-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hqebSjcp4iIkyKqCeU8N81di8HkTj0Jsuo9t1lZIJGDz6bUl805KYT+CRW83GOx2 ijuYu8SUP8ZB28ek2FXmgA== 0000007383-94-000034.txt : 19940815 0000007383-94-000034.hdr.sgml : 19940815 ACCESSION NUMBER: 0000007383-94-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMCO INC CENTRAL INDEX KEY: 0000007383 STANDARD INDUSTRIAL CLASSIFICATION: 3312 IRS NUMBER: 310200500 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00873 FILM NUMBER: 94543604 BUSINESS ADDRESS: STREET 1: 300 INTERPACE PKWY CITY: PARISPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 2013165200 MAIL ADDRESS: STREET 1: 300 INTERPACE PARKWAY CITY: PARSIPPANY STATE: NJ ZIP: 07054-0324 FORMER COMPANY: FORMER CONFORMED NAME: ARMCO STEEL CORP DATE OF NAME CHANGE: 19790506 10-Q 1 JUNE 30, 1994 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1994 ------------------------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------------- ------------------- Commission File No. 1-873-2 ----------------------------------------------- ARMCO INC. ---------- (Exact name of registrant as specified in its charter) Ohio 31-0200500 - ---------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415 --------------------------------------------------------------------- (Address of principal executive offices, Zip Code) (412) 255-9800 -------------------------------------------------- (Registrant's telephone number, including area code) - --------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock outstanding at July 31, 1994: 104,692,152 2 ARMCO INC. INDEX Page ---- Part I. Financial Information Condensed Statement of Consolidated Financial Position - June 30, 1994 and December 31, 1993 2 Condensed Statement of Consolidated Operations and Retained Deficit - Three and Six Months Ended June 30, 1994 and 1993 3 Condensed Statement of Consolidated Cash Flows - Six Months Ended June 30, 1994 and 1993 4 Notes to Condensed Consolidated Financial Statements 5-10 Management's Discussion and Analysis of the Condensed Consolidated Financial Statements 11-17 Segment Report 18 Part II. Other Information Item 1 Legal Proceedings 19 Item 6 Exhibits and Reports on Form 8-K 20 Signatures 22 Exhibits -1- 3 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Unaudited) (Dollars in millions) June 30, December 31, 1994 1993 ------- -------- ASSETS Current assets Cash and cash equivalents $ 152.1 $ 183.5 Receivables, less allowance for doubtful accts 186.2 185.1 Inventories (Note 2) 177.2 205.5 Net assets held for sale 27.5 30.9 Other (Note 4) 44.1 20.4 - -------------------------------------------------------------------------- Total current assets 587.1 625.4 Investments Investment in National-Oilwell (Note 5) 88.4 83.9 Investment in North American Stainless (Note 5) 50.3 43.8 Investment in AFSG (Note 6) 97.1 97.1 Other, less allowance for impairment 29.5 44.3 Property, plant and equipment 1,023.5 983.0 Accumulated depreciation (479.2) (455.2) - -------------------------------------------------------------------------- Property, plant and equipment - net 544.3 527.8 Deferred tax asset 338.5 295.6 Goodwill and other intangible assets 159.7 162.6 Other assets 20.4 24.2 - -------------------------------------------------------------------------- Total assets $1,915.3 $1,904.7 - -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Accounts and notes payable $ 110.1 $ 119.6 Employee benefit obligations 137.0 98.3 Accrued salaries and wages 30.1 28.7 Other accrued liabilities 93.7 98.1 Current portion of long-term debt and lease obligations 2.7 8.3 - ------------------------------------------------------------------------- Total current liabilities 373.6 353.0 Long-term debt and lease obligations, less current portion 381.9 379.7 Long-term employee benefit obligations 1,265.4 1,270.9 Other liabilities 138.8 204.5 Commitments and contingencies (Notes 6 and 9) Class B common stock of subsidiary, redemption values $12.7 and $13.2 9.9 9.7 Shareholders' deficit (Note 8) Preferred stock - Class A 137.6 137.6 Preferred stock - Class B 48.3 48.3 Common stock 1.0 1.0 Additional paid-in capital 953.5 951.1 Retained deficit (1,416.5) (1,450.3) Unrealized gain on equity securities 26.1 - Other (4.3) (0.8) - -------------------------------------------------------------------------- Total shareholders' deficit (254.3) (313.1) - -------------------------------------------------------------------------- Total liabilities and shareholders' deficit $1,915.3 $1,904.7 - -------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements
-2- 4 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS AND RETAINED DEFICIT (Unaudited) (Dollars and shares in millions except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1994 1993 1994 1993 ----- ----- ----- ----- Net sales $354.9 $ 454.1 $ 734.5 $ 880.7 Cost of products sold (316.3) (405.6) (663.0) (792.8) Selling and administrative expenses (24.6) (31.5) (48.4) (63.0) Special charge (Note 3) - - (20.0) - - ----------------------------------------------------------------------------- Operating profit 14.0 17.0 3.1 24.9 Interest income 1.9 1.3 3.8 2.9 Interest expense (8.4) (10.6) (17.3) (21.4) Sundry other - net (10.4) (11.1) (21.1) (16.8) - ----------------------------------------------------------------------------- Loss before income taxes (2.9) (3.4) (31.5) (10.4) Credit for income taxes (Notes 4 and 10) 29.8 2.2 29.6 9.1 - ----------------------------------------------------------------------------- Income (loss) from Armco and consolidated subsidiaries 26.9 (1.2) (1.9) (1.3) Equity in losses of Armco Steel Company, L.P. (Note 4) - - - (17.9) Gain on investment in Armco Steel Company, L.P. (Note 4) 36.5 - 36.5 - Equity in income (loss) of equity companies (Note 5) 6.5 (0.2) 8.1 (3.3) - ----------------------------------------------------------------------------- Income (loss) from continuing operations 69.9 (1.4) 42.7 (22.5) Discontinued operations -Worldwide Grinding Systems Income from operations - 10.1 - 9.2 - ----------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 69.9 8.7 42.7 (13.3) Cumulative effect of changes in accounting for postretirement and postemployment benefits and income taxes (Note 11) - - - (307.5) - ----------------------------------------------------------------------------- Net income (loss) 69.9 8.7 42.7 (320.8) Retained deficit, beginning of period (1,482.0) (1,124.7) (1,450.3) (790.7) Preferred stock dividends (4.4) (4.4) (8.9) (8.9) - ----------------------------------------------------------------------------- Retained deficit, end of period $(1,416.5) $(1,120.4) $(1,416.5) $(1,120.4) - ----------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding-primary 104.6 104.2 104.4 103.7 Net income (loss) applicable to common stock $ 65.5 $ 4.3 $ 33.8 $(329.7) Per share of common stock-primary Income (loss) from continuing operations $ 0.63 $ (0.06) $ 0.32 $ (0.30) Income from discontinued operations - 0.10 - 0.09 - ----------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting changes 0.63 0.04 0.32 (0.21) Cumulative effect of changes in accounting for postretirement and postemployment benefits and income taxes - - - (2.97) - ----------------------------------------------------------------------------- Net income (loss) per share - primary $ 0.63 $ 0.04 $ 0.32 $ (3.18) Net income (loss) per share - fully dilutive 0.55 * * * Cash dividends per share $2.10 Class A $ 0.525 $ 0.525 $ 1.050 $ 1.050 $3.625 Class A 0.906 0.906 1.813 1.813 $4.50 Class B 1.125 1.125 2.250 2.250 * Antidilutive or dilution less than 3% See Notes to Condensed Consolidated Financial Statements
-3- 5 ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited) (Dollars in millions) Six Months Ended June 30, ------------------ 1994 1993 ------ ------ Cash flows from operating activities: Net income (loss) $ 42.7 $ (320.8) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and lease-right amortization 24.6 28.1 Income from discontinued operations - (9.2) Gain on sales of investments and facilities (67.2) (0.9) Equity in undistributed (earnings) losses of associated companies (5.7) 21.4 Special charge 20.0 - Cumulative effect of accounting changes - 307.5 Other 3.5 5.8 Change in assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable (8.2) (39.9) Inventory 28.2 (14.1) Payables and accrued expenses 10.9 (8.1) Other assets and liabilities - net (28.1) 20.0 - --------------------------------------------------------------------- Net cash provided by (used in) operating activities 20.7 (10.2) - --------------------------------------------------------------------- Cash flows from investing activities: Net proceeds from the sale of businesses and asset 1.8 12.9 Proceeds from the sale and maturity of marketable securities - 1.8 Proceeds from the sale of investments 15.9 4.5 Purchase of marketable securities - (0.1) Purchase of investments (8.3) (0.9) Contributions to equity investees (6.1) (4.6) Capital expenditures (41.0) (17.5) Net cash used in discontinued operations (2.5) (43.4) Other 2.7 0.2 - --------------------------------------------------------------------- Net cash used in investing activities (37.5) (47.1) - --------------------------------------------------------------------- Cash flows from financing activities: Proceeds from drawdown of construction debt 7.5 - Principal payments on debt (10.9) (5.2) Change in notes payable (0.8) (2.4) Dividends paid (8.9) (8.9) Other (1.7) 0.9 - --------------------------------------------------------------------- Net cash used in financing activities (14.8) (15.6) - --------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 0.2 (2.6) - --------------------------------------------------------------------- Net change in cash and cash equivalents (31.4) (75.5) Cash and cash equivalents: Beginning of year 183.5 171.3 - --------------------------------------------------------------------- End of period $152.1 $ 95.8 - --------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 17.3 $ 22.1 Income taxes 0.1 1.6 Supplemental schedule of noncash investing and financing activities: Issuance of restricted stock 2.5 0.1 See Notes to Condensed Consolidated Financial Statements.
-4- 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in millions, except per share amounts) 1. The condensed consolidated financial statements of Armco Inc. (Armco) should be read in conjunction with the financial statements in Armco's Annual Report to Shareholders for the year ended December 31, 1993. In the opinion of Armco's management, the accompanying condensed consolidated financial statements contain all adjustments, which were of a normal recurring nature, necessary to present fairly, in all material respects, the financial position as of June 30, 1994, the results of operations for the three and six months ended June 30, 1994 and 1993 and cash flows for the six months ended June 30, 1994 and 1993. The results of operations for the three and six months ended June 30, 1994 are not necessarily indicative of the results to be expected for the year 1994. 2. Armco's inventories are valued at the lower of cost or market. Cost of inventories at most of Armco's domestic operations is measured on the LIFO - Last In, First Out - method. Other inventories are valued principally at average cost. June 30, December 31, Inventories on LIFO: 1994 1993 -------- ----------- Finished and semi-finished $ 158.0 $ 190.8 Raw materials and supplies 26.9 21.5 Less - Adjustment to state inventories at LIFO value (36.5) (38.5) -------- -------- Total 148.4 173.8 -------- -------- Inventories on average cost: Finished and semi-finished 11.2 14.1 Raw materials and supplies 17.6 17.6 -------- -------- Total 28.8 31.7 -------- -------- Total inventories $ 177.2 $ 205.5 ======== ========
3. In the six months ended June 30, 1994, Armco recorded a special charge of $20.0 for expenses associated with the temporary idling and restructuring of its Empire-Detroit steelmaking facilities in Mansfield and Dover, Ohio. These facilities are to be idled until completion of construction of a new thin-slab continuous caster at the Mansfield facility, scheduled for the second quarter of 1995. Approximately two-thirds of the charge is associated with group insurance, workers' compensation and other benefits for employees while the plant is idled. The remaining third of the charge relates to inventory writedowns and work force reductions. The liabilities related to this charge are recorded primarily in the current portion of employee benefit obligations in the Condensed Statement of Consolidated Financial Position. 4. On April 7, 1994, Armco Steel Company, L.P. (ASC), a fifty percent owned joint venture limited partnership between subsidiaries of Armco and Kawasaki Steel Corporation, completed an initial public offering and recapitalization. As part of this transaction, the business and assets of ASC were transferred to AK Steel Corporation (AK Steel), a newly formed, publicly traded company. In exchange for its interest in ASC, Armco received 1,023,987 shares of stock in AK Steel with a June 30, 1994 market value of $26.1, recorded in Other current assets with a corresponding credit in Unrealized gain in equity securities. The stock represents about four percent of the outstanding AK Steel shares. In addition, Armco was released from certain obligations to make future cash payments to the former joint venture. The number of shares received and other terms of the restructuring and recapitalization were determined by arm's-length negotiations. As a result of the transaction, in the three and six months ended June 30, 1994, Armco recognized nonrecurring gains totaling $66.5, or $.64 per share, primarily as a result of its release from certain obligations, as discussed above, recognition of deferred pension curtailment gains established at ASC's formation and a tax benefit related to the effect of this transaction on Armco's deferred tax asset position. Of the $66.5, a $30.0 tax benefit is recorded in Credit for income taxes and $36.5 is recognized as a Gain on investment in Armco Steel Company, L.P. In -5- 7 addition, should Armco decide to sell its shares in AK Steel, following the 180-day waiting period included in the transaction agreement, it would recognize a gain equal to the net proceeds received upon such sale. Losses incurred by ASC during the first quarter of 1993 reduced Armco's investment in ASC to zero, after which Armco stopped recording its equity in losses of the joint venture. 5. Armco and Acerinox S.A. of Spain each own a 50% partnership interest in North American Stainless (NAS) through their respective subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc. On July 18, 1994, Armco announced the signing of a letter of intent to sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco expects to record a gain of approximately $27.0 on completion of the sale, which is expected to occur in the third quarter of this year. In the second quarter of 1994, Armco and Acerinox, together invested an additional $12.1 in NAS. Armco is currently limited, under its debt agreements, as to the amount of contributions it can make to its joint venture partnerships. In the three and six months ended June 30, 1994, National-Oilwell, Armco's oil field equipment joint venture with USX, sold certain productive assets and lines of business. In the three and six month periods, Armco recognized $4.4 in equity income related to the net gain on these sales. 6. Armco Financial Services Group (AFSG) consists primarily of insurance companies which Armco intends to sell and which continue underwriting activities (AFSG companies to be sold) and insurance companies that have stopped writing new business for retention and are being liquidated (runoff companies). Armco signed a definitive agreement, dated August 2, 1994, to sell the AFSG companies to be sold. The agreement is subject to a number of conditions, including approvals by regulatory authorities. The proceeds from the sale of these businesses have been pledged as security for certain note obligations due to the runoff companies and will be retained in the investment portfolio of the runoff companies. Armco's investment in the AFSG companies to be sold is recorded at net realizable value, or $73.9 at June 30, 1994. These businesses are accounted for as discontinued operations and, as such, Armco does not recognize, in its financial statements, AFSG's results of operations. The following presents the summarized results of operations and financial condition of the AFSG companies to be sold: Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- Results of Operations 1994 1993 1994 1993 --------------------- ---- ---- ---- ---- Premiums earned $54.3 $57.1 $108.2 $115.6 Losses and loss adjustment expenses (40.9) (44.5) (85.6) (87.2) Underwriting expenses (20.7) (21.2) (41.8) (43.4) ------ ------ ------ ------ Underwriting loss (7.3) (8.6) (19.2) (15.0) Investment income 7.3 10.3 14.6 20.7 Other income (expenses) (0.1) 1.1 (0.1) (0.2) ------ ------ ------ ------ Income (loss) before effect of accounting change (0.1) 2.8 (4.7) 5.5 Cumulative effect of accounting change for postretirement benefits - - - (14.0) ------ -------- ------- ------- Net income (loss) $ (0.1) $ 2.8 $ (4.7) $ (8.5) ======= ======== ======== ========
-6- 8 June 30, Dec. 31, Financial Condition 1994 1993 ------------------- ------- ------- Assets: Invested assets $408.4 $440.7 Receivables 88.4 87.7 Other assets 40.4 43.0 ------ ------ Total assets 537.2 571.4 Liabilities: Property and casualty reserves 399.0 398.3 Payables and other liabilities 30.5 37.2 ----- ----- Total liabilities 429.5 435.5 ------ ----- Net assets 107.7 135.9 Net income not recognized (5.7) (10.4) Unrealized investment (gain) loss not recognized 10.2 (13.3) Loss on disposal of business (45.0) (45.0) Net liabilities to be retained 6.7 6.7 ------ ------ Armco's investment $ 73.9 $ 73.9 ======= ======
The runoff companies are accounted for by Armco as discontinued operations under the liquidation basis of accounting whereby all future cash inflows and outflows are considered. Armco believes, based on current facts and circumstances, including the opinion of outside actuaries, that future changes in estimates of net losses relating to the ultimate liquidation of the runoff companies will not be material to Armco's financial position or liquidity. As of June 30, 1994 and December 31, 1993, Armco's investment in the net assets of the runoff companies was $23.2. There are various matters pending which involve AFSG, relating to litigation, arbitration and regulatory affairs, including matters related to Northwestern National Insurance Company, a runoff company currently involved in, among other matters, arbitration and litigation with respect to certain reinsurance programs. The ultimate liability from such matters at June 30, 1994 cannot be determined; but in Armco's opinion, based on current facts and circumstances and the views of outside counsel and advisors, any liability resulting will not materially affect Armco's financial condition or liquidity. However, it is possible that due to fluctuations in Armco's results, future developments with respect to changes in the ultimate liability could have a material effect on future interim or annual results of operations. 7. Armco has in place an agreement with a group of banks to provide a credit facility for borrowings up to $170.0 on a revolving credit basis until December 31, 1995, secured by certain of Armco's receivables and inventories. At June 30, 1994, Armco had no borrowings outstanding under the agreement, but had utilized $83.8 of the credit facility as support for letters of credit. As amended in the second quarter of 1994, the credit agreement requires Armco to maintain a minimum working capital of $150.0 from May 1, 1994 through August 31, 1994, dropping to $130.0 from September 1, 1994 through December 31, 1994. At June 30, 1994, Armco's working capital, as defined, was $212.7. In addition, Armco must maintain cumulative net income greater than zero for the year 1994, increasing by $10.0 per quarter in 1995, and meet certain ratio requirements. Noncompliance with any of these covenants or the occurrence of any other event of default could result in the lending banks terminating their commitments under the credit agreement and/or accelerating the payment of amounts due thereunder. -7- 9 8. Under the terms of the credit agreement (Note 7), Armco is not permitted to pay cash dividends on its common stock. The payment of dividends on preferred stock is prohibited if Armco is in default under the credit agreement. Under the terms of the indentures for Armco's 11.375% Senior Notes Due 1999 and 9.375% Senior Notes Due 2000, Armco cannot pay a dividend on its common stock or repurchase its capital stock, unless it meets certain financial tests described in the indentures. Armco does not expect to be able to meet these tests in the near term. Armco is incorporated in the State of Ohio and is permitted to pay dividends on its common and preferred stock only to the extent that it has surplus as defined in the corporate statute of Ohio. At June 30, 1994, the amount from which Armco is permitted to pay dividends was $123.3. At its July 1994 meeting, the Board of Directors declared the regular quarterly dividends payable on Armco's $2.10 Cumulative Convertible Class A, $3.625 Cumulative Convertible Class A and $4.50 Cumulative Convertible Class B preferred stock issues. 9. A subsidiary of LTV Steel Company and First Taconite Company, a subsidiary of Armco, each owned a 50% interest in the properties and assets of Reserve Mining Company (Reserve Mining), a Minnesota partnership that produced taconite iron ore pellets and which filed for reorganization under Chapter 11 in 1986. On August 17, 1989, Cyprus Northshore Mining Corporation (Cyprus), a wholly owned subsidiary of Cyprus Minerals Company, purchased the assets of Reserve Mining. On that date, Armco and First Taconite Company entered into an agreement with the State of Minnesota, the Reserve Mining Company bankruptcy trustee and Cyprus, whereby Cyprus agreed to operate the Reserve Mining facility and, upon the purchase by AK Steel (formerly ASC) of certain quantities of iron ore pellets produced by the facility, or upon an approved modification to a tailings disposal site closure plan by the state as provided in the agreement, Cyprus agreed to assume closure and perpetual maintenance obligations of the tailings disposal site. Cyprus continues to operate the facility. In the second quarter of 1994, the Pension Benefit Guaranty Corporation (PBGC) filed suit seeking a judgment against Armco for the liability of Reserve Mining for the alleged underfunded amount of guaranteed benefits to be paid by the PBGC. On June 30, 1994, Armco settled this litigation. Under the agreement, Armco paid the PBGC $10.0 in connection with the Reserve Mining pension liability and agreed to contribut $17.5 to the Armco Inc. Pension Agreements Plan. These amounts had been previously accrued. In connection with the formation of ASC, ASC assumed and agreed to satisfy and indemnify Armco against certain obligations and liabilities related to the business and assets transferred to ASC including, among other things, environmental-related costs and obligations, employee benefit obligations, and liabilities under certain long-term supply contracts. As part of the recapitalization which resulted in the formation of AK Steel (Note 4), AK Steel assumed such obligations and indemnification of Armco. NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as well as a revolving bank credit facility totaling $40.0, of which $39.0 was used as of June 30, 1994. At December 31, 1993 and March 31, 1994, NAS was not in compliance with certain covenants contained in these loan agreements. Lenders have agreed to waive compliance with those covenants as of December 31, 1993 and March 31, 1994 and, in the second quarter of 1994, agreed to amendments to the covenants which bring the joint venture back into compliance. Armco provides a $7.4 letter of credit to secure 50% of NAS debt service payments. This letter of credit will be released if the proposed sale of 90% of Armco's interest is completed (Note 5). Armco has entered into certain contracts, which mature over the next two years, related to nickel, a commodity used in the production of stainless steel. These contracts involve the cash settlement of the difference between the market price of nickel at maturity and the contract -8- 10 price. Gains and losses related to outstanding contracts are recognized in income currently. Based on market values at June 30, 1994, contracts with a nominal amount of $7.0 would require Armco to pay a total of $1.5 during 1994 and 1995. Such amount has been accrued in the financial statements. There are various claims pending involving Armco and its subsidiaries regarding product liability, antitrust, patent, employee benefits, environmental and hazardous waste matters, reinsurance and insurance arrangements (Note 6), and other matters arising out of the conduct of Armco's business. Armco believes that the ultimate liability from pending claims and contingent liabilities will not materially affect the consolidated financial condition or liquidity of Armco; however, it is possible that due to fluctuations in Armco's results, future developments with respect to such matters could have a material effect on the results of operations in future interim or annual periods. Under the federal Comprehensive Environmental Response, Compensation and Liability Act, certain analogous state laws, and the federal Resource Conservation and Recovery Act, past disposal of wastes, whether on-site or at other locations, may result in the imposition of cleanup obligations by federal or state regulatory authorities or other potentially responsible parties, even when the wastes were disposed of in accordance with applicable laws and requirements in existence at the time of disposal. The federal government has asserted that joint and several liability applies in hazardous waste litigation and courts have held that, absent proof that damages are allocable or subject to allocation, joint and several liability will be applied. Armco has been named as a defendant, or identified as a potentially responsible party, in various proceedings wherein the federal government seeks reimbursement for, or compulsory clean-up of, hazardous waste sites. Armco has been required to perform or fund such cleanup or participate in cleanup with others at a number of sites at which its facilities disposed of wastes in the past and may, from time to time, be required to remediate or join with others in the remediation of other locations as these sites are identified by federal or state authorities. Armco is also a party to various private lawsuits with respect to alleged property damages and personal injury from waste disposal sites. In addition, environmental exit costs with respect to Armco's ongoing businesses, which costs it is Armco's policy not to accrue until a decision is made to dispose of a property, may be incurred if Armco makes a decision to dispose of additional properties. These costs include remediation and closure costs such as for cleanup of soil contamination, closure of waste treatment facilities and monitoring commitments. While Armco believes that the ultimate liability for the environmental remediation matters identified to date, including the cleanup, closure, and monitoring of waste sites, will not materially affect its consolidated financial condition or liquidity, the identification of additional sites, increases in remediation costs with respect to identified sites, the failure of other potentially responsible parties to contribute their share of remediation costs, decisions to dispose of additional properties and other changed circumstances may result in increased costs to Armco, which could have a material effect on its financial condition, liquidity and results of operations. At June 30, 1994, Armco had recorded on its Condensed Statement of Consolidated Financial Position, legal and environmental reserves of $79.8, of which $17.1 was classified as current. 10. In the six months ended June 30, 1993, Armco recognized income of $6.0 as the result of a settlement of state income taxes related to a former Armco subsidiary. Of the total amount, $2.4 was recorded in Credit for income taxes and $3.6, representing interest on the settlement, was recorded in Sundry other - net. In addition, Armco reversed a federal tax reserve of $4.3 as a result of the resolution of certain tax issues. This amount was recorded in Credit for income taxes. 11. Effective January 1, 1993, Armco adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), which required accrual of the estimated cost of these benefits during the years an employee is actively employed, rather than the previous practice of expensing these benefits on a pay-as-you-go basis after the participant is retired. Armco elected to recognize immediately the -9- 11 cumulative effect of this obligation and as a result recognized a net of tax charge of $440.0, or $4.25 per share, as of January 1, 1993. Armco adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) effective January 1, 1993. The cumulative effect of adopting SFAS 109, excluding a tax benefit of $170.3 for the cumulative effect of adoption of SFAS 106, was a benefit of $135.6, or $1.31 per share, as of January 1, 1993. Effective January 1, 1993, Armco adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" and recorded $3.1, or $.03 per share, of expense for the cumulative effect of establishing additional liabilities for certain short-term and long-term disability benefit plans. 12. Information relating to Armco's industry segments can be found on page 18. - -------------------------------- -10- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE ------------------------------------------- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- (Dollars in millions, except per share data) GENERAL - ------- Armco's results in the second quarter and first six months of 1994 and 1993 were as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1994 1993 1994 1993 ---- ---- ---- ---- Net sales $ 354.9 $ 454.1 $ 734.5 $ 880.7 Operating profit 14.0 17.0 3.1 24.9 Income (loss) before cumulative effect of accounting changes 69.9 8.7 42.7 (13.3) Net income (loss) 69.9 8.7 42.7 (320.8)
Sales in the three and six months ended June 30, 1994 decreased 22% and 17%, respectively, from the same periods in 1993, primarily because of the absence in 1994 of businesses that were sold or are no longer consolidated and the idling of operations at the Empire-Detroit Steel Division (Empire-Detroit) in the second quarter of this year. The businesses which have been sold or are no longer consolidated in Armco's financial statements represented $68.2 and $132.6 of sales in the second quarter and first six months, respectively, of 1993. Excluding those businesses from 1993, sales would have decreased 8% and 2% in the second quarter and first six months, respectively, of 1994 versus 1993, primarily as a result of the actions taken at Empire-Detroit. The second quarter operating profit was primarily attributable to strong performances at Armco Advanced Materials Company, Coshocton Stainless and Douglas Dynamics, Inc., partially offset by losses at Empire-Detroit. (see Business Segment Results). Operating profit for the three and six months ended June 30, 1993 included $7.7 and $13.0, respectively, from businesses which Armco has sold or no longer consolidates. Net income in the second quarter and first six months of 1994 included a $66.5 gain recognized as a result of the completion of an initial public offering by Armco's former joint venture, Armco Steel Company, L.P. (ASC). In the same periods, Armco recognized $4.4 in equity income representing half of a net gain realized by National-Oilwell on the sale of certain production equipment and lines of business held by that joint venture. Net income for the first six months of 1994 also included a $20.0 special charge for expenses related to the temporary idling and restructuring of Empire-Detroit's steelmaking facilities. In the second quarter of 1993, Armco reported net income of $8.7, which included $4.6 in nonrecurring federal tax credits and $10.1 of income from Worldwide Grinding Systems, a business which was divested in the second half of 1993. The net loss in the six months ended June 30, 1993 included a cumulative effect charge of $307.5 for adopting new accounting standards for postretirement and postemployment benefits and income taxes, $9.2 of income from Worldwide Grinding Systems, federal and state tax-related credits of $14.9, and an equity loss of $17.9 from ASC. -11- 13 BUSINESS SEGMENT RESULTS - ------------------------ Specialty Flat-Rolled Steel - --------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------- ---------------- 1994 1993 1994 1993 ---- ---- ---- ---- Net sales $ 269.2 $ 274.8 $ 532.4 $ 535.7 Operating profit 34.7 24.7 64.8 44.6 Shipments (000s of net tons) 174 178 351 347 Production (000s of net tons) 226 247 438 491 Capability utilization 105% 98% 102% 98%
Customer sales and tons shipped decreased by 2% in the second quarter of 1994 versus 1993, as increases driven by demand for automotive chrome stainless, electrical steel and stainless strip were offset by declines in shipments in stainless flat plate and slabs, and chrome nickel stainless sheet. The restructuring activity at Eastern Stainless Corporation continues as Eastern's management searches for ways to reduce losses. For the first six months of 1994 compared to 1993, customer sales were relatively flat on a small increase in shipments. A decrease in slab sales due to closing the melt shop at Eastern Stainless Corporation more than offset increased sales of stainless sheet and strip and electrical steel. A work stoppage at Allegheny Ludlum in the second quarter of 1994 increased demand for Armco products. The strike has since been settled. Operating profit increased 40% and 45%, respectively, for the second quarter and first six months of 1994 versus 1993. In spite of a fire, which caused an 11-day unplanned caster outage, production at the Butler, Pennsylvania melt facility set new records in 1994, significantly reducing the cost of products shipped from Armco Advanced Materials Company and Coshocton Stainless Division. In addition, reduced low-margin export sales and higher prices for electrical steels bolstered operating profit in the segment. Raw steel production of 226,000 tons in the second quarter of 1994 was down 9% compared to the same period of 1993, due to the closing of the Eastern Stainless Corporation melt shop in July 1993. However, Butler's production in the quarter was 5% higher than production in the second quarter of 1993. Butler's cast steel production capacity is estimated to be 860,000 tons in 1994, versus 850,000 tons in 1993. Outlook: Operating results are expected to continue to improve relative to 1993 as a result of continued strong market conditions, scheduled price increases and improved production efficiencies. Order rates for stainless sheet and strip, particularly for the automotive industry, are expected to remain strong through the remainder of the year. Demand for oriented electrical steel for distribution transformers and cold rolled non-oriented electrical steel for motors and generators is also expected to remain strong. Expansion of sales of these products, however, may be constrained by Butler's melting capacity. Through the first four months of 1994, imports of all specialty flat- rolled steel products increased sharply compared with a year ago. Imports of stainless sheet and strip increased 24% from the period January through April 1993 to the same period in 1994, while domestic shipments rose only 7%. The sharper increase in imports vis-a-vis shipments caused import penetration to jump from 22.6% to 25.2%. Imports of stainless plate were 44% higher in the first four months of 1994 than in 1993, while domestic shipments were only 5% higher. As a result, import penetration of plate increased from 13.5% to 17.8%. Electrical steel domestic shipments and imports declined approximately 4% for the four month period ended April 30, 1994 compared to the same period in 1993, with import penetration holding at a little over 18.5%. With respect to grain-oriented electrical steel, in 1993, Armco and a domestic competitor, as well as several labor unions representing work forces at specialty steelmaking plants, filed countervailing and -12- 14 anti-dumping petitions against Italy. There was also an anti-dumping duty petition filed against Japan, in which Armco was not a party. In October 1993, the International Trade Commission (ITC) issued a preliminary finding of injury. On January 25, 1994, the U.S. Department of Commerce announced a preliminary countervailing duty margin of 23.14% on imports of grain-oriented electrical steel from Italy. On February 3, the Department of Commerce announced preliminary anti-dumping duties of 5.62% against Italy and 31.08% against Japan. Subsequently, the Department of Commerce announced a final countervailing duty margin of 24.42% and anti-dumping duties of 60.79% on imports of grain-oriented electrical steel from Italy. The anti-dumping duty of 31.08% against Japan did not change. On May 18, 1994, the ITC gave a positive injury determination on the Italian countervailing and Japanese anti-dumping petitions. On July 29, 1994, the ITC ruled in favor of the petitioners in the Italian anti-dumping case. Other Steel and Fabricated Products - ----------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------- ---------------- 1994 1993 1994 1993 ---- ---- ---- ---- Net sales $ 85.7 $ 179.3 $ 202.1 $ 345.0 Special charge - - (20.0) - Operating profit (loss) (13.1) 2.4 (47.2) 0.3
Net sales decreased by 52% and 41% in the second quarter and first six months, respectively, of 1994 compared to the same periods in 1993. The shortfall was due to the absence, in 1994, of businesses that were sold or no longer consolidated. Those businesses represented $68.2 and $132.6 in sales in the second quarter and first six months, respectively, of 1993. Excluding those sales from the comparison, net sales in the second quarter of 1994 would have been 23% less than in the second quarter of 1993, primarily due to the idling of operations at Empire-Detroit, partially offset by higher snowplow shipments at Douglas Dynamics. Contributing to the increased operating losses for this segment were operating losses at Empire-Detroit of $17.9 and $59.5 in the second quarter and first six months of 1994, respectively, compared to losses of $7.9 and $16.0 in the same periods, respectively, in 1993. The 1994 year-to-date loss at Empire-Detroit included a special charge of $20.0 in connection with expenses related to the temporary idling and restructuring of Empire-Detroit's steelmaking facilities in Mansfield and Dover, Ohio. These facilities will be idled until the installation of a new thin-slab continuous caster at the Mansfield facility is completed, currently scheduled for the second quarter of 1995. Excluding the special charge, Empire-Detroit's operating loss was reduced from $21.6 in the first quarter of 1994 to $17.9 in the second quarter. Losses at Empire-Detroit in the first quarter of 1994 reflected the loss of the main drive motor in the blooming mill at Mansfield in early March, increases in scrap prices of nearly $50 per ton over prices a year ago without a corresponding increase in selling prices and operational inefficiencies due to the extreme cold weather. The lower losses in the second quarter are due to idling the facilities. Douglas Dynamics had a significant increase in operating profit due to higher sales of snowplows as a result of record snowfalls last winter, low customer inventory and continued strong demand for four-wheel drive vehicles. Sawhill Tubular showed slight losses on a year-to- date basis, reflecting continued operational difficulties experienced with new equipment at the Sharon, Pennsylvania plant, as well as higher hot band costs. Outlook: Empire-Detroit is expected to incur operating losses until the start-up of the thin-slab caster in the second quarter of 1995. However, losses should drop below the level seen in the first half of 1994 as the full benefits of idling are realized. Douglas Dynamics' sales and earnings are expected to grow further in 1994, driven by strong demand for four-wheel drive vehicles, distributors' need to replace inventory, a price increase effective with orders received after June 30, 1994 and sales of new products. -13- 15 DISCONTINUED OPERATIONS - ----------------------- Armco Financial Services Group - ------------------------------ The Armco Financial Services Group consists primarily of insurance companies which Armco intends to sell and which continue underwriting activities (AFSG companies to be sold) and insurance companies that have stopped writing new business for retention and are being liquidated (runoff companies). Armco signed a definitive agreement, dated August 2, 1994, to sell the AFSG companies to be sold. The sale is subject to a number of conditions, including approvals by regulatory authorities. Armco accounts for these businesses as discontinued operations and, as such, does not recognize, in is financial statements, AFSG's results of operations. Armco has an investment in the AFSG companies to be sold of $73.9 at June 30, 1994. Proceeds from the sale will remain committed to the support of Armco's runoff insurance subsidiaries. AFSG companies to be sold Direct written premiums in the second quarter and first six months of 1994 were $52.5 and $106.2, which was 6% and 5% lower than the second quarter and first six months, respectively, of 1993. Soft markets in commercial lines plus the decision to exit the Southwest Region (Texas) in 1993 reduced commercial lines writings. The loss from underwriting was $7.3 in the second quarter of 1994 compared to an $8.6 loss in the second quarter of 1993. Losses incurred were down as a result of both a decline in the earned premium base and focused attention to improve personal auto profitability. The underwriting loss for the first half of 1994 was $19.2 or $4.2 more than the same period in 1993. Lower losses incurred in the second quarter of 1994 were offset by a $5.0 increase in underwriting loss primarily due to losses associated with the first quarter 1994 winter storms in the Northeast and Midwest. Net investment income, including realized gains, in the second quarter of 1994 was $7.3, a decrease of $3.0 or 29% from the second quarter of 1993. The decline in investment income was primarily a result of $0.3 in realized losses in 1994 compared to $1.8 in realized gains in 1993 and a decline in investment yield of the base portfolio, due to the erosion of market interest rates over the last two years. The net loss in the first six months of 1994 was $4.7, which was $3.8 less than the $8.5 loss recorded in the first half of 1993. The net loss in 1993 included a one-time charge of $14.0 for the full postretirement benefit transition obligation, recognized upon adoption of Statement of Financial Accounting Standards No. 106. Liquidity and Financial Position: At June 30, 1994 and December 31, 1993, the companies to be sold had total assets of $537.2 and $571.4, respectively, including cash and invested assets of $408.4 and $440.7. Net assets at June 30, 1994 were $107.7, which was $28.2 below the December 31, 1993 balance of $135.9. The lower net assets were due to 1994 unrealized losses totaling $23.5 as a result of an increase in market interest rates which reduced the market value of the bond portfolio. Insurance premiums and interest are the AFSG companies' primary sources of cash. Total cash used by operating activities during the first six months of 1994 was $5.2, compared to $1.8 used in the first half of 1993. The increase in cash used in 1994 is primarily due to a $7.8 drop in premiums collected and a $1.3 decline in interest received. In the first six months of 1993, investing activities provided $13.7 and financing activities used $2.8 for payment on a note. Outlook: Earnings for the property and casualty industry are expected to remain flat in 1994. Pricing for normal commercial lines remains soft. There is some expectation that firming of prices will occur in 1994 as interest rates stabilize and capital gain opportunities lessen. Operating income for the AFSG companies to be sold is expected to improve modestly in 1994, despite significant catastrophe losses incurred in the first quarter. However, the increase in long- term market interest rates during the first half of 1994 is expected to limit capital gain opportunities. As a result, net income for AFSG companies to be sold is expected to decline compared to 1993. -14- 16 Runoff companies No charges have been recorded with respect to the runoff companies since the second quarter of 1990. Armco management continues to believe that future charges, if any, resulting from the runoff companies will not be material to Armco's financial position or liquidity. However, it is possible that due to fluctuations in Armco's results, future developments could have a material effect on the results of operations in one or more future interim or annual periods. EQUITY AND OTHER INVESTMENTS - ---------------------------- Armco Steel Company, L.P. (ASC) - ------------------------------- ASC was an equally owned limited partnership, formed in 1989, between subsidiaries of Armco and Kawasaki Steel Corporation. Losses incurred by ASC in subsequent years through 1993 reduced Armco's investment to zero, after which Armco stopped recording its equity in profits or losses related to the operations of ASC. On April 7, 1994, ASC completed an initial public offering and recapitalization. As part of this transaction, the business and assets of ASC were transferred to AK Steel Corporation (AK Steel), a newly formed, publicly traded company. In exchange for its interest in ASC, Armco received 1,023,987 shares of stock in AK Steel with a market value, based on the initial offering price, of approximately $24.0. The stock represents approximately four percent of the outstanding shares of AK Steel. In addition, Armco was released from certain obligations to make future cash payments to the former joint venture. The number of shares received and other terms of the restructuring and recapitalization were determined by arm's-length negotiations. As a result of the transaction, Armco recognized a nonrecurring gain in the second quarter of 1994 totaling $66.5, or $0.64 per share, primarily as a result of release from certain obligations discussed above, recognition of deferred pension curtailment gains established at ASC's formation and a $30.0 tax benefit related to the effect of this transaction on Armco's deferred tax asset position. In addition, should Armco decide to sell its shares in AK Steel, following the 180- day waiting period included in the transaction agreement, it would recognize a gain equal to the net proceeds received upon such sale. At June 30, 1994, the stock held by Armco had a market value of $26.1. AK Steel currently hot rolls stainless steel for Armco under a toll rolling agreement, which is in effect through the year 2002. National-Oilwell Armco's equity in the income of National-Oilwell was $4.4 and $4.1 in the second quarter and first six months of 1994 compared to equity losses of $0.2 and $1.5 in the comparable 1993 periods. Included in the second quarter equity income was a $4.4 net gain on the disposal of assets associated with businesses which National-Oilwell is exiting. Absent these gains, the joint venture would have broken even for the quarter. In the first quarter of 1994, National-Oilwell completed the divestiture of its unprofitable wellhead business, for which Armco recognized a $5.0 charge against its equity income in the fourth quarter of 1993. Improved demand for National-Oilwell core products is anticipated over the next twelve months as oil and gas prices begin to strengthen. National-Oilwell maintains its own cash and credit lines and funds its own operations, liabilities and capital expenditures. National- Oilwell has a $96.0 credit facility which matures on March 31, 1995. North American Stainless (NAS) Armco and Acerinox S.A. of Spain each own a 50% partnership interest in North American Stainless (NAS) through their respective subsidiaries, First Stainless Inc. and Stainless Steel Invest, Inc. On July 18, 1994, Armco announced the signing of a letter of intent to sell 90% of its 50% equity interest in NAS for $73.0 in cash. Armco expects to record a gain of approximately $27.0 on completion of the sale, which is expected to occur in the third quarter of this year. In connection with the -15- 17 transaction, Armco will enter into a supply contract with NAS to provide NAS with semi-finished stainless steel. Armco's equity income from its 50% interest in NAS was $0.5 for the second quarter of 1994 and $0.1 for the first six months of 1994, compared to losses of $0.3 and $2.1 in the second quarter and first six months, respectively, of 1993. NAS shipped approximately 29,000 prime tons of product in the second quarter of 1994, operating at close to 90% capability. Orders for chrome nickel stainless products continue to grow, in particular, in advance of the 5% price increase effective May 1, 1994 and as a result of the recent Allegheny Ludlum strike. The strike has since ended. NAS continues to gain market share and is expected to be profitable for the year. NAS had long-term debt outstanding totaling $117.9 at June 30, 1994 as well as a revolving bank credit facility totaling $40.0, of which $39.0 was used as of June 30, 1994. At December 31, 1993 and March 31, 1994, NAS was not in compliance with certain covenants contained in these loan agreements. Lenders agreed to waive compliance with these covenants as of December 31, 1993 and March 31, 1994 and, during the second quarter of 1994, agreed to amendments to the covenants, which bring the joint venture back into compliance. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1994, Armco had $152.1 of cash and cash equivalents compared to $183.5 at December 31, 1993. Total cash and cash equivalents decreased $31.4 during the first six months of 1994, primarily due to capital expenditures for the thin-slab caster at Empire-Detroit's Mansfield, Ohio facility. Net cash used in investing activities, including capital expenditures, was $37.5. Cash generated by operating activities was $20.7, while financing activities used $14.8, primarily for preferred stock dividends. In addition to the cash on hand, Armco has a $170.0 revolving credit facility that matures on December 31, 1995. At June 30, 1994, $83.8 of the credit facility was used as support for letters of credit and $86.2 was available. As amended in the second quarter of 1994, the credit agreement requires Armco to maintain a minimum working capital of $150.0 from May 1, 1994 through August 31, 1994, dropping to $130.0 from September 1, 1994 through December 31, 1994. At June 30, 1994, Armco's working capital, as defined, was $212.7. Beginning January 1, 1994, a cumulative net income test, as defined, became effective, which requires Armco to have a minimum cumulative net income greater than zero for the year 1994, increasing by $10.0 per quarter in 1995. In addition, Armco must meet certain ratio requirements. Noncompliance with any of these covenants or the occurrence of any other event of default could result in the lending banks terminating their commitments under the amended credit agreement and/or accelerating the payments of amounts due thereunder. On June 30, 1994, Armco settled a lawsuit with the Pension Benefit Guaranty Corporation (PBGC) related to the alleged underfunding of guaranteed benefits under Reserve Mining Company's pension plan (see Note 9 of the Notes to Condensed Consolidated Financial Statements). Under the settlement, on June 30, 1994, Armco paid $10.0 to the PBGC in connection with the Reserve Mining pension liability and, on July 15, 1994, made a $17.5 contribution to the Armco Inc. Pension Agreements Plan. Both amounts had been accrued for in Armco's financial statements. In the third quarter of 1994, Armco expects to realize approximately $73.0 on the sale of most of its interest in NAS, as discussed above. Except for capital projects and normal operating expenditures, Armco has no significant amounts of debt or other cash commitments due through the remainder of the year. Armco anticipates that its capital expenditures for 1994 will be approximately $100.0, including $40.0 for normal ongoing maintenance, environmental and expansion capital as well as about $60.0 of expenditures on the $100.0 thin-slab caster project at the Mansfield, Ohio plant, which was discussed in the Other Steel and Fabricated Products section. Financing for a significant portion of this project has been obtained, and installation of the caster is expected to be completed in the second quarter of 1995. On July 15, 1994, Armco's Board of Directors declared the regular quarterly dividends of $.525 per share on the $2.10 Cumulative Convertible Preferred Stock, Class A, and $.90625 per share on the -16- 18 $3.625 Cumulative Convertible Preferred Stock, Class A, each payable September 30, 1994 to shareholders of record on August 26, 1994. The Board of Directors also declared the regular quarterly dividend of $1.125 per share on the $4.50 Cumulative Convertible Preferred Stock, Class B, payable October 3, 1994, to shareholders of record on August 26, 1994. Payment of dividends on Armco's common stock is currently prohibited under the terms of certain of Armco's debt instruments. Under the terms of the amended credit agreement, Armco is not permitted to pay dividends on its common stock. -17- 19 ARMCO INC. SEGMENT REPORT (Unaudited) (Dollars in millions) 1994 1993 ------------- ----------------------------- 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ----- ----- ----- ----- ----- ----- Specialty Flat-Rolled Steel: Customer sales $269.2 $263.2 $225.5 $240.3 $274.8 $260.9 Operating profit 34.7 30.1 12.2 18.7 24.7 19.9 Other Steel and Fabricated Products: Customer sales 85.7 116.4 138.0 179.5 179.3 165.7 Special charges - (20.0) - (165.5) - - Operating profit (loss) (13.1) (34.1) (11.8) (172.0) 2.4 (2.1) Corporate General (7.6) (6.9) (10.6) (7.4) (10.1) (9.9) - ----------------------------------------------------------------------------- Total operating profit (loss) 14.0 (10.9) (10.2) (160.7) 17.0 7.9 - ----------------------------------------------------------------------------- Interest income 1.9 1.9 1.4 0.7 1.3 1.6 Interest expense (8.4) (8.9) (10.3) (11.0) (10.6) (10.8) Sundry other - net (10.4) (10.7) (6.5) (12.8) (11.1) (5.7) Credit (provision) for income taxes 29.8 (0.2) (0.2) (1.6) 2.2 6.9 - ----------------------------------------------------------------------------- Income (loss) of Armco and consolidated subsidiaries 26.9 (28.8) (25.8) (185.4) (1.2) (0.1) Equity in losses of Armco Steel Company, L.P. - - (10.0) - - (17.9) Gain on investment in Armco Steel Company, L.P. 36.5 - - - - - Equity in income (loss) of other equity companies 6.5 1.6 (9.9) (2.6) (0.2) (3.1) - ----------------------------------------------------------------------------- Income (loss) from continuing operations 69.9 (27.2) (45.7) (188.0) (1.4) (21.1) Discontinued operations - Worldwide Grinding Systems Income (loss) from operations - - - 5.0 10.1 (0.9) Loss on disposal of business - - - (40.0) - - - AFSG companies to be sold Loss on disposal of business - - (45.0) - - - - ----------------------------------------------------------------------------- Income (loss) before extraordinary items and cumulative effect of accounting changes 69.9 (27.2) (90.7) (223.0) 8.7 (22.0) Extraordinary items - - (7.3) - - - Cumulative effect of changes in accounting for postretirement and postemployment benefits and income taxes - - - - - (307.5) - ----------------------------------------------------------------------------- Net income (loss) $ 69.9 $(27.2) $(98.0) $(223.0) $ 8.7 $(329.5) ============================================================================== See Notes to Condensed Consolidated Financial Statements.
-18- 20 Part II. Other Information Item 1. Legal Proceedings ----------------- There are various claims pending against Armco and its subsidiaries involving product liability, antitrust, patent, insurance arrangements, environmental and hazardous waste matters, employee benefits and other matters arising out of the conduct of the business of Armco as previously described in Armco's Annual Report on Form 10-K for the year ended December 31, 1993 (the Form 10-K) and Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (the Form 10-Q). As previously discussed in the Form 10-K and Form 10-Q, on or about April 7, 1994, an action was filed in the United States District Court for the District of Minnesota by the Pension Benefit Guaranty Corporation (PBGC), on its own behalf as statutory trustee of the Pension Plan for Reserve Mining Company (Reserve Mining). The PBGC sought judgment against Armco for the liability of Reserve Mining, a Minnesota partnership between a subsidiary of Armco and a subsidiary of LTV Steel Company, for the alleged underfunded amount of guaranteed benefits to be paid by the PBGC. On June 30, 1994, Armco settled this litigation. Under the settlement agreement, Armco paid the PBGC $10.0 million in connection with the Reserve Mining pension liability, and on July 15, 1994, Armco contributed $17.5 million in cash to the Armco Inc. Pension Agreements Plan, of which all amounts had been previously accrued. An action entitled Larry B. Ricke, Trustee v. Armco was filed on April 25, -------------------------------- 1994 in the United States District Court for the District of Minnesota by the Trustee appointed by the PBGC for the purpose of recovering from Reserve Mining assets to satisfy Reserve Mining's liability for pension benefit entitlements which are in addition to those guaranteed by the PBGC. As previously discussed in the Form 10-Q, the complaint alleges that Armco is liable for the unfunded nonguaranteed benefits under the Pension Plan of Reserve Mining in the amount of $9.2 million plus interest. The pension benefits which are the subject of this action were part of the class settlement of United Steelworkers of America v. Armco. Approximately 1,500 --------------------------------------- members of the class signed individual releases (the 19 members who did not are plaintiffs in the Warner, Donovan, et al. v. Armco litigation) releasing -------------------------------- Armco from all claims, liabilities, etc. based upon or which arise out of any Reserve Mining Employee Pension Benefit Plan. Armco believes these releases bar the claims of the Trustee. A motion for summary judgment will be filed on or before August 26, 1994. As previously discussed in the Form 10-K, an action entitled Adamson, Harold --------------- E., et al. v. Armco was filed in July 1992 in the United States District - ------------------- Court for the District of Minnesota by former Reserve Mining salaried employees seeking damages arising from the welfare benefit plans of Reserve Mining. Plaintiff's counsel has estimated the amount of such claims to be approximately $12.0 million. Armco filed a Motion to Dismiss this action on the basis of the statute of limitations. On February 17, 1993, the Court dismissed plaintiffs' state law, ERISA and fiduciary claims with prejudice and plaintiffs' independent fiduciary claims without prejudice. On October 22, 1993, the Court granted Armco's motion to dismiss in its entirety. On November 22, 1993, plaintiffs filed a notice of appeal on the February 17 and October 22 decisions. The appeal was argued before the Eighth Circuit Court of Appeals on June 13, 1994. No decision has been rendered to date. As previously discussed in the Form 10-K, as a condition to the settlement of the Avalos v. Atlantic Richfield Company, (ARCO), et al. action, about ---------------------------------------------------- 300 individuals who were not represented by counsel or who had only recently had counsel appear on their behalf and who did not wish to settle their claims were severed from that action and transferred to a separate action styled Rosa Ann Barrett, et al. v. ARCO, et al. in the United States ---------------------------------------- District Court for the Southern District of Texas, Houston Division. In June 1994, the court granted summary judgment against all but two of the Barrett plaintiffs on the basis that they had not established a factual basis for their claims. Final judgment has not been entered, but is expected in this case. On December 13, 1993, Rhonda Sills, on behalf of herself and two of her children, sued the same defendants as in the Avalos ------ action. In January 1994, a suit on behalf of Rod Luke Chambers and about 30 other plaintiffs was filed against the ARCO defendants. These suits are based on the same theories as those asserted in the Avalos case and seek an ------ unspecified amount of damages. Armco believes -19- 21 the Barrett, Sills and Chambers lawsuits are not well-founded and, -------------- -------- accordingly, no liability has As previously discussed in the Form 10-K, on February 2, 1994, the Missouri Department of Natural Resources (Missouri DNR) issued a Notice of Violation to GS Technologies, Inc. (GS Technologies) for failure to obtain permits prior to the construction/modification of ten processes or pieces of equipment. These changes were made before the Kansas City facility was sold to GS Technologies as part of Armco's sale of its Worldwide Grinding Systems Division in late 1993. Full settlement of the Notice of Violation has been reached with Missouri DNR, which will require payment of $28,000 in penalties. Settlement documents are being drafted. As previously discussed in the Form 10-K, on or about July 31, 1990, the State of Connecticut filed an action entitled Leslie Carothers, Commissioner ------------------------------ of Environmental Protection v. Cyclops Corporation, Detroit Strip Division - -------------------------------------------------------------------------- in the Connecticut State Superior Court, Judicial District of Hartford/New Britain at Hartford, seeking certain penalties and a permanent injunction against Cyclops Corporation to restrain it from discharging wastewater into the waters of the State of Connecticut without a permit. The claims involve a closed facility in Hamden, Connecticut. Armco, as successor to Cyclops Corporation, and the State of Connecticut have signed a Consent Order under which Armco agreed to perform certain remedial investigations and activities. The penalty claim in the litigation has been resolved by payment of $60,000 in penalties. As previously discussed in the Form 10-K, in September 1992, National Supply Company, Inc., a wholly owned subsidiary of Armco (National Supply) and a 50% general partner in National-Oilwell, received a letter from the United States Environmental Protection Agency, which asserted that National Supply and/or National-Oilwell is a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act with respect to the Odessa Drum Company, Inc. Superfund site, located in Odessa, Ector County, Texas. Armco executed an agreement for de minimis settlement. ---------- Total payment is expected to be less than $1,000. The estimated remediation costs for the Fultz Landfill Superfund Site reported in the Form 10-K have been revised from $22.0 million to $15.0 million. Armco continues to be one of four main PRP's, at this site but the Department of Justice has agreed to use its offices to bring other appropriate parties into the case. The total liability on the foregoing claims and those other claims described under ITEM 3. LEGAL PROCEEDINGS in the Form 10-K or under Item 1 in the Forms 10-Q is not determinable; but in the opinion of management, the ultimate liability resulting will not materially affect the consolidated financial condition or liquidity of Armco and its subsidiaries; however, it is possible that due to fluctuations in the Company's results, future developments with respect to changes in the ultimate liability could have a material effect on future interim or annual results of operations. Item 6. Exhibits and Reports on Form 8-K -------------------------------- A. The following is an index of the exhibits included in the Form 10-Q: Exhibit 10 Stock Purchase Agreement among Armco, Armco Financial Services Corporation and Vik Brothers Insurance, Inc. Dated as of August 2, 1994, Sale of Stock of Northwestern National Holding Company, Inc. Exhibit 11 Computation of Income (Loss) Per Share -20- 22 B. The following Reports on Form 8-K were filed by Armco since March 31, 1994. Report Date Description ----------- ----------- April 7, 1994 Reporting that Armco would record nonrecurring gains in the second quarter as a result of the initial public offering and recapitalization of its former joint venture ASC (now publicly owned and renamed AK Steel Holding Corporation) which was completed on April 7, 1994. April 7, 1994 Reporting the pro forma financial information on the completed initial public offering and recapitalization of ASC. As part of the transaction, the business and assets of ASC were transferred to AK Steel Holding Corporation, a newly formed and publicly traded company. In exchange for its interest in ASC, Armco received 1,023,987 shares of stock in AK Steel Holding Corporation with a market value, based on the initial public offering price, of approximately $24.0 million. In addition, Armco was released from certain obligations to make future cash payments to the former joint venture. June 30, 1994 Reporting that Armco settled the Reserve Mining litigation with the PBGC. Under the terms of the agreement, Armco was to pay the PBGC $10.0 million in connection with the Reserve Mining pension liability and contribute $17.5 million in cash to the Armco Inc. Pension Agreements Plan on July 15, 1994. July 15, 1994 Reporting that Armco signed a letter of intent to sell most of its interest in North American Stainless (NAS), a 50- percent joint venture with Acerinox S.A. of Spain (Acerinox). Under the terms of the letter of intent, Armco will sell 90% of its equity interest to Acerinox and will retain a five percent ownership interest in the venture and would continue to supply NAS with chrome nickel stainless steel coils for a period after the sale.
-21- 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the registrant by the following duly authorized persons. Armco Inc. -------------------------------- (Registrant) Date August 12, 1994 /s/ D. G. Harmer - -------------------- ------------------------------- D. G. Harmer Vice President and Chief Financial Officer Date August 12, 1994 /s/ P. G. Leemputte - -------------------- ------------------------------- P. G. Leemputte Controller -22- EX-10 2 EX-10 EXHIBIT 10 Stock Purchase Agreement among Armco Inc., Armco Financial Services Corporation and Vik Brothers Insurance, Inc. --------------------------- Dated as of August 2, 1994 --------------------------- Sale of Stock of Northwestern National Holding Company, Inc. TABLE OF CONTENTS Page ARTICLE I. DEFINITION OF TERMS............................. 2 1. Certain Definitions......................... 2 1.1. Affiliate............................ 2 1.2. Annual Statement..................... 2 1.3. Business Day......................... 2 1.4. Closing and Closing Date............. 3 1.5. Closing Reserves..................... 3 1.6. Code................................. 3 1.7. Company.............................. 3 1.8. Consolidated Group................... 3 1.9. Escrow Account....................... 3 1.10. Existing Pledge...................... 3 1.11. Final Loss Amount.................... 3 1.12. Financial Statements................. 3 1.13. GAAP................................. 4 1.14. GAAP Financial Statement............. 4 1.15. GAAP Quarterly Statement............. 4 1.16. Hazardous Material................... 5 1.17. HSR Act.............................. 5 1.18. Insurance Subsidiary................. 5 1.19. knowledge............................ 5 1.20. Leased Real Property................. 5 1.21. Liens or Encumbrances................ 6 1.22. Material Adverse Effect.............. 6 1.23. 1992 Annual Statement................ 6 1.24. 1992 Consolidated Annual Statement... 6 1.25. NNIC................................. 6 1.26. Other Seller's Agreements............ 6 1.27. Owned Real Property.................. 6 1.28. Permitted Liens...................... 7 1.29. Person............................... 7 1.30. Pre-Closing Periods.................. 8 1.31. Property............................. 8 1.32. Purchase Price....................... 8 1.33. Purchaser Reinsurance Contracts...... 8 1.34. Quarterly Statement.................. 8 1.35. Shares............................... 8 1.36. Statutory Accounting Principles...... 9 1.37. subsidiary........................... 9 1.38. Tax or Taxes......................... 9 1.39. Tax Returns.......................... 9 -i- ARTICLE II. PURCHASE AND SALE OF SHARES................... 10 2.1. Purchase and Sale....................... 10 2.2. Purchase Price.......................... 10 2.3. Renewal Commission...................... 10 2.4. Statutory Surplus Adjustment............ 13 2.5. Certain Assumed Liabilities............. 18 2.6. Closing................................. 19 2.7. Transactions to be Effected at Closing............................... 19 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ARMCO........ 20 3. Representations and Warranties of Armco........ 20 3.1. Organization, Standing and Authority of Armco............................... 20 3.2. Execution and Delivery.................. 21 3.3. Consents and Approvals.................. 22 3.4. No Breach............................... 22 3.5. Armco as Common Parent.................. 22 3.6. Brokerage............................... 23 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLER.... 23 4. Representations and Warranties of the Seller.. 23 4.1. Due Incorporation and Authority......... 23 4.2. Outstanding Capital Stock, Options or Other Rights......................... 24 4.3. Transfer of the Shares.................. 25 4.4. Organization and Qualification.......... 26 4.5. No Violation of Company Instruments..... 26 4.6. Financial Statements.................... 27 4.7. Absence of Undisclosed Liabilities...... 28 4.8. Assets................................. 29 4.9. Events Since December 31, 1993......... 38 4.10. Insurance Claims and Assessments........ 40 4.11. Judgments, Decrees and Orders in Restraint of Business................ 41 4.12. Litigation and Proceedings.............. 41 4.13. Permits, Licenses and Franchises........ 42 4.14. Relationships With Affiliates, Officers and Directors............. 42 4.15. Labor Disputes; Compliance.............. 43 4.16. Other Sale Arrangement.................. 43 4.17. Employee Benefit Plans.................. 44 4.18. Questionable Payments................... 48 4.19. Consents................................ 48 4.20. Contracts and Binding Commitments....... 49 4.21. Threats of Cancellation................. 52 -ii- 4.22. Reinsurance............................. 53 4.23. Operations Insurance.................... 53 4.24. Taxes................................... 55 4.25. Accounts; Directors and Officers........ 59 4.26. Compliance with Applicable Law.......... 59 4.27. Conflict of Interest.................... 60 4.28. Broker's, Finder's or Similar Fees...... 60 ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.. 60 5. Representations and Warranties of the Purchaser.. 60 5.1. Due Incorporation and Authority......... 61 5.2. Consents................................ 62 5.3. No Breach............................... 62 5.4. Actions and Proceedings................. 63 5.5. Broker's, Finder's or Similar Fees...... 64 5.6. Purchase for Investment................. 64 ARTICLE VI. CONDUCT PENDING CLOSING DATE................... 65 6.1. Operations in the Ordinary Course....... 65 6.2. Restrictions............................ 66 6.3. Related Matters......................... 69 6.4. Sale of Portfolio Securities........... 69 6.5. Regulatory Filings...................... 70 6.6. Interim Financial Statements and Reports............................... 70 6.7. Access to Properties, Books and Records............................... 71 6.8. Replacement Insurance................... 72 ARTICLE VII. COVENANTS AND AGREEMENTS 72 7. Covenants and Agreements................ 72 7.1. Confidentiality; Return of Documents.... 72 7.2. Fees and Expenses....................... 73 7.3. Company Employee Benefit Plans.......... 74 7.4. Payment of Debts and Intercompany Receivables........................... 75 7.5. Agreement Not to Compete................ 76 7.6. Taxes................................... 76 7.7. The Seller's Access to Records.......... 88 7.8. Future Assessments...................... 89 7.9. Disclaimer of Other Representations and Warranties....................... 91 7.10. Further Assurances...................... 92 7.11. Proposition 103 and Other Excess Profit Laws........................... 92 -iii- 7.12. Reinsurance............................. 93 7.13. Reinsurance Support..................... 94 7.14. Trademark Assignment.................... 94 7.15. Severance and Other Costs............... 95 7.16. Escrow Agreement........................ 95 7.17. Supplements to Schedules................ 96 ARTICLE VIII. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY.................................... 97 8.1. Survival of Representations and Warranties and Indemnities.............. 97 8.2. Indemnity............................... 98 ARTICLE IX. CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE........................................... 105 9.1. Covenants............................... 105 9.2. Governmental Consents................... 105 9.3. No Litigation........................... 106 9.4. Legislation............................. 106 9.5. Delivery of Documents................... 106 9.6. Opinion of Counsel...................... 106 9.7. Certified Resolutions................... 106 9.8. Continued Accuracy of Representations and Warranties........................ 107 9.9. Other Approvals......................... 107 9.10. Other Consents.......................... 107 9.11. No Adverse Change....................... 108 9.12. Resignation of Directors................ 108 9.13. Release of Existing Pledge.............. 108 ARTICLE X. CONDITIONS TO THE OBLIGATION OF ARMCO AND THE SELLER TO CLOSE....................................... 108 10.1. Covenants............................... 108 10.2. Governmental Consents................... 109 10.3. No Litigation........................... 109 10.4. Legislation............................. 109 10.5. Payment and Delivery of Documents....... 109 10.6. Opinion of Counsel...................... 110 10.7. Certified Resolutions................... 110 10.8. Continued Accuracy of Representations and Warranties......................... 110 -iv- ARTICLE XI.TERMINATION, AMENDMENT AND WAIVER................ 110 11.1. Termination............................. 110 11.2. Effect of Termination................... 112 11.3. Amendment............................... 112 11.4. Extension; Waiver....................... 112 ARTICLE XII. MISCELLANEOUS................................. 112 12.1. Notices................................. 112 12.2. Interpretation.......................... 113 12.3. Governing Law........................... 114 12.4. Publicity............................... 114 12.5. Assignment; Binding Effect.............. 114 12.6. Entire Agreement; Third Party Beneficiaries.......................... 114 12.7. Construction............................ 115 12.8. Counterparts............................ 115 -v- This STOCK PURCHASE AGREEMENT made and entered into this 2nd day of August, 1994 by and among Armco Inc., an Ohio corporation ("Armco"), Armco Financial Services Corporation, a Delaware corporation (the "Seller"), and Vik Brothers Insurance, Inc., an Indiana corporation (the "Purchaser"): W I T N E S E T H WHEREAS, Armco is the beneficial and record owner of all of the issued and outstanding shares of capital stock of the Seller; and WHEREAS, the Seller is the beneficial and record owner of all of the issued and outstanding shares of common stock (the "Shares") of Northwestern National Holding Company, Inc., a Delaware corporation (the "Company"); and WHEREAS, the Seller wishes to sell to the Purchaser and the Purchaser wishes to buy from the Seller the Shares on the terms and conditions set forth in this Stock Purchase Agreement (the "Agreement"); NOW, THEREFORE, in reliance upon the representations and warranties contained herein and in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be bound, agree as follows: ARTICLE I. DEFINITION OF TERMS 1. Certain Definitions. As used in this Agreement, ------------------- the following terms have the following meanings unless the context requires otherwise: 1.1. "Affiliate" means a Person directly or indirectly ---------- controlling, controlled by or under common control with the Person of which it is an Affiliate. For the purposes of Section 4.17, "controlling, controlled by or under common control with" shall be determined under Section 414(b) and (c) of the Internal Revenue Code of 1986, as amended. The Company and its subsidiaries shall be considered Affiliates of the Seller with respect to the period ending on the Closing Date and Affiliates of the Purchaser with respect to the period commencing the day after the Closing Date for purposes of this Agreement. 1.2. "Annual Statement" for an Insurance Subsidiary ---------------- means the annual convention statement of such Insurance Subsidiary, relating to a specified year or date, prepared in accordance with Statutory Accounting Principles and filed by such Insurance Subsidiary with the insurance department of such Insurance Subsidiary's domiciliary state, including all notes, schedules and exhibits thereto. 1.3. "Business Day" means a day on which the Seller, ------------ the Purchaser and national banks doing business in New York City are open for business. -2- 1.4. "Closing" and "Closing Date" have the meanings ------- ------------ set forth in Section 2.6. 1.5. "Closing Reserves" has the meaning set forth in ---------------- Section 2.3 1.6. "Code" means the Internal Revenue Code of 1986, ---- as amended. 1.7. "Company" means Northwestern National Holding -------- Company, Inc., a Delaware corporation. 1.8. "Consolidated Group" means the affiliated group ------------------ (as defined in Section 1504 of the Code) of corporations of which the Company is a member and of which Armco is the common parent. 1.9. "Escrow Account" has the meaning set forth in -------------- Section 7.16. 1.10. "Existing Pledge" means the pledge and --------------- assignment of the Shares to Northwestern National Insurance Company of Milwaukee, Wisconsin ("NNIC") as security for the payment by the Seller of certain promissory notes of the Seller, in the aggregate principal amount of $72.6 million, to NNIC. 1.11. "Final Loss Amount" has the meaning set forth in ----------------- Section 2.3. 1.12. "Financial Statements" means, collectively, the ------------------- 1993 GAAP Financial Statements, the 1992 Annual Statements, the -3- 1993 Annual Statements, the 1992 Consolidated Annual Statement and the 1993 Consolidated Annual Statement. 1.13. "GAAP" or "generally accepted accounting ---- ----------------------------- principles" means the accounting principles generally used and - ---------- recognized from time to time within the United States which have substantial support from authoritative agencies or bodies, including the Securities and Exchange Commission, the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and general industry practice, which principles have been applied in a consistent manner throughout the periods involved. 1.14. "GAAP Financial Statement" means, as of a ------------------------ certain date or for a year ended on a certain date, the audited consolidated balance sheet of the Company and its subsidiaries as of such date and the audited consolidated statements of income, stockholder's equity and cash flows of the Company and its subsidiaries for the year ended on such date, including the related notes and auditor's report thereon. 1.15. "GAAP Quarterly Statement" means, as of a ------------------------ certain date or for a fiscal quarter ended on a certain date, the consolidated balance sheet of the Company and its subsidiaries as of such date and the consolidated statements of income, stockholder's equity and cash flows of the Company and it subsidiaries for the quarter ended on such date, including notes thereon. -4- 1.16. "Hazardous Material" has the meaning set forth ------------------ in Section 4.8. 1.17. "HSR Act" means the Hart-Scott-Rodino Antitrust ------- Improvements Act of 1976, as amended, and the rules promulgated thereunder. 1.18. "Insurance Subsidiary" means each of -------------------- Northwestern National Casualty Company, a Wisconsin stock insurance company ("NNCC"), Northwestern National Lloyds Insurance Company, a Texas Lloyds insurance company ("NNLC"), Northwestern National County Mutual Insurance Company, a Texas mutual insurance company ("NNCM"), NN Insurance Company, a Wisconsin stock insurance company ("NN Insurance"), Pacific National Insurance Company, a California stock insurance company ("PNIC"), Pacific Automobile Insurance Company, a California stock insurance company ("PAIC"), and Statesman Insurance Company, an Indiana stock insurance company ("Statesman"). 1.19. "knowledge" means, with respect to the Seller ---------------- and the Company, the knowledge of the Seller's or the Company's current officers after having made due inquiry of the appropriate individuals employed by the Seller, the Company and the Company's subsidiaries. 1.20. "Leased Real Property" means all real property -------------------- reflected in the Company's balance sheet included in its 1993 Consolidated Annual Statements as being leased by the Company or -5- one of its subsidiaries, a list of which is set forth in Schedule 1.20. 1.21. "Liens or Encumbrances" means any lien, pledge, --------------------- mortgage, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, encumbrance or any other similar restriction or limitation. 1.22. "Material Adverse Effect" means an effect which ----------------------- is materially adverse to the business, financial condition or results of operations of the Company, any Insurance Subsidiary or any other material subsidiary of the Company. 1.23. "1992 Annual Statement" and "1993 Annual --------------------- ------------ Statement" have the respective meanings set forth in Section 4.6. - --------- 1.24. "1992 Consolidated Annual Statement" and ---------------------------------- "1993 Consolidated Annual Statement" have the respective meanings ---------------------------------- set forth in Section 4.6. 1.25. "NNIC" has the meaning set forth in Section 7.13. ---- 1.26. "Other Seller's Agreements" means each agreement ------------------------- to be executed in connection with the transactions contemplated hereunder to which Seller is a party. 1.27. "Owned Real Property" means all real property ------------------- reflected in the Company's balance sheet included in its 1993 -6- Consolidated Annual Statement as being owned by the Company or one of its subsidiaries, which consists of the property located at 8450 Westfield Boulevard, Indianapolis, Indiana. 1.28. "Permitted Liens" means those Liens or --------------- Encumbrances affecting real or personal property which (i) are listed in Schedule 1.28 or are otherwise approved in writing by Purchaser, (ii) are for taxes, assessments or other governmental charges, or the claims of materialmen, carriers, landlords or like persons, all of which are not yet due or payable or which are being contested in good faith by appropriate proceedings and for which an appropriate reserve has been established, (iii) are zoning, building or other similar governmental restrictions, (iv) are easements, covenants, rights-of-way or other similar restrictions, (v) arise in the ordinary course of business including, Liens or Encumbrances arising from pledges of securities required pursuant to state insurance law or insurance regulatory requirements or pertaining to funds held or deposits made for the benefit of ceding companies or retrocessionaires; provided that -------- none of the items described above, together with all such other items, materially impairs the value or interferes with or prohibits the present use or operation of the Property by the Company or its subsidiaries. 1.29. "Person" means any individual, corporation, ------ partneship, firm, joint venture, association, joint stock -7- company, trust, unincorporated organization, governmental or regulatory authority or other entity. 1.30. "Pre-Closing Period" means all tax periods ending ------------------ on or before the Closing Date and, with respect to any tax period that includes but does not end on the Closing Date, the portion of such period that ends on and includes the Closing Date. 1.31. "Property" means real, personal or mixed property, -------- tangible or intangible. 1.32. "Purchase Price" means the aggregate purchase -------------- price described in Section 2.2. 1.33. "Purchaser Reinsurance Contracts" has the ------------------------------- meaning set forth in Section 2.3. 1.34. "Quarterly Statement" of an Insurance ------------------- Subsidiary, as of a certain date, or for a fiscal quarter ended on such date, means the quarterly convention statement prepared in accordance with Statutory Accounting Principles and filed by such Insurance Subsidiary with the insurance department of such Insurance Subsidiary's domiciliary state, including all notes, schedules and exhibits thereto. 1.35. "Shares" means all of the issued and outstanding ------ capital stock of Northwestern National Holding Company, Inc. -8- consisting of 1,000 shares of common stock, par value $10.00 per share. 1.36. "Statutory Accounting Principles" means the accounting ------------------------------- procedures and practices prescribed or permitted by the department of insurance of the state of domicile of an Insurance Subsidiary and used by that Insurance Subsidiary in the preparation of its 1993 Annual Statement and used by the Company in the preparation of the 1993 Consolidated Annual Statement. 1.37. "subsidiary" means a corporation of which 50% or ---------- more of the voting control is owned directly or indirectly by another entity. 1.38. "Tax" or "Taxes" means any Federal, state, --- ----- local, foreign or other income, premium, profits, estimated, franchise, license, impost, transfer, sales, use, ad valorem, customs, payroll, withholding, employment, wage, occupation, value added, property (real or personal), excise or other taxes, fees, duties, assessments, withholdings or governmental charges of any nature (including interest, penalties or additions to such items). 1.39. "Tax Returns" means all returns, reports, ----------- estimates, declarations, information returns and statements of any nature regarding Taxes for any period required to be filed by Armco, the Seller, the Company or its subsidiaries and relating -9- to the income, properties or operations of the Company or its subsidiaries. ARTICLE II. PURCHASE AND SALE OF SHARES 2.1. Purchase and Sale. Upon the terms and subject to ----------------- the conditions set forth in this Agreement, the Seller shall sell, assign, transfer, convey and deliver to the Purchaser and the Purchaser shall purchase from the Seller, on the Closing Date, the Shares. 2.2. Purchase Price. The Purchase Price for the -------------- Shares to be paid by the Purchaser at the Closing shall be $70 million less the $3.5 million paid with respect to the debt incurred in connection with the acquisition of Statesman, subject to the post-closing adjustments and payments set forth in Section 2.4 ("Purchase Price"), payable in the manner specified in Section 2.7. 2.3. Renewal Commission. ------------------ (a) Subject to the adjustments set forth below, the Purchaser agrees to pay the Seller a renewal commission (the "Renewal Commission") 90 days following the third anniversary of the Closing Date equal to $15 million. Such Renewal Commission (i) shall be reduced (but not to an amount less than zero) by the amount by which the Final Loss Amount shall exceed the Closing Reserves and (ii) is subject to set-off pursuant to Section 8.2. To the extent the Paid Portion (defined below) of the Final Loss -10- Amount includes offsets for reinsurance amounts not yet received, a corresponding amount of Renewal Commission, otherwise due, shall not be due and payable until 10 Business Days after such amounts are collected by the Company. To the extent that the Renewal Commission, or any portion thereof, shall not be paid when due, the Purchaser shall pay interest on the unpaid amount of such Renewal Commission from the date on which such amount becomes due and payable to the date of payment at the per annum rate equal to the prime rate announced by The Chase Manhattan Bank, N.A., New York, New York in effect from time to time during such period. Such Renewal Commission shall be increased by one-half (50%) of the amount by which the Closing Reserves exceed the Final Loss Amount. To the extent reinsurance recoverables, treated as uncollectible in the calculation of the Final Loss Amount, are received by the Purchaser or its subsidiaries prior to the fourth anniversary of the Closing Date and to the extent the receipt of such reinsurance recoverables would have caused a corresponding increase in the Renewal Commission, such amounts shall be remitted to the Seller. (b) The "Final Loss Amount" shall mean the consolidated (combined) losses and loss adjustment expenses with respect to losses incurred prior to the Closing Date ("Pre-Closing Losses") comprised of (i) the amounts paid by the Insurance Subsidiaries from the Closing Date (less amounts actually received or considered collectible under statutory accounting principles under reinsurance contracts, treaties or -11- agreements reflected in the Closing Balance Sheet and salvage and subrogation) to the third anniversary of the Closing Date ("Paid Portion") and (ii) the amount of the reserves for unpaid losses and loss adjustment expenses of the Insurance Subsidiaries as of the third anniversary of the Closing Date with respect to Pre-Closing Losses ("Reserved Portion"). The Reserved Portion is to be calculated by the Company in accordance with statutory accounting principles and accepted actuarial practices (i) giving effect to reinsurance recoverables considered collectible under Statutory Accounting Principles under any reinsurance contracts, treaties or agreements reflected in the calculation of those amounts for purposes of the Closing Balance Sheet (which shall not include any reinsurance contract, treaty or agreement (the "Purchaser Reinsurance Contracts") entered into at the request or direction of the Purchaser pursuant to Section 7.12 or otherwise), (ii) excluding the effect of any reinsurance contract, treaty or agreement entered into or modified on or after the Closing Date and (iii) giving effect to salvage and subrogation in a manner consistent with the Closing Balance Sheet. Such Reserved Portion shall be certified by an independent actuary satisfactory to the Purchaser and the Seller ("Independent Actuary") as being, in its opinion, a reasonable estimation of the unpaid ultimate losses and loss adjustment expenses for Pre-Closing Losses in accordance with statutory accounting principles and accepted actuarial practices, given the instructions set forth above. If the Independent Actuary concludes that the -12- Reserved Portion is not a reasonable estimation of such unpaid ultimate losses and loss adjustment expenses in accordance with the foregoing standards, the Independent Actuary shall calculate a reserve amount for Pre- Closing Losses, certifying that such amount is its best estimation of the unpaid ultimate losses and loss adjustment expenses for Pre-Closing Losses in accordance with statutory accounting principles and accepted actuarial practices, given the instructions above, and such amount shall become the Reserved Portion of the Final Loss Amount. The Purchaser and the Seller shall each pay one-half of the fees and expenses of Independent Actuary. (c) "Closing Reserves" shall mean the sum of (i) $15 million plus (ii) the reserves for losses and loss adjustment expenses, less reinsurance recoverables and salvage and subrogation, as shown on the Closing Balance Sheet. 2.4. Statutory Surplus Adjustment. --------------------------- (a) Following the Closing, the Seller and the Purchaser shall cooperate with the Company in the preparation of a consolidated balance sheet of the Company and its subsidiaries as of the Closing Date in accordance with the terms hereof (the "Closing Balance Sheet"). Except for the insurance reserves and except for the instructions set forth below, the Closing Balance Sheet shall be prepared in accordance with, Statutory Accounting Principles (including the methodologies, allocations and assumptions used by the Company in the preparation of the 1993 Consolidated Annual Statement); provided that no effect shall be given -13- to any accounting principles adopted or required subsequent to the 1993 Consolidated Annual Statement. The insurance reserves in the Closing Balance Sheet shall be calculated by the Company on an accounting and actuarial basis consistent with the Company's 1992 Consolidated Annual Statement (except with respect to the treatment of salvage and subrogation, which shall be treated on a basis consistent with the 1993 Consolidated Annual Statement). The Closing Balance Sheet shall be prepared by the Company and shall include a schedule and calculation of the consolidated (combined) statutory capital and surplus in the Closing Balance Sheet adjusted to eliminate the effects of (i) any financial reinsurance which has the effect of increasing the consolidated (combined) statutory capital and surplus of the Company and its subsidiaries in force subsequent to June 30, 1993, (ii) any capital gains realized from June 30, 1993 until the Closing Date (other than gains included in subparagraph (iv) below) or capital losses realized at the direction of the Purchaser (within the 30 days immediately prior to the Closing Date) by the Company and its subsidiaries as a result of the sale of portfolio securities, (iii) any Purchaser Reinsurance Contracts, (including transaction and other expenses related thereto), in each case to the extent included in such consolidated (combined) statutory capital and surplus, and (iv) the net realized capital losses of $542,575 arising out of the combination of NNCC and Statesman. The adjustment to the Closing Balance Sheet set forth in clauses (i), (ii) (except for tax payments on gains or losses -14- from Purchaser directed securities transactions) and (iv) above shall not be adjusted to reflect any tax consequences resulting therefrom. The consolidated (combined) statutory capital and surplus of the Company and its subsidiaries as shown on the Closing Balance Sheet, as adjusted in accordance with this section, is the "Closing Statutory Surplus". The Closing Balance Sheet shall identify the amount of the liabilities to be assumed pursuant to Section 2.5. (b) Each of the parties shall have access to the books and records of the Company for purposes of the review of the Closing Balance Sheet and the Seller shall have the right, at its expense, to place up to two representatives at the Company's facilities to review the preparation of the Closing Balance Sheet. Within 120 days of the Closing Date, the Company shall deliver such Closing Balance Sheet (including the calculation of Closing Statutory Surplus) to the Seller and the Purchaser. Subject to section (c) below, if the Closing Statutory Surplus calculated in accordance with this Section is less than $96.5 million, the amount of the difference between $96.5 million and such Closing Statutory Surplus shall be paid by the Seller to the Purchaser within 16 Business Days of the delivery of the Closing Balance Sheet and the calculation of the Closing Statutory Surplus. Subject to Section (c) below, if such Closing Statutory Surplus calculated in accordance with this Section is greater than $96.5 million, the amount of the difference, up to a total of $3.5 million, between such Closing Statutory Surplus and $96.5 -15- million shall be paid by the Purchaser to the Seller within 16 Business Days of delivery of the Closing Balance Sheet and the calculation of the Closing Statutory Surplus. Such payment by the Seller or the Purchaser shall be made, together with interest from the Closing Date to the date of payment on the amount of such difference at the per annum rate equal to the prime rate announced by The Chase Manhattan Bank, N.A., New York, New York in effect from time to time during such period, by wire transfer of immediately available funds to a bank account designated by the payee. (c) In the event that the Seller or Purchaser disagrees with such determination by the Company of the Closing Statutory Surplus, such party shall notify the other party of such disagreement within 15 Business Days of receipt of the Closing Balance Sheet and shall further identify in such notice the items in the Closing Balance Sheet (including the calculation of Closing Statutory Surplus) to which it objects; provided, however, that any challenges to the insurance reserves by either party will be restricted to determining that such reserves were calculated as stated above and not as to the adequacy of the reserve amount. If such notice is not given, the Closing Balance Sheet, and the calculation of the Closing Statutory Surplus, shall be final and binding as between the parties. If the Seller or the Purchaser timely delivers the notice setting forth the disagreement and the items to which it objects, the Seller and the Purchaser shall have 15 Business Days to resolve the dis- -16- agreement and the payment obligation pursuant to paragraph (b) above shall be suspended until the disagreement is resolved by the parties or by the Accounting Firm (as defined below). If the disagreement is unable to be resolved within such 15-day period, the Seller and the Purchaser agree to retain a nationally recognized accounting firm (the "Accounting Firm"), to arbitrate and resolve the disputed items in the Closing Balance Sheet and the calculation of the Closing Statutory Surplus within 60 days of such retention. The Seller and the Purchaser shall designate the Accounting Firm prior to the Closing. The Accounting Firm shall make such determination as an arbitrator by reviewing the disputed items in the Closing Balance Sheet and the Closing Statutory Surplus, such underlying documentation as it deems appropriate, and such written materials as shall be presented to it by either the Seller or the Purchaser within 30 days of its retention. On or before the 60th day after its retention, the Accounting Firm shall deliver a written report to the Seller and the Purchaser (i) stating whether each disputed item is calculated as required by Section 2.4(a), (ii) for any disputed items not calculated in accordance with the provisions of Section 2.4(a) restating the disputed items in accordance with Section 2.4(a) and providing the corresponding adjustment to the Closing Statutory Surplus, and (iii) stating the amount of the Closing Statutory Surplus, as adjusted to reflect such adjustments, if any. For the purposes of this engagement, the Accounting Firm shall assume that all items not being disputed are fairly -17- presented in accordance with Statutory Accounting Principles and as required by Section 2.4(a). The Closing Statutory Surplus so stated by the Accounting Firm as provided in clause (iii) above shall be final and binding on the parties hereto and shall be the "Closing Statutory Surplus" for all purposes of this Agreement and for the determination of any payment pursuant to Section 2.4(b). The fees and expenses of the Accounting Firm shall be borne equally by the Seller and the Purchaser. (d) The amount of any post-closing payment pursuant to Section 2.4(c) shall be paid within 10 Business Days of the delivery by the Accounting Firm of its report to the Seller and the Purchaser, together with interest from the Closing Date to the date of payment on the payment amount at the per annum rate equal to the prime rate announced by The Chase Manhattan Bank, N.A., New York, New York in effect from time to time during such period, by wire transfer of immediately available funds to a bank account designated by the payee. 2.5. Certain Assumed Liabilities. On such date after --------------------------- the delivery of the Closing Balance Sheet as any adjustment to the Purchase Price based on the Closing Statutory Surplus would be payable pursuant to Section 2.4, the Company shall pay to a segregated escrow account, acceptable to Purchaser and Seller, to be maintained specifically to fund such assumed liabilities, as directed by the Seller, an amount, together with interest from the Closing Date on such amount at the rate provided in Section 2.4 for payments made thereunder, equal to the amount of the -18- liabilities (that are of a type described in Schedule 2.5 hereto) which are both (i) included on the Closing Balance Sheet on a basis consistent with the 1993 Consolidated Annual Statement (except as set forth in Schedule 2.5) and (ii) assumed by either the Seller or Armco or for which the Company or the Purchaser is indemnified by the Seller or Armco. When the liabilities transferred above have been satisfied in full, any amounts remaining in such trust accounts shall be released to the Seller or Armco, as directed by the Seller. 2.6. Closing. The Closing of the sale and transfer of the ------- Shares (the "Closing") will take place at 10:00 a.m. on September 30, 1994 or such other date as the parties mutually agree, provided that the conditions precedent to Closing set forth in this Agreement have been satisfied or waived (the "Closing Date"), at the office of Schnader, Harrison, Segal & Lewis, 1600 Market Street, Philadelphia, Pennsylvania 19103. 2.7. Transactions to be Effected at Closing. At the Closing: -------------------------------------- (a) The Seller shall deliver to the Purchaser (i) one or more certificates representing the Shares free and clear of any Liens or Encumbrances, including the Existing Pledge, which shall be released at Closing, duly endorsed in blank or accompanied by duly executed instruments of transfer, or registered in the name of the Purchaser, and (ii) all documents -19- and instruments expressly required by this Agreement to be delivered by the Seller at the Closing. (b) The Purchaser shall (i) pay $66.5 million to the Seller, by wire transfer of immediately available funds to such account or accounts as the Seller shall designate to the Purchaser prior to the Closing, and (ii) deliver to the Seller all documents and instruments expressly required by this Agreement to be delivered by the Purchaser at the Closing. (c) The Seller shall either pay $5 million to the Escrow Account or shall provide a letter of credit acceptable to the Purchaser (the "Letter of Credit") in favor of the Purchaser in an amount of $5 million to support payments, if any, required to be made by the Seller on account of the Seller's indemnification obligations under this Agreement. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ARMCO 3. Representations and Warranties of Armco. Armco --------------------------------------- represents and warrants to the Purchaser as follows: 3.1. Organization, Standing and Authority of Armco. --------------------------------------------- Armco is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Ohio, and is in good standing as a foreign corporation in all jurisdictions in which its failure to qualify or be in good standing would adversely affect the consummation or the validity of the transactions provided for in this Agreement. Armco has all requisite corpo- -20- rate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby to be consummated by Armco. 3.2. Execution and Delivery. The execution, delivery ---------------------- and performance by Armco of this Agreement and the consummation of the transactions contemplated hereby to be consummated by Armco have been duly and validly authorized by all necessary corporate action on the part of Armco, and no other corporate proceedings on the part of Armco are necessary to authorize the execution, delivery and performance by Armco of this Agreement or the consummation of the transactions contemplated hereby to be consummated by Armco. This Agreement has been executed and delivered by Armco and (assuming that such agreement is a valid and binding obligation of the Purchaser) constitutes the valid and binding obligation of Armco, enforceable against Armco in accordance with its terms, except that (i) such enforceability may be subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, rehabilitation, liquidation, conservatorship, receivership or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. -21- 3.3. Consents and Approvals. The execution and ---------------------- delivery by Armco of this Agreement, the performance by Armco of its obligations hereunder and the consummation by Armco of the transactions contemplated hereby to be consummated by Armco do not require Armco to obtain any consent, approval, authorization or action of, or make any filing with or give any notice to, any public, governmental or judicial authority except (a) as set forth in Schedule 3.3; (b) such as have been duly obtained or made, as the case may be, and are in full force and effect on the Closing Date; or (c) such filings made with governmental agencies such as the Securities and Exchange Commission, which are (i) part of the regular disclosure obligations of Armco and (ii) available as public documents. 3.4. No Breach. The execution, delivery and --------- performance of this Agreement by Armco and the consummation of the transactions contemplated hereby by Armco or the Seller in accordance with the terms and conditions hereof will not violate, conflict with, or result in the breach of any provision of the Articles of Incorporation, Regulations or other charter or organizational document of Armco. 3.5. Armco as "Common Parent". Armco is the "common ------------- parent" of an "affiliated group" of corporations (as those terms are used in section 1504(a) of the Code and the Treasury Regulations promulgated under section 1502 of the Code) that includes the Company and each of its subsidiaries. -22- 3.6. Brokerage. Except for The Chase Manhattan Bank, --------- N.A. (whose fees will be paid by Armco or the Seller), no broker or finder has acted directly or indirectly for Armco or the Seller or the Company, and neither the Company nor any of its subsidiaries has incurred any obligation to pay any brokerage or finder's fee or other commission in connection with the transactions contemplated by this Agreement. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE SELLER 4. Representations and Warranties of the Seller. The -------------------------------------------- Seller represents and warrants to the Purchaser as follows: 4.1. Due Incorporation and Authority. The Seller is ------------------------------- a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to execute and deliver this Agreement and each of the Other Seller's Agreements, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Seller of this Agreement and each of the Other Seller's Agreements, and the consummtion by the Seller of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Seller are necessary to authorize the execution, delivery and performance by the Seller of this Agreement and each of the Other -23- Seller's Agreements, or the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by the Seller and (assuming this Agreement is a valid and binding obligation of the Purchaser) constitutes a valid and binding obligation of the Seller, enforceable against it in accordance with its terms, except that (i) such enforceability may be subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, rehabilitation, liquidation, conservatorship, receivership or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Each of the Company and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has the requisite corporate power and authority to own, lease and operate its assets and businesses and to carry on its businesses as now conducted. 4.2. Outstanding Capital Stock, Options or Other ------------------------------------------- Rights. The outstanding capital stock of the Company consists of - ------ 1,000 shares of common stock, par value $10.00 per share. No other class of capital stock or equity interest of the Company is authorized or outstanding. All of the outstanding Shares are owned of record and beneficially by the Seller and constitute 100 percent of the issued and outstanding shares of capital stock of -24- the Company. All of the Shares are duly authorized, validly issued, fully paid and nonassessable. Except for the corporations listed in Schedule 4.2, the Company has no other subsidiaries and does not beneficially own more than five percent of any Person. Except as set forth in Schedule 4.2, the Company owns 100% of the issued and outstanding shares of capital stock of the corporations listed in Schedule 4.2 free and clear of all Liens or Encumbrances. There is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from Armco, the Seller, the Company or its subsidiaries any of the outstanding, authorized but unissued, unauthorized or treasury shares of the capital stock or any other security or equity interest of the Company or its subsidiaries, and there is no outstanding security of any kind convertible into such capital stock or other equity interest of the Company or its subsidiaries. 4.3. Transfer of the Shares. Except for the Existing ----------------------- Pledge, the Seller owns beneficially and of record, free and clear of any Liens or Encumbrances, all of the Shares. Upon delivery of the payment for such Shares as herein provided and release of the Existing Pledge, the Seller will convey good title thereto, free and clear of any Liens or Encumbrances, other than the requirements of the Federal and state securities laws and state insurance laws with respect to limitations on the subsequent transfer thereof and other than any Liens or Encumbrances -25- thereon that may have been imposed or consented to by the Purchaser. 4.4. Organization and Qualification. The Seller has ------------------------------- delivered to the Purchaser true and complete copies of the Articles or Certificate of Incorporation and Bylaws or comparable instruments, in each case, as in effect on the date hereof, of the Company and each of its subsidiaries. Each of the Company and its subsidiaries is duly qualified or licensed in all jurisdictions in which the conduct of its business requires such qualification or license and the failure so to qualify or be licensed would have a Material Adverse Effect. 4.5. No Violation of Company Instruments. Subject to ----------------------------------- the approval of the respective Insurance Commissioners of the States of Wisconsin, Indiana, California, Texas and Michigan and the expiration of the waiting period under the HSR Act, the execution and delivery of this Agreement do not, and the sale of the Shares pursuant to this Agreement will not, violate any provision of the Articles of Incorporation or Bylaws of the Company or its subsidiaries, or any provision of, or result in the acceleration of any obligation under, any mortgage, note, lien, lease, franchise, license, permit, agreement, instrument, order, arbitration award, judgment or decree or in the termination of any license, franchise, lease, permit or other instrument to which the Company or any of its subsidiaries is a party or by which it is bound, except for such as to which requisite waivers -26- or consents either have been (or will be prior to the Closing) obtained by the Company or the obtaining of which has been waived by the Purchaser. 4.6. Financial Statements. -------------------- (a) The Seller has heretofore delivered to the Purchaser a copy of GAAP Financial Statements for the years ended December 31, 1993 and 1992, together with all exhibits and schedules thereto ("1993 GAAP Financial Statements"). Such 1993 GAAP Financial Statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 1993 and 1992 and their consolidated results of operations and cash flows for the years then ended in accordance with generally accepted accounting principles applied consistently in all material respects to the immediately preceding fiscal year except as set forth in the notes thereto and in the auditor's report thereon. (b) The Seller has heretofore delivered to the Purchaser a copy of the Annual Statement of each Insurance Subsidiary filed for the year ended December 31, 1992 ("1992 Annual Statements") and for the year ended December 31, 1993 (the "1993 Annual Statements"). Each such 1992 Annual Statement was prepared in accordance with statutory accounting principles and presents fairly, in all material respects, the statutory financial condition of such Insurance Subsidiary as of December 31, 1992, and the statutory results of the operations of such Insurance Subsidiary for the year then ended. Each such 1993 Annual -27- Statement was prepared in accordance with Statutory Accounting Principles and presents fairly, in all material respects, the statutory financial condition of such Insurance Subsidiary as of December 31, 1993, and the statutory results of the operations of such Insurance Subsidiary for the year then ended. (c) The Seller has heretofore delivered to the Purchaser a copy of the consolidated (combined) annual convention statement of the Company and the Insurance Subsidiaries filed with the Insurance Department of the State of Wisconsin, including all notes, schedules and exhibits thereto, for each of the years ended December 31, 1992 and 1993 (the "1992 Consolidated Annual Statement" and "1993 Consolidated Annual Statement," respectively). The 1992 Consolidated Annual Statement was prepared in accordance with statutory accounting principles. The 1993 Consolidated Annual Statement was prepared in accordance with Statutory Accounting Principles. Each of such 1992 Consolidated Annual Statement and 1993 Consolidated Annual Statement presents fairly, in all material respects, the consolidated (combined) statutory financial condition of the Company and the Insurance Subsidiaries as of December 31, 1992 and 1993, respectively, and the consolidated (combined) statutory results of the operations of the Company and the Insurance Subsidiaries for the year then ended. 4.7. Absence of Undisclosed Liabilities. Except as ---------------------------------- set forth in Schedule 4.7 or to the extent reflected or reserved against in the 1993 GAAP Financial Statements, the Company and -28- its subsidiaries, as of the date of the balance sheet contained in the 1993 GAAP Financial Statements, had no liabilities of any nature, whether accrued, absolute or contingent, including, without limitation, liabilities for Taxes, which were required to be disclosed or provided for under generally accepted accounting principles or which would have a Material Adverse Effect. Except as set forth in Schedule 4.7, since the date of the balance sheet contained in the 1993 GAAP Financial Statements, neither the Company nor any of its subsidiaries has incurred or become subject to any material obligations or liabilities of any nature, whether accrued, absolute, contingent or otherwise other than obligations and liabilities incurred in the normal and ordinary course of business consistent with past practices. The Seller represents that the total amount paid or to be paid by the Company or its subsidiaries, directly or indirectly (whether as dividends to its parent or otherwise), since October 1, 1993 with respect to any debt incurred in connection with the acquisition of Statesman does not exceed $3.5 million and such debt has been paid in full. 4.8. Assets. ------ (a) Investments. The Company and its subsidiaries have ----------- good and marketable title to all of their investments, including all bonds, stocks and other securities in their investment portfolios, all as reflected in the 1993 Annual Statements delivered to the Purchaser prior to the date of this Agreement, free and clear of all Liens and Encumbrances (other than Permitted Liens), except such as are reflected in such 1993 Annual -29- Statements, and except for restrictions in respect of deposits with state regulatory authorities. Investments required to be reflected at market value pursuant to GAAP are shown in the GAAP Financial Statements and the GAAP Quarterly Statements on the basis of their respective market values. (b) Owned Real Property. -------------------- (i) Schedule 4.8(b)(i) hereto contains a true, correct and complete list of all Owned Real Property. (ii) The Company or its subsidiary is the holder of good, indefeasible and marketable fee simple title to its Owned Real Property free and clear of all Liens or Encumbrances except for Permitted Liens. (iii) There are no leases, subleases, tenancies, licenses or other occupancy rights affecting any portion of the Owned Real Property except as set forth in Schedule 4.8(b)(iii), true and correct copies of which have been delivered or made available to the Purchaser. (iv) The use and occupancy of the Owned Real Property is in compliance with all applicable laws, regulations, statutes, ordinances, judgments, decrees or orders including without limitation, those governing zoning, subdivision, land development, erosion and drainage control, sewage collection and disposal, use, occupancy, building, fire, safety and environmental, except where the failure to be so in compliance would not reasonably be expected to have a material adverse impact on the use, occupancy or operation of such Owned Real Property. Except -30- as set forth in Schedule 4.8(b)(iv), the Seller, the Company, NNCC and Statesman have received no notice from any governmental entity advising of a violation of any applicable building code, environmental, zoning, subdivision, land development or land use laws, regulations or ordinances or any other applicable local, state or Federal laws, regulations or ordinances affecting the Owned Real Property, which violation would reasonably be expected to have a material adverse impact on the use, occupancy or operation of such Owned Real Property. (v) The Seller, the Company, NNCC and Statesman have no knowledge of any environmental, zoning, land use regulation or other legal proceedings which have been instituted and which would reasonably be expected to have a material adverse impact on the present use, occupancy or operation of such Owned Real Property. (vi) The Seller, the Company, NNCC and Statesman have no knowledge of and have not received any notice of any pending or contemplated condemnation proceedings affecting the Owned Real Property, or any part thereof. (vii) The Seller, the Company, NNCC and Statesman have no knowledge of and have not received any notice of any existing or proposed assessments for public improvements imposed or to be imposed upon the Owned Real Property. (viii) The Seller has heretofore delivered or made available to the Purchaser true, correct and complete copies of all material permits, approvals, licenses and certificates -31- which are required for the current development, use and occupancy of the Owned Real Property by the Company and its subsidiaries and are in the possession of the Company. The Seller has delivered or made available to the Purchaser true and complete copies of all surveys, deeds, title reports, mortgages, recorded documents with respect to Permitted Liens, maps, plans and blueprints of the Owned Real Property and the improvements thereon or relating to the proposed development of the Owned Real Property in the possession of the Company. (ix) Schedule 4.8(b)(ix) hereto contains a list of all material service, maintenance and construction contracts relating to the Owned Real Property, true and correct copies of which have been made available to the Purchaser by the Seller. (x) There are no outstanding agreements of sale with third parties to purchase any portion of the Owned Real Property and no person has an option to purchase any portion of the Owned Real Property. (xi) Except as set forth in Schedule 4.8(b)(xi), the Seller, the Company, NNCC and Statesman do not use, treat, store or dispose of, and have not permitted any other party to use, treat, store or dispose of, whether temporarily or permanently, any Hazardous Materials (as defined below) at, on or beneath the Owned Real Property in violation of any Federal, state or local law, regulation or ordinance. Except as set forth in Schedule 4.8(b)(xi), the Seller, the Company, NNCC and -32- Statesman have no knowledge of the presence, use, treatment, storage, release or disposal of any Hazardous Materials at, on or beneath the Owned Real Property which has created or might reasonably be expected to create any liability of owners or occupants of the Owned Real Property under any Federal, state or local law or regulation or which would require remediation or reporting to a governmental agency, in either case which would reasonably be expected to have a material adverse impact on the use, occupancy or operation of such Owned Real Property. For the purpose of this Agreement, "Hazardous Materials" shall include, but not be limited to, substances defined as "extremely hazardous substances", "hazardous substances", "hazardous materials", "hazardous waste" or "toxic substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 6901, et seq.; the Emergency Planning and Community Right-To-Know Act, 42 U.S.C. Sections 11001-11050; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; in similar statutes promulgated by the states in which the Property is located; and in the regulations adopted and publications promulgated pursuant to such laws. Except as noted in the Underground Tank Closure Program Final Report issued by ATEC Associates, Inc. (ATEC Project No. 21-04295), Final Account of Asbestos Abatement issued by SEAR Corporation (SEAR Project No. 91-0316), Phase I Environmental Site Assessment issued by ATEC Associates, Inc. (ATEC Project No. 21-07235), Asbestos -33- Investigation Report issued by ATEC Environmental Consultants (ATEC Project No. 21-09151) and Asbestos Abatement Monitoring and Air Sampling Report issued by ATEC Environmental Consultants (ATEC Project No. 21-19160), to the knowledge of the Seller, the Company, NNCC and Statesman, no asbestos or PCBs are contained in or stored on the Owned Real Property and there are no storage tanks for petroleum or any other Hazardous Materials located in, on or under the Owned Real Property. (c) Leased Real Property. -------------------- (i) Schedule 1.20 hereto contains a true and correct list of all Leased Real Property. True, correct and complete copies of all material leases relating to such Leased Real Property (the "Leases") have been delivered or made available to the Purchaser. (ii) The Company and its subsidiaries are in compliance with the material terms and provisions of the Leases and neither the Seller nor the Company has received any notice of any default under any Lease. (iii) Except as set forth in Schedule 4.8(c)(iii), the Company and its subsidiaries have not entered into any subleases of the Leased Real Property or granted any licenses or occupancy rights with respect to the Leased Real Property. (iv) Schedule 4.8(c)(iv) hereto contains a true, correct and complete list of all security deposits in excess of $5,000 held by the lessors under the Leases. -34- (v) The Company and its subsidiaries have not granted any Liens or Encumbrances (other than Permitted Liens) on the Leased Real Property, including without limitation, leasehold mortgages of the Leased Real Property. (vi) The use and occupancy of the Leased Real Property is in compliance, in all material respects, with all applicable laws, regulations, statutes, ordinances, judgments, decrees or orders including without limitation, those governing zoning, subdivision, land development, erosion and drainage control, sewage collection and disposal, use, occupancy, building, fire, safety and environmental matters. Except as set forth in Schedule 4.8(c)(vi), the Seller, the Company and its subsidiaries have not received any notice from any governmental entity advising of a violation of any applicable building code, environmental, zoning, subdivision, land development or land use laws, regulations or ordinances or any other applicable local, state or Federal laws, regulations or ordinances affecting the Leased Real Property which violation would reasonably be expected to have a material adverse impact on the use, occupancy or operation of such Leased Real Property. (vii) The Seller, the Company and its subsidiaries have no knowledge or have not received any notice of any existing or proposed assessments for public improvements imposed or to be imposed upon the Leased Real Property. (viii) The Seller has heretofore delivered or made available to the Purchaser true, correct and complete copies -35- of all material permits, approvals, licenses and certificates which are required for the present use and occupancy of the Leased Real Property to the extent that such are in the possession of the Seller, the Company or any of its subsidiaries. (ix) Schedule 4.8(c)(ix) hereto contains a list of all material service, maintenance and construction contracts relating to the Leased Real Property, true and correct copies of which have been delivered or made available to the Purchaser by the Seller to the extent that such are in the possession of the Seller, the Company or any of its subsidiaries. (x) Except as set forth in Schedule 4.8(c)(x), the Seller, the Company and its subsidiaries do not use, treat, store or dispose of, or have not permitted any other party to use, treat, store or dispose of, whether temporarily or permanently, any Hazardous Materials at, on or beneath the Leased Real Property in violation of any Federal, state or local law, regulation or ordinance. Except as set forth in Schedule 4.8(c)(x), the Seller, the Company and its subsidiaries have no knowledge of the presence, use, treatment, storage, release or disposal of any Hazardous Materials at, on or beneath the Leased Real Property which has created or might reasonably be expected to create any liability of owners or occupants of the Leased Real Property under any Federal, state or local law or regulation or which would require remediation or reporting to a governmental agency in either case which would reasonably be expected to have a material adverse impact on the use, occupancy or operation of -36- such Leased Real Property. Except as set forth in Schedule 4.8(c)(x), to the knowledge of the Seller, the Company and its subsidiaries, no asbestos or PCBs are contained in or stored on the Leased Real Property and there are no storage tanks for petroleum or any other Hazardous Materials located in, on or under the Leased Real Property. (d) Other Property. Each of the Company and its -------------- subsidiaries has good and valid title to all material personal property reflected as owned by such Person in the 1993 Consolidated Annual Statements and that acquired in the normal and ordinary course of business since December 31, 1993, except for property disposed of in the normal and ordinary course of business since December 31, 1993, free and clear of all Liens or Encumbrances except for (i) Liens or Encumbrances listed on Schedule 4.8(d) or (ii) Permitted Liens. Schedule 4.8(d)(i) contains a schedule of all equipment, vehicles and other tangible personal property of the Company and its subsidiaries having an individual value of $10,000 or more. The Company and its subsidiaries do not have any leasehold or other such interest in any material tangible personal property which require annual payments in excess of $10,000 in any year except as reflected in Schedule 4.8(d)(i). (e) Intangible Property. The Company owns or ------------------- exclusively holds all rights to, free and clear of all liens, claims or restrictions, the Marks listed on Schedule 4.8(e). The Company's subsidiaries do not own or have rights to any Marks. -37- The Company has not received any notice with respect to any alleged infringement or unlawful use of any trademark, service mark, trade name, copyright or other intangible property right owned or alleged to be owned by others. 4.9. Events Since December 31, 1993. Except as ------------------------------ required or permitted by this Agreement or disclosed in the 1993 Consolidated Annual Statement or in Schedule 4.9, since December 31, 1993 there has not been: (a) any change in the business and accounting policies or practices of the Company or its subsidiaries, including, without limitation, underwriting, the calculation and establishment of reserves and other valuation methods, investment or claims adjustment policies and practices or change in any activity which (i) has had the effect of accelerating the recording and billing of premiums or accounts receivable or retarding the payment of expenses in connection with any accounts or business of the Company and its subsidiaries or (ii) has had the effect of altering, modifying or changing the historic financial or accounting practices or policies of the Company and its subsidiaries; (b) any damage, destruction or loss (whether or not covered by insurance) which has had a Material Adverse Effect; (c) any direct or indirect redemption or other acquisition by the Company or any of its subsidiaries of any shares of capital stock of the Company or its subsidiaries of any -38- class, or any declaration, setting aside or payment of any dividend or other distribution in respect of any class of capital stock of the Company or its subsidiaries. (d) any bonus, stay-put, employment, termination, consultation, incentive or deferred compensation agreement between the Company or its subsidiaries and any of its Affiliates, directors, officers or other employees or consultants of the Company or its subsidiaries; (e) any indebtedness incurred by the Company or any of its subsidiaries for borrowed money or any commitment to borrow money entered into or any guarantee given by the Company or any of its subsidiaries; (f) any amendments to the articles of incorporation, bylaws or other charter or organizational document of the Company or any of its subsidiaries, including any merger with or into, or consolidation with any Person; (g) any change in the business, operations or financial condition of the Company or its subsidiaries which has had a Material Adverse Effect; (h) any sale, lease, abandonment or other disposition by the Company or any subsidiary of any material interest in property, other than in the ordinary course of business; (i) any general increase in salaries payable to employees, any change in the employment terms or conditions or terminations of executive or management employees, or any increase in the compensation payable or to become payable by the -39- Company or any of its subsidiaries to any officer, or other managing employee (other than under the terms of existing employment agreements); (j) the creation of any Liens or Encumbrances (other than Permitted Liens) in all or any material portion of the assets, properties or rights of the Company or its subsidiaries; (k) any single capital expenditure in excess of $25,000 made by the Company and its subsidiaries; (l) any amendment, modification, alteration or termination of any contract, agreement or license to which the Company or a subsidiary is a party, which would result in or have a Material Adverse Effect; or (m) any waiver of any rights of material value or any cancellation of any material claims, debts or accounts receivable, other than in the ordinary course of business, owing to the Company and its subsidiaries. 4.10. Insurance Claims and Assessments. Except -------------------------------- as set forth in Schedule 4.10 (which amounts have been accrued as a liability of the Company), no claim or assessment has been received by the Company or any Insurance Subsidiary from (i) any state insurance guaranty association in connection with that association's insolvency or other similar fund or (ii) any coastal reinsurance pool, fair plan, assigned risk plan or other residual market mechanisms, which claim or assessment is outstanding and remains unrecorded. -40- 4.11. Judgments, Decrees and Orders in Restraint ------------------------------------------ of Business. Except as set forth in Schedule 4.11, the Company - ----------- and its subsidiaries are not a party to or subject to any judgment or decree or order entered in any suit, arbitration or proceeding brought by a governmental agency or, to the knowledge of the Seller or the Company, by any other Person enjoining or restricting the Company or its subsidiaries in respect of any (a) business practice, (b) the acquisition of any property or (c) the conduct of business in any area, including any regulatory restrictions on writing insurance. 4.12. Litigation and Proceedings. Except as set -------------------------- forth in Schedule 4.12, there are no actions, suits, arbitrations, investigations or legal, administrative or other proceedings pending or, to the knowledge of the Seller or the Company, threatened against the Company or any of its subsidiaries, at law or in equity or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, other than claims for benefits and other amounts payable under, and within the limits of, policies of insurance issued by the Company and its subsidiaries and other than interest, court costs and attorney fees in connection therewith. There is no material default on the part of the Company or any of its subsidiaries with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitration, governmental department, commission, bureau, board, agency or instrumentality. -41- 4.13. Permits, Licenses and Franchises. Except as -------------------------------- set forth in Schedule 4.13, the Company and each of its subsidiaries has all permits, licenses, franchises and other authorizations necessary to, and has complied in all material respects with all laws applicable to, the conduct of its business and operations in the manner and in the areas in which such business and operations are presently being conducted, and all such permits, licenses, franchises and authorizations are in full force and effect and, to the knowledge of the Seller or the Company, valid. Each Insurance Subsidiary has been duly authorized by the relevant state insurance regulatory authorities to write the insurance that it is currently writing in the respective states in which it does business. The Company and its subsidiaries have not engaged in any activity which would cause revocation or suspension of any such permit, license, franchise or authorization, and no action or proceeding looking to or contemplating the revocation or suspension of any thereof is pending or, to the knowledge of the Seller or the Company, threatened. 4.14. Relationships With Affiliates, Officers and -------------------------------------------- Directors. Except as disclosed in Schedule 4.14 or as expressly - --------- provided for or permitted by this Agreement, Armco and the Seller have not, and no Affiliate (other than the Company and its subsidiaries), officer or director of Armco, the Seller or the Company has, entered into any contract or agreement with the Company or any of its subsidiaries in excess of $10,000, which will be binding on the Company or any of its subsidiaries follow- -42- ing the Closing, except for contracts or agreements that are cancelable at will by the Company or its subsidiary without penalty. 4.15. Labor Disputes; Compliance. No general -------------------------- work stoppage or other similar labor dispute in respect of the Company or any of its subsidiaries is pending or, to the knowledge of the Seller or the Company, threatened and no application for certification of a collective bargaining agent is pending or, to the knowledge of the Seller or the Company, threatened. No employees are covered by a collective bargaining agreement with the Company or its subsidiaries. The Company and its subsidiaries have complied in all material respects with all laws applicable to it relating to the employment and safety of labor, including provisions relating to wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, and all applicable occupational safety and health acts, laws and regulations. Other than as reflected in the Financial Statements or as set forth in Schedule 4.15, the Company and its subsidiaries are not liable for any arrears in wages or any taxes or penalties for failure to comply with any of the foregoing. 4.16. Other Sale Arrangement. Armco, the Seller ---------------------- and the Company are not obligated or liable, contingently or otherwise, for or in respect of negotiations, letters of intent or commitments for the sale of all, substantially all or a material portion of the assets of the Company and its subsidiaries or the -43- sale of the Shares of the Company to any Person other than the Purchaser. 4.17. Employee Benefit Plans. ---------------------- (a) (1) Other than the plans and programs listed and described in Schedule 4.17(a) (hereinafter referred to as the "Company Employee Benefit Plans"), (A) the Company and its subsidiaries do not sponsor or maintain and are not under any present or future obligation to contribute to any employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("Employee Benefit Plan"), (B) no employee or former employee of the Company or its subsidiaries currently participates in any Employee Benefit Plan sponsored or maintained by or to which contributions are, or in the future are to be, made by the Company or its subsidiaries, the Seller or any Affiliate of the Seller, and (C) there are no other deferred compensation, bonus, stock option, stock purchase and other employee benefit or fringe benefit plans or arrangements of any kind or nature sponsored, maintained or contributed to by the Company or any of its subsidiaries or which the Company or any subsidiary is under a present or future obligation to sponsor, maintain or contribute to or in which any employee of the Company or any subsidiary is a participant. (2) Neither the Company nor any of its subsidiaries is or has been a sponsor of, a contributor to, or under an obligation to contribute to any multiemployer plan -44- within the meaning of Section 3(37) of ERISA. Except as set forth in Schedule 4.17(a)(2), no event or events have occurred that have resulted in or will result in partial or complete withdrawal by the Seller or any of its Affiliates from a multiemployer plan. (b) (1) To the extent applicable to a Company Employee Benefit Plan, or other benefit plan maintained by or to which contributions have been made by the Seller or its Affiliates ("Affiliate Plan"), there does not exist any accumulated funding deficiency or underpayment of a required installment within the meaning of Section 412 of the Code or Section 302 of ERISA; nor has there been issued a waiver or variance of the minimum funding standards imposed by the Code with respect to any such plan; nor has any lien been created under Section 302(f) of ERISA or security been required under Section 307 of ERISA; nor are there any excise taxes due or hereafter to become due under Section 4971 of the Code with respect to the funding of any such plan for any plan year or other fiscal period ending on or before the Closing Date. (2) All obligations to contribute or pay any expenses with respect to any Company Employee Benefit Plan for any plan year or other fiscal period ending on or before the Closing Date have been paid or accrued. (3) Each Company Employee Benefit Plan that is intended to be qualified under Section 401(a) or 403(a) of the Code has received a favorable determination letter from the -45- Internal Revenue Service to that effect after 1985 and will remain so qualified from and after the date of such determination letter if amended on or before December 31, 1994 to include all required provisions. (4) Each Company Employee Benefit Plan and related trust agreement or annuity contract (or any other funding instrument) complies currently, and has complied in the past on a timely basis, in all material respects, with all applicable Federal, state, local and/or other governmental laws and ordinances, orders, rules and regulations including the requirements of ERISA and the Code, and has been administered in accordance with its terms. Neither the Company nor any Affiliate has received any written claim or notice that any such plan is not in compliance. (5) The Company and each other employer which is a sponsor of or makes contributions to a Company Employee Benefit Plan (or has been a sponsor of or has made contributions to such plan) is in compliance in all material respects with the requirements of all applicable Federal, state, local and/or other governmental laws and ordinances, orders, rules and regulations applicable to such plan including the Code and ERISA. (6) Except as set forth in Schedule 4.17(b)(6), with respect to each Company Employee Benefit Plan and Affiliate Plan subject to Title IV of ERISA, (A) there has not occurred any "reportable event" within the meaning of Section -46- 4043(b) of ERISA, or the regulations thereunder, with respect to which the 30-day notice requirement has not been waived under applicable regulations, and (B) the PBGC has not instituted or threatened a proceeding to terminate same. All PBGC premiums due on or before the Closing from the Company or any of its subsidiaries have been paid in full, including late fees, interest and penalties, if and to the extent applicable. (7) There have been no amendments to any defined benefit pension plan (as defined in Section 414(j) of the Code) listed in Schedule 4.17(b)(7) hereto which would increase the total present value of vested and nonvested benefits thereunder since the valuation date set forth in the most recent Schedule B relating thereto that has been filed with the Internal Revenue Service, a copy of which has been furnished to the Purchaser (the "Schedule B"). There has been no material adverse change in the assets, liabilities or financial position of any such plan since the valuation date set forth in the Schedule B. (8) Neither the Company nor any of its subsidiaries has any liability under Section 4062, 4063 or 4064 of ERISA. (9) Except as set forth in the Medical Plan Summary Plan Description dated 6-89, with Summaries of Material Modifications dated 11- 89, 1-91, 6-92, 3-93 and 4-93, the Dental Plan Summary Plan Description dated 6-89, with Summaries of Material Modifications dated 11-89, 12-90, 3- 93 and 4-93, and the Northwestern National Insurance Group Executive Life Insurance -47- Plan, a true and complete copy of each of which has been delivered to the Purchaser, the Company and its subsidiaries have no obligation and have made no promise or undertaking, written or oral, to pay any part of the cost of the medical, dental, death or other benefits for their employees after they retire. 4.18. Questionable Payments. To the knowledge of --------------------- the Seller or the Company, neither the Company nor any of its subsidiaries, directors, officers, agents, employees or other persons acting on behalf of the Company or any subsidiary has used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, or made any direct or indirect unlawful payments to government officials or employees from corporate funds, or established or maintained any unlawful funds. 4.19. Consents. Except as set forth in Schedule -------- 4.19, no consent, authorization, order or approval of, or filing or registration with, any governmental commission, board or other regulatory body will be required for or in connection with the execution and delivery of this Agreement by the Seller or the consummation by the Seller of the transaction contemplated hereby, other than (i) filings under the insurance holding company statutes, regulations and practices in states and jurisdictions in which the Insurance Subsidiaries are admitted to write insurance; (ii) notifications and filings under the HSR Act, and (iii) filings made with governmental agencies such as -48- the Securities and Exchange Commission as part of the ongoing public disclosure obligations of Armco or the Seller. Except as set forth in Schedule 4.19(a), no consent of any other party to a mortgage, note, lease, franchise, agreement, license or permit of the Company or any of its subsidiaries will be required for or in connection with the execution and delivery of this Agreement by the Seller or the consummation by the Seller of the transactions contemplated hereby other than the release of the Existing Pledge. 4.20. Contracts and Binding Commitments. -------------------------------- (a) Schedule 4.20 contains a list of all of the following contracts, arrangements or agreements (true and complete copies or, if none exist, written descriptions or identification of which have been made available to the Purchaser) to which the Company or any subsidiary is a party or by which any of the assets or properties of the Company or any subsidiary are bound and which are material to the operations of the Company and its subsidiaries (such listed contracts herein referred to as the "Contracts"), as such Contracts may have been amended, modified or supplemented to the date hereof: (i) all employment, bonus, incentive or deferred compensation, termination, stayput, agency, brokerage, consultation or representation Contracts or similarly binding arrangements of any type (including without limitation loans or advances) (where the potential liability of the Company or its subsidiaries exceeds $10,000) with any current or former em- -49- ployee, managing general agent, agent (other than insurance agents), consultant, representative, officer or director of the Company or its subsidiaries, and to the extent not set forth in the Contract, the name, position and rate of compensation of each such Person and the expiration date of each such Contract, as well as all leave, layoff or severance practices and policies of the Company and its subsidiaries; (ii) all Contracts or similarly binding arrangements with any Person containing any provision or covenant limiting the ability of the Company or any of its subsidiaries to engage in any line of business or compete with any Person or limiting the ability of any Person to compete with the Company and its subsidiaries following the Closing; (iii) all partnership, joint venture or profit sharing Contracts with any Person excluding contingent commission or other similar arrangements with agents and brokers in the ordinary course of business; (iv) all Contracts representing obligations for borrowed money or the direct or indirect guarantee or securing of any obligation for, or Contract to service the repayment of, borrowed money or any other liability in respect of indebtedness for borrowed money of any other Person, including without limitation, any Contract relating to (A) the maintenance of compensating balances that are not terminable by the Company without penalty upon not more than 30 days' notice, (B) any lines of credit, (C) the payment for property, products or services -50- which are not conveyed, delivered or rendered, (D) any obligation to keep- well, make-whole or maintain working capital or earnings levels or perform similar requirements or (E) the guarantee of any lease or other similar periodic payments to be made by any other Person other than any such Contract for an amount less than $50,000; (v) all Contracts relating to the future acquisition or disposition of any investment in any Person or of any interest in any business enterprise (other than the disposition or acquisition of portfolio securities in the ordinary course of business) and all Contracts requiring the Company or any subsidiary to purchase any security having a value individually, or in the aggregate of $10,000; (vi) all reinsurance pools pursuant to which the Company or any subsidiary has assumed reinsurance risks, and all assigned risk plans, fair plans, workers compensation pools or other residual insurance market mechanism in which the Company or any subsidiary is participating; (vii) each standard form of insurance agent agreement; (viii) all Contracts relating to computer software licensing or data processing services representing nonterminable future liabilities in excess of $10,000; (ix) all Contracts between the Company or any of its subsidiaries and Armco, the Seller or their Affiliates; -51- (x) all Contracts relating to licenses of trademarks, trade names, service marks or other similar property rights. (xi) all other contracts material to the operations of the business of the Company and its subsidiaries; and (xii) any power of attorney which is presently effective and outstanding other than the powers of attorney which exist as a matter of law or which have been granted pursuant to requirements of applicable state insurance regulatory authorities. (b) The Company and its subsidiaries are not in material breach of, or default under any of the Contracts and, to the knowledge of the Seller and the Company, no other party to any Contract is claiming that the Company or its subsidiaries are in material breach or default. The sale of the Shares pursuant to this Agreement will not result in the termination of any of the Contracts under the express terms thereof, will not require further consents of any party thereto (other than those that will have been obtained on or before the Closing Date) and will not bring into operation any other provision thereof nor result in a breach or default thereunder. 4.21. Threats of Cancellation. Except as disclosed ------------------------ in Schedule 4.21, since January 1, 1993 through the date hereof, no policyholder, or Persons writing or selling insurance business, which in either case individually or in the aggregate accounted -52- for five percent or more of the premium income of the Company and its Insurance Subsidiaries for the year ended December 31, 1993 has terminated or, to the knowledge the Seller or the Company, threatened to terminate its relationship with the Company or its Insurance Subsidiaries. 4.22. Reinsurance. Schedule 4.22 lists the ----------- reinsurance treaties, agreements or arrangements to which the Company or any Insurance Subsidiary is a party. There exists no financial reinsurance which has the effect of increasing the consolidated (combined) statutory capital and surplus of the Company and its subsidiaries. Receivables due to or payable by the Company or its Insurance Subsidiaries pursuant to such reinsurance treaties, agreements and arrangements have been properly recorded in the books and records of the Company and its Insurance Subsidiaries and reflected in 1993 Annual Statements of the appropriate Insurance Subsidiaries and the GAAP Financial Statements of the Company. No notice of intended cancellation has been received by the Company or its Insurance Subsidiaries from any reinsurer and no reinsurer has a right to retroactively experience rate or otherwise retroactively require additional premiums except as disclosed in Schedule 4.22(a). 4.23. Operations Insurance. -------------------- (a) Schedule 4.23 contains a true and complete list, as of the date hereof, of all material liability, property, workers compensation, directors and officers liability, and other -53- similar insurance contracts that insure the business, operations or affairs of the Company and its subsidiaries and that (i) have been issued to the Company or its subsidiaries (including without limitation the names and addresses of the insurers, the expiration dates thereof and the annual premiums and payment terms thereof) or (ii) are held by Armco, the Seller or by any Affiliate of Armco or the Seller for the benefit of the Company or its subsidiaries and that will not continue to be applicable to the Company or its subsidiaries following the Closing. All such insurance referred to in (i) above is in full force and effect as of the Closing Date. (b) The Company and its subsidiaries have not failed to give any material notice or present any material claim under any insurance policy or surety bond in due and timely fashion. The Seller has delivered or made available to the Purchaser the Company's most recently available information on: (i) accidents, casualties or damages occurring on or to the properties or assets of the Company and its subsidiaries; and (ii) claims by the Company and its subsidiaries for damages, reimbursement of losses, contribution or indemnification under any insurance policy and settlements or negotiations or settlements relating thereto. The Seller has provided or made available to the Purchaser all workers' compensation ratings and unemployment insurance ratings and contributions of the Company and its subsidiaries with respect to the employees. -54- 4.24. Taxes. ----- (a) Except as set forth in Schedule 4.24, all Tax Returns, other than those which are not material to the Company and its subsidiaries, required to be filed in respect of the Company and its subsidiaries either individually or on a consolidated basis that are due (after giving effect to any extensions) on or prior to the Closing Date have been (or will have been by the Closing Date) filed in accordance with all applicable laws. All such Tax Returns set forth with reasonable accuracy all material items required to be set forth therein. The Company and its subsidiaries have (or will have by the Closing Date) paid, accrued or otherwise adequately reserved liabilities for the payment of all Taxes, whether or not yet due and payable and whether or not disputed, in respect of the periods covered by Tax Returns which are due on or before the Closing Date, and have (or will have by the Closing Date) accrued or otherwise adequately reserved liabilities for the payment of all Taxes with respect to periods up to and including the Closing Date, for which Tax Returns have not yet been filed. As of the Closing Date, the Company and its subsidiaries will not have any material liability for any Taxes in excess of the amounts paid or accrued or the reserves established including any material Tax liability resulting from the Company and its subsidiaries being a member of or leaving the Consolidated Group. (b) The Company and its subsidiaries and the Consolidated Group have made all withholdings of Taxes required -55- to be made under all applicable Federal, state, local and foreign tax laws and regulations, and such withholdings have either been paid to the respective governmental agencies or set aside in accounts for such purpose or accrued and entered upon the books of the Company and its subsidiaries. (c) There have been delivered to the Purchaser true and complete copies of all those portions of income and franchise Tax Returns for taxable years 1990, 1991 and 1992 (including the relevant portions of all consolidated, combined and unitary tax returns and reports) with respect to the Company and its subsidiaries. The 1993 Tax Returns (or relevant portions thereof) will be delivered to the Purchaser after they are filed. (d) No deficiencies, adjustments or changes in assessments for any Taxes in respect of the Company or its subsidiaries have been assessed or, to the knowledge of Armco or the Seller, proposed or asserted against the Company, its subsidiaries or the Consolidated Group. The statute of limitations for assessment of Federal income tax against the Consolidated Group has expired for all taxable years ending on or before December 31, 1988. Schedule 4.24(d) sets forth for each taxable year ending after December 31, 1988 the current status of any examination being conducted by the Internal Revenue Service or any other taxing authority relating to the Company or the Consolidated Group. There are no deficiencies in Federal income Tax outstanding against any member of the Consolidated Group. Except as described on Schedule 4.24(d), there is no action, suit, proceed- -56- ing, audit, investigation or claim pending, or to the knowledge of the Seller, threatened in respect of any Taxes for which the Company and its subsidiaries may become liable in its own right or as a member of the Consolidated Group, or as a transferee of the assets of, or successor to, any entity. (e) Except as set forth in Schedule 4.24(e), neither the Seller, the Company, nor any other member of the Consolidated Group has executed or filed with the Internal Revenue Service or any other taxing authority any agreement or other document extending the period of assessment or collection of any Taxes for which the Company and its subsidiaries may be liable either directly or as a member of the Consolidated Group. (f) Except as set forth in Schedule 4.24(f), the Insurance Subsidiaries qualify as insurance companies under the Code and neither Armco, the Seller, the Company nor any Insurance Subsidiary has received any notice or other communication relating to or affecting such qualification of the Insurance Subsidiaries as insurance companies. (g) Except as set forth in Schedule 4.24(g) which attaches copies thereof, the Company and its subsidiaries are not a party to, is bound by, or has any obligation under any tax sharing or similar agreement. (h) The Company and its subsidiaries are members of an affiliated group that is eligible to file a consolidated return with the Seller and Armco for Federal income tax purposes. No other entity is or has since the date set forth in Schedule -57- 4.24(h) been eligible to file a consolidated return with the Company and its subsidiaries, and neither the Company nor its subsidiaries had filed or consented to the filing of any Federal or state consolidated return with any entity not a member of the existing Consolidated Group. (i) The aggregate amount of consolidated net operating losses within the meaning of Section 172 of the Code and Treas. Reg. Section 1.1502-21(f), of the Consolidated Group apportioned to the Company and its subsidiaries for all tax years ending on or prior to December 31, 1992, pursuant to Treas. Reg. Section 1.1502-79(a) is set forth in Schedule 4.24(i). Armco and the Seller, not later than September 30, 1994, shall update Schedule 4.24(i) to show the amount of consolidated net operating losses of the Consolidated Group apportioned to the Company and its subsidiaries for the taxable year ended December 31, 1993, pursuant to Treas. Reg. Section 1.1502-79(a). The apportioned net operating losses shown on Schedule 4.24(i) for all taxable years ending on or before December 31, 1993 shall be referred to herein as the "Represented Operating Losses". (j) Neither the Company nor any subsidiary is a partner in any partnership. (k) Except as set forth in Schedule 4.24(k), no adjustment to taxable income by reason of a change of accounting method is required in respect of any taxable year of the Company and its subsidiaries as to which the applicable statute of limitations has not yet expired. -58- (l) None of Armco, the Seller, the Company or its subsidiaries has filed a consent pursuant to Section 341(f) of the Code, or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Seller, the Company or its subsidiaries. 4.25. Accounts; Directors and Officers. Schedule -------------------------------- 4.25 sets forth a list of all accounts holding assets of the Company and its subsidiaries together with the names and address of the applicable financial institution or other depository, the account number and the names of all persons authorized to draw thereon or who have access thereto and all safe deposit boxes of the Company and its subsidiaries. Attached as Schedule 4.25(a) is a true and complete list, as of the date of this Agreement, showing the names of all of the officers and directors of the Company and its subsidiaries. 4.26. Compliance with Applicable Law. Except as ------------------------------ set forth in Schedule 4.26, the Company and its subsidiaries are presently complying in all material respects, in respect of its business, with all applicable laws (whether statutory or otherwise), rules, regulations, orders, ordinances, judgments, decrees, orders, writs and injunctions of all governmental authorities (Federal, state, local, foreign or otherwise) and the Seller, the Company and its subsidiaries have not received notification from any governmental authority of any asserted -59- present or past failure to so comply which has not been resolved or otherwise settled. 4.27. Conflict of Interest. To the knowledge of -------------------- the Seller and the Company, no person who is a director or officer of the Company or its subsidiaries nor any person who is a member of the immediate family of such director or officer, (i) has any direct or indirect material interest in any entity that does business with the Company or its subsidiaries, or (ii) has any contractual relationship with the Company or its subsidiaries other than as an employee (other than in the ordinary course). 4.28. Broker's, Finder's or Similar Fees. Except for ---------------------------------- the fee payable by Armco and the Seller to The Chase Manhattan Bank, N.A., there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with Armco or the Seller, or any action taken by Armco or the Seller. The Purchaser, the Company and its subsidiaries shall have no obligation or responsibility for the payment of said fee. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 5. Representations and Warranties of the ------------------------------------- Purchaser. The Purchaser represents and warrants to Armco and - --------- the Seller as follows: -60- 5.1. Due Incorporation and Authority. The ------------------------------- Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana, and has all requisite power and authority to own, lease and operate its assets and business and to carry on its business as now being and as heretofore conducted. The Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and each other agreement required to be executed and delivered by the Purchaser pursuant hereto, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by the Purchaser of this Agreement and each other agreement required to be executed and delivered by the Purchaser pursuant hereto, and the consummation by the Purchaser of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of the Purchaser are necessary to authorize the execution, delivery and performance by the Purchaser of this Agreement and each of the other agreements contemplated by this Agreement, or the consummation of the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by the Purchaser and (assuming this Agreement is a valid and binding obligation of the Seller and Armco) constitutes a valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms, except that (i) such enforceability may be subject to -61- bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, rehabilitation, liquidation, conservatorship, receivership or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 5.2. Consents. No consent, authorization, order -------- or approval of, or filing or registration with, any governmental commission, board or other regulatory body will be required for or in connection with the execution and delivery of this Agreement by the Purchaser or the consummation by the Purchaser of the transactions contemplated herein, except for (i) filings under the insurance holding company statutes, regulations and practices in states and jurisdictions in which the Insurance Subsidiaries are admitted to write insurance; and (ii) notifications and filings under the HSR Act. 5.3. No Breach. Except as set forth in --------- Schedule 5.3 the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby in accordance with the terms hereof will not (a) violate, conflict with or result in the breach of any provision of the Articles of Incorporation or Bylaws of the Purchaser; (b) (i) require any consent, approval or notice under, (ii) violate, conflict with or result in the breach of any of the terms of, (iii) result in a -62- material modification of the effect of, (iv) constitute a default under or (v) give rise to any right of termination, cancellation or acceleration under, any contract or other agreement to which the Purchaser is a party or by or to which it or any of its assets may be bound or subject, the impact of which, individually or in the aggregate, would be materially adverse to the business, operations or financial condition of the Purchaser; (c) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory agency binding upon the Purchaser or upon the securities, assets or business of the Purchaser, the violation of which would have a material adverse effect on the business, operations or financial condition of the Purchaser; or (d) to the knowledge of the Purchaser, violate any statute, law, rule or regulation of any jurisdiction or governmental or regulatory agency as relates to the Purchaser or to the securities, assets or business of the Purchaser, which violation would have a material adverse effect on the business, operations or financial condition of the Purchaser. 5.4. Actions and Proceedings. To the knowledge of the Purchaser, except as set forth in Schedule 5.4 and other than outstanding orders, judgments, injunctions, awards or decrees of any court, governmental or regulatory agency or arbitration tribunal relating to insurance claims made in connection with policies of insurance underwritten or assumed (as in the case of reinsurance) by the Purchaser in the ordinary course of business, there are no outstanding orders, judgments, injunctions, awards -63- or decrees of any court, governmental or regulatory agency or arbitration tribunal against or involving the Purchaser or against or involving any of its present directors, officers or employees in their capacities as such that individually or in the aggregate, are likely to prevent the Purchaser from consummating the transactions contemplated hereby in accordance with the terms hereof, or could affect the validity or enforceability of this Agreement. To the knowledge of the Purchaser, except as disclosed on Schedule 5.4(a), there are no actions, suits or claims or legal, administrative, regulatory or arbitration proceedings or investigations pending or threatened against or involving the Purchaser or any of its present directors or officers, in their capacities as such, or its assets that, individually or in the aggregate, are likely to prevent the Purchaser from consummating the transactions contemplated hereby in accordance with the terms hereof, or could affect the validity or enforceability of this Agreement. 5.5. Broker's, Finder's or Similar Fees. There ---------------------------------- are no brokerage commissions, finder's fees or similar fees or commissions payable in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Purchaser, or any action taken by the Purchaser. 5.6. Purchase for Investment. ----------------------- (a) Armco and the Seller have provided the Purchaser and its financial advisors, legal counsel and independent -64- auditors and actuaries with access to the books, records, facilities and personnel of the Company and its subsidiaries in order for the Purchaser to investigate the business, affairs and properties of the Company and its subsidiaries to make an informed investment decision to enter into this Agreement and to purchase the Shares. Such access and investigation shall not derogate from or in any way affect the rights of Purchaser with respect to a breach of the representations, warranties and covenants made by Armco or the Seller to the Purchaser in this Agreement. (b) None of Armco, the Seller or any agent or other party acting on behalf of either thereof has made any representation or warranty to the Purchaser with respect to the prospects of the Company or any of its subsidiaries or their respective businesses or the markets in which any of them operates. (c) The Purchaser represents that it is acquiring the Shares for its own account for investment and not with a view to the resale or distribution and will not sell or transfer such Shares in violation of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. ARTICLE VI. CONDUCT PENDING CLOSING DATE 6.1. Operations in the Ordinary Course. Subsequent to --------------------------------- the date of this Agreement and prior to the Closing Date and except as herein provided, the Seller agrees that it shall cause the Company and its subsidiaries to carry on its business -65- diligently and only in the ordinary course and in a normal manner consistent with past practice. The Seller shall maintain the corporate existence and powers of the Company and its subsidiaries and shall use its reasonable best efforts, and shall cause the Company and its subsidiaries to use their reasonable best efforts, to (i) preserve intact the business organization of the Company and its subsidiaries; (ii) preserve the material relationships of the Company and its subsidiaries with their agents, customers and others having business relations with them (except insofar as such relationships are terminated in the ordinary course of business); and (iii) maintain all of the material properties of the Company and its subsidiaries in customary repair, order and condition. Prior to and including the Closing Date and except as otherwise provided in this Agreement, the Seller shall cause the Company and its subsidiaries to maintain insurance coverages and their books, accounts and records in the usual manner on a basis consistent with prior years and to comply in all material respects with all laws, ordinances and regulations of governmental authorities applicable to the Company and its subsidiaries. 6.2. Restrictions. Except as permitted or ----------- required by this Agreement, prior to the Closing Date and without the prior written consent of the Purchaser, the Seller agrees that it shall not cause (nor will it permit) the Company or any of its subsidiaries to: -66- (a) change its business and accounting policies or practices, including without limitation, underwriting, the calculation and establishment of reserves and other valuation methods, and investment or claims adjustment policies and practices; (b) incur any indebtedness for borrowed money or any other liability or obligation (absolute or contingent) other than in the ordinary and usual course of business or grant any Liens or Encumbrances (other than Permitted Liens) in any asset of the Company or its subsidiaries; (c) grant or promise to grant to any of its officers, directors, managerial personnel or other employees or agents, any new or increased salary, commission, fee or other benefit or enter into any bonus, stayput, employment, termination, consultation, incentive or deferred compensation agreement with any of its employees, directors, officers, consultants or other Affiliates; (d) hire any new employees; (e) appoint any new agents except in the ordinary course of business; (f) authorize aggregate capital expenditures in excess of $250,000; (g) authorize, issue or sell any security of the Company or any of its subsidiaries, grant any option, warrant or any other right to purchase or convert any obligation into any -67- security of the Company or any of its subsidiaries except in accordance with this Agreement; (h) directly or indirectly redeem or acquire any shares of capital stock of the Company or any of its subsidiaries or declare or pay any dividend on, or make any other distribution in respect of any class of capital stock of the Company or its subsidiaries; (i) amend the articles of incorporation or bylaws of the Company or its subsidiaries or enter into any contract to merge or consolidate with any other Person, acquire all or substantially all of the assets of any other Person, or sell or otherwise dispose of, or contract to sell or otherwise dispose of, any material part of its assets; (j) enter into any new leases for real property; (k) enter into any contract which would be required to be listed pursuant to Section 4.20 of this Agreement if such contract was in effect on the date this Agreement was signed or enter into any other material contract; (l) forfeit, abandon, modify, waive, terminate or otherwise change rights, duties or obligations under any material Contracts other than in the ordinary course of business; (m) enter into any transaction with Armco, the Seller or its Affiliates; or (n) make any investments in noninvestment grade securities, equity securities or nonmarketable securities. -68- 6.3. Related Matters. The Seller shall report the fact of --------------- the resignation of any managerial or executive employee, or material agent or consultant of the Company or its subsidiaries to the Purchaser, within three Business Days of the Company or its subsidiaries receiving notice of any such resignation. 6.4. Sale of Portfolio Securities. During the period --------------------------- commencing with the date of this Agreement and ending on the Closing Date, the Seller shall not cause or permit the Company or any of its subsidiaries to sell securities from its portfolio except as may be required to generate cash to satisfy obligations as they become due. The Seller agrees that it and the Company will consult with the Purchaser concerning the investments in securities by the Company and its subsidiaries pending the Closing. The Seller agrees to cause the Company and its subsidiaries to sell securities in their respective portfolios and reinvest the proceeds of such sales as the Purchaser shall from time to time direct during the period of approximately 30 days prior to the Closing Date. Such investments shall be limited to investment grade securities. Gains or losses resulting from, and any expenses of, the transactions consummated at the direction of the Purchaser shall not be included in the calculation of the Closing Statutory Surplus. Any sales and reinvestments pursuant to this Section shall comply with applicable insurance company laws and regulations and shall be in accordance with good industry practice. -69- 6.5. Regulatory Filings. Each party shall duly make all ------------------ regulatory filings required to be made with respect to this Agreement and the transactions contemplated hereby, including filings under the HSR Act, and shall use its reasonable best efforts to obtain or assist to obtain all approvals of regulatory authorities and any other approvals required to carry out the transactions contemplated hereby. The Purchaser shall make its Form A or other required filings with the insurance regulatory authorities by September 30, 1994. The Seller shall promptly deliver to the Purchaser copies of all insurance regulatory reports, available to the Seller or its subsidiaries, that may be filed with respect to the Company or any of the Insurance Subsidiaries with insurance regulatory authorities. 6.6. Interim Financial Statements and Reports. --------------------------------------- (a) Through the Closing Date, the Seller shall provide to the Purchaser as promptly as practicable, but in no event later than 45 days after the end of each quarter, (i) copies of the most recent Quarterly Statements filed by each of the Insurance Subsidiaries which shall present fairly, in all material respects, the statutory financial condition as of the date presented and statutory results of operations for the quarter then ended of such Insurance Subsidiaries in conformity with Statutory Accounting Principles applied on a consistent basis, subject to normal year-end adjustments and (ii) copies of the most recent GAAP Quarterly Statements prepared by the Company which shall present fairly, in all the material respects, the -70- consolidated financial position as of the date presented and consolidated results of operations and cash flows of the Company and its subsidiaries for the quarter then ended in accordance with generally accepted accounting principles applied on a consistent basis, subject to normal year-end adjustments. (b) The Seller shall provide to the Purchaser, as promptly as practicable after receipt by the Seller or the Company, through the Closing Date (i) the management reports prepared by the independent auditors of the Company and its subsidiaries, (ii) the monthly management and financial reports prepared by the Company and its subsidiaries for internal use and (iii) all examination reports by any insurance departments. 6.7. Access to Properties, Books and Records. Prior to ---------------------------------------- the Closing Date, upon reasonable notice, the Seller shall, and shall cause the Company and its subsidiaries to, give the Purchaser and its agents, at Purchaser's expense, access at all reasonable times to the properties, books and records, employees, agents, accountants and actuaries of the Company and its subsidiaries and furnish to the Purchaser and its agents such documents, financial and operating data and other information (including, without limitation, information concerning loss reserves) with respect to the businesses and properties of the Company and its subsidiaries as the Purchaser or its agents shall from time to time reasonably request. As part of its investigation, the Purchaser, at its expense, may conduct environmental audits, for the use of the Purchaser, of the Owned Real Property -71- and certain Leased Real Property. Armco, the Seller, the Company and their employees shall cooperate and assist the Purchaser in the conduct of such environmental audits. Such inspection shall not derogate from or in any way affect the rights of the Purchaser with respect to a breach of the representations, warranties and covenants made by Armco and the Seller to the Purchaser in this Agreement. The Purchaser shall also have the right to place up to two representatives at the Company's facilities on a full-time basis prior to the Closing, at the Purchaser's expense, to observe and facilitate the transition following the signing of this Agreement. 6.8. Replacement Insurance. Armco and the Seller will --------------------- cooperate with the Purchaser in obtaining, at the Purchaser's expense, replacement insurance policies, effective as of the Closing Date, affording coverage to the Company and its subsidiaries comparable to that afforded by the policies listed in Schedule 6.8, which policies are not issued directly to the Company and its subsidiaries. ARTICLE VII. COVENANTS AND AGREEMENTS 7. Covenants and Agreements. The parties covenant and agree as follows: 7.1. Confidentiality; Return of Documents. All information provided pursuant hereto shall be subject to certain confidentiality agreements executed by the parties and all -72- documents (and copies thereof) provided to the other parties shall be promptly returned upon termination of this Agreement, and each party shall be entitled to injunctive relief to enforce the provisions of the confidentiality agreements referred to above and of this Section. 7.2. Fees and Expenses. ----------------- (a) If the transactions contemplated hereby are consummated, the parties shall each bear their respective fees and expenses. If this Agreement is terminated (1) by the Purchaser pursuant to Section 11.1(c); (2) by Armco and the Seller other than pursuant to Section 11.1(a), (b) or (e), or other than pursuant to Section 11.1(d) (if attributable to a reason other than the failure of Armco or the Seller to satisfy a condition under Article IX); or (3) pursuant to Section 11.1(d) as a result of the failure of Armco or the Seller to satisfy a condition under Article IX, the Seller shall pay to the Purchaser within 10 Business Days after receipt of the written demand from the Purchaser (i) a fee equal to $1 million and (ii) $250,000 to reimburse the Purchaser for its reasonable out-of-pocket expenses incurred in connection with the due diligence review and negotiations with respect to this Agreement and the transactions contemplated hereby. (b) If this Agreement is terminated for any reason or if the transactions contemplated hereby are not consummated on or before December 31, 1994 (unless extended by the parties), the Purchaser shall promptly pay and reimburse the -73- Company for expenses, including any payments for Taxes, incurred by the Seller, Armco, the Company or any of its subsidiaries arising out of, or by reason of, any Purchaser Reinsurance Contracts or the sale of securities as directed by the Purchaser pursuant to Section 6.4. (c) The amounts payable upon termination of this Agreement as set forth in this Section 7.2 shall be the exclusive remedy of the parties with respect to such termination and no party shall have any further monetary liability to the other parties in connection with this Agreement or the transactions contemplated thereby upon such termination. Notwithstanding the above, if this Agreement shall not have been properly terminated, a party may seek injunctive or other equitable relief to enforce the terms of this Agreement. 7.3. Company Employee Benefit Plans. ------------------------------ (a) Effective as of the Closing Date, the Company and its subsidiaries shall withdraw completely from participation in or sponsorship of all Company Employee Benefit Plans and related trusts. The Seller shall cause the Company to file and give any and all required notices to employees, governmental agencies or other Persons to effect the withdrawal of the Company and its subsidiaries from, or termination of, all Company Employee Benefit Plans as of the Closing Date. (b) Armco and the Seller shall assume all obligations and pay, satisfy or settle all claims, pursuant to the Company Employee Benefit Plans, whether arising before or after the -74- Closing Date, with respect to participants whether or not employees or former employees, including without limitation pension benefits previously accrued and medical, death, disability or other benefits being provided to retired or other former employees or other participants. Armco and the Seller shall indemnify the Purchaser, the Company and its subsidiaries for any amounts paid on or after the Closing Date by the Company or its subsidiaries in connection with any Company Employee Benefit Plan, including any benefits and any taxes, damages or expenses including attorney fees. (c) The Company and its subsidiaries shall provide reasonable assistance and information to the Seller in its administration of the Company Employee Benefit Plans. 7.4. Payment of Debts and Intercompany Receivables. If any -------------------------------------------- receivables (not including amounts under reinsurance arrangements) from Armco or its Affiliates are included in the assets of the Company and its subsidiaries, or if any payables (not including amounts under reinsurance arrangements) of the Company or its subsidiaries to Armco or its Affiliates are included in the liabilities of the Company and its subsidiaries, such receivables or payables shall be paid prior to the Closing Date unless otherwise provided by this Agreement. If such amounts cannot be calculated until the preparation of the Closing Balance Sheet, an estimate of such amount shall be paid prior to the Closing Date, with any adjustment to be paid within five -75- business days of the final determination of the Closing Balance Sheet. 7.5. Agreement Not to Compete. The parties acknowledge ------------------------ and agree that on or prior to the Closing Date, Armco, the Seller and the Purchaser will enter into the Agreement Not to Compete and for Federal income tax purposes will report such agreement as having a fair market value of $100,000. 7.6. Taxes. ----- (a) Tax Returns. The applicable income, deductions and ----------- credits of the Company and its subsidiaries for the period beginning January 1 of the year in which the Closing takes place up to and including the Closing Date (the "Short Period") will be included in the consolidated Federal income tax returns, and the consolidated state income tax returns of Armco set forth on Schedule 7.6(a) for such calendar year, and Armco shall pay any Taxes (excluding any deferred Taxes) attributable to such period. The income, deductions and credits with respect to the Company and its subsidiaries for the Short Period will be determined on the basis of the appropriate permanent records (including any deduction under Code Section 832(c)(4)), or if the portion of any item of income or deduction cannot be determined from the permanent records, in accordance with Treasury Regulations 1.1502-76(b)(4)(ii). Accordingly, the Purchaser agrees that it shall cause the Company to furnish on a timely basis to the Seller, at no cost to the Seller, such information and -76- documents as the Seller may reasonably request to enable Armco and the Seller to prepare and file its consolidated Federal and state income Tax Returns for the Short Period. Armco agrees that, subject to extensions duly obtained, it shall make timely payment of its Taxes for all taxable periods ending on or before the Closing Date. The Purchaser and the Company shall be responsible for filing all Tax Returns for periods ending after the Closing Date and, subject to Section 7.6(j), the Purchaser shall pay or cause to be paid all Taxes due for such periods. The Purchaser agrees not to make, or permit to be made, any election pursuant to Code Section 338(g), and further agrees not to take, or permit to be taken, any action resulting in a deemed election pursuant to Code Section 338(g) (or any similar provision under state law). Armco, the Seller and the Purchaser agree that they shall not make a joint election pursuant to Code Section 338(h)(10). Seller shall furnish Purchaser with an affidavit, stating, under the penalties of perjury, the Seller's United States tax identification number and that the Seller is not a foreign person in accordance with the provisions of Section 1445(b)(2) of the Code and the regulations promulgated thereunder. (b) Cooperation and Exchange of Information. Each --------------------------------------- party shall provide each other with such cooperation and information as either of them reasonably may request of the other in filing any Tax Return, amended return or claim for refund, determining a liability for taxes or a right to refund of taxes -77- or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of Tax Returns relating to the Company and its subsidiaries, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities and records concerning the ownership and tax basis of property, which either party may possess. Each party shall make its employees available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. Notwithstanding the foregoing, neither party shall be required unreasonably to prepare any document, or determine any information not then in its possession, in response to a request under this Section. Except as otherwise provided in this Agreement, the party requesting assistance hereunder shall reimburse the other for any reasonable out-of-pocket costs incurred in providing any Tax Return, document or other written information, and shall compensate the other for any reasonable costs (excluding wages and salaries) of making employees available, upon receipt of reasonable documentation of such costs. Each party will retain all Tax Returns, schedules and workpapers and all material records or other documents relating thereto, until the expiration of the statute of limitations (including extensions) of the taxable years to which such returns and other documents relate and, unless such returns and other documents are offered to the other party, until the final determination of any payments which may be required in respect of -78- such years under this Agreement. Any information obtained under this Section shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting any audit or other proceeding. Without limiting the generality of the foregoing, the Purchaser and the Company shall reasonably prepare and provide to the Seller and Armco any Federal, state and local tax information requested by Armco for Armco's use in preparing the Tax Returns for which Armco is responsible. This information shall be completed by the Purchaser and the Company within 90 days after receiving written request from Armco. (c) Tax Proceedings. In the event the Purchaser, or the --------------- Company receives notice, whether orally or otherwise, of any pending Tax examination, claim, settlement, proposed adjustment or related matter that may affect Armco or the Seller, or in the event Armco or the Seller receives any such notice which may affect the Purchaser, the Company or its subsidiaries, the party receiving such notice shall notify the other party in writing as soon as reasonably practicable. Armco shall be entitled at its expense to contest, control, compromise, settle or appeal all proceedings with respect to the Company's Taxes for periods ending on or before the Closing Date, provided that the Purchaser shall have the right to participate in and employ its own counsel, at its expense, with respect to any such proceeding that the Purchaser reasonably believes may cause the Purchaser, the Company or its subsidiaries to incur any liability for payment of -79- Taxes and Armco shall consult in good faith with the Purchaser with regard to any such proceeding. The Purchaser agrees that it will cooperate fully and will cause the Company to cooperate fully with Armco in the defense against or compromise of any claim asserted in any such proceeding. (d) Indemnification. (i) Armco and the Seller shall be --------------- responsible for and shall indemnify and hold the Purchaser, the Company and its subsidiaries harmless from all liability for all Taxes attributable or related to any period ending prior to or on the Closing Date, including the portion of the Short Period ending on the Closing Date for which the Company and its subsidiaries are included in any Tax Return of Armco but only to the extent such liability exceeds the amount of tax liabilities or reserves set forth on the Closing Balance Sheet; provided, however, that the Purchaser ----------------- shall indemnify the Seller and Armco for all Taxes imposed on them (determined without regard to any available net operating Loss Carryovers or other tax benefits) as a result of any election made, or deemed to have been made by the Purchaser, under Code Section 338(g) (or any similar provision of state or local law). Armco or the Seller shall pay all Taxes imposed or assessed against the Company and its subsidiaries, whether directly or as a member of the Consolidated Group, for any period ending on or before the Closing Date, but only to the extent such liability exceeds the amount of tax liabilities or reserves set forth on the Closing Balance Sheet. The Purchaser and the Company shall be responsible for and shall -80- indemnify and hold Armco and the Seller harmless from, and the Purchaser or the Company shall pay all Taxes with respect to the Company and its subsidiaries attributable or related to periods ending after the Closing Date, except as otherwise set forth in Section 7.6(j). (ii) Armco and Seller hereby agree, from and after the Closing date, to defend, indemnify, and hold the Purchaser, harmless from, against and in respect of any Loss (as defined in Section 8.2(e)) which may accrue to or be sustained by the Purchaser, the Company or its subsidiaries for the full amount of such Loss arising out of, as a result of or in respect of: (1) any error, misstatement, omission or inaccuracy or breach in or of any representation or warranty of Armco or the Seller contained in Section 4.24, or under any schedule, certificate, agreement, instrument or other document delivered pursuant thereto; or (2) any failure of Armco or the Seller or its subsidiaries duly to perform or observe any term, provision, instrument, covenant or agreement to be performed or observed by Armco or the Seller under this Section 7.6, or any schedule, certificate, agreement or other document entered into or delivered pursuant hereto. (e) Refunds. Except as provided in Section 7.6(h), Armco ------ or the Seller shall be entitled to all refunds of -81- Taxes of the Company and its subsidiaries with respect to the Pre-Closing Period (and any interest thereon) unless (i) any such refunds are carried as an asset on the Closing Balance Sheet or (ii) result from the carryback of net operating losses or capital losses of the Company or its subsidiaries, in which event any such refund shall be the property of the Company, but only to the extent attributable to the income of the Company or its subsidiaries for the carryback period. The Company shall pay to Armco or the Seller, within five Business Days after receipt thereof, any such refunds received by the Company, other than a refund to which the Company is entitled pursuant to the preceding sentence. If Armco or the Seller receives a refund to which the Company or its subsidiaries are entitled, Armco or the Seller shall pay any such refund to the Company within five Business Days after receipt thereof. The Purchaser shall be entitled to all refunds of Taxes of the Company and its subsidiaries attributable to periods ending after the Closing Date. Armco or the Seller shall pay to the Purchaser, within five Business Days after receipt thereof, any such refunds received by Armco or the Seller. (f) Tax-Sharing Agreements. Effective on the Closing Date, ---------------------- all Tax Sharing Agreements (as defined below), whether or not written, to which the Company or any of its subsidiaries on the one hand and Armco or any of its Affiliates on the other hand are parties, shall be terminated with respect to the Company and its subsidiaries and as between the Company and its subsidiaries on the one hand, and Armco and its Affil- -82- iates on the other hand, such agreements shall be of no further force and effect, and as between them, no party shall have any further rights or obligations with respect to any taxable period. (g) No Adverse Action. Neither the Seller nor Armco shall ----------------- (i) exercise its authority as agent of the Company and its subsidiaries under Treasury Regulation Section 1.1502-77 (or any comparable provision of state, local or foreign Tax law), or (ii) file any election or take any other similar action, including without limitation, amending any Tax Return or agreeing to any determination or audit, if such exercise or action is likely to have a Material Adverse Effect for any period ending after the Closing Date without having first received the consent of the Purchaser, which consent shall not be unreasonably withheld. (h) Loss Carryovers. (i) Notwithstanding the provisions of --------------- (1) any tax sharing agreements among Armco and its Affiliates (including, but not limited to, the Tax Sharing Agreement among Armco, Northwestern National Casualty Company, Statesmen Insurance Company, and NN Insurance Company dated January 1, 1991, the Tax Sharing Agreement between Armco and Northwestern National Lloyds Insurance Company dated January 1, 1992 and the Tax Sharing Agreement among Armco, Pacific National Insurance Company and Pacific Auto Insurance Company dated January 1, 1992) (collectively, "Tax Sharing Agreements") and (2) any other agreement between the parties, Armco and the Seller agree to waive (except as otherwise permitted by Sec- -83- tion 7.6(h)(ii)) any right they may have under the Internal Revenue Code (including, but not limited to, the right to make an election under Treasury Regulation Section 1.1502-20(g)) to reattribute to itself or any other entity any consolidated net operating losses of the Consolidated Group that are apportioned to the Company or its subsidiaries pursuant to Treas. Reg. Section 1.1502-79(a) as a result of Purchaser's purchase of the Shares (the "Apportioned Operating Losses"). Except as permitted in Section 7.6(h)(ii), Armco and the Seller also agree that they shall not, and their Affiliates shall not, utilize any of the Apportioned Operating Losses to offset any taxable income of any member of the Consolidated Group other than the Company or its subsidiaries for any taxable year of the Consolidated Group ending on or prior to December 31, 1994. After December 31, 1994, Armco and its Affiliates shall use only those Apportioned Operating Losses required to be used under Treasury regulations. If Armco or its Affiliates utilize any Apportioned Operating Losses, the Purchaser's sole remedy shall be as set forth in paragraph (iv) below. (ii) Notwithstanding paragraph (i) above, Armco shall be entitled to reattribute to itself Apportioned Operating Losses in an amount equal to the lesser of (1) the amount of such Apportioned Operating Losses or (2) the total of (x) the aggregate taxable income or gain of the Company and its subsidiaries attributable to Pre-Closing Periods resulting from Purchaser Reinsurance Contracts plus (y) the aggregate taxable -84- income or gain of the Company and its subsidiaries attributable to Pre- Closing Periods resulting from the sale of securities pursuant to Section 6.4, less (z) the excess, if any, of (I) the amount of consolidated net operating losses of the Consolidated Group that would have been apportioned to the Company or its subsidiaries pursuant to Treas. Reg. Section 1.1502- 79(a) as a result of the Purchaser's purchase of the Shares if there had been no items of income or gain from the Purchaser Reinsurance Contracts or sales of securities pursuant to Section 6.4, over (II) the Apportioned Operating Losses. The Purchaser shall cause the Company and its subsidiaries to assign and deliver to Armco any statement prepared by or on behalf of Armco pursuant to Treas. Reg. Section 1.1502-20(g)(5) relating to such reattribution and attach or cause the Company or any subsidiary to attach a copy of such statement to the appropriate income tax return pursuant to Treas. Reg. Section 1.1502-20(g)(5)(ii). Notwithstanding any provision herein to the contrary, the Purchaser shall have no right to cause the Seller or Armco to enter into Purchaser Reinsurance Contracts or the sale of securities described in Section 6.4 if the total of (x) plus (y) above exceeds the sum of $25.5 million plus an amount equal to the consolidated net operating losses of the Consolidated Group that is apportioned to the Company and its subsidiaries for the taxable year ended December 31, 1993, pursuant to Treas. Reg. Section 1.1502-79(a). (iii) The Seller shall notify the Company in writing within 60 days after the filing of any return, amended -85- return or any other document with the Internal Revenue Service in which any portion of the Apportioned Operating Losses are utilized by Armco or any other member of the Consolidated Group. The Seller shall notify the Company in writing within 60 days after its receipt of notice from the Internal Revenue Service of the final adjustment of Apportioned Operating Losses. In making any of the notifications required herein, the Seller shall disclose the amount of the Apportioned Operating Losses which have been either utilized or adjusted. (iv) Notwithstanding anything to the contrary in this Agreement, the Purchaser's sole remedy in the event (A) the Represented Operating Losses exceeds the Apportioned Operating Losses, or (B) there is a breach of the covenant set forth in the last sentence of Section 7.6(h)(i) shall be the right to obtain payment from Armco or Seller of the actual increase in federal income tax liability resulting solely from such excess or such breach; provided, however, that the covenant set forth in the last -------- ------- sentence of Section 7.6(h)(i) shall not be treated as having been breached to the extent that Armco reduced the amount of Apportioned Operating Losses it was entitled to reattribute pursuant to Section 7.6(h)(ii) by the amount of Apportioned Operating Losses that were utilized by Armco. (i) Timing Differences. As used in this Section 7.6(i), ------------------ the term "Seller Tax Period" shall mean any tax period ending on or prior to the Closing Date, and the term "Purchaser Tax Period" shall mean a taxable period ending after the Closing -86- Date. If as a result of an audit or other proceeding concerning the liability of the Company and its subsidiaries for Taxes, there is an adjustment as a result of which there should be both a net tax benefit for the Seller Tax Periods and a net tax detriment for Purchaser Tax Periods or both a net tax detriment for Seller's Tax Periods and a net tax benefit for Purchaser's Tax Periods, then Armco and the Seller shall pay to the Purchaser or the Purchaser shall pay to Armco and the Seller, as the case may be, the amount of net tax benefits actually derived as a result of such adjustments up to an amount equal to the net tax detriment actually incurred by Armco and the Seller or the Purchaser, as the case may be. A net tax benefit shall be deemed actually derived when the party entitled to such net tax benefit receives an actual refund of tax or a reduction of tax otherwise due and payable. A net tax detriment shall be deemed actually incurred when the party liable for such net tax detriment makes an additional or increased tax payment or suffers a reduction in an actual tax refund payment. Payments under this section shall be made without interest within 30 days after the later of the date the net tax benefit is actually derived or the date the net tax detriment is actually incurred. (j) Taxable Year Not Terminating at Closing Date. If for -------------------------------------------- any state, local or foreign tax purposes, the taxable year of the Company and its subsidiaries does not terminate on the Closing Date, Taxes of the Company and its subsidiaries attributable to, arising out of, or with respect to the Short Period -87- shall be allocated to and shall be the responsibility of Armco and the Seller to the extent such Taxes exceed the amounts that the Company and its subsidiaries have paid, accrued or otherwise adequately reserved therefor prior to the Closing Date. For purposes of this Section 7.6(j), Taxes of the Company and its subsidiaries attributable to, arising out of, or with respect to the Short Period shall be determined on the basis set forth in Section 7.6(a). Armco and the Seller agree to indemnify and hold the Purchaser and the Company harmless from and against all Taxes allocated to and the responsibility of Armco and the Seller under this Section 7.6(j). (k) The Seller agrees to pay any stock transfer taxes in connection with the transfer of the Shares to the Purchaser. 7.7. The Seller's Access to Records. ------------------------------ (a) The Purchaser agrees that after the Closing Date it shall, and shall cause the Company to, (i) provide Armco and the Seller with reasonable access to the employees of the Purchaser and the Company having knowledge of and responsibility for such books and records (including information stored on electronic data processing systems) and (ii) retain the books and records of the Company (including backup media for electronic data processing systems) for a period of at least seven years from the Closing Date in a responsible manner and at a location reasonably accessible and (iii) allow Armco and the Seller to examine and make copies of the books and records pertaining to -88- the business conducted by the Company pertinent to this Agreement and the transactions contemplated hereby, for reasonable business purposes including without limitation the preparation and examination of Tax Returns and financial statements and conduct of any litigation or regulatory dispute resolution, whether pending or threatened, concerning the business of the Company and its subsidiaries pertinent to this Agreement and the transactions contemplated hereby. Access to and copying of such books and records shall be restricted to normal business hours, shall be at Armco's and the Seller's expense and shall not unreasonably interfere with the business operations of the Purchaser or the Company. If requested by Armco or the Seller immediately prior to the end of the seven-year period, the Purchaser will cause the Company to retain such books and records (at Seller's expense) for a reasonable extended period of time. (b) The Purchaser shall provide to the Seller the Annual Statements for the Company and each of the Insurance Subsidiaries for each of 1994, 1995 and 1996 and the relevant portions of the Purchaser's Tax Return with respect to the Company and its subsidiaries for 1994. 7.8. Future Assessments. ------------------ (a) The Seller agrees that any state insurance guaranty association assessments made against the Insurance Subsidiaries prior to the Closing Date for any period prior to the Closing Date shall either be paid by Insurance Subsidiaries prior to the Closing Date or reflected on the Closing Balance Sheet, or, if paid by Insurance Subsidiaries after the Closing Date and not reflected in the Closing Balance -89- Sheet, shall be reimbursed in full by the Seller. (b) The Purchaser and the Seller agree that any refund, distribution or assessment received from or made against any Insurance Subsidiary by any coastal reinsurance pool, fair plan, assigned risk plan or other residual market mechanisms within three (3) years after the Closing Date on account of experience during a period identified by the pool or plan, shall (i) be for the account of the Seller when the period begins before and ends on or before the Closing Date and (ii) be prorated between the Seller and the Purchaser when the period begins before and ends after the Closing Date. The basis for such proration shall be as set forth in subsection (c), below. (c) Any proration required by this section shall be on the following basis: (i) The Seller's portion of any proration shall be based on the number of days prior to the Closing Date in the period on which the refund, distribution or assessment is based divided by the total number of days in such period. The Seller shall have no entitlement to or responsibility for the remaining portion of such refund, distribution or assessment. (ii) In determining the number of days in any proration period and the number of days chargeable to the Seller on the one hand or to the Company on the other, there shall be excluded portions of such period in which the Insurance Subsidi- -90- ary was not writing in the jurisdiction in question the type of insurance which caused it to be entitled to the refund or distribution or subject to the assessment. (d) The Purchaser shall promptly notify the Seller of any assessment, threatened assessment or any proceeding and inquiry that may result in an assessment relating in whole or in part to the period before the Closing Date and the Purchaser shall give the Seller the opportunity to challenge any portion of such assessment as may relate to the period before the Closing Date. Notwithstanding such challenge, to the extent the Company or its Insurance Subsidiaries shall have paid or is required to pay such assessment, the Seller shall be required to pay the entire amount of the assessment attributable to the period prior to the Closing Date to the Company; provided that if the Seller is successful in such challenge, it shall be reimbursed the portion of its assessment which is not required to be paid or which is reimbursed to the Company or its Insurance Subsidiaries. Notwithstanding anything to the contrary in any other provision of this Section, the Seller shall not be liable for an assessment to the extent such assessment is reflected on the Closing Balance Sheet. 7.9. Disclaimer of Other Representations and Warranties. --------------------------------------------------- The parties agree that no party hereto makes nor has made any warranties or representations, with respect to the transactions contemplated hereby, other than those expressly set forth in this Agreement, including the exhibits and schedules attached -91- hereto. The parties agree that Armco and the Seller make no warranties or representations with respect to the adequacy of the reserves for unpaid losses or loss adjustment expenses of any Insurance Subsidiaries. 7.10. Further Assurances. Armco and Seller agree that they ------------------ will from time to time at and subsequent to the Closing Date, at the request of Purchaser and without further consideration, execute and deliver such other instruments of conveyance, assignment and transfer and take such other actions as Purchaser may reasonably request in order more effectively to convey, assign, transfer to and vest in the Purchaser the Shares and the right to operate the business of the Company and its subsidiaries. 7.11. Proposition 103 and Other Excess Profit Laws. -------------------------------------------- (a) The Seller shall be responsible for the payment of any liability of the Company and its Insurance Subsidiaries incurred within three years after the Closing Date under California's Proposition 103, the Florida Excess Profit law, or any other excess profits or similar laws in existence prior to the Closing Date relating to operations or premium written prior to the Closing Date to the extent such liabilities are not reflected on the Closing Balance Sheet. The Purchaser agrees that it and the Insurance Subsidiaries will not initiate any proceeding with respect to such assessments, unless required by good business purposes and only after prior notification to -92- the Seller. The Purchaser agrees that neither it, the Company nor its subsidiaries shall settle assessments or liabilities covered by this Section without the prior consent of the Seller, which consent will not be unreasonably withheld. The Purchaser shall control all litigation or administrative proceedings concerning such matters at its own expense; provided that the Seller may participate in such litigation or administrative proceedings, at Seller's own expense. (b) In the event the Company or the Insurance Subsidiaries, after such litigation or administrative proceedings, are required to make one or more payments to policyholders, the state, or some other entity, and the Seller has consented to such payment or payments, the Purchaser shall cause such payments to be made; provided that the amount of any such payment shall be first paid to the Company or the Insurance Subsidiary by the Seller to the extent such liability was not reflected in the Closing Balance Sheet. 7.12. Reinsurance. Immediately prior to, or simultaneously ----------- with, the Closing, the Purchaser may direct the Insurance Subsidiaries to enter into reinsurance treaties or arrangements with reinsurers designated by the Purchaser; provided that all fees and similar expenses of such reinsurance shall be the responsibility of Purchaser and, if paid by the Company or its subsidiaries and such payment affects the Purchase Price, shall be reflected as an adjustment to the Purchase Price in favor of -93- the Seller. Such reinsurance shall be disregarded in the preparation of the Closing Balance Sheet. 7.13. Reinsurance Support. Prior to the Closing, the ------------------- Seller and the Company shall enter into an agreement whereby the Seller shall provide, or shall cause Northwestern National Insurance Company of Milwaukee, Wisconsin ("NNIC") to provide, financial support for the obligations of NNIC to NNCC under reinsurance contracts issued by NNIC. Such support shall take the form, acceptable to the Purchaser, of either a letter of credit or an escrow account (in the form of a secured "Funds Withheld Account") for the benefit of NNCC in an amount equal to $20 million. A portion of such letter of credit or escrow account equal to $10 million shall remain in effect until the 15th anniversary of the Closing Date. Another portion of such letter of credit or escrow account equal to $10 million shall remain in effect until the earlier to occur of (i) the novation or other complete release of NNCC with respect to all insurance policies covering Celanese Corporation or its affiliates or (ii) the 15th anniversary of the Closing Date. All interest earned on funds in the escrow account shall be paid quarterly to the Seller. The Seller shall cause the reinsurance arrangements between NNIC and NNCC to be amended, effective as of the Closing, to provide both NNCC and NNIC with a right of setoff and to suspend the payment obligations to the extent that claims of setoff are outstanding. -94- 7.14. Trademark Assignment. On or prior to the Closing, ------------------- the parties shall enter into the Trademark Assignment Agreement covering trademarks and service marks used by the Company and its subsidiaries. 7.15. Severance and Other Costs. The Seller agrees to ------------------------- reimburse and indemnify the Purchaser for the full amount of any payment made by the Company and its subsidiaries in connection with the termination of the employment of the Chairman of the Board of Directors of the Company pursuant to agreements with the Company or any of its subsidiaries in effect at the Closing Date as set forth on Schedule 7.15. The Seller shall reimburse and indemnify the Purchaser for one-half (50%) of the payments made by the Company and its subsidiaries pursuant to any employment, bonus, stay-put, termination, incentive or deferred compensation, consultation or similar agreement with any other officer or other key employee executed prior to the Closing Date as set forth on Schedule 7.15 in connection with the termination of such officer or employee before the third anniversary of the Closing Date. The Seller shall pay the Purchaser such termination or severance costs within 20 Business Days following the written demand of the Purchaser. 7.16. Escrow Agreement. If the Seller shall not elect to ----------------- provide the Letter of Credit as set forth in Section 2.7, then on or prior to the Closing, the Seller and the Purchaser shall enter into an escrow agreement ("Escrow Agreement") which shall -95- provide for an escrow account ("Escrow Account") with an independent third party acceptable to the Seller and the Purchaser. At the Closing, the Seller may elect to procure the Letter of Credit acceptable to the Purchaser or shall deposit $5 million of the Purchase Price in the Escrow Account to fund any claims of the Purchaser (i) under any covenant, agreement or other provision in this Agreement or (ii) resulting from a breach of any representation or warranty of the Seller or Armco in this Agreement. The Letter of Credit shall remain in effect, or if the Escrow Account is chosen, such funds shall remain in the Escrow Account, until the second anniversary of the Closing, provided, however, that any amounts required to satisfy claims pending at the second anniversary would remain available until such claims are settled. No claim shall be valid, or be deemed to be pending, with respect to any matter which would otherwise be the subject of a claim to be funded out of the Escrow Account unless such claim is asserted in writing prior to the second anniversary of the Closing, specifying in reasonable detail the covenant or agreement under which indemnification is sought or the representation or warranty that allegedly has been breached and, in each case, furnishing the basis for such allegation. Any such Escrow Agreement shall provide that at the end of the two-year period, funds on which no claims are pending shall be released to the Seller. Any interest earned on funds in the Escrow Account shall follow the principal of such funds. -96- 7.17. Supplements to Schedules. The Seller may at any time ------------------------ or from time to time after the date hereof, but not later than 10 Business Days prior to the Closing Date, supplement or amend the Schedules required to be furnished by the Seller under this Agreement with respect to any matter arising after the date hereof which, if existing or occurring at the date hereof, would have been required to be set forth or described in such Schedules. Other than an amendment to Schedules 4.8(d)(i) and 4.10 which shall not be treated as a breach, the Purchaser may treat any material supplement or amendment to a schedule as a breach of a representation or warranty by the Seller and any such supplement or amendment to such Schedules shall be disregarded for the purpose of determining the satisfaction of the conditions set forth in Article IX hereof; provided, --------- however, that any matter arising after the date hereof and disclosed in an - ------- amended or supplemented Schedule pursuant to this Section shall not form the basis for any Loss (as defined in Article VIII) by the Purchaser if the transactions contemplated hereby are consummated. ARTICLE VIII. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY 8.1 Survival of Representations and Warranties and ---------------------------------------------- Indemnities. Except to the extent otherwise provided, all representations - ----------- and warranties of the parties under this Agreement or in any exhibit, schedule, certificate or other document -97- delivered pursuant hereto shall survive the Closing Date for a period of two years ending on the second anniversary of the Closing Date. All agreements, covenants and contractual undertakings shall survive the Closing Date until such provisions are satisfied. All provisions shall survive the Closing Date subject to the foregoing terms and conditions regardless of any investigation at any time made by or on behalf of the parties or of any information the parties may have with respect to the other parties, the Company and its subsidiaries and the transactions contemplated hereby. 8.2. Indemnity. --------- (a) Subject to the provisions of this Section, the Seller hereby agrees, from and after the Closing date, to defend, indemnify, and hold the Purchaser, harmless from, against and in respect of any Loss (as hereinafter defined) which may accrue to or be sustained by the Purchaser, the Company or its subsidiaries for the full amount of such Loss arising out of, as a result of or in respect of: (i) any error, misstatement, omission or inaccuracy in any representation or warranty of Armco or the Seller or the breach of any warranty of Armco or the Seller under this Agreement, or under any schedule, certificate, agreement, instrument or other document delivered pursuant thereto; or (ii) any failure of Armco or the Seller or its subsidiaries duly to perform or observe any term, provision, instrument, covenant or agreement to be performed or observed by -98- the Company and its subsidiaries, prior to the Closing, or the Seller or its subsidiaries pursuant to this Agreement, or any schedule, certificate, agreement or other document entered into or delivered pursuant hereto. (b) Subject to the provisions of this Section, Armco hereby agrees, from and after the Closing Date, to defend, indemnify, and hold the Purchaser harmless from, against and in respect of any Loss (hereinafter defined) which may accrue to or be sustained by the Purchaser for the full amount of such Loss arising out of, as a result of or in respect of: (i) any error, misstatement, omission or inaccuracy in any representation or warranty of Armco or the breach of any warranty of Armco under this Agreement, or under any schedule, certificate, agreement, instrument or other document delivered pursuant thereto; or (ii) any failure of Armco duly to perform or observe any term, provision, instrument, covenant or agreement to be performed or observed by Armco pursuant to this Agreement, or any schedule, certificate, agreement or other document entered or delivered pursuant hereto. (c) Subject to the provisions of this Section, the Purchaser hereby agrees, from and after the Closing Date, to defend, indemnify, and hold the Seller harmless from, against and in respect of any Loss (hereinafter defined) which may accrue to or be sustained by the Seller for the full amount of such Loss arising out of, as a result of or in respect of: -99- (i) any error, misstatement, omission or inaccuracy in any representation or warranty of the Purchaser or the breach of any warranty of the Purchaser under this Agreement, or under any schedule, certificate, agreement, instrument or other document delivered pursuant thereto; or (ii) any failure of the Purchaser duly to perform or observe any term, provision, instrument, covenant or agreement to be performed or observed by the Purchaser or the Company after the Closing pursuant to this Agreement, or any schedule, certificate, agreement or other document entered or delivered pursuant hereto. (d) The indemnification and hold harmless ("Indemnification") obligations under this Agreement to which any party is entitled from any other party pursuant to this Section with respect to breaches of representations or warranties shall become effective only after the cumulative amount of such Loss exceeds in the aggregate $500,000, and such liability shall be limited to such cumulative amounts as exceed $500,000. (e) For purposes of this Agreement, "Loss" shall be deemed to mean and include any and all losses, liabilities, costs, reasonable expenses, judgments, assessments, penalties, damages, deficiencies, suits, actions, claims, proceedings, demands, causes of action, economic loss, and attorneys' fees and expenses and court costs and interest incident thereto. A Loss shall be measured net of any insurance recovery in respect of such Loss and such Loss shall not include any incidental or -100- consequential damages (including any loss of anticipated profits). (f) Notwithstanding anything to the contrary herein, the indemnity obligation of the Seller with respect to a breach of a representation or warranty shall be limited to an aggregate of $14 million, payable exclusively as follows: (i) first, from the Escrow Account or the Letter of Credit, as the case may be; (ii) o the extent the amount of the indemnity obligation exceeds the amounts available from the Escrow Account or the Letter of Credit, as the case may be, directly from the Seller, but not more than an aggregate of $2 million, and (iii) by set-off against any amount due from the Purchaser to the Seller on account of the Renewal Commission. (g) In order for a party seeking indemnification ("Indemnified Party") to be entitled to any Indemnification provided for under this Agreement, such Indemnified Party must give a written demand for Indemnification to the party against which Indemnification is sought ("Indemnifying Party") as soon as reasonably practicable after the Indemnified Party has knowledge of the material facts underlying the Indemnification demand. Such demand must set forth with reasonable specificity the factual and legal basis or bases of the Indemnification claim and must state as nearly as practicable the amount of Indemnification sought. The Indemnifying Party shall admit or deny liability for such Indemnification within 30 days of such demand. -101- (h) The parties' indemnification obligations under this Section 8.2 are independent of, and in addition to, any payments made pursuant to Sections 2.3 and 2.4 and Article VII of this Agreement, it being understood and agreed that a party's indemnification obligations hereunder do not apply to any losses or claims that may be imposed on, sustained, incurred or suffered by or asserted, as applicable, against another party directly or indirectly relating to any matter that is the subject of Sections 2.3, 2.4 and 4.24 or Article VII. Indemnification obligations under this Section 8.2 are the exclusive remedy for matters covered under this Section. Armco and the Seller shall not be required to indemnify the Purchaser or the Company for amounts that are accrued in the Closing Balance Sheet; provided such amounts are not assumed by Armco or the Seller pursuant to Section 2.5. (i) Third Party Procedures. (1) The Indemnified Party, ----------------------- promptly upon receipt of notice of the commencement of any action by a third party against the Indemnified Party in respect of which Indemnification may be sought hereunder, shall notify the Indemnifying Party in writing of the commencement thereof. Upon receipt of notice of the commencement of any such action, the Indemnifying Party shall assume control of the defense, compromise or settlement thereof (with counsel reasonably satisfactory to the Indemnified Party) at the Indemnifying Party's expense. Nothing herein shall be construed so as to give any insurance carrier a right of subrogation for claims paid except as -102- such right would otherwise exist in the absence of this Section. Further, nothing herein shall be construed to create any rights enforceable by any person not a party to this Agreement. (2) The Indemnified Party shall be entitled to participate in the defense of any action and to be represented by counsel of its own selection at the expense of the Indemnified Party. If the attorneys provided for the defense of the Indemnified Party by the Indemnifying Party withdraw from or are removed by court order from the Indemnified Party's representation, then the cost of counsel selected by the Indemnified Party shall be part of its Loss, and the Indemnified Party shall have the right in all respects to conduct its own defense. If the Indemnified Party otherwise retains its own counsel, the cost thereof shall be borne by the Indemnified Party. (3) As to cases in which the Indemnifying Party has assumed and is providing the defense for the Indemnified Party, the control of such defense and the right to reach settlement in such action shall be vested in the Indemnifying Party. Except with the written consent of the Indemnified Party (which consent shall not be unreasonably withheld), no Indemnifying Party shall consent to entry of any judgment or enter into any settlement, in respect of any third party claim which provides for anything other than money damages or other money payments for which the Indemnified Party is entitled to indemnification hereunder (subject to the limitations specified in this Section 8.2) or which does not include as a term thereof the giving -103- by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect of such third party claim. If the Indemnified Party, without the prior written consent of the Indemnifying Party (which consent shall not be unreasonably withheld), consents to the entry of any judgment or enters into any settlement with respect to a third party claim which is being defended by the Indemnifying Party, the Indemnifying Party shall be discharged from any such liability. As to any action, the party which is controlling such action shall provide to the other party reasoable information (including reasonable advance notice of all proceedings in respect thereto) regarding the conduct of the action and the right to attend all proceedings and depositions in respect thereto through its agents and attorneys, and the right to discuss the action with counsel for the party controlling such action. (4) If within 30 days after receipt by the Indemnifying Party of notice from the Indemnified Party as to the commencement of any action in respect of which Indemnification is sought hereunder, the Indemnifying Party has not notified the Indemnified Party that the Indemnifying Party assumes the defense of such action or has not actually assumed such defense, then the Indemnified Party shall have the right to defend such action and to proceed immediately against the Indemnifying Party to enforce all Indemnification rights hereunder (including but not limited to the costs of defense). The Indemnification obligations of the Indemnifying Party with respect to such action shall, however, in -104- no way be diminished by virtue of the exercise by the Indemnified Party of its rights under this Section, and the fact that the Indemnified Party shall have defended, settled or compromised such action pursuant to Section 8.2(i) shall not, in any circumstances, be deemed to constitute any waiver, release or exoneration of the Indemnifying Party from its indemnification obligations, regardless of the outcome of such action. ARTICLE IX. CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE The obligation of the Purchaser to consummate the purchase of the Shares contemplated by this Agreement is subject to the satisfaction on or prior to the Closing Date of the following conditions: 9.1. Covenants. Armco and the Seller shall have performed --------- and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by them on or prior to the Closing Date. 9.2. Governmental Consents. The applicable waiting period -------------------- under the HSR Act shall have expired and all consents, authorizations, orders or approvals of and filings with, any governmental commission, board or any regulatory body which are required (as set forth in Schedule 9.2) for or in connection with the execution and delivery of this Agreement and the consummation -105- of the transactions contemplated hereby shall have been obtained or made. 9.3. No Litigation. No litigation shall be pending or ------------- overtly threatened which challenges consummation of the transactions contemplated hereby or which is against one of the parties hereto and, if decided adversely to such party, would have a Material Adverse Effect. 9.4. Legislation. No Federal, state, local or foreign ----------- statute, rule or regulation shall have been enacted which prohibits the consummation of the transactions contemplated hereby. 9.5. Delivery of Documents. The Seller shall have tendered --------------------- to the Purchaser one or more certificates representing the Shares, duly endorsed in blank or accompanied by duly executed instruments of transfer to the Purchaser, certificates representing shares of the Company's subsidiaries, and all organizational documents, minute books and stock ledgers of the Company and the subsidiaries and agreements and other documents required to be delivered hereunder by Armco and the Seller to the Purchaser at Closing. All such documents shall be reasonably satisfactory to the Purchaser and its counsel. -106- 9.6. Opinion of Counsel. Armco and the Seller shall have ------------------ furnished the Purchaser with an opinion of Arnold & Porter, counsel for the Seller, dated the Closing Date, in form satisfactory to the Purchaser. 9.7. Certified Resolutions. Each of Armco and the Seller --------------------- shall have furnished the Purchaser with certified copies of resolutions duly adopted by their respective Boards of Directors authorizing and approving the execution and delivery of this Agreement and authorizing the sale of the Shares pursuant to this Agreement. 9.8. Continued Accuracy of Representations and Warranties. ---------------------------------------------------- The respective representations and warranties of Armco and the Seller, contained in this Agreement, shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date except for changes in the ordinary course of business and except for changes caused by the consummation of the transactions contemplated by this Agreement, and the Purchaser shall have received at the Closing a corporate certificate from each of Armco and the Seller dated the Closing Date and executed by the President or any Vice President of Armco and the Seller, as appropriate, containing a representation and warranty to that effect. 9.9. Other Approvals. The Company and its subsidiaries --------------- shall hold all approvals and licenses necessary to enable it to continue to carry on its business as presently conducted after consummation of the sale of the Shares, and no such approval (or any license or permit granted to the Company or its subsidiaries) shall have been withdrawn or suspended. -107- 9.10. Other Consents. All consents, waivers or approvals -------------- of third parties necessary to permit the consummation of the transactions contemplated hereby, which if not obtained would individually or in the aggregate have a Material Adverse Effect, shall have been obtained. 9.11. No Adverse Change. No material adverse change in ----------------- the business, results of operations, or financial condition of the Company and its subsidiaries shall have occurred since December 31, 1993. 9.12. Resignation of Directors. Resignations from all of ------------------------ the directors of the Company and its subsidiaries shall have been delivered to the Purchaser. 9.13. Release of Existing Pledge. The Existing Pledge --------------------------- shall have been released by NNIC and the Shares shall be free and clear of all Liens or Encumbrances. ARTICLE X. CONDITIONS TO THE OBLIGATION OF ARMCO AND THE SELLER TO CLOSE The obligation of Armco and the Seller to consummate the sale of the Shares contemplated by this Agreement is subject to the satisfaction on or prior to the Closing Date of the following conditions: 10.1. Covenants. The Purchaser shall have performed and ---------- complied in all material respects with all covenants and -108- agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 10.2. Governmental Consents. The applicable waiting --------------------- period under the HSR Act shall have expired and all consents, authorizations, orders or approvals of, and filings or registrations with, any governmental commission, board or regulatory body which are required (as set forth on Schedule 10.2) for or in connection with the execution and delivery of this Agreement and the consummation of the transaction contemplated hereby shall have been obtained or made. 10.3. No Litigation. No litigation shall be pending or -------------- overtly threatened which challenges consummation of the transactions contemplated hereby or which is against one of the parties hereto and, if decided adversely to such party, would have a Material Adverse Effect. 10.4. Legislation. No Federal, state, local or foreign ----------- statute, rule or regulation shall have been enacted which prohibits the consummation of the transactions contemplated hereby. 10.5. Payment and Delivery of Documents. The Purchaser --------------------------------- shall have delivered or tendered to the Seller the Purchase Price, together with all agreements and other documents required to be delivered hereunder to Armco and the Seller at -109- Closing. All such documents shall be reasonably satisfactory to Armco and the Seller and their counsel. 10.6. Opinion of Counsel. The Purchaser shall have ------------------ furnished Armco and the Seller with an opinion of Schnader, Harrison, Segal & Lewis, counsel for the Purchaser, dated the Closing Date, in form satisfactory to the Seller. 10.7. Certified Resolutions. The Purchaser shall have --------------------- furnished Armco and the Seller with a certified copy of resolutions duly adopted by its Board of Directors authorizing and approving the execution and delivery of this Agreement and authorizing the purchase of the Shares. 10.8. Continued Accuracy of Representations and ---------------------------------------- Warranties. The representations and warranties of the Purchaser contained - ---------- in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date except for changes in the ordinary course of business, and Armco and the Seller shall have received at the Closing a corporate certificate from the Purchaser dated the Closing Date and executed by the President or any Vice President of the Purchaser containing a representation and warranty to that effect. -110- ARTICLE XI. TERMINATION, AMENDMENT AND WAIVER 11.1. Termination. This Agreement may be terminated at ------------ any time prior to the Closing as follows: (a) By mutual consent of the parties; (b) By Armco and the Seller if there has been a material breach of any representaion, warranty, covenant or agreement set forth in this Agreement on the part of the Purchaser, and such material breach has not been cured within a reasonable period after notice thereof and has not been waived by Armco and the Seller; (c) By the Purchaser if there has been a material breach of any representation, warranty, covenant or agreement set forth in this Agreement on the part of Armco or the Seller, and such material breach has not been cured within a reasonable period after notice thereof and has not been waived by the Purchaser; (d) By any party if the Closing shall not have occurred by December 31, 1994, provided, that if approval of the transactions contemplated hereby are pending before the appropriate regulatory authorities at December 31, 1994 and all other conditions to the Closing set forth in Article IX and Article X could otherwise be satisfied on such date, such termination date shall be extended until the earlier of March 31, 1995 and 15 Business Days following the date on which such regulatory proceedings are completed; -111- (e) By any party if the transactions contemplated hereby shall violate a non-appealable final order, decree or judgment of any court or governmental body having competent jurisdiction or shall be prohibited by an applicable state or Federal statute or regulation. 11.2. Effect of Termination. In the event this Agreement ---------------------- is terminated, the obligations set forth herein (other than the obligations of the parties and their representatives, agents, employees, successors and assigns under Sections 7.1, 7.2 and 11.2) shall terminate and except as specifically provided for in Section 7.2, no party shall have any further liability to the other parties whatsoever. 11.3. Amendment. This Agreement may not be amended except --------- by an instrument in writing signed on behalf of all of the parties hereto. 11.4. Extension; Waiver. At any time prior to the ----------------- Closing, the parties may, in the manner and to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto and (ii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. -112- ARTICLE XII. MISCELLANEOUS 12.1. Notices. All notices or other communications ------- hereunder shall be in writing and shall be deemed given (i) upon delivery if delivered personally, (ii) three days after mailing by registered or certified mail (return receipt requested), or (iii) upon receipt if sent by an overnight delivery service or sent by facsimile transmission to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to Purchaser, to: Vik Brothers Insurance, Inc. 1000 Lenox Drive Lawrenceville, NJ 08468 Telecopier Number: (609) 895-3277 Attention: Stephen J. Greenberg (b) If to Armco or the Seller, to: Armco Inc. One Oxford Centre 301 Grant Street Pittsburgh, PA 15219 Telecopier Number: (412) 255-9805 Attention: John B. Corey Vice President, Asset Management and Business Development 12.2. Interpretation. When a reference is made in this -------------- Agreement to a section, schedule or exhibit, such reference shall be to a section, schedule or exhibit of this Agreement unless otherwise indicated or unless the context shall otherwise require. The table of contents and headings contained in this -113- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 12.3. Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of New York. 12.4. Publicity. So long as this Agreement is in effect, --------- no party shall issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other parties, unless, in the opinion of counsel, such announcement is required by the provisions of applicable law or regulations or by any governmental entity having jurisdiction over such party. 12.5. Assignment; Binding Effect. Neither this Agreement -------------------------- nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties, except the Purchaser may assign this Agreement to its Affiliates without prior written consent; provided, however, that any such assignment will not relieve the Purchaser of its obligations or liabilities hereunder. This Agreement will be binding upon, inure to the -114- benefit of and be enforceable by the parties and their respective successors and permitted assigns. 12.6. Entire Agreement; Third Party Beneficiaries. This ------------------------------------------- Agreement (including exhibits, schedules and documents referred to herein) constitutes the entire agreement between the parties relating to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 12.7. Construction. This Agreement is the result of arms ------------ length negotiations between the parties hereto and has been prepared jointly by the parties. In applying and interpreting the provisions of this Agreement, there shall be no presumption that the Agreement was prepared by any one party or that the Agreement shall be construed in favor of or against any one party. -115- 12.8. Counterparts. This Agreement may be executed in two ------------ or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. ARMCO INC. By:/s/ John B. Corey ------------------------------------- Vice President ARMCO FINANCIAL SERVICES CORPORATION By:/s/ John B. Corey ------------------------------------- Vice President VIK BROTHERS INSURANCE, INC. By:/s/ Alexander M. Vik ------------------------------------- Chairman -116- EX-11 3 EX-11 EXHIBIT 11 ARMCO INC. COMPUTATION OF INCOME (LOSS) PER SHARE (Unaudited) (Dollars and shares in millions except per share amounts) Three Months Ended Six Months Ended PRIMARY June 30, June 30, --------------- --------------- 1994 1993 1994 1993 ------ ------ ------ ------ Net income (loss) applicable to common stock (After preferred dividends of $4.4 for the three months ended June 30, 1994 and 1993; and $8.9 for the six months ended June 30, 1994 and 1993): Income (loss) from continuing operations $65.5 $ (5.8) $ 33.8 $ (31.4) Income from discontinued operations - 10.1 - 9.2 - ------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting changes 65.5 4.3 33.8 (22.2) Cumulative effect of changes in accounting for certain postretirement and postemployment benefits and income taxes - - - (307.5) - ------------------------------------------------------------------------------ Net income (loss) $ 65.5 $ 4.3 $ 33.8 $(329.7) - ------------------------------------------------------------------------------ Weighted average number of common shares 104.5 103.9 104.3 103.7 Weighted average number of common equivalent shares 0.1 0.3 0.1 - - ------------------------------------------------------------------------------ Average common shares outstanding as adjusted 104.6 104.2 104.4 103.7 - ------------------------------------------------------------------------------ Income (loss) per share: Income (loss) from continuing operations $0.63 $(0.06) $ 0.32 $(0.30) Income from discontinued operations - 0.10 - 0.09 - ------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting changes 0.63 0.04 0.32 (0.21) Cumulative effect of changes in accounting for certain postretirement and postemployment benefits and income taxes - - - (2.97) - ------------------------------------------------------------------------------ Net income (loss) per share $ 0.63 $ 0.04 $ 0.32 $(3.18) - ------------------------------------------------------------------------------ FULLY DILUTED* Net income (loss) applicable to common stock(After preferred dividends of $8.9 for the six months ended June 30, 1993): Income (loss) from continuing operations $69.9 $ (1.4) $ 42.7 $ (31.4) Income from discontinued operations - 10.1 - 9.2 - ------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting changes 69.9 8.7 42.7 (22.2) Cumulative effect of changes in accounting for certain postretirement and postemployment benefits and income taxes - - - (307.5) - ------------------------------------------------------------------------------ Net income (loss) $ 69.9 $ 8.7 $ 42.7 $(329.7) - ------------------------------------------------------------------------------ Weighted average number of common shares 104.5 103.9 104.3 103.7 Weighted average number of common equivalent shares 0.1 0.3 0.1 ** Weighted average number of preferred shares on an "if converted" basis 22.7 22.7 22.7 ** - ------------------------------------------------------------------------------ Average common shares outstanding as adjusted 127.3 126.9 127.1 103.7 - ------------------------------------------------------------------------------ Income (loss) per share: Income (loss) from continuing operations $ 0.55 $ (0.01) $ 0.34 $ (0.30) Income from discontinued operations - 0.08 - 0.09 - ------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting changes $ 0.55 0.07 0.34 (0.21) Cumulative effect of changes in accounting for postretirement and postemployment benefits and income taxes - - - (2.97) - ------------------------------------------------------------------------------ Net income (loss) per share $ 0.55 $ 0.07 $ 0.34 $ (3.18) - ------------------------------------------------------------------------------ Shares of stock outstanding at June 30 Common 104.6 103.9 Preferred - $2.10 Class A 1.7 1.7 Preferred - $3.625 Class A 2.7 2.7 Preferred - $4.50 Class B 1.0 1.0 * Calculation of fully diluted loss per share for all periods except the three months ended June 30, 1994 is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083, although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an antidilutive result, or is not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. ** Antidilutive
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