase Price,
that number of one two-hundredths of a share of Preferred Stock (calculated to
the nearest one-millionth) obtained by (i) multiplying (x) the number of one
two-hundredths of a share covered by a Right immediately prior to this
adjustment, by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment
of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one two-hundredths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding
after the adjustment in the number of Rights shall be exercisable for the
number of one two-hundredths of a share of Preferred Stock for which a Right
was exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become that
number of Rights (calculated to the nearest one tenthousandth) obtained by
dividing the Purchase Price in effect immediately prior to adjustment of the
Purchase Price by the Purchase Price in effect immediately after
- 27 -
<PAGE>
adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten (10) days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment
of the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of
Rights Certificates on such record date Rights Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders
shall be entitled as a result of such adjustment, or, at the option of the
Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by
the Company, new Rights Certificates evidencing all the Rights to which such
holders shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one two-hundredths of a share of Preferred Stock
issuable upon the exercise of the Rights, the Rights Certificates theretofore
and thereafter issued may continue to express the Purchase Price per one
two-hundredth of a share and the number of one two-hundredths of a share which
were expressed in the initial Rights Certificates issued hereunder.
(k) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one two-hundredths of a share of Preferred
- 28 -
<PAGE>
Stock and other capital stock or securities of the Company, if any, issuable
upon such exercise over and above the number of one two-hundredths of a share
of Preferred Stock and other capital stock or securities of the Company, if
any, issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall deliver to
--------
such holder a due bill or other appropriate instrument evidencing such
holder's right to receive such additional shares (fractional or otherwise) or
securities upon the occurrence of the event requiring such adjustment.
(l) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price,
in addition to those adjustments expressly required by this Section 11, as and
to the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any
shares of Preferred Stock at less than the current market price,
(iii) issuance wholly for cash of shares of Preferred Stock or securities
which by their terms are convertible into or exchangeable for shares of
Preferred Stock, (iv) stock dividends or (v) issuance of rights, options or
warrants referred to in this Section 11, hereafter made by the Company to
holders of its Preferred Stock shall not be taxable to such stockholders.
(m) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with
Section 11(n) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(n)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(n) hereof), if (x) at the
time of or immediately after such consolidation, merger, sale or transfer
there are any rights, warrants or other instruments or securities outstanding
or agreements in effect which would substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights or (y) prior to,
simultaneously with or immediately after such consolidation, merger, sale or
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<PAGE>
transfer, the stockholders of the Person who constitutes, or would constitute,
the "Principal Party" for purposes of Section 13(a) hereof shall have received
a distribution of Rights previously owned by such Person or any of its
Affiliates and Associates.
(n) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or
Section 26 hereof, take (or permit any Subsidiary to take) any action if at
the time such action is taken it is reasonably foreseeable that such action
will diminish substantially or otherwise eliminate the benefits intended to be
afforded by the Rights.
(o) Anything in this Agreement to the contrary notwithstanding,
in the event that the Company shall at any time on or after the Rights
Dividend Declaration Date and prior to the Distribution Date (i) declare a
dividend on the outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, the
number of Rights associated with each share of Common Stock then outstanding,
or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated
with each share of Common Stock following any such event shall equal the
result obtained by multiplying the number of Rights associated with each share
of Common Stock immediately prior to such event by a fraction the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Section 11 and Section 13
hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment and a brief statement of the facts accounting for such
adjustment, (b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Stock and the Common Stock, a copy of such
certificate, and (c) mail a brief summary thereof to each holder of a Rights
Certificate (or, if prior to the Distribution Date, to each holder of a
certificate representing shares of Common Stock) in accordance with Section 25
hereof. The Rights Agent shall be fully
- 30 -
<PAGE>
protected in relying on any such certificate and on any adjustment therein
contained and shall not be deemed to have knowledge of such adjustment unless
and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
------------------------------------------------------
Earning Power.
- -------------
(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate with, or merge with
and into, any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(n) hereof), and the Company shall
not be the continuing or surviving corporation of such consolidation or
merger, (y) any Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(n) hereof) shall consolidate with,
or merge with or into, the Company, and the Company shall be the continuing or
surviving corporation of such consolidation or merger and, in connection with
such consolidation or merger, all or part of the outstanding shares of Common
Stock shall be changed into or exchanged for stock or other securities of any
other Person or cash or any other property, or (z) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(n) hereof), then, and in
each such case, proper provision shall be made so that: (i) each holder of a
Right, except holders described in Section 7(e) hereof, shall thereafter have
the right to receive, upon the exercise thereof at the then-current Purchase
Price in accordance with the terms of this Agreement, such number of validly
authorized and issued, fully paid, nonassessable and freely tradeable shares
of Common Stock of the Principal Party (as such term is hereinafter defined),
not subject to any liens, encumbrances, rights of first refusal or other
adverse claims, as shall be equal to the result obtained by (1) multiplying
the then-current Purchase Price by the number of one two-hundredths of a share
of Preferred Stock for which a Right is exercisable immediately prior to the
first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has
occurred prior to the first occurrence of a Section 13 Event, multiplying the
number of such one two-hundredths of a share of Preferred Stock
- 31 -
<PAGE>
for which a Right was exercisable immediately prior to the first occurrence of
a Section 11(a)(ii) Event by the Purchase Price in effect immediately prior to
such first occurrence), and dividing that product (which, following the first
occurrence of a Section 13 Event, shall be referred to as the "Purchase Price"
for each Right and for all purposes of this Agreement) by (2) 50% of the
current market price (determined pursuant to Section 11(d)(i) hereof) per
share of the Common Stock of such Principal Party on the date of consummation
of such Section 13 Event; (ii) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such Section 13 Event, all the obligations
and duties of the Company pursuant to this Agreement; (iii) the term "Company"
shall thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof shall apply
only to such Principal Party following the first occurrence of a Section 13
Event; (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such transaction as may be
necessary to assure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first
occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x)
or (y) of the first sentence of Section 13(a), the Person that is the issuer
of any securities into which shares of Common Stock of the Company are
converted in such merger or consolidation, and if no securities are so issued,
the Person that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in clause
(z) of the first sentence of Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such
- --------
Person is not at such time and has not been continuously over the preceding
twelve (12)
- 32 -
<PAGE>
month period registered under Section 12 of the Exchange Act, and such Person
is a direct or indirect Subsidiary of another Person the Common Stock of which
is and has been so registered, "Principal Party" shall refer to such other
Person; and (2) in case such Person is a Subsidiary, directly or indirectly,
of more than one Person, the Common Stocks of two or more of which are and
have been so registered, "Principal Party" shall refer to whichever of such
Persons is the issuer of the Common Stock having the greatest aggregate market
value.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable
after the date of any consolidation, merger, sale or transfer mentioned in
paragraph (a) of this Section 13, the Principal Party will
(i) prepare and file a registration statement under the
Act, with respect to the Rights and the securities purchasable upon exercise
of the Rights on an appropriate form, and will use its best efforts to cause
such registration statement to (A) become effective as soon as practicable
after such filing and (B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Expiration Date; and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply in
all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii)
Event, the Rights which have not theretofore been exercised shall thereafter
become exercisable in the manner described in Section 13(a).
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<PAGE>
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(o)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there may be paid to the registered holders
of the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The closing price of
the Rights for any day shall be the last sale price, regular way, or in case
no such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading, or, if the Rights are not listed or admitted to
trading, on any national securities exchange, the last quoted price or if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in
use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by
a professional market maker making a market in the Rights selected by the
Board of Directors of the Company. If on any such date no such market maker
is making a market in the Rights, the fair value of the Rights on such date as
determined in good faith by the Board of Directors of the Company shall be
used.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples
of one two-hundredth of a share of Preferred Stock) upon exercise of the
Rights or to distribute certificates which evidence fractional shares of
Preferred Stock (other than fractions which are integral multiples of
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one two-hundredths of a share of Preferred Stock). In lieu of fractional
shares of Preferred Stock that are not integral multiples of one two-
hundredths of a share of Preferred Stock, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of
the current market value of one two-hundredths of a share of Preferred Stock.
For purposes of this Section 14(b), the current market value of one
two-hundredths of a share of Preferred Stock shall be one two-hundredths of
the closing price of a share of Preferred Stock (as determined pursuant to
Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date of
such exercise.
(c) Following the occurrence of a Triggering Event, the Company
shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the
same fraction of the current market value of one (1) share of Common Stock.
For purposes of this Section 14(c), the current market value of one share of
Common Stock shall be the closing price of one share of Common Stock (as
determined pursuant to Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement, other than rights of action vested in the Rights Agent pursuant to
Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), without
the consent of the Rights Agent or of the holder of any other Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), may, in
his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
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otherwise act in respect of, his right to exercise the Rights evidenced by
such Rights Certificate in the manner provided in such Rights Certificate and
in this Agreement. Without limiting the foregoing or any remedies available
to the holders of Rights, it is specifically acknowledged that the holders of
Rights would not have an adequate remedy at law for any breach of this
Agreement and shall be entitled to specific performance of the obligations
hereunder and injunctive relief against actual or threatened violations of the
obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
---------------------------
accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on
the Rights Certificates or the associated Common Stock certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent, subject to the last
sentence of Section 7(e) hereof, shall be required to be affected by any
notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any
holder of a Right or other Person as a result of its inability to perform any
of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
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<PAGE>
competent jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation; provided, however, the Company
--------
must use its best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
--------------------------------------------------
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
two-hundredths of a share of Preferred Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate,
as such, any of the rights of a stockholder of the Company or any right to
vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 24 hereof), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by such Rights Certificate shall have been exercised in accordance
with the provisions hereof.
Section 18. Concerning the Rights Agent.
---------------------------
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action
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<PAGE>
taken, suffered or omitted by it in connection with its administration of this
Agreement in reliance upon any Rights Certificate or certificate for Common
Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document
believed by it to be genuine and to be signed, executed and, where necessary,
verified or acknowledged, by the proper Person or Persons, or otherwise upon
the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights
Agent under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto; provided, however, that
--------
such corporation would be eligible for appointment as a successor Rights Agent
under the provisions of Section 21 hereof. In case at the time such successor
Rights Agent shall succeed to the agency created by this Agreement, any of the
Rights Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights
Agent and deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights Certificates either in
the name of the predecessor or in the name of the successor Rights Agent; and
in all such cases such Rights Certificates shall have the full force provided
in the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such
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<PAGE>
Rights Certificates either in its prior name or in its changed name; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
----------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter (including, without limitation, the identity of any Acquiring Person
or Adverse Person and the determination of "current market price") be proved
or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the
President, any Vice President, the Treasurer, any Assistant Treasurer, the
Secretary or any Assistant Secretary of the Company and delivered to the
Rights Agent; and such certificate shall be full authorization to the Rights
Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
- 39 -
<PAGE>
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights
Certificate; nor shall it be responsible for any change in the exercisability
of the Rights (including the Rights becoming void pursuant to Section 7(e)
hereof) or adjustment required under the provisions of Section 11 or
Section 13 or any other provision hereof or responsible for the manner, method
or amount of any such adjustment or the ascertaining of the existence of facts
that would require any such adjustment (except with respect to the exercise of
Rights evidenced by Rights Certificates after receipt of the certificate
described in Section 12 hereof setting forth any such adjustment); nor shall
it by any act hereunder be deemed to make any representation or warranty as to
the authorization or reservation of any shares of Common Stock or Preferred
Stock to be issued pursuant to this Agreement or any Rights Certificate or as
to whether any shares of Common Stock or Preferred Stock will, when so issued,
be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing
by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with
its duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer
or for any delay in acting while waiting for such instructions.
(h) Any application by the Rights Agent for written instructions
from the Company may, at the option of the Rights Agent, set forth in writing
any action
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<PAGE>
proposed to be taken or omitted by the Rights Agent under this Rights
Agreement and the date on and/or after which such action shall be taken or
such omission shall be effective. The Rights Agent shall not be liable for
any action taken by, or omission of, the Rights Agent in accordance with a
proposal included in any such application on or after the date specified in
such application (which date shall not be less than five Business Days after
the date the Chairman of the Board, the President, any Vice President, the
Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer
of the Company actually receives such application, unless any such officer
shall have consented in writing to an earlier date) unless, prior to taking
any such action (or the effective date in the case of an omission), the Rights
Agent shall have received written instructions in response to such application
specifying the action to be taken or omitted.
(i) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were
not Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company or for any
other legal entity.
(j) The Rights Agent may execute and exercise any of the rights
or powers hereby vested in it or perform any duty hereunder either itself or
by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any
such act, default, neglect or misconduct; provided, however, reasonable care
--------
was exercised in the selection and continued employment thereof.
(k) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that
repayment of such funds or adequate indemnification against such risk or
liability is not reasonably assured to it.
- 41 -
<PAGE>
(l) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the
form of assignment or form of election to purchase, as the case may be, has
either not been completed or indicates an affirmative response to clause 1
and/or 2 thereof, the Rights Agent shall not take any further action with
respect to such requested exercise or transfer without first consulting with
the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and thereby be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company, and
to each transfer agent of the Common Stock and Preferred Stock, by registered
or certified mail, and to the holders of the Rights Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Stock and Preferred Stock, by registered or certified
mail, and to the holders of the Rights Certificates by first-class mail. If
the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights
Agent. If the Company shall fail to make such appointment within a period of
thirty (30) days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who
shall, with such notice, submit his Rights Certificate for inspection by the
Company), then any registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Company or by such a
court, shall be (a) a corporation or financial institution organized and doing
business under the laws of the United States or of the States of New York,
Pennsylvania or Ohio (or of any other state of the United States so long as
such corporation is authorized to do business as a banking institution in the
States of New York, Pennsylvania or Ohio), in good standing, and having a
principal office in the States of New York, Pennsylvania or Ohio, which is
authorized under such laws to exercise corporate trust powers and is subject
to supervision or examination by federal or state authority and which has at
the time of its appointment
- 42 -
<PAGE>
as Rights Agent a combined capital and surplus of at least $100,000,000 or (b)
an affiliate of a corporation or financial institution described in clause (a)
of this sentence. After appointment, the successor Rights Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver, and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Stock and the Preferred Stock, and mail a notice thereof
in writing to the registered holders of the Rights Certificates. Failure to
give any notice provided for in this Section 21, however, or any defect
therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
-----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such
form as may be approved by its Board of Directors to reflect any adjustment or
change in the Purchase Price and the number or kind or class of shares or
other securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of shares of Common Stock following the Distribution
Date and prior to the redemption or expiration of the Rights, the Company
(a) shall, with respect to shares of Common Stock so issued or sold pursuant
to the exercise of stock options or under any employee plan or arrangement, or
upon the exercise, conversion or exchange of securities hereinafter issued by
the Company, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
--------
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Rights Certificate
would be issued, and (ii) no such
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<PAGE>
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
--------------------------
(a)(i) The Board of Directors of the Company may, at its
option, at any time prior to the earlier of (x) the close of business on the
tenth Business Day following the Stock Acquisition Date (or, if the Stock
Acquisition Date shall have occurred prior to the Record Date, the close of
business on the tenth Business Day following the Record Date), or (y) the
Final Expiration Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $0.0025 per Right, as such amount may be
appropriately adjusted, as determined by the Board of Directors, to reflect
any stock split, stock dividend or similar transaction occurring after the
date hereof (such redemption price being hereinafter referred to as the
"Redemption Price"); provided, however, that, except as set forth in
-------- -------
Section 23(a)(ii) hereof, the Board of Directors of the Company shall be
entitled so to redeem the Rights only if it consists of a majority of
Continuing Directors (as hereinafter defined). The term "Continuing Director"
shall mean a director who either was a member of the Board of Directors of the
Company prior to February 23, 1996 or who subsequently became a director of
the Company and whose election, or nomination for election by the Company's
stockholders, was approved by a vote of a majority of the Continuing Directors
then on the Board of Directors of the Company. Notwithstanding the foregoing,
but subject to Section 23(a)(ii) hereof, the Board of Directors of the Company
may not redeem any Rights after the tenth Business Day following the effective
date of any declaration that any Person is an Adverse Person (as provided in
Section 11(a)(ii)(B)).
(ii) If, following the occurrence of a Stock Acquisition
Date and/or following the expiration of the right of redemption hereunder but
prior to any Triggering Event, (x) a Person who is an Acquiring Person shall
have transferred or otherwise disposed of a number of shares of Common Stock
in one transaction or series of transactions, not directly or indirectly
involving the Company or any of its Subsidiaries, which did not result in the
occurrence of a Triggering Event such that such Person is thereafter a
Beneficial Owner of less than 10% of the outstanding shares of Common Stock,
and (y) there are no other Persons, immediately following the occurrence of
the event described in
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<PAGE>
clause (x), who are Acquiring Persons or Adverse Persons, then the right of
redemption shall be reinstated and thereafter be subject to the provisions of
this Section 23.
(iii) Notwithstanding anything contained in this Agreement
to the contrary, the Rights shall not be exercisable after the first
occurrence of an event described in Section 11(a)(ii) until such time as the
Company's right of redemption hereunder has expired.
(iv) The Company may, at its option, pay the Redemption
Price in cash, shares of Common Stock (based on the "current market price," as
defined in Section 11(d)(i) hereof, of the Common Stock at the time of
redemption) or any other form of consideration deemed appropriate by the Board
of Directors.
(b) Immediately upon the action of the Board of Directors
of the Company ordering the redemption of the Rights, evidence of which shall
have been filed with the Rights Agent and without any further action and
without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held. Promptly after the action of the
Board of Directors ordering the redemption of the Rights, the Company shall
give notice of such redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at each holder's
last address as it appears upon the registry books of the Rights Agent or,
prior to the Distribution Date, on the registry books of the Transfer Agent
for the Common Stock. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of redemption will state the method by which the payment of
the Redemption Price will be made.
Section 24. Notice of Certain Events.
------------------------
(a) In case the Company shall propose, at any time after
the Distribution Date, (i) to pay any dividend payable in stock of any class
to the holders of Preferred Stock or to make any other distribution to the
holders of Preferred Stock (other than a regular quarterly cash dividend out
of earnings or retained earnings of the Company), or (ii) to offer to the
holders of Preferred Stock rights or warrants to subscribe for or to purchase
any additional shares of Preferred Stock or shares of stock of any class or
any
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<PAGE>
other securities, rights or options, or (iii) to effect any reclassification
of its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(n) hereof), or
to effect any sale or other transfer (or to permit one or more of its
Subsidiaries to effect any sale or other transfer), in one transaction or a
series of related transactions, of more than 50% of the assets or earning
power of the Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its Subsidiaries in
one or more transactions each of which complies with Section 11(n) hereof), or
(v) to effect the liquidation, dissolution or winding up of the Company, then,
in each such case, the Company shall give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 25 hereof,
a notice of such proposed action, which shall specify the record date for the
purposes of such stock dividend, distribution of rights or warrants, or the
date on which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the shares of Preferred Stock, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least twenty (20) days prior to
the record date for determining holders of the shares of Preferred Stock for
purposes of such action, and in the case of any such other action, at least
twenty (20) days prior to the date of the taking of such proposed action or
the date of participation therein by the holders of the shares of Preferred
Stock, whichever shall be the earlier.
(b) In case any of the events set forth in
Section 11(a)(ii) hereof shall occur, then, in any such case, (i) the Company
shall as soon as practicable thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 25 hereof,
a notice of the occurrence of such event, which shall specify the event and
the consequences of the event to holders of Rights under Section 11(a)(ii)
hereof, and (ii) all references in the preceding paragraph to Preferred Stock
shall be deemed thereafter to refer to Common Stock and/or, if appropriate,
other securities.
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<PAGE>
Section 25. Notices. Notices or demands authorized by this Agreement to
-------
be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if
delivered by hand, sent by overnight courier or sent by first-class mail,
postage prepaid, addressed (until another address is filed in writing with the
Rights Agent) as follows:
Armco Inc.
One Oxford Centre
301 Grant Street
Pittsburgh, PA 15219-1415
Attention: Secretary
Subject to the provisions of Section 21, any notice or demand authorized by
this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or
made if delivered by hand, sent by overnight courier or sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing
with the Company) as follows:
Fifth Third Bank
Corporate Trust Department
#1090 02
38 Fountain Square Plaza
Cincinnati, Ohio 45202
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date
--------------------------
and subject to the penultimate sentence of this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of
certificates representing shares of Common Stock. From and after the
Distribution Date and subject to the penultimate sentence of this Section 26,
the Company and the Rights Agent shall, if the Company so directs, supplement
or amend this Agreement without the approval of any holders of Rights
- 47 -
<PAGE>
Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein, (iii) to shorten or lengthen any time period
hereunder, or (iv) to change or supplement the provisions hereunder in any
manner which the Company may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person, an Adverse Person or an Affiliate or Associate of
any such Person); provided, this Agreement may not be supplemented or amended
--------
to lengthen, pursuant to clause (iii) of this sentence, (A) a time period
relating to when the Rights may be redeemed at such time as the Rights are not
then redeemable, or (B) any other time period unless such lengthening of such
other time period is for the purpose of protecting, enhancing or clarifying
the rights of, and/or the benefits to, the holders of Rights; and provided
--------
further, that any amendment to Section 23(a) hereof shall be effective only if
- -------
it is approved when the Board of Directors of the Company consists of a
majority of Continuing Directors. Upon the delivery of a certificate from an
appropriate officer of the Company which states that the proposed supplement
or amendment is in compliance with the terms of this Section 26, the Rights
Agent shall execute such supplement or amendment. Notwithstanding anything
contained in this Agreement to the contrary, no supplement or amendment shall
be made which changes the Redemption Price, the Final Expiration Date, the
Purchase Price or the number of one onehundredths of a share of Preferred
Stock for which a Right is exercisable. Prior to the Distribution Date, the
interests of the holders of Rights shall be deemed coincident with the
interests of the holders of Common Stock.
Section 27. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors, etc.
---------------------------------------------------------
(a) For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares
of Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d3(d)(1)(i) of the General Rules
and Regulations under
- 48 -
<PAGE>
the Exchange Act as in effect on the date hereof. The Board of Directors of
the Company (or, as set forth herein, certain specified members thereof) shall
have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board of Directors
of the Company or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including, but not limited to, a determination to redeem or not
redeem the Rights, to declare that a Person is an Adverse Person or to amend
this Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions
with respect to the foregoing) which are done or made by the Board of
Directors of the Company in good faith, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (y) not subject the Board to any liability to the holders
of the Rights.
(b) For purposes of this Agreement, any determination to be
made by the Board of Directors of the Company may be made by a duly
constituted committee thereof if so authorized to act by the Board of
Directors pursuant to the Company's Regulations, and in such circumstances any
reference to the Board of Directors herein shall be deemed to include a
reference to such committee.
Section 29. Benefits of This Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any Person other than the Company, the Rights Agent
and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Rights Agent
and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock).
Section 30. Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full
- 49 -
<PAGE>
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this
- --------
Agreement to the contrary, if any such term, provision, covenant or
restriction is held by such court or authority to be invalid, void or
unenforceable and the Board of Directors of the Company determines in its good
faith judgment that severing the invalid language from this Agreement would
adversely affect the purpose or effect of this Agreement, the right of
redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the close of business on the tenth Business Day following the
date of such determination by the Board of Directors of the Company.
Section 31. Governing Law. This Agreement, each Right and each Rights
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Ohio and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
made and to be performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Attest: ARMCO INC.
By /s/ Regina M. Scolieri By /s/ Gary R. Hildreth
---------------------------------- -----------------------------------
Name: Regina M. Scolieri Name: Gary R. Hildreth
Title: Title: Vice President
- 50 -
<PAGE>
Attest: FIFTH THIRD BANK
By /s/ Greg Hahn By /s/ Kerry Byrne
------------------------------- -------------------------------
Name: Greg Hahn Name: Kerry Byrne
Title: Trust Officer Title: Vice President
- 51 -
<PAGE>
Exhibit A
[Form of Rights Certificate]
Certificate No. R- -------- Rights
NOT EXERCISABLE AFTER JUNE 26, 2006 OR EARLIER IF REDEEMED BY THE COMPANY.
THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.0025
PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ADVERSE
PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT
HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY
THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR
BECAME AN ACQUIRING [ADVERSE] PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING [ADVERSE] PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS
AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED
HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e)
OF SUCH AGREEMENT.]*
Rights Certificate
ARMCO INC.
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of February 23, 1996 (the "Rights Agreement"),
between Armco Inc., an Ohio corporation (the "Company"), and Fifth Third Bank
(the "Rights Agent"), to purchase from the Company at any time prior to
5:00 P.M. (Pittsburgh, Pennsylvania time) on June 26, 20006 at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one two-hundredths of a fully paid, nonassessable share of
Class A Preferred Stock designated as Participating Preferred Stock (the
- ----------------------------
* The portion of the legend in brackets shall be inserted only if applicable,
shall be modified to apply to an Acquiring Person or an Adverse Person, as
applicable, and shall replace the preceding sentence.
<PAGE>
"Preferred Stock") of the Company, at a purchase price of $20.00 per one
two-hundredths of a share (the "Purchase Price"), upon presentation and
surrender of this Rights Certificate with the Form of Election to Purchase and
related Certificate duly executed. The Purchase Price may be paid in cash or
by certified bank check or money order payable to the order of the Company.
The number of Rights evidenced by this Rights Certificate (and the number of
shares which may be purchased upon exercise thereof) set forth above, and the
Purchase Price per share set forth above, are the number and Purchase Price as
of February 23, 1996, based on the Preferred Stock as constituted at such
date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined
in the Rights Agreement), if the Rights evidenced by this Rights Certificate
are beneficially owned by (i) an Acquiring Person, an Adverse Person or an
Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement), (ii) a transferee of any such Acquiring Person, Adverse
Person, Associate or Affiliate, or (iii) under certain circumstances specified
in the Rights Agreement, a transferee of a person who, after such transfer,
became an Acquiring Person, an Adverse Person or an Affiliate or Associate of
any such Person, such Rights shall become null and void and no holder hereof
shall have any right with respect to such Rights from and after the occurrence
of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain
events, including Triggering Events (as such term is defined in the Rights
Agreement).
This Rights Certificate is subject to all of the terms, provisions, and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder of
the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in
the
- 2 -
<PAGE>
Rights Agreement. Copies of the Rights Agreement are available upon written
request to the Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated
for such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one two-hundredths of a share of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a
redemption price of $0.0025 per Right at any time prior to the earliest of the
close of business on (i) the tenth business day following the Stock
Acquisition Date (as such time period may be extended pursuant to the Rights
Agreement), (ii) the tenth business day following the effectiveness of a
declaration by the Board of Directors that a Person is an Adverse Person, and
(iii) the Final Expiration Date; provided, however, that with certain
exceptions the Company shall be entitled so to redeem the Rights only if the
Board of Directors consists of a majority of Continuing Directors (as such
term is defined in the Rights Agreement). After the expiration of the
redemption period, the Company's right of redemption may be reinstated if an
Acquiring Person reduces his beneficial ownership to less than 10% of the
outstanding shares of Common Stock in a transaction or series of transactions
not involving the Company and there are no other Acquiring Persons or Adverse
Persons.
The Company may (but shall not be required to) issue fractional shares of
Preferred Stock upon the exercise of any Right or Rights evidenced hereby
(other than fractions which are integral multiples of one two-hundredth of a
share of Preferred Stock, which may, at the election of the Company, be
evidenced by depositary receipts), and in lieu thereof a cash payment may be
made, as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote
or receive dividends or be
- 3 -
<PAGE>
deemed for any purpose the holder of shares of Preferred Stock or of any other
securities of the Company which may at any time be issuable on the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
give or withhold consent to any corporate action, or, to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by this Rights Certificate
shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS, the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of ,
----------- --
ATTEST: ARMCO INC.
By
- --------------------------- ---------------------------
Secretary Title:
Countersigned:
FIFTH THIRD BANK
By---------------------------
Authorized Signature
- 4 -
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED hereby
------------------------------
sells, assigns and transfers unto
----------------------------------
- ---------------------------------------------------------------------
(Please print name and address of transferee)
- ---------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney,
---------------
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ,
---------------- -----
-----------------------------------------
Signature
Signature Guaranteed:
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person, an
Adverse Person or an Affiliate or Associate of any such Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the
- 5 -
<PAGE>
Rights evidenced by this Rights Certificate from any Person who is, was or
subsequently became an Acquiring Person, an Adverse Person or an Affiliate or
Associate of any such Person.
Dated: , -------------------------------
----------------- ----- Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
- 6 -
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise Rights represented by the
Rights Certificate.)
To: ARMCO INC.
The undersigned hereby irrevocably elects to exercise
---------------
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon
the exercise of the Rights) and requests that certificates for such shares be
issued in the name of and delivered to:
Please insert social security
or other identifying number
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -----------------------------------------------------------------------------
(Please print name and address)
- -----------------------------------------------------------------------------
Dated: ,
---------------- -----
--------------------------------
Signature
Signature Guaranteed:
- 7 -
<PAGE>
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person,
an Adverse Person or an Affiliate or Associate of any such Person (as such
terms are defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
[ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or became an Acquiring Person, an Adverse Person
or an Affiliate or Associate of any such Person.
Dated: , ----------------------------------
------------------ ---- Signature
Signature Guaranteed:
- 8 -
<PAGE>
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On February 23, 1996, the Board of Directors of Armco Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of Company Common Stock to stockholders of record at the close of
business on June 26, 1996. One Right will also be distributed for each share
of Common Stock issued after June 26, 1996, until the Distribution Date (which
is described in the next paragraph). Each Right entitles the registered
holder to purchase from the Company a unit consisting of one two-hundredths of
a share (a "Unit") of Class A Preferred Stock, designated as Participating
Preferred Stock (the "Preferred Stock"), at a Purchase Price of $20.00 per
Unit, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement dated as of February 23, 1996 (the "Rights
Agreement") between the Company and Fifth Third Bank, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earliest of (i) 10 business 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
Common Stock (the "Stock Acquisition Date"), (ii) 10 business days following
the commencement of a tender offer or exchange offer that would if consummated
result in a person or group beneficially owning 20% or more of such
outstanding shares of Common Stock or (iii) 10 business days after the Board
of Directors of the Company shall declare any Person to be an "Adverse
Person," upon a determination that such person, alone or together with its
affiliates and associates, has or will become the Beneficial Owner of 10% or
more of the outstanding shares of Common Stock (provided that any such
determination shall not be effective until such Person has become the
Beneficial Owner of 10% or more of the outstanding shares of Common Stock) and
a determination by at least a majority of the "Continuing Directors" (who
generally are those directors who were directors of the Company on
February 23, 1996 or who subsequently became directors and whose elections or
nominations were approved by a majority of Continuing Directors), including
consultation with such persons as such
<PAGE>
directors shall deem appropriate, that (a) such beneficial ownership by such
person is intended to cause, is reasonably likely to cause or will cause the
Company to repurchase the Common Stock beneficially owned by such person or to
cause pressure on the Company to take action or enter into a transaction or
series of transactions intended to provide such person with short-term
financial gain under circumstances where the Board of Directors determines
that the best long-term interests of the Company and its stockholders would
not be served by taking such action or entering into such transactions or
series of transactions at that time or (b) such beneficial ownership is
causing or is reasonably likely to cause a material adverse impact (including,
but not limited to, impairment of relationships with customers or impairment
of the Company's ability to maintain its competitive position) on the business
or prospects of the Company or (c) such beneficial ownership otherwise is
determined to be not in the best interests of the Company and its
stockholders, employees, customers and communities in which the Company and
its subsidiaries do business.
However, the Board of Directors may not declare a person to be an Adverse
Person if, prior to the time that the person acquired 10% or more of the
shares of Common Stock then outstanding, such person provided to the Board of
Directors in writing a statement of the person's purpose and intentions in
connection with the proposed acquisition of Common Stock, together with any
other information reasonably requested of the person by the Board of
Directors, and the Board of Directors, based on such statement and reasonable
inquiry and investigation as it deems appropriate, determines to notify and
notifies such person in writing that it will not declare the person to be an
Adverse Person; provided, however, that the Board of Directors may expressly
condition in any manner a determination not to declare a person an Adverse
Person on such conditions as the Board of Directors may select, including,
without limitation, such person's not acquiring more than a specified amount
of stock and/or on such person's not taking actions inconsistent with the
purposes and intentions disclosed by such person in the statement provided to
the Board of Directors. In the event that the Board of Directors should at
any time determine, upon reasonable inquiry and investigation, that such
person has not met or complied with any conditions specified by the Board of
Directors, the Board of Directors may at any time thereafter declare the
person to be an Adverse Person.
- 2 -
<PAGE>
Until the Distribution Date (i) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with such
Common Stock certificates, (ii) new Common Stock certificates issued after
June 26, 1996 will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates for Common
Stock outstanding will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on June 26, 2006, unless earlier redeemed by
the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except for certain issuances in
connection with outstanding options and convertible securities and as
otherwise determined by the Board of Directors, only shares of Common Stock
issued prior to the Distribution Date will be issued with Rights.
In the event that the Board of Directors determines that a person is an
Adverse Person or, at any time following the Distribution Date, a person
becomes the beneficial owner of 25% or more of the then-outstanding shares of
Common Stock, each holder of a Right will thereafter have the right to receive
at the time specified in the Rights Agreement, (x) upon exercise and payment
of the exercise price, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right or (y) at the discretion of the Board of
Directors, upon exercise and without payment of the exercise price, Common
Stock (or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to the difference between the exercise price of
the Right and the value of the consideration which would be payable under
clause (x). Notwithstanding any of the foregoing, following the occurrence of
any of the events set forth in this paragraph, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person or Adverse Person will be null and void.
However, Rights
- 3 -
<PAGE>
are not exercisable following the occurrence of either of the events set forth
above until such time as the Rights are no longer redeemable by the Company as
set forth below.
For example, at an exercise price of $20.00 per Right, each Right not
owned by an Acquiring Person or an Adverse Person (or by certain related
parties) following an event set forth in the preceding paragraph would entitle
its holder to purchase $40.00 worth of Common Stock (or other consideration,
as noted above) for $20.00. Assuming that the Common Stock had a per share
value of $10.00 at such time, the holder of each valid Right would be entitled
to purchase four shares of Common Stock for $20.00. Alternatively, at the
discretion of the Board of Directors, each Right following an event set forth
in the preceding paragraph, without payment of the exercise price, would
entitle its holder to Common Stock (or other consideration, as noted above)
worth $20.00.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation (other than a merger
which follows an offer described in the second preceding paragraph), or (ii)
50% or more of the Company's assets or earning power is sold or transferred,
each holder of a Right (except Rights which previously have been voided as set
forth above) shall 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 Right. The events set forth in this paragraph and in the second
preceding paragraph are referred to as the "Triggering Events."
The Purchase Price payable, and the number of Units of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a
stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible securities
at less than the current market price of the Preferred Stock, or (iii) upon
the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
- 4 -
<PAGE>
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment
in cash will be made based on the market price of the Preferred Stock on the
last trading date prior to the date of exercise.
In general, the Company may redeem the Rights in whole, but not in part,
at a price of $0.0025 per Right, at any time until 10 business days following
the Stock Acquisition Date; provided, however, that with certain exceptions
the Company shall be so entitled to redeem the Rights only if the Board of
Directors then consists of a majority of Continuing Directors. Moreover,
redemption would not be permitted after 10 business days following the
effective date of any declaration by the Board of Directors that any person is
an Adverse Person. After the redemption period has expired, the Company's
right of redemption may be reinstated if an Acquiring Person or Adverse Person
reduces his beneficial ownership to less than 10% of the outstanding shares of
Common Stock in a transaction or series of transactions not involving the
Company and there are no other Acquiring Persons or Adverse Persons.
Immediately upon the action of the 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 $0.0025 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
will not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income in the event that
the Rights become exercisable for stock (or other consideration) of the
Company or for common stock of the acquiring company as set forth above.
Other than those provisions relating to the principal economic terms of
the Rights, any of the provisions of the Rights Agreement may be amended by
the Board of Directors of the Company prior to the Distribution Date. After
the Distribution Date, the provisions of the Rights Agreement may be amended
by the Board in order to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interests
of any Acquiring
- 5 -
<PAGE>
Person or Adverse Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time
period governing redemption shall be made when the Rights are not redeemable;
and provided further, that any amendment to the redemption provision shall be
effective only if the Board of Directors consists of a majority of Continuing
Directors.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A
dated , 1996. A copy of the Rights Agreement is available free
-------------
of charge from the Company. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated herein by reference.
- 6 -
<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
-------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
I. PRIMARY
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations.................. $ 23.5 $ 65.8 $(247.5) $(402.2) $(147.2)
Less: preferred dividends.... 17.9 17.8 17.8 10.3 8.1
-------- -------- -------- -------- --------
Income (loss) from continuing
operations after preferred
dividends................... $ 5.6 $ 48.0 $(265.3) $(412.5) $(155.3)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumulative
effect of changes in accoun-
ting principles............. $ 29.8 $ 77.7 $(327.0) $(421.5) $(336.5)
Less: preferred dividends.... 17.9 17.8 17.8 10.3 8.1
-------- -------- -------- -------- --------
Income (loss) before extra-
ordinary items and cumulative
effect of changes in accoun-
ting principles after
preferred dividends......... $ 11.9 $ 59.9 $(344.8) $(431.8) $(344.6)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumulative
effect of changes in accoun-
ting principles...... ...... $ 29.8 $ 77.7 $(327.0) $(421.5) $(336.5)
Loss on extraordinary items -- -- (7.3) (8.4) --
Cumulative effect of changes
in accounting principles.. -- -- (307.5) -- --
-------- -------- -------- -------- --------
Net income (loss)............. $ 29.8 $ 77.7 $(641.8) $(429.9) $(336.5)
Less preferred dividends.... 17.9 17.8 17.8 10.3 8.1
-------- -------- -------- -------- --------
Net income (loss) after
preferred dividends......... $ 11.9 $ 59.9 $(659.6) $(440.2) $(344.6)
======== ======== ======== ======== ========
Weighted average number of
common shares 106.0 104.6 103.8 98.8 88.5
Weighted average number of
common equivalent shares (A) -- 0.1 * * *
-------- -------- -------- -------- --------
Total shares for computation 106.0 104.7 103.8 98.8 88.5
======== ======== ======== ======== ========
Primary income (loss) per share:
Income (loss) from continuing
operations.................. $ 0.05 $ 0.46 $ (2.56) $ (4.18) $ (1.75)
Income (loss) before extra-
ordinary items and
cumulative effect of
changes in accounting
principles................ 0.11 0.57 (3.32) (4.37) (3.89)
Loss on extraordinary items. -- -- (0.07) (0.08) --
Cumulative effect of changes
in accounting principles.. -- -- (2.96) -- --
Net income (loss)........... 0.11 0.57 (6.35) (4.45) (3.89)
<PAGE>
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
-------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
II. FULLY DILUTED
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations.................. $ 23.5 $ 65.8 $(247.5) $(402.2) $(147.2)
Less: preferred dividends.... -- -- 17.8 10.3 8.1
-------- -------- -------- -------- --------
Income (loss) from continuing
operations after preferred
dividends................... $ 23.5 $ 65.8 $(265.3) $(412.5) $(155.3)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumulative
effect of changes in accounting
principles.................. $ 29.8 $ 77.7 $(327.0) $(421.5) $(336.5)
Less: preferred dividends.... -- -- 17.8 10.3 8.1
-------- -------- -------- -------- --------
Income (loss) before extra-
ordinary items and cumulative
effect of changes in
accounting principles after
preferred dividends......... $ 29.8 $ 77.7 $(344.8) $(431.8) $(344.6)
======== ======== ======== ======== ========
Income (loss) before extra-
ordinary items and cumulative
effect of changes in accounting
principles.................. $ 29.8 $ 77.7 $(327.0) $(421.5) $(336.5)
Loss on extraordinary items -- -- (7.3) (8.4) --
Cumulative effect of changes
in accounting principles.. -- -- (307.5) -- --
-------- -------- -------- -------- --------
Net income (loss)............. $ 29.8 $ 77.7 $(641.8) $(429.9) $(336.5)
Less preferred dividends..... -- -- 17.8 10.3 8.1
-------- -------- -------- -------- --------
Net income (loss) after
preferred dividends....... $ 29.8 $ 77.7 $(659.6) $(440.2) $(344.6)
======== ======== ======== ======== ========
Weighted average number of
common shares............... 106.0 104.6 103.8 98.8 88.5
Weighted average number of
common equivalent shares (A) -- 0.1 * * *
Weighted average number of
preferred shares on an
"if converted" basis........ 22.7 22.7 * * *
-------- -------- -------- -------- --------
Total shares for computation 128.7 127.4 103.8 98.8 88.5
======== ======== ======== ======== ========
Fully diluted income (loss)
per share (B):
Income (loss) from continuing
operations................ $ 0.18 $ 0.52 $ (2.56) $ (4.18) $ (1.75)
Income (loss) before extra-
ordinary items and cumulative
effect of changes in
accounting principles..... 0.23 0.61 (3.32) (4.37) (3.89)
Loss on extraordinary items. -- -- (0.07) (0.08) --
Cumulative effect of changes
in accounting principles.. -- -- (2.96) -- --
Net income (loss).......... 0.23 0.61 (6.35) (4.45) (3.89)
<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
13 of APB Opinion No. 15 because it results in dilution of less than 3%.
</TABLE>
<PAGE>
EXHIBIT 13
ARMCO SPECIALTY FLAT-ROLLED STEELS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1995
(Dollars in millions, except per share data)
GENERAL
This discussion and analysis of Armco's financial results should be read
together with the Consolidated Financial Statements and Notes on pages 31
through 46.
Operating Results
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,559.9 $1,437.6 $1,664.0
Special charges -- (35.0) (165.5)
Operating profit (loss) 69.0 39.2 (146.0)
Gain on sale of investments in
joint ventures/related stock 27.2 62.6 --
Equity in income (loss) of
equity companies 0.6 5.5 (32.7)
Credit (provision) for income
taxes (2.0) 28.7 7.3
Income (loss) from continuing
operations 23.5 65.8 (247.5)
Income (loss) from discontinued
operations --
National-Oilwell 6.3 11.9 (8.7)
AFSG companies to be sold -- -- (45.0)
Worldwide Grinding Systems -- -- (25.8)
Income (loss) before extraordinary
losses and cumulative effect of
accounting changes 29.8 77.7 (327.0)
Net income (loss) $ 29.8 $ 77.7 $ (641.8)
- ------------------------------------------------------------------------------
</TABLE>
1995 vs. 1994: Net sales increased in 1995 over 1994 because of strong
markets and higher prices for stainless and electrical steels, and the
addition of sales from Armco's modernized carbon and stainless steel producing
facilities in Mansfield and Dover, Ohio, which resumed operations in April
1995. Mansfield and Dover, idled in March of 1994, recorded sales which were
$52.1 higher in 1995 than in 1994. However, Armco's net sales in 1994 included
$52.8 from Eastern Stainless Corporation (Eastern Stainless), which has since
been divested. Excluding the results of Mansfield, Dover and Eastern
Stainless, 1995 net sales were 9% higher than 1994 sales. Increased sales for
the year in the Specialty Flat-Rolled Steels segment and by Sawhill Tubular,
were partially offset by a decline in sales at Douglas Dynamics, LLC (Douglas
Dynamics), Armco's snowplow and light truck equipment and accessories
manufacturer.
During 1994, special charges totaling $35.0 were recorded for expenses
associated with idling the Mansfield and Dover Operations and for employee
benefit and other charges related to the sale of assets by Eastern Stainless.
Both charges are more fully described in the discussion of BUSINESS SEGMENT
RESULTS - Specialty Flat-Rolled Steels.
The overall results of the Butler, Coshocton and Zanesville Operations in the
Specialty Flat-Rolled Steels segment exceeded 1994 operating profit by 22%. In
addition, results improved at Sawhill Tubular. However, excluding special
charges, operating profit in 1995 was down $5.2 from 1994, as higher losses
generated by the ramp-up of the Mansfield Operations and lower profits from
Douglas Dynamics more than offset the improvements.
Income from continuing operations in 1994 reflected the completion of an
initial public offering and recapitalization of Armco Steel Company, L.P.
(ASC), related to which Armco recognized a pretax gain of $36.5, and a $30.0
tax benefit. Also in 1994, Armco sold 90% of its investment in North American
Stainless (NAS) for $73.0 in cash, recognizing a $26.1 gain. In 1995, Armco
sold, for $27.2, the 1,023,987 shares of AK Steel Holding Corporation (AK
Steel) stock it had acquired during the recapitalization of ASC, recording a
gain in the same amount. These transactions are more fully described in OTHER
INVESTMENTS.
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 idling the
operations at Mansfield and Dover.
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 $138.8 lower in 1994 than
1993, largely as a result of the idling. Sales from Eastern Stainless, which
was divested in early 1995, were $59.4 lower during 1994 versus 1993.
Partially offsetting these reductions was a 12% increase in net sales from the
Butler, Coshocton and Zanesville Operations and a significant increase from
Douglas Dynamics.
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. These charges are more fully described in the discussion
of BUSINESS SEGMENT RESULTS - Fabricated Products.
Operating profit in 1994 improved over 1993 as a result of lower special
charges, as well as strong performances from the Butler, Coshocton and
Zanesville plants of the Specialty Flat-Rolled Steels segment and Douglas
Dynamics. Partially offsetting these improvements were deteriorating results
at Sawhill Tubular, losses of $86.0 at Mansfield and Dover and a $4.5 charge
to increase environmental and litigation reserves.
Equity in income (loss) of equity companies was $5.5 of income in 1994
compared to a $32.7 loss in 1993, partially a result of improved performance
by 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.
These businesses are more fully described in OTHER INVESTMENTS.
20 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
In 1993, 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. The anticipated transaction was completed in
April 1995.
Effective January 1, 1993, Armco adopted three new accounting pronouncements,
with a net cumulative effect of reducing net income by $307.5. The standards
are more fully described in ADOPTION OF MAJOR ACCOUNTING STANDARDS.
Outlook: Armco expects increased sales from all of its specialty flat-
rolled steel product lines in 1996. While demand may soften somewhat, Armco's
expanded capacity should allow the company to service market sectors that its
constrained capacity had previously prevented. Armco also expects the
Mansfield Operations to complete its ramp up to full production by mid-1996.
On the other hand, Douglas Dynamics is expecting a softer year in 1996 as it
experiences a normal cyclical downturn. Armco's business outlook is discussed
more fully in BUSINESS SEGMENT RESULTS.
BUSINESS SEGMENT RESULTS
During 1995, Armco realigned the management of its steel operations, combining
all steel-producing facilities under common control. Armco's new business
segments reflect this alignment.
Specialty Flat-Rolled Steels
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-rolled
stainless, electrical and carbon steels at plants in Butler, Pennsylvania, and
Coshocton, Dover, Mansfield and Zanesville, Ohio. The segment also includes
the results of European trading companies that buy and sell steel and
manufactured steel products. Through September 30, 1994, the segment also
included stainless steel plate products, which were finished at Eastern
Stainless, Armco's former 84%-owned subsidiary in Baltimore, Maryland. Armco
stopped consolidating the results of Eastern Stainless on this date following
a decision by Eastern Stainless to sell substantially all of its assets.
<TABLE>
Results for the Specialty Flat-Rolled Steels segment:
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $1,277.0 $1,114.4 $1,206.4
Special charges -- (35.0) --
Operating profit 76.0 40.5 33.7
- ------------------------------------------------------------------------------
</TABLE>
1995 vs. 1994: The Mansfield and Dover Operations were idled from late
in the first quarter of 1994 through the first quarter of 1995, though Dover
began limited operations early in the first quarter of 1995. By mid-year, the
Dover plant was fully operational. During the idle period, these operations
sold only on-hand coil inventory. With the completion of its new thin-slab
caster and modernized hot strip mill, Mansfield restarted in April 1995. The
restart was hampered by process control system difficulties and, in the third
quarter, the failure of the refractory lining and a skid in the new walking
beam furnace. The furnace problems necessitated an unscheduled 17-day outage,
halting the steel melting and casting operations. Early in the first quarter
of 1996, the Mansfield facility was operating at approximately 70% of
capacity.
<TABLE>
Customer sales and shipments by major product line:
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
(tons in thousands) Sales Tons Sales Tons Sales Tons
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Automotive chrome $ 423.8 312 $ 358.9 279 $ 285.1 224
Electrical 320.5 236 293.6 234 262.7 240
Specialty strip and sheet 269.0 99 222.8 91 254.2 110
Specialty semi-finished 130.5 78 80.2 64 39.8 31
Stainless plate -- -- 52.8 22 116.7 54
Carbon 94.1 214 62.1 125 200.1 406
Other 39.1 -- 44.0 -- 47.8 --
- ------------------------------------------------------------------------------
Total $1,277.0 939 $1,114.4 815 $1,206.4 1,065
- ------------------------------------------------------------------------------
Raw steel production 1,153 947 1,490
- ------------------------------------------------------------------------------
</TABLE>
Customer sales in 1995 increased 15% over 1994 sales, as demand for most
products remained strong throughout the year. Pricing also remained strong as
a result of raw material surcharges on products containing nickel and
chromium, January 1995 price increases for electrical steel and industry-wide
price increases for chrome nickel products. Armco and other specialty steel
producers add raw material surcharges to the price of their product to
compensate for higher costs incurred when the price of key raw materials such
as nickel, chromium or molybdenum rises above certain levels.
Armco's shipments of automotive chrome increased 12% in 1995, principally as a
result of continued strength in North American light vehicle production and
increased use of stainless steel in exhaust systems.
Shipments of electrical steel remained at a high level, sustained by strong
demand for both grain oriented electrical steel used in utility distribution
transformers and non-oriented electrical steel used in motors, generators and
industrial apparatus. Armco's orders for non-oriented electrical steel were
further increased by a 54-day strike at a major domestic competitor; however,
Armco's ability to ship this product was limited by capacity constraints.
The increase in Armco's shipments of specialty strip and sheet was primarily
attributable to broad-based increases in the automotive, consumer and
industrial markets, especially in the first half of 1995. In the second half,
demand slowed due to normal seasonal factors as well as liquidation of
customer inventories.
Specialty semi-finished shipments of hot bands and slabs grew 22% in 1995 on
strong demand from North American customers.
Customer sales for the segment were also affected by the idling and restart of
the Mansfield and Dover Operations and by the divestment of Eastern Stainless.
Sales by Mansfield and Dover increased by $52.1 in 1995. Eastern Stainless
sales of $52.8 were recognized in 1994, before Armco stopped consolidating
this business.
During 1994, Armco recognized a $20.0 special charge related to its decision
to idle and restructure the Mansfield and Dover, Ohio plants, while installing
a new thin-slab continuous caster. The special charge consisted of $11.2 for
employee benefits, primarily group insurance and supplemental unemployment
benefits, and $8.8 to write down inventories and fixed assets. At December 31,
1995, reserves established for these expenses had been substantially used for
their intended purposes.
Armco Inc. * 1995 Annual Report 21
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
<TABLE>
[Nine bar charts]
SPECIALTY FLAT-ROLLED STEELS - SALES
% by Market
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Automotive 40% 39% 23%
Industrial and Electrical Equipment 32% 34% 34%
Service Centers 9% 12% 28%
Other/Conversion 15% 10% 7%
Construction 2% 2% 6%
Appliances, Utensils and Cutlery 2% 3% 2%
- ------------------------------------------------------------------------------
SPECIALTY FLAT-ROLLED STEELS - SALES
% by Product Line
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Automotive Chrome 33% 32% 24%
Electrical 25% 26% 22%
Specialty Strip and Sheet 21% 20% 21%
Specialty Semi-finished 10% 7% 3%
Stainless Plate 0% 5% 10%
Carbon 7% 6% 16%
Other 4% 4% 4%
- ------------------------------------------------------------------------------
SPECIALTY FLAT-ROLLED STEELS - TONS SHIPPED
% by Product Line
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Automotive Chrome 33% 34% 21%
Electrical 25% 29% 23%
Specialty Strip and Sheet 10% 11% 10%
Specialty Semi-finished 9% 8% 3%
Stainless Plate 0% 3% 5%
Carbon 23% 15% 38%
- ------------------------------------------------------------------------------
</TABLE>
Also in 1994, Eastern Stainless, facing a decline in market demand and selling
prices for certain of its products, intense competition from both foreign and
domestic sources, and increased production costs, 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. On March 14, 1995, the transaction was completed.
Cash received on the sale was 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 were assumed by Armco. On the date of sale, the net liabilities
assumed by Armco, including amounts recorded at the establishment of the $15.0
special charge, totaled $53.0. Included in this amount was $48.1 of long-term
employee benefit obligations, which will be settled over many years. Upon
completion of the transaction, Eastern Stainless had no assets remaining as a
corporate legal entity and was dissolved without any shareholder distribution.
Specialty Flat-Rolled Steels operating profit in 1995 was almost double that
of 1994. Included in the 1995 operating results was a $104.2 operating loss
from Mansfield, primarily as a result of the startup problems described above.
The 1994 Specialty Flat-Rolled Steels operating profit included a $15.0
special charge for the divestment of Eastern Stainless and special charges and
losses of $86.0 from the Mansfield and Dover Operations, primarily as a result
of the idling. The remaining operations in this segment realized a 22%
increase in operating profit from 1994 to 1995.
The Butler, Coshocton and Zanesville Operations achieved record-breaking
production in 1995. Butler's melt shop cast 940,000 tons in 1995, which was 7%
higher than 1994. In 1995, each operation achieved record shipments and
profits.
Partially offsetting productivity gains and higher prices received for
products were the effects of an unplanned outage at the Butler Operations,
where the failure of a generator on one stand of the hot mill reduced
efficiency during a six-week period. The failure caused the use of
alternative, and more costly product routings, and resulted in lost sales.
1994 vs. 1993: The Butler and Zanesville plants operated at full
capacity in 1994, which limited 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 decreased by 8% and 23%, respectively, in 1994 versus 1993, primarily
reflecting the idling of operations at Mansfield and Dover, including the
reduction in lower priced carbon steel sales. Declines were also experienced
in shipments of chrome nickel stainless, non-oriented electrical and stainless
plate. In the fourth quarter of 1994, Armco stopped consolidating Eastern
Stainless sales. These reductions were partially offset by increases in
automotive chrome, oriented electrical steel and specialty strip and sheet.
The reduction in non-oriented electrical steel was primarily due to capacity
constraints. While prices across most stainless and electrical steel product
lines strengthened in 1994 compared to 1993, average sales dollars per ton
were lower due to a change in product mix as automotive chrome and specialty
semi-finished sales displaced sales of higher priced chrome nickel products.
22 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
<TABLE>
[Picture of melt shop and a bar chart with caption]
AVERAGE TONS CAST / MONTH - BUTLER MELT SHOP
<S> <C>
1991 50,000
1992 59,000
1993 66,000
1994 73,000
1995 78,000
<FN>
These impressive productivity gains are the direct result of employee
performance and equipment reliability.
</TABLE>
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 1994 special charges, operating profit in 1994 more than doubled
relative to 1993 profits. Improvements in yield and productivity and higher
capacity utilization reduced operating cost per ton, while the synergies
between the melting and finishing facilities, expected as a result of the 1992
Cyclops Industries, Inc. (Cyclops) acquisition, were more fully realized. As a
result, operating profits for the Butler, Coshocton and Zanesville Operations
increased 75% in 1994. Partially offsetting these gains, however, were the
1994 Mansfield and Dover Operations' special charge and losses of $86.0, which
were $44.2 greater than the 1993 losses, due primarily to the idling.
Outlook: Demand for specialty steels is expected to remain strong in
1996, with increased sales projected in all major product lines. Although
North American auto and light truck production is expected to remain flat,
automotive exhaust chrome sales are expected to rise on an increase in the
average amount of stainless steel used in each vehicle. Specialty strip and
sheet sales are expected to rise as Armco increases capacity to produce
specialty chrome nickel and chrome steels and reenters the commodity chrome
nickel market it left in early 1993. Sales of electrical steels are expected
to increase as more capacity becomes available. Electrical steel shipments
were constrained in 1994 and 1995 because of a lack of capacity, but as the
Mansfield Operations begins to produce more automotive chrome product, the
Butler Operations will have more capacity available for electrical steels.
Shipments of carbon steel, which is produced only at the Mansfield facility,
will increase as that plant ramps up. However, because stainless steels have
much higher margins, they will have priority over carbon steel when loading
the plant. Nevertheless, Armco expects to ship over 400,000 tons of carbon
steel in 1996.
Results for this segment are heavily dependent on the new thin-slab continuous
caster in Mansfield ramping up to full capacity, approximately 750,000 cast
tons. Armco expects the Mansfield Operations to complete its ramp up by mid-
1996. The high losses generated by the Mansfield and Dover Operations in 1995
should be drastically reduced in 1996, with these facilities returning to
profitability in the second half of the year.
In the fourth quarter of 1994, Armco announced a strategic facilities plan
under which it would spend up to $95.0 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 strip and sheet products, and non-automotive chrome stainless. Armco
expects that the scheduled projects largely will be complete by mid-1996, with
the full benefits of these projects available in the second half of the year.
Fabricated Products
At December 31, 1995, the Fabricated Products business segment included the
results of Sawhill Tubular, a manufacturer of steel pipe and tubing, and
Douglas Dynamics, a snowplow and light truck equipment and accessories
manufacturer. At various times during the three-year period ended December 31,
1995, the segment included other businesses that have since been divested.
During 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 substantial
special charges in that year.
<TABLE>
Results for the Fabricated Products segment:
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales $282.9 $323.2 $ 457.6
Special charges -- -- (165.5)
Operating profit (loss) 22.0 30.9 (141.7)
- ------------------------------------------------------------------------------
</TABLE>
1995 vs. 1994: Customer sales decreased by 12% in 1995 compared to 1994
primarily as a result of eliminating the sales of Bowman Metal Deck, a
manufacturer of steel roof and floor decking, which was sold in December 1994,
and lower sales by Douglas Dynamics. The severe winter weather in early 1994
led to the best sales year ever for Douglas Dynamics; however, the mild winter
preceding the 1995 selling season resulted in lower annual snowplow sales. In
spite of this, Douglas Dynamics' 1995 snowplow shipments were the third
highest in its history. Sawhill Tubular sales were 3% higher in 1995 than
1994.
Lower operating profit in 1995 resulted from the reduced sales at Douglas
Dynamics, which was partially offset by Sawhill Tubular's return to
profitability. Douglas Dynamics cut its operating costs by reducing manpower
to match the lower work load, decreasing the amount of production previously
performed by outside parties and periodically ceasing production to control
inventory levels at its Rockland, Maine facility. However, these actions could
not offset the effects of the lower volume of snowplows and other equipment
sales, and higher expenses related to new product development. Sawhill
Tubular's return to profitability was driven by an increase in sales,
complemented by
Armco Inc. * 1995 Annual Report 23
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
operational improvements and cost reduction programs, which not only led to
the higher results, but also brought about permanent reductions in
inventories.
1994 vs. 1993: Customer sales decreased by 29% in 1994 compared to 1993,
primarily due to the absence, in 1994, of businesses that were sold or are no
longer consolidated. 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. Excluding the no-longer consolidated
businesses from 1993, segment sales would have increased 21% in 1994 versus
1993. Record-setting sales at Douglas Dynamics, brought about by a substantial
increase in snowplow shipments, accounted for much of the sales increase.
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.
In 1993, consistent with its strategy to focus on the production of specialty
flat-rolled steel, Armco sold 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 Fabricated Products segment. In conjunction with the plans for disposal of
these businesses, Armco recorded special charges totaling $165.5 in 1993,
reflected in the operating loss of the segment. The total charges included
$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, particularly the asset
writedown and employee benefit amounts, were either non-cash or will be paid
over many years.
Absent the special charges from 1993, the increase in operating profit for
1994 was primarily attributable to Douglas Dynamics' higher sales of snowplows
as a result of near record snowfalls in early 1994, low customer inventory and
continued strong demand for four-wheel drive vehicles. This was partially
offset by the net $12.2 of operating profit generated by businesses identified
for sale in 1993. In addition, Bowman Metal Deck reduced its operating loss by
$4.0 in 1994 compared to 1993, while Armco's tubular business losses increased
by about the same amount.
Outlook: Sales at Douglas Dynamics are expected to be lower in 1996
compared to 1995, as the snowplow industry continues to experience its normal
cyclical change in volume. During this downturn, Armco expects to maintain
market share and margins, but still anticipates a decrease in operating
profits. New product sales at Douglas Dynamics are not expected to contribute
significantly to profits in 1996.
During 1996, sales at Sawhill Tubular are expected to approximate 1995 levels,
though continued operational improvements and cost reduction efforts are
expected to result in slightly improved operating profits.
DISCONTINUED OPERATIONS
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 and USX reached a definitive agreement, dated September 22, 1995, to
sell their respective partnership interests in National-Oilwell to an entity
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell
management. The sale was completed on January 16, 1996. For its 50% interest,
Armco received $77.0 in cash and receivables with a face value of $13.0. The
receivables will be recorded at a discounted value of $10.6. After recording
$2.1 for recognition of deferred foreign translation losses and miscellaneous
expenses, no gain or loss will be recognized on the transaction.
Armco recognized equity income from National-Oilwell until September 22, 1995,
when the definitive agreement was signed. After that date, Armco's investment
in National-Oilwell was equal to its estimated net realizable value and no
additional equity income was recorded. In 1995, 1994 and 1993, Armco
recognized National-Oilwell equity income (loss) of $6.3, $11.9 and $(8.7),
respectively.
Armco Financial Services Group (AFSG)
Prior to April 7, 1995, the Armco Financial Services Group consisted primarily
of insurance companies that Armco intended to sell and that continued
underwriting policies (AFSG companies to be sold), and companies that have
stopped writing new business and are being liquidated (runoff companies).
AFSG Companies to be Sold
On April 7, 1995, Armco completed the sale of the AFSG companies to be sold to
Vik Brothers Insurance Inc., a privately held, North Carolina-based property
and casualty insurance holding company. The proceeds from the sale consisted
of $64.2 in cash at the closing and $15.0 to be received in 1998. The latter
amount is subject to potential adjustment for adverse experience in certain
insurance reserves. Substantially all of these proceeds have been pledged as
security for certain note obligations due to the runoff companies and will be
retained in the investment portfolio of those companies.
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. The charge also included recording reserves totaling
approximately $11.5, primarily for
Armco Inc. * 1995 Annual Report 25
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
certain employee benefit liabilities Armco expected to retain after the sale.
As part of the sale agreement, Armco received $4.2 in cash from the former
companies to be sold and assumed an equal amount of additional employee
benefit obligations from them. Concurrent with the sale, Armco transferred the
cash and all of the above liabilities to the runoff companies reducing its
investment in those companies by $11.5 in the second quarter of 1995.
Runoff Companies
The runoff 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 1,007 as of December 31, 1995. 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 $188.0 at December
31, 1995. 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 to $118.7 at December 31, 1995 from $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
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 opinions 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.
Worldwide Grinding Systems
As part of Armco's strategy to focus on its specialty flat-rolled steel
businesses, on September 28, 1993, Armco sold 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 operation's management. In this latter transaction, Armco received
approximately $75.0 after certain purchase price adjustments. 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.
OTHER INVESTMENTS
Armco Steel Company, L.P. (ASC)
ASC was an equally owned limited partnership, formed in 1989, between
subsidiaries of Armco and Kawasaki Steel Corporation. Losses incurred by ASC
in subsequent years through 1993 reduced Armco's investment to zero, after
which Armco stopped recording its equity in profits or losses related to the
operations of ASC. 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.
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 did not account for AK
Steel under the equity method and, as a result, Armco's results were not
affected by AK Steel's 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 its release from certain
obligations 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 1995, Armco sold all of its shares in AK Steel received as a result of the
initial public offering and recapitalization for a total of $27.2, recognizing
a gain of the same amount.
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.
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 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 operations, while
Armco chose 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.
Armco Inc. * 1995 Annual Report 27
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Armco had $136.8 of cash and cash equivalents, compared
to $202.8 at December 31, 1994. 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, 1995. Cash, cash equivalents and liquid
investments decreased $91.8 in 1995 primarily as a result of cash payments,
which included $143.3 for capital expenditures, $54.8 for pension
contributions and $20.9 for preferred stock dividends. Partially offsetting
these cash outflows were $61.5 of net proceeds from the sale of businesses,
assets and investments, including $27.2 for the sale of AK Steel stock, and
cash generated from operations.
Capital expenditures in 1995 totaled $159.5, which included $143.3 of assets
purchased for cash and $16.2 of assets acquired through direct project
financing.
Inventories and trade payables increased 31% and 27%, respectively, during
1995, reflecting the increased level of business in the Specialty Flat-Rolled
Steels segment, the restart of operations at Mansfield and Dover, and higher
prices paid for raw materials. Trade receivables declined slightly as the
increase generated at Mansfield and Dover was more than offset by decreased
receivables at the other facilities in the Specialty Flat-Rolled Steels and
Fabricated Products segments. Lower receivables were due in part to shorter
average number of days outstanding, primarily for receivables in the Specialty
Flat-Rolled Steels segment, and the lower sales by Douglas Dynamics.
Inventories and trade receivables are expected to rise in 1996, primarily as
Mansfield increases operating activity.
At December 31, 1995, Armco had a $170.0 revolving credit facility that was
amended to expire on January 31, 1996. At December 31, 1995, $67.2 of the
credit facility was used as support for letters of credit and $102.8 was
available. Borrowings under the credit facility were secured by certain of
Armco's inventories and receivables.
In January 1996, Armco replaced its amended revolving credit facility with two
new bank credit facilities, totaling $170.0. Under a receivables facility,
Armco sold substantially all its trade receivables to a newly created, wholly
owned subsidiary, Armco Funding Corporation (AFC). Armco will sell additional
receivables to AFC as they are generated. AFC has entered into a five-year
revolving credit agreement with a group of banks providing up to $120.0 for
revolving credit loans and letters of credit secured by AFC's receivables.
Under an inventory credit facility, Armco entered into a three-year revolving
credit agreement with a group of banks providing up to $50.0 for revolving
credit loans secured by Armco's inventories. The credit agreement subjects
Armco to certain restrictions and covenants related to, among other things,
minimum working capital, minimum net income, current ratio and interest
coverage ratio requirements.
Armco has debt maturities of $25.8, $27.3 and $27.4 in 1996, 1997 and 1998,
respectively. In 1999 and 2000, $127.5 and $157.7, respectively, will come
due, primarily as a result of the maturity of the $100.0, 11.375% Senior Notes
due 1999 and the $125.0, 9.375% Senior Notes due 2000.
Armco anticipates that its capital expenditures for 1996 will total
approximately $50.0 to $60.0, including approximately $15.0 of the $95.0
strategic facilities plan, discussed above in the BUSINESS SEGMENT RESULTS -
Specialty Flat-Rolled Steels. The remaining capital expenditures will be for
normal replacement, environmental and expansion programs. In addition, Armco
expects to contribute up to $65.0 to its major pension funds in 1996.
Armco expects that its 1996 cash requirements, including amounts for debt
service, capital expenditures and pension payments, will be paid out of
existing cash balances, cash generated from operations and proceeds from the
sale of assets. On January 16, 1996, Armco sold its National-Oilwell joint
venture, receiving $77.0 in cash.
On January 26, 1996, 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 29, 1996 to shareholders of
record on March 1, 1996. 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 1, 1996, to shareholders of record on
March 1, 1996. 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 its inventory credit facility. Armco does not anticipate paying a
common stock dividend in the foreseeable future.
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 $29.0 for
the years 1996-2000, with the largest expenditures being made in the Specialty
Flat-Rolled Steels segment. Approximately $5.0 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 analysis of both current and expected regulations.
During the period 1991 through 1995, Armco's capital expenditures for
pollution control projects amounted to approximately $28.1, including $18.1 in
1995. 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.
28 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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 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 operating
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.
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, 1995, a
deferred tax asset of $328.5, net of a valuation allowance of $669.1. The
ultimate realization of this asset depends on Armco's ability to generate
sufficient taxable income in the future. As of December 31, 1995, Armco had
capital and net operating loss (NOL) carryforwards of approximately $1,165.8,
expiring between 1998 and 2010, with almost 80% expiring after the year 2000.
Even though Armco has incurred tax losses for the past six 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 four
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 four
years 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 capital
improvement program currently underway. 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 Standards 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 certain short-term and long-term disability plans.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Armco intends to adopt SFAS No. 121 when
required in 1996, but does not expect the adoption to have any material effect
on its Statements of Consolidated Financial Position or Consolidated
Operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). SFAS No. 123 provides that companies may choose
to change their method of accounting for stock options or, alternatively,
continue to account for stock options under their current method and provide
expanded footnote disclosures. Armco intends to adopt SFAS No. 123, when
required in 1996, but not change its method of accounting for stock options.
Armco Inc. * 1995 Annual Report 29
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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. Armco believes 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. Armco maintains 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 stated policies and
procedures, including policies on the ethical conduct of business. Armco
continually reviews and updates its 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 Armco. 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
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
Deloitte &
Touche LLP
- -------------
[Deloitte & Touche 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 subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of operations and cash flows for each of the three years in the
period ended December 31, 1995. 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 subsidiaries at
December 31, 1995 and 1994 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Notes 1, 2 and 3 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 5, 1996
30 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1995 and 1994
<CAPTION>
- -----------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents (Note 1) $ 136.8 $ 202.8
Short-term liquid investments (Note 1) -- 25.8
Accounts and notes receivable
Trade (less allowance for doubtful accounts of
$4.4 in 1995 and $4.1 in 1994) 162.8 164.9
Other 6.6 18.4
Inventories (Note 1) 216.2 165.5
Net assets held for sale (Note 11) 85.5 25.6
Other 5.9 46.0
- ------------------------------------------------------------------------------
Total current assets 613.8 649.0
- ------------------------------------------------------------------------------
Investments (Note 1)
Investment in National-Oilwell (Note 11) -- 79.5
Investment in AFSG (Note 11) 85.6 97.1
Other (less allowance for impairment of $16.7 in
1995 and $18.7 in 1994) 37.2 39.9
Property, plant and equipment (net of accumulated deprec-
iation of $539.8 in 1995 and $499.6 in 1994) (Note 1) 668.5 564.6
Deferred tax asset - net (Note 3) 326.1 321.8
Goodwill and other intangible assets (Note 1) 145.9 156.4
Other assets 19.5 26.6
- ------------------------------------------------------------------------------
Total assets $1,896.6 $1,934.9
==============================================================================
Liabilities
Current liabilities
Accounts and notes payable
Trade $ 148.2 $ 116.3
Other 7.5 6.3
Accrued salaries and wages 37.3 32.7
Current portion of employee benefit obligations
(Note 2) 132.8 130.7
Other accruals 67.4 93.9
Current portion of long-term debt (Note 4) 25.8 10.5
- ------------------------------------------------------------------------------
Total current liabilities 419.0 390.4
Long-term debt (Note 4) 361.6 363.8
Long-term employee benefit obligations (Note 2) 1,165.9 1,221.9
Other liabilities 180.5 177.3
Commitments and contingencies (Notes 1, 4, 9 and 11)
- ------------------------------------------------------------------------------
Shareholders' deficit (Note 5)
Preferred stock
Class A 137.6 137.6
Class B 48.3 48.3
Common stock (authorized 150,000,000 shares of
$.01 par value; issued and outstanding
106,102,560 in 1995 and 105,089,146 in 1994) 1.1 1.1
Additional paid-in capital 963.0 956.3
Retained deficit (1,378.5) (1,390.4)
Unrealized gain on equity securities (Note 10) -- 31.6
Other (1.9) (3.0)
- ------------------------------------------------------------------------------
Total shareholders' deficit (230.4) (218.5)
- ------------------------------------------------------------------------------
Total liabilities and shareholders' deficit $ 1,896.6 $1,934.9
==============================================================================
<FN>
See Notes to Financial Statements on pages 34 through 46.
</TABLE>
Armco Inc. * 1995 Annual Report 31
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
<TABLE>
STATEMENT OF CONSOLIDATED OPERATIONS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
- ----------------------------------------------------------------------------
(Dollars in millions, except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,559.9 $1,437.6 $1,664.0
Cost of products sold (1,392.7) (1,267.0) (1,519.5)
Selling and administrative expenses (98.2) (96.4) (125.0)
Special charges (Note 8) -- (35.0) (165.5)
- ----------------------------------------------------------------------------
Operating profit (loss) 69.0 39.2 (146.0)
Interest income 11.8 10.5 5.0
Interest expense (32.9) (33.8) (42.7)
Gain on sale of investments in joint ventures
and related stock (Note 10) 27.2 62.6 --
Equity in losses of Armco Steel Company, L.P.
(Note 10) -- -- (27.9)
Sundry other-net (Note 2) (49.6) (41.4) (43.2)
- ----------------------------------------------------------------------------
Income (loss) before income taxes 25.5 37.1 (254.8)
Credit (provision)for income taxes (Note 3) (2.0) 28.7 7.3
- ----------------------------------------------------------------------------
Income (loss) from continuing operations 23.5 65.8 (247.5)
Discontinued operations (Note 11) -
National-Oilwell
Income (loss) from operations (net of
taxes of $0.1 in 1995, $1.0 in 1994 and
$1.9 in 1993) 6.3 11.9 (8.7)
AFSG companies to be sold
Loss on disposal of business -- -- (45.0)
Worldwide Grinding Systems
Income from operations (net of taxes of
$2.6 in 1993) -- -- 14.2
Loss on disposal of business -- -- (40.0)
- ----------------------------------------------------------------------------
Income (loss) before extraordinary loss
and cumulative effect of accounting changes 29.8 77.7 (327.0)
Extraordinary loss (Note 4) -- -- (7.3)
Cumulative effect of changes in accounting
for postretirement and postemployment
benefits and income taxes (Notes 2 and 3) -- -- (307.5)
- ----------------------------------------------------------------------------
Net income (loss) $ 29.8 $ 77.7 $ (641.8)
- ----------------------------------------------------------------------------
Per share
Income (loss) per share-primary (Note 1)
Income (loss) from continuing operations $ 0.05 $ 0.46 $ (2.56)
Income (loss) from discontinued operations 0.06 0.11 (0.76)
- ----------------------------------------------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting changes 0.11 0.57 (3.32)
Extraordinary loss -- -- (0.07)
Cumulative effect of accounting changes -- -- (2.96)
- ----------------------------------------------------------------------------
Net income (loss) $ 0.11 $ 0.57 $ (6.35)
- ----------------------------------------------------------------------------
Dividends on preferred stock (Note 5)
$2.10 Class A $ 2.10 $ 2.10 $ 2.10
$3.625 Class A 3.625 3.625 3.625
$4.50 Class B 4.50 4.50 4.50
- ----------------------------------------------------------------------------
<FN>
See Notes to Financial Statements on pages 34 through 46.
</TABLE>
32 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
<CAPTION>
- ------------------------------------------------------------------------------------
(Dollars in millions) 1995 1994 1993
- ------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income (loss) $ 29.8 $ 77.7 $(641.8)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and lease-right amortization 52.8 48.8 53.2
(Income) loss from discontinued operations (6.3) (11.9) 79.5
Net gain on sales of investments and facilities (28.4) (64.3) (3.2)
Deferred income tax benefit -- (30.0) --
(Gain) loss on retirement of debt -- (0.3) 7.3
Equity in losses and undistributed (earnings)
of associated companies (0.4) (1.6) 34.1
Special charges -- 35.0 165.5
Cumulative effect of accounting changes -- -- 307.5
Other 11.3 14.3 32.4
Change in assets and liabilities, net of effects
of dispositions:
Accounts receivable 5.3 (7.6) (28.5)
Inventory (50.8) 12.4 0.8
Payables and accrued expenses 49.5 (1.8) (19.6)
Other assets and liabilities - net (47.3) (12.2) (18.7)
- ------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 15.5 58.5 (31.5)
- ------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net proceeds from the sale of businesses and assets 31.5 19.9 188.6
Proceeds from the sale and maturity of liquid
investments 29.7 -- 2.0
Proceeds from the sale of investments 30.0 89.4 20.4
Purchase of liquid investments (6.0) (24.5) --
Purchase of investments (1.2) (8.8) (0.6)
Contributions to investees (2.0) (7.7) (22.4)
Capital expenditures (143.3) (86.9) (53.9)
Net cash provided by (used in) discontinued
operations and businesses held for sale 1.0 (0.5) (20.7)
Other 0.4 2.9 (2.5)
- ------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (59.9) (16.2) 110.9
- ------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of debt 5.0 15.0 125.0
Principal payments on debt (8.1) (24.3) (165.7)
Change in notes payable (0.1) (0.8) (3.7)
Proceeds from issuance of common stock 2.4 2.8 2.1
Dividends paid on preferred stock (20.9) (14.8) (18.2)
Other -- (1.6) (1.3)
- ------------------------------------------------------------------------------------
Net cash used in financing activities (21.7) (23.7) (61.8)
- ------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 0.1 0.7 (5.4)
- ------------------------------------------------------------------------------------
Net Change In Cash And Cash Equivalents (66.0) 19.3 12.2
Cash and cash equivalents:
Beginning of year 202.8 183.5 171.3
- ------------------------------------------------------------------------------------
End of year $ 136.8 $ 202.8 $ 183.5
- ------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of interest capitalized) $ 31.2 $ 31.1 $ 44.5
Income taxes 0.7 0.7 2.7
Supplemental schedule of non-cash investing and
financing activities:
Debt incurred or assets exchanged directly for property 16.2 9.5 --
Issuance of restricted stock 4.7 2.5 0.1
Notes and stock received in partial payment for
asset sales -- 7.7 --
- ------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements on pages 34 through 46.
</TABLE>
Armco Inc. * 1995 Annual Report 33
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying financial statements consolidate the accounts of Armco and
all subsidiaries in which Armco has a controlling interest. The Worldwide
Grinding Systems segment and the Armco Financial Services Group (AFSG) are
included in discontinued operations (Note 11).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investments
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, repurchase agreements, Eurodollar time deposits
and money market mutual funds, are stated at amortized cost plus accrued
interest, which approximates market value.
Under the definitions provided in Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, Armco has invested assets of $145.2 and $239.6 at December 31,
1995 and 1994, respectively, which have been classified as held to maturity
and are, therefore, recorded at amortized cost. These invested assets, which
generally mature within one year, included $130.1 and $195.0, classified as
Cash and cash equivalents, and $15.1 and $18.8 of collateral deposits,
primarily reported in Other investments, at December 31, 1995 and 1994,
respectively. At December 31, 1994, invested assets also included $24.8 of
commercial paper in Short-term liquid investments stated at cost plus accrued
interest. At December 31, 1994, investments of $32.3, which primarily
consisted of the 1,023,987 shares of AK Steel Holding Corporation (AK Steel)
common stock with a market value of $31.5, were classified as available for
sale. In 1995, Armco sold all of its shares of AK Steel stock and recorded
proceeds and a realized gain of $27.2 (Note 10).
At December 31, 1995, the Other investments in the Statement of Consolidated
Financial Position included $14.3 of restricted collateral deposits and an
investment of $8.2 representing Armco's 5% limited partnership interest in
North American Stainless (NAS) (Note 10). The collateral deposits are
primarily invested in certificates of deposit 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, 1994, Other
investments included $18.0 of restricted collateral deposits and $6.7 for the
investment in NAS. At December 31, 1995, Armco had no material investments in
derivative financial instruments.
Translation Of Foreign Currency
In 1993, Armco recorded in Sundry other-net $5.9 of foreign currency losses,
primarily as a result of translating the financial statements of its Brazilian
sheet and strip subsidiary, which was sold in that year.
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 at average cost. Inventory
balances as of December 31, 1995 and 1994 were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Inventories on LIFO:
Finished and semi-finished $226.8 $158.7
Raw materials and supplies 24.8 24.8
Adjustment to state inventories at LIFO value (57.3) (41.1)
- ------------------------------------------------------------------------------
Total 194.3 142.4
Inventories on average cost:
Finished and semi-finished 15.5 14.8
Raw materials and supplies 6.4 8.3
- ------------------------------------------------------------------------------
Total 21.9 23.1
- ------------------------------------------------------------------------------
Total inventories $216.2 $165.5
- ------------------------------------------------------------------------------
</TABLE>
Liquidation of LIFO inventory layers caused by certain inventory reductions
increased net income for 1995 by $0.3 and 1994 by $3.6, or $.03 per share.
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 in
1995, 1994 and 1993 were $14.0, $12.0 and $9.4, respectively, including $0.9
and $3.9 in 1994 and 1993, respectively, funded by affiliates.
34 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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.
Armco's property, plant and equipment balances as of December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Land $ 26.6 $ 25.8
Buildings 88.4 72.1
Machinery and Equipment 1,039.4 858.6
Construction in Progress 53.9 107.7
- ------------------------------------------------------------------------------
Total property, plant and equipment 1,208.3 1,064.2
Accumulated depreciation (539.8) (499.6)
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 668.5 $ 564.6
- ------------------------------------------------------------------------------
</TABLE>
During 1995, 1994 and 1993, Armco expended $124.7, $109.9 and $125.1,
respectively, for maintenance and repair of its property, plant and equipment.
The decrease in spending in 1994 is largely attributable to the idling of the
Mansfield Operations during most of the year.
Armco has commitments to purchase property, plant and equipment (including
unexpended amounts relating to projects substantially under way) amounting to
approximately $30.0 at December 31, 1995.
Goodwill And Other Intangible Assets
Goodwill and other intangible assets primarily include goodwill recorded in
connection with the acquisition of Cyclops Industries, Inc. (Cyclops) on April
24, 1992. This goodwill 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, LLC 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 1995, 1994 and 1993 was $6.9, $6.9
and $7.0, respectively. At December 31, 1995 and 1994, accumulated
amortization of goodwill and other intangible assets was $28.4 and $21.5,
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 exists,
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 1995, 1994 and 1993 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 automotive,
industrial machinery and equipment, 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 is made to
customers primarily in western Europe. Approximately 26% of trade receivables
outstanding at December 31, 1995 are due from businesses that supply the U.S.
automotive industry. Except in a few situations where the risk warrants it,
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 1995 presentation.
Armco Inc. * 1995 Annual Report 35
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
2: PENSION AND OTHER EMPLOYEE BENEFITS
Pension Plans
Armco provides noncontributory pension benefits for most employees. Beginning
January 1, 1994, the benefits for most hourly represented employees are based
on a fixed dollar amount per year of service. 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 distributions are available.
The qualified plans have been funded to meet the minimum funding requirements
of the Employee Retirement Income Security Act of 1974. During 1994,
contributions of $17.7 were made, of which $17.5 was an extra contribution
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. During 1995, contributions of
$54.8, which exceeded the minimum funding requirements, were made to the
plans. As of December 31, 1995, funding credits of $27.0 were available to
offset future minimum funding requirements.
The components of net periodic pension expense, including amounts related to
divested units and assumptions used to determine such expenses, were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned in the period $ 13.7 $ 19.1 $ 20.4
Interest cost on the projected benefit
obligation 153.1 149.3 150.3
Actual loss (return) on plan assets (354.0) 21.9 (256.9)
Net amortization and deferral 204.3 (163.7) 115.1
- ------------------------------------------------------------------------------
Net periodic pension expense $ 17.1 $ 26.6 $ 28.9
- ------------------------------------------------------------------------------
Weighted average discount rate 8.50% 7.25% 8.00%
Weighted average expected long-term rate
of return on assets 9.50% 8.25% 8.75%
Rate of future compensation increases 4.00% 4.00% 5.00%
- ------------------------------------------------------------------------------
</TABLE>
Expense decreased in 1995 primarily due to the new cash balance pension
provisions for most nonrepresented employees and the higher discount rate. The
net periodic pension expense shown above includes $1.5 in 1994 and $3.7 in
1993, which were charged to previously established accruals for divested
units.
Net curtailment and settlement losses on pensions of $5.2 and $23.8 in 1994
and 1993, respectively, mainly for reductions in the work force, were
primarily recorded as special charges. Net curtailment losses in 1995 were
$1.7. None of the curtailment and settlement losses were included in net
periodic pension expense. Certain former Cyclops units that 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, of $1.7 in 1995, $2.4 in 1994 and $1.7 in 1993, are not included in
net periodic pension expense shown above.
The following table presents the funded status of pension plans using discount
rates of 7% and 8.5% at December 31, 1995 and 1994, respectively. The assumed
rate of future compensation increases was 4% in both years. Plan assets are
primarily invested in U.S. and foreign equities and debt securities issued by
the U.S. government, U.S. corporations and foreign entities. The funded status
of the pension plans deteriorated during 1995 as a result of the decrease in
the discount rate.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Plans for which Plans for which
Assets Exceed Accumulated
Accumulated Benefits Total
1995 Benefits Exceed Assets All Plans
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $ 3.8 $2,015.8 $2,019.6
Nonvested benefits 0.1 54.7 54.8
- ------------------------------------------------------------------------------
Accumulated benefits $ 3.9 $2,070.5 $2,074.4
- ------------------------------------------------------------------------------
Projected benefit obligation $ 5.2 $2,097.5 $2,102.7
Plan assets at fair value 4.9 1,908.6 1,913.5
- ------------------------------------------------------------------------------
Unfunded projected benefit obligation 0.3 188.9 189.2
Reconciliation of funded status
to recorded amounts:
Unrecognized negative prior service -- 7.6 7.6
Unrecognized net gain (loss) (0.8) 56.6 55.8
Unrecognized obligation -- (40.0) (40.0)
Amount required to recognize minimum
liability -- 2.9 2.9
- ------------------------------------------------------------------------------
Accrued pension liability (benefit) $(0.5) $ 216.0 $ 215.5
- ------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------
Actuarial present value of benefit
obligations:
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 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
- ------------------------------------------------------------------------------
</TABLE>
36 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
Retiree Health Care And Life Insurance Benefits
In addition to providing pension benefits, Armco provides certain health care
and life insurance benefits to 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, Armco announced changes
in the plans for certain nonrepresented employees and retirees that require
either higher retiree contributions or an alternative managed care program.
Also during 1993, new managed care programs applicable to future retirements
were negotiated with most of Armco's represented hourly employees. 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. Also in 1995, dental and vision coverage was
eliminated for post-1983 nonrepresented retirees.
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 after
the participant retired. The cumulative effect of recognizing this obligation
resulted in an after-tax charge of $440.0, or $4.24 per share, as of January
1, 1993.
The components of the net periodic postretirement benefit expense, including
amounts related to divested units but excluding the cumulative effect of
adoption in 1993, and assumptions used to determine such expenses were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during the period $ 5.6 $ 8.5 $11.2
Interest cost on accumulated postretirement
benefit obligation 74.7 66.8 79.1
Amortization of plan changes (3.7) (1.4) 1.7
- ------------------------------------------------------------------------------
Net periodic postretirement benefit expense $76.6 $73.9 $92.0
- ------------------------------------------------------------------------------
Weighted average discount rate 8.50% 7.25% 8.00%
Current year health care trend rate - Pre-age 65 10.25% 11.25% 13.00%
Current year health care trend rate - Post-age 64 8.25% 8.25% 10.00%
Ultimate health care trend rate 6.50% 5.25% 6.00%
Weighted average trend rate 7.30% 6.25% 7.00%
- ------------------------------------------------------------------------------
</TABLE>
In 1995, the impact of the higher discount rate more than offset the reduction
in expense from plan amendments. 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,
which were charged to previously established accruals for divested units. Net
curtailment gains (losses) on postretirement benefits of $10.2 in 1995, $(0.8)
in 1994 and $4.4 in 1993 were not included in net periodic postretirement
benefit expense.
Total claims paid were approximately $64.0 in 1995, $62.6 in 1994, and $63.9
in 1993.
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, 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $753.5 $726.2
Fully eligible active plan participants 84.2 71.4
Other active plan participants 77.4 114.3
- ------------------------------------------------------------------------------
Total 915.1 911.9
Plan assets at fair value -- --
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 915.1 911.9
Reconciliation of obligation to recorded amounts:
Unrecognized negative prior service 49.2 39.0
Unrecognized net gains 78.3 87.3
- ------------------------------------------------------------------------------
Accrued postretirement benefit liability $1,042.6 $1,038.2
- ------------------------------------------------------------------------------
Assumptions used to determine obligation:
Discount rate 7.00% 8.50%
Current year health care trend rate - Pre-age 65 9.25% 10.25%
Current year health care trend rate - Post-age 64 7.25% 8.25%
Ultimate health care trend rate 5.00% 6.50%
Weighted average trend rate 5.60% 7.30%
- ------------------------------------------------------------------------------
</TABLE>
The current year health care trend rates are assumed to decrease one
percentage point per year until they reach the ultimate rate. A one percentage
point increase in the assumed health care trend rate would increase the
accumulated postretirement benefit obligation as of January 1, 1995 by
approximately $90.0, and increase the annual net periodic postretirement
benefit expense by approximately $9.5 in 1995. The 1994 and 1993 amounts,
above, have been restated to remove the balances associated with the Armco
Financial Services Group.
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 that have been or are being discontinued. Sundry other-net
includes interest costs of $38.5, $35.8 and $23.8 in 1995, 1994 and 1993,
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
rates. The increase from 1994 to 1995 was primarily due to higher interest
rates.
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.
Armco Inc. * 1995 Annual Report 37
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
3: 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
consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $22.8 $36.0 $(271.2)
Foreign 2.7 1.1 16.4
- ------------------------------------------------------------------------------
Total $25.5 $37.1 $(254.8)
- ------------------------------------------------------------------------------
</TABLE>
Income tax credits (provisions) for Armco and consolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U. S. federal $ -- $ -- $ 4.2
U. S. state (0.8) (0.8) 4.9
Foreign (1.2) (0.5) (1.8)
- ------------------------------------------------------------------------------
Total (2.0) (1.3) 7.3
Deferred:
U.S. federal -- 27.3 --
U. S. state -- 2.7 --
Total -- 30.0 --
- ------------------------------------------------------------------------------
Total credit (provision) for income
taxes $(2.0) $28.7 $ 7.3
- ------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
applied to pretax book income with the provision for income taxes in the
Statement of Consolidated Operations for the year 1995:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Federal taxes at statutory rate $(8.9)
State income taxes, net of federal benefit (1.5)
Reduction in deferred tax valuation allowance 8.4
- ------------------------------------------------------------------------------
Provision for income taxes $(2.0)
- ------------------------------------------------------------------------------
</TABLE>
During 1995, Armco's capital loss carryforward increased by $12.2 as losses
associated with the Eastern Stainless asset sale and the sale of the ongoing
insurance business (Notes 8 and 11) were only partially offset by a $27.2 gain
on the sale of AK Steel stock (Note 10). Net operating loss carryforwards
decreased $20.7, largely due to the elimination of loss carryforwards of
$83.2, which were related to the former insurance and Eastern Stainless
businesses, partially offset by a $66.0 net operating loss incurred in 1995.
The difference between the pretax book income of $25.5 and the 1995 tax loss
of $66.0 is primarily due to costs associated with employee benefits, pensions
and restructuring actions, which had been accrued for financial accounting
purposes in prior years, but actually paid in 1995. Tax basis depreciation
for the year, which exceeded depreciation expense recorded on the books, and
the elimination of the book gain on the sale of AK Steel stock were the other
key factors contributing to the tax loss.
In 1994, the income tax benefit recognized of $28.7 was primarily the result
of decreasing the beginning balance of the valuation allowance by $30.0 due to
the effects, including the elimination of Armco Steel Company's (ASC) (Note
10) estimated future taxable losses, that the initial public offering 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 (provision)
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 (provision) for income taxes.
At December 31, 1995, 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 $ 55.8
2000 20.0
- ------------------------------------------------------------------------------
Total capital loss carryforward $ 75.8
- ------------------------------------------------------------------------------
Net operating losses: 1998 $ 59.7
1999 106.7
2001 123.3
2004 9.1
2005 130.3
2006 239.3
2007 186.9
2008 133.3
2009 35.4
2010 66.0
- ------------------------------------------------------------------------------
Total NOL carryforward $1,090.0
- ------------------------------------------------------------------------------
</TABLE>
Included in the $1,090.0 NOL carryforward is $17.5 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, if not used, will expire in the years 2004-2005.
Armco has $830.0 in U.S. alternative minimum tax net operating losses.
Additionally, Armco has $12.1 of alternative minimum tax credits that 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.
38 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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, 1995 and 1994, the net deferred
tax asset of $328.5 was included in the Statement of Consolidated Financial
Position as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Other current assets $ 2.4 $ 8.0
Deferred tax asset 326.1 321.8
Other liabilities -- (1.3)
- ------------------------------------------------------------------------------
Net deferred tax asset $328.5 $ 328.5
- ------------------------------------------------------------------------------
</TABLE>
Significant components of Armco's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Tax effects of:
Operating loss and tax credit carryforwards $ 480.6 $ 488.7
Employee benefits 576.9 602.8
Property, plant and equipment (132.0) (148.0)
Other (includes contingencies and other accruals) 72.1 86.3
- ------------------------------------------------------------------------------
Gross deferred tax asset 997.6 1,029.8
Valuation allowance (669.1) (701.3)
- ------------------------------------------------------------------------------
Net deferred tax asset $328.5 $ 328.5
- ------------------------------------------------------------------------------
</TABLE>
Even though Armco has incurred tax losses for the past six 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 four 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. 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 1991 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.
4: LONG-TERM DEBT AND OTHER FINANCING
Long-Term Debt
At December 31, 1995 and 1994 Armco's long-term debt, less current maturities,
was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Sinking fund debentures:
8.5% due 2001 $ 35.0 $ 39.8
9.2% due 2000 25.0 30.0
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
Variable rate (LIBOR plus 2.75%) due 1996-2001 38.6 44.6
5.0% due 2000 20.4 6.7
Pollution control revenue bonds - 8.125% 13.2 14.2
Other 4.4 --
- ------------------------------------------------------------------------------
Total $361.6 $363.8
- ------------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December
31, 2000, are as follows: 1996, $25.8; 1997, $27.3; 1998, $27.4, 1999, $127.5
and 2000, $157.7.
At December 31, 1995, the fair market value of Armco's long-term debt,
including current maturities, was approximately $385.4. This amount 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 was based on pertinent information available to management as
of December 31, 1995. Management is not aware of any significant factors that
would alter this estimate since that date. The fair market value of Armco's
long-term debt, including current maturities, at December 31, 1994 was
approximately $347.6.
During 1995 and 1994, construction loan commitments provided $21.2 and $24.3,
respectively, of financing in connection with the continuous caster at the
Mansfield facility. The caster is pledged as collateral on these loans. At
December 31, 1995 and 1994, $29.6 of long-term debt, including current
maturities, was financing utilized to construct a cold rolling mill at Armco's
Butler, Pennsylvania facility, included in the Specialty Flat-Rolled Steels
segment. The cold rolling mill is pledged as collateral on this loan.
In 1993, Armco issued $125.0 of 9.375% Senior Notes due November 1, 2000 and
retired debt with a face value of $125.0, recording an extraordinary loss of
$7.3, or $.07 per share.
Armco Inc. * 1995 Annual Report 39
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
Bank Credit Agreements
At December 31, 1995, Armco had 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, which was amended to expire on January 31, 1996 and secured by
certain of Armco's receivables and inventories. As of the end of 1995, Armco
had utilized $67.2 of the credit facility for letters of credit.
In January 1996, Armco replaced its amended revolving credit facility with two
new bank credit facilities, totaling $170.0. Under a receivables facility
Armco sold substantially all its trade receivables to a newly created wholly
owned subsidiary, Armco Funding Corporation (AFC). Armco will sell additional
receivables to AFC as they are generated. AFC has entered into a revolving
credit agreement with a group of banks providing up to $120.0 for revolving
credit loans and letters of credit secured by AFC's receivables. This facility
has a five-year term.
Under an inventory credit facility, Armco entered into a three-year revolving
credit agreement with a group of banks providing $50.0 for revolving credit
loans secured by Armco's inventories. The credit agreement subjects Armco to
certain restrictions and covenants related to, among other things, minimum
working capital, minimum net income, current ratio and interest coverage ratio
requirements.
Capitalized Interest
Armco capitalized interest on projects during construction of $5.1, $4.5 and
$1.2 in 1995, 1994 and 1993, respectively. Capitalized interest for 1995 and
1994 primarily relates to the construction of the thin-slab caster in
Mansfield, Ohio.
Long-Term Leases
Rental expense under operating leases was $7.7 in 1995, $7.2 in 1994 and $11.3
in 1993. At December 31, 1995, commitments to make future minimum lease
payments for operating leases were $8.0 in 1996, $6.1 in 1997, $4.8 in 1998,
$3.1 in 1999, $1.4 in 2000 and $2.6 in the year 2001 and thereafter.
5: 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. At December 31, 1995 and 1994, there were
authorized and issuable in series, 6,697,231 shares of Class A preferred stock
with no par value and 5,000,000 shares of $1 par value Class B preferred
stock.
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 $2.10 Class A preferred
stock had a total involuntary liquidation value of $25.5 at December 31, 1995
and 1994.
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 at a current price of $52.5375 per share, plus
accrued but unpaid dividends. This price declines at 12-month intervals, to
$50 per share on and after October 15, 2002. The $3.625 preferred Class A
stock had a total involuntary liquidation value of $135.0 at December 31, 1995
and 1994.
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. The Class B preferred stock had a total involuntary
liquidation value of $50.0 at December 31, 1995 and 1994.
During 1993, 25 shares Armco's Class A preferred stock were converted into
Armco common stock. At December 31, 1993, 1994 and 1995, the number of shares
outstanding and book value of Class A preferred stock were 4,397,231 and
$137.6. At December 31, 1993, 1994 and 1995, Armco had outstanding 999,900
shares of Class B preferred stock with a book value of $48.3.
Common Stock
At December 31, 1995, 22,681,261 unissued shares of Armco's common stock were
reserved for the conversion of preferred stock and 3,193,517 unissued shares
of common stock were reserved for the exercise of stock options (Note 6).
Activity for the years 1993, 1994 and 1995 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, 1992 103,512,133 $ 103.5 $845.5
Exercise of options 585,458 0.2 2.8
Restricted stock issued -
net of cancellations 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 -
net of cancellations 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
Exercise of options 108,962 -- 0.5
Restricted stock issued -
net of cancellations 587,596 -- 4.1
Issued for employee
savings plan 314,544 -- 2.1
Directors' stock purchase
plan 2,312 -- --
- ------------------------------------------------------------------------------
Balance, December 31, 1995 106,102,560 $ 1.1 $963.0
- ------------------------------------------------------------------------------
</TABLE>
40 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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. 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 new inventory credit facility (Note 4), 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
under the credit facility.
Under Ohio law, at December 31, 1995, the surplus from which Armco is
permitted to pay dividends was $101.4. 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 1996 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 1993, 1994 and 1995 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, 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)
Net income 29.8 -- --
Preferred stock dividends declared (17.9) -- --
Sale of equity securities -- (31.6) --
Foreign currency translation adjustment -- -- 1.1
Amortization and cancellation of
deferred compensation -- -- 2.1
Deferred compensation on restricted
stock issued -- -- (2.1)
- ------------------------------------------------------------------------------
Balance, December 31, 1995 $(1,378.5) $ -- $ (1.9)
- ------------------------------------------------------------------------------
</TABLE>
6: 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. As of December 31, 1995, 1,328,400 shares of
common stock were available for granting of awards under the 1993 Long-Term
Incentive Plan.
Armco Inc. * 1995 Annual Report 41
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
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
1995 3,193,517 $4.75-13.69
1994 3,097,496 3.24-13.69
1993 3,015,774 3.24-19.38
- ------------------------------------------------------------------------------
Options exercisable December 31
1995 1,524,536 $4.94-13.69
1994 2,241,996 3.24-13.69
1993 2,429,274 3.24-19.38
- ------------------------------------------------------------------------------
Options exercised (including stock
appreciation rights)
1995 347,646 $3.24- 5.94
1994 42,389 3.24- 5.94
1993 717,398 3.24- 7.00
- ------------------------------------------------------------------------------
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 provides that companies
may choose to change their method of accounting for stock options or,
alternatively, continue to account for stock options under their current
method and provide expanded footnote disclosures. Armco intends to adopt SFAS
No. 123, when required in 1996, but not change its method of accounting for
stock options.
7: SEGMENT INFORMATION
During 1995, Armco realigned the management of its steel operations, combining
all steel-producing facilities under common control. Reflecting this new
alignment, at December 31, 1995, Armco's business segments were: (1) Specialty
Flat-Rolled Steels, consisting of plants in Butler, Pennsylvania and
Coshocton, Dover, Mansfield and Zanesville, Ohio that produce flat-rolled
stainless, electrical and carbon steels 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;
(2) Fabricated Products, consisting of operations in Sharon and Wheatland,
Pennsylvania and Warren, Ohio that produce steel tubular products for the
industrial machinery, construction and appliance markets, as well as plants in
Milwaukee, Wisconsin, Rockland, Maine and Johnson City, Tennessee, that
manufacture snowplows and other light truck equipment and accessories for
four-wheel drive pickup trucks and utility vehicles. At various times during
the three-year period ended December 31, 1995, the Fabricated Products segment
also included other businesses that have since been divested or identified for
disposal (Note 8). Such businesses included producers of stainless steel bar,
rod and wire, and high temperature superalloys, and providers of
nonresidential construction products and services.
Armco's industry segment information is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer sales:
Specialty Flat-Rolled Steels $1,277.0 $1,114.4 $1,206.4
Fabricated Products 282.9 323.2 457.6
- ------------------------------------------------------------------------------
Total $1,559.9 $1,437.6 $1,664.0
- ------------------------------------------------------------------------------
Intersegment sales: (1)
Specialty Flat-Rolled Steels $ 5.6 $ -- $ 3.8
Fabricated Products -- 0.6 1.3
- ------------------------------------------------------------------------------
Special charges: (2)
Specialty Flat-Rolled Steels $ -- $ (35.0) $ --
Fabricated Products -- -- (165.5)
- ------------------------------------------------------------------------------
Total $ -- $ (35.0) $ (165.5)
- ------------------------------------------------------------------------------
Operating profit (loss): (3)
Specialty Flat-Rolled Steels $ 76.0 $ 40.5 $ 33.7
Fabricated Products 22.0 30.9 (141.7)
Corporate general (29.0) (32.2) (38.0)
- ------------------------------------------------------------------------------
Total $ 69.0 $ 39.2 $ (146.0)
- ------------------------------------------------------------------------------
Capital expenditures:
Specialty Flat-Rolled Steels $ 153.6 $ 89.4 $ 37.9
Fabricated Products 5.3 6.2 15.2
Corporate general 0.6 0.8 0.8
- ------------------------------------------------------------------------------
Total $ 159.5 $ 96.4 $ 53.9
- ------------------------------------------------------------------------------
Depreciation and lease-right amortization:
Specialty Flat-Rolled Steels $ 43.4 $ 40.2 $ 40.4
Fabricated Products 7.6 6.6 10.7
Corporate general 1.8 2.0 2.1
- ------------------------------------------------------------------------------
Total $ 52.8 $ 48.8 $ 53.2
- ------------------------------------------------------------------------------
Identifiable assets:
Specialty Flat-Rolled Steels $ 913.6 $ 746.5 $ 824.1
Fabricated Products 173.0 190.9 160.2
Corporate general (4) 638.9 820.9 739.4
Discontinued operations 171.1 176.6 181.0
- ------------------------------------------------------------------------------
Total $1,896.6 $1,934.9 $1,904.7
- ------------------------------------------------------------------------------
<FN>
(1) Prices generally approximate cost. Intersegment sales are eliminated in
consolidation. Sales between foreign and domestic companies are not material.
(2) See Note 8.
(3) Operating profit (loss) includes the effects of Special charges.
(4) Corporate general identifiable assets at December 31, 1995 included $130.8
of cash and liquid investments, current and noncurrent deferred tax assets of
$328.5 and goodwill and other intangible assets of $123.2.
</TABLE>
42 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
8: SPECIAL CHARGES
In 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 were idled from
the first quarter of 1994. The Dover Operations started limited production in
early 1995 and by mid-year was fully operational. The Mansfield plant
remained idle until construction of a new thin-slab continuous caster and
renovation of its hot strip mill were completed late in the first quarter of
1995. The special charge consisted of $11.2 for employee benefits, primarily
group insurance and supplemental unemployment benefits; and $8.8 to write down
inventories and fixed assets. At December 31, 1995, reserves established for
these expenses had been used for their intended purpose.
In the third quarter of 1994, Armco recognized a charge of $15.0 related to a
decision by Eastern Stainless Corporation to sell substantially all of its
assets to Avesta Sheffield Holding Company, a stainless steel plate
manufacturer, for cash and the assumption of certain liabilities. The
anticipated transaction closed on March 14, 1995. Approximately $8.6 of the
charge was to cover increases in pension and other employee benefit
obligations, $1.8 was for the write down of assets and $4.6 was for losses,
transaction fees and expenses. At December 31, 1995, the nonemployee benefit
reserves had been used for their intended purposes, while much of the pension
and other employee benefit liabilities will be paid out over many years.
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, stainless bar, rod and wire businesses, and a
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. The employee benefit charges primarily relate to
long-term retirement benefits that will be paid over many years.
9: LITIGATION AND ENVIRONMENTAL MATTERS
There are various claims pending involving Armco and its subsidiaries
regarding product liability, patent, employee benefits, antitrust,
environmental matters, reinsurance and insurance arrangements, and other
matters arising out of the conduct of Armco's business. The actual liability
for legal claims against Armco at December 31, 1995 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 operating results, future developments with respect
to such matters could have a material effect on the results of operations in
future interim or annual periods.
Like other manufacturers, Armco is subject to various environmental laws.
These laws necessitate expenditures to meet environmental compliance
requirements at Armco's facilities and to remediate sites where contamination
has occurred. Compliance costs are either expensed as they are incurred or,
when appropriate, are recorded as capital expenditures. Environmental exit
costs are accrued when a decision is made to dispose of a property.
Armco is a defendant or a potentially responsible party in proceedings
alleging liability for remediation, property damage or personal injury related
to certain past waste disposal sites. Armco has also received claims for
indemnification for some 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, theoretically, 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 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. Armco accrues its
estimate of remediation and other costs for sites where it is probable that a
liability has been incurred and the amount 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.
Armco Inc. * 1995 Annual Report 43
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
The recorded amounts are currently believed by management to be sufficient.
However, such estimates could significantly change in future periods to
reflect new laws or regulations, advances in technologies, additional sites
requiring remediation, new requirements at existing sites and Armco's share of
liability at multi-party sites. It is not possible to determine whether
additional loss, due to such changed circumstances, will occur or to
reasonably estimate the amount or range of any potential additional loss.
Armco believes, based on current facts and circumstances known to Armco, that
the ultimate liability for pending claims, contingent liabilities and
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 operating results, future developments with
respect to such matters could have a material effect on the results of
operations in future interim or annual periods.
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, 1995, Armco had recorded, in its Statement of
Consolidated Financial Position, $13.0 in Other accruals and $74.5 in Other
liabilities for estimated probable costs relating to legal and environmental
matters.
10: OTHER INVESTMENTS
Armco Steel Company, L.P. (ASC)
ASC was an equally owned limited partnership, formed in 1989, between
subsidiaries of Armco and Kawasaki Steel Corporation. Losses incurred by ASC
in subsequent years through 1993 reduced Armco's investment to zero, after
which Armco stopped recording its equity in profits or losses related to the
operations of ASC.
On April 7, 1994, ASC completed an initial public offering and
recapitalization. As part of this transaction, the business and assets of ASC
were transferred to AK Steel, 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 did not account for AK
Steel under the equity method of accounting, and Armco's results were not
affected by AK Steel's 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 the transaction, Armco recognized a nonrecurring pretax gain of
$36.5 in 1994, primarily as a result of the release from certain obligations
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 was more likely than not, had
increased by $30.0.
In 1995, Armco sold all of the shares in AK Steel it had received as a result
of the initial public offering and recapitalization for a total of $27.2,
recognizing a gain of the same amount.
Under a toll-rolling agreement that is in effect through the year 2002, AK
Steel hot rolls stainless steel for Armco. AK Steel continues to purchase
stainless steel from Armco.
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 semifinished stainless steel
at market prices.
11: DISCONTINUED OPERATIONS
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 and USX reached a definitive agreement, dated September 22, 1995, to
sell their respective partnership interests in National-Oilwell to an entity
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell
management. The sale was completed on January 16, 1996. For its 50% interest,
Armco received $77.0 in cash, and receivables with a face value of $13.0. The
receivables will be recorded at a discounted value of $10.6. After recording
$2.1 for recognition of deferred foreign translation losses and miscellaneous
expenses, no gain or loss was recognized on the transaction.
Armco recognized equity income from National-Oilwell until September 22, 1995,
when the definitive agreement was signed. After that date, Armco's investment
in National-Oilwell was equal to its estimated net realizable value and no
additional equity income was recorded. The results of National-Oilwell are
reported as discontinued operations on the Statement of Consolidated
Operations. At December 31, 1995, Armco's $85.5 investment in the joint
venture is reported in Net assets held for sale in the Statement of
Consolidated Financial Position.
44 Armco Inc. * 1995 Annual Report
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
The following is summarized financial information for National-Oilwell at
December 31, 1995 and the nine months ended September 30, 1995; and December
31, 1994 and 1993 and the years then ended:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $265.1 $240.0 $296.5
Noncurrent assets 22.9 28.3 47.0
Current liabilities 96.9 88.2 141.7
Noncurrent liabilities 13.1 18.2 31.1
Net sales 400.1 562.1 627.3
Gross profit 52.4 79.6 79.9
Special credits (charges) 7.4 13.9 (8.6)
Operating profit (loss) 17.0 29.1 (8.1)
Net income (loss) 16.0 23.9 (17.5)
- ------------------------------------------------------------------------------
</TABLE>
Armco received cash dividends from National-Oilwell of $1.0 and $15.5 in 1995
and 1994, respectively.
Armco Financial Services Group (AFSG)
Prior to April 7, 1995, the Armco Financial Services Group consisted primarily
of insurance companies that Armco intended to sell and that continued
underwriting policies (AFSG companies to be sold), and companies that have
stopped writing new business and are being liquidated (runoff companies).
AFSG Companies to be Sold
On April 7, 1995, Armco completed the sale of the AFSG companies to be sold to
Vik Brothers Insurance Inc., a privately held, North Carolina-based property
and casualty insurance holding company. The proceeds from the sale consisted
of $64.2 in cash at the closing and $15.0 to be received in 1998. The latter
amount is subject to potential adjustment for adverse experience in certain
insurance reserves. Substantially all of these proceeds have been pledged as
security for certain note obligations due to the runoff companies and will be
retained in the investment portfolio of those companies.
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. The charge also included recording reserves totaling
approximately $11.5, primarily for certain employee benefit liabilities Armco
expected to retain after the sale. As part of the sale agreement, Armco
received $4.2 in cash from the former companies to be sold and assumed an
equal amount of additional employee benefit obligations from them. Concurrent
with the sale, Armco transferred the cash and all of the above liabilities to
the runoff companies, reducing its investment in those companies by $11.5 in
1995.
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, 1995 for the
runoff companies:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Assets:
Invested assets $188.0
Reinsurance recoverable 114.8
Other 23.6
- ------------------------------------------------------------------------------
Total assets 326.4
Liabilities:
Losses and loss reserves (net of future
investment income of $42.7) 205.8
Other 35.0
- ------------------------------------------------------------------------------
Total liabilities 240.8
- ------------------------------------------------------------------------------
Net assets $ 85.6
- ------------------------------------------------------------------------------
</TABLE>
Currently, insurance regulators having supervisory authority over the runoff
companies retain substantial control over certain transactions, including the
payment of dividends to Armco.
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, 1995 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.
Worldwide Grinding Systems
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 its 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.
Worldwide Grinding Systems' net sales of $300.7 in the nine months ended
September 30, 1993 are not included in Armco's consolidated net sales.
Armco Inc. * 1995 Annual Report 45
<PAGE>
ARMCO SPECIALTY FLAT-ROLLED STEELS
12: QUARTERLY INFORMATION (Unaudited)
The following is quarterly information for Armco for 1995 and 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
4th 3rd 2nd 1st
1995: Year Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,559.9 $ 396.8 $ 404.1 $ 390.6 $ 368.4
Cost of products sold (1,392.7) (358.9) (364.1) (342.0) (327.7)
Gain on sale of
stock (1) 27.2 -- -- 25.9 1.3
Income from discontinued
operation (2) 6.3 -- 2.0 2.8 1.5
Net income (loss) 29.8 (8.4) (0.1) 35.9 2.4
Per share:
Income from
discontinued operation 0.06 -- 0.02 0.03 0.01
Net income (loss) 0.11 (0.12) (0.04) 0.30 (0.02)
- ------------------------------------------------------------------------------
1994:
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 (3) (35.0) -- (15.0) -- (20.0)
Gain on investments in
joint ventures (1) 62.6 -- 26.1 36.5 --
Income from discontinued
operation (2) 11.9 4.1 2.6 5.0 0.2
Net income (loss) 77.7 9.6 25.4 69.9 (27.2)
Per share:
Income from
discontinued operation 0.11 0.04 0.03 0.05 --
Net income (loss) 0.57 0.05 0.20 0.63 (0.30)
- ------------------------------------------------------------------------------
<FN>
(1) See Note 10.
(2) Equity in the income of National-Oilwell (Note 11).
(3) See Note 8.
</TABLE>
<TABLE>
Price Range and Dividends of Armco Stock
(Unaudited)
Common Stock 1994 Price per share 1995 Price per share
- ------------------------------------------------------------------------------
<CAPTION>
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 6-7/8 6-3/8 6-5/8 7-3/8 7-1/4 7-1/2 7-3/4 6-1/2
Low 4-5/8 4-1/2 5-1/2 5-7/8 6-1/8 6 5-7/8 5-3/8
- ------------------------------------------------------------------------------
Preferred Stock
Class a $2.10 1994 Price per share 1995 Price per share
- ------------------------------------------------------------------------------
<CAPTION>
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 29 25 24-1/8 23-3/4 23-3/8 24-1/8 26-1/4 25-3/8
Low 23-1/8 23-1/2 23 19-3/4 20 22-1/4 22 7/8 23-3/8
Dividend per share Dividend per share
.525 .525 .525 .525 .525 .525 .525 .525
- ------------------------------------------------------------------------------
Class A $3.625 1994 Price per share 1995 Price per share
- ------------------------------------------------------------------------------
<CAPTION>
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 58-7/8 54-1/2 54 54-1/2 54-1/4 56-1/4 57-3/4 51-7/8
Low 49 46 51-5/8 47-1/2 48-3/8 48 49-3/8 47-5/8
Dividend per share Dividend per share
.90625 .90625 .90625 .90625 .90625 .90625 .90625 .90625
- ------------------------------------------------------------------------------
Class B $4.50 1994 Price per share 1995 Price per share
- ------------------------------------------------------------------------------
<CAPTION>
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 51-7/8 49-1/2 47-3/4 46-3/8 46-3/4 49-1/4 50-3/8 49-1/4
Low 48 46-1/2 45-7/8 41 41-1/2 45-5/8 48-5/8 47
Dividend per share Dividend per share
1.125 1.125 1.125 1.125 1.125 1.125 1.125 1.125
- ------------------------------------------------------------------------------
</TABLE>
46 Armco Inc. * 1995 Annual Report
</TEXT
<PAGE>
<TABLE>
Exhibit 21
ARMCO INC.
SUBSIDIARIES
<CAPTION>
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 Services Corporation Delaware
Armco Financial Services International, Inc. Ohio
Armco Financial Services International, Ltd. Delaware
Armco Funding Corporation 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 Pacific Financial Services Limited Vanuatu
Armco Pacific Limited Singapore
Armco Participacoes e Empreendimentos Ltda. Brazil
Armco Resources Pty. Ltd. Australia
Armco S.A. Belgium
Armco S.A. Spain
Armco SARL France
Armco SMM srl Italy
Armco Steel Corporation Ohio
Black River Lime Company Ohio
<PAGE>
<CAPTION>
State/Country of
Name Incorporation
---- ----------------
Compass Insurance Company Delaware
Cyclops, Inc. Delaware
Cyclops International Limited United Kingdom
Dorcan International Corporation S.A. Uruguay
Douglas Dynamics, L.L.C. Delaware
Everest International, Inc. Ohio
FSA Services Corp. Delaware
First Stainless, Inc. Delaware
First Taconite Company Delaware
Flour City Architectural Metals, Inc. Delaware
Inversiones Armco S.A. (IASA) Chile
Materials Insurance Company Cayman Islands
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 Insurance Company Wisconsin
of Milwaukee, Wisconsin
Oweco Limited Scotland
PROCNE Corp. Ohio
Reserve Mining Company Minnesota
Strata Energy, Inc. Ohio
Talbico, Inc. New York
</TABLE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-24258, 33-24259, 33-60405, 33-54351, 33-54353, 33-54355, 33-
65946, and 333-01687 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 5, 1996 on the consolidated financial
statements and financial statement schedule of Armco Inc. and
subsidiaries appearing in and incorporated by reference in this Annual
Report on Form 10-K of Armco Inc. for the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 26, 1996
<PAGE>
Exhibit 23(ii)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-8 No. 33-24258, 33-24259, 33-60405, 33-54351, 33-
54353, 33-54355, 33-65946 and 333-01687 and in Post-Effective Amendment
No. 1 to Registration Statements No. 33-20852 and 33-20853 of Armco,
Inc. of our report dated January 31, 1996, 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, 1995.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE ARMCO INC. CONDENSED STATEMENT OF
CONSOLIDATED FINANCIAL POSITION AND CONDENSED STATEMENT
OF CONSOLIDATED OPERATIONS AND RETAINED DEFICIT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 136,800
<SECURITIES> 0
<RECEIVABLES> 169,400
<ALLOWANCES> 4,400
<INVENTORY> 216,200
<CURRENT-ASSETS> 613,800
<PP&E> 1,208,300
<DEPRECIATION> 539,800
<TOTAL-ASSETS> 1,896,600
<CURRENT-LIABILITIES> 419,000
<BONDS> 361,600
<COMMON> 1,100
0
185,900
<OTHER-SE> (417,400)
<TOTAL-LIABILITY-AND-EQUITY> 1,896,600
<SALES> 1,559,900
<TOTAL-REVENUES> 1,559,900
<CGS> 1,392,700
<TOTAL-COSTS> 1,392,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,900
<INCOME-PRETAX> 25,500
<INCOME-TAX> 2,000
<INCOME-CONTINUING> 23,500
<DISCONTINUED> 6,300
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,800
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.23
</TABLE>
<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 29, 1996, 106,550,937 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 29, 1996, 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 750,000 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 29, 1996, 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
-1-
<PAGE>
Stock 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."
On February 23, 1996, the Armco Board of Directors adopted a
Stockholder Rights Plan and declared a dividend distribution of one
preferred stock purchase right for each outstanding share of Armco Common
Stock to stockholders of record at the close of business on June 26,
1996. Armco's existing Stockholder Rights Plan expires on June 26, 1996.
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, 1995, the amount from which Armco is
permitted to pay dividends under this provision was $101.4 million.
-2-
<PAGE>
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 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".
As defined by the Internal Revenue Service, Armco did not have
"current earnings or profits" in 1995. Accordingly, all dividend
distributions paid in 1995 should be considered a return of capital
and/or capital gain, depending on the holder's tax basis in the stock.
Similarly, any dividends paid by Armco on its stock in 1996 will be
taxable as ordinary income only to the extent of Armco's "earnings and
profits."
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
-3-
<PAGE>
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.
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. At December 31, 1995, Armco had an amended credit agreement with
a group of banks to provide a credit facility for borrowings up to $170
million on a revolving credit basis, which was amended to expire on
January 31, 1996 and secured by certain of Armco's receivables and
inventories. In January 1996, Armco replaced its amended revolving
credit facility with two new bank credit facilities totaling $170
million. Under a receivables facility Armco sold substantially all its
trade receivables to a newly created wholly owned subsidiary, Armco
Funding Corporation. This facility has a five-year term. Under an
inventory credit facility, Armco entered into a three-
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year revolving credit agreement with a group of banks providing $50
million for revolving credit loans secured by Armco's inventories. The
credit agreement subjects Armco to certain restrictions and covenants
related to, among other things, minimum working capital, minimum net
income, current ratio and interest coverage ratio requirements. The new
inventory credit facility 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 facility.
Under the terms of the new inventory credit facility, Armco cannot
pay cash dividends on its common stock. In addition, under the terms of
the indentures for Armco's 11.375% Senior Notes due 1999, and 9.375%
Senior Notes due 2000, 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 1996. 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.
Under Ohio law, at December 31, 1995, the surplus from which Armco
is permitted to pay dividends was $101.4. Under the terms of Ohio law,
Armco is currently not permitted to purchase shares of its capital stock.
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
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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
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.
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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 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.
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