-----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, QKmuVVRgs69GkQwMeIo9Sp6UNPKtNH0+huilv98WVEMOt4Op60dY6x+3umlE5Vmk 67HdJwQE+rfD1dtEysOdNw== 0000950132-94-000119.txt : 19940404 0000950132-94-000119.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950132-94-000119 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 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-K SEC ACT: 34 SEC FILE NUMBER: 001-00873 FILM NUMBER: 94519712 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1993 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to _________________ Commission file number 1-873-2 ------- Armco Inc. ---------- (Exact name of registrant as specified in its charter) Ohio 31-0200500 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412/255-9800 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Class A Preferred Stock, without par value New York Stock Exchange Class B Preferred Stock, $1 par value each New York Stock Exchange Common Stock, $.01 par value each New York Stock Exchange Rights to Purchase Participating Preferred Stock of Class A Preferred Stock New York Stock Exchange Sinking Fund Debentures: New York Stock Exchange 8.70%, due 1995 9.20%, due 2000 8.50%, due 2001 11.375% Notes, due 1999 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((Section) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of Armco Inc. (assuming solely for purposes of this Form, that all members of registrant's Board of Directors are "affiliates") was approximately $778,557,626 as of February 28, 1994. As of the close of business on February 28, 1994, there were 104,103,174 shares of Common Stock outstanding. Documents incorporated by reference herein include: Annual Report to Shareholders for the year ended December 31, 1993 -- Parts I, II, and IV of this report. Proxy Statement for the 1994 Annual Meeting of Shareholders filed with the Commission under Rule 14a-6 of the Securities Exchange Act of 1934 in connection with the Company's 1994 Annual Meeting of Shareholders -- Part III of this report. PART I ITEM 1. BUSINESS General Armco Inc. ("Armco" or the "Company") was incorporated as an Ohio corporation in 1917 as a successor to a New Jersey corporation incorporated in 1899. Armco is the second largest domestic producer of stainless flat-rolled steels and is the largest domestic producer of electrical steels in terms of sales revenues. The Company also produces carbon steels and steel products and tubular steel goods. The Company is a partner in Armco Steel Company, L.P. ("ASC"), a 50%-owned joint venture with Kawasaki Steel Corporation ("Kawasaki") that produces primarily high-strength, low-carbon flat-rolled steel products. Armco is also a partner in North American Stainless ("NAS"), a 50%-owned joint venture with Acerinox S.A. that finishes chrome nickel flat-rolled stainless steel. The Company owns a 50% partnership interest in National-Oilwell, a distributor of oil country tubular goods and a manufacturer of drilling, production and other oil and gas equipment that operates a network of oil field supply stores throughout North America. Armco also provides insurance services through businesses it intends to sell or liquidate. As part of its strategy to focus on Specialty Flat-Rolled Steel, Armco has continued to evaluate the growth potential and profitability of its businesses and investments, and to rationalize or divest those that do not represent a strategic fit or offer growth potential or positive cash flow. In 1992 and 1993, Armco divested or otherwise rationalized several unprofitable or non-strategic operations. In September 1993, Armco sold its joint venture interest in several wire-drawing operations in its Worldwide Grinding Systems segment, and in November 1993, Armco sold the balance of its Worldwide Grinding Systems business. Also in September 1993, Armco sold Armco do Brasil S.A., its Brazilian sheet and strip business, and made a decision to dispose of several other businesses in its Other Steel and Fabricated Products segment, including Miami Industries (which was sold in October 1993), its Tex-Tube Division, its conversion services businesses and Flour City Architectural Metals. On January 28, 1994, Armco signed a letter of intent to sell its ongoing insurance operations to Vik Brothers Insurance, Inc., a privately owned property and casualty insurance holding company. Under the terms of the letter of intent, approximately $70 million would be received at closing and approximately $15 million would be received in three years, the latter payment being subject to a reserve analysis and potential adjustment at that time. As a result of restructuring certain obligations arising from the 1992 merger plan for the runoff companies, the proceeds from the sale have been pledged as security for certain note obligations due to the runoff insurance companies and will be retained in the investment portfolio of the Armco Financial Services Group runoff companies. The transaction is subject to a number of conditions, including a definitive purchase agreement, approval by regulatory authorities and approval of the boards of directors of Armco and the purchaser. In connection with the foregoing actions, Armco recorded in 1993 charges totaling $250.5 million, which included special charges of $165.5 million reflected in operating losses, and an $85.0 million charge reflected as loss on disposal of discontinued operations, which included a $45.0 million charge for expenses and losses in connection with the proposed sale of the ongoing insurance companies and $40.0 million in connection with the sale of the Worldwide Grindings Systems segment. The previously reported initial public offerings of equity and debt, through which ASC would implement its plan to restructure and recapitalize itself, commenced on March 30, 1994, with the underwritten public offerings by the corporate successor to ASC of approximately 17.6 million shares of common stock, at $23.50 per share, and $325 million of senior notes. The sales of the securities and the restructure and recapitalization are scheduled to be completed on April 7, 1994. Under the terms of the plan, the proceeds from the offerings will be used by ASC primarily to reduce its debt and unfunded pension liability, Armco's obligations to make certain cash payments to ASC will be eliminated and Armco will receive approximately 1 million shares, or approximately 4.2%, of the successor corporation's common stock. 1 Business Segments Following the sale in the fourth quarter of 1993 of the business of Armco's former Worldwide Grinding Systems segment, Armco will report its businesses in two segments -- Specialty Flat-Rolled Steel and Other Steel and Fabricated Products. The information on the amounts of revenue, operating results and identifiable assets attributable to each of Armco's business segments set out in Note 9 of the Notes to Financial Statements in Armco's Annual Report to Shareholders for the year ended December 31, 1993, is incorporated by reference herein. Additional information about Armco's business segments and equity investments is set forth in Management's Discussion and Analysis in Armco's Annual Report to Shareholders for the year ended December 31, 1993, which is incorporated by reference herein. Specialty Flat-Rolled Steel Armco's Specialty Flat-Rolled Steel businesses produce and finish stainless and electrical steel sheet and strip and stainless plate. The Specialty Flat-Rolled Steel group is headquartered in Butler, Pennsylvania, with its principal manufacturing plants in Butler and Zanesville, Ohio, where Armco produces flat-rolled stainless and electrical steel sheet and strip products, and in Coshocton, Ohio, where Armco finishes premium quality flat-rolled stainless steel in strip and sheet form. The segment also includes Eastern Stainless Corporation ("Eastern"), an 84%-owned subsidiary located in Baltimore, Maryland, which is a leading domestic producer of stainless steel plate as well as the results of European trading companies that buy and sell steel and manufactured steel products. Armco has a 50% interest in NAS, located in Carrollton, Kentucky, which began customer shipments in mid-1993 and can finish flat-rolled stainless steel in widths up to 60 inches. The NAS interest is accounted for as an equity investment. The specialty steel industry is a relatively small but distinct segment of the overall steel industry that represented approximately 2% of domestic steel tonnage but accounted for approximately 17% of domestic steel revenues in 1993. Specialty steels refer to alloy tool steel, electrical steel and stainless sheet, strip, plate, bar, rod and wire products. Specialty steels differ from basic carbon steel by their metallurgical composition. They are made with a high alloy content, which enables their use in environments that demand exceptional hardness, toughness, strength and resistance to heat, corrosion or abrasion or combinations thereof. Unlike high-volume carbon steel, specialty steel is generally produced in relatively small quantities utilizing special processing techniques designed to meet more exacting specifications and tolerances. Stainless steel, which represents the largest part of the specialty steel market, contains elements such as chromium, nickel and molybdenum that give it the unique qualities of resistance to rust, corrosion and heat; high strength; good wear characteristics; natural attractiveness; and ease of maintenance. Stainless steel is used, among other things, in the automotive, aircraft, and aerospace industries and in the manufacture of food handling, chemical processing, pollution control and medical and health equipment. Electrical steels are iron-silicon alloys and, through special production techniques, possess unique magnetic properties that make them desirable for use as energy efficient core material in such applications as electrical transformers, motors and generators. Since 1975, usage of stainless steel in the United States has more than doubled. Armco expects that the demand for stainless steel will continue to be positively affected by increasing use in the manufacture of consumer durable goods and industrial applications. Per capita stainless steel usage in many highly developed countries significantly exceeds usage per capita in the United States and Armco believes that this is an indication of the growth potential of demand for stainless steel in the United States. In addition, the 1990 amendments to the Clean Air Act have resulted in the 2 increasing use of corrosion-resistant materials in a number of applications for which stainless steel is well suited, including industrial pollution control devices and motor vehicle exhaust systems for use in the United States, where Armco now has the leading market share. Another factor that Armco believes will affect demand positively is the increasing issuance of new car bumper-to-bumper warranties and the use of stainless steel in passenger restraint systems. Stainless steel products generate higher average profit margins than carbon steel products and, depending on the stainless grade, sell at average prices of three to five times those of carbon steel. Armco produces flat-rolled stainless steel and alloy electrical steel sheet and strip products that are used in a diverse range of consumer durables and industrial applications. Since the acquisition of Cyclops, approximately 70% of Armco's sales of Specialty Flat-Rolled Steel has been stainless steel and 30% has been electrical steel. Major markets served are industrial machinery and electrical equipment, automotive, construction and service centers. In the stainless steel market, Armco is the leading domestic producer of chrome grades used primarily in the domestic market for automotive exhaust components. Stainless steel, which formerly was not used in parts of the exhaust system other than the catalytic converter, is now used in the entire exhaust system from manifold to tailpipe by many auto manufacturers. Armco has developed a number of specialty grades for this application, many of which are patented. Armco is also known for its "bright anneal" chrome grade finishes utilized for automotive and appliance trim and other chrome grades used for cutlery, kitchen utensils, scissors and surgical instruments. Specialty chrome nickel grades produced by Armco are used in household cookware, restaurant and food processing equipment and medical equipment. Commodity chrome nickel stainless steel finished by NAS and marketed by Armco is expected to meet anticipated demand from steel service centers and end users who serve the domestic chemical, pulp and paper, construction and food and beverage industries. Other Armco stainless products include functional stainless steel manufactured for automotive, agricultural, heating, air conditioning and other manufacturing uses and Eastern's stainless steel plate, principally in flat plate form, for use in industrial applications where high resistance to heat, stress or corrosion is required. Typical users of stainless steel plate include the chemical processing, pulp and paper, food and beverage, waste treatment, environmental control and textile industries for applications such as tanks, piping and tubing, flue gas scrubbers and heat exchangers. Eastern is also the only domestic producer of diamond-patterned stainless floor plate that is used primarily in decking for ships and chemical plant construction. Armco is the only United States manufacturer of a complete line of flat-rolled electrical steel sheet and strip products and is the sole domestic producer of certain high permeability oriented electrical steels. It is also the only domestic manufacturer utilizing laser scribing technology. In this process, the surface of electrical steel is etched with high-technology lasers which refine the magnetic domains of the steel resulting in superior electrical efficiency. Major electrical product categories are: Regular Grain Oriented ("RGO"), used in the cores of energy-efficient power and distribution transformers; Cold Rolled Non-Oriented ("CRNO"), used for electrical motors and lighting ballasts; and TRAN COR(R)H, which is used in power transformers and is the only high permeability electrical steel made domestically. In 1993, Armco exported approximately 18.7% of its RGO product to Mexico, South America and other international markets. Armco had trade orders in hand for its Specialty Flat-Rolled Steel segment of $154.8 million at December 31, 1993, and $132.7 million at December 31, 1992. The backlog increased in 1993 due to stronger demand and an improving economy. While substantially all of the orders in hand at year-end 1993 are expected to be shipped in 1994, such orders, as is customary in the industry, are subject to modification, extension and cancellation. Armco's specialty steelmaking operations are concentrated in the four contiguous states of Pennsylvania, Ohio, Kentucky and Maryland, which permits cost-efficient materials flow between plants. Armco's Butler, Pennsylvania facility, which is situated on 1,300 acres with 3.2 million square feet of buildings, continuously casts 100% of its steel. At Butler, melting takes place in three 165-ton electric arc furnaces that feed the world's largest (175-ton) argon-oxygen decarburization unit for refining molten metal that, in turn, feeds two double strand continuous casters. The melt capacity at 3 Butler was approximately 850,000 tons by year-end 1993. Butler also operates a hot-strip mill, anneal and pickle units and a fully-automated tandem cold-rolling mill. It also has various intermediate and finishing operations for both stainless and electrical steels. Armco's Zanesville, Ohio plant, with 508,000 square feet of buildings on 88 acres, is a dedicated finishing plant for some of the steel produced at the Butler facility and has a Sendzimer cold-rolling mill, anneal and pickle units, high temperature box anneal and other decarburization and coating units. The world-class finishing plant in Coshocton, Ohio, located on 650 acres, is housed in a 500,000 square-foot plant and has three Sendzimer mills, four anneal and pickle lines, three "bright anneal" lines, two 4-high mills for cold reduction and other processing equipment, including temper rolling, slitting and packaging facilities. Armco's joint venture, NAS, which began customer shipments in mid-1993, is a state-of-the-art stainless steel finishing facility in Carrollton, Kentucky. NAS produces high volume grades of flat-rolled chrome nickel stainless in coils up to 30 tons and in widths up to 60 inches, a product that offers cost and handling savings to customers. The new plant is highly automated, featuring anneal and pickle lines, a Sendzimer cold-rolling mill, and other related equipment using world-class technology. Since Eastern discontinued its melt operations on July 22, 1993, Eastern's operations consist primarily of a hot plate rolling mill and finishing facility in Baltimore, Maryland, with its slab requirements largely being supplied by Armco's Butler facility. Other Steel and Fabricated Products The Other Steel and Fabricated Products segment includes steelmaking, fabricating and processing plants in Pennsylvania and Ohio; a nonresidential construction company; a steel tubing company; and a snowplow manufacturer. The businesses in this segment currently include: -- Carbon steel operations at Mansfield, Ohio, which produce commodity grades of carbon steel sheet, much of which is coated at a dedicated galvanizing facility at Dover, Ohio. Under a plan to spend approximately $100 million at Mansfield to enhance its steel production capability and improve the operating performance of both the Mansfield and Dover, Ohio operations, Armco has begun installing a thin-slab caster and related plant modifications at Mansfield. Installation is expected to be completed in 1995. The caster is designed to produce carbon steels, functional grades of chrome stainless steels and nonoriented grades of electrical steels. The Mansfield plant currently consists of a 1.4 million square-foot facility, with a melt shop with two electric arc furnaces (170-ton and 100-ton), a 100-ton argon-oxygen decarburization unit, a six-stand hot strip mill, a five-stand tandem cold rolling mill and a newly retrofitted Z-mill for chrome stainless finishing. On March 28, 1994, Armco announced its intention to idle the production facilities at its Empire-Detroit carbon steel plant in Mansfield, Ohio and the Dover, Ohio galvanizing plant. The plants are expected to remain idle until the previously announced construction of a $100 million thin-slab caster is completed, which is scheduled for mid-1995. Armco expects to recognize a special charge of up to $20 million in the first quarter of 1994 for the cost of benefits to employees on layoff and other costs of idling the facilities, as well as costs associated with planned permanent work force reductions. -- Douglas Dynamics, which is the largest North American manufacturer of snowplows for four-wheel drive pick-up trucks and utility vehicles. Douglas Dynamics is headquartered in Milwaukee, Wisconsin, has snowplow manufacturing plants in Rockland, Maine and Milwaukee, Wisconsin and sells its snowplows through independent distributors throughout the United States and Canada. -- Sawhill Tubular, which produces steel pipe and tubing, electric welded and mandrel-drawn steel tubing and electric-resistance welded steel pipe at its plant in Pennsylvania. 4 During 1993, Armco divested or decided to dispose of various businesses previously in this segment: -- Armco sold Miami Industries, a steel tubing company, in October 1993, and has also decided to dispose of Tex-Tube, another steel tubing business. As of September 30, 1993, results for both Miami Industries and Tex-Tube are no longer reported as part of the Other Steel and Fabricated Products segment. -- Flour City Architectural Metals, headquartered in Glen Cove, New York, which designs, fabricates and installs custom curtain wall systems in nonresidential commercial and institutional construction. In February 1993, Armco sold part of its nonresidential construction business. As of September 30, 1993, Armco decided to dispose of the remainder of this business and no longer reports the results of its nonresidential construction businesses as part of the Other Steel and Fabricated Products segment. -- Conversion services (remelting, forging, blooming, anneal and pickling and heat treating) provided in plants in Baltimore, Maryland and Bridgeville, Pennsylvania. As of September 30, 1993, Armco decided to dispose of these businesses and no longer reports their results as part of the Other Steel and Fabricated Products segment. This segment also included the business of Armco do Brasil S.A., a fabricating and processing plant in Brazil that processed semi-finished steel. Armco sold this business in September 1993. Armco had trade orders in hand for its Other Steel and Fabricated Products segment of $73.0 million at December 31, 1993. The segment's backlog decreased in 1993 primarily as a result of the 1993 sale or planned divestiture of a number of businesses. While substantially all of the orders in hand at year-end 1993 are expected to be shipped in 1994, such orders, as is customary in these industries, are subject to modification, extension and cancellation. Employees At December 31, 1993, Armco had approximately 6,600 employees in its continuing operations and approximately 2,300 employees in its insurance and discontinued operations. Most of Armco's domestic production and maintenance employees are represented by international, national or independent local unions, although some operations are not unionized. Eastern recently completed two-year agreements with the United Steelworkers of America ("USWA"), the union that represents employees at the Eastern plant in Baltimore, Maryland. Armco also recently completed 36-month and 33-month agreements, respectively, with the local unions at the specialty steel plants in Butler, Pennsylvania and Zanesville, Ohio. In late June, the USWA employees at Armco's Mansfield and Dover, Ohio plants ratified new six-year contracts, which became effective September 1, 1993. Competition Armco's steel products are subject to wide variations in demand because of changes in business conditions. Armco faces intense competition within the domestic steel industry, from foreign steel producers, from manufacturers of products other than steel, including aluminum, ceramics, plastics and glass, and from foreign producers of steel components and products that typically have lower labor costs. In addition, many foreign steel producers are owned, controlled or subsidized by their governments and their decisions with respect to production and sales may be influenced more by political and economic policy considerations than by prevailing market conditions. Some foreign producers of steel and products made of steel have continued to ship into the United States market despite decreasing profit margins or losses. If certain pending trade proceedings ultimately do not provide relief from unfairly traded imports, if other relevant U.S. trade 5 laws are weakened, if world demand for steel declines or if the U.S. dollars strengthens, an increase in the market share of imports may occur and the pricing of the Company's products could be adversely affected. Competition is based primarily on price, with factors such as reliability of supply, service and quality also being important in certain segments. In addition to the other integrated steel producers, competition is presented by the so-called "mini-mills," which generally have smaller, non-unionized work-forces and are free of many of the employer, environmental and other obligations that traditionally have burdened integrated steel producers. Mini-mills also derive certain competitive advantages by utilizing less capital intensive sources of steel production. At least one of these mini-mills is already producing flat-rolled carbon steel products while others have considered doing the same. In future years, mini-mills may provide increased competition in the higher quality, value added product lines now dominated by the integrated carbon steel producers and stainless steel producers. Import penetration for stainless sheet and strip in 1993 and 1992 was 25.2% and 17.8%, respectively, and for stainless plate was 16.0% and 14.5%, respectively. Import penetration of electrical steel was 22.7% and 17.5%, respectively, during such periods. Voluntary steel import restraint agreements ("VRAs"), intended to achieve certain disciplines over market-distortive trade practices in the carbon and specialty steel industries, expired on March 31, 1992. With the expiration of the VRAs, Armco is unable to predict the level of future steel imports. Existing trade laws or current regulations may not be adequate to prevent unfair trading practices and imports may pose increasingly serious problems for the domestic specialty steel industry. This is particularly so if United States trade laws are weakened in the ongoing General Agreement on Tariffs and Trade Uruguay Round or the Multilateral Steel Agreement trade negotiations. At this time, it cannot be predicted with any degree of certainty what the outcome of such negotiations will be. Armco's carbon steel operations at Mansfield, Ohio, may also be adversely affected by the outcome of recent International Trade Commission ("ITC") and United States Department of Commerce ("Commerce Department") rulings on trade cases. On June 30, 1992, the major carbon steelmakers filed 84 trade cases against foreign producers of carbon steel from 21 countries charging them with selling steel below their home market prices and receiving unfair trade subsidies that are illegal under United States trade laws. On August 21, 1992, the ITC made affirmative preliminary determinations in 72 of the cases (affecting 95% of the volume of imports alleged to have been unfairly traded), finding that there was a reasonable indication that the domestic steel industry had been materially injured or was threatened with material injury by the imports in question. On June 22, 1993, the Commerce Department reached a final determination that foreign producers from 12 countries had unfairly benefited from government subsidies and that certain steel producers from 19 countries had unlawfully dumped steel and steel products in the U.S. market. On July 27, 1993, the ITC ruled that foreign producers had not caused injury to the domestic producers of hot-rolled carbon steel, although about one-third of the claims were upheld against foreign cold-rolled producers, and generally all claims against foreign coated carbon steel producers were upheld. This ruling was generally unfavorable for the domestic carbon steel industry, since it partially reversed previously assessed duties on foreign producers. It is too early to assess the effect, if any, that the rulings will have upon future pricing and demand for domestically produced products. The rulings, however, were generally favorable for coated carbon steel products, one of Mansfield's major product lines. Anti-dumping and countervailing duties might be imposed against those imports for which the ITC made a final affirmative injury determination. These duties are designed to offset "dumping" and the advantages of foreign subsidies and create a "level playing field" for domestic producers in the U.S. market. The Company and other U.S. steel producers have appealed certain of the ITC's determinations to the United States Court of International Trade, and foreign steel producers have appealed certain other of the ITC's determinations, as well as certain of the Commerce Department's determinations. During 1993, steel imports increased to 19.5 million tons, versus 17.1 million tons in 1992, an increase of 14.2%. In 1993, imports accounted for 18.8% of U.S apparent steel supply, versus 18.0% in 1992. Armco, Allegheny Ludlum Corporation, the USWA and the independent unions at Armco's plants in Butler, Pennsylvania and Zanesville, Ohio have filed a petition requesting that the U.S. 6 government impose both antidumping and countervailing duties on imports of grain-oriented electrical steel from Italy. In addition, Allegheny Ludlum Corporation and the USWA petitioned the U.S. government to assess antidumping duties on imports of grain-oriented electrical steel from Japan. In October 1993, the ITC issued a preliminary determination of material injury due to subsidized and dumped grain-oriented electrical steel from Italy and dumped grain-oriented electrical steel from Japan. The Commerce Department announced on January 25, 1994, a preliminary CVD (subsidy) margin of 23.14% against Italy. On February 3, 1994, the Commerce Department announced preliminary anti-dumping margins of 5.62% against Italy and 31.08% against Japan. A final ruling by the ITC is anticipated in June of 1994. Specialty steel (stainless sheet and strip, plate, bar, rod and wire, and electrical steels) imports accounted for approximately 26.5% of the domestic market in 1993, 20.8% in 1992, and 18.1% in 1991. Raw Materials and Energy Sources Raw material prices represent a major component of per ton production costs in the specialty steel industry. The principal raw materials used by Armco in the production of specialty steels are iron and steel scrap, chrome and nickel and their ferroalloys, stainless steel scrap, silicon and zinc. These materials are purchased in the open market from various outside sources. Since much of this purchased raw material is not covered by long-term contracts, availability and price are subject to world market conditions. Chrome and nickel and certain other materials in mined alloy form can be acquired only from foreign sources, many of them located in developing countries that may be subject to unstable political and economic conditions that might disrupt supplies or affect the price of these materials. A significant portion of the chrome and nickel requirements, however, is obtained from stainless steel scrap rather than mined alloys. While certain raw materials have been in short supply from time to time, Armco currently is not experiencing and does not anticipate any problems obtaining appropriate materials in amounts sufficient to meet its production needs. Armco also uses large amounts of electricity and natural gas in the manufacture of its products. It is expected that such energy sources will continue to be reasonably available in the foreseeable future. Compliance with amendments to the Clean Air Act, enacted in November 1990, may increase the operating costs of the utilities providing services to Armco's facilities, and in turn may result in increased costs to Armco for utility services. Environmental Matters Armco, in common with other United States manufacturers, is subject to various federal, state and local requirements for environmental controls relating to its operations. Armco has spent substantial amounts in recent years to control air and water pollution to achieve and maintain compliance with applicable environmental requirements. Armco also has spent and will continue to spend substantial amounts for proper waste disposal and for the investigation and cleanup of properties that require remediation as a result of past waste disposal. Statutory and regulatory requirements in this area are continuing to evolve and, accordingly, it is not possible to predict with certainty the type and magnitude of expenditures that will be required in the future. However, Armco has estimated aggregate expenditures of approximately $30.0 million during the three-year period 1993-1995, of which approximately $20.0 million is related to control of air pollution as required by amendments to the Clean Air Act (enacted in November 1990), corresponding state laws and implementing regulations (which amount does not include approximately $7.0 million in estimated capital expenditures related to Armco Worldwide Grindings Systems segment, the business of which was sold in 1993) for capital projects for pollution control in all its domestic and international operations, with the largest expenditures being made in the Specialty Flat-Rolled Steel segment. This projection has been prepared internally and without independent engineering or other assistance and reflects Armco's current analysis of probable required capital projects for pollution control. Expenditures associated with remediation matters for which Armco is one of a number of potentially responsible parties are generally not included. In addition to the direct impact on Armco, the Clean Air Act amendments are expected to increase the operating cost of electrical utilities which rely on 7 fossil fuels and this, in turn, could result in increased costs for utility services of which certain operations of Armco are significant customers. Armco's capital expenditures for pollution control projects amounted to approximately $4.1 million in 1993. During the period 1982 through 1992, Armco's capital expenditures for pollution control projects amounted to approximately $72.6 million (which amounts do not include such expenditures related to Armco Worldwide Grinding Systems segment, the business of which has been reclassified as a discontinued operation). Armco also is a party to a number of administrative proceedings and negotiations with environmental regulatory authorities. Armco believes that the ultimate liability from environmental-related liabilities will not materially affect the consolidated financial position or liquidity of Armco; however, it is possible that due to fluctuations in Armco's operating results, future developments with respect to such matters could have a material effect on the results of future operations or liquidity in 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 the disposal. The federal government has asserted that joint and several liability applies to 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 state or federal government or another potentially responsible party seeks reimbursement for or to compel 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 or facilities formerly owned by Armco 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 and state authorities. Armco and its subsidiaries are also parties to some lawsuits with respect to alleged property damage 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 of clean-up such as for 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 clean-up, 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. Research and Development Armco carries on a broad range of research and development activities aimed at improving its existing products and manufacturing processes and developing new products and processes. Armco's research and development activities are carried out primarily at a central research and technology laboratory located in Middletown, Ohio. This laboratory is engaged in applied materials research related to iron and steel, non-ferrous materials and new materials. In addition, the materials and metallurgy departments at each operating unit develop and implement improvements to products and processes that are directly connected with the activities of such operating unit. Armco spent $12.9 million, $24.0 million and $23.6 million, respectively, on research in each of the three years ended December 31, 1993, 1992 and 1991 (including $3.9 million, $9.4 million and $11.8 million, respectively, funded by affiliates, primarily ASC, in each of such years). 8 Equity and Other Investments Armco's equity and other investments include ASC, NAS (discussed above under "Specialty Flat-Rolled Steel"), Armco Financial Services Group ("AFSG") and National-Oilwell. Armco Steel Company, L.P. ASC is a joint venture limited partnership formed in 1989 by Armco and Kawasaki. With plants located in Middletown, Ohio and Ashland, Kentucky, ASC produces primarily high strength, low carbon flat-rolled steel. These products are supplied to the automotive, appliance and manufacturing markets, as well as to the construction industry and independent steel distributors and service centers. Effective May 13, 1989, substantially all of the assets, properties, business and liabilities of Armco's former Eastern Steel Division were transferred to, or assumed by, ASC, a Delaware limited partnership managed by a general partner corporation equally owned by subsidiaries of Armco and Kawasaki. The previously reported initial public offerings of equity and debt, through which ASC would implement its plan to restructure and recapitalize itself, commenced on March 30, 1994, with the underwritten public offerings by the corporate successor to ASC of approximately 17.6 million shares of common stock, at $23.50 per share, and $325 million of senior notes. The sales of the securities and the restructure and recapitalization are scheduled to be completed on April 7, 1994. Under the terms of the plan, the proceeds from the offerings will be used by ASC primarily to reduce its debt and unfunded pension liability, Armco's obligations to make certain cash payments to ASC will be eliminated and Armco will receive approximately 1 million shares, or approximately 4.2%, of the successor corporation's common stock. The domestic steel industry is highly competitive. Despite significant reductions in raw steel producing capability by major domestic producers over the last decade, the domestic industry continues to be adversely affected by excess world capacity. Over the last decade, extensive downsizings have necessitated costly restructuring charges that, when combined with highly competitive market conditions, have resulted in substantial losses for most domestic integrated steel producers. Carbon steel consumption in the United States has not grown with the overall economy in recent years. Producers of steel products face substantial competition from manufacturers of plastics, aluminum, ceramics, glass, concrete and other materials. While domestic carbon steel producers have taken action to scale back their operations through corporate reorganizations or as a result of bankruptcy proceedings, which actions have resulted in the closing of numerous production facilities, there still exists significant excess capacity in the domestic carbon steel industry. Overall, domestic steel capability utilization (including specialty steels) was approximately 87% during 1993. From time to time industry overcapacity has created an operating environment in which competing producers engaged in significant price discounting in order to maintain or gain market share. A number of major domestic steelmakers now operate under, or have emerged from, bankruptcy protection and have lower operating costs, which permit them to sell their products at lower prices. Further, domestic integrated carbon steel producers (including ASC) have lost market share to domestic mini-mills and low-cost reconstituted mills in recent years as these mills have expanded their product lines to include large-size structural products and certain carbon steel flat-rolled products, including thin cast slabs. Management believes that, before the cost reductions that have been effected in the last six months, ASC's cost per ton of steel was significantly higher than experienced by its domestic and foreign competitors and that its cost per ton is still higher than those of a number of its competitors, particularly the mini-mills. Imports of carbon steel and steel products have had a particularly adverse impact on domestic carbon steel shipments and pricing. High labor costs, including pension, health and other employee benefit obligations, and restrictive work practices are likely to continue to be competitive disadvantages for ASC and other domestic producers. Furthermore, foreign producers frequently have received subsidized financing and many are owned or controlled by foreign governments and base their decisions with respect to steel production and pricing on political and economic policy 9 considerations as well as business factors. As a result of voluntary steel import restraint arrangements negotiated in 1985 between the United States and certain other steel-producing nations, steel imports declined from the levels of the mid-1980's. However, such arrangements expired in March 1992 without being extended or replaced with other import restrictions. Existing trade laws or trade negotiations may not be adequate to prevent unfair trading practices. On June 30, 1992, the major carbon steelmakers filed 84 trade cases against foreign producers of carbon steel from 21 countries charging them with selling steel below their home market prices and receiving unfair trade subsidies that are illegal under United States trade laws. On August 21, 1992, the ITC made affirmative preliminary determinations in 72 of the cases (affecting 95% of the volume of imports alleged to have been unfairly traded), finding that there was a reasonable indication that the domestic steel industry had been materially injured or was threatened with material injury by the imports in question. On June 22, 1993, the Commerce Department reached a final determination that foreign producers from 12 countries had unfairly benefited from government subsidies and that certain steel producers from 19 countries had unlawfully dumped steel and steel products in the U.S. market. On July 27, 1993, the ITC ruled that foreign producers had not caused injury to the domestic producers of hot-rolled carbon steel, although about one-third of the claims were upheld against foreign cold-rolled producers, and generally all claims against foreign coated carbon steel producers were upheld. On November 30, 1992, and January 27, 1993, the Commerce Department assigned preliminary duties on subsidy and dumping cases, respectively. However, on July 27, 1993, the ITC ruled that foreign producers had not caused injury to the domestic producers of hot-rolled carbon steel, although about one-third of the claims were upheld against foreign cold-rolled producers, and generally all claims against foreign coated carbon steel producers were upheld. This ruling was generally unfavorable for the domestic carbon steel industry, since it partially reversed previously assessed duties on foreign producers. It is too early to assess the effect, if any, that the rulings will have upon future pricing and demand for domestically produced products. The automotive industry, directly or indirectly, comprises the most substantial portion of the total sales of ASC. Significant downturns in the domestic automotive industry have had and likely would have a material adverse effect on ASC's profitability. At December 31, 1993, ASC had approximately 6,400 active employees. Most of the production and maintenance employees are represented by national or independent local unions. ASC steelmaking employees at its Ashland, Kentucky, facility are covered under an agreement with the USWA. The contract, which was originally scheduled to expire on July 31, 1993, has been extended to June 1, 1994. ASC coke-making employees at the Ashland facility are covered under an agreement with the Oil, Chemical & Atomic Workers union, which was scheduled to expire on October 1, 1993, but has been extended to May 1, 1994. No predictions can be made as to the results of the renegotiations of these agreements or the possible effects of the renegotiations upon ASC, although the agreement with the USWA covering hourly employees at the Ashland facility establishes procedures for revising its economic terms upon their expiration and contains no-strike clauses that are effective during the negotiation period. The terms of the agreement with the Armco Employees Independent Federation ("AEIF") covering ASC's hourly employees at its Middletown, Ohio facility have been settled though March 1, 1997 pursuant to an arbitrator's decision. On February 15, 1994, the USWA filed a petition with the National Labor Relations Board seeking to represent the hourly employees at the Middletown facility currently represented by the AEIF. If the USWA is elected as the bargaining representative for those employees, it may seek to renegotiate the terms of the existing AEIF agreement covering those employees prior to March 1, 1997. Armco Financial Services Group AFSG currently consists primarily of insurance companies that Armco intends to sell (the "AFSG companies to be sold") and companies that have ceased writing new business and are being liquidated (the "runoff companies"). 10 The AFSG companies to be sold provide multiple-line casualty insurance, including personal and commercial automobile, workers' compensation, homeowners, multiperil, personal and commercial property and general liability insurance and consist primarily of Northwestern National Casualty Company ("NNCC"), Pacific National Insurance Company ("PNIC") and Statesman Insurance Company ("Statesman"). Armco wrote off, in the fourth quarter of 1991, its advances to the AFSG companies to be sold of $170.3 million. Armco estimates that 61% of future claims against the runoff companies will be paid during the period 1993-1997 and that substantially all remaining claims will be paid by the year 2017. While there have been no charges recorded with respect to the runoff companies since 1990, in the future there may be further adverse developments with respect to the runoff companies, which, if not otherwise offset through favorable commutations or other actions, will require additional charges to income. On January 28, 1994, Armco signed a letter of intent to sell its ongoing insurance operations to Vik Brothers Insurance, Inc., a privately owned property and casualty insurance holding company. Under the terms of the letter of intent, approximately $70 million would be received at closing and approximately $15 million would be received in three years, the latter payment being subject to a reserve analysis and potential adjustment at that time. As a result of restructuring certain obligations arising from the 1992 merger plan for the runoff companies, the proceeds from the sale have been pledged as security for certain note obligations due to the runoff insurance companies and will be retained in the investment portfolio of the Armco Financial Services Group runoff companies. The transaction is subject to a number of conditions, including a definitive purchase agreement, approval by regulatory authorities and approval of the boards of directors of Armco and the purchaser. The insurance business is highly competitive. Many of the competitors of the AFSG companies to be sold offer more diversified lines of insurance and have substantially greater financial resources. In addition, the insurance regulators having supervisory authority over Armco's insurance operations retain substantial control over certain corporate transactions, including the sale of the AFSG companies to be sold and the liquidation of the runoff companies. They also have broad powers to interpret statutory accounting requirements and to initiate rehabilitation and liquidation proceedings. The liability for unpaid losses and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liability is necessarily based on estimates and, while management believes that the amount is fairly stated, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments resulting therefrom are reflected in earnings currently. The Company does not discount the liability for unpaid losses and loss adjustment expenses. The AFSG companies to be sold estimate losses for reported claims on an individual case basis. Case reserves are based on experience with a particular type of risk and the available information surrounding each individual claim. Case reserves are reviewed on a regular basis. As additional facts become available, the case reserves are adjusted as necessary. The stability of the case reserving process is monitored through comparison with ultimate settlement. The estimates of losses for incurred but not reported claims (IBNR), as well as additive reserves for reported claims, are developed primarily from an analysis of historical patterns of the development of paid and incurred losses (dollars and claim counts) by accident year for each line of business. Salvage and subrogation estimates are developed from patterns of actual recoveries. Allocated loss adjustment expense reserves are developed from an analysis of historical patterns of the development of paid allocated loss adjustment expenses to incurred losses, by accident year, by line of business. These historical patterns are then applied to projected ultimate losses for each line of business. 11 Unallocated loss adjustment expense reserves are developed utilizing a cost accounting system. The cost accounting system is based on historical costs modified for anticipated changes in operations and selections of alternative costs. Loss and loss adjustment expense reserves are stated at management's estimate of the ultimate cost of settling all incurred but unpaid claims. Loss and loss adjustment expense reserves are not discounted. On October 25, 1990, Northwestern National Holding Company ("NNHC") purchased Statesman. NNHC has accounted for the Statesman acquisition as a purchase and accordingly, the original purchase price was allocated to assets and liabilities based upon their fair value at the date of acquisition. During 1986, Northwestern National Insurance Company was restructured and its principal book of business was transferred to NNCC. As provided by the agreement, NNCC assumed certain liabilities in connection with this book of business. Additionally, NNCC received securities and cash in connection with the transfer. Activity with respect to loss and loss adjustment expense reserves for the last three years is as follows:
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (Dollars in Thousands) 1993 1992 1991 -------- -------- --------- Liability for losses and LAE at beginning of year $284,309 $276,251 $250,249 -------- -------- -------- Provision for losses and LAE for claims occurring in the current year 179,183 192,428 206,535 Increase (decrease) in estimated losses and LAE for claims occurring in prior years 11,632 15,373 14,899 -------- -------- -------- Total 190,815 207,801 221,434 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year 75,189 85,384 86,873 Prior years 102,382 114,359 108,559 -------- -------- -------- Total 177,571 199,743 195,432 -------- -------- -------- Liability for losses and LAE at end of year $297,553 $284,309 $276,251 ======== ======== ========
A reconciliation of the liability for losses and loss adjustment expenses as reported to net of ceded reinsurance follows:
(Dollars in Thousands) 1993 1992 1991 -------- -------- --------- Liability for losses and LAE at end of year - as reported $297,553 $284,309 $276,251 Reinsurance receivables on ceded unpaid losses and LAE 26,643 18,352 16,975 -------- -------- -------- Liability for losses and LAE at end of year - net of ceded reinsurance $270,910 $265,957 $259,276 ======== ======== ========
12 The following table reconciles reserves determined in accordance with accounting principles and practices prescribed or permitted by insurance statutory authorities (Statutory reserve) to reserves determined in accordance with generally accepted accounting principles (GAAP reserve) at December 31, as follows:
(Dollars in Thousands) 1993 1992 1991 -------- -------- --------- Statutory reserve for losses and loss expenses $297,930 $291,832 $283,750 Salvage and subrogation - (7,523) (7,499) Postretirement and postemployment benefits (377) - - -------- -------- -------- GAAP reserve for losses and loss expenses $297,553 $284,309 $276,251 ======== ======== ========
Effective on January 1, 1993 the AFSG companies to be sold adopted a new statutory accounting principle allowing the recognition of salvage and subrogation recoverable in the determination of the statutory reserve for losses and loss expenses. Prior year financial statements have not been restated for the change in accounting principle. Effective on January 1, 1993 the AFSG companies to be sold adopted Statement of Financial Accounting Standards ("SFAS"), SFAS No. 106 and SFAS No. 112 pertaining to postretirement and postemployment benefits. The new accounting principles were adopted for both statutory and GAAP reporting purposes. However, certain differences exist between statutory and GAAP accounting principles that resulted in larger unallocated loss adjustment expense reserves for statutory reporting. The following table presents a calendar year runoff of the reserve for losses and loss adjustment expenses for the years 1984 through 1993. The top line of the table shows the reserve for losses and loss adjustment expenses recorded as of December 31 for each of the indicated years. This reserve represents the estimated amount of losses and loss expenses for claims arising in all years that are unpaid at the balance sheet date, including losses and loss adjustment expenses that had been incurred but not yet reported. Each column shows the reserve amount at the indicated calendar year end and cumulative data on payments and the re-estimated reserves for all accident years making up that calendar year end reserve. The last entry for each calendar year in the lower section of the table represents the incurred loss and loss expense developed, subsequent to the balance sheet date, through 1993. The estimates are increased or decreased as more information concerning the frequency and severity of claims becomes available. The deficiency depicted for a given year is cumulative for that year and all prior years. The following table shows a $40 million deficiency in 1990 and a $29 million deficiency in 1991. The AFSG companies to be sold experienced a significant number of large losses in 1991 and 1990, predominantly in multi-peril and commercial auto. The deficiencies that occurred in 1991 and 1990 are a result of additional unprecedented developments on these large losses. In addition, approximately $17 million of the deficiency for 1990 pertains to additional development and reserve strengthening that occurred on the 1990 and prior accident year loss and loss expense reserves of Statesman Insurance Company, a company acquired in October 1990. The AFSG companies to be sold implemented new reserving procedures to improve the future adequacy of reserve levels. The table reflects the (deficiency) redundancy on loss and loss expense reserves before the impact of the (deficiency) redundancy on loss and loss expense reserves ceded to unaffiliated insurers. 13
(Dollars in Millions) Year Ended 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserve for losses and loss expenses $36 $37 $172 $179 $198 $215 $250 $276 $284 $298 Cumulative amount paid as of: One year later 17 19 63 61 60 79 109 114 102 Two years later 30 30 100 91 98 127 169 176 Three years later 38 37 119 114 124 157 209 Four years later 42 38 132 129 139 178 Five years later 42 40 142 138 153 Six years later 43 41 149 148 Seven years later 44 42 154 Eight years later 45 43 Nine years later 46 Ten years later Reserve re-estimated as of: End of Year 36 37 172 179 198 215 250 276 284 298 One year later 40 45 176 179 176 209 265 292 296 Two years later 49 47 181 160 175 215 278 305 Three years later 50 50 164 163 177 219 290 Four years later 50 45 168 165 180 226 Five years later 46 46 169 168 187 Six years later 48 45 170 173 Seven years later 48 45 175 Eight years later 48 48 Nine years later 51 Ten years later Cumulative Redundancy (Deficiency) ($15) ($11) ($3) $6 $11 ($11) ($40) ($29) ($12) --- --- -- -- --- --- --- --- ---
The AFSG companies to be sold limits the maximum net loss which can arise from large risks by reinsuring (ceding) certain levels of risks with other reinsurers. The following table shows the deficiency on net loss and loss expense reserves, which is significantly lower than the deficiency in the table above. Significant development on large losses exceeding the AFSG companies to be sold net retention during 1990 and 1991 resulted in a smaller impact on reserve adequacy on a net of reinsurance basis 14 The (deficiency) redundancy computed net of ceded reinsurance is as follows: 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Deficiency) redundancy on reserve for losses and loss expenses ($15) ($11) ($3) $ 6 $11 ($11) ($40) ($29) ($12) - (Deficiency) redundancy on ceded unpaid losses and loss expenses (4) (4) (8) (4) (4) (5) (13) (11) (7) - ----- ----- ---- ---- --- ----- ----- ----- ---- (Deficiency) redundancy net of ceded reinsurance ($11) ($7) $ 5 $10 $15 ($ 6) ($27) ($18) ($ 5) - ===== ===== ==== ==== === ===== ===== ===== ===== =====
The tables do not present accident or policy year development data which readers may be more accustomed to analyzing; therefore, analysis of the effect of loss and loss expense reserving on any particular accident year cannot be discerned. The table reflects adjustments to income in each year for all prior years. Conditions and trends that have affected development of the reserve in the past may not occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. National-Oilwell Armco, through a wholly owned subsidiary, has a 50% partnership interest in National-Oilwell, which was formed in 1987 when Armco and USX Corporation each contributed their oilfield equipment operations to National-Oilwell in exchange for equal interests in the new partnership. National-Oilwell is a distributor of oil country tubular goods and a manufacturer of drilling, production and other oil and gas equipment, and operates a network of oil field supply stores throughout North America through which it distributes products to the oil and gas industries worldwide. National-Oilwell operates in a highly competitive environment. ITEM 2. PROPERTIES Armco owns and leases property around the world. This property includes manufacturing facilities, offices and undeveloped property. The locations of Armco's principal plants and materially important physical properties are described in ITEM 1. "BUSINESS" and are used by the Specialty Flat-Rolled Steel and Other Steel and Fabricated Products businesses. Armco believes that all its operating facilities are being adequately maintained and are in good operating condition. All of Armco's principal plants and properties are held in fee. Portions of the Houston plant, shut down in 1983, are leased from the Gulf Coast Waste Disposal Authority (Texas). In most instances, Armco has an option to purchase the leased facilities at the end of the lease period. ITEM 3. LEGAL PROCEEDINGS There are various claims pending against Armco and its subsidiaries involving product liability, patent, insurance arrangements, environmental, antitrust, hazardous waste, employee benefits and other matters arising out of the conduct of the business of Armco. Reserve Mining Litigation. On July 17, 1992, Armco was sued in the -------------------------- United States District Court, District of Minnesota, Fifth Division, by a group of former salaried employees of Reserve Mining Company ("Reserve"), a joint venture between a subsidiary of Armco and LTV Corporation that produced iron ore pellets. The complaint alleges that Armco is liable for certain unpaid welfare benefits, including vacation, severance, supplemental layoff, life insurance and health insurance 15 benefits. While Armco cannot determine the possible exposure, if any, from this lawsuit, plaintiffs preliminarily calculated the benefits at about $12 million. On February 17, 1993, the Court dismissed state law, ERISA and fiduciary claims with prejudice and plaintiffs' independent fiduciary claims without prejudice. Plaintiffs filed an amended complaint, in response to which Armco filed a motion to dismiss. On October 22, 1993, the Court granted Armco's motion to dismiss in its entirety. On November 22, 1993, plaintiffs filed a notice of appeal on the February 17 and October 22 decisions. The appeal is currently pending. In August 1992, Armco was sued in the U.S. District Court, District of Minnesota by members of the USWA who declined to participate in the USWA v. Armco settlement. The complaint alleges breaches of the Basic Labor - -------------- Agreement, Supplemental Unemployment Benefit Plan, Insurance Agreement, Pension Agreement and Program of Hospital-Medical Benefits for Pensioners and Surviving Spouses and seeks an unspecified amount of damages. On February 17, 1993, the Court granted Armco's motion to dismiss plaintiffs' state law claims. Plaintiffs' claims based on the labor agreements remain pending. Plaintiffs filed an amended complaint, in response to which Armco filed a motion to dismiss certain claims therein. On October 22, 1993, the Court granted Armco's motion. On November 8, 1993, Armco filed an answer to the allegations in the amended complaint not subject to the motion to dismiss. On May 14, 1993, Armco received a letter from the Pension Benefit Guaranty Corporation ("PBGC") asserting that Armco is liable for certain pension plan obligations of Reserve, a Minnesota general partnership between a subsidiary of Armco and a subsidiary of LTV Corporation. Reserve filed for reorganization under the U.S. Bankruptcy Code on July 16, 1986. In the letter, the PBGC demands payment by Armco of $42.8 million. On May 23, 1993, Armco and the PBGC entered into an agreement, tolling until December 31, 1993 the running of the statute of limitations with respect to the PBGC's claim against Armco and also with respect to any claims Armco may have against the PBGC. The original tolling agreement has been extended to April 29, 1994. While Armco's management believes that it has substantial defenses against these Reserve-related claims, if these creditors and other Reserve creditors are successful in such claims, Armco could become liable for these and other Reserve nondebt obligations in an amount which could be substantial. CRS Litigation. On October 31, 1990, a third-party complaint was served --------------- on Armco in the Circuit Court of Montgomery County, Maryland by the owner of a 6.3 mile potable water tunnel designed by defendant, CRS Sirrine ("CRS") and its predecessor companies, and constructed by Armco and Clevecon Inc. Armco built 3.4 miles of the tunnel; Clevecon built the remaining 2.9 miles. No portion of the tunnel, which was completed in early 1984, has ever been functional. Washington Suburban Sanitary Commission filed suit against CRS seeking damages in the amount of $200 million. CRS filed third-party complaints against Armco and Clevecon seeking damages to the extent of any liability of CRS attributable to Armco's or Clevecon's negligence or negligent misrepresentation in connection with the installation of the potable water tunnel and the third party defendants' alleged defective workmanship in connection with the same. Armco's motion to dismiss or, in the alternative, for summary judgment was denied by the Court. CRS subsequently settled the claims against it by Washington Suburban Sanitary Commission and continued to prosecute its third-party claims against Armco and Clevecon. Oral argument on Armco's re-filed summary judgment motion was held on January 3, 1994. The circuit court denied Armco's summary judgment motion and the case proceeded to trial. On January 28, 1994, a directed verdict was entered by the court in favor of Armco. CRS has filed a notice of appeal of the judgment entered in favor of Armco. Cornerstones Litigation. An action was filed by Cornerstones Municipal ------------------------ Utility District ("Cornerstones") and William St. John, as representative of a class of owners of real property situated within Cornerstones, in the District Court of Harris County, Texas, in July 1989, alleging that Armco Construction Products supplied defective pipe for a sanitary sewer system in three residential subdivisions. The petition sought in excess of $40 million in damages. On May 29, 1991, plaintiffs filed a Third Amended Petition adding Kingsbridge Municipal Utility District ("Kingsbridge") and John Keplinger, as representative of a class of owners of real property situated within Kingsbridge, as additional plaintiffs. The residents of Kingsbridge made similar allegations, sought certification of 16 the class of Kingsbridge homeowners and seek to recover damages for an allegedly faulty sanitary sewer system in four residential subdivisions. The amended petition seeks in excess of $40 million in damages, on behalf of the Kingsbridge and the Cornerstones plaintiffs, which is in excess of the court's jurisdictional limits. On January 13, 1992, the Court granted Armco's Motion for Summary Judgment and dismissed all of the Cornerstones plaintiffs' claims against the defendants on the basis of the statute of limitations. The Cornerstones plaintiffs appealed the decision and, in January 1993, the Appellate Court reversed the dismissal of the Cornerstones action and remanded it to the trial court. In May 1993, the Texas Supreme Court granted Armco's application for leave to appeal the appellate court's decision and heard argument on the matter on September 14, 1993. On November 24, 1993, the Texas Supreme Court reversed the appellate court in favor of Armco, awarding Armco its costs and remanding the case to the appellate court for disposition of unaddressed issues. The Kingsbridge action remains pending and is in discovery. On or about April 3, 1992, Vincent and Linda Adduci and 71 other plaintiffs, owners of real property situated within Cornerstones, filed suit in the District Court of Harris County, Texas, against multiple defendants, including Armco. The suit, similar to the action filed by Cornerstones and William St. John discussed above, alleges damages were sustained as a result of improper design and installation of the sanitary sewer system servicing the subdivision, as well as certain manufacturing and/or design defects of the pipe utilized to construct the sanitary system. The complaint seeks an unspecified amount of damages. On or about September 11, 1992, Harris W. Arthur and other plaintiffs, owners of real property situated within Cornerstones, filed suit in the District Court of Harris County, Texas, against multiple defendants, including Armco. The suit, similar to the action filed by Cornerstones and William St. John and the action filed by Vincent and Linda Adduci and other plaintiffs, alleges damages were sustained as a result of improper design and installation of the sanitary sewer system servicing the subdivision, as well as certain manufacturing and/or design defects of the pipe utilized to construct the sanitary sewer system. The complaint also asserts legal malpractice theories against various counsel for the Municipal Utility District. The complaint seeks an unspecified amount of damages. On March 22, 1993, an action captioned William C. Irons, et al. v. --------------------------- Turner, Collie & Braden, et al. was filed in the District Court of Harris - ------------------------------- County, Texas. This action, which involves approximately 100 additional owners of real property situated within Cornerstones, names multiple defendants, including Armco, and alleges theories of damages similar to those in the Arthur and Adduci matters. The complaint seeks an unspecified amount of - ------- ------ damages. Armco Chile Prodein, S.A. Litigation. On or about November 15, 1991, ------------------------------------- Armco and Armco Chile Prodein, S.A. were sued for damages in the United States District Court for the Southern District of Alabama by a maritime cargo carrier. Plaintiff's claims are based upon allegations of fraud, negligent misrepresentation, negligent interference with contractual relations and wrongful arrest. Plaintiff's allegations arise out of a series of transactions in which it was engaged by Armco Chile Prodein to transport fiberglass reinforced pipe from Jacksonville, Florida to Talcahuano, Chile. Plaintiff made three such shipments of pipe. After discovering damage to the first and second shipments of pipe, which defendants contend was due to negligence by plaintiff, Armco Chile Prodein arrested, pursuant to Chilean law, the vessel which plaintiff utilized to carry the third shipment of pipe. Plaintiff alleges, among other things, that this arrest was wrongful and that the alleged wrongful arrest resulted in such severe damage to plaintiff's business interests and reputation that plaintiff went out of business. Plaintiff's experts claim that the damages suffered by plaintiff range from $38 million to $47 million. Both Armco and Armco Chile Prodein filed motions for summary judgment. On January 25, 1993, the court granted summary judgment discharging Armco and subsequently denied plaintiff's motions for reconsideration of the summary judgment granted to Armco. On April 30, 1993, a jury verdict on plaintiff's wrongful arrest and lost profits claims was rendered in favor of the plaintiff and against Armco Chile Prodein in the amount of $10,500,000. Judgment on the verdict was entered by the Court on May 7, 1993. Thereafter, Armco Chile Prodein filed a motion seeking judgment as a matter of law or, alternatively, for a new trial. On October 12, 1993, finding that the jury's verdict on liability and damages was against the weight of the evidence, the trial court granted the defendant's post-trial motion, entering judgment in favor of Armco Chile 17 Prodein against plaintiff. The court also granted Armco's motion for a conditional new trial in the event the judgment is overturned on appeal. The plaintiff has appealed this ruling to the Federal Circuit Court. Environmental Proceedings. Armco's steelmaking operations have been -------------------------- involved in or subject to a number of consent orders or judgments under local, state or federal environmental laws and regulations which generally require Armco to comply with certain discharge standards and to add certain pollution abatement equipment. Armco continues to be subject to such orders or settlements to the extent that such standards have not been met or the equipment is not installed. In addition, Armco participates directly or indirectly in a number of proceedings challenging various regulations or procedures relating to environmental compliance. Armco becomes involved in such actions when it perceives that the ultimate application of such regulations or procedures could involve significant capital expenditures by Armco or subject Armco to penalties without obtaining a material environmental benefit. In addition, Armco has been named as a defendant in certain litigation wherein the state or federal government or other potentially responsible parties seek reimbursement for or to compel cleanup of hazardous waste sites. Armco has provided information on materials it has deposited at other hazardous waste sites and may be named as a defendant if litigation is commenced with respect to such sites. 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. The following paragraphs provide information on certain suits and proceedings in which Armco is a participant. On July 31, 1989, the United States filed a civil action in the United States District Court for the Southern District of Texas, Houston Division, under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for cost recovery and injunctive relief associated with the French Limited Superfund site (the "French Limited Site") near Crosby, Texas. Armco and 84 other defendants were named in the action. Concurrently, the United States government filed a Consent Decree requiring the defendants to reimburse the United States in the amount of $1.3 million, to pay certain future oversight costs and to undertake remedial action at the French Limited Site. The Decree was approved and entered by the court. The defendants estimated that the remedy outlined in the Decree would cost approximately $81 million over a five- to eight-year period. Armco's remaining share of costs, which is fully accrued, is approximately $1.6 million. Armco has been one of four remaining defendants in three class actions filed in the 157th Judicial District, District Court of Harris County, Texas on behalf of about 750 residents near the French Limited Site. These cases were Avalos ------ v. Atlantic Richfield Company, ("ARCO") et al., Curette v. ARCO and Adolph - --------------------------------------------------------------- ------ v. ARCO. In December 1992, the Avalos, Curette, and Adolph plaintiffs accepted - -------- a $1.1 million settlement offer made by Armco and two other defendants, of which Armco's share was $549,270.56. The settlement funds were paid out in 1993 and the court dismissed the action with prejudice. As a condition to settlement, 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 the Avalos 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. On December 13, 1993, Rhonda Sills, on behalf of herself and two of her children, sued the same defendants as in the Avalos case. In February, 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 the Barrett, Sills & Chambers ------------------------- lawsuits are not well-founded and, accordingly, no liability has been recorded at this time. An action styled The United States of America, State of Maryland v. -------------------------------------------------- Azrael, et al. v. Armco Steel Corporation, et al. was filed in the United - ------------------------------------------------- States District Court for the District of Maryland 18 pursuant to Section 107 of CERCLA to recover monies expended by the United States and the State of Maryland in response to a release and threatened release (federal allegation) and an imminent and substantial danger to the public health or welfare presented by the release or substantial threat of release (state allegation) of hazardous substances from a waste disposal site at the intersection of Kane and Lombard Streets in Baltimore, Maryland. Armco was served with a third-party complaint on April 19, 1991. The third-party complaint alleges that Armco arranged for the disposal and/or treatment or arranged with a transporter for transport for disposal or treatment of hazardous waste to the Kane and Lombard site. A determination has not been made as to how much waste, if any, Armco sent to the site. To date, settlement discussions with the third-party plaintiffs have been unsuccessful. On or about September 29, 1989, the United States filed a civil action in the United States District Court for the District of Minnesota under CERCLA for declaratory relief and cost recovery associated with the Arrowhead Refining Superfund site (the "Arrowhead Site") in Hermantown, Minnesota. Armco, Reserve and 13 other defendants are named in the action. The United States Environmental Protection Agency's ("USEPA") current estimated cost to clean up the Arrowhead Site is about $30 million. Armco has joined in the filing of a third-party complaint against approximately 300 third-party defendants. Discovery is in progress. During 1990, USEPA and the State of Minnesota issued several orders directing Armco and several other parties to undertake certain remedial actions or risk substantial penalties for not doing so. In early 1991, Armco joined the Minnesota Arrowhead Site Committee ("MASC"), a group of potentially responsible parties ("PRPs"), and has participated in MASC's implementation of the orders. In addition to its compliance activities, MASC also commissioned studies of alternative technologies to remedy sludge and soil contamination at the Arrowhead Site. USEPA is in the process of amending its Record of Decision to include a more cost effective remedy identified by these studies. Armco will be responsible for about 65% of the MASC groups cleanup costs at the site. On or about October 12, 1989, the United States filed a civil action in the United States District Court of Pennsylvania, Western District, against Armco and ten other defendants under CERCLA for cost recovery associated with the Malitovsky Drum Superfund site in Pittsburgh, Pennsylvania. Armco and the other defendants are alleged to have sent materials to the site. The complaint alleges that costs in excess of $1 million have been expended, and additional costs are being incurred through efforts of the United States to recover monies expended in connection with its response actions. Late in 1992, USEPA and the defendants reached an agreement in principle, under which Armco will pay $118,333.33. A definitive settlement agreement has been negotiated, pending final approval by USEPA. In December 1989, Traverse Bay Area Intermediate School District ("TBA") filed suit in the United States District Court for the Western District of Michigan alleging that Parsons Corporation, the predecessor in interest of Hitco, a former subsidiary of Armco, released hazardous substances which contaminated the plaintiff's property. Armco assumed the defense of Hitco pursuant to the terms of the sale of Hitco. The TBA litigation was dismissed with prejudice on January 4, 1993. Armco and TBA jointly performed a remedial investigation, focused feasibility study and risk assessment on TBA's property and submitted the reports to the Michigan Department of Natural Resources ("MDNR"). On March 24, 1993, MDNR sent Armco and TBA a "Notice of Demand for Payment and Response Action", claiming reimbursement of approximately $1.3 million in past costs plus statutory interest and demanding performance of additional investigation and response activities at the site which are estimated to cost about $600,000. Armco's costs are not expected to exceed $1.45 million in resolving Hitco's share of liability at the site. Armco and TBA are working cooperatively with MDNR to settle the matter. On or about June 29, 1992, Armco was served with a complaint, styled as a class action, filed in the Superior Court of California, County of Los Angeles, by Scott Liuzza and approximately 80 named plaintiffs against Armco and a number of other companies, relating to, among other things, a land reclamation site owned by Armco and recently closed under the supervision and with the approval of the appropriate environmental agencies. The plaintiffs are seeking a recovery in an unstated amount for alleged personal and property damages plus injunctive relief. The court sustained Armco's demurrer to the class action counts of the complaint and in March 1994 dismissed plaintiff's claims for the diminution of property values and personal injury. Discovery is in progress with a cutoff date of April 19, 1994. 19 On July 19, 1993, Armco's subsidiary Flour City Architectural Metals, Inc. (formerly E.G. Smith Construction Products, Inc.) ("Flour City") received a request from USEPA under Section 3007 of the Resource Conservation and Recovery Act ("RCRA") for information as part of an ongoing investigation into Flour City's compliance with a Consent Agreement and Final Order dated October 27, 1988 (the "Consent Order") relating to two inactive waste surface impoundments located at the former E.G. Smith plant in Cambridge, Ohio. On February 11, 1993, Armco sold the Flour City Cambridge, Ohio plant, but retained title to 21.5 acres of the Cambridge facility, including the surface impoundments, and responsibility for compliance with the terms of the Consent Order. Armco has established reserves which it believes will be adequate to cover the required remediation. Armco believes that it is in compliance with the Consent Order. Armco submitted a revised closure plan for this site in September, 1993. 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 claim involves a closed facility in Hamden, Connecticut. Although Armco, as successor to Cyclops Corporation, and the State of Connecticut have signed a Consent Order by which Armco agreed to perform certain remedial investigations and activities, the penalty claim in the litigation is still outstanding. Settlement discussions are expected to resolve this matter trial which is scheduled for April 16, 1994. An action styled Tammy Fisher Whalen v. AES, Inc., et al. was filed on ---------------------------------------- March 17, 1993 in the 10th Judicial District, District Court of Galveston County, Texas by Tammy Fisher Whalen on behalf of herself and several other plaintiffs against AES, Inc. and approximately 40 other defendants, including Armco and a number of other major corporations, relating to the McGinnis Waste Disposal Site. Substantially identical actions entitled Elizabeth Ewell, et ------------------- al v. AES, Inc., et al. and Bonnie R. Cannon, et al. v. AES, Inc., et al. - ----------------------- --------------------------------------------- were filed in the same court on May 4, 1993 and June 10, 1993, respectively. In each case, the plaintiffs sought $1 billion in alleged actual damages and $4 billion in punitive damages. Based on Armco's demonstration that no Armco materials went to the McGinnis Site, plaintiffs have moved to dismiss these actions. Whalen and Ewell were dismissed on June 21 and June 25, 1993 ------ ----- respectively. The judge is expected to sign the Cannon dismissal shortly. ------ In September 1992, National Supply Company, Inc., a wholly owned subsidiary of Armco ("National Supply") and a 50% general partner in National-Oilwell, received a letter from USEPA, which asserted that National Supply and/or National-Oilwell is a PRP under CERCLA with respect to the Odessa Drum Company, Inc. Superfund site (the "Odessa Site") located in Odessa, Ector County, Texas. Armco has joined a de minimis PRP group to negotiate a settlement for its liability at this site. Armco believes that any response costs National Supply may bear in connection with the Odessa Site will not be material to Armco. In August 1992, Eastern received a letter from USEPA, which asserted that Eastern is a PRP under CERCLA with respect to the Moyer Landfill Superfund site (the "Moyer Landfill Site") in Collegeville, Pennsylvania. Eastern has responded that it did not send waste or other materials to the Moyer Landfill Site. Eastern understands that a cost recovery action has been instituted in the United States District Court, Eastern District of Pennsylvania, against a substantial number of parties, not including Eastern, which are asserted to have potential liability under CERCLA with respect to the Moyer Landfill Site. No claims against Armco are anticipated. E. G. Smith Construction Products, Inc. ("E. G. Smith"), a subsidiary of Armco, is one of four companies that have been identified by USEPA as PRPs at the Fultz Landfill Superfund site in Byesville, Ohio. USEPA's preliminary estimates for remediation cost is $22 million on a present value basis. The USEPA did not provide an estimate of the waste volume at the site alleged to be that of E. G. Smith. The operators of the landfill have stated that any of E. G. Smith's industrial wastes that are of concern to USEPA were not deposited in the landfill but were transported to another site. USEPA is undertaking cleanup at the site, with the expectation that they can recover such costs from the PRP's. 20 Cyclops received a notice from USEPA that it may be a PRP with respect to the anticipated remediation of contaminated soil on certain property in New Boston, Ohio sold by Cyclops to a third party several years ago. No amount was estimated by USEPA as to the cost of such remediation. Prior to such sale, the salvage contractor hired by the current owner (which was then occupying the property as a tenant of Cyclops) engaged in intentional conduct which directly resulted in contamination. As a part of the sentence imposed upon the contractor in response to his guilty plea to the resulting criminal charges, the contractor agreed to remediate the contaminated condition. Armco currently is reviewing its legal position as to the notice, including the defenses which it may have on the basis of the circumstances of the contamination. The current owner of the property and the contractor have also been notified by USEPA that they may be PRPs. Armco and the current owner have collected $825,000 on a $1 million performance bond which had been obtained to secure the contractor's performance. These funds are being used for remediation and oversight of the clean-up. In July of 1990, Eastern entered into a Consent Order with the Maryland Department of Environment to resolve a complaint alleging various violations of environmental requirements. This Order was followed by a voluntary Consent Judgment on April 17, 1992 and an amendment of the Consent Judgment in August of 1993. Pursuant to the Order and Judgment, Eastern spent a total of $4.5 million in 1991, 1992 and 1993 on various pollution prevention projects. In addition, Eastern paid a $0.3 million penalty and agreed to expend an additional $0.9 million on projects in 1994. Additional expenditures of about $1 million will be necessary if Eastern restarts its melting, grinding and coil processing operations. On July 22, 1993, Armco received a request from the Kansas Department of Health and Environment ("KDHE") for information regarding a former Armco Construction Products Division plant located in Topeka, Kansas and now owned by Contech Construction Products, Inc. ("Contech"). Contech and Armco had previously tried to resolve a claim by Contech concerning all environmental contamination at the Topeka plant. The claim arises under indemnity provisions contained in an agreement dated June 30, 1986 between Armco and Contech, formerly a subsidiary of Armco, under which Armco conveyed the property and other assets to Contech pursuant to a management buyout of Contech. The request was issued pursuant to a Kansas law that has liability provisions similar to CERCLA. Despite several meetings among Armco, Contech and other former owners of allegedly contaminated portions of the plant, the parties have been unable to resolve the dispute. Armco answered KDHE's information request in August 1993. The amount, if any, of potential liability cannot be reasonably estimated. In December 1993, Armco and one other company received a notice of nonbinding preliminary allocation of proportionate responsibility from the Pennsylvania Department of Environmental Resources ("PADER") for the William Taylor Estate site. PADER is seeking a voluntary settlement for the recovery of past and future response costs at the site. The notice alleges disposal of material from three facilities operated by the Sawhill Tubular Division. While cleanup costs cannot be estimated, Armco believes, based on information to date, that the response costs will not be material. 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 its sale of its Worldwide Grinding Systems in late 1993. Armco is taking the lead in working with Missouri DNR to resolve this issue. It is not expected that any penalties will be material. On February 16, 1994, Missouri DNR and the USEPA jointly issued a Part B permit to the Kansas City facility under RCRA. This permit seeks to require "interim measures" including investigation and potentially, remediation at several areas of the facility. Armco has petitioned for review of most of such permit provisions to the Environmental Appeals Board. These provisions are stayed during pendancy of the appeal. It is expected that preliminary investigation costs may reach $1 million; however, other costs cannot be determined until there is more certainty as to the extent of actual permit requirements. On January 18, 1994, Armco received a 104(e) request for information under CERCLA from USEPA regarding shipments from the former E. G. Smith Division of Cyclops to the Granville 21 Solvents site in Ohio. Armco has responded to the request. Cleanup costs and any Armco liability therefor cannot be determined based on available information. In the opinion of management, the ultimate liability resulting from the claims described in the preceding paragraphs in the "Legal Proceedings" section will not materially affect the consolidated financial position or liquidity of Armco and its subsidiaries; however, it is possible that due to fluctuations in Armco's operating results, future developments with respect to such matters could have a material effect on its financial condition, liquidity and results of operations in future interim or annual periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders of Armco during the fourth quarter of the year ended December 31, 1993. Executive Officers of Armco The executive officers of Armco as of March 1, 1994, were as follows:
Years Age as of Tenure in of Service Name March 1, 1994 Office Office (8) with Armco - ---- ------------- -------- ---------- ----------- James F. Will 55 President and 1994 2 Chief Executive Officer (1) James L. Bertsch 50 Vice President and Treasurer 1989 28 John B. Corey 50 Vice President, 1994 15 Asset Management and Business Development (2) David G. Harmer 50 Vice President and 1993 11 months Chief Financial Officer (3) David A. Higbee 51 Vice President, Diversified 1994 28 Businesses (4) Gary R. Hildreth 55 Vice President, General Counsel 1993 23 and Secretary (5) Peter G. Leemputte 36 Controller (6) 1993 7 months Robert M. Visokey 51 Executive Vice President- 1994 1 Steel Operations (7)
________________________ (1) Effective January 1, 1994, Mr. Will was elected Chief Executive Officer. He had previously been President and Chief Operating Officer. (2) Effective March 1, 1994. (3) Effective April 1, 1993. (4) Effective as of March 1, 1994. 22 (5) Effective September 1, 1993, Mr. Hildreth was elected Vice President and Secretary. He had previously been General Counsel since February 1, 1993. (6) Effective September 1, 1993. (7) Effective March 1, 1994. (8) All officers are elected annually by the Board of Directors and hold office until their successors are elected and qualified. Each of the officers named above has held responsible positions with Armco or its subsidiaries during the past five years, with the exceptions of Messrs. Will, Harmer, Leemputte, Visokey and Higbee. Immediately prior to joining Armco, Mr. Will was President and Chief Executive Officer of Cyclops Industries, Inc. (a manufacturer of flat-rolled carbon and stainless steel products). Mr. Harmer was Vice President and Controller of FMC Corporation (a broad-based chemicals and manufacturing company). Mr. Leemputte was project manager for Gemini Consulting (specializing in the development and application of leading edge business concepts and practices). Prior to that, Mr. Leemputte held various accounting positions at FMC Corporation. Mr. Visokey was Vice President, Purchasing and Traffic for LTV Steel Company. Mr. Higbee was President of National-Oilwell. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference from page 57 of the Annual Report to Shareholders for the year ended December 31, 1993. ITEM 6. SELECTED FINANCIAL DATA
1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Net sales $1,664.0 $1,673.2 $1,204.0 $1,342.3 $2,044.1 Special credits (charges) (165.5) (185.1) (48.7) -- 84.0 Income (loss) from continuing operations (256.2) (419.3) (160.6) (75.8) 188.5 Income (loss) from continuing operations per common share (2.64) (4.35) (1.91) (0.95) 2.04 Total assets 1,904.7 1,869.9 1,765.0 2,182.6 2,413.1 Long-term debt and lease obligations 379.7 401.0 350.7 354.2 416.4 Long-term employee benefit obligations 1,270.9 541.6 362.3 352.3 376.1 Class B common stock of subsidiary 9.7 9.3 -- -- --
_______________________________ (1) The information in this Item should be read in conjunction with Armco's financial statements and the Notes thereto, which are incorporated by reference in Item 8. (2) In 1993, Armco adopted SFAS 106 and 109 which increased long-term employee benefits and total assets. (3) In April 1992, Armco acquired Cyclops Industries, Inc. (4) Special credits (charges) for the years 1991 through 1993 primarily relate to the shutdown and rationalization of operating facilities. The credit in 1989 is primarily a result of a $109.4 gain on the formation of Armco Steel Company, L.P. from the assets, liabilities and 23 business of the Eastern Steel Division, and a credit for a favorable ruling on certain export commitments, partially offset by corporate restructuring charges. (5) The Class B common stock was issued by Eastern Stainless Corporation prior to Armco's acquisition of this 84%-owned former subsidiary of Cyclops Industries, Inc. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference from pages 19-31 following the caption "Management's Discussion and Analysis" of the Consolidated Financial Statements in the Annual Report to Shareholders for the year ended December 31, 1993. Subsequent Developments On March 28, 1994, Armco announced its intention to idle the production facilities at its Empire-Detroit carbon steel plant in Mansfield, Ohio and the Dover, Ohio galvanizing plant. The plants are expected to remain idle until the previously announced construction of a $100 million thin-slab caster is completed, which is scheduled for mid-1995. Armco expects to recognize a special charge of up to $20 million in the first quarter of 1994 for the cost of benefits to employees on layoff and other costs of idling the facilities, as well as costs associated with planned permanent work force reductions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference from pages 32-56 of the Annual Report to Shareholders for the year ended December 31, 1993. (Unaudited) Subsequent Developments On March 28, 1994, Armco announced its intention to idle the production facilities at its Empire-Detroit carbon steel plant in Mansfield, Ohio and the Dover, Ohio galvanizing plant. The plants are expected to remain idle until the previously announced construction of a $100 million thin-slab caster is completed, which is scheduled for mid-1995. Armco expects to recognize a special charge of up to $20 million in the first quarter of 1994 for the cost of benefits to employees on layoff and other costs of idling the facilities, as well as costs associated with planned permanent work force reductions. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item as to executive officers of Armco is contained in Part I of this report under "Executive Officers of Armco" and is incorporated herein by reference. The information required as to directors is incorporated herein by reference from the information set 24 forth under the caption "ELECTION OF DIRECTORS" in the registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Rule 14a-6 of the Securities Exchange Act of 1934, as amended (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference from the information set forth in the Proxy Statement under the caption "EXECUTIVE COMPENSATION". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The security ownership in Armco stock of directors, certain executive officers and directors and executive officers as a group and of persons known by Armco to be the beneficial owners of more than five percent of any class of Armco's voting securities is incorporated herein by reference from the information set forth in the Proxy Statement under the caption "MISCELLANEOUS -- Stock Ownership". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K I. Documents Filed as a Part of this Report
A. Financial Statements Page ---- 1. Statement of Consolidated Operations for the Years Ended December 31, 1993, 1992 and 1991 * 2. Statement of Consolidated Financial Position as of December 31, 1993 and 1992 * 3. Statement of Consolidated Cash Flows for the Years ended December 31, 1993, 1992 and 1991 * 4. Statement of Consolidated Shareholders' Equity (Deficit) for the Years Ended December 31, 1991, 1992 and 1993 * 5. Notes to Financial Statements * 6. Independent Auditors' Report * 7. Independent Auditors' Report 31 8. Financial Statement Schedules for the Years Ended 32-35 December 31, 1993, 1992 and 1991 I -- Marketable Securities - Other Security Investments
25 V -- Property, Plant and Equipment VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment VIII -- Valuation and Qualifying Accounts and Reserves 9. Responsibility for Financial Reporting * 10. Armco Steel Company, L. P. Consolidated Financial 36-59 Statements and Financial Statement Schedules as of December 31, 1991, 1992 and 1993 and for the four years in the period ended December 31, 1993 11. Armco Financial Services Group - companies to be sold 60-87 Consolidated Financial Statements and Financial Statement Schedules as of December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991
________________ *Incorporated in this annual report on Form 10-K by reference to pages 32-56 of the Annual Report to Shareholders for the year ended December 31, 1993. Financial Statements and Financial Statement Schedules Omitted The financial statements and financial statement schedules for Armco Inc. and Consolidated Subsidiaries, and for Armco Financial Services Group and Armco Steel Company, L.P., other than those listed above, are omitted because of the absence of conditions under which they are required, or because the information is set forth in the notes to financial statements. B. Exhibits The following is an index of the exhibits included in the Form 10-K Annual Report. 3(a). Articles of Incorporation of Armco Inc., as amended as of May 12, 1993(1) 3(b). Regulations of Armco Inc. (2) 4. Armco hereby agrees to furnish to the Securities and Exchange Commission, upon its request, a copy of each instrument defining the rights of holders of long-term debt of Armco and its subsidiaries omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. 10(a). Incentive Compensation Plan (3)* 10(b). Deferred Compensation Plan for Directors (4)* 10(c). 1983 Stock Option Plan (5)* 10(d). Incentive Compensation Plan (6)* 10(e). 1993 Long-Term Incentive Plan of Armco Inc.* (7) 10(f). Severance Agreements (8)* 10(g). 1988 Stock Option Plan (9)* 10(h). 1988 Restricted Stock Plan (9)* 26 10(i). Executive Supplemental Deferred Compensation Plan Trust (10)* 10(j). Executive Supplemental Deferred Compensation Plan (11)* 10(k). Rights Agreement dated as of June 27, 1986 between Armco Inc. and Harris Trust and Savings Bank, as amended as of June 24, 1988 (13) 10(l). Joint Venture Formation Agreement dated March 24, 1989 (14) 10(m). Incentive Compensation Plan for Key Management (12)* 10(n). Pension Plan for Outside Directors (12)* 10(o). Key Management Severance Policy (15)* 10(p). Armco Inc. 1991 Long-Term Incentive Plan (Armco Inc. Long-Term Incentive Plan Performance Share Plan) (16)* 10(q). Profit Sharing Plan for Armco Advanced Materials Company (17)* 10(r). Minimum Pension Plan (18)* 10(s). Stainless Steel Toll Rolling Services Agreement 10(t). Armco Inc. Noncontributory Pension Plan As Amended and Restated (Effective As of January 1, 1989.)* 10(u). Armco Inc. Retirement and Savings Plan.* 11. Computation of Income (Loss) Per Share 13. Annual Report to Shareholders for the year ended December 31, 1993. (Filed for information only, except for those portions that are specifically incorporated in this Form 10-K Annual Report for the year ended December 31, 1993.) 21. List of subsidiaries of Armco Inc. 23. Independent Auditors' Consent 28. Schedule P - Analysis of Losses and Loss Expenses 99. Description of Armco Capital Stock The annual reports (Form 11-K) for the year ended December 31, 1993 for the Armco Inc. Retirement and Savings Plan and the Armco Inc. Thrift Plan for Hourly Employees will be filed by amendment as exhibits hereto, as permitted under Rule 15d-21. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to the Form 10-K pursuant to Item 14(c) of Form 10-K. ______________________ (1) Incorporated by reference from Exhibit 4.2 to Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (2) Incorporated by reference from Exhibit 3(b) to Armco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987. (3) Incorporated by reference from Exhibits 10(a) and 10(c) to Armco's Annual Report on Form 10-K for the year ended December 31, 1980. (4) Incorporated by reference from Exhibit 10(f) to Armco's Annual Report on Form 10-K for the year ended December 31, 1981. 27 (5) Incorporated by reference from Exhibit 19 to Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1983. (6) Incorporated by reference from Exhibit 10(g) to Armco's Annual Report on Form 10-K for the year ended December 31, 1983. (7) Incorporated by reference from Exhibit 10 to Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (8) Incorporated by reference from Exhibit 10(a) to Armco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. (9) Incorporated by reference from Exhibits 10(h) and 10(i) to Armco's Annual Report on Form 10-K for the year ended December 31, 1988. (10) Incorporated by reference from Exhibit 10(b) to Armco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. (11) Incorporated by reference from Exhibit 10(c) to Armco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. (12) Incorporated by reference from Exhibit 10(l) to Armco's Annual Report on Form 10-K for the year ended December 31, 1989. (13) Incorporated by reference from Exhibit 1 to Armco's Form 8-A dated July 7, 1986 and Exhibit 1.1 to Armco's Form 8 dated July 11, 1988. (14) Incorporated by reference from Exhibit 10 to Armco's Form 8-K dated March 27, 1989. (15) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on Form 10-K for the year ended December 31, 1990. (16) Incorporated by reference from Exhibit 10(p) to Armco's Annual Report on Form 10-K for the year ended December 31, 1991. (17) Incorporated by reference from Exhibit 10(q) to Armco's Annual Report on Form 10-K for the year ended December 31, 1991. (18) Incorporated by reference from Exhibit 10(r) to Armco's Annual Report on Form 10-K for the year ended December 31, 1991. ______________________ II. Reports on Form 8-K The following reports on Form 8-K were filed by Armco since the Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 was filed:
Report Date Description ----------- ------------ October 28, 1993 Reporting the sale of Miami Industries, a producer of welded carbon steel tubing, to Copperweld Corporation. November 12, 1993 Reporting the sale of Armco's Worldwide Grinding Systems segment. January 26, 1994 Reporting the proposed recapitalization of ASC and Armco's signing of a letter of intent to sell its ongoing insurance operations to Vik Brothers Insurance, Inc.
28 March 10, 1994 Reporting that Armco would receive approximately 1 million shares, or an approximately 4.2% interest in the proposed recapitalization of ASC, if successfully implemented, rather than the "less than 1%" to have been received by Armco as originally proposed.
29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 31, 1994. ARMCO INC. JAMES F. WILL By________________________________ James F. Will President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 31, 1994. JAMES F. WILL OWEN B. BUTLER By ___________________________________ By _______________________________ James F. Will Owen B. Butler President, Director Chief Executive Officer and Director ROBERT L. PURDUM DAVID A. DUKE By ___________________________________ By _______________________________ Robert L. Purdum David A. Duke Director Director DAVID G. HARMER JOHN C. HALEY By ___________________________________ By _______________________________ David G. Harmer John C. Haley Vice President and Director Chief Financial Officer PETER G. LEEMPUTTE PAUL H. HENSON By ___________________________________ By _______________________________ Peter G. Leemputte Paul H. Henson Controller Director WILLIAM B. BOYD JOHN H. LADISH By ___________________________________ By _______________________________ William B. Boyd John H. Ladish Director Director JOHN J. BURNS, JR. BURNELL R. ROBERTS By ___________________________________ By _______________________________ John J. Burns, Jr. Burnell R. Roberts Director Director 30 INDEPENDENT AUDITORS' REPORT Armco Inc.: We have audited the consolidated financial statements of Armco Inc. and consolidated subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, and have issued our report thereon dated February 9, 1994, which report includes an explanatory paragraph for changes in Armco Inc.'s methods of accounting for postretirement benefits other than pensions, income taxes, certain investments in debt and equity securities, and postemployment benefits; such consolidated financial statements and report are included in your 1993 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of Armco Inc. and consolidated subsidiaries, listed in Item 14. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE Pittsburgh, Pennsylvania February 9, 1994 31 SCHEDULE I ARMCO INC. AND CONSOLIDATED SUBSIDIARIES MARKETABLE SECURITIES--OTHER SECURITY INVESTMENTS (Dollars in Millions)
=================================================================================================================================== Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------------------------ Amount at which each portfolio of equity Number of shares or Market value of security issues and each Name of issuer and units--principal amount Cost of each issue at other security issue carried title of each issue of bonds and notes each issue balance sheet date in the balance sheet - ------------------------------------------------------------------------------------------------------------------------------------ National-Oilwell (1) $ 83.9 (4) $ 83.9 North American Stainless (1) 43.8 (4) 43.8 Armco Financial Services Group (2) 97.1 (4) 97.1 Short-term Liquid Investments and Marketable Securities 5.0 5.0 5.3 5.0 Other Equity Companies (3) 2.7 (4) 2.7 Other Cost Investments -- 36.6 (4) 36.6 ------ --- ------- Total $269.1 N/A $269.1
(1) Joint venture partnerships. The investment represents 50% ownership in these businesses. (2) Discontinued business, 100% owned by Armco. (3) Companies accounted for by the equity method; presented at cost plus equity. (4) Investments represent joint venture ownership and/or investments in restricted deposits, advances or assets held for sale, for which there are no quoted market prices. 32 SCHEDULE V ARMCO INC. PROPERTY, PLANT AND EQUIPMENT (Dollars in Millions)
============================================================================================================ Column A Column B Column C Column D Column E Column F - ------------------------------------------------------------------------------------------------------------ Balance at Beginning Additions Other Balance at Classification of Period at Cost Retirements Changes End of Period - ------------------------------------------------------------------------------------------------------------ For the Year ended December 31, 1991: Land, land improvements and leaseholds................. $ 17.2 $ 0.1 $ -- $ (0.2) (A) $ 16.9 1.3 (B) (1.5) (C) Buildings.................... 84.9 2.2 0.9 (0.9) (A) 80.1 4.3 (B) (9.5) (C) Machinery and equipment...... 686.1 67.2 8.8 (1.6) (A) 721.1 9.9 (B) (31.7) (C) Construction in progress..... 55.9 (40.6) -- (1.7) (C) 13.6 -------- ------ ----- ------- -------- TOTAL $ 844.1 $ 28.9 $ 9.7 $ (31.6) $ 831.7 ======== ====== ===== ======= ======== - ------------------------------------------------------------------------------------------------------------ For the Year ended December 31, 1992: Land, land improvements and leaseholds................. $ 16.9 $ 0.8 $ 0.2 $ (0.4) (A) $ 28.3 13.7 (B) (2.5) (C) Buildings.................... 80.1 6.7 1.5 (2.7) (A) 96.7 31.1 (B) (17.0) (C) Machinery and equipment...... 721.1 40.5 4.1 (10.5) (A) 924.5 266.9 (B) (89.4) (C) Construction in progress..... 13.6 12.0 -- (0.2) (A) 38.7 15.7 (B) (2.4) (C) -------- ------ ----- ------- -------- TOTAL $ 831.7 $ 60.0 $ 5.8 $ 202.3 $1,088.2 ======== ====== ===== ======= ======== - ------------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 1993: Land, land improvements and leaseholds................. $ 28.3 $ 0.1 $ 0.5 $ (0.1) (A) $ 26.0 (1.8) (C) Buildings.................... 96.7 2.6 0.7 3.9 (A) 78.8 (23.7) (C) Machinery and equipment...... 924.5 49.9 35.9 5.7 (A) 843.1 (101.1) (C) Construction in progress..... 38.7 1.3 -- 0.8 (A) 35.1 (5.7) (C) -------- ------ ----- ------- -------- TOTAL $1,088.2 $ 53.9 $37.1 $(122.0) $ 983.0 ======== ====== ===== ======= ======== - ------------------------------------------------------------------------------------------------------------
NOTES: (A) Represents foreign currency translation adjustment and reclassifications. (B) Fair market value of assets of purchased businesses. (C) Recorded value of assets of divested businesses. (D) Prior period amounts above have been restated to reflect the assets and accounts of Armco's Worldwide Grinding Systems businesses as discontinued operations. 33 SCHEDULE VI ARMCO INC. ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Dollars in Millions)
============================================================================================================ Column A Column B Column C Column D Column E Column F - ------------------------------------------------------------------------------------------------------------ Additions Balance at Charged Beginning to Costs & Other Balance at Classification of Period Expenses Retirements Changes End of Period - ------------------------------------------------------------------------------------------------------------ For the Year ended December 31, 1991: Land, land improvements and leaseholds................. $ 9.6 $ 0.4 $ -- $ (0.1) (A) $ 9.9 Buildings.................... 41.2 2.5 0.4 (0.2) (A) 39.1 (4.0) (B) Machinery and equipment........ 422.4 31.3 6.7 (0.7) (A) 426.2 (20.1) (B) ------ ----- ----- ------ ------ TOTAL....... $473.2 $34.2 $ 7.1 $(25.1) $475.2 ====== ===== ===== ====== ====== ------------------------------------------------------------------------------------------------------------ For the Year ended December 31, 1992: Land, land improvements and leaseholds................. $ 9.9 $ 0.4 $ -- $ (0.3) (B) $ 10.0 Buildings.................... 39.1 4.9 0.1 (0.3) (A) 35.8 (7.8) (B) Machinery and equipment...... 426.2 41.8 3.4 (1.2) (A) 419.3 (44.1) (B) ------ ----- ----- ------ ------ TOTAL....... $475.2 $47.1 $ 3.5 $(53.7) $465.1 ====== ===== ===== ====== ====== ------------------------------------------------------------------------------------------------------------ For the Year ended December 31, 1993: Land, land improvements and leaseholds................. $ 10.0 $ 0.5 $ -- $ (0.1) (B) $ 10.4 Buildings.................... 35.8 6.0 0.1 0.4 (A) 37.8 (4.3) (B) Machinery and equipment...... 419.3 46.7 11.0 0.4 (A) 407.0 (48.4) (B) ------ ----- ----- ------ ------ TOTAL....... $465.1 $53.2 $11.1 $(52.0) $455.2 ====== ===== ===== ====== ====== ------------------------------------------------------------------------------------------------------------
NOTES: (A) Represents foreign currency translation adjustment and reclassifications. (B) Recorded value of assets of divested businesses. (C) The rates of depreciation are: land improvements 5%, buildings 2%--5%, and machinery and equipment 5%--33%. (D) Prior period amounts above have been restated to reflect the assets and accounts of Armco's Worldwide Grinding Systems businesses as discontinued operations. 34 SCHEDULE VIII ARMCO INC. AND CONSOLIDATED SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in Millions)
====================================================================================================== Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------ Deductions from Reserves Additions for Purposes Balance at Charged to for which Beginning Costs and Reserves were Other Balance at Description of Year Expenses Provided Changes End of Year - ------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 1991: Allowance for doubtful accounts........ $14.2 $1.2 $ 2.4 $(0.9) (A) $11.9 (0.2) (B) Allowance for impairment of investments.......................... 33.9 1.7 3.9 - 31.7 - ------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 1992: Allowance for doubtful accounts ...... $11.9 $0.8 $10.6 $(0.1) (A) $ 5.1 3.1 (B) Allowance for impairment of investments.......................... 31.7 0.6 5.0 1.0 28.3 - ------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 1993: Allowance for doubtful accounts ...... $ 5.1 $0.3 $ 0.8 $(0.6) (B) $ 4.0 Allowance for impairment of investments ......................... 28.3 - 0.4 (7.9) (B) 20.0 - ------------------------------------------------------------------------------------------------------
NOTES: (A) Represents foreign currency translation adjustment and reclassifications. (B) Net balances of consolidated subsidiaries purchased (divested). 35 INDEPENDENT AUDITORS' REPORT Armco Inc.: We have audited the accompanying consolidated balance sheets of Armco Steel Company, L.P. and Subsidiaries (an Investee of Armco Inc.) as of December 31, 1991, 1992 and 1993, and the related consolidated statements of operations and partners' capital (deficit) and cash flows for each of the four years in the period ended December 31, 1993. Our audits also included Financial Statement Schedule V, Property, Plant and Equipment; Schedule VI, Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment; Schedule VIII, Valuation and Qualifying Accounts and Reserves; Schedule IX, Short-term Borrowings; and Schedule X, Supplementary Income Statement Information, of Armco Steel Company, L.P. and subsidiaries (an Investee of Armco Inc.), all for each of the four years in the period ended December 31, 1993. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Armco Steel Company, L.P. and subsidiaries (an Investee of Armco Inc.) at December 31, 1991, 1992 and 1993, and the results of its operations and its cash flows for each of the four years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 5 to the consolidated financial statements, in 1993 the Company changed its method of accounting for retiree health care and life insurance benefits to conform with Statement of Financial Accounting Standards No. 106 and, retroactively, restated its 1990, 1991 and 1992 financial statements for the change. /s/ Deloitte & Touche Cincinnati, Ohio January 26, 1994 36 ARMCO STEEL COMPANY, L.P. CONSOLIDATED BALANCE SHEETS December 31, 1991, 1992 and 1993 (dollars in millions) ASSETS
1991 1992 1993 ---- ---- ---- Current Assets: Cash and cash equivalents (Note 1)............................... $ 13.8 $ 1.2 $ 144.2 Accounts and notes receivable (Note 3): Trade (less allowance for doubtful accounts of $2.5, $2.7 and $4.5 for 1991, 1992 and 1993, respectively)......... 101.1 125.4 137.3 Other receivables.............................................. 26.7 13.0 14.1 -------- -------- -------- Total accounts and notes receivable.............................. 127.8 138.4 151.4 Inventories (Notes 1 and 3)...................................... 324.0 276.6 255.1 Other current assets............................................. 2.1 1.2 3.3 -------- -------- -------- Total Current Assets............................................... 467.7 417.4 554.0 -------- -------- -------- Investments (Note 1): Investment in Eveleth (net of impairment of $46.6 for 1992 and 1993--Notes 7 and 8)........................................... 49.2 -- -- Investment in SOS (Notes 1 and 11) -- 20.1 22.7 Other............................................................ 10.5 36.2 22.1 -------- -------- -------- Total investments.................................................. 59.7 56.3 44.8 -------- -------- -------- Property, plant and equipment (Notes 1 and 3): Land, land improvements and leaseholds........................... 45.4 42.0 40.4 Buildings........................................................ 92.6 80.6 80.1 Machinery and equipment.......................................... 1,039.6 1,033.1 1,059.5 Construction in progress......................................... 82.1 25.7 37.1 -------- -------- -------- Total.............................................................. 1,259.7 1,181.4 1,217.1 Less accumulated depreciation...................................... 199.8 272.6 344.9 -------- -------- -------- Property, plant and equipment--Net................................. 1,059.9 908.8 872.2 Other (Note 5)..................................................... 45.5 42.5 47.7 -------- -------- -------- TOTAL ASSETS................................................. $1,632.8 $1,425.0 $1,518.7 ======== ======== ========
See notes to consolidated financial statements. 37 ARMCO STEEL COMPANY, L.P. CONSOLIDATED BALANCE SHEETS December 31, 1991, 1992 and 1993 (dollars in millions) LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
1991 1992 1993 ---- ---- ---- Current Liabilities: Notes payable (Note 3)........................................... $ 58.0 -- -- Overdrafts payable............................................... 6.6 $ 54.3 $ 52.8 Accounts payable: Trade.......................................................... 90.8 82.8 101.8 Other.......................................................... 18.8 24.6 17.9 -------- -------- -------- Total accounts payable........................................... 109.6 107.4 119.7 Accrued salaries, wages and commissions.......................... 40.4 32.5 35.5 Other accruals (Notes 2, 5, and 9)............................... 132.8 133.5 159.3 Current portion of long-term debt (Note 3)....................... 44.2 104.6 130.8 -------- -------- -------- Total Current Liabilities.......................................... 391.6 432.3 498.1 -------- -------- -------- Long-term debt (Note 3)............................................ 497.9 563.3 598.6 Deferred income taxes (Note 2)..................................... 10.9 0.1 0.2 Other liabilities (Notes 5 and 9).................................. 659.1 879.0 1,008.0 Commitments and contingencies (Notes 3, 7 and 10).................. -- -- -- -------- -------- -------- Total Liabilities.................................................. 1,559.5 1,874.7 2,104.9 Partners' Capital (Deficit) (less receivables from affiliates of $17.6, $16.5 and $16.5 for 1991, 1992 and 1993, respectively) (Notes 1, 5 and 6)............................................... 73.3 (449.7) (586.2) -------- -------- -------- TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT).......................................... $1,632.8 $1,425.0 $1,518.7 ======== ======== ========
See notes to consolidated financial statements. 38 ARMCO STEEL COMPANY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL (DEFICIT) For the Years Ended December 31, 1990, 1991, 1992 and 1993 (dollars in millions)
1990 1991 1992 1993 ---- ---- ---- ---- Net Sales: Customers................................................ $1,315.6 $1,211.6 $1,292.6 $1,458.3 Affiliates (Note 6)...................................... 101.2 89.8 111.9 136.2 -------- -------- -------- -------- Total Net Sales............................................ 1,416.8 1,301.4 1,404.5 1,594.5 Operating Costs: Cost of products sold (Notes 1 and 10)................... 1,284.5 1,303.4 1,318.6 1,380.3 Selling and administrative expenses (Note 6)............. 133.8 134.4 118.6 111.2 Depreciation and amortization (Note 1)................... 72.8 82.6 87.3 73.5 Special charges and unusual items (Note 8)............... -- -- 379.3 17.6 -------- -------- -------- -------- Total Operating Costs...................................... 1,491.1 1,520.4 1,903.8 1,582.6 -------- -------- -------- -------- Operating Profit (Loss).................................... (74.3) (219.0) (499.3) 11.9 Other (Income) Expense: Interest expense (Note 3)................................ 24.3 40.8 46.4 58.1 Royalty income........................................... (3.9) (4.6) (5.0) (3.8) Miscellaneous other--net................................. (1.1) 1.4 1.9 0.3 -------- -------- -------- -------- Total Other Expense........................................ 19.3 37.6 43.3 54.6 -------- -------- -------- -------- Loss Before Income Taxes, Extraordinary Item and Accounting Change........................................ (93.6) (256.6) (542.6) (42.7) Benefit for Income Taxes (Note 2) (3.5) (5.5) (10.6) -- -------- -------- -------- -------- Net Loss before Extraordinary Item and Accounting Change... (90.1) (251.1) (532.0) (42.7) Extraordinary Item (Note 9)................................ -- -- (12.1) -- Cumulative Effect of Change in Accounting for Certain Postretirement Benefits (Note 5)......................... (491.6) -- -- -- -------- -------- -------- -------- Net Loss................................................... (581.7) (251.1) (544.1) (42.7) Partners' Capital (Deficit), Beginning Balance............. 700.7 189.4 73.3 (449.7) Distribution to partners................................... (14.8) (1.5) -- -- Additional capital contributions........................... 70.0 115.1 21.1 19.4 Asset adjustment due to ownership change................... 15.2 21.4 -- -- Charge to record a minimum Accumulated Benefit Obligation (Note 5)...................................... -- -- -- (113.2) -------- -------- -------- -------- Partners' Capital (Deficit), Ending Balance................ $ 189.4 $ 73.3 $ (449.7) $ (586.2) ======== ======== ======== ========
See notes to consolidated financial statements. 39 ARMCO STEEL COMPANY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1990, 1991, 1992 and 1993 (dollars in millions)
1990 1991 1992 1993 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss................................................... $(581.7) $(251.1) $(544.1) $ (42.7) ------- ------- ------- ------- Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization............................ 72.8 82.6 87.3 73.5 Blast furnace reline amortization........................ 6.4 4.8 4.3 4.5 Special charges and unusual items........................ -- -- 379.3 17.6 Other--net............................................... 19.6 26.0 35.4 47.1 Changes in Assets and Liabilities: Accounts receivable.................................... 21.3 4.0 (22.6) (14.7) Inventories............................................ (99.9) 59.0 47.4 18.4 Current liabilities.................................... 43.6 27.7 (40.7) 36.9 Other assets........................................... (5.9) 1.8 (1.5) (6.8) Deferred taxes......................................... (3.1) (5.5) (10.7) 0.1 Other liabilities...................................... 465.7 1.9 23.4 (35.1) ------- ------- ------- ------- Total Adjustments.......................................... 520.5 202.3 501.6 141.5 ------- ------- ------- ------- NET CASH FLOWS FROM OPERATING ACTIVITIES............................................... (61.2) (48.8) (42.5) 98.8 ------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................... (211.8) (163.1) (86.2) (40.2) Proceeds from Sale of Plant, Property and Equipment........ 1.2 0.5 0.4 7.3 Proceeds from Sale of Investments.......................... 2.4 -- 6.8 -- Proceeds from Sale of Eveleth Notes........................ 7.7 7.7 7.7 7.7 Advances to Investees...................................... (15.8) (25.5) (25.6) (23.0) Returns of Advances........................................ 7.8 8.9 8.5 -- Collection on Loans........................................ 4.2 23.9 1.1 -- Loans Made................................................. (0.1) -- -- -- Purchase of Investments.................................... -- (4.6) (14.9) (2.8) Proceeds--Assets Held for Sale............................. -- -- -- 18.2 ------- ------- ------- ------- NET CASH FLOWS FROM INVESTING ACTIVITIES................... (204.4) (152.2) (102.2) (32.8) ------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt....................... (34.9) (38.0) (44.2) (104.6) Proceeds from issuance of long-term debt 119.6 208.2 170.0 166.0 Changes in notes payable................................... 123.0 (65.0) (58.0) -- Change in overdrafts payable............................... (13.2) (3.1) 47.6 (1.4) Partners' contributions--net............................... 55.2 105.5 19.0 19.4 Other--net................................................. (1.9) (2.3) (2.3) (2.4) ------- ------- ------- ------- NET CASH FLOWS FROM FINANCING ACTIVITIES............................................... 247.8 205.3 132.1 77.0 ------- ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... (17.8) 4.3 (12.6) 143.0 Cash and cash equivalents, beginning of period............. 27.3 9.5 13.8 1.2 ------- ------- ------- ------- Cash and cash equivalents, end of period................... $ 9.5 $ 13.8 $ 1.2 $ 144.2 ======= ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest (net of amount capitalized)..................... $ 21.5 $ 38.3 $ 44.7 $ 52.8 Income taxes............................................. 0.5 0.1 0.1 0.1
See notes to consolidated financial statements. 40 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in millions) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--Armco Steel Company, L.P. (the "Company") is a limited partnership formed pursuant to an agreement dated March 24, 1989 (the "Joint Venture Agreement") between Armco Inc. ("Armco") and Kawasaki Steel Corporation ("Kawasaki"). The general partner of the Company is AK Steel Corporation (the "General Partner"), formerly AK Management Corporation, a Delaware corporation owned one-half by each of AJV Investments Corp., a Delaware corporation and wholly-owned subsidiary of Armco and KSCA, Incorporated, a Delaware corporation and indirect wholly-owned subsidiary of Kawasaki. The limited partners of the Company are Armco and Kawasaki Steel Investments, Inc., a Delaware corporation and indirect wholly-owned subsidiary of Kawasaki ("KSI"). Under the Joint Venture Agreement, on May 13, 1989, Armco sold certain assets, properties and business of its Eastern Steel Division ("Predecessor") to KSI for $350.0. Simultaneously, KSI contributed the purchased assets, properties and business to the Company in exchange for a 39.5% limited partnership interest. Armco transferred to the Company substantially all of the remaining assets, properties and business of Predecessor and the Company also assumed certain of Armco's liabilities and obligations related to or arising out of Predecessor and its properties, assets and the conduct of Predecessor business for a 59.5% limited partnership interest. On May 14, 1990, KSI made a cash contribution to the Company of $70.0. On May 13, 1991 and October 4, 1991, KSI contributed another $70.0 and $33.8, respectively. The latter contribution was in satisfaction of its obligation to make an additional $35.0 capital contribution on March 15, 1992, without any change in its limited partnership interest. As a result of these contributions, on May 14, 1990, KSI's limited partnership interest increased to 44.5% with a corresponding reduction in Armco's interest and on May 13, 1991, KSI's limited partnership interest increased, and Armco's limited partnership interest decreased, to 49.5%. The General Partner has a 1.0% general partnership interest in the Company. The accompanying consolidated financial statements of the Company include the net assets acquired at formation from Armco and Kawasaki on the basis of Armco's and Kawasaki's historical cost, and the changes in the net assets of the Company subsequent to the formation, and the results of operations, partners' capital (deficit) and the cash flows for the periods since inception on such historical cost basis. Kawasaki's historical cost was based on the purchase price paid on May 13, 1989 by Kawasaki for its 40% interest in the net assets of the Company. Armco's historical cost is based on the book value of net assets contributed on May 13, 1989 by Armco for its 60% interest in the Company, adjusted for changes resulting from the 5% reductions in limited partnership interest effective May 14, 1990 and May 13, 1991. The Company consists of the operations and accounts of the Middletown Works, Ashland Works, Headquarters and ASC Investments, Inc. and its group of wholly-owned subsidiaries, (the "ASCII group"). With plants in Middletown, Ohio, and Ashland, Kentucky, the Company provides coated, high strength, low carbon flat-rolled steels to the automotive, appliance, construction and service center markets primarily in the Midwest. The Company had one major customer that accounted for 23.0%, 27.9%, 23.0% and 22.5% of its net sales in 1990, 1991, 1992 and 1993, respectively. Armco and Kawasaki agreed to share a portion of the 1992 Special Charges and Unusual Items (see Note 8) unequally with Armco being allocated 74.5%, Kawasaki 24.5% and the General Partner 1.0%. On August 31, 1992, the Company acquired a 50% ownership interest in Southwestern Ohio Steel, L.P. (SOS), a joint venture to which substantially all of the businesses of Southwestern Ohio Steel, Inc. and SOS Leveling Company, Inc. were transferred by Armco. The Company's interest in SOS was funded through capital contributions from Kawasaki, in the form of cash of $11.1, and from Armco, in the form of a 25% ownership interest in SOS with an estimated fair value of $11.1. 41 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) Inventories--Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured on the last in, first out (LIFO) method. Other inventories are measured principally at average cost.
December 31, December 31, December 31, 1991 1992 1993 ------------ ------------ ------------ Inventories on LIFO: Finished and semifinished....................... $251.6 $210.4 $191.7 Raw materials and supplies...................... 103.3 103.5 80.5 Adjustment to state inventories at LIFO value... (41.3) (46.3) (23.7) ------ ------ ------ Total........................................... 313.6 267.6 248.5 Other inventories............................... 10.4 9.0 6.6 ------ ------ ------ Total inventories........................... $324.0 $276.6 $255.1 ====== ====== ======
Liquidation of LIFO inventory layers caused by certain inventory reductions reduced the net losses in 1992 and 1993 by $2.6 and $10.4, respectively. Investments--The Company has investments in associated companies (joint ventures and an entity that the Company does not control). These investments are accounted for under the equity method. Because these companies are directly integrated in the basic steelmaking facilities, the Company includes its proportionate share of the income (loss) of these associated companies in cost of products sold. Virginia Horn Taconite Company, a member of the ASCII group ("Virginia Horn"), owns a 56% share of Eveleth Expansion Company ("Eveleth"), a company which produces iron ore pellets, which equates to a 35% interest in Eveleth Mines. In connection with such investment, Virginia Horn has certain commitments to Eveleth. Because Virginia Horn does not control Eveleth, the investment is accounted for under the equity method (see Note 7). 42 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) The following are condensed balance sheets of Eveleth at December 31, 1992 and 1993 and condensed statements of Eveleth's operations for the three years in the period ended December 31, 1993. The financial statements are presented on an historical basis and as adjusted to reflect the Company's estimate of net realizable value of the fixed assets of Eveleth. Eveleth Expansion Company (a partnership) Condensed Balance Sheets December 31, 1992 and 1993 (dollars in millions)
Assets 1992 1993 ---------------------- ---------------------- Historical- Historical- Historical Adjusted Historical Adjusted ---------- ---------- ---------- ---------- Current assets: Cash........................ $ 0.1 $ 0.1 -- -- Accounts receivable......... 0.3 0.3 $ 0.4 $ 0.4 Due from affiliates......... 20.9 20.9 15.3 15.3 Inventories................. 7.5 7.5 5.4 5.4 ------ ----- ------ ----- Total Current Assets.......... 28.8 28.8 21.1 21.1 Property, plant and equipment--net.............. 138.9 6.4 128.9 6.9 Other assets.................. 5.1 5.1 2.5 2.5 ------ ----- ------ ----- TOTAL ASSETS................ $172.8 $40.3 $152.4 $30.5 ====== ===== ====== ===== Liabilities and Partners' Capital (Deficit) Current liabilities: Accounts payable............ $ 0.6 $ 0.6 $ 0.6 $ 0.6 Due to affiliates........... 4.8 4.8 1.5 1.5 Accrued liabilities......... 4.5 4.5 2.4 2.4 Current portion of long-term debt........... 13.7 13.7 13.7 13.7 ------ ----- ------ ----- Total current liabilities..... 23.6 23.6 18.2 18.2 Long-term debt................ 27.4 27.4 13.7 13.7 Other liabilities............. -- -- 2.6 2.6 ------ ----- ------ ----- Partners' Capital (Deficit)... 121.8 (10.7) 117.9 (4.0) ------ ----- ------ ----- TOTAL LIABILITIES AND PARTNERS' CAPITAL $172.8 $40.3 $152.4 $30.5 (DEFICIT) ====== ===== ====== =====
43 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) Eveleth Expansion Company (a partnership) Condensed Statements of Operations For the Years Ended December 31, 1991, 1992 and 1993 (dollars in millions)
1991 1992 1993 ------- -------- -------- Pellet sales to partners.............. $ 36.2 $ 32.5 -- Cost of pellets sold.................. 36.2 35.5 -- Operating expenses.................... 23.9 23.0 $ 30.8 Write-off of deferred charges......... -- -- 2.3 ------ ------ ------ Operating loss........................ (23.9) (26.0) (33.1) Interest expense, net................. 5.7 4.4 3.1 ------ ------ ------ Net Loss -- historical................ (29.6) (30.4) (36.2) Adjustment recorded by the Company to reduce depreciation expense for the previously recognized impairment of fixed assets....................... 5.8 6.1 10.6. Adjustment recorded by the Company for the additional impairment of fixed assets........................ -- (42.0) -- ------ ------ ------ Net loss--adjusted $(23.8) $(66.3) $25.6) ====== ====== ======
Notes General -- Eveleth, a partnership, is in the business of mining taconite and producing iron ore pellets for its partners. The partners of Eveleth, and their respective percentage equity interests in Eveleth, are Virginia Horn (56%), Onco Eveleth Company, a wholly-owned subsidiary of Oglebay Norton Company (ONCO) (20.5%) and Ontario Eveleth Company, a wholly-owned subsidiary of Stelco, Inc. (Stelco) (23.5%). Pellet production is allocated for sale to the partners based upon annual agreements. Partnership Funding -- Under the terms of agreements with Eveleth's lenders and among the partners, each partner is obligated to advance a portion of Eveleth's required operating funds, whether or not pellets are produced. Operating advances by each partner are made pursuant to a formula which allocates certain variable costs based on each partner's share of annually agreed-upon pellet production and certain fixed costs based on each partner's percentage interest in Eveleth. Eveleth is dependent for its continued existence upon the annual pellet purchases and ongoing financial support of its partners. Property, Plant and Equipment--Property, plant and equipment and the related depreciation expense included in the Historical--Adjusted amounts are based on the Company's estimate of the net realizable value of such fixed assets. The Historical--Adjusted amounts reflect amounts recorded by the Company for the impairment of fixed assets of $94.2 recorded prior to 1991 and an additional impairment of $42.0 recorded in 1992. The Historical--Adjusted depreciation amounts recorded by the Company represent reductions of depreciation expense for the previously recognized impairment of fixed assets in the Historical--Adjusted financial statements. Debt--Evelth's debt bears inerest of 9.5-10% and matures in 1995. 44 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) The Company records its proportionate share of the losses of Eveleth based on Historical--Adjusted amounts. These losses, which are included in the Company's cost of products sold, were $6.5, $16.1, $17.4 and $14.0 in 1990, 1991, 1992 and 1993, respectively. In addition, in 1992 the Company fully impaired its investment in Eveleth to recognize the Company's estimate of the net realizable value of the fixed assets of Eveleth. The Company's recorded share of Eveleth's losses in 1991 and 1992 exceeded its proportionate percentage interest in Eveleth because the Company purchased a larger percentage of Eveleth's annual pellet production relative to its percentage interest and, therefore, under the cost-allocation formula described above, the Company absorbed a higher percentage of the Eveleth costs. The Company's annual cash funding of Eveleth's fixed costs is appproximately $12.0 per year. See Notes 7 and 8. The following is a summary of the net assets of SOS at December 31, 1992 and 1993 and its operating results for the four months ended December 31, 1992 and the year ended December 31, 1993.
1992 1993 ---- ---- Curent assets.................................. $56.7 $ 70.9 Noncurrent assets.............................. 26.1 28.5 Current liabilities............................ 21.1 29.0 Noncurrent liabilities......................... 17.6 21.8 Net sales...................................... 65.2 253.6 Gross margin................................... -- 59.0 Net income..................................... 1.0 8.8
Property, Plant and Equipment--Steelmaking plant and equipment are depreciated under the straight line method over their estimated lives ranging from 2 to 31 years. Maintenance and repair expenses for 1990, 1991, 1992 and 1993 were $278.5, $267.1, $265.5 and $261.3, respectively. Financial Instruments--The carrying value of the Company's financial instruments does not differ materially from their estimated fair value. Cash Equivalents--Cash equivalents include short-term, highly liquid investments that are readily convertible to known amounts of cash and are of an original maturity of three months or less. 2. INCOME TAXES The ASCII group will file a consolidated federal income tax return for the year ended December 31, 1993. No federal tax will be due for 1993 due to the incurrence of a consolidated 1993 loss. ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) Deferred federal income taxes in the accompanying Consolidated Balance Sheets relate to temporary differences of the ASCII group, primarily differences between book and tax carrying values of the group's investments in joint ventures. The ASCII group recorded a consolidated deferred tax benefit of $10.8 in 1992 which represents the net reduction during the year of the group's consolidated deferred tax liability. No deferred tax charge or benefit was recorded in 1993. The ASCII group has consolidated net operating loss (NOL) carryforwards into 1994 of $34.3 under the "regular" tax system ($32.5 under the alternative minimum tax (AMT) system). These NOL's, if unused to offset future consolidated taxable income of the ASCII group, will expire in 2006, 2007 and 2008. In addition, Virginia Horn, one of ASCII's wholly-owned subsidiaries, has available an NOL carryforward into 1994 of $1.5 under the "regular" tax system ($1.7 under the AMT system). This carryforward, if unused to offset future Virginia Horn taxable income, will expire in 2001. However, for federal income tax purposes, the amount of NOL carryforwards arising prior to the Recapitalization (see Note 11) which will annually be 45 available to offset taxable income following the Recapitalization may be restricted by Section 382 of the Internal Revenue Code. As a result, the use of all or a significant portion of these NOL carryforwards may be deferred or disallowed. The ASCII group adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, effective January 1, 1993. The effect of this standard was not material. Other than for the ASCII group, the financial statements do not reflect U.S. federal income tax liabilities because each of the partners' U.S. federal income tax returns will include their appropriate share of the Company's taxable income or loss. 3. NOTES PAYABLE AND LONG-TERM DEBT At December 31, 1993, the Company had agreements that provide credit facilities for borrowings up to $50.0 with a group of banks on a revolving credit basis until May, 1994. At December 31, 1993, $3.8 letters of credit were issued under these facilities. Under the terms of a Security Agreement between the Company and its lenders, these credit facilities and the majority of the Company's long-term debt are secured by a pool of Company assets which includes accounts receivable, inventories, and property, plant and equipment. The terms of the Security Agreement will permit additional financings, which are yet to be negotiated, of up to $254.0 through 1995 to be secured by the pledged assets. At December 31, 1993, the Company also had a $100.0 unsecured term loan, maturing in 1996, with an affiliate of Kawasaki. The Company has incurred interest expense and commitment fees to an affiliate of Kawasaki of $2.1, $2.4, $1.3 and $4.2 during 1990, 1991, 1992 and 1993, respectively, relating to borrowings under the revolving credit agreement and the unsecured term loan. On January 18, 1994, the Company's various lenders signed amendments to the revolving credit agreements and long-term debt agreements to revise certain financial covenants effective as of December 31, 1993. The Company is required to maintain as of December 31, 1993 a minimum tangible net worth of $650.0, a minimum current ratio of 1.0 and a maximum leverage ratio of 1.0, as defined in the agreements. At December 31, 1993, the Company's actual measures under these financial covenants were a tangible net worth of $742.1, a current ratio of 1.76 and a leverage ratio of 0.85. In addition, on January 18, 1994 the Company entered into an agreement with certain of its lenders whereby the maturity of a portion of its debt will be extended to May 31, 1995 in the event that the proposed recapitalization described in Note 11 is not completed by May 1994 (the original maturity date of the debt). Management believes that the Recapitalization will be completed before that date. As a result, $80.0 of debt has been classified as long-term at December 31, 1993. 46 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) At December 31, 1991, 1992 and 1993, the Company's long-term debt, less current maturities, was as follows:
1991 1992 1993 ---- ---- ---- 6.62% to 6.67% due 1994-1997(a).......... $160.0 $240.0 $180.0 7.27% to 7.37% due 1994-2002(a).......... 84.0 84.0 78.8 9.23% to 9.38% due 1994-1997............. 73.6 57.3 40.9 9.52% to 9.57% due 1994-1999............. 65.0 55.0 45.0 10.55% to 11.1% due 1994-1996............ 51.8 37.8 23.8 9.26% to 9.38% due 1994-2003............. 36.0 36.0 32.4 11.50% due 1994-1996(b).................. 17.8 14.3 9.4 6.42% due 1994-2003...................... 9.6 8.9 8.3 Floating rate due 1995(c)................ -- -- 80.0 Floating rate due 1996(d)................ -- 30.0 100.0 Other.................................... 0.1 -- -- ------ ------ ------ Total.................................. $497.9 $563.3 $598.6 ====== ====== ======
- ---------------- (a) Rate fixed in 1992. (b) Debt secured by the No. 1 Electrogalvanizing Line and a $15.0 letter of credit. (c) Debt with extended maturity to May 31, 1995. (d) Unsecured subordinated term loan with an affiliate of Kawasaki. At December 31, 1993, the maturities of long-term debt are as follows:
1994............................... $130.8 1995............................... 200.8 1996............................... 215.0 1997............................... 93.2 1998............................... 25.0 1999 and thereafter................ 64.6 ------ Total............................. $729.4 ======
The Company capitalized interest on projects under construction of $12.6, $7.1, $3.5 and $1.2 during 1990, 1991, 1992 and 1993, respectively. 4. OPERATING LEASES Rental expense was $9.7, $11.2, $14.6 and $10.1 for 1990, 1991, 1992 and 1993, respectively. At December 31, 1993, obligations to make future minimum lease payments were as follows:
1994.................................... $3.1 1995.................................... 2.2 1996.................................... 1.9 1997.................................... 0.2 1998.................................... -- ---- Total lease obligations................ $7.4 ====
5. EMPLOYEE AND RETIREE BENEFIT PLANS Pension Plans--The Company provides noncontributory pension benefits to virtually all employees. Benefits are based on years of service and earnings in the highest 60 consecutive months in the last 120 months prior to retirement or a minimum amount per year of service, whichever is higher. The qualified plans are funded in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. 47 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) The details of the net periodic pension expense for 1990, 1991, 1992 and 1993 are as follows:
1990 1991 1992 1993 ---- ---- ---- ---- Economic Assumptions: Discount rate.......................................... 8.5% 9.0% 8.25% 8.5% Expected long-term rate of return on assets............ 9.25% 9.75% 9.0% 9.25% Rate of future compensation increases.................. 5.0% 5.0% 5.0% 5.0% Cost of benefits earned during the period................ $ 18.1 $ 15.8 $ 15.2 $ 12.3 Interest cost on the projected benefit obligation........ 62.6 67.1 69.6 80.7 Actual return on plan assets............................. (8.0) (144.6) (36.3) (83.6) Net amortization and deferral............................ (35.4) 97.6 (19.4) 26.2 ------ ------- ------ ------ Net periodic pension expense....................... $ 37.3 $ 35.9 $ 29.1 $ 35.6 ====== ======= ====== ======
The funded status of the plans at December 31, 1991, 1992 and 1993, using the assumptions stated below for each period, was as follows:
1991 1992 1993 ---- ---- ---- Economic Assumptions: Discount rate............................................. 8.25% 8.5% 7.5%* Rate of future compensation increases..................... 5.0% 5.0% 4.0% Actuarial present value of benefit obligations: Vested benefits........................................... $744.8 $861.7 $1,029.9 Nonvested benefits........................................ 60.6 45.6 54.1 ------ ------ -------- Accumulated benefits...................................... 805.4 907.3 1,084.0 ------ ------ -------- Projected benefit obligation.............................. 879.2 987.1 1,118.4 Plan assets at fair value................................. 671.8 688.4 726.3 ------ ------ -------- Reconciliation of funded status to recorded amounts: Unfunded projected benefit obligation..................... 207.4 298.7 392.1 Unrecognized prior service................................ (60.4) (38.7) (35.4) Unrecognized net loss..................................... (36.5) (58.5) (147.4) ====== ====== ======== Accrued pension cost.................................... $110.5 $201.5 $ 209.3 ====== ====== ========
- ----------------- * The change in the discount rate is expected to increase pension expense by $9.1 annually and to have no material effect on funding requirements. The mix of pension assets held at December 31, 1993 was as follows:
Equities.............................. 65% Fixed income securities............... 34% Short-term securities................. 1%
Of the total accrued pension cost of $110.5, $201.5 and $209.3 at December 31, 1991, 1992, and 1993, respectively, $45.4, $24.9 and $56.6 are included in Other accruals, and $65.1, $176.6 and $152.7 are included in Other liabilities in the accompanying Consolidated Balance Sheets. The 1992 pension disclosures above include the effects on the Company's pension plans of the Special Charges and Unusual Items described in Note 8. The total loss resulting from the related curtailment and special and contractual termination benefits amounted to $105.9. A minimum liability and corresponding intangible asset of $23.2, $25.9 and $35.2 at December 31, 1991, 1992 and 1993, respectively, was recognized for the excess of the accumulated benefit obligation over the total 48 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) of plan assets and the accrued pension liability. These balances are included in Other liabilities and Other assets, respectively, in the accompanying Consolidated Balance Sheets. In addition, a direct charge to equity of $113.2 was recorded in 1993 primarily as a result of the reduction in the discount rate for pension liabilities from 8.5% to 7.5%. The corresponding credit is included in Other liabilities. Retiree Health Care and Life Insurance Benefits -- In addition to providing pension benefits, the Company provides certain health and life insurance benefits for retirees. Most employees become eligible for these benefits at retirement. The retiree health and life insurance benefits are funded as claims are paid and for 1990, 1991, 1992 and 1993 the Company paid benefits totalling $24.2, $28.1, $29.7 and $32.2, respectively. In December 1993, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", retroactive to January 1, 1990. SFAS 106 requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care, as claims were incurred. SFAS No. 106 allows recognition of the cumulative effect of this obligation in the year of the adoption or the amortization of the obligation over a period of up to twenty years. The Company elected to recognize this obligation immediately effective January 1, 1990 and recorded $491.6 as the cumulative effect of this charge. The Company's cash flows are not affected by implementation of this statement, but implementation increased the operating loss by $23.8, $22.2, and $22.9 in 1990, 1991 and 1992, respectively, and decreased the operating profit by $27.0 in 1993. The Company is presently paying for these plans from its general assets as the benefits become payable. The Company does not anticipate funding these benefits in the foreseeable future. In 1990, 1991, 1992 and 1993, the Company recognized $48.0 $50.3, $52.6 and $59.2, respectively, as an expense for postretirement health care and life insurance benefits. A special charge of $56.5 for retiree health care benefits associated with restructuring and a voluntary salary reduction program was taken in the fourth quarter of 1992. (see Note 8). The following table sets forth the plans' funded status, reconciled with amounts recognized in the Company's statement of financial position at December 31, 1991, 1992 and 1993.
1991 1992 1993 ---- ---- ---- Accumulated postretirement benefit obligation: Retirees.................................................................... $359.1 $410.8 $442.4 Fully eligible active plan participants..................................... 65.2 74.6 74.1 Other active plan participants.............................................. 127.3 145.6 154.1 ------ ------ ------ Total................................................................... 551.6 631.0 670.6 Fair value of plan assets..................................................... -- -- -- ------ ------ ------ Accumulated postretirement benefit obligations in excess of plan assets....... 551.6 631.0 670.6 Prior service cost not yet recognized in net periodic postretirement benefit cost................................................................ -- -- -- Unrecognized transition obligation............................................ -- -- -- Unrecognized net loss......................................................... -- -- (11.3) ------ ------ ------ Accrued postretirement benefit cost........................................... $551.6 $631.0 $659.3
49 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions)
1990 1991 1992 1993 ---- ---- ---- ---- Net periodic postretirement benefit cost for 1990, 1991, 1992 and 1993 included the following components: Service cost -- benefits attributed to service during the period........ $ 6.0 $ 6.5 $ 6.9 $ 6.9 Interest cost on accumulated postretirement benefit obligations......... 42.0 43.8 45.7 52.3 Actual return on assets................................................. -- -- -- -- Amortization of transition obligation................................... -- -- -- --
For measurement purposes, health care costs are assumed to increase 10% in 1994 grading down by 1% per year to a constant level of 4.5% annual increase for pre-65 benefits and 7% in 1994 grading down by 1% per year to a constant level of 4.5% annual increase for post-65 benefits. In concluding that health care trend rates will decrease at a rate of 1% per year, the Company has considered future rates of inflation, recent movements toward managed health care programs in negotiated contracts and the trend among larger companies toward the formation of coalitions in an effort to reduce health care costs. The Company is currently finalizing negotiations with health care providers in the Cincinnati- Dayton corridor, a region that includes a significant number of the Company's retirees. In addition, the Company intends to implement similar managed health care programs in other geographic regions containing a concentration of its retirees, and is developing a managed care network for all active and retired salaried and union employees in Ohio. These programs will be in effect in January 1995. The Company has also considered the recent political environment and activities geared towards reducing health care costs and has taken into consideration the level of health care costs in relation to the U.S. Gross National Product (GNP). Despite the assumption that health care trend rates will decrease 1% per year, the combination of assumptions used in the SFAS 106 valuation results in approximately 18% of GNP for health care costs by the year 2000 compared to 14% currently. A one (1) percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of January 1, 1994 by $75.7 and the aggregate of the service cost and interest cost components of net period benefit cost for the year then ended by $6.8. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% for 1993 and 8.5% for prior years. This 1% reduction in the discount rate associated with a 1% reduction in the ultimate health care trend rate will increase OPEB expense by $0.1. The Company will adopt SFAS 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1993. Adoption of this standard did not have a material effect on the accompanying consolidated financial statements. 6. RELATED PARTY TRANSACTIONS During 1990, 1991, 1992 and 1993, the Company was party to certain transactions with Armco, Kawasaki, and their affiliates. These transactions consisted of charges to and from the Company for various services rendered and received, and are reflected primarily in Selling and administrative expenses in 1990, 1991 and 1992, and in Cost of products sold in 1993 in the accompanying Consolidated Statements of Operations. The following is a summary of such related party services for the periods: Services provided to Armco and affiliates by the Company:
1990 1991 1992 1993 ---- ---- ---- ---- Data processing......................................... $ 4.9 $ 3.6 $ 3.1 $ 1.4 Administrative and accounting........................... 2.4 1.9 0.9 0.7 Processing services and other materials................. 2.9 3.9 2.0 -- Processing and conversion............................... 0.6 0.9 4.6 13.3 Purchasing and selling.................................. 0.3 0.2 0.1 -- ----- ----- ----- ----- Total............................................... $11.1 $10.5 $10.7 $15.4 ===== ===== ===== =====
50 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) Services provided to the Company by Armco, Kawasaki and their affiliates and inventory purchases from Armco: Stainless purchases............................................. $ 7.5 $ 8.7 $15.3 $20.2 Research and engineering........................................ 11.1 11.6 9.8 4.0 Other........................................................... 1.8 2.5 0.3 0.8 ----- ----- ----- ----- Total....................................................... $20.4 $22.8 $25.4 $25.0 ===== ===== ===== =====
Processing and conversion increased during 1992 and 1993 as the Company provided services to Armco under a long-term toll rolling agreement, which will continue in effect after completion of the proposed Recapitalization (see Note 11). Research and engineering decreased in 1993 due to Armco transferring a portion of their research staff to the Company on April 1, 1993. The cost of this research staff for the nine-months ended December 31, 1993 was $3.8 and was included in Selling and administrative expenses in the Consolidated Statements of Operations and Partners' Capital (Deficit). In 1993, the Company purchased processing services and other materials of $3.6 from SOS. The Company acquired a 50% ownership interest in SOS to which substantially all of the businesses of Southwestern Ohio Steel, Inc. and SOS Leveling Company, Inc. were transferred by Armco. Sales to Armco, Kawasaki and their affiliates were $101.2, $89.8, $85.9 and $36.7 during 1990, 1991, 1992 and 1993, respectively, and sales to SOS were $26.0 for the four months ended December 31, 1992 and $99.5 for 1993. All of these amounts are included in Total Net Sales in the accompanying Consolidated Statements of Operations. Other miscellaneous sales to Armco, Kawasaki and their affiliates were $5.0, $2.5, $1.7 and $0.7 during 1990, 1991, 1992 and 1993, respectively. Under the Joint Venture Agreement, Armco is obligated to indemnify the Company for certain supplemental unemployment benefit payments up to a maximum of $20.0. As a result, the related receivables are included as reductions in Partners' Capital (Deficit) in the accompanying Consolidated Balance Sheets. 7. COMMITMENTS Virginia Horn is committed to fund its percentage share of certain defined fixed costs of Eveleth. Through an agreement with Armco the Company has assumed Armco's obligations relating to Virginia Horn which include a guarantee of Virginia Horn's performance to the other participants of Eveleth Mines. Under agreement with another owner of Eveleth, the Company purchased 300,000 tons of iron ore from this Eveleth partner in 1993 and is expected to purchase at least 250,000 tons per year through 1996. Beginning in the fourth quarter of 1992, Virginia Horn elected not to nominate to purchase equity iron ore pellets from Eveleth. As a result of that decision together with doubts regarding the continued level of support by the Eveleth Mines partners, in light of worldwide excess iron ore capacity and Eveleth Mines' position as a high cost producer, the Company concluded that its ability to recover its investment was doubtful and therefore impaired its investment in Eveleth Mines (see Note 8). However, the Company continues to record its proportionate share of Eveleth's losses, of which approximately $12.0 per year is funded with cash. See Note 10. As of December 31, 1993, the Company had agreed to purchase a total of 1.6 million tons of iron ore pellets from a Brazilian iron ore company through 1998. Under this contract, the Company also has agreed to purchase sinter feed ore requirements. In addition, the Company has agreed to purchase at least 6.5 million tons through 1997 from a North American pellet producer. In June 1993, the Company and Peabody Coal Company ("Peabody") entered into a six-year agreement that superseded a 1984 agreement. The new agreement provides for a fixed market price from February 1994 through February 1996, after which annual price adjustments will be made based on market prices. In addition, Peabody agreed to a price reduction for the remainder of 1993. 51 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) The Company has committed to purchase property, plant and equipment (including unexpended amounts relating to projects substantially under way) amounting to approximately $74.8 (including $38.9 of environmental costs of which $24.2 and $14.7 will be spent in 1994 and 1995 respectively) at December 31, 1993. 8. SPECIAL CHARGES AND UNUSUAL ITEMS The special charges and unusual items recorded in 1992 and 1993 are:
1992 1993 ---- ---- Shutdown of Ashland Hot Strip Mill: Disposal of assets(a)..................................... $ 2.3 Employee and retiree benefits including pensions.......... 13.7 ------ Subtotal -- Shutdown of Ashland Hot Strip Mill....... 16.0 Reduction of Salaried Workforce............................. 39.0 Restructuring of Facilities: Disposal and write-off of certain steelmaking assets(a)... 117.2 $ 7.6 Employee and retiree benefits including pensions.......... 144.5 5.0 Environmental liabilities................................. 11.0 -- Impairment of investment in Eveleth....................... 46.6 -- Other..................................................... 5.0 -- ------ ------ Subtotal -- Restructuring of Facilities............. 324.3 12.6 Legal, litigation and other............................... -- 5.0 ------ ------ TOTAL.............................................. $379.3 $ 17.6 ====== ======
- -------------- (a) Net of estimated realizable values. In 1992, the Company recorded charges totalling $379.3 relating to restructuring of facilities, workforce reductions and the impairment of its investment in Eveleth. Restructuring of the facilities and workforce reductions resulted from the determination that the Company had redundant assets, excess capacity and excessive operating costs. The impairment of Eveleth followed the Company's conclusion as to its inability to recover its investment (see Note 7). Most of these actions, which were intended to reduce future operating costs, took place following an operations review conducted by the Company's newly appointed management team and were completed in the fourth quarter of 1992. In 1993, the Company continued to review its operations for the purpose of reducing operating costs. In connection with this review, the Company recorded additional charges of $12.6 for restructuring of facilities, and $5.0 for certain legal, litigation and other unusual items which consist of $3.0 that is reserved for litigation payments resulting from the aborted outsourcing of operations in Ashland that were shut down as part of the Ashland restructuring and $2.0 for legal expenses in connection with defending the Company for existing and potential lawsuits relating to the workforce terminations. See Note 10. 9. EXTRAORDINARY ITEM The extraordinary item recorded in 1992 represents the following: "The Coal Industry Retiree Health Benefit Act" requires that health benefits for any pre-1976 retirees who were previously covered by one of two insolvent United Mineworkers multi-employer welfare funds revert to their former employers. Retirees of employers that no longer exist are also assigned to surviving companies using a formula included in the legislation. The Company was required to assume a portion of their benefits and recorded an extraordinary loss of $12.1 of which $1.2 and $0.9 are included in Other accruals and $10.9 and $11.9 in Other liabilities in the accompanying Consolidated Balance Sheets as of December 31, 1992 and 1993, respectively. 52 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) 10. LEGAL, ENVIRONMENTAL MATTERS AND CONTINGENCIES Domestic steel producers, including the Company, are subject to stringent federal, state and local laws and regulations relating to the protection of human health and the environment. The Company has expended, and can be expected to expend in the future, substantial amounts for compliance with these environmental laws and regulations. Capital expenditures for environmental remediation and protection for 1993 totalled $16.4. In addition, the Company made payments for environmental compliance of approximately $38.3 for 1993. The Clean Air Act Amendments of 1990 (the "CAAA" or "Amendments") impose new standards designed to reduce air emissions. The Amendments will directly affect many of the Company's ongoing operations, particularly its coke oven batteries. The Company believes that the costs of complying with the Amendments will not have a material adverse effect on its financial condition, results of operations or cash flows. Federal regulations promulgated pursuant to the Clean Water Act impose categorical pretreatment limits on the concentrations of various constitutions in coke plant wastewaters prior to discharge into publicly owned treatment works ("POTW"). Due to concentrations of ammonia and phenol in excess of these limits at the Middletown Works, the Company, through the Middletown POTW, petitioned the United States Environmental Protection Agency (the "EPA") for "removal credits," a type of compliance exemption, based on the Middletown POTW's satisfactory treatment of the Company's wastewater for ammonia and phenol. The EPA declined to review the Company's application on the grounds that the EPA had failed to promulgate new sludge management rules. As a result of the EPA's refusal, the Company sought and obtained from the Federal District Court for the Southern District of Ohio an injunction prohibiting the EPA from instituting enforcement action against the Company for noncompliance with the pretreatment limitations, pending the EPA's promulgation of the applicable sludge management regulations. Although the Company is unable to predict the outcome of this matter, if the EPA eventually refuses to grant the Company's request for removal credits, the Company could incur additional costs to construct pretreatment facilities at the Middletown Works. The estimated cost of such a facility is in the range of $2.0 to $4.0. The Company believes those costs would not have a material adverse effect on its financial condition, results of operations or cash flows. The Company operates an on-site landfill for the disposal of various sludges and dusts, principally resulting from air and water pollution treatment systems at the Middletown Works. These materials are currently considered non-hazardous wastes. The Company currently intends, subject to approval by the Ohio Environmental Protection Agency (the "Ohio EPA"), to expand the present landfill, which is expected to reach capacity in the next eight to nine years. Based on current projections, the Company estimates that the design and construction of the expansion, which is slated to begin in mid-1994 with an anticipated completion date of January 1, 1996, will cost approximately $6.2 million. If the expansion is not approved by the Ohio EPA, the Company may incur increased disposal costs due to the need for off-site disposal. The Company believes these costs would not have a material adverse effect on its financial condition, results of operations or cash flows. On December 5, 1986, Armco received notification from the EPA advising that it was being considered as a PRP at the Maxey Flats Nuclear Disposal Site near Morehead, Kentucky. Records from the landfill indicated that the Ashland Works had sent approximately 120 cubic feet of material to the site. The Company has been identified as de minimis contributor to the Maxey Flats site, and as a result, anticipates that it will be able to resolve its liability for a nominal amount. 53 ARMCO STEEL COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (dollars in millions) The Company will continue to review its businesses to determine if additional facilities should be closed, written down or otherwise restructured or if its workforce should be further reduced. In this regard, the Company is negotiating with the Eveleth partners concerning the potential closure of, or the Company's exit from, Eveleth. If these negotiations are successfully completed, the closure of, or exit from, Eveleth would be subject to other events, including the approval by the Company's Board of Directors, and could result in a charge of approximately $30.0 million. This amount approximates the Company's proportionate share of the potential shutdown costs arising from the potential closure, which costs primarily represent employee and retiree benefits and contract termination fees. In addition, in the second quarter of 1994 the Company may incur a charge of approximately $65.0 million relating to further reductions of its workforce, subject to approval by the Company's Board of Directors. This charge is expected to be comprised of approximately $50.0 million for pension-related curtailments and $15.0 million for health care related curtailments. Although it is not possible at this time for the Company to determine accurately the amounts of any other special charges that may result from the closure, write down or restructuring of other facilities or from additional workforce reductions, additional special charges could be incurred and may be substantial. The company is also involved in routine litigation, other environmental proceedings, and claims pending with respect to matters arising out of the normal conduct of the business. In management's opinion, the ultimate liability resulting from such claims, individually or in the aggregate, will not materially affect the Company's consolidated financial position, results of operations or cash flows. In June 1990, the Company filed an antitrust action against several companies. Effective February 25, 1992, the Company reached a confidential settlement with three of the four remaining defendants. The settlement reduced 1992 Cost of products sold in the accompanying Consolidated Statements of Operations. The Company is continuing to pursue the claim against the remaining defendant. 11. SUBSEQUENT EVENTS On January 13, 1994, the General Partner approved the filing with the Securities and Exchange Commission of registration statements in connection with a proposed Recapitalization of the Company (the "Recapitalization"). The Company is currently negotiating for the sale of its ownership interest in SOS and another subsidiary of ASCII. No prediction can be made concerning the ultimate outcome of such negotiations which, if successful, would be subject to other events including the approval by the Company's Board of Directors. However, the ultimate sale, if any, will not result in a loss. 54 SCHEDULE V ARMCO STEEL COMPANY, L.P. PROPERTY, PLANT AND EQUIPMENT (Dollars in Millions)
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Balance Balance Beginning Additions Other at End Classification of Period at Cost Retirements Changes of Period -------------- --------- --------- ----------- ------- --------- For the Year ended December 31, 1990: Land, land improvements and leaseholds............................ $ 42.3 $ 1.3 $ 0.2 $ 0.3 (B) $ 43.7 Buildings.............................. 68.0 11.0 0.3 6.9 (B) 85.6 Machinery and equipment................ 569.9 165.3 0.8 13.7 (A) 767.5 19.2 (B) 0.2 (C) Construction in progress............... 193.4 35.4 -- (26.4) (B) 202.4 -------- ------- -------- ------- -------- TOTAL.............................. $ 873.6 $ 213.0 $ 1.3 $ 13.9 $1,099.2 ======== ======= ======== ======= ======== For the Year ended December 31, 1991: Land, land improvements and leaseholds............................ $ 43.7 $ 1.7 $ -- $ -- $ 45.4 Buildings.............................. 85.6 7.0 -- -- 92.6 Machinery and equipment................ 767.5 274.7 2.6 -- 1,039.6 Construction in progress............... 202.4 (120.3) -- -- 82.1 -------- ------- -------- ------- -------- TOTAL.............................. $1,099.2 $ 163.1 $ 2.6 $ -- $1,259.7 ======== ======= ======== ======= ======== For the Year ended December 31, 1992: Land, land improvements and leaseholds............................ $ 45.4 $ 3.1 $ 0.8 $ (5.7) (D) $ 42.0 Buildings.............................. 92.6 1.3 -- (13.3) (D) 80.6 Machinery and equipment................ 1,039.6 115.6 1.6 (120.5) (D) 1,033.1 Construction in progress............... 82.1 (33.8) -- (22.6) (D) 25.7 -------- ------- -------- ------- -------- TOTAL.............................. $1,259.7 $ 86.2 $ 2.4 $(162.1) $1,181.4 ======== ======= ======== ======= ======== For the Year ended December 31, 1993: Land, land improvements and leaseholds............................ $ 42.0 $ 0.1 $ 1.6 $ (0.1) (D) $ 40.4 Buildings.............................. 80.6 -- 0.5 -- 80.1 Machinery and equipment................ 1,033.1 28.5 4.8 2.7 (D) 1,059.5 Construction in progress............... 25.7 11.6 0.2 -- 37.1 -------- ------- -------- ------- -------- TOTAL.............................. $1,181.4 $ 40.2 $ 7.1 $ 2.6 $1,217.1 ======== ======= ======== ======= ========
- -------------- NOTES: (A) Reclass from Lease-rights to Property upon payment of leases. (B) Reclass additional portions of Caster undergoing modification to construction in progress. (C) Transfer of steel processing companies from Armco Inc. (D) Impair and reclass to investments, assets which are to be idled and sold as part of the Company's restructuring plan. 55 SCHEDULE VI ARMCO STEEL COMPANY, L.P. ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Dollars in Millions)
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- Additions Balance Charged Balance Beginning to Costs & Other at End Classification of Period Expenses Retirements Changes of Period -------------- --------- -------- ----------- ------- --------- For the Year ended December 31, 1990: Land, land improvements and leaseholds............................ $ 1.2 $ 1.8 $ -- $ -- $ 3.0 Buildings.............................. 4.7 5.0 -- -- 9.7 Machinery and equipment................ 36.7 66.0 0.2 0.8 (A) 105.6 2.3 (B) ------ ------ ------ ------ ------ TOTAL.............................. $ 42.6 $ 72.8 $ 0.2 $ 3.1 $118.3 ====== ====== ====== ====== ====== For the Year ended December 31, 1991: Land, land improvements and leaseholds............................ $ 3.0 $ 1.6 $ -- $ (0.1)(C) $ 4.5 Buildings.............................. 9.7 5.4 -- (1.7)(C) 13.4 Machinery and equipment................ 105.6 75.6 2.0 0.9 (B) 181.9 1.8 (C) ------ ------ ------ ------ ------ TOTAL.............................. $118.3 $ 82.6 $ 2.0 $ 0.9 $199.8 ====== ====== ====== ====== ====== For the Year ended December 31, 1992: Land, land improvements and leaseholds............................ $ 4.5 $ 1.4 $ 0.1 $ (0.2)(D) $ 5.6 Buildings.............................. 13.4 5.2 -- (4.4)(D) 14.2 Machinery and equipment................ 181.9 80.7 1.1 (8.7)(D) 252.8 ------ ------ ------ ------ ------ TOTAL.............................. $199.8 $ 87.3 $ 1.2 $(13.3) $272.6 ====== ====== ====== ====== ====== For the Year ended December 31, 1993: Land, land improvements and leaseholds............................ $ 5.6 $ 1.3 $ 0.5 $ 1.1 (B) $ 7.5 Buildings.............................. 14.2 4.0 0.1 0.2 (B) 18.3 Machinery and equipment................ 252.8 68.2 2.8 0.9 (D) 319.1 ------ ------ ------ ------ ------ TOTAL.............................. $272.6 $ 73.5 $ 3.4 $ 2.2 $344.9 ====== ====== ====== ====== ======
- ---------- NOTES: (A) Reclass from Lease-rights to Property upon payment of leases. (B) Impairment of a blast furnace and other equipment. (C) Reclassification of asset groups. (D) Impairment and reclassification to investments, assets which are to be idled and sold as part of the Company's restructuring plan. (E) Generally, depreciation rates on assets are 5% for land improvements and leaseholds, 3-4% for Buildings and 5% for Machinery and equipment. 56 SCHEDULE VIII ARMCO STEEL COMPANY, L.P. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in Millions)
Column A Column B Column C Column D Column E --------------------- ----------- ----------- ------------ ------------- Deductions from Reserves for Additions Purposes for Balance at Charged which Beginning to Costs & Reserves were Balance at Description of Period Expenses Provided End of Period ----------- ----------- ----------- ------------- ------------- For the Year Ended December 31, 1990: Allowance for doubtful accounts................. $ 2.7 $ 0.3 $ -- $ 3.0 Allowance for impairment of investments......... 0.1 -- -- 0.1 For the Year Ended December 31, 1991: Allowance for doubtful accounts................. 3.0 1.5 2.0 2.5 Allowance for impairment of investments......... 0.1 -- -- 0.1 For the Year Ended December 31, 1992: Allowance for doubtful accounts................. 2.5 1.0 0.8 2.7 Allowance for impairment of investments......... 0.1 46.6(A) -- 46.7 For the Year Ended December 31, 1993: Allowance for doubtful accounts................. 2.7 1.8 -- 4.5 Allowance for impairment of investments......... 46.7 -- -- 46.7
- -------------- NOTES: (A) Represents impairment of Virginia Horn Taconite Company's investment in Eveleth Expansion Company. 57 SCHEDULE IX ARMCO STEEL COMPANY, L.P. SHORT-TERM BORROWINGS (Dollars in Millions)
Column A Column B Column C Column D Column E Column F --------------------- ----------- ----------- ----------- ----------- ----------- Weighted Maximum Average Average Weighted Amount Amount Interest Balance Average Outstanding Outstanding Rate Category of Aggregate at End Interest During the During the During the Short-Term Borrowings of Period Rate Period(B) Period(B) Period(B) --------------------- ----------- ----------- ----------- ----------- ----------- For the Year Ended December 31, 1990: Payable to banks...................... $40.0 8.8% $40.0 $ 3.9 8.8% Other(A).............................. 83.0 9.8 (C) 83.0 22.2 8.9 ----- ----- ----- ----- ----- For the Year Ended December 31, 1991: Payable to banks...................... $30.0 6.3% $68.0 $20.5 7.0% Other(A).............................. 28.0 5.9 92.0 33.3 6.5 ----- ----- ----- ----- ----- For the Year Ended December 31, 1992: Payable to banks...................... $ -- --% $30.0 $ 4.8 5.5% Other(A).............................. -- -- 55.0 26.6 4.2 ----- ----- ----- ----- ----- For the Year Ended December 31, 1993: Payable to banks...................... $ -- --% $ -- $ -- --% Other(A).............................. -- -- -- -- -- ----- ----- ----- ----- -----
- -------------- NOTES: (A) Borrowings from an affiliate, which are payable within one year. (B) Based on daily balances. (C) Based on average rates for two weeks preceding and following year-end. 58 SCHEDULE X ARMCO STEEL COMPANY, L.P. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Column B -------- Column A Charged to Costs and Expenses -------- -------------------------------------------- Item 1990 1991 1992 1993 ---- ---- ---- ---- ---- Maintenance and repairs........ $278.5 $267.1 $265.5 $261.3
59 INDEPENDENT AUDITORS' REPORT - ---------------------------- Armco Inc.: We have audited the statement of consolidated net assets of Armco Financial Services Group - Companies to be Sold as of December 31, 1993 and 1992 and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included Financial Statement Schedule I, Summary of Investments - Other than Investments in Related Parties; Schedule III, Condensed Financial Information; Schedule VI, Reinsurance; Schedule VIII, Valuation and Qualifying Accounts; and Schedule X, Supplemental Information Concerning Property-Casualty Insurance Operations. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Armco Financial Services Group - Companies to be Sold at December 31, 1993 and 1992 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Notes 3 and 6 to the consolidated financial statements, effective January 1, 1993 the Company changed its method of accounting for reinsurance contracts and postretirement benefits other than pensions. As discussed in Note 1 to the consolidated financial statements, effective December 31, 1993 the Company changed its method of accounting for investments in debt securities. DELOITTE & TOUCHE Milwaukee, Wisconsin February 25, 1994 60 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD STATEMENT OF CONSOLIDATED NET ASSETS AS OF DECEMBER 31, 1993 AND 1992 (Dollars in thousands)
ASSETS: 1993 1992 -------- -------- Investments (Notes 1, 2): Fixed Maturity Investments: Held to maturity at amortized cost (market $38,879 and $162,819) $ 38,077 $156,657 Available for sale at market 1993 and amortized cost 1992 (amortized cost $366,528 in 1993 and market $253,758 in 1992) 379,849 248,684 Equity securities, at market value (cost $1) 1 1 Cash equivalents 21,953 7,573 -------- -------- Total Investments 439,880 412,915 -------- -------- Cash 826 4,495 Accrued investment income 5,988 6,536 Premium balances receivable less allowance for doubtful accounts of $1,757 and $1,790 53,707 58,860 Prepaid reinsurance premiums 3,118 3,051 Reinsurance receivable (Note 3) 28,038 20,378 Deferred policy acquisition costs (Note 1) 19,712 19,727 Property and equipment net of accumulated depreciation of $7,914 and $6,577 7,299 7,942 Due from affiliates (Note 4) 803 - Goodwill net of amortization of $549 and $366 (Note 1) 6,762 6,945 Other assets (Note 6) 5,267 4,822 -------- -------- TOTAL ASSETS $571,400 $545,671 ======== ======== LIABILITIES AND NET ASSETS: LIABILITIES: Reserve for losses and loss adjustment expenses (Note 3) $297,553 $284,309 Unearned premiums (Note 3) 95,992 101,528 Dividends to policyholders 4,755 5,659 Reinsurance premiums payable 1,247 2,171 Accrued expenses 8,580 9,158 Due to affiliates (Note 4) - 36 Postretirement and postemployment benefits (Note 6) 15,347 - Other liabilities 9,234 10,969 Note payable (Note 7) 2,800 5,600 -------- -------- TOTAL LIABILITIES 435,508 419,430 -------- -------- NET ASSETS (NOTE 8) 135,892 126,241 -------- -------- TOTAL LIABILITIES AND NET ASSETS $571,400 $545,671 ======== ========
See notes to consolidated financial statements. 61 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD STATEMENT OF CONSOLIDATED OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
1993 1992 1991 -------- -------- -------- REVENUES: Net premiums earned (Note 3) $227,693 $239,886 $250,862 Net investment income (Note 2) 32,543 34,057 35,294 Net realized gain on investments (Note 2) 11,150 10,082 2,529 -------- -------- -------- TOTAL REVENUES 271,386 284,025 288,685 -------- -------- -------- EXPENSES: Losses and loss adjustment expenses (Note 3) 177,128 196,077 208,988 Policyholder dividends 2,414 2,966 5,170 Policy acquisition costs (Note 1) 46,456 49,912 56,256 Other expenses (Notes 4, 6) 34,814 37,853 32,380 -------- -------- -------- TOTAL EXPENSES 260,812 286,808 302,794 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 10,574 (2,783) (14,109) INCOME TAX (BENEFIT) PROVISION (NOTE 5) 223 (166) 246 -------- -------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 10,351 (2,617) (14,355) -------- -------- -------- Cumulative effect on prior years of a change in accounting principle for postretirement benefits, (Note 6) (14,000) - - -------- -------- -------- NET LOSS $ (3,649) $ (2,617) $(14,355) ======== ======== ========
See notes to consolidated financial statements. 62 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD STATEMENT OF CONSOLIDATED CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
1993 1992 1991 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,649) $ (2,617) $ (14,355) --------- --------- --------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,063 1,507 1,561 Gain on sale of fixed maturity investments, net (11,150) (9,816) (3,385) (Gain) loss on sale of stock, net - (266) 855 Loss on sale of property and equipment 35 - - Changes in: Accrued investment income 548 (452) 482 Premium balances receivable 5,153 (906) 7,221 Reinsurance recoverable on paid losses - (495) (592) Reinsurance receivable (7,660) (4,100) (3,652) Deferred policy acquisition costs 15 2,381 3,275 Due to/from affiliates (839) 207 1,193 Prepaid reinsurance premiums (67) 38 608 Other assets (466) 384 2,016 Insurance reserves 7,708 8,740 17,251 Policyholder dividends payable (905) (330) 981 Reinsurance premiums payable (924) (228) (1,488) Accrued expenses (578) 46 (3,308) Postretirement and postemployment benefits 15,347 - - Other liabilities (1,755) 609 4,385 --------- --------- --------- Total adjustments 6,525 (2,681) 27,403 --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,876 (5,298) 13,048 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of fixed maturity investments: Held to maturity 57,733 - - Available for sale 212,834 - - All other - 195,154 194,043 Proceeds from maturities of fixed maturity investments: Held to maturity - - - Available for sale 7,318 - - All other - 71,422 36,115 Proceeds from sales of equity securities - 454 506 Purchase of fixed maturity investments: Held to maturity (40,674) - - Available for sale (225,852) - - All other - (269,216) (230,607) Purchase of property and equipment (737) (1,184) (1,549) Proceeds from sales of property and equipment 13 - - --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,635 (3,370) (1,492) --------- --------- ---------
(continued) 63 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
1993 1992 1991 ------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on note payable (2,800) (5,600) (2,800) ------- -------- ------- NET CASH USED IN FINANCING ACTIVITIES (2,800) (5,600) (2,800) ------- -------- ------- CHANGE IN CASH AND CASH EQUIVALENTS $10,711 $(14,268) $ 8,756 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,068 26,336 17,580 ------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $22,779 $ 12,068 $26,336 ======= ======== ======= SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for income taxes $ 150 $ 58 $ 342 Cash paid for interest 408 831 1,010
See notes to consolidated financial statements. - ------------------------------------------------------------------------------ 64 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 - ---------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Armco Financial Services Group - Companies to be Sold (AFSG - Companies to be Sold or the Company) consists of the net assets of Armco Inc.'s (Armco) insurance companies which Armco intends to sell and which continue underwriting activities. These activities principally represent the transactions of Northwestern National Holding Company, Inc. (NNHC), which is a wholly owned subsidiary of Armco Financial Services Corporation (AFSC), which is a wholly owned subsidiary of Armco and is accounted for by Armco as an investment in net assets using the cost recovery method. NNHC owns 100% of the common and preferred stock of Northwestern National Casualty Company and its wholly owned subsidiary, NN Insurance Company (collectively, NNCC), Pacific National Insurance Company and its wholly owned subsidiary, Pacific Automobile Insurance Company (collectively, PNIC), SICO, Inc. and its wholly owned subsidiary, Statesman Insurance Company and Statesman's wholly owned subsidiary Timeco, Inc. (collectively, SICO) and Certified Finance Corporation (CFC). CFC had not commenced operations as of December 31, 1993. Principles of Consolidation - The consolidated financial statements include --------------------------- the accounts of NNHC and its subsidiaries NNCC, PNIC, SICO and CFC. Significant intercompany accounts and transactions have been eliminated. Business Segment - The Company operates in a single business segment, ---------------- property and casualty insurance. Basis of Presentation - The accompanying financial statements have been --------------------- prepared on the basis of generally accepted accounting principles (GAAP) which vary from statutory reporting practices prescribed or permitted for insurance companies by regulatory authorities (see Note 8). Investments - In May 1993, the Financial Accounting Standards Board (FASB) ----------- issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The statement requires fixed maturity investments which are available for sale to be recorded at market value. The Company adopted SFAS No. 115 on December 31, 1993 and reclassified certain investments from the "held to maturity class" into the "available for sale" class on the same date. The financial statement effect of adopting the statement was to increase investments by $13,321,000 and net assets by $13,321,000. Amounts reported in the Statement of Consolidated Cash Flows for 1993 are based on the classification of securities prior to the adoption of SFAS No. 115. Fixed maturity investments include bonds and mortgage-backed securities. Fixed maturity investments which the Company has the positive intent and ability to hold to maturity ("held to maturity") are reported at amortized cost. Fixed maturity investments which are available for sale ("available for sale") are reported at market value as of December 31, 1993 and at the lower of amortized cost or market, determined in the aggregate, as of December 31, 1992. Equity securities are common stocks which are reported at market value. The difference between cost and market value of common stocks, and investments available for sale at December 31, 1993, is reflected as a component of net assets. Short-term investments (cash equivalents) are reported at cost which approximates market value. During 1992, the Company re-evaluated its intentions to hold to maturity all of its bonds and reclassified certain investments as available for sale. Investments classified as available for sale are expected to be held for an indefinite period and may be sold depending on interest rates, cash requirements and other considerations. Because the aggregate market value of these investments exceeded the amortized cost, there was no financial statement effect of this reclassification as of December 31, 1992. 65 Investment income consists primarily of interest which is recognized on an accrual basis. Interest income on mortgage-backed securities is determined on the effective yield method based on scheduled principal payments. Realized capital gains and losses, calculated as the difference between proceeds and book value, are determined by specific identification of the investments sold. Recognition of Premium Revenues - Premiums, net of reinsurance ceded, are ------------------------------- earned on a pro rata basis over the term of the policy. Deferred Policy Acquisition Costs - Policy acquisition costs that vary with --------------------------------- and are directly related to the production of premiums are deferred and amortized over the terms of the policies to which they relate. Amortization for the years ended December 31, 1993, 1992 and 1991 was $46,456,000, $49,912,000 and $56,256,000, respectively. Depreciation - Depreciation on property and equipment is provided primarily ------------ on the straight-line basis over the estimated useful lives of the respective assets. Goodwill - Goodwill, which represents the excess of cost over the fair value -------- of net assets of acquired subsidiaries is amortized on a straight-line basis over periods not exceeding 40 years. Cash Flow - For purposes of reporting cash flows, the Company considers all --------- highly liquid short-term investments purchased with maturities of three months or less to be cash equivalents. Insurance Liabilities - The liability for losses and loss adjustment expenses --------------------- is reported net of a receivable for salvage and subrogation of $7,746,000, $7,523,000 and $7,499,000 at December 31, 1993, 1992 and 1991, respectively. Participating Policy Contracts - Participating business represents ------------------------------ approximately 14%, 13% and 11% of total premiums in force at December 31, 1993, 1992 and 1991, respectively. Participating business is composed entirely of workers' compensation policies. The amount of dividends to be paid on these policies is determined based on the provisions of the individual policies. Dividend expense for the years ended December 31, 1993, 1992 and 1991, was $2,414,000, $2,966,000 and $5,170,000, respectively. 66 2. INVESTMENTS The amortized cost and market value of the Company's fixed maturity investments as of December 31, 1993 that are designated as held to maturity are as follows:
GROSS GROSS 1993 AMORTIZED UNREALIZED UNREALIZED MARKET (Dollars in Thousands) COST GAINS LOSSES VALUE --------- ---------- ----------- ------- US Treasury securities and obligations of US government corporations and agencies $33,100 $1,091 $(240) $33,951 Corporate securities 1,000 1 - 1,001 Mortgage-backed securities 3,977 40 (90) 3,927 ------- ------ ----- ------- Total fixed maturity investments held to maturity $38,077 $1,132 $(330) $38,879 ======= ====== ===== =======
67 The amortized cost and market value of the Company's fixed maturity investments as of December 31, 1993 that are designated as available for sale are as follows:
Gross Gross 1993 Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value --------- ---------- ---------- ------ US Treasury securities and obligations of US government corporations and agencies $ 48,399 $ 2,204 $ (452) $ 50,151 Corporate securities 189,579 7,273 (1,604) 195,248 Mortgage-backed securities 110,933 6,432 (450) 116,915 Other debt securities 17,617 436 (518) 17,535 -------- ------- ------- -------- Total fixed maturity investments available for sale $366,528 $16,345 $(3,024) $379,849 ======== ======= ======= ========
The amortized cost and market value of the Company's fixed maturity investments as of December 31, 1992 that are designated as held to maturity are as follows:
GROSS GROSS 1992 AMORTIZED UNREALIZED UNREALIZED MARKET (Dollars in Thousands) COST GAINS LOSSES VALUE --------- ---------- ----------- --------- US Treasury securities and obligations of US government corporations and agencies $ 23,300 $1,018 $ (1) $ 24,317 Corporate securities 65,076 2,241 (51) 67,266 Mortgage-backed securities 67,152 3,190 (290) 70,052 Other debt securities 1,129 55 - 1,184 -------- ------ ----- -------- Total fixed maturity investments held to maturity $156,657 $6,504 $(342) $162,819 ======== ====== ===== ========
68 The amortized cost and market value of the Company's fixed maturity investments as of December 31, 1992 that are designated as available for sale are as follows:
Gross Gross 1992 Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value --------- ---------- ---------- ------ US Treasury securities and obligations of US government corporations and agencies $ 34,872 $ 977 $ (4) $ 35,845 Corporate securities 133,670 2,508 (1,336) 134,842 Mortgage-backed securities 72,430 3,132 (347) 75,215 Other debt securities 7,712 145 (1) 7,856 -------- ------ ------- -------- Total fixed maturity investments available for sale $248,684 $6,762 $(1,688) $253,758 ======== ====== ======= ========
The amortized cost and market value of the Company's fixed maturity investments at December 31, 1993, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE FOR HELD TO MATURITY SALE AMORTIZED MARKET AMORTIZED MARKET (Dollars in Thousands) COST VALUE COST VALUE ----------- ----------- --------- --------- Due in one year or less $ 737 $ 754 $ 2,577 $ 2,637 Due after one year through five years 79,793 81,933 11,560 11,641 Due after five years through ten years 54,874 56,728 5,942 6,137 Due after ten years 120,191 123,519 14,021 14,537 -------- -------- ------- ------- 255,595 262,934 34,100 34,952 Mortgage-backed securities 110,933 116,915 3,977 3,927 -------- -------- ------- ------- $366,528 $379,849 $38,077 $38,879 ======== ======== ======= =======
Proceeds from fixed maturity investment sales and gross realized gains and losses during 1993 are as follows:
PROCEEDS PROCEEDS GROSS GROSS FROM FROM REALIZED REALIZED (Dollars in Thousands) SALES MATURITIES GAINS LOSSES ----------- ----------- --------- -------- Available for sale $212,834 $ 7,318 $10,520 $ (498) Held to maturity 57,733 0 1,209 (81) -------- -------- ------- ------- $270,567 $ 7,318 $11,729 $ (579) ======== ======== ======= =======
Proceeds from sales and maturities of investments during 1992 and 1991 were $267,030,000 and $230,664,000, respectively. Gross gains of $11,060,000 and $5,514,000 and gross losses of $978,000 and $2,985,000 were realized on those sales. 69 At December 31, 1993 and 1992, the Company's fixed maturity investments carried at amortized cost of $52,845,000 and $44,716,000, respectively, were on deposit with regulatory authorities. Total investment income, investment expense and net investment income for the years ended December 31, 1993, 1992 and 1991 were as follows:
(Dollars in thousands) 1993 1992 1991 -------- -------- -------- INVESTMENT INCOME: Fixed maturity investments $32,485 $33,693 $34,561 Short-term investments 416 761 1,073 ------- ------- ------- Total investment income 32,901 34,454 35,634 Investment expense (358) (397) (340) ------- ------- ------- Net investment income $32,543 $34,057 $35,294 ======= ======= =======
3. REINSURANCE ACTIVITY The Company limits the maximum net loss which can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks with other insurers, either on an automatic basis or under general reinsurance contracts known as "treaties" or by negotiation on substantial individual risks. Ceded reinsurance is treated as the risk and liability of the assuming companies. Reinsurance contracts do not relieve the Company from its obligations to policyholders. In the event that reinsuring companies are unable to meet their obligations under the agreements, the Company would continue to have primary liability to policyholders for losses incurred. The Company evaluates the financial condition of its reinsurers and evaluates concentrations of credit risk when determining reinsurance placements. At December 31, 1993 reinsurance receivables of $18,061,000 and prepaid reinsurance premiums of $2,026,000 were associated with a single reinsurer. The Company has never suffered a significant loss due to reinsurers unable to meet their obligations. 70 The following tables summarize amounts related to reinsurance assumed and ceded as of December 31, 1993, 1992 and 1991 and for the years then ended, respectively.
Premium Activity: (Dollars in Thousands) 1993 1992 ------------------------------ ------------------------------ WRITTEN EARNED UNEARNED WRITTEN EARNED UNEARNED -------- -------- -------- -------- -------- -------- Direct $209,791 $215,075 $ 83,983 $222,541 $223,543 $89,267 Assumed: Unaffiliated 6,786 6,173 2,042 3,855 4,156 1,429 Affiliated 20,761 21,626 9,967 24,461 25,200 10,832 Ceded: Unaffiliated (15,241) (15,174) (3,118) (12,963) (13,002) (3,051) Affiliated (7) (7) - (11) (11) - -------- -------- -------- -------- -------- -------- Net $222,090 $227,693 $ 92,874 $237,883 $239,886 $98,477 ======== ======== ======== ======== ======== ========
1991 ------------------------------ WRITTEN EARNED UNEARNED -------- -------- -------- Direct $226,834 $227,084 $ 90,269 Assumed: Unaffiliated 5,642 5,506 1,730 Affiliated 25,527 32,794 11,571 Ceded: Unaffiliated (13,858) (14,465) (3,090) Affiliated (57) (57) - -------- -------- -------- Net $244,088 $250,862 $100,480 ======== ======== ========
71 Loss and Loss Adjustment Expense (LAE) Activity: (Dollars in Thousands)
1993 1992 ------------------------- ----------------------- LIABILITY LIABILITY INCURRED FOR INCURRED FOR LOSS & LAE LOSS & LAE LOSS & LAE LOSS & LAE ----------- ------------ ---------- ----------- Direct $175,232 $262,345 $184,620 $242,866 Assumed: Unaffiliated 4,774 12,795 3,781 12,052 Affiliated 11,137 30,993 20,280 40,681 Ceded: Unaffiliated (13,781) (26,643) (11,590) (18,352) Affiliated (234) (8,580) (1,014) (11,290) -------- -------- -------- -------- Net $177,128 $270,910 $196,077 $265,957 ======== ======== ======== ========
1991 ------------------------ LIABILITY INCURRED FOR LOSS & LAE LOSS & LAE ---------- ----------- Direct $183,060 $226,861 Assumed: Unaffiliated 6,226 12,237 Affiliated 34,663 50,716 Ceded: Unaffiliated (12,367) (16,977) Affiliated (2,594) (13,561) -------- -------- Net $208,988 $259,276 ======== ========
72 In December 1992, the FASB issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." The statement establishes the conditions required for a contract to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. The Company adopted SFAS No. 113 on January 1, 1993. Prior to the adoption of the new statement, assets and liabilities were reported net of the effects of reinsurance. Subsequent to the adoption of the new statement, ceded reinsurance balances due from unaffiliated insurers are reported separately as assets. Ceded reinsurance balances due from affiliated insurers continue to be reported in liabilities. As permitted by the statement, prior period financial statements have been restated. 4. TRANSACTIONS WITH AFFILIATES The Company has entered into a number of agreements or arrangements with affiliated companies in connection with intercompany services. The net amounts charged (credited) to operations during 1993, 1992 and 1991, were as follows:
(Dollars in Thousands) 1993 1992 1991 ----- ----- ------ Service fees $ 32 $ 29 $ 27 Office rental - - 1,016 Other 635 737 567 ----- ----- ------ $ 667 $ 766 $1,610 ===== ===== ======
The net amount due from affiliates at December 31, 1993, which includes fees and assessments paid by the Company on behalf of affiliates, was $803,000. At December 31, 1992, $36,000 was due to affiliates. 5. INCOME TAXES Armco and the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) effective January 1, 1993. SFAS No. 109 requires an asset and liability approach for financial accounting. Armco accounted for the operating results of the AFSG - Companies to be Sold under the cost recovery method, whereby net income is not recognized until realized through a sale of the business, while net losses are charged against income as incurred. These businesses are now presented as discontinued operations with a portion of the consolidated Armco federal tax provision/benefit being allocated to the Company in accordance with the intraperiod tax allocation provisions of SFAS No. 109. Because Armco is in a consolidated net operating loss position for both financial reporting and federal income tax purposes, no federal income tax provision or benefit was allocated to the Company. Because Armco accounts for the Company as an investment which it intends to sell, the cumulative effect of adopting SFAS No. 109 and the deferred federal tax assets and liabilities applicable to the Company are recorded on the books of Armco, rather than by the Company. The Company and its subsidiaries file state income tax returns in several states on both a separate company and combined basis. A provision (benefit) of $223,000, $(166,000) and $246,000 is reported in the Statement of Consolidated Operations for the years ended December 31, 1993, 1992 and 1991, respectively. The 1993 provision includes a current year state income tax provision of $224,000 and adjustments to prior years state income taxes of $(1,000). The 1992 benefit includes a current year state income tax provision of $27,000 and a refund from prior year state income taxes of $(193,000). The 1991 provision includes a current year state income tax provision of $2,000 and an adjustment to prior years state income taxes of $244,000. 73 6. PENSION, PROFIT SHARING AND BENEFIT PLANS The Company has a noncontributory, trusteed retirement plan covering substantially all of its employees. Pension costs relating to this retirement plan are computed based on accepted actuarial methods. It is the Company's policy to fund pension costs as they accrue, but, in no event at less than the amount required by, nor more than the maximum amount allowable under, the Employee Retirement Income Security Act of 1974 (ERISA). Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the retirement plan's funded status and amounts recognized in the financial statements of the Company at December 31, 1993, 1992 and 1991:
(Dollars in Thousands) 1993 1992 1991 --------- --------- ---------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $28,833 for 1993, $23,148 for 1992 and $22,356 for 1991 $ 29,592 $ 23,498 $ 22,885 ======== ======== ======== Projected benefit obligation for service rendered to date $(31,761) $(26,474) $(26,006) Plan assets at market value 36,412 33,520 33,373 -------- -------- -------- Plan assets in excess of projected benefit obligation 4,651 7,046 7,367 Unrecognized net (gain) loss 532 (1,754) (2,102) Unrecognized net asset at December 31, being amortized over 15 years (2,504) (2,817) (3,130) Unrecognized prior service cost 31 39 47 -------- -------- -------- Prepaid pension cost $ 2,710 $ 2,514 $ 2,182 ======== ======== ========
Net periodic pension benefit for 1993, 1992 and 1991 included the following components: Service cost -- benefits earned during the period $ 825 $ 792 $ 632 Interest cost on projected benefit obligation 2,141 2,030 1,982 Actual return on plan assets (4,735) (1,894) (7,034) Net amortization and deferral 1,573 (1,259) 4,079 -------- -------- -------- Net periodic pension benefit $ (196) $ (331) $ (341) ======== ======== ========
The following assumptions were used in determining the actuarial present value of the projected benefit obligation as of December 31, 1993, 1992 and 1991:
1993 1992 1991 ----- ----- ----- Settlement rate 7.25% 8.00% 8.00% Increase in future compensation levels 4.00% 5.00% 5.00% Long-term rate of return on assets 8.25% 8.75% 8.75%
74 The Company, along with other affiliates, has a benefit plan which provides medical and dental benefits for eligible retired employees. Substantially, all employees become eligible for these benefits if they reach normal retirement age while working for the Company. These benefits are funded as claims are paid. In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The standard requires the accrual of expense for these benefits during the years the employee is actively employed. The Company adopted SFAS No. 106 on January 1, 1993. The cumulative effect of the accounting change resulted in a decrease in 1993 income of $14,000,000. The following table sets forth the benefit plan's funded status and amounts recognized in the balance sheets of the companies participating in the plan as of December 31, 1993.
(Dollars in thousands) Accumulated postretirement benefit obligation: Retirees $12,789 Fully eligible active plan participants 876 Other active plan participants 7,637 ------- Total 21,302 Plan assets at fair value - ------- Accumulated postretirement benefit obligation in excess of plan assets 21,302 Unrecognized transition obligation - Unrecognized prior service cost - Unrecognized loss (937) ------- Accrued postretirement benefit liability $20,365 =======
The accrued postretirement benefit liability applicable solely to the Company is $14,633,000 as of December 31, 1993. Net postretirement benefit cost for 1993 includes the following components: Service cost $ 1,007 Interest cost on accumulated postretirement benefit obligation 1,492 Actual return on plan assets - Net amortization and deferral - ------- Net periodic postretirement benefit cost 2,499 Recognition of transition obligation 13,147 ------- Net postretirement benefit cost $15,646 =======
Net postretirement benefit cost applicable solely to the Company for the year ended December 31, 1993 is $15,174,000. For measurement purposes, an 11.25% annual rate of increase in the per capita cost of covered health care benefits for non-Medicare eligible participants was assumed for 1994 (8.25% used for Medicare eligible participants); the rate was assumed to decrease gradually to 5.25% for all participants by 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the plan's accumulated postretirement benefit obligation as of December 31, 1993 by $2,866,000, and the aggregate service cost and interest cost components of the plan's net periodic postretirement benefit cost for the year by $446,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1993 was 7.25%. The Company also has a noncontributory, trusteed profit sharing plan. Annual contributions to the plan (limited to a maximum of 15% of participating salaries) are based upon operating results of the Company. No expense was recorded for the years ended December 31, 1993, 1992 and 1991. 75 The Company provides medical, dental and life insurance benefits to eligible participants on long-term disability, at no cost to the participant. Prior to 1993, the Company expensed these benefits on a pay-as-you-go basis. In December 1992, the FASB issued SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires recognition of an employer's obligation to provide benefits to former and inactive employees after employment but before retirement. The Company adopted SFAS No. 112 in 1993. The cumulative effect of the accounting change, reported on the Statement of Consolidated Operations as a component of other expenses, resulted in a decrease in 1993 income of $715,000. 7. NOTE PAYABLE As partial financing of the SICO acquisition, the Company entered into a $14,000,000 term loan agreement with a local bank. The Company has the option of electing an interest rate tied to the bank's prime or Eurodollar rate. The interest rate on the loan was 5.875%, 5.625% and 7.69% as of December 31, 1993, 1992 and 1991, respectively. The term loan is secured by the stock of SICO. Under the terms of the loan agreement, the Company is required to make principal payments of $700,000 on March 31, 1994 and each quarter end thereafter through December 31, 1994. The loan is subject to various covenants. At December 31, 1993, the lender waived compliance with certain existing covenants and new covenants were negotiated effective January 1, 1994. The new covenants require the Company to maintain tangible shareholder's equity, as defined, of $120 million during fiscal 1994. At December 31, 1993, as defined, tangible shareholder's equity was $138.1 million. In addition, various covenants applicable to the Company's subsidiaries require minimum statutory surplus levels and maximum premiums to surplus ratios. 8. NET ASSETS NNHC depends on dividends from its subsidiaries to service debt and pay expenses. The payment of shareholder dividends by insurance companies without the prior approval of the state insurance regulators is limited to formula amounts based on net investment income, and capital and surplus determined in accordance with statutory accounting principles. At December 31, 1993, approximately $4.2 million of dividends are available without prior regulatory approval. NNCC paid dividends to NNHC of $3,170,000, $3,896,500 and $3,500,000 during the years ended December 31, 1993, 1992 and 1991, respectively In accordance with the terms of an order dated April 10, 1985 of the Insurance Commissioner of the State of California (the Commissioner), PNIC may not pay any dividend or other distribution unless the dividend is approved by the Commissioner. PNIC received approval for and paid dividends to NNHC of $1,000,000 during the year ended December 31, 1992 and $450,000 during the year ended December 31, 1991. SICO paid dividends to NNHC of $1,500,000 during the year ended December 31, 1992. During the year ended December 31, 1991, PNIC redeemed all 500,000 shares of its preferred stock owned by NNHC at the $10 par value. Simultaneous with this redemption, NNHC made a $2,000,000 capital contribution to PNIC and a $3,500,000 contribution to NNCC. This transaction was approved by the Commissioner. The following information has been prepared on the basis of statutory accounting principles which differ from GAAP. The principal differences relate to deferred acquisition costs and assets not admitted for statutory reporting.
(Dollars in thousands) 1993 1992 1991 -------- ------- -------- Statutory net income (loss) $ 9,704 $ 245 $ (9,639) Statutory policyholders' surplus 108,734 94,212 100,581
76 9. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments. In developing the fair value of financial instruments, the Company uses available market quotes and data, provided by external pricing services, as well as valuation methodologies where appropriate. As considerable judgment is required in interpreting market data and performing valuation methodologies, the fair value estimates presented below are not necessarily indicative of the amounts the Company might pay or receive in actual current market transactions. Furthermore, as a number of the Company's significant assets and liabilities are excluded from the provisions of SFAS No. 107, the disclosures below do not reflect the Company's statement of net assets on a fair value basis, nor the fair value of the Company as a whole.
(Dollars in thousands) December 31, 1993 December 31, 1992 ------------------- ------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value -------- --------- -------- --------- Financial Assets: Fixed maturity investments $417,926 $418,728 $405,341 $416,577 Equity securities 1 1 1 1 Cash and cash equivalents 22,779 22,779 12,068 12,068 Accrued investment income 5,988 5,988 6,536 6,536 Premium balances receivable 53,707 53,707 58,860 58,860 Financial Liabilities: Other liabilities 9,234 9,234 10,969 10,969 Note payable 2,800 2,800 5,600 5,600
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Financial Assets ---------------- Fair values for fixed maturity investments are based on quoted market prices. Equity securities are valued based on quoted market prices. Cash and cash equivalents are highly liquid investments with maturities of less than three months; carrying value approximates fair value. Accrued investment income is valued at carrying value as it is short-term in nature. Insurance premium balances receivable are generally collected on a monthly basis. Due to the short-term nature of these receivables, their carrying value approximates fair value. Financial Liabilities --------------------- The Company's insurance reserves are specifically excluded from the provisions of SFAS No. 107. Other financial liabilities are valued at their carrying value due to their short-term nature. As permitted under SFAS No. 107, other financial liabilities exclude postretirement and postemployment benefit obligations for purposes of this disclosure. The fair value of the Company's note payable is based on current rates offered to the Company for debt of the same remaining maturities. 77 10. COMMITMENTS The Company leases certain office facilities and equipment under operating leases. Minimum rental commitments under noncancelable leases are as follows:
(Dollars in Thousands) 1994 $3,013 1995 2,288 1996 1,762 1997 1,595 1998 115 Thereafter - ------ $8,773 ======
Total rental expense was $2,512,000, $2,291,000 and $2,201,000 in 1993, 1992 and 1991, respectively. 11. LITIGATION The Company is involved in various lawsuits that have arisen from the normal conduct of business. These proceedings are handled by corporate and outside counsel. It is the opinion of management that the outcome of these proceedings will not have a material effect on the Company's financial condition or liquidity; however, it is possible that due to fluctuations in the Company's results, future developments with respect to changes in the ultimate liability could have a material effect on future interim or annual results of operations. 12. SUBSEQUENT EVENTS On January 31, 1994, Armco announced that it had signed a letter of intent to sell Northwestern National Holding Company, Inc. and its subsidiaries to Vik Brothers Insurance, Inc. (Vik), a privately held, Raleigh, North Carolina- based property and casualty insurance holding company. In connection with the proposed transaction, Vik would pay approximately $70 million at the closing and approximately $15 million, reduced by a potential adjustment for adverse experience in the insurance reserves, in three years. The final agreement is subject to a number of conditions, including a definitive purchase agreement, and approvals by regulatory authorities and the boards of directors of both companies. - -------------------------------------------------------------------------------- 78 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1993 (Dollars in thousands)
AMOUNT AT WHICH SHOWN MARKET IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - ------------------------------------------------------------------------------ FIXED MATURITY INVESTMENTS: Bonds: United States Government and government agencies and authorities $116,058 $119,860 $119,058 Public utilities 17,617 17,535 17,535 All other corporate bonds 270,930 281,333 281,333 -------- -------- -------- TOTAL FIXED MATURITIES 404,605 418,728 417,926 -------- -------- -------- EQUITY SECURITIES: Common stocks: Industrial, miscellaneous and all other 1 1 1 -------- -------- -------- TOTAL EQUITY SECURITIES 1 1 1 -------- -------- -------- SHORT-TERM INVESTMENTS 21,953 21,953 21,953 -------- -------- -------- TOTAL INVESTMENTS $426,559 $440,682 $439,880 ======== ======== ========
See notes to consolidated financial statements. 79 ARMCO FINANCIAL SERVICES GROUP - SCHEDULE III COMPANIES TO BE SOLD (PARENT ONLY) CONDENSED FINANCIAL INFORMATION CONDENSED STATEMENTS OF NET ASSETS AS OF DECEMBER 31, 1993 AND 1992 (Dollars in thousands)
1993 1992 ASSETS: -------- -------- Investments: Equity securities at market value (cost $1) $ 1 $ 1 Investments in stock of subsidiaries accounted for on the equity method 131,943 124,947 Cash 5 55 Other assets 6,802 7,008 -------- -------- TOTAL ASSETS $138,751 $132,011 ======== ======== LIABILITIES AND NET ASSETS: LIABILITIES: Other liabilities $ 59 $ 170 Note payable 2,800 5,600 -------- -------- TOTAL LIABILITIES 2,859 5,770 -------- -------- NET ASSETS 135,892 126,241 -------- -------- TOTAL LIABILITIES AND NET ASSETS $138,751 $132,011 ======== ========
See notes to condensed financial information. 80 ARMCO FINANCIAL SERVICES GROUP - SCHEDULE III COMPANIES TO BE SOLD (PARENT ONLY) CONDENSED FINANCIAL INFORMATION CONDENSED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
1993 1992 1991 -------- -------- -------- REVENUES: Net investment income $ - $ - 18 -------- -------- -------- TOTAL REVENUES - - 18 EXPENSES: Interest expense 299 728 1,037 Other expenses 216 230 230 -------- -------- -------- TOTAL EXPENSES 515 958 1,267 LOSS - BEFORE EQUITY IN NET INCOME (LOSS) OF SUBSIDIARIES (515) (958) (1,249) EQUITY IN NET INCOME (LOSS) OF 10,866 (1,659) (13,106) SUBSIDIARIES -------- -------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 10,351 (2,617) (14,355) -------- -------- -------- Cumulative effect on prior years of a change in accounting principle for postretirement benefits (14,000) - - -------- -------- -------- NET LOSS $ (3,649) $ (2,617) $(14,355) ======== ======== ========
See notes to condensed financial information. 81 ARMCO FINANCIAL SERVICES GROUP - SCHEDULE III COMPANIES TO BE SOLD (PARENT ONLY) CONDENSED FINANCIAL INFORMATION CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
1993 1992 1991 -------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,649) $(2,617) $(14,355) Adjustments to reconcile net loss to net cash provided by operating activities: Equity in net (income) loss of subsidiaries (11,560) 1,659 13,106 Cumulative effect of accounting changes 14,000 - - Dividends received from subsidiaries 3,170 6,396 3,950 Amortization 183 183 183 Changes in: Other assets 23 (7) 178 Other liabilities 583 (107) 16 -------- ------- -------- Total adjustments 6,399 8,124 17,433 -------- ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,750 5,507 3,078 -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital contribution to subsidiaries - - (5,500) Proceeds from redemption of preferred stock - - 5,000 -------- ------- -------- NET CASH USED IN INVESTING ACTIVITIES - - (500) -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on note payable (2,800) (5,600) (2,800) -------- ------- -------- NET CASH USED IN FINANCING ACTIVITIES (2,800) (5,600) (2,800) -------- ------- -------- CHANGE IN CASH AND CASH EQUIVALENTS (50) (93) (222) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55 148 370 -------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5 $ 55 $ 148 ======== ======= ======== SUPPLEMENTAL CASH FLOW DISCLOSURE: Cash paid for interest $ 408 $ 831 $ 1,010
See notes to condensed financial information. - -------------------------------------------------------------------------------- 82 ARMCO FINANCIAL SERVICES GROUP - SCHEDULE III COMPANIES TO BE SOLD (PARENT ONLY) CONDENSED FINANCIAL INFORMATION NOTES TO CONDENSED FINANCIAL INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 1. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements of the AFSG - Companies to be Sold. 2. Long-term debt consists of the following:
December 31, 1993 1992 ------- ------- Note payable $2,800 $5,600 ====== ======
As partial financing of the SICO acquisition, the Company entered into a $14,000,000 term loan agreement with a local bank. The Company has the option of electing an interest rate tied to the bank's prime or Eurodollar rate. The interest rate on the loan was 5.875%, 5.625% and 7.69% as of December 31, 1993, 1992 and 1991, respectively. The term loan is secured by the stock of SICO. Under the terms of the loan agreement, the Company is required to make principal payments of $700,000 on March 31, 1994 and each quarter end thereafter through December 31, 1994. The loan is subject to various covenants. At December 31, 1993, the lender waived compliance with certain existing covenants and new covenants were negotiated effective January 1, 1994. The new covenants require the Company to maintain tangible shareholder's equity, as defined, of $120 million during fiscal 1994. At December 31, 1993, as defined, tangible shareholder's equity was $138.1 million. In addition, various covenants applicable to the Company's subsidiaries require minimum statutory surplus levels and maximum premiums to surplus ratios. 3. NNHC depends on dividends from its subsidiaries to service debt and pay expenses. The payment of shareholder dividends by insurance companies without the prior approval of the state insurance regulators is limited to formula amounts based on net investment income, and capital and surplus determined in accordance with statutory accounting principles. At December 31, 1993, approximately $4.2 million of dividends are available without prior regulatory approval. NNCC paid dividends to NNHC of $3,170,000, $3,896,500 and $3,500,000 during the years ended December 31, 1993, 1992 and 1991 respectively. In accordance with the terms of an order dated April 10, 1985 of the Insurance Commissioner of the State of California (the Commissioner), PNIC may not pay any dividend or other distribution unless the dividend is approved by the Commissioner. PNIC received approval for and paid dividends to NNHC of $1,000,000 during the year ended December 31, 1992 and $450,000 during the year ended December 31, 1991. SICO paid dividends to NNHC of $1,500,000 during the year ended December 31, 1992. During the year ended December 31, 1991, PNIC redeemed all 500,000 shares of its preferred stock owned by NNHC at the $10 par value. Simultaneous with this redemption, NNHC made a $2,000,000 capital contribution to PNIC and a $3,500,000 contribution to NNCC. This transaction was approved by the Commissioner. 4. In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The statement requires fixed maturity investments which are available for sale to be recorded at market value. The Company adopted SFAS No. 115 on December 31, 1993. 83 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE VI REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
ASSUMED PERCENTAGE PROPERTY AND LIABILITY INSURANCE CEDED FROM OF AMOUNT PREMIUM EARNED FOR THE YEARS ENDED DIRECT TO OTHER OTHER NET ASSUMED DECEMBER 31, AMOUNT COMPANIES COMPANIES AMOUNT TO NET - ------------------------------------ -------- --------- --------- -------- -------- 1993 $215,075 $15,181 $27,799 $227,693 12.2% ======== ======= ======= ======== 1992 $223,543 $13,013 $29,356 $239,886 12.2% ======== ======= ======= ======== 1991 $227,084 $14,522 $38,300 $250,862 15.3% ======== ======= ======= ========
84 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
AMOUNTS - CHARGED (CREDITED) BALANCE AT TO BALANCE BEGINNING COSTS AND AT END FOR THE YEARS ENDED DECEMBER 31, OF PERIOD EXPENSE OF PERIOD - -------------------------------- ---------- -------------- --------- 1993: Allowance for doubtful accounts $1,790 $ (33) $1,757 ====== ====== ====== Accumulated depreciation on property & equipment $6,577 $1,337 $7,914 ====== ====== ====== Amortization of goodwill $ 366 $ 183 $ 549 ====== ====== ====== 1992: Allowance for doubtful accounts $1,409 $ 381 $1,790 ====== ====== ====== Accumulated depreciation on property & equipment $5,469 $1,108 $6,577 ====== ====== ====== Amortization of goodwill $ 183 $ 183 $ 366 ====== ====== ====== 1991: Allowance for doubtful accounts $1,414 $ (5) $1,409 ====== ====== ====== Accumulated depreciation on property & equipment $4,144 $1,325 $5,469 ====== ====== ====== Amortization of goodwill $ - $ 183 $ 183 ====== ====== ======
85 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE X SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Dollars in thousands)
AS OF DECEMBER 31, ------------------------------------ 1993 1992 1991 ---------- ---------- ---------- Deferred policy acquisition costs $ 19,712 $ 19,727 $ 22,108 Reserves for losses and loss adjustment 297,553 284,309 274,224 expenses Unearned premiums 95,992 101,528 103,569
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1993 1992 1991 ---------- ---------- ---------- Earned premiums $227,693 $239,886 $250,862 Net investment income 43,693 44,139 37,823 Loss and loss adjustment expenses incurred: Current year 171,849 185,101 200,067 Prior years 5,279 10,976 8,921 Amortization of policy acquisition costs 46,456 49,912 56,256 Paid loss and loss adjustment expenses 172,089 189,396 188,007 Net premiums written 222,090 237,882 244,088
86 ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD DISCLOSURE OF CERTAIN DATA ON LOSS AND LOSS EXPENSE RESERVES The liability for unpaid losses and loss adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liability is necessarily based on estimates and, while management believes that the amount is fairly stated, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments resulting therefrom are reflected in earnings currently. The Company does not discount the liability for unpaid losses and loss adjustment expenses. AFSG companies to be sold estimates losses for reported claims on an individual case basis. Case reserves are based on experience with a particular type of risk and the available information surrounding each individual claim. Case reserves are reviewed on a regular basis. As additional facts become available, the case reserves are adjusted as necessary. The stability of the case reserving process is monitored through comparison with ultimate settlement. The estimates of losses for incurred but not reported claims (IBNR), as well as additive reserves for reported claims, are developed primarily from an analysis of historical patterns of the development of paid and incurred losses (dollars and claim counts) by accident year for each line of business. Salvage and subrogation estimates are developed from patterns of actual recoveries. Allocated loss adjustment expense reserves are developed from an analysis of historical patterns of the development of paid allocated loss adjustment expenses to incurred losses, by accident year, for each line of business. These historical patterns are then applied to projected ultimate losses for each line of business. Unallocated loss adjustment expense reserves are developed utilizing a cost accounting system. The cost accounting system is based on historical costs modified for anticipated changes in operations and selections of alternative costs. In December 1992, the FASB issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration contracts." The statement establishes the conditions required for a contract to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. The Company adopted SFAS No. 113 in 1993. Prior to the adoption of the new statement, assets and liabilities were reported net of the effects of reinsurance. Subsequent to the adoption of the new statement, ceded reinsurance balances due from unaffiliated insurers are reported separately as assets. Ceded reinsurance balances due from affiliated insurers continue to be reported in liabilities. As permitted by the statement, prior period financial statements have been restated. Loss and loss adjustment expense reserves are stated at management's estimate of the ultimate cost of settling all incurred but unpaid claims. Loss and loss adjustment expense reserves are not discounted. 87 EX-10.S 2 SERVICES AGREEMENT Exhibit 10(s) SECOND STAINLESS STEEL TOLL ROLLING SERVICES AGREEMENT between ARMCO STEEL COMPANY, L.P. and ARMCO ADVANCED MATERIALS COMPANY SECOND STAINLESS STEEL TOLL ROLLING SERVICES AGREEMENT December 21 THIS AGREEMENT, effective as of _______________________, 1993, is between Armco Steel Company, L.P., a Delaware limited partnership, with its principal business at 703 Curtis Street, Middletown, Ohio 45043 (hereinafter "ASC") and Armco Advanced Materials Company, a business unit of Armco Inc., an Ohio corporation, with its principal place of business at 101 Three Degree Road, Butler, Pennsylvania 16003-0832 (hereinafter "AAMC"). WITNESSETH WHEREAS, the parties entered into an Austenitic Stainless Steel Toll Rolling Services Agreement dated March 30, 1992 (the "Initial Agreement"); and WHEREAS, the parties now wish to terminate the Initial Agreement in its entirety (as of the effective date of this Agreement) and substitute the Initial Agreement with this Second Stainless Steel Toll Rolling Services Agreement. NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: Article 1. Definitions ----------- 1.1 "Product" will mean standard stainless steel slab grade groups --------- including 201, 301, 304, 304L, 316, 316L, Nitronic 30, 430 and 434. 1.2 "Stability" will be defined (by grade group, gage and width) to ----------- have occurred after ASC has rolled 600 total cumulative slab tons including a minimum of 150 slab tons during a stainless rolling with quality levels acceptable to AAMC and without any occurrence of the following: - Twisting/wavy Inter-Stand Shape during rolling in the Finishing Mill at any time from Thread to Tailout (i.e., a loss of control in the Finishing Mill). - A strip mill cobble - A coiler cobble When a new gage and width has attained Stability, then Product orders of the same grade group and gages between the new gage and the old gage and narrower widths will also be deemed to have attained Stability. 1.2.1 Notwithstanding the definitional attainment of Stability, Stability for a given Product grade group, gage and width will be deemed to have occurred for application in all other terms and conditions of the Agreement, including Price, after ASC and AAMC have executed a Stability Acceptance Form, depicting the stable area, substantially similar to attached Exhibit C. 1.3 "QSOPS" means the Quality Standard Operating Practices numbered 23-0001-601 through 23-0033-601 attached hereto as Exhibit A and any additions or amendments thereof as may be agreed to by the parties. Article 2. Exclusive Services ------------------ 2.1 Throughout the term of this Agreement, ASC agrees to convert Product slabs provided by AAMC to hot band coils at the pricing set out in Exhibit B, which is based on an annual amount of 250,000 tons of incoming slabs. The annual conversion of over 250,000 tons of Product slabs will require the mutual agreement of the parties and the price for such conversion will be renegotiated to account for any ASC cost changes, including but not limited to costs to cover carbon displacement and additional capital. 2.2 Unless otherwise agreed to by the parties in writing, ASC will provide the toll rolling services concerning the Products discussed herein exclusively for AAMC (and not for any direct competitor of AAMC) and AAMC will exclusively utilize ASC to provide all of its toll rolling service requirements for the Products covered by this Agreement. Article 3. Duties of ASC and AAMC ---------------------- 3.1 ASC will, for all services rendered under this Agreement, adhere to the practices set out in QSOPS. The QSOPS will be established as a performance standard only after Stability has been achieved. Thereafter, ASC will not convert Product when non-compliance with the QSOPS is anticipated without giving notice to AAMC. 3.2 No guarantees, express or implied, as to yield, quality, or 2 performance of the converted hot band coils are made by ASC. No damages or losses incurred by AAMC or its final customers, either during the conversion process at ASC or shipment thereafter, will be paid or reimbursed by ASC. Notwithstanding the above and only after ASC has achieved Stability in an operating window, ASC will reimburse AAMC for Product slab direct and verifiable cost less the salvage value for any Product rendered defective by ASC's failure to adhere to the QSOPS. AAMC will only be entitled to such reimbursement for damaged Product (not otherwise delivered to ASC defective) within a Stabilized window and only to the extent that the damage exceeds 2.0% "stable" slab weight scrapped per calendar quarter (3 months).* "stable" slab weight scrapped *% = __________________________________ Total "stable" slab weight charged into furnace minus carryarounds 3.3 ASC will have no responsibility for the chemical composition or physical properties of any material supplied by AAMC and subsequently converted by ASC. 3.4 ASC reserves the right to refuse to process any material of questionable quality, or that may represent a hazard to processing equipment or to employees. 3.5 All slabs provided by AAMC for conversion will be suitable for hot rolling to final product specifications. 3.6 AAMC will provide an annual forecast concerning its conversion requirements, which will be updated quarterly with the most current quarter's tonnage requirements displayed on a weekly basis and all following quarters' tonnage requirements set out on a monthly basis. AAMC will make best efforts to spread evenly throughout the year all Product deliveries to comply with ASC production scheduling. Article 4. Pricing ------- 4.1 Pricing for toll rolling services under this Agreement through December 31, 1994 will be as set forth in Exhibit B. The conversion charges set forth in Exhibit B will be determined 3 based on the actual scale weight of outgoing hot band coils. For the period commencing January 1, 1995 through December 31, 1995 and for each year thereafter during the term of this Agreement, the parties will negotiate in good faith adjustments to pricing for toll rolling services taking into consideration learning curve effects, carbon steel displacement costs, quality value added considerations, cost improvements due to higher volume, ASC capital and claim costs and the other cost information of ASC, provided, however, that in no event shall any price adjustment(s) result in pricing increases or decreases of more than 6% per year or an aggregate of 40% through December 31, 2002. 4.2 If the parties fail to agree on pricing for any period after December 31, 1994 in accordance with the procedures and criteria set forth above, this Agreement shall continue in effect for the full term and pricing for such unresolved period shall be settled by final and binding arbitration before a board of arbitration composed of three arbitrators sitting in Columbus, Ohio and in accordance with the rules for commercial arbitration of the American Arbitration Association, New York, New York as in effect from time to time. Arbitrators shall be selected as follows: each party shall choose an arbitrator familiar with steel manufacturing and toll rolling services and a third member, also familiar with steel manufacturing and toll rolling services shall be chosen by the two so chosen. If either party hereto fails to choose such an arbitrator within thirty (30) days after receipt of notice of commencement of arbitration (or its delivery of notice of arbitration to the other) or if such two (2) arbitrators fail to choose a third arbitrator within thirty (30) days after both are appointed, the party who has chosen its arbitrator (or either party if both have chosen arbitrators) may apply to the American Arbitration Association for appointment of the arbitrator or arbitrators of appropriate qualifications needed to complete the board of arbitration. Each party shall bear its own legal and other costs of preparing its case and one-half (1/2) the cost of the arbitration. Each party shall present to the arbitrators a proposed price or pricing structure and the arbitrators, notwithstanding any rule or direction of the American Arbitration Association, must select only one of the proposed price or pricing structures and no other price or pricing structure. The arbitration award shall be final and binding upon the parties, and judgment thereon may be entered in any court of competent jurisdiction. Nothing herein shall be deemed to give the 4 arbitrators authority to add to, amend, modify, or expand the terms of this Agreement. 4.3 Notwithstanding any provision contained herein to the contrary, should ASC's energy costs during the term of this Agreement increase as a result of any governmental imposed energy tax, or any like cause, then ASC, upon giving AAMC written notice of the cost increase on a verifiable per ton basis, will unilaterally increase the price for all toll rolling services effected by such increase. Price increases related to this provision will not be incorporated into the 6% or 40% caps discussed above. Article 5. Time of Commencement and Completion ----------------------------------- 5.1 This Agreement will be effective for calendar years 1993 through 2002 and continue thereafter unless terminated by either party as set forth in Article 10. 5.2 AAMC will place written processing orders with ASC not less than three (3) weeks prior to the estimated delivery date of any Product slabs. Each purchase order will specify the quantity of Product to be delivered to ASC and specifications for the Services to be performed. 5.3 AAMC will deliver quantities of Product necessary for the conversion required under each purchase order not later than three (3) days nor earlier than two (2) weeks prior to the scheduled rolling of such Product. Any additional costs incurred by ASC due to late delivery by AAMC will by paid by AAMC. Article 6. Records ------- 6.1 In accord with paragraphs 5.3 and 17.4, ASC will keep accurate records concerning labor and equipment chargeable to AAMC, and such records will be made available bi-annually for inspections at reasonable times by AAMC. Such inspection will be for the purpose of verifying the correctness of invoices rendered and payments made or to be made under this Agreement. Article 7. Reports ------- 7.1 General manufacturing reports concerning Services rendered under this Agreement will be provided to AAMC as soon as possible. 5 7.2 Accurate reports concerning the quality of hot band coils produced under this Agreement will be provided by AAMC to ASC as soon as possible to enable ASC to take corrective action, determine stability, and improve hot band quality. Article 8. EEO --- 8.1 ASC will comply with all Equal Employment Opportunity requirements. Article 9. Insurance --------- ASC agrees it will comply with the applicable requirements of the Unemployment Compensation Laws of all states within which it operates. ASC will maintain the following insurance, written on an occurrence basis, at its sole cost and expense. 9.1 ASC will, throughout the term of this Agreement, insure ASC's building and premises against loss for "All Risk" perils. This insurance will include coverage for AAMC Product while in the care, custody and control of ASC. 9.2 Workers Compensation insurance in compliance with the law or laws of the state or states in which the employees are hired or will work. Employer's Liability insurance with limits of not less than $100,000 per person and $500,000 per occurrence. Where applicable, "Stop-Gap" insurance coverage will be maintained with limits of not less than $500,000 per occurrence. 9.3 Commercial General & Automobile Liability insurance including Products/Completed Operations and including Contractual Liability insurance, to cover liability assumed in this contract. Limits of liability will not be less than the following: 1. General Liability (including Contractual Liability): Bodily Injury and Property Damage $1,000,000 Per Occurrence - Combined Single Limit 2. Products - Completed Operations: Bodily Injury and Property Damage $1,000,000 Per Occurrence - Combined Single Limit 6 3. Automobile Liability: Bodily Injury and Property Damage $1,000,000 Per Occurrence - Combined Single Limit 9.4 Should any of the above described policies be cancelled or materially changed before the expiration data thereof, the issuing company will endeavor to mail thirty (30) days prior written notice to AAMC. Certificates of insurance indicating the aforementioned insurance is in effect will be filed with AAMC before starting work. Limits of liability required under this section will not be considered as a limitation of liability under this Agreement. Article 10. Termination ----------- 10.1 This Agreement may be terminated by either party, at any time after December 31, 2002, upon at least twelve (12) months written notice to the other party. 10.2 Upon termination, neither party will have any recourse against the other except for the following obligations: a) ASC will be responsible to provide services under accepted purchase orders on Product shipped prior to the effective date of termination. b) AAMC will pay all invoices for services rendered per an appropriate request made prior to the effective date of termination. c) Either party will remain responsible to the other for any liabilities arising under this Agreement or resulting from materials shipped for conversion services prior to the termination effective date. 10.3 Notwithstanding any other provision in this Agreement to the contrary, should Armco Inc. have failed to make an aggregate cash capital contribution of $20,000,000.00 (twenty million dollars) to ASC (to be utilized to purchase equipment and services to enhance ASC's hot strip mill rolling capability) on or before December 31, 1993, then this Agreement will be unilaterally voidable by ASC upon five (5) days written notice. Upon the expiration of the five (5) day notice period, this Agreement will terminate. 7 Article 11. Payment Terms ------------- 11.1 AAMC agrees to pay ASC for the conversion of Product slabs to hot band coils on a net thirty (30) days from date of invoice basis. All payments will be delivered to a lockbox designated by ASC. 11.2 ASC will provide completed lien waivers and supplier affidavit forms in a form satisfactory to AAMC. Article 12. Terms and Conditions of Sale ---------------------------- 12.1 The terms and conditions of sale applicable to the services provided under this Agreement will be those stated in this Agreement. No other terms and conditions will apply, including without limitation, those set forth in any purchase order, acknowledgement or delivery instruction forms of the parties. Article 13. Licenses and Permits -------------------- 13.1 ASC will be qualified to do business in every state in which services are performed. ASC, its employees and all others acting under its direction or control, will comply with all laws, ordinances and regulations of all legally constituted authorities and the National Board of Fire Underwriters, bearing on the conduct of the services. Article 14. Safety Regulations ------------------ 14.1 It will be the responsibility of ASC to adopt, enforce and require all of its subcontractors to adopt and enforce accepted safety practices. Article 15. Ownership of Product -------------------- 15.1 It is mutually understood and agreed that any and all Product shipped by or on behalf of AAMC to ASC under this Agreement at any time remains the sole and exclusive property of AAMC regardless of what type or and/or how much processing may have been completed. In furtherance of this provision, ASC will upon reasonable notice provide to AAMC any documentation and other evidence and take any appropriate action that may be required to prove or demonstrate to AAMC or any third party that title in such Product is then in name of and remains solely with AAMC. ASC will have no right to sell, transfer or encumber Product 8 owned by AAMC. 15.2 ASC will neither take nor permit any action which will prejudice AAMC's rights in any Product delivered under this Agreement. In accord with this Article, AAMC will have the unrestricted right to remove the Product, and ASC will surrender the Product to AAMC. AAMC will have the right, with notice and legal process to enter ASC's premises for such removal. ASC also agrees that it will sign any necessary documents to perfect AAMC's ownership interest in the Product. Article 16. Salvageable Material -------------------- 16.1 All scrap generated under this Agreement will be returned to AAMC at AAMC's sole expense. 16.2 Scrap will consist of head and tail crops and any other unrollable Product generated in the course of rolling. Article 17. Shipping -------- 17.1 All incoming and outgoing freight concerning the transport of Product under this Agreement will be paid by AAMC. Incoming freight must be prepaid and outgoing shipments will be freight collect and invoiced to AAMC. 17.2 All Product will be shipped via truck or rail. 17.3 ASC will have the right to ship Product promptly within seventy- two (72) hours of conversion. 17.4 ASC will observe all specified shipping instructions and, unless otherwise requested, route to attain the lowest tariff rate at time of shipment. All packaging instructions must be observed. AAMC will pay for all packaging in excess of standard banding. Article 18. Loading and Unloading of Trucks ------------------------------- 18.1 ASC will unload all and load all Product pertaining to this Agreement unless otherwise specified. Should demurrage accrue on trucks or rail due to the failure of ASC within the free period, after delivery to it at its siding or site, such demurrage will be paid by ASC. 9 Article 19. Force Majeure ------------- 19.1 Neither party will be responsible for failure to perform, caused in whole or in part by any of the following: Acts of God, wars, riots, fires, explosions, breakdowns or accidents; strikes, lockouts or other labor difficulties; lack or shortages of labor, materials, utilities, energy sources, or transportation facilities; delays of carriers, compliance with governmental rules and regulations (including without limitation environmental regulations); any other like causes; or any other unlike causes beyond the control or without the fault or negligence of AAMC or ASC. The foregoing will be in addition to and not in limitation of any excuses for nonperformance available to the parties, under the Uniform Commercial Code or any other applicable law. The party so prevented from complying will give prompt written notice to the other party of the nature and probable duration of such force majeure and of the extent of its effects on such party's performance hereunder. Each party will, in the event it experiences a force majeure event, make all reasonable efforts to remove such disability as soon as possible, except for labor disputes which will be solely within said party's discretion. During any period that a party is so prevented from complying, the other party may seek to have its needs met by or through others without liability hereunder, and once the disability is removed this Agreement will be reinstated. Article 20. No Other Agreements or Arrangements in Conflict ----------------------------------------------- 20.1 The parties hereby each individually warrant that they have the full and unencumbered right to enter into this Agreement, and that entering this Agreement is not in contravention of any other agreement or arrangement to which it is a party, or any judgment or decree by which it is bound, and that it does not require any consent from any other person or entity, or under any other agreement to which it is a party or by which it is bound. Article 21. Assignment ---------- Neither party may assign this Agreement or its obligations hereunder without the written consent of the other party. 10 Article 22. Binding ------- This Agreement is for the benefit of and is binding upon the parties hereto, their successors, heirs and assigns. Article 23. Amendments ---------- This Agreement cannot be modified in any way except in a writing signed by both parties. Article 24. Severability ------------ If any provision of this Agreement is determined to be unenforceable or invalid, the remaining provisions of this Agreement will not be affected thereby and will remain in full force and effect. Article 25. Waiver ------ No failure by either party to insist upon the strict performance of any covenant, duty, agreement, or condition of this Agreement, or to exercise any right or remedy upon the breach thereof, will constitute a waiver of any breach of this Agreement. Article 26. Notices ------- Any and all notices, demands or other communications required or permitted to be given by any party to any other party under this Agreement (collectively, "notices") will be in writing, either delivered by hand to the other party at that party's address set forth below, or sent by postage prepaid mail, or by telephone facsimile transmission, to the party's address and facsimile number. Article 27. Governing Law ------------- This Agreement will be governed by and construed in accordance with the laws of the State of Ohio. Article 28. Confidentiality --------------- ASC and AAMC agree that the terms of this Agreement will be kept in strict confidence and that neither party will disclose the same to any third party, except (a) to the extent necessary for the 11 disclosing party to comply with any applicable laws, rules, regulations, statutes or ordinances necessary to conduct its business affairs, (b) by commission of a valid subpoena and/or order of a court of competent jurisdiction, or (c) to a subsidiary, parent or affiliated corporation of ASC or AAMC. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their respective officers thereunto duly authorized as of the date first above written. /s/ David G. Harmer By:_______________________________ Corporate Vice Pres. & CFO Title:____________________________ 12/28/93 Date:_____________________________ ARMCO INC. ARMCO STEEL COMPANY, L.P. /s/ R. M. Visokey /s/ By:_______________________________ By:________________________________ President President & CEO Title:____________________________ Title:_____________________________ 12/28/93 12-21-93 Date:_____________________________ Date:______________________________ 12/17/93 at 4:00pm 93-paamc.jgh 12 EX-10.T 3 NONCONTRIBUTORY PENSION EXHIBIT 10(t) ARMCO INC. NONCONTRIBUTORY PENSION PLAN As Amended and Restated Effective As Of January 1, 1989 TABLE OF CONTENTS -----------------
Article Page - ------- ---- BACKGROUND 1 1 DEFINITIONS 2 1.1 Actuarially Equivalent............................ 2 1.2 Actuary........................................... 2 1.3 Affiliate......................................... 2 1.4 Average Monthly Earnings.......................... 2 1.5 Basic Agreement................................... 3 1.6 Board Of Directors................................ 3 1.7 BPAC.............................................. 3 1.8 BPARC............................................. 3 1.9 Break In Continuous Service....................... 4 1.10 Code.............................................. 4 1.11 Committee......................................... 4 1.12 Company........................................... 4 1.13 Continuous Service................................ 4 1.14 Divested Unit..................................... 4 1.15 Earnings.......................................... 4 1.16 Effective Date.................................... 5 1.17 Eligible For Public Pension....................... 5 1.18 Employee.......................................... 5 1.19 Employing Company................................. 5 1.20 ERISA............................................. 5 1.21 Layoff............................................ 5 1.22 Participant....................................... 5 1.23 PBGC.............................................. 6 1.24 Permanent Shutdown................................ 6 1.25 Plan.............................................. 6 1.26 Plan Year......................................... 6 1.27 Public Pension.................................... 6 1.28 Regulations....................................... 6 1.29 Retirement........................................ 7 1.30 Trust............................................. 7 2 PLAN ADMINISTRATION 8 2.1 Powers Of The Benefit Plans Administrative Committee.......................... 8
i 2.2 Powers Of The Benefit Plans Asset Review Committee............................ 8 2.3 Powers of An Arbitrator........................... 8 2.4 Compensation And Expenses Of Committee Members.............................. 8 2.5 Bond For Committee Members........................ 8 2.6 Composition Of Committee.......................... 9 2.7 Committee Procedures.............................. 9 2.8 Disqualified Committee Member..................... 9 2.9 Exercise Of Discretion............................ 9 2.10 Appointment Of Counsel............................ 9 2.11 Delegation Of Authority........................... 9 2.12 Local Plan Administrators......................... 10 2.13 Discharge Of Duties............................... 10 2.14 Indemnification................................... 10 2.15 Claims Procedure.................................. 10 3 ELIGIBILITY AND TYPES OF PENSIONS 13 3.1 Pension Applications............................. 13 3.2 Normal Retirement Pension........................ 13 3.3 62/15 Retirement Pension......................... 13 3.4 30-Year Retirement Pension....................... 13 3.5 Early Retirement (55/15) Pension................. 13 3.6 Permanent Incapacity Pension..................... 13 3.7 Immediate Severance (70/80) Pension.......................................... 14 3.8 Rule-Of-65 Retirement Pension.................... 14 3.9 Deferred Vested Pension.......................... 15 3.10 Nonduplication Of Benefits....................... 15 4 SPECIAL PENSION PAYMENT 16 4.1 Eligibility...................................... 16 4.2 Amount........................................... 16 4.3 Vacation Pay Of Hourly Participants..................................... 16 4.4 Vacation Pay Of Salaried Participants..................................... 17 4.5 Period For Which Payable......................... 17
ii 5 REGULAR PENSION 18 5.1 Basic Formula For Calculation Of Regular Pension............................... 18 5.2 Increased Regular Pensions....................... 23 5.3 Increased Rule-Of-65 Retirement Pensions......................................... 23 5.4 Form Of Payment Of Regular Pensions.............. 24 5.5 Commencement And Termination Of Regular Pension Payments...................... 24 6 DEDUCTIONS FROM PENSIONS 26 6.1 Deduction For Public Pension...................... 26 6.2 Deduction For Other Pension....................... 26 6.3 Deduction For Severance Allowance................. 27 6.4 Deduction For Disability Payments................. 27 7 SURVIVOR BENEFITS 29 7.1 Pre-Pension Spouse Coverage....................... 29 7.2 Pre-Retirement Survivor Annuity Coverage.......................................... 31 7.3 Automatic 50% Spouse Annuity...................... 35 7.4 Co-Pensioner Options.............................. 37 7.5 Election Of Co-Pensioner Options.................. 38 7.6 Commencement And Termination Of Pensions Under Co-Pensioner Options............... 39 7.7 Death Of Participant Before Retirement........................................ 39 7.8 Death Of Co-Pensioner After Retirement........................................ 39 7.9 Death Of Co-Pensioner Before Retirement........................................ 39 7.10 Post Retirement Adjustments....................... 39 7.11 Commencement Of Payments.......................... 39 8 SURVIVING SPOUSE'S BENEFIT 41 8.1 Eligibility....................................... 41 8.2 $140.00 And $90.00 Minimums....................... 41 8.3 50% Rate.......................................... 41
iii 8.4 Commencement And Termination Of Surviving Spouse's Benefit..................... 42 8.5 Determination Of Status As Surviving Spouse.................................. 42 9 DETERMINATION OF CONTINUOUS SERVICE 43 9.1 Definition........................................ 43 9.2 Deductions From Continuous Service........................................... 43 9.3 Break In Continuous Service....................... 43 9.4 Other Continuous Service.......................... 45 9.5 Employment With a Divested Unit................... 46 10 REEMPLOYMENT OF RETIRED PARTICIPANTS 47 10.1 Application....................................... 47 10.2 Effect On Pension................................. 47 10.3 Continuous Service Of Reemployed Participant............................ 47 10.4 Termination Of Reemployment After Original Immediate Severance (70/80) Retirement Or Rule-Of-65 Retirement........................................ 48 10.5 When Special Pension Payment Not Payable....................................... 48 10.6 Reinstated Immediate Severance (70/80) Retirement Or Reinstated Rule-Of-65 Retirement............................. 48 11 FUNDING AND CONTRIBUTIONS 49 11.1 Contributions..................................... 49 11.2 Actuarial Valuations.............................. 49 11.3 Investment Of Contributions....................... 49 12 General Provisions 50 12.1 No Employment Rights.............................. 50 12.2 Non-Assignability Of Pension Rights............................................ 50
iv 12.3 Legal, Physical Or Mental Incapacity....................................... 50 12.4 Maximum Pensions................................. 50 12.5 Sole Source Of Benefits.......................... 51 12.6 Information From Participants.................... 51 12.7 Communications To Committees..................... 52 12.8 Communications From Committees................... 52 12.9 Lost Payee....................................... 52 12.10 Service Of Process............................... 52 12.11 Expenses......................................... 52 13 AMENDMENT OR TERMINATION 53 13.1 Right Of Amendment Or Termination...................................... 53 13.2 Allocation Of Trust Fund Upon Termination................................. 53 13.3 Disposition Of Allocated Funds................... 53 13.4 Conditional Limitation Of Benefits......................................... 54 13.5 Merger, Consolidation Or Transfer Of Assets Or Liabilities......................... 55 13.6 Corporate Mergers, Acquisitions And Divestments.................................. 55 14 TOP HEAVY PROVISIONS 57 14.1 Determination Of Top Heavy Status................ 57 14.2 Definitions...................................... 57 14.3 Effect Of Top Heavy Status....................... 60 Exhibit A - Table Of Percentages............................. 62 Exhibit B - Actuarial Assumptions............................ 66 Exhibit C-1 Early Commencement Percentages For QDRO's With More Than 15 Years Of Service.......................................... 67 Exhibit C-2 Early Commencement Percentages For QDRO's With Less Than 15 Years Of Service........ 68 Appendix 1 - Provisions Relating To Covered Employees Of HMK Industries Of Oklahoma Inc................ 69
v Appendix 2 - Provisions Relating To Covered Employees Of National Oilwell.................... 72 Appendix 3 - Provisions Relating To Covered Employees Under The Armco Inc. Retirement Pension Plan............................................. 73 Appendix 4 - Provisions Relating To Covered Employees Of ME International.............................. 76 Appendix 5 - Provisions Relating To Covered Employees Of Contech....................................... 78 Appendix 6 - Provisions Relating To Covered Employees Of Atlantic Building Systems, Inc................ 80 Appendix 7 - Provisions Relating To Covered Employees Of Permanently Shutdown Facilities............... 83 Appendix 8 - List Of Divested Units........................... 86
vi BACKGROUND Armco Inc., an Ohio corporation ("Armco") established the Armco Inc. Noncontributory Pension Plan (the "Plan") effective as of January 1, 1950. The Plan was amended and restated from time to time thereafter. The Internal Revenue Service has determined that the Plan and its Trust, the Armco Master exemption under Sections 401(a) and 501(a) of the Internal Revenue Code (the "Code"). As a result of the formation of the Armco Steel Company, L.P., a Delaware limited partnership between Armco and Kawasaki Steel Corporation ("KSC"), and the decentralization of Armco, Armco has amended and restated the Plan as five plans, one of which is the plan contained in this document which shall continue to be known as the Armco Inc. Noncontributory Pension Plan and which is amended and restated effective as of January 1, 1989. It is intended that the amended and restated Plan likewise qualify for favorable federal income tax treatment under the Code. Unless otherwise expressly provided herein, the rights of any person whose employment terminates or who retires on or before the effective date of this Plan or a particular Plan amendment to this Plan, including such person's eligibility for benefits and the time and form in which benefits, if any, will be paid, shall be determined solely under the terms of the Plan as in effect on the date of his termination of employment or retirement, unless such person is thereafter reemployed and again becomes a Participant. ARTICLE 1 DEFINITIONS The following words and phrases have the meanings indicated below, unless a different meaning is plainly required by the context. 1.1 "Actuarially Equivalent" or "Actuarial Equivalent" means, when used with reference to a pension, a benefit of equivalent value computed on the basis of formulae, mortality and other tables and interest rates specified in the Plan and as amended from time to time by BPARC based on the recommendation of the Actuary; provided, however, that the interest rate used to determine the present value of a Participant's benefit shall mean the interest rate or rates as of the date distribution commences which would be used by the PBGC for purposes of determining the present value of the Participant's benefit under the Plan if the Plan had terminated on that date with insufficient assets to provide benefits guaranteed by the PBGC on that date. 1.2 "Actuary" means the enrolled actuary, as defined in ERISA, engaged by BPARC. 1.3 "Affiliate" means any corporation which is included in a controlled group of corporations (within the meaning of Code (S) 414(b)) which includes the Company, any trade or business (whether or not incorporated) which is under common control with the Company (within the meaning of Code (S) 414(c)), any organization included in the same affiliated service group as the Company (within the meaning of Code (S) 414(m)), or any other entity required to be aggregated with the Company pursuant to the Regulations under Code (S) 414(o); except that for purposes of applying the provisions of Plan (S) 12.4 and Article 14 with respect to the limitation of benefits, Code (S) 415(h) shall apply. 1.4 "Average Monthly Earnings" means the average monthly Earnings of a Participant for services rendered which are paid by one or more Employing Companies during the Participant's last 120 full calendar months of Continuous Service counted under this Plan prior to his Retirement determined as follows: (a) The Participant's Earnings shall be calculated for each of the 10 calculation years during his last 120 full calendar months of Continuous Service prior to his Retirement. The first calculation year shall be the first 12 out of the last 120 full calendar months of Continuous Service prior to Retirement, the second calculation year shall be the second 12 out of such 120 months and so forth through the tenth calculation year which shall be the last 12 out of such 120 months. (b) There shall then be selected from such 10 calculation years a "calculation period" which shall be the 5 consecutive calculation years in which the Participant's aggregate Earnings were the highest. Earnings shall not include payments of any form of compensation received in such calculation period for a period in excess of 60 months; in -2- any such case the lesser of such excess payments received shall be excluded. After the highest 5 calculation years have been selected, imputed income relating to supplemental life insurance coverage and Company contributions to the Armco Inc. Thrift Plan for Salaried Employees and the Armco Inc. Thrift Plan for Hourly Employees, for such period shall be included in the Participant's aggregate Earnings. From and after January 1, 1990, imputed income relating to life insurance coverage shall not be included in the Participant's aggregate Earnings. (c) Earnings during the calculation period shall be divided by 60, except that, if during the calculation period the Participant was absent from work without pay because of disability or Layoff, the divisor of 60 shall be reduced by the greater of the aggregate of the full calendar months of such absence: (1) in excess of 3 in each separate period, or (2) in excess of 6; provided, however, that in the case of Permanent Incapacity Retirement, before making the foregoing reduction, if the calculation period is the last 5 calculation years prior to the Participant's Retirement, there shall be deducted each full calendar month that the Participant was absent without pay because of total disability during the last 6 calendar months of such period. Months deducted under the foregoing shall not be counted as months of absence under (1) and (2) above. (d) If, in the judgment of BPAC, the Average Monthly Earnings derived by the application of this Plan (S) 1.4 does not fairly represent the normal Earnings of the Participant, BPAC may, for the purpose of calculating the pension of such Participant, make such adjustments in the actual Earnings of such Participant so as to fairly represent his normal Earnings. 1.5 "Basic Agreement" means a labor agreement between an Employing Company and a recognized collective bargaining representative covering rates of pay, hours of work, and other basic terms and conditions of employment, which is in effect during the term of the Plan and is applicable to bargaining unit employees at the locations covered by a Basic Agreement, and, where used with respect to an Employee, means the Basic Agreement applicable to such Employee. 1.6 "Board Of Directors" means the board of directors of the Company as the same may be constituted from time to time. 1.7 "BPAC" means the Benefit Plans Administrative Committee provided for in Plan (S) 2.1. 1.8 "BPARC" means the Benefit Plans Asset Review Committee provided for in Plan (S) 2.2. -3- 1.9 "Break In Continuous Service" has the meaning set forth in Plan (S) 9.3. 1.10 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. References to Code provisions shall be interpreted to incorporate all lawful Regulations or rulings issued thereunder or any successor provisions thereto. 1.11 "Committee" means BPAC and BPARC or either of them. For purposes of ERISA, the members of BPAC and BPARC shall be named fiduciaries and administrators of the Plan with respect to the matters for which they are responsible in accordance with the terms of the Plan and any formal action of the Board Of Directors establishing or modifying such responsibilities. 1.12 "Company" means Armco Inc., an Ohio corporation, or any corporation which shall be a successor to it in ownership of substantially all of its assets. The Company shall be the sponsor of the Plan. 1.13 "Continuous Service" means continuous service determined pursuant to Plan Article 9. 1.14 "Divested Unit" means, except as otherwise provided in Plan (S) 1.24, a business of the Company or any Affiliate (whether organized and operated as a division, a subsidiary or a division of a subsidiary) which has been sold or transferred as a going business to a third party (including a partnership or joint venture) not related to the Company or any Affiliate, or to a corporation, partnership or joint venture partly owned by the Company or an Affiliate but which is not itself an Affiliate, regardless of whether the sale or transfer is accomplished by means of a sale or transfer of the stock or by means of a sale or transfer of assets. Subject to Plan (S) 9.5, a Divested Unit shall continue to be an Employing Company. 1.15 "Earnings" mean, for the purposes of Plan (S) 1.4, the Participant's earnings for services rendered (excluding any amount included in base hourly rates resulting from a Cost-of-Living Adjustment other than the first Cost-of- Living Adjustment which was included in the base hourly rates subsequent to April 30, 1974, and any amount of Cost-of-Living Adjustment paid to salaried nonexempt Participants not included in base pay) calculated as if the following had not occurred: (a) any decreases in the standard hourly wage scale and the base scale for incentives effective May 15, 1983 for members of the Armco Employees Independent Federation, Inc.; June 1, 1983 for members of the Zanesville Armco Independent Organization, Inc., including the nonexempt salaried bargaining unit employees; or August 1, 1983 for members of the Butler Armco Independent Union; or (b) any decreases as a result of the Incentive Plan Offset for members of the Salaried Employees Auxiliary of the Armco Employees Independent Federation, Inc.; the Butler Armco Independent Salary Union, and the Butler Plant Protection Union; or -4- (c) any other decreases which may hereafter be agreed to in a Basic Agreement to be disregarded for the purpose of calculating Earnings under the Plan; provided, however, that effective January 1, 1989, Earnings shall not include any amount in excess of $200,000 (adjusted for cost-of-living in accordance with Code (S) 401(a)(17)). 1.16 "Effective Date" means January 1, 1989, the effective date of the Plan as hereby amended and restated. 1.17 "Eligible For Public Pension" means the date on which a Participant (or the Participant's spouse or the widow of a deceased Participant) is eligible to receive, or would upon application be eligible to receive, a Public Pension, or would be so eligible except for an offset or suspension imposed by law. 1.18 "Employee" means any person who is employed by or paid through the payroll of an Employing Company as a regular full-time permanent employee, and whose principal duties are in the United States or a United States citizen employed abroad, excluding (i) any person represented by a recognized collective bargaining representative who has entered into a Basic Agreement which does not provide for participation under the Plan if pension benefits were a subject of good faith bargaining; (ii) any leased employee within the meaning of Code (S) 414(n)(2); (iii) any foreign national working in the United States; and (iv) any full-time salaried employee with a Continuous Service date on or after January 1, 1990. 1.19 "Employing Company" means the Company and any business unit or a division or department of a business unit which is designated as an Employing Company by BPAC and which is identified as such in an Appendix hereto. 1.20 "ERISA" means the Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. References to ERISA provisions shall be interpreted to incorporate all lawful Regulations or rulings issued thereunder or any successor provisions thereto. 1.21 "Layoff" means an involuntary, temporary discontinuance of employment under a written layoff policy which, at the time of discontinuance, is either declared by the Employing Company to be temporary or which is reasonably believed at the time of the initial layoff by the Employing Company to be temporary, and shall include voluntary layoff status which an Employee elects in lieu of immediate termination of employment as a matter of right under written Company policies regarding layoff status. 1.22 "Participant" means any Employee who is accruing Continuous Service for any purpose under this Plan or any former Employee, including any surviving spouse or beneficiary of a deceased former employee, who is accruing Continuous Service for any purpose under this Plan or who is no longer accruing Continuous Service but who is receiving or entitled to receive a pension or a Deferred Vested Pension under this Plan. Each employee of an Employing Company who becomes employed in a classification of -5- employment qualifying such employee as an Employee shall automatically become a Participant upon completing at least one year of Continuous Service and attaining age 21. 1.23 "PBGC" means the Pension Benefit Guaranty Corporation. 1.24 "Permanent Shutdown" means the total and permanent closing of a major steelmaking, manufacturing or fabrication facility or a significant department of such facility which involves the Layoff or termination of employment of a significant number of Employees; or, when expressly provided in a Basic Agreement, the permanent closing of a plant, department or division which is agreed to be a Permanent Shutdown (or which is otherwise found under the applicable claims procedure to be a Permanent Shutdown, provided that such finding shall apply only with respect to the Employees covered by such Basic Agreement). Except as may otherwise be required by the terms of a Basic Agreement, an Employee (i) whose job is eliminated, (ii) who is displaced from his job by a plant, department or division force reduction, (iii) who refuses a transfer of employment, or (iv) who voluntarily terminates his employment or voluntarily retires after the effective date of a Permanent Shutdown but before his employment is involuntarily terminated by the Employing Company, shall be deemed to have voluntarily terminated employment and not to have lost his employment as a result of a Permanent Shutdown for all purposes under the Plan including, but not limited to, eligibility for a pension under Plan (S)(S) 3.7 and 3.8. Neither the sale or transfer of a business nor the closing of all or any part of a business following its sale or transfer shall be considered a Permanent Shutdown. 1.25 "Plan" means the Armco Inc. Noncontributory Pension Plan, as the same may be amended from time to time. 1.26 "Plan Year" means the calendar year. 1.27 "Public Pension" means a benefit in the nature of an annuity, pension or payment of similar kind (a) under Title II of the Social Security Act or its successor ("Social Security Act"), (b) under the Railroad Retirement Act or its successor, (c) under a provision of law hereafter established, if an Employing Company has contributed directly or indirectly to such benefit by tax or otherwise with respect to employment of the Participant by an Employing Company, (d) any pension or payment of similar kind by reason of any law of any foreign country or any state or political subdivision thereof. 1.28 "Regulations" means the applicable regulations, rulings and guidelines (including any proposed rules or temporary rules or releases promulgated pending the -6- issuance of such regulations, rulings or other guidelines) issued under the Code or ERISA by the Internal Revenue Service, the Department of Labor, the PBGC or any other governmental agency. 1.29 "Retirement" means and shall be considered to occur: (a) in the case of a Participant who applies for a pension prior to incurring a Break In Continuous Service, on the date he wishes to retire which shall be a date on or after the latest of (1) the date of his request for Retirement, (2) the date of his attainment of eligibility for a pension, (3) the last day for which he received Earnings from an Employing Company, but not later than the last day of his Continuous Service; or (b) in the case of a Participant who applies for a pension after incurring a Break In Continuous Service, on the last day of his Continuous Service, provided that on such last day he was eligible for immediate commencement of his pension. 1.30 "Trust" means the Armco Master Pension Trust, as amended from time to time, or such other one or more trusts, or any successor trust or trusts established by the Company, under which any assets of the Plan or income thereon may be held, invested or reinvested to effectuate the purposes of the Plan. -7- ARTICLE 2 PLAN ADMINISTRATION 2.1 Powers Of The Benefit Plans Administrative Committee. BPAC shall be a named fiduciary of the Plan with the general responsibility, full discretionary authority and the power to administer and construe the provisions of the Plan, to determine in its discretion any questions of law or fact arising under the Plan, to determine in its discretion the amount of and to authorize the payment of benefits properly due under the Plan, to maintain Plan records, to adopt amendments to the Plan in accordance with Plan (S) 13.1 and to exercise such other rights and powers as may be specifically granted to it herein or by the Board Of Directors. 2.2 Powers Of The Benefit Plans Asset Review Committee. BPARC shall be a named fiduciary of the Plan with the general responsibility, full discretionary authority and the power to manage or to direct the management of any Plan asset which may be held in trust from time to time; to establish the Plan's funding policy; to appoint, remove or change any trustee, investment manager or other funding agency; to delegate to each trustee or investment manager such authority or discretion to manage, acquire or dispose of such assets of the Plan as BPARC may deem appropriate in its discretion and as may be described from time to time by notice to each such trustee or investment manager; and to exercise such other rights and powers as may be specifically granted to it herein or by the Board Of Directors. 2.3 Powers Of An Arbitrator. Any question which is required to be resolved in accordance with a grievance or arbitration procedure established under a Basic Agreement shall be resolved in accordance with that procedure and BPAC shall have no duty or responsibility with reference to such dispute except to carry out its duties hereunder upon resolution of such dispute in accordance with such procedure. Notwithstanding the foregoing, BPAC shall not be relieved of its duty to assure the final resolution of any dispute resolved in accordance with a Basic Agreement does not materially and adversely affect those Participants who are not members of the unit of employees covered under the Basic Agreement. 2.4 Compensation And Expenses Of Committee Members. No member of either Committee shall receive any compensation for serving as a member of such Committee but each member shall be entitled to be reimbursed for any reasonable expense incurred in carrying out his duties as a member of such Committee. 2.5 Bond For Committee Members. No bond or other security shall be required of either Committee or of any member of either Committee except as may be required by ERISA. -8- 2.6 Composition Of Committee. Any person may serve on either or both Committees, and any member of either Committee or of any subcommittee or any agent or other person to whom either of said Committees may delegate any authority, may serve in more than one capacity with respect to the Plan. 2.7 Committee Procedures. Each Committee shall elect or designate a Chairman, shall establish procedures for and the time and place of meetings, shall provide for the keeping of minutes of all meetings and shall establish such other procedures as they deem to be necessary or appropriate. 2.8 Disqualified Committee Member. No member of either Committee may act or influence the decision of the remaining Committee members with respect to any matter relating solely to himself or to any right or benefit he or any of his beneficiaries may have under the Plan. 2.9 Exercise Of Discretion. The grant of discretion to the Committees to carry out their respective duties hereunder and under the terms of any Trust need not be expressly stated in order to apply to any situation involving discretion in the administration of this Plan and the Trust, but shall be inferred whenever discretion is found to be necessary; and further, the grant of discretion to act is, and is to be construed as, a grant of the broadest possible scope of authority and power to act, it being the intention of the Company in establishing this Plan to assure that all interpretations of the Plan and any Trust shall be made by the Committees, or in accordance with any grievance procedure which may apply, rather than by a third party not familiar with the Plan, its history and purpose. Furthermore, by way of illustration and not limitation, it is intended to grant each fiduciary Committee the broadest possible powers to interpret the Plan and Trust documents, to apply any interpretation in its discretion to finally determine any question arising under the Plan or Trust, and to determine all questions of eligibility for, the commencement date of and the amount of benefits due under the Plan and Trust, if any are due. Each Committee shall endeavor to make consistent determinations in cases involving the same circumstances, but shall not be required to do so. Neither Committee may exercise its discretion in an arbitrary or capricious fashion, nor may it exercise its discretion in a fashion which adversely affects the tax-qualified status of the Plan or which results in discrimination in favor of shareholders, officers or highly compensated employees. 2.10 Appointment Of Counsel. Each Committee may arrange for the engagement of legal counsel, who may be counsel for the Company or an Affiliate, and may rely upon the opinion of such counsel. 2.11 Delegation Of Authority. Either Committee may delegate to any agent or to any subcommittee or any member of either Committee or any subcommittee the authority to perform any act such Committee may perform. Such delegation is subject to revocation at any time at the Committee's discretion. -9- 2.12 Local Plan Administrators. The Company or BPAC may designate one or more persons, each of whom may or may not be a member of the Committee, to be the Local Plan Administrator at each location of each Employing Company. The Local Plan Administrator shall be responsible for providing such information to the Participants and other persons entitled to benefits under the Plan as BPAC may direct, including information regarding the procedure for electing the form of benefits or for filing claims for benefits, and shall perform such other routine and non-discretionary tasks involving the day-to-day administration and operation of the Plan as BPAC may delegate from time to time. No Local Plan Administrator may exercise any discretion in the performance of his duties with respect to the Plan, nor shall any Local Plan Administrator be authorized to make any interpretation of the Plan or to bind either Committee by any statement, written or oral, not first approved in writing by the Committee. 2.13 Discharge Of Duties. In so far as it is acting in its fiduciary capacity under the Plan, each Committee and any of those of its delegates or appointees who exercise fiduciary responsibility shall discharge their respective fiduciary duties under the Plan solely in the interest of and for the exclusive purpose of providing benefits to Participants and their beneficiaries, exercising the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character with like aims, and in accordance with the terms and conditions of the Plan and applicable law, and shall endeavor to defray the reasonable expenses for the administration of the Plan. 2.14 Indemnification. The Company and each Employing Company shall, and hereby does agree to, indemnify and hold harmless each present member of each Committee and each successor member and each of any such member's heirs, executors and administrators, and the Committees delegates and appointees, including counsel (other than persons who are independent of the Company or any Affiliate and who render services to the Plan for a fee and other than any arbitrator acting in accordance with any Basic Agreement), from any and all liability or expense, including settlement costs, costs of litigation and counsel fees, reasonably incurred by him or on his behalf in any action, suit or proceeding to which he is or may be made a party by reason of his being or having been a member, delegate or appointee of or counsel to the Committee, except in matters involving (i) felonious criminal liability or (ii) gross, intentional and willful misconduct of a person who was not acting within the scope of his authority with respect to the matter giving rise to the actual or potential liability. If any insurance is in force to cover claims of a nature described above, then no person indemnified hereunder shall have any right of indemnification except to the extent of any deductible amount under the insurance coverage or to the extent any claim is outside of the coverage or the amount of the award, settlement or expense exceeds the insurance limits. 2.15 Claims Procedure. An application for benefits under the Plan or an inquiry about the interpretation of a Plan provision shall not be a claim under this procedure unless addressed to the Committee in writing and in accordance with the provisions of this Plan (S) 2.15. No statement, whether written or oral, by any person, including a Local -10- Plan Administrator or a Committee member (unless made by that member in communicating a formal decision of the Committee), is binding on the Committee. (a) Any person who questions the amount of any benefit paid or who believes that a benefit should have commenced to be paid which did not so commence or who has some other claim arising under the Plan or Trust (the "Claimant"), shall either (i) deliver a written claim by notice to BPAC fully describing the nature of such claim and incorporating or attaching all information and documentation necessary to enable BPAC to determine whether to grant or deny the claim, or (ii) if such claim is properly subject to resolution under a grievance and/or arbitration procedure established by a Basic Agreement, file such claim in accordance with such grievance and/or arbitration procedure. (1) If the claim is filed with the Local Plan Administrator, then the Local Plan Administrator shall forthwith forward the claim, as filed, to BPAC and shall provide notice to the Claimant of the date that such claim was so forwarded. BPAC shall review the claim and supporting information and shall make an initial determination approving or denying the claim. (2) If the claim is filed under an applicable grievance and/or arbitration procedure, the final decision, whether made by agreement or as a result of a final arbitration award, under such grievance and/or arbitration procedure shall be the initial decision under the claims procedure set forth in this Plan (S) 2.15; provided, however, that the Committee's responsibility with respect to any such final decision shall be limited to the review of such final decision with reference to its impact, if any, on all persons not directly the subject of such final decision. Such final decision shall be enforced by the Committee unless enforcement will, in the Committee's sole discretion, materially and adversely affect other Participants, in which case the Committee shall take such action as it deems to be appropriate to protect the interests of all of the Participants. (b) When the initial determination of a claim is rendered by BPAC, BPAC shall, within 90 days (or such other period as may be established by applicable law) from the time the claim is received, mail a notice of the initial determination to the Claimant. Such 90-day period may be extended by BPAC for up to 90 additional days if special circumstances so require by a notice of extension to the Claimant within the first 90-day period. If the initial determination of a claim is rendered under an applicable grievance and/or arbitration procedure, the final decision under such procedure shall be communicated in accordance with such procedure, but not later than the last date which BPAC could communicate such decision under the foregoing sentence. (c) Each Claimant shall have the right to request a full and fair review by BPAC of the initial determination. Such request for review must be made by notice to BPAC within 60 days of receipt of the notice of initial determination and must include all such new information, or documentation as the Claimant believes to be pertinent to BPAC's review of the initial decision. The Claimant or his duly authorized representative shall -11- have the right to review any pertinent documents and to submit any issues or comments. The Claimant or his duly authorized representative may, during such 60-day period, examine and review during reasonable business hours any pertinent documents and may request copies thereof, by written request accompanied by payment of any reasonable copying charges therefor. (d) BPAC shall, within 60 days after receipt of the request for review, (or in special circumstances, such as where BPAC in its sole discretion holds a hearing, within 120 days of receipt of the request for review) submit its decision on review in writing to the Claimant. The decision on review will be final, conclusive and binding on all parties. (e) Any notice of denial or other decision on review shall be written in a manner calculated to be understood by the Claimant. A notice of denial shall set forth (i) the specific Plan provisions on which the denial is based, (ii) an explanation of additional material or information, if any, necessary to validate such claim together with a statement of why such material or information is necessary, and (iii) an explanation of the review procedure. A decision on review shall set forth the specific Plan provisions on which the decision is based. (f) Any claim questioning the amount of a benefit filed more than 90 days following the date of the first payment which would be adjusted if such claim were granted may be rejected as untimely except upon a showing satisfactory to the Committee of extenuating circumstances accounting for the delay in filing the claim; provided, however, that the Plan expressly reserves to the Committees the right and the power to review any claim made at any time, whether within the time for filing such claim or not, or to provide an interpretive opinion relating to any provision of the Plan or Trust or with reference to any factual situation. -12- ARTICLE 3 ELIGIBILITY AND TYPES OF PENSIONS 3.1 Pension Applications. Eligible Participants must make application for a pension in writing on a form or forms provided by BPAC and file such form or forms with BPAC at any time prior or subsequent to the Participant's Retirement, except as provided in Plan (S) 3.9. BPAC may require an applicant for a pension to provide any reasonably necessary information. Payment of pensions shall commence as provided in Plan (S) 5.5. 3.2 Normal Retirement Pension. Any Participant who has attained age 65 and who has completed at least 5 years of Continuous Service shall be eligible to retire and shall, upon his Retirement, be eligible for a Normal Retirement Pension. 3.3 62/15 Retirement Pension. Any Participant who has attained age 62 but not age 65 and who has completed at least 15 years of Continuous Service shall be eligible to retire and shall, upon his Retirement, be eligible for a 62/15 Retirement Pension. 3.4 30-Year Retirement Pension. Any Participant who has not attained age 62 and who has completed at least 30 years of Continuous Service shall be eligible to retire and shall, upon his Retirement, be eligible for a 30-Year Retirement Pension. 3.5 Early Retirement (55/15) Pension. Any Participant who has completed at least 15 but less than 30 years of Continuous Service and who has attained age 55, but not age 62, shall be eligible to retire and shall, upon his Retirement, be eligible for an Early Retirement (55/15) Pension. The amount of an Early Retirement (55/15) Pension shall be equal to the Regular Pension provided in Plan Article 5 reduced to its Actuarial Equivalent based on the Participant's age on his pension commencement date, which shall be the date specified by the Participant in his application for a pension, but no later than the first day of the month following his 62nd birthday. If the Participant elects to defer his pension, the Special Pension Payment pursuant to Plan Article 4 shall be deferred to the pension commencement date unless the Participant affirmatively elects to have such Special Pension Payment made upon his Retirement. 3.6 Permanent Incapacity Pension. Any Participant who has completed at least 15 years of Continuous Service, who becomes permanently incapacitated and whose incapacity has continued for a period of at least 5 consecutive months shall, upon presentation of evidence of permanent incapacity satisfactory to BPAC, be eligible for a Permanent Incapacity Pension. A Participant shall be eligible for a Permanent Incapacity Pension only if certified as totally and permanently disabled by a physician selected by BPAC. -13- 3.7 Immediate Severance (70/80) Pension. Any Participant who has not attained age 62, has completed at least 15 years of Continuous Service and who (i) has attained age 55 and whose combined age and years of Continuous Service equals 70 or more, or (ii) whose combined age and years of Continuous Service equals 80 or more, and (a) who incurs a Break In Continuous Service by reason of a Permanent Shutdown, a Layoff or a physical disability, or (b) who does not incur a Break In Continuous Service and who is absent from work by reason of (1) having elected Layoff status in lieu of having his employment terminated as a result of a Permanent Shutdown, in accordance with the provisions of a Basic Agreement or a written policy of an Employing Company providing such election, or (2) a physical disability, but only if the Participant shall be certified as totally and permanently disabled by a physician selected by BPAC, or (3) a Layoff other than Layoff status resulting from an election referred to in (1) above and whose return to active employment is declared unlikely by BPAC, or (c) who does not incur a Break In Continuous Service and who, while on Layoff status described in (b)(1) above, accepts a job with an Employing Company and, prior to the expiration of 90 consecutive calendar days from the first day worked on such job, elects to retire, shall be eligible to retire and shall, upon his Retirement, be eligible for an Immediate Severance (70/80) Pension. The amount of such Immediate Severance (70/80) Pension paid to a Participant shall be determined in accordance with the provisions of (S) 5.1(d). 3.8 Rule-Of-65 Retirement Pension. Any Participant (i) who has completed at least 20 years of Continuous Service on his last day worked, (ii) who has not attained age 55, and (iii) whose combined age and years of Continuous Service equals 65 or more but less than 80, and (a) who incurs a Break In Continuous Service by reason of (i) a Layoff or (ii) a physical disability, or (b) who does not incur a Break In Continuous Service and who is absent from work by reason of a Layoff resulting from his election to be placed on Layoff status as a result of a Permanent Shutdown, or (c) who does not incur a Break In Continuous Service and who is absent from work by reason of (i) a physical disability, but only if the Participant shall be certified as totally and permanently disabled by a physician selected by BPAC, or (ii) a Layoff other -14- than a Layoff resulting from an election described in (b) above and whose return to active employment is declared unlikely by BPAC, or (d) who is not eligible for Retirement under (a), (b) or (c) above and who incurs a Break In Continuous Service by reason of his involuntary termination of employment by the Employing Company on or after the date the Board Of Directors authorized the Permanent Shutdown of the unit at which he is employed, provided the involuntary termination is by reason of the Permanent Shutdown and is not an involuntary termination by the Employing Company for good cause, and who has not been offered suitable long-term employment by the Employing Company, shall be eligible to retire, and shall, upon his Retirement, be eligible for a Rule-Of-65 Retirement Pension; provided, however, that if at the time of the Participant's application for Retirement his Employing Company has not yet determined whether the Participant will be offered suitable long-term employment, the Participant will not be eligible to retire until the earlier of (i) the date on which the Employing Company finally determines that the Participant will not be offered suitable long-term employment and the Participant is so advised, or (ii) the date on which the Participant incurs a Break In Continuous Service. The amount of such Rule-Of-65 Retirement Pension paid to a Participant shall be determined in accordance with the provisions of (S) 5.1(d). 3.9 Deferred Vested Pension. Any Participant not eligible for a pension under any other section of this Article 3, who incurs a Break In Continuous Service for any reason and who, at the time of such Break In Continuous Service, has completed at least 5 years of Continuous Service, shall be eligible for a Deferred Vested Pension. BPAC shall furnish such Participant with an appropriate written notice of the eligibility requirements and his relevant employment status. The Participant may make application for a Deferred Vested Pension not earlier than 90 days prior to the first day of the month for which the first installment of pension is payable pursuant to Plan (S)(S) 5.5(d) and (e). A Participant's right to his Regular Pension shall be nonforfeitable (for reasons other than death) upon the later of (i) the date the Participant attains age 65, or (ii) the fifth anniversary of the date the Participant commenced participation in the Plan. 3.10 Nonduplication Of Benefits. Notwithstanding anything to the contrary contained in this Plan, no pension (including any Special Pension Payment pursuant to Article 4) shall be payable for any month with respect to which the Participant claims and is eligible for benefits under the sickness and accident plan of an Employing Company, or similar benefits provided under law. -15- ARTICLE 4 SPECIAL PENSION PAYMENT 4.1 Eligibility. A special initial payment (the "Special Pension Payment") shall be payable to retired Participants, except for any Participant eligible for a Permanent Incapacity Pension, a Deferred Vested Pension or as provided in Plan Article 10. 4.2 Amount. (a) The amount of the Special Pension Payment for a Participant who was entitled to a vacation in the year of his Retirement, or who would have been entitled to a vacation in the year of his Retirement except for such Retirement, shall be calculated as follows: (1) The number of weeks of vacation to which the Participant was or would have been entitled multiplied by the amount of the Participant's vacation pay, plus (2) The number of weeks of vacation determined in (1) above subtracted from 13 (14 in the case of a Participant eligible for more than 4 weeks of regular vacation in the year of his Retirement), and multiplied by the amount of the Participant's adjusted vacation pay; minus (3) the amount of vacation pay the Participant received in such year. (b) The amount of the Special Pension Payment for a Participant not entitled to any vacation in the year of his Retirement shall be calculated under the formula established in (a) above as though the Participant had retired in the year in which he was last entitled to a vacation. (c) The Special Pension Payment shall be reduced by the amount of Other Pension as defined in Plan (S) 6.2 which is payable for any portion of the 3 month period to which the Special Pension Payment applies. 4.3 Vacation Pay Of Hourly Participants. For hourly paid Participants, the weekly rate of vacation pay shall be computed in accordance with the applicable formula for the calculation of such pay under a Basic Agreement or an otherwise established practice. (a) If a Participant takes his entire vacation in periods in which the same rate of vacation pay applied, the weekly rate of vacation pay shall be the rate paid to the Participant. -16- (b) If a Participant takes his entire vacation in 2 or more periods to which different rates of vacation pay apply, the weekly rate of vacation pay shall be the average for the several periods. (c) If a Participant takes only a part of his vacation, the weekly rate of vacation pay shall be the average of the rates applicable to the period taken and the period not taken. (d) If a Participant has not taken any of his vacation, the weekly rate of vacation pay shall be the rate applicable if he had commenced a vacation immediately prior to Retirement. (e) "Adjusted vacation pay" means the vacation pay determined in accordance with (a) through (d) above, reduced by the amount of such pay which results from a Cost-of-Living Adjustment other than the first Cost-of-Living Adjustment included in the base hourly rates subsequent to April 30, 1974. 4.4 Vacation Pay Of Salaried Participants. For salaried Participants, the weekly rate of vacation pay shall be deemed to be the Participant's total compensation received in the last 12 months of active employment status, including imputed income relating to supplemental life insurance coverage and Company contributions to the Armco Inc. Thrift Plan for Salaried Employees, or any successor plan, divided by 52. Such total compensation shall not include any amounts paid as a Cost-of-Living Adjustment in addition to regular base salary and shall not include payments of any form of compensation received in such period of 12 months for a period in excess of 12 months; in any such case the lesser of such excess payments received shall be excluded. From and after January 1, 1990, such total compensation shall not include imputed income relating to life insurance coverage. 4.5 Period For Which Payable. The Special Pension Payment shall be payable for the first 3 calendar months following the month of the Participant's Retirement. Such Special Pension Payment shall be paid in accordance with non-discriminatory administrative practices as established by BPAC from time to time or as may be required by an applicable Basic Agreement. -17- ARTICLE 5 REGULAR PENSION 5.1 Basic Formula For Calculation Of Regular Pension. The Regular Pension shall be a monthly amount determined in accordance with (a), (b) and (c) below, adjusted in accordance with Plan (S)(S) 5.2, 5.3, 6.1, 6.2, 6.3, 6.4, 7.1(f), 7.2(e), 7.3 and 7.4 if applicable. (a) Subject to (b) and (c) below, the monthly amount used in the calculation of any Regular Pension shall be determined in accordance with (1), (2) or (3) below, whichever is the greatest: (1) Minimum Pension. A monthly amount equal to: (A) $17.50 ($21.50 for retirements on or after September 30, 1990) for each of the first 15 years (and fractions thereof calculated to the nearest month) of the Participant's Continuous Service; plus (B) $19.00 ($23.00 for retirements on or after September 30, 1990) for each of the Participant's years (and fractions thereof calculated to the nearest month) of Continuous Service in excess of 15 but not more than 30 years; plus (C) $20.50 ($24.50 for retirements on or after September 30, 1990) for each of the Participant's years (and fractions thereof calculated to the nearest month) of Continuous Service in excess of 30 years. For retirements occurring after September 30, 1989 and before September 30, 1990, the monthly pension benefit will be increased from and after October 1, 1990 to an amount determined under the Minimum Pension formula as in effect on September 30, 1990. (2) 1.1/1.2% Pension. A monthly amount equal to the Participant's Average Monthly Earnings multiplied by: (A) For a Participant with more than 30 years of Continuous Service, 33% plus a percentage determined by multiplying 1.2% by the number of years (and fractions thereof calculated to the nearest month) of his Continuous Service in excess of 30 years, or (B) For a Participant with 30 or less years of Continuous Service, 1.1% multiplied by the number of years (and fractions thereof calculated to the nearest month) of his Continuous Service, -18- plus, for a Participant who retires on or after July 31, 1986 (or, for any Participant whose terms and conditions of employment are subject to a Basic Agreement in effect on January 1, 1989, or any successor thereto which provides for a continuation of this provision, and who retires prior to the expiration of such Basic Agreement or on such later date as the Basic Agreement may provide) an additional amount determined by multiplying the amount determined in accordance with (A) and (B) above, whichever is applicable, by 5%. (3) 1.5% Pension. A 1.5% Pension is payable only to a Participant who is either receiving Social Security disability benefits for which he is eligible on the date of his Retirement or who has attained age 62. The 1.5% Pension is a monthly amount equal to 1.5% of the Average Monthly Earnings of the Participant multiplied by the number of years (and fractions thereof calculated to the nearest month) of his Continuous Service, less 50% of the monthly amount of Social Security benefits payable at the date of his Retirement. If Social Security benefits are not payable at the time of the Participant's Retirement, then 50% of the Social Security benefit as defined in Plan (S) 5.1(b)(4)(A) shall be used. After the reduction for the monthly amount of Social Security benefit has been determined, it shall not be changed to reflect any change in such benefit. The 1.5% Pension shall be increased by 5% for any Participant who retires on or after July 31, 1986 (or, for any Participant whose terms and conditions of employment are subject to a Basic Agreement in effect on January 1, 1989, or any successor thereto which provides for a continuation of this provision, and who retires prior to the expiration of such Basic Agreement or on such later date as the Basic Agreement may provide). A Participant will not be entitled to a 1.5% Pension unless he has been a Participant for at least 60 months at any time prior to his Retirement, including at least the 12 consecutive months immediately preceding his Retirement. Notwithstanding any other contrary provision of this Plan, in calculating the accrued benefit (including the right to any optional benefit provided under this Plan) of any Plan Participant who is a highly compensated employee within the meaning of Code (S) 414(q), such highly compensated employee shall accrue no additional benefit under this Plan (S) 5.1(a)(3) from or after January 1, 1989 to the extent that such additional benefit accrual exceeds the benefit which would otherwise accrue in accordance with the terms of the Plan as subsequently amended to comply with those qualification requirements described in Treasury Regulation (S) 1.401(b)- 1(b)(2)(ii). This provision shall be effective until the last date by which the Plan may be amended retroactively to comply with the Tax Reform Act of 1986 for the Plan Year beginning January 1, 1989 in order to remain qualified under the Code and shall be effective for such period if and only if the subsequent amendment to comply with the Tax Reform Act of 1986 is made on or before the last day by which the Plan may be amended retroactively to comply with the Tax Reform Act of 1986 for the Plan Year commencing January 1, 1989. -19- In addition, the benefit accrued by any highly compensated employee, as defined at Code (S) 414(q), shall in no event exceed the benefit accrual during the Plan Year beginning January 1, 1989 with respect to such participant under the terms of the Plan as subsequently amended to comply with the terms of the Tax Reform Act of 1986. However, such highly compensated employee's benefit shall not be less than what that participant had accrued on December 31, 1988. (b) Participants Eligible For Public Pension. Notwithstanding anything to the contrary contained in Plan (S)(S) 5.1(a)(1), (2) and (3), (1) for any month in which a Participant is eligible for a Public Pension related to the Social Security Act, the monthly amount used in the calculation of any Regular Pension may not exceed an amount which, when added to the monthly amount of Social Security, will result in a sum that is greater than the product of: (A) the Participant's gross average monthly earnings, multiplied by (B) the sum of 70% plus 1% for each full year of Continuous Service in excess of 15; (2) provided, however, that a monthly amount affected by the limitation in (b)(1) above shall not be less than an amount equal to $14.00 for each of the first 15 years of Continuous Service (and fractions thereof calculated to the nearest month) plus $15.00 for each year of Continuous Service between 15 and 30 (and fractions thereof calculated to the nearest month) and $16.00 for each year of Continuous Service in excess of 30 (and fractions thereof calculated to the nearest month); and (3) provided, further, that there shall be no adjustment in the monthly amount determined under (b)(1) above because of future increases in the Participant's monthly amount of Social Security which may become effective subsequent to the date of his Retirement. (4) The phrase "monthly amount of Social Security" shall mean: (A) in the case of a Participant who retires prior to age 62, the Social Security Act Old-Age Benefit to which the Participant becomes entitled at age 62 based on the law in effect at the time of his Retirement and on the assumption that he will receive no creditable compensation for Social Security purposes after the date of his Retirement, and that the Participant's compensation prior to his Retirement equaled or exceeded the maximum taxable wages creditable for Social Security purposes, unless the Participant produces a statement from the Social Security Administration establishing lesser creditable compensation, or -20- (B) in the case of a Participant who retires on or after age 62, the Social Security Act Old-Age Benefit to which he is or would be entitled at the date of his Retirement based on the law in effect at such date. (5) For the purpose of (b)(1) above, "gross average monthly earnings" means the sum of the Participant's W-2 earnings for the 2 calendar years out of the last 10 calendar years prior to his Retirement in which the Participant's earnings were the highest, divided by 24. The calendar year in which the Participant retires shall be included as one of the "last 10 calendar years prior to his Retirement" if his Retirement occurs after June 30 of such year and the Participant worked in such year. (6) In the case of a Participant who retires on other than a Deferred Vested Pension and who did not work for one or more full calendar months due solely to Layoff, disability and/or Retirement during either or both of the last 2 calendar years in which he worked prior to his Retirement, his W-2 earnings shall be increased by adding for each such calendar month during that year an amount equal to 4-1/3 times his average weekly earnings, including any Cost-of-Living Adjustment, for all hours paid for by an Employing Company with respect to the weekly pay periods in which he worked during that year, provided that if he did not work at least 12 weekly pay periods in that year, his average weekly earnings shall be based on the last 12 weekly pay periods in which he worked during and prior to that year. The calendar year in which the Participant retires shall be included in the "last 2 calendar years in which he worked prior to his Retirement" if his Retirement occurs after June 30 of such year and the Participant worked in such year. (7) A Participant who retires on other than a Deferred Vested Pension and who did not work during either or both of the last 2 calendar years prior to his Retirement due solely to a compensable disability shall, for the purpose of the calculation in (b)(6) above, have his W-2 earnings for the last 2 calendar years in which he worked adjusted by increasing his W-2 earnings for each such year by the amount provided pursuant to (b)(6) above, if applicable, and then by the percentage increase in the non- incentive standard hourly wage scale rate for Job Class 10 under a Basic Agreement applicable to production and maintenance employees in the basic steel operations of the Company between August 1 of the calendar year in question and August l of the earlier of the last 2 calendar years prior to his Retirement, except that such adjustment shall not be made with respect to W-2 earnings for either of the last 2 calendar years prior to his Retirement. The calendar year in which the Participant retires shall be included in the "last 2 calendar years prior to his Retirement" if his Retirement occurs after June 30 of such year and the Participant worked in such year. -21- (c) Regular Pension Under Early Retirement (55/15) Pension. (1) For a Regular Pension paid pursuant to an Early Retirement (55/15) Pension, the monthly amount determined in accordance with Plan (S)(S) 5.1(a)(1), (2), (3) and 5.1(b) is applicable only if the Participant elects, in his application for a pension, to defer commencement of his Regular Pension until after attaining age 62, ("Deferred Early Retirement (55/15) Pension"), and for any Deferred Vested Pension, the monthly amount determined in accordance with Plan (S)(S) 5.1(a)(1), (2), (3) and 5.1(b) is applicable, only if (A) with respect to a Participant who incurs a Break In Continuous Service after attaining age 40 and completing at least 15 years of Continuous Service, his Regular Pension commences after he has attained age 62, or (B) with respect to a Participant who incurs a Break In Continuous Service either prior to attaining age 40 or after attaining age 40 and before completing at least 15 years of Continuous Service, his Regular Pension commences after he has attained age 65. (2) A Participant may, in his application for an Early Retirement (55/15) Pension, elect immediate commencement of pension, and a Participant who incurs a Break In Continuous Service after attaining age 40 and completing at least 15 years of Continuous Service and who is entitled to a Deferred Vested Pension may, pursuant to Plan (S) 5.5(d), make application for commencement of pension payments after attaining age 55 and prior to attaining age 62, and in either such case the Regular Pension calculated under Plan (S)(S) 5.1(a)(1), (2) and 5.1(b) shall be reduced to its Actuarial Equivalent as of the effective date of the pension; provided, however, that at age 62 the amount of such pension shall be the greatest of the amounts computed under Plan (S)(S) 5.1(a)(1), (2), (3) and 5.1(b) reduced to its Actuarial Equivalent as of the effective date of such pension. The Actuarial Equivalent early retirement percentages are shown on Exhibit A, Schedule A-1 attached. (3) A Participant who incurs a Break In Continuous Service either prior to attaining age 40 or after attaining age 40 and before completing at least 15 years of Continuous Service, and who is entitled to a Deferred Vested Pension may, pursuant to Plan (S) 5.5(e), make application for commencement of pension payments after attaining age 55 and prior to attaining age 65, and in such case the monthly amount calculated under Plan (S)(S) 5.1(a)(1), (2) and 5.1(b) shall be reduced to its Actuarial Equivalent as of the effective date of the pension; provided, however, that at age 65 the amount of such pension shall be the greatest of the amounts computed under Plan (S)(S) 5.1(a)(1), (2), (3) and 5.1(b) reduced to its Actuarial Equivalent as of the effective date of such pension. The Actuarial Equivalent early retirement percentages are shown on Exhibit A, Schedule A-2 attached. -22- (d) Regular Pension Under Immediate Severance (70/80) Pension and Rule-Of- 65 Retirement Pension. Notwithstanding anything to the contrary in this Plan, any Regular Pension paid pursuant to an Immediate Severance (70/80) Pension and Rule-Of-65 Retirement Pension upon any Break In Continuous Service occurring on or after January 1, 1990, shall not exceed the amount which would have been payable had such Retirement occurred on December 31, 1989. 5.2 Increased Regular Pensions. Subject to the limitations of Plan (S) 5.1(d), in the determination of the amount of any Regular Pension under a Permanent Incapacity Pension or Immediate Severance (70/80) Pension, the monthly amount determined in accordance with Plan (S)(S) 5.1(a)(1), (2) and 5.1(b) shall be increased by $400 per month; provided, however, that such increase shall not be applicable with respect to a Regular Pension payable for any month for which the Participant is eligible for a Public Pension. 5.3 Increased Rule-Of-65 Retirement Pensions. Subject to the limitations of Plan (S) 5.1(d), in the determination of the amount of any Regular Pension for Rule-Of-65 Retirement, the monthly amount determined in accordance with Plan (S)(S) 5.1(a)(1), (2) and 5.1(b) shall be increased by $400 per month; provided, however, that such increase shall not be applicable with respect to such Regular Pension payable for any month for which the Participant is eligible for a Public Pension; and provided, further, that if the Participant has earned income after his Retirement and prior to attainment of eligibility for a Public Pension which exceeds $5,500 during any calendar year (hereinafter "Excess Earned Income"), the Increased Pension payable pursuant to this Plan (S) 5.3 (hereinafter "Increased Pension") for any calendar year shall be reduced by $1 for each $2 of Excess Earned Income. The Excess Earned Income base amount shall be prorated for the year in which the Participant's Retirement occurs and for the year in which the Participant becomes eligible for a Public Pension. For the purpose of this Plan (S) 5.3, earned income shall include wages, salaries, tips, bonuses, commissions, and earnings resulting from self- employment. (a) To facilitate determination of his annual earned income, each Participant shall at the time of Rule-Of-65 Retirement, authorize the Social Security Administration and/or the Railroad Retirement Board to release to BPAC a record of his creditable earnings for Social Security and/or Railroad Retirement Act purposes and agree to give BPAC by April 15th of each year a copy of his W-2 forms and a statement of his annual earned income for the preceding year on a form provided by BPAC. If the Participant revokes the authorization to the Social Security Administration and/or Railroad Retirement Board or fails to submit the required information to BPAC by April 15th of each year, the Participant shall be presumed to be ineligible for Increased Pension for the preceding year. (b) If it is determined in accordance with (a) above that the Participant was not eligible for all or part of the Increased Pension which he received for the preceding year, payment of Increased Pension will be suspended and not resumed until the month following the month in which the Participant notifies BPAC that he does not expect his earned income for the current year to exceed the Excess Earned Income base amount. -23- The amount of any overpayment will be recouped by reducing or discontinuing payment of the Participant's Regular Pension (and his Increased Pension, if he notifies BPAC that he does not expect his earned income for the current year to exceed the Excess Earned Income base amount) until the full amount of the overpayment has been recovered. (c) At the request of the Participant, BPAC may reduce or discontinue payment of Increased Pension for a period specified by the Participant. If it is determined that the Participant did not receive all of the Increased Pension to which he was entitled for a given year, the amount due shall be paid promptly. 5.4 Form Of Payment Of Regular Pensions. Each Regular Pension shall be paid in monthly installments. 5.5 Commencement And Termination Of Regular Pension Payments. (a) In the case of a Participant who is eligible for any type of pension other than an Early Retirement (55/15) Pension, a Permanent Incapacity Pension or a Deferred Vested Pension, the first installment of Regular Pension shall commence with the first full calendar month following the 3 calendar months for which the Special Pension Payment is payable. (b) In the case of a Participant who is eligible for a Permanent Incapacity Pension, the first installment of any Regular Pension shall commence with the first full calendar month following the month in which the Participant's Retirement occurs. (c) In the case of a Participant who is eligible for an Early Retirement (55/15) Pension, the first installment of Regular Pension shall commence with the fourth calendar month following the month in which the Participant attains age 62 unless the Participant elects earlier commencement in accordance with Plan (S) 5.1(c)(2), in which case the first installment of Regular Pension shall be payable for the first full calendar month following the 3 calendar months for which the Special Pension Payment is payable. (d) In the case of a Participant who is eligible for a Deferred Vested Pension and who incurs a Break In Continuous Service after attaining age 40 and completing at least 15 years of Continuous Service, the first installment of Regular Pension shall be payable for the calendar month following the Participant's 62nd birthday unless the Participant elects earlier commencement in accordance with Plan (S) 5.1(c)(2), in which case the first installment of Regular Pension shall be payable for the later of (1) the calendar month specified by the Participant in his application for a pension, provided such month is subsequent to the month in which he attains age 55, or (2) the calendar month in which his application for a pension is made. -24- (e) In the case of a Participant who is eligible for a Deferred Vested Pension and who incurs a Break In Continuous Service either prior to attaining age 40 or after attaining age 40 and before completing at least 15 years of Continuous Service, the first installment of Regular Pension shall be payable for the calendar month following the Participant's 65th birthday unless the Participant elects earlier commencement in accordance with Plan (S) 5.1(c)(3), in which case the first installment of Regular Pension shall be payable for the later of (1) the calendar month specified by the Participant in his application for a pension, provided such month is subsequent to the month in which he attains age 55, or (2) the calendar month in which his application for a pension is made. (f) Unless the Participant otherwise elects, payment of benefits under the Plan to the Participant shall commence not later than the 60th day after the latest of the last day of the Plan Year in which the Participant (i) attains his Normal Retirement date, (ii) attains the 10th anniversary of his participation in the Plan or (iii) terminates his employment. Notwithstanding the foregoing, any pension payable to a Participant shall commence in accordance with Code (S) 401(a)(9) no later than April lst of the calendar year following the calendar year in which such Participant attains age 70 1/2. Such pension shall be paid, in accordance with the Regulations, over the life of such Participant or over a period not extending beyond the life expectancy of such Participant or the joint life expectancies of such Participant and his beneficiary. (g) To the extent required by the Code and Regulations, pension payments may not commence prior to the date the Participant attains his Normal Retirement date without the Participant's consent, and if the Participant is married and has elected to receive his pension in a form other than an Automatic 50% Spouse Annuity, the consent of the Participant's spouse. (h) The last monthly installment of any Regular Pension shall be paid until the first to occur of: (1) the month following the month in which the Participant dies, or (2) the month following the month in which the Participant's pension ceases pursuant to Plan Article 10, or (3) in the case of a Participant receiving a Permanent Incapacity Pension, for the month following the month in which it is determined by medical examination that he is no longer permanently incapacitated. -25- ARTICLE 6 DEDUCTIONS FROM PENSIONS 6.1 Deduction For Public Pension. Deduction from the amount determined in accordance with Plan (S)(S) 5.1(a), (b) and (c) for a Public Pension shall be made in accordance with the following provisions: (a) Except as provided under Plan (S)(S) 5.1(a)(3) and 5.1(b), a Regular Pension shall not be affected by a Public Pension related to the Social Security Act. (b) For any month a Participant is eligible for a Public Pension not related to the Social Security Act, there shall be a deduction for such Public Pension from the amount determined in accordance with Plan (S)(S) 5.1(a), (b) and (c). The amount of such deduction shall be the amount of Public Pension paid or payable to the Participant, or that would upon application become payable to him for such month, without regard to any offset, suspension or reduction imposed by law (including any reduction by reason of commencement of such Public Pension prior to the age at which it is first provided under law without such a reduction), except that for a Participant whose original date of hire was prior to January 1, 1975, the amount of such deduction shall be equal to 50% of the Tier II benefit determined in accordance with the Railroad Retirement Act; provided such deduction shall be limited to the amount, to the extent reasonably determinable, of such Public Pension attributable to employment by an Employing Company; and provided, further, that in the case of a Participant eligible for a Public Pension under the Railroad Retirement Act, the amount of such deduction shall be based on the provisions of such Act in effect as of the date the Participant retires. (c) After a deduction for a Public Pension first becomes applicable, it shall not be changed to reflect any increase of such Public Pension resulting from: (1) amendment of the law under which such Public Pension is provided, if the effective date of such increase occurs after the first month with respect to which a deduction for such Public Pension became applicable, or (2) subsequent employment by other than an Employing Company. 6.2 Deduction For Other Pension. If any Participant entitled to a pension under the Plan is or shall become, or upon application would become, entitled to any other pension or payment in the nature of a pension (other than a payment covered by Plan (S) 6.4, or any payment under the Armco Inc. Thrift Plan for Hourly Employees or the Armco Inc. Thrift Plan for Salaried Employees) or from any source or fund to which the Company, any Employing Company or Affiliate or any foreign affiliate or subsidiary directly or indirectly contributed (any such other pension or payment hereinafter "Other Pension"), then the amount determined in accordance with Plan (S)(S) 5.1, 5.2 or 5.3 and otherwise payable to such Participant for any period shall be reduced by the amount of any such Other Pension paid or payable to him or that would upon application become -26- payable to him for the corresponding period; provided, however, that if such Participant contributed to such source or fund, then the amount by which such amount would otherwise be reduced in accordance with the foregoing provisions of this Plan (S) 6.2 shall be decreased by the amount of that part of such Other Pension which is attributable to the contributions which such Participant made to such source or fund; and provided, further, that such deduction shall be limited to the amount, to the extent reasonably determinable, of such Other Pension attributable to employment with an Employing Company during a period in which the Participant was credited with Continuous Service for the purpose of calculating the amount of any Regular Pension under this Plan. In the event such Other Pension is not payable at the same time and manner as the benefit under this Plan, an adjustment shall be made on an Actuarially Equivalent basis. 6.3 Deduction For Severance Allowance. For retirements occurring on or before December 31, 1989 and to the maximum extent permitted by applicable law: (a) Severance Allowance Paid Or Payable. If any Participant is or becomes entitled to or is paid any discharge, liquidation, dismissal, or severance allowance or payment of similar kind (hereinafter "Severance Allowance") by reason of any plan of the Company or any Employing Company, or in respect of which the Company or any Employing Company directly or indirectly contributed, or by reason of any law, then the total amount of such Severance Allowance paid or payable to him shall be deducted from the amount determined in accordance with Plan (S)(S) 5.1, 5.2 or 5.3 upon his Retirement; provided, however, that (i) such Severance Allowance shall not be deducted from or charged against any Deferred Vested Pension, and (ii) if such Participant contributed to the source or fund out of which such Severance Allowance is paid or becomes payable, then the amount which may be deducted from or charged against such amount in accordance with the foregoing provisions of this Plan (S) 6.3 shall be decreased by the amount of that part of such Severance Allowance which is attributable to the contributions which such Participant made to such source or fund. There shall be no deduction for Severance Allowance paid to a Participant whose Break In Continuous Service occurs on or after January 1, 1990. (b) Severance Allowance Waived. If any Participant becomes entitled to a Severance Allowance which may be deducted from the amount determined in accordance with Plan (S)(S) 5.1, 5.2 or 5.3 under (a) above, he may waive payment of the Severance Allowance. Such waiver must be in writing on a form acceptable to BPAC. If the Participant waives such Severance Allowance, the total amount of Regular Pension paid to or on behalf of him and his Co- Pensioner, if any, shall not be less than the amount of such Severance Allowance. 6.4 Deduction For Disability Payments. Any amount paid to or on behalf of any Participant on account of injury or occupational disease incurred in the course of his employment by an Employing Company or any other employer causing disability in the nature of a permanent disability, whether pursuant to Workers' Compensation or Occupational Disease laws, or otherwise arising under statutory or common law (except fixed statutory payments for the loss of, or 100% loss of use of, any bodily member or a -27- benefit in the nature of an annuity, pension or payment of similar kind by reason of any law), shall be deducted from or charged against the amount determined in accordance with Plan (S)(S) 5.1, 5.2 or 5.3; provided, however, that any such deduction or charge shall be adjusted to take into account expenses such as reasonable lawyers' fees and medical expenses, incurred by the Participant in processing a claim for such payment and that any payments received by the Participant under Workers' Compensation or Occupational Disease laws shall not be deducted from any such amount for a Permanent Incapacity Pension payable prior to age 65 or from the increase in Regular Pension for Permanent Incapacity Retirement provided by Plan (S) 5.2. If any amount which is to be deducted from or charged against the amount determined in accordance with Plan (S)(S) 5.1, 5.2 or 5.3 pursuant to this Plan (S) 6.4 is determined with respect to a period of time, such deduction or charge shall be made only with respect to the same period. If any such amount is not determined with respect to a period of time, the amount shall be apportioned to a period of time under procedures reasonably designed to result in deduction or charge comparable to that which would be made if the amount had been determined with respect to a period of time. -28- ARTICLE 7 SURVIVOR BENEFITS 7.1 Pre-Pension Spouse Coverage. (a) Any Participant who has a spouse and (1) who is accruing Continuous Service after having attained age 55, and completing at least 5 years of Continuous Service, or (2) who incurs a Break In Continuous Service with eligibility for an Early Retirement 55/15 Pension or a Deferred Vested Pension, and who does not elect immediate commencement of pension pursuant to Plan (S) 5.5, may elect Pre-Pension Spouse Coverage which will provide a lifetime monthly payment for the Participant's spouse following the Participant's death. Any monthly payment resulting from Pre-Pension Spouse Coverage will be in addition to any Surviving Spouse's Benefit provided under Plan Article 8. (b) The Participant may elect to obtain Pre-Pension Spouse coverage by filing the form prescribed for this purpose with BPAC at any time prior to commencement of his pension. (c) Pre-Pension Spouse Coverage shall become effective 2 years following the date the Participant files the prescribed form electing coverage, provided the Participant, with spousal consent, has waived Pre-Retirement Survivor Annuity Coverage pursuant to Plan (S) 7.2 effective on such date. Notwithstanding the foregoing, if a Participant dies as the result of an accident after electing Pre-Pension Spouse Coverage but prior to the date such coverage becomes effective, Pre-Pension Spouse Coverage will be deemed to have become effective as of the date such Participant elected such coverage. (d) A Participant may terminate Pre-Pension Spouse Coverage at any time effective as of the date the form prescribed for this purpose is filed with BPAC. Such coverage will automatically terminate as of the earliest of: (1) the date the Participant is divorced from his spouse, (2) the date the spouse dies, (3) except in the case of a Participant covered by (a)(2) above, the date of the Participant's Retirement, (4) except in the case of a Participant covered by (a)(2) above, the date the Participant incurs a Break In Continuous Service, or -29- (5) in the case of a Participant covered by (a)(2) above, the last day of the month preceding the first month for which Regular Pension is paid. (e) Provided the Participant meets all of the eligibility requirements of (a) above, the effective date of Pre-Pension Spouse Coverage for a Participant who is reemployed following Retirement or a Break In Continuous Service, which terminated such coverage in accordance with (d) (3) or (4) above, shall be the date of his reemployment; provided, however, that the Participant may, within 30 days after such reemployment, revoke such coverage effective as of the date of his reemployment. (f) If a Participant elects Pre-Pension Spouse Coverage, the amount determined in accordance with Plan (S) 5.1 will be reduced by an amount equal to the product of 7/10 of 1% of such amount, multiplied by the number of years (and fractions thereof) that such coverage was in effect. (g) If a Participant dies while Pre-Pension Spouse Coverage is in effect, the surviving spouse shall receive 50% of an amount equal to: (1) the amount determined in accordance with Plan (S)(S) 5.1(a) and (b) as though the Participant had retired on the date of his death and (A) in the case of a Participant who dies after completing at least 15 years of Continuous Service and prior to attaining age 62, as though at the time of his death he were entitled to receive a pension without actuarial reduction on account of age, except that Plan (S) 5.1(a)(3) would not apply, (B) in the case of a Participant who dies prior to completing at least 15 years of Continuous Service and prior to attaining age 65, as though at the time of his death he were entitled to receive a pension without actuarial reduction on account of age, except that Plan (S) 5.1(a)(3) would not apply, reduced in accordance with (f) above, multiplied by (2) the applicable percentage obtained from Plan Exhibit A, Schedule A-3-1 or Schedule A-3-2 attached, based on the ages of the Participant and his spouse as of the Participant's date of death. (h) The first installment of the amount payable to the Participant's spouse pursuant to this Plan (S) 7.1 shall be payable for the month following the month in which the Participant dies and the last installment shall be payable for the month in which the spouse dies. (i) Satisfactory proof of marriage of the Participant and his spouse and of the age of the Participant's spouse will be required prior to the commencement of Pre-Pension Spouse Coverage. Satisfactory proof of divorce or of the death of the Participant's spouse will be required for automatic termination of Pre-Pension Spouse -30- Coverage under (d)(1) and (2) above. Consent of the Participant's spouse shall not be required to terminate Pre-Pension Spouse Coverage. (j) The sum of any lifetime monthly benefits payable concurrently under this Plan (S) 7.1 and Article 8 shall not be more than 100% of the amount the Participant would have received during his lifetime had the Participant retired at age 65 on the date of his death. In the event that the amount of such benefit exceeds 100%, the amount of the Pre-Pension Spouse Coverage shall be reduced accordingly. (k) In the event a Participant who elected Pre-Pension Spouse Coverage dies as the result of an accident prior to the date Pre-Pension Spouse Coverage becomes effective, and such Participant has not revoked the Pre-Retirement Survivor Annuity Coverage provided under Plan (S) 7.2, the Pre-Pension Spouse Coverage will be paid in lieu of any benefit under Plan (S) 7.2. 7.2 Pre-Retirement Survivor Annuity Coverage. (a) Eligibility. Pre-Retirement Survivor Annuity Coverage (hereinafter "Survivor Annuity Coverage") is automatically applicable to any Participant (i) who has been married for at least one year, (ii) who has not, with the written consent of his spouse, revoked such coverage, and (iii) who has completed at least 5 years of Continuous Service. (b) Commencement And Termination Of Survivor Annuity Coverage. The surviving spouse, as defined under Plan (S) 7.2(d)(7), of a Participant who dies while Survivor Annuity Coverage is in effect, will be eligible for a monthly payment: (1) commencing with the first day of the month following the month in which the Participant dies if the Participant died while accruing Continuous Service and after having attained age 55 or having completed at least 30 years of Continuous Service; or (2) commencing with the first day of the month following the month in which the Participant's 55th birthday would have occurred; provided, however, to the extent required by the Code and Regulations, if the Actuarially Equivalent value of Survivor Annuity Coverage exceeds $3,500, payment of the Survivor Annuity Coverage may not, without the surviving spouse's consent, commence prior to the date the Participant would have attained his Normal Retirement date had he lived. If the surviving spouse does not consent, payment of the Survivor Annuity Coverage shall commence with the first day of the month following the month in which the surviving spouse's consent is received or the Participant would have attained his Normal Retirement date had he lived, whichever occurs first. The last installment of the Survivor Annuity Coverage shall be payable for the month in which the spouse dies. (c) Amount Of Survivor Annuity Coverage. The amount of the Survivor Annuity Coverage shall be determined as follows: -31- (1) If a Participant dies while accruing Continuous Service, the Survivor Annuity Coverage shall be equal to (A) the amount determined in accordance with Plan (S)(S) 5.1(a) and (b) as though the Participant had been age 65 and had retired on the date of his death, (but disregarding Plan (S) 5.1(a)(3) unless the Participant had attained age 62 as of the date of his death), reduced in accordance with Plan (S) 7.1(f) or 7.2(e), multiplied by (B) the applicable percentage obtained from Exhibit A, Schedule A- 4, based on the difference between the ages of the Participant and his spouse as of the date of the Participant's death, reduced by any Surviving Spouse's Benefit payable under Plan Article 8. (2) If a Participant retired on an Early Retirement 55/15 Pension or a Deferred Vested Pension after attaining age 55, and elected to defer commencement of such pension and dies prior to the commencement of such pension, the Survivor Annuity Coverage shall be equal to: (A) the amount determined in accordance with Plan (S)(S) 5.1(a) (but disregarding Plan (S) 5.1(a)(3) unless the Participant had attained age 62 as of the date of his death), (b) and (c), as though the Participant had elected to have pension payments commence with the first of the month following the date of his death, reduced in accordance with Plan (S) 7.1(f) or 7.2(e), multiplied by (B) the applicable percentage obtained from Exhibit A, Schedule A- 4, based on the difference between the ages of the Participant and his spouse as of the date of the Participant's death, reduced by any Surviving Spouse's Benefit payable under Plan Article 8. (3) If a Participant who is eligible for a Deferred Vested Pension dies prior to attaining age 55, the Survivor Annuity Coverage shall be equal to (A) the amount determined in accordance with Plan (S) 5.1(a) (but disregarding Plan (S) 5.1(a)(3) unless the Participant had attained age 62 as of the date of his death), (b) and (c) as though the Participant survived until age 55 and elected to have pension payments commence as of the first of the month following attainment of age 55, reduced in accordance with Plan (S) 7.1(f) or 7.2(e), multiplied by -32- (B) the applicable percentage obtained from Exhibit A, Schedule A- 4, based on the difference between the ages of the Participant and his spouse as of the date of the Participant's death. (d) Notification, Revocation, Election And Termination Of Survivor Annuity Coverage. (1) BPAC shall furnish or cause to be furnished to each Participant covered by this Plan (S) 7.2, an explanation of Survivor Annuity Coverage, the benefits provided and the effect, or cost, of such coverage on his Regular Pension (A) within the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year preceding the Plan Year in which the Participant attains age 35 or, if an individual is not a Participant during such period, within a reasonable time after such individual becomes a Participant, and (B) on the date of the Participant's termination of employment, if he has a spouse. There shall be no charge for Survivor Annuity Coverage after Retirement or after a Break In Continuous Service if the Participant, with the written consent of his spouse, files a valid revocation within 90 days of the date he is notified regarding such coverage. (2) A Participant may revoke, with the written consent of his spouse, Survivor Annuity Coverage, within the period beginning on the first day of the Plan Year in which he attains 35 and ending on the date of his death, by filing the form prescribed for this purpose with BPAC. To be valid, the revocation must be signed by the Participant and his spouse in the presence of a representative of BPAC, or in the presence of a Notary Public, and the form must be notarized. A revocation will become effective on the date the form is received by BPAC. Spousal consent will not be required to revoke Survivor Annuity Coverage if it is established to the satisfaction of BPAC that the consent of the spouse cannot be obtained because there is no spouse, because the spouse cannot be located or because of such other circumstances as may be prescribed in Regulations. (3) Survivor Annuity Coverage will automatically terminate as of the earliest of (A) the date the Participant is divorced from his spouse; (B) the date the spouse dies; (C) the date of the Participant's Retirement; provided that if the Participant has terminated service while eligible for an immediate pension, the last day of the month preceding the first month for which a pension is paid; -33- (4) A Participant who revokes Survivor Annuity Coverage may subsequently elect such coverage at any time within the period specified in (2) above, by submitting the prescribed form, together with copies of the Participant's marriage certificate and birth certificates for the Participant and his spouse, to BPAC. Such election will not be effective until the form and required documents are received by BPAC. (5) A Participant who returns to the employ of an Employing Company after Retirement and receiving a pension or after having incurred a Break In Continuous Service with eligibility for an Early Retirement (55/15) Pension or Deferred Vested Pension, shall automatically receive Survivor Annuity Coverage effective with the first day of his reemployment unless the Participant, with the written consent of his spouse, revokes such coverage within 90 days of his date of reemployment. (6) Satisfactory proof of marriage of the Participant and his spouse and the age of the Participant's spouse will be required prior to commencement of the payments under Survivor Annuity Coverage. Satisfactory proof of divorce or of the death of the Participant's spouse will be required for automatic termination of Survivor Annuity Coverage under (d)(3) above. (7) The "surviving spouse" for the purpose of this Plan (S) 7.2 is (i) the person to whom the Participant is married on the date of his death, but only if the Participant and his spouse were married throughout the one year period immediately preceding the date of his death or (ii) the person designated as the surviving spouse under a Qualified Domestic Relations Order as provided in Plan (S) 12.2. (e) Participant Cost For Survivor Annuity Coverage. There will be no charge for Survivor Annuity Coverage prior to the Plan Year in which the Participant attains age 35. After such time, if a Participant is covered by Survivor Annuity Coverage, the amount determined in accordance with Plan (S) 5.1 will be reduced by an amount equal to the sum of: 1/10 of 1% for each year (and fraction thereof) that such coverage was in effect prior to the Participant's attainment of age 50; 3/10 of 1% for each year (and fraction thereof) that such coverage was in effect after the Participant attained age 50 and prior to attainment of age 55; 5/10 of 1% for each year (and fraction thereof) that such coverage was in effect after the Participant attained age 55 plus an adverse selection charge (applicable each time the Participant elects Survivor Annuity Coverage following a revocation of the same) equal to 1/10, 3/10, or 5/10 of 1%, whichever is applicable, based on the age of the Participant as of the date such -34- coverage is elected; and the percentage determined pursuant to Plan (S) 7.1(f) for each year that Pre-Pension Spouse Coverage was in effect. (f) Notwithstanding anything to the contrary contained herein, in the event a Participant who has elected Pre-Pension Spouse Coverage and has not revoked Survivor Annuity Coverage dies accidentally before the effective date of Pre-Pension Spouse Coverage, Pre-Pension Spouse Coverage will be payable in lieu of Survivor Annuity Coverage. 7.3 Automatic 50% Spouse Annuity. A Participant who has a spouse at the time pension payments commence shall automatically receive a Net Reduced Pension during his lifetime and after his death, his spouse shall receive a lifetime monthly payment equal to 50% of his Reduced Pension, unless he revokes the Automatic 50% Spouse Annuity in accordance with (c) below. (a) For the purpose of this Plan (S) 7.3, a "Reduced Pension" means an amount equal to the amount determined in accordance with Plan (S) 5.1, reduced in accordance with Plan (S)(S) 7.1(f) and 7.2(e), if applicable, and subject to the deductions under Plan (S)(S) 6.1 and 6.2, if applicable, multiplied by the applicable percentage obtained from Exhibit A, Schedule A-3- 1 or A-3-2 attached, based on the ages of the Participant and his spouse at the date pension payments commence; and "Net Reduced Pension" means the Reduced Pension increased in accordance with Plan (S) 5.2 or 5.3, if applicable, and decreased in accordance with Plan (S)(S) 6.3 and 6.4, if applicable. (b) BPAC shall furnish or cause to be furnished to each married Participant, within a reasonable period of time before the date pension payments commence, a written explanation of the Automatic 50% Spouse Annuity. A Participant may revoke the Automatic 50% Spouse Annuity by written notice duly filed with BPAC at any time within the 90-day period ending on the date pension payments commence, or within 90 days following the date on which BPAC provides such written explanation to the Participant, or, if the Participant has not been given specific information regarding the terms and conditions of the Automatic 50% Spouse Annuity and its financial effect upon his pension and within 60 days of receiving the notice makes a written request for such specific information, within 90 days following the date on which BPAC provides such information, whichever is later, and either (i) receive the Regular Pension otherwise payable during his lifetime, or (ii) elect a Co-Pensioner Option in accordance with Plan (S) 7.4. (c) Revocation of the Automatic 50% Spouse Annuity must be executed on the form prescribed for this purpose by BPAC and shall be deemed to be duly filed when received by BPAC. A Participant may revoke the Automatic 50% Spouse Annuity only with the written consent of his spouse. To be valid, the form must be signed by the Participant and his spouse in the presence of a representative of BPAC, or in the presence of a Notary Public. A spouse's consent is irrevocable when properly signed, witnessed and delivered to BPAC and shall continue to be effective and binding on the spouse notwithstanding any subsequent election by the Participant to cancel such revocation of -35- the Automatic 50% Spouse Annuity. Spousal consent will not be required to revoke the Automatic 50% Spouse Annuity if it is established to the satisfaction of BPAC that the consent of the spouse cannot be obtained because there is no spouse, because the spouse cannot be located or because such other circumstances prescribed by Regulations. A Participant may cancel a revocation of the Automatic 50% Spouse Annuity at any time during the period in which it may be revoked. (d) Any monthly payment resulting from the Automatic 50% Spouse Annuity will be in addition to any Surviving Spouse's Benefit provided under Plan Article 8. (e) The first installment of Net Reduced Pension under the Automatic 50% Spouse Annuity shall be payable for the month in which the Participant is first entitled under Plan (S) 5.5 to receive a Regular Pension. The last installment of Net Reduced Pension shall be payable for the month in which the Participant dies; provided, however, that any monthly installments payable to such Participant and remaining unpaid at the time of his death will be paid to his surviving spouse. The first monthly payment to the Participant's spouse shall be payable for the month following the month in which the Participant dies, but not for any month prior to the month for which the Participant would have first been entitled to receive a Net Reduced Pension, and the last monthly payment to such spouse shall be payable for the month in which the spouse dies. (f) Satisfactory proof of marriage of the Participant and his spouse and of the age of the Participant's spouse will be required prior to the commencement of payments under the Automatic 50% Spouse Annuity. (g) Upon the death of: (1) a Participant prior to the commencement of pension payments, the Participant's spouse shall not be entitled to any payments pursuant to this Plan (S) 7.3; (2) the Spouse of a Participant covered under the Automatic 50% Spouse Annuity after the end of the period provided in (b) above but prior to the death of the Participant, the Participant shall continue to receive Net Reduced Pension installments; and (3) the Spouse of a Participant covered by the Automatic 50% Spouse Annuity prior to the expiration of the period provided in (b) above, the Participant will be treated as if he had revoked the Automatic 50% Spouse Annuity. (h) Notwithstanding anything to the contrary contained in this Plan (S) 7.3, if, after the Retirement of a Participant covered under the Automatic 50% Spouse Annuity, the amount of Regular Pension which would have been payable to him had he revoked such coverage is subject to any further deduction, change, offset or correction, then the amount payable under the Automatic 50% Spouse Annuity to such Participant and/or his -36- spouse shall be adjusted to reflect any such further deduction, change, offset or correction. (i) For the purpose of this Plan (S) 7.3, in the case of a Participant who retires on other than a Deferred Vested Pension or a Deferred Early Retirement (55/15) Pension, pension payments shall be deemed to commence as of the date of the Participant's Retirement and, in the case of a Participant who retires on a Deferred Vested Pension or a Deferred Early Retirement (55/15) Pension, pension payments shall be deemed to commence as of the first of the month for which Regular Pension is first payable under Plan (S) 5.5. (j) The sum of any lifetime monthly benefits payable concurrently under this Plan (S) 7.3 and Article 8 shall not be more than 100% of the pension payable to the Participant during his lifetime. If the amount of such benefits equals more than 100%, the amount of benefits payable under this Plan (S) 7.3 shall be reduced accordingly. 7.4 Co-Pensioner Options. Any Participant may, under the conditions set forth in Plan (S) 7.5, by written notice duly filed with BPAC, (i) elect to convert the Regular Pension otherwise payable to him upon his Retirement into a Net Reduced Pension, in accordance with the 100% Co-Pensioner Option or the 50% Co-Pensioner Option described below, or (ii) revoke any such election previously made, in which event he shall be treated as if he had not made such election, or (iii) change any such election from one to the other and/or change the person previously named as his Co-Pensioner. For the purpose of this Plan (S) 7.4, "Reduced Pension" means an amount equal to: (i) the amount determined in accordance with Plan (S) 5.1 reduced in accordance with Plan (S)(S) 7.1(f) and 7.2(e), if applicable, and subject to the deductions provided in Plan (S)(S) 6.1 and 6.2, if applicable, multiplied by (ii) the applicable percentage obtained from Exhibit A, Schedule A-3-1 or A-3-2 attached, based on the ages of the Participant and his Co-Pensioner at the date pension payments commence; and "Net Reduced Pension" means the Reduced Pension increased in accordance with Plan (S)(S) 5.3 and 5.4, if applicable, and decreased in accordance with Plan (S)(S) 6.3 and 6.4, if applicable. (a) 100% Co-Pensioner Option. Under this option a Net Reduced Pension shall be payable to the Participant during his life and, after his death, an amount equal to his Reduced Pension shall be payable to his Co-Pensioner, which he named as such by written designation duly filed with BPAC. (b) 50% Co-Pensioner Option. Under this option a Net Reduced Pension shall be payable to the Participant during his life and, after his death, an amount equal to 50% of his Reduced Pension shall be payable to his Co-Pensioner, which he named as such by written designation duly filed with BPAC. (c) Notwithstanding anything to the contrary in this Plan (S) 7.4 above, if a Participant who elects a Co-Pensioner Option has a spouse eligible for a Surviving Spouse's Benefit, the Participant shall receive a pension equal to: -37- (1) 50% of the monthly amount determined in accordance with Plan (S) 5.1 reduced in accordance with Plan (S) 7.1(f), if applicable, and subject to the deductions provided in Plan (S)(S) 6.1 and 6.2, if applicable; plus (2) 50% of his Reduced Pension; increased in accordance with Plan (S) 5.2 or 5.3, if applicable, and decreased in accordance with Plan (S)(S) 6.3 and 6.4, if applicable. Following the Participant's death, his Co-Pensioner shall receive an amount equal to 50% of the Participant's Reduced Pension if the Participant elected a 100% Co-Pensioner Option, or an amount equal to 25% of the Participant's Reduced Pension if the Participant elected a 50% Co-Pensioner Option. (d) The sum of any lifetime monthly benefits payable concurrently under this Plan (S) 7.4 and Article 8 shall not be more than 100% of the pension payable to the Participant during his lifetime. If the sum of such benefits exceeds 100%, the benefit payable under this Plan (S) 7.4 shall be reduced accordingly. 7.5 Election Of Co-Pensioner Options. A Participant may, in accordance with the provisions of Plan (S) 7.4, elect a Co-Pensioner Option, revoke a Co- Pensioner Option or change a Co-Pensioner Option election or Co-Pensioner, provided such action is taken at any time prior to the date pension payments commence, or within 90 days following the date on which BPAC provides written notice to the Participant regarding the Co-Pensioner Options, or if the Participant has not been given specific information regarding the terms and conditions of such options and the financial effect upon his pension of electing such options, and within 60 days of receiving the notice regarding the options makes a written request for such specific information, within 90 days following the date on which BPAC provides such information, whichever is later; provided, however, that if the Participant has a spouse at the time pension payments commence, (a) the Participant may not elect a Co-Pensioner Option unless he revokes the Automatic 50% Spouse Annuity and the spouse consents in writing to such revocation and election; and (b) the Participant may not change the Co-Pensioner Option elected or the Co-Pensioner designated unless his spouse consents in writing to such change. Any election or revocation of a Co-Pensioner Option, or change of a Co- Pensioner Option election and/or Co-Pensioner pursuant to this Article 7 must be on a form prescribed for the purpose by BPAC, signed by the Participant and, when appropriate, the Participant's spouse and will be deemed to be duly filed when received by BPAC or its delegate. Satisfactory proof of age of the Co- Pensioner will be required prior to the payment of pension installments under an elected option. The Co-Pensioner's consent is not required to revoke an election, to change the Co-Pensioner or to change the Co-Pensioner Option elected. Any consent of a spouse under this Plan (S) 7.5 must be made in accordance with the procedure described in Plan (S) 7.3(c). -38- 7.6 Commencement And Termination Of Pensions Under Co-Pensioner Options. In the case of a Participant who has elected a Co-Pensioner Option, the first installment of Net Reduced Pension shall be payable for the month in which he is first entitled to receive a Regular Pension under Plan (S) 5.5 and the last installment of such Net Reduced Pension shall be payable to the Participant for the month in which he dies. The first monthly payment to the Participant's Co- Pensioner shall be payable for the month following the month in which the Participant dies, but not for any month prior to the month for which the Participant would have first been entitled to receive a Reduced Pension, and the last monthly payment to such Co-Pensioner shall be payable for the month in which the Co-Pensioner dies. 7.7 Death Of Participant Before Retirement. If a Participant who elected a Co-Pensioner Option dies prior to the commencement of pension payments, such election shall cease to be effective, and his Co-Pensioner shall not be entitled to any payments. 7.8 Death Of Co-Pensioner After Retirement. If a Participant elected a Co-Pensioner Option and his Co-Pensioner dies (a) after the Participant commenced receiving pension payments, or, if later, (b) after the expiration of the 90-day period described in Plan (S) 7.5 but prior to the Participant's death, the Participant shall continue to receive Net Reduced Pension installments. 7.9 Death Of Co-Pensioner Before Retirement. If a Participant elected a Co-Pensioner Option and his Co-Pensioner dies (a) before the Participant commenced receiving pension payments, or, if later, (b) before the expiration of the 90-day period described in Plan (S) 7.5, then the Participant shall be treated as if he had not elected a Co-Pensioner Option. 7.10 Post Retirement Adjustments. Notwithstanding any provision in Plan (S)(S) 7.4 through 7.9, if after the Retirement of a Participant who elected a Co-Pensioner Option, the amount of Regular Pension which would have been payable to him had he not elected a Co-Pensioner Option is subject to any further deduction, change, offset or correction, then the amount payable under the Co- Pensioner Option to such Participant or his Co-Pensioner shall be adjusted to reflect any such further deduction, change, offset or correction. Notwithstanding anything to the contrary contained in this Plan Article 7, in the event that the amount payable to a Co-Pensioner is determined as though the Participant did not have a spouse who is eligible for a Surviving Spouse's Benefit because the Participant had a spouse at Retirement but failed to notify BPAC that he had a spouse, the amount otherwise payable to the Co-Pensioner for any month shall be reduced by the amount of any Surviving Spouse's Benefit provided to the Participant's spouse for the same month. 7.11 Commencement Of Payments. For the purposes of this Plan Article 7, in the case of a Participant who retires on other than a Deferred Vested Pension or a Deferred Early Retirement (55/15) Pension, pension payments shall be deemed to commence as of the date of the Participant's Retirement and, in the case of a Participant who retires on a Deferred Vested Pension or a Deferred Early Retirement (55/15) Pension, pension -39- payments shall be deemed to commence as of the first day of the month for which Regular Pension is first payable. -40- ARTICLE 8 SURVIVING SPOUSE'S BENEFIT 8.1 Eligibility. If a Participant dies (a) (i) while accruing Continuous Service and after completing at least 15 years of Continuous Service, or (ii) before making application for a pension and after incurring a Break In Continuous Service with eligibility for Retirement on an immediately commencing pension, or (b) after Retirement on other than a Deferred Vested Pension, his surviving spouse, determined pursuant to Plan (S) 8.5, shall be eligible for a Surviving Spouse's Benefit. 8.2 $140.00 And $90.00 Minimums. Unless the provisions of Plan (S) 8.3 result in a higher amount, the amount of the Surviving Spouse's Benefit shall be $140.00 for any month up to and including the month in which the surviving spouse attains the age at which widow's or widower's benefits are first provided under a law referred to in Plan (S) 1.27 and $90.00 for any month thereafter. 8.3 50% Rate. Unless the provisions of Plan (S) 8.2 result in a higher amount, the amount of the Surviving Spouse's Benefit shall be determined in accordance with the following: (a) If a Participant covered by Plan (S) 8.1(a) dies, the monthly amount of the Surviving Spouse's Benefit, subject to (d) and (e) below, shall be equal to 50% of the amount determined in accordance with Plan (S)(S) 5.1(a) and (b) as though the Participant had retired on the date of his death, and, if the Participant dies prior to age 62, as though at the time of his death he was entitled to receive a Regular Pension without any actuarial reduction on account of age, except that Plan (S) 5.1(a)(3) would not apply. (b) If a Participant covered by Plan (S) 8.1(b) dies, the monthly amount of the Surviving Spouse's Benefit, subject to (c), (d) and (e) below, shall be equal to 50% of the Regular Pension payable to the Participant at the time of his death determined in accordance with Plan (S) 5.1. (c) If a Participant dies after his Retirement with eligibility for an Early Retirement (55/15) Pension and prior to age 62 and who had elected to defer the commencement of Regular Pension until after attaining age 62, the Regular Pension payable to the Participant shall, for the purposes of (b) above, be deemed to be the amount determined in accordance with Plan (S)(S) 5.1(a)(1), (2), 5.1(b) and (c) which would have been payable if he elected to receive a Regular Pension commencing with the first month for which the Surviving Spouse's Benefit is payable. (d) Commencing with the first Surviving Spouse's Benefit payable after the surviving spouse attains the age at which widow's or widower's benefits are first provided -41- under a law referred to in Plan (S) 1.27, the amount of the Surviving Spouse's Benefit otherwise payable for any month shall be reduced by 50% of the amount of the widow's or widower's benefit to which the surviving spouse is, or upon application would be, entitled for such month based on the law in effect at the time the Surviving Spouse's Benefit first becomes payable (without regard to any offset or suspension imposed by such law) and based upon the benefit payable to such person as a widow or widower without regard to any benefit earned in his or her own right. If the surviving spouse is not eligible for a widow's or widower's benefit for such month, the amount of the reduction shall be equal to 50% of the amount of the widow's or widower's benefit that could have become payable to the surviving spouse for such month, based on the Participant's wages, if the surviving spouse had been eligible and had applied for such a benefit. (e) If the surviving spouse receives, or upon application would be entitled to receive, any payment derived from rights acquired by the Participant, which would if received by the Participant have been subject to deduction under Plan (S) 6.2 from the amount determined in accordance with Plan (S)(S) 5.1, 5.2 and 5.3 otherwise payable to the Participant (except any such payment received by the surviving spouse by reason of an election by the Participant to receive a reduced payment), the amount of such payment not attributable to the contributions of the Participant shall be deducted from the Surviving Spouse's Benefit. 8.4 Commencement And Termination Of Surviving Spouse's Benefit. The first installment of Surviving Spouse's Benefit shall be payable for the month following the month in which the Participant dies, and the last installment shall be payable for the month in which the surviving spouse dies; provided, however, that a Surviving Spouse's Benefit shall not be payable for any month for which a Special Pension Payment was payable to the Participant. In connection with an application for a Surviving Spouse's Benefit, BPAC may require the surviving spouse to grant any authorization necessary to receive relevant records from the agency administering the law referred to in Plan (S) 8.3(d). 8.5 Determination Of Status As Surviving Spouse. A person shall be considered a surviving spouse for the purposes of this Plan Article 8, only if, (a) such person is married to the Participant on the date of his death, and (b) with respect to a Participant who dies after his Retirement, such person was married to the Participant at the date of the Participant's Retirement or at a date after Retirement and before the Participant attained age 65, and (c) immediately after the Participant's death, such person is a widow or widower of the Participant within the provisions of the Social Security Act, except that where such Act requires reference to the law of the District of Columbia, the applicable law be that of the State of Ohio. -42- ARTICLE 9 DETERMINATION OF CONTINUOUS SERVICE 9.1 Definition. "Continuous Service" means an Employee's service prior to his Retirement calculated from his last hiring date (and in the case of an employee who incurs a Break In Continuous Service, Continuous Service shall be calculated from the date of his re employment following his last unremoved Break In Continuous Service); provided however, that an Employee's last hiring date prior to January 1989 shall be based on the practices in effect at the time his Break In Continuous Service occurred. 9.2 Deductions From Continuous Service. There shall be no deduction for any time lost which does not constitute a Break In Continuous Service, except that in determining the length of an Employee's Continuous Service (a) that portion of any absence due to shutdown, force reduction, Layoff or physical disability which continues beyond 2 years from commencement of such absence shall not be credited as Continuous Service; provided, however, that an absence in excess of 2 years due to a compensable disability shall be credited as Continuous Service; (b) except as provided in 9.3(a) and 9.3(c)(2), the period between a Break In Continuous Service and the date of the Employee's reemployment which results in the removal of a Break In Continuous Service shall not be credited as Continuous Service; and (c) any period of employment with any company which, directly or indirectly, owns at least 50% of the Company, or with any company or business at least 50% owned by the Company or any Employing Company, shall be counted as Continuous Service but only for the purposes of determining eligibility to participate and entitlement to a pension under Plan Article 3 but not for purposes of determining the Regular Pension amount, unless otherwise expressly provided in a written Appendix hereto. (d) Continuous Service Under Plan (S)(S) 3.7 Or 3.8. Notwithstanding anything to the contrary in this Plan, Continuous Service after December 31, 1989 shall be included for the purpose of determining eligibility for Retirement pursuant to Plan (S) 3.7 (Immediate Severance (70/80) Pension) or Plan (S) 3.8 (Rule-Of-65 Retirement Pension) upon the occurrence of a Break In Continuous Service on or after January 1, 1990; provided that such Continuous Service accruing from and after January 1, 1990 shall not be counted for the purpose of determining the amount of any Regular Pension paid pursuant to an Immediate Severance (70/80) Pension or a Rule-Of-65 Retirement Pension, which amount shall be determined in accordance with Plan (S) 5.1(d). 9.3 Break In Continuous Service. (a) An Employee's Continuous Service will be broken by (1) his quitting; -43- (2) his discharge, provided that if he is rehired within 6 months the Break In Continuous Service will be removed; (3) his involuntary termination of employment by the Employing Company due to a Permanent Shutdown or force reduction, provided that if the Participant is rehired within 2 years, or if at termination he had more than 2 years of Continuous Service, within a period equal to his length of Continuous Service prior to the Break but not more than 5 years, the Break In Continuous Service shall be removed and the first 2 years of absence will be counted as Continuous Service; (4) an absence which continues for more than 2 years, except that (A) an absence in excess of 2 years due to compensable disability incurred during the course of employment shall not constitute a Break In Continuous Service until one month following the end of the month for which statutory compensation payments terminate; and (B) if an Employee who is absent in excess of 2 years on account of Layoff or physical disability returns to work with an Employing Company within the period equal to his length of Continuous Service prior to the Break but not more than 5 years, the Break In Continuous Service shall be removed; and (C) a Break In Continuous Service will not occur by reason of the absence of any Employee who subsequent to May 1, 1940, entered the military, naval or merchant marine service of the United States, who has reemployment rights under the law, who complies with requirements of law as to reemployment and who is reemployed; or (5) his Retirement. (b) An Employee who is absent on a maternity or paternity absence shall not incur a Break In Continuous Service until the second anniversary of the first day of such absence; provided, however, that in determining the length of an Employee's Continuous Service, the period between the first day of a maternity or paternity absence and the first anniversary thereof shall be credited as Continuous Service solely for eligibility and vesting purposes and, provided further, that the period of any such absence which continues beyond the first anniversary thereof shall be credited as Continuous Service solely for eligibility and vesting purposes only if so provided under a parental leave policy of an Employing Company or in accordance with the terms of a Basic Agreement. For the purposes of this Plan (S) 9.3 (b), a "maternity or paternity absence" means an absence from work by reason of the Employee's pregnancy, the birth of the Employee's child or the placement of a child with the Employee in connection with the adoption of the child by the Employee or for purposes of caring for a child for the period immediately following such birth or placement; provided that the Employee has proven to the satisfaction of BPAC that such absence is for one of the foregoing purposes. -44- (c) For the sole purpose of determining eligibility for pension pursuant to Plan (S) 3.2 or unreduced pension commencing at age 65 pursuant to Plan (S) 3.9, (1) for all purposes under the plan, an Employee who incurs a Break In Continuous Service prior to becoming eligible for an immediate pension or a Deferred Vested Pension and who is reemployed by an Employing Company shall, upon completion of one year of Continuous Service following such reemployment, have his Break In Continuous Service removed if the period between the Break In Continuous Service and the date of his reemployment does not exceed 5 years; and (2) an Employee who incurs a Break In Continuous Service by reason of quitting or being discharged prior to becoming eligible for an immediate pension or a Deferred Vested Pension, who is reemployed within one year of quitting or being discharged without having his Break In Continuous Service removed pursuant to Plan (S) 9.3(a)(2), and who upon incurring a subsequent Break In Continuous Service has less than 5 years of Continuous Service, calculated in accordance with Plan (S)(S) 9.1, 9.2 and 9.3, shall receive credit for his Continuous Service prior to the first break described above and for the period between such Break In Continuous Service and the date of reemployment plus any other Continuous Service which would result from application of (b) above taking into account service credited pursuant to this paragraph. 9.4 Other Continuous Service. (a) Except as otherwise provided herein, Continuous Service as an Employee with any Employing Company or Affiliate shall be recognized. A period of employment with a unit of the Company or an Affiliate which is not an Employing Company and with any Employing Company or Affiliate other than as an Employee shall be counted only for purposes of determining eligibility to participate and entitlement to a pension under Plan Article 3 but not for purposes of determining the Regular Pension amount. (b) BPAC may, in its sole discretion, determine that Continuous Service may include service with an Employing Company prior to the date such Employing Company became an Affiliate. (c) In the case of a Participant who is an Employee on the date of his Retirement, Continuous Service may include, in the discretion of BPAC, all service recognized by any Affiliate or Employing Company for pension purposes. The Participant's Average Monthly Earnings may include remuneration from any such unit of the Company, in such manner as BPAC may determine. (d) Continuous Service also may include, in the discretion of BPAC, a leave of absence granted by an Employing Company and approved by the Company. -45- 9.5 Employment With a Divested Unit. Subject to Plan (S)(S) 1.24 and 13.6 and Plan Article 10 and any applicable Appendix or Basic Agreement, employment with a Divested Unit shall constitute Continuous Service under the Plan solely for the purpose of determining the date of entitlement to the commencement of benefits under Plan Article 3, and employment with a Divested Unit shall not be counted as Continuous Service under the Plan for satisfying any other Continuous Service requirement unless otherwise expressly so provided in the agreement for the sale or transfer of such Divested Unit which agreement is approved by the Board Of Directors or by BPAC; provided, however, that no person shall first qualify for a Permanent Incapacity Pension, an Immediate Severance (70/80) Pension or a Rule-Of-65 Pension after the date of sale or transfer to a Divested Unit. -46- ARTICLE 10 REEMPLOYMENT OF RETIRED PARTICIPANTS 10.1 Application. The provisions of this Article 10 supersede the provisions of all other Articles of the Plan with respect to any Participant who is employed or reemployed by (i) the Company, (ii) an Employing Company, (iii) a Divested Unit or (iv) an Affiliate at least 50% owned by the Company or an Affiliate (provided such employer is an "employer maintaining the Plan" within the meaning of ERISA (S) 203(a)(3)(B) and the Regulations thereunder). 10.2 Effect On Pension. (a) A Participant covered under this Article 10 who returns to employment of an employer described in Plan (S) 10.1 and whose employment with such employer is counted as Continuous Service for any purpose under the Plan, shall have his pension payment or commencement suspended beginning after his first full month of employment (as determined in accordance with the Regulations). (b) Notwithstanding the foregoing, a Participant's pension will not be suspended if (i) payment of his pension is required to commence pursuant to Plan (S) 5.5(f), (ii) the Participant's reemployment does not constitute "service" within the meaning of ERISA (S) 203(a)(3)(B) or (iii) the Participant had attained age 65 as of the date of his reemployment and his employment subsequent to such date is not counted as Continuous Service for the purpose of determining the amount of his pension. (c) If a Participant's pension payment or commencement is suspended in accordance with the foregoing, such suspension shall cease on the earlier of (i) the date the Participant terminates his employment with an employer described in Plan (S) 10.1, (ii) the date the Participant's pension is required to commence pursuant to Plan (S) 5.5(f), (iii) the date the Participant's reemployment no longer constitutes "service" within the meaning of ERISA (S) 203(a)(3)(B) or (iv) the date the Participant attains age 65 if his employment subsequent to such date is not counted as Continuous Service for the purpose of determining the amount of his pension. 10.3 Continuous Service Of Reemployed Participant. (a) Any Participant, other than a Participant covered under (b) below, whose pension has been discontinued pursuant to Plan (S) 10.2, or who is eligible for a Deferred Vested Pension, shall be credited with his Continuous Service as of the date of his prior Retirement plus his Continuous Service accrued after reemployment for the purpose of calculating any subsequent pension to which he may become entitled; provided, however, that nothing in this Plan (S) 10.3 shall affect the calculation of Continuous Service as provided in Plan (S) 9.3(a)(4). Notwithstanding the foregoing, reemployment with an employer described in Plan (S) 10.1(iii) or (iv) shall not be credited as Continuous Service -47- for any purpose under the Plan unless specifically permitted in an Appendix or in accordance with Plan (S) 13.6. (b) If a Participant is reemployed more than three years after his Retirement or more than three years after he incurred a Break In Continuous Service with eligibility for a Deferred Vested Pension and such Participant again retires or incurs a Break In Continuous Service before completing at least 5 years of Continuous Service after such reemployment, then the amount of pension payable with respect to the period of Continuous Service accrued before his most recent prior Retirement or prior Break In Continuous Service shall be determined pursuant to the Plan as in effect at the time of his prior Retirement or prior Break In Continuous Service. 10.4 Termination Of Reemployment After Original Immediate Severance (70/80) Retirement Or Rule-Of-65 Retirement. Subject to Plan (S) 5.1(d), any Participant who is receiving an Immediate Severance (70/80) Pension or Rule-Of- 65 Retirement Pension, and who is subsequently reemployed as an Employee by an Employing Company, shall upon ceasing work, after reemployment and prior to age 62, by reason of a Permanent Shutdown of a plant, department or subdivision thereof or by reason of a Layoff or physical disability, be eligible to retire and, shall upon his Retirement (hereinafter "Reinstated Rule-Of-65 Retirement" if he had previously retired on Rule-Of-65 Retirement or "Reinstated Immediate Severance (70/80) Retirement" if he had previously retired on Immediate Severance (70/80) Retirement), be eligible for a pension commencing with the month following the month in which his Retirement occurs; provided, however, that such Participant shall not be eligible under the provisions of this Plan (S) 10.4 to retire during a period of absence from work due to a physical disability until such disability has continued for a period of 5 consecutive full calendar months, or until the Participant attains age 62, whichever occurs first. 10.5 When Special Pension Payment Not Payable. A Special Pension Payment shall not be made to any Participant who received a Special Pension Payment for a prior Retirement under this or any predecessor plan. 10.6 Reinstated Immediate Severance (70/80) Retirement Or Reinstated Rule- Of-65 Retirement. The amount of Regular Pension for Reinstated Immediate Severance (70/80) Retirement shall be determined in the same manner as a Regular Pension under Immediate Severance (70/80) Retirement, in accordance with Plan (S) 5.1, including Plan (S) 5.1(d). The amount of Regular Pension for Reinstated Rule-Of-65 Retirement shall be determined in the same manner as a Regular Pension under Rule-Of-65 Retirement, in accordance with Plan (S) 5.1, including Plan (S) 5.1(d). -48- ARTICLE 11 FUNDING AND CONTRIBUTIONS 11.1 Contribution's. Subject to Plan Article 13, each Employing Company shall contribute to one or more pension trusts or funds not less frequently than quarterly during each Plan Year such amounts, based on the recommendation of the Actuary, as the Company shall determine. 11.2 Actuarial Valuations. BPARC shall from time to time review the actuarial assumptions and methods recommended by the Actuary. The Actuary shall make an annual valuation of the Plan and, at least once in each 3-year period, shall make an actuarial study of the mortality, service and compensation experience of the Participants in the Plan and the investment experience and any other relevant experience in gains and losses under the Plan, including such calculations as may be necessary to determine whether the Plan is adequately funded, and shall report the results of its study to BPARC. Prior to termination of the Plan, forfeitures of benefits arising from termination of service, death or any other reason under the Plan shall not be applied to increase the benefits that any Participant would otherwise be entitled to receive under the Plan, but may be anticipated in estimating costs under the Plan and shall be applied to reduce the Company's contributions under the Plan. 11.3 Investment Of Contributions. All moneys, securities or other property received as contributions under the Plan shall be delivered to the trustee under the Trust, to be managed, invested, reinvested and distributed for the purposes of the Plan. -49- ARTICLE 12 GENERAL PROVISIONS 12.1 No Employment; Rights. This Plan is not and shall not be deemed to be a contract between the Company or any Employing Company and any employee or to be a consideration for, or an inducement or condition of, the employment of any employee. Nothing contained in this Plan gives any employee the right to be retained in the service of the Company or any Employing Company or to interfere with the right of the Company or any Employing Company by which he shall then be eoyed to terminate his employment at any time. 12.2 Non-Assignability; Of Pension Rights. (a) Except as may otherwise be required by law or pursuant to the terms of a "Qualified Domestic Relations Order"("QDRO"), no assignment of any pension will be recognized or permitted nor shall any pension or payment on account of pension be subject to attachment or other legal process for or against the Participant, a surviving spouse or a Co-Pensioner. If BPAC sh find that any such assignment, attachment or action for or against the Participant, a surviving spouse or a Co-Pensioner has been made with respect to any pension payment due or to become due to any Participant, surviving spouse or Co- Pensioner, BPAC in its sole discretion may terminate the interest of such Participant, surviving spouse or Co-Pensioner to such pension payment, and in such case shall apply the amount of such pension payment to or for the benefit of such Participant, surviving spouse or Co-Pensioner, his spouse, children or other relatives or dependents, as BPAC may determine, and any such application shall be a complete discharge of all liability with respect to such pension payment. (b) For purposes of the Plan, a "QDRO" means any judgment, decree or order (including approval of a property settlement agreement) which has been determined by BPAC, in accordance with QDRO procedures established under the Plan, to constitute a qualified domestic relations order within the meaning of Code (S) 414(p)(1). 12.3 Legal, Physical Or Mental Incapacity. If any person entitled to receive any benefits hereunder is, in the judgment of BPAC, legally, physically or mentally incapable of personally receiving or receipting for a payment, BPAC may, but shall not be required to, order such payment to be made to such other person, persons or institution as, in the judgment of BPAC, is then maintaining or has custody of such payee. 12.4 Maximum Pensions. (a) Subject to the provisions of Plan (S)(S) 12.4(b), (c), and 13.1, the Board Of Directors shall have the power to determine the Maximum Pension to be granted under this Plan. -50- (b) Notwithstanding any other provision of the Plan, (i) any annuity payable to a Participant for life as part of an Automatic 50% Spouse Annuity or as part of a Co-Pension Option elected by the Participant and having the effect of a qualified joint and survivor annuity within the meaning of Code (S) 401(a)(11) (excluding in either case any survivor annuity payable to a surviving spouse thereunder); (ii) any straight life annuity payable to a Participant; and (iii) any other Co-Pensioner Option elected by a Participant (including both the annuity payable to the Participant and any other annuity or benefit payable thereunder), shall be subject to the limitation of this Plan (S) 12.4. (c) The benefits to which this Plan (S) 12.4 is applicable shall not exceed the limitations set forth in Code (S) 415, which are incorporated herein by reference. For these purposes, the limitation year shall mean the Plan Year and "compensation" shall have the meaning set forth in Treasury Regulation (S) 1.415-2(d). If a Participant in this Plan so participates in any defined contribution plan (as defined in Code (S)(S) 414(i) and 415(k)) maintained by the Company or any Affiliate, and, if in any Plan Year the sum of the Participant's Defined Benefit Fraction (as defined in Code (S) 415(e)(2)) and the Participant's Defined Contribution Fraction (as defined in Code (S) 415(e)(3)) exceed 1.0, then the benefit payable under this Plan shall be reduced so that the sum of such fractions in respect of such Participant does not exceed 1.0. If the above reductions do not insure that the limitations set forth in this Plan (S) 12.4 are not exceeded, then the Annual Additions (as defined in Code (S) 415(c)(2)) to any defined contribution plan maintained by the Company or any Affiliate in which the Participant participates shall be reduced in accordance with the provisions of that plan, but only to the extent necessary to ensure that such limitation is not exceeded. IfParticipantin this Plan also participates in another defined benefit plan (as defined in Code (S)(S) 414(j) and 415(k)) maintained by the Company or any Affiliate, and if in any Plan Year such Participant's aggregated accrued benefit under such plans exceeds the applicable limits under Code (S) 415, then the benefit payable under this Plan shall be reduced to the extent necessary to comply with Code (S) 415. 12.5 Sole Source Of Benefits. The pension trusts or funds contributed in accordance with Plan Article 11 shall be the sole source of benefits under the Plan and, except as otherwise required by ERISA, an Employing Company, BPAC and BPARC assume no liability or responsibility for payment of such benefits, and each Participant, surviving spouse, Co-Pensioner or other person who shall claim the right to any payment under the Plan shall be entitled to look only to such trusts or funds for such payment and shall not have any right, claim or demand therefor against the Company, any Employing Company, Affiliate, BPAC or BPARC or any member thereof, or against any Employee or director of the Company, any Employing Company or Affiliate. 12.6 Information From Participants. Each Participant shall file with the Human Resources Department of his Employing Company or BPAC such pertinent information concerning himself, his spouse and his Co-Pensioner as BPAC may reasonably require to carry out its duties hereunder, and to the maximum extent permitted by ERISA, no Participant, surviving spouse, Co-Pensioner or other person shall have any rights or be -51- entitled to any benefits under the Plan unless such information is timely filed by or with respect to him. 12.7 Communications To Committees. All elections, designations, requests, notices, instructions and other communications (required or permitted under the Plan) from the Company, an Employing Company, a Participant, Co- Pensioner, surviving spouse or other person to BPAC or BPARC shall be in such form as is prescribed from time to time by each such Committee, shall be mailed by first-class mail to any member of either Committee or its Secretary or Assistant Secretary or to the General Counsel of the Company or shall be personally delivered to any such person, and shall be deemed to have been given and delivered only upon actual receipt thereof by such person. Delivery to a Local Plan Administrator shall not constitute delivery to a Committee. 12.8 Communications From Committees. All notices, statements, reports and other communications required or permitted under the Plan from the Company, an Employing Company, BPAC or BPARC to any Employee, Participant, Co-Pensioner, surviving spouse or other person, shall be deemed to have been duly given when delivered to, or when mailed by first-class mail, postage prepaid, and addressed to such person at his address last appearing on the records of the Employing Company. 12.9 Lost Payee. If BPAC cannot ascertain the whereabouts of any person to whom a payment is due under the Plan, including an alternate payee under a Qualified Domestic Relations Order described in Plan (S) 12.2, and if, after 3 years from the date such payment is due, a notice of such payment due is mailed to the last known address of such person, as shown on the records of the Employer, and within 3 months after such mailing such person has not made written claim therefor, BPAC, if it so elects, may direct that such payment and all remaining payments otherwise dto such person be cancelled on the records of the Plan and the amount thereof used to reduce Company contributions, and upon such cancellation, the Plan and the Trust shall have no further liability therefor, except that, in the event such person later notifies BPAC of his whereabouts and requests the payment or payments due to him under the Plan, the amount so applied shall be paid to him in accordance with the terms of the Plan. 12.10 Service Of Process. Any member of BPAC, the Secretary of the Company or the trustee may accept service of process for the Plan. 12.11 Expenses. Any expenses incurred by or on behalf of either Committee, any trustee or investment manager in carrying out its duties with respect to the Plan or the Trust may be paid by the Company or may, in the discretion of BPAC, be charged to and paid from the interest of the Participant or Participants with respect to whom such expenses were incurred in accordance with rules uniformly applicable to all Participants. If the Company fails or refuses to pay any such expense, then such expenses may be paid from the Trust (i) when reimbursement of such expense is sought by any person other than the trustee, if the expense is deemed to be reasonable in the sole discretion of the trustee, or (ii) when reimbursement of such expense is sought by the trustee, if the expense is deemed to be reasonable and appropriate in the sole discretion of BPARC. -52- ARTICLE 13 AMENDMENT OR TERMINATION 13.1 Right Of Amendment Or Termination. (a) The Board Of Directors shall have the right at any time to amend, suspend or terminate the Plan, any contributions thereunder, any trust or any contract issued by an insurance company forming a part of the Plan, in whole or in part and for any reason and without the consent of the Company, any Employing Company, or Affiliate, or any Participant, Co-Pensioner, surviving spouse or other beneficiary; provided, however, that the Committees may adopt amendments to the Plan or to any trust, investment management agreement or other contract which may form a part of the Plan, to the extent so empowered by the Board Of Directors. In so acting, a Committee is not acting in its capacity as a named fiduciary of the Plan, but is acting solely in its corporate capacity as a committee of the Board Of Directors. (b) No amendment or modification shall be made which would retroactively impair any rights to any benefit under the Plan which any Participant, Co- Pensioner, surviving spouse or other eligible beneficiary would otherwise have had at the date of such amendment by reason of the contributions theretofore made, except to such extent as may be necessary or appropriate to qualify or maintain the Plan and any trust which may form a part of the Plan as a plan and trust meeting the requirements of Code (S)(S) 401(a) and 501(a) or any other applicable section of law (including ERISA) and Regulations issued pursuant thereto, as now in effect or hereafter amended or adopted, or make it possible for any part of the funds of the Plan (other than such part as is required to pay taxes, if any, and administration expenses as provided in Plan (S) 12.11) to be used for or diverted to any purposes other than for the exclusive benefit of Participants and their Co-Pensioners, surviving spouses and other eligible beneficiaries under the Plan prior to the satisfaction of all liabilities with respect thereto. 13.2 Allocation Of Trust Fund Upon Termination. Subject to Plan (S) 13.3, if the Plan is wholly or partially terminated, the funds of the Plan shall be allocated for the benefit of each Participant, Co-Pensioner and surviving spouse affected by the termination in such nondiscriminatory manner as BPAC shall determine in accordance with ERISA, subject to any required approval by applicable government agencies, so as to provide nonforfeitable benefits for each such affected person to the extent that such benefits have been funded, but in no case shall the amount so allocated exceed the actuarial reserve for any such person. If any of the funds of the Plan remain after the satisfaction of all liabilities of the Plan, such remaining funds shall be paid to the Company. 13.3 Disposition Of Allocated Funds. Subject to Plan (S) 7.3, the amount allocated with respect to an individual pursuant to Plan (S) 13.2 shall, in the discretion of BPARC, be paid to such individual in cash in a single payment or used to purchase an annuity retirement income contract from one or more insurance companies selected by BPARC, -53- or paid to a trust or fund under any plan which meet the requirements for qualification and tax-exemption under Code (S)(S) 401(a) and 501(a). 13.4 Conditional ;Limitation Of Benefits. The Unrestricted Benefits provided by the contributions of the Employing Companies for the 25 highest paid Employees as of the Effective Date (including any Unrestricted Benefits but exclusive of any Supplemental Pension Payments that he has already received up to that time), including any such Employees who are not Participants at that time, but may later become Participants, (but excluding any Participant whose annual pension will not exceed $1,500), shall not exceed his Unrestricted Benefits as of the date the Plan is discontinued, if it is discontinued (i) within 10 years after the Effective Date, or (ii) during the first 10 years after the Effective Date, or (iii) after the first 10 years after the Effective Date if the full current costs of the Plan for the first 10 years after the Effective Date have not been funded. (a) For the purposes of this Plan (S) 13.4, the following definitions shall apply: (1) "Effective Date" means August 1, 1975 and shall also mean the effective date of any subsequent amendment to the Plan which has a substantial effect on contributions or benefits payable under the Plan. (2) "Unrestricted Benefits" means benefits in the form provided by the Plan, including any cash payments available to a living Participant and any survivor's benefits payable on behalf of a Participant who dies after Retirement, which have been provided by contributions of the Employing Companies not exceeding the greatest of the following amounts: (A) the contributions of the Employing Companies (or funds attributable thereto) which would have been applied to provide benefits for the Employee under this Plan as in effect immediately prior to the Effective Date, (B) $20,000, (C) the sum of (i) the contributions of the Employing Companies (or funds attributable thereto) which would have been applied to provide benefits for the Employee under this Plan as in effect immediately prior to the Effective Date, and (ii) an amount computed by multiplying the number of years for which the current costs of the Plan after that date are met by the smaller of 20% of his annual compensation or $10,000, or (D) the sum of the amount allocated to him pursuant to priorities First through Fourth (A) of ERISA (S) 4044. (3) "Supplemental Pension Payments" mean any current payments to a retired Participant sufficient, together with his Unrestricted Benefits, to bring the total current payments to him up to the full pension benefits provided under the Plan. -54- (b) Notwithstanding the above limitations, the following limitations shall apply if they would result in a greater amount of Employing Company contributions being used for the benefit of Employees described in (a) above: (1) In the case of an Employee who is a substantial owner (as defined in ERISA (S) 4022(b)(5)), an amount equal to the present value of the benefit guaranteed to such Employee under ERISA (S) 4022, or if the Plan has not terminated, the present value of the benefit that would be guaranteed if the Plan had terminated on the date the benefit commenced, determined in accordance with PBGC Regulations; and (2) In the case of any other Employee, an amount equal to the present value of the minimum benefit described in ERISA (S) 4022(b)(3)(B) (determined on the earlier of the date the Plan terminates or the date benefits commence in accordance with PBGC Regulations) without regard to any other limitations in ERISA (S) 4022. (c) The foregoing conditions shall not restrict the full payment of any survivor's benefits on behalf of a Participant who dies while the Plan is in effect and its full current costs have been met and shall not restrict the current payment of the full amount of any pension called for by the Plan for any retired Participant while the Plan is in full effect and its full current costs have been met. If and when the contributions by the Employing Companies are sufficient at a later date to meet the full current costs of the Plan, the excess of the pension, otherwise payable, over the actual pension paid during the period that such full current costs had not been met, shall be paid in a lump sum to the retired Participant, or, if such retired Participant had died in the meantime, to the estate of such Participant. If under applicable law or Regulations, the foregoing provisions of this Plan (S) 13.4 are no longer necessary for the Plan to meet the requirements of Code (S) 401(a), then such provisions shall become void and shall no longer apply, without the necessity of further amendment to the Plan. 13.5 Merger, Consolidation Or Transfer Of Assets Or Liabilities. This Plan may be merged with or into any other qualified pension or retirement plan, provided that no merger or consolidation with, or transfer of assets or liabilities to, any other pension or retirement plan, shall be made unless the benefit each Participant would receive if such plan were terminated immediately after such merger or consolidation, or transfer of assets and liabilities, would be at least as great as the benefit he would have received had this Plan been terminated immediately before such merger, consolidation or transfer. Assets or liabilities of another tax-qualified defined benefit pension plan may be transferred to or assumed by this Plan, or another tax-qualified defined benefit pension plan may be merged with and into this Plan if such action meets the requirements of applicable law, including the requirements of Code (S) 414(l). 13.6 Corporate Mergers, Acquisitions And Divestments. Upon such terms as BPAC may approve, benefits may be provided under this Plan to a Participant with respect to any period of his prior employment by any organization, and such benefits (and any Continuous Service credited with respect to such period of employment under Plan -55- Article 9) may be provided for, in whole or in part, by funds transferred, directly or indirectly, to this Plan from such organization or an employee benefit plan of such organization which qualified under Code (S) 401(a). Furthermore, Participants who are in the employ of a Divested Unit may continue to accrue Continuous Service for limited purposes under this Plan (but not for the purpose of determining the amount of benefit to be paid) while in the employ of a Divested Unit, or its successor or acquiring business, upon such terms and conditions as the agreement of sale or a Basic Agreement may provide and BPAC may expressly approve in its sole discretion. -56- ARTICLE 14 TOP HEAVY PROVISIONS 14.1 Determination Of Top Heavy Status. For purposes of this Plan Article 14, the Plan shall be considered a "Top Heavy Plan" for any Plan Year if, (i) at least one Key Employee is a Participant and (ii) the ratio of the total Present Value of accrued benefits of all Key Employees under all Aggregation Group Plans to the total Present Value of accrued benefits of both Key Employees and Non-Key Employees under all Aggregation Group Plans exceeds 0.6. Solely for the purpose of determining if the Plan, or any Aggregation Group Plan, is a Top Heavy Plan, the accrued benefit of a Participant, other than a Key Employee, shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Company or an Affiliate (the "Armco Group"), or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rate of Code (S) 411(b)(1)(c). All calculations under (i) and (ii) above with respect to this Plan shall be made as of the Determination Date applicable to the subject Plan Year, and all calculations under (ii) above with respect to any Aggregation Group Plan other than this Plan shall be made as of that plan's Determination Date which falls within the same calendar year as the Determination Date used by this Plan. 14.2 Definitions. For the purpose of this Plan Article 14 the following terms shall have the following meanings: (a) Aggregation Group Plan. "Aggregation Group Plan" means each qualified plan of the Armco Group in which a Key Employee is a participant and each other qualified plan of the Armco Group which enables a plan of the Armco Group in which a Key Employee is a participant to satisfy Code (S)(S) 401(a)(4) or 410, including any such plan which was terminated during the five-year period ending on the applicable Determination Date if such plan would, but for the fact that it was terminated, be an Aggregation Group Plan. In addition, the Company may choose to treat any other qualified plan as an Aggregation Group Plan if the Aggregation Group Plans will continue to satisfy Code (S)(S) 401(a)(4) and 410 with such plan being taken into account. (b) Average Annual Compensation. "Average Annual Compensation" means the average of an individual's total compensation received from all members of the Armco Group for the 5 consecutive Plan Years which produces the highest result, excluding from consideration, however, compensation received in any Plan Year which began prior to January 1, 1984 and in any Plan Year which follows the last Plan Year in which the Plan was considered a Top Heavy Plan. For the purpose of this Plan (S) 14.2(b) "compensation" shall have the meaning prescribed in Treasury Regulation (S) 1.415-2(d). (c) Determination Date. The "Determination Date", which is applicable to any Plan Year of an Aggregation Group Plan, means the last day of the immediately preceding -57- Plan Year (except that, for the first Plan Year of a plan, the "Determination Date" shall be the last day of the first Plan Year). (d) Key Employee. With respect to any Aggregation Group Plan and as of any Determination Date, a "Key Employee" means any Employee or former Employee or beneficiaries of such who at any time during the Plan Year which includes such Determination Date, or during any of the 4 immediately preceding Plan Years, is employed by and has received compensation from any member of the Armco Group, and: (1) an officer (disregarding any person with the title but not the authority of an officer) of any member of the Armco Group, provided such person receives compensation of greater than 50% of the amount in effect under Code (S) 415(b)(1)(A) from all members of the Armco Group for the Plan Year which includes the subject Determination Date and provided there are not 50 other such officers who have received annual Earnings in a greater amount than that received by the subject person for the Plan Year which includes the subject Determination Date and the 4 immediately preceding Plan Years; (2) one of the 10 Employees owning (or considered as owning within the meaning of Code (S) 318, except that subparagraph (c) of Code (S) 318(a)(2) shall be applied by substituting "5%" for "50%") the largest Employee-held interests in all members of the Armco Group, provided such person owns at least 0.5% of all members of the Armco Group and receives total Earnings of $30,000 or more from any and all members of the Armco Group for the Plan Year which includes the subject Determination Date; (3) a 5% or more owner of an employer; or (4) a 1% or more owner of an employer who receives total Earnings of $150,000 or more from any and all members of the Armco Group for the Plan Year which includes the subject Determination Date. A person is considered to own 5% or 1%, as the case may be, of an employer if he owns (or is considered as owning within the meaning of Code (S) 318, except that subparagraph (c) of Code (S) 318(a)(2) shall be applied by substituting "5%" for "50%") at least 5% or 1%, as the case may be, of either the outstanding stock of an employer or the voting power of all stock of an employer. For purposes of this subsection (d), the term "Key Employee" includes any beneficiary of a person who is deceased as of the subject Determination Date but who when alive had been a Key Employee during the Plan Year which includes the subject Determination Date or any of the 4 immediately preceding Plan Years. Further, for purposes of determining the number of officers taken into account under subsection (d)(1), employees described in Code (S) 414(q)(8) shall be excluded. (e) Non-Key Employee. With respect to any Aggregation Group Plan and as of any Determination Date, a "Non-Key Employee" means a person who at any time during the Plan Year which includes such Determination Date or during any of the 4 immediately -58- preceding Plan Years is employed by any member of the Armco Group but who has never been considered a Key Employee as of such or any earlier Determination Date. Further, the term "Non-Key Employee" includes any beneficiary of a person who is deceased as of the subject Determination Date, and who when alive had been an Employee of any member of the Armco Group during the Plan Year which includes the subject Determination Date or any of the 4 immediately preceding Plan Years, but had not been a Key Employee as of the subject or any earlier Determination Date. (f) Present Value Of Accrued Benefits. (1) For any Aggregation Group Plan which is a defined benefit plan (as defined, in Code (S) 414(j)), the "Present Value" of a Participant's accrued benefit, determined as of any Determination Date, means the single sum value of the monthly retirement benefit not yet paid which the Participant had accrued under such plan, calculated, as of the latest Valuation Date which coincides with or precedes such Determination Date, in accordance with the actuarial assumptions and interest rate set forth in Exhibit B. For this purpose, such accrued monthly retirement benefit is calculated as if it was to commence as of the first day of the month following the month the Participant attains his Normal Retirement age under such plan (or, if such Normal Retirement age had already been attained, as of the first day of the month next following the month in which occurs such Valuation Date) and as if it was to be paid in the form of a single life annuity. In addition, the dollar amount of any distributions from the Plan, including the value of any annuity contract distributed from the Plan, actually paid to such Participant prior to the subject Valuation Date but still within the Plan Year which includes such Valuation Date or one of the 4 immediately preceding Plan Years shall be added in calculating such "Present Value" of the Participant's accrued benefit. (2) For any Aggregation Group Plan which is a defined contribution plan (as defined in Code (S) 414(i)), the "Present Value" of a Participant's accrued benefit, as determined as of any Determination Date, means (i) the sum of the total of the Participant's account balances under the plan as valued as of the latest Valuation Date which coincides with or precedes such Determination Date, and (ii) an adjustment for contributions due as of such Determination Date. In the case of a profit sharing or stock bonus plan, the adjustment in clause (ii) above shall be the amount of the contributions, if any, actually made after the subject Valuation Date but on or before such Determination Date and, in the case of the first Plan Year, any amounts contributed to the plan after such Determination Date which are allocated as of a date in such first Plan Year. In the case of a money purchase or target benefit plan, the adjustment in clause (ii) above shall be the amount of the contributions, if any, which are either actually made or due to be made after the subject Valuation Date but before the expiration of the period allowed for meeting minimum funding requirements under Code (S) 412 for the Plan Year which includes the subject Determination Date. In addition, the dollar amount of any distributions from the plan, including the value of any annuity contract distributed from the plan, actually paid to such Participant prior to the subject Valuation Date -59- but still within the Plan Year which includes such Valuation Date or one of the four immediately preceding Plan Years shall be added in calculating such "Present Value" of the Participant's accrued benefit. (3) In the case of any rollover (as defined in Code (S) 402) from a plan qualified under Code (S) 401(a) to another qualified plan, or a direct qualified plan-to-qualified plan transfer, to or from a subject Aggregation Group Plan which is both initiated by a Participant and made between a plan maintained by a member(s) of the Armco Group and a plan maintained by an employer(s) not in the Armco Group, then (i) the Aggregation Group Plan, if it is the plan from which the rollover or transfer is made, will count the amount of the rollover or transfer as a distribution made as of the date such amount is distributed by such plan in determining the "Present Value" of the Participant's accrued benefit under subsection (1) or (2) above, as applicable, and (ii) the Aggregation Gr Plan, if it is the plan to which the rollover or transfer is made, will consider the amount of the rollover or transfer when made as part of the Participant's accrued benefit in determining the "Present Value" thereof under subsection (1) or (2) above, as applicable, if such rollover or transfer was accepted prior to January 1, 1984, and will not so consider the amount of the rollover or transfer as part of the Participant's accrued benefit in determining such "Present Value" if such rollover or transfer is accepted on or after January 1, 1984. (4) In the case of any rollover (as defined in Code (S) 402) from a plan qualified under Code (S) 401(a) to another qualified plan, or a direct qualified plan-to-qualified plan transfer, to or from a subject Aggregation Group Plan which is not described in subsection (3) above, then (i) the subject Aggregation Group Plan, if it is the plan from which the rollover or transfer is made, will not consider the amount of the rollover or transfer as part of the Participant's accrued benefit in determining the "Present Value" thereof under subsection (1) or (2) above, as applicable, and (ii) the subject Aggregation Group Plan, if it is the plan to which the rollover or transfer is made, will consider the amount of the rollover or transfer when made as part of the Participant's accrued benefit in determining such "Present Value." (g) Valuation Date. "Valuation Date" means, (i) in the case of a defined benefit plan (as defined in Code (S) 414(j)), the date as of which the plan actuary computes plan costs for minimum funding requirements under Code (S) 412 and, (ii) in the case of a defined contribution plan (as defined in Code (S) 414(i)), the date as of which plan income, gains and/or contributions are allocated to plan accounts of Participants. 14.3 Effect Of Top Heavy Status. (a) If this Plan becomes a Top Heavy Plan with respect to any Plan Year which begins on or after January 1, 1984, the reference in Plan (S) 3.9 to "at least 5 years shall be deleted and the words "at least 3 years" shall be inserted therefor, but such modification shall apply only with respect to the benefit accrued through the close of the most recently -60- completed Top Heavy Plan Year during which such individual was a Participant. With respect to the benefit accrued for any such Participant from and after the close of the most recently completed Top Heavy Plan Year, Plan (S) 3.9 shall not be modified. Each Participant who has at least 3 years of Continuous Service as of the first day of a Plan Year during which the Plan is not a Top Heavy Plan and who was a Participant during a preceding Plan Year during which the Plan was a Top Heavy Plan shall be entitled to elect to continue to have his accrued benefit determined in accordance with the provisions of Plan (S) 3.9 as modified by this Plan (S) 14.3(a). (b) For any Plan Year which begins on or after January 1, 1984 and in which this Plan is considered a Top Heavy Plan, the annual amount of the accrued benefit of any Participant who is a Non-Key Employee determined as of the Determination Date applicable to such Plan Year shall not be less than 2% of the Participant's Average Annual Compensation times the Participant's years of Continuous Service up to but not exceeding 10 such years. A Participant's years of Continuous Service shall not include any period of a Plan Year which began prior to January 1, 1984 and any periof a Plan Year as of which the Plan is not considered a Top Heavy Plan. Only up to 10 such years of Continuous Service of participation are taken into account under this Plan (S) 14.3(b). (c) For any Plan Year which begins on or after January 1, 1984 and in which this Plan is considered a Top Heavy Plan, the maximum amount of Earnings received by a Participant in any Plan Year which may be taken into account for any purpose under this Plan shall not exceed $200,000 or such higher amount as may be permitted by Regulations for the calendar year with or during which such Plan Year ends. (d) For any Plan Year which begins on or after January 1, 1984 and in which this Plan is considered a Top Heavy Plan, the limitations of Plan (S) 12.4(c) shall be modified in accordance with Code (S) 416(h). For purposes hereof, this Plan shall be considered a "Super Top Heavy Plan" for any Plan Year if, both the reference to "0.6" contained in the first paragraph of Plan (S) 14.1 was changed to "0.9" and the Plan would be considered a Top Heavy Plan for such Plan Year under Plan (S) 14.1, as so amended. This Plan, together with the attached Exhibits and Appendices, was adopted effective as of January 1, 1989, by action of the Board Of Directors of at its meeting held on April 28, 1989, and as supplemented by further action of the Board Of Directors at its meeting held on October 27, 1989. /s/ Richard D. Brown _____________________ Richard D. Brown Assistant Secretary Armco Inc. -61- EXHIBIT A--SCHEDULE A-1 - ----------------------- Armco Inc. Noncontributory Pension Plan [Plan (S) 5.1(c)(2)-Over Age 40 and Over 15 Years Of Service] DEFERRED VESTED EARLY COMMENCEMENT PERCENTAGES Age At Commencement Of Pension
Whole Years ----------- Months 55 56 57 58 59 60 61 62 - ------ -- -- -- -- -- -- -- -- 0 55.85% 60.35% 65.33% 70.84% 76.96% 83.82% 91.45% 100.00% 1 56.23 60.77 65.79 71.35 77.53 84.46 92.16 2 56.60 61.18 66.25 71.86 78.10 85.09 92.87 3 56.98 61.60 66.71 72.37 78.68 85.73 93.59 4 57.35 62.01 67.17 72.88 79.25 86.36 94.30 5 57.73 62.43 67.63 73.39 79.82 87.00 95.01 6 58.10 62.84 68.09 73.90 80.39 87.64 95.72 7 58.48 63.26 68.54 74.41 80.96 88.27 96.44 8 58.85 63.67 69.00 74.92 81.53 88.91 97.15 9 59.23 64.09 69.46 75.43 82.11 89.54 97.86 10 59.60 64.50 69.92 75.94 82.68 90.18 98.57 11 59.98 64.92 70.38 76.45 83.25 90.82 99.29
The above percentages will be applied on the basis of the Participant's age to the nearest month. EXHIBIT A--SCHEDULE A-2 - ----------------------- Armco Inc. Noncontributory Pension Plan [Plan (S) 5.1(c)(3)-Under Age 40 or Under 15 Years Of Service] DEFERRED VESTED EARLY COMMENCEMENT PERCENTAGES Age At Commencement Of Pension
Whole Years ----------- Months 55 56 57 58 59 60 61 62 63 64 65 - ------ -- -- -- -- -- -- -- --- -- -- -- 0 42.04 45.42 49.16 53.30 57.91 63.10 68.85 75.28 82.53 90.72 100 1 42.32 45.73 49.51 53.68 58.34 63.58 69.39 75.88 83.21 91.49 2 42.60 46.04 49.85 54.07 58.78 64.06 69.92 76.49 83.90 92.27 3 42.89 46.36 50.20 54.45 59.21 64.54 70.46 77.09 84.58 93.04 4 43.17 46.67 50.54 54.84 59.64 65.02 70.99 77.70 85.26 93.81 5 43.45 46.98 50.80 55.22 60.07 65.50 71.53 78.30 85.94 94.59 6 43.73 47.29 51.23 55.61 60.51 65.98 72.07 78.91 86.63 95.36 7 44.01 47.60 51.58 55.99 60.94 66.45 72.60 79.51 87.31 96.13 8 44.29 47.91 51.92 56.37 61.37 66.93 73.14 80.11 87.99 96.91 9 44.48 48.23 52.27 56.76 61.80 67.41 73.67 80.72 88.67 97.68 10 44.86 48.54 52.61 57.14 62.24 67.89 74.21 81.32 89.36 98.45 11 45.15 48.85 52.96 57.53 62.67 68.37 74.74 81.93 90.04 99.23
The above percentages will be applied on the basis of the Participant's age to the nearest month. -62- EXHIBIT A--SCHEDULE A-3-1 - ------------------------- Armco Inc. Noncontributory Pension Plan Effective for retirements on or before September 30, 1989, this Table of Percentages will be used in calculating the amounts payable if one of the following options is applicable: the Pre-Pension Spouse Coverage (50%), the Automatic 50% Spouse Option, the 50% Co-Pensioner Option, or the 100% Co- Pensioner Option.
Participant's Age --------------------------------------------------------------------------- Difference Between 51 and 64 and Ages of Participant Under 52 to 54 55 to 57 58 to 60 61 to 63 Over and spouse or ------------ ---------- ---------- ---------- ---------- -------- Co-Pensioner 50% 100% 50% 100% 50% 100% 50% 100% 50% 100% 50% 100% - --------------------- --- ---- --- ---- --- ---- --- ---- --- ---- --- ---- Participant Older - --------------------- 20 or more years 71% 56% 72% 57% 73% 58% 73% 58% 74% 58% 74% 58% 17, 18 or 19 yrs. 71 56 72 58 73 59 74 60 75 60 75 60 14, 15 or 16 yrs. 72 57 73 59 74 60 75 61 76 62 76 62 11, 12 or 13 yrs. 73 58 74 60 75 62 77 63 77 64 78 64 8, 9 or 10 yrs. 74 59 75 61 77 63 78 65 79 66 80 66 5, 6 or 7 yrs. 75 60 76 62 78 65 79 67 81 68 81 69 2, 3 or 4 yrs. 76 62 77 64 79 67 81 69 82 71 83 72 less than 2 yrs. 77 64 79 66 81 69 83 71 84 73 85 75 Participant Younger - --------------------- less than 2 yrs. 77% 64% 79% 66% 81% 69% 83% 71% 84% 73% 85% 75% 2, 3 or 4 yrs. 79 66 80 68 82 71 84 74 86 76 87 78 5, 6 or 7 yrs. 80 68 82 70 84 73 86 76 88 79 89 81 8, 9 or 10 yrs. 92 70 84 73 86 76 88 79 90 82 91 84 11, 12 or 13 yrs. 84 73 85 75 88 79 90 82 92 85 93 87 14, 15 or 16 yrs. 86 75 87 78 89 81 91 84 93 87 94 90 17, 18 or 19 yrs. 87 78 89 81 91 84 93 87 95 90 96 92 20 or more years 89 80 91 83 93 87 94 89 96 92 96 93
NOTES: Participant's age and co-pensioner's age rounded to the nearest whole year; e.g., age 51 years, six months becomes 52. Age differential is net difference between Participant's and co-pensioner's age as rounded. If the named co-pensioner is any person other than the Participant's spouse, it may, in compliance with Internal Revenue Service regulations, be necessary to modify the amount payable to the Participant and co-pensioner so as to provide that the present value of the benefit to the Participant is more than 50% of the present value of the pension that would have been payable to the Participant had he not elected a survivor option. -63- EXHIBIT A-SCHEDULE A-3-2 - ------------------------ Armco Inc. Noncontributory Pension Plan Effective for retirements on or after October 1, 1989, this Table of Percentages will be used in calculating the amounts payable if one of the following options is applicable: the Pre-Pension Spouse Coverage (50%), the Automatic 50% Spouse Option, the 50% Co-Pensioner Option, or the 100% Co-Pensioner Option.
Table of Percentages --------------------- Difference Between Ages Participant Older Participant Younger of Participant and Spouse ----------------- ------------------- or Co-Pensioner 50% 100% 50% 100% - ------------------------- --- ----- --- ---- 0 Years 88.0% 81.0% 88.0% 81.0% 1 87.6 80.4 88.4 81.6 2 87.2 79.8 88.8 82.2 3 86.8 79.2 89.2 82.8 4 86.4 78.6 89.6 83.4 5 86.0 78.0 90.0 84.0 6 85.6 77.4 90.4 84.6 7 85.2 76.8 90.8 85.2 8 84.8 76.2 91.2 85.8 9 84.4 75.6 91.6 86.4 10 84.0 75.0 92.0 87.0 11 83.6 74.4 92.4 87.6 12 83.2 73.8 92.8 88.2 13 82.8 73.2 93.2 88.8 14 82.4 72.6 93.6 89.4 15 82.0 72.0 94.0 90.0 16 81.6 71.4 94.4 90.6 17 81.2 70.8 94.8 91.2 18 80.8 70.2 95.2 91.8 19 80.4 69.6 95.6 92.4 *20 and over 80.0 69.0 96.0 93.0
NOTES: Age differential is net difference between Participant's and Co- Pensioner's age as rounded. * Further actuarial adjustments will be made in cases involving age disparities greater than 20 years in accordance with the methods and assumptions utilized in establishing the percentages included in the tables set forth in this Schedule A-3-2. -64- EXHIBIT A--SCHEDULE A-4 - ----------------------- Armco Inc. Noncontributory Pension Plan [Plan (S) 7.2-Survivor Annuity Coverage] DIFFERENCE BETWEEN AGES OF PARTICIPANT AND SPOUSE
Participant's Age At Death -------------------------- Participant Older Whole Years 55 to 57 58 to 60 61 to 63 64 & Older - ----------------- -------- -------- -------- ---------- *20 or more years 36.5% 36.5% 37.0% 37.0% 17, 18, or 19 years 36.5 37.0 37.5 37.5 14, 15 or 16 years 37.0 37.5 38.0 38.0 11, 12 or 13 years 37.5 38.5 38.5 40.0 8, 9 or 10 years 38.5 39.0 39.5 40.5 5, 6 or 7 years 39.0 39.5 40.5 40.5 2, 3 or 4 years 39.5 40.5 41.0 41.5 less than 2 years 40.5 41.5 42.0 42.5
Participant Younger Whole Years 55 to 57 58 to 60 61 to 63 64 & Older - ------------------- -------- -------- -------- ---------- Less than 2 years 40.5% 41.5% 42.0% 42.5% 2, 3 or 4 years 41.0 42.0 43.0 43.5 5, 6 or 7 years 42.0 43.0 44.0 44.5 8, 9 or 10 years 43.0 44.0 45.0 45.5 11, 12 or 13 years 44.0 45.0 46.0 46.5 14, 15 or 16 years 45.0 45.5 46.5 47.0 17, 18 or 19 years 45.5 46.5 47.5 48.0 *20 or more years 46.5 47.0 48.0 48.0
* Further actuarial adjustments will be made in cases involving age disparities greater than 20 years in accordance with the methods and assumptions utilized in establishing the percentages included in the tables set forth in this Schedule A-4. -65- EXHIBIT B - --------- Armco Inc. Noncontributory Pension Plan The actuarial assumptions to be used in computing the Present Value of accrued benefits for purposes of determining whether the Plan is a Top Heavy Plan under Plan (S) 14.1 are as follows: Mortality: The 1976-1980 GAM Table (The 1971 GAM Table projected to 1978 with - ---------- Scale E). Interest: 8.5% per annum, compounded annually. - --------- No assumptions as to future withdrawals or future salary increases shall be used. -66- EXHIBIT C-1 Armco Inc. - ----------- Noncontributory Pension Plan QUALIFIED DOMESTIC RELATIONS ORDERS EARLY COMMENCEMENT PERCENTAGES [Participant Over Age 40 and Over 15 Years Of Service] Alternate Payee's Age At Commencement Of Pension
Months Whole ------ Years 0 1 2 3 4 5 6 7 8 9 10 11 - ----- - - - - - - - - - - -- -- 21 6.66% 6.69% 6.72% 6.75% 6.78% 6.81% 6.85% 6.88% 6.91% 6.94% 6.97% 7.00% 22 7.03 7.06 7.10 7.13 7.16 7.20 7.23 7.26 7.30 7.33 7.36 7.40 23 7.43 7.46 7.50 7.53 7.57 7.60 7.64 7.67 7.70 7.74 7.77 7.81 24 7.84 7.88 7.92 7.95 7.99 8.03 8.07 8.10 8.14 8.18 8.22 8.25 25 8.29 8.33 8.37 8.41 8.44 8.48 8.52 8.56 8.60 8.64 8.67 8.71 26 8.75 8.79 8.83 8.88 8.92 8.96 9.00 9.04 9.08 9.13 9.17 9.21 27 9.25 9.29 9.34 9.38 9.43 9.47 9.52 9.56 9.60 9.65 9.69 9.74 28 9.78 9.83 9.88 9.92 9.97 10.02 10.07 10.11 10.16 10.21 10.26 10.30 29 10.35 10.40 10.45 10.50 10.55 10.60 10.65 10.70 10.75 10.80 10.85 10.90 30 10.95 11.00 11.06 11.11 11.16 11.22 11.27 11.32 11.38 11.43 11.48 11.54 31 11.59 11.65 11.70 11.76 11.82 11.87 11.93 11.99 12.04 12.10 12.16 12.21 32 12.27 12.33 12.39 12.45 12.51 12.57 12.64 12.70 12.76 12.82 12.88 12.94 33 13.00 13.07 13.13 13.20 13.26 13.33 13.39 13.46 13.52 13.59 13. 13.72 34 13.78 13.85 13.92 13.99 14.06 14.13 14.20 14.26 14.33 14.40 14.47 14.54 35 14.61 14.68 14.76 14.83 14.91 14.98 15.05 15.13 15.20 15.28 15.35 15.43 36 15.50 15.58 15.66 15.74 15.82 15.90 15.98 16.05 16.13 16.21 16.29 16.37 37 16.45 16.54 16.62 16.71 16.79 16.88 16.97 17.05 17.14 17.22 17.31 17.39 38 17.48 17.57 17.66 17.75 17.84 17.93 18.03 18.12 18.21 18.30 18.39 18.48 39 18.57 18.67 18.77 18.87 18.96 19.06 19.16 19.26 19.36 19.46 19.55 19.65 40 19.75 19.86 19.96 20.07 20.17 20.28 20.39 20.49 20.60 20.70 20.81 20.91 41 21.02 21.13 21.25 21.36 21.47 21.59 21.70 21.81 21.93 22.04 22.15 22.27 42 22.38 22.50 22.63 22.75 22.87 22.99 23.12 23.24 23.36 23.48 23.61 23.73 43 23.85 23.98 24.12 24.25 24.38 24.51 24.65 24.78 24.91 25.04 25.18 25.31 44 25.44 25.58 25.73 25.87 26.01 26.16 26.30 26.44 26.59 26.73 26.87 27.02 45 27.16 27.32 27.47 27.63 27.78 27.94 28.09 28.25 28.40 28.56 28.71 28.87 46 29.02 29.19 29.36 29.53 29.69 29.86 30.03 30.20 30.37 30.54 30.70 30.87 47 31.04 31.22 31.41 31.59 31.77 31.95 32.14 32.32 32.50 32.68 32.87 33.05 48 33.23 33.43 33.63 33.83 34.02 34.22 34.42 34.62 34.82 35.02 35.21 35.41 49 35.61 35.83 36.04 36.26 36.48 36.69 36.91 37.13 37.34 37.56 37.78 37.99 50 38.21 38.45 38.68 38.92 39.16 39.39 39.63 39.87 40.10 40.34 40.58 40.81 51 41.05 41.31 41.57 41.83 42.08 42.34 42.60 42.86 43.12 43.38 43.63 43.89 52 44.15 44.43 44.72 45.00 45.28 45.57 45.85 46.13 46.42 46.70 46.98 47.27 53 47.55 47.86 48.17 48.48 48.79 49.10 49.42 49.73 50.04 50.35 50.66 50.97 54 51.28 51.66 52.04 52.42 52.80 53.18 53.57 53.95 54.33 54.71 55.09 55.47 55 55.85 56.23 56.60 56.98 57.35 57.73 58.10 58.48 58.85 59.23 59.60 59.98 56 60.35 60.77 61.18 61.60 62.01 62.43 62.84 63.26 63.67 64.09 64.50 64.92 57 65.33 65.79 66.25 66.71 67.17 67.63 68.09 68.54 69.00 69.46 69.92 70.38 58 70.84 71.35 71.66 72.37 72.83 73.39 73.90 74.41 74.92 75.43 75.94 76.45 59 76.96 77.53 78.10 78.68 79.25 79.82 80.39 80.96 81.53 82.11 82.68 83.25 60 83.82 84.46 85.09 85.73 86.36 87.00 87.64 88.27 88.91 89.54 90.18 90.81 61 91.45 92.16 92.87 93.59 94.30 95.01 95.72 96.44 97.15 97.86 98.57 99.29 62 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 63 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 64 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 65 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
-67- EXHIBIT C-2 Armco Inc. - ----------- Noncontributory Pension Plan QUALIFIED DOMESTIC RELATIONS ORDERS EARLY COMMENCEMENT PERCENTAGES [Participant Under Age 40 Or Under 15 Years Of Service] Alternate Payee's Age At Commencement Of Pension
Months Whole ------ Years 0 1 2 3 4 5 6 7 8 9 10 11 - ----- - - - - - - - - - - -- -- 21 5.00% 5.02% 5.05% 5.07% 5.09% 5.12% 5.14% 5.16% 5.19% 5.21% 5.23% 5.26% 22 5.28 5.30 5.33 5.35 5.38 5.40 5.43 5.45 5.47 5.50 5.52 5.55 23 5.57 5.60 5.62 5.65 5.67 5.70 5.73 5.75 5.78 5.80 5.83 5.85 24 5.88 5.91 5.94 5.97 5.99 6.02 6.05 6.08 6.11 6.14 6.16 6.19 25 6.22 6.25 6.28 6.31 6.34 6.37 6.40 6.42 6.45 6.48 6.51 6.54 26 6.57 6.60 6.63 6.66 6.69 6.72 6.76 6.79 6.82 6.85 6.88 6.91 27 6.94 6.97 7.01 7.04 7.07 7.11 7.14 7.17 7.21 7.24 7.27 7.31 28 7.34 7.38 7.41 7.45 7.48 7.52 7.55 7.59 7.62 7.66 7.69 7.73 29 7.76 7.80 7.84 7.88 7.91 7.95 7.99 8.03 8.07 8.11 8.14 8.18 30 8.22 8.26 8.30 8.34 8.38 8.42 8.46 8.50 8.54 8.58 8.62 8.66 31 8.70 8.74 8.79 8.83 8.87 8.91 8.95 9.00 9.04 9.08 9.13 9.17 32 9.21 9.26 9.30 9.35 9.39 9.44 9.48 9.53 9.57 9.62 9.66 9.71 33 9.75 9.80 9.85 9.90 9.95 10.00 10.05 10.09 10.14 10.19 10.24 10.29 34 10.34 10.39 10.44 10.50 10.55 10.60 10.65 10.70 10.75 10.81 10.86 10.91 35 10.96 11.02 11.07 11.13 11.18 11.24 11.30 11.35 11.41 11.46 11.52 11.57 36 11.63 11.69 11.75 11.81 11.87 11.93 11.99 12.05 12.11 12.17 12.23 12.29 37 12.35 12.41 12.48 12.54 12.60 12.67 12.73 12.79 12.86 12.92 12.98 13.05 38 13.11 13.18 13.25 13.32 13.38 13.45 13.52 13.59 13.66 13.73 13.79 13.86 39 13.93 14.00 14.08 14.15 14.23 14.30 14.38 14.45 14.52 14.60 14.67 14.75 40 14.82 14.90 14.98 15.06 15.14 15.22 15.30 15.37 15.45 15.53 15.61 15.69 41 15.77 15.86 15.94 16.03 16.11 16.20 16.28 16.37 16.45 16.54 16.62 16.71 42 16.79 16.88 16.98 17.07 17.16 17.25 17.35 17.44 17.53 17.62 17.72 17.81 43 17.90 18.00 18.10 18.20 18.30 18.40 18.50 18.59 18.69 18.79 18.89 18.99 44 19.09 19.20 19.31 19.41 19.52 19.63 19.74 19.84 19.95 20.06 20.17 20.27 45 20.38 20.50 20.61 20.73 20.84 20.96 21.08 21.19 21.31 21.42 21.54 21.65 46 21.77 21.90 22.02 22.15 22.28 22.40 22.53 22.66 22.78 22.91 23.04 23.16 47 23.29 23.43 23.56 23.70 23.84 23.97 24.11 24.25 24.38 24.52 24.66 24.79 48 24.93 25.08 25.23 25.38 25.53 25.68 25.83 25.97 26.12 26.27 26.42 26.57 49 26.72 26.88 27.05 27.21 27.37 27.53 27.70 27.86 28.02 28.18 28.35 28.51 50 28.67 28.85 29.02 29.20 29.38 29.55 29.73 29.91 30.08 30.26 30.44 30.61 51 30.79 30.98 31.18 31.37 31.57 31.76 31.96 32.15 32.34 32.54 32.73 32.93 52 33.12 33.33 33.55 33.76 33.97 34.18 34.40 34.61 34.82 35.03 35.25 35.46 53 35.67 35.90 36.14 36.37 36.61 36.84 37.08 37.31 37.54 37.78 38.01 38.25 54 38.48 38.78 39.07 39.37 39.67 39.96 40.26 40.56 40.85 41.15 41.45 41.74 55 42.04 42.32 42.60 42.89 43.17 43.45 43.73 44.01 44.29 44.58 44.86 45.14 56 45.42 45.73 46.04 46.36 46.67 46.98 47.29 47.60 47.91 48.23 48.54 48.85 57 49.16 49.51 49.85 50.20 50.54 50.89 51.23 51.56 51.92 52.27 52.61 52.96 58 53.30 53.68 54.07 54.45 54.84 55.22 55.61 55.99 56.37 56.76 57.14 57.53 59 57.91 58.34 58.78 59.21 59.64 60.07 60.51 60.94 61.37 61.80 62.24 62.67 60 63.10 63.58 64.06 64.54 65.08 65.50 65.98 66.45 66.93 67.41 67.89 68.37 61 68.85 69.39 69.92 70.46 70.99 71.53 72.07 72.60 73.14 73.67 74.21 74.74 62 75.28 75.88 76.49 77.09 77.70 78.30 78.91 79.51 80.11 80.72 81.32 81.93 63 82.53 83.21 83.90 84.83 85.26 85.94 86.63 87.31 87.99 88.67 89.36 90.04 64 90.73 91.49 92.27 93.04 93.81 94.59 95.36 96.13 96.91 97.68 98.45 99.23 65 100.00
-68- Armco Inc. Noncontributory Pension Plan APPENDIX 1 Provisions Relating to Covered Employees Of HMK Industries Of Oklahoma, Inc. The Company sold its Sand Springs Works located in Sand Springs, Oklahoma (the "Works") and its Fabricated Reinforcing Products plants located in Grand Prairie, Texas; Omaha, Nebraska; Memphis, Tennessee; Denver, Colorado; Houston, Texas; and Baton Rouge, Louisiana, (the "Plants") to HMK Industries of Oklahoma, Inc. (the "Buyer") effective as of August 31, 1981. The salaried employees of the Company at the Works and the Plants and the hourly paid employees at the Grand Prairie and Omaha Plants participated in the Plan immediately prior to such sale. The Company and the Buyer agreed in the Purchase Agreement to provide continuity of employment and benefits for such employees. The Plan was amended to reflect the foregoing as described in this Appendix 1. This Appendix 1 shall apply with respect to Covered Employees effective from and after August 31, 1981. To the extent the provisions of this Appendix 1 conflict with any provision of the Plan, the provisions of this Appendix 1 shall control. Appendix 1.1 Covered Employees. This Appendix l applies to those employees of the Company whose employment was transferred to the Buyer or its successor or assign or any subsidiary or affiliate thereof in connection with the Buyer's purchase of the Company's Works and Plants (the "Divested Unit"), effective as of August 31, 1981, and who were Participants in the Plan immediately prior thereto, including the salaried employees at such Works and Plants and the hourly paid employees at the Grand Prairie and Omaha Plants. Appendix 1.2 Extended Eligibility. Notwithstanding any provision of the Plan to the contrary, for the purposes hereinafter described a Covered Employee shall not be considered to have separated from service under the Plan, and therefore shall not incur a Break In Continuous Service by reason of the sale of the Divested Unit but shall continue to accrue Continuous Service under the terms of Plan Article 9 as though his employment with the Buyer was employment with an Employing Company, but only for the following purposes: (a) for the purpose of determining eligibility to retire with a Normal Retirement Pension, a 62/15 Retirement Pension, a 30-Year Retirement Pension, an Early Retirement (55/15) Pension, or a Deferred Vested Pension; -69- (b) for the purpose of determining eligibility for Pre-Pension Spouse Coverage and a Surviving Spouse's Benefit. Appendix 1.3 Fixed Factors. Except as expressly provided by this Appendix 1, all factors relating to eligibility for or amount of pension benefits of a Covered Employee shall be fixed at their status on August 31, 1981, under the terms of the Plan as in effect on such date. Events subsequent to the sale of the Divested Unit shall not alter or affect any fixed factors. Such fixed factors include but are not limited to: (a) length of Continuous Service and Average Monthly Earnings for purposes of determining the amount of any pension under Plan Article 5, which shall be computed based on Continuous Service and Average Monthly Earnings up to August 31, 1981; (b) the amount of any deductions under Plan Article 6, which shall be computed as of August 31, 1981, based on the law in effect on such date; (c) the existence of permanent incapacity, other disability, or Layoff status for purposes of eligibility under Plan Article 3, which conditions shall be recognized only if extant before September 1, 1981; and (d) the occurrence of a Permanent Shutdown for purposes of eligibility under Plan Article 3, which event shall not be recognized if it occurred after August 31, 1981. The sale of the Divested Unit shall not be considered a Permanent Shutdown. Appendix 1.4 Certain Incidental Benefits. In no event shall any Covered Employee first become eligible on or after August 31, 1981, to receive a Permanent Incapacity Pension, Immediate Severance (70/80) Pension, or a Rule-Of-65 Pension, nor shall any such Covered Employee qualify to receive a Special Pension Payment, Increased Regular Pension or Increased Rule-Of-65 Pension. Appendix 1.5 Reemployment Of Retired Covered Employees. If a Covered Employee retires from the employ of the Company or the Buyer and is subsequently re-employed by the Company or the Buyer, the provisions of Plan Article 10 shall apply. -70- Armco Inc. Noncontributory Pension Plan APPENDIX 2 Provisions Relating To Covered Employees Of National-Oilwell Effective as of March 31, 1987, the Company transferred its National Supply Company business to National-Oilwell, a general partnership, 50% of which is owned by the Company. The salaried employees of the Company at National Supply Headquarters in Houston, Texas, the salaried and hourly employees at the National Supply Marketing Division, except Mobile Rig, Houston Plant, Los Neitos, Gainesville, Torrance, San Marcos, and certain salaried part-time employees participated in the Plan immediately prior to such transfer. This Appendix 2 shall apply with respect to Covered Employees, as defined below, effective March 31, 1987. To the extent the provisions of this Appendix 2 conflict with any provision of the Plan, the provisions of this Appendix 2 shall control. Appendix 2.1 Covered Employees. This Appendix 2 applies to (i) any Employee of the Company whose employment is transferred from the Company (including its National Supply Company division) or National-Oilwell (including any Affiliate that is at least 50% owned by National-Oilwell) at any time on or after March 31, 1987, and who was a Participant in the Plan immediately prior to his transfer of employment, and (ii) to any former or retired Employee of the Company or National-Oilwell who was a Participant in the Plan, who has a vested accrued benefit under the Plan and who becomes an Employee of National-Oilwell. Appendix 2.2 Extended Eligibility. Notwithstanding any provision of the Plan to the contrary, for the purposes hereinafter described a Covered Employee described in Appendix 2.1 shall not incur a Break In Continuous Service, solely by reason of the transfer of such Employee's employment to National-Oilwell or by National-Oilwell to an Affiliate that is at least 50% owned by National-Oilwell. Each Covered Employee shall continue to accrue Continuous Service under the terms of Plan Article 9 as though his employment with National-Oilwell was employment with the Company, but only for the following purposes: (a) for the purpose of determining eligibility to retire with a Normal Retirement Pension, a 62/15 Retirement Pension, a 30-Year Retirement Pension, an Early Retirement (55/15) Pension or a Deferred Vested Pension; and (b) for the purpose of determining eligibility for Pre-Pension Spouse Coverage and Pre-Retirement Survivor Annuity Coverage. -71- Appendix 2.3 Fixed Factors. Except as expressly provided by this Appendix 2, all factors relating to eligibility for or amount of pension benefits of a Covered Employee shall be fixed at their status on March 31, 1987, or if earlier, as of the most recent Break In Continuous Service or Retirement of the Covered Employee described in Appendix 2.1(ii) under the terms of the Plan as in effect on such date. Events subsequent to the employment by or transfer to National-Oilwell shall not alter or affect any fixed factors. Such fixed factors include but are not limited to: (a) length of Continuous Service and Average Monthly Earnings for the purpose of determining the amount of any pension under Plan Article 5, which shall be computed based on Continuous Service and Average Monthly Earnings up to March 31, 1987; (b) the amount of any deductions under Plan Article 6, which shall be computed as of March 31, 1987, based on the law in effect on such date; (c) the existence of permanent incapacity, other disability, or Layoff status for purposes of eligibility under Plan Article 3, which conditions shall be recognized only if extant before April 1, 1987; and (d) the occurrence of a Permanent Shutdown of National-Oilwell or any successor for purposes of eligibility under Plan Article 3, which event shall not be recognized if it occurred after March 31, 1987. The transfer of the Company's National Supply division to National-Oilwell shall not be considered a Permanent Shutdown. Appendix 2.4 Certain Incidental Benefits. In no event shall any Covered Employee first become eligible after March 31, 1987, to receive a Permanent Incapacity Pension, an Immediate Severance (70/80) Pension, or a Rule-Of-65 Pension nor shall any Covered Employee qualify for a Special Pension Payment, Increased Regular Pension or Increased Rule-Of-65 Pension. Only Covered Employees who had completed at least 15 years of Continuous Service on the date of their transfer of employment to National-Oilwell shall be eligible for a Surviving Spouse's Benefit. Appendix 2.5 Reemployment Of Retired Covered Employees. If a Covered Employee or former Employee retires from the employ of the Company or National-Oilwell and is subsequently reemployed by the Company or National-Oilwell, the provisions of Plan Article 10 shall apply. -72- Armco Inc. Noncontributory Pension Plan APPENDIX 3 Provisions Relating To Covered Employees Under The Armco Inc. Retirement Pension Plan Effective January 1, 1988, the Armco Inc. Retirement Pension Plan ("Retirement Plan") was merged with and into the Plan. The liability to provide all benefits payable under the Retirement Plan was assumed by the Plan which received a transfer of assets from the Retirement Plan which is, in the opinion of the enrolled actuary, the equivalent in value of the liabilities assumed. The rights of any person whose employment terminated or who retired prior to January 1, 1988, including such person's eligibility for benefits and the time and form in which benefits, if any, will be paid, shall be determined solely under the terms of the Retirement Plan in effect on the date of his termination of employment or retirement. This Appendix 3 sets forth the provisions which apply to Covered Employees on and after January 1, 1988 and which differ from the provisions of the Plan. Any benefits payable to a Covered Employee under the Plan, and the time and manner in which such benefits will be paid, shall be determined under the terms of the Retirement Plan as set forth in this Appendix 3. To the extent the provisions of this Appendix 3 conflict with any provision of the Plan, the provisions of this Appendix 3 shall control. Appendix 3.1 Covered Employees. This Appendix 3 applies to (i) those employees at the Piqua Minerals facility in Piqua, Ohio of Armco Material Resources Division of Armco Inc. hired on or after August 1, 1983 who, on January 1, 1988, were covered under the Agreement between Armco Inc. and the Employees Association of Piqua Minerals dated August 1, 1983 and (ii) those employees of Atlantic Building Systems, Inc. whose benefits under the Retirement Plan were frozen as of June 30, 1986, pursuant to the sale of Atlantic Building Systems, Inc. to Southwest General, Inc. Individuals described in clause (ii) shall continue to accrue Continuous Service solely for the purpose of determining eligibility for benefits under the Retirement Plan. Appendix 3.2 Pension Payable. The monthly retirement benefit a Participant has earned as of a specified date (subject to any requirements as to vesting or possibility of forfeiture) calculated by multiplying $8.50 by the number of the Participant's years (and fractions thereof) of Credited Service and paid as a Single Life Annuity commencing on the first day of the month following the month in which the Participant attains Normal Retirement age (or if the Participant has already attained his Normal Retirement age, commencing on the first day of the month following the month in which such specified date occurs). In no event shall any supplemental pension amount be payable under Plan Article 4 or Plan (S)(S) 5.2 or 5.3. Upon Retirement under Plan (S) 3.4, as modified by -73- Appendix (S) 3.4, or Plan (S) 3.9, any pension amount will be reduced in accordance with Appendix (S) 3.4. Appendix 3.3 Participation And Service. 1. Date of Participation. Each Covered Employee who as a Participant in the Plan on December 31, 1987 shall continue to be a Participant on January 1, 1988. Each other person who is a Covered Employee or who becomes a Covered Employee on or after January 1, 1988 shall become a Participant on the first day of the month following the last to occur of the date (i) he becomes a Covered Employee, (ii) he completes one year of Continuous Service or (iii) he attains age 21. 2. Continuous Service. An employee's Continuous Service shall be determined in accordance with the terms of the Plan, including, without limitation, Plan Article 9. 3. Credited Service. Credited Service shall be determined in full years and fractions thereof (with any whole month being counted as 1/12th of a full year and with any fractional month being rounded to the nearest whole month). For the purpose of determining an employee's Credited Service, an employee's Continuous Service shall be reduced by any months (or fraction of a month) of absence from active employment which may have been included as Continuous Service under Plan (S)(S) 9.3(a)(2), (3), (4) or (6), 9.3(b), 93.(c) or otherwise. Service with a Diverted Unit shall be counted as Continuous Service only insofar as BPAC may approve at the time of the sale or transfer of the Divested Unit. 4. Reemployment Within Twelve Months Of a Break In Service. If any former employee of the Company or any Affiliate who incurred a Break In Continuous Service for a reason described in Item 3 above is reemployed and performs an hour of service within 12 months following the date of such Break In Continuous Service, the Break in Continuous Service shall be disregarded; provided, however, that the period from the Break in Continuous Service to his reemployment date shall be included as Credited Service. 5. Reemployment With Ten Years or More. In any case where Item 4 above does not apply, a former employee of the Company or any Affiliate who incurred a Break in Continuous Service after completing 5 years or more of Continuous Service, shall be credited with his prior Continuous Service of his reemployment date and shall immediately qualify for participation in the Plan upon satisfying each other applicable condition set forth in Item 1 above; provided, however, that his period of absence shall not be counted as Credited Service. 6. Reemployment With Less Than Ten Years. In any case where Items 4 and 5 above do not apply, a former employee of the Company or any Affiliate who incurred a Break In Continuous Service before completing at least 5 years of Continuous Service, his prior Continuous Service on his reemployment date may be disregarded only if his period of absence as of his reemployment date is of a duration in excess of the greater of 5 years or the length of his prior -74- aggregate period of absence (excluding any prior period of absence which was properly disregarded under this rule, as then in effect, because of a prior Break In Continuous Service); provided, however, that his period of absence shall not be counted as Credited Service. Appendix 3.4 Retirement Dates. 1. Normal Retirement. A Participant who is covered under this Appendix 3 shall be eligible to retire only in accordance with Plan (S)(S) 3.2, 3.5, 3.6 and 3.9, as each may be amended herein. 2. Early Retirement. A Participant who incurs a Break In Continuous Service (other than by reason of his death or permanent incapacity) prior to qualifying for Normal Retirement may apply for and receive a retirement benefit under Plan (S) 3.5; provided, however, that the reference to "15 years but less than 30 years of Continuous Service" shall be amended to "10 years of Continuous Service"; and provided further, that the Plan is amended to provide that, subject to the other provisions of this Appendix 3, such retirement benefit shall (i) commence as of the first day of the month following the later of the month in which the Participant incurs a Break In Continuous Service or the month in which he applies for his pension and (ii) be reduced by.5% for each month by which the date as of which such retirement benefit commences precedes the first day of the month following the month in which the Participant would attain age 65, rather than the actuarial adjustment specified in Plan (S)(S) 5.1(c)(2) or (3). 3. Deferred Vested Retirement. A Participant who incurs a Break In Continuous Service (other than by reason of his death or permanent incapacity), prior to attaining age 55 but after completing at least 5 years of Continuous Service, may apply for and receive a retirement benefit under Plan (S) 3 and, subject to the other provisions of this Appendix 3, such retirement benefit shall (i) commence as of the first day of the month following the later of the month in which the Participant attains age 55 or the month in which he applies for a pension and (ii) be reduced by 0.5% for each month by which the date as of which such retirement benefit commences precedes the first day of the month following the month in which the Participant would attain age 65. Appendix 3.5 Payment Of Benefits. A Participant's retirement benefit under the Plan, if any, shall be payable in accordance with Plan Article 7; provided, however, that Plan (S)(S) 7.1, 7.2(e), 7.4 and Article 8 shall not apply to this Appendix 3. -75- Armco Inc. Noncontributory Pension Plan APPENDIX 4 Provisions Relating To Covered Employees Of ME International Effective as of March 3, 1987 the Company transferred its National Automatic Electric Foundry (NAEF) business to ME International, a general partnership. The salaried employees of NAEF participated in the Plan immediately prior to such transfer. This Appendix 4 shall apply with respect to Covered Employees effective from and after March 3, 1987. To the extent the provisions of this Appendix 4 conflict with any provisions of the Plan, the provisions of this Appendix 4 shall control. Appendix 4.1 Covered Employees. This Appendix 4 shall apply, effective March 3, 1987, to employees of NAEF, including any person whose employment was transferred to ME International, in connection with the transfer of NAEF to ME International, and who were Participants in the Plan immediately prior thereto. Appendix 4.2 Extended Eligibility. Notwithstanding any provision of the Plan to the contrary, for the purposes herein described a Covered Employee shall not be considered to have separated from service under the Plan, and therefore shall not incur a Break In Continuous Service, by reason of the transfer of NAEF to ME International, but shall continue to accrue Continuous Service under the terms of Plan Article 9 as though his employment with ME International was employment with the Company, but only for the following purposes: (a) for the purpose of determining eligibility to retire with a Normal Retirement Pension, a 62/15 Retirement Pension, a 30-Year Retirement Pension, an Early Retirement (55/15) Pension, or a Deferred Vested Pension; (b) for the purpose of determining eligibility for Pre-Pension Spouse Coverage, and Pre-Retirement Survivor Annuity Coverage. Appendix 4.3 Fixed Factors. All factors under the Plan relating to eligibility for or amount of any pension benefits of a Covered Employee shall be fixed at their status on March 3, 1987, under the terms of the Plan as in effect on such date. Events subsequent to the transfer of NAEF to ME International shall not alter or affect any fixed factors. Such fixed factors include but are not limited to: (a) length of Continuous Service and Average Monthly Earnings for purposes of determining the amount of any pension under Plan Article 5, which shall be computed based on Continuous Service and Average Monthly Earnings up to March 3, 1987; -76- (b) the amount of any deductions under Plan Article 6, which shall be computed as of March 3, 1987, based on the law in effect on such date; (c) the existence of permanent incapacity, other disability, or Layoff status for purposes of eligibility under Plan Article 3, which conditions shall be recognized only if extant before March 4, 1987; and (d) the occurrence of a Permanent Shutdown for purposes of eligibility under Plan Article 3, which event shall not be recognized if it occurred after March 3, 1987. The transfer of NAEF to ME International shall not be considered a Permanent Shutdown. Appendix 4.4 Certain Incidental Benefits. In no event shall any Covered Employee first become eligible after March 3, 1987, to receive a Permanent Incapacity Pension, Immediate Severance (70/80) Pension or Rule-Of-65 Pension, nor shall any such Covered Employee qualify to receive a Special Pension Payment under Plan Article 4, Increased Regular Pension under Plan (S) 5.2 or Increased Rule-Of-65 Pension under Plan (S) 5.3. Appendix 4.5 Reemployment Of Retired Covered Employees. If a Covered Employee retires from the employ of the Company or ME International and is subsequently reemployed by the Company, any Employing Company or ME International, the provisions of Plan Article 10 shall apply. -77- Armco Inc. Noncontributory Pension Plan APPENDIX 5 Provisions Relating To Covered Employees Of Contech Construction Products, Inc. Effective as of June 30, 1986, the Company sold its Construction Products Division ("CPD") to Contech Construction Products Inc. ("Contech"). All salaried employees of CPD, excluding employees employed at field locations and Riverside, California, participated in the Plan immediately prior to such sale. This Appendix 5 shall apply with respect to Covered Employees effective from and after June 30, 1986. On that date, Contech became an Employing Company under the Plan. To the extent the provisions of this Appendix 5 conflict with any provisions of the Plan, the provisions of this Appendix 5 shall apply. Appendix 5.1 Covered Employees. This Appendix 5 shall apply, effective June 30, 1986, to employees of CPD including any person whose employment was transferred to Contech or its successor or assign or any subsidiary or affiliate therewith in connection with Contech's purchase of CPD from the Com_ pany, and who were Participants in the Plan immediately prior thereto, including all salaried employees of CPD except those employed at field locations and Riverside, California. Appendix 5.2 Fixed Factors. Notwithstanding any provision of the Plan to the contrary, all factors under the Plan relating to eligibility for or amount of any pension benefits of a Covered Employee shall be fixed at their status on June 30, 1986, under the terms of the Plan as in effect on such date. Events subsequent to the sale of CPD to Contech shall not alter or affect any of these factors. Such fixed factors include but are not limited to: (a) length of Continuous Service and Average Monthly Earnings for purposes of determining the amount of any pension under Plan Article 5, which shall be computed based on Continuous Service and Average Monthly Earnings up to June 30, 1986. (b) the amount of any deductions under Plan Article 6, which shall be computed as of June 30, 1986, based on the law in effect on such date; (c) the existence of permanent incapacity, other disability, or Lay off status for purposes of eligibility under Plan Article 3, which conditions shall be recognized only if extant before July 1, 1986; and (d) the occurrence of a Permanent Shutdown for purposes of eligibility under Plan Article 3, which event shall not be recognized if it occurred after June 30, 1986. The sale of the CPD to Contech shall not be considered a Permanent Shutdown. -78- Appendix 5.3 Certain Incidental Benefits. In no event shall any Covered Employee first become eligible after June 30, 1986, to receive a Permanent Incapacity Pension, an Immediate Severance (70/80) Pension, or Rule-Of-65 Pension, nor shall any Covered Employee qualify to receive any Special Pension Payment under Plan Article 4, any Increased Regular Pension under Plan (S) 5.2 or any Increased Rule-Of-65 Pension under Plan (S) 5.3. Only Covered Employees who had completed at least 15 years of Continuous Service as of June 30, 1986 shall be eligible for a Surviving Spouse's Benefit. Appendix 5.4 Reemployment of Retired Covered Employees. If a Covered Employee retired from the employ of the Company more than six months prior to June 30, 1986 and is subsequently reemployed by Contech, such Covered Employee shall not have his pension payment or commencement suspended. -79- Armco Inc. Noncontributory Pension Plan APPENDIX 6 Provisions Relating To Covered Employees Of Atlantic Building Systems, Inc. Effective June 30, 1986 the Company sold its Atlantic Building Systems, Inc., ("Atlantic") to Southwest General, Inc. (the "Buyer"). Certain salaried employees of Atlantic listed in Appendix (S) 6.6 and hourly paid employees of Atlantic employed at Washington Courthouse, Ohio participated in the Plan immediately prior to such sale. The Company and the Buyer agreed in the Purchase Agreement to provide continuity of employment and benefits for such employees. The Plan was amended to reflect the foregoing as described in this Appendix 6. This Appendix 6 shall apply with respect to Covered Employees from and after June 30, 1986. On that date, Southwest General, Inc. became an Employing Company under the Plan. To the extent the provisions of this Appendix 6 conflict with any provisions of the Plan, the provisions of this Appendix 6 shall control. Appendix 6.1 Covered Employees. This Appendix 6 applies to those employees of Atlantic whose employment was transferred to the Buyer or its successor or assignor or any subsidiary or affiliate thereof in connection with the Buyer's purchase of Atlantic, effective as of June 30, 1986, and who were participants in the Plan immediately prior thereto, including those individuals listed in Appendix (S) 6.6 and hourly paid employees of Atlantic employed at Washington Courthouse, Ohio. Appendix 6.2 Extended Eligibility. Notwithstanding any provision of the Plan to the contrary, for the purposes hereinafter described, a Covered Employee shall not be considered to have separated from service under the Plan, and therefore shall not incur a Break In Continuous Service, by reason of the sale of Atlantic but shall continue to accrue Continuous Service under the terms of Plan Article 9 as though his employment with the Buyer was employment with the Company, but only for the following purposes: (a) for purposes of determining eligibility to retire with a Normal Retirement Pension, a 30-Year Retirement Pension, an Early Retirement (55/15) Pension or a Deferred Vested Pension; and (b) for purposes of determining eligibility for Pre-Pension Spouse Coverage and Pre-Retirement Survivor Annuity Coverage. Appendix 6.3 Fixed Factors. Except as expressly provided in this Appendix 6, all factors relating to eligibility for or amount of pension benefits of a Covered Employee shall be fixed at their status on June 30, 1986 under the terms of the Plan as in effect on such date. Events subsequent to the sale of Atlantic -80- shall not alter or affect any fixed factors. Such fixed factors include but are not limited to: (a) length of Continuous Service and Average Monthly Earnings for the purpose of determining the amount of any pension under Plan Article 5, which shall be computed based on Continuous Service and Average Monthly Earnings up to June 30, 1986; (b) the amount of any deductions under Plan Article 6, which shall be computed as of June 30, 1986 based on the law in effect on such date; (c) the existence of permanent incapacity, other disability or Layoff status for purposes of eligibility under Plan Article 3, which conditions shall be recognized only if extant before July 1, 1986; and (d) the occurrence of a Permanent Shutdown for purposes of Plan Article 3, which event shall not be recognized if it occurred after June 30, 1986. The sale of Atlantic to the Buyer shall not be considered a Permanent Shutdown. Appendix 6.4 Certain Incidental Benefits. In no event shall any Covered Employee first become eligible after June 30, 1986 to receive a Permanent Incapacity Pension, as Immediate Severance (70/80) Pension or a Rule-of-65 Pension, nor shall any Covered Employee qualify for a Special Pension Payment, Increased Regular Pension under Plan (S) 5.2 or Increased Rule-of-65 Pension under Plan (S) 5.3. Only Covered Employees who had completed at least 15 years of Continuous Service as of June 30, 1986 shall be eligible for a Surviving Spouse's Benefit. Appendix 6.5 Reemployment Of Retired Covered Employees. If a Covered Employee retires from the employ of the Company or the Buyer and is subsequently reemployed by the Company or the Buyer, the provisions of Plan Article 10 shall apply. Appendix 6.6 Covered Salaried Employees. Effective January 1, 1984, salaried employees of Atlantic were given the election to remain Participants in the Plan or to become participants on the Armco Inc. Retirement Pension Plan. The following individuals, who were Participants on the Plan on December 31, 1983, elected to remain covered under the Plan: -81- Social Security Number ---------------------- Kenneth Bond ###-##-#### Robert Boonstra ###-##-#### Derrell Brown ###-##-#### Robert Burns ###-##-#### Donald Campbell ###-##-#### Walker Carll ###-##-#### Donald Cockerill ###-##-#### Donald Dunn ###-##-#### Edwin Elliot ###-##-#### Richard Gleadall ###-##-#### James Hanawalt ###-##-#### Burdette Johnson ###-##-#### Paul Johnson ###-##-#### Phillip Johnson ###-##-#### Loren Klontz ###-##-#### William Koger ###-##-#### Lee Lynch ###-##-#### Donald Maddux ###-##-#### Marion McDonald ###-##-#### Philip Morrow ###-##-#### James Newland ###-##-#### John Owens ###-##-#### Roger Pope ###-##-#### John Rich ###-##-#### Hollis Slazer, Jr. ###-##-#### Robert Tillis ###-##-#### James Welch, Jr. ###-##-#### Melvin Wieland ###-##-#### Wiley Witherspoon, Jr. ###-##-#### Lee Zimmerman ###-##-#### -82- Armco Inc. Noncontributory Pension Plan APPENDIX 7 Provisions Relating To Covered Employees Of Permanently Shutdown Facilities A Permanent Shutdown has occurred at the facilities and on the dates listed below. In accordance with Plan (S) 9.3, Participants employed at such units incurred a Break In Continuous Service by reason of their termination of employment as a result of the Permanent Shutdown of the facility at which they were employed. Such individuals are entitled to receive or are receiving benefits, if any, in accordance with the provisions of the Plan. Year Permanently Facility Shutdown -------- ---------------- Evendale, Ohio Facility 1979 Idaho Falls Sales Yard 1979 Bathey, Michigan Manufacturing Co. 1980 Marion, Ohio Works 1980 Mansfield, Pennsylvania 1980 Corrugated Steel Pipe Plant Boise, Idaho Sales Yard 1980 Houston Construction Services 1981 South Bend, Indiana 1981 Construction Services ALMA, Michigan Corrugated 1981 Steel Pipe Plant Marion, Ohio Plant 1981 Butler, Pennsylvania Works 1982 Slab Mill -83- Houston, Texas Pipe and 1982 Tube Plant Denver, Colorado Plant 1982 AMR Resource Development 1982 Department, Middletown, Ohio Houston, Texas Works 1983 Kansas City Works 1983 Certain Low Carbon Wire Operations Certain Merchant Wire Operations Certain Fastener Operations 10" Bar Mill PAR Industries, Texas 1983 Construction Products Division 1984 Fairbanks, Texas Plant Construction Products Division 1984 Construction Service Division, Middletown, Ohio Construction Products Division 1985 Memphis, Tennessee Plant Construction Products Division 1985 Halethorpe, Maryland Plant Ambridge, Pennsylvania Works 1985 Logan, Ohio Plant 1985 Torrance, California Plant 1985 Well Control Plant 1985 Houston, Texas Manchester Inn 1985 Middletown, Ohio National Supply Company 1985 Houston, Texas Plant -84- Armco Special Risks Division 1986 Dallas, Texas Los Nietos, California Plant 1986 Gainesville, Texas Plant 1986 Kansas City, Missouri Works 1988 12" Mill #1 Melt Shop Union Wire Rope Plant 1988 -85- Armco Inc. Noncontributory Pension Plan Noncontributory Pension Plan APPENDIX 8 List Of Divested Units The sale of the following Divested Units occurred on the dates listed below. Eastern Steel Division 5/12/89 Armco Steel Company, L.P. AK Management Corporation Piqua Minerals 9/30/89 Valley Asphalt Corporation -86- FIRST AMENDMENT to the Armco Inc. Noncontributory Pension Plan The Armco Inc. Noncontributory Pension Plan is hereby amended in the following respects: 1. Plan (S) 3.6 is amended to insert the following parenthetical after the word Participant where it appears in the first line: ", other than a Participant eligible for a Deferred Vested Pension in accordance with Plan (S) 3.9," 2. Plan (S)(S) 5.1(b)(1), (2), (3), (5), (6), (7) are hereby deleted and Plan (S)(S) 5.1(b)(4) is renumbered (S) 5.1(b); and the reference to Plan (S) 5.1(b)(4)(A) where it appears in Plan (S) 5.1(a)(3), or elsewhere within the Plan, is changed to refer to the new paragraph as renumbered, Plan (S) 5.1(b). 3. Plan (S) 14.3(b) is amended to add the following new sentence thereto at the end thereof: "The minimum benefit of a Non-Key Employee will be determined without regard to the level of the Non-Key Employee's Earnings." The foregoing amendments shall be effective as of January 1, 1990. Except as herein amended, the Plan shall remain in full force and effect as heretofore constituted. This first amendment was duly adopted by the Benefit Plans Administrative Committee at its meeting held on the 23rd day of May, 1990. /s/ Richard D. Brown ---------------------- Richard D. Brown Assistant Secretary Second Amendment to the Armco Inc. Noncontributory Pension Plan The Armco Inc. Noncontributory Pension Plan as heretofore established effective as of January 1, 1989 and as thereafter amended on May 23, 1990, is further amended in the following respects: 1. Section 9.2(b) is amended to read as follows: -------------- "Except as provided in Plan (S)(S) 9.3(a) and 9.3(c)(2), the period between an Employee's Break In Continuous Service and the date of such Employee's reemployment which results in the removal of a Break In Continuous Service shall not be credited as Continuous Service; and" 2. Section 9.3(c) is amended to read as follows: -------------- (c) An Employee who incurs a Break In Continuous Service prior to becoming eligible for an immediate or a Deferred Vested Pension, who becomes reemployed by an Employing Company, whose Break In Continuous Service is not removed pursuant to Plan (S) 9.3(a)(2), and (1) whose reemployment occurred within 5 years of such Break In Continuous Service and who completes 1 year of Continuous Service following such reemployment shall have his Break In Continuous Service removed for all purposes under the Plan; and (2) whose reemployment occurred within 1 year of such Break In Continuous Service, who upon incurring a subsequent Break In Continuous Service has less than 5 years of Continuous Service shall receive credit for his Continuous Service prior to the first break described above and for the period between such Break In Continuous Service and the date of reemployment, plus any other Continuous Service which would result from application of Plan (S) 9.3(c)(1) above taking into account service credited pursuant to this paragraph, but credit for his Continuous Service shall be granted under this Plan (S) 9.3(c)(2) only for the purpose of determining eligibility for pension under Plan (S)(S) 3.2 or 3.9. 3. Appendix 5 containing provisions relating to Covered Employees of Contech Construction Products Inc. is amended in the following respects: (a) The second sentence of the of the first paragraph of Appendix 5 is deleted and a new sentence is inserted therefore reading as follows: "Except as provided in Appendix 5.5 below, all salaried employees, and those hourly employees who are not represented by the international unions with which Armco Inc. had a collective bargaining agreement at the time of the sale, participated in the Plan immediately prior to such sale." (b) A new Appendix 5.5 is added reading as follows: "Appendix 5.5. Excluded Employees. Those employees of CPD who ------------ ------------------ were not eligible to participate in the Plan at the date of sale are as follows: 10/11/90 (a) All non-exempt salaried employees not located in the headquarters offices of CPD in Middletown, Ohio, who were hired on or after June 22, 1982. (b) All exempt salaried employees hired after January 1, 1984. (c) All employees of Canyon Concrete Company. (d) All employees at any of the following locations: Winchester, KY Walnut Ridge, AR Bowling Green, OH Albuquerque, NM West Palm Beach, FL Denver, CO Sulfur Springs, TX Phoenix, AR (e) All hourly employees hired on or after May 1, 1983, at any of the following locations: Madeira, CA Springfield, IL Portage, WI Salt Lake City, UT Montgomery, AL (f) All hourly employees hired on or after June 1, 1983 at any of the following locations: Minneapolis, MN Baton Rouge, LA Des Moines, IA Schulenburg, TX Topeka, KS Wahoo, NE (g) All hourly employees hired on or after July 1, 1983 at any of the following locations: Jacksonville, FL Raleigh, NC Hillsboro, OR Mangum, OK (h) All hourly employees hired on or after February 1, 1984 at any of the following locations: Greencastle, PA Palmer, AK This Second Amendment of the Armco Inc. Noncontributory Pension Plan was approved by the Armco Inc. Benefit Plans Administrative Committee at its meeting held on October 11, 1990. /s/ Richard D. Brown ______________________________ Richard D. Brown Secretary-Benefit Plans Administrative Committee Third Amendment to the Armco Inc. Noncontributory Pension Plan The Armco Inc. Noncontributory Pension Plan as heretofore established effective as of January 1, 1989 and as thereafter amended on May 23, 1990 and October 11, 1990, is further amended in the following respects: 1. Section 9.4(a) is amended to delete the period at the end thereof and -------------- to add at the end of the paragraph the following: ", the Special Pension Payment under Article 4 or the Surviving Spouse Benefit under Article 8." The Third Amendment of the Armco Inc. Noncontributory Pension Plan was approved by the Armco Inc. Benefits Plan Administrative Committee at its meeting held on November 14, 1991. /s/ Richard D. Brown ______________________________ Richard D. Brown Secretary-Benefit Plans Administrative Committee 11/14/91 EX-10.U 4 THRIFT PLAN EXHIBIT 10(u) ARMCO INC. THRIFT PLAN FOR SALARIED EMPLOYEES Amended And Restated Effective As Of January l, 1989 ARMCO INC. THRIFT PLAN FOR SALARIED EMPLOYEES Table Of Contents
Article Page ------- ---- Background........................ 1 1 Definitions....................... 2 2 Eligibility And Vesting........... 8 3 Employer Contributions............ 9 4 Participant Contributions......... 11 5 Limitations On Contributions...... 13 6 Allocations And Valuation......... 18 7 Participant Directed Investments.. 20 8 Distributions..................... 22 9 Withdrawals While Employed........ 25 10 Loans............................. 28 11 Participating Employers........... 30 12 Plan Administration............... 32 13 Amendment Or Termination.......... 36 14 Miscellaneous Provisions.......... 38 15 Top Heavy Provisions.............. 41
BACKGROUND Armco Inc., an Ohio corporation ("Armco"), established the Armco Inc. Thrift Plan for Salaried Employees (the "Plan") effective as of January 1, 1964, to encourage eligible employees to develop individual initiative and thrift while at the same time providing them with an opportunity to invest in Armco Stock. Further, the Plan enables employees to share in the growth and prosperity of Armco, to accumulate capital for their future security and to acquire a proprietary stock interest in Armco. Armco also believes that by establishing and maintaining the Plan it is better able to attract and retain qualified employees. The assets to pay benefits provided under the Plan are held in the Armco Inc. Thrift Plan Trust. All assets under such Trust are commingled and are available to pay all benefits under the Plan. The Internal Revenue Service has determined that the Plan and its Trust meet the requirements for qualification under Sections 401(a), 401(k) and 501(a) of the Internal Revenue Code. The Plan, as herein set forth, constitutes an amendment and restatement of the Plan effective as of January 1, 1989, except as otherwise provided herein. The Plan has been restated to incorporate the First and Second Amendments to the Plan and to include amendments to Article 10 in order to comply with the recent Department of Labor Final Regulations regarding loans to participants. The Plan and its Trust are intended to continue to meet the requirements of Sections 401(a), 401(k) and 501(a) of the Internal Revenue Code of 1986, as now in effect or hereinafter amended, or any other applicable provisions of law. Effective May 1, 1989, Armco created the Armco Steel Company Thrift Plan as a result of the formation of Armco Steel Company, L.P., a Delaware limited partnership ("ASC") jointly formed by Armco and Kawasaki Steel Corporation, a Japanese corporation. Unless otherwise provided by the Armco Inc. Benefit Plans Administrative Committee, the employees of ASC who were participants in the Armco Salaried Plan prior to the formation of ASC have been permitted to continue to participate under the Armco Salaried Plan until the transfer of administration is completed, but not after January 1, 1990. ASC will make contributions to a new trust for its plan as soon as the administrative systems are established. Unless otherwise expressly provided herein, the rights of any person whose employment terminated or who retired on or before the effective date of a particular amendment, including such person's eligibility for benefits and the time and form in which benefits, if any, will be paid, shall be determined solely under the terms of the Plan as in effect on the date of his termination of employment or retirement, unless such person is thereafter reemployed and again becomes a Participant. ARTICLE 1 DEFINITIONS The following words and phrases have the meaning indicated below, unless a different meaning is plainly required by the context. 1.1. "Account" means the record or records established and maintained ------- pursuant to Plan (S) 6.5 to record funds held in the Trust for the benefit of a Participant. 1.2. "Account Balance" means the proportionate interest of the --------------- Participant's Account in the Fund or any segregated Investment Fund as of any Valuation Date. 1.3. "Affiliate" means any corporation which is included in a controlled --------- group of corporations (within the meaning of Code (S) 414(b) which includes Armco, any trade or business (whether or not incorporated) which is under common control with Armco (within the meaning of Code (S) 414(c), any organization included in the same affiliated service group (within the meaning of Code (S) 414(m)) as Armco, and any other entity required to be aggregated with Armco pursuant to the Regulations under Code (S) 414(o); except that for purposes of Plan (S) 5.7 and Article 15 with respect to the limitation on contributions, Code (S) 415(h) shall apply. 1.4. "After-Tax Contribution" means any contribution to the Plan made by a ---------------------- Participant by means of a payroll deduction, including both After-Tax Basic Contributions and After-Tax Supplemental Contributions. 1.5. "Armco" means Armco Inc., an Ohio corporation, or any successor in ----- interest to all or substantially all of its assets or any successor to Armco's ownership or one or more of the Employers. 1.6. "Armco Stock" means Armco Inc. common stock. ----------- 1.7. "Armco Stock Fund" means the segregated commingled investment account ---------------- established by the Trustee in accordance with the provisions of the Trust Agreement, the assets of which are invested in Armco Stock. 1.8. "Base Salary" means the rate at which that portion of an eligible ----------- Employee's compensation is paid as regular periodic base wages, disregarding any adjustment occasioned by a Participant's election to have Pretax Contributions made on his behalf. Base Salary shall not include any amount in excess of $200,000 (adjusted for cost-of-living in accordance with Code (S) 401(a)(17)). 2 1.9. "Basic Contribution" means any contribution made to the Plan as a ------------------ condition of participation, including both After-Tax Basic Contributions made by a Participant pursuant to a payroll deduction authorization and Pretax Basic Contributions made by an Employer on the Participant's behalf pursuant to a Pretax Authorization Agreement, and which is eligible for an Employer Matching Contribution pursuant to Plan (S) 3.1. Contributions authorized by a Participant by means of either a Pretax Authorization Agreement or a payroll deduction authorization shall first be counted as Basic Contributions until the Participant's maximum Basic Contribution percentage described in Plan (S) 4.1 is reached. 1.10. "Beneficiary" means the Participant's Spouse, or if the Participant ----------- has no Spouse or obtains the Spouse's Consent, any person or entity validly designated in writing by a Participant to receive such benefits as may be due hereunder upon the Participant's death. A designation shall become effective only upon the Participant's death and shall be valid only if received by BPAC prior to such Participant's death in such form as is acceptable to BPAC. In the absence of a valid designation or if no validly designated Beneficiary survives the Participant or if each surviving validly designated Beneficiary is legally impaired or prohibited from taking, then the Participant's Beneficiary shall be the Participant's surviving Spouse or, if none, the Participant's estate. 1.11. "Board" means the Board of Directors of Armco as the same may be ----- constituted from time to time. 1.12. "BPAC" means the Benefit Plans Administrative Committee created by ---- the Board and as constituted from time to time or any successor thereto or any subcommittee created or other delegate appointed by BPAC to exercise all or a portion of its powers. 1.13. "BPARC" means the Benefit Plans Asset Review Committee created by the ----- Board and as constituted from time to time or any successor thereto or any subcommittee created or other delegate appointed by BPARC to exercise all or a portion of its powers. 1.14. "Code" means the Internal Revenue Code of 1986, as now in effect or ---- as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 1.15. "Committee" means BPAC and BPARC or either of them. A reference to --------- the Committee shall not expand or be deemed to have expanded the authority or duty of either BPAC or BPARC to act or refrain from acting hereunder, such authority and duty being as set forth specifically herein and in any formal action of the Board establishing or modifying such authority or duty of either Committee. 1.16. "DOL" means the United States Department of Labor. --- 3 1.17. "Early Retirement" means any termination of Service on or after a ---------------- Participant's 55th birthday. 1.18. "Effective Date" of the Plan as amended and restated means January 1, -------------- 1989. 1.19. "Employee" means any person who is employed by an Employer in the -------- classification of a regular salaried employee or, when approved by BPAC a regular hourly-paid employee of the Employer, but excluding (i) any individual who is an active participant in the Armco Inc. Thrift Plan for Hourly Employees, (ii) any individual who is a member of a unit of employees whose terms and conditions of employment are subject to collective bargaining between the Employer and the representative union of which any such employee is a member and if retirement benefits have been the subject of good faith bargaining between the Employer and such representative union, unless such collective bargaining agreement expressly provides for participation hereunder, (iii) any individual who is an employee of an Affiliate which is not an Employer, (iv) any individual who is employed in a division, plant, location, or other operating unit which his Employer has elected not to include for participation in the Plan, and (v) any leased employee within the meaning of Code (S) 414(n)(2). 1.20. "Employer" means any Affiliate which, with the consent of BPAC, makes -------- participation under this Plan available for and on behalf of all of its Employees or those of its Employees employed in such division, plant, location or other operating unit or units as the Employer may specify and BPAC may approve. 1.21. "Employer Contribution" means any contribution made by an Employer, --------------------- including any Pretax Contribution, any Employer's Matching Contributions made pursuant to Plan (S)(S) 3.1 and 6.1 and any other Employer Contribution to be allocated pursuant to Plan (S)(S) 3.3 and 6.2. 1.22. "Employment Date" means the first date on which an Employee is --------------- credited with an Hour Of Service. 1.23. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- now in effect or as hereafter amended. All citations to sections of ERISA are to such sections as they may from time to time be amended or renumbered. 1.24. "Fixed Income Fund" means the segregated commingled investment ----------------- account established by the Trustee in accordance with the provisions of the Trust Agreement, the assets of which, including any income thereon, shall be (i) deposited wholly or partly with an insurance company or companies to be held and invested by such insurance company or companies under a fixed income fund arrangement established pursuant to a group deposit administration annuity 4 contract, or other type of contract, and utilizing under any such contract any general, commingled, separate or individual separate investment accounts, or (ii) invested wholly or partly in a fixed income type fund, maintained by a bank or other financial institution, through the medium of any common, collective or commingled trust fund which is qualified under Code (S)(S) 401(a) and 501(a), or (iii) invested wholly or partly by direct investments made by an Investment Manager designated from time to time by BPARC. 1.25. "Fund" means all property of the Plan, real or personal, tangible or ---- intangible, all of which shall be held in such trust or trusts as may be established by BPARC, including the assets of each and every Investment Fund which may be established or maintained from time to time. 1.26. "Highly Paid Group" means those Employees who are "highly compensated ----------------- employees" as defined in Code (S) 414(q). 1.27. "Hour Of Service" means each hour for which an Employee is directly --------------- or indirectly paid, or entitled to payment, by Armco or any Affiliate for the performance of duties as an Employee. 1.28. "Investment Fund" means the Armco Stock Fund, the Fixed Income Fund, --------------- or such other segregated, commingled fund or funds as may be from time to time established and maintained in accordance with the provisions of the Trust Agreement. 1.29. "Investment Manager" means the fiduciary appointed by the Trustee or ------------------ BPARC to manage the investment of all or a specified portion of the Fund. Each Investment Manager shall be an insurance company qualified to provide investment management services under the laws of more than one state, a bank as defined in the Investment Advisors Act of 1940, or an investment advisor properly registered under that Act and shall acknowledge in writing to BPARC that it is a fiduciary of the Plan. 1.30. "IRS" means the United States Internal Revenue Service. --- 1.31. "Local Plan Administrator" means the Local Plan Administrator ------------------------ designated pursuant to Plan (S) 12.11. 1.32. "Lower Paid Group" means those Employees who are not members of the ---------------- Highly Paid Group. 1.33. "Notice" means a written document prepared in a form acceptable to ------ either Committee, as appropriate, and if such notice is to be provided by an Employer or a Committee, either properly posted or mailed on or before the last date said notice is permitted to be given in a properly addressed envelope, postage prepaid, to the last known address of the person entitled to such notice, as shown on the Employer's records; or, if such notice is to be provided to an 5 Employer or a Committee or by any person other than an Employer or a Committee, received by the addressee on or before the last date said notice is permitted to be given. 1.34. "Participant" means any person who is entitled to the distribution of ----------- an Account or for whose benefit an Account is maintained. 1.35. "Plan" means the Armco Inc. Thrift Plan for Salaried Employees as the ---- same may be amended from time to time. 1.36. "Plan Year" means the calendar year. --------- 1.37. "Pretax Authorization Agreement" means a written agreement between ------------------------------ the Participant and his Employer, in a form acceptable to BPAC, pursuant to which the Participant elects to reduce his Base Salary and the Employer agrees to contribute such amount to the Plan on the Participant's behalf as a Pretax Contribution. 1.38. "Pretax Contribution" means any contribution to the Plan made by an ------------------- Employer on behalf of a Participant pursuant to a Participant's Pretax Authorization Agreement, including both Pretax Basic Contributions and Pretax Supplemental Contributions. 1.39. "Reemployment Date" means the date an Employee is first credited with ----------------- an Hour Of Service following a Severance From Service Date. 1.40. "Regulations" mean the applicable regulations, rulings, and ----------- guidelines (including any proposed rules or temporary rules or releases promulgated pending the issuance of such regulations, rulings or other guidelines) issued under the Code or ERISA by the IRS, the DOL, or any other governmental agency. 1.41. "Retirement" means a Participant's termination of employment for any ---------- reason, other than death, on or after the earlier of his (i) having attained age 65 or (ii) having qualified for the immediate payment of pension benefits under any defined benefit pension plan maintained by Armco or any Affiliate. 1.42. "Rollover Contribution" means contributions made by a Participant --------------------- pursuant to Plan (S) 4.5. 1.43. "Service" means all service credited under the terms of the Plan ------- prior to January l, 1989 and the aggregate of each period of employment as an Employee of Armco or any Affiliate measured from the later of (i) January 1, 1989, (ii) an Employee's Employment Date or (iii) an Employee's Reemployment Date, through any subsequent Severance From Service Date. All months of Service, whether or not consecutive, shall be aggregated and expressed as full years and fractions thereof. 6 1.44. "Severance From Service Date" means the later of (i) the date on --------------------------- which an Employee's Service terminates for any reason or (ii) the second anniversary of an Employee's absence due to layoff or disability, including a compensable disability incurred during the course of employment. 1.45. "Spouse" means the person to whom a Participant is legally married on ------ the later of (i) the date the Participant executes a Beneficiary designation form or (ii) the date the Participant qualifies for a distribution of his interest in the Plan. 1.46. "Spouse's Consent" means a written consent signed by a Participant's ---------------- Spouse in the presence of and whose signature is witnessed by a representative of BPAC or a notary public. The Spouse's Consent must acknowledge the effect on the Spouse of consenting to an action for which the consent is sought. The Spouse's consent is not required if the Participant established to the satisfaction of BPAC that he has no Spouse, that his Spouse cannot be located, or such other circumstances as may be authorized by Regulations. 1.47. "Supplemental Contribution" means any contribution made to the Plan ------------------------- by or on behalf of a Participant, other than Basic Contributions, including both Pretax Supplemental Contributions and After-Tax Supplemental Contributions. 1.48. "Trust Agreement" means the agreement of trust by and between Armco --------------- Inc. and the Trustee establishing the Armco Inc. Thrift Plan Trust and such one or more other agreements under which any asset of the Plan or any income thereon is received, held, invested, or reinvested. 1.49. "Trustee" means T. Rowe Price Trust Company, a Maryland Limited Trust ------- Company, or any other trustee which may accept appointment as such from time to time under the Trust Agreement. 1.50. "Valuation Date" means the last day of each month and such other date -------------- or dates as BPAC may establish from time to time. 7 ARTICLE 2 ELIGIBILITY AND VESTING 2.1. Eligibility To Participate. Each Employee who was a Participant in -------------------------- the Plan on December 31, 1987 shall continue to be a Participant. Each other Employee shall be eligible to participate in the Plan in accordance with Plan (S) 2.2 on his Employment Date or Reemployment Date. 2.2. Participation Election. An eligible Employee may elect to become a ---------------------- Participant by completing and filing the appropriate written enrollment forms with the Local Plan Administrator. Such election forms shall include a Pretax Authorization Agreement and/or a payroll deduction authorization specifying the amount of the contributions elected pursuant to Article 4, an investment direction pursuant to Plan (S) 7.1, a Beneficiary designation pursuant to Plan (S) 1.10 and an agreement to be bound by all the terms and conditions of the Plan under the Trust. An Employee who so elects shall become a Participant on the first pay day of the month following the date on which such forms are filed. 2.3. Vesting Of Contributions. Employer Contributions (including Pretax ------------------------ Contributions) and Participant Contributions (including Rollover Contributions) shall be fully vested and nonforfeitable from and after the date such contributions are received by the Trustee. 8 ARTICLE 3 EMPLOYER CONTRIBUTIONS 3.1. Employer Matching Contributions. Subject to Article 5, each Employer ------------------------------- shall contribute to the Plan for each Plan Year an amount equal to 100% of the aggregate Basic Contributions made during such Plan Year by those Participants employed by such Employer during the Plan Year; provided, however, that each Employer, by action of its board on or before the last date for the payment of its contribution hereunder, may contribute for any Plan Year such greater or lesser amount as its board of directors may determine or may elect to make no contribution at all. 3.2. Pretax Contributions. Each Employer shall, unless otherwise approved -------------------- by BPAC, allow its Employees to enter into a Pretax Authorization Agreement with the Employer. If all or any portion of any Pretax Contribution is not deductible by the Employer for the fiscal year for which paid, the Employer shall immediately give Notice of such fact to BPAC. BPAC shall either pay such Contribution to the Participant for whose benefit the contribution was made or shall, to the extent permitted by law, allow the Participant to reclassify the contribution as an After-Tax Contribution. 3.3. Additional Employer Contributions. Subject to Article 5, in addition --------------------------------- to the contributions under Plan (S)(S) 3.1 and 3.2, an Employer may contribute such additional amounts to the Plan from time to time as may be determined by its board of directors and approved by BPAC. 3.4. Right To Discontinue Contributions. Each Employer reserves the right ---------------------------------- to permanently discontinue its contributions hereunder by Notice to BPAC. 3.5. Last Date For Payment Of Contributions. Each Employer will make -------------------------------------- payment of its contribution for each Plan Year directly to the Trustee, or in such other manner as BPARC may direct, on or before the last date prescribed by law for the filing of its federal income tax return, including any extension of time for such filing, for the fiscal year which ends within or concurrently with the Plan Year for which such contribution is made. Neither the Trustee nor either Committee shall be under any duty to inquire into the correctness of the amounts contributed and paid over to the Trustee hereunder, nor shall the Trustee or either Committee be under any duty to enforce payment of any contribution to be made hereunder by any Employer. 3.6. Contribution Of Employer Stock. Armco may make its contribution ------------------------------ hereunder in cash or by transferring shares of Armco Stock to the Trustee from shares held in treasury or from authorized but previously unissued shares. Armco may make a contribution of Armco Stock on behalf of another Employer provided appropriate intercorporate transfers are made to assure that 9 the Employer is bearing the expense of its contribution. Contributions of Armco Stock will be valued at the average of the daily high and low reported on the New York Stock Exchange - Composite Transactions for the day the Trustee receives the contribution. 3.7. Exclusive Benefit Rule. The assets of the Plan shall not inure to ---------------------- the benefit of any Employer and shall be held for the exclusive purpose of providing benefits to Participants and/or their Beneficiaries and for defraying the reasonable expenses of administering the Plan. Notwithstanding the foregoing, (i) any portion of an Employer's Contribution which is made by virtue of a mistake of fact shall, unless prohibited by law, be returned to the Employer within one year after the payment of the contribution or, at the option of the Employer, shall be treated as a carry-over contribution; (ii) each Employer's Contribution is conditioned upon the deductibility of the contribution for federal income tax purposes under Code (S) 404 and to the extent any such contribution is disallowed as a deduction, such contribution shall, in the Employer's discretion, be treated as a carry-over contribution or be returned to the Employer upon demand therefor made within one year of the disallowance; and (iii) each Employer's Contribution is conditioned upon the Plan's continued qualification for favorable federal income tax treatment under the applicable provisions of Code (S) 401 and any contribution paid with respect to a Plan Year during which the Plan fails to so qualify shall, in the Employer's discretion, be treated as a carry-over contribution or be returned to the Employer upon demand therefor made within one year following the date of denial of such qualification. 10 ARTICLE 4 PARTICIPANT CONTRIBUTIONS 4.1. Basic Contributions. Subject to Article 5, Basic Contributions may ------------------- not be less than 1% of a Participant's Base Salary nor more than the percentage of the Participant's Base Salary shown in the following table:
Years Of Service As Of The First Day Of Each Maximum Basic Contributions Calendar Quarter As A Percentage Of Base Salary ------------------ ------------------------------ Less than 10 years 3% 10 years, but less than 20 4% 20 years or more 5%
4.2. Supplemental Contributions. Subject to Article 5, each Participant -------------------------- who is contributing at his maximum permissible Basic Contribution rate may authorize Pretax Supplemental Contributions made on his behalf by means of a Pretax Authorization Agreement and/or After-Tax Supplemental Contributions made by means of a payroll deduction authorization. 4.3. Changes To Basic And/Or Supplemental Contributions. -------------------------------------------------- A Participant may change his Basic and/or Supplemental Contribution rate effective as of the first day of January, April, July, or October of any Plan Year by filing the appropriate form with the Local Plan Administrator by the last work day of the month preceding the month in which such change is to be effective. 4.4. Suspension Of Contributions. A Participant may suspend his Basic --------------------------- and/or Supplemental Contributions effective as of the first day of any month by filing the appropriate form with the Local Plan Administrator by the last work day of the month preceding the month in which such suspension is to be effective. Any suspension of Basic Contributions shall concurrently suspend any Supplemental Contributions which may have been authorized by the Participant. A Participant who suspends Basic Contributions may not resume making Basic or Supplemental Contributions for 3 months following the date such suspension is effective. Such Participant may elect to resume making Basic and Supplemental Contributions following such 3-month suspension period, by filing new enrollment forms with the Local Plan Administrator. Such election shall be effective on the first pay day of the month following the date on which such forms are filed. 4.5. Rollover Contributions. An Employee may make a Rollover Contribution ---------------------- of cash, or such other property as BPARC may specifically approve in advance, of the taxable portion of a "qualifying rollover distribution" which the Employee received from another plan and which is contributed to the Plan in 11 compliance with the requirements for the Employee's making a federal income tax- free "rollover" under the Code. BPAC shall obtain such evidence, assurances, opinions and certifications as it deems necessary to establish to its satisfaction that any amount contributed to the Plan as a Rollover Contribution was received by the Employee as a qualifying rollover distribution and that the acceptance of such Rollover Contribution will not affect the qualification of the Plan or the tax-exempt status of the Trust under Code (S)(S) 401(a) and 501(a). Any Rollover Contribution which is found by the IRS as not being qualified for tax-free rollover treatment shall be returned to the Participant. Any expense incident to or liability incurred by the Plan or any fiduciary of the Plan because of transfer of such disqualified assets to the Trustee shall be borne solely by and charged to the individual who requested the transfer. 12 ARTICLE 5 LIMITATIONS ON CONTRIBUTIONS 5.1. Maximum Employer Contributions. Subject to Plan (S)(S) 5.5 and 5.6, ------------------------------ in no event shall Employer Contributions in any Plan Year, including for this purpose an Employer's Matching and Pretax Contributions, exceed in the aggregate an amount equal to 15% of the compensation of all Participants in its employ during such Plan Year or the amount otherwise deductible by the Employer for such year for federal income tax purposes. 5.2. Maximum Pretax Contributions. Subject to Plan (S)(S) 5.4, 5.5 and ---------------------------- 5.6, Pretax Contributions made on behalf of a Participant in any Plan Year shall not exceed $7,000 (adjusted for cost-of-living in accordance with Code (S) 402(g)). In the event that the aggregate amount of Pretax Contributions made on behalf of a Participant exceeds the limitation in the previous sentence, the amount of such excess, increased by any income and decreased by any losses attributable thereto, shall be refunded to the Participant no later than April 15 of the calendar year following the calendar year for which the Pretax Contributions were made. 5.3. Maximum After-Tax Supplemental Contributions. Subject to Plan (S)(S) -------------------------------------------- 5.4 and 5.6, a Participant's After-Tax Supplemental Contributions for any Plan Year shall not exceed 10% of his Base Salary for such Plan Year. 5.4. Maximum Aggregate Contributions. Subject to Plan (S)(S) 5.5 and 5.6, ------------------------------- a Participant's total Basic Contributions and Supplemental Contributions may not, for any Plan Year, exceed 20% of the Participant's Base Salary for such Plan Year. 5.5. Actual Deferral Percentage Tests. -------------------------------- (a) Notwithstanding any provision of the Plan to the contrary, the Actual Deferral Percentage for the Plan Year for members of the Highly Paid Group shall not exceed the greater of the following Actual Deferral Percentage tests: (i) the Actual Deferral Percentage for the Plan Year of members of the Lower Paid Group multiplied by 1.25; or (ii) the Actual Deferral Percentage for the Plan Year of members of the Lower Paid Group multiplied by 2.0, provided that the Actual Deferral Percentage for members of the Highly Paid Group does not exceed the Actual Deferral Percentage of members of the Lower Paid Group by more than 2%. (b) The "Actual Deferral Percentage" for a Plan year means, for each specified group of Employees, the average of the ratios (calculated separately for each Employee in such group) of (i) the amount of Pretax Contributions made on behalf of each Employee for the Plan Year to (ii) the amount of each Employee's compensation (as defined in Code (S) 414(s)) for such 13 Plan Year. An Employee's Actual Deferral Percentage shall be zero if no Pretax Contributions are made on his behalf for such Plan year. (c) BPAC shall determine as of the end of the Plan Year, and at such other time or times as BPAC in its discretion shall determine, whether one of the Actual Deferral Percentage tests specified in (a) above is satisfied for such Plan Year. This determination shall be made after first determining the amount, if any, of excess deferrals (within the meaning of Code (S) 402(g)) as provided in Plan (S) 5.2. In the event that neither of the Actual Deferral Percentage tests is satisfied, BPAC shall, (i) to the extent permitted under the Code and the Regulations, and to the extent any such recharacterization would not cause a violation of the requirements of Plan (S) 5.6(a), if the Participant so elects, recharacterize Excess Contributions as After-Tax Contributions, in the manner described in (d) below, or (ii) to the extent such recharacterization is not possible or the Participant does not so elect, refund the Excess Contributions in the manner described in (e) below. "Excess Contributions" mean, with respect to any Plan Year, the excess of the aggregate amount of Pretax Contributions (and any earnings and losses allocable thereto) made on behalf of members of the Highly Paid Group for such Plan Year, over the maximum amount of Pretax Contributions that could be made on behalf of the Highly Paid Group without violating the requirements of Plan (S) 5.5(a), determined by reducing Pretax Contributions made on behalf of members of the Highly Paid Group in order of the Actual Deferral Percentages beginning with the highest of such percentages. (d) To the extent provided in (c) above, in accordance with the Code and the Regulations, if a member of the Highly Paid Group so elects in writing, BPAC shall recharacterize Excess Contributions of such Participant for a Plan Year as After-Tax Contributions in order to satisfy the requirements of (a) above, in which event the amount of Excess Contributions so recharacterized shall, to the extent permitted by the Code and the Regulations, be treated as having been refunded to the Participant and then contributed by the Participant as an After-Tax Contribution. (e) If a Highly Compensated Participant does not elect recharacterization under (d) above, or if required in order to comply with the provisions of (a) above and the Code, BPAC shall refund Excess Contributions for a Plan Year to the Participant. The distribution of such Excess Contributions shall be made to members of the Highly Paid Group to the extent practicable before the 15th day of the third month immediately following the Plan Year for which such Excess Contributions were made, but in no event later than the end of the Plan Year immediately following the Plan Year for which such Excess Contributions were made. Any such distribution shall be made to each member of the Highly Paid Group on the basis of the respective portions of such amounts attributable to each member of the Highly Paid Group. 14 5.6. Average Contribution Percentage Tests. ------------------------------------- (a) Notwithstanding any provisions of the Plan to the contrary, the Average Contribution Percentage for the Plan Year for members of the Highly Paid Group shall not exceed the greater of the following Average Contribution Percentage tests: (i) the Average Contribution Percentage for the Plan Year of members of the Lower Paid Group multiplied by 1.25; or (ii) the Average Contribution Percentage for the Plan Year of members of the Lower Paid Group multiplied by 2.0, provided that the Average Contribution Percentage for members of the Highly Paid Group does not exceed the Average Contribution Percentage for members of the Lower Paid Group by more than 2%. (b) The "Average Contribution Percentage" for a Plan Year means, for each specified group of Employees, the average of the ratios (calculated separately for each Employee in such group) of (i) the sum of (A) Employer Matching Contributions, (B) After-Tax Contributions, and (C) if BPAC so elects in accordance with and to the extent permitted by the Regulations, Pretax Contributions, credited to the Employee's Account for such Plan Year, to (ii) the amount of his compensation (as defined in Code (S) 414(s)) for the Plan Year. An Employee's Average Contribution Percentage shall be zero if no contributions are made on his behalf for such Plan Year. (c) BPAC shall determine as of the end of the Plan Year, and at such other time or times as BPAC in its discretion shall decide, whether one of the Average Contribution Percentage tests specified in (a) above, is satisfied for such Plan Year. This determination shall be made after first determining the treatment of excess deferrals (within the meaning of Code (S) 402(g)) as provided in Plan (S) 5.2 and then determining the treatment of Excess Contributions under Plan (S) 5.5. In the event that neither of the Average Contribution Percentage tests is satisfied, BPAC shall refund the Excess Contributions in the manner described in (d) below. For purposes of this Plan (S) 5.6, "Excess Contributions" mean with respect to any Plan Year and with respect to any Participant, the excess of the total amount of Employer Matching Contributions, After-Tax Contributions and Pretax Contributions (if the Regulations permit and BPAC elects to take Pretax Contributions into account when calculating the Average Contribution Percentage) and any earnings and losses allocable thereto, credited to the Accounts of members of the Highly Paid Group for such Plan Year, over the maximum amount of such contributions that could be made without violating the requirements of (a) above. The amount of each Highly Paid Group member's Excess Contributions shall be determined by reducing the Average Contribution Percentage of each member of the Highly Paid Group whose Average Compensation Percentage is in excess of the percentage otherwise permitted under (a) above to the maximum amount permitted under (a) above. 15 (d) If BPAC is required to refund Excess Contributions to any member of the Highly Paid Group for a Plan Year in order to satisfy the requirements of (a) above, then such refund shall be made to the extent practicable before the 15th day of the third month immediately following the Plan Year for which such Excess Contributions were made, but in no event later than the end of the Plan Year following the Plan Year for which such excess contributions were made. The amounts so refunded shall be made in the following order of priority: (i) first by distributing After-Tax Contributions, and earnings thereon credited to the Participant's Account; (ii) then by distributing Pretax Contributions (to the extent such amounts are included in the Average Contribution Percentage) and earnings thereon credited to the Participant's Account; and (iii) finally by distributing Employer Matching Contributions and earnings thereon credited to the Participant's Account. All such distributions shall be made to members of the Highly Paid Group on the basis of the respective portions of such amounts attributable to each member of the Highly Paid Group. 5.7. Annual Additions Limitation. --------------------------- (a) The maximum Annual Addition which may be credited for a Plan Year to each Participant's Account shall not exceed the lesser of (1) 25% of his compensation for the Plan Year or (ii) $30,000, as adjusted from time to time in accordance with Code (S) 415(d). For purposes of this Plan (S) 5.7, "Annual Addition" means the total amount of Pretax Contributions, Employer Matching Contributions, Additional Employer Contributions and After-Tax Contributions credited to a Participant's Account during the Plan Year, "compensation" means compensation as defined under Treasury Regulation 1.415-2(d) and the "limitation year" means the Plan Year. This limitation shall be administered in compliance with the requirements of Code (S) 415, the provisions of which are incorporated herein by reference. (b) If the Annual Addition to a Participant's Account exceeds the maximum permissible under (a) above, calculated after the adjustments made in accordance with Plan (S)(S) 5.5 and 5.6, then the excess amount ("Excess Amount") shall be disposed of, but only to the extent necessary, by first returning the After-Tax Contributions credited to the Participant's Account. If the excess may be distributed by the return of After-Tax Contributions credited to the Participant's Account, then the After-Tax Contributions shall be returned, without earnings, gains or losses attributable thereto, but such earnings, gains or losses will be considered as an Employee contribution for the limitation year in which the After-Tax Contributions were returned. If it is necessary to return either Pretax Contributions or Employer Matching Contributions credited to the Participant's Account, then such contributions shall be set aside in a suspense account to be reallocated to the Participant from whose Account the contributions were removed in order to satisfy the Annual Additions limitation year in the next succeeding limitation year or any subsequent limitation year, as necessary in order to allow the reallocation without violation of the Annual 19 Additions limitation herein described; provided, however, that if the Participant is not employed on the last day of the Plan Year, then the Excess Amounts remaining and held unallocated in a suspense account for such Participant shall, in the next limitation year, be applied to reduce Employer Matching Contributions for such year and shall be reallocated to all other Participants in the next succeeding limitation year, until exhausted. (c) If after application of (b) above, an Excess Amount still exists, then (i) if the Participant is covered by the Plan at the end of the limitation year, the Excess Amount in the Participant's Account will be used to reduce Employer Matching Contributions for such Participant in the next limitation year, and each succeeding limitation year if necessary, or (ii) if the Participant is not covered by the Plan at the end of the limitation year, the Excess Amount will be held unallocated in a suspense account and will be applied to reduce future Employer Matching Contributions for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary." 17 ARTICLE 6 ALLOCATIONS AND VALUATION 6.1. Allocation Of Employer Matching Contributions. Each Employer's --------------------------------------------- Matching Contribution for each Plan Year, if any, made pursuant to Plan (S) 3.1 shall be paid to the Trust and allocated not less often than annually among those Participants who are Employees of the Employer and who made Basic Contributions during the Plan Year pro rata based upon the ratio that each such Participant's Basic Contribution bears to the aggregate of all such Participant's Basic Contributions. 6.2. Allocation Of Additional Employer Contributions. ----------------------------------------------- If an Employer makes additional contributions to the Plan pursuant to Plan (S) 3.3, such contributions shall be paid to the Trust in a single payment and shall be allocated among all Employees of such Employer who are employed on the last day of the Plan Year for which such contribution is made in the proportion that each such Employee's compensation for such Plan Year bears to the compensation of all Employees of such Employer. 6.3. Investment Of Employer Contributions. Employer Contributions ------------------------------------ (excluding Pretax Contributions) for each Plan Year shall be invested in the Armco Stock Fund at the average price per share paid by the Trustee to purchase shares of Armco Stock for the Armco Stock Fund for such contribution. An Employer may direct the investment of Employer Contributions to one or more other Investment Funds, as provided in Plan (S) 7.3. Pretax Contributions shall be invested as Participant contributions in accordance with Plan Article 7. Nothing herein shall be deemed to limit or prevent a Participant from fully exercising any right with respect to Armco Stock held in the Trust for his benefit, such as the right to vote shares or tender shares, which rights are reserved to the Participant under the terms of the Trust Agreement. 6.4. Allocation Of Participant Contributions. Each Participant's Basic or --------------------------------------- Supplemental Contributions (including any Pretax Contributions made on his behalf) for each pay period shall be allocated not less often than monthly, to such Participant's Account. Any Rollover Contribution, including any earnings, gains or losses properly allocable thereto, shall each be separately identified and accounted for. 6.5. Establishment Of Accounts. BPAC shall maintain, or cause to be ------------------------- maintained, accurate and complete records of all contributions made by or on behalf of each Participant, the investment thereof and the expenses, earnings or losses allocable thereto, and shall establish and maintain in the name of each Participant, as appropriate, an Armco Stock Fund Account, a Fixed Income Fund Account, and such other accounts and subaccounts as are necessary for the proper administration of the Plan. The establishment and maintenance of, or 18 allocations and credits to, the Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of the Trust. 6.6. Fund Earnings Or Losses. The accounting method used shall assure ----------------------- that the current fair market value of the assets held in each Investment Fund, as determined by the Trustee, exclusive of any Employer's or Participant's contribution paid to or accrued by the Fund which may be allocable to such Investment Fund for the period for which the valuation is made, shall be determined and allocated not less often than quarterly as of each Valuation Date among the Participants' Accounts in the Investment Fund in the proportion that each Participant's Account in such Investment Fund bears to the aggregate of all Participants' Accounts in such Investment Fund as of such Valuation Date. 6.7. Correction Of Errors. Notwithstanding anything to the contrary -------------------- contained in the Plan or the Trust Agreement, each Committee is fully empowered to do, at any time and from time to time, all things necessary or convenient to correct any accounting or recordkeeping errors or to maintain the Plan's tax qualified status, including any error made in calculating the Account Balance of any Participant, and no Participant shall have or be deemed to have any interest in any sum erroneously credited to his Account. 6.8. Other Accounting Procedures. Each Committee may, in its respective --------------------------- discretion and if administratively necessary or desirable, establish such other accounting or other procedures as may be appropriate to carry out its function hereunder and to implement the intent of the Plan. Nothing contained herein shall require or be deemed to require deviation from the procedures herein established. 19 ARTICLE 7 PARTICIPANT DIRECTED INVESTMENTS 7.1. Investment Of Basic And Supplemental Contributions. Each Participant -------------------------------------------------- shall, at the time he files his enrollment forms in accordance with Plan (S) 2.2, direct that his Basic and Supplemental Contributions be allocated to and invested in the Armco Stock Fund, the Fixed Income Fund, or such other Investment Funds as may be established by BPARC. Such allocations shall be made in increments of 10% or more as BPAC may from time to time determine. Each Participant may, once during each calendar quarter in accordance with procedures established by BPAC, change the Investment Fund or Funds to which future Basic and/or Supplemental Contributions are to be allocated. 7.2. Rollover Contributions. Each Participant shall specify concurrently ---------------------- with the making of any Rollover Contribution, in accordance with procedures established by BPAC, the Investment Fund or Funds to which such contribution shall be allocated and invested. Such allocation shall be made in increments of 10% or more as BPAC may from time to time determine. 7.3. Transfers Between Investment Funds. Each Participant may, once ---------------------------------- during each calendar quarter, in accordance with procedures established by BPAC, direct that all or a specified portion of his Account, including any earnings thereon, held in any one or more Investment Funds be transferred from such Investment Fund or Funds to any other Investment Fund or Funds. 7.4. Absence Of Direction. If a Participant fails or refuses to direct -------------------- the investment of his current contributions as provided in Plan (S) 7.1 such Participant shall be deemed to have elected to direct the investment of such contributions in the Fixed Income Fund or any successor to such Investment Fund or to such other Investment Fund as the Trustee may from time to time recommend or BPARC shall select. 7.5. No Direction By A Beneficiary. A Participant's Beneficiary may not ----------------------------- exercise the rights afforded to Participants pursuant to this Article 7. 7.6. Delayed Effective Date Of Direction. Either Committee or the Trustee ----------------------------------- may, in their sole discretion and without liability therefore, delay the effective date of any investment direction delivered by any Participant in order to enable the orderly liquidation or reinvestment of assets or for such other reason as the Trustee deems to be appropriate. In no event shall any direction, properly given, be effective unless actually received. 7.7. Trustee's Limited Discretion. The Trustee may not and shall not be ---------------------------- under any duty or obligation to purchase or sell shares of Armco's Stock except as may be necessary to invest funds required by the terms of the Plan to be invested in the Armco Stock Fund regardless of the current market 20 conditions, the presence of a bona fide tender offer or any other condition affecting or tending to affect the value of Armco's Stock. 7.8. Voting Rights. Each Participant shall have the exclusive right (i) ------------- to direct the Trustee to vote whole shares held by the Trustee for the Participant's benefit in the Armco Stock Fund, and (ii) to exercise any and all other rights which may accrue to an owner of any shares so held in the Armco Stock Fund. In the absence of any such directions, neither the Trustee nor either Committee may exercise any right accruing with respect to any shares held in the Armco Stock Fund. 21 ARTICLE 8 DISTRIBUTIONS 8.1. Distribution Upon Termination Of Service. Any Participant who ---------------------------------------- terminates Service for any reason other than Retirement or death shall be entitled to payment in full of his Account Balance within a reasonable time after the date of his termination of Service, in kind and/or in cash at the net value on the date on which the assets in which his Account is invested are liquidated. If the Participant's Account Balance is greater than $3,500 on the date he terminates Service, the Participant may make a one-time irrevocable election at the time of his termination of Service to receive an immediate distribution of his Account Balance or to leave his Account Balance in the Plan until April 1 of the calendar year in which the Participant attains age 65. If the Participant elects to have his Account Balance remain in the Plan after his termination of Service, his Account Balance will be invested in the Fixed Income Fund, or any successor to such Investment Fund or to such other Investment Fund as the Trustee may from time to time recommend or BPARC shall select. If the Participant should die prior to distribution thereof, such Participant's Account Balance, will be distributed in accordance with Plan (S)(S) 8.3 and 8.5. 8.2. Distribution Upon Retirement. Any Participant who terminates Service ---------------------------- because of his Retirement shall be entitled to payment in full of his Account Balance, in kind and/or in cash at the net value on the date on which the assets in which his Account is invested are liquidated. Unless a deferred payment is elected in accordance with Plan (S) 8.4, such distribution shall be made within a reasonable time following such Participant's Retirement. 8.3. Distribution Upon Death. Distribution of a Participant's Account ----------------------- Balance shall be made within a reasonable time following the death of a Participant in kind and/or in cash at the net value on the date on which the assets in which his Account is invested are liquidated. 8.4. Deferred Distribution. A Participant who is entitled to distribution --------------------- under Plan (S) 8.2 may direct, by Notice to BPAC on or before the date he terminates Service, that distribution of his Account Balance be deferred until any date on or before the first day of the Plan Year in which the Participant attains age 70, or such earlier date as the Participant may subsequently request. 8.5. Form Of Distribution. Any portion of a Participant's Account Balance -------------------- invested in any Investment Fund other than the Armco Stock Fund shall, upon Retirement or other termination of Service, be paid in a single sum payment by check drawn on the Trust and payable to the order of the Participant or, if he is deceased, to the order of his Beneficiary. A Participant's distributable interest in the Armco Stock Fund shall be paid in a single sum payment either in cash or in whole shares of Armco Stock together with cash representing the value of any fractional shares or any contributions theretofore 22 not yet invested in Armco Stock, as the Participant may specify by Notice to BPAC. In the case of a distribution following the Participant's death, the Participant's distributable interest in the Armco Stock Fund shall be paid to his Beneficiary in whole shares of Armco Stock together with cash representing the value of any fractional shares. The payment of a Participant's interest in the Armco Stock Fund in cash shall be accomplished by the sale of the Participant's shares of Armco Stock. 8.6. Statutory Payment Date Before January 1, 1989. Unless a Participant --------------------------------------------- elects to defer the commencement of benefits hereunder to a date not later than the first day of the Plan Year in which such Participant attains age 70, the payment of benefits under the Plan will begin not later than the 60th day after the latest of the close of the Plan Year in which the Participant (i) attains age 65, (ii) attains the 10th anniversary of his first date of participation in the Plan, or (iii) terminates his Service. Notwithstanding the foregoing, distribution of a benefit to any Participant who is a 5% owner with respect to the Plan Year ending in the calendar year in which such Participant attains age 70-1/2 must commence no later than the April 1st of the calendar year in which such Participant attains age 70-1/2. No distribution of any amounts attributable to contributions paid after January 1, 1985 on behalf of a Participant (other than voluntary non-deductible contributions made by him as a 5% owner) while he was a 5% owner shall be made to a Participant who is or has been a 5% owner prior to such Participant's attaining age 59-1/2 for any reason other than such Participant's death or disability. For purposes of this Plan (S) 8.6, a 5% owner shall mean a 5% owner of such Participant's employer as defined in Code (S) 416(i)(1)(B)(i). 8.7. Statutory Payment Date After December 31, 1988. Notwithstanding Plan ---------------------------------------------- (S) 8.6, effective from and after January 1, 1989, any benefit payable to a Participant hereunder shall commence no later than April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 regardless of whether the Participant has terminated Service. 8.8. Transferred Employees. If a Participant ceases to be an Employee by --------------------- reason of a transfer of employment to a class of employees of an Employer not eligible for participation or to an Affiliate which is not an Employer then, except as hereinafter provided, such Participant's Account Balance shall be held for distribution until such time as such Participant's Service terminates. BPAC may, in its sole discretion, direct the Trustee to transfer and the Trustee shall thereupon transfer such Participant's Account Balance directly to the trustee of any other qualified defined contribution plan of an Affiliate in which the Participant may then be participating. Any such transfer shall be expressly conditioned upon the existence of provisions in such transferee plan and trust to the effect that the interest so transferred shall be fully vested and nonforfeitable from and after the date of transfer and shall be separately accounted for and held for the benefit of the Participant. Transfer by the 23 Trustee hereunder shall be in full satisfaction of any claim for benefits hereunder by such Participant. 8.9. QDRO Accounts. An Account established for the benefit of an ------------- alternate payee (who is not an Employee) under a Qualified Domestic Relations Order (as provided in Plan (S) 14.2) shall be treated in the same manner as an Account of a Participant who had terminated service. 24 ARTICLE 9 WITHDRAWALS WHILE EMPLOYED 9.1. Withdrawals. Withdrawals may be made not more often than twice in ----------- any Plan Year from After-Tax Contributions and/or Employer Matching Contributions, or any earnings thereon. Subject to the provisions of Plan (S)(S) 9.3 and 9.4, withdrawals may be made from Pretax Contributions, or any earnings thereon, at any time. Withdrawals may be made from all or a specified portion of contributions credited to an Account from such Investment Fund or Funds as the Participant may specify, by filing the appropriate form with the Local Plan Administrator by the last work day of the month preceding the month in which such withdrawal is to be effected. No withdrawal may exceed the lesser of the amount specified by the Participant or the fair market value of the contributions from which the withdrawal is specified to be made. 9.2. Employer Matching Contributions. Withdrawals from Employer Matching ------------------------------- Contributions may only be made from those contributions credited to the Participant's Account for at least two full calendar years prior to the date of withdrawal. 9.3. Withdrawal Of Pretax Contributions. Pretax Contributions and ---------------------------------- earnings attributable thereto may be withdrawn prior to a Participant's attaining age 59-1/2, only upon an adequate showing of hardship in accordance with Plan (S) 9.4. Withdrawals may be made solely from Pretax Contributions but not from earnings thereon. 9.4. Hardship Withdrawals. -------------------- (a) Subject to Plan (S) 9.3 and the following provisions of this Plan (S) 9.4, a Participant who has made all permissible withdrawals (other than hardship withdrawals) and obtained all nontaxable loans currently available under this Plan and all other plans maintained by the Employer in which the Participant also participates, may make a withdrawal of at least $500 from Pretax Contributions credited to his Account by filing the appropriate forms with the Local Plan Administrator by the 15th day of the month preceding the month in which such withdrawal is to be effective. Such forms shall include the Participant's written representation that the amount of the hardship withdrawal does not exceed the amount necessary to satisfy a heavy and immediate financial need of the Participant (as described in subsection (b) below). (b) Hardship withdrawals shall be available only if the withdrawal is made on account of an immediate and heavy financial need of the Participant resulting from: 25 (i) medical expenses described in Code (S) 213(d) incurred by the Participant, his spouse or any dependent of the Participant (as defined in Code (S) 152), (ii) the purchase (excluding mortgage payments) of a principal residence for the Participant, (iii) payment of tuition for the next semester or quarter of post-secondary education for the Participant or his spouse, children or dependents, (iv) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence, or (v) such other events as may be prescribed by the IRS. (c) Any Participant who makes a hardship withdrawal shall not be permitted to make Basic or Supplemental Contributions under the Plan for the 12- month period immediately following the date on which the hardship withdrawal is received. In addition, the maximum amount of Pretax Contributions (as provided on Plan (S) 5.2) made on behalf of such Participant for the Plan Year immediately following the Plan Year in which the hardship withdrawal is made shall be reduced by the amount of Pretax Contributions made on such Participant's behalf for the Plan Year in which the hardship withdrawal was made. 9.5. Form Of Payment. --------------- (a) Any portion of a Participant's Account Balance withdrawn from any Investment Fund other than the Armco Stock Fund shall be paid in a single payment by check drawn on the trust and payable to the order of the Participant or, if he is deceased, then to the order of his Beneficiary. (b) Sums withdrawn from a Participant's Account invested in the Armco Stock Fund shall be paid in a single payment in cash or in whole shares of Armco Stock together with cash representing the value of any fractional shares or any contributions theretofore not yet invested in Armco Stock, as the Participant may specify by Notice to BPAC. If such sums are to be withdrawn in cash, the shares shall be sold and the net proceeds distributed. Shares to be withdrawn shall be valued at the price of shares sold by the Trustee for cash withdrawals. If that average cost of the Participant's shares is less than the fair market value of the shares, the Participant's application requesting a withdrawal shall be deemed to include a request to withdraw such net unrealized appreciation. If that average cost exceeds the fair market value of the shares, to the extent the withdrawal is from Participant contributions, the amount of the unrealized net loss shall be recorded as undistributed Participant contributions. 26 ARTICLE 10 LOANS 10.1. Permitted Loans. Subject to the following provisions of this Article --------------- 10, any Participant who has not terminated Service, who is receiving pay from his Employer and who is eligible to contribute to the Plan, may make application to borrow from his Account Balance, from such Investment Fund or Funds as he may specify, by filing the appropriate form with the Local Plan Administrator by the 20th day of any month. Effective as of October 18, 1989, any Participant may make application to borrow from his Account Balance. Any loan application received after the 20th day of the month shall be returned to the Participant. Determination of whether a loan shall be approved shall be made under procedures developed by BPAC and applied in a uniform and nondiscriminatory manner. Approved loans shall be distributed to the Participant by the 20th day of the month immediately following the month in which the loan application is made. 10.2. Required Consent. To the extent required by the Code and ---------------- Regulations, no loan shall be made to any Participant unless BPAC receives the written consent of the Participant and, if the Participant is married, of the Participant's Spouse, to the loan and to any potential reduction in the Participant's Account Balance resulting from such loan, and authorizing payroll deductions for the repayment of the loan. 10.3. Limitations On Loans. -------------------- (a) Loans under the Plan must be for a minimum of $1,000 and in no event may exceed the lesser of (a) $50,000 reduced by the excess (if any) of (i) the highest outstanding loan balance owed by the Participant during the one-year period ending on the day preceding the date of the loan, over (ii) the outstanding balance of all other loans from the Plan to the Participant on the date of the loan, or (b) 50% of his Account Balance; provided, however, that the maximum amount available for loan from each Investment Fund selected by the Participant may not exceed 95% of the value of the Participant's interest in such Investment Fund determined on the date the Participant's Account is debited for the loan. (b) No more than one loan shall be made to a Participant at any time and any outstanding loan must be repaid in full before another loan may be granted. (c) Loans will first be applied against After-Tax Contributions credited to a Participant's Account, then against Employer Matching Contributions credited to a Participant's Account and finally against Pretax Contributions credited to a Participant's Account. 27 10.4. Required Collateral. A promissory note shall be signed by the ------------------- Participant and his Spouse, if any, pledging not more than 50% of the present value of the Participant's Account Balance and any other security deemed necessary as collateral for the loan. 10.5. Repayment. --------- (a) Each loan to a Participant shall be repaid by payroll deductions in substantially equal installments of no less than $50 consisting of principal and interest. Each loan shall have a repayment period of not less than 1 year and not more than 5 years, except that a loan that is used to buy or build the borrower's principal residence may have a repayment period of not more than 10 years. Principal residence status will be determined at the time application for the loan is made. Any loan may be prepaid in whole without penalty at any time. (b) As each repayment of the loan is received, the entire amount representing both principal and interest shall be credited to the Participant's Account and invested in accordance with the Participant's investment allocation election in effect at the time of each repayment. 10.6. Interest Charges. Effective as of October 18, 1989, the interest ---------------- rate on loans shall be a reasonable rate of interest commensurate with the prevailing interest rate charged on similar commercial loans by persons in the business of lending money. Unless otherwise established by BPAC, the interest rate, as established by the Chase Manhattan Bank, N.A., shall be equal to the prime rate plus 2.0% determined on the first market day of the month in which the loan application is approved. The interest rate so established shall remain fixed for the full term of the loan. 10.7. Failure To Make Timely Payment. If at any time prior to the full ------------------------------ repayment of the loan the Participant's periodic loan payments cease to be made for any reason, the loan shall be in default and shall be immediately due and payable. Notice of the default shall be given to the Participant at his last known address. If such payment is not made within 30 days thereafter, BPAC shall have the right at its discretion either to accelerate the loan and to reduce the Participant's Account Balance by the amount of the unpaid loan balance including interest then due or to file suit on the Participant's promissory note. 10.8. Termination Of Employment. If at any time prior to the full ------------------------- repayment of a loan the Participant terminates Service for any reason, or if the Plan should terminate, the unpaid balance of the Participant's loan (including any interest thereon) shall be immediately due and payable, and if the unpaid balance is not repaid by the date the Participant terminates Service, the unpaid loan and interest shall be deducted from any amount distributable from the Plan to which such Participant or his Beneficiary may be entitled without further action by or 28 approval of the Participant, the Participant's Spouse or any Beneficiary. Such reduction shall constitute a complete discharge of all liability to the Plan for the loan. 29 ARTICLE 11 PARTICIPATING EMPLOYERS 11.1. Permission To Participate. Any Affiliate may participate as an ------------------------- Employer under this Plan for the benefit of its Employees or such Employees of such division, plant, location, or other operating unit as the Board or BPAC may specifically authorize. 11.2. Agreement To Contribute. By applying to participate as an Employer ----------------------- or by participating as an Employer with respect to any Employee, each Employer expressly agrees to make contributions to the Trust for the benefit of Participants employed by such Employer in accordance with the terms of the Plan, as the same may be modified from time to time with respect to such Employer with the approval of BPAC. 11.3. Post-Joinder Amendments. By choosing to participate as an Employer, ----------------------- each Employer expressly agrees to be bound to any modification or amendment to the Plan or the Trust which may be adopted from time to time by the Board, BPAC, or BPARC without further action by its respective board of directors. 11.4. Delegation Of Authority To BPAC/BPARC. Each Employer expressly ------------------------------------- agrees that BPAC and BPARC be, and each hereby is, authorized and empowered to exercise such authority of the board of directors of the Employer with respect to the adoption, amendment, or restatement of any employee benefit plan or related trust established to provide benefits for Employees of the Employer as either Committees may exercise with respect to employee benefit plans or related trusts of Armco in accordance with authority delegated to each Committee from time to time by the Board or by the terms of this Plan. No such action by BPAC or BPARC shall require any express or implied ratification by any Employer to become effective and binding. 11.5. Termination Of Participation. Any Employer may terminate its ---------------------------- participation in the Plan or Trust as to all or any portion of the Participants who are Employees of such Employer or may permanently discontinue its contributions under the Plan by Notice to the Committees at least 30 days prior to the effective date of such action. If those Participants to whom such Employer has taken action to terminate participation or discontinue contributions continue to be employed by an Affiliate, then each such Participant's Accrued Benefit shall be held in the Trust for distribution in accordance with the terms of the Plan. If those Participants cease to be employed by an Affiliate, distribution shall be made in accordance with the terms of this Plan. 11.6. Segregated Investment Funds. Any Employer may request that BPARC --------------------------- cause the Trustee to establish a segregated Investment Fund for the benefit of Participants employed by such Employer. The Trustee shall establish 30 any such segregated Investment Fund for the purpose of holding assets contributed by such Employer or the Participants employed by such Employer only if and as directed by BPARC. 11.7. Special Provisions. BPAC may adopt such riders to this Plan to ------------------ modify the terms of all or any part of the Plan as it applies to all or to a specified portion of the Employees of any Employer as BPAC deems to be necessary or desirable to implement the desires of a particular Employer. No such modification may result in discrimination in favor of the officers, shareholders, or highly paid employees of Armco or any Affiliate and any such modification which is finally found by the IRS or by any other federal agency or by a court of competent jurisdiction to be discriminatory may be voided, in the discretion of BPAC, from and after the effective date such discriminatory effect began. 31 ARTICLE 12 PLAN ADMINISTRATION 12.1. Power Of Administrative Committee. BPAC shall be the named fiduciary --------------------------------- with the general responsibility and the power to administer and construe the provisions of the Plan, to determine questions of law and fact arising under the Plan, to determine the amount of the authorized payment of benefits under the Plan, to maintain Plan records, to adopt amendments to the Plan as hereinafter provided, and to exercise such other rights and powers as may be specifically granted to it herein or by the Board. 12.2. Power Of Asset Review Committee. BPARC shall be the named fiduciary ------------------------------- with the general responsibility and the power to manage or to direct the management of any Plan asset which may be held in trust from time to time, to establish the Plan's funding policy, to appoint or remove or change any Trustee, Investment Manager, or other funding agency, to delegate to each Trustee or Investment Manager such authority or discretion to manage, acquire, or dispose of such assets of the Plan as BPARC may deem appropriate and as may be described from time to time by Notice to each such Trustee or Investment Manager, and to exercise such other rights and powers as may be specifically granted to it herein or by the Board. BPARC shall have no responsibility for any investment decision made by a Participant in accordance with the terms of this Plan. 12.3. Compensation And Expenses Of Committee Members. No member of either ---------------------------------------------- Committee shall receive any compensation for serving as a member of such Committee, but each member shall be entitled to be reimbursed for any reasonable expense incurred in carrying out his duties as a member of such Committee. 12.4. Bond For Committee Members. No bond or other security shall be -------------------------- required of either Committee or of any member of either Committee except as may be required by ERISA. 12.5. Composition Of Committees. Any person may serve on either or both of ------------------------- said Committees, and any member of either of said Committee or of any subcommittee or any agent or other person to whom either of said Committees may delegate any authority, may serve in more than one capacity with respect to the Plan. 12.6. Committee Procedures. Each Committee shall elect or designate a -------------------- Chairman, shall establish procedures for and the time and place of meetings, shall provide for the keeping of minutes of all meetings, and shall establish such other procedures as they deem to be necessary or appropriate. The Chairman or any other member authorized by the Committee may sign any document by or on behalf of the Committee. 32 12.7. Disqualified Committee Member. No member of either Committee may act ----------------------------- or influence the decision of the remaining Committee members with respect to any matter relating solely to himself or to any right or benefit he or any of his Beneficiaries may have under the Plan. 12.8. Exercise Of Discretion. Whenever BPAC or BPARC is vested with ---------------------- discretionary powers under the terms of this Plan, such Committee shall endeavor to make consistent determinations in cases involving the same circumstances, but shall not be required to do so. Neither Committee may exercise its discretion in a fashion which results in discrimination in favor of shareholders, officers or highly compensated employees of Armco or any Affiliate, or in such manner as may otherwise adversely affect the tax-qualified status of the Plan. 12.9. Appointment Of Counsel. Each Committee may arrange for the ---------------------- engagement of such legal counsel, who may be counsel for Armco or any Affiliate, and may rely upon the written opinion of such counsel. 12.10. Delegation Of Authority. Either Committee may delegate to any ----------------------- agent or to Armco's Human Resources Department or Finance Department or to any subcommittee or member of such Committees or any subcommittee the authority to perform any act, such Committee may perform hereunder, such delegation to be subject to revocation at any time in the Committee's discretion. 12.11. Local Plan Administrators. BPAC may designate one or more persons, ------------------------- each of whom may or may not be a member of the Committee, to be the Local Plan Administrator at each location of each Employer. The Local Plan Administrator shall be responsible for providing such information to the Participants and other persons entitled to benefits under the Plan as BPAC may direct, including information regarding the procedure for electing the form of benefits, for making withdrawals, making transfers or filing claims for benefits, and shall perform such other routine and nondiscretionary tasks involving the day-to-day administration and operation of the Plan as BPAC may delegate from time to time. No Local Plan Administrator may exercise any discretion in the exercise of his duties, such exercise being reserved to the Committees and their delegates as named fiduciaries. 12.12. Discharge Of Duties. Each Committee and any of its delegates or ------------------- appointees shall discharge their respective duties under the Plan solely in the interest of and for the exclusive purpose of providing benefits to the Participants and their Beneficiaries exercising the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character with like aims and in accordance with the terms and conditions of the Plan and applicable law, and shall endeavor to defray the reasonable expenses for the administration of the Plan. 33 12.13. Indemnification. Each Employer shall, and hereby does agree, to --------------- indemnify and hold harmless each present member of each Committee and each successor member and each of any such member's heirs, executors, and administrators, and the Committee's delegates and appointees, including counsel (other than persons who are independent of any Affiliate and who render services to the Plan for a fee) for any and all liability or expense, including settlement costs, costs of litigation and counsel fees reasonably incurred by him in any action, suit, or proceeding to which he is or may be made a party by reason of his being or having been a member, delegate, or appointee of or counsel to the Committee, except in matters involving felonious criminal liability or gross, intentional and willful misconduct of a person who was not acting within the scope of his authority with respect to the matter giving rise to the actual or potential liability. If any insurance is in force to cover claims or a nature described above, then no person indemnified hereunder shall have any right of indemnification except to the extent of any deductible amount under the insurance coverage or to the extent any claim is outside of the coverage or the amount of the award, settlement, or expense exceeds the insurance limits. 12.14. Claims Procedure. ---------------- (a) Any person who questions the amount of any benefit paid or who believes that a benefit should have commenced to be paid which did not so commence or who has some other claim arising under the Plan or Trust (the "Claimant"), shall deliver a written claim by Notice to BPAC fully describing the nature of such claim and incorporating or attaching all information and documentation necessary to enable BPAC to determine whether to grant or deny the claim. If the claim is filed with the Local Plan Administrator, then the Local Plan Administrator shall forthwith forward the claim, as filed, to BPAC, and shall provide Notice to the Claimant of the date that such claim was so forwarded. BPAC shall review the claim and supporting information and shall make an initial determination approving or denying the claim. (b) If the claim is denied in whole or in part, BPAC shall, within 90 days (or such other period as may be established by applicable law) from the time the claim is received, mail a Notice of Denial to the Claimant. Such 90- day period may be extended by BPAC if special circumstances so require for up to 90 additional days by a Notice of Extension to Claimant within the first 90-day period. (c) Each Claimant shall have the right to request a full and fair review by BPAC of its initial determination. Such request for review must be made by Notice to BPAC within 60 days of receipt of the Notice of Denial and must include all such new information or documentation as the Claimant believes pertinent to BPAC's review of its prior decision. The Claimant or his duly authorized representative shall have the right to review any pertinent documents and to submit any issues or comments. The Claimant or his duly authorized 34 agent may, during such 60-day period, examine and review during reasonable business hours any pertinent documents and may request copies thereof, by written request accompanied by payment of any reasonable copying charges therefor. (d) BPAC shall, within 60 days after receipt of the request for review (or in special circumstances, such as where BPAC in its sole discretion holds a hearing, within 120 days of receipt of the request for review), submit its decision on review in writing to the Claimant. The decision on review will be final, conclusive, and binding on all parties. (e) Any notice of denial or decision on review shall be written in a manner calculated to be understood by the Claimant. A notice of denial shall set forth (i) the specific Plan provisions on which the denial is based, (ii) an explanation of additional material or information, if any, necessary to perfect such claim together with a statement of why such material or information is necessary, and (iii) an explanation of the review procedure. A decision on review shall set forth the specific Plan provisions on which the decision is based. 12.15. Service Of Process. Any member of BPAC, the Secretary of Armco or ------------------ the Trustee may accept service of process for the Plan. 12.16. Expenses. Any expenses incurred by either Committee or the Trustee -------- in carrying out its duties with respect to the Plan or the Fund may be paid by Armco or may, in the discretion of BPAC, be charged to and paid from the Account of the Participant or Participants for whose benefit or with respect to whose Accounts said expenses were incurred in accordance with rules uniformly applicable to all Participants. In the event Armco fails or refuses to pay any such expense and, when reimbursement of such expense is sought by any person other than the Trustee, the expense is deemed to be reasonable in the sole discretion of the Trustee, or when reimbursement of such expense is sought by the Trustee, the expense is deemed to be reasonable and appropriate in the sole discretion of BPARC, then the Trustee shall reimburse such expense directly from the aggregate Employer Contributions for the Plan Year in which such expense was reimbursed. 12.17. Information From Participants. Each Participant shall file with ----------------------------- BPAC or BPARC such pertinent information concerning himself, his Beneficiary or any other person as BPAC may reasonably require, and no Participant, Beneficiary or other person shall have any right or be entitled to any benefit under the Plan unless such information is filed by or with respect to him. 35 ARTICLE 13 AMENDMENT OR TERMINATION 13.1. Right To Amend Or Terminate. Armco intends to maintain the Plan in --------------------------- effect indefinitely. However, the Board reserves the right to amend, modify, or terminate the Plan at any time or to modify or amend in whole or in part any or all of the provisions of the Plan, retroactively if deemed necessary or appropriate to meet the requirements of the Code, ERISA or any similar provisions of subsequent laws or to conform to Regulations or other policies in effect from time to time, or to obtain a determination that the Plan qualifies for favorable federal income tax treatment. The Committees may exercise such power and authority of the Board to modify, amend, merge, split, or terminate the Plan or any Trust Agreement as the Board may delegate to either of such Committees from time to time. No amendment or modification shall make it possible for any part of the corpus or income of the Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries under the Plan prior to the satisfaction of all liabilities of the Plan. 13.2. Merger. This Plan shall not merge or consolidate with or transfer ------ assets or liabilities to any other plan unless each Participant would be entitled to receive a benefit immediately after the merger, consolidation or transfer, if the Plan then terminated, at least equal to the benefit each such Participant would have been entitled to receive immediately before the merger, consolidation, or transfer, if the Plan then terminated. 13.3. Termination. The Board may, with Notice to the Committees and to the ----------- Trustee, terminate this Plan or discontinue all Employer Contributions as to all Participants or as to any class or unit of the Participants. No Employer shall have any duty or liability to make or to continue to make contributions hereunder from and after the effective date of any such termination or discontinuance of contributions. 13.4. Distribution Upon Termination. Upon the permanent discontinuance of ----------------------------- contributions or the termination or partial termination of the Plan, the interest of all affected Participants shall be distributed as and when BPAC shall provide. Prior to authorizing any distribution, BPAC shall process any termination reports required to be filed in accordance with federal law. Any assets in the Fund which have not been allocated to any Participant shall, after the payment of taxes and administration expenses, be allocated among the Accounts of all Participants in such nondiscriminatory manner as may be approved by BPAC. 13.5. Plan-To-Plan Transfers. In the case of a disposition of all or any ---------------------- part of any business of Armco or any Affiliate. BPARC may direct the Trustee to transfer the Account of any Participant who becomes an employee of the acquiring entity directly to the trustee of any successor plan, provided such 36 successor plan qualifies for favorable federal income tax treatment under the provisions of Code (S) 401(a) and the interest of the Participant so transferred is nonforfeitable and held for the exclusive benefit of such Participant under the terms of such successor plan. In the case of an acquisition of all or any part of a business by Armco or any Affiliate, BPARC may direct the Trustee to accept a transfer to this Plan of an account balance held for the benefit of any employee of such business, provided such predecessor plan qualifies for favorable federal income tax treatment under the provisions of Code (S) 401(a) and such balance shall be nonforfeitable and held for the exclusive benefit of the employee for whom the account was held by such predecessor plan. Upon a transfer of Plan assets or liabilities to or from any other plan as herein provided, each Participant shall be entitled to receive a benefit immediately after such transfer which shall be equal to or greater than the benefit which the Participant would have been entitled to receive immediately prior to the transfer if the Plan then terminated. 37 ARTICLE 14 MISCELLANEOUS PROVISIONS 14.1. Not An Employment Contract. This Plan is not and shall not be deemed -------------------------- to constitute a contract of employment between Armco or any Affiliate and any Employee or other person, nor shall anything herein contained be deemed to give any Employee or other person any right to be retained in his Employer's employ or to in any way limit or restrict his Employer's right or power to discharge any Employee or other person at any time and to treat him without any regard to the effect which such treatment might have upon him as a Participant of the Plan. 14.2. Non-Alienation Of Benefits. Except as may otherwise be required by -------------------------- law or pursuant to the terms of a Qualified Domestic Relations Order, no asset held in Trust for the benefit of any Participant or for the Beneficiary of any deceased former Participant nor any benefit payable under the terms of this Plan shall be subject to any manner to any voluntary or involuntary alienation, anticipation, sale, transfer, assignment, pledge, encumbrance or charge. Each and every attempt to voluntarily or involuntarily anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void and no distribution or payment of assets or benefits shall be in any way attachable for or subject to any debt, contract, liability, engagement or tort of any person entitled to such distribution or payment. If a Participant or Beneficiary is adjudicated a bankrupt or purports to anticipate, alienate, sell, transfer, assign, pledge, voluntarily or involuntarily, BPAC may hold or cause to be held and, if so held, shall apply such asset, distribution or payment or any part thereof to or for the benefit of such Participant or Beneficiary in such manner as BPAC shall, in its discretion, determine. For purposes of this Plan (S) 14.2, a "Qualified Domestic Relations Order" means any judgment, decree or order (including approval of a property settlement agreement) which has been determined by BPAC in accordance with procedures established under the Plan, to constitute a qualified domestic relations order within the meaning of Code (S) 414(p)(1). The prohibition against assignment or alienation of benefits provided in this Plan (S) 14.2 shall not apply with respect to any loan made to a Participant under the Plan pursuant to Plan Article 10. 14.3. Minors And Incompetents. Whenever and as often as any person ----------------------- entitled to payments hereunder shall be under a legal disability, or in the sole judgment of BPAC, shall otherwise be unable to apply such payments to his own best interest and advantage, BPAC in the exercise of its discretion may direct all or any portion of such payments to be made in any one or more of the following ways: (i) directly to such person; (ii) to his legal guardian or conservator; (iii) to his Spouse; or (iv) to any other person to be expended for the Participant's benefit. Any such payment shall be a complete discharge of the liability of the Plan and the Trustee therefor. BPAC's decisions shall in each case be final and binding upon all persons in interest and, upon payment, neither Committee nor 38 the Trustee shall be under any duty to see to the proper application of such funds. 14.4. Slayers. No person who is held criminally responsible under the law ------- of any state or nation by a court of competent jurisdiction for any crime which directly or indirectly results in the death of any Participant or the death of any Beneficiary of a deceased Participant may take any interest of such Participant under this Plan, whether or not such person is the sole Beneficiary of such Participant, and the interest of each Participant shall be distributed as if any such person predeceased the Participant unless BPAC otherwise determines in its sole discretion. 14.5. Lost Payee. If BPAC cannot ascertain the whereabouts of any person ---------- to whom a payment is due under the Plan, including an Alternate Payee under a Qualified Domestic Relations Order, and if, after 5 years from the date such payment is due, a Notice of such payment due is mailed to the last known address of such person, as shown on the records of the Employer and within 3 months after such mailing such person has not made written claim therefor, BPAC may direct that such payment and all remaining payments otherwise due to such person be paid to any other Beneficiary or, if none can be found, be cancelled on the records of the Plan and neither the Plan nor BPAC nor any Affiliate nor any other person shall have any liability until proper claim is made therefor. Any Participant or Beneficiary may receive such cancelled benefit by making proper claim therefor at any time. 14.6. Source For Payment Of Benefits. The Fund shall be the sole source ------------------------------ for payment of benefits under this Plan, and each Employee, Participant, Beneficiary or any other person who shall claim any right to any payment or benefit under this Plan shall be entitled to look only to the Fund therefor. No Affiliate, Trustee, Committee or Committee member or any other person shall be individually liable for the payment of any benefit under this Plan. 14.7. Rights Under The Plan. No Participant or Beneficiary or any other --------------------- person shall have any interest in or right under the Plan to any part of the Plan's assets except as and to the extent provided in the Plan. 14.8. Necessary Parties. To the extent permitted by law, in any action or ----------------- proceeding involving the Fund or any property constituting part or all thereof, or the administration thereof, BPAC and the Trustee shall be the only necessary parties. No Participant, Beneficiary or other person having or claiming to have an interest in the Fund or under the Plan shall be entitled to any notice of the proceeding unless notice is required by applicable law or by the court or administrative agency having jurisdiction over the proceeding. Any final judgment which may be entered in any such action shall be binding upon all such persons having or claiming to have any interest in the Fund. 39 14.9. Stockholders. In any action either at law or equity involving a ------------ Participant and his interest in the Plan or its operation, but in which the Trustee, a Committee, or an Employer are not directly a party litigant or a necessary party, upon court approval or order, BPAC may direct that payment be made to any court or those persons designated by the court of all sums or other property which are the subject matter of such litigation. Upon such payment, neither the Trustee, either Committee nor any Employer shall be liable or accountable for such payment. 14.10. Participant's Annual Statement. Each Participant shall be ------------------------------ furnished at least annually a statement of his Account showing as of the first day and the last day of the prior Plan Year the value of his investments reflecting all After-Tax Contributions, Pretax Contributions, Rollover Contributions and Employer Contributions made by or on his behalf and earnings credited thereto, and any withdrawals therefrom and any interfund transfers made during the Plan Year. 14.11. Applicable Law. This Plan shall be governed by, construed and -------------- enforced, to the extent possible, according to federal law and the law of the State of Ohio, and all provisions hereof shall be administered according to such State's law and any federal law, regulation, or rule which may from time to time be applicable. 40 ARTICLE 15 TOP HEAVY PROVISIONS 15.1. Top Heavy Plan. The Plan will be considered a Top Heavy Plan for any -------------- Plan Year if it is determined to be a Top Heavy Plan as of the last day of the preceding Plan Year. Notwithstanding any other provisions of the Plan, the provisions of this Article 15 shall apply and supersede all other provisions of the Plan during each Plan Year with respect to which the Plan is determined to be a Top Heavy Plan. 15.2. Special Definitions. For purposes of this Article 15 and as ------------------- otherwise used in the Plan, the following terms shall have the meanings set forth below: (a) "Aggregation Group" shall mean (i) the group composed of each ----------------- qualified employee benefit plan maintained by Armco or any Affiliate in which a Key Employee is a participant and (ii) each other qualified plan maintained by Armco or any Affiliate which enables a plan of Armco or any Affiliate in which a Key Employee is a participant to meet the requirements of Code (S)(S) 401(a)(4) and 410. In addition, BPAC may, in its discretion, include in the Aggregation Group such other qualified plan or plans maintained by Armco or any Affiliate if such Aggregation Group will continue to satisfy the requirements of Code (S)(S) 401(a)(4) and 410 with such plans being taken into account; provided, however, that voluntary inclusion as a member of the Aggregation Group shall not subject the plan to the requirements of Code (S) 416 unless the plan is part of the required aggregation group as defined in Code (S) 416(g)(2)(A)(i). (b) "Key Employee" means any Employee of an Employer who at any time ------------ during the Plan Year or the 4 preceding Plan Years is (i) an officer (disregarding any person with the title but not the authority of an officer and disregarding all but the 50 officers who have the largest annual compensation during the 5 Plan Years including the current Plan Year) having an annual compensation greater than 50% of the amount in effect under Code (S) 415(b)(1)(A) for any such Plan Year, (ii) one of the 10 Employees having an annual compensation greater than the limitation in effect under Code (S) 415(c)(1)(A) and owning the largest interest in the Employer, (iii) a 5% owner of the Employer, or (iv) a 1% owner of the Employer having an annual compensation from the Employer of more than $150,000. For the purposes of this Plan (S) 15.2(b), compensation shall have the meaning prescribed in Treasury Regulation (S) 1.415-2(d). (c) "Top Heavy Plan" means the Plan if, as of the last day of the -------------- Plan Year, (i) the aggregate of the Account Balances of Key Employees under the Plan exceeds 60% of the aggregate of the Account Balances of all participants, or (ii) the sum as of the last day of the Plan Year of the present value of the cumulative accrued benefits for Key Employees under all the 41 defined benefit plans included in an Aggregation Group in which the Plan is a member and the aggregate of the accounts of Key Employees under all defined contribution plans included in such Aggregation Group exceeds 60% of a similar sum determined for all Employees participating in such plans. For the purpose of determining the present value of the cumulative accrued benefit for any Employee or the amount of the Account of any Employee, such present value or amount shall be increased by the aggregate distributions made with respect to such Employee under the Plan during the 5 year period ending on the last day of the Plan Year for which the test is made. Rollover Contributions shall be disregarded for these purposes in accordance with Regulations. (d) "Super Top Heavy Plan" means a Top Heavy Plan which would -------------------- continue to be a Top Heavy Plan if 90% was substituted for 60% each place it appears in the definition of Top Heavy Plan. 15.3. Limitations On Base Salary. For any Plan Year that the Plan is a Top -------------------------- Heavy Plan, only the first $200,000 (adjusted annually for Plan Years beginning on or after January l, 1988, in accordance with the Regulations) of Base Salary shall be credited to a Participant. 15.4. Minimum Contributions. If the Plan is a Super Top Heavy Plan, the --------------------- allocation of an Employer's Contribution (disregarding any Pretax Contribution) shall, in any Plan Year for any Participant who is not a Key Employee, be equal to the lesser of (i) 4% of such Participant's Base Salary, or (ii) the percentage of Base Salary of contributions for the Key Employee for whom such percentage is the highest for such Plan Year, disregarding Base Salary in excess of $200,000 and any Pretax Contribution included in Base Salary. For this purpose, all defined contribution plans required to be included in the Aggregation Group shall be treated as a single plan. If the Plan is a Top Heavy Plan but not a Super Top Heavy Plan, the foregoing sentence shall be modified to substitute 3% for 4%. 15.5. Limitations. For each Plan Year that the Plan is a Top Heavy Plan, ----------- 1.0 shall be substituted for 1.25 as the multiplicand of the dollar limitation in determining the denominator of the defined benefit plan faction and of the defined contribution plan fraction for purposes of Plan (S) 5.7 and Code (S) 415(e). 15.6. Other Plans. BPAC shall, to the maximum extent permitted by the Code ----------- and in accordance with the Regulations, apply the provisions of this Article 15 by taking into account the benefits payable and the contributions made under all other defined contribution plans and defined benefit plans maintained by an Affiliate which are qualified under Code (S) 401(a) to prevent inappropriate omissions or required duplications of minimum benefits or contributions. 42 First Amendment to the Armco Inc. Thrift Plan For Salaried Employees Effective as of January 1, 1989 Armco Inc., Armco Advanced Material Corporation and Baltimore Specialty Steels Corporation have each determined that it would be appropriate to allow certain individuals to accumulate an additional retirement savings contribution under the Armco Inc. Thrift Plan For Salaried Employees commencing on and after January 1, 1990. It is expected that the first contribution will be made following the close of the Plan Year ending December 31, 1990. Furthermore, as a result of its review of the provisions of the Armco Inc. Thrift Plan For Salaried Employees, as amended and restated effective as of January 1, 1989, the Internal Revenue Service has requested that certain amendments be made in order to assure continuing compliance with the applicable provisions of Sections 401 and 501 of the Internal Revenue Code of 1986, as amended. Now, therefore, the Armco Inc. Thrift Plan For Salaried Employees is hereby amended in the following respects, all effective as of January 1, 1990 except as specifically made effective on January 1, 1989: 1. Section 1.21 is deleted and a new Plan (S) 1.21 is inserted reading as follows: 1.21. "Employer Contribution" means any contribution made by an Employer, --------------------- including any Employer's Matching Contributions made pursuant to Plan (S) 3.1, any Pretax Contribution made pursuant to Plan (S) 3.2, any Retirement Savings Contributions made pursuant to Plan (S) 3.3 or any Additional Contribution made pursuant to Plan (S) 3.4. 2. Article 1 is hereby amended to add a new Plan (S) 1.35 and new Plan (S)(S) 1.43, 1.44 and 1.45, and to renumber the present Plan (S)(S) 1.35-1.41 as Plan (S)(S) 1.36-1.42 and existing Plan (S)(S) 1.42-1.50 as Plan (S)(S) 1.46-1.54, the new Plan (S) 1.35 and (S)(S) 1.43-1.45 reading as follows: 1.35 "Participant Contributions" means any After-Tax Contribution made by ------------------------- a Participant, including After-Tax Basic and After-Tax Supplemental Contributions. 1.42. "Retirement Savings Contribution" means an amount equal to 2% of a ------------------------------- Retirement Savings Participant's Retirement Savings Income received in any Plan Year. 1.43. "Retirement Savings Income" means a Participant's Base Salary plus ------------------------- any overtime earnings, bonuses (including profit sharing bonuses), shift differential compensation and any salary continuation payments received during a period of up to ninety (90) days in any Plan Year. 1.44. "Retirement Savings Participant" means any Employee employed in a ------------------------------ classification of employees eligible for participation in the Plan's Retirement Savings Contribution in accordance with the provisions of Plan (S) 2.4. 3. Plan (S) 2.1 is amended to change the reference to "1987" where it appears in the second line to "1989". 4. A new Plan (S) 2.4 is added to the end of Article 2 reading as follows: 2.4. Retirement Savings Participation. An Employee who is in a -------------------------------- classification of employees of an Employer listed on Appendix A, attached hereto and made a part of the Plan by this reference, shall be eligible to participate as a Retirement Savings Participant commencing upon the first day of the month following the date of his employment in a covered classification of employees as defined on Appendix A. No person accruing benefits under a defined benefit pension plan to which Armco or any Affiliate sponsors or maintains, or to which Armco or any Affiliate has made or is making a contribution, may be eligible to share in the allocation of any Retirement Savings Contribution made by any Employer hereunder; provided, however, in the case of a transfer of employment during a Plan Year to or from a classification of employment eligible for participation in such a defined benefit pension plan, an Employee may receive a share of the allocation of a Retirement Savings Contribution with respect to his Retirement Savings Income earned during that portion of the Plan Year while he did not accrue benefits under the defined benefit pension plan. Appendix A may be modified or amended from time to time hereafter provided that no such modification shall retroactively deprive any Retirement Savings Participant of any previously accrued and vested benefit. -2- 5. Plan Article 3 is amended to renumber Plan (S)(S) 3.3 through 3.7 as Plan (S)(S) 3.4 through 3.8 and to insert a new Plan (S) 3.3 reading as follows: 3.3. Retirement Savings Contributions. Subject to Article 5, in addition -------------------------------- to the contributions under Plan (S)(S) 3.1 and 3.2, an Employer shall make a contribution as of the last day of each Plan Year in an amount equal to two percent (2%) of the Retirement Savings Income of each Retirement Savings Participant employed by such Employer as of the last day of the Plan Year. Such Contribution shall be made regardless of the profits of the contributing Employer but shall for all purposes of the federal income tax laws be and be deemed to be a profit sharing plan contribution. 6. Plan (S) 5.1 is amended to modify the phrase "including for this purpose an Employer's Matching and Pretax Contributions..." where it appears in the second and third lines thereof to read "including for this purpose an Employer's Matching, Retirement Savings and Pretax Contributions..." 7. Plan Article 5 is amended to change the reference to "Base Salary" where it appears in Plan (S)(S) 5.3 and 5.4 to "Retirement Savings Income." 8. Plan (S) 5.6(b)(i) is amended to renumber subparagraphs (i)(B) and (i)(C) as subparagraphs (i)(C) and (i)(D) and to add a new subparagraph (i)(B) reading as follows: "(B) Retirement Savings Contributions," 9. Plan (S)(S) 5.6(c) and (d) and Plan (S)(S) 5.7 (b), (c)(i) and (c)(ii) are each amended to add a reference to "and/ or Retirement Savings Contributions," immediately after the reference to "Employer Matching Contributions" in each place it appears. 10. Effective as of January 1, 1989, Plan (S) 5.7(b) is hereby amended to insert after the words "under (a) above" the following: as a result of the allocation of forfeitures, a reasonable error in estimating a Participant's annual compensation, or under other limited facts and circumstances which the Commissioner of the Internal Revenue Service finds justify the availability of the rules hereinafter set forth, ... 11. Plan Article 6 is amended to delete Plan (S) 6.3, to renumber Plan (S) 6.2 as Plan (S) 6.3 and to insert a new Plan (S) 6.2 reading as follows: -3- 6.2. Allocation Of Retirement Savings. Each Employer's Retirement Savings -------------------------------- Contribution for each Plan Year made pursuant to Plan (S) 3.3 shall be paid to the Trust and allocated not less often than annually, as of the last day of the Plan Year for which the contribution is made, for the benefit of those Retirement Savings Participants who are employed by Armco or any Affiliate as of the last day of such Plan Year; provided, however, that such Contribution shall only be made with respect to Retirement Savings Income earned while such person employed in a classification of employment for which such person was eligible to be a Retirement Savings Participant. No contribution shall be due or payable on behalf of any person not employed by Armco or one of its Affiliates on the last day of the Plan Year with respect to which a Employer makes a Retirement Savings Contribution. For Plan Years beginning after 1989, all Employer Matching Contributions and Retirement Savings may be aggregated for record keeping purposes and held in a single Account for the benefit of the Participant. 12. Plan (S) 7.1 is deleted and a new Plan (S) 7.1 is inserted therefore reading as follows: 7.1. Investment Of Contributions. Each Participant shall, at the time he --------------------------- files his enrollment forms in accordance with Plan (S)(S) 2.2, direct that Employer Contributions and Participant Contributions allocated to his account shall be invested in the Armco Stock Fund, the Fixed Income Fund or such other Investment Fund or Funds as may be established by BPARC. Such allocations shall be made in increments of ten percent (10%) or more as BPAC may from time to time determine. Each participant may, once during each calendar quarter in accordance with the procedures established by BPAC, change the Investment Fund or Funds to which the future Contributions are to be invested. 13. Effective as of January 1, 1989, Plan (S) 8.3 as amended to insert after the words "within a reasonable time following the death of a Participant" the words "(but in no event more than five years following the death of the Participant)". 14. Plan (S) 9.1 is amended to add a new sentence thereto at the end thereof reading as follows: -4- No withdrawals may be made of any Employer Matching Contributions or Retirement Savings Contributions received for Plan Years beginning after 1989 or any earnings thereon. 15. Effective as of January 1, 1989, Plan (S) 10.2 is amended to add the following sentence thereto at the end thereof: "The Participant's Spouse must consent to the loan within a ninety (90) day period ending on the date of the loan." 16. Effective as of January 1, 1989, Plan (S) 15.2(a) is amended to change the reference to "Code (S)(S) 401(a)(4) and 410" to "Code (S)(S) 401(a)(4) or 410" in both places where that phrase appears. 17. Effective as of January 1, 1989, Plan (S) 15.2(a) is further amended to add the parenthetical "(including for this purpose any terminated plan that was maintained by Armco or any Affiliate during the 5-year period ending on the determination date for the year in question if a key employee participated in that plan)" between the words "participant" and "and" at the end of the subparagraph (i). In all other respects the Plan shall remain in full force and effect in accordance with it's terms. This amendment was adopted by the Armco Inc. Benefit Plans Administrative Committee at it's meeting held on the 8th day of February, 1990. /s/ Richard D. Brown ___________________________ Richard D. Brown Assistant Secretary -5- Appendix A to the Armco Inc. Thrift Plan For Salaried Employees Employers Providing Retirement Savings Eligibility The following units have elected to become participating Employers for the purpose of providing certain of their Employees with the opportunity to participate in the Retirement Savings Contribution, each effective as of January 1, 1990. Armco Inc.-for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Armco Inc. Midwest Steel Division-for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Armco Advanced Materials Corporation ("AAMC")- for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate; and for the benefit of any employee who is a member of a unit of employees whose terms and conditions of employment are the subject of a collective bargaining agreement between AAMC and a recognized union representing employees of such unit (a "covered employee") provided (i) such covered employee has a continuous service date of January 1, 1990 or later, (ii) is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate, -1- (iii) if such covered employee is an hourly-paid employee who is a participant in the Armco Inc. Thrift Plan for Hourly Employees ("Hourly Thrift Plan"), (A) participation shall be permitted hereunder notwithstanding the prohibition contained in Plan (S) 1.19(i), but solely for the limited purpose of participation in the Retirement Savings Contribution and no other Contributions by or on behalf of such participant shall be permitted hereunder, (B) the definition of Retirement Savings Income set forth at Plan (S) 1.43 shall be amended to substitute the phrase "Eligible Wages as defined in the Armco Inc. Thrift Plan for Hourly Employees" for the phrase "Base Salary", and (C) the Retirement Savings Contribution held for the benefit of any participant may be transferred annually, or otherwise as BPAC may direct, to the Hourly Thrift Plan for the benefit of such covered employee provided such transfer meets all requirements of applicable law. Baltimore Specialty Steels Corporation-for the benefit of any Employee who has a continuous service date of February 1, 1988 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or under any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Additionally, any other Employee of Armco or any Affiliate listed above (including an hourly-paid employee of AAMC) may become a Retirement Savings Participant by executing a written agreement, in a form acceptable to the Employer and approved by BPAC, to voluntarily and irrevocably forego future participation in each and every defined benefit pension plan sponsored or maintained by Armco or any Affiliate or to which Armco or any Affiliate has made a contribution (but without forfeiture of any theretofore accrued benefit and with continuing credit under such defined benefit plan for future continuous service for the purposes of vesting and eligibility for benefits thereunder) and to voluntarily and irrevocably waive any and all benefit accruals in any and all such defined benefit pension plans for continuous service accrued from and after the date of the election to participate as a Retirement Savings Participant. Any such election, shall require the Participant's Spouse's Consent and, once made, the Spouse's Consent shall be irrevocable. In no event shall any person be entitled to any Retirement Savings Contributions under this Plan with respect to any period of time such person accrued a benefit under a defined benefit pension plan sponsored -2- or maintained by Armco or any Affiliate or to which Armco or any Affiliate has made a contribution. -3- Second Amendment to the Armco Inc. Retirement and Savings Plan (formerly the Armco Inc. Thrift Plan for Salaried Employees) Effective as of January 1, 1990 At its meeting held on February 8, 1990, the Armco Inc. Benefit Plans Administrative Committee approved the adoption of the First Amendment to the Armco Inc. Thrift Plan for Salaried Employees, which among other things, provided for Retirement Savings Contributions for certain qualifying participants. Certain represented hourly-paid employees were allowed to participate in the Retirement Savings Contribution to be made following the close of the Plan Year ending December 31, 1990. By reason of subsequent negotiations with the collective bargaining representative for such employees, it has been agreed that those represented hourly-paid employees will instead participate in the Armco Inc. Thrift Plan For Hourly Employees for 1990. Appendix A must be amended to reflect this bargaining agreement. At its meeting held on May 23, 1990, the Armco Inc. Benefit Plans Administrative Committee approved the addition of two new investment choices and changed the name of the Plan to the Armco Inc. Retirement and Savings Plan. Now, therefore, the Appendix A, added by the First Amendment to this Armco Inc. Retirement and Savings Plan, is hereby restated in its entirety reading as in the form attached hereto and made a part hereof by this reference, all effective as of January 1, 1990. In all other respects the Plan shall remain in full force and effect in accordance with it's terms. This amendment was adopted by the Armco Inc. Benefit Plans Administrative Committee at it's meeting held on the 11th day of October, 1990. /s/ Richard D. Brown ______________________________ Richard D. Brown Assistant Secretary 10/11/90 Appendix A to the Armco Inc. Retirement and Savings Plan Employers Providing Retirement Savings Eligibility The following units have elected to become participating Employers for the purpose of providing certain of their Employees with the opportunity to participate in the Retirement Savings Contribution, each effective as of January 1, 1990. Armco Inc. - for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Armco Inc. Midwest Steel Division - for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Armco Advanced Materials Corporation ("Armco/AMC") - for the benefit of any Employee who has a continuous service date of January 1, 1990 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate; and for the benefit of any represented salaried employee who is a member of a unit of employees whose terms and conditions of employment are the subject of a collective bargaining agreement between Armco/AMC and a recognized union representing employees of such unit (a "covered employee") provided such covered employee has a continuous service date of January 1, 1990 or later and is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension -1- Agreements Plan or any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Baltimore Specialty Steels Corporation - for the benefit of any Employee who has a continuous service date of February 1, 1988 or later and who is not eligible for current benefit accruals under the Armco Inc. Noncontributory Pension Plan, the Armco Inc. Pension Agreements Plan or under any other tax-qualified defined benefit pension plan maintained by Armco or any Affiliate. Additionally, any Employee of Armco or any Affiliate whose continuous service date is before January 1, 1990 may become a Retirement Savings Participant by executing a written agreement, in a form acceptable to the Employer and approved by BPAC, to voluntarily and irrevocably forego future current participation in each and every defined benefit pension plan sponsored or maintained by Armco or any Affiliate or to which Armco or any Affiliate has made a contribution (but without forfeiture of any theretofore accrued benefit and with continuing continuous service credit under such defined benefit plan for the purposes of vesting and eligibility for benefits thereunder) and to voluntarily and irrevocably waive any and all benefit accruals in any and all such defined benefit pension plans for continuous service accrued from and after the date of the election to participate as a Retirement Savings Participant. Any such election, shall require the Participant's Spouse's Consent and, once made, the Spouse's Consent shall be irrevocable. In no event shall any person be entitled to any Retirement Savings Contributions under this Plan with respect to any period of time such person accrued a benefit under a defined benefit pension plan sponsored or maintained by Armco or any Affiliate or to which Armco or any Affiliate has made a contribution. -2- EX-11 5 COMPUTATION OF INCOME EXHIBIT 11 ARMCO INC. AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF INCOME (LOSS) PER SHARE (Dollars in Millions, Except Per Share Amounts)
Year Ended December 31 ---------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------ ----------- ----------- ----------- ----------- I. PRIMARY Income (loss) from continuing operations... $ (256.2) $ (419.3) $ (160.6) $ (75.8) $ 188.5 Less: preferred dividends................. 17.8 10.3 8.1 8.1 8.1 ------------ ----------- ----------- ----------- ----------- Income (loss) from continuing operations after preferred dividends................. $ (274.0) $ (429.6) $ (168.7) $ (83.9) $ 180.4 ============ =========== =========== =========== =========== Income (loss) before extraordinary items and cumulative effect of changes in accounting principles..................... $ (327.0) $ (421.5) $ (336.5) $ (85.2) $ 165.0 Less: preferred dividends................. 17.8 10.3 8.1 8.1 8.1 ------------ ----------- ----------- ----------- ----------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles after preferred dividends................................. $ (344.8) $ (431.8) $ (344.6) $ (93.3) $ 156.9 ============ =========== =========== =========== =========== Income (loss) before extraordinary items and cumulative effect of changes in accounting principles..................... $ (327.0) $ (421.5) $ (336.5) $ (85.2) $ 165.0 (Loss) on extraordinary items............ (7.3) (8.4) -- (4.3) -- Cumulative effect of changes in accounting principles................... (307.5) -- -- -- -- ------------ ----------- ----------- ----------- ----------- Net income (loss).......................... $ (641.8) $ (429.9) $ (336.5) $ (89.5) $ 165.0 Less: preferred dividends................ 17.8 10.3 8.1 8.1 8.1 ------------ ----------- ----------- ----------- ----------- Net income (loss) after preferred dividends................................ $ (659.6) $ (440.2) $ (344.6) $ (97.6) $ 156.9 ============ =========== =========== =========== =========== Weighted average number of common shares............................. 103,837,743 98,813,185 88,491,503 88,462,818 88,275,303 Weighted average number of common equivalent shares (A).............. * * * * 123,625 ------------ ----------- ----------- ----------- ----------- Total shares for computation 103,837,743 98,813,185 88,491,503 88,462,818 88,398,928 ============ =========== =========== =========== =========== Primary income (loss) per share: Income (loss) from continuing operations.. $ (2.64) $ (4.35) $ (1.91) $ (0.95) $ 2.04 Income (loss) before extraordinary items and cumulative effect of changes in accounting principles..................... (3.32) (4.37) (3.89) (1.05) 1.78 (Loss) on extraordinary items............ (0.07) (0.08) -- (0.05) -- Cumulative effect of changes in accounting principles................... (2.96) -- -- -- -- Net income (loss)......................... (6.35) (4.45) (3.89) (1.10) 1.78
EXHIBIT 11 ARMCO INC. AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF INCOME (LOSS) PER SHARE - (Continued) (Dollars in Millions, Except Per Share Amounts)
Year Ended December 31 --------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------ ----------- ----------- ----------- ---------- II. FULLY DILUTED INCOME (LOSS) PER SHARE Income (loss) from continuing operations.............. $ (256.2) $ (419.3) $ (160.6) $ (75.8) $ 188.5 Less: preferred dividends............................ 17.8 10.3 8.1 8.1 -- ------------ ----------- ----------- ----------- ----------- Income (loss) from continuing operations after preferred dividends............................ $ (274.0) $ (429.6) $ (168.7) $ (83.9) $ 188.5 ============ =========== =========== =========== =========== Income (loss) before extraordinary items and cumulative effect of changes in accounting principles................................ $ (327.0) $ (421.5) $ (336.5) $ (85.2) $ 165.0 Less: preferred dividends............................ 17.8 10.3 8.1 8.1 -- ------------ ----------- ----------- ----------- ----------- Income (loss) before extraordinary items and cumulative effect of changes in accounting principles after preferred............. dividends............................................ $ (344.8) $ (431.8) $ (344.6) $ (93.3) $ 165.0 ============ =========== =========== =========== =========== Income (loss) before extraordinary items and cumulative effect of changes in accounting principles................................ $ (327.0) $ (421.5) $ (336.5) $ (85.2) $ 165.0 (Loss) on extraordinary items....................... (7.3) (8.4) -- (4.3) -- Cumulative effect of changes in accounting principles.............................. (307.5) -- -- -- -- ------------ ----------- ----------- ----------- ----------- Net income (loss)..................................... $ (641.8) $ (429.9) $ (336.5) $ (89.5) $ 165.0 Less: preferred dividends........................... 17.8 10.3 8.1 8.1 -- ------------ ----------- ----------- ----------- ----------- Net income (loss) after preferred dividends........................................... $ (659.6) $ (440.2) $ (344.6) $ (97.6) $ 165.0 ============ =========== =========== =========== =========== Weighted average number of common shares........................................ 103,837,743 98,813,185 88,491,503 88,462,818 88,275,303 Weighted average number of common equivalent shares (A)......................... * * * * 157,943 Weighted average number of preferred shares on an "if converted" basis.................... * * * * 4,376,163 ------------ ----------- ----------- ----------- ----------- Total shares for computation.. 103,837,743 98,813,185 88,491,503 88,462,818 92,809,409 ============ =========== =========== =========== =========== Fully diluted income per share (B): Income (loss) from continuing operations.............. $ (2.64) $ (4.35) $ (1.91) $ (0.95) $ 2.03 Income (loss) before extraordinary items and cumulative effect of changes in accounting principles................................ (3.32) (4.37) (3.89) (1.05) 1.78 Gain (loss) on extraordinary items.................. (0.07) (0.08) -- (0.05) -- Cumulative effect of changes in accounting principles.............................. (2.96) -- -- -- -- Net income (loss)................................... (6.35) (4.45) (3.89) (1.10) 1.78
- --------- * Antidilutive NOTES: (A) Common equivalent shares are included for dilutive stock options as if the options were exercised and the proceeds used to acquire common shares of Armco. (B) Calculation of fully diluted income per share is submitted for 1989 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. EX-13 6 ANNUAL REPORT EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS 19 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS THREE YEARS ENDED DECEMBER 31, 1993 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND PER TON DATA) GENERAL This discussion and analysis of Armco's 1993 financial results should be read together with the Consolidated Financial Statements and Notes on pages 33 through 56. Armco's results in 1993, 1992 and 1991, shown below, reflect the reclassification of Worldwide Grinding Systems as a discontinued operation.
- ------------------------------------------------------------------------------- 1993 1992 1991 =============================================================================== Net sales $1,664.0 $1,673.2 $1,204.0 Special charges -- net (165.5) (185.1) (48.7) Operating loss (146.0) (157.3) (9.5) Equity in losses of equity companies (43.7) (255.5) (110.6) Loss from continuing operations (256.2) (419.3) (160.6) Discontinued operations -- Worldwide Grinding Systems Income from operations 14.2 0.4 8.8 Loss on disposal of business (40.0) -- -- AFSG companies to be sold Loss from operations -- (2.6) (14.4) Write-off of advances to AFSG -- -- (170.3) Loss on disposal of business (45.0) -- -- Loss before extraordinary losses and cumulative effect of accounting changes (327.0) (421.5) (336.5) Net loss $ (641.8) $ (429.9) $ (336.5) - -------------------------------------------------------------------------------
TITLE: ARMCO INC. -- 1993 SALES % BY PRODUCTS Stainless Sheet and Strip 30% Electrical Steel 15% Semi-Finished 8% Stainless Plate 7% Carbon Sheet and Strip 18% Pipe and Tubing 15% Other 7% % BY MARKETS Industrial and Electrical Equipment 30% Service Centers 26% Automotive 18% Construction 13% Appliance, Utensils and Cutlery 2% Other 11% AS A RESULT OF DIVESTMENTS, THE PERCENTAGE OF ARMCO'S SALES FROM MORE PROFITABLE, VALUE-ADDED SPECIALTY STEEL PRODUCT LINES INCREASED DRAMATICALLY. Year-to-year results are not directly comparable due to the divestiture of certain businesses and to the acquisition of Cyclops Industries, Inc. (Cyclops) on April 24, 1992. In 1993, consistent with its specialty steel strategy, Armco sold its Brazilian sheet and strip operations, Worldwide Grinding Systems, a welded tubing operation and a portion of its nonresidential construction business and also announced its plans to dispose of certain other businesses within the Other Steel and Fabricated Products segment. In early 1994, Armco signed a letter of intent to sell the Armco Financial Services Group (AFSG) companies to be sold and announced a recapitalization plan for Armco Steel Company, L.P. (ASC), its carbon steel joint venture with Kawasaki Steel Corporation (Kawasaki), whereby Armco's interest will be reduced to less than one percent. See discussions in "Business Segment Results," "Discontinued Operations" and "Equity and Other Investments -- Armco Steel Company, L.P. (ASC)," below. In conjunction with the disposal of businesses, Armco recorded, in 1993, charges totaling $250.5, which include special charges of $165.5 reflected in operating losses, a $45.0 charge for expenses and losses associated with Armco's signing of a letter of intent to sell the AFSG companies to be sold and $40.0 as a loss on the disposal of the Worldwide Grinding Systems segment. [PHOTOGRAPH OF FRED O'BRIEN APPEARS HERE] "ARMCO'S INVESTOR RELATIONS ACTIVITIES WILL CONTINUE TO BE MORE FOCUSED IN 1994. AS A COMPLEX COMPANY MAKING MAJOR CHANGES TO BECOME MORE OPERATIONS-ORIENTED, WE WILL SCHEDULE REGULAR MEETINGS WITH ANALYSTS TO KEEP THEM UP-TO-DATE ON OUR PROGRESS." -- FRED O'BRIEN, ASSISTANT TREASURER AND DIRECTOR OF INVESTOR RELATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS 20 - -------------------------------------------------------------------------------- The total charges include $143.6 for the excess of carrying value of net assets over anticipated proceeds on disposal, $66.2 for employee benefit costs and $18.1 for estimated losses through the dates of disposal. Most of the charges are either non-cash or will be paid over a long period. Armco expects to spend up to $25.0 in 1994 related to these charges. Other components of the charges were expenses related to provisions for legal and environmental matters and recognition of previously deferred foreign currency translation adjustments, partially offset by pension curtailment gains. Some of the businesses that have recently been sold or that are currently for sale significantly impacted Armco's results in recent periods. In conjunction with Armco's decision to dispose of certain businesses in the Other Steel and Fabricated Products segment, Armco stopped recording, as a component of continuing operations, the sales, costs and expenses of these businesses after September 30, 1993. All results presented for the Worldwide Grinding Systems businesses and the AFSG companies to be sold have been reclassified to discontinued operations. Effective January 1, 1993, Armco recorded a charge of $440.0, or $4.24 per share, net of taxes, for the adoption of Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). This accounting standard requires the accrual of expense for postretirement benefits during the years an employee is actively employed, rather than the former practice of expensing the benefits on an as-incurred basis when the participant is retired. In addition, the adoption of SFAS 106 resulted in an increase in annual postretirement benefit expense, which increased net losses $32.0 for 1993. Also effective January 1, 1993, Armco recorded a cumulative effect benefit of $135.6, or $1.31 per share, for the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), excluding the tax benefit related to the adoption of SFAS 106. TITLE: STAINLESS STEEL SHEET AND STRIP CONSUMPTION Apparent Consumption (Tons in Thousands) 1988 1,133 1989 1,060 1990 1,064 1991 1,047 1992 1,188 1993 1,366 Import Penetration 1988 11.9% 1989 13.7% 1990 15.3% 1991 16.1% 1992 16.1% 1993 25.2% Source: Specialty Steel Institute of the United States ON THE POSITIVE SIDE, STAINLESS STEEL CONSUMPTION IN THE U.S. CONTINUES TO RISE. IN 1993, SHEET AND STRIP USE INCREASED 15 PERCENT OVER 1992 AND PLATE CONSUMPTION WAS UP OVER 13 PERCENT. ON THE NEGATIVE SIDE, RECORD LEVELS OF STAINLESS SHEET AND STRIP IMPORTS PUT STRONG DOWNWARD PRESSURE ON PRICES AND ACCOUNTED FOR MUCH OF 1993'S GROWTH IN DOMESTIC USE. TITLE: ARMCO INC. -- SPECIALTY STEEL MARKET SHARE STAINLESS SHEET AND STRIP Armco 25% Allegheny-Ludlum 26% J&L Specialty Products 16% Washington Steel/Lukens 8% Imports 25% ELECTRICAL STEEL Armco 42% Allegheny-Ludlum/Jessop 20% Warren Consolidated Industries 16% Imports 22% STAINLESS PLATE Armco 18% Allegheny-Ludlum 31% J&L Specialty Products 11% Washington Steel/Lukens 9% Avesta 8% Other 7% Imports 16% ARMCO IS A MAJOR PLAYER IN ALL OF THE DOMESTIC SPECIALTY STEEL MARKETS AND THE LEADER IN AUTOMOTIVE CHROME STAINLESS AND ELECTRICAL STEELS. Source: Management estimates As a result of the adoption of SFAS 109, Armco has recorded a deferred tax asset of $298.5, net of a valuation allowance of $776.2. The ultimate realization of this asset depends on Armco's ability to generate sufficient taxable income in the future. As of December 31, 1993, Armco had capital and net operating loss carryforwards of approximately $1,216.3, expiring between 1996 and 2008, with approximately 70% expiring after the year 2000. Even though Armco has incurred book and tax losses for the past four fiscal years, management believes that it is more likely than not that it will generate taxable income sufficient to realize the recognized portion of the tax benefit associated with future deductible temporary differences and NOL and tax credit carryforwards prior to their expiration. This belief is based upon, among other factors, changes in operations that have occurred during 1992 and 1993, as well as consideration of available tax planning strategies. Specifically, cost savings associated with Armco's acquisition of Cyclops and capital investments are being realized, and are anticipated to continue, to improve operating results. Business restructurings announced during the fourth quarter of 1992 and the third and fourth quarters of 1993 included the sale of non-strategic units, some of which have been unprofitable. Armco has operated in a highly cyclical industry and consequently has had a MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- history of generating and then utilizing significant amounts of NOL carryforwards. During the years 1987-1989, Armco utilized approximately $350.0 of NOL carryforwards. Management believes that the valuation allowance noted above is appropriate given the current projections of taxable income. If Armco is unable to generate sufficient taxable income in the future through operating results, increases in the valuation allowance will be required through a charge to expense. However, if Armco achieves sufficient profitability to utilize a greater portion of the total deferred tax asset, the valuation allowance will be reduced through a credit to income. 1993 VS. 1992: Armco's net sales declined slightly because of the sale or the identification for sale of a number of businesses within the Other Steel and Fabricated Products segment. The decline was almost entirely offset by improved sales in the Specialty Flat-Rolled Steel segment and Douglas Dynamics as well as by the impact of a full year of results from the former businesses of Cyclops. Operating losses declined because of improved performance in the Specialty Flat-Rolled Steel segment and at Douglas Dynamics, and because of a reduction in special charges. Special charges of $165.5, taken in the third quarter of 1993, were associated with the decision to dispose of a number of businesses within the Other Steel and Fabricated Products segment. Excluding special charges, operating profit declined slightly in 1993 compared to 1992, as improvements in the Specialty Flat-Rolled Steel segment were more than offset by increased losses at Empire-Detroit, costs associated with the start-up of a new stretch mill at Sawhill Tubular, losses on certain contracts at a nonresidential construction company and approximately $29.3 of additional expense related to the adoption of SFAS 106. The loss from continuing operations in 1993 compared to the prior year declined due to reduced special charges and reduced losses from equity investments. Armco's net loss from equity investments was $43.7 in 1993 compared to $255.5 in 1992. The reduction was due primarily to the fact that Armco stopped recording losses in ASC after Armco's investment in ASC was reduced to zero. (See "Equity and Other Investments," below.) Armco's net loss for 1993 includes $14.9 of tax refunds and accrual reversals compared to $52.1 in 1992. The net loss for 1993 was impacted by the cumulative effect of the adoption of three new accounting standards, the net effect of which was a charge of $307.5 recorded in the first quarter. 1992 VS. 1991: Armco's net sales increased, primarily due to the Cyclops acquisition, but operating losses worsened, primarily due to special charges. In 1992, the net loss reflected net special charges of $204.2 for a series of restructuring actions to reduce costs, improve future profitability and strengthen Armco's competitive position. Of this total, $185.1 is reported as a special charge reflected in operating loss, and $19.1 is reflected in income from discontinued operations. The $204.2 charge is comprised of $126.0 for employee benefit costs related to the restructurings, $24.0 for the estimated losses through the dates of the ultimate disposal of specified units, $23.0 for the loss on the divestment and the excess carrying value of net assets over the anticipated proceeds on disposal, with the remainder comprised primarily of provisions for legal and environmental matters and the recognition of previously deferred foreign currency translation adjustments. In addition to these special charges, the 1992 net loss reflected $173.2 for Armco's share of special and extraordinary charges at ASC, $3.3 for Armco's share of special charges at the National-Oilwell joint venture, a $2.3 extraordinary loss on early retirement of debt, a tax refund of $39.1 and a $13.0 reduction in income tax reserves. The net loss in 1991 reflected special restructuring charges of $48.7, a charge of $170.3 to write off Armco's advances to AFSG and a gain of $24.1 on Armco's investment in ASC. Excluding special charges, the operating results in 1992 decreased as cost reduction benefits of the acquisition and results of the acquired stainless flat-rolled steel, tubular and nonresidential construction businesses were more than offset by increased operating losses from the stainless bar, rod and wire products and carbon steel businesses. Excluding special charges, ASC's results improved but National-Oilwell's results weakened in 1992 compared to 1991. OUTLOOK: Armco's results are expected to improve in 1994 compared to 1993 as a result of restructuring actions taken in 1992 and 1993, operational improvements in its Specialty Flat-Rolled Steel segment and an improving U.S. economy, which is favorably affecting Armco's major markets. BUSINESS SEGMENT RESULTS SPECIALTY FLAT-ROLLED STEEL Armco's Specialty Flat-Rolled Steel businesses produce and finish stainless and electrical steel sheet and strip at plants in Butler, Pennsylvania and Coshocton and Zanesville, Ohio. Stainless steel plate products are finished at Eastern Stainless Corporation (Eastern Stainless), Armco's 84%-owned subsidiary in Baltimore, Maryland. The segment also includes the results of European trading companies which buy and sell steel and manufactured steel products. [PHOTOGRAPH OF DENNIS McGLONE APPEARS HERE] "IN 1994, THE SPECIALTY FLAT-ROLLED STEEL SEGMENT MUST CONTINUE TO IMPROVE QUALITY, DELIVERY AND INTERNAL COST EFFICIENCY. WE ALSO HAVE TO RAMP UP SALES AT NORTH AMERICAN STAINLESS, CONTINUE TO IMPROVE ELECTRICAL STEEL PROFITABILITY AND FIND BETTER WAYS TO MEET THE NEEDS OF EXISTING AUTOMOTIVE CHROME AND CHROME NICKEL STAINLESS CUSTOMERS." -- DENNIS MCGLONE, SENIOR VICE PRESIDENT -- COMMERCIAL, ARMCO ADVANCED MATERIALS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS 22 - -------------------------------------------------------------------------------- There is significant interaction between Armco's Butler, Pennsylvania plant and North American Stainless (NAS), a 50%-owned joint venture which operates a greenfield chrome nickel stainless finishing facility in Carrollton, Kentucky. NAS purchases, at market prices, a portion of its steel requirements from Armco's Butler plant. In addition, Armco is the exclusive sales agent for NAS. The results for NAS are reported under "Other Equity Companies." The Specialty Flat-Rolled Steel segment's results appear below.
- ------------------------------------------------------- 1993 1992 1991 ======================================================= Customer sales $1,001.5 $885.5 $693.0 Special charges -- (37.6) -- Operating profit 75.5 21.4 42.3 (000s tons) Shipments 653 571 469 Raw steel production 882 793 612 Capability utilization 94% 84% 79% - -------------------------------------------------------
1993 VS. 1992: The 13% increase in customer sales reflects a 14% increase in volume due to a full year of shipments from former Cyclops units and increased demand for specialty steels, particularly from the automotive chrome markets. Average prices declined slightly, reflecting a change in product mix as strong demand for automotive chrome and increased supply of chrome nickel semi-finished product to NAS led to reduced shipments of higher-priced, finished chrome nickel products, now being sold by NAS. In addition, lower raw material costs and increased foreign imports, which have risen 62%, 26% and 40% for stainless sheet and strip, stainless plate and electrical steels, respectively, during 1993 compared to 1992, have placed pressure on chrome nickel pricing. Exports declined to 4% of this segment's total tons shipped in 1993 compared to 6% in 1992 as Armco shifted some melting capacity from export markets to more profitable domestic markets. Operating profit increased because of improvements in operating practices and cost savings relating to synergies from the Cyclops acquisition, in addition to the absence of special charges such as those incurred in 1992. Operating profit excluding special charges was $116 per ton, or 8% of sales, in 1993 compared to $103 per ton, or 7% of sales, in 1992. In 1993, due to the adoption of SFAS 106, operating profit included approximately $20.1 of additional postretirement benefits expense over the previous, as-incurred basis. Were it not for that increase, the operating profit margins would have improved more significantly in the period-to-period comparisons. Key to Armco's strategy of enhancing its role as a leading domestic producer of specialty flat-rolled steel was supplying the steel feedstock for finishing by the former Cyclops businesses from Armco's world-class melt shop in Butler, thereby increasing the utilization of the Butler facility and providing the former Cyclops units with an improved source of supply. In 1993, the steelmaking capability at the Butler plant increased to 850,000 tons per year from 750,000 tons per year in 1992, primarily as a result of improved operating practices. Production at the Butler plant increased 15% in 1993 compared to 1992, with the majority of the increase due to supplying feedstock to the former Cyclops units and to NAS and the balance due to increased demand for steel products by external customers. Because Butler was able to meet Eastern Stainless' feedstock requirements at a lower cost, Eastern Stainless was able to close its melt shop in July 1993. TITLE: SPECIALTY FLAT-ROLLED STEEL -- 1993 SALES % BY PRODUCTS Stainless Sheet and Strip 51% Electrical 24% Semi-Finished Stainless 14% Stainless Plate 11% % BY MARKETS Industrial and Electrical Equipment 40% Automotive 27% Service Centers 20% Construction 3% Appliance, Utensils and Cutlery 3% Other 7% THE AUTOMOTIVE, INDUSTRIAL MACHINERY AND SERVICE CENTER MARKETS CONTINUE TO BE THE MAJOR CONSUMERS OF ARMCO SPECIALTY STEELS. During 1993, Eastern Stainless signed two-year labor agreements with the United Steelworkers of America (USWA). Although the new agreements do not significantly affect employment cost, they do provide Armco with more flexibility as it continues to take action to restructure Eastern Stainless to improve its operating performance. Armco also signed, in 1993, 36-month and 33- month agreements with the local independent unions at the specialty steel plants in Butler, Pennsylvania and Zanesville, Ohio, respectively. These contracts include provisions for a managed healthcare benefits system and greater flexibility within the work force. 1992 VS. 1991: Customer sales increased 28% in 1992, reflecting both increased shipments and higher average prices. The shipment increase of 22%, average price improvement of 5% and mix [PHOTOGRAPH OF GARY McDANIEL APPEARS HERE] "WE HAVE AN AGGRESSIVE OPERATING PLAN FOR BUTLER, ZANESVILLE AND EASTERN STAINLESS IN 1994. CLEARLY, OUR EFFORTS WILL BE CONCENTRATED ON ACHIEVING OR EXCEEDING THE PLANNED PROFITABILITY WHILE CONTINUING TO ENHANCE CUSTOMER SATISFACTION, CREATING AN ENVIRONMENT THAT FOSTERS MORE EMPLOYEE TEAMWORK AND REDUCING VARIABILITY IN OUR PROCESSES. SPECIFICALLY, WE WANT TO INCREASE CAST TONS BY ANOTHER SIX PERCENT OVER 1993'S RECORD LEVELS, FURTHER OPTIMIZE COLD ROLLING AND CONTINUE TO IMPROVE OUR CUSTOMER DELIVERY PERFORMANCE, WHICH REACHED 93 PERCENT IN THE FOURTH QUARTER." -- GARY MCDANIEL, VICE PRESIDENT & GENERAL MANAGER -- BUTLER, ZANESVILLE AND EASTERN STAINLESS MANAGEMENT'S DISCUSSION AND ANALYSIS 23 - -------------------------------------------------------------------------------- TITLE: BUTLER PLANT ON-TIME SHIPMENT PERFORMANCE 1993 PERCENT ON-TIME (BY ORDERS) 1st QTR 80% 2nd QTR 79% 3rd QTR 90% 4th QTR 93% CLOSE COOPERATION BETWEEN PRODUCTION AND INSIDE SALESPEOPLE AT THE BUTLER PLANT RESULTED IN 93 PERCENT ON-TIME DELIVERY PERFORMANCE FOR THE FOURTH QUARTER OF 1993, A 63 PERCENT IMPROVEMENT FROM JUST TWO YEARS AGO, WHILE SHIPMENTS INCREASED AND INVENTORY WAS REDUCED. improvements were a result of the Cyclops acquisition. By comparison, average prices excluding the former Cyclops businesses were slightly lower in 1992 than in 1991. Operating profit in 1992 included a special charge of $37.6 for closing the Eastern Stainless melt shop and reducing the work force of the businesses in the segment. Excluding the special charge, operating profit was $103 per ton, or 7% of sales, in 1992 compared to $90 per ton, or 6% of sales, in 1991, reflecting the improved product mix and a better capability utilization rate as a result of the benefit of the Cyclops acquisition, offset by poor electrical steel yields and higher costs. OUTLOOK: Demand for specialty flat-rolled steel in 1994 is expected to be strong, especially in automotive chrome stainless sheet. Electrical steel demand is anticipated to improve further principally due to higher housing starts. However, domestic shipments of stainless plate are likely to remain weak due to high levels of imports and softness in certain capital goods markets. Operating results are expected to improve in 1994 relative to 1993 as raw steel production should run at improved levels for the full year due to higher product demand. Increased foreign competition, combined with added domestic capacity, will continue to place pressure on pricing. Despite this increased competition, Armco expects to compete as a low-cost, high-quality producer and to retain its position in the marketplace. [PHOTO OF JAY PARR APPEARS HERE] "FOR 1994, COSHOCTON'S EMPLOYEES WANT TO INCREASE SHIPMENT VOLUME TO 70,000 TONS FROM LAST YEAR'S BEST-EVER TOTAL OF 66,300 TONS. WE'RE GOING TO IMPROVE ON-TIME DELIVERIES TO 95 PERCENT. AND WE'LL CONTINUE TO DRIVE THE COST OF QUALITY DOWN TO 12 PERCENT OF TOTAL SALES REVENUE. PLANT SAFETY WILL CONTINUE TO BE OUR NUMBER ONE PRIORITY." -- JAY PARR, GENERAL MANAGER, COSHOCTON STAINLESS Regarding imports of 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 duty and anti-dumping duty petitions against Italy. There was also an anti-dumping duty petition filed against Japan, in which Armco was not a filing 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. Final injury determination by the ITC is now scheduled for May regarding the countervailing duty of imports from Italy and for June regarding the anti- dumping investigation of imports from Japan and Italy. TITLE: COSHOCTON STAINLESS DIVISION COST OF QUALITY % of Sales 1989 18.8% 1990 18.1% 1991 18.7% 1992 18.5% 1993 13.2% DUE TO A MORE CONSISTENT SUPPLY OF FEEDSTOCK AND MORE EFFICIENT ROUTING FROM THE BUTLER MELT SHOP THROUGH ACS HOT ROLLING, ARMCO'S COSHOCTON FINISHING PLANT WAS ABLE TO DECREASE ITS COST OF QUALITY 27 PERCENT IN 1993. CRITICAL ISSUE TEAMS HAVE TARGETED ANOTHER 9 PERCENT IMPROVEMENT FOR 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS 24 - -------------------------------------------------------------------------------- OTHER STEEL AND FABRICATED PRODUCTS At December 31, 1993, the Other Steel and Fabricated Products business segment included Empire-Detroit, Sawhill Tubular and Douglas Dynamics. At various times during the three-year period ended December 31, 1993, the segment included other businesses which have since been divested or identified for divestment. During 1991, 1992 and 1993, Armco took actions to restructure and/or divest several businesses in this segment that did not represent a strategic fit or offer growth potential or generate positive cash flow, resulting in significant special charges in all three years.
- ----------------------------------------------- 1993 1992 1991 =============================================== Customer sales $ 662.5 $ 787.7 $511.0 Special charges (165.5) (129.8) (48.7) Operating (loss) (183.5) (128.5) (19.4) - ------------------------------------------------
1993 VS. 1992: Customer sales decreased by 16% in 1993 compared to 1992, primarily due to divestments and restructuring of businesses within the segment. Divestments that affect the comparison include Southwestern Ohio Steel (SOS) (sold in August 1992), Armco do Brasil (sold in September 1993), Miami Industries (sold in October 1993) and E. G. Smith (sold in February 1993). In addition, the results of other businesses identified for divestment are no longer reflected as consolidated units in Armco's consolidated statements of income from the dates indicated. Those businesses include stainless bar, rod and wire (year-end 1992), the conversion systems business (September 30, 1993), Flour City Architectural Metals (September 30, 1993) and Armco's Tex-Tube Division (September 30, 1993). This decrease was partially offset by increased sales at Douglas Dynamics and by a full year of shipments from Empire-Detroit and Sawhill Tubular (both acquired as part of Cyclops in April, 1992). On September 21, 1993, Armco sold the stock of Armco do Brasil, S.A. to the operation's management for approximately $55.0 in net cash proceeds and recorded a special charge of $15.0 against third quarter earnings. On October 28, 1993, Armco completed the sale of Miami Industries to Copperweld Corporation for approximately $15.0 in total cash proceeds and certain assumed liabilities. On February 16, 1993, Armco sold E. G. Smith to a Pittsburgh-based investor group for approximately $11.0. [PHOTOGRAPH OF TONY KURLEY APPEARS HERE] "1993 SAW GROUNDBREAKING ON A $100 MILLION THIN-SLAB CONTINUOUS CASTER AND CREATION OF THE MANSFIELD STEEL OPERATIONS (MSO) TO COMPETE AGAINST TRADITIONAL MINI-MILLS. OUR 1994 GOALS ARE TO EXPEDITE CONSTRUCTION, START UP A NEW LADLE METALLURGY FACILITY TO IMPROVE QUALITY AND REDUCE COSTS AND RESTRUCTURE MSO INTO AN EFFICIENT OPERATION WHICH CAN CONTRIBUTE TO ARMCO'S PROFITABILITY." -- TONY KURLEY, GENERAL MANAGER, MANSFIELD STEEL OPERATIONS TITLE: OTHER STEEL & FABRICATED PRODUCTS -- 1993 SALES % BY PRODUCTS Carbon Sheet and Strip 46% Pipe and Tubing 37% Construction 5% Other 12% % BY MARKETS Service Centers 35% Construction 27% Industrial and Electrical Equipment 15% Aircraft and Aerospace 5% Automotive 4% Other 14% BECAUSE OF THE DIVESTMENT AND RESTRUCTURING OF VARIOUS NON-STRATEGIC BUSINESSES IN 1993, THE OTHER STEEL AND FABRICATED PRODUCTS SEGMENT NOW INCLUDES STEEL PIPE, SNOWPLOW AND FLAT-ROLLED CARBON STEEL BUSINESSES. The operating loss in this segment in 1993 includes special charges of $165.5 to cover estimated losses and reserve requirements for the ultimate disposal of a number of businesses. Of the total, $15.0 is associated with the sale of Armco's Brazilian operations and the remaining $150.5 is associated with the ultimate disposal of Armco's stainless bar, rod and wire businesses, its conversion services business, a nonresidential construction business and a tubing business. Operating profit, excluding special credits and charges, declined in 1993 primarily because of the divestiture of SOS and E.G. Smith, as well as the costs associated with the start-up of the stretch reduction mill at Sawhill Tubular Division, higher scrap prices for Empire-Detroit and losses on certain contracts at the remaining nonresidential construction operation. These declines were partially offset by improvements at Douglas Dynamics and the elimination of losses due to the restructuring of the stainless bar, rod and wire businesses at year-end 1992. 1992 VS. 1991: Customer sales increased 54%, primarily as a result of the Cyclops acquisition, which more than offset the effect of divestitures. Operating results in 1992 and 1991 included special charges related to such divestitures. In 1992, special charges included $101.4 to restructure and downsize significantly the stainless bar, rod and wire businesses in Maryland and Pennsylvania, $25.7 to divest operations primarily in Venezuela and $8.1 to close a metal fabricating plant in Pennsylvania, partially offset by a gain of $5.4 on the sale of SOS. In 1991, special charges included $32.4 for the sale or divestiture of businesses in South America, $13.8 for work force reductions at the stainless bar, rod and wire business in Maryland and $2.5 related to other divestitures. Operating profit of the MANAGEMENT'S DISCUSSION AND ANALYSIS 25 - -------------------------------------------------------------------------------- remaining businesses increased in 1992 primarily due to cost reductions at the Brazilian operation and improvement in the snowplow business. The steel tubing and nonresidential construction companies obtained in the Cyclops acquisition also contributed to the improved operating results before special charges. LIFO layer liquidations resulting from reductions of inventory levels increased 1992 operating losses by $0.4 and decreased 1991 operating losses by $26.0. OUTLOOK: Operating results are expected to improve in 1994 at Douglas Dynamics on higher shipments of snowplows and at Sawhill Tubular as that operation moves into full production with the new stretch reduction mill. Continuing losses are expected at Empire-Detroit, however, partially driven by scrap prices, which are expected to remain at a higher average level in 1994 relative to 1993. In June 1993, Armco announced a plan to spend approximately $100.0 to enhance the steel production capability and improve operating performance at Empire-Detroit's Mansfield, Ohio operations by installing a thin-slab caster and making related plant modifications. The caster is designed to produce carbon steels, functional grades of chrome stainless steels and non-oriented grades of electrical steels. Installation of the caster is expected to be completed in 1995. In late June 1993, the USWA employees at Empire-Detroit's Mansfield and Dover, Ohio plants ratified new, six-year contracts, which became effective September 1, 1993. The contracts allow for a 25% reduction in the work force and a change in work rules that should allow for a more efficient use of the new caster technology and increased employee health benefit cost sharing, partially offset by benefit and wage increases toward the end of the contract. On July 27, 1993, the ITC announced its decisions on trade cases that had been levied by U.S. carbon steel producers, ruling that foreign producers had not caused injury to the domestic producers of hot-rolled carbon steel, although about one-third of the claims against foreign cold-rolled producers, and generally all claims against foreign coated carbon steel producers, were upheld. This ruling could adversely impact domestic carbon steel producers such as Armco's Mansfield, Ohio operations. While the effect that the rulings will have upon future pricing and demand for domestically produced steel products is still unknown, domestic carbon steel price increases effective January 1994 appear to be holding, and additional price increases have been announced on flat-rolled products effective July 1994. As is typical in the industry, however, there is no certainty that these increases will continue to be realized. [PHOTOGRAPH OF JOE VALLEY APPEARS HERE] "LAST YEAR'S INSTALLATION AND START-UP OF THE NEW STRETCH MILL AT SAWHILL WAS A SOLID SUCCESS. OUR PLAN FOR 1994 IS TO IMPROVE BY EIGHT PERCENT ON LAST YEAR'S RECORD SALES WHILE REAPING THE COST BENEFITS FROM THE MORE EFFICIENT EQUIPMENT. WE ALSO INTEND TO INVESTIGATE OTHER CAPITAL INVESTMENTS WHICH CAN BE ECONOMICALLY JUSTIFIED." -- JOE VALLEY, PRESIDENT, SAWHILL TUBULAR DISCONTINUED OPERATIONS WORLDWIDE GRINDING SYSTEMS
- -------------------------------------------------------------------- 1993 1992 1991 ==================================================================== Income from operations $ 14.2 $ 0.4 $ 8.8 Loss on disposal of business (40.0) -- -- - --------------------------------------------------------------------
As part of Armco's strategy to focus on its specialty steel businesses, Armco sold, on September 28, 1993, its Worldwide Grinding Systems' 50% interest in several wire drawing operations for $33.0 in cash to Leggett & Platt Incorporated, its partner in these joint ventures. On November 12, 1993, Armco completed the sale of the balance of its Worldwide Grinding Systems segment to an investment firm, Bain Capital, in partnership with members of the operations' management. In this latter transaction, Armco received about $80.0 in total compensation, excluding pending post-closing adjustments. The 1992 operating loss included a special charge of $19.1 for closing a foundry and reducing the work force. Armco's results for 1991, 1992 and 1993 reflect the reclassification of the results of Worldwide Grinding Systems to discontinued operations. ARMCO FINANCIAL SERVICES GROUP (AFSG) The Armco Financial Services Group consists primarily of insurance companies that Armco intends to sell and which continue underwriting (AFSG companies to be sold) and companies that have stopped writing new business for retention and are being liquidated (runoff companies). On January 31, 1994, Armco announced that it had signed a letter of intent to sell the ongoing insurance operations to Vik Brothers Insurance, Inc., a privately-held, Raleigh, North Carolina-based, property and casualty insurance holding company. Under the terms of the letter, the buyer would pay $70.0 at the closing and $15.0 in three years, reduced by a potential adjustment for adverse experience in the insurance reserves. Proceeds from the sale will remain committed to the support of Armco's runoff insurance subsidiaries. Armco recorded a charge against 1993 fourth quarter earnings of $45.0 to write down the carrying value of the AFSG companies to be sold to the estimated net realizable value upon MANAGEMENT'S DISCUSSION AND ANALYSIS 26 - -------------------------------------------------------------------------------- disposition. The final agreement is subject to a number of conditions, including a definitive purchase agreement and approval by regulatory authorities and the boards of directors of both companies. At December 31, 1990, Armco's investment in and advances to AFSG were stated at Armco's then estimated net realizable value on ultimate disposition of the companies in the group. Due to depressed market conditions, underwriting losses and changes in the expected timing of the disposition, Armco, in the fourth quarter of 1991, wrote off its advances to AFSG of $170.3. At December 31, 1993, Armco's investment in AFSG is stated at an amount equal to Armco's current estimate of its net realizable value. AFSG COMPANIES TO BE SOLD
- ------------------------------------------------------------------------------ 1993 1992 1991 ============================================================================== Equity in income (loss) $ 10.4 $ (2.6) $ (14.4) Deferred income (10.4) -- -- Write-off of advances to AFSG -- -- (170.3) Cumulative effect of SFAS 106 (14.0) -- -- Premiums earned $227.7 $239.9 $ 250.9 Underwriting loss (32.1) (46.2) (50.9) Net investment income (including realized gains) 43.7 44.1 37.8 Realized gains 11.2 10.1 2.5 - ------------------------------------------------------------------------------
1993 VS. 1992: Operations for 1993 resulted in income before the cumulative effect of an accounting change, as losses and underwriting expenses were reduced. The adoption of SFAS 106 in the first quarter of 1993 resulted in a charge of $14.0. This charge reduced Armco's investment in the AFSG companies to be sold and was included in the total cumulative effect of accounting changes recorded by Armco. Armco accounts for these operations under the cost recovery method, whereby net income is not recognized until realized through a sale of the businesses, while net losses are charged against income as incurred. Direct written premiums and premiums earned declined due to a continuing soft market in business insurance, as well as the shutdown of the Southwest Region office as of January 1, 1993. Lower incurred losses, workers' compensation pool expenses and loss adjustment expenses resulted in reduced losses from underwriting. Net investment income, including realized gains, declined slightly on lower market interest rates. 1992 VS. 1991: The net loss of the AFSG companies to be sold was reduced in 1992 relative to 1991. Premiums earned declined in 1992 compared to 1991 as the property and casualty insurance industry continued to experience soft underwriting conditions. Despite the lower premiums, the underwriting loss improved due to a decline in the number of large losses. LIQUIDITY AND FINANCIAL POSITION: At December 31, 1993, the AFSG companies to be sold had total assets of $571.4, including cash and invested assets of $440.7. Net assets at December 31, 1993 were $135.9, an increase of $9.7 compared to December 31, 1992. Insurance premiums and interest are the companies' primary sources of cash. Operating activities provided $2.3 in 1993 compared to a use of cash of $6.5 in 1992. The improvement in 1993 is primarily due to a $13.3 reduction in loss payments and a $6.4 decrease in commissions and general underwriting expenses, partially offset by reduced premium collections of $10.3. Investing activities provided $11.4 in 1993 compared to a use of $2.2 in 1992. Financing activities used $2.8 in 1993 compared to a use of $5.8 in 1992. The investment portfolio of the AFSG companies to be sold consists primarily of investment grade bonds. The market value of the invested assets at December 31, 1993 was $441.5 compared to $428.6 at December 31, 1992. OUTLOOK: As discussed above, Armco has announced the signing of a letter of intent to sell the AFSG companies to be sold. Finalization of the disposition is subject to a number of conditions, including a definitive purchase agreement and approval by regulatory authorities. Proceeds from the sale have been pledged as security for certain note obligations due the runoff insurance companies and will be retained in the investment portfolios of the AFSG runoff companies. If the proposed transaction is unable to be consummated, Armco would negotiate with other potential buyers to conclude a sale of these businesses. MANAGEMENT'S DISCUSSION AND ANALYSIS 27 - -------------------------------------------------------------------------------- Armco expects results from the AFSG companies to be sold to continue to improve in 1994 over 1993. New programs have been implemented which are targeted at improving pricing and reducing incurred losses through selection of risks and agency management, with a focus on classes of business that yield profitable returns. Premiums written are expected to increase slightly in 1994, primarily through improving customer service and an expansion of the agency force. Incurred losses are expected to continue to decline through the implementation of a non-metro agency and underwriting program, focused pricing and various other tactical activities. RUNOFF COMPANIES The runoff insurance companies have not written any business for retention, except for an immaterial amount of guaranteed renewable accident and health business. The number of policyholders of this business has decreased from approximately 4,000 at December 31, 1986 to about 1,300 as of December 31, 1993. No charges have been recorded with respect to the runoff companies since the second quarter of 1990. In September 1991, Armco sold one of its runoff insurance companies to a group comprised of the company's management. In exchange for the transfer of the cash and assets related to this company, the purchaser assumed all obligation for the liabilities, future losses and expenses of the company. In 1992, regulatory authorities approved a merger plan, which permitted Armco to merge a runoff insurance company, which had a statutory surplus impairment, into another runoff company, curing the impairment. Under terms of this merger plan, Armco agreed with regulatory authorities to maintain statutory surplus of the surviving runoff company at $10.0. During 1993, regulatory authorities allowed the restructure and securing of certain obligations arising from the 1992 merger plan, and Armco was released from the surplus maintenance agreement. LIQUIDITY AND FINANCIAL RESOURCES: Claims are paid by using the investment portfolio of the runoff companies and the related investment income from such portfolio. The portfolio had a market value of $126.2 at December 31, 1993. The runoff companies believe the existing invested assets, related income and other assets will provide sufficient funds to meet all future claims payments. The loss reserves of the runoff companies, net of reinsurance recoverables, decreased from $498.3 at December 31, 1986 to $165.2 at December 31, 1993. The runoff companies estimate that 61% of the claims will be paid in the next five years and that substantially all of the claims will be paid by the year 2017. The ultimate amount of the claims as well as the timing of the claims payments are estimated based on an annual review of loss reserves performed by the runoff companies' independent and consulting actuaries. OUTLOOK: Armco management continues to believe, based on current facts and circumstances and the views of outside counsel and advisors, that future charges, if any, resulting from the runoff companies will not be material to Armco's financial condition. However, it is possible that due to fluctuations in Armco's results, future developments could have a material affect on the results of one or more future interim or annual periods. EQUITY AND OTHER INVESTMENTS ARMCO STEEL COMPANY, L.P. (ASC) ASC, an equally owned limited partnership between Armco and Kawasaki, concentrates on the production of custom engineered grades and value-added applications of hot-rolled steel and coated and uncoated cold-rolled steel for sale to the automotive, appliance and manufacturing markets, as well as to the construction industry and independent steel distributors and service centers. Armco's financial interest in ASC, originally 60%, decreased to 55% in May 1990 and to 50% in May 1991 as a result of cash contributions made by Kawasaki pursuant to the joint venture formation agreement. Kawasaki's final required cash contribution to ASC pursuant to the formation agreement was made in October 1991 without further change in ownership. Armco recorded a gain of $24.1 on its investment in ASC in 1991, reflecting Armco's interest in the increase in net assets of ASC caused by Kawasaki's cash contributions, which was partially reduced by the decrease in Armco's investment due to the ownership changes. On January 26, 1994, Armco Inc. announced that ASC has begun implementing a proposed plan to recapitalize the business. Under the plan, ASC intends to sell equity through an initial public offering and debt through a senior note offering. Proceeds would be used to restructure and recapitalize ASC, primarily by reducing its current debt and unfunded pension liability. None of the proceeds would be paid to either of the partners. Under the terms of the plan, Armco's obligations to make certain cash payments to ASC would be eliminated and its ownership reduced to less than one percent. No assurance, however, can be given that the recapitalization plan for ASC will be successfully completed. In connection with the offerings, ASC adopted SFAS 106 retroactive to January 1, 1990, recorded a cumulative effect charge of $491.6 and reclassified its financial statements for 1990 through 1993. The Customer sales, Operating profit (loss) and Net loss shown below represent the results of ASC, including the retroactive application of SFAS 106. MANAGEMENT'S DISCUSSION AND ANALYSIS 28 - --------------------------------------------------------------------------------
- ---------------------------------------------------------- 1993 1992 1991 ========================================================== Customer sales $1,594.5 $1,404.5 $1,301.4 Special charges (19.6) (379.3) -- Operating profit (loss) 13.9 (499.3) (219.0) Net loss (40.7) (544.1) (251.1) Armco's equity loss (27.9) (234.1) (119.0) (000s tons) Shipments 3,429 3,049 2,769 Raw steel production 3,601 3,399 3,087 Capability utilization 91% 79% 68% - -----------------------------------------------------------
1993 VS. 1992: Losses incurred by ASC during the first quarter of 1993 reduced Armco's investment to zero, after which Armco stopped recording losses related to the operations of ASC. In 1993, Armco funded $19.4 to ASC for hot strip mill improvements that enhance ASC's ability to roll certain gauges of chrome nickel stainless steel for Armco. However, Armco has no binding commitment or intention to provide financial support of ASC's operations. ASC currently provides services to Armco (on an arm's length basis) under a long- term toll rolling agreement, which will continue in effect after completion of the proposed recapitalization. ASC's customer sales increased 14% in 1993 versus 1992, reflecting a 12% increase in tons shipped and a 1% increase in average selling prices. The shipment increase was primarily due to improved operating efficiencies. Price increases announced during 1993 were partially offset by a less favorable product mix. In addition, many of the price increases did not take effect until the fourth quarter of 1993, and certain others will not be fully reflected until the first half of 1994. ASC recorded an operating profit in 1993 compared to an operating loss in 1992. This improvement is due to continuing efforts on cost reduction activities, the move to 100% continuous casting, improved productivity, lower raw material contract prices, salaried work force reductions and the rationalization of less productive, higher cost operations. The 1993 operating income includes approximately $19.6 in restructuring charges, while the 1992 operating loss included restructuring charges of approximately $379.3. In December 1993, ASC adopted SFAS 106 retroactive to January 1, 1990, and recorded a cumulative effect charge of $491.6 in 1990. The 1992 operating loss includes a charge of $16.0 in connection with ASC's decision to shut down permanently the hot strip rolling mill and associated units at its Ashland (Kentucky) Works, as well as the benefits of a litigation settlement reached in February 1992, the terms of which are subject to a confidentiality agreement. 1992 VS. 1991: Armco's equity loss from ASC increased substantially in 1992 because of special charges. ASC's 1992 customer sales increased 8% compared to 1991 reflecting a 10% increase in shipments and a 2% decrease in selling prices (exclusive of mix changes) in a weak market environment. Shipments to service centers increased while shipments to the automotive, appliance, construction and manufacturing sectors decreased. ASC's capability utilization rate was adversely affected by interruptions caused by the installation of a gas cleaning system at Ashland in 1992 and by interruptions due to a major modernization of the Middletown hot strip mill in 1991. Excluding special charges, ASC's operating loss declined about 50% in 1992 compared to 1991, reflecting improved operating performance. In 1992, ASC recorded charges totaling $379.3, which included $119.5 to write down operating assets, $158.2 for pension costs and termination benefits related to work force reductions and $46.6 for the impairment of its investment in Eveleth, a partnership which produces iron ore pellets. Rationalization of operating facilities resulted from the determination that ASC had redundant assets and excess capacity. The impairment of Eveleth followed ASC's conclusion as to its inability to recover its investment because of doubts regarding the continued level of support by it and the other Eveleth partners in light of worldwide excess iron ore capacity and Eveleth's position as a high cost producer. In the fourth quarter of 1992, ASC decided not to continue to purchase iron ore pellets from Eveleth. Most of these actions took place following an operations review conducted by ASC's newly-appointed management team and completed in the fourth quarter of 1992. OUTLOOK: As discussed above, ASC is implementing a plan to recapitalize the business. Under that plan, Armco will reduce its ownership in ASC to less than one percent. No assurance, however, can be given that the recapitalization plan for ASC will be successfully completed. Armco does not intend to record any profit and loss impact from the results of ASC. The current collective bargaining agreement with the USWA covering ASC's hourly steelmaking employees at the Ashland Works was originally scheduled to expire July 31, 1993, but has been extended to June 1, 1994. The current agreement with the Oil, Chemical and Atomic Workers (OCAW) was scheduled to expire October 1, 1993, but has been extended to May 1, 1994. No predictions can be made as to the results of the renegotiations of these agreements or the possible effects of the renegotiations upon ASC, although the agreement with the USWA covering hourly Ashland Works employees establishes procedures for revising economic terms upon their expiration and contains no-strike clauses that are effective during the negotiation period. MANAGEMENT'S DISCUSSION AND ANALYSIS 29 - -------------------------------------------------------------------------------- The terms of the agreement with the Armco Employees Independent Federation (AEIF) covering ASC's hourly employees at the Middletown Works have been settled through March 1, 1997 pursuant to arbitration. On February 15, 1994, the USWA filed a petition with the National Labor Relations Board seeking to represent the hourly employees at the Middletown Works currently represented by the AEIF. If the USWA is elected as the bargaining representative for those employees, it may seek to renegotiate the terms of the existing AEIF agreement covering those employees prior to its scheduled expiration on March 1, 1997. LIQUIDITY AND FINANCIAL RESOURCES: As a limited partnership, ASC maintains its own cash, credit lines and long-term debt, and funds its own operations, liabilities and capital expenditures, separate from the partners. At December 31, 1993, ASC had $729.4 principal amount of long-term debt outstanding (including current portion), a substantial portion of which was incurred after the formation of ASC to finance capital improvements and operating losses. In addition, ASC has a $50.0 revolving credit facility available for general partnership purposes, which expires in May 1994, under which $3.8 was utilized for letters of credit and the balance was available at December 31, 1993. These facilities and the majority of ASC's long-term debt are secured by substantially all of ASC's assets, including accounts receivable, inventories and property, plant and equipment. Included in the total long-term debt figure stated above, ASC has borrowed, under an agreement with an affiliate of Kawasaki, $100.0 on an unsecured basis, subordinated to the secured lenders, which matures in February 1996. In the event that ASC is unable to borrow under its credit agreement or is unable to secure new financing, ASC may be unable to continue to fund its operations and to satisfy its debt obligations. Armco has no commitments or intention to finance ASC further. Under the credit agreements relating to these obligations, as amended effective December 30, 1992, ASC is required to maintain a minimum tangible net worth of $650.0, which increased from $600.0 on July 1, 1993, a minimum current ratio of 1.0 and a maximum leverage ratio of 1.0. At December 31, 1993, ASC's tangible net worth, current ratio and leverage ratio, each as defined, were $742.1, 1.76 and 0.85, respectively. ASC had $144.2 in cash and cash equivalents at December 31, 1993. ASC's operating activities generated cash and cash equivalents of $98.8 in 1993. In the same period, ASC used $32.8 in investing activities, including $40.2 in capital expenditures, and obtained $77.0 from net financing activities. ASC has debt payments due under its credit facilities aggregating $130.8 in 1994. The terms of the security agreement will permit additional financings, which are yet to be negotiated, up to $254.0 through 1995 to be secured by the pledged assets. However, there are no formal commitments with respect to further financing. ASC will continue to review its businesses to determine if additional facilities should be written down or otherwise restructured. In this regard, ASC is negotiating with the Eveleth partners concerning the potential closure of, or ASC's exit from, Eveleth. If these negotiations are successfully completed, the closure of, or exit from Eveleth, would be subject to other events, including the approval by ASC's Board of Directors and could result in an additional charge of approximately $30.0. Although it is not possible at this time to determine accurately the amounts of any other special charges that may result from the closure, write-down or other restructuring of additional facilities, additional special charges could be incurred and may be material to the results and financial condition of ASC. OTHER EQUITY COMPANIES Armco's equity in net losses of other equity companies in 1993, 1992 and 1991 are shown below:
- ------------------------------------------------------------------------------- 1993 1992 1991 =============================================================================== National-Oilwell $(11.0) $(19.4) $(16.0) North American Stainless (6.4) -- -- Other 1.6 (2.0) 0.3 Total (15.8) (21.4) (15.7) - -------------------------------------------------------------------------------
1993 VS. 1992: Improvement in 1993 compared to 1992 was primarily the result of National-Oilwell's increased revenues and implementation of previously announced actions to rationalize the company. Included in Armco's 1993 equity in losses from National-Oilwell was $5.0, representing half of National-Oilwell's write-down of its wellhead business assets, which National-Oilwell sold in February 1994. The 1992 equity in losses for National-Oilwell included $3.3 of a $6.5 charge for restructuring and rationalization. The improvement in Armco's equity in losses was somewhat offset by the equity losses recorded in 1993 by Armco for NAS, which was proceeding through start-up and early periods of operation during 1993. As a partnership, NAS maintains its own cash, credit lines and long-term debt, and funds its own operations, liabilities and capital expenditures, separate from the partners. NAS is partially financed by long-term debt and a revolving credit agreement. These agreements contain covenants which require NAS to maintain certain minimum net worth and ratio tests. At December 31, 1993, NAS was in default on certain of its covenant requirements. Discussions designed to reach agreement on a cure for this default situation have begun, and Armco believes that an acceptable resolution will be reached. Armco is restricted by its own credit facilities as to the amount of contributions it can make to its joint venture partnerships. MANAGEMENT'S DISCUSSION AND ANALYSIS 30 - -------------------------------------------------------------------------------- 1992 VS. 1991: The decline in 1992 compared to 1991 was principally due to the worsening of National-Oilwell's operating loss. The results reflected the continuing market weakness and downsizing in the North American oil sector, which led to a reduction in work force and the closing of manufacturing plants, supply stores and tubular product stocking yards in 1991 and 1992. Armco's equity in losses at National- Oilwell includes $3.3 and $12.3 for its equity in special charges associated with this restructuring in 1992 and 1991, respectively. OUTLOOK: NAS is expected to increase its shipments due to improved operations, greater customer acceptance and a stronger economy. However, NAS faces increased foreign competition in commodity chrome nickel stainless sheet, which is likely to place pressure on pricing. National-Oilwell's sales are expected to continue to be negatively impacted by a weak market for oilfield equipment and supplies. However, National- Oilwell anticipates improvement in overall results due to benefits from rationalization in 1992 and 1993 and from divestiture of its unprofitable wellhead business in February 1994. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1993, Armco had cash and cash equivalents of $183.5 compared to $171.3 at December 31, 1992. The increase was due primarily to the net generation of $100.5 of cash by investing activities, primarily the sale of businesses and assets, which provided $188.6, and the sale of investments, which provided $24.9, offset by capital expenditures of $53.9 and contributions to equity investees of $22.4. Despite the $641.8 loss for the year, operating activities used cash of only $21.1 because much of the loss was due to special charges and the cumulative effect of accounting changes which did not require the immediate use of Armco's cash. Cash used in operating activities was primarily due to increases in accounts receivable and decreases in payables and accrued expenses. Financing activities used $61.8, primarily for principal payments on debt of $165.7 and preferred stock dividends of $18.2, partially offset by proceeds of $125.0 raised in a Senior Note Offering on November 12, 1993. The effect of exchange rate changes during the period reduced cash by $5.4. In addition to its cash balance and liquid investments, Armco has a $170.0 revolving credit facility that matures on December 31, 1995. At December 31, 1993, $84.3 of the credit facility was used for letters of credit and $85.7 was available. Borrowings under the credit facility are secured by certain of Armco's inventory and receivables. The credit facility contains a minimum working capital requirement, as defined, of $225.0 at any time during 1994, increasing to $250.0 at any time during 1995. At December 31, 1993, such working capital was $272.3. Beginning January 1, 1994, a cumulative net income test, as defined, was in effect, which requires Armco to have a minimum cumulative net income greater than zero at December 31, 1994, which will increase by $10.0 per quarter in 1995. In addition, Armco must meet certain ratio requirements. Under the terms of the amended credit agreement, Armco is not permitted to pay cash dividends on its common stock. Armco anticipates that its capital expenditures for 1994 will be approximately $100.0, including normal ongoing maintenance capital as well as $50.0-$60.0 of expenditures on the two-year, $100.0 thin-slab caster project at the Mansfield, Ohio plant, which was discussed in the Other Steel and Fabricated Products section. Financing commitments for this project have been obtained, and installation of the caster is expected to be completed in 1995. As discussed in "Equity and Other Investments -- Armco Steel Company, L.P.," above, Armco, in 1993, to satisfy a separate tolling agreement with ASC, funded $19.4 for ASC hot strip mill improvements that enhance ASC's ability to toll roll certain gauges of chrome nickel stainless steel for Armco. In November 1993, Armco sold $125.0 of 9.375% Senior Notes to the public. The Senior Notes, which mature on November 1, 2000, are unsecured and rank equally with other existing, unsecured indebtedness. The proceeds of that offering, together with approximately $16.6 of Armco's cash, were used to refinance an aggregate of $125.0 principal amount of existing indebtedness. Armco expects to meet all of its debt service and working capital requirements during 1994 through cash generated from operations, the proceeds of asset sales and cash on hand. Although to date Armco has been able to obtain financing on satisfactory terms, there can be no assurance that this will continue to be the case. On January 28, 1994, Armco's Board of Directors declared the regular quarterly dividends of $0.525 per share of $2.10 cumulative convertible preferred stock, Class A, and $0.90625 per share of $3.625 cumulative convertible preferred stock, Class A, each payable March 31, 1994, to shareholders of record on March 4, 1994. The Board of Directors also declared the regular quarterly dividend of $1.125 per share of $4.50 cumulative convertible preferred stock, Class B, payable April 1, 1994, to shareholders of record March 4, 1994. Payment of dividends on Armco's common stock is currently prohibited under the terms of certain of Armco's debt instruments. Armco does not anticipate paying a common stock dividend in the foreseeable future. At the April 23, 1993, annual meeting, Armco's shareholders voted to reduce the par value of Armco's common stock to $0.01 per share from $1.00 per share. As a result, $102.7 was transferred from Armco's stated capital account for its common stock to Additional paid-in capital, increasing surplus from which Armco is permitted, under Ohio law, to pay dividends on its common and preferred stock issues. Armco is incorporated in Ohio. In addition, effective March 31, 1993, the corporate statute of Ohio was amended to provide that Ohio corporations that recognize immediately the full amount of their transition obligation under SFAS 106, as Armco did, could increase the amount available for MANAGEMENT'S DISCUSSION AND ANALYSIS 31 - -------------------------------------------------------------------------------- payment of dividends by adding to the corporation's surplus at the time of the dividend the amount of the difference between the reduction in the corporation's surplus that resulted from the immediate recognition of the SFAS 106 transition obligation and the amount of the transition obligation that would have been recognized at the time of the dividend had the corporation elected to amortize its recognition of such transition obligation. At December 31, 1993, the amount from which Armco is permitted to pay dividends was $75.7. ENVIRONMENTAL MATTERS Armco has spent substantial amounts in recent years to control air and water pollution to achieve and maintain compliance with applicable environmental requirements. Armco also has spent and will continue to spend substantial amounts for proper waste disposal and for the investigation and cleanup of properties that require remediation as a result of past waste disposal. Statutory and regulatory requirements in this area are continuing to evolve and, accordingly, it is not possible to predict with certainty the type and magnitude of expenditures that will be required in the future. However, Armco has estimated aggregate expenditures of approximately $30.0 for capital projects for pollution control during the three-year period 1993-1995, of which approximately $20.0 is related to control of air pollution as required by amendments to the Clean Air Act (enacted in November 1990), corresponding state laws and implementing regulations. This projection has been prepared internally and without independent engineering or other assistance and reflects Armco's current analysis of probable required capital projects for pollution control. Expenditures associated with remediation matters for which Armco is one of a number of potentially responsible parties are generally not included. In addition to the direct impact on Armco, the Clean Air Act amendments are expected to increase the operating costs of electrical utilities which rely on fossil fuels and this, in turn, could result in increased costs for utility services of which certain operations of Armco are significant customers. Armco's capital expenditures for pollution control projects amounted to approximately $72.6 during the period 1982 through 1992. Armco also is a party to a number of administrative proceedings and negotiations with environmental regulatory authorities. Armco believes that the ultimate liability from environmental-related liabilities will not materially affect the consolidated financial position or liquidity of Armco; however, it is possible that due to fluctuations in Armco's operating results, future developments with respect to such matters could have a material effect on the results of operations or liquidity 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 state or federal government or another potentially responsible party seeks reimbursement for, or compulsory cleanup 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 or facilities formerly owned by Armco 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. In addition, Armco also is a party to various 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 may be incurred if Armco makes a decision to dispose of additional properties. While Armco believes that the ultimate liability for the environmental remediation and related 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. [PHOTOGRAPH OF JOHN BAUER APPEARS HERE] "ARMCO IS FOCUSED ON SPECIALTY STEEL AND COMMITTED TO CREATING VALUE FOR ALL OF ITS CUSTOMERS. THIS IS THE MESSAGE WE'LL BE TRYING TO GET ACROSS IN 1994. A KEY AUDIENCE IS GOVERNMENT OFFICIALS DEBATING FOREIGN TRADE ISSUES. WE WILL PURSUE UNFAIR TRADE ACTIONS, SUCH AS LAST YEAR'S SUCCESSFUL GRAIN-ORIENTED ELECTRICAL STEEL SUITS, TO PROTECT OUR COMPETITIVE POSITION IN THE SPECIALTY BUSINESS. WE WILL ALSO BE HEAVILY INVOLVED IN THE DEVELOPING DEBATES ON HEALTH CARE AND ENVIRONMENTAL ISSUES." -- JOHN BAUER, DIRECTOR -- CORPORATE AFFAIRS 32 - -------------------------------------------------------------------------------- RESPONSIBILITY FOR FINANCIAL REPORTING Armco's management prepared the financial statements presented in this Annual Report in accordance with generally accepted accounting principles in the United States. These principles require choices among alternatives and numerous estimates of financial matters. We believe the accounting principles chosen are appropriate in the circumstances, and the estimates and judgements involved in Armco's financial reporting are reasonable and conservative. Armco's management is responsible for the integrity and objectivity of the financial information presented in this Annual Report. We maintain a system of internal accounting control and a program of internal audits. They are designed to provide reasonable assurance that the financial reports are fairly presented and that Armco employees comply with our stated policies and procedures, including policies on the ethical conduct of business. We continually review and update our policies and system of internal accounting control as our businesses and business conditions change. Management and the Audit Review Committee of the Board of Directors recommended, and the Board of Directors approved, the hiring of Deloitte & Touche as independent auditors for the Company. Deloitte & Touche expresses an informed professional opinion on Armco's financial statements. The Audit Review Committee, composed solely of independent outside directors, oversees Armco's public financial reporting. The Audit Review Committee meets periodically with management, Deloitte & Touche, and Armco's internal auditors, both individually and jointly, to discuss internal accounting control and financial reporting matters. Deloitte & Touche and Armco's internal auditors have free access to the Audit Review Committee to discuss any matters. We believe Armco's internal control system, combined with the activities of the internal and independent auditors and the Audit Review Committee, provides you reasonable assurance of the integrity of our financial reporting. /s/ James F. Will James F. Will President and Chief Executive Officer /s/ David G. Harmer David G. Harmer Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT [LOGO OF DELOITTE & TOUCHE APPEARS HERE] 2500 One PPG Place Pittsburgh, PA Armco, Its Shareholders and Directors: We have audited the statement of consolidated financial position of Armco Inc. and consolidated subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Armco Inc. and consolidated subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 1, 2 and 4 to the financial statements, in 1993 Armco Inc. changed its methods of accounting for postretirement benefits other than pensions, income taxes, certain investments in debt and equity securities, and postemployment benefits. /s/ Deloitte & Touche February 9, 1994 33 - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED OPERATIONS
- ------------------------------------------------------------------------------- For the years ended December 31, 1993, 1992 and 1991 - ------------------------------------------------------------------------------- (Dollars in millions, except per share amounts) 1993 1992 1991 - ------------------------------------------------------------------------------- Net sales $ 1,664.0 $ 1,673.2 $ 1,204.0 Cost of products sold (1,519.5) (1,509.8) (1,050.5) Selling and administrative expenses (125.0) (135.6) (114.3) Special charges -- net (Note 10) (165.5) (185.1) (48.7) - ------------------------------------------------------------------------------- Operating loss (146.0) (157.3) (9.5) Interest income 5.0 9.6 28.8 Interest expense (42.7) (44.6) (49.6) Sundry other -- net (36.1) (5.5) (20.9) - ------------------------------------------------------------------------------- Loss before income taxes (219.8) (197.8) (51.2) Credit for income taxes (Note 4) 7.3 34.0 1.2 - ------------------------------------------------------------------------------- Loss of Armco and consolidated subsidiaries (212.5) (163.8) (50.0) Equity in loss of Armco Steel Company, L.P. (Note 14) (27.9) (234.1) (119.0) Gain on investment in Armco Steel Company, L.P. (Note 14) -- -- 24.1 Equity in loss of other equity companies (Note 15) (15.8) (21.4) (15.7) - ------------------------------------------------------------------------------- Loss from continuing operations (256.2) (419.3) (160.6) Discontinued operations -- Worldwide Grinding Systems (Note 17) Income from operations (Net of taxes of $2.6 in 1993, $1.6 in 1992 and $1.3 in 1991) 14.2 0.4 8.8 Loss on disposal of business (40.0) -- -- AFSG companies to be sold (Note 3) Loss from operations (Net of tax benefit of $0.2 in 1992 and tax provision of $0.2 in 1991) -- (2.6) (14.4) Writeoff of advances to AFSG -- -- (170.3) Loss on disposal of business (45.0) -- -- - ------------------------------------------------------------------------------- Loss before extraordinary losses and cumulative effect of accounting changes (327.0) (421.5) (336.5) Extraordinary losses (Notes 5 and 14) (7.3) (8.4) -- Cumulative effect of changes in accounting for postretirement and postemployment benefits and income taxes (Notes 2 and 4) (307.5) -- -- - ------------------------------------------------------------------------------- Net loss $ (641.8) $ (429.9) $ (336.5) - ------------------------------------------------------------------------------- Loss per share -- primary (Note 1) Loss from continuing operations $ (2.64) $ (4.35) $ (1.91) Loss from discontinued operations (.68) (.02) (1.99) Loss before extraordinary losses and cumulative effect of accounting changes (3.32) (4.37) (3.89) Extraordinary losses (.07) (.08) -- Cumulative effect of accounting changes (2.96) -- -- Net loss (6.35) (4.45) (3.89) Dividends (Note 7) Preferred stock $2.10 Class A 2.10 2.10 2.10 $3.625 Class A 3.63 .84 -- $4.50 Class B 4.50 4.50 4.50 - -------------------------------------------------------------------------------
See Notes to Financial Statements on pages 38 through 56. 34 - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED FINANCIAL POSITION
- ------------------------------------------------------------------------------- December 31, 1993 and 1992 - ------------------------------------------------------------------------------- (Dollars in millions, except per share amounts) 1993 1992 - ------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents (Note 1) $ 183.5 $ 171.3 Accounts and notes receivable Trade (less allowance for doubtful accounts of $4.0 for 1993 and $5.1 for 1992) 166.1 187.9 Other receivables 19.0 23.1 Inventories (Note 1) 205.5 238.1 Net assets held for sale (Note 1) 30.9 190.4 Other 20.4 13.9 - ------------------------------------------------------------------------------- Total current assets 625.4 824.7 - ------------------------------------------------------------------------------- Investments (Note 1) Investment in Armco Steel Company, L.P. (Note 14) -- 8.5 Investment in National-Oilwell (Note 15) 83.9 94.8 Investment in North American Stainless (Note 15) 43.8 48.3 Investment in AFSG (Note 3) 97.1 149.4 Other (less allowance for impairment of $20.0 for 1993 and $28.3 for 1992) 44.3 53.5 Property, plant and equipment (Note 1) Land 26.0 28.3 Buildings 78.8 96.7 Machinery and equipment 843.1 924.5 Construction in progress 35.1 38.7 - ------------------------------------------------------------------------------- Total property, plant and equipment 983.0 1,088.2 Accumulated depreciation (455.2) (465.1) - ------------------------------------------------------------------------------- Property, plant and equipment -- net 527.8 623.1 - ------------------------------------------------------------------------------- Deferred tax asset (Note 4) 295.6 -- Goodwill and other intangible assets (Note 1) 162.6 36.4 Other assets 24.2 31.2 - ------------------------------------------------------------------------------- Total assets $1,904.7 $1,869.9 - -------------------------------------------------------------------------------
See Notes to Financial Statements on pages 38 through 56. 35 - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 1993 1992 - ------------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts and notes payable Trade $ 108.6 $ 136.0 Other 11.0 22.4 Accrued taxes 7.7 15.3 Accrued salaries and wages 28.7 31.6 Current employee benefit obligations (Note 2) 98.3 63.3 Other accruals 90.4 99.1 Current portion of long-term debt and lease obligations (Note 5) 8.3 20.7 - ------------------------------------------------------------------------------- Total current liabilities 353.0 388.4 - ------------------------------------------------------------------------------- Long-term debt and lease obligations (Note 5) 379.7 401.0 Long-term employee benefit obligations (Note 2) 1,270.9 541.6 Other liabilities 204.5 187.3 Commitments and contingencies (Note 12) Class B common stock of subsidiary, redemption value $13.2 (Note 16) 9.7 9.3 - ------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (DEFICIT) (Note 7) Preferred stock Class A--authorized 6,697,231 shares of no par value, issuable in series. Series issued: $2.10 cumulative convertible (involuntary liquidation value $25.5) and $3.625 cumulative convertible (involuntary liquidation value $135.0) 137.6 137.6 Class B--authorized 5,000,000 shares of $1 par value, issuable in series. Series issued: $4.50 cumulative convertible (involuntary liquidation value $50.0) 48.3 48.3 Common stock--authorized 150,000,000 shares of $.01 par value ($1 in 1992); issued and outstanding 104,122,974 for 1993 and 103,512,133 for 1992 1.0 103.5 Additional paid-in capital 951.1 845.5 Retained deficit (1,450.3) (790.7) Net foreign currency translation loss (Note 1) (0.8) (1.9) - ------------------------------------------------------------------------------- Total shareholders' equity (deficit) (313.1) 342.3 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity (deficit) $ 1,904.7 $1,869.9 - -------------------------------------------------------------------------------
36 - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED CASH FLOWS
- ------------------------------------------------------------------------------- For the years ended December 31, 1993, 1992 and 1991 - ------------------------------------------------------------------------------- (Dollars in millions) 1993 1992 1991 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(641.8) $(429.9) $(336.5) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and lease-right amortization 53.2 46.7 33.9 Loss from discontinued operations 70.8 2.2 175.9 Gain on sales of investments and facilities (3.2) (0.9) (38.6) Loss on retirement of debt 7.3 2.3 -- Equity in losses and undistributed earnings of associated companies 45.1 261.8 149.5 Special charges -- net 165.5 185.1 48.7 Cumulative effect of accounting changes 307.5 -- -- Other 22.0 14.3 7.1 Change in assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable (28.5) 7.6 (1.5) Inventory 0.8 (20.7) 43.9 Payables and accrued expenses (14.0) (71.0) (33.9) Other assets and liabilities -- net (5.8) (88.2) (27.4) - ------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (21.1) (90.7) 21.1 - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from the sale of businesses and assets 188.6 38.9 2.0 Proceeds from the sale and maturity of marketable securities 2.0 28.1 335.1 Proceeds from the sale of investments 24.9 18.7 40.7 Purchase of marketable securities -- (7.0) (90.6) Purchase of investments (6.0) (12.8) (7.3) Contributions to equity investees (22.4) (8.0) (38.1) Capital expenditures (53.9) (59.4) (26.1) Acquisitions, net of cash acquired -- (103.3) (66.6) Net cash provided by (used in) discontinued operations (2.2) 32.9 9.6 Other (30.5) (8.2) (0.2) - ------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 100.5 (80.1) 158.5 - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 125.0 100.0 36.5 Principal payments on debt (165.7) (195.6) (17.1) Change in notes payable (3.7) 1.0 (12.1) Proceeds from issuance of common stock 2.1 0.4 -- Proceeds from issuance of preferred stock -- 130.4 -- Dividends paid (18.2) (10.3) (16.9) Other (1.3) 0.9 0.7 - ------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (61.8) 26.8 (8.9) - ------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (5.4) (10.3) (4.9) - ------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 12.2 (154.3) 165.8 Cash and cash equivalents: Beginning of year 171.3 325.6 159.8 - ------------------------------------------------------------------------------- End of year $ 183.5 $ 171.3 $ 325.6 - ------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 44.5 $ 39.6 $ 48.3 Income taxes 2.7 2.1 2.4 Supplemental schedule of noncash investing and financing activities: Debt incurred directly for property -- -- 1.0 Issuance of restricted stock 0.1 3.9 -- Acquisition of a business: Fair value of assets acquired -- 687.6 80.7 Liabilities assumed -- (470.2) (13.7) Cash paid -- current year -- (104.5) (67.0) Cash paid -- prior year -- (4.0) -- Stock issued -- (78.9) -- Debt issued to retire preferred stock of Cyclops Corporation -- (30.0) -- Contribution of investment to equity investee -- (9.1) -- - -------------------------------------------------------------------------------
See Notes to Financial Statements on pages 38 through 56. 37 - -------------------------------------------------------------------------------- STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 1991, 1992 and 1993 - -------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) - -------------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Class A Class B Additional Paid-In Shares Amount Shares Amount Shares Amount Capital - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1990 1,697,256 $ 7.2 999,900 $48.3 88,494,610 $ 88.5 $777.4 Restricted stock cancelled (9,000) -- (0.1) Net loss Cash dividends declared -- preferred Adjustment for net unreal- ized gains on marketable equity securities of AFSG Foreign currency translation adjustment - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 1,697,256 7.2 999,900 48.3 88,485,610 88.5 777.3 $3.625 preferred stock issued 2,700,000 130.4 Exercise of options 103,980 0.1 0.3 Restricted stock issued 645,000 0.6 3.3 Common stock issued for business acquisition 14,277,543 14.3 64.6 Net loss Cash dividends declared -- preferred Adjustment for net unreal- ized losses on marketable equity securities of AFSG Foreign currency translation adjustment - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 4,397,256 137.6 999,900 48.3 103,512,133 103.5 845.5 Exercise of options 585,458 0.2 2.8 Restricted stock issued 26,000 -- 0.1 Par value reduction -- (102.7) 102.7 Net loss Cash dividends declared -- preferred Foreign currency translation adjustment Other (25) -- (617) -- -- - --------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 4,397,231 $137.6 999,900 $48.3 104,122,974 $ 1.0 $951.1 - ---------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- Net Foreign Net Currency Unrealized Retained Translation Gains Deficit Adjustments (Losses) - -------------------------------------------------------------------------------------- Balance, December 31, 1990 $ (5.9) $(14.8) $(0.9) Restricted stock cancelled Net loss (336.5) Cash dividends declared -- preferred (8.1) Adjustment for net unreal- ized gains on marketable equity securities of AFSG 1.1 Foreign currency translation adjustment 3.2 - -------------------------------------------------------------------------------------- Balance, December 31, 1991 (350.5) (11.6) 0.2 $3.625 preferred stock issued Exercise of options Restricted stock issued Common stock issued for business acquisition Net loss (429.9) Cash dividends declared -- preferred (10.3) Adjustment for net unreal- ized losses on marketable equity securities of AFSG (0.2) Foreign currency translation adjustment 9.7 - -------------------------------------------------------------------------------------- Balance, December 31, 1992 (790.7) (1.9) -- Exercise of options Restricted stock issued Par value reduction Net loss (641.8) Cash dividends declared -- preferred (17.8) Foreign currency translation adjustment 1.1 Other - -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 $(1,450.3) $ (0.8) $ -- - --------------------------------------------------------------------------------------
See Notes to Financial Statements on pages 38 through 56. NOTES TO FINANCIAL STATEMENTS 38 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Dollar amounts in millions, except per share amounts) 1. SUMMARY OF ACCOUNTING POLICIES CONSOLIDATION The accompanying statements include the accounts of Armco and all subsidiaries in which Armco has a controlling interest except for the Worldwide Grinding Systems segment (Note 17) and the Armco Financial Services Group (AFSG) (Note 3), which are reflected as discontinued operations for all periods presented. On April 24, 1992, Armco completed the acquisition of Cyclops Industries, Inc. (Cyclops), including its subsidiary, Eastern Stainless Corporation (Note 16). Armco paid $103.3 in cash and issued $30.0 of debt and 14.3 million shares of its common stock valued at $78.9 for the businesses acquired. The acquisition was accounted for using the purchase method of accounting. Cyclops was a producer of flat-rolled stainless and carbon steels, tubular steel products and special alloys, and operated businesses which designed, fabricated and erected nonresidential construction products. As of April 25, 1992, Armco began including the former Cyclops units in its financial statements. The following unaudited pro forma schedule presents combined Armco and Cyclops for the twelve months ended December 31, 1992 and 1991 as if the acquisition had taken place on January 1, 1991:
- ------------------------------------------------------------------------------- 1992 1991 =============================================================================== Net sales $1,974.6 $2,227.8 Loss before extraordinary losses (437.1) (397.5) Net loss (445.5) (397.5) Net loss per share (4.41) (3.95) - -------------------------------------------------------------------------------
INVESTMENTS Armco has investments in associated companies (joint ventures, partnerships and companies in which Armco has a 20% or more interest, but does not control). The following summary financial information reflects Armco's share of these associated companies, which are accounted for by the equity method, including Armco Steel Company, L.P. (restated as described in Note 14), National-Oilwell (Note 15) and North American Stainless (Note 15).
- ------------------------------------------------------------------------------- 1993 1992 1991 =============================================================================== Current assets $ 436.0 $ 368.4 $ 432.4 Noncurrent assets 699.6 670.1 700.9 Current liabilities 357.2 316.6 327.4 Noncurrent liabilities 885.1 797.2 595.0 Net sales 1,073.8 991.0 1,084.9 Gross profit (loss) 155.3 (62.7) 40.0 Loss before extraordinary loss (35.1) (285.2) (144.9) Net loss (35.1) (291.3) (144.9) - -------------------------------------------------------------------------------
In 1993, Armco adopted Statement of Financial Accounting Standards (SFAS) 115, Accounting for Certain Investments in Debt and Equity Securities, which provides guidance as to when it is appropriate to report certain invested assets at fair market value. Under the definitions provided in this Statement at December 31, 1993, Armco's invested assets, totaling $203.0, have been classified as held to maturity and are therefore properly recorded at amortized cost. There was no material effect to Armco as a result of adopting this standard. At December 31, 1993, Armco has included in Other investments in the Statement of Consolidated Financial Position, $26.2 of financial instruments, of which $22.1 are restricted collateral deposits. Sales of marketable securities and other cost investments resulted in gains of $14.1 in 1991, which are reported in Sundry other -- net. CASH AND CASH EQUIVALENTS Cash equivalents, which consist primarily of commercial paper, bank repurchase agreements and certificates of deposit, are stated at cost plus accrued interest, which approximates market value. Cash equivalents include only securities having a maturity of three months or less at the time of purchase. In accordance with SFAS 95, Statement of Cash Flows, cash flows from Armco's operations in foreign countries are calculated based on their reporting currencies. As a result of this and the sale of businesses during the year, amounts related to changes in assets and liabilities reported on the Statement of Consolidated Cash Flows will not necessarily agree to changes in the corresponding balances on the Statement of Consolidated Financial Position. The effect of exchange rate changes on cash balances held in foreign currencies is reported on a separate line below Cash flows from financing activities. TRANSLATION OF FOREIGN CURRENCY Assets and liabilities of international operations are translated at current exchange rates, and related revenues and expenses are translated at average rates of exchange in effect during the year. Cumulative translation adjustments are recorded as a separate component of shareholders' equity. Assets and liabilities of international operations in hyperinflationary economies are translated at historical rates, and NOTES TO FINANCIAL STATEMENTS 39 - -------------------------------------------------------------------------------- translation adjustments relating to such operations are included in Sundry other - -- net with transaction gains and losses. Armco reports interest income and interest expense net of related translation losses and gains to approximate the real rate of interest earned or expensed by its businesses operating in hyperinflationary economies. INVENTORIES Inventories are valued at the lower of cost or market. Cost of inventories at most domestic operations is measured on the LIFO -- Last In, First Out -- method. Other inventories are measured principally at average cost. Inventory balances as of December 31, 1993 and 1992 were:
- ------------------------------------------------------------------------------- 1993 1992 =============================================================================== INVENTORIES ON LIFO: Finished and semi-finished $190.8 $200.3 Raw materials and supplies 21.5 15.2 Adjustment to state inventories at LIFO value (38.5) (27.4) - ------------------------------------------------------------------------------- Total 173.8 188.1 - ------------------------------------------------------------------------------- INVENTORIES ON AVERAGE COST: Finished and semi-finished 14.1 23.4 Raw materials and supplies 17.6 26.6 - ------------------------------------------------------------------------------- Total 31.7 50.0 - ------------------------------------------------------------------------------- Total inventories $205.5 $238.1 - -------------------------------------------------------------------------------
Liquidation of LIFO inventory layers caused by certain inventory reductions reduced the Loss before extraordinary losses and cumulative effect of accounting changes and Net loss for 1991 by $27.4, or $.31 per share, primarily in the Other Steel and Fabricated Products segment. RESEARCH AND DEVELOPMENT COSTS Armco conducts a broad range of research and development activities, including programs for its affiliated companies. These activities are aimed at improving existing products and manufacturing processes and developing new products and processes. Research and development costs are recorded as expense when incurred, reduced by amounts funded by affiliates. The amounts incurred for 1993, 1992 and 1991 were $12.9, $24.0 and $23.6, respectively, including $3.9, $9.4 and $11.8 funded by affiliates in 1993, 1992 and 1991. [PHOTOGRAPH OF STEVE GILBY APPEARS HERE] "ARMCO RESEARCH & TECHNOLOGY HAS FOUR KEY OBJECTIVES FOR 1994. ONE, WE WILL LEAD THE DEVELOPMENT OF A LONG-RANGE STRATEGIC PLAN FOR RETAINING AND GROWING ARMCO'S FLAT-ROLLED STEEL MARKET SHARE. TWO, WE WILL IMPLEMENT A KEY PROJECT MANAGEMENT SYSTEM TO COORDINATE ALL RESEARCH PROJECTS TOWARD THIS END. THREE, WE WILL ASSIST ARMCO OPERATING UNITS IN ACHIEVING THEIR AGGRESSIVE 1994 BUSINESS PLANS. FOUR, WE WILL ACCELERATE OUR LONGER RANGE RESEARCH PROGRAM AIMED AT MAJOR NEW PROCESS AND PRODUCT DEVELOPMENT FOR THE SPECIALTY STEEL GROUP." -- STEVE GILBY, MANAGING DIRECTOR -- RESEARCH & TECHNOLOGY PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease. During 1993, 1992 and 1991, Armco expensed $125.1, $129.6 and $101.8, respectively, for maintenance and repair of its property, plant and equipment. NET ASSETS HELD FOR SALE Net assets held for sale in the Statement of Consolidated Financial Position consists of the lower of cost or net realizable value of net assets in businesses which have been identified for divestment. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets primarily include goodwill recorded in connection with the effect of adoption of SFAS 106 in 1993 on the acquisition of Cyclops on April 24, 1992. These assets are being amortized using the straight- line method over 40 years. Also included are goodwill and intangible assets acquired in the purchase of Douglas Dynamics, Inc. on July 2, 1991. These assets are being amortized over their estimated useful lives, the majority of which do not exceed 17 years. Amortization expense for 1993, 1992 and 1991 was $7.0, $3.7 and $1.9, respectively. EARNINGS PER SHARE Primary earnings per share is computed by deducting the amount of dividends on preferred stock from income (added to a loss). This amount is then divided by the weighted average number of common shares outstanding during the year, plus common equivalent shares outstanding if the common equivalent shares are dilutive. Common equivalent shares include dilutive stock options as if the options were exercised and the proceeds used to acquire common shares. Dilutive stock options give the right to buy shares at a price which is less than current market price. The fully diluted per share amounts are not presented in 1993, 1992 and 1991 because such amounts are antidilutive. ENVIRONMENTAL LIABILITIES Armco has participated in or funded various cleanup efforts at sites where its facilities have disposed of wastes, including sites located on its own properties. Costs related to these efforts are accrued when it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. It is Armco's policy not to accrue environmental exit costs with respect to ongoing businesses until a decision is made to dispose of the property. NOTES TO FINANCIAL STATEMENTS 40 - -------------------------------------------------------------------------------- CONCENTRATIONS OF CREDIT RISK Armco is primarily a producer of stainless, electrical and carbon steels and steel products, which are sold to a number of markets, including industrial machinery and equipment, automotive, aircraft, construction, power generation, appliances, and agriculture. Following the divestment of the Worldwide Grinding Systems business segment, Armco sells domestically to customers primarily in the Midwestern and Eastern United States, while foreign sales are primarily made to customers in Western Europe. Credit risk related to Armco's trade receivables is limited due to the large number of customers in differing industries and geographic areas. RECLASSIFICATIONS Certain amounts in prior period financial statements have been reclassified to conform to the 1993 presentation. 2. PENSION AND OTHER EMPLOYEE BENEFITS PENSIONS Armco provides noncontributory pension benefits for most employees. Benefits for most nonrepresented and certain represented employees are primarily based on years of service and earnings in the highest 60 consecutive months in the last 120 months prior to the date of retirement or a minimum amount per year of service, whichever is higher. As a result of the labor negotiations in 1993, the benefits for most hourly represented employees are based on a fixed dollar amount per year of service. The qualified plans have been funded to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. During years prior to 1993, Armco made cash contributions which in total exceeded the minimum required contributions. As a result, at December 31, 1993, funding credits of $39.7 were available to offset future minimum funding requirements. No contributions were made during 1993. On April 24, 1992, Armco assumed the former Cyclops pension plans. These plans had projected benefit obligations of $431.4 and plan assets with a market value of $323.6. The unfunded projected benefit obligation of $107.8 was recorded on acquisition. Effective October 31, 1992, all qualified Cyclops pension plans, with the exception of plans for certain Eastern Stainless Corporation employees, were merged into the Armco pension plans. [PHOTOGRAPH OF JIM EDGERTON APPEARS HERE] "IN 1993, ARMCO PUT IN PLACE A PROGRAM TO MONITOR AND CONTROL HEALTH CARE COSTS. THE KEY DECISION WAS MOVING TO MANAGED CARE FOR BOTH ACTIVE EMPLOYEES AND RETIREES. THIS DELIVERY SYSTEM IS MORE EFFICIENT AND COST-EFFECTIVE. FURTHER REFINEMENTS SUCH AS HMOS COULD BE DOWN THE ROAD. WE ARE ALREADY SEEING SIGNIFICANT SAVINGS FROM MORE COST-SHARING." -- JIM EDGERTON, DIRECTOR -- HUMAN RESOURCES Economic assumptions and net periodic pension expense by component were as follows:
- -------------------------------------------------------------------------------------------------- 1993 1992 1991 ================================================================================================== Weighted average discount rate 8.0% 8.0% 9.0% Weighted average expected long-term rate of return on assets 8.75% 8.75% 9.75% Rate of future compensation increases 5.0% 5.0% 5.0% Cost of benefits earned during the period $ 20.4 $ 21.5 $ 13.9 Interest cost on the projected benefit obligation 150.3 137.0 117.2 Actual return on plan assets (256.9) (108.3) (325.0) Net amortization and deferral 115.1 (32.8) 212.5 - -------------------------------------------------------------------------------------------------- Net periodic pension expense $ 28.9 $ 17.4 $ 18.6 - --------------------------------------------------------------------------------------------------
Expense increased in 1993 primarily due to lower than expected investment returns in 1992, inclusion of Cyclops for the full year, closing facilities and force reductions. The net periodic expense shown above includes $3.7, for divested units, which was charged in 1993 to previously established accruals. Net curtailment losses on pensions of $23.8 in 1993, $44.6 in 1992 and $5.8 in 1991 for reductions in the work force were recorded as special charges and are not included in net periodic pension expense. Certain former Cyclops units have hourly employees participating in multi-employer pension and welfare plans. The total expense for contributions to those programs was $1.7 in 1993 and $2.1 in 1992, which was not included in net periodic pension expense shown above. The following table presents the funded status of pension plans using discount rates of 7.25% and 8.0%, respectively, at December 31, 1993 and 1992. The assumed rate of future compensation increases was 4% for 1993 and 5% for 1992. The funded status of the pension plans decreased during 1993, primarily as a result of the decrease in the discount rate, but also due to early retirements related to shutdowns and force reductions. Amounts include benefits for employees of Worldwide Grinding Systems. NOTES TO FINANCIAL STATEMENTS 41 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Plans for which Plans for which Assets Exceed Accumulated Accumulated Benefits Total 1993 Benefits Exceed Assets All Plans ================================================================================= ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: Vested benefits $34.9 $2,014.2 $2,049.1 Nonvested benefits 1.7 46.8 48.5 - --------------------------------------------------------------------------------- Accumulated benefits 36.6 2,061.0 2,097.6 Projected benefit obligation 41.5 2,115.9 2,157.4 Plan assets at fair value/1/ 45.5 1,864.9 1,910.4 - --------------------------------------------------------------------------------- Unfunded (overfunded) projected benefit obligation (4.0) 251.0 247.0 RECONCILIATION OF FUNDED STATUS TO RECORDED AMOUNTS: Unrecognized prior service -- (20.8) (20.8) Unrecognized net gain (loss) (1.3) 73.0 71.7 Unrecognized net asset (obligation) 2.5 (56.1) (53.6) Amount required to recognize minimum liability -- 5.0 5.0 - --------------------------------------------------------------------------------- Accrued pension liability (benefit) $(2.8) $ 252.1 $ 249.3 - ---------------------------------------------------------------------------------
/1/ The mix of pension assets held at December 31, 1993 was 50% equities, 44% fixed income securities, and 6% short-term securities.
- --------------------------------------------------------------------------------- Plans for which Plans for which Assets Exceed Accumulated Accumulated Benefits Total 1992 Benefits Exceed Assets All Plans ================================================================================= ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: Vested benefits $1,121.0 $651.0 $1,772.0 Nonvested benefits 38.2 16.8 55.0 - --------------------------------------------------------------------------------- Accumulated benefits 1,159.2 667.8 1,827.0 Projected benefit obligation 1,256.6 700.8 1,957.4 Plan assets at fair value/1/ 1,228.8 605.1 1,833.9 - --------------------------------------------------------------------------------- Unfunded projected benefit obligation 27.8 95.7 123.5 RECONCILIATION OF FUNDED STATUS TO RECORDED AMOUNTS: Unrecognized prior service (10.2) (7.6) (17.8) Unrecognized net gain 109.3 59.1 168.4 Unrecognized net obligation (58.5) (13.6) (72.1) Amount required to recognize minimum liability -- 3.1 3.1 - --------------------------------------------------------------------------------- Accrued pension liability $ 68.4 $136.7 $ 205.1 - ---------------------------------------------------------------------------------
/1/ The mix of pension assets held at December 31, 1992 was 53% equities, 44% fixed income securities, and 3% short-term securities. RETIREE HEALTH CARE AND LIFE INSURANCE BENEFITS In addition to providing pension benefits, Armco provides certain health care and life insurance benefits for most retirees. Most employees become eligible for these benefits when they retire. Retiree health and life insurance benefits are funded as claims are paid. During 1993, the company announced changes in the plans for certain nonrepresented employees and retirees which will require either higher retiree contributions or an alternative managed care program. Also during 1993, new managed care programs were negotiated with most of Armco's represented hourly employees which will be applicable to future retirements. Effective January 1, 1993, the Company implemented the immediate recognition method of adopting SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The standard requires the accrual of expense for these benefits during the years an employee is actively employed, rather than the previous practice of expensing these benefits on a pay-as-you-go basis when the participant retired. The cumulative effect of recognizing this obligation resulted in a net of tax charge of $440.0 or $4.24 per share as of January 1, 1993. The cumulative effect was determined as follows: - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation attributable to: Retirees $ 712.9 Active employees eligible to retire 103.8 Other active employees 202.2 - ----------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 1,018.9 - ----------------------------------------------------------------------------- Less: Fair value of plan assets -- Retroactive purchase adjustment of Cyclops acquisition 131.2 Accruals recorded in previous years for divestitures/shutdowns 277.4 - ----------------------------------------------------------------------------- Transition obligation at January 1, 1993 610.3 Estimated deferred tax benefits 170.3 - ----------------------------------------------------------------------------- Cumulative effect recorded on January 1, 1993 $ 440.0 =============================================================================
Included in the above schedule are $19.5 in total accumulated postretirement benefit obligation and $5.5 in accruals recorded in previous years for divestitures/shutdowns on the financial statements of the AFSG companies to be sold. The resulting net charge of $14.0 reduced the net assets of the AFSG companies to be sold and Armco's investment in AFSG (Note 3). NOTES TO FINANCIAL STATEMENTS 42 - -------------------------------------------------------------------------------- Upon adoption, Armco was required to apply, retroactively, the provisions of SFAS 106 to its accounting for the acquisition of Cyclops. As a result, Armco recognized $133.4 of goodwill not previously recorded. The cumulative effect of accounting changes considers $2.2 of goodwill amortization for the period from April 24, 1992 to December 31, 1992. For 1993, the components of the net periodic postretirement benefit expense were as follows: - -------------------------------------------------------------------------------- Cost of benefits earned during the period $12.2 Interest cost on accumulated postretirement benefit obligation 80.6 Amortization of plan changes 1.7 - -------------------------------------------------------------------------------- Net periodic postretirement benefit expense $94.5 - --------------------------------------------------------------------------------
The net periodic postretirement benefit expense shown above includes $9.6, for divested units, which was charged to previously established accruals. Net curtailment gains on postretirement benefits of $4.4 recorded in 1993 were recorded as special charges and are not included in net periodic postretirement benefit expense. Assumptions used to determine the January 1, 1993 obligation and 1993 costs are as follows:
- ---------------------------------------------------------------------------------- Pre-age 65 Post-age 64 ================================================================================== Weighted average discount rate 8.0% 8.0% Current year health care trend rate 13.0% 10.0% Ultimate health care trend rate 6.0% 6.0% - ----------------------------------------------------------------------------------
The current year health care trend rates are assumed to decrease one percent per year until they reach the ultimate rate of 6.0%. The weighted average trend rate for all years is 7.0%. A one percent increase in the assumed health care trend rate in each year would increase the accumulated postretirement benefit obligation as of January 1, 1993 by approximately $90.0, and increase the annual net periodic postretirement benefit expense by approximately $9.5. The expense for postretirement benefits under the previous pay-as-you-go method reduced net income by $49.6 in 1992, and $43.8 in 1991. These amounts were less than the incurred claims cost for these programs, since under the previous accounting method a portion of the claims amounts ($7.1 in 1992 and $6.8 in 1991) were charged to reserves established on previous divestments. Total incurred claims costs were approximately $64.9 in 1993, $56.7 in 1992, and $50.6 in 1991. The 1992 expense includes $3.2 for Cyclops retirees. As part of the formation of Cyclops, an unrelated company retained the liability for postretirement benefits for former Cyclops employees retiring before July, 1987. The following table shows the funded status of the postretirement benefit plans and the amounts recognized in Armco's Statement of Consolidated Financial Position as of December 31, 1993: - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 734.5 Fully eligible active plan participants 82.2 Other active plan participants 156.2 - ----------------------------------------------------------------------------- Total 972.9 Plan assets at fair value -- - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 972.9 RECONCILIATION OF OBLIGATION TO RECORDED AMOUNTS: Unrecognized transition obligation -- Unrecognized net reduction in prior service cost 23.2 Unrecognized net gain 47.4 - ----------------------------------------------------------------------------- Accrued postretirement benefit liability $1,043.5 =============================================================================
Assumptions used to determine obligation: - -----------------------------------------------------------------------------
Pre-age 65 Post-age 64 ============================================================================= Discount rate 7.25% 7.25% Current year health care trend rate 11.25% 8.25% Ultimate health care trend rate 5.25% 5.25% - ------------------------------------------------------------------------------
The current year health care trend rates are assumed to decrease one percent per year until they reach the ultimate rate of 5.25%. The weighted average trend rate is 6.25% for all years. POSTEMPLOYMENT BENEFITS Effective January 1, 1993, the Company adopted SFAS 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. EMPLOYEE BENEFIT OBLIGATIONS OF FORMER BUSINESS UNITS Armco has recorded, in its employee benefit obligations, the present value of estimated pension and health care benefits for former employees associated with facilities which have been or are being divested. Sundry other -- net includes net pension and imputed interest costs related to these liabilities of $23.8, $13.2 and $16.1 in 1993, 1992 and 1991, respectively. NOTES TO FINANCIAL STATEMENTS 43 - -------------------------------------------------------------------------------- 3. ARMCO FINANCIAL SERVICES GROUP (AFSG) AFSG currently consists primarily of insurance companies which Armco intends to sell and which continue underwriting activities (AFSG companies to be sold) and companies that have stopped writing new business and are being liquidated (runoff companies). Armco previously announced its intention to dispose of or liquidate all of the AFSG companies. AFSG COMPANIES TO BE SOLD In 1991, in light of depressed market conditions, underwriting losses and changes in the expected timing of the disposition of the AFSG companies to be sold, Armco wrote off its advances to AFSG of $170.3. At December 31, 1992 and 1991, Armco's investment in the AFSG companies to be sold was stated at an amount equal to Armco's equity in the net assets of these businesses, which approximated Armco's estimate of their net realizable value. The net realizable value was based on an assumption that Armco would retain the AFSG companies to be sold until the insurance business had recovered from weak market conditions. In January 1994, after further evaluation of its various alternatives, Armco signed a letter of intent to sell these businesses, even though the insurance market remained weak. The final agreement is subject to a number of conditions, including a definitive purchase agreement, and approvals by regulatory authorities and the boards of directors of both companies. Armco has recorded a $45.0 charge in the fourth quarter of 1993 in connection with its decision to sell these companies. The charge was primarily taken to reduce Armco's investment in the AFSG companies to be sold to the current estimate of its net realizable value. In connection with the proposed transaction, the buyer would pay approximately $70.0 at the closing and approximately $15.0, reduced by a potential adjustment for adverse experience in the insurance reserves, in three years. As a result of restructuring certain obligations arising from the 1992 merger plan for the runoff companies, the proceeds from the sale have been pledged as security for certain note obligations due to the runoff insurance companies and will be retained in the investment portfolio of the AFSG runoff companies. Armco accounted for the operating results of the AFSG companies to be sold under the cost recovery method, whereby net income is not recognized until realized through a sale of the businesses, while net losses are charged against income as incurred. These businesses are now presented as discontinued operations. The following sets forth the summarized statements of financial condition and results of operations for the AFSG companies to be sold at December 31, 1993 and 1992, and for the year ended December 31, 1993, 1992 and 1991.
- -------------------------------------------------------------------------------- 1993 1992 ================================================================================ FINANCIAL CONDITION ASSETS: Invested assets $ 440.7 $ 417.4 Receivables 87.7 85.8 Other 43.0 42.5 - ------------------------------------------------------------------------------- Total assets 571.4 545.7 - ------------------------------------------------------------------------------- LIABILITIES: Property and casualty reserves 398.3 391.6 Payables and other liabilities 37.2 27.9 - ------------------------------------------------------------------------------- Total liabilities 435.5 419.5 - ------------------------------------------------------------------------------- Net assets $ 135.9 $ 126.2 Amounts not recognized under cost recovery: Current period income (10.4) -- Unrealized investment gain (13.3) -- Loss on disposal of businesses (45.0) -- Net liabilities to be retained 6.7 -- - -------------------------------------------------------------------------------- Investment in AFSG companies to be sold $ 73.9 $ 126.2 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- 1993 1992 1991 ====================================================================================== RESULTS OF OPERATIONS Premiums earned $ 227.7 $ 239.9 $ 250.9 Losses and loss adjustment expenses (177.1) (196.1) (209.0) Underwriting expenses (82.7) (90.0) (92.8) - -------------------------------------------------------------------------------------- Underwriting loss (32.1) (46.2) (50.9) Investment income 43.7 44.1 37.8 Other expenses (1.2) (0.5) (1.3) - -------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting for postretirement benefits 10.4 (2.6) (14.4) Cumulative effect of change in accounting for postretirement benefits (14.0) -- -- - ------------------------------------------------------------------------------------- Net loss $ (3.6) $ (2.6) $ (14.4) - --------------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 44 - -------------------------------------------------------------------------------- During 1993, the AFSG companies to be sold adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS 112, Employers' Accounting for Postemployment Benefits, SFAS 113 Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts and SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. Upon adoption of SFAS 106, the AFSG companies to be sold recorded a charge of $14.0 for the cumulative effect of this accounting change. This amount is included in Cumulative effect of changes in accounting on Armco's Statement of Consolidated Operations. The effect of adoption of SFAS 112 was not material. SFAS 113 requires that reinsurance receivables and prepaid insurance premiums be reported as assets and eliminates the practice of reporting assets and liabilities relating to reinsurance contracts net of the effects of reinsurance. Adoption of SFAS 113 by the AFSG companies to be sold did not result in a charge to earnings; however, AFSG's 1992 statement of financial condition has been restated to reflect this accounting change. As a result of the adoption of SFAS 115, the recorded value of certain investments and net assets of the business was increased by $13.3. There was no effect on net income, and under the cost recovery method, Armco deferred the effect on equity. AFSG adopted SFAS 109, Accounting for Income Taxes, in 1993; however, the effect of adoption was not material. Based on market values, invested assets at December 31, 1993 consisted primarily of investment grade bonds: U.S. Treasury securities (19%); corporate bonds (48%); mortgage-backed securities (28%) and cash and short-term investments (5%). The market value of invested assets at December 31, 1993 and 1992 was $441.5 and $428.6, respectively. Investment income for 1993, 1992 and 1991 included net realized gains of $11.2, $10.1 and $2.5, respectively. Property and casualty reserves included amounts determined from loss reports and individual cases and an amount, based upon past experience, for losses incurred but not reported. Such amounts are necessarily based upon estimates and, while management believes the amounts are fairly stated, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in current earnings. Policy acquisition costs that vary with and are directly related to the production of premiums are deferred and amortized over the terms of the policies. Amortization for the years ended December 31, 1993, 1992 and 1991 was $46.5, $49.9 and $56.3. The AFSG companies to be sold limit their exposure to loss by ceding (reinsuring) certain levels of risk with other insurers. In the event that all or any of the reinsuring companies might be unable to meet their obligations under the reinsurance agreements, the AFSG companies to be sold would be liable for such obligations. At December 31, 1993, reinsurance ceded balances totaled $38.3. Participating business represented approximately 14.5%, 13.2%, and 11.0% of total premiums in force at December 31, 1993, 1992 and 1991. The amount of dividends to be paid on these policies is based upon the individual policies. Policyholder dividend expense for the years ended December 31, 1993, 1992 and 1991 was $2.4, $3.0 and $5.2, respectively. The amount of statutory policyholders' surplus at December 31, 1993 and 1992 was $108.7 and $94.2, respectively. RUNOFF COMPANIES The runoff companies are accounted for 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 such net losses relating to the ultimate liquidation of the runoff companies will not be material to Armco's financial position or liquidity. The following sets forth the summarized statement of financial condition of the runoff companies at December 31, 1993. - ---------------------------------------------------------------------------- ASSETS: Invested assets $126.2 Reinsurance recoverable 179.5 Other 29.2 - ----------------------------------------------------------------------------- Total assets 334.9 - ----------------------------------------------------------------------------- LIABILITIES: Losses and loss reserves (net of future investment income of $43.8) 279.7 Other 32.0 - ----------------------------------------------------------------------------- Total liabilities 311.7 - ----------------------------------------------------------------------------- Net assets $ 23.2 - -----------------------------------------------------------------------------
The statement of financial condition reflects the runoff companies' adoption of SFAS 113. Other assets include notes receivables and accrued interest of $4.0 and $7.0 from North American Stainless and National-Oilwell, respectively, joint ventures which are 50%-owned by subsidiaries of Armco. In 1992, regulatory authorities approved a merger plan which permitted Armco to merge a runoff insurance company with a statutory surplus impairment into another of Armco's runoff companies, curing the impairment. The merger plan contemplated that Armco would cause the surviving company to be runoff and to maintain its statutory surplus at not less than $10.0. During 1993, regulatory authorities allowed Armco to restructure and secure certain obligations arising from the 1992 merger plan, and Armco was released from its surplus maintenance agreement. NOTES TO FINANCIAL STATEMENTS 45 - -------------------------------------------------------------------------------- Currently, insurance regulators having supervisory authority over the AFSG insurance operations retain substantial control over certain transactions, including the sale of the AFSG companies to be sold and the payment of dividends to Armco. There are various pending matters relating to litigation, arbitration and regulatory affairs, including matters related to Northwestern National Insurance Company, a runoff company currently involved in, among other matters, litigation with respect to certain reinsurance programs. The ultimate liability from such matters at December 31, 1993 cannot be determined; but in Armco's opinion, based on current facts and circumstances and the views of outside counsel and advisors, any liability resulting will not materially affect Armco's financial position or liquidity. However, it is possible that due to fluctuations in Armco's results, future developments with respect to changes in the ultimate liability could have a material effect on future interim or annual results of operations. 4. INCOME TAXES Armco files a consolidated U.S. federal income tax return. This return includes all domestic companies 80% or more owned by Armco and the proportionate share of Armco's interest in partnership investments. The United States and foreign components of income (loss) before income taxes consist of the following:
- ------------------------------------------------------------------------------- 1993 1992 1991 =============================================================================== United States $(232.7) $(207.8) $(29.1) Foreign 12.9 10.0 (22.1) - -------------------------------------------------------------------------------- Total $(219.8) $(197.8) $(51.2) - --------------------------------------------------------------------------------
[PHOTOGRAPH OF BARRY HALLER APPEARS HERE] "IN ADDITION TO PERFORMING THE TRADITIONAL ROLE OF ASSESSING THE CONTROL ENVIRONMENT AND THE RELIABILITY OF FINANCIAL INFORMATION, IN 1994 ARMCO'S INTERNAL AUDITORS WILL ADD VALUE THROUGH INTERNAL AUDITS DESIGNED TO IDENTIFY OPPORTUNITIES FOR IMPROVEMENT IN OPERATIONAL EFFICIENCIES AND EFFECTIVENESS." -- BARRY HALLER, DIRECTOR -- INTERNAL AUDITING Income tax credits (provisions) for Armco and consolidated subsidiaries are as follows:
- --------------------------------------------------------------------------------- 1993 1992 1991 ================================================================================= CURRENT: U.S. federal $ 4.2 $29.4 $ 1.7 U.S. state 4.9 (0.3) (3.3) Foreign (1.8) (2.6) (2.3) - ---------------------------------------------------------------------------------- Total 7.3 26.5 (3.9) - ---------------------------------------------------------------------------------- DEFERRED: U.S. federal -- 4.4 6.1 U.S. state -- 1.6 (1.5) Foreign -- 1.5 0.5 - ---------------------------------------------------------------------------------- Total -- 7.5 5.1 - ---------------------------------------------------------------------------------- Total credit for income taxes $ 7.3 $34.0 $ 1.2 - ----------------------------------------------------------------------------------
At December 31, 1993, Armco had capital and net operating loss (NOL) carryforwards for federal tax purposes expiring as follows:
- -------------------------------------------------------------------------------- Year Expires Amount ================================================================================ CAPITAL LOSSES: 1996 $ 68.7 1998 118.1 - --------------------------------------------------------------------------------- Total $ 186.8 - --------------------------------------------------------------------------------- ORDINARY LOSSES: 1998 $ 63.0 1999 128.8 2001 156.7 2002 3.0 2004 9.1 2005 130.5 2006 247.1 2007 193.4 2008 97.9 - ---------------------------------------------------------------------------------- Total $1,029.5 - ----------------------------------------------------------------------------------
Included in the $1,029.5 net operating loss carryforward are $71.2 attributable to the former Cyclops consolidated group and $17.5 from the separate return years of Douglas Dynamics, Inc. These losses are subject to limitations regarding the offset of Armco's future taxable income and will expire if not used in the period 1998-2005. Armco has $755.6 in U.S. NOTES TO FINANCIAL STATEMENTS 46 - -------------------------------------------------------------------------------- alternative minimum tax net operating losses. Additionally, Armco has $12.1 of alternative minimum tax credits which have no expiration. Investment tax credits of $7.7 are available to offset the regular tax liability in future years. Armco also has tax loss carryforwards available at certain foreign subsidiaries of $17.4, most of which, if not used to reduce future taxable income, will expire in 1995 and 1996. Armco adopted SFAS 109, Accounting for Income Taxes, effective January 1, 1993. SFAS 109 supersedes SFAS 96, Accounting for Income Taxes, which was adopted by Armco in 1988. 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. In 1993, there was no material effect on pretax accounting income as a result of applying SFAS 109. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. Of the total net deferred tax asset of $298.5 on the Statement of Consolidated Financial Position, $295.6 is reported as noncurrent Deferred tax asset and $5.9 is in Other current assets. Partially offsetting the asset amounts are credits of $1.5 each in Other accruals and Other liabilities. Significant components of Armco's net deferred tax asset are as follows:
- ------------------------------------------------------------------------------------ December 31, January 1, 1993 1993 ===================================================================================== Operating loss and tax credit carryforwards $ 497.0 $ 408.7 Employee benefits 615.3 570.2 Property, plant and equipment (142.5) (168.6) Other (includes contingencies and other accruals) 104.9 69.5 - ------------------------------------------------------------------------------------- Subtotal $1,074.7 879.8 Less: Valuation allowance (776.2) (581.8) - -------------------------------------------------------------------------------------- Total deferred tax asset $ 298.5 $ 298.0 - --------------------------------------------------------------------------------------
Even though Armco has incurred book and tax losses for the past four fiscal years, management believes that it is more likely than not that it will generate taxable income sufficient to realize a portion of the tax benefit associated with future deductible temporary differences and NOL and tax credit carryforwards prior to their expiration. This belief is based upon, among other factors, changes in operations that have occurred during 1992 and 1993, as well as consideration of available tax planning strategies. Specifically, cost savings, associated with Armco's acquisition of Cyclops and new capital investments, are being realized and are anticipated to continue to improve operating results. Business restructurings announced during the fourth quarter of 1992 and third quarter of 1993 include the sale of certain non-strategic units, some of which have been unprofitable. Armco has operated in a highly cyclical industry and consequently has had a history of generating and then utilizing significant amounts of NOL carryforwards. During the years 1987-1989, Armco utilized approximately $350.0 of NOL carryforwards. Management believes that the valuation allowance is appropriate given the current estimates of future taxable income. If Armco is unable to generate sufficient taxable income in the future through operating results, increases in the valuation allowance will be required through a charge to expense. However, if Armco achieves sufficient profitability to utilize a greater portion of the deferred tax asset, the valuation allowance will be reduced through a credit to income. United States income tax returns of Armco for the year 1988 and prior years have been subject to examination by the Internal Revenue Service and are closed to assessments. However, net operating loss carryforwards from these years remain open to adjustment. Armco has been in a cumulative net operating loss carryforward position since 1983 and believes that it has sufficient loss carryforwards in excess of any potential audit adjustments that might be made by the Internal Revenue Service for any open years. In 1993, Armco recorded income from tax benefits of $4.9 in Credit for income taxes on the Statement of Consolidated Operations; and income of $5.8, related to interest, in Sundry other -- net, for settlements of state income tax issues. In addition, Armco reversed a federal tax reserve of $4.3 as a result of the resolution of certain tax issues. This amount was recorded in Credit for income taxes. In 1992, Armco recognized income of $39.1 as the result of a settlement with the Internal Revenue Service on two federal tax refund claims. Of the total amount recognized, $16.2, representing the tax refunds, was recorded in Credit for income taxes and $22.9, representing interest on the claims, was recorded in Sundry other -- net. In addition, Armco adjusted certain income tax reserves resulting in a $13.0 benefit for income taxes, primarily in the fourth quarter of 1992. NOTES TO FINANCIAL STATEMENTS 47 - -------------------------------------------------------------------------------- 5. LONG-TERM DEBT AND OTHER FINANCING At December 31, 1993 and 1992 Armco's long-term debt, less current maturities, was as follows:
- -------------------------------------------------------------------------------------- 1993 1992 ====================================================================================== SINKING FUND DEBENTURES: 8.5% due 2001 $ 48.0 $ 53.7 9.2% due 2000 35.0 35.0 8.7% due 1995 7.9 11.0 8.0% Eastern Stainless Corporation due 2003 13.4 13.4 NOTES PAYABLE: 9.375% due 2000 125.0 -- 11.375% due 1999 100.0 100.0 7.875% due 1994-1996 5.3 7.0 Variable rate (1993 average 6.4%) due 1996-2000 29.6 29.6 11% note to AFSG due 1997 -- 30.0 13.5% due 1994 -- 89.0 Pollution control and other revenue bonds (2.6% to 8.125%) 15.0 31.1 Other 0.5 1.2 - -------------------------------------------------------------------------------------- Total $379.7 $401.0 - --------------------------------------------------------------------------------------
Maturities of existing long-term debt during the five years ending December 31, 1998, is as follows: 1994, $8.3; 1995, $22.1; 1996, $22.5; 1997, $20.3 and 1998, $20.5. The fair market value of Armco's long-term debt, including current maturities, is approximately $392.8. This value was determined by calculating a value based on cash flow yield to maturity and comparing that amount to market quotations where possible. The fair market value estimate is based on pertinent information available to management as of December 31, 1993. Management is not aware of any significant factors that would alter this estimate after that date. At December 31, 1993, long-term debt included $29.6 of financing utilized to construct a cold rolling mill at Armco's Butler, Pennsylvania facility, included in the Specialty Flat-Rolled Steel segment. The last two payments on this debt were to be made in 1994 and 1995. However, Armco signed an agreement effective February 28, 1994, which restructures such payments to ten semiannual installments beginning in 1996. This loan is secured by a pledge of the cold rolling mill and a $6.0 cash collateral account. In the fourth quarter of 1993, Armco issued $125.0 of 9.375% Senior Notes due November 1, 2000. The proceeds, together with approximately $16.6 of Armco's cash, were used for the retirement of the following debt issues: $30.0 of the 11% note maturing in 1997 due to the AFSG runoff companies from Douglas Dynamics, Inc., $5.0 of the 7.875% bonds maturing in 2005 and $2.0 of the 8.7% debentures due in 1995. In addition, $88.0 of the 13.5% Notes due 1994 were defeased when Armco placed $99.9 in a trust to pay principal and interest when due. The early extinguishment of debt resulted in an extraordinary loss of $7.3 or $.07 per share in fourth quarter of 1993. In 1992, Armco issued $100.0 of 11.375% Senior Notes due October 15, 1999. The proceeds were used for general corporate purposes and retirement of other debt issues. On November 10, 1992, Armco extinguished the $30.0, 12.75% notes issued on April 24, 1992, in connection with the acquisition of Cyclops (Note 1). In 1992, Armco purchased $32.5 face value of its long-term debt obligations resulting in an extraordinary loss of $2.3 or $.02 per share. In the fourth quarter of 1993, Armco entered into an amended credit agreement with a group of banks to provide a credit facility for borrowings up to $170.0 on a revolving credit basis until December 31, 1995, secured by certain of Armco's receivables and inventories. As of the end of 1993, Armco had utilized $84.3 of the credit facility for letters of credit. At December 31, 1993, the amended credit agreement required Armco to maintain a minimum working capital of $225.0 at any time in 1994 increasing to $250.0 at any time in 1995. At December 31, 1993, working capital, as defined, was $272.3. In addition to these requirements, 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. Certain subsidiaries of Armco have other financing agreements which require that they meet covenants and financial tests. Under the terms of the amended credit agreement, 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 amended credit agreement. Armco capitalized interest on projects during construction of $1.2, $1.1, and $0.8 in 1993, 1992 and 1991, respectively. NOTES TO FINANCIAL STATEMENTS 48 - -------------------------------------------------------------------------------- 6. LONG-TERM LEASES Rental expenses under operating leases were $11.3 in 1993, $14.1 in 1992 and $9.2 in 1991. At December 31, 1993, commitments to make future minimum lease payments for operating leases were as follows: - ------------------------------------------------------------------------------ PAYMENTS TO BE MADE IN: 1994 $ 9.7 1995 7.7 1996 5.8 1997 4.5 1998 2.7 1999 and thereafter 5.5 - ------------------------------------------------------------------------------ Total 35.9 - ------------------------------------------------------------------------------ Less future minimum subleases to be received 2.3 - ------------------------------------------------------------------------------ Net commitment $33.6 - ------------------------------------------------------------------------------
7. SHAREHOLDERS' EQUITY PREFERRED STOCK Armco has outstanding two classes of preferred stock. The two classes rank equally with respect to dividend payments, redemption and liquidation rights. The preferred stock ranks senior to Armco's common stock with respect to dividends and upon liquidation. Armco has two series of Class A preferred stock outstanding. The $2.10 Class A preferred stock pays cumulative dividends at the annual rate of $2.10 per share. Shareholders of the $2.10 Class A preferred stock have one vote per share and each share is convertible into 1.27 shares of Armco's common stock. This series of Class A preferred stock may be redeemed at Armco's option for $40 per share, plus accrued but unpaid dividends. The $3.625 Class A preferred stock pays cumulative dividends at the annual rate of $3.625 per share. Shareholders of this series of Class A preferred stock are entitled to one vote per share and each share is convertible into 6.78 shares of Armco's common stock. The $3.625 Class A preferred stock may be redeemed at Armco's option on or after October 15, 1995 at prices starting at $52.5375, plus accrued but unpaid dividends, and declining, at 12-month intervals, to $50 on and after October 15, 2002. Armco's outstanding series of Class B preferred stock is nonvoting and pays cumulative dividends at the annual rate of $4.50 per share. Each share is convertible into 2.22 shares of Armco's common stock. The Class B preferred stock may be redeemed at Armco's option for $50 per share, plus accrued but unpaid dividends. COMMON STOCK At the April 23, 1993 annual meeting, Armco's shareholders voted to reduce the par value of Armco's common stock to $.01 per share from $1.00 per share. At December 31, 1993, 22,681,261 shares of Armco's common stock were reserved for the conversion of preferred stock and 3,015,774 shares of common stock were reserved for the exercise of stock options (Note 8). SHAREHOLDER RIGHTS PLAN On June 27, 1986, Armco adopted a Shareholder Rights Plan designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of Armco without offering a fair price to all of Armco's shareholders. Under the terms of the plan, preferred stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock held as of the close of business on July 7, 1986. Until the rights become exercisable, common stock issued will also have one right attached. Each right will entitle shareholders to buy one two-hundredth (a "unit") of a share of a newly authorized Class A participating preferred stock of Armco at an exercise price of $35. Each right or unit will thereafter entitle the holder to receive upon exercise, common stock or, in certain circumstances, preferred stock or other securities or assets of the company having a value of $70. The rights will be exercisable only if a person or group acquires beneficial ownership of 20% or more of Armco's common stock or announces a tender or exchange offer, after which such person or group would beneficially own 30% or more of the common stock. A total of 650,000 shares of Class A participating preferred stock have been reserved for issuance upon exercise of the rights. Armco, except as otherwise provided in the plan, will generally be able to redeem the rights at one cent per right at any time during a ten-day period following public announcement that a 20% position in Armco has been acquired. During this ten-day period, Armco may also extend the time during which it may redeem the rights. The rights are not exercisable until the expiration of the redemption period. The rights will expire on June 26, 1996. DIVIDENDS Under the terms of the amended credit agreement (Note 5), Armco cannot pay cash dividends on its common stock. In addition, under the terms of indentures for Armco's 11.375% Senior Notes due 1999 and 9.375% Senior Notes due 2000, Armco can pay a dividend on its common stock only if it meets certain financial tests described in the indentures. Armco does not expect to satisfy these tests in the near future, and therefore, Armco does not expect to be able to pay a common stock dividend or repurchase its capital stock. The payment of preferred stock NOTES TO FINANCIAL STATEMENTS 49 - -------------------------------------------------------------------------------- dividends is prohibited if Armco is in default of the credit agreement. As a result of the reduction in the par value of Armco's common stock, $102.7 was transferred from Armco's stated capital account for its common stock to Additional paid-in capital, increasing surplus from which Armco is permitted, under Ohio law, to pay dividends on its common and preferred stock issues. Armco is incorporated in Ohio. In addition, effective March 31, 1993, the corporate statute of Ohio was amended to provide that Ohio corporations that recognize immediately the full amount of their transition obligation under SFAS 106, as Armco did, could increase the amount available for payment of dividends by adding to the corporation's surplus at the time of the dividend the amount of the difference between the reduction in the corporation's surplus that resulted from the immediate recognition of the SFAS 106 transition obligation and the amount of the transition obligation that would have been recognized at the time of the dividend had the corporation elected to amortize its recognition of such transition obligation. At December 31, 1993, the amount from which Armco is permitted to pay dividends under this provision was $75.7. The Board of Directors at its January 1994 meeting declared the regular quarterly dividends payable on both series of Armco's Class A preferred stock and on its Class B preferred stock. 8. COMMON STOCK OPTIONS Armco shareholders adopted Common Stock Option Plans in 1977, 1983 and 1988. In addition, stock options may also be granted under the 1993 Long Term Incentive Plan. These plans provide generally for granting options to purchase common stock for not less than 100% of the market price on the date the option is granted. The 1977, 1983 and 1988 Plans have expired as to new grants. For outstanding options containing stock appreciation rights, the excess of the market price of the stock over the option price is accrued. Although they may terminate earlier under certain conditions, stock options generally expire 10 years after they are granted. Options relating to 3,427,000 shares of stock were available for granting at December 31, 1993 under the 1993 Long Term Incentive Plan. On April 24, 1992, stock options granted to Cyclops employees and directors prior to the acquisition were converted into Armco stock options with the same terms and conditions as the original grants. The Cyclops options provided for purchase of common stock for not less than 100% of the market price on the date the options were granted, and generally expire five years after the date of grant. However, options converted for members of the Cyclops board of directors expired on April 24, 1993. The following is summarized information relating to Armco common stock options:
- ------------------------------------------------------------------------------------------- Number Option Price of Shares Per Share =========================================================================================== Options outstanding December 31 1993 3,015,774 $3.24-19.38 1992 3,741,252 3.24-19.38 1991 3,451,500 4.13-21.38 Options exercisable December 31 1993 2,429,274 $3.24-19.38 1992 3,741,252 3.24-19.38 1991 2,842,100 5.94-21.38 Options exercised (including stock appreciation rights) 1993 717,398 $ 3.24-7.00 1992 119,580 3.24-5.94 1991 -- -- - -------------------------------------------------------------------------------------------
9. SEGMENT INFORMATION Armco's business segments include: (1) Specialty Flat-Rolled Steel, which includes businesses that produce electrical and stainless steel sheet and strip, and stainless steel plate for the industrial machinery and equipment, automotive, construction and service center markets; and international trading companies, that buy and sell steel and manufactured steel products; and (2) Other Steel and Fabricated Products, which, at December 31, 1993, included operations that produce carbon sheet and strip, and tubular products for the industrial machinery, construction, agriculture and appliance markets, and a manufacturer of snowplows for light trucks and utility vehicles. At various times during the three-year period ended December 31, 1993, the Other Steel and Fabricated Products segment also included other businesses which have since been divested or identified for disposal (Note 10). Such businesses included producers of stainless steel bar, rod and wire and high temperature superalloys, and providers of nonresidential construction products and services, and steel cutting, slitting, leveling, blanking and other services. NOTES TO FINANCIAL STATEMENTS 50 - -------------------------------------------------------------------------------- Armco's industry segment information is as follows:
- -------------------------------------------------------------------------------------- 1993 1992 1991 ====================================================================================== CUSTOMER SALES: Specialty Flat-Rolled Steel $1,001.5 $ 885.5 $ 693.0 Other Steel and Fabricated Products 662.5 787.7 511.0 - ------------------------------------------------------------------------------------- Total $1,664.0 $1,673.2 $1,204.0 - ------------------------------------------------------------------------------------- INTERSEGMENT SALES:/1/ Specialty Flat-Rolled Steel $ 11.1 $ 7.1 $ 5.4 Other Steel and Fabricated Products 52.0 2.9 7.4 - -------------------------------------------------------------------------------------- SPECIAL CHARGES -- NET: Specialty Flat-Rolled Steel $ -- $ (37.6) $ -- Other Steel and Fabricated Products (165.5) (129.8) (48.7) Corporate general -- (17.7) -- - -------------------------------------------------------------------------------------- Total $ (165.5) $ (185.1) $ (48.7) - --------------------------------------------------------------------------------------- OPERATING PROFIT (LOSS):/2/ Specialty Flat-Rolled Steel $ 75.5 $ 21.4 $ 42.3 Other Steel and Fabricated Products (183.5) (128.5) (19.4) Corporate general (38.0) (50.2) (32.4) - -------------------------------------------------------------------------------------- Total $ (146.0) $ (157.3) $ (9.5) - -------------------------------------------------------------------------------------- CAPITAL EXPENDITURES: Specialty Flat-Rolled Steel $ 17.1 $ 34.1 $ 17.0 Other Steel and Fabricated Products 36.0 24.1 9.1 Corporate general 0.8 1.2 1.0 - -------------------------------------------------------------------------------------- Total $ 53.9 $ 59.4 $ 27.1 - -------------------------------------------------------------------------------------- DEPRECIATION AND LEASE-RIGHT AMORTIZATION: Specialty Flat-Rolled Steel $ 30.1 $ 27.0 $ 19.7 Other Steel and Fabricated Products 21.0 17.2 11.8 Corporate general 2.1 2.5 2.4 - -------------------------------------------------------------------------------------- Total $ 53.2 $ 46.7 $ 33.9 - -------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS: Specialty Flat-Rolled Steel $ 614.3 $ 626.0 $ 370.3 Other Steel and Fabricated Products 380.9 570.9 331.7 Corporate general/3/ 812.4 400.4 772.3 Discontinued operations 97.1 272.6 290.7 - -------------------------------------------------------------------------------------- Total $1,904.7 $1,869.9 $1,765.0 - --------------------------------------------------------------------------------------
/1/ Prices generally approximate market. Intersegment sales are eliminated in consolidation. Sales between foreign and domestic companies are not material. /2/ Operating profit (loss) includes the effects of Special charges -- net. In addition, in 1993 Armco adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (Note 2). As a result, in 1993 Armco recognized additional employee benefit expenses of $20.1 and $7.6 in the Specialty Flat-Rolled and Other Steel and Fabricated Products segments, respectively. /3/ Corporate general identifiable assets in 1993 includes, among other assets, $174.3 of cash and liquid investments, $83.9 for the investment in National- Oilwell, current and noncurrent deferred tax assets of $301.5 and goodwill of $127.9. 10. SPECIAL CHARGES In 1993, as part of its strategy to focus on specialty flat-rolled steel, Armco sold the Brazilian operations and decided to exit a number of domestic businesses and recorded special charges totaling $165.5. Of the total, $15.0 related to the sale of Armco do Brasil S.A. and the remainder was associated with the ultimate disposal of a nonresidential construction business, a tubing plant, the stainless bar, rod and wire businesses, and conversion systems business. The total special charges include $61.2 for the excess of carrying value of net assets over anticipated proceeds on disposal, $78.0 for employee benefit costs, and $19.5 for estimated losses through the dates of disposal. Other components of the charges were expenses related to provisions for legal and environmental matters and recognition of previously deferred foreign currency translation adjustments, partially offset by pension curtailment gains. In 1992, Armco recorded special charges, totaling $185.1, associated with a series of restructuring actions undertaken to reduce costs, improve profitability and strengthen Armco's competitive position. These charges included: $37.6 to close the Eastern Stainless Corporation melt shop and reduce the salaried work force at Armco's Specialty Flat-Rolled Steel operations; $32.6 related to the sale of Armco's Venezuelan operations and closing a fabricating plant in Heidelberg, Pennsylvania; and $101.4 to downsize plants in Baltimore, Maryland and Bridgeville, Pennsylvania, and sell the Cytemp Specialty Steel plant in Titusville, Pennsylvania. Armco also recognized a charge of $17.7 to restructure corporate functions. Additional special charges -- net in the Other Steel and Fabricated Products segment in 1992 included a $5.4 gain on the sale of Southwestern Ohio Steel and SOS Leveling Co., Inc. and $1.2 to increase a reserve for the planned divestment of VSX Corporation. These charges included $114.0 for employee benefit costs related to the restructurings and $39.9 for continuing losses and excess carrying value of net assets over the anticipated proceeds on disposal, with the remainder comprised primarily of provisions for legal and environmental matters and the recognition of previously deferred foreign currency translation adjustments. Special charges in 1991 included $13.8 associated with work force reductions at the stainless bar, rod and wire business in Baltimore, Maryland, $5.2 for costs related to the shutdown of a tubing plant in South America, a $1.7 charge for costs associated with the divestment of VSX Corporation, $27.2 for net losses and costs related to the planned divestment of certain businesses in South America and $0.8 to close a trading company office. NOTES TO FINANCIAL STATEMENTS 51 - -------------------------------------------------------------------------------- 11. FOREIGN SUBSIDIARIES Armco's foreign subsidiaries are on a fiscal year ending October 31. The amounts presented here are for Armco's consolidated foreign subsidiaries, based on financial statements for fiscal years ending in 1993, 1992 and 1991.
- -------------------------------------------------------------------- 1993 1992 1991 ==================================================================== Net sales $122.9 $177.7 $228.0 Net income (loss) 14.8 9.3 (19.7) Identifiable assets 27.5 156.0 127.4 - --------------------------------------------------------------------
Included in the above amounts are the following related to Armco's South American operations for the years 1993, 1992 and 1991: Net sales of $81.3, $129.6 and $175.8; Net income (loss) of $14.4, $7.9 and $(22.1); and Identifiable assets of $0.0, $123.2 and $88.2. The changes in 1993 were due primarily to the sale of the Brazilian operation during 1993. Foreign currency losses recognized in Sundry other -- net were $5.9 in 1993, $11.6 in 1992 and $10.3 in 1991, primarily related to Armco's operations in Brazil. Foreign currency translation losses of $17.7 and $2.1 were realized in 1992 and 1991 as a result of the divestment of certain fabricating and processing businesses in South America (Note 10) and are not included in the foreign subsidiaries' amounts above. 12. COMMITMENTS AND CONTINGENCIES First Taconite Company, a subsidiary of Armco, and a subsidiary of LTV Corporation, each owned a 50% interest in the properties and assets of Reserve Mining Company (Reserve Mining), a Minnesota partnership that produced taconite iron ore pellets and which filed for reorganization under Chapter 11 in 1986. On August 17, 1989, Cyprus Northshore Mining Corporation (Cyprus), a wholly owned subsidiary of Cyprus Minerals Company, purchased the assets of Reserve Mining. On that date, Armco and First Taconite Company entered into an agreement with the state of Minnesota, the Reserve Mining Company bankruptcy trustee and Cyprus, whereby Cyprus agreed to operate the facility and, upon the purchase by Armco Steel Company, L.P. 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. [PHOTOGRAPH OF GREG KARAVANICH APPEARS HERE] "ALTHOUGH SOME FACILITIES HAD OUTSTANDING SAFETY RECORDS IN 1993, ARMCO'S OVERALL RESULTS WERE DISAPPOINTING, IN PART DUE TO DISTRACTIONS RELATED TO THE MERGER. WE ARE COMMITTED TO SIGNIFICANT IMPROVEMENT IN 1994, AND AN AGGRESSIVE PLAN IS BEING IMPLEMENTED TOWARD THIS END. EXPERIENCE TELLS US THAT ESTABLISHING LABOR/MANAGEMENT SAFETY COMMITTEES IN THE PLANTS CONTRIBUTES TO SUPERIOR RESULTS, SO WE WILL CONTINUE TO STRESS THIS APPROACH IN 1994." -- GREG KARAVANICH, DIRECTOR -- INDUSTRIAL RELATIONS & SAFETY In connection with the formation of ASC (Note 14), ASC assumed and agreed to satisfy and indemnify Armco against certain obligations and liabilities including, among other things, environmental costs and obligations, employee benefit obligations, and liabilities under certain long-term supply contracts related to the transferred business and assets. Should ASC be unable to satisfy its indemnification obligations to Armco, Armco could again be required to discharge certain of such assumed obligations and liabilities, the amounts of which could be material. In 1990, Armco, through a subsidiary, formed North American Stainless, a 50%-owned joint venture partnership with Acerinox, S.A. of Spain to build and operate a new chrome nickel stainless steel finishing facility in Carrollton, Kentucky. In the fourth quarter of 1992, Armco provided a $7.4 letter of credit to secure 50% of North American Stainless' annual debt service payment, which letter of credit continues in effect. 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 differential between the spot price at maturity and the contract price. Gains and losses related to outstanding contracts are recognized in income currently. Based on market values at December 31, 1993, contracts with a nominal amount of $16.9 would require Armco to pay $5.5. Armco has committed to purchase property, plant and equipment (including unexpended amounts relating to projects substantially under way) amounting to approximately $39.9 at December 31, 1993. NOTES TO FINANCIAL STATEMENTS 52 - -------------------------------------------------------------------------------- 13. LITIGATION AND ENVIRONMENTAL MATTERS There are various claims pending involving Armco and its subsidiaries regarding product liability, patent, antitrust, environmental and hazardous waste matters, reinsurance and insurance arrangements, and other matters arising out of the conduct of Armco's business. In addition, Armco is involved with various claims brought against Reserve Mining (Note 12). If the claimants are successful in such claims, Armco could become liable for these nondebt obligations in an amount that could be substantial. In Armco's opinion, based on current facts and circumstances, the ultimate liability resulting from legal claims against Armco at December 31, 1993, will not materially affect the financial position or liquidity of Armco and its subsidiaries. However, it is possible that due to fluctuations in Armco's results, future developments with respect to such matters could have a material effect on the results of operations of future interim or annual periods. 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 the 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 state or federal government seeks reimbursement for, or compulsory cleanup 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 also is 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 December 31, 1993, Armco had recorded $14.5 in Other accruals and $73.2 in Other liabilities for estimated probable costs relating to legal and environmental matters. 14. ARMCO STEEL COMPANY, L. P. Effective May 13, 1989, Armco sold certain assets and a portion of its Eastern Steel Division's business to Kawasaki Steel Investments Inc. (KSI). Simultaneously, KSI contributed the purchased assets and business and assumed liabilities to a newly formed joint venture limited partnership called Armco Steel Company, L.P. (ASC), receiving in exchange a 39.5% limited partnership interest in ASC. Armco contributed substantially all of the remaining Eastern Steel Division assets and business and liabilities to ASC in exchange for a 59.5% limited partnership interest. The other 1% partnership interest is held by the general partner, AK Management Corporation, which, in turn, is owned 50% each by subsidiaries of Kawasaki Steel Corporation and Armco. Prior to forming the joint venture, KSI committed to make a series of additional contributions to ASC, in consideration of which, over time, KSI's partnership interest would increase and Armco's partnership interest would decrease until each owned 49.5% of the joint venture. The partnership became an equally owned joint venture on May 13, 1991; and in 1991, Armco recorded a gain of $24.1, which primarily represented Armco's interest in the increase in the net assets of ASC due to the KSI contributions partially offset by the decrease in Armco's investment due to the ownership percentage change. Armco and Kawasaki Steel Corporation, through subsidiaries, have equal control in operating the limited partnership. Armco accounts for its investment in ASC using the equity method. At December 31, 1992, Armco's investment in ASC was $8.5. In 1992, Armco agreed to contribute $10.0 to the joint venture to fund hot strip mill improvements, which enhance ASC's ability to roll stainless steel for Armco. Of this total, $0.6 was contributed in 1992. The remaining $9.4 effectively increased Armco's investment in ASC to $17.9 during the first quarter of 1993. However, losses incurred during the three months ended NOTES TO FINANCIAL STATEMENTS 53 - -------------------------------------------------------------------------------- March 31, 1993 reduced Armco's investment to zero, after which Armco stopped recording losses related to the results of ASC. In the fourth quarter of 1993, however, Armco recognized a $10.0 equity loss as a result of paying an additional $10.0 to ASC to fund capital projects which will benefit stainless steel rolling at ASC for Armco. Armco has no binding commitment or intention to provide financial support to ASC's operations. Further, Armco does not expect to recognize its equity in the income or losses of ASC in the foreseeable future. ASC has begun implementing a proposed recapitalization plan, consisting of the issuance of equity through an initial public offering and debt through a senior note offering. Proceeds would be used to restructure and recapitalize the business, primarily by reducing its debt and unfunded pension liability. Under the terms of the plan, Armco's obligations to make certain cash payments to ASC would be eliminated and Armco's ownership interest would be reduced to less than one percent. Should the recapitalization plan be consummated, Armco expects to recognize a gain of $38.5 related to the immediate recognition of deferred pension curtailment gains and release from certain obligations for future cash payments. In addition, Armco expects to recognize tax benefits related to this transaction. Such benefits cannot yet be determined. During 1993, 1992 and 1991, Armco and its subsidiaries were parties to certain transactions with ASC. These transactions consisted of sales and purchases of products and processing services, and charges to and from ASC for various services performed. Transactions for administrative services approximate each company's costs, and are reflected primarily in Selling and administrative expenses. Sales of products and processing services are billed at prices which approximate market. The following is a summary of such related party transactions for the periods:
- --------------------------------------------------------------------------------- 1993 1992 1991 ================================================================================== SALES TO ASC: Products, processing and conversion $25.9 $17.3 $12.6 Research and engineering services 4.0 9.8 11.6 Administrative services 0.4 0.2 0.6 - ----------------------------------------------------------------------------------- Total $30.3 $27.3 $24.8 - ----------------------------------------------------------------------------------- PURCHASES FROM ASC: Products, processing and conversion $45.1 $77.2 $87.5 Administrative services 2.1 4.1 6.6 - ----------------------------------------------------------------------------------- Total $47.2 $81.3 $94.1 - -----------------------------------------------------------------------------------
The formation agreement included provisions which required Armco to make payments to ASC in the years 1991 through 1994. Such payments, which included additional capital contributions and payments related to certain employee benefit and environmental matters, did not affect Armco's ownership percentage. In 1992, Armco contributed $7.4 as the final capital contribution and made certain other payments totaling $1.1 as required by the formation agreement. In 1991, Armco made payments totaling $18.1 as scheduled for the year. In addition, Armco accelerated certain payments to ASC related to environmental costs and expenses. Future payments totaling $12.0 were satisfied by a payment of $10.6 in the fourth quarter 1991. During 1992, Armco sold the assets of Southwestern Ohio Steel and SOS Leveling Co., Inc. to Southwestern Ohio Steel, L.P., a newly formed joint venture. Armco received $33.2 in cash in connection with the transaction in addition to a 25% interest in the new joint venture, that was concurrently contributed to ASC. Upon completion of the transaction, Southwestern Ohio Steel, L.P. was equally owned by ITOCHU International Inc. (formerly, C. Itoh & Co. (America) Inc.) and ASC. At December 31, 1993 and 1992, Armco had included in its Statement of Consolidated Financial Position the following for amounts related to ASC:
- ----------------------------------------------------------------------- 1993 1992 ======================================================================= Other receivables $ 3.2 $ 2.1 Accounts payable -- Other 3.5 2.2 Current employee benefit obligations 0.4 0.4 Long-term employee benefit obligations 16.1 16.1 - -----------------------------------------------------------------------
The following is summarized financial information for ASC at December 31, 1993, 1992 and 1991, and for the years then ended. Armco's proportionate share of such amounts is included in the equity investment schedule in Note 1. Amounts have been restated to reflect ASC's adoption, in the fourth quarter of 1993, of SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, retroactively effective to January 1, 1990, in connection with the proposed initial public offering. At January 1, 1990, ASC recognized a charge of $491.6 for the cumulative effect of adopting SFAS 106. NOTES TO FINANCIAL STATEMENTS 54 - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------- 1993 1992 1991 ================================================================================= Current assets $ 554.0 $ 417.4 $ 467.7 Noncurrent assets 964.7 1,007.6 1,165.1 Current liabilities 496.1 432.3 391.6 Noncurrent liabilities 1,606.8 1,442.4 1,167.9 Net sales 1,594.5 1,404.5 1,301.4 Gross profit 216.2 85.9 (2.0) Special charges (19.6) (379.3) -- Operating profit (loss) 13.9 (499.3) (219.0) Loss before extraordinary loss (40.7) (532.0) (251.1) Net loss (40.7) (544.1) (251.1) - ---------------------------------------------------------------------------------
In the fourth quarter of 1993, ASC recorded special charges totaling $19.6 for the disposal and write-off of certain steelmaking assets, employee and retiree benefits including pensions and to increase legal reserves. Because Armco is not currently recognizing its equity in ASC's results, these special charges had no current effect on Armco's net loss. During 1992, ASC recognized special charges totaling $379.3 for costs associated with rationalization of its operations, including $119.5 for disposal of assets, $158.2 for employee and retiree benefits, $39.0 for reduction in salaried work force and $46.6 to impair its investment in an equity joint venture. In addition, ASC recorded an extraordinary charge of $12.1 to establish an estimated liability for retiree benefits under the Coal Industry Retiree Health Benefit Act, signed into law during the year. These actions resulted in an increase to Armco's Equity in loss of Armco Steel Company, L.P. of $167.1 and a charge in Extraordinary losses of $6.1. ASC has outstanding revolving credit and other financing agreements with a number of lending institutions. Effective as of December 31, 1992, ASC's various lenders consented to the amendment of the revolving credit agreements, as well as a capital projects financing agreement and other ASC debt instruments, to provide that the obligations under these agreements and instruments would be secured by a pledge of substantially all of ASC's assets and to revise the covenants. In January 1994, ASC's various lenders agreed to amendments to the revolving credit and long-term debt agreements to revise certain financial covenants effective as of December 31, 1993. ASC is required to maintain as of December 31, 1993, a minimum tangible net worth of $650.0, a minimum current ratio of 1.0 and a maximum leverage ratio of 1.0, as defined in the agreements. At December 31, 1993, the actual measures under these financial covenants were a tangible net worth of $742.1, a current ratio of 1.76 and a leverage ratio of 0.85. With plants in Middletown, Ohio and Ashland, Kentucky, ASC concentrates on the production of custom engineered grades and value-added applications of hot- rolled steel and coated and uncoated cold-rolled steel for sale to the automotive, appliance and manufacturing markets, as well as to the construction industry and independent steel distributors and service centers. 15. OTHER EQUITY COMPANIES NATIONAL-OILWELL Effective April 1, 1987, Armco exchanged the business and certain net assets of its oil field business for a 50% interest in a joint venture (National- Oilwell) owned by subsidiaries of Armco and USX Corporation (USX). USX also transferred its oil field equipment and services operation to the joint venture. Armco's equity loss in the joint venture for 1993 included a fourth quarter charge of $5.0 for its portion of the loss on the sale of the company's wellhead business that was completed in the first quarter of 1994. Armco's equity losses in 1992 and 1991 included $3.3 and $12.3, respectively, for its portion of the charges recorded for the shut down and rationalization of certain of National- Oilwell's manufacturing facilities. At December 31, 1993, National-Oilwell had outstanding $7.0 of a note payable and accrued interest due to AFSG. During 1992, National-Oilwell adopted SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS 109, Accounting for Income Taxes. The net effect of adoption of these two standards on Armco's equity in the losses of National-Oilwell was to reduce the 1992 loss by $0.3. Armco received distributions from National-Oilwell totaling $16.0 in 1991. National-Oilwell sells oil field tubular pipe, and produces and sells drilling and production equipment, and process pumps used in the world's oil and gas services industry. NORTH AMERICAN STAINLESS North American Stainless (NAS) is a 50%-owned joint venture partnership between subsidiaries of Armco and Acerinox, S.A. of Spain, established to own and operate a greenfield chrome nickel stainless finishing facility in Carrollton, Kentucky. This facility was completed in December 1992 and began shipping customer product in mid-1993. NAS purchases, at market prices, a portion of its steel requirements from Armco's Butler, Pennsylvania plant, which is in the Specialty Flat-Rolled Steel segment. During 1993, NAS had sales of $56.5, an operating loss of $8.0 and a net loss of $12.8. Armco's equity loss in the year from NAS was $6.4. As a partnership, NAS maintains its own cash, credit lines and long-term debt, and funds its own operations, liabilities and capital expenditures, separate from the partners. NAS is partially financed by long-term debt and credit agreements established with a number of banks and other lending institutions. These agreements contain covenants which require NAS to maintain certain minimum net worth NOTES TO FINANCIAL STATEMENTS 55 - -------------------------------------------------------------------------------- and ratio tests. At December 31, 1993, NAS was in default on certain of its covenant requirements. Discussions designed to reach agreement on a cure for this default situation have begun, and Armco believes that an acceptable resolution will be reached, and that such resolution will not have a material adverse impact on Armco. Armco is restricted by its own credit facilities as to the amount of contributions it can make to its joint venture partnerships. In the fourth quarter of 1993, NAS borrowed $4.0 each from Acerinox and AFSG to fund its operations and meet other debt payment requirements. In 1993, Armco and Acerinox each contributed $3.0 to NAS. Armco's 1993 Net sales on the Statement of Consolidated Operations included $37.0 of product sales to NAS, and at December 31, 1993, Trade receivables on the Statement of Consolidated Financial Position included $16.1 from NAS. 16. SUBSIDIARY CAPITAL STOCK Armco owns all of the Class A common stock of Eastern Stainless Corporation (Eastern Stainless), representing 84% of the outstanding voting rights. Eastern Stainless Class B common stock, which is publicly traded, has the remaining voting rights. Dividends on Eastern Stainless' redeemable Class B common stock, of which 12,532,701 shares are authorized, issued and outstanding, are cumulative from the effective date of issue at the fixed rate of $.08 per share per annum, and are payable annually. In addition to the fixed rate dividends, Class B common shareholders are entitled to participating dividends. These participating dividends are equal to the excess of 8 1/4% of Eastern Stainless' cumulative income (as defined in Eastern Stainless' amended Articles of Incorporation) over the total fixed dividends paid from the date of issuance to the end of the fiscal quarter immediately preceding the redemption date. The participating dividend, if any, is payable on the redemption date. As of December 31, 1993, no amounts had accrued under the participating dividend provision. Beginning May 1, 1993, to the extent funds are legally available, Eastern Stainless may redeem, in whole or in part, the outstanding shares at a redemption price equal to $1 per share plus accrued and unpaid fixed and participating dividends. Beginning May 1, 1996 and on each anniversary thereafter through 2003, to the extent funds are legally available, Eastern Stainless is required to redeem 1,587,417 shares, or the aggregate number of shares outstanding if less, at the redemption price. The carrying value of the shares, which includes the unpaid fixed and participating dividends, is periodically increased through charges to operations which yield an effective rate of 13.9%, based upon the fixed dividend, and will become due under the mandatory redemption requirements. Holders of the stock are entitled to one vote per share, which represents approximately 16% of the voting shares, with respect to matters concerning Eastern Stainless. The payment of dividends on, or the redemption of, Eastern Stainless' Class A common shares and its Class B common shares is subject to certain covenants contained in agreements entered into by Eastern Stainless or Armco. In the event of any liquidation or dissolution of Eastern Stainless, voluntary or involuntary, the holders of the Class B common stock are entitled to be paid out of Eastern Stainless' assets an amount in cash equal to $1 per share plus accrued and unpaid fixed and participating dividends before any distribution to Armco. 17. WORLDWIDE GRINDING SYSTEMS -- DISCONTINUED OPERATIONS Armco's Worldwide Grinding Systems segment consisted of foreign and domestic businesses that produced grinding balls and rods, abrasion-resistant castings, liners, process control systems and carbon wire rods. Armco also participated in grinding system and wire rod joint ventures in the United States and certain foreign countries through this segment. On September 28, 1993, Armco completed the sale of a 50% joint venture interest in several wire-drawing operations and received $33.0 in net cash proceeds. On November 11, 1993, Armco sold the remaining businesses in this segment for approximately $80.0, excluding pending post-closing adjustments, and accordingly, the results of this segment are reported as discontinued operations. Armco recorded a $40.0 charge for losses and expenses associated with the decision to dispose of this segment, including $5.8 to recognize previously unrealized foreign translation losses. Net sales for the segment were $300.7 in the nine months ended September 30, 1993, and $400.4 and $391.3 in 1992 and 1991, respectively. These amounts are not included in Armco's consolidated net sales. Income from these discontinued operations in 1992 included a charge of $19.1 to close unprofitable European foundry operations and reduce salaried work force at the Worldwide Grinding Systems plant in Kansas City, Missouri. NOTES TO FINANCIAL STATEMENTS 56 - -------------------------------------------------------------------------------- 18. QUARTERLY INFORMATION (UNAUDITED) The following is quarterly information for Armco for 1993 and 1992:
- -------------------------------------------------------------------------------------------------------------- 1993 Year 4 Q 3 Q 2 Q 1 Q ============================================================================================================== Net sales $ 1,664.0 $ 363.5 $ 419.8 $ 454.1 $ 426.6 Cost of products sold (1,519.5) (341.7) (385.0) (405.6) (387.2) Special charges -- net/1/ (165.5) -- (165.5) -- -- Income (loss) from discontinued operations (70.8) (45.0) (35.0) 10.1 (0.9) Income (loss) before extraordinary losses and accounting changes (327.0) (90.7) (223.0) 8.7 (22.0) Extraordinary losses (7.3) (7.3) -- -- -- Cumulative effect of accounting changes (307.5) -- -- -- (307.5) Net income (loss) (641.8) (98.0) (223.0) 8.7 (329.5) Per share: Income (loss) before extraordinary losses and accounting changes (3.32) (0.92) (2.19) 0.04 (0.25) Extraordinary losses (0.07) (0.07) -- -- -- Cumulative effect of accounting changes (2.96) -- -- -- (2.97) Net income (loss) (6.35) (0.99) (2.19) 0.04 (3.22) - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 1992 Year 4 Q 3 Q 2 Q 1 Q =============================================================================================================== Net sales $ 1,673.2 $ 464.0 $ 497.0 $ 443.2 $ 269.0 Cost of products sold (1,509.8) (424.8) (454.3) (394.3) (236.4) Special charges -- net/1/ (185.1) (168.9) 5.4 (21.6) -- Income (loss) before extraordinary losses (421.5) (368.3) (25.2) 2.5 (30.5) Extraordinary losses (8.4) (8.4) -- -- -- Net income (loss) (429.9) (376.7) (25.2) 2.5 (30.5) Per share: Income (loss) before extraordinary losses (4.37) (3.60) (0.26) 0.01 (0.37) Extraordinary losses (0.08) (0.08) -- -- -- Net income (loss) (4.45) (3.68) (0.26) 0.01 (0.37) - ----------------------------------------------------------------------------------------------------------------
/1/ See Note 10. Quarterly information has been restated to reflect the reclassification of the AFSG companies to be sold and Worldwide Grinding Systems to discontinued operations. (Notes 3 and 17) The first quarter of 1993 includes the cumulative effect of adoption of three accounting standards. SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions and SFAS 109, Accounting for Income Taxes were both adopted in the first quarter. SFAS 106 resulted in a net of tax charge of $440.0 or $4.24 per share, and SFAS 109 resulted in a credit of $135.6 or $1.31 per share in the cumulative effect of accounting changes. SFAS 112, Employers' Accounting for Postemployment Benefits, was adopted in the fourth quarter of 1993, retroactive to the first quarter. The cumulative effect of SFAS 112 was a charge of $3.1 or $.03 per share. In the fourth quarter of 1993 and 1992, Armco recognized extraordinary losses related to the early retirement of debt of $7.3 and $2.3 or $.07 and $.02 per share, respectively. In the fourth quarter of 1992, Armco also recognized an extraordinary loss of $6.1 or $.06 per share as its portion of an ASC equity loss to establish an estimated liability for retiree benefits under the Coal Industry Retiree Health Benefit Act. 57 - -------------------------------------------------------------------------------- PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (UNAUDITED) TITLE: PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (UNAUDITED) COMMON STOCK 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $6-5/8 $7-3/8 $7-1/2 $6-3/4 LOW $4-1/4 $5-1/4 $5-3/4 $5 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $8-3/8 $8 $7-1/2 $6-3/8 LOW $6 $6-5/8 $6 $4-7/8 PREFERRED STOCK Class A $2.10 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $21-1/2 $24-1/2 $25 $23 LOW $19 $19-3/4 $22-3/4 $19-1/2 Dividend per share .525 .525 .525 .525 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $27-1/2 $26-5/8 $26-7/8 $25-7/8 LOW $21 $24-1/8 $25-3/8 $23-5/8 Dividend per share .525 .525 .525 .525 Class A $3.625 (Issued 10/8/92)* 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $56-1/2 LOW $48-1/2 Dividend per share .83576* 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $65-1/4 $65-1/4 $61 $56-3/4 LOW $55-1/4 $58-3/8 $55-1/4 $51 Dividend per share .90625 .90625 .90625 .90625 Class B $4.50 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $39-1/4 $44-1/2 $46 $43-1/2 LOW $32-1/2 $36-7/8 $41-7/8 $37-3/4 Dividend per share 1.125 1.125 1.125 1.125 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $49-1/2 $49-7/8 $50-3/4 $50-3/4 LOW $42-1/8 $47-3/4 $49-1/8 $49 Dividend per share 1.125 1.125 1.125 1.125 On December 31, 1993, shareholders of record of Armco's common stock numbered 32,665. Dividend checks for Armco's cumulative convertible preferred stock are mailed to arrive on or about the last business day of the following months: - ------------------------------------------------------------------------------------- Class A $2.10 $0.525 per share/qtr. Mar., Jun., Sept., Dec. Class A $3.625 $0.90625 per share/qtr. Mar., Jun., Sept., Dec. Class B $4.50 $1.125 per share/qtr. Mar., Jun., Sept., Dec. - --------------------------------------------------------------------------------------
Graphic Appendix List 1993 Annual Report Charts PAGE: 19 TITLE: ARMCO INC. -- 1993 SALES % BY PRODUCTS Stainless Sheet and Strip 30% Electrical Steel 15% Semi-Finished 8% Stainless Plate 7% Carbon Sheet and Strip 18% Pipe and Tubing 15% Other 7% % BY MARKETS Industrial and Electrical Equipment 30% Service Centers 26% Automotive 18% Construction 13% Appliance, Utensils and Cutlery 2% Other 11% PAGE: 20 (first column) TITLE: STAINLESS STEEL SHEET AND STRIP CONSUMPTION Apparent Consumption (Tons in Thousands) 1988 1,133 1989 1,060 1990 1,064 1991 1,047 1992 1,188 1993 1,366 Import Penetration 1988 11.9% 1989 13.7% 1990 15.3% 1991 16.1% 1992 16.1% 1993 25.2% PAGE: 20 (second column) TITLE: ARMCO INC. -- SPECIALTY STEEL MARKET SHARE STAINLESS SHEET AND STRIP Armco 25% Allegheny-Ludlum 26% J&L Specialty Products 16% Washington Steel/Lukens 8% Imports 25% ELECTRICAL STEEL Armco 42% Allegheny-Ludlum 20% Warren Consolidated Industries 16% Imports 22% STAINLESS PLATE Armco 18% Allegheny-Ludlum 31% J&L Specialty Products 11% Washington Steel/Lukens 9% Avesta 8% Other 7% Imports 16% PAGE: 22 (second column) TITLE: SPECIALTY FLAT-ROLLED STEEL -- 1993 SALES % BY PRODUCTS Stainless Sheet and Strip 51% Electrical 24% Semi-Finished Stainless 14% Stainless Plate 11% % BY MARKETS Industrial and Electrical Equipment 40% Automotive 27% Service Centers 20% Construction 3% Appliance, Utensils and Cutlery 3% Other 7% PAGE: 23 (first column) TITLE: BUTLER PLANT ON-TIME SHIPMENT PERFORMANCE 1993 PERCENT ON-TIME (BY ORDERS) 1st QTR 80% 2nd QTR 79% 3rd QTR 90% 4th QTR 93% PAGE: 23 (second column) TITLE: COSHOCTON STAINLESS DIVISION COST OF QUALITY % of Sales 1989 18.8% 1990 18.1% 1991 18.7% 1992 18.5% 1993 13.2% PAGE: 24 (second column) TITLE: OTHER STEEL & FABRICATED PRODUCTS -- 1993 SALES % BY PRODUCTS Carbon Sheet and Strip 46% Pipe and Tubing 37% Construction 5% Other 12% % BY MARKETS Service Centers 35% Construction 27% Industrial and Electrical Equipment 15% Aircraft and Aerospace 5% Automotive 4% Other 14% PAGE: 57 TITLE: PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (UNAUDITED) COMMON STOCK 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $6-5/8 $7-3/8 $7-1/2 $6-3/4 LOW $4-1/4 $5-1/4 $5-3/4 $5 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $8-3/8 $8 $7-1/2 $6-3/8 LOW $6 $6-5/8 $6 $4-7/8 PREFERRED STOCK Class A $2.10 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $21-1/2 $24-1/2 $25 $23 LOW $19 $19-3/4 $22-3/4 $19-1/2 Dividend per share .525 .525 .525 .525 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $27-1/2 $26-5/8 $26-7/8 $25-7/8 LOW $21 $24-1/8 $25-3/8 $23-5/8 Dividend per share .525 .525 .525 .525 Class A $3.625 (Issued 10/8/92)* 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $56-1/2 LOW $48-1/2 Dividend per share .83576* 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $65-1/4 $65-1/4 $61 $56-3/4 LOW $55-1/4 $58-3/8 $55-1/4 $51 Dividend per share .90625 .90625 .90625 .90625 Class B $4.50 1992 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $39-1/4 $44-1/2 $46 $43-1/2 LOW $32-1/2 $36-7/8 $41-7/8 $37-3/4 Dividend per share 1.125 1.125 1.125 1.125 1993 Price per share 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. HIGH $49-1/2 $49-7/8 $50-3/4 $50-3/4 LOW $42-1/8 $47-3/4 $49-1/8 $49 Dividend per share 1.125 1.125 1.125 1.125 EX-21 7 LIST OF SUBSIDIARIES Exhibit 21
ARMCO INC. SUBSIDIARIES State/Country of Name Incorporation ---- ---------------- Advanced Materials Processing, Inc. Delaware AH (UK) Inc. Delaware AJV Investments Corp. Delaware AK Management Corporation Delaware Armco Advanced Materials, Inc. Delaware Armco Argentina S.A. Argentina Armco Caribbean Corporation Puerto Rico Armco Chile Productos de Ingenieria S.A. (Prodein) Chile Armco da Amazonia Ltda. Brazil Armco Finance Internationale S.A. Switzerland Armco Finance (U.K.) Limited United Kingdom Armco Financial Holdings Corporation Delaware Armco Financial Services Corporation Delaware Armco Financial Services Europe Limited Delaware Armco Financial Services, Inc. Ohio Armco Financial Services International, Inc. Ohio Armco Financial Services International, Ltd. Delaware Armco GmbH Germany Armco Grinding Systems Australia Pty. Ltd. Australia Armco Grundstucksverwaltungs GmbH Germany Armco Insurance Group Inc. Delaware Armco Investment Management, Inc. Delaware Armco Limited United Kingdom Armco Management Corporation Delaware Armco Merchandising Limited United Kingdom Armco Merchandising S.A. Belgium Armco Pacific Financial Corporation Ohio Armco Pacific Financial Services Limited Vanuatu Armco Pacific Investments, Inc. Ohio Armco Pacific Limited Singapore
Armco Participacoes e Empreendimentos Ltda. Brazil Armco Resources Pty. Ltd. Australia Armco S.A. Spain Armco SARL France Armco SMM srl Italy Armco Steel Corporation Ohio Armco Trust Limited United Kingdom Armco Wire Company Delaware Black River Lime Company Ohio Certified Finance Corporation Texas Compass Insurance Company Delaware Cyclops, Inc. Delaware Cyclops International Limited United Kingdom Delvelesson Limited United Kingdom Dorcan International Corporation S.A. Uruguay Douglas Dynamics, Inc. Wisconsin Eastern Stainless Corporation Virginia Everest International, Inc. Ohio Exim Overseas Inc. Ohio FSA Services Corp. Delaware First Stainless, Inc. Delaware First Taconite Company Delaware Flour City Architectural Metals, Inc. Delaware Hangar Facilities, Inc. Ohio Insurance Management Corporation Texas Inversiones Armco S.A. (IASA) Chile Materials Insurance Company Cayman Islands NN Administration, Inc. Delaware NN Insurance Company Wisconsin NN Pipeline Company Delaware National Supply Company, Inc. Delaware The National Supply Company of Mexico, S.A. Mexico New Village Homes, Ltd. Delaware Northern Land Company Minnesota Northwestern National Casualty Company Wisconsin Northwestern National County Texas
Mutual Insurance Company of Texas Northwestern National Holding Company, Inc. Delaware Northwestern National Insurance Company Wisconsin of Milwaukee, Wisconsin Northwestern National Lloyds Insurance Company Texas Oweco Limited Scotland Pacific Automobile Insurance Company California Pacific National Insurance Company California PROCNE Corp. Ohio Reserve Mining Company Minnesota Risk Consultants Inc. Delaware Risk Consultants (Cayman) Ltd. Delaware Shalmet-US, Inc. Delaware SICO, Inc. Indiana Statesman Insurance Company Indiana Strata Energy, Inc. Ohio Talbico, Inc. New York Timeco, Inc. Indiana VSX Corporation Delaware
EX-23 8 CONSENT OF AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Armco Inc.: We consent to the incorporation by reference in Registration Statement Nos. 33- 20852, 33-20853, 33-24258, 33-24259, 33-47468, and 33-65946 of Armco Inc. on Form S-8 of (1) our reports dated February 9, 1994 on the financial statements and financial statement schedules of Armco Inc. and consolidated subsidiaries; (2) our report dated January 26, 1994 on the financial statements and financial statement schedules of Armco Steel Company, L.P.; and (3) our report dated February 25, 1994 on the financial statements and financial statement schedules of Armco Financial Services Group - Companies to be Sold, appearing in and incorporated by reference in this Annual Report on Form 10-K of Armco Inc. for the year ended December 31, 1993. DELOITTE & TOUCHE Pittsburgh, Pennsylvania March 28, 1994 EX-28 9 COMPANIEES TO BE SOLD Exhibit 28 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES Notes to Schedule P (1) The Parts of Schedule P: Part 1 - detailed information on losses and loss expenses. Part 2 - history of incurred losses and allocated expenses. Part 3 - history of loss and allocated expense payments. Part 4 - history of bulk and incurred-but-not reported reserves. Schedule P Interrogatories (2) Lines of business A through M and R are groupings of the lines of business used on Page 14, the state page. (3) Reinsurance A, B, C, and D (lines N to Q) are: Reinsurance A = nonproportional property (1988 and subsequent) Reinsurance B = nonproportional liability (1988 and subsequent) Reinsurance C = financial lines (1988 and subsequent) Reinsurance D = old Schedule O line 30 (1987 and prior) (4) The Instructions to Schedule P contain directions necessary for filling out Schedule P. SCHEDULE P - PART 1 - SUMMARY (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Loss and Loss Expense Payments -------------------------------------------------------------------------- Years Premiums Earned Allocated Loss 9 10 11 12 in Which ---------------------------- Loss Payments Expense Payments Number of Premiums Were 2 3 4 ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 1,224 714 736 641 18 130 735 X X X X 2. 1984.... 225,016 173,815 51,201 171,926 137,345 19,558 15,874 1,780 4,437 42,703 X X X X 3. 1985.... 183,143 132,945 50,198 121,294 88,817 14,985 11,560 1,555 4,411 40,314 X X X X 4. 1986.... 237,661 72,541 165,120 46,540 (18,375) (2,297) (8,531) 9,022 17,331 88,480 X X X X 5. 1987.... 208,464 25,783 182,680 100,802 9,230 9,201 785 3,081 11,859 111,848 X X X X 6. 1988.... 247,425 33,421 214,004 126,198 16,722 10,430 916 3,780 12,843 131,833 X X X X 7. 1989.... 282,498 37,848 244,650 163,687 19,796 12,397 1,059 4,581 14,181 169,410 X X X X 8. 1990.... 278,766 18,614 260,153 158,946 4,565 11,344 144 4,560 14,479 180,061 X X X X 9. 1991.... 265,384 14,707 250,677 142,384 5,885 7,801 79 3,887 13,051 157,273 X X X X 10. 1992.... 252,899 13,158 239,740 110,023 3,733 4,443 153 2,772 11,239 121,819 X X X X 11. 1993.... 242,875 15,327 227,548 64,870 1,403 2,227 32 1,306 7,798 73,461 X X X X - ---------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 1,207,895 269,836 90,828 22,710 36,341 111,759 1,117,936 X X X X - ----------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 8,531 6,653 1,407 993 468 441 139 2,457 X X X X 2. 1984... 1,128 1,060 744 634 409 338 10 260 X X X X 3. 1985... 1,708 1,580 1,275 1,116 1,022 947 18 380 X X X X 4. 1986... 11,220 1,776 1,780 111 879 (583) 127 477 13,054 X X X X 5. 1987... 3,143 338 758 282 738 75 129 4,148 X X X X 6. 1988... 6,688 1,043 2,030 467 962 179 319 8,489 X X X X 7. 1989... 8,930 163 3,524 723 2,593 560 524 14,685 X X X X 8. 1990... 17,978 2,989 4,756 982 4,154 502 814 23,732 X X X X 9. 1991... 25,454 2,415 11,685 2,086 9,430 35 1,367 1,545 43,577 X X X X 10. 1992... 30,507 211 21,327 2,640 10,858 115 1,989 2,339 62,064 X X X X 11. 1993... 53,578 2,348 35,135 3,091 12,061 250 2,947 3,358 98,442 X X X X - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 168,863 20,577 84,421 13,124 43,574 1,543 7,746 9,672 271,286 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior...... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,291 166 2. 1984....... 198,212 155,250 42,962 88.1 89.3 83.9 178 81 3. 1985....... 144,713 104,019 40,694 79.0 78.2 81.1 287 92 4. 1986....... 75,931 (25,602) 101,533 31.9 (35.3) 61.5 11,114 1,940 5. 1987....... 126,630 10,635 115,995 60.7 41.2 63.5 3,280 867 6. 1988....... 159,470 19,148 140,322 64.5 57.3 65.6 7,208 1,281 7. 1989....... 205,836 21,741 184,095 72.9 57.4 75.2 11,568 3,117 8. 1990....... 212,473 8,681 203,792 76.2 46.6 78.3 18,763 4,969 9. 1991....... 211,350 10,499 200,850 79.6 71.4 80.1 32,637 10,940 10. 1992....... 190,735 6,852 183,883 75.4 52.1 76.7 48,982 13,082 11. 1993....... 179,027 7,124 171,903 73.7 46.5 75.5 83,273 15,169 - ---------------------------------------------------------------------------------------------------------------------------- 12. Totals..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 219,583 51,704 - ----------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 62 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 2 - SUMMARY
- ------------------------------------------------------------------------------------------------------------------------------------ 1 Incurred Losses and Allocated Expenses Reported At Year End (000 omitted) Development** ------------------------------------------------------------------------------------------------ ------------------ Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 12 13 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 One Year Two Year - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 20,627* 21,702 28,102 28,114 28,443 29,418 30,936 30,715 30,562 31,280 718 565 2. 1984..... 35,637 37,560 39,170 39,752 39,823 39,254 39,022 38,549 38,497 38,515 17 (34) 3. 1985..... X X X X 36,373 34,363 35,104 37,119 36,352 36,625 36,194 36,139 36,265 125 71 4. 1986..... X X X X X X X X 89,274 85,369 86,439 77,794 80,931 81,698 82,947 83,726 779 2,028 5. 1987..... X X X X X X X X X X X X 105,374 100,983 101,348 100,569 101,918 103,376 104,007 630 2,089 6. 1988..... X X X X X X X X X X X X X X X X 129,174 128,066 126,314 125,665 125,919 127,161 1,241 1,496 7. 1989..... X X X X X X X X X X X X X X X X X X X X 164,547 164,154 167,044 169,201 169,390 189 2,346 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 178,800 182,929 187,289 188,499 1,210 5,570 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 187,052 185,877 186,254 377 (798) 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 173,221 170,305 (2,916) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 160,747 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals........................................................................................................ 2,371 13,331 - -----------------------------------------------------------------------------------------------------------------------------------
*Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse. SCHEDULE P - PART 3 - SUMMARY
- ----------------------------------------------------------------------------------------------------------------------------------- 12 13 Number Number of of 1 Cumulative Paid Losses and Allocated Expenses At Year End (000 omitted) Claims Claims ------------------------------------------------------------------------------------------------- Closed Closed Years in Which With Without Losses Were 2 3 4 5 6 7 8 9 10 11 Loss Loss Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Payment Payment - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 000 10,359 18,569 23,595 25,580 27,470 27,816 27,783 28,357 28,962 X X X X X X X X 2. 1984.... 18,046 27,510 31,154 33,552 35,431 37,605 38,136 38,178 38,201 38,265 X X X X X X X X 3. 1985.... X X X X 14,317 24,050 28,227 31,696 33,693 35,044 35,513 35,682 35,903 X X X X X X X X 4. 1986.... X X X X X X X X (52,566) (2,193) 26,309 43,941 54,595 62,295 67,993 71,149 X X X X X X X X 5. 1987.... X X X X X X X X X X X X 37,479 63,163 76,330 86,722 92,100 95,541 99,988 X X X X X X X X 6. 1988.... X X X X X X X X X X X X X X X X 48,345 80,355 96,210 108,220 115,013 118,990 X X X X X X X X 7. 1989.... X X X X X X X X X X X X X X X X X X X X 64,541 109,151 132,291 146,664 155,229 X X X X X X X X 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 79,057 127,462 151,494 165,581 X X X X X X X X 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 76,562 123,017 144,222 X X X X X X X X 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 73,544 110,580 X X X X X X X X 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 65,662 X X X X X X X X - -----------------------------------------------------------------------------------------------------------------------------------
Note: Net of salvage and subrogation received. SCHEDULE P - PART 4 - SUMMARY
- ---------------------------------------------------------------------------------------------------------------------- 1 Bulk and Incurred But Not Reported Reserves on Losses and Allocated Expenses at Year End (000 omitted) Years in Which ----------------------------------------------------------------------------------------------------- Losses Were 2 3 4 5 6 7 8 9 10 11 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 - ---------------------------------------------------------------------------------------------------------------------- 1. Prior....... 1,805 1,156 1,381 (225) 456 296 1,008 903 688 440 2. 1984........ 5,284 1,153 686 287 726 617 590 241 190 182 3. 1985........ X X X X 6,812 1,479 921 1,746 809 752 326 284 234 4. 1986........ X X X X X X X X 38,727 24,296 19,796 9,135 8,522 5,604 3,809 3,132 5. 1987........ X X X X X X X X X X X X 25,400 15,680 10,037 4,383 2,359 1,907 1,214 6. 1988........ X X X X X X X X X X X X X X X X 38,340 18,122 9,595 4,972 2,987 2,525 7. 1989........ X X X X X X X X X X X X X X X X X X X X 45,705 19,931 10,175 7,835 5,394 8. 1990........ X X X X X X X X X X X X X X X X X X X X X X X X 47,933 21,208 12,049 7,929 9. 1991........ X X X X X X X X X X X X X X X X X X X X X X X X X X X X 55,812 26,806 18,993 10. 1992........ X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 50,834 29,430 11. 1993........ X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 43,855 - ----------------------------------------------------------------------------------------------------------------------
63 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1A - HOMEOWNERS/FARMOWNERS (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 84 64 5 96 121 X X X X 2. 1984.... 22,569 14,576 7,993 16,745 10,624 1,547 741 319 867 7,794 3. 1985.... 16,563 9,404 7,159 10,729 6,664 815 319 74 575 5,136 4. 1986.... 17,239 4,294 12,945 2,973 (1,611) (188) (657) 353 1,439 6,492 5. 1987.... 13,129 898 12,231 6,712 304 451 1 151 1,074 7,932 6. 1988.... 12,121 701 11,420 6,923 271 311 5 69 1,315 8,273 7. 1989.... 11,449 719 10,730 6,299 52 332 65 1,053 7,632 4,421 8. 1990.... 10,921 758 10,163 7,109 3 360 100 836 8,302 4,500 9. 1991.... 11,303 670 10,633 7,881 323 78 777 8,981 3,515 10. 1992.... 12,106 838 11,268 8,214 351 54 646 9,211 4,948 11. 1993.... 12,060 1,376 10,684 6,800 50 272 31 480 7,502 4,207 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 80,469 16,421 4,579 409 1,294 9,158 77,376 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 2. 1984... 3. 1985... 15 15 1 4. 1986... 58 1 59 5 5. 1987... 10 10 2 6. 1988... 15 15 1 7. 1989... 28 28 2 8. 1990... 72 21 1 94 7 9. 1991... 516 60 177 11 11 764 15 10. 1992... 945 269 161 28 26 1,401 42 11. 1993... 1,936 30 1,063 253 30 70 3,292 324 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 3,595 30 1,392 612 69 109 5,678 399 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 19,159 11,365 7,794 84.9 78.0 97.5 3. 1985..... 12,134 6,983 5,151 73.3 74.3 72.0 15 4. 1986..... 4,283 (2,268) 6,551 24.8 (52.8) 50.6 58 1 5. 1987..... 8,247 305 7,942 62.8 34.0 64.9 10 6. 1988..... 8,564 276 8,288 70.7 39.4 72.6 15 7. 1989..... 7,712 52 7,660 67.4 7.2 71.4 28 8. 1990..... 8,399 3 8,396 76.9 0.4 82.6 72 22 9. 1991..... 9,745 9,745 86.2 91.6 576 188 10. 1992..... 10,612 10,612 87.7 94.2 1,214 187 11. 1993..... 10,874 80 10,794 90.2 5.8 101.0 2,969 323 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,957 721 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 64 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 1 1 (1) (1) X X X X 2. 1984.... 29,649 18,116 11,533 23,444 15,140 2,138 1,135 190 1,175 10,482 3. 1985.... 26,595 14,596 11,999 21,971 11,547 1,451 646 452 1,369 12,598 4. 1986.... 31,640 8,915 22,725 10,561 (4,922) (341) (813) 701 2,776 18,731 5. 1987.... 30,213 3,848 26,365 24,789 2,492 1,220 128 298 2,578 25,967 6. 1988.... 36,791 6,257 30,534 27,617 4,602 1,489 235 343 2,866 27,135 7. 1989.... 41,228 8,576 32,652 32,001 6,350 1,568 199 378 2,657 29,677 8,681 8. 1990.... 40,804 1,242 39,562 31,966 195 1,326 4 432 2,870 35,963 8,509 9. 1991.... 37,805 691 37,114 26,045 885 (1) 347 2,273 29,204 7,392 10. 1992.... 41,325 441 40,884 21,855 479 273 1,614 23,948 10,646 11. 1993.... 40,171 584 39,587 11,092 233 (1) 155 1,020 12,346 8,288 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 231,342 35,405 10,448 1,532 3,569 21,197 226,050 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 24 24 5 2. 1984... 123 123 23 23 7 3. 1985... 41 26 8 2 25 6 4. 1986... 665 384 9 5 295 5 5. 1987... 272 16 64 31 5 357 16 6. 1988... 308 165 50 135 38 12 570 17 7. 1989... 937 56 255 50 144 78 17 1,247 44 8. 1990... 1,261 20 432 50 487 57 54 2,164 93 9. 1991... 4,009 1,120 915 117 137 6,181 202 10. 1992... 7,409 1,721 1,280 297 163 10,573 592 11. 1993... 13,374 1 6,799 1,454 411 406 22,032 2,182 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 28,423 634 10,508 150 4,519 1,029 801 43,467 3,169 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 26,903 16,398 10,505 90.7 90.5 91.1 23 3. 1985..... 24,842 12,219 12,623 93.4 83.7 105.2 15 10 4. 1986..... 13,675 (5,351) 19,026 43.2 (60.0) 83.7 281 14 5. 1987..... 28,944 2,620 26,324 95.8 68.1 99.8 288 69 6. 1988..... 32,592 4,887 27,705 88.6 78.1 90.7 423 147 7. 1989..... 37,579 6,655 30,924 91.1 77.6 94.7 1,086 161 8. 1990..... 38,396 269 38,127 94.1 21.7 96.4 1,623 541 9. 1991..... 35,384 (1) 35,385 93.6 (0.1) 95.3 5,129 1,052 10. 1992..... 34,521 34,521 83.5 84.4 9,130 1,443 11. 1993..... 34,378 34,378 85.6 86.8 20,172 1,860 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 38,147 5,320 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 65 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 1 1 X X X X 2. 1984.... 25,308 19,542 5,766 25,651 20,395 2,190 1,695 141 444 6,195 3. 1985.... 17,348 12,198 5,150 9,608 6,OO7 1,436 1,081 34 375 4,331 4. 1986.... 24,583 5,873 18,710 (1,873) (10,069) (728) (1,071) 506 1,576 10,115 5. 1987.... 21,057 184 20,873 10,605 204 927 60 133 1,182 12,450 6. 1988.... 28,706 3,032 25,674 13,444 954 1,445 66 255 1,031 14,900 7. 1989.... 32,567 3,971 28,596 21,757 2,850 2,126 232 443 1,338 22,139 4,432 8. 1990.... 29,317 1,282 28,035 14,168 123 1,272 2 222 1,263 16,578 4,399 9. 1991.... 27,867 987 26,880 17,396 1,268 941 13 149 1,302 18,358 4,090 10. 1992.... 24,995 744 24,251 7,817 378 6 87 1,037 9,226 3,562 11. 1993.... 23,358 791 22,567 4,236 261 52 709 5,206 3,157 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 122,809 21,732 10,249 2,084 2,022 10,257 119,499 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 10 27 27 11 11 2 12 1 2. 1984... 4 4 30 30 5 5 1 3. 1985... 30 30 6 6 32 32 2 4. 1986... 653 496 5 1 5 166 11 5. 1987... 894 241 10 22 685 6 6. 1988... 668 68 22 758 20 7. 1989... 1,417 207 238 49 1,911 32 8. 1990... 2,585 235 35 288 81 3,154 65 9. 1991... 2,898 2,180 150 1,061 64 220 6,209 123 10. 1992... 4,772 176 2,984 250 1,072 131 325 8,727 241 11. 1993... 8,626 422 3,667 300 1,208 182 529 13,308 688 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 22,557 1,369 9,419 799 3,915 48 377 1,255 34,930 1,190 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10 2 2. 1984..... 28,324 22,129 6,195 111.9 113.2 107.4 3. 1985..... 11,487 7,156 4,331 66.2 58.7 84.1 4. 1986..... (362) (10,643) 10,281 (1.5) (181.2) 54.9 161 5 5. 1987..... 13,640 505 13,135 64.8 274.5 62.9 663 22 6. 1988..... 16,678 1,020 15,658 58.1 33.6 61.0 736 22 7. 1989..... 27,132 3,082 24,050 83.3 77.6 84.1 1,624 287 8. 1990..... 19,892 160 19,732 67.9 12.5 70.4 2,785 369 9. 1991..... 25,998 1,431 24,567 93.3 145.0 91.4 4,928 1,281 10. 1992..... 18,385 432 17,953 73.6 58.1 74.0 7,330 1,397 11. 1993..... 19,236 722 18,514 82.4 91.3 82.0 11,571 1,737 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 29,808 5,122 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 66 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1D - WORKERS' COMPENSATION (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 881 537 75 49 3 25 395 X X X X 2. 1984.... 41,974 34,769 7,205 34,791 30,720 2,213 1,847 69 469 4,906 3. 1985.... 33,475 25,912 7,563 26,061 21,397 1,757 1,208 50 534 5,747 4. 1986.... 32,438 8,654 23,784 13,248 (649) 163 (208) 2,344 3,408 17,676 5. 1987.... 31,373 2,096 29,277 19,364 314 1,512 13 699 2,168 22,717 6. 1988.... 45,908 208 45,700 28,662 416 2,065 12 875 3,346 33,645 7. 1989.... 60,068 3,022 57,046 36,354 273 2,441 11 783 4,003 42,514 14,685 8. 1990.... 56,728 2,050 54,678 35,294 907 2,464 10 738 4,177 41,018 13,580 9. 1991.... 54,391 1,127 53,264 25,577 240 1,139 2 315 3,833 30,307 11,960 10. 1992.... 51,079 821 50,258 17,466 27 745 178 3,522 21,706 11,931 11. 1993.... 54,832 859 53,973 8,002 164 38 2,247 10,413 8,645 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 245,700 54,182 14,738 2,944 6,092 27,732 231,044 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 3,842 3,245 1,028 615 133 133 89 1,099 254 2. 1984... 764 696 597 490 116 94 10 207 18 3. 1985... 406 316 690 584 144 119 12 233 14 4. 1986... 5,880 780 1,273 278 198 69 76 193 6,417 226 5. 1987... 1,377 97 345 50 77 44 53 1,705 78 6. 1988... 3,133 40 770 50 170 141 144 4,127 182 7. 1989... 4,520 103 1,077 100 631 470 205 6,230 392 8. 1990... 10,468 2,968 1,381 100 1,051 437 346 10,178 764 9. 1991... 10,694 1,996 2,679 250 1,476 677 476 13,079 1,011 10. 1992... 10,576 7,369 475 1,914 898 870 20,254 1,401 11. 1993... 13,015 349 14,225 625 2,479 60 1,032 1,211 29,896 1,898 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 64,675 10,590 31,434 3,617 8,389 475 3,775 3,609 93,425 6,238 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,010 89 2. 1984..... 38,960 33,847 5,113 92.8 97.3 71.0 175 32 3. 1985..... 29,604 23,624 5,980 88.4 91.2 79.1 196 37 4. 1986..... 24,363 270 24,093 75.1 3.1 101.3 6,095 322 5. 1987..... 24,896 474 24,422 79.4 22.6 83.4 1,575 130 6. 1988..... 38,290 518 37,772 83.4 249.0 82.7 3,813 314 7. 1989..... 49,231 487 48,744 82.0 16.1 85.4 5,394 836 8. 1990..... 55,181 3,985 51,196 97.3 194.4 93.6 8,781 1,397 9. 1991..... 45,874 2,488 43,386 84.3 220.8 81.5 11,127 1,952 10. 1992..... 42,462 502 41,960 83.1 61.1 83.5 17,470 2,784 11. 1993..... 41,343 1,034 40,309 75.4 120.4 74.7 26,266 3,630 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 81,902 11,523 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 67 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1E - COMMERCIAL MULTIPLE PERIL (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 10 9 136 135 11 2 X X X X 2. 1984.... 35,954 32,062 3,532 27,027 24,635 3,945 3,531 51 311 3,117 3. 1985.... 35,107 30,506 4,601 21,457 19,494 2,558 2,214 56 270 2,577 4. 1986.... 50,067 17,571 32,496 2,568 (3,337) (77) (2,091) 1,120 2,017 9,936 5. 1987.... 42,073 7,507 34,566 14,124 2,469 2,091 139 95 1,422 15,029 6. 1988.... 43,206 7,524 35,682 18,492 6,452 2,345 215 347 1,084 15,254 7. 1989.... 46,287 6,444 39,843 22,819 4,299 2,893 308 917 1,284 22,389 4,999 8. 1990.... 50,181 3,233 46,948 27,410 3,249 2,996 39 606 1,487 28,605 6,925 9. 1991.... 51,070 2,875 48,195 27,817 2,891 2,656 55 833 1,432 28,959 7,793 10. 1992.... 48,689 3,332 45,357 24,540 3,039 1,338 132 218 1,444 24,151 7,692 11. 1993.... 47,530 4,617 42,913 14,153 1,249 713 29 101 1,022 14,610 7,503 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 200,417 64,449 21,594 4,706 4,355 11,773 164,629 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 632 614 18 205 2. 1984... 111 111 3 3. 1985... 53 45 11 11 8 2 4. 1986... 884 (542) 5 5 5 5 23 1,449 7 5. 1987... 334 134 5 473 5 6. 1988... 1,125 500 119 137 15 896 13 7. 1989... 976 6 285 50 669 29 1,903 36 8. 1990... 1,517 1 823 50 1,294 55 3,638 77 9. 1991... 3,882 18 1,766 700 2,928 35 86 103 7,926 207 10. 1992... 4,198 15 3,695 800 3,530 65 401 194 10,737 370 11. 1993... 10,221 623 4,368 1,000 3,576 90 448 294 16,746 1,603 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 23,933 1,391 11,061 2,605 12,284 206 935 718 43,794 2,528 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18 2. 1984..... 31,394 28,277 3,117 88.2 88.2 88.3 3. 1985..... 24,349 21,764 2,585 69.4 71.3 56.2 8 4. 1986..... 5,425 (5,960) 11,385 10.8 (33.9) 35.0 1,426 23 5. 1987..... 18,110 2,608 15,502 43.0 34.7 44.8 334 139 6. 1988..... 23,317 7,167 16,150 54.0 95.3 45.3 744 152 7. 1989..... 28,955 4,663 24,292 62.6 72.4 61.0 1,205 698 8. 1990..... 35,582 3,339 32,243 70.9 103.3 68.7 2,289 1,349 9. 1991..... 40,584 3,699 36,885 79.5 128.7 76.5 4,930 2,996 10. 1992..... 38,939 4,051 34,888 80.0 121.6 76.9 7,078 3,659 11. 1993..... 34,347 2,991 31,356 72.3 64.8 73.1 12,966 3,780 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30,998 12,796 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 68 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X X X X X 2. 1984.... 668 668 985 985 208 208 3. 1985.... (248) (248) 382 382 66 66 4. 1986.... 1,158 986 172 27 (80) 30 (90) 65 292 5. 1987.... 232 44 188 1 2 3 6. 1988.... (330) (437) 107 7. 1989.... 119 119 1 4 5 2 8. 1990.... 174 46 128 13 13 9. 1991.... 103 1 102 10. 1992.... 73 73 11. 1993.... 60 60 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 1,395 1,287 305 184 84 313 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ------------------------------------ ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 2. 1984... 3. 1985... 4 4 4. 1986... 1 1 5. 1987... 6. 1988... 7. 1989... 8. 1990... 9. 1991... 10. 1992... 11. 1993... - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 5 5 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 1,193 1,193 178.6 178.6 3. 1985..... 452 452 (182.3) (182.3) 4. 1986..... 123 (169) 292 10.6 (17.1) 169.8 5. 1987..... 3 3 1.3 1.6 6. 1988..... 7. 1989..... 5 5 4.2 4.2 8. 1990..... 13 13 7.5 10.2 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 69 - -------------------------------------------------------------------------------- SCHEDULE P - PART 1F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS MADE N O N E - ------------------------------------------------------------------------------- 70 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT (ALL PERILS), BOILER AND MACHINERY) (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X X X X X 2. 1984.... 2,190 2,190 457 457 116 116 X X X X 3. 1985.... X X X X 4. 1986.... X X X X 5. 1987.... X X X X 6. 1988.... X X X X 7. 1989.... X X X X 8. 1990.... X X X X 9. 1991.... X X X X 10. 1992.... X X X X 11. 1993.... X X X X - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 457 457 116 116 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 2. 1984... 3. 1985... 4. 1986... 5. 1987... 6. 1988... N O N E 7. 1989... 8. 1990... 9. 1991... 10. 1992... 11. 1993... - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 573 573 26.2 26.2 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 71 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1H - SECTION 1 - OTHER LIABILITY - OCCURRENCE (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 255 105 488 426 12 224 X X X X 2. 1984.... 13,590 11,866 1,724 10,973 10,012 5,357 5,138 14 217 1,397 3. 1985.... 14,988 12,755 2,233 11,476 10,487 5,063 4,616 6 364 1,800 4. 1986.... 29,480 12,500 16,980 6,427 344 (1,157) (2,090) 628 2,833 9,849 5. 1987.... 25,255 6,827 18,428 8,198 2,139 2,053 340 43 1,093 8,865 6. 1988.... 25,085 8,179 16,906 6,044 970 1,852 163 91 967 7,730 7. 1989.... 25,132 7,118 18,014 7,515 1,541 2,021 163 75 1,106 8,938 1,851 8. 1990.... 26,732 7,784 18,948 5,447 67 1,810 85 272 1,133 8,238 1,928 9. 1991.... 25,101 6,255 18,846 5,703 1,390 1,070 1 126 1,039 6,421 1,908 10. 1992.... 22,156 5,657 16,499 2,243 390 1 75 938 3,570 1,451 11. 1993.... 21,731 5,365 16,366 929 116 16 726 1,771 1,136 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 65,210 27,055 19,063 8,843 1,346 10,428 58,803 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 3,982 2,730 343 343 302 275 47 1,326 67 2. 1984... 126 126 117 113 261 235 30 8 3. 1985... 1,152 1,152 477 441 621 580 2 79 4 4. 1986... 2,992 692 505 (158) 560 (615) 235 4,373 60 5. 1987... 254 1 387 232 463 45 916 11 6. 1988... 1,435 503 908 367 520 126 2,119 11 7. 1989... 1,040 1,699 523 911 12 224 3,351 36 8. 1990... 1,969 2 1,835 747 964 8 266 4,285 60 9. 1991... 3,292 400 3,975 986 2,727 4 571 9,179 120 10. 1992... 2,463 20 4,760 1,115 2,676 50 42 632 9,346 125 11. 1993... 4,210 900 4,696 1,166 2,837 100 58 637 10,214 280 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 22,915 6,526 19,702 5,875 12,842 625 124 2,785 45,218 782 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,252 74 2. 1984..... 17,051 15,624 1,427 125.5 131.7 82.8 4 26 3. 1985..... 19,155 17,276 1,879 127.8 135.4 84.1 36 43 4. 1986..... 12,395 (1,827) 14,222 42.0 (14.6) 83.8 2,963 1,410 5. 1987..... 12,493 2,712 9,781 49.5 39.7 53.1 408 508 6. 1988..... 11,852 2,003 9,849 47.2 24.5 58.3 1,473 646 7. 1989..... 14,516 2,227 12,289 57.8 31.3 68.2 2,216 1,135 8. 1990..... 13,424 901 12,523 50.2 11.6 66.1 3,055 1,230 9. 1991..... 18,377 2,777 15,600 73.2 44.4 82.8 5,881 3,298 10. 1992..... 14,102 1,186 12,916 63.6 21.0 78.3 6,088 3,258 11. 1993..... 14,151 2,166 11,985 65.1 40.4 73.2 6,840 3,374 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30,216 15,002 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 72 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1H - SECTION 2 - OTHER LIABILITY - CLAIMS-MADE (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X X X X X 2. 1984.... 3. 1985.... 4. 1986.... 5. 1987.... 6. 1988.... 66 66 1 1 2 7. 1989.... 321 321 9 21 1 30 11 8. 1990.... 509 40 469 117 40 47 9 3 115 13 9. 1991.... 584 115 469 18 10 3 28 14 10. 1992.... 575 101 474 18 27 3 3 42 20 11. 1993.... 216 20 196 8 8 14 - --------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 162 40 114 12 10 224 X X X X - ---------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 2. 1984... 3. 1985... 4. 1986... 5. 1987... 6. 1988... 7. 1989... 5 5 1 8. 1990... 9. 1991... 5 5 1 10. 1992... 1 1 11. 1993... 37 37 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals. 48 48 2 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... 1 1 1.5 1.5 7. 1989..... 35 35 10.9 10.9 5 8. 1990..... 164 49 115 32.2 122.5 24.5 9. 1991..... 33 33 5.7 7.0 5 10. 1992..... 46 3 43 8.0 3.0 9.1 1 11. 1993..... 45 45 20.8 23.0 37 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 48 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 73
- ------------------------------------------------------------------------- 21 22 23 24 Number of Salvage Unallocated Total Claims and Loss Net Losses Outstanding- Subrogation Expense and Expenses Direct and Anticipated Unpaid Unpaid Assumed ------------------------------------------------------------ 1. Prior ... 408 2 (29) 13 2. 1992..... 192 16 538 19 3. 1993..... 763 71 1,581 433 - ------------------------------------------------------------------------- 4. Totals .. 1,363 89 2,091 465 - -------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- Total Losses and Loss and Loss Expense Percentage Discount for Time Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money ----------------------------------------- -------------------------------------------- ----------------------------- 25 26 27 28 29 30 31 32 Direct Direct Loss and Assumed Ceded Net* and Assumed Ceded Net Loss Expense - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... X X X X X X X X X X X X X X X X X X X X X X X X 2. 1992..... 22,354 391 21,963 62.7 70.5 62.6 3. 1993..... 20,049 20,049 59.4 60.9 - ----------------------------------------------------------------------------------------------------------------------------------- 4. Totals .. X X X X X X X X X X X X X X X X X X X X X X X X - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------- Net Balance Sheet Reserves 33 After Discount - ------------------------------ --------------------------- Inter-Company 34 35 Pooling Participation Losses Loss Expenses Percentage Unpaid Unpaid - ----------------------------------------------------------- 1. Prior ... X X X X (94) 65 2. 1992..... 358 180 3. 1993..... 1,331 250 - ----------------------------------------------------------- 4. Totals .. X X X X 1,596 495 - -----------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 74 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1K - FIDELITY, SURETY, FINANCIAL GUARANTY, MORTGAGE GUARANTY (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.... X X X X X X X X X X X X 36 53 15 14 17 (17) X X X X 2. 1992..... 4 2 2 1 1 X X X X 3. 1993..... 4 2 2 X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 4. Totals... X X X X X X X X X X X X 37 53 15 14 17 (16) X X X X - -----------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ------------------------------------ ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expense Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 21 21 (51) 51 (51) 21 2. 1992.... 3. 1993.... - ---------------------------------------------------------------------------------------------------------------------------------- 4. Totals.. 21 21 (51) 51 (51) 21 - ----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X (51) 2. 1992..... 1 1 27.3 48.4 3. 1993..... - ------------------------------------------------------------------------------------------------------------------------------ 4. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X (51) - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) SCHEDULE P - PART 1L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH) (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... X X X X X X X X X X X X X X X X 2. 1992..... 381 381 88 6 94 X X X X 3. 1993..... 503 503 98 4 2 103 X X X X - ---------------------------------------------------------------------------------------------------------------------------------- 4. Totals .. X X X X X X X X X X X X 187 10 2 197 X X X X - ----------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ------------------------------------ ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expense Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 2. 1992.... 20 0 20 3. 1993.... 53 2 0 55 - ----------------------------------------------------------------------------------------------------------------------------------- 4. Totals.. 73 2 0 75 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1992..... 114 114 30.1 30.1 20 0 3. 1993..... 158 158 31.5 31.5 53 2 - ------------------------------------------------------------------------------------------------------------------------------ 4. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 73 2 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 75 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1M - INTERNATIONAL NONE SCHEDULE P - PART 1N - REINSURANCE A NONE SCHEDULE P - PART 1O - REINSURANCE B NONE SCHEDULE P - PART 1P - REINSURANCE C NONE SCHEDULE P - PART 1Q - REINSURANCE D NONE 76, 77, 78 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE (000 omitted)
- ---------------------------------------------------------------------------------------------------------------------------------- 1 Premiums Earned Loss and Loss Expense Payments ---------------------------- -------------------------------------------------------------------------- Years 2 3 4 Allocated Loss 9 10 11 12 in Which Loss Payments Expense Payments Number of Premiums Were ------------------------------------------ Salvage Unallocated Total Claims Earned and Direct 5 6 7 8 and Loss Net Paid Reported- Losses Were and Net Direct Direct Subrogation Expense (5-6+7 Direct and Incurred Assumed Ceded (2 - 3) and Assumed Ceded and Assumed Ceded Received Payments -8+10) Assumed - ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... X X X X X X X X X X X X 30 30 0 0 X X X X 2. 1984.... 1,895 1,793 102 932 853 461 443 11 108 3. 1985.... 1,871 1,754 117 2,043 1,770 1,096 1,041 19 347 4. 1986.... 3,259 772 2,487 (2,874) (2,542) 128 (1,466) 149 397 1,659 5. 1987.... 3,283 97 3,186 627 406 22 6 171 1,181 6. 1988.... 3,138 67 3,071 145 89 7 82 315 7. 1989.... 3,585 101 3,484 264 119 6 71 454 118 8. 1990.... 4,202 315 3,887 489 337 3 96 922 199 9. 1991.... 3,563 173 3,390 365 56 5 94 515 151 10. 1992.... 2,859 60 2,799 38 35 1 65 138 83 11. 1993.... 1,783 48 1,735 1 0 0 4 5 45 - ---------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. X X X X X X X X X X X X 2,028 80 2,757 70 177 1,009 5,644 X X X X - ----------------------------------------------------------------------------------------------------------------------------------
Note: For "prior," report amounts paid or received in current year only. Report cumulative amounts paid or received for specific years. Report loss payments net of salvage and subrogation received.
- ---------------------------------------------------------------------------------------------------------------------------------- Losses Unpaid Allocated Loss Expenses Unpaid ----------------------------------- ------------------------------------- 21 22 23 24 Case Basis Bulk + IBNR Case Basis Bulk + IBNR Number of ---------------- ----------------- ----------------- ----------------- Total Net Claims 13 14 15 16 17 18 19 20 Salvage Unallocated Losses Outstanding- Direct Direct Direct Direct and Loss and Direct and and and and Subrogation Expenses Expenses and Assumed Ceded Assumed Ceded Assumed Ceded Assumed Ceded Anticipated Unpaid Unpaid Assumed - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 43 43 9 9 22 22 7 2. 1984.... 0 0 4 4 3. 1985.... 10 10 81 81 204 204 2 4. 1986.... 30 (53) 41 (16) 108 (42) 13 303 6 5. 1987.... 6. 1988.... 7. 1989.... 8. 1990.... 75 36 34 1 10 154 20 9. 1991.... 145 63 97 0 27 332 12 10. 1992.... 28 30 25 0 6 89 15 11. 1993.... 61 42 37 1 9 149 7 - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals.. 391 303 75 532 189 2 65 1,027 69 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Loss and Loss Expense Net Balance Total Losses and Percentage Discount for Time Sheet Reserves Loss Expenses Incurred (Incurred/Premiums Earned) Value of Money 33 After Discount --------------------------- --------------------------- ----------------- ----------------- 25 26 27 28 29 30 31 32 Inter-Company 34 35 Direct Direct Pooling Loss and and Loss Participation Losses Expenses Assumed Ceded Net* Assumed Ceded Net Loss Expense Percentage Unpaid Unpaid - ------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2. 1984..... 1,409 1,300 108 74.3 72.5 106.3 3. 1985..... 3,453 3,107 347 184.6 177.1 296.4 4. 1986..... (2,157) (4,119) 1,962 (66.2) (533.5) 78.9 139 163 5. 1987..... 1,203 22 1,181 36.7 22.7 37.1 6. 1988..... 315 315 10.0 10.3 7. 1989..... 454 454 12.7 13.0 8. 1990..... 1,076 1,076 25.6 27.7 111 43 9. 1991..... 847 847 23.8 25.0 208 124 10. 1992..... 227 227 7.9 8.1 58 31 11. 1993..... 153 153 8.6 8.8 103 46 - ------------------------------------------------------------------------------------------------------------------------------ 12. Totals... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 619 408 - ------------------------------------------------------------------------------------------------------------------------------
*Net = (25 - 26) = (11 + 23) 79 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 1R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS MADE NONE 80 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 2A - HOMEOWNERS/FARMOWNERS
- ------------------------------------------------------------------------------------------------------------------------------------ 1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development** ------------------------------------------------------------------------------------------------ ------------------ Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 12 13 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 One Year Two Year - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior ... 1,778* 2,424 4,427 3,755 3,352 3,297 3,209 3,083 3,073 3,098 25 15 2. 1984..... 5,278 5,985 7,353 7,763 7,240 7,103 7,014 6,907 6,907 6,927 20 20 3. 1985..... X X X X 4,707 4,716 5,204 4,885 4,733 4,657 4,569 4,567 4,576 9 7 4. 1986..... X X X X X X X X 6,863 6,353 5,466 5,298 5,012 5,061 5,060 5,111 51 50 5. 1987..... X X X X X X X X X X X X 8,170 7,513 7,156 7,065 6,859 6,834 6,868 34 9 6. 1988..... X X X X X X X X X X X X X X X X 7,761 7,325 7,005 6,898 6,892 6,973 81 75 7. 1989..... X X X X X X X X X X X X X X X X X X X X 6,828 6,922 6,577 6,572 6,607 35 30 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 7,901 7,525 7,652 7,559 (93) 34 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,433 9,392 8,957 (435) (476) 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,539 9,940 401 X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,244 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals 128 (236) -----------------------------
SCHEDULE P - PART 2B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... 5,650* 5,564 5,327 5,465 5,740 5,642 5,738 5,680 5,679 5,679 (1) 2. 1984..... 9,765 9,990 9,727 9,779 9,827 9,540 9,492 9,358 9,358 9,330 (28) (28) 3. 1985..... X X X X 11,343 10,605 11,009 11,522 11,363 11,477 11,272 11,250 11,252 2 (20) 4. 1986..... X X X X X X X X 20,049 16,902 16,686 15,941 16,178 16,026 16,261 16,245 (16) 219 5. 1987..... X X X X X X X X X X X X 23,950 23,300 22,812 23,330 23,468 23,586 23,741 155 273 6. 1988..... X X X X X X X X X X X X X X X X 24,728 24,332 23,945 24,308 24,616 24,827 211 519 7. 1989..... X X X X X X X X X X X X X X X X X X X X 26,833 26,167 26,963 28,000 28,250 250 1,287 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 32,388 33,745 34,547 35,203 656 1,458 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 31,046 31,494 32,975 1,481 1,929 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 32,762 32,744 (18) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 32,952 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals 2,693 5,636 -----------------------------
SCHEDULE P - PART 2C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... 4,506* 4,660 5,499 5,552 5,406 5,383 5,308 5,275 5,269 5,280 11 5 2. 1984..... 5,353 5,798 6,347 6,491 6,776 6,300 5,879 5,756 5,760 5,751 (9) (5) 3. 1985..... X X X X 4,579 3,743 3,817 4,308 4,038 4,039 3,986 4,002 3,956 (46) (30) 4. 1986..... X X X X X X X X 8,204 8,873 9,668 8,492 9,084 8,781 8,994 8,700 (294) (81) 5. 1987..... X X X X X X X X X X X X 11,596 11,145 10,798 11,606 11,832 11,686 11,931 245 99 6. 1988..... X X X X X X X X X X X X X X X X 14,369 13,127 14,058 14,480 14,487 14,605 118 125 7. 1989..... X X X X X X X X X X X X X X X X X X X X 19,461 20,571 22,129 22,788 22,663 (125) 534 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 17,064 17,099 18,010 18,388 378 1,289 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 21,558 21,925 23,045 1,120 1,487 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 16,974 16,591 (383) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,276 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals 1,015 3,423 -----------------------------
SCHEDULE P - PART 2D - WORKERS' COMPENSATION
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... 5,542* 5,222 5,290 5,528 5,737 6,178 7,366 6,871 6,857 6,776 (81) (95) 2. 1984..... 4,345 4,597 4,586 4,475 4,462 4,612 4,771 4,663 4,657 4,634 (23) (29) 3. 1985..... X X X X 4,922 4,811 4,846 5,519 5,484 5,619 5,529 5,497 5,434 (63) (95) 4. 1986..... X X X X X X X X 16,485 18,993 21,332 19,373 21,046 20,138 19,546 20,492 946 354 5. 1987..... X X X X X X X X X X X X 20,495 21,865 22,437 21,981 21,996 22,367 22,201 (166) 205 6. 1988..... X X X X X X X X X X X X X X X X 34,629 35,815 33,977 34,051 33,881 34,282 401 231 7. 1989..... X X X X X X X X X X X X X X X X X X X X 44,944 44,044 43,491 44,771 44,536 (235) 1,045 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 39,839 43,413 45,408 46,673 1,265 3,260 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 39,869 39,094 39,077 (17) (792) 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 38,430 37,568 (862) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 36,851 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals 1,165 4,084 -----------------------------
SCHEDULE P - PART 2E - COMMERCIAL MULTIPLE PERIL
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior ... 1,037* 1,282 1,503 1,609 1,616 1,574 1,566 1,670 1,659 1,674 15 4 2. 1984..... 2,191 2,600 2,700 2,765 2,924 2,870 2,811 2,811 2,813 2,806 (7) (5) 3. 1985..... X X X X 2,235 2,347 2,276 2,450 2,311 2,185 2,158 2,160 2,315 155 157 4. 1986..... X X X X X X X X 10,894 8,807 8,408 8,283 8,153 8,738 9,122 9,345 223 607 5. 1987..... X X X X X X X X X X X X 12,969 11,276 11,848 11,881 12,957 14,207 14,075 (132) 1,118 6. 1988..... X X X X X X X X X X X X X X X X 15,063 14,360 14,325 14,230 14,561 15,051 490 821 7. 1989..... X X X X X X X X X X X X X X X X X X X X 22,046 21,860 22,509 22,426 22,979 553 470 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 30,643 30,895 31,444 30,701 (743) (194) 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 37,428 36,530 35,350 (1,180) (2,078) 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 34,369 33,250 (1,119) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30,040 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals (1,745) 900 -----------------------------
*Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse. 81 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 2F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
- ----------------------------------------------------------------------------------------------------------------------------------- 1 Incurred Losses and Allocated Expenses Reported at Year End (000 omitted) Development** ------------------------------------------------------------------------------------------------------------------- Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 12 13 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 One Year Two Year - ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... * 2. 1984.... 3. 1985.... X X X X 4. 1986.... X X X X X X X X 73 (96) 183 468 227 227 227 227 5. 1987.... X X X X X X X X X X X X 81 20 9 1 1 1 1 6. 1988.... X X X X X X X X X X X X X X X X 73 14 7. 1989.... X X X X X X X X X X X X X X X X X X X X 34 1 1 1 1 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 100 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals -------------------
SCHEDULE P - PART 2F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS-MADE
- ---------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 2. 1984.... 3. 1985.... 4. 1986.... 5. 1987.... 6. 1988.... NONE 7. 1989.... 8. 1990.... 9. 1991.... 10. 1992.... 11. 1993.... - -----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 2G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT (ALL PERILS), BOILER AND MACHINERY)
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 2. 1984.... 3. 1985.... 4. 1986.... 5. 1987.... 6. 1988.... NONE 7. 1989.... 8. 1990.... 9. 1991.... 10. 1992.... 11. 1993.... - -----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 2H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. 1,578 * 1,741 5,205 5,168 5,124 5,942 6,338 7,346 7,279 8,030 751 684 2. 1984... 800 868 853 916 1,067 1,317 1,405 1,395 1,341 1,210 (131) (185) 3. 1985... X X X X 1,162 1,178 1,038 1,576 1,591 1,773 1,792 1,738 1,513 (225) (279) 4. 1986... X X X X X X X X 12,442 12,825 11,042 7,406 8,403 10,052 10,041 11,154 1,113 1,102 5. 1987... X X X X X X X X X X X X 10,244 8,473 9,462 7,912 7,829 7,718 8,643 925 814 6. 1988... X X X X X X X X X X X X X X X X 9,254 10,030 9,931 8,941 8,705 8,756 51 (185) 7. 1989... X X X X X X X X X X X X X X X X X X X X 11,885 10,433 11,549 10,644 10,959 315 (590) 8. 1990... X X X X X X X X X X X X X X X X X X X X X X X X 10,949 11,334 10,584 11,124 540 (210) 9. 1991... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13,481 13,373 13,990 617 509 10. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,830 11,346 516 X X X X 11. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10,622 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals 4,470 1,661 ------------------
SCHEDULE P - PART 2H - SECTION 2 - OTHER LIABILITY - CLAIMS-MADE
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior.. * 2. 1984... 3. 1985... X X X X 4. 1986... X X X X X X X X 5. 1987... X X X X X X X X X X X X 6. 1988... X X X X X X X X X X X X X X X X 5 2 1 1 1 1 7. 1989... X X X X X X X X X X X X X X X X X X X X 25 23 40 39 35 (4) (5) 8. 1990... X X X X X X X X X X X X X X X X X X X X X X X X 82 85 94 115 21 30 9. 1991... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 76 33 33 (43) 10. 1992... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 77 43 (34) X X X X 11. 1993... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 45 X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 12. Totals (17) (18) ------------------
*Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse. 82 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 2I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE, EARTHQUAKE, GLASS, BURGLARY AND THEFT)
- ------------------------------------------------------------------------------------------------------------------------------------ 1 Incurred Losses and Allocated Expenses Reported At Year End (000 omitted) Development** ------------------------------------------------------------------------------------------------ ------------------ Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 12 13 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 One Year Two Year - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,928 * 2,920 2,230 (690) (698) 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,246 7,815 (432) X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3,514 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------ 4. Totals (1,122) (698) ------------------
SCHEDULE P - PART 2J - AUTO PHYSICAL DAMAGE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,721 * 2,090 1,830 (260) (892) 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 21,022 20,736 (286) X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18,903 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------ 4. Totals (546) (892) ------------------
SCHEDULE P - PART 2K - FIDELITY, SURETY, FINANCIAL GUARANTY, MORTGAGE GUARANTY
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X (70)* (78) (78) 0 (8) 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1 1 X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ----------------------------------------------------------------------------------------------------------------------------------- 4. Totals 1 (8) ------------------
SCHEDULE P - PART 2L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 62 * 33 33 (29) 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 158 114 (44) X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 158 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------ 4. Totals (44) (29) ------------------
SCHEDULE P - PART 2M - INTERNATIONAL
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior... 2. 1984.... 3. 1985.... 4. 1986.... 5. 1987.... 6. 1988.... NONE 7. 1989.... 8. 1990.... 9. 1991.... 10. 1992.... 11. 1993.... - -----------------------------------------------------------------------------------------------------------------------------------
*Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse. 83 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 2N - REINSURANCE A
- ------------------------------------------------------------------------------------------------------------------------------------ 1 Incurred Losses and Allocated Expenses Reported At Year End (000 omitted) Development** ------------------------------------------------------------------------------------------------ ------------------ Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 12 13 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 One Year Two Year - ------------------------------------------------------------------------------------------------------------------------------------ 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993.....
SCHEDULE P - PART 2O - REINSURANCE B
- ------------------------------------------------------------------------------------------------------------------------------------ 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993.....
SCHEDULE P - PART 2P - REINSURANCE C
- ------------------------------------------------------------------------------------------------------------------------------------ 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993.....
SCHEDULE P - PART 2Q - REINSURANCE D
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... NONE 4. 1986..... 5. 1987.....
SCHEDULE P - PART 2R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior ... (114)* (99) (99) 93 545 498 517 440 440 588 148 148 2. 1984..... 29 21 21 21 21 21 21 21 21 97 76 76 3. 1985..... X X X X 39 34 34 34 34 34 34 41 328 287 294 4. 1986..... X X X X X X X X 1,544 501 1,930 1,481 1,774 1,655 2,449 1,552 (897) (103) 5. 1987..... X X X X X X X X X X X X 2,130 1,407 1,208 1,216 1,417 1,445 1,011 (434) (407) 6. 1988..... X X X X X X X X X X X X X X X X 1,387 611 679 357 346 233 (112) (124) 7. 1989..... X X X X X X X X X X X X X X X X X X X X 1,304 1,106 774 978 383 (595) (391) 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 1,746 1,104 1,840 971 (869) (133) 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,246 1,348 726 (622) (520) 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 816 155 (660) X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 140 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------ 12. Totals (3,678) (1,160) -------------------------------
SCHEDULE P - PART 2R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993.....
*Reported reserves only. Subsequent development relates only to subsequent payments and reserves. **Current year less first or second prior year, showing (redundant) or adverse. 84 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 3A - HOMEOWNERS/FARMOWNERS
- ------------------------------------------------------------------------------------------------------------------------------------ 12 13 Number of Number of 1 Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) Claims Claims ------------------------------------------------------------------------------------------------ Closed Closed Years in Which With Without Losses Were 2 3 4 5 6 7 8 9 10 11 Loss Loss Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Payment Payment - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior... 000 780 1,823 2,553 2,926 2,998 2,937 2,950 3,073 3,098 2. 1984.... 2,643 4,654 5,488 6,024 6,344 6,747 6,896 6,907 6,907 6,927 3. 1985.... X X X X 2,576 3,896 4,071 4,335 4,464 4,506 4,563 4,561 4,561 4. 1986.... X X X X X X X X 324 3,142 4,168 4,514 4,613 4,858 4,893 5,053 5. 1987.... X X X X X X X X X X X X 4,340 6,395 6,514 6,749 6,804 6,808 6,858 6. 1988.... X X X X X X X X X X X X X X X X 4,578 6,091 6,579 6,778 6,859 6,958 7. 1989.... X X X X X X X X X X X X X X X X X X X X 4,555 5,992 6,183 6,339 6,579 1,743 136 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 5,007 6,667 7,377 7,466 2,056 166 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,116 7,894 8,204 2,315 272 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,386 8,565 2,093 292 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,022 1,645 256 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior... 000 2,742 3,775 4,861 5,364 5,553 5,679 5,680 5,679 5,679 2. 1984.... 4,917 7,074 7,842 8,563 9,001 9,299 9,314 9,334 9,335 9,307 3. 1985.... X X X X 2,854 6,739 8,867 9,966 10,698 10,953 11,158 11,195 11,229 4. 1986.... X X X X X X X X (5,017) 6,575 10,566 12,723 14,127 15,235 15,531 15,955 5. 1987.... X X X X X X X X X X X X 7,934 15,472 18,808 21,530 22,263 23,169 23,389 6. 1988.... X X X X X X X X X X X X X X X X 8,567 16,024 20,333 22,517 23,632 24,269 7. 1989.... X X X X X X X X X X X X X X X X X X X X 9,589 18,953 23,854 25,851 27,020 4,928 1,069 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 13,500 25,426 31,030 33,093 6,117 1,508 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,839 21,188 26,931 4,910 1,085 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 12,411 22,334 4,374 1,043 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11,326 2,734 500 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
- ----------------------------------------------------------------------------------------------------------------------------------- 1. Prior... 000 2,348 4,081 4,936 4,897 5,261 5,264 5,269 5,269 5,270 2. 1984.... 1,707 3,451 4,324 4,759 5,227 5,731 5,756 5,756 5,759 5,751 3. 1985.... X X X X 850 2,136 2,747 3,448 3,645 3,899 3,968 3,983 3,956 4. 1986.... X X X X X X X X (10,051) (2,657) 2,475 5,502 7,139 8,134 8,641 8,539 5. 1987.... X X X X X X X X X X X X 2,237 5,417 7,983 9,233 10,359 10,967 11,268 6. 1988.... X X X X X X X X X X X X X X X X 3,375 6,727 9,502 11,735 13,131 13,869 7. 1989.... X X X X X X X X X X X X X X X X X X X X 4,584 11,834 16,366 19,425 20,801 3,345 733 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 4,616 9,930 13,501 15,315 3,405 676 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,123 13,980 17,056 2,890 783 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,025 8,189 2,249 542 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,497 1,879 323 - -----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3D - WORKERS' COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior... 000 2,857 3,679 4,343 4,939 5,213 5,482 5,198 5,396 5,766 2. 1984.... 832 2,561 3,388 3,801 4,057 4,297 4,406 4,414 4,428 4,437 3. 1985.... X X X X 1,274 2,714 3,495 4,213 4,807 5,078 5,102 5,168 5,213 4. 1986.... X X X X X X X X (17,289) (5,749) 2,573 7,053 9,501 11,320 13,046 14,268 5. 1987.... X X X X X X X X X X X X 4,808 11,353 15,388 17,528 19,024 19,869 20,549 6. 1988.... X X X X X X X X X X X X X X X X 7,063 17,067 22,431 26,566 28,866 30,299 7. 1989.... X X X X X X X X X X X X X X X X X X X X 9,359 21,709 30,312 35,639 38,511 8,486 756 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 9,984 23,591 31,599 36,841 7,498 599 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,198 20,100 26,474 7,153 717 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,527 18,184 6,468 592 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,166 4,892 418 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3E - COMMERCIAL MULTIPLE PERIL
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior... 000 478 881 1,311 1,405 1,440 1,468 1,645 1,654 1,656 2. 1984.... 1,004 1,807 2,114 2,339 2,573 2,756 2,811 2,811 2,813 2,806 3. 1985.... X X X X 897 1,509 1,742 1,885 2,122 2,185 2,158 2,160 2,307 4. 1986.... X X X X X X X X (6,062) (617) 2,000 3,714 5,401 6,758 7,793 7,919 5. 1987.... X X X X X X X X X X X X 4,570 7,070 8,178 10,383 11,289 12,118 13,607 6. 1988.... X X X X X X X X X X X X X X X X 5,652 9,812 11,187 12,700 13,588 14,170 7. 1989.... X X X X X X X X X X X X X X X X X X X X 9,157 15,241 17,801 19,335 21,105 3,510 1,029 8. 1990.... X X X X X X X X X X X X X X X X X X X X X X X X 12,617 20,709 24,728 27,118 4,028 1,239 9. 1991.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,629 23,880 27,527 4,637 1,549 10. 1992.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,826 22,707 3,882 1,522 11. 1993.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 13,588 3,330 1,337 - ------------------------------------------------------------------------------------------------------------------------------------
Note: Net of salvage and subrogation received. 85 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 3F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
- ------------------------------------------------------------------------------------------------------------------------------------ 12 13 Number of Number of 1 Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) Claims Claims ------------------------------------------------------------------------------------------------ Closed Closed Years in Which With Without Losses Were 2 3 4 5 6 7 8 9 10 11 Loss Loss Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Payment Payment - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 000 2. 1984..... 3. 1985..... X X X X 4. 1986..... X X X X X X X X (384) (256) (244) (198) 227 227 227 227 5. 1987..... X X X X X X X X X X X X 1 1 1 1 1 1 6. 1988..... X X X X X X X X X X X X X X X X 7. 1989..... X X X X X X X X X X X X X X X X X X X X 1 1 1 1 1 1 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS-MADE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT (ALL PERILS), BOILER AND MACHINERY)
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 000 1,031 4,251 5,456 5,555 6,497 6,228 6,290 6,539 6,751 2. 1984..... 110 368 445 536 715 1,274 1,303 1,297 1,298 1,180 3. 1985..... X X X X 153 247 470 1,018 1,135 1,553 1,681 1,691 1,436 4. 1986..... X X X X X X X X (20,851) (13,229) (6,206) (1,068) 1,706 3,656 5,268 7,016 5. 1987..... X X X X X X X X X X X X 650 1,661 3,553 5,166 5,890 6,064 7,772 6. 1988..... X X X X X X X X X X X X X X X X 973 2,240 3,717 5,372 6,289 6,763 7. 1989..... X X X X X X X X X X X X X X X X X X X X 1,063 2,214 4,457 6,703 7,832 1,109 474 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 1,044 3,011 4,760 7,105 1,081 525 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,356 3,512 5,382 1,030 565 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,190 2,632 760 353 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,045 567 214 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3H - SECTION 2 - OTHER LIABILITY - CLAIMS-MADE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 000 2. 1984..... 3. 1985..... X X X X 4. 1986..... X X X X X X X X 5. 1987..... X X X X X X X X X X X X 6. 1988..... X X X X X X X X X X X X X X X X 1 1 1 1 1 2 7. 1989..... X X X X X X X X X X X X X X X X X X X X 11 21 23 24 30 2 8 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 24 55 72 115 5 7 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4 28 28 2 7 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15 42 2 15 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8 4 - ------------------------------------------------------------------------------------------------------------------------------------
Note: Net of salvage and subrogation received. 86 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 3I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE, EARTHQUAKE, GLASS, BURGLARY AND THEFT)
- ------------------------------------------------------------------------------------------------------------------------------------ Cumulative Paid Losses and Allocated Expenses at Year End (000 omitted) 12 13 ------------------------------------------------------------------------------------------------ Number of 1 Number of Claims Claims Closed Years in Which Closed Without Losses Were 2 3 4 5 6 7 8 9 10 11 With Loss Loss Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Payment Payment - ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 1,918 2,158 X X X X X X X X 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,545 7,542 X X X X X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,514 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3J - AUTO PHYSICAL DAMAGE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 1,911 1,861 35,262 2,053 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 18,484 20,214 11,228 763 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,393 9,523 602 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3K - FIDELITY, SURETY, FINANCIAL GUARANTY, MORTGAGE GUARANTY
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 (10) (27) X X X X X X X X 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1 X X X X X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 000 33 33 X X X X X X X X 2. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 66 94 X X X X X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 103 X X X X X X X X - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3M - INTERNATIONAL
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------------
Note: Net of salvage and subrogation received. 87 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 3N - REINSURANCE A
- ------------------------------------------------------------------------------------------------------------------------------------ 12 13 Number of 1 CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) Number of Claims Years in Which ----------------------------------------------------------------------------------------------- Claims Closed Losses Were 2 3 4 5 6 7 8 9 10 11 Closed Without Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 With Loss Loss - ------------------------------------------------------------------------------------------------------------------------------------ 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3O - REINSURANCE B
- -------------------------------------------------------------------------------------------------------------------------------- 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3P - REINSURANCE C
- -------------------------------------------------------------------------------------------------------------------------------- 1. 1988..... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3Q - REINSURANCE D
- -------------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 2. 1984..... 3. 1985..... NONE 4. 1986..... 5. 1987..... - --------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 000 49 49 73 453 480 588 588 588 588 2. 1984..... 27 21 21 21 21 21 21 21 21 97 3. 1985..... X X X X 26 34 34 34 34 34 41 34 328 4. 1986..... X X X X X X X X (1,636) (793) (638) 627 836 1,076 1,544 1,262 5. 1987..... X X X X X X X X X X X X 101 196 358 609 941 1,011 1,011 6. 1988..... X X X X X X X X X X X X X X X X 49 72 121 149 222 233 7. 1989..... X X X X X X X X X X X X X X X X X X X X 62 159 293 375 383 82 34 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 144 348 786 826 121 46 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 132 388 421 89 55 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 71 73 42 26 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1 30 6 - ------------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 3R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
- ------------------------------------------------------------------------------------------------------------------------------------ 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - ------------------------------------------------------------------------------------------------------------------------------------
Note: Net of salvage and subrogation received. 88 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 4A - HOMEOWNERS/FARMOWNERS
- -------------------------------------------------------------------------------------------------------------------------- 1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) ---------------------------------------------------------------------------------------------------------- Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 - -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 259 459 926 (74) (11) 11 43 4 2. 1984..... 1,108 165 400 205 (16) 100 46 3. 1985..... X X X X 715 209 558 266 92 59 4. 1986..... X X X X X X X X 1,756 1,030 575 336 120 18 8 5. 1987..... X X X X X X X X X X X X 1,210 742 357 119 17 6. 1988..... X X X X X X X X X X X X X X X X 1,405 276 127 43 15 7. 1989..... X X X X X X X X X X X X X X X X X X X X 1,228 349 68 22 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 1,308 206 144 21 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,246 611 237 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,104 430 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,316 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4B - PRIVATE PASSENGER AUTO LIABILITY/MEDICAL
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 614 272 176 (26) 85 44 59 2. 1984..... 919 285 130 27 222 126 132 24 23 23 3. 1985..... X X X X 2,348 271 107 417 225 238 41 19 8 4. 1986..... X X X X X X X X 4,788 2,363 1,963 974 421 58 65 9 5. 1987..... X X X X X X X X X X X X 4,096 2,086 1,038 548 173 157 80 6. 1988..... X X X X X X X X X X X X X X X X 5,426 2,379 861 474 264 250 7. 1989..... X X X X X X X X X X X X X X X X X X X X 5,916 1,349 527 543 349 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 5,947 2,701 958 869 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,765 2,577 2,035 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,352 3,001 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,253 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4C - COMMERCIAL AUTO/TRUCK LIABILITY/MEDICAL
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 333 225 76 (5) 204 94 21 2. 1984.... 734 194 85 0 359 215 83 3. 1985..... X X X X 960 261 33 424 169 77 8 3 4. 1986..... X X X X X X X X 4,059 2,598 2,179 805 597 98 17 4 5. 1987..... X X X X X X X X X X X X 3,008 2,098 755 550 89 31 10 6. 1988..... X X X X X X X X X X X X X X X X 5,653 1,692 731 408 150 68 7. 1989..... X X X X X X X X X X X X X X X X X X X X 5,064 2,363 1,294 664 445 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 6,529 2,283 1,291 488 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,661 2,788 3,091 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,385 3,806 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4,575 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4D - WORKERS' COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 463 99 97 (108) 100 58 624 670 635 413 2. 1984..... 1,065 306 5 40 107 117 227 129 130 129 3. 1985..... X X X X 1,056 287 59 287 154 253 166 215 131 4. 1986..... X X X X X X X X 3,569 3,061 3,965 3,124 3,519 2,486 1,429 1,124 5. 1987..... X X X X X X X X X X X X 4,774 3,261 1,971 1,499 1,032 713 372 6. 1988..... X X X X X X X X X X X X X X X X 12,005 6,385 3,188 2,109 1,116 890 7. 1989..... X X X X X X X X X X X X X X X X X X X X 15,257 7,937 3,199 2,547 1,608 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 13,287 6,136 2,640 2,332 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 17,006 6,276 3,905 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15,355 8,808 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 16,019 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4E - COMMERCIAL MULTIPLE PERIL
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 141 56 53 (28) 20 2. 1984..... 503 58 47 (5) 24 3. 1985..... X X X X 607 262 107 181 67 4. 1986..... X X X X X X X X 6,630 2,662 1,781 955 163 40 5. 1987..... X X X X X X X X X X X X 4,165 1,554 1,078 331 36 179 134 6. 1988..... X X X X X X X X X X X X X X X X 4,728 1,872 1,039 185 302 256 7. 1989..... X X X X X X X X X X X X X X X X X X X X 6,125 2,386 1,624 1,199 904 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 8,739 4,425 3,224 2,067 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 12,187 6,611 3,959 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 9,492 6,360 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,854 - --------------------------------------------------------------------------------------------------------------------------
89 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 4F - SECTION 1 - MEDICAL MALPRACTICE - OCCURRENCE
- --------------------------------------------------------------------------------------------------------------------------- 1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) ----------------------------------------------------------------------------------------------------------- Years in Which 2 3 4 5 6 7 8 9 10 11 Losses Were 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Incurred - --------------------------------------------------------------------------------------------------------------------------- 1. Prior..... 2. 1984...... 3. 1985...... X X X X 4. 1986...... X X X X X X X X 91 22 71 116 5. 1987...... X X X X X X X X X X X X 40 19 8 6. 1988...... X X X X X X X X X X X X X X X X 48 14 7. 1989...... X X X X X X X X X X X X X X X X X X X X 34 8. 1990...... X X X X X X X X X X X X X X X X X X X X X X X X 100 9. 1991...... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 10. 1992...... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 11. 1993...... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4F - SECTION 2 - MEDICAL MALPRACTICE - CLAIMS-MADE
- --------------------------------------------------------------------------------------------------------------------------- 1. Prior..... 2. 1984...... 3. 1985...... 4. 1986...... 5. 1987...... 6. 1988...... NONE 7. 1989...... 8. 1990...... 9. 1991...... 10. 1992...... 11. 1993...... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4G - SPECIAL LIABILITY (OCEAN MARINE, AIRCRAFT (ALL PERILS), BOILER AND MACHINERY)
- --------------------------------------------------------------------------------------------------------------------------- 1. Prior..... 2. 1984...... 3. 1985...... 4. 1986...... 5. 1987...... 6. 1988...... NONE 7. 1989...... 8. 1990...... 9. 1991...... 10. 1992...... 11. 1993...... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4H - SECTION 1 - OTHER LIABILITY - OCCURRENCE
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior ... 342 182 95 55 77 68 261 229 54 27 2. 1984..... 313 152 39 52 61 34 102 88 37 30 3. 1985..... X X X X 438 206 96 179 112 125 111 47 77 4. 1986..... X X X X X X X X 14,757 11,474 8,064 2,676 3,180 2,811 1,979 1,838 5. 1987..... X X X X X X X X X X X X 5,983 4,795 4,497 1,121 843 676 618 6. 1988..... X X X X X X X X X X X X X X X X 6,401 5,043 3,149 1,634 1,089 1,061 7. 1989..... X X X X X X X X X X X X X X X X X X X X 8,415 4,890 3,328 2,465 2,087 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 7,324 5,171 3,260 2,052 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 8,578 7,027 5,716 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 7,249 6,271 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 6,267 - -------------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4H - SECTION 2 - OTHER LIABILITY - CLAIMS-MADE
- --------------------------------------------------------------------------------------------------------------------------- 1. Prior..... 2. 1984...... 3. 1985...... 4. 1986...... 5. 1987...... 6. 1988...... NONE 7. 1989...... 8. 1990...... 9. 1991...... 10. 1992...... 11. 1993...... - --------------------------------------------------------------------------------------------------------------------------
90 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 4I - SPECIAL PROPERTY (FIRE, ALLIED LINES, INLAND MARINE, EARTHQUAKE, GLASS, BURGLARY AND THEFT)
- -------------------------------------------------------------------------------------------------------------------------- 1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) ---------------------------------------------------------------------------------------------------------- Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 - -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 2,098 615 21 2 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,179 224 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 406 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4J - AUTO PHYSICAL DAMAGE
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,060 (132) (81) 2 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1,090 453 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 30 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4K - FIDELITY, SURETY, FINANCIAL GUARANTY, MORTGAGE GUARANTY
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X (73) (68) (51) 2 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4L - OTHER (INCLUDING CREDIT, ACCIDENT AND HEALTH)
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 62 2 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 92 20 3. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 55 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4M - INTERNATIONAL
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 2 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - --------------------------------------------------------------------------------------------------------------------------
91 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P - PART 4N - REINSURANCE A
- -------------------------------------------------------------------------------------------------------------------------- 1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) ---------------------------------------------------------------------------------------------------------- Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 - -------------------------------------------------------------------------------------------------------------------------- 1. 1988...... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4O - REINSURANCE B
- -------------------------------------------------------------------------------------------------------------------------- 1. 1988...... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4P - REINSURANCE C
- -------------------------------------------------------------------------------------------------------------------------- 1. 1988...... 2. 1989..... 3. 1990..... 4. 1991..... NONE 5. 1992..... 6. 1993..... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4Q - REINSURANCE D
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 2. 1984..... 3. 1985..... NONE 4. 1986..... 5. 1987..... - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4R - SECTION 1 - PRODUCTS LIABILITY - OCCURRENCE
- -------------------------------------------------------------------------------------------------------------------------- 1 BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) ---------------------------------------------------------------------------------------------------------- Years in Which Losses Were 2 3 4 5 6 7 8 9 10 11 Incurred 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 - -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 2. 1984..... 3. 1985..... X X X X 13 4. 1986..... X X X X X X X X 1,017 644 1,278 249 576 150 358 207 5. 1987..... X X X X X X X X X X X X 1,382 901 350 197 166 151 6. 1988..... X X X X X X X X X X X X X X X X 1,239 516 487 124 45 7. 1989..... X X X X X X X X X X X X X X X X X X X X 1,104 809 172 401 8. 1990..... X X X X X X X X X X X X X X X X X X X X X X X X 1,313 434 535 70 9. 1991..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X 805 641 160 10. 1992..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 536 55 11. 1993..... X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 78 - --------------------------------------------------------------------------------------------------------------------------
SCHEDULE P - PART 4R - SECTION 2 - PRODUCTS LIABILITY - CLAIMS-MADE
- -------------------------------------------------------------------------------------------------------------------------- 1. Prior.... 2. 1984..... 3. 1985..... 4. 1986..... 5. 1987..... 6. 1988..... NONE 7. 1989..... 8. 1990..... 9. 1991..... 10. 1992..... 11. 1993..... - --------------------------------------------------------------------------------------------------------------------------
92 CONSOLIDATED ANNUAL STATEMENT FOR THE YEAR 1993 OF THE ARMCO FINANCIAL SERVICES GROUP - COMPANIES TO BE SOLD SCHEDULE P INTERROGATORIES 1. Computation of excess statutory reserves over statement reserves. See Instructions for explanation and formulas. (a) Auto Liability (private passenger and commercial) 1993 $0 ( 70.7%) 1992 $0 ( 70.7%) ---------------------- ---------------------- 1991 $0 ( 70.7%) Total $0 ---------------------- ----------- (b) Other Liability and Products Liability 1993 $0 ( 60.0%) 1992 $0 ( 60.0%) ---------------------- ---------------------- 1991 $0 ( 60.0%) Total $0 ---------------------- ------------ (c) Medical Malpractice 1993 $36 ( 60.0%) 1992 $44 ( 60.0%) ---------------------- --------------------- 1991 $61 ( 60.0%) Total $141 ---------------------- ------------ (d) Workers' Compensation 1993 $171 ( 75.0%) 1992 $0 ( 75.0%) ---------------------- --------------------- 1991 $0 ( 75.0%) Total 171 ---------------------- ------------ (e) Credit Total 0 ------------ (f) All Lines Total (Report here and Page 3) Total 312 ------------ 2. What is the extended loss and expense reserve - direct and assumed - for the following classes? An example of an extended loss and expense reserve is the actuarial reserve for the free-tail coverage arising upon death, disability or retirement in most medical malpractice policies. Such a liability is to be reported here even if it was not reported elsewhere in Schedule P, but otherwise reported as a liability item on page 3. Show the full reserve amount, not just the change during the current year.
- ------------------------------------------------------------------------------- Year in which premiums 1 2 3 were earned and losses Medical Other Products were incurred Malpractice Liability Liability - ------------------------------------------------------------------------------- (a) 1987 (b) 1988 (c) 1989 (d) 1990 NONE (e) 1991 (f) 1992 (g) 1993 - ------------------------------------------------------------------------------- (h) Totals 0 0 0 - -------------------------------------------------------------------------------
3. The term "Loss expense" includes all payments for legal expenses, including attorney's and witness fees and court costs, salaries and expenses of investigators, adjustors and field men, rents, stationery, telegraph and telephone charges, postage, salaries and expenses of office employees, home office expenses and all other payments under or on account of such injuries, whether the payments are allocated to specific claims or are unallocated. Are they so reported in this statement? Answer: Yes [X] No [_] 4. The unallocated loss expense payments paid during the most recent calendar year should be distributed to the various years in which losses were incurred as follows: (1) 45% to the most recent year, (2) 5% to the next most recent year, and (3) the balance to all years, including the most recent, in proportion to the amount of loss payments paid for each year during the most recent calendar year. If the distribution in (1) or (2) produces an accumulated distribution to such year in excess of 10% of the premiums earned for such year, disregarding all distributions made under (3), such accumulated distribution should be limited to 10% of premiums earned and the balance distributed in accordance with (3). Are they so reported in this Statement? Answer: Yes [X] No [_] 5. Do any lines in Schedule P include reserves which are reported gross of any discount to present value of future payments, but are reported net of such discounts on page 10? Answer: Yes [_] No [X] If yes, proper reporting must be made in the Notes to Financial Statements, as specified in the Instructions. Also, the discounts must be reported in Schedule P - Part 1, Columns 31 and 32. Schedule P must be completed gross of non-tabular discounting. Work papers relating to discount calculations must be available for examination upon request. Discounting is allowed only if expressly permitted by the state insurance department to which this Annual Statement is being filed. 6. What were the net premiums in force at the end of the year for: (in thousands of dollars) (a) Fidelity $2 (b) Surety $0 7. Claim count information is reported (check one) If not the same in all years, explain in Question 8. (a) per claim ----------- (b) per claimant X ----------- 8. The information provided in Schedule P will be used by many persons to estimate the adequacy of the current loss and expense reserves, among other things. Are there any especially significant events, coverage, retention or accounting changes which have occurred which must be considered when making such analyses (An extended statement may be attached)? Part 4-Bulk and Incurred But Not Reported Reserves - 1984 to 1987 represents pure incurred but not reported losses and allocated expenses. 1988 - 1993 represents bulk reserves plus pure incurred but not reported losses and allocated expenses. All Incurred Losses and Allocated Loss Adjustment Expenses and Bulk Loss and Loss Adjustment Reserves in Parts 2 and 4 have been reduced by the amount of anticipated salvage and subrogation in accordance with a change in accounting principles for salvage and subrogation recoverable. ....................................... ............................................................................ ............................................................................ ............................................................................ ............................................................................ 93 EX-99 10 DESCRIPTION OF CAPITAL Exhibit 99 DESCRIPTION OF CAPITAL STOCK General The authorized capital stock of Armco consists of (i) 150,000,000 shares of Common Stock, par value $.01 per share ("Armco Common Stock"), of which, at February 28, 1994, 104,103,174 shares were issued and outstanding; (ii) 6,697,231 shares of Class A Preferred Stock, no par value ("Class A Preferred Stock"), issuable in series, of which, at February 28 1994, 1,697,231 shares of Armco $2.10 Cumulative Convertible Preferred Stock ("$2.10 Preferred Stock") were issued and outstanding and 2,700,000 shares of $3.625 Cumulative Convertible Preferred Stock ("$3.625 Preferred Stock") were issued and outstanding; and of which 650,000 shares had been designated Participating Preferred Stock (the "Participating Preferred Stock"), none of which were issued; and (iii) 5,000,000 shares of Class B Preferred Stock, par value $1 per share ("Class B Preferred Stock"), issuable in series, of which, at February 28, 1994, 999,900 shares of $4.50 Cumulative Convertible Preferred Stock ("$4.50 Preferred Stock") were issued and outstanding. The Class A Preferred Stock and the Class B Preferred Stock are sometimes referred to herein as the "Armco Preferred Stock." No class of authorized capital stock of Armco, including the Armco Common Stock, has preemptive or other subscription rights. Armco is authorized to issue the Armco Preferred Stock in one or more series with such designations, powers, preferences and rights, and qualifications, limitations or restrictions thereon, as are permitted under Armco's Amended Articles of Incorporation and as shall be stated in the resolutions providing for the issue thereof as may be adopted by the Armco Board of Directors. The Class A Preferred Stock and the Class B Preferred Stock rank equally, whether or not dividend rates, dividend payment dates, redemption or liquidation prices per share of any series of Class A Preferred Stock differ from those of the Class B Preferred Stock, and the holders of Class A Preferred Stock and Class B Preferred Stock shall be entitled to the receipt of dividends and of the amounts distributable upon liquidation, dissolution or winding up, in proportion to their respective rates or liquidation prices, without preference or priority one over the other. Shares of Class A Preferred Stock which shall have been purchased, redeemed or otherwise acquired by Armco, including shares which have been converted or exchanged into another class or series of capital stock or other securities of Armco, shall be deemed retired and shall not be reissued or resold. Shares of Class B Preferred Stock purchased, redeemed or otherwise acquired by Armco will be restored to the status of authorized but unissued shares of Class B Preferred Stock, without designation as to series, and may thereafter be issued by the Armco Board of Directors. Each issued and outstanding share of Armco Preferred Stock is currently convertible into shares of Common Stock -- each $2.10 Preferred Stock share into 1.27 shares, each $4.50 Preferred Stock share into 2.22 shares and each $3.625 Preferred Stock share into 6.78 shares. The number of shares of Armco Common Stock into which such Armco Preferred Stock shares are convertible is subject to adjustment under certain circumstances, such as splits or combinations of the Armco Common Stock or dividends on the Armco Common Stock paid in Armco Common Stock or non-cash assets. In addition, under certain circumstances involving a Change of Control (as defined in the terms of the $3.625 Preferred Stock), each issued and outstanding share of the $3.625 Preferred Stock may be converted, at the option of the holder, for a limited period into a number of shares of Armco Common Stock determined by formula. These special conversion rights of the $3.625 Preferred Stock may deter certain mergers, tender offers or other takeover attempts. On June 27, 1986, the Armco Board of Directors declared a dividend distribution of one Armco Preferred Stock Purchase Right (a "Right") for each outstanding share of Armco -1- Common Stock, payable to holders of Armco Common Stock of record at the close of business on July 7, 1986. Each Right, when exercisable, entitles the registered holder to purchase from Armco a unit consisting of one two-hundredth of a share of Participating Preferred Stock. Prior to the earlier of the Rights Distribution Date and the Expiration Date (each as hereinafter defined), one Right will be distributed with each share of Armco Common Stock issued. See "Preferred Stock Purchase Rights." The documents defining the terms of the Armco Common Stock, the Rights and the Armco Preferred Stock are available for inspection upon request at the office of the Secretary of Armco. Such documents are also on file with and available for inspection at the Securities and Exchange Commission, 450 Fifth Street N.W., Washington, D.C. 20549, and the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The statements set forth below are only summaries of such terms and provisions and reference should be made to such documents and instruments for complete statements of such terms and provisions. Dividend Rights Subject to the prior rights of the holders of Armco Preferred Stock to receive dividends in cash at the rate provided for, and subject to any restrictions or limitations contained in the express terms and provisions of any shares of Armco Preferred Stock, dividends may be declared and paid upon the Armco Common Stock, as and when determined by the Armco Board of Directors, out of funds legally available therefor. At the April 23, 1993, annual meeting, Armco's shareholders voted to reduce the par value of Armco's common stock to $0.01 per share from $1.00 per share. As a result, $102.7 million was transferred from Armco's stated capital account for its common stock to additional paid-in capital, increasing surplus from which Armco is permitted, under Ohio law, to pay dividends on its common and preferred stock issues. Armco is incorporated in Ohio. In addition, effective March 31, 1993, the corporate statute of Ohio was amended to provide that Ohio corporations that recognize immediately the full amount of their transition obligation under Statement of Financial Accounting Standards ("SFAS"), SFAS 106, as Armco did, could increase the amount available for payment of dividends by adding the corporation's surplus at the time of the dividend the amount of the difference between the reduction in the corporation's surplus that resulted from the immediate recognition of the SFAS 106 transition obligation and the amount of the transition obligation that would have been recognized at the time of the dividend had the corporation elected to amortize its recognition of such transition obligation. At December 31, 1993, the amount from which Armco is permitted to pay dividends under this provision was $75.7 million. The express terms and provisions of the $4.50 Preferred Stock provide that the holders of shares of $4.50 Preferred Stock are entitled to receive cumulative dividends at the annual rate of $4.50 per share before cash dividends are paid on the Armco Common Stock. The express terms and provisions of the $3.625 Preferred Stock provide that the holders of shares of $3.625 Preferred Stock are entitled to receive cumulative dividends at the annual rate of $3.625 per share before cash dividends are paid on the Armco Common Stock. The express terms and provisions of the $2.10 Preferred Stock provide that the holders of shares of $2.10 Preferred Stock are entitled to receive cumulative dividends at the annual rate of $2.10 per share before cash dividends are paid on the Armco Common Stock. See "Dividend Payment Restrictions". Voting Rights Except as otherwise required by law, the holders of Armco Common Stock, as well as the holders of Class A Preferred Stock, are entitled at all times to one vote for each share of such stock owned by them. Except as set forth below, the holders of Class B Preferred Stock are not entitled to vote on any matter. If proper and timely notice is given by any shareholder before the time fixed for holding a meeting for the election of directors that such shareholder desires to cumulate his votes at such election, and if an announcement of the giving of such notice is made upon the convening of the meeting, each shareholder shall have the right to cumulate his votes and give one candidate as many votes as equal the number of directors to be elected multiplied by the number of votes to which he is entitled, or to distribute them on the same principle among as many candidates as such shareholder sees fit. Shareholders who are entitled to vote in the election of directors generally may nominate director candidates for election. Such shareholders must deliver written notice thereof to the Secretary of Armco not later than (i) with respect to an election to be held at any annual meeting of shareholders, 90 days prior to the date one year from the date of the immediately preceding annual meeting of shareholders, and (ii) with respect to an election to be held at any special meeting of shareholders for the election of directors, the close of business -2- on the tenth day following the date on which notice of such meeting is first given to shareholders. The provision relating to director nomination may have the effect of delaying, deferring or preventing a change in control of Armco. In the event of a default in the payment of the equivalent of six quarterly dividends payable to holders of the Class A Preferred Stock or the Class B Preferred Stock, the respective holders of the outstanding shares of the Class A Preferred Stock or the Class B Preferred Stock, as the case may be, voting as a class, are entitled to elect two additional directors to serve on the Armco Board of Directors until such default is cured. In addition, as a prerequisite to the adoption of (i) any amendment of the Armco Amended Articles of Incorporation (the "Armco Articles") materially altering any existing provision of the Class A Preferred Stock or the Class B Preferred Stock, such amendment must receive the affirmative approval of at least two-thirds of the outstanding shares of the Class A Preferred Stock or the Class B Preferred Stock, as the case may be, voting as a class, and (ii) any amendment of the Armco Articles which increases the authorized number of shares of the Class A Preferred Stock or the Class B Preferred Stock or creates any class of shares which ranks equally with or prior to the Class A Preferred Stock or the Class B Preferred Stock, such amendment must receive the affirmative approval of a majority of the outstanding shares of the Class A Preferred Stock or the Class B Preferred Stock, as the case may be, voting as a class. Liquidation Rights In the event of any voluntary or involuntary liquidation of Armco, the holders of shares of the $4.50 Preferred Stock will be entitled to receive from the assets of Armco, prior to any payment to the holders of Armco Common Stock, the sum of $50 per share, plus dividends accrued and unpaid to the date of payment. In the event of the voluntary liquidation of Armco, the holders of shares of the $2.10 Preferred Stock will be entitled to receive from the assets of Armco, prior to any payment to the holders of Armco Common Stock, the sum of $40 per share, plus dividends accrued and unpaid to the date of payment. In the event of the involuntary liquidation of Armco, the holders of shares of the $2.10 Preferred Stock similarly will be entitled to receive from the assets of Armco the sum of $15 per share, plus dividends accrued and unpaid to the date of payment, prior to any distribution to holders of Armco Common Stock. In the event of any voluntary or involuntary liquidation of Armco, the holders of shares of the $3.625 Preferred Stock will be entitled to receive from the assets of Armco, prior to any payment to the holders of Armco Common Stock, the sum of $50 per share, plus dividends accrued and unpaid to the date of payment. After such payments to the holders of Armco Preferred Stock, any remaining assets available for distribution to common shareholders will be distributed to the holders of the Armco Common Stock pro rata in accordance with their respective shares. Redemptions Shares of the $2.10 Preferred Stock may be redeemed at Armco's option for a purchase price of $40 per share, plus dividends accrued and unpaid to the date of redemption. Shares of the $3.625 Preferred Stock may be redeemed at Armco's option on or after October 15, 1995 for a purchase price per share starting at $52.5375 and declining, at 12-month intervals, to $50 on and after October 15, 2002, plus dividends accrued and unpaid to the date of redemption. Shares of the $4.50 Preferred Stock may be redeemed at Armco's option purchase price of $50 per share, plus dividends accrued and unpaid to the date of redemption. Dividend Payment Restrictions Armco has restrictive covenants under various loan agreements relating to the payment of dividends on, or the purchase of, its capital stock. Under the terms of Armco's existing $170.0 million revolving credit facility, Armco's most restrictive loan agreement in this regard, cash dividends cannot be paid on Armco Common Stock. This Armco credit agreement permits the payment of dividends on the outstanding $4.50 Preferred Stock, the outstanding $3.625 Preferred Stock and the outstanding $2.10 Preferred Stock so long as Armco is not in -3- default thereunder. The existing Armco revolving credit facility currently is scheduled to terminate on December 31, 1995. Under the terms of the indentures for Armco's 13.50% Senior Notes Due 1994, 11.375% Senior Notes due 1999, and 9.375% Senior Notes due 1999, Armco can pay a dividend on the Armco Common Stock if it meets certain financial tests described in the indentures. Armco does not expect to satisfy these tests described in such indentures during the remainder of 1994. In addition to preventing Armco from paying dividends on the Armco Common Stock, the inability to meet such financial tests prohibits Armco from repurchasing its capital stock. Preferred Stock Purchase Rights The Rights are issued under a Rights Agreement between Armco and Fifth Third Bank. Each Right entitles the registered holder to purchase for $35.00 (as such amount may be adjusted in accordance with the terms of the Rights Agreement, the "Exercise Price") from Armco, a unit consisting of one two- hundredth of a share, subject to adjustment, of Participating Preferred Stock. The Rights are currently evidenced by the certificates representing the Armco Common Stock and each outstanding share of Armco Common Stock is, and each share of Armco Common Stock issued prior to the earlier of the Rights Distribution Date and the Expiration Date, as defined below, will be, accompanied by a Right. Except as may otherwise be subsequently determined by the Armco Board of Directors, no shares of Armco Common Stock issued on or after such date will be accompanied by, nor will the holder of such share of Armco Common Stock be entitled to receive, any Right. The Rights currently may be transferred only with the Armco Common Stock and the surrender for transfer of any certificate for Armco Common Stock will also constitute the transfer of the Rights associated with the Armco Common Stock represented by such certificate. Upon the earlier of the following (the "Rights Distribution Date") (i) ten days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Armco Common Stock (the "Stock Acquisition Date") or (ii) ten business days following the date that a tender or exchange offer is first published or sent if it would result in a person or group beneficially owning 30% or more of such outstanding shares of Armco Common Stock, the Rights will become exercisable and separate Rights certificates will be issued. Except as otherwise determined by the Armco Board of Directors, only shares of Armco Common Stock issued prior to the earlier of the Rights Distribution Date and the Expiration Date, as defined below, will be issued with Rights. The Rights are not exercisable until the Rights Distribution Date and will expire at the earlier of the close of business on June 26, 1996 (the "Final Expiration Date") and the time at which the Rights are redeemed by Armco as described below (the earlier of such times is referred to as the "Expiration Date"). In the event that (i) Armco is the surviving corporation in a merger with an Acquiring Person and the Armco Common Stock is not changed or exchanged, (ii) a person or entity becomes the beneficial owner of 30% or more of the then outstanding shares of Armco Common Stock (except pursuant to an offer for all the outstanding shares of Armco Common Stock at a price and on terms determined by a majority of the members of the Armco Board of Directors who are not officers of Armco and who are not affiliated with an Acquiring Person to be in the best interests of Armco or in a transaction of the type described in section (i) of the following paragraph), (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Rights Agreement or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1%, then each holder of a Right will have the right to receive, upon exercise (which shall not be permitted until such time as the Rights are no longer redeemable by Armco as set forth below), Armco Common Stock (or, in certain circumstances, preferred stock, cash, property, other Armco securities or a combination thereof), having a -4- value equal to two times the exercise price of the Right. Following the occurrence of any such event described above, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that, at any time following the Stock Acquisition Date, (i) Armco enters into a merger or other business combination transaction in which Armco is not the surviving corporation or in which Armco is the surviving corporation and all or part of the then outstanding shares of Armco Common Stock are exchanged for cash, property, stock or other securities of an entity other than Armco (other than such a merger or transaction in which holders of Armco Common Stock receive the same price as in a tender offer or exchange offer approved by a majority of the members of the Armco Board of Directors who are not officers of Armco and who are not affiliated with an Acquiring Person to be in the best interests of Armco) or (ii) 50% or more of Armco's assets or earning power is sold or transferred, then each holder of a then valid Right will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Rights. Armco may redeem the Rights in whole, but not in part, at a price of $.01 per Right, payable in cash, shares of Armco Common Stock or other form of consideration deemed appropriate by the Armco Board of Directors, at any time until ten days following the Stock Acquisition Date. Thereafter, Armco's right of redemption may be reinstated if an Acquiring Person reduces his beneficial ownership to 10% or less of the outstanding shares of Armco Common Stock in a transaction or series of transactions not involving Armco and there is no other Acquiring Person. Under certain circumstances, the decision to redeem the Rights requires the concurrence of a majority of the Continuing Directors (those members of the Armco Board of Directors who were members of the Armco Board of Directors prior to June 27, 1986, and any person, other than an Acquiring Person or affiliate thereof, subsequently elected to the Armco Board of Directors who is recommended or approved by a majority of such members). Immediately upon the action of the Armco Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 redemption price. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of Armco, including, without limitation, the right to vote or to receive dividends. Holders of Rights may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable as set forth above. Prior to the Rights Distribution Date, the Armco Board of Directors may amend any provisions of the Rights Agreement, including the terms governing the Rights, other than the price at which Armco can redeem the Rights, the Final Expiration Date, the Exercise Price and the number of one two-hundredth of a share of Participating Preferred Stock for which a Right is exercisable. After the Rights Distribution Date, such terms may be amended (in certain circumstances, only with the concurrence of the Continuing Directors) only for limited purposes and to limited effects. At any time when the Rights are not redeemable, no amendment shall be made to adjust the time period governing redemption. Participating Preferred Stock The Participating Preferred Stock purchasable upon exercise of the Rights will be non-redeemable and will rank in parity with all other series of Armco Preferred Stock as to the payment of dividends and distribution of assets. Each share of Participating Preferred Stock will be entitled to receive a preferential quarterly dividend equal to the greater of (i) $75 or (ii), subject to certain adjustments, 200 times all dividends or other distributions, other than a dividend payable in shares of Armco Common Stock or a subdivision of the outstanding shares of Armco Common Stock, declared on the Armco Common Stock, since the last dividend payment date. In the event of any liquidation of Armco, the holders of the Participating Preferred Stock will receive a preferred liquidation payment of $7,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, and, if greater, will be -5- entitled to receive an aggregate liquidation payment equal to 200 times the payment made per share of Armco Common Stock, subject to certain adjustments. Each share of Participating Preferred Stock will have one vote. The Participating Preferred Stock is not convertible into Armco Common Stock or any other security of Armco, and is not redeemable. The foregoing rights of the Participating Preferred Stock are protected against dilution in the event additional shares of Armco Preferred Stock or other capital stock are issued pursuant to a stock split, stock dividend or similar recapitalization. Miscellaneous The Armco Common Stock has no conversion rights, and there are no redemption or sinking fund provisions applicable thereto. The Fifth Third Bank is transfer agent and registrar for the Armco Common Stock. The Armco Common Stock, $2.10 Preferred Stock, $3.625 Preferred Stock and $4.50 Preferred Stock are traded on the New York Stock Exchange, the principal market therefor. In addition, the Armco Common Stock is traded on the Midwest Stock Exchange and other regional exchanges. -6- -----END PRIVACY-ENHANCED MESSAGE-----