<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998
REGISTRATION NO. 333-56777
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EARLE M. JORGENSEN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5051 95-088610
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR
ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3050 EAST BIRCH STREET, BREA, CALIFORNIA 92821, (714) 579-8823
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
---------------
MAURICE S. NELSON, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EARLE M. JORGENSEN COMPANY
3050 EAST BIRCH STREET
BREA, CALIFORNIA 92821
(714) 579-8823
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES OF ALL COMMUNICATIONS SHOULD BE SENT TO:
MARK A. CONLEY, ESQ.
KATTEN MUCHIN & ZAVIS
1999 AVENUE OF THE STARS
SUITE 1400
LOS ANGELES, CALIFORNIA 90067
(310) 788-4400
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------
9 1/2% Senior Notes due 2005.... $105,000,000 100% $105,000,000 $30,975
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</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 of Regulation C under the Securities Act of 1933, as
amended.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRATION
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 12, 1998
PRELIMINARY PROSPECTUS
EARLE M. JORGENSEN COMPANY
OFFER TO EXCHANGE
[LOGO OF EARLE M. JORGENSEN COMPANY]
9 1/2% SENIOR NOTES DUE 2005, SERIES B
FOR ALL OUTSTANDING 9 1/2% SENIOR NOTES DUE 2005, SERIES A
Earle M. Jorgensen Company (the "Company") hereby offers, upon the terms and
subject to conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"; together with
the Prospectus, the "Exchange Offer"), to exchange up to an aggregate principal
amount of $105,000,000 of its 9 1/2% Senior Notes due 2005, Series B (the
"Exchange Notes") for up to an aggregate principal amount of $105,000,000 of
its outstanding 9 1/2% Senior Notes due 2005, Series A (the "Old Notes"). The
terms of the Exchange Notes are identical in all material respects to those of
the Old Notes, except for certain transfer restrictions and registration rights
relating to the Old Notes. The Exchange Notes will be issued pursuant to, and
entitled to the benefits of, the Indenture (as defined herein) governing the
Old Notes. The Exchange Notes and the Old Notes are sometimes referred to
collectively as the "Notes". The Company is the wholly owned and sole
subsidiary of Earle M. Jorgensen Holding Company, Inc. ("Holding").
The Company will accept for exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on
September , 1998, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Expiration Date will not in any event be extended to a
date later than March , 1999 (180 days after the initial Expiration Date).
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. In the event the Company terminates the
Exchange Offer and does not accept for exchange any Old Notes with respect to
the Exchange Offer, the Company will promptly return the Old Notes to the
holders thereof. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange, but is otherwise
subject to certain customary conditions. The Old Notes may be tendered only in
integral multiples of $1,000.
The Old Notes were sold by the Company on March 24, 1998 to Donaldson, Lufkin
& Jenrette Securities Corporation and BT Alex. Brown Incorporated (the "Initial
Purchasers") in a transaction not registered under the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon an exemption under the
Securities Act (the "Initial Offering"). The Initial Purchasers subsequently
placed the Old Notes with qualified institutional buyers in reliance upon Rule
144A under the Securities Act and to certain purchasers pursuant to Regulation
S under the Securities Act. Accordingly, the Old Notes may not be reoffered,
resold or otherwise transferred in the United States unless registered under
the Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement, dated March 24, 1998, by and among the Company
and the Initial Purchasers in connection with the Initial Offering (the
"Registration Rights Agreement"). See "The Exchange Offer."
(Cover continued on next page)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST , 1998.
<PAGE>
(Continued from Cover)
The Exchange Notes will mature on April 1, 2005. Interest on the Exchange
Notes will by payable in cash semiannually on April 1 and October 1 of each
year, commencing on October 1, 1998. Holders of the Exchange Notes will
receive interest on October 1, 1998 from the date of initial issuance of the
Exchange Notes plus an amount equal to the accrued interest on the Old Notes
from the most recent date to which interest has been paid to the date of
exchange thereof. The Company will not be required to make any mandatory
redemption or sinking fund payment with respect to the Exchange Notes prior to
maturity. The Exchange Notes will be redeemable at the option of the Company,
in whole or in part, on or after April 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. Notwithstanding the foregoing, prior to April 1, 2001, the Company
may redeem from time to time up to 35% of the aggregate principal amount of
the Exchange Notes originally outstanding, at a redemption price equal to
109.5% of the principal amount thereof, plus accrued and unpaid interest, if
any, to the redemption date, with the net proceeds of certain issuances of
common stock; provided, that at least 65% of the aggregate principal amount of
the Exchange Notes originally outstanding remain outstanding immediately after
the occurrence of such redemption. Upon a Change of Control (as defined
herein), the Company will be required to make an offer to repurchase all
outstanding Exchange Notes at 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the date of repurchase. See
"Description of the Notes--Repurchase of Notes at the Option of the Holder
Upon a Change of Control."
The Exchange Notes will constitute unsecured obligations of the Company and
rank pari passu in right of payment with all present and future senior
unsecured indebtedness of the Company. The Exchange Notes will be effectively
subordinated to the Company's Special Term Loan (as defined herein) and the
New Credit Facility (as defined herein) to the extent of the value of the
assets securing such indebtedness and to any additional secured indebtedness
of the Company permitted under the Indenture governing the Notes. The Exchange
Notes will rank pari passu in right of payment with the Old Notes. As of March
31, 1998, there was approximately $207.9 million of such secured indebtedness
(including $0.7 million in letters of credit) that was effectively senior to
the Notes. There is no indebtedness ranking junior to the Notes. See
"Description of the Notes" and "Description of Other Indebtedness."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission" or "SEC"), the Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Old Notes may be offered for resale,
resold and otherwise transferred by respective holders thereof (other than any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement with any person to participate in the
distribution of the Exchange Notes and is not engaged in and does not intend
to engage in a distribution of the Exchange Notes. Notwithstanding the
foregoing, each broker-dealer that receives the Exchange Notes in exchange for
the Old Notes acquired for its own account as a result of market-making
activities or other trading activities must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of the Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer to satisfy the prospectus
delivery requirements in connection with resales of the Exchange Notes. The
Company has agreed that, for a period of one year after the Registration
Statement is declared effective by the Commission, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes, or the price at which holders would be able to sell the
Exchange Notes. Future trading prices of the Exchange Notes will depend on
many factors, including, among other things, prevailing interest rates, the
Company's operating results and the market for similar securities.
Historically, the market for securities
ii
<PAGE>
similar to the Exchange Notes, including non-investment grade debt, has been
subject to disruptions that have caused substantial volatility in the prices
of such securities. There can be no assurance that any market for the Exchange
Notes, if such market develops, will not be subject to similar disruptions.
The Initial Purchasers have advised the Company that they currently intend to
make a market in the Exchange Notes offered. However, the Initial Purchasers
are not obligated to do so and any market making may be discontinued at any
time without notice.
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
Holders of the Old Notes not tendered and accepted in the Exchange Offer
will continue to hold the Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. See "The
Exchange Offer--Consequences of Failure to Exchange."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR ITS ACCEPTANCE WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF THAT JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER, SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "DESCRIPTION OF THE NOTES--BOOK-ENTRY; DELIVERY;
FORM AND TRANSFER." THE COMPANY EXPECTS THAT THE EXCHANGE NOTES ISSUED
PURSUANT TO THE EXCHANGE OFFER WILL BE REPRESENTED BY A GLOBAL NOTE (AS
DEFINED HEREIN), WHICH WILL BE DEPOSITED WITH, OR ON BEHALF OF, THE DEPOSITORY
TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME OR IN THE NAME OF CEDE & CO.,
ITS NOMINEE. BENEFICIAL INTEREST IN THE GLOBAL NOTE REPRESENTING THE EXCHANGE
NOTES WILL BE SHOWN ON, AND TRANSFER THEREOF WILL BE EFFECTED THROUGH, RECORDS
MAINTAINED BY DTC AND ITS PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF THE
GLOBAL NOTE, NOTES IN CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE FOR THE
GLOBAL NOTE ONLY UNDER LIMITED CIRCUMSTANCES AS SET FORTH IN THE INDENTURE.
SEE "DESCRIPTION OF THE NOTES--BOOK-ENTRY; DELIVERY; FORM AND TRANSFER."
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE CONTENTS
OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. THE COMPANY IS
NOT MAKING ANY REPRESENTATION TO ANY PROSPECTIVE INVESTOR IN THE EXCHANGE
NOTES REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH PERSON UNDER
APPROPRIATE LEGAL INVESTMENT OR SIMILAR LAWS.
iii
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, exhibits, annexes and schedules thereto,
the "Registration Statement") pursuant to the Securities Act, and the rules
and regulations promulgated thereunder, covering the Exchange Notes being
offered. This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Company complies with
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports,
proxy statements and other information filed by the Company may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at the
following regional offices of the Commission: 7 World Trade Center, New York,
New York 10048; and 500 West Madison Street, Chicago, Illinois 60661. Copies
of such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
at prescribed rates. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission, for so long as any of the Notes
remain outstanding, it will furnish to the holders of the Notes and file with
the Commission (unless the Commission will not accept such a filing) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K as if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants, and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports, in each case within the time periods set forth in the
Commission's rules and regulations. In addition, for so long as any of the
Notes remain outstanding, the Company has agreed to make available to any
prospective purchaser of the Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144A(d)(4)
under the Securities Act.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning
certain aspects of the business of the Company. All statements other than
statements of historical facts included in this Prospectus, including, without
limitation, statements regarding the issuer's future financial position,
business strategy, budgets, projected costs and plans and objectives of
management for future operations are forward-looking statements. These
forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from those contemplated in such forward-looking statements,
including, without limitation, changes in the price and supply of metal
products, changes in the demand for metal products in the industries supplied
by the Company, relationships with significant customers, interest rate
fluctuations, the impact of environmental regulations, and general economic
and business conditions. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations
will prove to be correct. Prospective investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
iv
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus and is qualified in its entirety by the more detailed information
and consolidated financial statements and the related notes thereto appearing
elsewhere in this Prospectus. Prospective investors are urged to read this
Prospectus in its entirety and the consolidated financial statements, and the
related notes included in this Prospectus before tendering the Old Notes in
exchange for Exchange Notes. The Company's fiscal year ends March 31, and thus,
for example, "fiscal 1998" refers to the fiscal year ending March 31, 1998.
"EMJ" or the "Company" refers to Earle M. Jorgensen Company.
THE COMPANY
The Company is one of the largest independent distributors of metal products
in the United States ("U.S."), providing value-added metals processing services
and distributing a broad line of carbon, alloy, stainless and aluminum bar,
tubing and pipe, and plate and sheet metal products. The Company sells these
products to over 40,000 customers engaged in a wide variety of industries
including machinery manufacturing, transportation, fabricated metal products,
aerospace, oil tools, construction, shipbuilding, plastics, chemicals,
petrochemicals, farm equipment, food processing, energy and environmental
control. These customers are serviced through the Company's network of 25
service centers, four plate processing centers, one cutting center, one tube
honing facility, three sales offices and one national merchandising office.
During fiscal 1998 the Company generated revenues and EBITDA (as defined
herein) of $1,050.0 million and $82.5 million, respectively.
The Company serves its customers by providing quick product delivery, metals
processing expertise and inventory management services. The Company purchases
metals from primary producers and sells these metals in smaller quantities to a
wide variety of end users, generally within 24 hours from receipt of an order.
During fiscal 1998, the Company handled approximately 8,100 sales transactions
per business day, an average of $510 per transaction. EMJ processes most of the
metals it sells by cutting to length, burning, sawing, honing, shearing,
grinding, polishing, and performing other similar services, all to customer
specifications.
In late fiscal 1997, the Company appointed a new Chief Executive Officer and
developed and began to implement a plan to restructure and realign its
operations and reduce its workforce. Since March 1997, the Company has closed
four domestic service centers, while continuing to service the markets of those
facilities from service centers in adjoining territories. In addition, the
Company has sold two foreign subsidiaries which generated operating losses of
$2.9 million during the three years ended March 31, 1998. Since December 31,
1996, the Company's workforce has decreased approximately 15%, from
approximately 2,600 on December 31, 1996 to approximately 2,200 on March 31,
1998. In the aggregate, the Company believes that it has reduced its cost
structure by approximately $17 million since commencement of its restructuring
plan. The Company also instituted a new management incentive compensation plan
to provide bonuses to branch managers based on the achievement of certain
branch operating and corporate financial objectives.
The Company is currently engaged in a reengineering program emphasizing
process improvements including: (i) pursuing sales to new and existing
customers utilizing management information systems that provide improved
customer and market data and (ii) further implementing cost savings through
reductions in delivery and inventory handling expenses and through other
efficiency realizations.
The Company's restructuring plan has resulted in, and the reengineering
program is expected to continue, a downward trend in operating expense ratios.
According to industry sources, the U.S. metals distribution and processing
industry generated $40 billion in revenues in 1996. Metals service centers are
able to purchase, store, process and deliver metals to end users in a more
efficient and cost-effective manner than end users could achieve by dealing
directly with a primary metals producer. In particular, outsourcing of pre-
production processing services by end users to service centers and processors
saves time, space, labor and inventory expenses. The Company believes that the
metals service center
1
<PAGE>
industry will continue to be driven by four primary trends: (i) increased
demand for value-added services, (ii) increased outsourcing of processing by
domestic manufacturers, (iii) a shift by customers to fewer and larger
suppliers, and (iv) consolidation of industry participants.
COMPETITIVE STRENGTHS
The Company believes that the following factors contribute to its success in
the metals distribution industry:
Market Position. The Company is among the largest independent distributors of
metal products in the U.S. The Company believes that its broad product
offerings, with a specialization in higher margin bar and tubing (as compared
to flat-rolled products), have enabled it to maintain its position among the
market leaders and achieve gross margins that are among the highest for
comparable publicly-traded metals distribution companies. The Company is among
the largest purchasers of steel in the U.S. and has developed long-term
relationships with numerous metals producers, resulting in access to a wide
variety of metals and new product and service ideas. Because the Company
purchases large volumes of metals, it is able to achieve economies of scale in
purchasing. Furthermore, the Company believes that its salesforce is among the
most experienced in the industry.
Network of Strategically Located Facilities. The Company's service centers
are strategically located throughout North America, generally within one day's
delivery time to almost all U.S. manufacturing centers. The Company believes
that its network of strategically located facilities positions it to increase
sales to national customers that currently buy metals from various suppliers in
different locations. The Company's facilities serve more than 40,000 customers,
with no single customer accounting for more than three percent of the Company's
gross revenues. Such diversification reduces the Company's vulnerability to the
financial or economic weakness of particular customers, industries or regions.
Service and Product Selection. The Company specializes in higher gross margin
bar and tubing products that are not commonly sold directly by steel and
aluminum producers in small quantities. The Company serves the needs of its
customers by carrying a broad range of shapes and sizes in its core product
areas in large quantities, which allows the Company to deliver orders to
customers typically within 24 hours from receipt of an order. Each of the
Company's service centers strives to be a market leader in the Company's core
product lines in its geographic area. The Company benefits from an excellent
reputation for quality and service built over its 75 years in operation and has
received numerous quality and service awards from its customers. The Company
was among the first in the metals distribution industry to receive multi-site
ISO 9002 certification and had the first metals service center to receive QS
9000 certification established by the automobile industry.
Management Information Systems and Inventory Practices. The Company has
invested significant resources to upgrade its management information and
financial reporting system. The Company's current system, which was brought on
line in February 1995, provides an internal benchmarking system to track
profitability by customer and product type. The Company believes that this
information system will assist management in its efforts to purchase more
effectively, reallocate inventory among different locations and improve
customer service through better order reference data. The Company tailors its
inventory at each service center to the specific customer requirements of the
particular market served.
Reduced Cost Structure and Economies of Scale. The Company believes that the
closure or sale of underperforming assets, the reduction in its workforce and
other restructuring initiatives have improved the Company's cost structure by
approximately $17 million. The Company believes that it will be better able to
withstand an economic downturn as a result of its cost reduction initiatives.
In addition, because of the Company's large size and scope of operations, its
fixed costs are spread across a large base of sales.
Experienced Management with Equity Ownership. The Company's executives and
other members of its management have substantial experience in the metals
industry. In addition, the Company's employees directly,
2
<PAGE>
and indirectly through the Earle M. Jorgensen Employee Stock Ownership Plan
(the "ESOP"), own in the aggregate approximately 35.3% (28.8% on a diluted
basis) of the outstanding common stock of Holding (the "Holding Common Stock")
as of March 31, 1998.
OPERATING AND GROWTH STRATEGY
The Company's primary business goal is to improve its operating profits while
expanding its market share. Its operating and growth strategy consists of the
following elements:
Continue Cost Reductions and Productivity Improvements. The Company is
currently implementing a reengineering program to improve profitability and
realize cost savings through continued reductions in delivery and inventory
handling expenses and through other efficiency realizations. The Company seeks
to increase asset and employee productivity and to further decrease unit costs
through initiatives intended to increase volume, thereby taking advantage of
economies of scale. The Company has made and will continue to make investments
in its management information system to increase the efficiency of the Company
and assist it in identifying additional areas for operational improvement. In
addition, the Company has instituted a new management incentive compensation
plan to provide incentives to branch management that are based on branch
operating achievements and corporate financial objectives.
Focus on Higher Gross Margin Value-Added Products and Services. The Company
seeks to maintain its gross margins and to expand its market share by (i)
making sales from inventory with value-added services as often as possible,
since such sales generally generate higher gross margins and (ii) providing
inventory management and timely delivery services. Since the mid-1980's, the
Company has shifted its product mix away from commodity-like products such as
flat-rolled steel and has increased its sales of specialty products such as
carbon, alloy, stainless and aluminum bar and tubing that generally afford
higher gross margins. Although the Company continues to sell steel and aluminum
sheet products, it does so primarily in niche markets or as a service to
important customers that are significant purchasers of other higher gross
margin products.
Realize Efficiencies from Management Information System Investments. The
Company believes that continuing enhancements to the Company's management
information system will assist the Company in its initiatives to achieve
further cost savings and enable it to handle a larger number of orders. Planned
improvements in the Company's management information system include: (i) an
improved order processing system which will allow its salespersons to access
customer history and to improve order throughput, (ii) a warehouse automation
system to better control inventory and shipment logistics, (iii) upgraded
financial reporting, planning and sales and gross profit analysis systems, and
(iv) document imaging technology to facilitate processing, storage and
retrieval of transactional data. These and other enhancements should assist the
Company's efforts to improve the information available to management in its
initiatives to improve customer service, optimize inventory levels and achieve
greater operational efficiencies.
The principal executive offices of the Company are located at 3050 East Birch
Street, Brea, California 92821, and its telephone number is (714) 579-8823.
Affiliates of Kelso & Company ("Kelso") hold approximately 63.2% of the
outstanding shares of the Holding Common Stock. Kelso is a merchant banking
firm located in New York City.
THE REFINANCING TRANSACTIONS
The net proceeds received by the Company from the sale of the Old Notes and
the Special Term Loan were approximately $199.5 million, after deduction of
underwriting discounts and commissions but before payment by the Company of
other related fees and expenses of the Initial Offering and the Special Term
Loan.
3
<PAGE>
Concurrently with the closing of the Initial Offering, the Company entered
into a loan agreement (the "Special Term Loan") with DLJ Capital Funding, Inc.,
as syndication agent, Donaldson Lufkin & Jenrette Securities Corporation and BT
Alex. Brown Incorporated, as arrangers, and Fleet Bank, N.A. as administrative
agent, and the lenders party thereto, pursuant to which the Company borrowed
$100.0 million. The net proceeds of the Special Term Loan were used, together
with the proceeds from the Initial Offering and the New Credit Facility, to
refinance existing indebtedness and to pay related transaction fees and
expenses as described herein.
Concurrently with the closing of the Initial Offering, the Company replaced
its revolving Credit Facility (the "Credit Facility") with a new revolving
credit facility pursuant to a credit agreement with a group of banks (the "New
Credit Facility" and together with the Credit Facility (the "Revolving Credit
Facility")). The New Credit Facility provides up to $220.0 million in revolving
credit and letter of credit availability secured by a pledge of the Company's
inventory and accounts receivable. See "Description of Other Indebtedness." The
replacement of the Credit Facility with the New Credit Facility is referred to
as the "Bank Refinancing."
The net proceeds of the Initial Offering, the Special Term Loan and the New
Credit Facility were used to (i) redeem $155.0 million in aggregate principal
amount of the Company's outstanding 10 3/4% Senior Notes (the "10 3/4% Notes")
together with premium and accrued interest thereon to the date of redemption,
(ii) prepay approximately $5.1 million in aggregate principal amount of
purchase money indebtedness, including premium and accrued interest thereon,
and (iii) pay a dividend to Holding in the amount of approximately
$45.4 million which enabled Holding to (x) prepay $40.0 million in principal
amount of its senior indebtedness (the "Holding Notes") (which were issued as
interest paid in kind on the Holding Notes), and (y) pay approximately
$5.4 million of interest accrued as of March 24, 1998 on the Holding Notes
(collectively, the "Holding Prepayment"). The Holding Notes are owned by an
affiliate of Kelso. The Initial Offering, the Holding Prepayment and the Bank
Refinancing are referred to collectively as the "Refinancing Transactions."
4
<PAGE>
THE EXCHANGE OFFER
The Exchange Notes.......... The forms and terms of the Exchange Notes are
identical in all material respects to the terms
of the Old Notes for which they may be exchanged
pursuant to the Exchange Offer, except for
certain transfer restrictions and registration
rights relating to the Old Notes and except for
certain interest provisions relating to the Old
Notes described below under "Terms of the
Exchange Notes."
The Exchange Offer.......... The Company is offering to exchange up to
$105,000,000 aggregate principal amount of its 9
1/2% Senior Notes due 2005, Series B (the
"Exchange Notes") for up to $105,000,000
aggregate principal amount of its outstanding 9
1/2% Senior Notes due 2005, Series A (the "Old
Notes"). Old Notes may be exchanged only in
integral multiples of $1,000.
Expiration Date;
Withdrawalof Tender........ The Exchange Offer will expire at 5:00 p.m., New
York City time, on September , 1998, or such
later date and time to which it is extended by
the Company. The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
No Minimum Condition........ The Exchange Offer is not conditioned upon any
minimum amount of Old Notes being tendered for
Exchange.
Certain Conditions to the
Exchange Offer............. The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Certain
Conditions to the Exchange Offer." The Company
currently expects that each of the conditions
will be satisfied and that no waivers will be
necessary.
Procedures for Tendering
Old Notes.................. Each holder of the Old Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal (or facsimile thereof)
in accordance with the instructions contained
herein and therein, and mail or otherwise deliver
the Letter of Transmittal (or the facsimile), or
(in the case of a book-entry transfer) an Agent's
Message (as defined herein) in lieu of the Letter
of Transmittal, and any other required
documentation to the Exchange Agent (as defined
herein) at one of the addresses set forth herein
prior to the Expiration Date. In addition, prior
to the Expiration Date, either (a) certificates
for tendered Old Notes must be received by the
Exchange Agent at such address, or (b) the Old
Notes must be transferred pursuant to the
procedures for book-entry transfer described
below (and a confirmation of the tender received
by the Exchange Agent, including an Agent's
Message if the tendering holder has not delivered
a Letter of Transmittal). By executing the Letter
of Transmittal, each holder will represent to the
Company that, among other things, (i) any
Exchange Notes to be received by it will be
5
<PAGE>
acquired in the ordinary course of its business,
(ii) it has no arrangement with any person to
participate in the distribution of the Exchange
Notes, and (iii) it is not an "affiliate,"
as defined in Rule 405 of the Securities Act, of
the Company or, if it is an affiliate, it will
comply with the registration and prospectus
delivery requirements of the Securities Act to
the extent applicable. See "The Exchange Offer--
Procedures for Tendering" and "Plan of
Distribution."
Interest on the Exchange
Notes...................... The Exchange Notes will bear interest at the rate
of 9 1/2% per annum, payable semi-annually on
April 1 and October 1, commencing October 1,
1998. Holders of the Exchange Notes will receive
interest on October 1, 1998 from the date of
initial issuance of the Exchange Notes, plus an
amount equal to the accrued interest on the Old
Notes from the most recent date to which interest
has been paid to the date of exchange thereof.
Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the
Exchange Notes.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender the Old Notes in the
Exchange Offer should contact the registered
holder promptly and instruct the registered
holder to tender on the beneficial owner's
behalf. If the beneficial owner wishes to tender
on the owner's own behalf, such owner must, prior
to completing and executing the Letter of
Transmittal and delivering the Old Notes, either
make appropriate arrangements to register
ownership of the Old Notes in the owner's name or
obtain a properly completed bond power from the
registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures................. Holders of the Old Notes who wish to tender their
Old Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent, or who cannot complete the
procedure for book-entry transfer on a timely
basis and deliver an Agent's Message in lieu of
the Letter of Transmittal, prior to the
Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of Exchange
Notes...................... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Acceptance of Old Notes
for Exchange; Delivery of Exchange Notes."
6
<PAGE>
Consequences of Failure to
Exchange................... Holders of the Old Notes who do not tender their
Old Notes in the Exchange Offer will continue to
hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto
under the Indenture dated as of March 24, 1998
between the Company and United States Trust
Company of New York, as trustee (the "Trustee")
relating to the Old Notes and the Exchange Notes
(the "Indenture"), except for any such rights
under the Registration Rights Agreement (as
defined herein) that by their terms terminate or
cease to have further effectiveness as a result
of the making of, and the acceptance for exchange
of all validly tendered Old Notes pursuant to the
Exchange Offer. Holders of Old Notes who do not
exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of
such Old Notes as set forth in the legend therein
as a consequence of the offer or sale of the Old
Notes pursuant to an exemption from, or in a
transaction not subject to, the registration
requirements of the Securities Act and applicable
state securities laws. In general, the Old Notes
may not be offered or sold, unless registered
under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Old Notes
under the Securities Act. To the extent that Old
Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered or
tendered but unaccepted Old Notes could be
adversely affected. See "The Exchange Offer--
Consequences of Failure to Exchange."
Registration Requirements... The Company has agreed to use its best efforts to
consummate by September , 1998 the registered
Exchange Offer pursuant to which holders of the
Old Notes will be offered an opportunity to
exchange their Old Notes for the Exchange Notes
which will be issued without legends restricting
transfer. In the event that applicable
interpretations of the staff of the Commission do
not permit the Company to effect the Exchange
Offer or in certain other circumstances, the
Company has agreed to file a shelf registration
statement covering resales of the Old Notes (the
"Shelf Registration Statement") and to use its
best efforts to cause the Shelf Registration
Statement to be declared effective under the
Securities Act and, subject to certain
exceptions, keep the Shelf Registration Statement
effective until two years after its effective
date.
Certain U.S. Federal Income
Tax Considerations......... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Old Notes, see "Certain
U.S. Federal Income Tax Consequences."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange of the Old Notes pursuant to the
Exchange Offer.
Exchange Agent.............. United States Trust Company of New York is the
Exchange Agent. The address and telephone number
of the Exchange Agent are set forth in "The
Exchange Offer--Exchange Agent."
7
<PAGE>
TERMS OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that the Exchange Notes are registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof. See "Description of the Exchange Notes."
Exchange Notes.............. $105 million aggregate principal amount of 9 1/2%
Senior Notes due 2005, Series B of the Company.
Maturity Date............... April 1, 2005.
Interest Payment Dates...... April 1 and October 1, commencing October 1,
1998.
Ranking..................... The Exchange Notes constitute unsecured
obligations of the Company and rank pari passu in
right of payment with all present and future
senior unsecured indebtedness of the Company. The
Exchange Notes will be effectively subordinated
to borrowings under the Special Term Loan, which
is secured by a first priority lien on a
substantial portion of the existing and future
acquired unencumbered property, plant and
equipment of the Company, and the Company's New
Credit Facility, which is secured by a first
priority lien on all of the inventory and
accounts receivable of the Company, to the extent
of the value of the assets securing such senior
secured indebtedness and to any additional
secured indebtedness of the Company permitted
under the Indenture governing the Exchange Notes.
As of March 31, 1998, the Company had
approximately $207.9 million of such secured
indebtedness (including $0.7 million in letters
of credit) that was effectively senior to the
Notes. See "Description of the Notes--General"
and "Description of Other Indebtedness."
Optional Redemption......... The Exchange Notes will be redeemable at the
option of the Company, in whole or in part, on or
after April 1, 2002, at the redemption prices
set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption.
Notwithstanding the foregoing, prior to April 1,
2001, the Company may redeem from time to time up
to 35% of the aggregate principal amount of the
Exchange Notes originally outstanding at a
redemption price equal to 109.5% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the redemption date, with the net
proceeds of certain issuances of common stock by
the Company (or of Holding to the extent such net
proceeds are contributed as a capital
contribution in exchange for common stock of the
Company); provided, that at least 65% of the
aggregate principal amount of the Exchange Notes
originally outstanding remain outstanding
immediately after the occurrence of such
redemption. See "Description of the Notes--
Optional Redemption."
Change of Control........... Upon a Change of Control, the Company will be
required to offer to repurchase all outstanding
Exchange Notes at 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. Certain
transactions involving a change in ownership
among the current stockholders of Holding will
not be
8
<PAGE>
deemed to constitute a Change of Control. See
"Description of the Notes--Repurchase of Exchange
Notes at the Option of the Holder Upon a Change
of Control."
Certain Covenants........... The Indenture contains certain covenants with
respect to the Company that limit the ability of
the Company to, among other things, (i) incur
additional Indebtedness (as defined herein),
(ii) pay dividends or make other distributions,
(iii) make certain investments, (iv) create
certain liens, (v) sell certain assets, (vi)
enter into certain transactions with affiliates,
and (vii) enter into certain mergers or
consolidations involving the Company. See
"Description of the Notes--Certain Covenants."
For additional information regarding the Exchange Notes, see "Description of
the Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain matters that should be
considered before tendering the Old Notes in exchange for the Exchange Notes.
9
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data set forth below with respect to the Company's
statement of operations for each of the three years in the period ended March
31, 1998, and with respect to the Company's balance sheet as of March 31, 1998
are derived from the consolidated financial statements which are included
elsewhere in this Prospectus and which have been audited by Ernst & Young LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus. The statement of operations data for the years ended March 31, 1994
and 1995 are derived from consolidated financial statements audited by Ernst &
Young LLP which are not included herein. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of the Company and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $843,380 $1,022,884 $1,025,659 $1,023,565 $1,050,005
Gross profit............ 249,758 305,909 261,021 280,739 294,624
Operating expenses
exclusive of
restructuring,
consolidation and other
non-recurring charges.. 222,750 247,184 245,619 245,826 225,019
Restructuring,
consolidation and other
non-recurring charges.. 1,282 715 12,776 20,088 2,838
Income from operations.. 25,726 58,010 2,626 14,825 66,767
Extraordinary loss...... -- -- -- -- 9,075
Net income (loss)....... (4,306) 19,919 (29,311) (26,556) 15,760
Pro forma net income
(1).................... 18,368
<CAPTION>
AS OF
MARCH 31,
1998
----------
(DOLLARS
IN
THOUSANDS)
BALANCE SHEET DATA:
<S> <C>
Working capital................................................... $ 156,500
Net property, plant and equipment................................. 106,643
Total assets...................................................... 443,821
Long-term debt (including current portion)........................ 312,234
Stockholder's equity (deficit).................................... (36,919)
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
OTHER DATA:
<S> <C> <C> <C> <C> <C>
EBITDA (2).............. $ 51,538 $ 88,678 $ 40,404 $ 45,424 $ 82,497
Cash flows provided by
(used in) operating
activities............. (4,240) (15,201) 70,118 (5,951) 36,602
Cash flows provided by
(used in) investing
activities............. 490 (10,352) (16,105) (680) 7,555
Cash flows provided by
(used in) financing
activities............. 14,701 23,384 (38,745) 4,838 (44,515)
Net cash interest
expense (3)............ 26,457 31,592 37,310 37,747 39,993
Pro forma net cash
interest expense (4)... 37,649
Capital expenditures.... $ 12,371 $ 16,177 $ 16,658 $ 4,449 $ 7,264
Ratio of earnings to
fixed charges (5)...... -- 1.58x -- -- 1.54x
Pro forma ratio of
earnings to fixed
charges (6)............ 1.64x
Dividends paid (7)...... $ 5,898 $ 3,654 $ 22,289 $ 5,552 $ 56,888
</TABLE>
(Notes on following page)
10
<PAGE>
- --------------------
(1) "Pro forma net income" reflects the change in interest expense, including
the amortization of debt issue costs, and resulting tax consequences from
such changes, assuming the Refinancing Transactions were consummated on
April 1, 1997, and the indebtedness of the Company was as shown in the
Capitalization table.
(2) "EBITDA" represents income from operations before net interest expense,
taxes, depreciation, amortization, non-cash ESOP expense and certain other
expenses, as shown in the table below. EBITDA is presented because
management believes that it provides an important measure of the Company's
debt service ability. The Company's management believes that EBITDA, while
providing useful information, should not be considered in isolation or as a
substitute for consolidated statement of operations and cash flows data
prepared in accordance with generally accepted accounting principles. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from operations.......... $25,726 $58,010 $ 2,626 $14,825 $66,767
Depreciation and amortization
(a)............................ 14,680 14,135 12,022 10,620 9,475
Non-cash ESOP expense (b)....... 6,005 7,694 3,401 3,102 2,788
LIFO charge (credit)............ 3,629 7,558 9,710 (3,491) 349
FAS 106 adjustments............. (268) (360) (256) 280 280
Consolidation expense........... 1,282 715 -- -- --
Debt forgiveness................ 484 51 -- -- --
Lease termination fees.......... -- 875 125 -- --
Restructuring charges........... -- -- 3,571 15,638 2,838
Fixed asset write-downs or
write-offs..................... -- -- 9,205 4,450 --
------- ------- ------- ------- -------
EBITDA.......................... $51,538 $88,678 $40,404 $45,424 $82,497
======= ======= ======= ======= =======
</TABLE>
--------------------
(a) Depreciation and amortization excludes amortization of debt issues
costs aggregating $2,040, $2,117, $2,144, $2,144 and $1,757 for the
fiscal years ended March 31, 1994, 1995, 1996, 1997 and 1998,
respectively, and debt issue costs of $550 written off in connection
with an amendment to the Company's revolving loan agreement in 1996,
reflected in the Company's consolidated statements of operations as
interest expense.
(b) Non-cash ESOP expense represents the amount of ESOP expense charged to
operations that were or will be paid in the form of Holding's equity
securities.
(3) Net cash interest expense represents net interest expense, including
interest expense associated with borrowings against cash surrender value of
life insurance policies maintained by the Company, adjusted to exclude (i)
the amortization and write-off of debt issue costs (see Note 2(a) above)
and bond discount and (ii) accrued interest.
(4) Pro forma net cash interest expense represents estimated cash interest
expense assuming consummation of the Refinancing Transactions had occurred
as of the first day of April 1997. The pro forma net cash interest expense
calculation is based on indebtedness as shown in the Capitalization table.
Annual interest rates used in this calculation are the rates payable by the
Company on its indebtedness for the year ended March 31, 1998: 7.56% on
industrial revenue bond indebtedness, 7.65% on the New Credit Facility (the
pro forma weighted average rate on the Credit Facility borrowings (which
reflects the lower interest rate structure under the New Credit Facility)
for the year ended March 31, 1998), 8.94% on the Special Term Loan and
9.50% on the Notes. Pro forma cash interest expense includes interest
expense of $9,354 in respect of life insurance policy loans payable at the
rate of 11.76% per annum. Life insurance policy loans do not constitute
indebtedness of the Company and are not shown in the Capitalization table.
Pro forma net cash interest expense does not include amortization of the
debt issuance costs related to the New Credit Facility, the Special Term
Loan and the Notes, which would amount to approximately $1,368 for fiscal
1998 on a pro forma basis.
(5) In computing the ratio of earnings to fixed charges, "earnings" represents
pre-tax income (loss) plus fixed charges except capitalized interest, if
any. "Fixed charges" represents interest whether expended or capitalized,
debt cost amortization, and 33% of rent expense, which is representative of
the interest factor. Earnings were sufficient to cover fixed charges for
the fiscal years ended March 31, 1995 and 1998. Earnings were insufficient
to cover fixed charges for the fiscal years ended March 31, 1994, 1996 and
1997 by $4,306, $38,248 and $26,055, respectively.
(6) "Pro forma ratio of earnings to fixed charges" reflects the change in
interest expense, including the amortization of debt issue costs, assuming
the Refinancing Transactions were consummated on April 1, 1997, the
indebtedness of the Company was as shown in the Capitalization Table and
the interest rates on the Company's indebtedness were as stated in note (4)
above.
(7) Dividends paid include the Holding Prepayment of $45,419 and dividends to
Holding in connection with Holding's repurchasing of its capital stock from
terminated employees. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
11
<PAGE>
RISK FACTORS
In addition to other information contained in this Prospectus, investors
should consider carefully the following specific risk factors, as well as the
other information set forth in this Prospectus, before tendering the Old Notes
in exchange for the Exchange Notes.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT DEPENDENT ON FUTURE PERFORMANCE
AND FACTORS OUTSIDE COMPANY CONTROL
The Company is highly leveraged. As of March 31, 1998, EMJ and its
subsidiaries had total debt (including current maturities) of approximately
$312.2 million and a percentage of total debt to total capitalization of
approximately 114.0%. See "Capitalization." In addition, EMJ may, subject to
certain restrictions, incur further indebtedness from time to time to finance
expansion or for other purposes through acquisitions or capital leases. As of
March 31, 1998, the Company's Fixed Charge Coverage Ratio (as defined in the
Indenture) was 2.02 to 1. The Company is prohibited by the Indenture from
incurring additional indebtedness other than Permitted Indebtedness (as
defined in the Indenture), unless the Fixed Charge Coverage Ratio is greater
than 2.0 to 1. See also, "--Restrictions Imposed by Lenders."
The Company's leverage could have important consequences to the holders of
the Exchange Notes, including: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, refinancing or other purposes will be impaired, (ii) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of debt service (principal and interest) on its
indebtedness and will not be available for other purposes, (iii) the Company's
leverage will increase its vulnerability to economic downturns and limit its
ability to withstand adverse economic conditions, and (iv) the Company's
ability to capitalize on significant business opportunities and to respond to
competition may be limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Liquidity and Capital
Resources."
The Company experienced net losses of approximately $29.3 million and $26.6
million for fiscal 1996 and 1997, respectively, principally as a result of
interest payments on indebtedness and certain restructuring, consolidation and
other non-recurring charges. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEFICIT OF EARNINGS TO FIXED CHARGES; DEBT SERVICE; CONSEQUENCES OF FAILURE TO
SERVICE DEBT
Due to the Company's substantial indebtedness, a significant portion of the
Company's cash flow from operations is required for debt service. The
Company's earnings were insufficient to cover fixed charges by approximately
$38.2 million and $26.1 million in fiscal 1996 and 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
However, on a pro forma basis, after giving effect to the Refinancing
Transactions and the application of the proceeds therefrom as described
herein, the Company's earnings would have covered fixed charges by 1.64 times
in fiscal 1998. This pro forma fixed charge coverage ratio was calculated (i)
assuming that the Notes bear interest at 9.50%, the Special Term Loan bears
interest at 8.94% and borrowings under the New Credit Facility bear interest
at 7.65%, (ii) assuming the indebtedness outstanding would have been in the
amounts set forth in the Capitalization table, and (iii) replacing existing
debt issuance cost amortization with estimated new debt issuance costs of $8.6
million amortizable over the life of the respective indebtedness resulting in
a reduction in interest expense of approximately $0.4 million in fiscal 1998.
See footnote (5) to "Selected Historical Consolidated Financial Data" for the
definitions of "earnings" and "fixed charges."
12
<PAGE>
The Company's ability to meet its debt service and other obligations will
depend upon its future performance, which will be affected by prevailing
economic and competitive conditions and other factors, some of which are
beyond the control of the Company. The Company's ability to meet its debt
service obligations also may be affected by changes in prevailing interest
rates, as the Special Term Loan and borrowings under the New Credit Facility
bear interest at floating rates. There can be no assurance that the Company
will be able to meet its debt service and other obligations. However, the
Company's annual debt service obligations until March 24, 2003 (when the New
Credit Facility matures) will be primarily limited to interest payments on the
Notes, the Special Term Loan, the New Credit Facility and outstanding
industrial revenue bonds, and to principal payments of $1.0 million per year
on the Special Term Loan and to principal payments on outstanding industrial
revenue bonds of approximately $0.5 million in fiscal years 1999 and 2000,
$1.4 million in fiscal years 2001 through 2004 and $6.2 million in the
aggregate thereafter through 2010.
RISK OF PRINCIPAL REPAYMENT; ABILITY TO REPAY THE NOTES WILL BE DEPENDENT ON
REFINANCING
The Company will have substantial principal repayment obligations prior to
the maturity of the Notes on April 1, 2005. The Company will be required to
have fully repaid its borrowings under the Special Term Loan on or before
March 24, 2004 and the New Credit Facility on or before March 24, 2003. See
"Description of Other Indebtedness." The Company believes it will generate
sufficient cash flow from operations to be able to make the scheduled payments
of interest under the New Credit Facility and the Notes and principal and
interest under the Special Term Loan; however, the Company does not expect to
generate sufficient cash flow from operations to repay the New Credit Facility
when it matures in 2003 or to pay the $94.3 million in principal due on the
Special Term Loan when it matures in 2004. The Company expects that its
ability to repay the Notes at their scheduled maturity will be dependent in
whole or in part on (i) replacing the New Credit Facility on or prior to its
maturity, (ii) refinancing all or a portion of the Special Term Loan before it
matures and (iii) refinancing all or a portion of the Notes before they
mature. The Special Term Loan is secured by a first priority lien on a
substantial portion of the Company's existing and future acquired unencumbered
property, plant and equipment and the New Credit Facility is secured by a
first priority lien on all of the Company's inventory and accounts receivable.
The Company's ability to refinance the Notes or seek additional financing
could be impaired as a result of such security.
In the event the Company is unable to make required payments or otherwise
comply with the terms of its indebtedness, including the New Credit Facility,
the Special Term Loan and the Notes, the Company would be in default under the
terms of its indebtedness. Such a default could result, among other things, in
a foreclosure or other actions by creditors against collateral securing such
indebtedness, and in cross defaults to other indebtedness resulting in the
acceleration of the maturity of all principal and interest of indebtedness
subject to such cross defaults, which could result in the Company being forced
to seek protection under applicable bankruptcy laws or in an involuntary
bankruptcy proceeding being brought against the Company. Under such
circumstances, the holders of the Notes may be adversely affected.
RANKING
The Exchange Notes constitute unsecured obligations of the Company ranking
pari passu in right of payment with all present and future senior unsecured
indebtedness of the Company (including the Old Notes) that is not, by its
terms, expressly subordinated in right of payment to the Exchange Notes. The
Special Term Loan and borrowings under the New Credit Facility constitute
secured obligations of the Company ranking pari passu in right of payment with
all present and future indebtedness of the Company that is not by its terms
expressly subordinated in right of payment to such indebtedness. As of March
31, 1998, the Company had outstanding approximately $207.9 million in senior
secured indebtedness (including $0.7 million in letters of credit). The
Exchange Notes rank pari passu with these obligations, but are unsecured,
while the Special Term Loan is secured by a first priority lien on a
substantial portion of the Company's existing and future acquired unencumbered
property, plant and equipment and the obligations under the New Credit
Facility are secured by a first priority lien on all of the Company's
inventory and accounts receivable. Under certain circumstances, the
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<PAGE>
Indenture permits the Company to refinance or incur additional amounts of
secured indebtedness. Such secured indebtedness would effectively rank senior
to the Notes. See "Description of the Notes--Covenants--Limitation on
Indebtedness." In the event of a bankruptcy proceeding or other default by the
Company, the lenders under the Company's secured indebtedness (including the
Special Term Loan and the New Credit Facility) will have a claim on the assets
pledged to secure such indebtedness and such assets would be applied to the
payment of such claims before claims of holders of unsecured senior
indebtedness such as the Notes would be satisfied. The Holding Notes are
structurally subordinated to the Notes, and dividends by the Company to
Holding to pay principal or interest on the Holding Notes will be limited by
the Indenture governing the Notes, by the Special Term Loan and by the New
Credit Facility. See "Description of the Notes--Certain Covenants--Limitation
on Restricted Payments" and "Description of Other Indebtedness--Indebtedness
of Holding."
RESTRICTIONS IMPOSED BY LENDERS
The Indenture, the Special Term Loan and the New Credit Facility impose
significant operating and financial restrictions on the Company. Such
restrictions affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness, pay dividends or make other distributions, make certain
investments, create certain liens, sell certain assets, enter into certain
transactions with affiliates, or engage in certain mergers or consolidations
involving the Company. In addition, the New Credit Facility contains other and
more restrictive covenants and requires the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests may be affected by events beyond its
control, and there can be no assurance that the Company will meet such tests.
These restrictions could limit the ability of the Company to obtain future
financing, make needed capital expenditures, withstand a future downturn in
its business or the economy, or otherwise conduct necessary corporate
activities. A failure by the Company to comply with the restrictions contained
in the Indenture, the Special Term Loan agreement or the New Credit Facility
agreement could lead to a default under the terms of the Indenture, the
Special Term Loan agreement or the New Credit Facility agreement. In the event
of a default under the Indenture, the Special Term Loan agreement or the New
Credit Facility agreement, the applicable lender could elect to declare all
amounts borrowed pursuant thereto and all amounts due under other instruments
(including but not limited to the Indenture, the Special Term Loan agreement
or the New Credit Facility agreement, as applicable) that may contain cross-
acceleration or cross-default provisions may also be declared to be
immediately due and payable together with accrued and unpaid interest and the
lenders could terminate all commitments thereunder. In such event, there can
be no assurance that the Company would be able to make such payments or borrow
sufficient funds from alternative sources to make any such payment. Even if
additional financing could be obtained, there can be no assurance that it
would be on terms that are favorable or acceptable to the Company. In
addition, the Company's indebtedness under the Special Term Loan and New
Credit Facility is secured by a substantial portion of the assets of the
Company and, upon the occurrence of a default and the acceleration of such
indebtedness, the holders of such indebtedness could seize such assets and
sell them as a means to satisfy all or part of such indebtedness. See
"Description of the Notes--Certain Covenants" and "Description of Other
Indebtedness."
FRAUDULENT TRANSFER CONSIDERATIONS
The Company made a distribution to Holding of $45.4 million from the net
proceeds of the Refinancing Transactions, of which $40.0 million was used by
Holding to redeem a portion of its senior indebtedness.
If a court in a lawsuit brought by an unpaid creditor of the Company or a
representative of such creditor, such as a trustee in bankruptcy, or of the
Company as a debtor-in-possession, were to find under relevant federal and
state fraudulent conveyance statutes that the Company had (a) actual intent to
defraud or (b) did not receive fair consideration or reasonably equivalent
value for the distribution from the Company to Holding or for incurring the
debt, including the Notes, in connection with the Refinancing Transactions,
and that, at the time of such incurrence, the Company (i) was insolvent, (ii)
was rendered insolvent by reason of such incurrence, (iii) was engaged in a
business or transaction for which the assets remaining with the Company
constituted
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<PAGE>
unreasonably small capital or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, such
court could void the Company's obligations under the Notes, subordinate the
Notes to other indebtedness of the Company or take other action detrimental to
the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company would be
considered insolvent for these purposes if the sum of the company's debts
(including contingent debts) were greater than the fair saleable value of all
the company's property, or if the present fair saleable value of the company's
assets were less than the amount that would be required to pay its probable
liability on its existing debts as they become absolute and matured. Moreover,
regardless of solvency or the adequacy of consideration, a court could void
the Company's obligations under the Notes, subordinate the Notes to other
indebtedness of the Company or take other action detrimental to the holders of
the Notes if such court determined that the incurrence of debt, including the
Notes, was made with the actual intent to hinder, delay or defraud creditors.
The Company believes that the indebtedness represented by the Notes was
incurred for proper purposes and in good faith without any intent to hinder,
delay or defraud creditors, that the Company received reasonably equivalent
value or fair consideration for incurring such indebtedness, that the Company
was at the time the Refinancing Transactions were consummated and will
continue to be, solvent under the applicable standards (notwithstanding the
negative net worth that resulted from the Refinancing Transactions) and that
the Company has and will have sufficient capital for carrying on its
businesses and is and will be able to pay its debts as they mature. There can
be no assurance, however, as to what standard a court would apply in order to
evaluate the parties' intent or to determine whether the Company was insolvent
at the time, or rendered insolvent upon consummation of the Refinancing
Transactions or that, regardless of the method of valuation, a court would not
determine that the Company was insolvent at the time, or rendered insolvent
upon consummation, of the Refinancing Transactions.
In rendering their opinions in connection with the Initial Offering, counsel
for the Company did not express any opinion as to the applicability of federal
or state fraudulent conveyance laws.
CYCLICAL NATURE OF METALS DISTRIBUTION INDUSTRY
Cyclical trends in the basic metal industries affect the results of
operations in the metals service center industry. Price and tonnage shipment
volatility in the metals industry may have an adverse effect on the Company's
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, some of the Company's
products are sold to industries that experience significant fluctuations in
demand based on economic conditions, energy prices or other factors beyond the
control of the Company.
COMPETITION
The metals distribution industry is highly fragmented and competitive. The
Company believes that there is a trend towards consolidation in the industry
as metals purchasers seek to deal with fewer suppliers, however, the industry
is expected to continue to be highly fragmented and competitive for the
foreseeable future. EMJ faces strong competition from other national, regional
and local independent metals distributors, subsidiaries of metals producers
and the producers themselves. Although EMJ is one of the largest distributors
of metals in the U.S., some of its competitors have greater financial
resources than EMJ and most of its competitors are less leveraged than EMJ.
See "Business--Competition."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The Company depends to a significant degree on its management information
systems in the operation of its business and has taken customary precautions
to protect such systems. In 1995, the Company experienced start-up operational
difficulties in connection with the implementation of its new management
information system
15
<PAGE>
that adversely affected its customer service, results of operations and
working capital, but the Company believes such problems have been resolved.
The destruction or the failure of or an interruption in service from any of
the Company's management information systems for any significant period of
time could have a material adverse effect on the Company's results of
operations or on the ability of the Company to implement the improvements to
its management information systems described herein. See "Business--Management
Information Systems."
YEAR 2000 COMPLIANCE
The Company believes that its management information systems are
substantially in compliance with Year 2000 standards and such standards are
not expected to materially impact the Company's internal operations. However,
Year 2000 considerations may have an effect on some of the Company's customers
and suppliers, and thus indirectly affect the Company. The Company is
assessing the effect, if any, on certain of its customers and suppliers by
conducting Year 2000 compliance surveys. It is not possible to quantify the
effect that customer, supplier or governmental authorities' problems with Year
2000 might have on the Company, but the Company has not been advised of any
problems of its customers, suppliers or governmental authorities that it
believes will have a material adverse effect on the Company's business.
CHANGE OF CONTROL
Upon the occurrence of any Change of Control (as defined under "Description
of the Notes--Repurchase of Notes at the Option of the Holder Upon a Change of
Control"), the Indenture will require EMJ to make an offer (a "Change of
Control Offer") to purchase all of the Notes issued and then outstanding under
the Indenture at a purchase price equal to 101% of the principal amount
thereof plus accrued interest thereon, as of the date of purchase.
Any Change of Control under the Indenture would constitute a default under
the New Credit Facility and the Special Term Loan pursuant to which each of
the lenders under the New Credit Facility and the Special Term Loan could
accelerate and require immediate payment of all of the then outstanding
obligations under the New Credit Facility and the Special Term Loan. See
"Capitalization."
If a Change of Control were to occur, it is likely that EMJ would be unable
to repay all of its obligations under the New Credit Facility, the Special
Term Loan and the Indenture and to repay other indebtedness that would become
payable upon the occurrence of such Change of Control. Accordingly, it is
likely that a prospective acquiror of all or substantially all of Holding's
assets or of more than 50% of Holding's common equity would, in order to avoid
the occurrence of a default under the Company's indebtedness, either fund
EMJ's purchase of the Notes tendered in the Change of Control Offer following
such acquisition or seek to refinance the Notes, and refinance the Company's
other indebtedness as required by the terms thereof, which funding or
refinancing may have the effect of delaying, deferring or preventing such an
acquisition.
VOTING CONTROL
EMJ and Holding are private corporations. Kelso, through its affiliates,
holds approximately 63.2% of the outstanding shares of Holding Common Stock as
of March 31, 1998 and is able to elect a majority of the Board of Directors of
Holding and EMJ. A Kelso affiliate also holds two sets of warrants that
represent the right to purchase in the aggregate 2,937,915 additional shares
(the "Warrants"), which increases Kelso's ownership of the Holding Common
Stock to approximately 70.0% on a diluted basis. As a result of such stock
ownership, whether or not such Warrants are exercised, those shareholders can
effectively control the affairs and policies of Holding and EMJ. See "Security
Ownership of Certain Beneficial Owners and Management."
TAX MATTERS
The Company has determined that it has a net operating loss carryforward
("NOL") of approximately $70.0 million at March 31, 1998. The NOL is available
for offset against future taxable income, if utilized during
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<PAGE>
the carryforward period which expires between 2008 and 2011. Tax benefits
arising from NOLs are subject to revisions to the tax laws and challenge by
the Internal Revenue Service and may not be available in subsequent years if
the use of the NOLs is limited or lost. For example, the use of the NOL may be
limited if an ownership change within the meaning of section 382 of the Code
occurs after the Exchange Offer with respect to the Company. If an ownership
change were to occur, such a limitation could reduce the Company's net income.
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON TRADING MARKET
FOR THE OLD NOTES
Holders of the Old Notes who do not exchange their Old Notes for the
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of the Old Notes as set forth in the legend
thereon as a consequence of the issuance of the Old Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold unless registered under the
Securities Act and applicable state laws, or pursuant to an exemption
therefrom. Subject to the obligation by the Company to file the Shelf
Registration Statement in certain circumstances, the Company does not intend
to register the Old Notes under the Securities Act and, after consummation of
the Exchange Offer, will not be obligated to do so. In addition, any holder of
the Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Additionally, as a result of the
Exchange Offer, it is expected that a substantial decrease in the aggregate
principal amount of the Old Notes outstanding will occur. As a result, it is
unlikely that a liquid trading market will exist for the Old Notes at any
time. This lack of liquidity will make transactions more difficult and may
reduce the trading price of the Old Notes. See "The Exchange Offer" and
"Description of the Notes--Registration Rights of the Old Notes."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
There has not previously been any public market for the Exchange Notes.
There can be no assurance as to the liquidity of any markets that may develop
for the Exchange Notes, the ability of holders to sell the Exchange Notes, or
the price at which holders would be able to sell the Exchange Notes. Future
trading prices of the Exchange Notes will depend on many factors, including
among other things, prevailing interest rates, the Company's operating results
and the market for similar securities. Historically, the market for securities
similar to the Exchange Notes has been subject to disruptions that have caused
substantial volatility in the prices of such securities. The Initial
Purchasers have advised the Company that they currently intend to make a
market for the Exchange Notes offered hereby. However, the Initial Purchasers
are not obligated to do so and any market making may be discontinued at any
time without notice.
The liquidity of, and trading markets for the Exchange Notes may also be
adversely affected by declines in the market for high yield securities
generally. Such a decline may adversely affect such liquidity and trading
markets independent of the financial performance of, and prospects for, EMJ.
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<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered. In consideration
for issuing the Exchange Notes as contemplated in this Prospectus, the Company
will receive, in exchange, Old Notes in like principal amount. The form and
terms of the Exchange Notes are identical in all material respects to the form
and terms of the Old Notes, except as otherwise described under "The Exchange
Offer--Terms of the Exchange Offer." The Old Notes surrendered in exchange for
the Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company. As such, no effect has been given to the
Exchange Offer in the capitalization table.
The Company applied the net proceeds received by the Company from the sale
of the Old Notes and the other Refinancing Transactions to (i) redeem $155.0
million in aggregate principal amount of outstanding 10 3/4% Notes, together
with premium and accrued interest thereon to the date of redemption, (ii)
prepay approximately $5.1 million in aggregate principal amount of purchase
money indebtedness, including premium and accrued interest thereon, and (iii)
pay a dividend to Holding in the amount of approximately $45.4 million to
enable Holding to (x) prepay $40.0 million in principal amount of the Holding
Notes (which were issued as interest paid in kind on the Holding Notes), and
(y) pay approximately $5.4 million of interest accrued as of March 31, 1998 on
the Holding Notes. The Holding Notes are owned by affiliates of Kelso.
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<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and capitalization of
the Company as of March 31, 1998. This table should be read in conjunction
with the Company's consolidated financial statements and the notes related
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Cash.................................................... $ 20,763
=========
Long-term debt (1):
Revolving Credit Facility (2)......................... $ 94,434
Special Term Loan (3)................................. 100,000
9 1/2% Senior Notes due 2005.......................... 105,000
Industrial Revenue Bonds.............................. 12,800
---------
Total debt, including current portion............... 312,234
Less current portion (4)............................ 1,500
---------
Total long-term debt................................ 310,734
---------
Stockholder's equity (deficit):
Preferred stock, $.01 par value; authorized shares-
200; none issued and
outstanding.......................................... --
Common stock, $.01 par value; authorized shares-2,800;
issued and outstanding shares-128.................... --
Additional paid in capital............................ 116,789
Foreign currency translation adjustment............... (278)
Accumulated deficit................................... (153,430)
---------
Total stockholder's equity (deficit)................ (36,919)
---------
Total capitalization................................ $ 273,815
=========
</TABLE>
- ---------------------
(1) See Note 6 to the Company's consolidated financial statements for a
description of long-term debt.
(2) See "Description of Other Indebtedness--New Credit Facility."
(3) See "Description of Other Indebtedness--Special Term Loan Agreement."
(4) Current portion of long-term debt consisted of industrial revenue bond
indebtedness of $500 maturing within one year of March 31, 1998, and the
$1,000 annual principal payment on the Special Term Loan. See "Description
of Other Indebtedness--Special Term Loan Agreement".
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on March 24, 1998 to the Initial
Purchasers. The Initial Purchaser placed the Old Notes with a limited number
of qualified institutional buyers in reliance on Rule 144A under the
Securities Act and to certain purchasers pursuant to Regulation S under the
Securities Act. Pursuant to the Registration Rights Agreement, the Company
agreed (i) to file a registration statement with respect to an offer to
exchange the Old Notes for senior debt securities of the Company with terms
substantially identical to the Old Notes (except that the Exchange Notes do
not contain terms with respect to transfer restrictions) within 90 days after
the date of original issuance of the Old Notes, and (ii) to use its best
efforts to cause the registration statement to become effective under the
Securities Act within 150 days after the issue date. In the event that
applicable law or interpretations of the staff of the Commission do not permit
the Company to file the registration statement containing this Prospectus or
to effect the Exchange Offer, or if certain holders of the Old Notes notify
the Company that they are not permitted to participate in, or would not
receive freely tradeable Exchange Notes pursuant to, the Exchange Offer, the
Company will use its best efforts to cause to become effective a Shelf
Registration Statement with respect to the resale of the Old Notes and to keep
the Shelf Registration Statement effective until two years after the effective
date thereof. Upon consummation of the Exchange Offer, holders of the Old
Notes not tendered and accepted in the Exchange Offer who did not notify the
Company that they are not permitted to participate in, or would not receive
freely tradeable Exchange Notes pursuant to, the Exchange Offer may no longer
have any registration rights under the Registration Rights Agreement. The
interest rate on the Old Notes is subject to increase under certain
circumstances if the Company is not in compliance with its obligations under
the Registration Rights Agreement. See "Description of the Notes--Registration
Rights of the Old Notes."
Each holder of the Old Notes who wishes to exchange the Old Notes for the
Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
it has no arrangement with any person to participate in the distribution of
the Exchange Notes, and (iii) it is not an "affiliate," as defined in Rule 405
of the Securities Act, of the Company, or, if it is an affiliate, it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable. See "Description of the Notes--
Registration Rights of the Old Notes."
RESALE OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third-parties, the Company believes that, except as
described below, the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the Exchange Notes are acquired in the
ordinary course of the holder's business and the holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes. Any holder who tenders
in the Exchange Offer with the intention or for the purpose of participating
in a distribution of the Exchange Notes cannot rely on this interpretation by
the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction, unless an exemption from registration is
otherwise available.
Each broker-dealer that receives the Exchange Notes in exchange for the Old
Notes acquired for its own account as a result of market-making activities or
other trading activities (a "Participating Broker-Dealer") must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of the Exchange Notes. The Letter of
Transmittal states that a broker-dealer will not, by so acknowledging and by
delivering a prospectus, be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may
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<PAGE>
be used by a Participating Broker-Dealer in connection with resales of the
Exchange Notes. The Company has agreed that, for a period of one year after
the Registration Statement is declared effective by the Commission, it will
make this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder and any beneficial owner(s) of the tendered Old
Notes (the "Beneficial Owner(s)") in the ordinary course of business, (ii) the
holder and any Beneficial Owner(s) (other than a broker-dealer referred to in
the next sentence) are not engaging and do not intend to engage, in a
distribution of the Exchange Notes, (iii) the holder and any Beneficial
Owner(s) have no arrangement or understanding with any person to participate
in a distribution of the Exchange Notes, (iv) neither the holder nor any
Beneficial Owner is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act, and (v) the holder and any Beneficial Owner(s)
acknowledge that if the holder or Beneficial Owner(s) participates in the
Exchange Offer for the purpose of distributing the Exchange Notes they must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Notes and cannot
rely on these no-action letters. As indicated above, each Participating
Broker-Dealer must acknowledge that it will deliver a prospectus in connection
with any resale of the Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 in principal
amount of the Exchange Notes in exchange for each $1,000 in principal amount
of outstanding Old Notes surrendered pursuant to the Exchange Offer. The Old
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Old Notes except the Exchange Notes will be registered under the
Securities Act and hence will not bear legends restricting transfer. The
Exchange Notes will evidence the same debt as the Old Notes. The Exchange
Notes will be issued under and entitled to the benefits of the Indenture,
which also authorized the issuance of the Old Notes, such that both series
will be treated as a single class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of the Old Notes being tendered for exchange.
As of the date of this Prospectus, $105,000,000 in aggregate principal
amount of the Old Notes is outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of the Old
Notes. There will be no fixed record date for determining registered holders
of the Old Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. The Old Notes which are not tendered for exchange in
the Exchange Offer will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits such holders have under the
Indenture.
The Company shall be deemed to have accepted for exchange properly tendered
Old Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for
the tendering holders for the purpose of receiving the Exchange Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not previously
accepted for exchange, upon the occurrence of any of the conditions specified
below under "--Certain Conditions to the Exchange Offer."
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<PAGE>
Holders who tender the Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. The Expiration Date
shall not in any event be extended to a date later than , 1999 (180
days after the initial Expiration Date).
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders of Old Notes an announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Certain Conditions to the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by oral or written notice thereof to
the registered holders of the Old Notes. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 9 1/2% per annum, payable
semi-annually, on each April 1 and October 1, commencing October 1, 1998.
Holders of the Exchange Notes will receive interest on October 1, 1998 from
the date of initial issuance of the Exchange Notes, plus an amount equal to
the accrued interest on the Old Notes from the most recent date to which
interest has been paid to the date of exchange thereof for the Exchange Notes.
Interest on the Old Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Old Notes, and may terminate or amend the Exchange Offer as provided herein
before the acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and
return all tendered Old Notes to the tendering holders, (ii) extend the
22
<PAGE>
Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders"), or (iii) waive the unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. Any Old Notes not accepted for
exchange for any reason will be returned without expense to the tendering
holder thereof as promptly as practicable after the expiration or termination
of the Exchange Offer.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of the right and each right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for the Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
PROCEDURES FOR TENDERING
Only a holder of the Old Notes may tender the Old Notes in the Exchange
Offer. For a holder to validly tender the Old Notes pursuant to the Exchange
Offer, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case of
a book-entry transfer) an Agent's Message (as defined below) in lieu of the
Letter of Transmittal, and any other required documents must be received by
the Exchange Agent at one of the addresses set forth under "--Exchange Agent"
prior to the Expiration Date. In addition, prior to the Expiration Date,
either (a) certificates for tendered Old Notes must be received by the
Exchange Agent at such address, or (b) the Old Notes must be transferred
pursuant to the procedures for book-entry transfer described below (and a
confirmation of the tender received by the Exchange Agent, including an
Agent's Message if the tendering holder has not delivered a Letter of
Transmittal). The term "Agent's Message" means a message, transmitted by the
book-entry transfer facility, The Depository Trust Company (the "Book-Entry
Transfer Facility"), to and received by the Exchange Agent and forming a part
of a book-entry confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the tendering participant
that the participant has received and agrees to be bound by the Letter of
Transmittal and that the Company may enforce the Letter of Transmittal against
the participant.
By executing the Letter of Transmittal (or transmitting an Agent's Message
in lieu thereof), each holder will make to the Company the representations set
forth above in the third paragraph under the heading "--Resale of the Exchange
Notes."
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between the holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF THE OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR THE OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
23
<PAGE>
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct the
registered holder of the Old Notes to tender on the beneficial owner's behalf.
If the beneficial owner wishes to tender on the owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder of the Old Notes. The transfer
of registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as
defined below) unless the Old Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special
Delivery Instructions" on the Letter of Transmittal, or (ii) for the account
of an Eligible Institution. In the event that signatures on a Letter
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, the Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by the registered
holder as the registered holder's name appears on the Old Notes with the
signature thereon guaranteed by an Eligible Institution. If the Letter of
Transmittal is signed by a participant in the Depository Trust Company
("DTC"), the signature must correspond with the name as it appears on the
security position listing as the holder of the Old Notes and must be
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of the Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of the Old Notes, neither
the Company, the Exchange Agent nor any other person is under a duty to do so
or shall incur any liability for failure to give notification. Tenders of the
Old Notes will not be deemed to have been made until any defects or
irregularities are cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Act to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of the Exchange Notes for the Old Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of the Old Notes or a timely book-entry
confirmation of transfer of the Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal (or, in the case of book-entry transfers, an Agent's
Message in lieu thereof) and all other required documents. If any tendered Old
Notes are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange Offer or if the
24
<PAGE>
Old Notes are submitted for a greater principal amount than the holder desires
to exchange, the unaccepted or non-exchanged Old Notes will be returned
without expense to the tendering holder (or, in the case of any Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the Book-
Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with the Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer the Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with the
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of the Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile
thereof), with any required signature guarantee, or (in the case of a book-
entry transfer) an Agent's Message in lieu of the Letter of Transmittal, and
any other required documents, must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent" on or prior to the
Expiration Date or, if the guaranteed delivery procedures described below are
to be complied with, within the time period provided under such procedures.
Delivery of documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from the
Eligible Institution (i) an Agent's Message with respect to guaranteed
delivery that is accepted by the Company, or (ii) a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the registered number(s) of the Old Notes and the principal amount of the
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three (3) New York Stock Exchange trading days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the Old Notes or a book-entry confirmation of transfer of the
Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility (a "Book-Entry Confirmation"), as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case
of a book-entry transfer) an Agent's Message in lieu of the Letter of
Transmittal, as well as all tendered Old Notes in proper form for transfer
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent
within three (3) New York Stock Exchange trading days after the Expiration
Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of the Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
25
<PAGE>
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of the Old Notes), and (where
certificates for the Old Notes have been transmitted) specify the name in
which the Old Notes were registered, if different from that of the withdrawing
holder. If certificates for the Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of the
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of withdrawal
with signatures guaranteed by an Eligible Institution unless the holder is an
Eligible Institution. If the Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of the Book-Entry Transfer Facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which were tendered for exchange but which are not exchanged for any
reason will be returned to the holder without cost to the holder, or (in the
case of the Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above) the Old Notes will be credited to an
account maintained with the Book-Entry Transfer Facility for the Old Notes, as
soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering"
at any time on or prior to the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly on the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after such
acceptance. See "--Certain Conditions to the Exchange Offer" above. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely book-
entry confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date.
26
<PAGE>
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for a Notice of Guaranteed Delivery should be directed to the
Exchange Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail: By Overnight or Courier: By Hand:
UNITED STATES TRUST COMPANY UNITED STATES TRUST COMPANY UNITED STATES TRUST COMPANY
OF NEW YORK OF NEW YORK OF NEW YORK
P.O. BOX 843 770 BROADWAY, 13TH FLOOR 111 BROADWAY
COOPER STATION NEW YORK, NY 10003 LOWER LEVEL
NEW YORK, NY 10276-0844 ATTN: CORPORATE TRUST SERVICES NEW YORK, NY 10006
ATTN: CORPORATE TRUST SERVICES ATTN: CORPORATE TRUST SERVICES
Facsimile Transmission Number: Confirm by Telephone: Information:
212-780-0592 800-548-6565 800-548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, and are estimated to be approximately $200,000. These
expenses include registration fees, fees and expenses of the Exchange Agent
and Trustee, accounting and legal fees and printing costs, and related fees
and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, certificates
representing the Old Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to the tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register the Exchange Notes in the name of, or request that the
Old Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax.
27
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of the Old Notes who do not exchange their Old Notes for the
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of the Old Notes, as set forth in the legend
thereon, as a consequence of the issuance of the Old Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.
Accordingly, the Old Notes may only be resold (i) to the Company (upon
redemption or otherwise), (ii) to a "qualified institutional buyer" within the
meaning of Rule 144A of the Securities Act pursuant to Rule 144A, (iii)
outside the United States to non-U.S. persons in compliance with Regulation S
under the Securities Act, (iv) pursuant to an effective registration
statement, or (v) pursuant to any other available exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), in each case in accordance with
any applicable state securities laws. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act.
28
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data set forth below with
respect to the Company's statement of operations for each of the three years in
the period ended March 31, 1998, and with respect to the Company's balance
sheets as of March 31, 1997 and 1998 are derived from the consolidated
financial statements which are included elsewhere in this Prospectus and which
have been audited by Ernst & Young LLP, independent auditors, as indicated in
their report included elsewhere in this Prospectus. The statement of operations
data for the years ended March 31, 1994 and 1995 and the balance sheet data as
of March 31, 1994, 1995 and 1996 are derived from consolidated financial
statements audited by Ernst & Young LLP which are not included herein. The data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $843,380 $1,022,884 $1,025,659 $1,023,565 $1,050,005
Gross profit................ 249,758 305,909 261,021 280,739 294,624
Operating expenses exclusive
of restructuring,
consolidation and other
non-recurring charges...... 222,750 247,184 245,619 245,826 225,019
Restructuring, consolidation
and other non-recurring
charges.................... 1,282 715 12,776 20,088 2,838
Income from operations...... 25,726 58,010 2,626 14,825 66,767
Extraordinary loss.......... -- -- -- -- 9,075
Net income (loss)........... (4,306) 19,919 (29,311) (26,556) 15,760
Pro forma net income (1).... 18,368
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $176,280 $ 243,738 $ 166,587 $ 170,988 $ 156,500
Net property, plant and
equipment.................. 143,099 139,705 134,259 120,050 106,643
Total assets................ 505,928 543,548 484,911 454,882 443,821
Long-term debt (including
current portion)........... 294,136 296,274 279,952 291,286 312,234
Stockholder's equity
(deficit).................. 54,708 76,400 25,141 1,927 (36,919)
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (2).................. $ 51,538 $ 88,678 $ 40,404 $ 45,424 $ 82,497
Cash flows provided by (used
in) operating activities... (4,240) (15,201) 70,118 (5,951) 36,602
Cash flows provided by (used
in) investing activities... 490 (10,352) (16,105) (680) 7,555
Cash flows provided by (used
in) financing activities... 14,701 23,384 (38,745) 4,838 (44,515)
Net cash interest expense
(3)........................ 26,457 31,592 37,310 37,747 39,993
Capital expenditures........ $ 12,371 $ 16,177 $ 16,658 $ 4,449 $ 7,264
Ratio of earnings to fixed
charges (4)................ -- 1.58x -- -- 1.54x
Dividends paid (5).......... $ 5,898 $ 3,654 $ 22,289 $ 5,552 $ 56,888
</TABLE>
- ---------------------
(1) "Pro forma net income" reflects the change in interest expense, including
the amortization of debt issue costs resulting from such changes, assuming
the Refinancing Transactions were consummated on April 1, 1997, and the
indebtedness of the Company was as shown in the Capitalization table.
(notes continued on following page)
29
<PAGE>
(2) "EBITDA" represents income from operations before net interest expense,
taxes, depreciation, amortization, non-cash ESOP expense and certain other
expenses, as shown in the table below. EBITDA is presented because
management believes that it provides an important measure of the Company's
debt service ability. The Company's management believes that EBITDA, while
providing useful information, should not be considered in isolation or as
a substitute for consolidated statement of operations data prepared in
accordance with generally accepted accounting principles. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from operations.......... $25,726 $58,010 $ 2,626 $14,825 $66,767
Depreciation and amortization
(a)............................ 14,680 14,135 12,022 10,620 9,475
Non-cash ESOP expense (b)....... 6,005 7,694 3,401 3,102 2,788
LIFO charge (credit)............ 3,629 7,558 9,710 (3,491) 349
FAS 106 adjustments............. (268) (360) (256) 280 280
Consolidation expense........... 1,282 715 -- -- --
Debt forgiveness................ 484 51 -- -- --
Lease termination fees.......... -- 875 125 -- --
Restructuring charges........... -- -- 3,571 15,638 2,838
Fixed asset write-downs or
write-offs..................... -- -- 9,205 4,450 --
------- ------- ------- ------- -------
EBITDA.......................... $51,538 $88,678 $40,404 $45,424 $82,497
======= ======= ======= ======= =======
</TABLE>
-----------------
(a) Depreciation and amortization excludes amortization of debt issues costs
aggregating $2,040, $2,117, $2,144, $2,144 and $1,757 for the fiscal
years ended March 31, 1994, 1995, 1996, 1997 and 1998, respectively, and
debt issue costs of $550 written off in connection with an amendment to
the Company's revolving loan agreement in 1996, reflected in the
Company's consolidated statements of operations as interest expense.
(b) Non-cash ESOP expense represents the amount of ESOP expense charged to
operations that were or will be paid in the form of Holding's equity
securities.
(3) Net cash interest expense represents net interest expense, including
interest expense associated with borrowings against cash surrender value
of life insurance policies maintained by the Company, adjusted to exclude
(i) the amortization and write-off of debt issue costs (see note (2)(a)
above) and bond discount and (ii) accrued interest.
(4) In computing the ratio of earnings to fixed charges, "earnings" represents
pre-tax income (loss) plus fixed charges except capitalized interest, if
any. "Fixed charges" represents interest whether expended or capitalized,
debt cost amortization, and 33% of rent expense, which is representative
of the interest factor. Earnings were sufficient to cover fixed charges
for the fiscal years ended March 31, 1995 and 1998. Earnings were
insufficient to cover fixed charges for the fiscal years ended March 31,
1994, 1996 and 1997 by $4,306, $38,248 and $26,055, respectively.
(5) Dividends paid include the Holding Prepayment of $45,419 and dividends to
Holding in connection with Holding's repurchasing of its capital stock
from terminated employees. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial Data," and the consolidated financial
statements of the Company and the notes related thereto appearing elsewhere in
this Prospectus and other more detailed financial data appearing elsewhere
herein.
GENERAL
The Company was formed in May 1990 when Kelso and its affiliates acquired
control of and combined two leading metals distributors, EMJ (founded in 1921)
and Kilsby-Roberts Holding Co. (founded in 1915). Through its network of 25
service centers strategically located throughout North America, the Company
distributes a broad line of bar, tubing and pipe, and plate and sheet metal
products to over 40,000 customers.
During the past several years, the Company has undergone substantial
changes. In March 1997, the Company announced a $15.6 million restructuring
plan that included selling certain foreign operations, closing four domestic
distribution centers, and reducing the Company's workforce in order to improve
operating efficiencies and margins. In addition, fiscal 1997 included a $4.5
million write-off of certain costs related to its management information and
reporting system. In fiscal 1996, the Company recorded a $3.6 million
restructuring charge for workforce reductions and a non-recurring charge of
$9.2 million for asset write-downs and write-offs. In addition, fiscal 1996
included a charge to cost of sales of $26.9 million representing the
difference between the Company's physical inventory balances and its perpetual
inventory records after the implementation and conversion to a new management
information system in February 1995. The implementation of the new computer
system required a company-wide training effort and change in operational
processes that required a learning period for the system's users, and such
implementation adversely affected the Company's results of operations in
fiscal 1996. Start-up difficulties impacted sales, purchasing, receivables and
inventory management and caused the Company to incur additional expense in
correcting errors arising in the transition process. The Company believes that
such problems have been resolved.
In late fiscal 1997, the Company appointed a new Chief Executive Officer and
developed and began to implement a plan to restructure and realign its
operations and reduce its workforce. In addition, the Company has shifted its
strategic focus to emphasize maximizing operating income and cash flow. The
Company increased its EBITDA from $45.4 million in fiscal 1997 to $82.5
million in fiscal 1998, an increase of $37.1 million, or 81.7%. For the same
periods, EBITDA margin increased from 4.4% to 7.9% of sales, respectively.
This improved operating performance has resulted primarily from the successful
implementation of the Company's restructuring plan. Cost savings measures
implemented included: (i) the closure of four under-performing domestic
service centers and the sale of unprofitable foreign subsidiaries in Mexico
and the United Kingdom (net operating losses totalled $2.9 million in the
three years ended March 31, 1998), and (ii) a reduction in the number of
employees from approximately 2,600 on December 31, 1996 to approximately 2,200
on March 31, 1998, including the elimination of a number of corporate
managerial positions. In the aggregate, the Company believes that it has
reduced its cost structure by approximately $17 million since commencement of
its restructuring plan.
The Company is currently engaged in a reengineering program emphasizing
process improvements including: (i) pursuing sales to new and existing
customers, utilizing enhanced information systems to provide improved customer
and market data and (ii) further implementing cost savings through reductions
in delivery and inventory handling expenses and through other efficiency
realizations. The Company is also pursuing further operational efficiencies
by: (i) providing incentives for service center managers and salespersons
based on branch operating achievements and corporate financial objectives; and
(ii) repositioning faster moving inventory from the facilities which the
Company had designated as depots to the service centers, which is designed to
increase sales and operating income. The Company is continually enhancing its
management information systems with the objective of improving operating
performance through better and more efficient service at reduced costs.
The Company's restructuring plan has resulted in, and the reengineering
program is expected to continue, a downward trend in operating expense ratios.
31
<PAGE>
The metals service center industry has been historically cyclical (with
periods of strong demand and higher prices followed by periods of weaker
demand and lower prices), principally due to the nature of the industries in
which the largest consumers of metals operate. The domestic metals service
center industry cycle is based on the cycles for the U.S. industries that it
services. The Company believes its results have been less sensitive to
economic trends than some of its competitors due to its customer base, product
mix and the variety of industries served.
STATEMENT OF OPERATIONS INFORMATION
The following table sets forth certain consolidated statement of operations
data for the Company. The historical financial data for the fiscal years ended
March 31, 1996, 1997 and 1998, are derived from the historical financial
statements included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1996 % 1997 % 1998 %
---------- ----- ---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $1,025,659 100.0% $1,023,565 100.0% $1,050,005 100.0%
Gross profit............ 261,021 25.4 280,739 27.4 294,624 28.1
Operating expenses
exclusive of
restructuring and other
non-recurring expenses. 245,619 23.9 245,826 24.0 225,019 21.4
Warehouse and delivery
expenses.............. 129,966 12.7 135,287 13.2 128,495 12.2
Selling expenses....... 41,794 4.1 40,791 4.0 37,147 3.5
General and
administrative
expenses.............. 73,859 7.2 69,748 6.8 59,377 5.7
Income from operations.. 2,626 0.3 14,825 1.4 66,767 6.4
Net interest expense.... 40,874 4.0 40,880 4.0 41,059 3.9
Extraordinary loss...... -- -- -- -- 9,075 0.9
Net income (loss)....... (29,311) (2.9) (26,556) (2.6) 15,760 1.5
</TABLE>
RESULTS OF OPERATIONS--YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH
31, 1997
Revenues. Revenues for fiscal 1998 increased 2.6% to $1,050.0 million,
compared to $1,023.6 million in fiscal 1997. Revenues from domestic operations
for fiscal 1998 increased $36.6 million (3.8%) to $996.4 million compared to
$959.8 million in fiscal 1997. Domestic revenues in fiscal 1998 reflect a 9%
increase in tonnage volume offset by a 3% reduction in average selling price
(material costs declined 4%) compared to fiscal 1997. Revenues from
international operations decreased $10.2 million to $53.6 million in fiscal
1998 due to the sale of the U.K. and Mexican subsidiaries (see Note 4 to
Consolidated Financial Statements).
Gross Profit. Gross profit increased $13.9 million to $294.6 million in
fiscal 1998 compared to $280.7 million in fiscal 1997 and gross margin
increased to 28.1% compared to 27.4%. Fiscal 1998 included a LIFO charge of
$0.3 million compared to a corresponding LIFO credit of $3.5 million in fiscal
1997. Gross profit and gross margin from foreign operations was $11.4 million
and 21.3% in fiscal 1998, compared to $13.4 million and 21.0% in fiscal 1997.
Exclusive of foreign operations and LIFO, gross margin was 28.5% for fiscal
1998 compared to 27.5% in fiscal 1997. The increase of 1.0% is due to changes
in product mix, primarily higher bar tonnage shipped (18%) and higher average
prices on tubular products (3%) in fiscal 1998 compared to fiscal 1997. The
Company believes such changes were primarily due to changes in customer demand
toward products with higher margins, and not attributable to specific
strategies or initiatives of the Company. In addition, the shift in demand did
not reflect an identifiable trend in demand for product or by industry.
Expenses. Total operating expenses in fiscal 1998 were $227.8 million
compared to $265.9 million in fiscal 1997. Fiscal 1998 included a
restructuring charge of $2.8 million representing the loss on sale of the
Company's U.K. and Mexican operations (see Note 4 to Consolidated Financial
Statements). Fiscal 1997 included a restructuring charge of $15.6 million and
a non-recurring charge for asset write-offs of $4.5 million (see Note 1 to
Consolidated Financial Statements). Excluding such charges, operating expenses
in fiscal 1998 would have been $225.0 million, or 21.4% of revenues, compared
to $245.8 million, or 24.0% of revenues, in fiscal 1997.
32
<PAGE>
Warehouse and delivery expenses decreased $6.8 million (5.0%) to $128.5
million in fiscal 1998 compared to $135.3 million in fiscal 1997. As a percent
of revenues, warehouse and delivery expenses were 12.2% in 1998 and 13.2% in
fiscal 1997. The decrease resulted from a 7% reduction in compensation and
related expenses resulting from a reduction in the number of employees,
including reductions from the closure of four domestic service centers and
from the sale of the Mexican and U.K. subsidiaries in August 1997 and January
1998, respectively, partially offset by higher freight and shipping expenses
attributable to the 9% increase in tonnage volume shipped and repositioning
depot inventories.
Selling, general and administrative expenses decreased $14.0 million (12.7%)
to $96.5 million in fiscal 1998 compared to $110.5 million in fiscal 1997. In
fiscal 1998 selling expenses decreased $3.7 million (9.1%) to $37.1 million,
compared to $40.8 million in fiscal 1997, and decreased as a percent of
revenues to 3.5% from 4.0% in fiscal 1997 due to a 5% reduction in
compensation and related expenses resulting from the closure of four domestic
service centers and the sale of the Mexican and U.K. subsidiaries. General and
administrative expenses decreased by $10.4 million (14.9%) to $59.4 million in
fiscal 1998, and to 5.7% of revenues in fiscal 1998 from 6.8% in fiscal 1997.
The decrease in general and administrative expenses was attributable to an 8%
decrease in compensation and related expenses resulting from the March 1997
restructuring, which included an administrative workforce reduction, higher
income from cash discounts taken on vendor payments and gains from sales of
surplus facilities.
Net Interest Expense. Net interest expense was $41.1 million in fiscal 1998
and $40.9 million in fiscal 1997. Such amounts include interest on the
Revolving Credit Facility, the 10 3/4% Notes and the Notes, Special Term Loan
(in fiscal 1998 only), and borrowings against the cash surrender value of
certain life insurance policies and the amortization of debt issue costs
($1.8 million in fiscal 1998 and $2.1 million in fiscal 1997).
During fiscal 1998 the average outstanding indebtedness (excluding
borrowings against the cash surrender value of certain life insurance
policies) was $303.9 million versus $304.5 million in fiscal 1997. The
weighted average interest rate on such indebtedness during fiscal 1998 was
9.68% versus 9.62% in fiscal 1997. The changes in the average outstanding
indebtedness and the average interest rate were attributable to the Company's
Revolving Credit Facility borrowings and the impact of the Refinancing
Transactions consummated in March 1998 (see also "--Liquidity and Capital
Resources"). The average borrowings under the Revolving Credit Facility
decreased to $127.3 million from $130.4 million in fiscal 1997, and the
average interest rate increased to 8.65% in fiscal 1998 from 8.54% in fiscal
1997.
The outstanding borrowings against the cash surrender value of life
insurance policies was $88.9 million at March 31, 1998 and $76.5 million at
March 31, 1997, and the total interest expense on such borrowings increased to
$9.4 million in fiscal 1998 compared to $8.6 million in fiscal 1997. Such
increases resulted from a borrowing of $12.4 million against the increased
cash surrender value of life insurance policies in November 1997 to pay annual
premiums on such policies and to pay interest on previous borrowings (see "--
Liquidity and Capital Resources"). As specified in the terms of the insurance
policies, the rates for dividends payable on the policies correspondingly
increase when borrowings are outstanding under the policies. This increase in
dividends is greater than the increase in the incremental borrowing rate.
Dividend income earned under the policies was $10.3 million in fiscal 1998,
$7.8 million in fiscal 1997 and $7.6 million in fiscal 1996 and is reported as
an offset to general and administrative expenses in the Company's statements
of operations.
The interest rates on the Notes and on the life insurance policy borrowings
are fixed at 9.50% and 11.76%, respectively. The interest rates on the
Revolving Credit Facility and the Special Term Loan are floating rates (9.0%
and 8.94%, respectively, as of March 31, 1998).
Extraordinary Loss. The extraordinary loss of $9.1 million includes the
write-off of deferred financing costs and the payment of call premiums and
other expenses related to the early retirement of the Company's 10 3/4% Notes
and purchase money indebtedness as part of the Refinancing Transactions.
33
<PAGE>
RESULTS OF OPERATIONS--YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH
31, 1996
Revenues. Revenues for fiscal 1997 decreased 0.2% to $1,023.6 million,
compared to $1,025.7 million in fiscal 1996. Revenues from domestic operations
for fiscal 1997 increased $0.8 million to $959.8 million compared to $959.0
million in fiscal 1996. Foreign revenues decreased $2.9 million to $63.8
million. While domestic revenues were relatively flat, foreign revenues were
adversely impacted by general weaknesses in the local economies of Canada and
the United Kingdom. In addition, the transition to the Company's new
management information system in 1996 was disruptive to operations and reduced
domestic revenues in fiscal 1996.
Gross Profit. Gross profit increased $19.7 million to $280.7 million in
fiscal 1997 compared to $261.0 million in fiscal 1996 and gross margin
increased to 27.4% compared to 25.4%. The increases were primarily
attributable to a charge to cost of sales of $26.9 million recorded in fiscal
1996 (see Note 2 to Consolidated Financial Statements). Fiscal 1997 also
included a LIFO credit of $3.5 million compared to a corresponding LIFO charge
of $9.7 million in fiscal 1996. Gross profit and gross margin from foreign
operations was $13.4 million and 21.0% in fiscal 1997, compared to $15.6
million and 23.4% in fiscal 1996. Exclusive of foreign operations and LIFO,
gross margin was 27.5% for fiscal 1997, compared to 26.6% in fiscal 1996. The
increase of 0.9% reflects the charge to cost of sales in fiscal 1996,
partially offset by the effect of changes in product and customer mix
resulting from cyclical changes in industrial production, competitive pricing
pressures, disposition of slow moving and discontinued inventory, and a sudden
decline in stainless and aluminum sheet commodity prices.
In preparing its financial statements for the year ended March 31, 1996, the
Company recorded a charge to cost of sales of $26.9 million to adjust its
inventory balance to a carrying value based upon its adjusted perpetual
inventory records. This adjustment resulted from errors that arose in the
implementation of a new information
system. The errors were widespread and materially affected the inventories at
virtually all of the Company's branch locations. A review analysis that began
in February 1995 and was not concluded until shortly before the reporting of
fiscal 1996 results in the first quarter of fiscal 1997 enabled the Company to
identify that some errors were due to errors in quantities, decimal point
placement, and units of measure input by branch personnel into the perpetual
inventory records, but it was unable to identify the causes for other
differences between physical quantities counted and priced at applicable cost,
determined on the first-in, first-out basis that is used for the valuing
inventory in the perpetual inventory records, and related quantities and
carrying amounts in the perpetual inventories prior to adjustment. Today, the
Company speculates that most of the unidentified differences likely resulted
from transactions improperly processed or not processed by branch personnel
due to their unfamiliarity with the new information system, because all of the
efforts by the Company and its consultants found no defects in the software
logic of the new information system's processing of inventory transactions and
the physical counts continued to be taken by the same personnel who took the
physical counts under the prior information systems and were familiar with the
layout of the physical quantities of inventories at their locations. However,
due to the large number of transactions handled daily, the Company was unable
to identify such improperly processed transactions. Therefore, it was not
practicable to determine the amount of the adjustment related to any
particular type of error or any period prior to the fourth quarter of fiscal
1996.
As a result of its intensive review and analysis, the Company identified a
number of improvements that were implemented in the new information system, in
the training of its personnel in the use of the new information system, and in
the procedures performed in the monthly closing cycle to provide additional
assurance that the inventory balances reported in its financial statements are
fairly stated in accordance with its accounting policies. As a result of these
improvements the Company has not experienced significant differences between
its perpetual inventory balances and its priced-out physical counts in any
subsequent period.
Expenses. Total operating expenses of $265.9 million in fiscal 1997 included
a restructuring charge of $15.6 million and a non-recurring charge for asset
write-offs of $4.5 million (see Note 1 to Consolidated Financial Statements).
Total operating expenses of $258.4 million in fiscal 1996 included a
restructuring charge of $3.6 million for workforce realignment, and a non-
recurring charge of $9.2 million for asset write-downs and
34
<PAGE>
write-offs (see Note 1 to Consolidated Financial Statements). Excluding such
charges, operating expenses in fiscal 1997 would have been $245.8 million, or
24.0% of revenues, compared to $245.6 million, or 23.9% of revenues, in fiscal
1996.
Warehouse and delivery expenses increased $5.3 million (4.1%) to $135.3
million in fiscal 1997 compared to $130.0 million in fiscal 1996. As a percent
of revenues, warehouse and delivery expenses were 13.2% in 1997 and 12.7% in
fiscal 1996. The increases are primarily attributable to higher freight costs
and related handling expenses resulting from the expansion of services from
existing inventory depots and from additional depots established in fiscal
1996.
Selling, general and administrative expenses decreased $5.2 million (4.4%)
to $110.5 million in fiscal 1997 compared to $115.7 million in fiscal 1996. In
fiscal 1997 selling expenses decreased $1.0 million (2.4%) to $40.8 million,
and decreased as a percent of revenues to 4.0% from 4.1% in fiscal 1996 due to
lower compensation costs. General and administrative expenses decreased by
$4.1 million (5.5%) to $69.7 million in fiscal 1997, and to 6.8% of revenues
from 7.2% in fiscal 1996. The decrease in general and administrative expenses
was primarily due to lower compensation expense, lower depreciation and
amortization of property, plant and equipment resulting from a change in
accounting estimate in fiscal 1996, higher income from cash discounts taken on
vendor payments and gains from sales of surplus facilities.
Net Interest Expense. Net interest expense was $40.9 million in both fiscal
1997 and 1996. Such amounts include interest on the Credit Facility, 10 3/4%
Notes, interest on borrowings against the cash surrender value of certain life
insurance policies and the amortization or write-off of debt issue costs ($2.1
million in fiscal 1997 and $2.7 million in fiscal 1996).
During fiscal 1997 the average outstanding indebtedness (excluding
borrowings against the cash surrender value of certain life insurance
policies) was $304.5 million versus $305.4 million in fiscal 1996. The
weighted average interest rate on such indebtedness during fiscal 1997 was
9.62% versus 9.83% in fiscal 1996. The decrease in the average outstanding
indebtedness and the weighted average interest rate was attributable to the
Company's Credit Facility borrowings. The average borrowings under the Credit
Facility decreased to $130.4 million from $131.6 million in fiscal 1996, and
the average interest rate decreased to 8.54% in fiscal 1997 from 9.09% in
fiscal 1996.
The outstanding borrowings against the cash surrender value of life
insurance policies was $76.5 million at March 31, 1997 and $65.9 million at
March 31, 1996, and the total interest expense on such borrowings increased to
$8.6 million in fiscal 1997 compared to $7.2 million in fiscal 1996. Such
increases resulted from a borrowing of $11.4 million against the increased
cash surrender value of life insurance policies in November 1996 to pay annual
premiums on such policies and to pay interest on previous borrowings. See "--
Liquidity and Capital Resources." As specified in the terms of the insurance
policies, the rates for dividends earned under the policies correspondingly
increase when borrowings are outstanding under the policies. This increase in
dividends is greater than the increase in the incremental borrowing rate.
Dividend income earned under the policies was $7.8 million in fiscal 1997 and
$7.6 million in fiscal 1996 and is reported as an offset to general and
administrative expenses in the Company's statements of operations.
During fiscal 1997, the interest rates on the 10 3/4% Notes and on the life
insurance policy borrowings were fixed at 10.75% and 11.76%, respectively. The
interest rate on the Credit Facility was at a floating rate (10.0% as of March
31, 1997).
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements for debt service and capital
expenditures are expected to consist primarily of interest payments under its
New Credit Facility, interest and principal payments on the Special Term Loan,
interest payments on the Notes, dividend payments to Holding in connection
with the required repurchase of its capital stock from departing stockholders
pursuant to Holding's Stockholders Agreement and the ESOP,
35
<PAGE>
capital expenditures and principal and interest payments on the Company's
industrial revenue bonds. As of March 31, 1998, annual principal payments
required by the Company's outstanding industrial revenue bonds indebtedness
amount to $0.5 million in fiscal 1999 and 2000, $1.4 million in fiscal years
2001 through 2004 and $6.2 million in the aggregate thereafter through 2010.
The Company will not be required to make any principal payments in respect of
the Notes until 2005. The New Credit Facility will mature in 2003 and the
Special Term Loan will mature in 2004. The Special Term Loan requires
principal payments to be made in equal quarterly installments of $250,000. The
final installment due at maturity will repay in full all outstanding
principal. The New Credit Facility, the Special Term Loan and Notes have
covenants which are comparable to those complied with previously, and although
compliance with such covenants in the future is largely dependent on the
future performance of the Company and general economic conditions, for which
there can be no assurance, the Company expects that it will continue to be in
compliance with all of its debt covenants for the foreseeable future.
As of March 31, 1998, the Company's primary sources of liquidity were
available borrowings of approximately $90.6 million under the New Credit
Facility, available borrowings of approximately $5.5 million against certain
life insurance policies and internally generated funds. Borrowings under the
New Credit Facility are secured by the Company's domestic inventory and
accounts receivable, and future availability under the facility is determined
by prevailing levels of the Company's accounts receivable and inventory. The
Special Term Loan is secured by a first priority lien on a substantial portion
of the Company's current and future acquired unencumbered property, plant and
equipment. The life insurance policy loans are secured by the cash surrender
value of the policies and are non-recourse to the Company. The interest rate
on the life insurance policy loans is 0.5% greater than the dividend income
rate on the policies. As of March 31, 1998, there was approximately
$16.5 million of cash surrender value in all life insurance policies
maintained by the Company, net of borrowings.
The Company's capital expenditures were $7.3 million in fiscal 1998, $4.4
million in fiscal 1997 and $16.7 million in fiscal 1996. Capital expenditures
in fiscal 1996 and 1995 included $6.3 million and $5.7 million, respectively,
of expenditures financed through purchase money and industrial revenue bond
indebtedness. During fiscal 1998, capital expenditures were primarily for
routine replacement of machinery and equipment and for computer hardware and
software. For fiscal 1999, the Company has planned approximately $15.3 million
of capital expenditures (including $4.3 million deemed carryover from the
fiscal 1998 budget) to be financed from internally generated funds.
Approximately $8.1 million is for routine replacement of machinery and
equipment and facility improvements and expansions, $5.3 million is for the
purchase of a leased facility, and $1.9 million is for further additions to
the Company's management information systems.
During fiscal 1998, the Company redeemed $11.5 million of its capital stock
from retiring and terminated employees, as required by the terms of the
Company's ESOP and Holding's Stockholders Agreement. The Company expects that
such redemptions for fiscal 1999 will be comparable, although the timing of
such expenditures is not within the control of the Company and there can be no
assurance in this regard.
The cash required to complete the 1997 restructuring, including the
redemption of stock from terminated employees was financed from proceeds from
the sale of domestic facilities and foreign operations, as discussed above,
and from internal cash flows.
The dividend payment to Holding of $45.4 million to effect the Holding
Prepayment (see "Prospectus Summary--Refinancing Transactions"), resulted in
tax losses reported by Holding in the amount of approximately $27.2 million.
Such tax losses are available to offset consolidated federal taxable income of
Holding and the Company and will reduce cash taxes payable by the Company
under the Tax Allocation Agreement between Holding and the Company (see Note 7
to Consolidated Financial Statements).
36
<PAGE>
Working capital and cash flows of the Company over the past three fiscal
years are summarized below:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1996 1997 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED DATA:
Working capital............................... $166,587 $170,988 $156,500
Net cash provided by (used in) operating
activities................................... 70,118 (5,951) 36,602
Net cash provided by (used in) investing
activities................................... (16,105) (680) 7,555
Net cash provided by (used in) financing
activities................................... (38,745) 4,838 (44,515)
</TABLE>
The Company's working capital decreased $14.5 million to $156.5 million at
March 31, 1998 versus $171.0 million at March 31, 1997, primarily as the
result of the sale of foreign operations in the U.K. and Mexico and higher
accounts payable and accrued liabilities, including deferred taxes.
Inventories increased $6.4 million and accounts receivable decreased $8.2
million when compared to fiscal 1997 amounts. The Company's average accounts
receivable days outstanding were 36.1 days in fiscal 1998, 39.1 days in fiscal
1997 and 40.8 days in fiscal 1996.
Net cash provided by operations increased $42.6 million in fiscal 1998
compared to fiscal 1997 primarily due to the significant improvement in
earnings and lower accounts receivable. The impact of higher inventories on
operating cash flow in fiscal 1998 was offset by higher accounts payable and
accrued liabilities.
Net cash provided by investing activities increased $8.2 million in 1998
compared to 1997 primarily as a result of higher proceeds from fixed asset
dispositions, including excess facilities in Hartford, Connecticut;
Birmingham, Alabama; Grand Prairie, Texas; Detroit, Michigan and Kansas City,
Missouri, and proceeds received from the sale of foreign subsidiaries in the
U.K. and Mexico (see Note 4 to Consolidated Financial Statements), offset by
higher capital expenditures.
Net cash used in financing activities increased $49.4 million in 1998
compared to 1997 primarily as a result of reducing the outstanding balance
under the Revolving Credit Facility and payment of debt issue costs in
connection with the issuance of the Notes, the Special Term Loan, and the
replacement of the Credit Facility (see Note 6 to Consolidated Financial
Statements). Dividends paid to Holding for the repurchase of Holding's capital
stock from departing stockholders was $11.5 million in fiscal 1998 compared to
$5.6 million in fiscal 1997. In addition, proceeds from the Refinancing
Transactions were used to redeem the 10 3/4% Notes, prepay purchase money
indebtedness and pay a dividend to Holding to effect the Holding Prepayment.
See "Prospectus Summary--Refinancing Transactions."
The Company believes its sources of liquidity and capital resources are
sufficient to meet all currently anticipated operating cash requirements,
including debt service payments on the New Credit Facility, the Special Term
Loan and the Notes prior to their respective maturities. However, the Company
anticipates that it will be necessary to replace the New Credit Facility on or
prior to its maturity in 2003 and to refinance all or a portion of the Special
Term Loan on or prior to its maturity in 2004 and the Notes on or prior to
their maturity in March 2005, although there can be no assurance on what
terms, if any, the Company would be able to obtain such refinancing or
additional financing. The Company's ability to make interest payments on the
New Credit Facility and the Notes and principal and interest payments on the
Special Term Loan will be dependent on maintaining the level of performance
reflected in the fiscal 1998 results, which will be dependent on a number of
factors, many of which are beyond its control, and the continued availability
of revolving credit borrowings. The Company's earnings were sufficient to
cover fixed charges for fiscal 1998. Earnings were insufficient to cover fixed
charges for fiscal years 1997 and 1996 by $26.1 million and $38.2 million,
respectively.
ENVIRONMENTAL CONTINGENCIES
The Company is currently involved with remediation and/or investigation
activities at several former facilities where soil and/or groundwater
contamination is present. As of March 31, 1998, reserves totaling $2.3 million
have been established to cover those future environmental costs that are known
or can be reasonably estimated. See "Business--Environmental Matters" and Note
9 to the Company's Consolidated Financial Statements included elsewhere herein
for a more detailed discussion of specific environmental contingencies.
37
<PAGE>
The Company's service centers are subject to many federal, state and local
requirements relating to the protection of the environment, including
hazardous waste disposal and underground storage tank regulations. The Company
believes that it is in material compliance with all applicable environmental
laws and that the Company's products and processes do not present any unusual
environmental concerns. The Company does not anticipate any material
expenditures or material recurring costs in the near future in connection with
pollution control.
Some of the properties owned or leased by the Company are located in
industrial areas with histories of heavy industrial use. Although the location
of these properties may result in the Company's incurring environmental
liabilities that arise from causes other than the operations of the Company,
the Company does not expect that any such liabilities will have a material
adverse impact on the Company's results of operations, financial condition or
liquidity. The Company does not carry environmental insurance coverage.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, principally the Occupational Health and
Safety Act and regulations thereunder, which, among other requirements,
establish noise, dust and safety standards. The Company believes that it is in
material compliance with applicable laws and regulations and does not
anticipate that future compliance with such laws and regulations will have a
material adverse effect on the results of operations or financial condition of
the Company.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, management believes that, based upon all currently
available information, the resolution of such environmental matters will not
have a material adverse effect on the Company's financial condition, results
of operations or liquidity. The possibility exists, however, that new
environmental legislation and/or environmental regulations may be adopted, or
other environmental conditions may be found to exist, that may require
expenditures not currently anticipated and that may be material. See
"Business--Environmental Matters."
FOREIGN EXCHANGE EXPOSURE
The functional currency for the Company's foreign subsidiaries is the
applicable local currency. Exchange adjustments resulting from foreign
currency transactions are recognized in net earnings, whereas adjustments
resulting from the translation of financial statements are reflected as a
separate component of stockholder's equity. The Company does not hedge its
exposure to foreign currency fluctuations. Net foreign currency transaction
gains or losses have not been material in any of the years presented. See
"Business--Foreign Operations." However, the 1995 devaluation of the Mexican
peso and ongoing instability of the peso and the Mexican economy have had a
negative impact on the Company's Mexican operations, which generated operating
losses aggregating $2.9 million for the three fiscal years ended March 31,
1997.
In March 1997, the Company approved a restructuring plan that included
selling its foreign operations in the United Kingdom and Mexico. As a result
of this decision, the cumulative foreign currency translation losses for these
operations were recognized as part of the estimated loss on sale of these
operations.
YEAR 2000 COMPLIANCE
The Company believes that its management information systems are
substantially in compliance with Year 2000 standards and such standards are
not expected to materially impact the Company's internal operations. However,
Year 2000 considerations may have an effect on some of the Company's customers
and suppliers, and thus indirectly affect the Company. The Company is
assessing the effect, if any, on certain of its customers and suppliers by
conducting Year 2000 compliance surveys. It is not possible to quantify the
effect that customer, supplier or governmental authorities' problems with Year
2000 might have on the Company, but the Company has not been advised of any
problems of its customers, suppliers or governmental authorities that it
believes will have a material adverse effect on the Company's business.
INFLATION
The Company's operations have not been, nor are they expected to be,
materially affected by inflation.
38
<PAGE>
BUSINESS
GENERAL
The Company is one of the largest independent distributors of metal products
in the U.S., providing value added metals processing services and distributing
a broad line of carbon, alloy, stainless and aluminum bar, tubing and pipe,
and plate and sheet metal products. The Company sells these products to over
40,000 customers engaged in a wide variety of industries including machinery
manufacturing, transportation, fabricated metal products, aerospace, oil
tools, construction, shipbuilding, plastics, chemicals, petrochemicals, farm
equipment, food processing, energy and environmental control. These customers
are serviced through the Company's network of 25 service centers, four plate
processing centers, one cutting center, one tube honing facility, three sales
offices and one national merchandising office. In fiscal 1998, the Company
generated revenues and EBITDA of $1,050.0 million and $82.5 million,
respectively.
The Company serves its customers by providing quick product delivery, metals
processing expertise and inventory management services. The Company purchases
metals from primary producers and sells these metals in smaller quantities to
a wide variety of end users, generally within 24 hours from receipt of an
order. During fiscal 1998, the Company handled approximately 8,100 sales
transactions per business day, an average of $510 per transaction. EMJ
processes most of the metals it sells, by cutting to length, burning, sawing,
honing, shearing, grinding, polishing, and performing other similar services,
all to customer specifications.
In late fiscal 1997, the Company appointed a new Chief Executive Officer and
developed and began to implement a plan to restructure and realign its
operations and reduce its workforce. Since March 1997, the Company has closed
four domestic service centers, while continuing to service the markets of
those facilities from service centers in adjoining territories. In addition,
the Company has sold two foreign subsidiaries which generated net operating
losses of $2.9 million in the three years ended March 31, 1998. The Company
also reduced the number of employees from approximately 2,600 on December 31,
1996 to approximately 2,200 on March 31, 1998. In the aggregate, the Company
believes that it has reduced its cost structure by approximately $17 million
since commencement of its restructuring plan.
The Company also instituted a new management incentive compensation plan to
provide bonuses to branch managers based on the achievement of certain branch
operating and corporate financial objectives. The Company is currently engaged
in a reengineering program emphasizing process improvements including: (i)
pursuing sales to new and existing customers utilizing management information
systems that provide improved customer and market data and (ii) further
implementing cost savings through reductions in delivery and inventory
handling expenses and through other efficiency realizations.
The Company's restructuring plan has resulted in, and the reengineering
program is expected to continue, a downward trend in operating expense ratios.
INDUSTRY OVERVIEW
The Company believes that metals service centers provide valuable services
that are needed by end users. Primary metals producers, which manufacture and
sell large volumes of steel, aluminum and specialty metals in standard sizes
and configurations, generally sell only to those large end-users and metals
service centers who do not require processing of the products and who can
order in large quantities and tolerate relatively long lead times. Metals
service centers, which offer services ranging from pre-production processing
in accordance with specific customer requirements to storage and distribution
of unprocessed metal products, function as intermediaries between primary
metals producers and end-users.
The current trend among primary metals producers is to focus on their core
competency of high-volume production of a limited number of standardized metal
products. This change in focus has been driven by their need to develop and
improve efficient, volume-driven production techniques in order to remain
competitive.
39
<PAGE>
At the same time, most end-users have recognized the economic advantages
associated with outsourcing their metal processing and inventory management
requirements. Outsourcing permits end-users to reduce total production cost by
shifting the responsibility for pre-production processing to metals service
centers, whose higher efficiencies in performing these processing services
make the ownership and operation of the necessary equipment a better
investment. Inventory management and just-in-time delivery services provided
by metals service centers also enable end-users to reduce material costs,
decrease capital required for inventory and equipment and save time, labor and
other expenses.
As a result of these trends, metals service centers play an increasingly
important role in all segments of the metals industry. Metals service centers
purchase and distribute about 30% of all carbon industrial products and nearly
45% of all stainless steel products produced in the U.S. Metals service
centers are the single largest customer group of the U.S. domestic steel
industry and serve the metal supply needs of more than 300,000 manufacturers
and fabricators through service center locations nationwide. The metals
distribution and processing industry generated an estimated $40 billion in
revenues in the U.S. in 1996. The Company believes that the metals service
center industry will continue to increase its role as a valuable intermediary
between primary metal producers and end users, primarily as a result of (i)
the refocus by metal producers towards sales efforts to larger volume
purchasers to increase production efficiency and (ii) increased demand by end
users for outsourced metals processing, just-in-time inventory management and
the other value-added materials management services.
The metals service center industry is highly fragmented, consisting of a
large number of small companies, which are limited as to product line, size of
inventory and customers located within a specific geographic area, and a few
relatively large companies. The larger and more sophisticated companies, such
as EMJ, have certain advantages over smaller companies, such as higher
discounts for volume purchases, the ability to service customers with
operations in multiple locations and the use of more sophisticated information
systems. There has been a trend toward consolidation in the industry in
recognition of the advantages of larger companies. According to industry
sources, the number of steel processors and metals service center companies in
the U.S. has been reduced from approximately 7,000 in 1980 to approximately
3,400 in 1997.
COMPETITIVE STRENGTHS
The Company believes that the following factors contribute to its success in
the metals distribution industry:
Market Position. The Company is among the largest independent distributors
of metal products in the U.S. The Company believes that its broad product
offerings, with a specialization in higher margin bar and tubing (as compared
to flat-rolled products), have enabled it to maintain its position among the
market leaders and achieve gross margins that are among the highest for
comparable publicly-traded metals distribution companies. The Company is among
the largest purchasers of steel in the U.S. and has developed long-term
relationships with numerous metals producers, resulting in access to a wide
variety of metals and new product and service ideas. Because the Company
purchases large volumes of metals, it is able to achieve economies of scale in
purchasing. Furthermore, the Company believes that its salesforce is among the
most experienced in the industry.
Network of Strategically Located Facilities. The Company's service centers
are strategically located throughout North America, generally within one day's
delivery time to almost all U.S. manufacturing centers. The Company believes
that its network of strategically located facilities positions it to increase
sales to national customers that currently buy metals from various suppliers
in different locations. The Company's facilities serve more than 40,000
customers, with no single customer accounting for more than three percent of
the Company's gross revenues. Such diversification reduces the Company's
vulnerability to the financial or economic weakness of particular customers,
industries or regions.
Service and Product Selection. The Company specializes in higher gross
margin bar and tubing products that are not commonly sold directly by steel
and aluminum producers in small quantities. The Company serves the needs of
its customers by carrying a broad range of shapes and sizes in its core
product areas in large
40
<PAGE>
quantities, which allows the Company to deliver orders to customers typically
within 24 hours from receipt of an order. Each of the Company's service
centers strives to be a market leader in the Company's core product lines in
its geographic area. The Company benefits from an excellent reputation for
quality and service built over its 75 years in operation and has received
numerous quality and service awards from its customers. The Company was among
the first in the metals distribution industry to receive multi-site ISO 9002
certification and had the first metals service center to receive QS 9000
certification established by the automobile industry.
Management Information Systems and Inventory Practices. The Company has
invested significant resources to upgrade its management information and
financial reporting system. The Company's current system, which was brought on
line in February 1995, provides an internal benchmarking system to track
profitability by customer and product type. The Company believes that this
information will assist management in its efforts to purchase more
effectively, reallocate inventory among different locations and improve
customer service through better order reference data. The Company tailors its
inventory at each service center to the specific customer requirements of the
particular market served.
Reduced Cost Structure and Economies of Scale. The Company believes that the
closure or sale of underperforming assets, the reduction in its workforce and
other restructuring initiatives have improved the Company's cost structure by
approximately $17 million annually. The Company believes that it will be
better able to withstand an economic downturn as a result of its cost
reduction initiatives. In addition, because of the Company's large size and
scope of operations, its fixed costs are spread across a large base of sales.
Experienced Management with Equity Ownership. The Company's executives and
other members of its management have substantial experience in the metals
industry. In addition, the Company's employees directly, and indirectly
through the Jorgensen Employee Stock Ownership Plan (the "ESOP"), own in the
aggregate approximately 35.3% (28.8% on a diluted basis) of the outstanding
Holding Common Stock as of March 31, 1998.
OPERATING AND GROWTH STRATEGY
The Company's primary business goal is to improve its operating profits
while expanding its market share. Its operating and growth strategy consists
of the following elements:
Continue Cost Reductions and Productivity Improvements. The Company is
currently engaged in a reengineering program to improve profitability and
realize cost savings through continued reductions in delivery and inventory
handling expenses and through other efficiency realizations. The Company seeks
to increase asset and employee productivity and to further decrease unit costs
through initiatives intended to increase volume, thereby taking advantage of
economies of scale. The Company has made and will continue to make investments
in its management information system to increase the efficiency of the Company
and assist it in identifying additional areas for operational improvement. In
addition, the Company has instituted a new management incentive plan to
provide incentives to branch management that are based on branch operating
achievements and corporate financial objectives.
Focus on Higher Gross Margin Value-Added Products and Services. The Company
seeks to maintain its gross margins and to expand its market share by (i)
making sales from inventory with value-added services as often as possible,
since such sales generally generate higher gross margins and (ii) providing
inventory management and timely delivery services. Since the mid-1980's, the
Company has shifted its product mix away from commodity-like products such as
flat-rolled steel and has increased its sales of specialty products such as
carbon, alloy, stainless and aluminum bar and tubing that generally afford
higher gross margins. Although the Company continues to sell steel and
aluminum sheet products, it does so primarily in niche markets or as a service
to important customers that are significant purchasers of other higher gross
margin products.
Realize Efficiencies from Management Information System Investments. The
Company believes that continuing enhancements to the Company's management
information system will assist the Company in its
41
<PAGE>
initiatives to achieve further cost savings and enable it to handle a larger
number of orders. Planned improvements in the Company's management information
system include: (i) an improved order processing system which will allow its
salespersons to access customer history and to improve order throughput, (ii)
a warehouse automation system to better control inventory and shipment
logistics, (iii) upgraded financial reporting, planning and sales and gross
profit analysis systems and (iv) document imaging technology to facilitate
processing, storage and retrieval of transactional data. These and other
enhancements should assist the Company's efforts to improve the information
available to management in its initiatives to improve customer service,
optimize inventory levels and achieve greater operational efficiencies.
CUSTOMERS AND MARKETS
The Company services the steel or aluminum requirements of over 40,000
active customers throughout the U.S. in a wide variety of industries,
including machinery manufacturing, transportation, fabricated metal products,
aerospace, oil tools, construction, shipbuilding, plastics, chemicals,
petrochemicals, farm equipment, food processing, energy and environmental
control. The Company is not dependent on any single customer or industry, and
during fiscal 1998 no single customer accounted for more than three percent of
revenues.
During fiscal 1998, the Company handled approximately 8,100 sales
transactions per business day generating an average revenue of approximately
$510 per transaction. Sales of stock inventory maintained by the Company
("stock sales") represented approximately 87% of Company domestic revenues in
fiscal 1998. Special requirements of the customer are met by arranging mill-
direct sales and by making buy-outs from other distributors of items the
Company does not maintain as stock inventory. Such sales generally have lower
gross margins than stock sales, but provide a valuable customer service.
The vast majority of sales are from individual purchase orders and are not
subject to ongoing supply contracts; however, the Company sometimes enters
into contracts to purchase and supply specific products over a period of a
year or longer. Such contracts provide the customer with greater certainty as
to timely delivery, price stability and continuity of supply, and sometimes
satisfy particular processing or inventory management requirements. Such
contracts have resulted in new customer relationships and increased sales
volumes for the Company, but can have a slightly lower gross margin than
ordinary sales. Such contracts, in the aggregate, represented less than 10% of
Company revenues in fiscal 1998.
Seasonal fluctuations in the Company's business generally occur in the
summer months and in November and December, when many customers' plants are
closed for vacations. Order backlog is not a significant factor in the
business of the Company, as orders are generally filled within 24 hours.
PRODUCTS
The Company has designated certain carbon and alloy, aluminum, and stainless
products as core product offerings under its bar, tubing and pipe, plate, and
sheet product lines. The Company stocks a broad range of shapes and sizes of
each of these products in each service center (unless there is no market for
the product line at a particular location), and each service center strives to
be a market leader in the Company's core product lines in its geographic area.
Each service center also tailors its inventory to the customer and market
requirements of its geographic area.
Machinery manufacturing, transportation, fabricated metal products,
aerospace, oil tools, construction, shipbuilding, plastics, chemicals,
petrochemicals, farm equipment, food processing, energy and environmental
control, among others, are major markets for the Company. Carbon steel bar
products (hot-rolled and cold-finished) and carbon plate and sheet are used in
construction equipment, farm equipment, automotive and truck manufacturing,
shipbuilding and oil exploration as well as a wide range of other products.
Stainless steel bar, plate and sheet is used widely in the chemical,
petrochemical, oil refining and biomedical industries where resistance to
corrosion is important. Aluminum bar, plate and sheet is frequently used in
aircraft and aerospace applications where weight is a factor. Different tubing
products are appropriate for particular uses based on different
characteristics of the tubing materials, including strength, weight,
resistance to corrosion and cost. Carbon tubing and pipe are used in general
manufacturing. Alloy tubing is used primarily in the manufacturing
42
<PAGE>
of oil field equipment and farm equipment. Stainless steel tubing and pipe are
used in applications requiring a high resistance to corrosion, such as food
processing. Aluminum tubing and pipe are used in applications that put a
premium on light weight (such as aerospace manufacturing).
The following table sets forth a percentage breakdown of revenue from stock
sales (excludes mill-direct revenue and buy-outs) by product group for U.S.
operations for the fiscal years ended March 31, 1996, 1997 and 1998.
BREAKDOWN OF REVENUES FROM STOCK SALES BY PRODUCT GROUP
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
BARS:
Carbon and Alloy..................................... 32.6% 33.9% 37.0%
Stainless............................................ 14.2 13.6 12.2
Aluminum............................................. 5.7 5.5 6.2
------ ------ ------
Total.............................................. 52.5 53.0 55.4
------ ------ ------
TUBING AND PIPE:
Carbon and Alloy..................................... 26.4 26.8 27.0
Stainless............................................ 3.8 3.7 3.6
Aluminum............................................. 3.7 3.6 3.3
------ ------ ------
Total.............................................. 33.9 34.1 33.9
------ ------ ------
PLATE:
Carbon............................................... 5.4 5.6 5.5
Stainless............................................ 2.2 1.8 1.5
Aluminum............................................. 2.8 2.5 2.4
------ ------ ------
Total.............................................. 10.4 9.9 9.4
------ ------ ------
SHEET:
Carbon............................................... 0.6 0.5 0.4
Stainless............................................ 0.9 0.6 0.3
Aluminum............................................. 1.5 1.8 0.5
------ ------ ------
Total.............................................. 3.0 2.9 1.2
------ ------ ------
Other.................................................. 0.2 0.1 0.1
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Revenues from stock sales as a percentage of total
revenues.............................................. 83.4% 85.7% 87.2%
====== ====== ======
</TABLE>
INTELLECTUAL PROPERTY AND LICENSES
EMJ(R) is a registered trademark and service mark in the U.S. and in other
countries where the Company does or expects to do business. The Company
considers certain information owned by it to be trade secrets and the Company
takes measures to protect the confidentiality and control the disclosure of
such information. The Company believes that these safeguards adequately
protect its proprietary rights. While the Company considers all of its
intellectual property rights as a whole to be important, the Company does not
consider any single right to be essential to its operations.
MANAGEMENT INFORMATION SYSTEMS
In February 1995, the Company implemented a new management information
system that integrated three different systems the Company had operated in
prior years into one system for most Company operations. The
43
<PAGE>
transition to the new system required a Company-wide training effort and
changes in operational processes. The Company experienced start-up operational
difficulties in 1995 in connection with the implementation of its new
management information system that adversely affected its customer service,
results of operations and working capital. The Company believes such problems
have been resolved.
The system is designed to increase the Company's ability to analyze and
manage its operations and improve the productivity of the Company and its
customers and suppliers. The system enhances the Company's ability to utilize
electronic commerce in dealing with its customers and suppliers, including
EDI, remote inquiry and ordering ("RIO"), bar coding, document imaging and
other functions that can result in more efficiency and greater productivity
for all users. Planned improvements in the Company's management information
system include: (i) an advanced order processing system which will allow its
salespersons to access customer history and improve order throughput, (ii) a
warehouse automation system to better control inventory and shipment
logistics, (iii) an upgraded financial reporting, planning and sales and gross
profit analyses system and (iv) document imaging technology to facilitate
processing, storage and retrieval of transactional data.
SUPPLIERS
The majority of the Company's procurement activities are from a centralized
merchandising office in Chicago where purchases are made by specialists in
each of the Company's major product lines. The Company concentrates on
developing close working relationships with high-quality suppliers to ensure
quality and timely delivery to the Company's customers.
The vast majority of the Company's purchases are made by purchase order and
the Company has no significant supply contracts with periods in excess of one
year. The Company is not dependent on any single supplier for a material
portion of its purchases, and in fiscal year 1998 no single supplier
represented more than 10% of its total purchases. The Company purchased less
than three percent of its inventory requirements from foreign based suppliers
in fiscal 1998.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 2,200 persons, of
whom approximately 1,285 were employed in production or shipping, 455 were
employed in sales and 460 served in executive, administrative or office
capacities. Three different unions represent approximately 750 of the
Company's employees from 16 locations. The related collective bargaining
agreements expire on staggered dates between October 31, 1998 and May 31,
2001. The Company is negotiating a collective bargaining agreement with 18
newly organized employees of the Toronto facility, which is expected to be in
place by the end of June 1998. The Company is currently negotiating a renewal
of its collective bargaining agreement covering 83 employees at its facilities
in Los Angeles, California, which is expected to be in place by the end of
June 1998. The Company believes that it has a good overall relationship with
its employees.
FOREIGN OPERATIONS
The Company now maintains two metal service centers in Canada operating
through a wholly-owned subsidiary, Earle M. Jorgensen (Canada) Inc., a
Canadian limited liability company. On September 8, 1997, the Company sold its
operations in Mexico, and on January 29, 1998, the Company sold its operations
in the United Kingdom. For the fiscal years ended March 31, 1996, 1997 and
1998, revenues from foreign operations totaled $66.7 million, $63.8 million
and $53.6 million, respectively. See Note 4 to Consolidated Financial
Statements.
COMPETITION
The metals service center industry is highly fragmented and generally
competes on price, product availability, timely delivery, reliability, quality
and processing capability. Apart from price, these services are all "value-
added" services provided by metals service centers to lower customers' overall
costs. The industry
44
<PAGE>
includes both general-line distributors, which handle a wide range of metal
products, and specialty distributors, which specialize in particular
categories of metal products. Metals service centers range from nationwide to
regional and local in geographic coverage. Although the Company is one of the
largest distributors of metals in the U.S., some of its competitors have
greater financial resources and most of its competitors are less leveraged
than the Company.
ENVIRONMENTAL MATTERS
The Company's service centers are subject to many federal, state and local
requirements relating to the protection of the environment, including
hazardous waste disposal and underground storage tank regulations. The Company
believes that it is in material compliance with all applicable environmental
laws and that the Company's products and processes do not present any unusual
environmental concerns. The Company does not anticipate any material
expenditures or material recurring costs in the near future in connection with
pollution control.
Some of the properties owned or leased by the Company are located in
industrial areas with histories of heavy industrial use. Although the location
of these properties may result in the Company's incurring environmental
liabilities that arise from causes other than the operations of the Company,
the Company does not expect that any such liabilities will have a material
adverse impact on the Company's results of operations, financial condition or
liquidity. The Company does not carry environmental insurance coverage.
The Company's operations are also governed by laws and regulations relating
to workplace safety and worker health, principally the Occupational Health and
Safety Act and regulations thereunder, which, among other requirements,
establish noise, dust and safety standards. The Company believes that it is in
material compliance with applicable laws and regulations and does not
anticipate that future compliance with such laws and regulations will have a
material adverse effect on the results of operations or financial condition of
the Company.
During fiscal 1996, 1997 and 1998, expenditures made in connection with
environmental matters totaled approximately $0.8 million, $1.1 million and
$0.4 million, respectively, principally for remediation and investigation
activities at sites where contamination of soil and/or groundwater is present,
including the sites discussed below. As of March 31, 1998, the Company had
accrued approximately $2.3 million for future investigation and remediation
expenditures that could be reasonably estimated related to the following
matters:
Alameda Street (Los Angeles). Remediation was completed in fiscal 1996 and
the Company has received final approval from the County of Los Angeles
authorities. Total costs incurred by the Company in connection with this
project were $3.4 million, of which $1.7 million has been capitalized to the
property. The Company was reimbursed $1.5 million of such costs by the lessee
in accordance with a cost sharing agreement.
In February 1998 the Company was notified that it had potential
responsibility for the lead and copper soil contamination of an undeveloped
parcel that is part of the Alameda Street property. A remediation plan has
been approved by local government agencies. As of March 31, 1998, the
Company's accrual for future investigation and remediation expenditures
includes the estimated costs under the remediation plan.
Bristol (Pennsylvania). A remedial action plan submitted and approved by the
Pennsylvania regulatory agency was completed in fiscal 1998. As of March 31,
1998, the project's cost totaled $4.3 million, of which $3.2 million was paid
by the Company and $1.1 million was paid by the former owner of the property.
No additional costs are expected to be incurred. The Company sold the facility
in July 1996.
Forge (Seattle/Kent, WA). The Company has indemnified the purchasers of its
former Forge facility for remediation of certain conditions at the facility
and at an off-site disposal site existing at the date of sale. In addition,
the Company indemnified such purchasers for up to $2.5 million of remediation
and investigation costs associated with or related to the environmental
conditions existing at the time of sale and discovered after the
45
<PAGE>
closing and for which claims were made prior to July 2, 1995. No such claims
were made. As of March 31, 1998, the remediation and investigation costs of
the Forge facility totaled $2.6 million. The Company's accrual for future
investigation and remediation expenditures includes the estimated remaining
costs of remediation. As of March 31, 1998, remediation and investigation
costs at the disposal site totaled $0.5 million and the Company has reserved
for future monitoring costs.
Union (New Jersey). During fiscal 1994, the Company was notified by the
current owner that it has potential responsibility for the environmental
contamination of a property formerly owned by a subsidiary and disposed of by
such subsidiary prior to its acquisition by the Company. The prior owner of
such subsidiary has also been notified of its potential responsibility. On
March 31, 1997, the current owner of the property informed the Company that it
estimated the cost of investigation and cleanup of the property at $875,000
and requested contribution to such costs from the Company and the prior owner.
The Company has contested responsibility and commented on the clean up plan.
The Company does not have sufficient information to determine what potential
liability it has, if any. Accordingly, no reserves have been specifically
established for this matter as of March 31, 1998.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, management believes that, based upon all currently
available information, the resolution of such environmental matters will not
have a material adverse effect on the Company's financial condition, results
of operations or liquidity. The possibility exists, however, that new
environmental legislation and/or environmental regulations may be adopted, or
other environmental conditions may be found to exist, that many require
expenditures not currently anticipated and that may be material.
PROPERTIES
The Company currently maintains 25 service centers, four plate processing
centers, one cutting center, one tube honing facility, three sales offices and
one merchandising office at various locations throughout the U.S. and is
headquartered in Brea, California. Service centers in Birmingham, Alabama;
Hartford, Connecticut; Detroit, Michigan and Buffalo, New York were closed
and, except for Detroit and Buffalo, sold in connection with the 1997
restructuring plan. In addition, the Company sold facilities in Kansas City
and Dallas in connection with a consolidation of its operators in each of
those cities, discontinued its flat-rolled processing operations and sold its
operations in the United Kingdom and Mexico. The Company's facilities are in
good condition and are equipped to provide efficient processing of customer
orders. The Company's facilities generally are capable of being utilized at
higher capacities, if necessary. Most leased facilities have initial terms of
more than one year and include renewal options. While some of the leases
expire in the near term, the Company does not believe that it will have
difficulty renewing such leases or finding alternative sites.
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<PAGE>
Set forth below is a table summarizing certain information with respect to
the Company's facilities.
<TABLE>
<CAPTION>
COUNTRY/CITY/STATE OWNED/LEASED FACILITY (SQ. FT.)
<S> <C> <C>
United States:
Phoenix, Arizona........................ Owned 72,200
Little Rock, Arkansas................... Leased 28,800
Hayward, California..................... Leased 86,000
Los Angeles, California................. Owned 632,700
Los Angeles, California................. Leased 83,600
Denver, Colorado........................ Leased 78,800
Honolulu, Hawaii........................ Owned 109,200
Chicago, Illinois....................... Owned 554,000
Roselle, Illinois....................... Leased 4,900
Plainfield, Indiana..................... Owned 142,700
Davenport, Iowa......................... Leased 59,200
Boston, Massachusetts................... Owned 64,200
Minneapolis, Minnesota.................. Owned 160,000
Kansas City, Missouri................... Leased(a) 126,500
Kansas City, Missouri................... Leased 103,500
St. Louis, Missouri..................... Leased 106,700
Charlotte, North Carolina............... Owned 178,200
Cincinnati, Ohio........................ Leased(b) 137,000
Cleveland, Ohio......................... Owned 199,600
Cleveland, Ohio......................... Owned 134,500
Tulsa, Oklahoma......................... Owned 106,500
Tulsa, Oklahoma......................... Owned 137,900
Portland, Oregon........................ Leased 31,300
Philadelphia, Pennsylvania.............. Leased 234,800
Memphis, Tennessee...................... Leased 56,500
Dallas, Texas........................... Owned 132,200
Houston, Texas.......................... Owned 276,000
Kent, Washington........................ Leased 83,700
Canada:
Toronto, Ontario........................ Leased 38,600
Montreal, Quebec........................ Leased 57,000
Other Properties:
Brea, California (headquarters)......... Leased 38,300
</TABLE>
- ---------------------
(a) This previously owned facility was sold in March 1998 and is temporarily
being leased backed until completion of a move and consolidation to the
other Kansas City location. The move and consolidation is being
accommodated by an expansion, which is expected to be completed by
November 1998.
(b) The Company has exercised its option to purchase the facility.
LITIGATION
The Company and its subsidiaries and branches are occasionally involved in
ordinary, routine litigation incidental to their normal course of business,
none of which management believes to be material to their financial condition
or results of operations. The Company and its subsidiaries and branches
maintain various liability insurance coverages to protect their assets from
losses arising out of or involving activities associated with ongoing and
normal business operations. See also "--Environmental Matters."
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age (at March 31, 1998), principal
occupation and business experience during the last five years of each of the
directors and executive officers of the Company and Holding. The directors and
executive officers of the Company and Holding are identical. The executive
officers serve at the pleasure of the Board of Directors of the Company and
Holding, respectively.
Each member of the Board of Directors of the Company and of Holding holds
office until the next annual meeting of the stockholders thereof or until his
successor is elected and qualified. The election of directors of Holding is
subject to the provisions of a Stockholders' Agreement. See "--Stockholders'
Agreement."
Prior to January 1, 1998, non-officer directors of the Company, other than
Messrs. Schuchert and Nickell, were paid an annual retainer of $25,000 plus
$1,000 for each board meeting attended. Effective January 1, 1998, each of
such non-officer directors (Messrs. Marquard, Rutledge and Ligon) was granted
options to purchase 10,000 shares of Holding Common Stock at their fair market
value as established by the most recent appraisal available at the date of
grant. Such options will vest in four equal increments at the end of each
calendar quarter of 1998. Effective April 1, 1997 and April 1, 1998, in
consideration for his service as a director, Chairman of the Executive
Committee and Chairman of the Board, Mr. Roderick was granted options to
purchase 20,000 shares of Holding Common Stock at their fair market value as
established by the most recent appraisal available at the date of the grant.
Such options are fully vested. The Company expects to continue the practice of
paying director's fees with grants of stock options.
In addition, all non-officer directors are reimbursed for all approved out-
of-pocket expenses related to meetings attended. The Company's directors
receive no additional compensation for their services as directors of Holding.
Officers of the Company and Holding who serve as directors do not receive
compensation for their services as directors other than the compensation they
receive as officers of the Company and Holding.
There are no family relationships among directors and executive officers of
the Company and Holding. For information regarding the stock ownership of
Holding by the Company's and Holding's directors and executive officers, see
"Security Ownership of Certain Beneficial Owners and Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Earle M. Jorgensen 99 Chairman Emeritus and Director
David M. Roderick 74 Chairman of the Board and Chairman of the
Executive Committee and Director
Maurice S. Nelson, Jr. 60 President, Chief Executive Officer and
Chief Operating Officer and Director
Charles P. Gallopo 56 Vice President, Chief Financial Officer and
Secretary
Frank D. Travetto 45 Vice President Merchandising
Kenneth L. Henry 51 Vice President Central Region
James D. Hoffman 39 Vice President Eastern Region
R. Neil McCaffery 48 Vice President Western Region
Mark R. McWhirter 38 Vice President and Chief Information Officer
Joseph S. Schuchert 69 Director
Neven C. Hulsey 63 Director
Charles K. Ligon 60 Director
William A. Marquard 78 Director
Frank T. Nickell 50 Director
John Rutledge 49 Director
</TABLE>
48
<PAGE>
Earle M. Jorgensen. Mr. Jorgensen founded EMJ and was Chairman of the Board
of EMJ and its successor, the Company, from 1924 until April 1994. He was also
Chairman of the Board of Holding from May 1990 until April 1994. Mr. Jorgensen
was Chief Executive Officer of EMJ from 1924 to June 1986. Until February
1990, Mr. Jorgensen was a director of Northrop Corporation. Mr. Jorgensen has
been a director of Holding since May 1990. In April 1994, Mr. Jorgensen became
Chairman Emeritus of the Board of the Company and Holding.
David M. Roderick. Mr. Roderick became Chairman of the Board of the Company
and Holding on January 21, 1998. Mr. Roderick has also served as Chairman of
the Executive Committee of the Company and Holding since February 1, 1997.
Before that, Mr. Roderick was Chairman of the Board of the Company and Holding
from April 1994. Mr. Roderick has been a director of the Company and Holding
since January 1994. Mr. Roderick also serves as director of American Standard
Companies Inc., Baron Enterprises and Kelso & Companies, Inc. Previously, Mr.
Roderick served as Director, Chairman, and Chief Executive Officer of the USX
Corporation. Mr. Roderick joined USX in 1959, was Chairman of USX Finance
Committee and a Director from 1973 to 1975, was President and Director from
1975 until 1979 and was Chief Executive Officer and Chairman from 1979 to
1989.
Maurice S. Nelson, Jr. Mr. Nelson was elected President, Chief Executive
Officer and Chief Operating Officer and a director of the Company and Holding
effective February 1, 1997. Before that, Mr. Nelson served as President, Chief
Executive Officer and Chief Operating Officer of Inland Steel Company from
1992 until April 1996. Before that, Mr. Nelson was the President of the
Aerospace and Commercial division of the Aluminum Company of America (Alcoa)
from 1987 to 1992.
Charles P. Gallopo. Mr. Gallopo has been Secretary of the Company and
Holding since July 1997 and Vice President and Chief Financial Officer of the
Company and Holding since December 1993. Before that, Mr. Gallopo was Chief
Financial Officer of Severin Montres, Ltd. since July 1989. Severin Montres,
Ltd., owned by Gucci Group, N.U., is a manufacturer and distributor of Gucci
watches.
Frank D. Travetto. Mr. Travetto has been the Company's Vice President
Merchandising since March 1997. Before that, Mr. Travetto was the Company's
Vice President Western Region since 1996, the Company's Vice President Eastern
Region from 1992 to 1996, and the Company's Division President, Canadian
Operations from 1990 to 1992.
Kenneth L. Henry. Mr. Henry has been the Company's Vice President Central
Region since October 1995. Since January 1998, Mr. Henry has also been
responsible for operations of the Company's Chicago facility. Before that, Mr.
Henry was the Company's Vice President Southern Region since 1994, and Vice
President of the Kilsby-Roberts Division of EMJ from April 1992 to 1994.
James D. Hoffman. Mr. Hoffman has been the Company's Vice President Eastern
Region since July 1996. Before that, Mr. Hoffman was District Manager for the
Company's Cleveland and Buffalo operations since June 1992.
R. Neil McCaffery. Mr. McCaffery has been the Company's Vice President
Western Region since March 1997. Before that, Mr. McCaffery was the Company's
Vice President Southern Region since April 1996, and was District Manager for
the Company's Los Angeles operations from 1991 to 1996.
Mark R. McWhirter. Mr. McWhirter has been Vice President and Chief
Information Officer of the Company since February 1995. Before that, Mr.
McWhirter was an Account Manager at Electronic Data Systems since March 1988.
Joseph S. Schuchert. Mr. Schuchert has been Chairman and a director of Kelso
& Companies, Inc. since March 1989 and was Chief Executive Officer from March
1989 to August 1997. Kelso & Companies, Inc. is the general partner of Kelso,
a Delaware limited partnership. Before the formation of Kelso & Companies,
Inc. in 1989, Mr. Schuchert was Managing General Partner of Kelso. Mr.
Schuchert is a director of American Standard Companies Inc. and Kelso
Insurance Services, Inc. Mr. Schuchert has been a director of the Company
since March 1990, and a director of Holding since May 1990.
49
<PAGE>
Neven C. Hulsey. Mr. Hulsey has been a director of the Company since March
1990 and Holding since May 1990. He served as Chairman of the Board of the
Company and Holding from February 1, 1997 until January 21, 1998. Before that,
Mr. Hulsey was President and Chief Executive Officer of the Company from April
1990, and of Holding from May 1990. Mr. Hulsey was Chairman of the Board,
Director, President and Chief Executive Officer of Kilsby from 1984 until May
1990. Mr. Hulsey has been a director of the Company from March 1990, and a
director of Holding from May 1990. Mr. Hulsey also serves as a director of
International House of Pancakes, Inc. and Webco Industries Inc.
Charles K. Ligon. Mr. Ligon has been a director of the Company since
November 1997. From 1992 through 1996, Mr. Ligon was a partner of Lundquist
Advisory, an investment advisory firm. Mr. Ligon has worked for Aluminum
Company of America (Alcoa) from 1971 to 1991 in many capacities, including LBO
Manager and Vice President of Alcoa Separations Technology, Group Vice
President of the Materials Science Group, and Vice President of Corporate
Planning and Development. Mr. Ligon also served as a director of FX Energy
from 1992 through 1994 and KMS Industries from 1987 through 1992.
William A. Marquard. Mr. Marquard has been a director of the Company since
March 1990, and a director of Holding since May 1990. Mr. Marquard also serves
as a director and Chairman of the Board of Arkansas Best Corporation and
Mosler, Inc., and as a director of Kelso & Companies, Inc., Treadco, Inc. and
EarthShell Container Corporation.
Frank T. Nickell. Mr. Nickell has served as director of the Company and
Holding since August 1993. He has been President and a director of Kelso &
Companies, Inc. since March 1989 and Chief Executive Officer of Kelso &
Companies, Inc. since September 1997. Kelso & Companies, Inc. is the general
partner of Kelso, a Delaware limited partnership. Before the formation of
Kelso & Companies, Inc., from 1984 to 1989, Mr. Nickell was a general partner
of Kelso. He is also a director of Charter Communications Long Beach, Inc.,
CCA Holdings Corp., CCT Holdings Corporation, Peebles Inc., Kelso Insurance
Services, Inc., and The Bear Stearns Companies.
John Rutledge. Dr. Rutledge has been a director of the Company and Holding
since June 1992. Dr. Rutledge is the founder of Rutledge & Company, Inc., a
merchant banking firm, and has been Chairman since January 1991. He is the
founder of Claremont Economics Institute, and has been Chairman since January
1979. Dr. Rutledge is also a director of Amerindo Investment Advisers, Inc.,
Lazard Freres Funds, Fluidrive Inc., United Refrigerated Services, Inc., Adobe
Air Inc. and CST Office Products, and is a consultant to Kelso and StairMaster
Sports/Medical Products, Inc.
STOCKHOLDERS' AGREEMENT
The Company's By-laws provide for one to ten directors. The Board of
Directors of the Company currently consists of nine directors. Certain of
Holding's shareholders have agreed, pursuant to the Stockholders' Agreement,
dated as of September 14, 1990, as amended (the "Stockholders' Agreement"),
that two directors shall be designated by the Management Stockholders (as
defined in the Stockholders' Agreement), so long as they are reasonably
acceptable to Kelso, and that at least five directors shall be designated by
Kelso. Messrs. Nelson and Hulsey are the directors designated by the
Management Stockholders and the remaining directors were designated by Kelso.
Mr. Ligon was elected as a director by the holders of Series A Preferred Stock
of Holding pursuant to the terms of the Series A Preferred Stock. The
Stockholders' Agreement also provides that in the event of termination of
employment, under certain circumstances, each Management Stockholder is
entitled to sell, and Holding can require such a Management Stockholder to
sell, their shares of Holding Common Stock to Holding at their appraised Fair
Market Value (as defined therein). The Board of Directors of the Company has
approved an extension of the term of the Stockholders' Agreement to March 24,
2008.
50
<PAGE>
EXECUTIVE COMPENSATION
Set forth below is information concerning the compensation levels for the
executive officers of Holding and the Company serving as of March 31, 1998.
Officers of the Company receive no additional compensation for their services
as officers of Holding.
Cash Compensation. The following table sets forth compensation for the three
fiscal years ended March 31, 1998, for the Chief Executive Officer and the
four most highly compensated executive officers of the Company as of March 31,
1998.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- ----------------
SECURITIES
UNDERLYING STOCK ALL OTHER
BONUS OPTIONS/SAR (#) COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY (1) (2) (3)
- --------------------------- ---- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Maurice S. Nelson, Jr. .... 1998 $550,020 $591,111 $ 64,924
President, Chief Executive
Officer and 1997 91,670 -- 1,320,000 150,000
Chief Operating Officer
(4)
Charles P. Gallopo......... 1998 209,701 276,663 37,136
Vice President, Chief
Financial Officer 1997 196,470 84,714 23,928
and Secretary 1996 195,023 12,102 32,397
Frank D. Travetto.......... 1998 193,480 183,997 25,000 23,856
Vice President,
Merchandising 1997 162,008 -- 12,488
1996 156,945 63,965 41,947
Kenneth L. Henry........... 1998 161,561 150,050 25,000 60,973
Vice President, Central
Region 1997 135,627 -- 13,359
1996 135,448 66,010 16,177
R. Neil McCaffery.......... 1998 154,447 146,859 25,000 14,989
Vice President, Western
Region 1997 131,336 17,009 7,580
1996 95,152 122,674 7,720
</TABLE>
- ---------------------
(1) Amounts reflect cash compensation earned by executive officers in each of
the fiscal years presented, including amounts received after fiscal year
end, or deferred at the election of those officers. Bonus amounts include
(i) a cash bonus payable pursuant to the Company's Management Incentive
Compensation Plan, which became effective April 1, 1997, and (ii) a cash
bonus payable each year to all management investors pursuant to the
Company's Management Stock Bonus Plan (or, in the case of Mr. Gallopo, an
equivalent policy) in proportion to their ownership of Holding Common
Stock. The following bonuses were paid to Messrs. Nelson, Gallopo,
Travetto, Henry and McCaffery under the Company's Management Incentive
Compensation Plan (a) in fiscal 1998: $591,111, $228,255, $183,997,
$150,050 and $146,859, respectively, (b) in fiscal 1997: none, and (c) in
fiscal 1996: none. The following bonuses were paid to Messrs. Gallopo,
Travetto, Henry and McCaffery under the Company's Management Stock Bonus
Plan (a) in fiscal 1998: none, except Mr. Gallopo ($48,408), (b) in fiscal
1997: none, except Mr. Gallopo ($84,714), and (c) in fiscal 1996: $12,102,
$3,000, $4,750 and $1,250, respectively. Prior to fiscal 1998, Messrs.
Travetto, Henry and McCaffery were participating under a predecessor
incentive plan based on the operating performance of their respective
regions. The following amounts were paid under this plan to Messrs.
Travetto, Henry and McCaffery, respectively (a) in fiscal 1997: none,
except for Mr. McCaffery ($17,009), and (b) in fiscal 1996: $60,965,
$61,260 and $121,424.
(2) Holding has granted Mr. Nelson and certain other executive officers
options to purchase shares of Holding Common Stock at their fair market
value on the date of grant. Mr. Nelson's options have an exercise price of
$5.41 per share; options granted to Messrs. Henry, Travetto and McCaffery
have an exercise price of
51
<PAGE>
$3.34 per share. See "Holding Stock Option Plan" and "Stock Option Grants
Table" below for further information.
(3) Amounts shown include allocations to the accounts of each of the named
officers of contributions made by the Company to the ESOP and to the
Company's 401(a)(17) Supplemental Contribution Plan ("401(a)(17) Plan")
and of premiums paid by the Company for long-term disability and life
insurance policies. The following allocations were made in fiscal 1998 to
Messrs. Nelson, Gallopo, Travetto, Henry and McCaffery, respectively: (i)
ESOP--$8,000, $8,000, $8,000, $7,875 and $7,575; (ii) 401(a)(17) Plan--
49,057, $13,806, $10,710, $7,376 and $6,918; (iii) long term disability--
$7,285, $6,133, $3,745, $5,908 and none; and (iv) life insurance--$582,
$9,197, $1,401, $1,362 and $496. In fiscal 1997, the following allocations
were made to Messrs. Nelson, Gallopo, Travetto, Henry and McCaffery,
respectively: (i) ESOP--none, $7,500, $7,500, $6,600 and $7,270; (ii)
401(a)(17) Plan--none, $2,214, $540, none and none; (iii) long term
disability--none, $6,207, $3,573, $5,908 and none; and (iv) life
insurance--none, $8,007, $875, $851 and $310. In fiscal 1996, the
following allocations were made to Messrs. Gallopo, Travetto, Henry and
McCaffery, respectively: (i) ESOP--$7,500 each; (ii) 401(a)(17) Plan--
$9,996, $3,238, $2,163 and none; (iii) long term disability--$6,351,
$3,410, $5,908 and none; and (iv) life insurance--$8,550, $623, $606 and
$220. The amounts in respect of life insurance represent the estimated
value of the premiums paid by the Company on certain disability and life
insurance policies in respect of each executive. Some of the policies are
managed on a split-dollar basis and the Company will receive the premiums
it has paid from the proceeds of such insurance. In such cases the amount
of the other compensation attributed to the executive was calculated by
treating the premiums paid by the Company as a demand loan, and the amount
of compensation is equal to the imputed interest expense on the cumulative
outstanding premiums paid by the Company, assuming an interest rate equal
to the short-term federal funds rate, from time to time. Amounts shown
also include relocation payments of $38,452 to Mr. Henry in fiscal 1998
and $27,176 to Mr. Travetto in fiscal 1996 and a discretionary payment to
Mr. Nelson of $150,000 in fiscal 1997.
(4) Mr. Nelson joined the Company on February 1, 1997 and his compensation in
fiscal 1997 represents actual compensation for a period of two months.
HOLDING STOCK OPTION PLAN
Holding has adopted the Earle M. Jorgensen Holding Company, Inc. Stock
Option Plan (the "Stock Option Plan"). The Executive Committee of the Board of
Directors is authorized to grant options under the Stock Option Plan. Stock
options may be granted at not less than 100% of the fair market value of
Holding Common Stock on the date of grant and are generally exercisable for a
period not exceeding ten years. Option grants or the vesting of options may be
contingent upon such terms and conditions, such as the achievement of
performance measures or upon the passage of time, as the Executive Committee
determines. The Executive Committee will make grants under the Stock Option
Plan to provide executive officers with additional incentives for outstanding
individual performance and the opportunity to acquire an ownership stake in
the Company, thereby more closely aligning their interests with those of the
stockholders.
The Executive Committee has the right, if the holders of options agree, to
grant replacement options which may contain terms more favorable than the
options they replace, such as a lower exercise price, and cancel the replaced
options.
The aggregate number of shares of Holding Common Stock available for grants
or subject to outstanding options, and the respective prices and/or vesting
criteria applicable to outstanding options will be proportionately adjusted to
reflect any stock dividend on the Holding Common Stock, or any
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase the
Holding Common Stock at a price substantially below its fair market value. To
the extent deemed appropriate by the Executive Committee, subject to any
required action by the stockholders, in any merger, consolidation,
reorganization, liquidation, dissolution, or other similar transaction, any
option granted under the Stock Option Plan shall pertain to the securities and
any other property to which a holder of the number of shares of Common Stock
covered by the option would have been entitled to receive in connection with
such event.
52
<PAGE>
Upon a Change of Control of Holding, with certain exceptions, all
outstanding stock options (whether or not then fully exercisable or vested)
will be cashed out at specified prices as of the date of the Change of
Control, except that any stock options outstanding for less than six months
will not be cashed out until six months after the applicable date of grant.
Generally, a participant who is granted a stock option will not be subject
to federal income tax at the time of grant and the Company will not be
entitled to a tax deduction by reason of such grant. Upon exercise of a
nonqualified option, generally the difference between the option price and the
fair market value of the Holding Common Stock on the date of exercise will be
considered ordinary income to the participant and generally the Company will
be entitled to a corresponding tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant and the Company is not entitled to a tax
deduction by reason of such exercise. However, if Holding Common Stock
purchased pursuant to the exercise of an incentive stock is sold within two
years from the date of grant or within one year after the transfer of such
Holding Common Stock to the participant, then the difference, with certain
adjustments, between the fair market value of the Holding Common Stock at the
date of exercise and the option price will be considered ordinary income to
the participant and generally the Company will be entitled to a corresponding
tax deduction. If the participant disposes of the Holding Common Stock after
such holding periods, any gain or loss upon such disposition will be treated
as a capital gain or loss and the Company will not be entitled to a deduction.
The maximum number of shares of Holding Common Stock reserved for issuance
under the Stock Option Plan is 1,700,000, subject to adjustment as provided in
the Stock Option Plan to reflect certain corporate transactions affecting the
number or type of outstanding shares.
STOCK OPTION GRANTS TABLE
The following table sets forth certain information concerning stock options
granted during fiscal 1998 by Holding to the Chief Executive Officer and the
next four most highly compensated executive officers of the Company. In
addition, there are shown hypothetical gains that could be realized for the
respective options, based on assumed rates of annual compound price
appreciation of 5% and 10% from the date the options are granted over the ten-
year term of the options. The actual gain, if any, realized upon exercise of
the options will depend upon the market price of Holding's Common Stock
relative to the exercise price of the option at the time the option is
exercised. There is no assurance that the amounts reflected in this table will
be realized.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------------------------------------- STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF OPTIONS GRANTED EXERCISE OPTION TERM
SECURITIES UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION ----------------
NAME OPTIONS GRANTED (#)(1) FISCAL YEAR ($/SH.) DATE 5% ($) 10% ($)
- ---- ---------------------- --------------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Maurice S. Nelson, Jr. . -- 0% N/A N/A N/A N/A
Charles P. Gallopo...... -- 0% N/A N/A N/A N/A
Frank D. Travetto....... 25,000 20% $3.34 7/31/2007 $52,513 $133,077
Kenneth L. Henry........ 25,000 20% 3.34 7/31/2007 52,513 133,077
R. Neil McCaffery....... 25,000 20% 3.34 7/31/2007 52,513 133,077
</TABLE>
- ---------------------
(1) Holding has not granted any stock appreciation rights. All the options
shown above become exercisable on August 1, 1999. All outstanding stock
options shall become fully exercisable and shall be cancelled and
exchanged for cash in an amount equal to the excess of the Change in
Control Price (as defined in the Stock Option Plan as defined below) over
the exercise price, in the event of any transaction or series of
transactions, other than a public offering, where a person or a group,
excluding Holding, any of its subsidiaries and Kelso and its affiliates,
is or becomes the beneficial owner, directly or indirectly, of
53
<PAGE>
securities representing 35% or more of the voting power of Holding's then
outstanding securities (an "SOP Change of Control"), unless the Executive
Committee determines prior to the occurrence of such SOP Change of Control
that such options shall be honored, or assumed or new rights (having
substantially equivalent or better rights, terms and conditions and
economic value) substituted therefor.
THE ESOP
The Company maintains an employee stock ownership plan (the "ESOP") in
respect of the Company's nonunion employees who meet certain service
requirements. The Company's annual contributions to the ESOP are a percentage
(5% plus additional amounts up to an aggregate maximum contribution of 10%
pursuant to a program established by the Board of Directors for fiscal 1999
and 2000 rewarding the achievement of Company performance objectives) of total
cash compensation (as defined in the ESOP) and may be made by the Company in
cash or by Holding in shares of Holding capital stock. Participants become 20%
vested in their account balances after one year of continuous service.
Participants vest an additional 20% for each year of service thereafter and
become fully vested upon completion of five years of service, retirement,
disability or death. Following the occurrence of a participant's termination
of service (as defined in the ESOP), retirement, disability, or death, the
ESOP is required to either distribute the vested balance in stock or cash. If
stock is distributed, it is accompanied by a put option to Holding under terms
defined in the ESOP. At March 31, 1998, shares of Holding's Series A and
Series B Preferred Stock and Holding Common Stock owned by the ESOP totaled
83,903, 24,946, 3,833,577 shares, respectively. Contributions payable to the
ESOP totaled $3,401,000, $3,102,000 and $2,788,000 as of March 31, 1996, 1997
and 1998, respectively. Contributions for fiscal years 1994 through 1997 were
made by Holding in the form of Holding Common Stock. The contribution for
fiscal 1998 will also be in the form of Holding Common Stock.
Although Holding has not expressed any intent to terminate the ESOP, it has
the right to terminate or amend the provisions of the ESOP at any time. In the
event of any termination, participants become fully vested to the extent of
the balances in their separate accounts and receive put options with respect
to Holding stock allocated to their accounts.
In 1984, 1985 and 1986, K-R purchased life insurance policies to provide,
among other things, a separate source for funds to repurchase capital stock,
including capital stock distributed by the ESOP, from departing employees.
Certain of these policies allow the Company to borrow against the cash
surrender value of such policies. As of March 31, 1998, the Company has
borrowed $88.9 million against the cash surrender value of such policies to
fund renewal premiums, accrued interest on previous borrowings and working
capital needs. The net cash surrender value available for future borrowings
was approximately $5.5 million as of March 31, 1998. Other resources of the
Company, such as the Revolving Credit Facility, are available, subject to
certain limitations, to satisfy stock repurchase obligations as they arise.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources".
The Internal Revenue Service (the "IRS") is currently conducting an audit of
the ESOP for the fiscal years ended March 31, 1992 through March 31, 1996. The
IRS issued a preliminary report was issued to the Company in which the IRS
asserted that certain contributions of stock by Holding to the ESOP violated
provisions of the Internal Revenue Code. The U.S. Department of Labor (the
"DOL") is currently conducting an investigation of the same transactions
involving the ESOP and has come to conclusions similar to those reached by the
IRS. The Company believes that the assertions of the IRS and DOL are incorrect
and has responded accordingly. In connection with its investigation, the DOL
and its advisors have also reviewed the valuation of Holding prepared for the
ESOP for fiscal 1997. The Company does not have sufficient information to
estimate its potential liability; however, the Company believes that the IRS
and DOL investigations will be resolved in a manner that will not result in a
material liability to the Company.
SUPPLEMENTAL ESOP
In fiscal 1996, the Company adopted a supplemental ESOP contribution plan
("Supplemental ESOP") for contributions not allowed under the ESOP pursuant to
limitations of Sections 401(a)(17) and 415 of the Internal
54
<PAGE>
Revenue Code of 1986, as amended. Participants in the Supplemental Plan
include certain highly compensated employees and other employees who are not
eligible to participate in the ESOP. Contributions payable, vesting and
distributions under the Supplemental Plan are comparable with those under the
ESOP. Contributions under the Supplemental Plan are made in cash and are held
in an irrevocable trust. Contributions payable totaled $93,000, $30,000 and
$119,000 as of March 31, 1996, 1997 and 1998, respectively.
MANAGEMENT INCENTIVE COMPENSATION PLAN
Effective April 1, 1997, the Company adopted a new Management Incentive
Compensation Plan (the "Incentive Plan"). The Incentive Plan provides for
payment of cash bonuses to senior executives and other key management
employees based on the achievement of certain operating profit and cash flow
objectives determined by the Board of Directors or the Executive Committee.
Bonuses awarded are determined on a sliding scale based on the percentage of
the objectives achieved. No bonus is payable unless at least 80% of the
objectives are achieved, and the maximum bonus payable is 150% of base
compensation. In addition, the Company's Chief Executive Officer may award
bonuses from a discretionary pool for exemplary service. The Board of
Directors ratified bonuses pursuant to the Incentive Plan aggregating
$6.9 million in fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
David M. Roderick, Frank T. Nickell and Maurice S. Nelson, Jr. are members
of the Executive Committee, which succeeded to the functions of the Management
and Compensation Committee of Holding and the Company on January 30, 1997.
Kelso affiliates beneficially own shares of the capital stock of Holding as
described under "Item 12. Security Ownership of Certain Beneficial Owners and
Management." Mr. Nickell and Mr. Schuchert are stockholders of Kelso and
general partners of Kelso Partners I, L.P. ("KP I"), Kelso Partners III, L.P.
("KP III"), and Kelso Partners IV, L.P. ("KP IV"). KP I, KP III and KP IV are
the general partners of Kelso Investment Associates, Limited Partnership ("KIA
I"), KIA III-Earle M. Jorgensen, L.P. ("KIA III-EMJ") and Kelso Investment
Associates IV, L.P. ("KIA IV"), respectively. Mr. Nickell and Mr. Schuchert
are directors of Holding and the Company and share investment and voting power
with respect to shares of the capital stock of Holding held by KIA I, KIA III-
EMJ and KIA IV as described under "Security Ownership of Certain Beneficial
Owners and Management."
In 1990, the Company agreed to pay Kelso an annual fee of $1,250,000 each
year for financial advisory services and to reimburse it for out-of-pocket
expenses incurred in connection with rendering such services. Two general
partners of Kelso affiliates serve on the Boards of Directors of the Company
and Holding. The agreement for advisory services was amended in September 1997
to provide such services at an annual fee of $625,000 for each of the fiscal
years ending March 31, 1998 and 1999. For each of the fiscal years 1996, 1997
and 1998, the Company paid Kelso the annual fee and reimbursed Kelso $154,000,
$393,000 and $62,000, respectively, for out-of-pocket expenses.
Holding has issued to KIA IV two warrants, entitling KIA IV to purchase
2,937,915 shares of Holding Common Stock in the aggregate at a purchase price
of $.01 per share.
In January 1996, the Company amended its agreement with Kelso Insurance
Services, Inc. (an affiliate of Kelso) ("Kelso Insurance"), and American
Telephone and Telegraph Company ("AT&T") pursuant to which the Company as well
as certain other Kelso affiliated companies participates in a
telecommunications network under which AT&T provides communications services
to the group at a special tariff rate. Pursuant to such agreement, as amended,
the Company has guaranteed a minimum annual usage for communication services,
and Kelso Insurance has guaranteed the Company's minimum usage to AT&T. No fee
was paid by the Company to Kelso Insurance in connection with this
transaction.
Effective April 1, 1997 and April 1, 1998, in consideration for his service
as a director, Chairman of the Company's Executive Committee and Chairman of
the Board, the Company granted Mr. Roderick options to
55
<PAGE>
purchase 20,000 shares of Holding Common Stock at a purchase price of $5.41
per share and $3.34 per share, respectively, in each case, the fair market
value as established by the most recent appraisal available at the date of
grant. Prior to this grant, Mr. Roderick had a three-year incentive
compensation agreement with Holding which expired on March 31, 1997. Pursuant
to such agreement, Mr. Roderick was granted 50,000 shares of Holding Common
Stock, 20,000 of which were vested upon issuance and all or a portion of the
remainder were to be vested through fiscal 1997, if Holding achieved certain
financial targets. A total of 34,000 shares were vested under the agreement
when it expired on March 31, 1997. Pursuant to the agreement, Mr. Roderick
received a cash payment in fiscal 1996 totaling $145,309, equal to the
federal, state and local income tax liability payable by him by reason of the
value of the initial payment of 20,000 unrestricted shares of Holding Common
Stock and such cash payment.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OF THE COMPANY
All of the issued and outstanding voting stock of the Company, consisting of
128 shares of common stock, is owned by Holding.
CAPITAL STOCK OF HOLDING
The following table sets forth information with respect to the beneficial
ownership of shares of Holding Common Stock and Series A Preferred Stock as of
March 31, 1998, by all stockholders of Holding known to be beneficial owners
of more than 5% of any such class, by each director, by each executive officer
of the Company named in the Summary Compensation Table and by all directors
and executive officers as a group as determined in accordance with Rule 13d-
3(i) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As of March 31, 1998, 26,213 shares of Series B Preferred Stock of
Holding have been issued (and 1,163 shares have been accrued but not
declared), of which 24,946 were owned by the ESOP and 1,204 were owned by
Holding.
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF NUMBER OF SHARES OF
NUMBER OF SHARES OF SHARES SERIES A
NAME AND ADDRESS OF SHARES OF COMMON STOCK OF SERIES A PREFERRED STOCK
BENEFICIAL OWNER COMMON STOCK OUTSTANDING(a) PREFERRED STOCK OUTSTANDING(b)
------------------- ------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Kelso Investment
Associates, IV, L.P.
(c).................... 9,462,475(d) 59.3%(d) 0 0.0%
KIA III--Earle M.
Jorgensen, L.P. (c).... 1,704,740 13.1% 0 0.0%
Joseph S. Schuchert (c). 11,167,215(d)(e) 70.0%(d)(e) 24,519(f) 17.7%(f)
Frank T. Nickell (c).... 11,187,714(d)(e) 70.1%(d)(e) 24,519(f) 17.7%(f)
Michael B. Goldberg (c). 9,462,475(d)(e) 59.3%(d)(e) 0 0.0%
George E. Matelich (c).. 11,172,215(d)(e) 70.0%(d)(e) 24,519(f) 17.7%(f)
Thomas R. Wall, IV (c).. 11,172,215(d)(e) 70.0%(d)(e) 24,519(f) 17.7%(f)
Frank K. Bynum (c)...... 11,167,215(d)(e) 70.0%(d)(e) 0 0.0%
David I. Wahrhaftig (c). 11,167,215(d)(e) 70.0%(d)(e) 0 0.0%
Earle M. Jorgensen (g).. 200,000 1.5% 0 0.0%
Neven C. Hulsey (g)..... 250,000 1.9% 24,519 17.7%
Maurice S. Nelson (g)... 0 0.0% 0 0.0%
Charles P. Gallopo (g).. 50,000 0.4% 0 0.0%
Frank D. Travetto (g)... 12,000 0.1% 0 0.0%
Kenneth L. Henry (g).... 19,000 0.1% 704 0.5%
R. Neil McCaffery (g)... 5,000 0.0% 0 0.0%
David M. Roderick (g)
(l).................... 74,000 0.6% 0 0.0%
John Rutledge (h) (l)... 7,500 0.1% 0 0.0%
William A. Marquard (c)
(l).................... 12,500 0.1% 0 0.0%
Charles K. Ligon (l).... 2,500 0.0% 0 0.0%
Earle M. Jorgensen
Company Employee Stock
Ownership Plan (g)..... 3,764,056(i) 28.9%(i) 80,338(i) 58.1%(i)
All directors and
executive officers of
the Company as a group
(l).................... 712,999(j) 5.5%(j) 25,223(k) 18.2%(k)
</TABLE>
- ---------------------
(a) The percentage of shares of Holding Common Stock outstanding for KIA IV,
and Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and
Bynum was calculated assuming the total outstanding shares of Holding
Common Stock was 15,955,227, (i) including shares of Holding Common Stock
which would be outstanding assuming KIA IV exercised the two Warrants
referred to in note (d) below in succession and there had been no other
dilution events prior to such exercise, (ii) excluding 47,500 shares
subject to stock options referred to in note (l) below, and (iii)
excluding the 176,182 shares of Holding Common Stock currently held in the
Holding treasury. The percentage of shares of Holding Common Stock
outstanding for all other holders was calculated assuming the total
outstanding shares of Holding Common
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<PAGE>
Stock was 13,017,312, excluding shares subject to stock options, shares
issuable upon the exercise of the Warrants held by KIA IV and the 176,182
shares of Holding Common Stock held in the Holding treasury as of March 31,
1998.
(b) The percentage of shares of Series A Preferred Stock outstanding was
calculated assuming the total outstanding shares of Series A Preferred
Stock was 138,417, excluding 109,129 shares of Series A Preferred Stock
held in the Holding treasury as of March 31, 1998.
(c) The business address for such person(s) is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, New York, 10022. Kelso & Company is a
private investment firm.
(d) Includes 2,937,915 shares of the Holding Common Stock that KIA IV is
entitled to purchase pursuant to two Warrants issued to KIA IV. Each
Warrant entitles the holder to purchase up to 10% of the Holding Common
Stock on a fully-diluted basis at an exercise price of $.01 per share.
(e) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum
may be deemed to share beneficial ownership of shares of Holding Common
Stock owned of record by (i) KIA IV and an affiliated entity by virtue of
their status as general partners of KP IV, the general partner of KIA IV,
and such affiliate, and (ii) except Mr. Goldberg, KIA III-EMJ by virtue of
their status as general partners of KP III, the general partner of KIA
III-EMJ. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig
and Bynum share investment and voting power with respect to securities
owned by the Kelso affiliates of which they are general partners. Messrs.
Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum disclaim
beneficial ownership of the shares of Holding Common Stock owned by the
Kelso affiliates.
(f) Messrs. Schuchert, Nickell, Wall and Matelich may be deemed to share
beneficial ownership of shares of Series A Preferred Stock owned of record
by KIA I by virtue of their status as general partners of KP I, the
general partner of KIA I. Messrs. Schuchert, Nickell, Wall and Matelich
disclaim beneficial ownership of the shares of Series A Preferred Stock
owned by KIA I.
(g) The business address of such person(s) or entity is 3050 East Birch
Street, Brea, California, 92821.
(h) The business address for Dr. Rutledge is One Greenwich Office Park,
Greenwich, Connecticut, 06831.
(i) Excludes 69,521 shares of Holding Common Stock and 3,565 shares of Series
A Preferred Stock held by the ESOP in directed accounts that may be deemed
to be beneficially owned by any of the directors or executive officers or
other employees of the Company.
(j) Excludes (i) 11,167,215 shares of Holding Common Stock held by Kelso
affiliates that may be deemed to be beneficially owned by Mr. Schuchert
and Mr. Nickell, and (ii) shares held by the ESOP, except for shares held
in directed accounts that may be deemed to be beneficially owned by any of
the directors and executive officers of the Company.
(k) Excludes (i) 24,519 shares of Series A Preferred Stock held by KIA I that
may be deemed to be beneficially owned by Mr. Schuchert and Mr. Nickell,
and (ii) shares held by the ESOP, except for shares held in directed
accounts that may be deemed to be beneficially owned by any of the
directors or executive officers of the Company.
(l) Includes shares subject to stock options vested and exercisable as of
April 1, 1998.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kelso affiliates beneficially own shares of the capital stock of Holding as
described under "Security Ownership of Certain Beneficial Owners and
Management." Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig
and Bynum are indirect stockholders of Kelso and general partners of KP I
(other than Messrs. Goldberg, Bynum and Wahrhaftig), KP III (other than Mr.
Goldberg) and KP IV. KP I, KP III and KP IV are the general partners of KIA I,
KIA III-EMJ and KIA IV, respectively. Messrs. Schuchert and Nickell are
directors of Holding and the Company. See "Security Ownership of Certain
Beneficial Owners and Management."
The Company, Holding and Kelso and its affiliates entered into certain
agreements in connection with the Acquisition. Such agreements and
transactions are described under "Management--Compensation Committee
Interlocks and Insider Participation."
KIA IV is the holder of two Holding warrants which are described under
"Management--Compensation Committee Interlocks and Insider Participation."
Mr. Gallopo has borrowed $403,000 from Holding by issuing two separate
notes, one of which is non-recourse, each in the principal amount of $201,500,
to Holding in payment for 50,000 shares of Holding Common Stock. The notes
mature on March 31, 2001, bear interest at the rate of 6% per annum, and are
secured by a pledge of Mr. Gallopo's Holding Common Stock. Mr. Gallopo has
also received 16,000 phantom stock units. which vested on November 29, 1997.
Each phantom stock unit entitles Mr. Gallopo to receive an amount equal to the
difference between the fair market value of a share of Holding Common Stock on
the date of redemption and a base price, subject to adjustment, of $9.23.
Mr. McWhirter has borrowed $92,300 from Holding by issuing two notes, one of
which is non-recourse, each in the principal amount of $46,150, to Holding in
payment for 10,000 shares of Holding Common Stock. The notes mature on March
31, 2002, bear interest at the rate of 6% per annum and are secured by a
pledge of Mr. McWhirter's Holding Common Stock.
Mr. Hulsey is a general partner of a California partnership, Kilsby-Roberts
Group ("KRG"), and has an interest in such partnership of 3.704%. Through
December 1996, KRG owned a facility leased to the Company and received
approximately $41,000 of rent monthly from the Company during fiscal 1997. The
Company believes such rent was a market rent and is not higher than would
otherwise be paid if such premises were leased from an independent third
party. In January 1997, KRG sold the facility to an independent third party.
Effective April 1, 1997 and April 1, 1998, in consideration for his service
as a director, Chairman of the Company's Executive Committee and Chairman of
the Board, the Company granted Mr. Roderick options to purchase 20,000 shares
of Holding Common Stock at their fair market value as established by the most
recent appraisal available at the date of grant. Mr. Roderick had an incentive
compensation agreement with Holding which expired on March 31, 1997. Such
transactions are described under "Executive Compensation--Compensation
Committee Interlocks and Insider Participation."
59
<PAGE>
DESCRIPTION OF THE NOTES
The Exchange Notes will be, and the Old Notes were, issued under an
Indenture dated as of March 24, 1998 (the "Indenture") between the Company and
United States Trust Company of New York, as trustee (the "Trustee"). The terms
of the Indenture are also governed by certain provisions of the Trust
Indenture Act of 1939, as amended. The following description of the material
provisions of the Notes, the Indenture and the Registration Rights Agreement
are summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the respective documents.
Copies of the Indenture and the Registration Rights Agreement can be obtained
from the Company upon request. Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to them in the Indenture or the
Registration Rights Agreement, as applicable. Wherever particular provisions
of the Indenture are referred to in this summary, such provisions are
incorporated by reference as part of the statements made and such statements
are qualified in their entirety by such reference.
GENERAL
The Old Notes are and the Exchange Notes will be senior unsecured
obligations of the Company and will rank pari passu in right of payment to all
other present and future senior unsecured Indebtedness of the Company,
provided, however, to the extent any other Indebtedness is secured by any
assets of the Company, the holders of such secured Indebtedness will have a
prior claim to those assets. At March 31, 1998, there was $207.9 million of
outstanding Senior Indebtedness (including $0.7 million in letters of credit)
secured by assets of the Company. The Old Notes were and the Exchange Notes
will be issued only in fully registered form without coupons in denominations
of $1,000 and any integral multiple thereof.
The Notes will mature on April 1, 2005. The Notes will bear interest at the
rate of 9 1/2% per annum, payable semi-annually on April 1 and October 1 in
each year, commencing October 1, 1998, to the registered holders of such Notes
(the "Holders") at the close of business on the March 15 or September 15 next
preceding each Interest Payment Date.
Principal of, premium, if any, and interest on each of the Notes will be
payable, and the Notes may be presented for registration of transfer or
exchange, at the Corporate Trust Office of the Trustee or such other office or
agency of the Company as may be designated by the Company for such purpose. At
the option of the Company, payment of interest may be made by check mailed to
the Holders at the addresses set forth on the registry books maintained by the
Trustee, who will initially act as registrar for the Notes. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Company, at its option, may redeem the Notes as a whole, or from time to
time in part, on or after April 1, 2002 at the redemption prices (expressed as
a percentage of the principal amount thereof) set forth below (in each case
together with accrued and unpaid interest, if any, to the Redemption Date):
<TABLE>
<CAPTION>
IF REDEEMED DURING THE 12-MONTH
PERIOD BEGINNING APRIL 1, REDEMPTION PRICE
------------------------------- ----------------
<S> <C>
2002................................................... 104.750%
2003................................................... 102.375%
2004 and thereafter.................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to April 1, 2001, the Company may
redeem from time to time up to 35% of the aggregate principal amount of the
Notes originally outstanding at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest, if any to the
redemption date, with the net proceeds of a public offering of common stock by
the Company (or of Holding to the extent such net proceeds are contributed as
a capital contribution in exchange for common stock of the Company); provided
that
60
<PAGE>
at least 65% of the aggregate principal amount of the Notes originally
outstanding remain outstanding immediately after such redemption.
Notice of redemption will be sent, by first class mail, postage prepaid, at
least 30 days and not more than 60 days prior to the date fixed for redemption
to each Holder to be redeemed at the last address for such Holder then shown
on the registry books. On and after the Redemption Date, interest will cease
to accrue on the Notes or part thereof called for redemption. In case of a
partial redemption, selection of the Notes or portions thereof for redemption
shall be made by the Trustee by lot, pro rata or in such manner as it shall
deem appropriate and fair. Notes may be redeemed in part in multiples of
$1,000 principal amount only.
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the "Change of Control Date"),
each Holder shall have the right, at such Holder's option, to require the
Company to repurchase all or any part of such Holder's Notes pursuant to the
offer described in the next paragraph (the "Change of Control Offer") at a
purchase price equal to 101% of the principal amount thereof (the "Change of
Control Purchase Price"), plus accrued and unpaid interest, if any, to the
date of repurchase.
Within 10 business days following the Change of Control Date, the Company
will send by first class mail a notice to each Holder, with a copy to the
Trustee, stating, among other things: (i) that a Change of Control has
occurred and that such Holder has the right to require the Company to
repurchase such Holder's Notes at the Change of Control Purchase Price; (ii)
the circumstances and relevant facts regarding such Change of Control
(including relevant information with respect to the transaction giving rise to
such Change of Control); (iii) the repurchase date specified by the Company
(which shall be not earlier than 30 days or later than 60 days after the date
such notice is mailed) (the "Repurchase Date"); and (iv) the instructions
determined by the Company consistent with the Indenture that a Holder must
follow in order to have its Notes accepted for repurchase. Holders will have
the right to have their Notes repurchased by the Company if such Notes are
tendered for repurchase at any time prior to the close of business on the
fifth business day prior to the Repurchase Date. Holders may withdraw their
election, in whole or in part, at any time prior to the close of business on
the third business day prior to the Repurchase Date (or such shorter period as
may be required by applicable law).
As used herein, a "Change of Control" means (i) directly or indirectly a
sale, transfer or other conveyance of all or substantially all of the assets
of the Company or Holding, on a consolidated basis, to any "person" or "group"
(as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable), excluding transfers or conveyances
to or among the Company's Wholly Owned Restricted Subsidiaries, as an entirety
or substantially as an entirety in one transaction or series of related
transactions; (ii) prior to the earlier to occur of (A) the first public
offering of Holding Common Stock or (B) the first public offering of Common
Stock, Kelso and its Affiliates, the officers, directors and employees of the
Company and its Subsidiaries and the ESOP (collectively, the "Permitted
Holders") cease to beneficially own, directly or indirectly, in the aggregate
a majority of the total voting power of all classes of Capital Stock then
outstanding and normally entitled to vote in elections of directors ("Voting
Stock") of the Company, whether as a result of issuance of securities of the
Company, any merger, consolidation, liquidation or dissolution of the Company,
any direct or indirect transfer of securities by Holding or otherwise (the
Permitted Holders will be deemed to beneficially own any Voting Stock of the
Company held by Holding so long as Permitted Holders beneficially own,
directly or indirectly, in the aggregate a majority of the voting power of the
Voting Stock of Holding); (iii) any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable), other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the
Exchange Act, whether or not applicable, except that a person shall be deemed
to have "beneficial ownership" of all shares that any such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 30% of the total
voting power of all Voting Stock then outstanding of the Company and the
Permitted Holders "beneficially own" (as so defined), directly or indirectly,
in the aggregate a lesser percentage of the total voting power of the Voting
Stock of the Company than such other person and do not have the right
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<PAGE>
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors of the Company (for the purposes
of this clause (iii), such other person will be deemed to beneficially own any
Voting Stock of the Company held by Holding, if such other person
"beneficially owns" (as so defined), directly or indirectly, more than 30% of
the voting power of the Voting Stock of Holding and the Permitted Holders
"beneficially own" (as so defined), directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of Holding and do
not have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors of Holding); or
(iv) during any period of 24-consecutive months, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved or who were nominated and elected by the
Permitted Holders pursuant to the Stockholder Agreement) cease for any reason
to constitute a majority of the Board of Directors of the Company then in
office.
Clause (i) of the definition of Change of Control set forth in the preceding
paragraph includes a sale, transfer or other conveyance of all or
"substantially all" of the Company's or Holding's assets. Although there is a
developing body of case law interpreting the phrase "substantially all," there
is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of the Notes to require the Company to
repurchase such Holder's Notes as a result of a sale, transfer or other
conveyance of the Company's or Holding's assets to another person may be
uncertain.
As noted above, certain transactions with Permitted Holders may not be
deemed to constitute a Change of Control. In the event a Change of Control
occurs and any repurchase pursuant to the foregoing constitutes a "tender
offer" for purposes of Rule 14e-1 under the Exchange Act, the Company will
comply with the requirements of Rule 14e-1 as then in effect, to the extent
applicable, and any other applicable securities laws or regulations with
respect to such repurchase.
The Company's ability to repurchase the Notes pursuant to a Change of
Control Offer may be limited by, among other things, the Company's financial
resources at the time of repurchase. See "Capitalization" and "Risk Factors--
Change of Control."
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Indebtedness. The Indenture provides that the Company shall
not create, incur, assume, guarantee or otherwise become liable for, and shall
not permit any of its Restricted Subsidiaries to create, incur, assume,
guarantee or otherwise become liable for, any Indebtedness, except for
Permitted Indebtedness.
Notwithstanding the foregoing, the Company may create, incur, assume,
guarantee or otherwise become liable for Indebtedness (other than guarantees
of Indebtedness, the incurrence of which would not be permitted under the
Indenture) if, at the time such Indebtedness is so created, incurred or
assumed and after giving effect thereto and the application of the proceeds
therefrom, the Fixed Charge Coverage Ratio of the Company for the four most
recent fiscal quarters for which financial information is available shall not
be less than 2.0 to 1.0.
For purposes of calculating the Fixed Charge Coverage Ratio referred to
above, if the Indebtedness to be created, incurred or assumed is Indebtedness
of an entity which is to be acquired by, and made a Restricted Subsidiary of,
the Company or of a Restricted Subsidiary (whether or not such Indebtedness
was incurred by such entity in connection with such acquisition), or is
Indebtedness incurred by the Company or any Restricted Subsidiary in
connection with such acquisition, then the Fixed Charge Coverage Ratio of the
Company shall be determined on a pro forma basis giving effect to both the
Fixed Charges related to such additional Indebtedness as well as the
Consolidated Cash Flow of the entity to be acquired.
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<PAGE>
Limitation on Restricted Payments. The Indenture provides that the Company
shall not, and shall not permit any of its Restricted Subsidiaries to,
directly or indirectly, make any Restricted Payment, if, after giving effect
thereto (i) a Default or an Event of Default, shall have occurred and be
continuing or (ii) the aggregate amount of all Restricted Payments made and
the amount of Investments then outstanding pursuant to clause (vii)(y) under
the "Limitation on Investments" covenant by the Company and its Restricted
Subsidiaries (the amount expended, distributed or invested for such purposes,
if other than in cash, to be determined in good faith by the Board of
Directors of the Company and evidenced by a Board Resolution) from and after
the date of the Indenture shall exceed the sum of (a) 50% of Consolidated Net
Income of the Company accrued for the period (taken as one accounting period)
commencing with the date of the Indenture to and including the date of such
calculation (or, in the event Consolidated Net Income for such period is a
deficit, then minus 100% of such deficit); (b) 50% of the (1) increase in
depreciation expense resulting from the application of APB 16 purchase
accounting to the acquisition of the Company in 1990, and (2) amortization of
goodwill and deferred financing costs existing as of the date of the
Indenture, in each case, for the period specified in clause (a) above; (c) the
aggregate net cash proceeds, including marketable securities, received by the
Company or Holding from the issuance or sale (other than to a Subsidiary of
the Company or Holding, as the case may be) of its Capital Stock (other than
Redeemable Stock) or any convertible debt securities that have been converted
into shares of Capital Stock (other than Redeemable Stock), from and after the
date of the Indenture, provided that, in the case of any issuance or sale by
Holding such net cash proceeds are contributed as a capital contribution in
exchange for common stock of the Company; (d) the aggregate amount received by
the Company or its Restricted Subsidiaries from an Unrestricted Subsidiary
(excluding amounts received by the Company or any Restricted Subsidiary from
an Unrestricted Subsidiary which represents a repayment of the principal
portion of any loan or advance or any return of contributed capital); (e) if
there is a redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries of the Company, such aggregate amount of the net reduction in
Investments in clause (vii) of the "Limitation on Investments" covenant not to
exceed in the case of any Unrestricted Subsidiaries the amount of Restricted
Investments previously made by the Company or any Restricted Subsidiary of the
Company in such Unrestricted Subsidiary which amount was included in the
calculation of the amount of Restricted Payments; and (f) $10,000,000.
The foregoing clause (ii) will not prevent (a) the payment of any dividend
on Capital Stock within 60 days after the date of its declaration if such
dividend could have been made on the date of its declaration in compliance
with the foregoing provisions, (b) the purchase, redemption or retirement or
other acquisition of Capital Stock in exchange for or out of the proceeds of a
substantially concurrent issue and sale (other than to a Subsidiary) of other
shares of Capital Stock (other than Redeemable Stock) of the Company, (c) cash
dividends paid to Holding which dividends are used by Holding to repurchase
Capital Stock of Holding from officers and employees (or their estates) of
Holding, the Company or its Subsidiaries upon death, disability or termination
of employment of such officers and employees to the extent required by the
terms of the Stockholder's Agreement, including any extension of the
Stockholders' Agreement on substantially the same terms and conditions, as in
effect on the date of the Indenture; provided, however, that the aggregate
amount of all such repurchases in any fiscal year of the Company does not
exceed $5,000,000; (d) cash dividends paid to Holding which dividends are used
by Holding to repurchase shares of its Capital Stock from participants who are
distributed such shares from the ESOP to the extent required by the terms
thereof as in effect on the date of the Indenture; (e) cash dividends paid to
Holding out of the net proceeds to the Company of any benefits paid pursuant
to the terms of the Life Insurance Policies; provided, however, that such net
proceeds shall be first used to repurchase Capital Stock of Holding from the
estate of such former officer or employee if such repurchase is required by
the ESOP, the Stockholder Agreement or any other agreement and provided,
further, that the amount of such dividend shall be excluded in the calculation
of Restricted Payments for purposes of clause (ii) of the immediately
preceding paragraph; (f) the purchase, redemption, retirement or other
acquisition of any Indebtedness with the Net Proceeds from Asset Dispositions
as permitted under the "Limitation on Dispositions of Assets" covenant;
(g) the exchanging, refinancing or refunding of Subordinated Indebtedness
through the issuance of Subordinated Indebtedness so long as (1) the principal
amount of the new Subordinated Indebtedness to be issued does not exceed the
principal amount (plus any premium and consent payments required) of the
Subordinated Indebtedness so exchanged, refinanced or refunded and (2) the
Subordinated Indebtedness to be issued does not
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have a final maturity or mandatory redemption payments prior to the earlier of
the final maturity of the Subordinated Indebtedness being so exchanged,
refinanced or refunded or the stated maturity of the Notes; (h) any securities
or other Investments received in connection with any sale or other disposition
of property or assets, including any Asset Disposition that complies with the
"Limitation on Dispositions of Assets" covenant; and (i) Investments in
connection with a Financing Disposition by or to any Receivables Entity,
including Investments of funds held in accounts permitted or required by the
arrangements governing such Financing Disposition or any related Indebtedness.
Limitation on Liens. The Indenture provides that the Company shall not, and
shall not permit any of its Restricted Subsidiaries, directly or indirectly,
to create, incur, assume or permit to exist any Lien except for Permitted
Liens upon or with respect to any of its property, whether owned at the date
of the Indenture or thereafter acquired, or on any income or profits therefrom
or assign or otherwise convey any right to receive income, unless the Notes
are secured equally and ratably simultaneously with or prior to the creation,
incurrence or assumption of such Lien.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
the Company shall not, and shall not permit any Restricted Subsidiary to,
enter into any Sale and Leaseback Transaction unless (i) the Company would be
able to incur Indebtedness (other than Permitted Indebtedness) in an amount
equal to the Attributable Debt with respect to such Sale and Leaseback
Transaction or (ii) where the Company or such Restricted Subsidiary receives
consideration from such Sale and Leaseback Transaction at least equal to the
fair market value of the property subject thereto (which shall be determined
in good faith by the Board of Directors and evidenced by a Board Resolution)
and applies the Net Proceeds of such Sale and Leaseback Transaction in
accordance with the provisions set forth in the "Limitation on Dispositions of
Assets" covenant.
Limitation on Dispositions of Assets. The Indenture provides that the
Company shall not, and shall not permit any Restricted Subsidiary to, sell,
transfer, lease, convey or otherwise dispose of any assets (other than (i) an
asset disposition or the sale of Inventory in the ordinary course of business
consistent with past practice, (ii) any Financing Disposition, (iii) any
disposition of the Designated Facilities, or (iv) as permitted under
"Limitation on Consolidation and Merger" below which constitutes a transfer,
conveyance, sale, lease or other disposition of all or substantially all of
the Company's assets) unless (a) the Company (or the Restricted Subsidiary, as
the case may be) receives consideration at the time of such disposition (an
"Asset Disposition") at least equal to the fair market value of the assets
disposed of (which shall be determined in good faith by the Board of Directors
and evidenced by a Board Resolution), and (b) the Net Proceeds received by the
Company for such disposition consists of at least 75% cash, provided, however,
that for the purposes of this covenant, "cash" shall include (i) the amount of
any liabilities (other than liabilities that are by their terms subordinated
to the Notes) of the Company or such Restricted Subsidiary (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or in the
notes thereto) that are assumed by the transferee of any such assets or other
property in such Asset Disposition or are no longer the liability of the
Company or any Restricted Subsidiary (and excluding any liabilities that are
incurred in connection with or in anticipation of such Asset Disposition), but
only to the extent that such assumption is effected on a basis under which
there is no further recourse to the Company or any of its Restricted
Subsidiaries with respect to such liabilities and (ii) any securities, notes
or other obligations received by the Company or any such Restricted Subsidiary
in connection with such Asset Disposition that are converted by the Company or
such Restricted Subsidiary into cash within 180 days of receipt. Within 18
months from the date of such disposition, the Net Proceeds (other than Net
Proceeds of any Asset Disposition of the Excluded Facility) thereof shall be
(x) applied to capital expenditures of the Company or the Restricted
Subsidiaries; (y) used by the Company or a Restricted Subsidiary to acquire
additional properties or assets related to the Company's business or to make
Investments in entities, which, after giving effect to such Investment, will
become Restricted Subsidiaries, or (z) applied to repay, repurchase or redeem
Indebtedness of a Restricted Subsidiary or Indebtedness of the Company ranking
on a parity with or senior to the Notes; provided, however, that if such
repaid, repurchased or redeemed Indebtedness is Indebtedness incurred under or
in respect of the New Credit Facility (or any substitute or replacement
facility), the amount of borrowing capacity under such facility shall be
permanently reduced by the amount of such
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repayment, repurchase or redemption; provided, however, no such permanent
reduction in borrowing capacity shall be required if such repayment,
repurchase or redemption is made with the Net Proceeds remaining after
consummation of a Proceeds Offer (as defined below).
To the extent that Net Proceeds from such disposition are not so applied,
the Company (or the Restricted Subsidiary, as the case may be) shall use the
remaining Net Proceeds (less any amount of Net Proceeds used to pay reasonable
fees and expenses connected with an offer to purchase hereunder) (the
"Purchase Amount") to make an offer to purchase Notes in accordance with the
requirements of the Indenture ("Proceeds Offer") at a price equal to 100% of
the principal amount thereof. If at any time any non-cash consideration
received by the Company or a Restricted Subsidiary in respect of a disposition
of assets is converted into or sold or otherwise disposed of for cash, then
such cash shall constitute Net Proceeds for purposes of this provision and
shall be applied in accordance with the preceding two sentences within 30 days
of the receipt of such cash. The receipt of all proceeds of insurance paid on
account of the loss of or damage to any assets and awards of compensation for
any such assets taken by condemnation or eminent domain, net of expenses
incurred in their collection, shall constitute Net Proceeds.
Notwithstanding the foregoing, a Proceeds Offer may be deferred with respect
to an Asset Disposition or series of related Asset Dispositions if the Net
Proceeds, after giving effect to the application, if any, as set forth in
clauses (x), (y) or (z) above, is less than $5,000,000. Such Proceeds Offer
may be deferred until such time as such Net Proceeds, plus the aggregate
amount of Net Proceeds resulting from any prior or subsequent Asset
Disposition(s) during any 12 month period not otherwise applied as provided in
clauses (x), (y) or (z) above, is at least equal to $7,500,000, at which time
the Company shall apply all such Net Proceeds to a Proceeds Offer.
Notwithstanding the foregoing, to the extent that any or all of the Net
Proceeds of any disposition of assets is prohibited or delayed by applicable
local law from being repatriated to the United States, the portion of such Net
Proceeds so affected will not be required to be applied pursuant to this
provision but may be retained for so long, but only for so long, as the
applicable local law will not permit repatriation to the United States. The
Indenture provides that the Company will promptly take all reasonable actions
required by the applicable local law to permit such repatriation, and once
such repatriation of any affected Net Proceeds is permitted under applicable
local law, such repatriation will be immediately effected and such repatriated
Net Proceeds will be applied in the manner set forth above as if such
disposition of assets had occurred on the date of repatriation.
Limitation on Restricted Subsidiary Dividends. The Indenture provides that
the Company shall not, and shall not permit any of its Restricted Subsidiaries
to, create, assume or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions in respect of such Restricted
Subsidiary's Capital Stock or otherwise transfer cash or assets or make loans
or advances to the Company or any other Restricted Subsidiary, or pay
Indebtedness owing to the Company or any other Restricted Subsidiary, (ii)
make any loans or advances to the Company or any Restricted Subsidiary, or
(iii) transfer any of its property or cash to the Company or any Restricted
Subsidiary, other than as permitted by the Indenture, except for such
encumbrances or restrictions existing under or by reason of (a) applicable
law, (b) customary non-assignment provisions of any agreement or obligation,
including a lease governing a leasehold interest, of the Company or a
Subsidiary of the Company, (c) the Indenture, (d) the Special Term Loan and
any amendments, modifications or refinancing thereof, provided, however, that
any such amendments, modifications, or refinancings shall not impose any
greater encumbrance or restriction than those contemplated by the Special Term
Loan as in existence on the date of original issuance of the Notes, (e) the
New Credit Facility, provided, however, that any amendments to the New Credit
Facility shall not impose any greater encumbrance or restriction than those
contemplated by such New Credit Facility as in existence on the date of
original issuance of the Notes, (f) any Indebtedness incurred pursuant to
clause (xv) of the definition of Permitted Indebtedness and any amendments,
modifications or refinancings thereof, (g) any instrument governing
Indebtedness of a Person acquired by the Company or any Subsidiary of the
Company at the time of such acquisition, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired, (h) any
restriction on the sale or other disposition of assets or property securing
Indebtedness as a result of a Permitted Lien on such assets or
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property (including without limitation, customary restrictions relating to
assets securing any indebtedness under the Special Term Loan, the New Credit
Facility or the Indebtedness incurred pursuant to clause (ix) or (xv) of the
definition of Permitted Indebtedness), (i) contracts for the sale of assets,
including customary restrictions with respect to agreements for sale of
substantially all of the Capital Stock or assets of such Subsidiary provided
that such restrictions apply only to the assets being sold and for only so
long as such contract remains in effect, or (j) an agreement relating to
Indebtedness of or a Financing Disposition to or by any Receivables Entity.
Nothing contained in this "Limitation on Restricted Subsidiary Dividends"
covenant shall prevent the Company or any Restricted Subsidiary from (1)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitations on Liens" covenant or (2) restricting the sale
or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
Limitation on Transactions with Affiliates. The Indenture provides that the
Company shall not, and shall not permit any of its Restricted Subsidiaries to,
enter into transactions with Affiliates of the Company or Holding (other than
the Company and its Wholly Owned Restricted Subsidiaries) except for Permitted
Transactions, transactions in respect of Restricted Payments made in
accordance with the "Limitation on Restricted Payments" covenant and
transactions the terms of which are no less favorable than the terms which
could be obtained by the Company, or, if the Company is not a party to such
transaction, such Restricted Subsidiary, as the case may be, in a comparable
transaction made on an arm's length basis between unaffiliated parties, and
for transactions involving aggregate payments in excess of $3,000,000, the
Company delivers to the Trustee a resolution of the Board of Directors of the
Company (including all, if any, of the disinterested directors) to the effect
that the terms of such transactions are fair and reasonable to the Company, or
if the Company is not a party to such transaction, such Restricted Subsidiary.
Limitation on Investments. The Indenture provides that the Company shall
not, and shall not permit any Restricted Subsidiary to, make any Investments
in any other person, except (i) Investments in the Company or in any other
Restricted Subsidiary by any Restricted Subsidiary or by the Company in a
Wholly Owned Restricted Subsidiary of the Company; (ii) receivables owing to
the Company or its Restricted Subsidiaries created in the ordinary course of
business and payable or dischargeable substantially in accordance with
customary trade terms; (iii) Permitted Transactions; (iv) Investments made in
Cash Equivalents; (v) Investments permitted to be made pursuant to the
"Limitation on Dispositions of Assets" covenant; (vi) Investments existing on
the date of the Indenture; and (vii) Investments in Unrestricted Subsidiaries
(or an entity (or entities) which, after giving effect to such Investment,
becomes an Unrestricted Subsidiary) not otherwise permitted by clauses (i)
through (vi) above, in an aggregate amount not exceeding at any time
outstanding the sum of (x) $7,500,000 and (y) an amount which is equal to the
amount of Restricted Payments permitted at such time to be made pursuant to
the "Limitation on Restricted Payments" covenant (the sum of (x) and (y) being
referred to as the "Permitted Investment Amount").
Limitation on Consolidation and Merger. The Indenture provides that the
Company shall not in a single transaction or through a series of related
transactions consolidate with or merge with or into another person or directly
or indirectly sell, transfer, lease or convey all or substantially all of its
properties and assets to another person unless: (i) (a) the Company is the
continuing corporation in the case of a merger or (b) the resulting, surviving
or transferee entity (the "Surviving Entity") is a corporation or partnership
organized under the laws of the United States, any state thereof or the
District of Columbia and expressly assumes by supplemental indenture in a form
reasonably satisfactory to the Trustee all of the obligations of the Company
under the Indenture and the Notes; (ii) no Default or Event of Default shall
have occurred and be continuing immediately after giving effect to such
transaction; (iii) the Consolidated Net Worth of the Company or the Surviving
Entity, as the case may be, on a pro forma basis after giving effect to such
consolidation, merger or sale, transfer, lease or conveyance of assets (but
prior to any purchase accounting adjustments resulting from the transaction)
is not less than the Consolidated Net Worth of the Company, immediately prior
to the date of the transaction; and (iv) immediately after giving effect to
such transaction, the Company or the Surviving Entity, as the case may be, on
a pro forma basis would be able to incur $1.00 of additional Indebtedness
(other than Permitted
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Indebtedness) under the "Limitation on Indebtedness" covenant as if, in the
case of the Surviving Entity, such Person were the Company.
Notwithstanding the foregoing, clause (iv) shall not prohibit a transaction,
the principal purpose of which is (as determined in good faith by the Board of
Directors of the Company and evidenced by a resolution thereof) to change the
state of incorporation of the Company, and such transaction does not have as
one of its purposes the evasion of the restrictions of this section.
SUPPLEMENTAL INDENTURES
The Indenture permits the Company and the Trustee, without notice to or the
consent of the Holders, to amend or supplement the Indenture or the Notes for
certain specified purposes, including curing ambiguities, defects or
inconsistencies (provided that such action shall not materially adversely
affect the interests of the Holders in any respect), providing for the
assumption of the Company's obligations to the Holders under certain
circumstances, providing for uncertificated Notes, and to maintain compliance
with the Trust Indenture Act of 1939, as amended. Other modifications,
amendments or supplements to the Indenture or the Notes may be made with the
consent of the Holders of not less than a majority in aggregate principal
amount of the Notes at the time outstanding, and such modifications,
amendments or supplemental indentures will be binding on every Holder whether
or not such Holder has consented thereto, provided that no such modification,
amendment or supplemental indenture shall, without the consent of Holders of
each outstanding Note affected thereby, among other things (a) change the
final maturity of any Note, or reduce the principal amount thereof (including
the amount payable upon redemption), reduce the rate or extend the time of
payment of interest thereon, or impair or affect the right of any Holder of
Notes to institute suit for the payment of any of the Notes or (b) reduce the
aforesaid percentage of Notes, the consent of Holders of which is required for
any such modification, amendment or supplement to the Indenture.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as being: (a) any failure to pay
an installment of interest on the Notes as and when the same becomes due and
payable and such failure continues for 30 days; (b) failure to pay all or any
part of the principal of (or premium, if any, on) the Notes when and as the
same shall become due and payable at maturity, redemption, by declaration or
otherwise, including payment of the Change of Control Price; (c) failure by
the Company duly to observe, perform or comply with any covenant or agreement
contained in the Notes or the Indenture which failure continues for a period
of 60 days after written notice specifying such failure and demanding that the
Company remedy the same has been given to the Company by the Trustee or to the
Company and the Trustee by Holders of at least 25% in aggregate principal
amount of Notes then outstanding; (d) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any Material Subsidiary; (e)
(i) a default which extends beyond any stated period of grace applicable
thereto, excluding any extension thereof, under any bond, debenture, note,
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness of the Company or any of
its Restricted Subsidiaries, whether now existing or hereafter created,
aggregating in excess of $10,000,000 at any one time, if as a result of such
event of default the maturity of such Indebtedness has been accelerated prior
to its final stated maturity, or (ii) failure to pay such Indebtedness,
aggregating in principal amount in excess of $10,000,000 at any one time, at
its final stated maturity; or (f) the rendering of final judgments not covered
by insurance (which coverage shall be in full force and effect) for the
payment of money in an amount equal to or greater than, in the case of any one
such judgment $2,500,000, and, in the case of all such judgments $5,000,000,
against the Company or any of its Restricted Subsidiaries by a court of
competent jurisdiction which are not stayed, satisfied, vacated or discharged
within 60 days after such judgments become final and nonappealable.
If an Event of Default (other than an Event of Default with respect to the
Company described in clause (d) of the preceding paragraph), shall occur and
be continuing then, and in every such case, unless the principal of all the
Notes shall have already become due and payable, either the Trustee or the
Holders of not less than 25% in aggregate principal amount of then outstanding
Notes, by notice in writing to the Company (and to the Trustee
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if given by Holders), may declare all of the principal of the Notes (or the
Change of Control Purchase Price if the Event of Default includes failure to
pay the Change of Control Purchase Price), together with accrued interest
thereon to be due and payable immediately. If an Event of Default with respect
to the Company specified in clause (d) above occurs, all principal of, premium
applicable to, and accrued interest on, all then outstanding Notes shall
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder.
The provisions described in the preceding paragraph, however, are subject to
the condition that if, at any time after a declaration of acceleration has
been made and before a judgment or decree for payment of the money due has
been obtained by the Trustee, the Holders of a majority in aggregate principal
amount of the then outstanding Notes, by written notice to the Company and the
Trustee, may waive, on behalf of all Holders, a Default or an Event of Default
if: (a) the Company has paid or deposited with the Trustee a sum sufficient to
pay (i) all overdue interest on all then outstanding Notes, (ii) the principal
of (and premium, if any, applicable to) any Notes which would become due
otherwise than by such declaration of acceleration, and interest thereon at
the rate borne by the Notes, (iii) to the extent that payment of such interest
is lawful, interest upon overdue interest at the rate borne by the Notes and
(iv) all sums paid or advanced by the Trustee under the Indenture and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and (b) all Events of Default, other than the
nonpayment of the principal of Notes which have become due solely by such
declaration of acceleration, have been cured or waived. Notwithstanding the
previous sentence, no waiver shall be effective for any Default or Event of
Default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each then outstanding Security,
unless all such affected Holders agree, in writing, to waive such Default or
Event of Default. No such waiver shall cure or waive any subsequent default or
impair any right consequent thereon.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any past or existing
Default or Event of Default under the Indenture, except a continuing Default
in the payment of principal of, or interest on any Notes or a default with
respect to any covenant or provision which cannot be modified or amended
without the consent of the Holder of each outstanding Note affected. The
Trustee is under no obligation to exercise any of its rights or powers under
the Indenture at the request, order or direction of any of the Holders unless
such Holders have offered to the Trustee security or indemnity satisfactory to
the Trustee. Subject to all the provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the Notes at
the time outstanding have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee.
The Company is required to furnish the Trustee, forthwith upon becoming
aware of any Default or Event of Default under the Indenture, an officer's
certificate specifying such default and within 120 days after the end of each
fiscal year, an officer's certificate to the effect that the officers
executing the same have conducted, or supervised, a review of the activities
of the Company and its Restricted Subsidiaries and of performance under the
Indenture and that, to such officers' knowledge, based on their review, the
Company has fulfilled all of its obligations under the Indenture, or, if there
has been a failure to comply with such obligations, describing such failure
with particularity.
DEFEASANCE
The Company may terminate its obligations (except as to surviving rights of
registration of transfer or exchange of Notes expressly provided for in the
Indenture) under the Indenture when (i) either (A) all outstanding Notes
authenticated and delivered thereunder (except lost, stolen or destroyed Notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation or (B) all the Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within
one year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with the
Trustee United States dollars in an amount
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sufficient to pay and discharge the entire indebtedness on the Notes, not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest to the date of such deposit or Stated Maturity
or date of redemption, respectively; (ii) the Company has paid or caused to be
paid all sums payable by the Company under the Indenture; and (iii) the
Company has delivered an Officers' Certificate and an Opinion of Counsel
relating to compliance with the conditions set forth in the Indenture. Such
Opinion of Counsel may, as to all matters of fact, rely on, among other
things, such Officers' Certificate.
Subject to certain conditions, the Company may, at its option and at any
time, terminate its obligations with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness on the outstanding Notes and the
Indenture shall cease to be of further effect as to all outstanding Notes
except as to (i) rights of registration of transfer, substitution and exchange
of the Notes and the Company's right of optional redemption, (ii) rights of
Holders to receive, solely from the trust fund described below, payments of
principal of, premium, if any, and interest on the Notes and any rights of the
Holders with respect to such amounts, (iii) the rights, obligations and
immunities of the Trustee under the Indenture and (iv) certain other specified
provisions in the Indenture (the foregoing exceptions (i) through (iv) are
collectively referred to as the "Reserved Rights"). In addition, subject to
certain conditions, the Company may, at its option and at any time, terminate
its obligations with respect to certain covenants set forth in the Indenture
and any omission to comply with such obligations will not constitute a Default
or an Event of Default with respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or caused to be deposited with the Trustee,
in trust for the benefit of the Holders of the Notes, at any time prior to the
Stated Maturity of the Notes, (A) money in an amount, (B) U.S. Government
Obligations that, through the payment of interest and principal, will provide,
not later than one day before the due date of payment in respect of the Notes,
money in an amount, or (C) a combination thereof, sufficient to pay and
discharge the principal amount of, premium, if any, and interest on the Notes
to redemption or Stated Maturity, as the case may be, then outstanding on the
dates on which any such payments are due in accordance with the terms of the
Indenture and of the Notes; (ii) no Default or Event of Default will have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the incurrence of Indebtedness, the
proceeds of which are applied to such deposit); (iii) such defeasance or
covenant defeasance will not result in a breach or violation of, or constitute
a default under, the Indenture (other than a Default or Event of Default
resulting from the incurrence of Indebtedness, the proceeds of which are
applied to such deposit), or any material agreement or instrument to which the
Company is a party or by which it is bound; (iv) the Company shall have
delivered to the Trustee an opinion of outside counsel acceptable to the
Trustee (who may be counsel to the Company) to the effect that (a) in the
event that the defeasance or covenant defeasance, as the case may be, shall
occur more than twelve months prior to Stated Maturity of the Note, such
defeasance or covenant defeasance will not be deemed, or result in, a taxable
event for federal income tax purposes, with respect to Holders of the Note
(and in the case of defeasance the Internal Revenue Service has provided a
ruling to the Company or published a ruling or there has been a change after
the Issue Date in applicable federal income tax law), and (b) after the 91st
day following the Company's deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization, or
similar laws affecting creditors' rights generally; and (v) the Company shall
have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent provided in the Indenture
relating to either defeasance or covenant defeasance, as the case may be, have
been complied with.
REPORTS
The Company will deliver to the Trustee and mail to each Holder, within 15
days after it files them with the Commission, copies of its annual report and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may by rules and regulations prescribe)
which the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
required to remain subject to the reporting requirements of Section 13 or
15(d) of
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the Exchange Act, the Company shall continue to file with the Commission and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports.
CERTAIN DEFINITIONS
In addition to the terms defined above, the Indenture contains, among other
things, the following definitions:
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"APB 16" means Accounting Principles Board Opinion No. 16 (Business
Combinations) as in effect on the date of the Indenture.
"Attributable Debt" in respect of a Sale and Leaseback Transaction means, at
the time of determination, the present value (discounted at the interest rate
implicit in the lease, compounded semiannually) of the obligation of the
lessee of the property subject to such Sale and Leaseback Transaction for
rental payments during the remaining term of the lease included in such
transaction including any period for which such lease has been extended or
may, at the option of the lessor, be extended or until the earliest date on
which the lessee may terminate such lease without penalty or upon payment of
penalty (in which case the rental payments shall include such penalty), after
excluding all amounts required to be paid on account of maintenance and
repairs, insurance, taxes, assessments, water, utilities and similar charges.
"Capital Stock" of any Person means any and all shares, interests,
participations, or other equivalents (however designated) of capital stock of
such Person and any rights (other than debt securities convertible into
capital stock), warrants or options to acquire such capital stock.
"Capitalized Lease Obligation" means, as to any Person, Indebtedness
represented by obligations under a lease that is required to be capitalized on
the balance sheet of such Person for financial reporting purposes in
accordance with GAAP and the amount of such Indebtedness shall be the
capitalized amount of such obligations determined in accordance with GAAP and
the stated maturity thereof shall be the date of the last payment of rent or
any other amount due under such lease.
"Cash Equivalents" means (i) obligations issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) and maturing within one year
from the date of acquisition, (ii) dollar and eurodollar time deposits and
certificates of deposit or bankers' acceptances of any domestic commercial
bank or domestic branch office or agency of a foreign commercial bank of
recognized standing having capital and surplus in excess of $100,000,000 (a
"Qualified Bank"), (iii) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i)
above entered into with any Qualified Bank, (iv) commercial paper issued by
any Qualified Bank and commercial paper of any other issuer rated at least A-2
or the equivalent thereof by Standard & Poor's Corporation or at least P-2 or
the equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year from the date of acquisition, (v) securities, bonds,
notes, debentures or investments or other forms of Indebtedness of any person
rated at least A or the equivalent thereof by Standard & Poor's Corporation
and at least A or the equivalent thereof by Moody's Investors Service, Inc.,
(vi) investments in money market or mutual funds registered under the
Investment Company Act of 1940, as amended, whose sole investments are
comprised of securities and other instruments or obligations described in
clauses (i) through (v) above and (vii) with respect to only foreign
operations of the Company and its Subsidiaries, overnight deposits in the
ordinary course of business with foreign commercial banks and certificates of
deposit or bankers' acceptances of foreign commercial banks of recognized
standing having capital and surplus in excess of $100,000,000.
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"Consolidated Cash Flow" of any Person, for any period, means the
Consolidated Net Income of such person plus the sum of (a) income taxes,
determined on a consolidated basis for such person and its Restricted
Subsidiaries, (b) Fixed Charges of such person and its Restricted
Subsidiaries, (c) depreciation expense, (d) amortization expense and (e) all
other non-cash items deducted from net revenues in determining Consolidated
Net Income for such period, all determined in accordance with GAAP.
"Consolidated Net Income" of any Person, for any period, means the net
income (loss) of such person and its Restricted Subsidiaries for such period,
determined in accordance with GAAP, provided that (i) the net income
(determined as set forth above) of any Unrestricted Subsidiary or any other
Person, other than a Restricted Subsidiary, in which such person or any of its
Restricted Subsidiaries has a joint interest with a third party shall be
included only to the extent of the amount of dividends or distributions
actually paid to such person or Restricted Subsidiary during such period, (ii)
the net income (loss) of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the net income of any Restricted Subsidiary shall be excluded
to the extent such Restricted Subsidiary is prohibited, directly or
indirectly, from distributing such net income or any portion thereof to such
person, (iv) the net income (loss) of such person shall be adjusted by
excluding (to the extent otherwise included) any extraordinary gains and
extraordinary losses together with any related provisions for taxes on any
such gain or loss during any such period, (v) the net income (loss) of such
person shall be adjusted by excluding any adjustments relating to the LIFO
method of accounting for inventory during such period, (vi) the net income
(loss) of the Company shall be adjusted to exclude (to the extent otherwise
included) the one-time non-cash charges associated with the write-off of
deferred debt issuance costs associated with the Refinancing Transactions and
to exclude any redemption premiums paid on the 10 3/4% Notes or the purchase
money indebtedness redeemed in connection with the Refinancing Transactions.
"Consolidated Net Worth" of any Person, at any date, means the aggregate of
capital, surplus and retained earnings less (a) any accumulated deficit and
(b) any amounts attributable to Redeemable Stock, of such person and its
Restricted Subsidiaries as would be shown on a consolidated balance sheet of
such person and its Restricted Subsidiaries prepared in accordance with GAAP.
"Designated Facilities" means the facilities of the Company located in
Detroit, Michigan, Lynwood, California (the Alameda Sheet and Strip building),
Kansas City, Missouri (the JSA Facility), and Buffalo, New York and any
property, plant or equipment located at such facility.
"Eligible Accounts Receivable" means all accounts receivable which are not
more than 180 days past due under their normal payments terms.
"Excluded Facility" means the real property and plant located at 601 Redna
Terrace, Cincinnati, Ohio, to the extent that such real property and plant is
purchased by the Company for an amount not exceeding $6,000,000 and
subsequently sold by the Company on or prior to March 31, 1999 pursuant to a
transaction in which the Company enters into a lease agreement with the
purchaser of such real property and plant on terms no less favorable in any
material respect than the terms of the existing lease agreement for such real
property and plant.
"Financing Disposition" means any sale, transfer, conveyance or other
disposition of property or assets by the Company or any Subsidiary thereof to
any Receivables Entity, or by any Receivables Subsidiary, in each case in
connection with the incurrence by a Receivables Entity of Indebtedness, or
obligations to make payments to the obligor on Indebtedness, which may be
secured by a Lien in respect of such property or assets.
"Fixed Charges" means, with respect to any Person for any period, such
person's consolidated interest expense determined in accordance with GAAP, (a)
including amortization of original issue discount and non-cash expenses
attributable to accruals and the interest component of capital leases, (b)
excluding the amortization of debt issuance costs, (c) excluding an amount of
interest expense in respect of Life Insurance Policy loans that is equal to
any dividends received in respect of the Life Insurance Policies (not to
exceed the amount of such
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interest expense on the Life Insurance Policies), and (d) plus the product of
(x) the sum of (i) cash dividends paid on any preferred stock of such person
plus (ii) cash and the fair market value (as determined by the Company's Board
of Directors in good faith) of any non-cash dividends paid on any preferred
stock of any Restricted Subsidiary (other than a Wholly Owned Restricted
Subsidiary), times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective aggregate
Federal, state and local tax rate of such person, expressed as a decimal. For
purposes of this definition, interest on a capital lease shall be deemed to
accrue at the rate of interest implicit in such capital lease in accordance
with GAAP (including Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board ("FASB")).
"Fixed Charge Coverage Ratio" means for any Person, for any period, such
Person's ratio of Consolidated Cash Flow to Fixed Charges for such period.
"GAAP" means generally accepted accounting principles in effect in the
United States as of the time, when and for the period as to which such
accounting principles are to be applied; provided, however, that for purposes
of computing Consolidated Net Worth, the Fixed Charge Coverage Ratio and
compliance with the "Limitation on Restricted Payments" covenant, "GAAP" means
such generally accepted accounting principles as adopted by the Company on the
date of the Indenture.
"Heller Documents" means (a) the Loan and Security Agreement dated as of
March 27, 1995, by and between the Company and Heller Financial, Inc.; (b) the
Promissory Note dated March 30, 1995, made by the Company and payable to the
order of Heller Financial, Inc.; (c) the Deed of Trust and Security Agreement
dated as of March 28, 1995, by and between the Company as grantor, Scott A.
Stein, as trustee, and Heller Financial, Inc., as the lender; and (d) the
Guaranty dated March 28, 1995, made by Holding.
"Indebtedness" means, as to any person, without duplication, (a) all
obligations of such person, including accrued and unpaid interest, for
borrowed money (including any net overdraft in any bank which overdraft is not
satisfied within three consecutive Business Days from its occurrence), (b) all
obligations of such person evidenced by bonds (other than performance bonds
issued in the ordinary course of business), debentures, notes, letters of
credit or reimbursement agreements (other than letters of credit or
reimbursement agreements in respect of accounts payable to trade creditors
incurred in the ordinary course of business in connection with the obtaining
of materials or services) or similar instruments, (c) all obligations of such
person to pay the deferred purchase price of property or services (other than
accounts payable to trade creditors arising in the ordinary course of
business), (d) all Capitalized Lease Obligations of such person, (e) all
indebtedness of others secured by a Lien on any asset of such person, whether
or not such indebtedness is assumed by such person or guaranteed by such
person, (f) all indebtedness of others guaranteed by such person to the extent
of such guarantee, (g) Attributable Debt of such person, (h) preferred stock
issued by a Subsidiary of such person, (i) Redeemable Stock issued by such
Person, and (j) obligations under interest rate swaps and caps and currency
swaps or options and other similar hedging agreements (other than such
arrangements entered into in the ordinary course of business); and the amount
of any such Indebtedness on the date of determination thereof shall be the
outstanding balance of any such unconditional obligations as described above
and the maximum liability of any such contingent obligation at such date and,
with respect to clauses (h) and (i), the amount of Indebtedness shall equal
the liquidation preference.
"Interest Rate Contracts" means interest rate swap agreements, interest rate
cap agreements, interest rate collar agreements, interest rate insurance, and
other agreements or arrangements designed to provide protection against
fluctuations in interest rates.
"Investments" of any Person means, collectively, any direct or indirect
loan, advance or other extension of credit, capital contribution, or transfer
of cash, property or other assets to, or any acquisition of Capital Stock,
securities or other evidences of Indebtedness including by way of guarantee or
similar arrangement, of, any other person. For the purposes of the "Limitation
on Restricted Payments" and "Limitation on Investments" covenants, (i)
"Investment" shall include the fair market value of the net assets of any
Subsidiary at the time
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that such Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the net assets of any Unrestricted Subsidiary that is
designated a Restricted Subsidiary shall be deducted from the aggregate amount
of Investments in computing the net amount of Investments and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
fair market value at the time of such transfer, in each case as determined in
good faith by the Board of Directors of the Company, and evidenced by a Board
Resolution.
"Lien" means, with respect to any property, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
property. The Company shall be deemed to own subject to a Lien any property
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such property.
"Life Insurance Policies" means those certain life insurance policies
obtained in 1984, 1985 and 1986 by Kilsby-Roberts Holding Co. ("KR") from
Phoenix Mutual Life Insurance Company covering participants in the KR employee
stock ownership plan and certain other KR executives, as in effect on the date
of the Indenture.
"Net Proceeds" means, from any Asset Disposition by any Person, cash
received therefrom by such Person, net of (i) all legal, title and recording
tax expenses, commissions and other fees and expenses incurred and all
federal, state, provincial, foreign and local taxes actually paid or provided
for as a liability as a consequence of such Asset Disposition, (ii)
appropriate amounts to be provided by such Person as a reserve, in accordance
with GAAP, against any liabilities associated with the asset sold or disposed
of in such Asset Disposition and retained by such Person after such Asset
Disposition, and (iii) all payments made by such Person on any Indebtedness
which is secured by such assets in accordance with the terms of any Lien upon
or with respect to such assets or which must by the terms of such Lien, or in
order to obtain a necessary consent to such asset sale or by applicable law,
be repaid out of the proceeds from such asset sale.
"Permitted Indebtedness" means, without duplication, (i) Indebtedness of the
Company and its Restricted Subsidiaries incurred under or in respect of the
New Credit Facility (or any substitute or replacement facility) provided that
the New Credit Facility shall be permanently reduced by the amount of any
prepayment from the proceeds of an Asset Disposition pursuant to the
"Limitation on Dispositions of Assets" and provided that the aggregate
principal amount of such Indebtedness outstanding at any time pursuant to this
clause (i) may not exceed (x) the greater of (a) $220,000,000 or (b) the sum
of 85% of Eligible Accounts Receivable and 60% of the book value of the
inventory (determined on a first-in first-out basis) of the Company and its
Restricted Subsidiaries, plus (y) any additional amounts (without duplication)
permitted to be incurred by the Company and its Restricted Subsidiaries
pursuant to clause (xvi) below (clause (i)(x) and, collectively with clause
(i)(y), the "Total Amount"), minus, (z) the amount then outstanding under any
Receivables Financing (as set forth in the books and records of the Company
and confirmed by the agent, trustee or other representative of the institution
or group providing such Receivables Financing; (ii) Indebtedness evidenced by
the Notes; (iii) indebtedness evidenced by the Special Term Loan; (iv)
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary or of
any Wholly Owned Restricted Subsidiary to the Company or to any other Wholly
Owned Restricted Subsidiary; (v) Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of issuance of the Notes; (vi)
Indebtedness of the Company in connection with Life Insurance Policy Loans;
(vii) Indebtedness of the Company or any Restricted Subsidiary evidenced by
standby letters of credit, performance bonds, surety bonds, guarantees and
similar obligations incurred in the ordinary course of business for purposes
of insuring the performance of obligations of the Company or such Restricted
Subsidiary and in an aggregate principal amount not to exceed $7,500,000 at
any time; (viii) Indebtedness of the Company or a Restricted Subsidiary in
respect of Capitalized Lease Obligations; provided, however, that the
aggregate Indebtedness incurred under this clause (viii) will not at any time
exceed $12,500,000; (ix) Indebtedness of the Company or a Restricted
Subsidiary (including industrial revenue bond Indebtedness) that is secured by
a Lien on property, which Indebtedness constitutes all or part of the purchase
price of the property subject thereto or is incurred prior to, at the time of
or within 180 days after the acquisition of such property for the purpose of
financing all or any part of the purchase price thereof, provided that such
secured Indebtedness does not exceed the purchase price of such property;
(x) Indebtedness of the Company issued in exchange for, or the net proceeds
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of which will be used to exchange, refinance or refund outstanding
Indebtedness incurred pursuant to the second paragraph of the "Limitation of
Indebtedness" covenant or pursuant to clauses (ii), (iii), (v), (xv) and (xvi)
so long as (x) the principal amount of the Indebtedness issued does not exceed
the principal amount (plus any premium and consent payments required) of the
Indebtedness so exchanged, refinanced or refunded, (y) where the Indebtedness
to be exchanged, refinanced or refunded is not Senior Indebtedness, the
Indebtedness issued does not have a final maturity or mandatory redemption
payments prior to the earlier of the final maturity of the Indebtedness being
so exchanged, refinanced or refunded or the stated maturity of the Notes, and
(z) where the Indebtedness being so exchanged, refinanced or refunded is
subordinated to the Notes, the Indebtedness is subordinated to the Notes in
right of payment to the same extent as the indebtedness so exchanged,
refinanced or refunded; (xi) Attributable Debt in respect of Sale and
Leaseback Transactions engaged in pursuant to and in accordance with clause
(ii) under the "Limitation on Sale and Leaseback Transactions" covenant;
(xii) Indebtedness incurred in connection with Investments in Unrestricted
Subsidiaries; provided that such Investments are permitted by the "Limitation
on Investments" covenant; (xiii) Indebtedness of the Company incurred pursuant
to Interest Rate Contracts related to the New Credit Facility and the
obligations under the Special Term Loan Agreement to the extent the notional
principal amount of any such Interest Rate Contract does not exceed the amount
of Indebtedness permitted pursuant to clause (i) above; (xiv) Indebtedness of
a Receivables Subsidiary secured by a Lien on all or part of the assets
disposed of in, or otherwise incurred in connection with, a Financing
Disposition; provided, that the aggregate principal amount of indebtedness
outstanding under this clause (xiv) may not exceed the Total Amount;
(xv) Indebtedness incurred by the Company's Canadian subsidiary under or in
respect of a secured bank credit facility, provided that the aggregate
principal amount of such Indebtedness outstanding pursuant to this clause (xv)
shall not exceed $10.0 million and (xvi) Indebtedness of the Company other
than Indebtedness permitted under clauses (i) through (xv), but without
duplication as to additional amounts permitted to be outstanding under clause
(i) (y) above, provided that the aggregate amount of such Indebtedness may not
exceed $25,000,000 at any time outstanding. To the extent that Net Proceeds
from an Asset Disposition are used to repay, repurchase or redeem Indebtedness
incurred under or in respect of the New Credit Facility pursuant to the
"Limitation on Dispositions of Assets" covenant, the amount of Indebtedness
permitted by clauses (i) and (xiv) of this definition shall be permanently
reduced by the amount of such repayment, repurchase or redemption provided,
however, no such permanent reduction in borrowing capacity shall be required
if such repayment, repurchase or redemption is made with the Net Proceeds
remaining after consummation of a Proceeds Offer.
"Permitted Liens" means (i) Liens for taxes not yet due or which are being
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Company or
its Restricted Subsidiaries, as the case may be, in conformity with GAAP; (ii)
statutory Liens or landlords' and carriers', warehousemen's, mechanics',
materialmen's, repairmen's, or other like Liens arising in the ordinary course
of business and not overdue for a period of more than 60 days or which are
being contested in good faith by appropriate proceedings; (iii) pledges or
deposits in connection with workers' compensation, unemployment insurance and
other types of social security benefits; (iv) any attachment or judgment Lien
not giving rise to a Default or an Event of Default; (v) the Lien on the funds
or securities deposited with the trustee under the indenture relating to the
10 3/4% Notes (such funds or securities not to exceed $162,500,000 plus
earnings thereon) for the purpose of defeasing or redeeming the 10 3/4% Notes
on or prior to April 23, 1998; (vi) Liens incurred or deposits made to secure
the performance of tenders, bids, leases, statutory obligations, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (vii) easements,
rights-of-way, restrictions and other similar charges or encumbrances not
interfering in any material respect with the business of the Company; (viii)
leases or subleases granted to others not interfering with the ordinary
conduct of the business of the Company; (ix) title defects or irregularities
which do not in the aggregate materially impair the use of such properties by
the Company, (x) Liens in respect of the Life Insurance Policies incurred in
connection with the Life Insurance Policy Loans permitted under clause (vi) of
the definition of "Permitted Indebtedness"; (xi) Capitalized Lease Obligations
permitted under the "Limitation on Indebtedness" covenant, (xii) any other
Liens imposed by operation of law which do not materially affect the Company's
ability to perform its obligations under the Notes and the Indenture; (xiii)
Liens existing on the date
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of this Indenture and renewals and extensions thereof; (xiv) Liens securing
obligations under the New Credit Facility encumbering inventory (including raw
materials, work-in-process, supplies and finished goods), accounts receivable
(including sellers' rights relating thereto, all contracts and contract rights
relating thereto and all books and records relating thereto), all collection
accounts, deposit accounts and other bank accounts relating to collection of
the foregoing, together with the proceeds and products of all of the
foregoing; (xv) Liens granted to secure obligations under or in respect of the
Special Term Loan; (xvi) purchase money mortgages and purchase money security
interests incurred in the normal and ordinary course of the Company's and its
Restricted Subsidiaries' business to the extent related to Indebtedness
incurred pursuant to clause (ix) of the definition of "Permitted
Indebtedness"; (xvii) until April 1, 1998, Liens granted to secure
Indebtedness under the Heller Documents; (xviii) Liens securing Indebtedness
of any entity existing at the time such assets are acquired by the Company or
a Restricted Subsidiary, whether by merger, consolidation, purchase of assets
or otherwise (whether or not such Liens are created, incurred or assumed in
contemplation of the acquisition thereof by the Company or a Restricted
Subsidiary), provided such Liens do not extend to any other assets of the
Company or any other Restricted Subsidiaries, and Liens securing refinancings
of such Indebtedness provided that such Liens do not extend to any assets
other than assets securing such Indebtedness to be refinanced; (xix) Liens
securing reimbursement obligations with respect to letters of credit which
encumber documents and other property relating to such letters of credit and
the products and proceeds thereof; (xx) Liens arising pursuant to Sale and
Leaseback Transactions engaged in pursuant to and in accordance with the
"Limitation on Sale and Leaseback Transactions" covenant; (xxi) Liens securing
Indebtedness or other obligations of any Receivables Entity; (xxii) Liens
securing Indebtedness incurred pursuant to clause (xv) of the definition of
"Permitted Indebtedness"; and (xxiii) Liens other than those described above
with respect to obligations not in excess of $5,000,000 in the aggregate at
any time.
"Permitted Transactions" means (i) reasonable and customary fees,
compensation and benefits paid to officers, directors, employees or
consultants of the Company or any Restricted Subsidiary or their respective
Affiliates for services rendered to the Company or any Restricted Subsidiary
in the ordinary course of business consistent with past practice, (ii)
transfers of goods and services by or among the Company and its Restricted
Subsidiaries and their respective Affiliates in the ordinary course of
business consistent with past practice, provided that if any such transaction
or series of related transactions involves in excess of $3,000,000, the Board
of Directors of the Company shall determine in good faith by resolution that
such transaction is on terms fair and reasonable to the Company, (iii)
transactions pursuant to agreements with Affiliates which are currently in
effect in accordance with their terms, and (iv) dividends and distributions to
Holding permitted under the "Limitations on Restricted Payments" covenant, (v)
any transactions between the Company or any Restricted Subsidiary and the ESOP
(or any successor thereto); (vi) advances to employees, officers, directors,
agents and representatives for travel and other reasonable and ordinary
business expenses, (vii) advances and loans to employees and officers in
connection with their relocation, (viii) payments to Stainless Insurance Ltd.
in respect of insurance services provided to the Company or any Restricted
Subsidiary, and (ix) payments to any Receivables Subsidiary for services
performed or reimbursement of expenses in connection with the financing or
refinancing of Receivables.
"Person" or "person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Receivable" means a right to receive payment arising from a sale or lease
of goods or services by a Person pursuant to an arrangement with another
Person pursuant to which such other Person is obligated to pay for goods or
services under terms that permit the purchase of such goods and services on
credit, as determined in accordance with GAAP.
"Receivables Financing" means any financing of Receivables of the Company or
any Restricted Subsidiary that have been transferred to a Receivables Entity
in a Financing Disposition.
"Receivables Entity" means (x) any Receivables Subsidiary or (y) any other
Person that is engaged in the business of acquiring, selling, collecting,
financing or refinancing Receivables, accounts (as defined in the
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Uniform Commercial Code as in effect in any jurisdiction from time to time),
other accounts and/or other receivables, and/or related assets.
"Receivables Subsidiary" means a Subsidiary of the Company that (a) is
engaged solely in the business of acquiring, selling, collecting, financing or
refinancing Receivables, accounts (as defined in the Uniform Commercial Code
as in effect in any jurisdiction from time to time) and other accounts and
receivables (including any thereof constituting or evidenced by chattel paper,
instruments or general intangibles), all proceeds thereof and all rights
(contractual and other), collateral and other assets relating thereto, and any
business or activities incidental or related to such business, and (b) is
designated as a "Receivables Subsidiary" by the Board of Directors of the
Company.
"Redeemable Stock" means any series or class of Capital Stock of any Person
which by its terms is redeemable at the option of the holder or is subject to
mandatory redemption prior to the maturity of the Notes.
"Restricted Payments" means, collectively, with respect to any person (i)
the declaration or payment of any dividend or other distribution on shares of
such person's or a Restricted Subsidiary's Capital Stock (except dividends or
distributions in additional shares of Capital Stock, other than Redeemable
Stock, or any dividend or distribution by a Restricted Subsidiary to the
Company or one of its Wholly Owned Restricted Subsidiaries), (ii) any payment
on account of the purchase, redemption, retirement or other acquisition of any
shares of the Company or a Restricted Subsidiary's Capital Stock or any
option, warrant or other right to acquire such shares, or (iii) any
defeasance, redemption, repurchase or other acquisition or retirement for
value prior to scheduled maturity, scheduled repayment, or scheduled sinking
fund payment of any Indebtedness subordinate in right of payment to the Notes;
provided, however, that the following items shall not be deemed to be
Restricted Payments: (i) payments by the Company pursuant to a permitted tax
sharing agreement, and (ii) payments by the Company to Holding pursuant to the
terms of the Management Agreement (subject to certain limitations).
"Restricted Subsidiary" means (i) any Subsidiary of the Company which exists
on the date of the Indenture and (ii) any other such Subsidiary which the
Company has not classified as an Unrestricted Subsidiary. The Company by
resolution of its Board of Directors may classify a Subsidiary as an
Unrestricted Subsidiary until such time as the Company may, by further
resolution of its Board of Directors, classify such Subsidiary as a Restricted
Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
other Person or to which such other Person is a party providing for the
leasing by such Person of any property or asset of such Person which has been
or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such other Person or to any Person to whom funds have
been or are to be advanced by such other Person on the security of such
property or asset. The stated maturity of such arrangement shall be the date
of the last payment of rent or any other amount due under such arrangement
prior to the first date on which such arrangement may be terminated by the
lessee without payment of a penalty.
"Senior Indebtedness" means Indebtedness of the Company which is not by its
terms subordinated to the Notes.
"Subsidiary" means, with respect to any person, (i) any corporation or other
entity of which a majority of the total voting power of the shares of capital
stock or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions is at the time owned directly or indirectly by such person or (ii)
any partnership or joint venture at least a majority of the voting power of
which is directly or indirectly owned by such person, whether in the form of
membership, general, special or limited partnership interests or otherwise.
"Unrestricted Subsidiary" means any Subsidiary of the Company which the
Company by resolution of its Board of Directors shall classify as an
Unrestricted Subsidiary and any such Subsidiary of an Unrestricted
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Subsidiary until such time as (i) the Company may, by further resolution of
its Board of Directors classify such Subsidiary as a Restricted Subsidiary or
(ii) the Company or any of its Restricted Subsidiaries becomes directly or
indirectly liable in respect of any contractual obligation or Indebtedness of
such Unrestricted Subsidiary. A Subsidiary of the Company may only be
classified as an Unrestricted Subsidiary if immediately after such
classification, there would not be a default or Event of Default under the
Indenture and the Company and its Restricted Subsidiaries would have only
Investments in such subsidiary which would be permitted by the "Limitation on
Investments" covenant. An Unrestricted Subsidiary of the Company may only be
reclassified as a Restricted Subsidiary if immediately after giving effect to
such reclassification, there would be no default or Event of Default under the
Indenture and the Company and Restricted Subsidiaries could create, assume,
guarantee or suffer to exist $1.00 of additional Indebtedness (other than
Permitted Indebtedness). Any valid classification shall be effective as of the
date specified in the applicable resolution of the Company's Board of
Directors, which shall not be prior to the date such resolution is made.
"Wholly Owned Restricted Subsidiary" means, with respect to any person, a
Restricted Subsidiary all of whose capital stock (other than directors'
qualifying shares) or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions and other equity interests are at the time owned directly or
indirectly by such person.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Exchange Notes will be issued in the form of a global
certificate (the "Global Note"). Upon issuance, the Global Note will be
deposited with the Trustee, as custodian for The Depository Trust Company
("DTC"), in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to the accounts of DTC's Direct and Indirect
participants (as defined below).
Transfer of beneficial interests in any Global Note will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants
(including, if applicable, those of the Euroclear System ("Euroclear") and
Cedel Bank, societe anonyme ("Cedel" )), which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"--Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. Notes in
certificated form may be presented for registration of transfer and exchange
at the offices of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through
electronic book-entry changes in accounts of Participants. The Direct
Participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities that
clear through or maintain a direct or indirect custodial relationship with a
Direct Participant (collectively, the "Indirect Participants").
DTC has advised the Company that, pursuant to DTC's procedures, (i) upon
deposit of the Global Note, DTC will credit the accounts of the Direct
Participants with portions of the principal amount of the Exchange Notes of
the individual beneficial owners, and (ii) DTC will maintain records of the
ownership interests of such Direct Participants in the Global Note and the
transfer of ownership interests by and between Direct Participants. DTC will
not maintain records of the ownership interests of, or the transfer of
ownership interests by and
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between, Indirect Participants or other owners of beneficial interest in the
Global Notes. Direct Participants and Indirect Participants must maintain
their own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes. Persons who are not Direct Participants may
beneficially own securities held by or on behalf of DTC only through the
Direct Participants or the Indirect Participants. The ownership interest and
transfer of ownership interest of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Direct Participants
and Indirect Participants.
Investors in the Global Note may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that
they own. This may limit or curtail the ability to transfer beneficial
interest in a Global Note to such persons. Because DTC can act only on behalf
of Direct Participants, which in turn act on behalf of Indirect Participants
and others, the ability of a person having a beneficial interest in the Global
Note to pledge such interest to persons or entities that are not Direct
Participants in DTC, or to otherwise take actions in respect of such
interests, may be affected by the lack of physical certificates evidencing
such interests. For certain other restrictions on the transferability of the
Exchange Notes see "--Transfers of Interests in Global Notes for Certificated
Notes."
Except as described in "--Transfers of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Note will
not have Exchange Notes registered in their names, will not receive physical
delivery of Exchange Notes in certificated form and will not be considered the
registered owners or holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Company and the Trustee will treat the
persons in whose names the Exchange Notes are registered (including Exchange
Notes represented by Global Note) as the owners thereof for the purpose of
receiving payments and for any and all other purposes whatsoever. Payments in
respect of the principal, premium and interest on Global Note registered in
the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any of DTC's records or any
Direct Participant's or Indirect Participant's records relating to the
beneficial ownership interests in any Global Note or (ii) any other matter
relating to the actions and practices of DTC or any of its Direct Participants
or Indirect Participants.
DTC has advised the Company that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Note as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to
the beneficial owners of the Notes will be governed by standing instructions
and customary practices between them and will not be the responsibility of
DTC, the Trustee or the Company. Neither the Company nor the Trustee will be
liable for any delay by DTC or its Direct Participants or Indirect
Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee as the registered owner of the
Notes for all purposes.
Interests in the Global Note will trade in DTC's Same-Day Funds Settlement
System and, therefore, transfers between Direct Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in
immediately available funds. Transfers between Indirect Participants (other
than Indirect Participants who hold an interest in the Notes through Euroclear
or CEDEL) who hold an interest through a Direct Participant will be effected
in accordance with the procedures of such Direct Participant but generally
will settle in
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immediately available funds. Transfers between and among Indirect Participants
who hold interests in the Notes through Euroclear and CEDEL will be effected
in the ordinary way in accordance with their respective rules and operating
procedures.
Subject to compliance with the transfer restrictions applicable to the Notes
described herein, cross-market transfers between Direct Participants in DTC,
on the one hand, and Indirect Participants who hold interests in the Notes
through Euroclear or CEDEL, on the other hand, will be effected by Euroclear
or CEDEL's respective Nominee through DTC in accordance with DTC's rules on
behalf of Euroclear or CEDEL; however, delivery of instructions relating to
cross-market transactions must be made directly to Euroclear or CEDEL, as the
case may be, by the counterparty in accordance with the rules and procedures
of Euroclear or CEDEL and within their established deadlines (Brussels time
for Euroclear and UK time for CEDEL). Indirect Participants who hold interest
in the Notes through Euroclear and CEDEL may not deliver instructions directly
to Euroclear's or CEDEL's Nominee. Euroclear or CEDEL will, if the transaction
meets its settlement requirements, deliver instructions to its respective
Nominee to deliver or receive interests on Euroclear's or CEDEL's behalf in
the relevant Global Note in DTC, and make or receive payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Note are credited and
only in respect of such portion of the aggregate principal amount of the
Exchange Notes as to which such Direct Participant or Direct Participants has
or have given direction. However, if there is an Event of Default under the
Notes, DTC reserves the right to exchange Global Note (without the direction
of one or more of its Direct Participants) for legended Notes in certificated
form, and to distribute such certificated forms of Notes to its Direct
Participants. See "--Transfers of Interests in Global Notes for Certificated
Notes."
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Note among Direct
Participants, Euroclear and CEDEL, they are under no obligation to perform or
to continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Initial Purchasers or the
Trustee will have any responsibility for the performance by DTC, Euroclear or
CEDEL or their respective Direct and Indirect Participants of their respective
obligations under the rules and procedures governing any of their operations.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Exchange Notes in
registered, certificated form without interest coupons ("Certificated Notes")
if (i) DTC (x) notifies the Company that it is unwilling or unable to continue
as depositary for the Global Notes and the Company thereupon fails to appoint
a successor depositary within 90 days or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of
Certificated Notes or (iii) there shall have occurred and be continuing a
Default or an Event of Default with respect to the Notes. In any such case,
the Company will notify the Trustee in writing that, upon surrender by the
Direct and Indirect Participants of their interest in such Global Note,
Certificated Notes will be issued to each person that such Direct and Indirect
Participants and the DTC identify as being the beneficial owner of the related
Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by
such Direct Participant (for itself or on behalf of an Indirect Participant),
to the Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interests in any Global Note will be
registered in the names, and issued in any approved denominations, requested
by DTC on behalf of such Direct or Indirect Participants (in accordance with
DTC's customary procedures).
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Neither the Company nor the Trustee will be liable for any delay by the
holder of the Global Notes or DTC in identifying the beneficial owners of
Notes, and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Notes or
DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available same day funds to the accounts
specified by the holder of interests in such Global Note. With respect to
Certificated Notes, the Company will make all payments of principal, premium,
if any, and interest by wire transfer of immediately available funds to the
accounts specified by the holders thereof or, if no such account is specified,
by mailing a check to each such holder's registered address. The Company
expects that secondary trading in the Certificated Notes will also be settled
in immediately available funds.
REGISTRATION RIGHTS OF THE OLD NOTES
The Company and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date pursuant to which the Company agreed to (i) file
a Registration Statement with the Commission with respect to the Exchange
Offer within 90 days of the Closing Date, and (ii) use its reasonable best
efforts to have it declared effective under the Securities Act by the 150th
day after the Closing Date. The Company also agreed to use its best efforts to
cause the Registration Statement to be effective continuously, to keep the
Exchange Offer open for a period of not less than 20 business days and cause
the Exchange Offer to be consummated no later than the 30th calendar day after
it is declared effective by the Commission. Pursuant to the Exchange Offer,
certain Holders of Series A Notes which constitute Transfer Restricted
Securities may exchange their Transfer Restricted Securities for registered
Series B Notes. To participate in the Exchange Offer, each Holder must
represent that it is not an affiliate of the Company, it is not engaged in,
and does not intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the Series B Notes that are
issued in the Exchange Offer, and that it is acquiring the Series B Notes in
the Exchange Offer in its ordinary course of business.
If (i) the Exchange Offer is not permitted by applicable law or Commission
policy or (ii) any Holder of Series A Notes which are Transfer Restricted
Securities notifies the Company prior to the 20th business day following the
consummation of the Exchange Offer that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer, (b) it may not
resell the Series B Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus, and the prospectus contained in the
Registration Statement is not appropriate or available for such resales by it,
or (c) it is a broker-dealer and holds Series A Notes acquired directly from
the Company or any of the Company's affiliates, the Company will file with the
Commission a Shelf Registration Statement to register for public resale the
Transfer Restricted Securities held by any such Holder who provides the
Company with certain information for inclusion in the Shelf Registration
Statement.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means each Series A Note until the earliest of the date on which
(i) such Series A Note is exchanged in the Exchange Offer and entitled to be
resold to the public by the Holder thereof without complying with the
prospectus delivery requirements of the Securities Act, (ii) such Series A
Note has been disposed of in accordance with the Shelf Registration Statement,
(iii) such Series A Note is disposed of by a Broker-Dealer pursuant to the
"Plan of Distribution" contemplated by the Exchange Offer Registration
Statement (including delivery of the Prospectus contained therein), or
(iv) such Series A Note is distributed to the public pursuant to Rule 144
under the Securities Act.
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The Registration Rights Agreement provides that (i) if the Company fails to
file an Registration Statement with the Commission on or prior to the 90th day
after the Closing Date, (ii) if the Exchange Offer Registration Statement is
not declared effective by the Commission on or prior to the 150th day after
the Closing Date, (iii) if the Exchange Offer is not consummated on or before
the 30th calendar day after the Registration Statement is declared effective,
(iv) if obligated to file the Shelf Registration Statement and the Company
fails to file the Shelf Registration Statement with the Commission on or prior
to the 90th day after such filing obligation arises, (v) if obligated to file
a Shelf Registration Statement and the Shelf Registration Statement is not
declared effective on or prior to the 150th day after the obligation to file a
Shelf Registration Statement arises, or (vi) if the Registration Statement or
the Shelf Registration Statement, as the case may be, is declared effective
but thereafter ceases to be effective or useable in connection with resales of
the Transfer Restricted Securities, without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such
failure and that is itself declared effective immediately (each, a
"Registration Default"), the Company agrees to pay to each Holder of Transfer
Restricted Securities affected thereby liquidated damages ("Liquidated
Damages") in an amount equal to $0.05 per week per $1,000 in principal amount
of Transfer Restricted Securities held by such Holder for each week or portion
thereof that the Registration Default continues for the first 90 day period
immediately following the occurrence of such Registration Default. The amount
of the Liquidated Damages shall increase by an additional $0.05 per week per
$1,000 in principal amount of Transfer Restricted Securities with respect to
each subsequent 90 day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $0.50 per week per $1,000
principal amount of Transfer Restricted Securities. The Company shall not be
required to pay Liquidated Damages for more than one Registration Default at
any given time. Following the cure of all Registration Defaults, the accrual
of Liquidated Damages will cease.
All accrued Liquidated Damages shall be paid by the Company to Holders
entitled thereto by wire transfer to the accounts specified by them or by
mailing checks to their registered address if no such accounts have been
specified.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
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DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
The following is a summary of the material terms and provisions of the New
Credit Facility. This summary does not purport to be a complete description of
the New Credit Facility and is subject to the detailed provisions of and
qualified in its entirety by reference to the New Credit Facility agreement
which was filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
General. On March 24, 1998, the Company entered into the New Credit Facility
with a group of banks (the "Banks"). The terms of the New Credit Facility
provide for a five year revolving credit facility in an amount up to
$220.0 million, with availability based upon 85% of the Company's eligible
accounts receivable and 55% of the Company's eligible inventory. Borrowings
under the New Credit Facility mature in 2003, and together with the proceeds
of the other Refinancing Transactions were used to refinance the Credit
Facility, to redeem the 10 3/4% Notes together with premium and accrued
interest to the date of redemption, to pay a dividend to Holding, to repay
certain purchase money indebtedness, and to pay fees and expenses in
connection with the foregoing. The loans under the New Credit Facility may be
repaid and reborrowed.
Interest Rate. Interest on revolving loans under the New Credit Facility are
payable, at the Company's option, at a rate per annum equal to (i) the Banks'
prime rate plus 1/2 of 1% or (ii) the reserve adjusted Eurodollar rate plus 1
3/4%. Interest is payable monthly in arrears for prime rate loans and at the
end of each Eurodollar interest period for Eurodollar loans, except that
interest on Eurodollar Loans for periods exceeding three months is payable
quarterly.
Fees. The Company is obligated to pay certain fees pursuant to the New
Credit Facility including: (i) an unused commitment fee of 3/8 of 1%, payable
quarterly in arrears, and (ii) letter of credit fees of 1 3/4% per annum of
the maximum amount available to be drawn under each letter of credit, payable
quarterly in arrears, plus issuance, fronting, amendment fees and standard
documentary and processing charges. The Company is obligated to pay certain
structuring or arrangement fees and an annual Agent's fee.
Guaranty. Indebtedness of the Company is guaranteed by Holding.
Collateral. Borrowings under the New Credit Facility are fully secured by a
lien on all domestic inventory and receivables of the Company. In addition, a
negative pledge was taken by the Banks on all assets of the Company not
otherwise encumbered by pre-existing debt or the New Credit Facility,
provided, however, that the Special Term Loan was secured by real property,
plant and equipment of the Company.
Prepayment. The Company will be entitled, at its option, to prepay or reduce
the New Credit Facility subject to prior notice and certain amount
limitations.
Covenants. The New Credit Facility contains certain covenants, customary for
agreements of this type, including (i) limitations on consolidation, merger
and the sale or acquisition of assets by the Company or its subsidiaries
outside the ordinary course of business, (ii) limitations on the incurrence of
liens by the Company or its subsidiaries, (iii) limitations on the incurrence
of indebtedness by the Company or its subsidiaries, (iv) limitations on annual
capital expenditures by the Company or its subsidiaries, (v) limitations on
advances, investments and loans by the Company and its subsidiaries, (vi)
limitations on dividends and other restricted payments by the Company and its
subsidiaries in respect to their capital stock, (vii) limitations on
transactions with affiliates, (viii) required maintenance of levels of working
capital on a quarterly basis and (ix) required maintenance of fixed charge
coverage ratios on a quarterly basis for the four quarter fiscal period then
ending.
Events of Default. Defaults under the New Credit Facility include (i) any
failure of the Company to pay when due amounts owing in connection with the
revolving facility and other amounts payable under the New Credit Facility,
(ii) any failure to pay amounts due under certain other agreements or defaults
that result in or permit the acceleration of certain other indebtedness, (iii)
the breach of certain terms and conditions or
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representations or warranties in the New Credit Facility, (iv) certain events
of bankruptcy, insolvency or dissolution, (v) the rendering of certain
judgements, (vi) matters related to certain pension plan liabilities,
(vii) the failure or invalidity of the security interests provided to the
Banks, (vii) a Change in Control under the Indenture and (ix) a default under
the Indenture or the Special Term Loan.
SPECIAL TERM LOAN AGREEMENT
On March 24, 1998, the Company entered into a loan agreement (the "Special
Term Loan Agreement") with DLJ Capital Funding, Inc., as syndication agent,
Donaldson, Lufkin & Jenrette Securities Corporation and BT Alex. Brown
Incorporated, as arrangers, and a financial institution, as administrative
agent, and the lenders party thereto, pursuant to which the Company borrowed
$100.0 million. The net proceeds of the Special Term Loan were used, together
with the net proceeds of the Offering and New Credit Facility, to refinance
existing indebtedness and to pay related transaction fees and expenses. The
following is a summary of the material terms of the Special Term Loan
Agreement. The summary does not purport to be complete and is subject to the
detailed provisions of and qualified in its entirety by reference to the
Special Term Loan Agreement, which was filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Special Term Loan matures on March 24, 2004. Amounts outstanding under
the Special Term Loan Agreement bear interest at either (i) the Alternate Base
Rate (as defined therein) plus 2.00% or (ii) the LIBO Rate (as defined
therein) plus 3.25%, determined at the Company's option. At March 31, 1998 the
Company had elected to have Special Term Loans bear interest at the 30-day
LIBO Rate or 9.1%. The Company's obligations under the Special Term Loan
Agreement are secured by a first priority lien on substantially all of the
existing and future acquired unencumbered property, plant and equipment of the
Company. The Company may prepay obligations under the Special Term Loan
Agreement at any time subject to a prepayment penalty of 3% during the first
year after closing, 2% during the second year, 1% during the third year and no
penalty thereafter.
The Special Term Loan amortizes in equal quarterly installments in an amount
equal to $1 million per annum. The final installment due at maturity will
repay in full all outstanding principal.
The Special Term Loan is subject to mandatory prepayment provisions
including, without limitation: (i) upon the occurrence of a change of control
(defined in a manner similar to "Change of Control" in the Indenture) and (ii)
100% of the net proceeds from asset sales permitted under the Special Term
Loan Agreement provided that up to a certain permitted limit may be reinvested
within 18 months.
The Special Term Loan Agreement contains customary representations and
warranties. Covenants under the Special Term Loan Agreement are substantially
similar to those described under "Description of the Notes--Certain
Covenants." Lenders under the Special Term Loan Agreement have customary
voting, participation and assignment rights.
INDEBTEDNESS OF HOLDING
On March 24, 1998, Holding prepaid $40.0 million in aggregate principal
amount of Holding Notes that were issued as interest paid in kind and amended
the Holding Notes to extend their maturity to March 20, 2006. Holding also
paid approximately $5.4 million of unpaid accrued interest on the Holding
Notes to the date of such prepayment. The Company dividended approximately
$45.4 million of the proceeds from the Initial Offering to Holding to provide
the funds needed to redeem the Holding Notes as described above and pay
accrued and unpaid interest. The following description is a summary of certain
provisions of the Holding Notes.
The Holding Notes were issued pursuant to an agreement among KIA IV, Holding
and the Company, as amended (the "KIA IV Agreement") and are senior
obligations of Holding, ranking pari passu in right of payment to any senior
indebtedness of Holding and senior to any subordinated indebtedness of
Holding. However, because the operations of Holding are generally conducted
through its subsidiaries, the cash flow of Holding and the consequent ability
of Holding to service its debt, including the Holding Notes, is dependent
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upon the earnings of such subsidiaries and the distribution of these earnings
to Holding or upon loans or other payments of funds by such subsidiaries to
Holding. Moreover, the ability of such subsidiaries to pay dividends or make
loans to Holding is limited by the covenants of such subsidiaries' debt
instruments, including the Notes, the Special Term Loan and the New Credit
Facility. See "Description of the Notes" and "--Special Term Loan Agreement."
The Holding Notes are structurally subordinated to all liabilities,
including trade payables and leasehold obligations of Holding's subsidiaries.
Any right to receive assets of any subsidiary upon such subsidiary's
liquidation or reorganization is structurally subordinated to the claims of
that subsidiary's creditors.
The Holding Notes mature on March 20, 2006. The Holding Notes bear interest
at a rate per annum equal to the greater of (i) 18% or (ii) the lesser of the
prime rate plus 8% and 20%, payable semiannually. Interest will accrue on any
overdue payment of principal or interest at a rate per annum equal to 2% over
the rate otherwise borne by the Holding Notes. The Holding Notes are secured
by a pledge of the Company's common stock. The Holding Notes may be prepaid,
in whole or in part and without premium, at any time. The terms of the Holding
Notes provide that excess cash flow (to be defined in the KIA IV Agreement) of
Holding and the proceeds from the sale of any securities issued by Holding,
shall be applied to payment of interest and principal on the Holding Notes.
The KIA IV Agreement obliges Holding to cause the Company to declare and pay
dividends to Holding to the extent permitted under the terms of certain
indebtedness of the Company.
In the event that Holding does not have sufficient excess cash flow to pay
in full interest due under the Holding Notes, Holding may issue additional
senior notes (the "PIK Notes") to the holders of the Holding Notes in an
aggregate principal amount equal to the amount of such insufficiency. The
terms of the PIK Notes will be identical to the terms of the Holding Notes.
The Holding Notes will be freely transferable, subject to applicable U.S.
federal and state securities laws. In connection with any sale of the Holding
Notes to an unaffiliated third party, KIA IV shall have the right to cause the
Holding Notes to be amended such that they contain customary terms for similar
notes that are being sold at that time privately or publicly, as the case may
be, provided that the maturity date will not be shortened and neither the
principal amount nor the interest rate will be increased.
The KIA IV Agreement contains covenants placing limitations on (i) dividends
or other payments in respect of the capital stock of Holding and its
subsidiaries, (ii) incurrence of additional indebtedness by Holding and its
subsidiaries, (iii) the issuance of capital stock by Holding's subsidiaries,
(iv) transactions by Holding and its subsidiaries with affiliates, (v) asset
dispositions of Holding and its subsidiaries, (vi) liens of Holding and its
subsidiaries and (vii) mergers and reorganizations of Holding and its
subsidiaries.
Defaults under the KIA IV Agreement include (i) any failure of Holding to
pay when due amounts owing under the Holding Notes, (ii) the breach of certain
covenants or representations or warranties in the KIA IV Agreement, (iii)
certain events of bankruptcy, insolvency or dissolution of Holding or its
subsidiaries, (iv) any failure to pay amounts due under certain other
agreements or defaults that result in the acceleration of certain other
indebtedness of Holding and its subsidiaries, (v) the rendering of certain
judgments against Holding or its subsidiaries, (vi) failure or invalidity of
the pledge of the Company's common stock and (vii) a default under the New
Credit Facility, the Special Term Loan or the Indenture.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain U.S. federal income tax consequences
of the purchase, ownership and disposition of the Exchange Notes and the
Exchange Offer. Unless otherwise stated, this summary deals only with Old
Exchange Notes held as capital assets (generally, assets held for investment
under the Code) by holders who purchase the Exchange Notes upon original
issuance. The tax treatment of a holder of Old Notes and Exchange Notes may
vary depending upon his particular situation. This summary does not address
all of the tax consequences that may be relevant to holders who may be subject
to special tax treatment such as insurance companies, broker-dealers, tax-
exempt organizations, or, except to the extent described below, foreign
taxpayers. In addition, this summary does not address any aspects of state,
local, or foreign tax laws. This summary is based on the U.S. federal income
tax law in effect as of the date hereof, which is subject to change, possibly
on a retroactive basis. Each investor is urged to consult his tax advisor as
to the particular consequences of purchasing, owning and disposing of Old
Notes and Exchange Notes, including the application and effect of U.S.
federal, state, local and foreign tax laws.
As used herein, "Non-U.S. Holder" means a beneficial owner of Old Notes and
Exchange Notes that is not a citizen or resident of the U.S., a corporation,
partnership or other entity created or organized in or under the laws of the
U.S. or any political subdivision thereof, or an estate the income of which is
subject to U.S. federal income taxation without regard to the source of its
income or a trust whose administration is subject to the primary supervision
of a U.S. court and which has one or more fiduciaries who have authority to
control substantial decisions of the trust.
INDEBTEDNESS
The Old Notes and the Exchange Notes should be treated as indebtedness of
the Company. In the unlikely event the Old Notes and the Exchange Notes were
treated as equity, the amount treated as a distribution on any such Old Note
or Exchange Note would first be taxable to the holder as dividend income to
the extent of the Company's current and accumulated earnings and profits, and
would next be treated as a return of capital to the extent of the holder's tax
basis in the Old Notes or Exchange Notes, with any remaining amount treated as
a gain from the sale of an Old Note or an Exchange Note. In addition, in the
event of equity treatment, the Company could not deduct interest on such Old
Notes or Exchange Notes. The remainder of this discussion assumes that the Old
Notes and the Exchange Notes will constitute indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for Exchange Notes pursuant to the Exchange
Offer should not be treated as an "exchange" because the Exchange Notes should
not be considered to differ materially in kind or extent from the Old Notes.
Rather, the Exchange Notes received by a holder of the Old Notes should be
treated as a continuation of the Old Notes in the hands of such holder. As a
result, there should be no adverse federal income tax consequences to holders
exchanging the Old Notes for the Exchange Notes pursuant to the Exchange
Offer.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means the beneficial holder of an Old
Note or an Exchange Note that for U.S. federal income tax purposes is (i) a
citizen or resident (as defined in Section 7701(b) of the Code) of the U.S.,
(ii) a corporation, partnership or other entity formed under the laws of the
U.S. or any political subdivision hereof, (iii) an estate the income of which
is subject to U.S. federal income taxation regardless of its source, (iv) in
general, a trust subject to the primary supervision of a court within the U.S.
and the control of a U.S. person as described in Section 7701(a)(30) of the
Code, and (v) any other person whose income or gain with respect to an Old
Note or an Exchange Note is effectively connected with the conduct of a U.S.
trade or business. A "Non-U.S. Holder" is any holder other than a U.S. Holder.
85
<PAGE>
INTEREST
A holder of an Old Note or an Exchange Note will be required to report
stated interest on the Old Note and the Exchange Note as interest income in
accordance with the holder's method of accounting. Because the Old Notes were
and Exchange Notes will be issued at par, there will be no original issue
discount.
TAX BASIS IN THE OLD NOTES AND THE EXCHANGE NOTES
A holder's tax basis in an Old Note will be the holder's purchase price for
the Old Note. If a holder of an Old Note exchanges the Old Note for an
Exchange Note pursuant to the Exchange Offer, the tax basis of the Exchange
Note immediately after such exchange should equal the holder's tax basis in
the Old Note immediately prior to the exchange.
DISPOSITION OF THE OLD NOTES OR THE EXCHANGE NOTES
The sale, exchange, redemption or other disposition of an Old Note or an
Exchange Note, except in the case of an exchange pursuant to the Exchange
Offer (see the above discussion), generally will be a taxable event. A holder
generally will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition of the Old Note or the
Exchange Note (except to the extent attributable to accrued interest) and (ii)
the holder's adjusted tax basis in such debt instrument. Such gain or loss
will be capital gain or loss, and will be long term if the Old Notes have been
held for more than 18 months at the time of the sale or other disposition.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE OR DATE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquire Notes other than at par, including those provisions
of the Internal Revenue Code relating to the treatment of "market discount"
and "amortizable bond premium." Any such purchaser should consult its tax
advisor as to the consequences of the acquisition, ownership and disposition
of Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Old Notes and
the Exchange Notes and (2) the issue price of the Exchange Notes must be
withheld and remitted to the U.S. Treasury. Therefore, each holder should
complete and sign IRS Form W-9 (included) so as to provide the information and
certification necessary to avoid backup withholding. However, certain holders
(including, among others, certain foreign persons) are not subject to these
backup withholding and reporting requirements. To qualify as an exempt foreign
recipient, that holder should complete and sign Form W-8 (included), attesting
to that individual's exempt foreign status. Such statements can be obtained
from the Company. For further information concerning backup withholding and
instructions for completing the IRS Form W-8 and Form W-9 (including how to
obtain a taxpayer identification number if you do not have one and how to
complete the IRS Form W-8 and Form W-9 if the Old Notes are held in more than
one name), contact the Company.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to withholding will be
reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
NON-U.S. HOLDERS
Payments of Interest
No withholding of U.S. federal income tax will be required with respect to
payments by the Company of interest on an Old Note or an Exchange Note to a
Non-U.S. Holder of such Old Note or Exchange Note, provided
86
<PAGE>
that (i) the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled to
vote, is not a controlled foreign corporation that is related to the Company
through stock ownership, a foreign tax-exempt organization or foreign private
foundation for U.S. federal income tax purposes, and (ii) the requirements of
section 871(h) or 881(c) of the Code, as set forth below, are satisfied.
Notwithstanding the above, a Non-U.S. Holder that is engaged in the conduct of
a U.S. trade or business will be subject to (i) U.S. federal income tax on
interest that is effectively connected with such trade or business and (ii) if
the Non-U.S. Holder is a corporation, a U.S. branch profits tax equal to 30%
of its "effective connected earnings and profits" (as adjusted) for the
taxable year, unless it qualifies for an exemption from such tax or a lower
tax rate under an applicable treaty.
Gain on Sale of Old Notes and Exchange Notes
A Non-U.S. Holder will generally not be subject to tax on any capital gains
recognized upon the sale, exchange, redemption or other disposition of an Old
Note or an Exchange Note unless (i) such gain is effectively connected with
the conduct of a U.S. trade or business by the Non-U.S. Holder or (ii) in the
case of a Non-U.S. Holder who is a nonresident alien individual, such holder
is present in the U.S. for 183 or more days in the taxable year and certain
other requirements are met. In the case of (i) above, the Non-U.S. Holder will
be subject to tax on its net income at graduated rates. In the case of (ii)
above, the Non-U.S. Holder will be subject to tax at a rate of 30% on any such
capital gains to the extent that such capital gains exceed his U.S. source
capital losses.
Federal Estate Tax
An Old Note or an Exchange Note held by an individual who at the time of
death is not a citizen or resident of the U.S. will not be subject to U.S.
federal estate tax as a result of such individual's death, provided that the
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
and that the interest accrued on such Old Notes or Exchange Notes was not
effectively connected with a U.S. trade or business.
Owner Statement Requirements
Sections 871(h) and 881(c) of the Code require that either the beneficial
owner of an Old Note or an Exchange Note or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course or its trade or business (a "Financial
Institution") and that holds an Old Note or an Exchange Note on behalf of such
owner file a statement with the Company or its agent to the effect that the
beneficial owner is not a U.S. person in order to avoid withholding of U.S.
federal income tax. Under current regulations, this requirement will be
satisfied if the Company or its agent receives (i) a statement (an "Owner's
Statement") from the beneficial owner of an Old Note or an Exchange Note in
which such owner certifies, under penalties of perjury, that such owner is not
a U.S. person and provides such owner's name and address, or (ii) a statement
from the Financial Institution holding the Old Note on behalf of the
beneficial owner in which the Financial Institution certifies, under penalties
of perjury, that is has received the Owner's Statement together with a copy of
the Owner's Statement. The beneficial owner must inform the Company or its
agent (or, in the case of a statement described in clause (ii) of the
immediately preceding sentence, the Financial Institution) within 30 days of
any change in information on the Owner's Statement.
Backup Withholding and Information Reporting
Under current U.S. federal income tax law, a 31% "backup" withholding tax is
applied to certain payments made to, and to the proceeds of sales before
maturity by, certain U.S. persons if such persons (i) fail to furnish their
taxpayer identification numbers which, for an individual, would be his Social
Security Number or (ii) in certain circumstances, fail to certify, under
penalties of perjury, that they have both furnished a correct taxpayer
identification number and not been notified by the Internal Revenue Service
that they are subject to backup withholding for failure to report interest
payments. Under current regulations, this backup withholding will not apply to
payments made by the Company or a paying agent on an Old Note or Exchange Note
if the Owner's
87
<PAGE>
Statement is received; provided in each case that the Company or the paying
agent, as the case may be, does not have actual knowledge that the payee is a
U.S. person.
Under current regulations, payments of the proceeds of the sale of an Old
Note or Exchange Note to or through a foreign office of a "broker" will not be
subject to backup withholding but will be subject to information reporting if
the broker is a U.S. person, a controlled foreign corporation for U.S. federal
income tax purposes, or a foreign person 50% or more of whose gross income is
from a U.S. trade or business for a specified three-year period (a "U.S.
Connected Broker"), unless the broker has in its records documentary evidence
that the holder of an Old Note or an Exchange Note is not a U.S. person and
certain conditions are met or the holder of an Old Note or an Exchange Note
otherwise establishes an exemption. Payment of the proceeds of a sale to or
through the U.S. office of a broker is subject to backup withholding and
information reporting unless the holder certifies its non-U.S. status under
penalties of perjury or otherwise establishes an exemption.
On October 7, 1997, the Treasury Department released new Treasury
Regulations governing the backup withholding and information reporting
requirements. The new regulations would not generally alter the treatment of
Non-U.S. Holders who furnish an Owner's Statement to the Company or the paying
agent. The new regulations may change certain procedures applicable to the
foreign office of a U.S. broker or foreign brokers with certain types of
relationships to the United States. The new regulations are generally
effective for payments made after December 31, 1998. For payments made after
1998, a beneficial owner withholding certificate is valid only if it is
provided on Form W-8 (for payments before 1999, a substitute form may be
provided). A Form W-8 is valid only if its validity period has not expired, it
is signed under penalties of perjury by the beneficial owner and it contains
all of the information required on the form. The required information is the
beneficial owner's name, permanent resident address, tax identification number
(if required), the country under the laws of which the beneficial owner is
created, incorporated or governed, the classification of the entity, and such
other information as may be required by the regulations.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS
OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING
AND DISPOSING OF THE NOTES AND THE EXCHANGE NOTES OF THE COMPANY, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF
ANY PROPOSED CHANGES IN APPLICABLE LAWS.
88
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may
be offered for resale, resold and otherwise transferred by holders thereof
(other than any holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the Exchange Notes are acquired in the ordinary course of the
holders' business, and the holders are not engaged in, and do not intend to
engage in, and have no arrangement or understanding with any person to
participate in, a distribution of the Exchange Notes; and, provided further,
that Participating Broker-Dealers will be subject to a prospectus delivery
requirement with respect to resales of the Exchange Notes. To date, the staff
of the Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to transactions
involving an exchange of securities such as the exchange pursuant to the
Exchange Offer (other than a resale of an unsold allotment from the sale of
the Old Notes to the Initial Purchaser) with the Prospectus contained in the
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company agreed to permit Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use this
Prospectus in connection with the resale of the Exchange Notes. The Company
agreed, for a period of one year after the Registration Statement is declared
effective by the Commission, to make this Prospectus, as amended or
supplemented, available to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for the
Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer--Resale of
the Exchange Notes." In addition, each holder who is a Participating Broker-
Dealer will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of the Exchange Notes.
The Company will not receive any proceeds from any sale of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any Participating Broker-Dealer that
resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
the Exchange Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
89
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Katten Muchin & Zavis, a partnership including
professional corporations, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company at March 31, 1997 and
1998, and for each of the three years in the period ended March 31, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
90
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EARLE M. JORGENSEN COMPANY:
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets at March 31, 1997 and 1998.................... F-3
Consolidated Statements of Operations for the years ended March 31, 1996,
1997 and 1998............................................................ F-4
Consolidated Statements of Stockholder's Equity for the years ended March
31, 1996, 1997 and 1998.................................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1997, 1998............................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Earle M. Jorgensen Company
We have audited the accompanying consolidated balance sheets of Earle M.
Jorgensen Company as of March 31, 1997 and 1998, and the related consolidated
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended March 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 21(b). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Earle M.
Jorgensen Company at March 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Orange County, California
April 24, 1998
F-2
<PAGE>
EARLE M. JORGENSEN COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 21,477 $ 20,763
Accounts receivable, less allowance for doubtful
accounts.............................................. 113,544 105,303
Inventories............................................ 174,045 180,403
Other current assets................................... 3,915 3,679
--------- ---------
Total current assets................................. 312,981 310,148
--------- ---------
Net property, plant and equipment, at cost............... 120,050 106,643
Cash surrender value of life insurance policies.......... 14,258 16,470
Debt issue costs, net of accumulated amortization........ 4,806 8,600
Other assets............................................. 2,787 1,960
--------- ---------
Total assets......................................... $ 454,882 $ 443,821
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable....................................... $ 87,519 $ 92,061
Accrued employee compensation and benefits............. 15,066 21,883
Accrued restructuring expenses......................... 10,632 894
Other accrued liabilities.............................. 10,907 15,347
Deferred income taxes.................................. 16,919 21,963
Current portion of long-term debt...................... 950 1,500
--------- ---------
Total current liabilities............................ 141,993 153,648
--------- ---------
Long-term debt........................................... 290,336 310,734
Deferred income taxes.................................... 17,093 12,709
Other long-term liabilities.............................. 3,533 3,649
Commitments and contingencies............................ -- --
Stockholder's equity:
Preferred stock, $.01 par value; 200 shares authorized
and unissued.......................................... -- --
Common stock, $.01 par value; 2,800 share authorized;
128 shares issued and outstanding..................... -- --
Capital in excess of par value......................... 171,073 116,789
Foreign currency translation adjustment................ 44 (278)
Accumulated deficit.................................... (169,190) (153,430)
--------- ---------
Total stockholder's equity........................... 1,927 (36,919)
--------- ---------
Total liabilities and stockholder's equity........... $ 454,882 $ 443,821
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
EARLE M. JORGENSEN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................... $1,025,659 $1,023,565 $1,050,005
Cost of sales............................... 764,638 742,826 755,381
---------- ---------- ----------
Gross profit................................ 261,021 280,739 294,624
Expenses:
Warehouse and delivery.................... 129,966 135,287 128,495
Selling................................... 41,794 40,791 37,147
General and administrative................ 73,859 69,748 59,377
Restructuring............................. 3,571 15,638 2,838
Other non-recurring charges............... 9,205 4,450 --
---------- ---------- ----------
Total expenses.......................... 258,395 265,914 227,857
---------- ---------- ----------
Income from operations...................... 2,626 14,825 66,767
Interest expense, net....................... 40,874 40,880 41,059
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item......................... (38,248) (26,055) 25,708
Income tax provision (benefit).............. (8,937) 501 873
---------- ---------- ----------
Net income (loss) before extraordinary item. (29,311) (26,556) 24,835
Extraordinary loss, early retirement of
debt....................................... -- -- 9,075
---------- ---------- ----------
Net income (loss)........................... $ (29,311) $ (26,556) $ 15,760
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EARLE M. JORGENSEN COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
IN FOREIGN
COMMON STOCK EXCESS CURRENCY
------------- OF PAR TRANSLATION ACCUMULATED
SHARES AMOUNT VALUE ADJUSTMENT DEFICIT TOTAL
------ ------ -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1995................... 128 $ -- $192,411 $(2,688) $(113,323) $ 76,400
Dividend to Parent...... -- -- (22,289) -- -- (22,289)
Capitalization of ESOP
contribution, net...... -- -- 3,401 -- -- 3,401
Foreign currency
translation adjustment. -- -- -- (3,060) -- (3,060)
Net loss................ -- -- -- -- (29,311) (29,311)
--- ----- -------- ------- --------- --------
Balance at March 31,
1996................... 128 -- 173,523 (5,748) (142,634) 25,141
Dividend to Parent...... -- -- (5,552) -- -- (5,552)
Capitalization of ESOP
contribution, net...... -- -- 3,102 -- -- 3,102
Foreign currency
translation adjustment
and writeoff........... -- -- -- 5,792 -- 5,792
Net loss................ -- -- -- -- (26,556) (26,556)
--- ----- -------- ------- --------- --------
Balance at March 31,
1997................... 128 -- 171,073 44 (169,190) 1,927
Dividend to Parent...... -- -- (56,888) -- -- (56,888)
Non-cash dividend to
Parent................. -- -- (184) -- -- (184)
Capitalization of ESOP
contribution, net...... -- -- 2,788 -- -- 2,788
Foreign currency
translation adjustment. -- -- -- (322) -- (322)
Net income.............. -- -- -- -- 15,760 15,760
--- ----- -------- ------- --------- --------
Balance at March 31,
1998................... 128 $ -- $116,789 $ (278) $(153,430) $(36,919)
=== ===== ======== ======= ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
EARLE M. JORGENSEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................ $(29,311) $(26,556) $ 15,760
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Write-off of foreign currency translation
losses........................................ -- 5,345 --
Asset write-downs.............................. 9,205 4,450 --
Depreciation and amortization.................. 12,022 10,620 9,475
Amortization of debt issue costs and discount
on senior notes included in interest expense.. 2,279 2,279 1,892
Write-off of debt issue costs and discount..... -- -- 3,225
Accrued postretirement benefits................ (256) 280 280
ESOP expense contributed to capital............ 3,401 3,102 2,788
Deferred income taxes.......................... (9,650) 1,202 660
Gain on sale of property, plant and equipment.. (559) (1,079) (2,480)
Loss on sale of subsidiaries................... -- -- 2,838
Provision for bad debts........................ 1,362 1,817 414
Decrease (increase) in cash surrender value of
life insurance over premiums paid............. (1,894) (1,798) 679
Changes in operating assets and liabilities
(excluding subsidiaries sold):
Decrease (increase) in accounts receivable... 40,065 (1,697) 2,994
Decrease (increase) in inventories........... 21,637 14,407 (18,111)
Decrease (increase) in other current assets.. 2,921 635 (341)
Increase (decrease) in accounts payable and
accrued liabilities and expenses ........... 19,241 (19,428) 15,069
Other.......................................... (345) 470 1,460
-------- -------- ---------
Net cash provided by (used in) operating
activities................................ 70,118 (5,951) 36,602
INVESTING ACTIVITIES:
Additions to property, plant and equipment....... (16,658) (4,449) (7,264)
Proceeds from the sale of property, plant and
equipment....................................... 1,158 4,630 12,534
Costs associated with sale of subsidiaries....... -- -- (1,739)
Proceeds from sale of subsidiaries............... -- -- 6,918
Premiums paid on life insurance policies......... (1,530) (2,345) (3,373)
Proceeds from redemption of life insurance poli-
cies............................................ 925 1,484 479
-------- -------- ---------
Net cash provided by (used in) investing
activities................................ (16,105) (680) 7,555
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving loan
agreements...................................... (19,747) 12,149 (23,576)
Proceeds from issuance of senior notes and term
loans........................................... -- -- 205,000
Repayment of senior notes........................ -- -- (155,000)
Costs associated with early retirement of debt... -- -- (906)
Other borrowings (payments), net................. 3,291 (949) (5,868)
Increase in debt issue costs..................... -- (810) (7,277)
Cash dividend to Parent.......................... (22,289) (5,552) (56,888)
-------- -------- ---------
Net cash provided by (used in) financing
activities................................ (38,745) 4,838 (44,515)
Effect of exchange rate changes on cash.......... (3,060) 447 (356)
-------- -------- ---------
Net increase (decrease) in cash.................. 12,208 (1,346) (714)
Cash at beginning of year........................ 10,615 22,823 21,477
-------- -------- ---------
Cash at end of year.............................. $ 22,823 $ 21,477 $ 20,763
======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION--The Company became a wholly-owned
subsidiary of Earle M. Jorgensen Holding Company, Inc. (the Parent) as the
result of a series of business combinations and mergers effective April 1,
1990.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries including Earle M. Jorgensen
(U.K.) Ltd (EMJ (UK)) (formerly Kilsby Jorgensen Steel and Aluminium Ltd.),
Kilsby Jorgensen Steel & Aluminum S.A. de C.V. (EMJ (Mexico)), and Earle M.
Jorgensen (Canada) Inc. (EMJ (Canada)) (formerly Kilsby Jorgensen Steel and
Aluminum Inc.) and Stainless Insurance Ltd., a captive insurance subsidiary
(EMJ (Bermuda)) operating in the United Kingdom, Mexico, Canada and Bermuda,
respectively. Excluding EMJ (Bermuda), net losses from foreign operations
totaled $3,516,000 and $95,000 in 1997 and 1998, respectively. In fiscal 1996,
such foreign operations generated $357,000 of net income. In fiscal 1997 and
1998, EMJ (Bermuda) generated $436,000 and $155,000 of net income,
respectively, from investment income and intercompany fees. In fiscal 1998,
the Company sold its operations in the United Kingdom and Mexico (see Note 4).
All significant intercompany accounts and transactions have been eliminated.
Certain amounts reported in prior years have been reclassified to conform to
the 1998 presentation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION--The Company recognizes revenue when products are
shipped.
CONCENTRATION OF CREDIT RISK--The Company sells the majority of its products
throughout the United States and Canada. Sales to the Company's recurring
customers are generally made on open account terms while sales to occasional
customers are made on a C.O.D. basis. The Company performs periodic credit
evaluations of its ongoing customers and generally does not require
collateral. The Company establishes an allowance for potential credit losses
based upon factors surrounding the credit risk for specific customers,
historical trends and other information; such losses have been within
management's expectations. The Company's allowance for doubtful accounts at
March 31, 1997 and 1998 was $963,000 and $406,000, respectively. Management
believes there are no significant concentrations of credit risk as of March
31, 1998.
RESTRUCTURING--In March 1997, the Company approved a plan to restructure its
operations. The plan's major actions included selling the Company's foreign
operations in the United Kingdom and Mexico, closing four domestic
distribution centers whose sales territories are now serviced from other
nearby facilities, and reducing the Company's workforce by approximately 10%.
As a result, a restructuring charge of $15,638,000 was recorded to cover
provisions for loss on sale of foreign operations ($7,027,000, including the
write-off of cumulative translation adjustments of $5,345,000); costs of
severance and other termination benefits and related expenses associated with
the reduction in workforce ($6,537,000); and costs directly related to the
closure of facilities for which there is no future economic value
($2,074,000).
During fiscal 1998, the restructuring plan was substantially completed,
including the sale of foreign operations in the United Kingdom and Mexico (see
Note 4) and the closure of three domestic facilities. As of March 31, 1998,
accrued restructuring expenses totaled $0.9 million and are considered
adequate to cover remaining foreseeable costs.
F-7
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In September 1995, the Company implemented a plan designed to enhance
operating productivity and efficiencies. As a result, a restructuring charge
of $3,571,000 was recorded to cover the costs associated with a 7% reduction
in the Company's workforce. In addition, the Company recorded a non-recurring
charge of $9,205,000 for write-downs and write-offs of certain property, plant
and equipment, a portion of which ($3,330,000) was the excess purchase price
or "step-up" allocated to the net book values of such assets at the time of
the Company's merger in 1990.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is recorded at
cost. Additions, renewals and betterments are capitalized; maintenance and
repairs which do not extend useful lives are expensed as incurred. Gains or
losses from disposals are reflected in income and the related costs and
accumulated depreciation are removed from the accounts. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of 10 to 40 years for buildings and improvements and three to 20
years for machinery and equipment. Leasehold improvements are amortized over
the terms of the respective leases.
IMPAIRMENT OF LONG-LIVED ASSETS--In fiscal 1996, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", which requires impairment losses to be
recorded on long-lived assets used in operations or are expected to be
disposed of, when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets.
There were no impairment losses recorded in fiscal 1996 as the result of
adopting SFAS No. 121. In fiscal 1997, the Company evaluated certain
applications of its management information and financial reporting system and
determined that such applications would not be used in the future.
Accordingly, the Company recorded a non-recurring charge of $4,450,000 for the
write-off of costs related to these applications.
DEBT ISSUE COSTS--Debt issue costs are deferred and amortized to interest
expense on a straight line basis over the life of the underlying indebtedness.
The amortization of debt issue costs aggregated $2,144,000, $2,144,000 and
$1,757,000 for the years ended March 31, 1996, 1997 and 1998, respectively.
Accumulated amortization of debt issue costs was $8,612,000 and $55,000 at
March 31, 1997 and 1998, respectively. In March 1998, the Company incurred
$8,517,000 of costs related to the issuance of indebtedness and wrote-off
$2,966,000 of unamortized debt issue costs related to retired debt in
connection with a series of refinancing transactions (see Note 6).
FOREIGN CURRENCY TRANSLATION--The assets and liabilities of the foreign
subsidiaries have been translated into U.S. dollars using the year-end
exchange rates. Revenues, costs and expenses have been translated at average
exchange rates for each year. Adjustments resulting from translation of
foreign currency financial statements are reflected as a separate component of
stockholder's equity. Exchange gains and losses from foreign currency
transactions are included in operations in the period in which they occur.
CASH AND STATEMENTS OF CASH FLOWS--Cash includes disbursements and deposits
not yet funded by or applied to the Company's Revolving Credit Facility as of
a balance sheet date. The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
For the years ended March 31, 1996, 1997 and 1998 cash paid for interest on
borrowings was $37,310,000, $37,747,000 and $39,993,000, and cash paid for
income taxes was $677,000, $403,000 and $360,000, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997 and 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures
About Segments of an Enterprise and
F-8
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Related Information," SFAS No. 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits," and SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." In addition, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company will adopt the FASB standards in fiscal 1999 and
SOP 98-1 by fiscal 2000 and does not believe such adoptions will have a
material impact to its financial statements.
2. INVENTORIES
Substantially all inventories are held for sale at the Company's service
center locations and are valued at the lower of cost (using the last-in,
first-out (LIFO) method) or market. If the Company had used the first-in,
first-out (FIFO) method of inventory valuation, inventories would have been
higher by $1,697,000 at March 31, 1997 and $2,046,000 at March 31, 1998.
In fiscal 1997, a reduction of LIFO inventory quantities carried at costs
lower or higher than costs prevailing in prior years occurred but did not have
a significant impact on the Company's gross profit. There were no such
reductions in fiscal years 1996 and 1998.
In February 1995, the Company began the implementation of a new enhanced
inventory and management information system. To ensure the accuracy of the
conversion of the perpetual inventory records, the Company performed physical
inventory counts and other procedures at all of its locations during the
second, third and fourth quarters of fiscal 1996. The Company identified a
difference between the perpetual inventory records and the general ledger
amounting to $26.9 million and, accordingly, recorded a charge to cost of
sales for this difference in the fourth quarter of fiscal 1996.
3. NET PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation at March 31, 1997
and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Land............................................ $ 32,583,000 $ 27,732,000
Buildings and improvements...................... 43,943,000 34,376,000
Machinery and equipment......................... 97,940,000 97,920,000
------------ ------------
174,466,000 160,028,000
Less accumulated depreciation................... 54,416,000 53,385,000
------------ ------------
Net property, plant and equipment............. $120,050,000 $106,643,000
============ ============
</TABLE>
4. SALE OF FOREIGN OPERATIONS
In March 1997, the Company approved a plan to sell its foreign operations in
the United Kingdom and Mexico and accordingly recorded a charge of $7,027,000
for the estimated loss on the sales, including the recognition of deferred
foreign currency translation losses. The Company sold its Mexican operations
in August 1997 and sold its United Kingdom operations in January 1998. As a
result of such sales, the Company recognized a loss of $2,838,000 in fiscal
1998 that is reflected as a restructuring charge in the accompanying
statements of operations.
For the fiscal years ended March 31, 1996, 1997 and 1998, combined revenues
from these foreign operations were $36,629,000, $35,193,000 and $23,417,000;
and income (loss) from operations was $80,000, ($2,935,000) and ($233,000),
respectively.
F-9
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CASH SURRENDER VALUE OF LIFE INSURANCE
The Company is the owner and beneficiary of life insurance policies on all
former nonunion employees of a predecessor company including certain current
employees of the Company and its Parent. The Company is also the owner and
beneficiary of key man life insurance policies on certain current and former
executives of the Company and predecessor companies. These policies are
designed to provide cash to the Company to repurchase shares held by employees
in the ESOP and shares held individually by employees upon the termination of
their employment. Cash surrender value of the life insurance policies increase
by a portion of the amount of premiums paid and by dividend income earned
under the policies. Dividend income earned under the policies totaled
$7.6 million in fiscal 1996, $7.8 million in fiscal 1997 and $10.3 million in
fiscal 1998 and is recorded as an offset to general and administrative expense
in the accompanying statements of operations.
The Company has borrowed against the cash surrender value of certain
policies to pay a portion of the premiums and accrued interest on those
policies and to fund working capital needs. Interest rates on borrowings under
the life insurance policies are fixed at 11.76%. As of March 31, 1998,
approximately $5,500,000 was available for future borrowings.
<TABLE>
<CAPTION>
SURRENDER NET CASH
VALUE BEFORE LOANS SURRENDER
LOANS OUTSTANDING VALUE
------------ ----------- -----------
<S> <C> <C> <C>
Balance at March 31, 1997............ $ 90,805,000 $76,547,000 $14,258,000
Balance at March 31, 1998............ 105,350,000 88,880,000 16,470,000
</TABLE>
Interest on cash surrender value borrowings totaled $7,173,000, $8,621,000
and $9,354,000 in fiscal 1996, 1997 and 1998, respectively, and is included in
net interest expense in the accompanying statements of operations.
6. LONG-TERM DEBT
On March 24, 1998, the Company consummated a series of refinancing
transactions, including the issuance of 9 1/2% Senior Notes totaling
$105,000,000, borrowing of $100,000,000 under a variable rate Term Loan, and
the replacement of its revolving credit facility. The proceeds from such
transactions were used to redeem $155,000,000 of the 10 3/4% Senior Notes,
plus call premium and accrued interest, and to prepay $5,084,000 of purchase
money indebtedness, including call premium and accrued interest. Accordingly,
the Company recorded an extraordinary loss of $9,075,000 consisting of call
premiums paid and other expenses incurred, and the write-off of deferred
financing costs, related to the early retirement of debt.
Long-term debt at March 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revolving Loans due March 24, 2003............... $118,011,000 $ 94,434,000
Variable Rate Term Loan due March 24, 2004....... -- 100,000,000
9 1/2% Senior Notes due April 1, 2005............ -- 105,000,000
10 3/4% Senior Notes............................. 154,607,000 --
Industrial Development Revenue Bonds:
Payable in annual installments of $500,000
commencing June 1, 1998, interest at 9%....... 4,000,000 4,000,000
Payable in annual installments of $715,000
commencing December 1, 2004, interest at
5.25%......................................... 4,300,000 4,300,000
Payable in annual installments of $900,000
commencing September 1, 2000, interest at
8.5%.......................................... 4,500,000 4,500,000
Purchase money financing......................... 5,868,000 --
------------ ------------
291,286,000 312,234,000
Less current portion............................. 950,000 1,500,000
------------ ------------
$290,336,000 $310,734,000
============ ============
</TABLE>
F-10
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate maturities of long-term debt are as follows: $1,500,000 in 1999;
$1,500,000 in 2000; $2,400,000 in 2001; $2,400,000 in 2002; $96,834,000 in
2003; and $207,600,000 thereafter.
The fair value of the Company's Senior Notes and Term Loans at March 31,
1998 was $106,050,000 and $100,125,000, respectively, based on the quoted
market price as of that date. The carrying values of all other long-term debt
and other financial instruments at March 31, 1998 approximate fair value.
Credit Agreement
Effective March 24, 1998, the Company entered into an amended and restated
revolving credit facility ("Credit Agreement"), which allows maximum
borrowings of $220 million, including letters of credit ($0.7 million
outstanding at March 31, 1998). Borrowings under the Credit Agreement bear
interest at a base rate (generally defined as the bank's prime lending rate
plus 1/2% or LIBOR plus 1.75%). At March 31, 1998, the bank's prime lending
rate was 8.50% and LIBOR was 5.69%. In addition, borrowings under the
revolving loans are limited to an amount equal to 85% of eligible trade
receivables plus 55% of eligible inventories (as defined). Unused available
borrowings under the revolving loans totaled $90.6 million at March 31, 1998.
The revolving loans mature on March 24, 2003 and are secured by a lien on all
domestic inventory and accounts receivable of the Company.
Under the Credit Agreement the Company is obligated to pay certain fees
including an unused commitment fee of 3/8%, payable quarterly in arrears, and
letter of credit fees of 1 3/4% per annum of the maximum amount available to
be drawn under each letter of credit, payable quarterly in arrears, plus
issuance, fronting, amendment and other standard fees. The Company paid loan
commitment fees totaling $218,000 in 1996, $305,000 in 1997 and $257,000 in
1998.
The Credit Agreement contains financial covenants in respect of maintenance
of minimum working capital and a fixed charge coverage ratio (as defined). The
Credit Agreement also limits, among other things, the incurrence of liens and
other indebtedness, mergers, consolidations, the sale of assets, annual
capital expenditures, advances, investments and loans by the Company and its
subsidiaries, dividends and other restricted payments by the Company and its
subsidiaries in respect to their capital stock, and certain transactions with
affiliates. On June 4, 1997, the Company received a waiver to fiscal 1997
financial covenants relating to consolidated net worth and fixed charge ratio
and received amendments to other financial covenants for future periods.
9 1/2% Senior Notes and Variable Rate Term Loan
On March 24, 1998, the Company refinanced $155 million of 10 3/4% Senior
Notes by issuing $105 million of 9 1/2% Senior Notes and borrowing $100
million under a variable rate Term Loan. The 9 1/2% Senior Notes were issued
at par and interest is payable each April 1 and October 1, commencing October
1, 1998. The 9 1/2% Senior Notes are unsecured obligations of the Company and
may be redeemed by the Company under certain conditions and with certain
restrictions at varying redemption prices. The Indenture to the 9 1/2% Senior
Notes contains certain covenants which limits, among other things, the
incurrence of liens and other indebtedness, mergers, consolidations, the sale
of assets, investments and loans, dividends and other distributions, and
certain transactions with affiliates. The Term Loan bears interest at either
an Alternate Base Rate (as defined) plus 2.0% or at LIBOR plus 3.25%. At March
31, 1998, the effective interest rate under the Term Loan was 8.94%. Amounts
outstanding under the Term Loan are secured by a first priority lien on
substantially all the existing and future acquired unencumbered property,
plant and equipment of the Company. Principal payments are required to be paid
quarterly in amounts equal to $250,000, commencing on June 30, 1998. The Term
Loan may be prepaid, subject to declining call premiums through fiscal 2001
and is subject to prepayments at the option of the holder upon a Change in
Control (as defined) and with 100% of net proceeds from asset sales, as
permitted. Covenants under the Term Loan are similar to those under the 9 1/2%
Senior Notes.
F-11
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other
The Company issues industrial revenue bonds in connection with significant
facility improvements or construction projects. The purchase money financing
included borrowings under a loan agreement entered into on March 27, 1995
which provided up to $7,500,000 for the expansion or acquisition of facilities
and purchase of equipment. The outstanding borrowings required monthly
payments of principal of $79,112 plus interest (at one month LIBOR plus 3.25%)
through July 2003 and were repaid on March 24, 1998.
7. INCOME TAXES
The Company is included in the consolidated tax returns of Holding and
calculates its tax provision as though it files on a separate basis. The
consolidated tax liability of the Company and Parent is allocated to each of
these entities pursuant to a Tax Allocation Agreement between the Company and
Parent ("Tax Allocation Agreement"). Under the Tax Allocation Agreement,
Parent pays all taxes and is reimbursed by the Company for the lesser of (i)
the Company's allocated portion of the taxes due, or (ii) the tax that would
be payable if the Company filed its own returns.
The Company records deferred taxes based upon differences between the
financial statement and tax basis of assets and liabilities pursuant to SFAS
No. 109, "Accounting for Income Taxes", as though it files on a separate
basis. Any differences in deferred taxes determined on a separate basis and
the actual payments made or received under the Tax Allocation Agreement are
accounted for as an equity adjustment between the Company and Parent. There
were no such differences in fiscal 1998. Deferred taxes are also recorded for
the future benefit of Federal and state tax losses and tax credit
carryforwards. Deferred tax assets have not been recognized for the loss
carryforwards of the Company's foreign subsidiaries. Consistent with SFAS No.
109, a valuation allowance has been recognized for certain deferred tax
assets, which management believes are not likely to be realized.
At March 31, 1998, the Company had net operating loss carryforwards of
$70,000,000 for Federal income tax purposes. These carryforwards resulted from
the Company's losses during 1993 and 1996, and expire in years 2008 and 2011,
respectively. The ultimate realization of the benefits of these loss
carryforwards is dependent on future profitable operations. In addition, use
of the Company's net operating loss carryforwards and other tax attributes may
be substantially limited if a cumulative change in ownership of more than 50%
occurs within any three year period subsequent to a loss year.
Significant components of the Company's deferred income tax assets and
liabilities at March 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation..................... $ 10,267,000 $ 8,497,000
Purchase price adjustments..................... 43,324,000 40,903,000
------------ ------------
Total deferred tax liabilities................... 53,591,000 49,400,000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards............... 27,352,000 26,524,000
Capital loss carryforward...................... -- 6,728,000
Other.......................................... 16,538,000 11,546,000
Valuation allowance for deferred tax assets.... (24,311,000) (30,070,000)
------------ ------------
Net deferred tax assets.......................... 19,579,000 14,728,000
------------ ------------
Net deferred tax liabilities..................... $ 34,012,000 $ 34,672,000
============ ============
</TABLE>
F-12
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income before taxes consists primarily of income (loss) from the Company's
domestic operations and also includes pre-tax income (loss) of $359,000,
$(3,080,000) and $60,000 from the Company's foreign operations for fiscal
1996, 1997 and 1998, respectively.
Significant components of the provision for income taxes attributable to
continuing operations for the years ended March 31, 1996, 1997 and 1998 were
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $ 88,000
State............................. 676,000 403,000 125,000
------------ ------------ -----------
Total current..................... 676,000 403,000 213,000
------------ ------------ -----------
Deferred:
Federal........................... (12,240,000) (11,716,000) (6,109,000)
State............................. (3,235,000) (2,497,000) 1,010,000
Valuation allowances.............. 5,862,000 14,311,000 5,759,000
------------ ------------ -----------
Total deferred.................... (9,613,000) 98,000 660,000
------------ ------------ -----------
$ (8,937,000) $ 501,000 $ 873,000
============ ============ ===========
</TABLE>
The reconciliation of the income tax provision (benefit) differs from that
which would result from applying the U.S. statutory rate as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Expected tax (benefit) at Federal
statutory rate..................... $(13,387,000) $(9,119,000) $ 5,412,000
State tax expense (benefit), net of
Federal taxes...................... (1,876,000) (1,207,000) 657,000
Net increase in cash surrender
values of life insurance........... (1,607,000) (2,797,000) (2,851,000)
State franchise and capital taxes... 423,000 403,000 448,000
Effect of Internal Revenue Service
examination........................ 792,000 -- --
Foreign loss carryforward (with)
without tax benefit................ (126,000) 1,078,000 --
Tax benefit of credit carryovers and
carrybacks......................... -- (800,000) (5,796,000)
Change in valuation allowance....... 5,862,000 12,706,000 5,759,000
Capital loss on sale of
subsidiaries....................... -- -- (4,125,000)
Other............................... 982,000 237,000 1,369,000
------------ ----------- -----------
Income tax (benefit) expense...... $ (8,937,000) $ 501,000 $ 873,000
============ =========== ===========
</TABLE>
The change of $5,759,000 in the valuation allowance for deferred tax assets
as of March 31, 1998 was due to the uncertainty of realizing the benefit
during the tax loss carryforward period.
8. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
The Company and its Parent have an Employee Stock Ownership Plan (ESOP)
which covers nonunion employees of the Company who meet certain service
requirements. The cost of the ESOP is borne by the Company through annual
contributions to an Employee Stock Ownership Trust (ESOT) in amounts
determined by the Board of Directors. Contributions may be made in cash or
shares of the Parent's stock as the Parent's Board of Directors may from time
to time determine. Participants vest at a rate of 20% per year of service and
F-13
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
become fully vested upon retirement, disability or death. Upon the occurrence
of a participant's termination (as defined), retirement, disability, or death,
the ESOP is required, by the terms of the ESOP, to either distribute the
vested balance in stock or to repurchase the vested balance for cash (as
determined by the Benefits Committee). If stock is distributed, it is
accompanied by a put option to the Parent under terms defined in the ESOP.
Shares of the Parent's Series A and B preferred and common stock owned by the
ESOP totaled 83,903, 24,946 and 3,833,577 at March 31, 1998, respectively.
Contributions payable to the ESOT totaled $3,401,000, $3,102,000 and
$2,788,000 in 1996, 1997 and 1998, which represented 5% of eligible
compensation for each of the respective years. The contribution for fiscal
years 1996 and 1997 was made in the form of Holding's common stock. The
contribution for fiscal 1998 will also be in the form of Holding's common
stock.
Although the Parent has not expressed any intent to terminate or amend the
plan, it has the right to do so at any time. In the event of any termination,
participants become fully vested to the extent of the balances in their
separate accounts and come under the put options as previously discussed.
Pension and Postretirement Benefit Plans
The Company maintains a noncontributory defined benefit pension plan
covering substantially all hourly union employees (the "Hourly Plan").
Benefits under the Hourly Plan are vested over 5 years and are determined
based on years of service and the employee's compensation during the last ten
years of employment. The assets of the Hourly Plan for participants are held
in trust and consist of bonds, equity securities and insurance contracts and
the Company contributes at least the minimum required annually under ERISA.
Net pension expense for the Hourly Plan for the years ended March 31, 1996,
1997 and 1998 was $500,000, $420,000 and $641,000, respectively, and included
the following components:
<TABLE>
<CAPTION>
1996 1997 1998
----------- --------- -----------
<S> <C> <C> <C>
Service cost of benefits earned during the
period................................... $ 484,000 $ 509,000 $ 730,000
Interest cost on projected benefit
obligation............................... 520,000 547,000 596,000
Actual return on plan assets.............. (1,892,000) (924,000) (1,940,000)
Net amortization and deferral............. 1,388,000 288,000 1,255,000
----------- --------- -----------
$ 500,000 $ 420,000 $ 641,000
=========== ========= ===========
The Company maintains an unfunded supplemental plan which provides benefits
to highly compensated employees whose basic pension plan benefit is limited by
the Internal Revenue Code (the "Supplemental Plan"). Net pension expense for
the Supplemental Plan for the years ended March 31, 1996, 1997 and 1998 was
$67,000, $67,000 and $70,000, respectively, and included the following
components:
<CAPTION>
1996 1997 1998
----------- --------- -----------
<S> <C> <C> <C>
Interest cost on projected benefit
obligation............................... $ 52,000 $ 53,000 $ 52,000
Net amortization and deferral............. 15,000 14,000 18,000
----------- --------- -----------
$ 67,000 $ 67,000 $ 70,000
=========== ========= ===========
</TABLE>
In addition to the Company's defined benefit pension plans, the Company
sponsors a defined benefit health care plan that provides postretirement
medical and dental benefits to eligible full time employees (the
"Postretirement Plan"). The Postretirement Plan is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance. The accounting for the Postretirement Plan
anticipates future cost-sharing changes to the written plan that are
consistent with the Company's expressed intent to increase the retiree
contribution rate annually to compensate for the expected health care trend
rate. The Company's policy is to fund the cost of medical benefits under this
plan as they are submitted for reimbursement. Gains and losses realized from
the remeasurement of the plan's liability are
F-14
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amortized to income over three years. Net benefit expense (income) for the
Postretirement Plan for the years ended March 31, 1996, 1997 and 1998 was
$(256,000), $280,000 and $280,000, respectively, and included the following
components:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost of benefits earned during the
period....................................... $ 201,000 $ 203,000 $ 239,000
Interest cost on projected benefit obligation. 183,000 211,000 216,000
Net amortization and deferral................. (640,000) (134,000) (175,000)
--------- --------- ---------
$(256,000) $ 280,000 $ 280,000
========= ========= =========
</TABLE>
Information as of March 31, 1998, regarding the Hourly Plan, Supplemental
Plan, and Postretirement Plan follows:
<TABLE>
<CAPTION>
SUPPLEMENTAL POSTRETIREMENT
HOURLY PLAN PLAN PLAN
----------- ------------ --------------
<S> <C> <C> <C>
Accumulated benefit obligation,
including vest................... $(7,097,000) $(793,000) $(3,371,000)
Projected benefit obligation...... (9,675,000) (793,000) (3,371,000)
Fair value of plan assets......... 10,333,000 -- --
Accrued pension costs............. (607,000) (480,000) (3,600,000)
Discount rate..................... 7.00% 7.00% 7.00%
Expected long-term rate of return
on assets........................ 8.00% -- --
Rate of increase in compensation
levels........................... 5.00% 5.00% --
</TABLE>
As of March 31, 1998, the vested benefit obligation applicable to the Hourly
Plan and the Supplemental Plan was $6,740,000 and $793,000, respectively.
The discount rate, expected long-term rate of return on assets, and rate of
increase in compensation levels used to calculate the expense under these
plans for fiscal 1996, 1997 and 1998 were 8.25%, 8.00% and 5.00%; 7.25%, 8.00%
and 5.00% and 7.00%, 8.00% and 5.00%, respectively.
The health care cost trend rate used in the calculation of cost (income)
related to the postretirement health care plans was 8.5% grading down ratably
to 5.5% by March 2004. A 1% increase in the assumed health care cost trend
rate would have increased postretirement costs in fiscal 1998 by $191,000.
The health care cost trend rate used to calculate the accumulated
postretirement benefit obligation was 8.5% for 1998, grading down ratably to
5.5% by March 2004. The health care cost trend rate assumption can have a
significant effect on the amounts reported. A 1% increase in the assumed
health care cost trend rate in each year would increase the projected benefit
obligation as of March 31, 1998 by $463,000.
In accordance with union agreements, the Company also contributes to
multiemployer defined benefit retirement plans covering substantially all
union employees of the Company. Expenses incurred in connection with these
plans totaled $1,771,000, $1,753,000 and $1,615,000 in 1996, 1997 and 1998,
respectively.
9. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases, under several agreements with varying terms, certain
office and warehouse facilities, equipment and vehicles. Rent expense totaled
$17,844,000, $18,859,000 and $17,412,000 for the years ended March 31, 1996,
1997 and 1998, respectively. The portion of rent expense paid to related
parties totaled $443,000, $367,000 and none for the years ended March 31,
1996, 1997 and 1998, respectively. As of March 31,
F-15
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1998, there were no future lease obligations with related parties. Minimum
rentals of certain leases escalate from time to time based on certain indices.
At March 31, 1998 the Company was obligated under noncancellable operating
leases for future minimum rentals as follows:
<TABLE>
<S> <C>
Fiscal year:
1999....................................................... $13,073,000
2000....................................................... 11,058,000
2001....................................................... 8,667,000
2002....................................................... 6,060,000
2003....................................................... 4,457,000
Thereafter................................................. 14,257,000
-----------
Total.................................................... $57,572,000
===========
</TABLE>
Other Commitments
In connection with the 1990 merger, the Company agreed to pay Kelso &
Companies, Inc. (Kelso), affiliates of which own the majority of Parent's
common stock, an annual fee of $1.25 million each year for financial advisory
services and to reimburse it for out-of-pocket expenses incurred in connection
with rendering such services. The Company also agreed to indemnify Kelso and
its affiliates against certain claims, losses, damages and liabilities and
expenses that may arise in connection with the merger. The agreement for
advisory services was amended in September 1997 to provide such services at an
annual fee of $625,000 for each of the fiscal years ending March 31, 1998 and
1999. The term of the agreement with Kelso is indefinite. Fees and expenses
paid to Kelso in connection with these agreements totaled $1,404,000,
$1,643,000 and $687,000 during the years ended March 31, 1996, 1997 and 1998,
respectively.
Environmental Contingencies
The Company is currently involved with investigation and/or remediation
activities at several current and formerly-owned facilities where soil and/or
groundwater contamination is present or alleged. As of March 31, 1998,
reserves totaling $2.3 million have been established to cover those future
environmental costs associated with the matters specified below, which are
known or can be reasonably estimated based on findings and recommendations
from independent environmental consultants.
Alameda Street (Los Angeles). Remediation was completed in fiscal 1996 and
the Company has received final approval from the County of Los Angeles
authorities. Total costs incurred by the Company in connection with this
project were $3.4 million, of which $1.7 million has been capitalized to the
property. The Company was reimbursed $1.5 million of such costs by the lessee
in accordance with a cost sharing agreement.
In February 1998 the Company was notified that it had potential
responsibility for lead and copper soil contamination of another undeveloped
parcel that is part of the Alameda Street property. A remediation plan has
been approved by local government agencies. As of March 31, 1998, the
Company's accrual for future investigation and remediation expenditures
includes the estimated costs under the remediation plan.
Bristol (Pennsylvania). A remedial action plan submitted and approved by the
Pennsylvania regulatory agency was completed in fiscal 1998. As of March 31,
1998, the project's cost has totaled $4.3 million, of which $3.2 million has
been paid by the Company and $1.1 million was paid by the former owner of the
property pursuant to a cost sharing agreement. No additional costs are
expected to be incurred. The Company sold the facility in July 1996.
F-16
<PAGE>
EARLE M. JORGENSEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Forge (Seattle/Kent, WA). The Company has indemnified the purchasers of its
former Forge facility for remediation of certain conditions at the facility
and at an off-site disposal site existing at the date of purchase. In
addition, the Company indemnified such purchasers for up to $2.5 million of
remediation and investigation costs associated with or related to the
environmental conditions existing at the time of sale and discovered after the
closing and for which claims were made prior to July 2, 1995. No such claims
were made. As of March 31, 1998, the remediation and investigation costs of
the Forge facility have totaled $2.6 million. The Company's accrual for future
investigation and remediation expenditures includes the estimated remaining
costs of remediation. As of March 31, 1998, remediation and investigation
costs at the disposal site have totaled $0.5 million and the Company has
reserved for future monitoring costs.
Union (New Jersey). During fiscal 1994, the Company was notified by the
current owner that it has potential responsibility for the environmental
contamination of a property formerly owned by a subsidiary and disposed of by
such subsidiary prior to its acquisition by the Company. The prior owner of
such subsidiary has also been notified of its potential responsibility. On
March 27, 1997, the current owner of the property informed the Company that it
estimated the cost of investigation and cleanup of the property at $875,000
and requested contribution to such costs from the Company and the prior owner.
The Company has contested responsibility and commented on the cleanup plan.
The Company does not have sufficient information to determine what potential
liability it has, if any. Accordingly, no reserves have been specifically
established for this matter as of March 31, 1998.
Although it is possible that new information or future developments could
require the Company to reassess its potential exposure relating to all pending
environmental matters, management believes that, based upon all currently
available information, the resolution of such environmental matters will not
have a material adverse effect on the Company's financial condition, results
of operations or liquidity. The possibility exists, however, that new
environmental legislation and/or environmental regulations may be adopted, or
other environmental conditions may be found to exist, that many require
expenditures not currently anticipated and that may be material.
Other
The Company is involved in litigation in the normal course of business. In
the opinion of management, these matters will be resolved without a material
impact on the Company's financial position or results of operations.
F-17
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... iv
Forward-Looking Statements................................................ iv
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
Use of Proceeds........................................................... 18
Capitalization............................................................ 19
The Exchange Offer........................................................ 20
Selected Historical Consolidated Financial Data........................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 39
Management................................................................ 48
Security Ownership of Certain Beneficial Owners and Management............ 57
Certain Relationships and Related Transactions............................ 59
Description of the Notes.................................................. 60
Description of Other Indebtedness......................................... 82
Certain U.S. Federal Income Tax Consequences.............................. 85
Plan of Distribution...................................................... 89
Legal Matters............................................................. 90
Experts................................................................... 90
Index to Financial Statements............................................. F-1
</TABLE>
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[LOGO OF EARLE M. JORGENSEN COMPANY]
Earle M. Jorgensen Company
OFFER TO EXCHANGE
9 1/2% SENIOR NOTES DUE 2005, SERIES B
FOR ALL OUTSTANDING
9 1/2% SENIOR NOTES DUE 2005, SERIES A
--------------------------
PROSPECTUS
--------------------------
AUGUST , 1998
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- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to specific authority granted by Section 102 of the General
Corporation Law of the State of Delaware, Article SIXTH of the Registrant's
Certificate of Incorporation contains the following provision regarding
limitation of liability of directors and officers:
"(e) No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of his or her fiduciary
duty as a director, provided that nothing contained in this Article shall
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or knowing violation of the law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for any transaction from
which the director derived an improper personal benefit."
The Registrant, as a Delaware corporation, is empowered by Section 145 of
the General Corporation Law of the State of Delaware, subject to the
procedures and limitations stated therein, to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe the person's conduct was unlawful.
The statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors,
or otherwise. The power to indemnify applies to actions brought by or in the
right of the corporation as well, but only to the extent of defense and
settlement expenses and not to any satisfaction of a judgment or settlement of
the claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication of negligence
or misconduct unless the court, in its discretion, believes that in light of
all the circumstances indemnification should apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of the actions referred to
therein, such person is entitled, pursuant to Section 145, to indemnification
as described above.
Reference is made to Article SIXTH of the Registrant's Certificate of
Incorporation (included as Exhibit 3.1 hereto) and Article VI of the
Registrant's By-laws (included as Exhibit 3.2 hereto), which provide for
indemnification by the Registrant of its directors and officers to the full
extent permitted by the General Corporation Law of the State of Delaware.
The Registrant maintains policies that insure its directors and officers
against claims arising out of the performance of their duties in such
capacities.
The form of Purchase Agreement included as Exhibit 4.1 provides for
indemnification of the Registrant and certain controlling persons under
certain circumstances, including indemnification for liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling Registrant pursuant to the foregoing provisions, the Company has
II-1
<PAGE>
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form S-1 as filed on January 15, 1993 (Registration
No. 3357134) (the "Company's 1993 Registration Statement").
3.2* By-laws of the Company. Incorporated by reference to Exhibit 3.2
of the Company's 1993 Registration Statement.
4.1* Form of Indenture with respect to the Company's 9 1/2% Senior
Notes. Incorporated by reference to Exhibit 4.1 to the Company's
Annual Report on Form 10-K, Commission File No. 5-10065 for the
fiscal year ended March 31, 1998 (the "Company's 1998 Form 10-
K").
4.2(a)* Form of certificate for the Company's 9 1/2% Senior Notes, Series
A, $100,000,000. Incorporated by reference to Exhibit 4.2(a) to
the Company's 1998 Form 10-K.
4.2(b)* Form of certificate for the Company's 9 1/2% Senior Notes, Series
A, $4,350,000. Incorporated by reference to Exhibit 4.2(b) to the
Company's 1998 Form 10-K.
4.2(c)* Form of certificate for the Company's 9 1/2% Senior Notes, Series
A, $650,000. Incorporated by reference to Exhibit 4.2(c) to the
Company's 1998 Form 10-K.
4.2(d)** Form of certificate for the Company's 9 1/2% Senior Notes, Series
B.
4.3* Purchase Agreement, dated as of March 19, 1998, among the Company,
Donaldson, Lufkin & Jenrette Securities Corporation and BT Alex.
Brown Incorporated, for an aggregate of $105,000,000 in principal
amount of the Company's 9 1/2% Senior Notes due 2005.
Incorporated by reference to Exhibit 4.3 to the Company's 1998
Form 10-K.
4.4* Registration Rights Agreement, dated as of March 24, 1998, among
the Company, Donaldson, Lufkin & Jenrette Securities Corporation
and BT Alex. Brown Incorporated. Incorporated by reference to
Exhibit 4.4 to the Company's 1998 Form 10-K.
4.5* Amended and Restated Credit Agreement dated as of March 3, 1993,
amended and restated as of March 24, 1998, among the Company,
Holding, Various Financial Institutions, and BT Commercial
Corporation, as Agent (the "Agent"). Incorporated by reference to
Exhibit 4.5 to the Company's 1998 Form 10-K.
4.6* Term Loan Agreement ("Term Loan Agreement"), dated as of March 24,
1998 among the Company, Various Financial Institutions, as the
Lenders, DLJ Capital Funding, Inc., as the Syndication Agent for
the Lenders, Bankers Trust Company, as the Documentation Agent
for the Lenders and Fleet National Bank, as the Administrative
Agent ("Administrative Agent") for the Lenders. Incorporated by
reference to Exhibit 4.6 to the Company's 1998 Form 10-K.
4.7* Form of Restructuring Agreement among Holding, the Company and KIA
IV. Incorporated by reference to Exhibit 4.25 of Amendment No. 3
to the Company's 1993 Registration Statement ("Amendment No. 3").
4.8* Amendment to Restructuring Agreement, dated as of March 3, 1993,
by and between Holding and KIA IV, amended as of March 24, 1998.
Incorporated by reference to Exhibit 4.8 to the Company's 1998
Form 10-K.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.9* Form of Security Agreement between the Company and BT Commercial
Corporation, as Collateral Agent. Incorporated by Reference to
Exhibit 4.27 of Amendment No. 3.
4.10* Form of Acknowledgement, Consent and Amendment, dated as of March
24, 1998, between the Company and the Agent. Incorporated by
reference to Exhibit 4.10 to the Company's 1998 Form 10-K.
4.11* Form of Security Agreement, dated as of March 24, 1998 by the
Company, in favor of the Administrative Agent. Incorporated by
reference to Exhibit 4.11 to the Company's 1998 Form 10-K.
4.12* Form of Mortgage, dated as of March 24, 1998, made by the Company in
favor of the Administrative Agent. Incorporated by reference to
Exhibit 4.12 to the Company's 1998 Form 10-K.
4.13* Intercreditor Agreement, dated as of March 24, 1998, by and among
Fleet National Bank, as the Administrative Agent, and BT Commercial
Corporation, as Agent. Incorporated by reference to Exhibit 4.13 to
the Company's 1998 Form 10-K.
5** Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
10.1* Stockholders Agreement, amended and restated as of September 14,
1990, among Holding, KIA III-EMJ, KIA IV, Kelso Equity Partners 11,
L.P. and the Management Stockholders and Other Investors named
therein. Incorporated by reference to Exhibit 4.1 of Holding's
Post-Effective Amendment No. 1 to the Form S-1 Registration
Statement as filed with the Commission on October 12, 1990
(Registration No. 33-35022) ("Holding's Post-Effective Amendment
No. 1 to the 1990 Form S-1").
10.2* Amendment to the Stockholders Agreement, dated as of January 20,
1992. Incorporated by reference to Exhibit 10.2 of the Company's
1993 Registration Statement.
10.3* Management Stockholders Bonus Plan. Incorporated by reference to
Exhibit 4.7 of Holding's Post-Effective Amendment No. 1 to the 1990
Form S-1.
10.4* Services Agreement, between Acquisition and Kelso, dated March 19,
1990. Incorporated by reference to Exhibit 10.2 of Holding's
Registration Statement on Form S-1 as filed May 30, 1990 with the
Commission (Registration No. 33-35022) ("Holding's 1990
Registration Statement").
10.5* Trust Agreement applicable to the EMJ Employee Stock Ownership and
Capital Accumulation Plan, dated as of May 25, 1984, by and between
Crocker National Bank ("Crocker"), as Trustee, and EMJ.
Incorporated by referenced to Exhibit 4.1 to Form 8 (Amendment No.
1 to EMJ's Annual Report on Form 10-K, Registration No. L-753 7,
for the fiscal year ended December 31, 1984) (the "Form 8").
10.6* Amendment 1985-I to the EMJ Employee Stock Ownership and Capital
Accumulation Plan effective as of January 1985. Incorporated by
reference to Exhibit 4.1 to Post-Effective Amendment No. 1 to EMJ's
Registration Statement on Form S-8, Registration No. 2-87991, filed
August 21, 1985.
10.7* Amendment 1986-1 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan and Plan Trust Agreement executed December 1986
between EMJ and Wells Fargo Bank, N.A., as Trustee (formerly
Crocker). Incorporated by reference to Exhibit 4.2 to the Form 8.
10.8* Amendment 1988-1 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan executed February 29, 1988. Incorporated by
reference to Exhibit (10)d to EMJ's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9* Amendment 1988-11 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan executed June 22, 1988. Incorporated by reference
to Exhibit 8 to EMJ's Schedule 14D-9 filed on February 5, 1990
("EMJ's 1990 Schedule 14D-9").
10.10* Amendment 1989-1 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan executed March 20, 1989. Incorporated by
reference to Exhibit 8 to EMJ's 1990 Schedule 14D-9.
10.11* EMJ Supplemental Benefit Plan 1989 Amendment in Toto. Incorporated
by reference to Exhibit (10)p to EMJ's 1989 Form 10-K.
10.12* Amendment 1989-11 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan executed December 29, 1989. Incorporated by
reference to Exhibit (10)q to EMJ's 1989 Form 10-K.
10.13* Amendment 1990-1 to the EMJ Employee Stock Ownership and Capital
Accumulation Plan Trust Agreement executed March 19, 1990.
Incorporated by reference to Exhibit (10)r to EMJ's Annual Report
on Form 10-K for fiscal year ended December 31, 1989.
10.14* C. A. Roberts Pension Plan, amended and restated as of January 1,
1986, with amendments thereto. Incorporated by reference to Exhibit
10.22 of Holding's 1990 Registration Statement.
10.15* Kilsby Executive Life Insurance Plan. Incorporated by reference to
Exhibit 10.25 of Holding's 1990 Registration Statement.
10.16* Kilsby Executive Long-Term Disability Plan. Incorporated by
reference to Exhibit 10.26 of Holding's 1990 Registration
Statement.
10.17* Holding's ESOP. Incorporated by reference to Exhibit 10.31 of
Holding's Annual Report on Form 10-K for the year ended March 31,
1991 (Registration No. 33-35022) ("Holding's Form 10-K").
10.18* Amendment No. 1 to Holding's ESOP, dated October 21, 1991.
Incorporated by reference to Exhibit 10.24 of the Company's 1993
Registration Statement.
10.19* Amendment No. 2 to Holding's ESOP, dated October 21, 1991.
Incorporated by reference to Exhibit 10.25 of the Company's 1993
Registration Statement.
10.20* Amendment No. 3 to Holding's ESOP, dated February 18, 1992.
Incorporated by reference to Exhibit 10.26 of the Company's 1993
Registration Statement.
10.21* Amendment No. 4 to Holding's ESOP, dated January 25, 1993.
Incorporated by reference to Exhibit No. 10.21 to Holding's
Registration Statement on Form S-1 as filed October 19, 1994 with
the Commission (Registration No. 33-85364) ("Holding's 1994
Registration Statement").
10.22* Amendment No. 5 to Holding's ESOP, dated January 25, 1993.
Incorporated by reference to Exhibit No. 10.22 to Holding's 1994
Registration Statement.
10.23* Amendment No. 6 to Holding's ESOP, dated January 25, 1993.
Incorporated by reference to Exhibit No. 10.23 to Holding's 1994
Registration Statement.
10.24* Amendment No. 7 to Holding's ESOP, dated January 25, 1993.
Incorporated by reference to Exhibit No. 10.24 to Holding's 1994
Registration Statement.
10.25* Amendment No. 8 to Holding's ESOP, dated July 27, 1993. Incorporated
by reference to Exhibit No. 10.25 to Holding's 1994 Registration
Statement.
10.26* Amendment No. 9 to Holding's ESOP, dated October 7, 1994.
Incorporated by reference to Exhibit No. 10.26 to Holding's 1994
Registration Statement.
10.27* Holding's ESOP Trust Agreement. Incorporated by reference to Exhibit
10.32 of Holding's Form 10-K.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28* Jorgensen Compensation Policy, dated as of April 1, 1991, including
description of Return on Net Operating Assets Incentive Plan.
Incorporated by reference to Exhibit 10.34 of Holding's 1991
Form 10-K.
10.29* Lease and Agreement, dated as of August 1, 1991, between Advantage
Corporate Income Fund L.P. and the Company, relating to the sale
and lease-back of K-R's Kansas City, Missouri property.
Incorporated by reference to Exhibit 10.30 of the Company's 1993
Registration Statement.
10.30* Lease and Agreement, dated as of September 1, 1991, between
Advantage Corporate Income Fund L.P. and the Company, relating to
the sale and lease-back of the Cincinnati, Ohio property.
Incorporated by reference to Exhibit 10.31 of the Company's 1993
Registration Statement.
10.31* Industrial Building Lease, dated as of October 16, 1991, between Ira
Houston Jones and Helen Mansfield Jones, Roderick M. Jones and
Cherilyn Jones, Roger G. Jones and Norma Jean Jones, Robert M.
Jones and Olga F. Jones and the Company, relating to the sale and
lease-back of the Alameda Street property in Lynwood, California.
Incorporated by reference to Exhibit 10.32 of the Company's 1993
Registration Statement.
10.32* Stock Purchase Agreement, dated as of January 21, 1992, between
McJunkin Corporation and the Company, relating to the sale of the
Company's Republic Supply division. Incorporated by reference to
Exhibit 10.33 of the Company's 1993 Registration Statement.
10.33* Contract of Sale, dated as of January 21, 1992, between the Company
and Hansford Associates Limited Partnership, relating to the sale
of the warehouse properties and the sale of the Company's Republic
Supply division. Incorporated by reference to Exhibit 10.34 of the
Company's 1993 Registration Statement.
10.34* Stock Purchase Agreement, dated as of June 30, 1992, among Forge
Acquisition Corporation, The Jorgensen Forge Corporation and the
Company, relating to the sale of the Company's Forge division.
Incorporated by reference to Exhibit 10.35 of the Company's 1993
Registration Statement.
10.35* Industrial Real Estate Lease, dated June 25, 1992, between Paul
Nadzikewycz and the Company, relating to the sale and lease-back of
JSA's Denver, Colorado property. Incorporated by reference to
Exhibit 10.36 of the Company's 1993 Registration Statement.
10.36* Industrial Real Estate Lease, dated October 19, 1992, between
Fiorito Enterprises, Inc. and the Company, relating to the sale and
lease-back of the Portland, Oregon facility. Incorporated by
reference to Exhibit 10.27 of the Company's 1993 Registration
Statement.
10.37* Truck Lease and Service Agreement, dated as of November 1, 1984,
between Ryder Truck Rental, Inc. ("Ryder") and EMJ and all
amendments thereto, between Ryder and the Company (amendments dated
January 1, 1992, January 30, 1992 and undated (executed by the
Company)). Incorporated by reference to Exhibit 10.38 of the
Company's 1993 Registration Statement.
10.38* Lease, dated July 30, 1982, between Republic Bank, Dallas N.A., as
Ancillary Trustee of the Fluor Employees' Trust Fund and Kilsby-
Roberts Co., relating to K-R's Houston, Texas property (the
"Houston Lease"). Incorporated by reference to Exhibit 10.42 of the
Company's 1993 Registration Statement.
10.39* Amendment No. 1 to the Houston Lease, dated as of December 31, 1986,
among Barclays Bank of California, as Trustee for Republic Bank,
Dallas, N.A., as Ancillary Trustee of the Fluor Employees' Trust
Fund, KRG and Kilsby-Roberts Co. Incorporated by reference to
Exhibit 10.43 of the Company's 1993 Registration Statement.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.40* Form of Management Agreement between the Company and Holding.
Incorporated by reference to Exhibit 10.46 of Amendment No. 2 to
the Company's 1993 Registration Statement.
10.41* Form of Tax Allocation Agreement between the Company and Holding.
Incorporated by reference to Exhibit 10.47 of Amendment No. 3.
10.42* Earle M. Jorgensen Holding Company, Inc. Phantom Stock Plan adopted
January 11, 1995. Incorporated by reference to Exhibit 10.39 to
Amendment No. 1 to Holding's 1994 Registration Statement as filed
with the commission on January 19, 1995 (Registration No. 33-85364)
("Amendment No. I to Holding's 1994 Registration Statement").
10.43* Industrial Real Estate Lease, dated July 15, 1993, between Jorgensen
and 58 Cabot L.P., relating to the Langhorne, Pennsylvania
facility. Incorporated by reference to Exhibit 10.27 to Holding's
1994 Registration Statement.
10.44* Amendment to the Stockholders Agreement, dated as of September 30,
1994. Incorporated by reference to Exhibit 10.41 to Amendment No. 1
to Holding's 1994 Registration Statement.
10.45* Stock Compensation Agreement, dated as of December 13, 1994, between
Holding and David M. Roderick. Incorporated by reference to Exhibit
10.42 to Amendment No. 1 to Holding's 1994 Registration Statement.
10.46* Holding's 401(a)(17) Supplemental Contribution Plan, effective April
1, 1994. Incorporated by reference to Exhibit 10.54 to the
Company's Annual Report on Form 10-K, Commission File No. 5-10065
for the fiscal year ended March 31, 1995 (the "Company's 1995
Form 10-K").
10.47* Holding's Deferred Compensation Plan, effective April 1, 1994.
Incorporated by reference to Exhibit 10.55 to the Company's 1995
Form 10-K.
10.48* Amendment No. 2 to the Earle M. Jorgensen Company Capital
Accumulation Plan and Trust dated as of May 3, 1996. Incorporated
by reference to Exhibit 10.55 to the Company's Annual Report on
Form 10-K, Commission File No. 5-10065 for the fiscal year ended
March 31, 1996 (the "Company's 1996 Form 10-K").
10.49* Earle M. Jorgensen Holding Company, Inc. Stock Option Plan effective
January 30, 1997. Incorporated by reference to Exhibit 10.57 to the
Company's Annual Report on Form 10-K, Commission File No. 5-10065
for the fiscal year ended March 31, 1997 (the "Company's 1997
Form 10-K").
10.50* Form of Holding Incentive and Non-Qualified Stock Option Agreement.
Incorporated by reference to Exhibit 10.58 to the Company's 1997
Form 10-K.
10.51* Earle M. Jorgensen Holding Company, Inc. Stock Option Plan, as
amended July 21, 1997. Incorporated by reference to Exhibit 10.61
to the Company's Quarterly Report on Form 10-Q, Commission File No.
510065 for the fiscal quarter ended September 29, 1997.
10.52* Earle M. Jorgensen Company Management Incentive Compensation Plan.
Incorporated by reference to Exhibit 10.62 to the Company's
Quarterly Report on Form 10-Q, Commission File No. 5-10065 for the
fiscal quarter ended December 31, 1997.
12.1* Statement of Computation of Number of Times Fixed Charges Earned.
21* Listing of the Company's subsidiaries.
23.1** Consent of Katten Muchin & Zavis (included in their opinion filed as
Exhibit 5 to this Registration Statement).
23.2** Consent of Independent Auditors--Ernst & Young LLP.
24* Powers of Attorney.
25* Statement of eligibility under the Trust Indenture Act of 1939, as
amended, of Trustee on Form T-1, as Trustee under the Indenture.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27* Financial Data Schedule
99.1* Form of Letter of Transmittal for the Exchange Notes.
99.2* Form of Notice of Guaranteed Delivery for the Exchange Notes.
99.3* Letter to Registered Holders and Depository Trust Company
Participants.
99.4* Letter to Clients.
99.5* Instruction Letter to Registered Holder and/or Book Entry Transfer
Participant from Beneficial Owner.
99.6* Guidelines for Certificate of Taxpayer Identification Number on
Substitute Form W-9.
</TABLE>
- ---------------------
* Previously filed.
** Included in this filing.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts and Reserves (see page S-1).
All other schedules have been omitted because the information is not
applicable or is not material or because the information required is set forth
in the financial statements on the notes thereto.
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-7
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first call mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Brea, State of
California, on the 7th day of August, 1998.
EARLE M. JORGENSEN COMPANY
By: /s/ Maurice S. Nelson, Jr.
-----------------------------------
Maurice S. Nelson, Jr.
President and Chief Executive
Officer
By: /s/ Charles P. Gallopo
-----------------------------------
Charles P. Gallopo
Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 7th day of August, 1998.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
* Director and Chairman Emeritus
_________________________________
Earle M. Jorgensen
* Director and Chairman of the Board and Chairman of
_________________________________ the Executive Committee
David M. Roderick
* President, Chief Executive Officer, Chief Operating
_________________________________ Officer and Director (Principal Executive Officer)
Maurice S. Nelson, Jr.
/s/ Charles P. Gallopo Vice President, Chief Financial Officer and
_________________________________ Secretary
Charles P. Gallopo (Principal Financial and Accounting Officer)
* Director
_________________________________
Joseph S. Schuchert
* Director
_________________________________
Neven C. Hulsey
* Director
_________________________________
Charles K. Ligon
* Director
_________________________________
William A. Marquard
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
* Director
_________________________________
Frank Nickell
* Director
_________________________________
John Rutledge
*By: /s/ Charles P. Gallopo
________________________
Charles P. Gallopo
(Attorney-in-fact)
</TABLE>
II-10
<PAGE>
EARLE M. JORGENSEN COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------------- ------------------ ----------------------- -------------
BALANCE AT CHARGES TO BAD DEBTS CHARGED BALANCE AT
DESCRIPTION BEGINNING OF PERIOD COSTS AND EXPENSES OFF (NET OF RECOVERIES) END OF PERIOD
----------- ------------------- ------------------ ----------------------- -------------
<S> <C> <C> <C> <C>
Year ended March 31,
1998
Allowance for doubtful
accounts............. $ 963,000 $ 414,000 $ (971,000) $ 406,000
Year ended March 31,
1997
Allowance for doubtful
accounts............. 1,017,000 1,817,000 (1,871,000) 963,000
Year ended March 31,
1996
Allowance for doubtful
accounts............. 1,146,000 1,362,000 (1,491,000) 1,017,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.2(d) Form of certificate for the Company's 9 1/2% Senior Notes, Series B.
5 Opinion of Katten Muchin & Zavis as to the legality of the securities
being registered (including consent).
23.2 Consent of Independent Auditors--Ernst & Young LLP.
</TABLE>
<PAGE>
EXHIBIT 4.2(d)
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTIONS 311 AND 312 OF THE INDENTURE DATED AS OF MARCH 24, 1998
BETWEEN THE COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK AS TRUSTEE.
<PAGE>
EARLE M. JORGENSEN COMPANY
Series B 9 1/2% Senior Notes due 2005
No. N-001 $________________
CUSIP No.480829AC4
Earle M. Jorgensen Company, a Delaware corporation (herein called the
"Company", which term includes any successor Person under the Indenture
hereinafter referred to), for value received, hereby promises to pay to CEDE &
CO., or its registered assigns, the principal sum of _________________
($____________) Dollars on April 1, 2005 at the office or agency of the Company
referred to below, and to pay interest thereon on October 1, 1998 and semi-
annually thereafter, on April 1 and October 1 in each year, from October 1,
1998, or from the most recent Interest Payment Date to which interest has been
paid or duly provided for, at the rate of 9 1/2% per annum, until the principal
hereof is paid or duly provided for, and (to the extent lawful) to pay on demand
interest on any overdue interest at the rate borne by the Notes from the date on
which such overdue interest becomes payable to the date on which payment of such
interest has been made or duly provided for. The interest so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in such Indenture, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of business on the
Record Date for such interest, which shall be the March 15 or September 15
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly provided
for shall forthwith cease to be payable to the Holder on such Record Date, and
such defaulted interest, and (to the extent lawful) interest on such defaulted
interest at the rate borne by the Notes, may be paid to the Person in whose name
this Note (or one or more Predecessor Notes) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Notes not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice as
may be required by such exchange, all as more fully provided in said Indenture.
Payment of the principal of (and premium, if any, on) and interest on this Note
will be made at the office or agency of the Company maintained for that purpose
in The City of New York, or at such other office or agency of the Company as may
be maintained for such purpose, in such coin or currency of the United States
<PAGE>
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that payment of interest may be made at the
-------- -------
option of the Company (i) by check mailed to the address of the Person entitled
thereto as such address shall appear on the Note Register or (ii) by transfer to
an account maintained by the payee located in the United States.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: September ___, 1998 EARLE M. JORGENSEN COMPANY
By_________________________
Title:
Attest:
- ---------------------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
Dated: September ___, 1998
This is one of the Notes referred to in the within-mentioned
Indenture.
UNITED STATES TRUST COMPANY
OF NEW YORK
____________________, as Trustee
By:
Authorized Officer
<PAGE>
[Reverse of Note]
This Note is one of a duly authorized issue of securities of the
Company designated as its 9 1/2% Series B Senior Notes due 2005 (herein called
the "Notes"), limited (except as otherwise provided in the Indenture referred to
below) in aggregate principal of $105,000,000, that may be issued under a Senior
Notes Indenture (herein called the "Indenture") dated as of March 24, 1998
between the Company and United States Trust Company of New York (herein called
the "Trustee", which term includes any successor trustee under the Indenture),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a statement of the respective rights, limitations of rights, duties,
obligations and immunities thereunder of the Company, the Trustee and the
Holders of the Notes, and of the terms upon which the Notes are, and are to be,
authenticated and delivered.
The Company, at its option, may redeem the Notes as a whole, or from
time to time in part, on or after April 1, 2002, at the redemption prices
(expressed as a percentage of the principal amount thereof) set forth below (in
each case together with accrued and unpaid interest, if any, to the Redemption
Date):
<TABLE>
<CAPTION>
IF REDEEMED DURING THE 12-MONTH
PERIOD BEGINNING APRIL 1, REDEMPTION PRICE
<S> <C>
2002........................ 104.750%
2003........................ 102.375%
2004 and thereafter......... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to April 1, 2001, the Company may
redeem from time to time up to 35% of the aggregate principal amount of the
Notes originally outstanding at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest, if any to the
redemption date, with the net proceeds of a public offering of common stock by
the Company (or of Holding to the extent such net proceeds are contributed as a
capital contribution in exchange for common stock of the Company); provided that
at least 65% of the aggregate principal amount of the Notes originally
outstanding remain outstanding immediately after such redemption.
Upon the occurrence of a Change of Control (the "Change of Control
Date"), each Holder shall have the right, at such Holder's option, to require
the Company to repurchase all or any part of such Holder's Notes pursuant to the
offer
<PAGE>
(the "Change of Control Offer") at a purchase price equal to 101% of the
principal amount thereof (the "Change of Control Purchase Price"), plus accrued
and unpaid interest, if any, to the date of repurchase.
The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated March 24, 1998, among the Company and the
Initial Purchasers named therein (the "Registration Rights Agreement"). The
Registration Rights Agreement will provide that (i) if the Company fails to file
an Exchange Offer Registration Statement with the Commission on or prior to the
90/th/ day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 150/th/
day after the Closing Date, (iii) if the Exchange Offer is not consummated on or
before the 30/th/ calendar day after the Exchange Offer Registration Statement
is declared effective, (iv) if obligated to file the Shelf Registration
Statement and the Company fails to file the Shelf Registration Statement with
the Commission on or prior to the 90/th/ day after such filing obligation
arises, (v) if obligated to file a Shelf Registration Statement and the Shelf
Registration Statement is not declared effective on or prior to the 150/th/
day after the obligation to file a Shelf Registration Statement arises, or (vi)
if the Exchange Offer Registration Statement or the Shelf Registration
Statement, as the case may be, is declared effective but thereafter ceases to be
effective or useable in connection with resales of the Transfer Restricted
Securities, without being succeeded immediately by a post-effective amendment to
such Registration Statement that cures such failure and that is itself declared
effective immediately (each, a "Registration Default"), the Company agrees to
pay to each Holder of Transfer Restricted Securities affected thereby liquidated
damages "(Liquidated Damages") in an amount equal to $0.05 per week per $1,000
in principal amount of Transfer Restricted Securities held by such Holder for
each week or portion thereof that the Registration Default continues for the
first 90 day period immediately following the occurrence of such Registration
Default. The amount of the Liquidated Damages shall increase by an additional
$0.05 per week per $1,000 in principal amount of Transfer Restricted Securities
with respect to each subsequent 90 day period until all Registration Defaults
have been cured, up to a maximum amount of Liquidated Damages of $0.50 per week
$1,000 principal amount of Transfer Restricted Securities. The Company shall
not be required to pay Liquidated Damages for more than one Registration Default
at any given time. Following the cure of all Registration Defaults, the accrual
of Liquidated Damages will cease.
<PAGE>
In the case of any redemption of Notes, interest installments whose
Stated Maturity is on or prior to the Redemption Date will be payable to the
Holders of such Notes, or one or more Predecessor Notes, of record at the close
of business on the relevant Regular Record Date referred to on the face hereof.
Notes (or portions thereof) for whose redemption and payment provision is made
in accordance with the Indenture shall cease to bear interest from and after the
Redemption Date.
All accrued Liquidated Damages shall be paid by the Company to Holders
entitled thereto by wire transfer to the accounts specified by them or by
mailing checks to their registered address if no such accounts have been
specified.
In the event of redemption of this Note in part only, a new Note or
Notes for the unredeemed portion hereof shall be issued in the name of the
Holder hereof upon the cancellation hereof.
The Indenture defines an Event of Default as being: (a) any failure to
pay an installment of interest on the Notes as and when the same becomes due and
payable and such failure continues for 30 days; (b) failure to pay all or any
part of the principal of (or premium, if any, on) the Notes when and as the same
shall become due and payable at maturity, redemption, by declaration or
otherwise, including payment of the Change of Control Purchase Price; (c)
failure by the Company duly to observe, perform or comply with any covenant or
agreement contained in the Notes or the Indenture which failure continues for a
period of 60 days after written notice specifying such failure and demanding
that the Company remedy the same has been given to the Company by the Trustee or
to the Company and the Trustee by Holders of at least 25% in aggregate principal
amount of Notes then outstanding; (d) certain events of bankruptcy, insolvency
or reorganization in respect of the Company or any Material Subsidiary; (e) (i)
a default which extends beyond any stated period of grace applicable thereto,
excluding any extension thereof, under any bond, debenture, note, mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness of the Company or any of its Restricted
Subsidiaries, whether now existing or hereafter created, aggregating in excess
of $10,000,000 at any one time, if as a result of such event of default the
maturity of such Indebtedness has been accelerated prior to its final stated
maturity, or (ii) failure to pay such Indebtedness, aggregating in principal
amount in excess of $10,000,000 at any one time, at its final stated maturity;
or (f) the rendering of final judgments not covered by insurance (which coverage
shall be in full force and effect) for the payment of money in an amount equal
to or greater than, in the case of any one such judgment $2,500,000, and, in the
case of all such judgments
<PAGE>
$5,000,000, against the Company or any of its Restricted Subsidiaries by a court
of competent jurisdiction which are not stayed, satisfied or discharged within
60 days after such judgments become final and nonappealable.
If an Event of Default (other than an Event of Default with respect to
the Company described in clause (d) of the preceding paragraph), shall occur and
be continuing then, and in every such case, unless the principal of all the
Notes shall have already become due and payable, either the Trustee or the
Holders of not less than 25% in aggregate principal amount of then outstanding
Notes, by notice in writing to the Company (and to the Trustee if given by
Holders), may declare all of the principal of the Notes (or the Change of
Control Purchase Price if the Event of Default includes failure to pay the
Change of Control Purchase Price), together with accrued interest thereon to be
due and payable immediately. If an Event of Default with respect to the Company
specified in clause (d) above occurs, all principal of, premium applicable to,
and accrued interest on, all then outstanding Notes shall become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder.
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders under the Indenture at any time by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Notes at the time Outstanding. The Indenture
also contains provisions permitting the Holders of specified percentages in
aggregate principal amount of the Notes at the time Outstanding, on behalf of
the Holders of all the Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by or on behalf of the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange therefor or in lieu hereof whether or not notation of such
consent or waiver is made upon this Note.
<PAGE>
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note Register
of the Company, upon surrender of this Note for registration of transfer at the
office or agency of the Company maintained for such purpose in The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Notes, of authorized denominations and for the same aggregate principal
amount will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
All terms used in this Note that are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
No recourse for the payment of the principal of, or premium, if any,
or interest on, any of the Notes or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Company in the Indenture or in any of the Notes, or because of
the creation of any
<PAGE>
Indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer, director, employee, controlling person of the Company or
of a Subsidiary of the Company or of any successor Person of the Company or of a
Subsidiary of the Company. Each Holder by accepting a Note waives and releases
all such liability, and such waiver and release is part of the consideration for
the issuance of the Notes.
The Indenture and this Note shall be governed by, and construed in
accordance with, the internal laws of the State of New York (without giving
effect to the conflict of laws principles thereof). The Trustee, the Company,
and (by their acceptance of the Notes) the Holders agree to submit to the non-
exclusive jurisdiction of any United States federal or state court located in
the Borough of Manhattan, in the City of New York, in any action or proceeding
arising out of or relating to the Indenture of this Note.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to Earle M.
Jorgensen Company, 3050 East Birch Street, Brea, CA 92821, Attention: Chief
Financial Officer.
<PAGE>
[Form of Transfer Notice for the Notes]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ----------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)
- --------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing
- --------------------------------------------------------------------------------
attorney to transfer such Note on the books of the Company with full power of
substitution in the premises.
<PAGE>
In connection with any transfer of this Note occurring prior to the
date which is the earlier of the date of an effective Registration Statement or
March 24, 2000; i.e., the end of the period referred to in Rule 144(k) under the
Securities Act, the undersigned confirms that without utilizing any general
solicitation or general advertising that:
Check One
---------
[_] this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided
by Rule 144A thereunder.
or
--
[_] this Note is being transferred other than in accordance with (a)
above and documents are being furnished which comply with the
conditions of transfer set forth in this Note and the Indenture.
If none of the foregoing boxes is checked, the Trustee or other Note Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Sections 311 and 312 of the Indenture shall
have been satisfied.
Date: __________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
Signature Guarantee:___________________________________
<PAGE>
TO BE COMPLETED BY PURCHASER IF (A) ABOVE IS CHECKED.
Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Note Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Note Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, as amended, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Dated:____________________ _____________________________________
NOTICE: To be executed by an
executive officer
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 1201 or Section 1013 of the Indenture, check the Box: [_]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 1201 or Section 1013 of the Indenture, state the amount (in
original principal amount) below:
$_____________________.
Date: _____________________
Your Signature: ________________________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: ___________________________________
Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Note Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Note Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
<PAGE>
EXHIBIT 5
August 11, 1998
Earle M. Jorgensen Company
3050 East Birch Street
Brea, CA 92821
Re: Registration Statement on Form S-4 - File No. 333-56777
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Earle M. Jorgensen Company, a Delaware
corporation (the "Company"), in connection with the preparation and filing of a
registration statement on Form S-4, File No. 333-56777 (the "Registration
Statement"), and the amendments thereto, with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended. The
Registration Statement relates to the exchange of up to an aggregate principal
amount of $105,000,000 of the Company's 9 1/2% Senior Notes due 2005, Series B
(the "New Notes") for an equal amount of its outstanding 9 1/2% Senior Notes due
2005, Series A (the "Old Notes" and, together with the New Notes, the "Notes").
Capitalized terms used but not defined herein shall have the meanings as set
forth in the Registration Statement or the Indenture relating to the Notes (the
"Indenture"), as the case may be.
In connection with this opinion, we have relied as to matters of fact,
without investigation, upon certificates of public officials and others and upon
affidavits, certificates and written statements of directors, officers, and
employees of, and the accountants for, the Company. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such instruments, documents, and records as we have deemed relevant and
necessary to examine for the purpose of this opinion, including (a) the
Registration Statement, and the amendments thereto, (b) the Certificate of
Incorporation of the Company, (c) the By-laws of the Company, (d) the minutes of
meetings of the Board of Directors of the Company, (e) the Indenture for the
Notes, (f) the Form of New Notes, and (g) the Statements on Form T-1 under the
Trust Indenture Act of 1939, as amended, filed with the SEC in connection with
the Indenture.
In connection with this opinion, we have assumed the accuracy and
completeness of all documents and records that we have reviewed, the genuineness
of all signatures, the due authority of the parties signing such documents, the
authenticity of the documents submitted to us as originals and the conformity to
authentic original documents of all documents submitted to us as certified,
conformed or reproduced copies. We have further assumed that:
<PAGE>
Earle M. Jorgensen Company
August 11, 1998
Page 2
(i) All natural persons involved in the transactions contemplated by
the Registration Statement (the "Offering") and the Indenture
have sufficient legal capacity to enter into and perform their
respective obligations under the Indenture and to carry out their
roles in the Offering.
(ii) Each party involved in the Offering other than the Company
(collectively the "Other Parties") has satisfied all legal
requirements that are applicable to it to the extent necessary to
make the Indenture enforceable against it.
(iii) Each of the Other Parties has complied with all legal
requirements pertaining to its status as such related to its
rights to enforce the Indenture against the Company.
Based upon and subject to the foregoing, it is our opinion that:
(1) The Company is a corporation duly incorporated and existing under
the laws of the State of Delaware.
(2) The New Notes covered by the Registration Statement, when
executed in the manner set forth in the Indenture and issued and
delivered in the manner set forth in the Registration Statement,
will be legally issued and will be binding obligations of the
Company under the terms of the Indenture, except (i) as
enforceability may be limited by the effects of bankruptcy,
insolvency, reorganization, receivership, moratorium and other
similar laws affecting the rights and remedies of creditors
generally; (ii) as enforceability may be limited by the effects
of general principles of equity, whether applied by a court of
law or equity; (iii) as rights to indemnity or contribution under
the same may be limited by federal or state securities laws or
the public policy underlying such laws; and (iv) that we express
no opinion as to the waiver of the defense of usury.
Our opinion expressed above is limited to the laws of the States of
Delaware and New York and the federal securities laws of the United States of
America, and we do not express any opinion herein concerning any other law.
This opinion is given as of the date hereof and we assume no obligation to
advise you of changes that may hereafter be brought to our attention.
<PAGE>
Earle M. Jorgensen Company
August 11, 1998
Page 3
This opinion is solely for the information of the addressees hereof and is not
to be quoted in whole or in part or otherwise referred to, nor is it to be filed
with any governmental agency or any other person, without our prior written
consent. No one other than the addressees hereof is entitled to rely on this
opinion. This opinion is rendered solely for purposes of the issuing of the New
Notes and should not be relied upon for any other purpose.
We hereby consent to the reference to our name in the Registration
Statement under the caption "Legal Matters" and further consent to the filing of
this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ KATTEN MUCHIN & ZAVIS
_____________________________________
KATTEN MUCHIN & ZAVIS
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts", "Summary
Financial Data", and "Selected Historical Consolidated Financial Data" and to
the use of our report dated April 24, 1998, included in the Registration
Statement (Amendment No. 1 to Form S-4 No. 333-56777) and related Prospectus
of Earle M. Jorgensen Company for the registration of $105,000,000 of 9 1/2%
Senior Notes due 2005, Series B.
/s/ Ernst & Young LLP
Orange County, California
August 6, 1998
