<PAGE> 1
***************************************************************************
* *
*AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1994*
* *
***************************************************************************
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NS GROUP, INC.
AND OTHER REGISTRANTS
(SEE TABLE OF ADDITIONAL REGISTRANTS)
KENTUCKY
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
3312
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
61-0985936
(IRS EMPLOYER
IDENTIFICATION NUMBER)
NINTH AND LOWELL STREETS
NEWPORT, KENTUCKY 41072
(606) 292-6809
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN R. PARKER
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
NINTH AND LOWELL STREETS
NEWPORT, KENTUCKY 41072
(606) 292-6809
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL CORRESPONDENCE TO:
WILLIAM F. SEABAUGH
BRYAN CAVE
ONE METROPOLITAN SQUARE
211 N. BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
GARY L. SELLERS
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
------------------------
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
NAME OF ADDITIONAL REGISTRANTS INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER
- ----------------------------------- ------------------------------ ---------------------
<S> <C> <C>
Erlanger Tubular Corporation Oklahoma 73-1281150
Imperial Adhesives, Inc. Ohio 31-1070331
Koppel Steel Corporation Pennsylvania 25-1635833
Newport Steel Corporation Kentucky 61-1116686
Northern Kentucky Air, Inc. Kentucky 62-1208414
Northern Kentucky Management, Inc. Kentucky 61-1014963
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF ANY OF THE SECURITIES REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED
OR CONTINUOUS BASIS
PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING
BOX / /
------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Secured Notes due 2003.......... $125,000,000 100%(1) $125,000,000(1) $43,104
- -----------------------------------------------------------------------------------------------------------------------
Senior Guarantees of Senior Secured
Notes due 2003 of Registrants other
than NS Group, Inc..................... -- -- -- None(2)
=======================================================================================================================
<FN>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Pursuant to Rule 457(a), no separate fee is being paid with respect to these
guarantees.
</TABLE>
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
<PAGE> 2
<TABLE>
NS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................. Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges........................................ Prospectus Summary; Investment
Considerations; Summary Consolidated
Financial Data
4. Use of Proceeds......................................... Use of Proceeds
5. Determination of Offering Price......................... *
6. Dilution................................................ *
7. Selling Security Holders................................ *
8. Plan of Distribution.................................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered.............. Description of the Senior Secured Notes
10. Interests of Named Experts and Counsel.................. *
11. Information with Respect to the Registrants
(a) Description of Business............................ Business
(b) Description of Property............................ Business
(c) Legal proceedings.................................. Business
(d) Common Equity Securities........................... *
(e) Financial Statements............................... Consolidated Financial Statements
(f) Selected Financial Data............................ Selected Consolidated Financial Data
(g) Supplementary Financial Information................ Notes to Selected Consolidated Financial
Data
(h) Management's Discussion and Analysis of Financial
Condition and Results of Operations................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants........................................ *
(j) Directors and Executive Officers................... Management
(k) Executive Compensation............................. Management
(l) Security Ownership................................. Principal Stockholders
(m) Certain Relationships and Related
Transactions....................................... Management; Principal Stockholders;
Compensation Committee Interlocks and
Insider participation; Certain Transactions
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.............................. *
<FN>
____________________
*Item is inapplicable or answer is in the negative and is omitted from the
Prospectus.
</TABLE>
<PAGE> 3
***************************************************************************
* *
* 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. *
* *
***************************************************************************
Prospectus (Subject to Completion Dated November 29, 1994)
$125,000,000
NS GROUP, INC.
% SENIOR SECURED NOTES DUE 2003
NS Group, Inc. (the "Company") is offering (the "Offering") $125,000,000
aggregate principal amount of % Senior Secured Notes due 2003 (the "Senior
Secured Notes"). Interest on the Senior Secured Notes will be payable
semi-annually on and of each year, commencing
, 1995, at the rate of % per annum. Up to 40% of the principal
amount of the Senior Secured Notes will be redeemable with the net proceeds of a
public equity offering at the option of the Company during the first 36 months
after the date of the Offering at % of the principal amount thereof plus
accrued interest; provided that at least $75,000,000 principal amount of Senior
Secured Notes remains outstanding after such redemption. The Senior Secured
Notes will also be redeemable, in whole or in part, at the option of the Company
on and after , 1999, at the redemption prices set forth herein plus
accrued interest.
The Senior Secured Notes will be obligations of the Company and will rank pari
passu with the Company's other unsubordinated debt obligations. The Senior
Secured Notes will be secured by intercompany notes issued in favor of the
Company by the steel-making Subsidiaries of the Company, in an aggregate amount
at least equal to the principal amount of the Senior Secured Notes (the
"Intercompany Notes"). The Senior Secured Notes also will be unconditionally
guaranteed, jointly and severally, by each Subsidiary of the Company (the
"Guarantees"). Each Intercompany Note and Guarantee will rank pari passu in
right of payment with the unsubordinated obligations of the Subsidiaries,
including obligations arising in connection with the working capital facility to
be entered into prior to or concurrently with the Offering. For each of the
Company's steel-making Subsidiaries, its Intercompany Note will be secured by a
first priority security interest and its Guarantee will be secured by a second
priority security interest in its steel-making operations, excluding inventory,
accounts receivable and certain intangible property. After giving effect to the
Offering and the application of certain cash balances of the Company to the
payment of debt, as of September 24, 1994, the Company would have had
approximately $166.6 million of total Indebtedness on a consolidated basis.
In the event of a Change of Control, the Company will be obligated to make an
offer to purchase all outstanding Senior Secured Notes from the holders of
Senior Secured Notes ("Holders") at a redemption price of 101% of the principal
amount thereof plus accrued interest. Under certain circumstances, the Company
will be obligated to apply the Net Available Cash from asset sales to the
purchase of substitute property for use in the Company's business or to make
offers to purchase a portion (calculated as set forth herein) of the Senior
Secured Notes at a redemption price of 100% of the principal amount thereof plus
accrued interest.
------------------------------------------------------------------------
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED
WITH AN INVESTMENT IN THE SENIOR SECURED NOTES.
------------------------------------------------------------------------
THE SENIOR SECURED NOTES AND THE GUARANTEES 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.
------------------------------------------------------------------------
<TABLE>
=================================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SENIOR SECURED NOTE % % %
TOTAL $ $ $
=================================================================================================
<FN>
(1) Plus accrued interest, if any, from , 1995.
(2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
</TABLE>
------------------------------------------------------------------------
The Senior Secured Notes are offered by the Underwriters, subject to prior sale,
when, as and if issued by the Company and delivered to and accepted by the
Underwriters, and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that the delivery of the Senior Secured Notes will be
made in book-entry form through the facilities of The Depository Trust Company
on or about , 1995.
CHEMICAL SECURITIES INC. CS FIRST BOSTON
The date of this Prospectus is , 1995
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR SECURED
NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission 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: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the New York Stock Exchange, on which shares of the Company's Common
Stock are listed, at 20 Broad Street, New York, New York.
The Company and the Subsidiaries have filed with the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Senior Secured Notes, and Guarantees thereof, offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in schedules and exhibits to the Registration Statement as
permitted by 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 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 such 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 Registration Statement, including all exhibits thereto, may
be inspected and copied in the manner and at the sources described above.
---------------------
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. See
"Investment Considerations" for certain factors that should be considered in
connection with an investment in the Senior Secured Notes offered hereby. Unless
the context otherwise requires, all references to the "Company" refer to NS
Group, Inc. and its principal operating subsidiaries, Newport Steel Corporation
("Newport"), Koppel Steel Corporation ("Koppel"), Erlanger Tubular Corporation
("Erlanger") and Imperial Adhesives, Inc. ("Imperial"), and all references to a
fiscal year refer to the fiscal year of the Company which ends on the last
Saturday of September (for example, references to "fiscal 1994" mean the fiscal
year ended September 24, 1994). In October 1993, the Company sold its subsidiary
Kentucky Electric Steel Corporation ("KES"). Except as otherwise noted herein,
all information in this Prospectus relating to the Company's operations for
fiscal 1994 is presented excluding KES.
The Company is a leading producer of specialty steel products. The
Company's specialty steel products consist of: (i) seamless and welded tubular
goods primarily used in oil and natural gas drilling and production operations;
(ii) line pipe used in the transmission of oil, natural gas and other fluids;
(iii) special bar quality products primarily used in the manufacture of heavy
industrial equipment and off-road vehicles; and (iv) hot rolled coils which are
sold to service centers and other manufacturers for further processing. The
Company manufactures these specialty steel products at its two mini-mills,
located in Koppel, Pennsylvania and near Newport, Kentucky. The Koppel
facilities include one of the most modern tubemaking operations in the world and
the Newport facility is the only mini-mill with continuous casting capabilities
manufacturing welded tubular products in the United States. The Company sold in
excess of 561,000 tons of specialty steel products in fiscal 1994.
The overall domestic market consumption of oil and natural gas related
tubular products (oil country tubular goods), such as those manufactured by the
Company, declined from approximately 1.9 million tons in 1990 to 1.5 million
tons in the twelve month period ended September 1994, primarily due to a
decrease in domestic drilling activity. While this decline in demand has
negatively impacted prices for tubular products, the Company was able to
increase its shipments to this market from approximately 119,800 tons in fiscal
1990 to approximately 200,000 tons in fiscal 1994. The Company believes it has
been able to increase shipments and market share because it has consistently
invested in new assets (including the Koppel facilities acquired in fiscal 1991)
and has improved its steel-making operations. Since fiscal 1990, the year before
the Company installed a continuous slab caster at its Newport facilities,
manufacturing costs (excluding the costs of depreciation and steel scrap) at the
Newport facilities have declined by approximately 14%, or $40 per ton shipped.
Since fiscal 1992, the first full year of operations of the Koppel facilities,
operating improvements and production and shipment increases have resulted in a
reduction of manufacturing costs (excluding the costs of depreciation and steel
scrap) at the Koppel facilities of approximately 11%, or $43 per ton shipped.
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 11% of the Company's net sales for fiscal
1994.
In October 1993, to improve its financial flexibility, the Company sold
KES, a manufacturer of special bar quality products, for cash and stock totaling
$50.4 million. KES had been acquired by the Company in 1986 for approximately
$7.3 million.
SPECIALTY STEEL PRODUCTS
Oil Country Tubular Goods. The Company is a significant producer of
seamless and welded oil country tubular goods ("OCTG"), which represented 38% of
the Company's net sales for fiscal 1994. OCTG products are used as production
tubing, drill pipe and casing in oil and natural gas drilling and production
applications. For fiscal 1994, the Company's shipments of OCTG products
accounted for approximately 13% of total shipments by domestic OCTG producers.
In the seamless production tubing market segment, which represented 11% of the
Company's net sales for fiscal 1994, the Company is one of only two domestic
producers; there are several foreign producers.
Line Pipe. The Company is a significant producer of line pipe, which
represented 14% of the Company's net sales for fiscal 1994. The Company's line
pipe products range in size from 1.9 to 12.75 inches in outside diameter, and
are used in gathering lines for the transportation of oil and natural gas at
drilling sites and in
3
<PAGE> 6
transmission lines by both gas utility and transmission companies. The Company's
shipments represented approximately 15% of total small diameter shipments of
line pipe (16 inches and under in outside diameter) by domestic producers during
fiscal 1994.
Special Bar Quality Products. The Company manufactures special bar quality
("SBQ") products, which represented 21% of the Company's net sales for fiscal
1994. The Company focuses on larger dimension SBQ products which are primarily
used by forgers and original equipment manufacturers of heavy machinery and
off-road vehicles.
Hot Rolled Coils. The Company also manufactures hot rolled coils, which
represented 5% of the Company's net sales for fiscal 1994. These products are
sold to service centers and other manufacturers for use in high strength
applications. The Company significantly increased shipments of hot rolled coils
during fiscal 1994 and, due to the current favorable conditions in this market,
the Company believes it can continue to increase its sales of hot rolled coils
in fiscal 1995.
STRATEGY
The Company's business strategy is to increase its sales and improve its
results by: (i) implementing capital improvements; (ii) continuing to reduce its
operating costs; (iii) positioning the Company to take advantage of potential
upturns in its end user markets; and (iv) improving its overall financial
flexibility and capital structure.
Implement Capital Improvement Program. The Company intends to implement a
three year, $25.8 million capital expenditure program designed to further reduce
its operating costs, improve quality and enhance its market position. The
program includes eight projects, each of which will allow the Company to achieve
productivity improvements and reduce operating costs through the elimination of
redundant or less efficient operations and processes. The Company intends to
complete four of these projects in fiscal 1995 for an estimated aggregate cost
of approximately $3.4 million. These projects are anticipated to result in
operating benefits of approximately $2.3 million annually before depreciation.
Over the balance of the program, which is scheduled to be completed by the end
of fiscal 1997, the Company intends to implement four additional projects for an
estimated aggregate cost of approximately $22.4 million that are anticipated to
result in annual operating benefits of approximately $11.3 million before
depreciation.
Implementation of the program is dependent on future market conditions,
satisfactory completion of engineering studies, the likelihood of realizing the
estimated operating benefits and the availability of funds. Although the
anticipated operating benefits estimates are based upon fiscal 1994 shipment
levels and product mix, assumptions that management believes are reasonable,
there can be no assurance that the Company will be able to achieve such
operating benefits.
Reduce Operating Costs. The Company has consistently reinvested in its
physical facilities and undertaken initiatives to streamline operations and
reduce operating costs per ton. In addition to capital investments in its
facilities, the Company continually seeks to reduce other operating costs such
as labor, raw material and transportation expenses. In April 1994, the Company
negotiated a new five year labor contract with union employees at its Newport
facilities which allows the Company to consolidate certain jobs and, along with
changes in incentive and benefit plans, will result in savings that the Company
believes will total approximately $1.0 million per year beginning in fiscal
1995.
In October 1994, the Company upgraded the two ladle cranes in Newport's
melt shop to improve productivity, increase yields and reduce refractory costs.
Based on fiscal 1994 shipment levels, the Company believes these upgrades will
result in anticipated annual operating benefits of approximately $0.6 million
for welded tubular products and hot rolled coils. The Company has also
implemented operational changes at its Koppel facilities to reduce production
costs. In fiscal 1994 changes at the ladle metallurgy facility reduced the
non-metallic content of the surface and subsurface of its SBQ products which
substantially eliminates the need to grind blooms. Based on 1994 shipment
levels, the Company believes that these changes will result in an anticipated
annual operating benefit of approximately $0.5 million. During fiscal 1995, the
Company intends to implement changes in Koppel's melt shop to increase furnace
productivity from current operating levels. These changes will increase and
accelerate heat input to the UHP furnace, and should result in improved
production rates per hour.
4
<PAGE> 7
Position for Market Upturns. The Company's operating strategy is to
maintain an active market presence through all phases of its customers' business
cycles. During market downturns, the Company has followed this strategy by
maintaining production while at the same time reducing costs and investing in
its facilities. This strategy has allowed the Company to maintain and improve
its market presence and customer relationships during difficult market
conditions. The Company believes it is well-positioned to take advantage of
market upturns as they occur. For example, total shipments by domestic SBQ
producers increased approximately 8% in the twelve month period ended September
1994 over the comparable twelve month period ended September 1993. During fiscal
1994, the Company increased its shipments and average selling price of SBQ
products by 44% and 11%, respectively, excluding KES. The Company's Koppel and
Newport tubemaking facilities operated at approximately 51% and 47% of capacity,
respectively, for fiscal 1994. Consequently, the Company has significant excess
production capacity that it believes it can readily access with minimal
additional fixed costs should the OCTG markets improve.
Improve Financial Flexibility and Capital Structure. The Offering is part
of the Company's long-term plan to improve its financial flexibility and its
capital structure by reducing its financial leverage. In conjunction with the
closing of the Offering, the Company will use a portion of its existing cash
balances to reduce its total debt outstanding. Prior to or concurrently with the
Offering, the Company will enter into a $45 million three year working capital
facility, which is expected to be undrawn upon completion of the Offering. Upon
completion of the Offering, the Company's aggregate cash, short-term investments
and borrowing capacity under the new credit facility will total approximately
$ million, and based on the Company's debt outstanding after the Offering,
it will have minimal term debt amortization requirements over the next five
years. The Company also intends to further reduce its financial leverage in the
future by raising funds through the issuance of additional equity to retire a
portion of its long-term debt. The Company intends to pursue such equity
offering at such time that its financial results and general market conditions
support an acceptable equity offering. There can be no assurances, however, when
or if and for what amount the Company will complete an equity offering.
RECENT DEVELOPMENTS
Following a recent industry trend, the Company joined with most other
domestic tubular product manufacturers in announcing selling price increases
effective for new orders of seamless and welded OCTG and line pipe products
shipped after October 1, 1994. These announced price increases ranged from $20
to $40 per ton depending on the type of product, and affect substantially all of
the Company's tubular products. For the five week period ended October 29, 1994,
the Company's average selling prices for new bookings of welded OCTG and line
pipe products were $490 and $482 per ton, respectively, compared to fiscal 1994
fourth quarter average selling prices of $474 and $463 per ton, respectively.
For the comparable periods, the Company experienced increases in average selling
prices within the announced price increase range for new bookings of its
seamless OCTG and line pipe products; however, due to changes in product mix,
the average selling prices of the new bookings of seamless OCTG and line pipe
products were below the average selling prices for the fourth quarter of fiscal
1994. In early November 1994, again following an industry trend, the Company
announced further price increases for its seamless and welded OCTG and line pipe
products which are effective for all products shipped after January 1, 1995.
These additional announced price increases range from $20 to $30 per ton.
In addition, the Company's tubular product shipments and order book have
been increasing since midsummer of 1994. The Company's total OCTG shipments for
the quarter ended September 1994 increased by 33% over shipments in the quarter
ended June 1994, and the Company's order book, most of which is scheduled for
delivery within 120 days, increased to 89,100 tons at the end of September 1994
from 72,600 tons at the end of June 1994. By the end of October 1994, the order
book had risen to 89,700 tons.
As a result of the recent increases in the Company's tubular product
shipments, the Company's capacity utilization rates in the fourth quarter of
fiscal 1994 increased to over 57% and 54%, respectively, at its Koppel and
Newport tubemaking facilities, after averaging 48% and 43%, respectively, for
the first nine months of fiscal 1994. The Company intends to further increase
production and has recently begun hiring and training a third production crew at
its Koppel tubemaking facilities.
The Company has also continued to experience increases in its shipments and
selling prices of SBQ products and hot rolled coils. In September 1994, the
Company announced a price increase averaging $10 per ton on its SBQ products
effective for shipments after October 1, 1994, and announced another increase on
its SBQ products of $25 per ton effective for shipments beginning January 1,
1995. Similar price increases have
5
<PAGE> 8
been announced by other SBQ producers. The Company's order book for SBQ products
totaled approximately 41,100 tons at the end of September 1994 compared with
approximately 37,400 tons at the end of June 1994.
The Company believes that, primarily as a result of increases in selling
prices and shipments, sales and EBITDA for the five week period ended October
29, 1994 increased to $32.3 million and $3.7 million, respectively, compared to
$27.5 million and $2.7 million, respectively, for the comparable period in 1993.
The results for the five week period ended October 29, 1994 are not necessarily
indicative of the results that may be expected for a full quarter or a full year
and there can be no assurances that the October levels of shipments, prices or
production costs are sustainable or that the announced price increases will
remain in effect.
In November 1994, the Company signed a five year labor agreement with the
United Steelworkers of America ("USWA") for the Koppel hourly workforce which
includes a net increase in labor costs of approximately 3% per year. The Company
estimates this contract will result in an average increase in labor costs of
approximately $0.5 million per year.
6
<PAGE> 9
THE OFFERING
Securities................. $125,000,000 aggregate principal amount of %
Senior Secured Notes due 2003.
Interest Payment Dates..... The Senior Secured Notes will bear interest from
the date of issuance at the rate of % per
annum and will be payable semi-annually on
and of each year,
commencing , 1995.
Equity Redemption.......... During the first 36 months after the Offering, the
Company may redeem up to 40% of the principal
amount of the outstanding Senior Secured Notes with
the net proceeds of a public offering of common
stock of the Company (the "Common Stock") at %
of the principal amount thereof plus accrued
interest to the redemption date; provided that at
least $75,000,000 principal amount of the Senior
Secured Notes remains outstanding after such
redemption.
Optional Redemption........ The Senior Secured Notes may be redeemed at the
option of the Company, at any time as a whole, or
from time to time in part, on and after
, 1999, initially at % of their
principal amount, plus accrued interest to the date
of redemption, and declining ratably to par on
, 2001.
Security................... The Senior Secured Notes will be secured by
Intercompany Notes issued in favor of the Company
by Newport, Koppel and Erlanger and will be
guaranteed by each Subsidiary. For each of Newport,
Koppel and Erlanger, its Intercompany Note will be
secured by a first priority security interest and
its Guarantee will be secured by a second priority
security interest in its steel-making operations,
excluding inventory, accounts receivable and
certain intangible property. The Credit Facility
(as defined below) and the guarantees executed in
connection therewith will be secured by a lien on
the inventory, accounts receivable and certain
intangible property of the Company and its
Subsidiaries.
Ranking.................... The Senior Secured Notes will be obligations of the
Company and will rank pari passu in right of
payment with any existing and future unsubordinated
Indebtedness (as defined herein) of the Company,
including obligations arising under the Company's
guarantee of the Credit Facility (as defined
below). Each Intercompany Note and Guarantee will
rank pari passu in right of payment with any
existing and future unsubordinated Indebtedness of
the applicable Subsidiary. Prior to or concurrently
with the Offering, the Company will enter into a
$45 million three year working capital facility
with The Bank of New York Commercial Corporation
and PNC Bank Ohio, N.A. (the "Credit Facility").
The Company and its Subsidiaries that are not
borrowers under the Credit Facility will execute
guarantees of the obligations arising thereunder.
The obligations of each Subsidiary arising in
connection with the Credit Facility or the related
guarantees, as applicable, will rank pari passu
with the applicable Subsidiary's obligations under
its Intercompany Note and/or Guarantee.
Change of Control.......... In the event of a Change of Control (as defined
herein), Holders will have the right to require the
Company to purchase all Senior Secured Notes then
outstanding at a purchase price equal to 101% of
the principal amount thereof plus accrued interest
to the date of repurchase.
7
<PAGE> 10
A Change of Control would constitute a default
under the Credit Facility. Upon a Change of
Control, the Company may be required to repay all
of its outstanding obligations under the Credit
Facility prior to the payment of the principal of
any of the Senior Secured Notes that the Company is
required to repurchase pursuant to the Indenture.
If a Change of Control were to occur, the Company
might be unable to repay all of its obligations
under the Credit Facility, to purchase all of the
Senior Secured Notes tendered and to repay other
Indebtedness that may become payable upon the
occurrence of a Change of Control.
Covenants.................. The Indenture under which the Senior Secured Notes
will be issued will contain certain restrictive
covenants that, among other things, will limit the
ability of the Company to incur additional
indebtedness; create liens; make certain restricted
payments; engage in certain transactions with
affiliates; engage in sale and leaseback
transactions; dispose of assets; issue or sell
stock of its subsidiaries; transfer assets to its
subsidiaries; enter into agreements that restrict
the ability of its subsidiaries to pay dividends
and make distributions; engage in mergers,
consolidations and transfers of substantially all
of the Company's assets; and make certain
investments, loans and advances.
Asset Sale Offers.......... The Net Available Cash (as defined herein) from
sales or other dispositions of Collateral (as
defined herein) shall become subject to the lien of
the Indenture and the Security Documents (as
defined herein). In the event the Net Available
Cash from Asset Sales (with certain exceptions)
equals or exceeds $5,000,000, the Company shall
elect, within 360 days of such date, to either
apply such cash to the acquisition of assets that,
upon purchase, shall become subject to the lien of
the Security Documents if the Net Available Cash
represents Collateral Proceeds (as defined herein),
or to make offers to purchase a portion (calculated
as set forth herein) of the Senior Secured Notes at
a purchase price equal to 100% of the principal
amount thereof, plus accrued interest to the date
of repurchase. Notwithstanding the foregoing, the
Company and its Subsidiaries, in the aggregate,
shall be permitted to retain $1,000,000 of the Net
Available Cash from Asset Sales and all of the Net
Available Cash from the sale of certain non-steel
related assets. Asset Sales and prepayment of the
Senior Secured Notes in connection with Asset Sale
Offers could result in a default under the Credit
Facility.
For a more detailed description of the Senior Secured Notes, see
"Description of the Senior Secured Notes." For a description of certain events
of default under the Credit Facility which could result in the Senior Secured
Notes becoming immediately due and payable, see "Investment
Considerations -- Leverage; Certain Restrictions; Deficiency of Earnings to
Fixed Charges" and "Description of Certain Indebtedness."
USE OF PROCEEDS
The net proceeds of this Offering will be used for the repayment of
outstanding indebtedness and general corporate purposes. See "Use of Proceeds."
INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the matters set forth under
"Investment Considerations."
8
<PAGE> 11
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data should be read in conjunction with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto included elsewhere herein. Unless otherwise
noted, this data includes KES for all periods prior to its sale in October 1993.
See "Supplemental Summary Consolidated Financial Data." In addition, this data
includes Koppel for all periods from the date of its acquisition in October
1990.
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER
--------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................... $249,871 $212,471 $281,242 $353,082 $303,380
Cost of products sold............................. 204,649 201,751 250,189 310,586 278,161
Selling and administrative expenses............... 25,852 28,897 29,652 30,824 24,530
Operating income (loss)........................... 19,370 (18,177) 1,401 11,672 689
Net interest income (expense)..................... (410) (14,117) (21,075) (20,819) (18,297)
Gain on sale of subsidiary........................ -- -- -- -- 35,292
Provision (credit) for income taxes............... 6,291 (11,973) (6,058) (3,382) 7,382
Extraordinary items............................... -- -- (2,542) (1,095) --
Cumulative effect of a change in accounting
principle....................................... -- -- -- -- 1,715
Net income (loss)................................. 13,047 (20,603) (15,900) (6,991) 13,208
BALANCE SHEET DATA:
Working capital................................... $ 64,858 $ 48,411 $ 40,676 $ 39,060 $ 45,202
Total assets...................................... 220,856 329,889 319,079 317,242 315,327
Total debt........................................ 72,812 196,345 193,753 192,155 182,525
Common shareholders' equity....................... 107,226 85,149 68,574 62,622 76,464
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(1)......................................... $ 26,515 $ (3,385)(2) $19,793 $ 30,078 $ 55,326(3)
Capital expenditures.............................. 45,011 16,433 4,148 6,080 11,760
Depreciation and amortization..................... 6,879 15,725 18,711 19,093 18,789
Ratio of earnings to fixed charges(4)............. 3.2x N/M(5) N/M(5) N/M(5) 1.9x(3)
Ratio of EBITDA to net interest charges(6)........ 5.8x N/M(7) 0.9x(7) 1.4x 3.0x(3)
Tons shipped:
Tubular products
Welded OCTG................................... 119,800 92,200 112,000 142,100 138,200
Seamless OCTG................................. -- 7,000 20,500 48,700 61,800
Welded line pipe.............................. 78,300 67,000 88,500 110,900 82,800
Seamless line pipe............................ -- 200 10,400 14,400 10,700
SBQ products.................................... -- 14,000 72,000 102,500 147,900
Hot rolled coil products........................ -- -- 100 6,600 38,800
Other products(8)............................... 87,000 48,700 69,800 78,600 80,800
-------- -------- -------- -------- --------
Total tons shipped (excluding KES).............. 285,100 229,100 373,300 503,800 561,000
KES tons shipped................................ 239,400 198,300 217,900 244,400 --
-------- -------- -------- -------- --------
Total tons shipped.............................. 524,500 427,400 591,200 748,200 561,000
========= ========= ========= ========= =========
Average selling price per ton:
Welded tubular products......................... $ 489 $ 484 $ 420 $ 406 $ 422
Seamless tubular products....................... -- 894 833 813 787
SBQ products (excluding KES).................... -- 398 399 396 439
<FN>
- ---------------
(1) EBITDA represents earnings before net interest expense, taxes, depreciation
and amortization, and is calculated as net income before extraordinary items
and the cumulative effect of a change in accounting principle plus net
interest expense, taxes, depreciation and amortization. EBITDA provides
additional information for determining the Company's ability to meet debt
service requirements. EBITDA does not represent and should not be considered
as an alternative to net income, any other measure of performance as
determined by generally accepted accounting principles, as an indicator of
operating performance or as an alternative to cash flows
9
<PAGE> 12
from operating, investing or financing activities or as a measure of
liquidity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of liquidity and operating
results.
(2) Fiscal 1991 results were adversely impacted by several factors, including
primarily the start-up and initial operation of the Koppel facilities; a
decline in welded tubular shipments and KES shipments; and start-up costs
associated with Newport's continuous slab caster, reheat furnace and ladle
metallurgy facilities. The Koppel facilities, which were acquired in the
first quarter of fiscal 1991, commenced operations in the latter part of the
second quarter of fiscal 1991. The Koppel facilities incurred a $13.8
million operating loss in fiscal 1991, including $4.2 million of costs
incurred prior to the commencement of production and in connection with the
start-up of the facilities. The Company also experienced a significant
decline in demand for its welded tubular products and the Newport facilities
incurred a $7.7 million operating loss in fiscal 1991. In addition, the
Newport facilities incurred start-up costs, which are not quantifiable,
associated with its continuous slab caster, reheat furnace and ladle
metallurgy facility. Such costs were incurred primarily during the first
three months of fiscal 1991.
(3) For fiscal 1994, on a pro forma basis to exclude the gain on the sale of and
the results for KES, EBITDA was $19.8 million, the ratio of earnings to
fixed charges was not meaningful and the ratio of EBITDA to net interest
charges was 1.1x. Earnings were insufficient to cover fixed charges by $16.6
million. See "Supplemental Summary Consolidated Financial Data."
(4) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of income before income taxes, extraordinary items and the
cumulative effect of a change in accounting principle plus fixed charges
(excluding capitalized interest) and (b) fixed charges consist of interest
expense, including capitalized interest and amortization of debt expense.
(5) Earnings were insufficient to cover fixed charges by $38.1 million for
fiscal 1991, $19.4 million for fiscal 1992 and $9.3 million for fiscal 1993.
(6) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(7) EBITDA was insufficient to cover net interest charges by $23.0 million in
fiscal 1991 and $1.3 million in fiscal 1992.
(8) Other products include seamless mechanical tubing and products classified as
secondary and limited service.
</TABLE>
10
<PAGE> 13
<TABLE>
SUPPLEMENTAL SUMMARY CONSOLIDATED
FINANCIAL DATA
The following supplemental summary consolidated financial data includes
unaudited pro forma summary consolidated financial data for fiscal 1994, and for
comparative purposes, certain historical data excluding the results of KES for
fiscal 1992 and fiscal 1993. On October 6, 1993, the Company sold KES, a
wholly-owned subsidiary, to a newly formed public company in exchange for $45.6
million in cash and 400,000 shares (approximately 8%) of the new public company,
then valued at $4.8 million. The unaudited pro forma summary consolidated
financial data for fiscal 1994 gives effect to the elimination of the pre-tax
gain of $35.3 million, the related tax effect of $13.8 million and $0.2 million
of operating income of KES for the eleven days of fiscal 1994 prior to the sale.
This supplemental summary consolidated financial data should be read in
conjunction with "Summary Consolidated Financial Data," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere herein.
<CAPTION>
PRO FORMA
SUMMARY
CONSOLIDATED
HISTORICAL DATA EXCLUDING FINANCIAL DATA
KES FISCAL YEAR
FISCAL YEAR ENDED SEPTEMBER ENDED SEPTEMBER
--------------------------- ----------------
1992 1993 1994
----------- ----------- ----------------
(Dollars in thousands, except per ton data)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.......................................... $ 200,803 $ 262,535 $303,380
Cost of products sold.............................. 186,212 239,118 278,362
Selling and administrative expenses................ 21,615 21,030 24,530
Operating income (loss)............................ (7,024) 2,387 488
Net interest expense............................... (18,297)
Provision (credit) for income taxes................ (6,460)
Loss before cumulative effect of a change in
accounting principle............................. (10,158)
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(1).......................................... $ 10,606 $ 20,159 $ 19,833
Capital expenditures............................... 3,805 5,404 11,760
Depreciation and amortization...................... 17,965 18,328 18,789
Ratio of earnings to fixed charges(2).............. N/M(3)
Ratio of EBITDA to net interest charges(4)......... 1.1x
<FN>
- ---------------
(1) EBITDA represents earnings before net interest expense, taxes, depreciation
and amortization, and is calculated as net income before extraordinary
items and the cumulative effect of a change in accounting principle plus
net interest expense, taxes, depreciation and amortization. EBITDA provides
additional information for determining the Company's ability to meet debt
service requirements. EBITDA does not represent and should not be
considered as an alternative to net income, any other measure of
performance as determined by generally accepted accounting principles, as
an indicator of operating performance or as an alternative to cash flows
from operating, investing or financing activities or as a measure of
liquidity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of liquidity and operating
results.
(2) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of income before income taxes, extraordinary items and the
cumulative effect of a change in accounting principle, plus fixed charges
(excluding capitalized interest) and (b) fixed charges consist of interest
expense, including capitalized interest and amortization of debt expense.
(3) On a pro forma basis, earnings were insufficient to cover fixed charges by
$16.6 million for fiscal 1994.
(4) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
</TABLE>
11
<PAGE> 14
INVESTMENT CONSIDERATIONS
In addition to the other information set forth in this Prospectus,
prospective investors should carefully consider the following information in
evaluating the Company and its business before making an investment in the
Senior Secured Notes.
LEVERAGE; CERTAIN RESTRICTIONS; DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company currently has, and after the Offering will continue to have, a
substantial amount of long-term debt in relation to common shareholders' equity.
As of September 24, 1994, the Company had total debt of $182.5 million. After
giving effect to the Offering and the application of certain cash balances of
the Company to the payment of debt, as of September 24, 1994, the Company would
have had $166.6 million of total debt, including the $125 million aggregate
principal amount of the Senior Secured Notes. See "Use of Proceeds," "Summary of
the Refinancing Transaction," and "Capitalization." The Company's gross interest
expense for fiscal 1994, 1993, 1992 and 1991 was $20.0 million, $21.1 million,
$21.8 million and $16.1 million, respectively. The Company's gross interest
expense is not expected to change materially after giving effect to the Offering
and the application of the proceeds therefrom. For fiscal 1994 (on a pro forma
basis), 1993, 1992 and 1991, the Company's earnings were insufficient to cover
fixed charges by $16.6 million, $9.3 million, $19.4 million and $38.1 million,
respectively. These amounts were calculated including KES for the periods prior
to its sale in October 1993. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." On a pro forma basis for fiscal
1994 (excluding the gain on the sale of and the results for KES), assuming the
completion of the Offering and the application of certain cash balances on the
first day of such period and the application of the net proceeds of the Offering
on the first day of such period, fixed charges would have been in excess of
earnings by $ million. The Company's ability to make interest payments on
and to repay the principal of the Senior Secured Notes will depend upon the
Company's ability to generate cash sufficient to meet such required payments or
to refinance its debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company's level of indebtedness, together with the restrictive
covenants included in the Indenture and the Credit Facility, may have the effect
of limiting the Company's ability to incur additional indebtedness, sell assets
or acquire other entities, and may otherwise limit the operational and financial
flexibility of the Company. The effect of these restrictions may be to place the
Company at a competitive disadvantage in relation to less leveraged competitors.
In particular, with respect to the Credit Facility and the related
guarantees and security agreements, each will contain extensive affirmative and
negative covenants, including, among others, covenants: (i) prescribing minimum
levels of net worth and working capital; (ii) requiring the maintenance of a
certain interest coverage ratio, current ratio and ratio of total liabilities to
net worth; and (iii) placing limits on the ability of the Company and each of
its subsidiaries to incur indebtedness, create liens, guarantee indebtedness,
make investments, make loans or extensions of credit, make capital expenditures,
declare, pay or make dividends, substantially change the nature of its business,
engage in transactions with affiliates, enter into leases, and form
subsidiaries. The Credit Facility will require the Company to maintain as of the
end of each fiscal quarter an interest coverage ratio of 1.1 to 1.0 during
fiscal 1995, 1.5 to 1.0 during fiscal 1996 and 1.75 to 1.0 during fiscal 1997,
measured on a rolling four-quarter basis. For the fiscal year ended September
24, 1994, the interest coverage ratio (excluding the gain on the sale and the
results of KES) was 1.2 to 1.0. In addition, the net worth covenant under the
Credit Facility will require the Company to maintain a net worth of at least $70
million, less the after-tax effect of prepayment penalties associated with the
prepayment of debt with the proceeds of the Offering. At September 24, 1994, the
Company had a net worth of approximately $76.5 million. The Company currently
would be, and will be upon the completion of the Offering, in compliance with
all covenants under the Credit Facility. If the Company's results from
operations do not improve over its results for fiscal 1994, then the Company
could be in default under its Credit Facility in the absence of a waiver or
amendment from the lenders. There can be no assurance that the Company would be
able to obtain any necessary waivers or be able to renegotiate the terms of the
Credit Facility.
The Credit Facility will also contain covenants which limit the ability of
the Company and each of its subsidiaries to sell assets other than sales in the
ordinary course of business, sales of obsolete or idle assets
12
<PAGE> 15
(other than the collateral under the Credit Facility) and sales of certain
non-steel related assets (in which event the maximum revolving advance amount
would be reduced), and to enter into certain transactions among affiliates,
among others. The Credit Facility does not permit the Company or any of its
Subsidiaries to (i) merge, consolidate or reorganize or (ii) acquire all or
substantially all of the stock or assets of any entity unless the Company has
working capital after such transaction of no less than the sum of $20,000,000
plus scheduled principal payments due within 36 months. At September 24, 1994,
assuming completion of the Offering and the application of certain cash balances
of the Company to the payment of debt, the Company would have had $ million
in working capital and minimal term debt amortization requirements over the next
five years. In addition, the Credit Facility will restrict prepayment of
indebtedness, including the Senior Secured Notes through optional redemptions,
certain Asset Sale Offers and Change of Control Offers.
The Credit Facility will be a borrowing base facility, although the agent
for the lenders may reduce the borrowing base by the amount of reserves such
agent reasonably deems necessary (including reserves for environmental matters).
The Credit Facility will contain certain events of default including, among
others: (i) failure to pay the obligations under the Credit Facility when due;
(ii) breach of any representation or warranty in any of the loan documents;
(iii) failure to comply with terms, provisions, conditions or covenants in any
of the loan documents (which in some cases do not include notice or cure
periods); (iv) issuance of liens or attachment or entry of judgment (over a
threshold level) which are not satisfied, stayed or lifted within 30 days; (v)
certain events of insolvency or bankruptcy or the written admission of inability
to pay debts when due; (vi) liens created under the Credit Facility ceasing to
be first priority, perfected security interests or any portion of the collateral
being seized; (vii) material defaults under other agreements to which the
Company or any of its subsidiaries is a party which has a material adverse
effect on the Company; (viii) change of ownership; (ix) revocation, suspension,
adverse modification or termination (or the institution of proceedings to do so)
of any material license, permit, patent, trademark or tradename; (x) certain
ERISA violations; and (xi) interruption of business operations. In addition, any
change in the condition or affairs (financial or otherwise) of Newport, Koppel
or Imperial which in the lenders' reasonable opinion materially impairs the
collateral for the Credit Facility or the ability of Newport, Koppel and
Imperial, taken as a whole, to perform their obligations under the Credit
Facility will constitute an event of default. See "Description of Certain
Indebtedness."
RECENT LOSSES
The Company has incurred losses before extraordinary items of $5.9 million,
$13.4 million and $20.6 million for the fiscal years ended 1993, 1992 and 1991,
respectively. These losses include the results of KES prior to its sale in
October 1993. For fiscal 1994, excluding the gain on the sale of and the results
for KES, the Company's pro forma net loss before the cumulative effect of a
change in accounting principle was $10.2 million. Primary factors contributing
to the Company's losses include the decline in the demand for and the selling
prices of the Company's products, particularly its tubular products; the
start-up of Koppel in the face of declining markets; start-up costs associated
with Newport's continuous slab caster; and increases in the cost of steel scrap,
the Company's principal raw material. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
DEPENDENCE ON OIL COUNTRY TUBULAR GOODS MARKET; CYCLICAL INDUSTRY AND
SENSITIVITY TO ECONOMIC CONDITIONS
OCTG products represent the Company's principal product lines and largest
source of net sales, representing 38% of the Company's net sales for fiscal
1994. The market for OCTG is primarily dependent upon domestic oil and natural
gas drilling activity, which is largely dependent on current and forecasted oil
and gas prices. The domestic drilling industry has been in a period of
contraction since 1986, with average rig count declining from a high of
approximately 3,970 in 1981 to a low of approximately 718 in 1992. Although
certain industry analysts believe that rig count may increase to some degree
over the next few years, any increase in rig count may benefit only welded or
only seamless product sales depending on the type of wells being drilled. The
Company's OCTG sales and margins are also influenced by OCTG imports, inventory
levels of welded and seamless products, competitive conditions, steel scrap
prices and other factors beyond the Company's control. The Company's OCTG sales
and margins may be subject to significant variation from
13
<PAGE> 16
year to year. No assurance can be given as to the likelihood, timing and extent
of any increase in domestic oil and natural gas drilling or as to the level of
future demand for the Company's products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Industry-wide inventory levels of OCTG can vary significantly from period
to period and have a direct effect on the demand for new production of such
products. As a result, the Company's OCTG sales and results of operations may
vary significantly from period to period. During most of the period from 1986 to
1993, demand within the energy industry for OCTG was satisfied to a significant
extent through draw downs of existing inventories held by distributors and end
users. Draw downs of existing inventories of OCTG abated in late 1992 and
inventory levels began to increase during 1993. There can be no assurance that
OCTG inventories will not again become excessive or that substantial draw downs
of such inventories will not again occur, which could have a material adverse
effect on price levels and the quantity of OCTG products sold by the Company.
The demand for the Company's SBQ and hot rolled coil products is cyclical
in nature and is sensitive to general economic conditions. The demand for and
the pricing of the Company's SBQ and hot rolled coil products is also affected
by economic trends in areas such as commercial and residential construction,
automobile production and industrial investment in new plants and facilities.
Future economic downturns may adversely affect the Company.
CAPITAL INTENSIVE INDUSTRY
The Company operates in an industry which requires substantial capital
investment. Although the Company has invested considerably in its steel-making
operations, additional capital expenditures are required to continue to upgrade
its facilities. The Company believes that foreign and domestic producers will
also continue to invest heavily to achieve increased production efficiencies and
improve product quality. During the past few years, the Company has deferred
certain discretionary capital expenditures due to financial constraints. There
can be no assurance that there will be sufficient internally generated cash or
available acceptable external financing to make the necessary capital
expenditures for a protracted period of time.
The Company intends to implement a three-year, $25.8 million capital
expenditure program intended to reduce its operating costs, improve quality and
enhance its marketing position. The program calls for implementing projects
which, when fully operational in fiscal 1997, are projected to result in
aggregate annual operating benefits of approximately $13.6 million before
depreciation. The capital expenditure program is under continuous review and the
Company may, based upon the results of engineering studies, revisions in
budgeted project costs, increases or decreases in estimated operating benefits,
changes in the demand for the Company's products, or the unavailability of
internally generated cash or acceptable external financing, decide in the future
to eliminate, postpone, modify or accelerate projects, or to substitute new
projects for those currently included in the program. Upon completion of the
capital expenditure program, the Company believes that its steelmaking
operations, like those of other steel producers, will continue to require
capital expenditures and additional projects that are essential to the Company's
long-term competitiveness. See "-- Competition" for information concerning low
cost thin slab casting operations. Because the estimated operating benefits from
the Company's expected efficiencies and planned capital improvements are based
upon a number of assumptions, estimated operating benefits may not necessarily
be indicative of the Company's future financial performance, and increases in
the cost of raw materials or other operating costs may offset any operating
benefits causing actual results to vary significantly. In addition, the Company
has based its operating benefits estimates on fiscal 1994 production and
shipment levels and product mix. Any increase or decrease in actual tons shipped
or a change in product mix would affect the operating benefits realized through
the capital expenditure program. Although the Company believes its assumptions
with respect to its planned capital expenditure program to be reasonable, there
can be no assurance that the estimated operating benefits of the Company's
capital expenditure program will actually be achieved, that demand for tubular
products, hot rolled coil, and SBQ products will continue to support fiscal 1994
production and shipment levels, that other difficulties will not be encountered
in completing the capital expenditure program, or that the projects can be
installed or constructed at the estimated costs.
14
<PAGE> 17
COMPETITION
The Company competes with foreign and domestic producers, including both
integrated and mini-mill producers, many of which have substantially greater
assets and larger sales organizations than the Company. The domestic mini-mill
steel industry, particularly with respect to OCTG products, is characterized by
vigorous competition with respect to price, quality and service, as well as
competition to achieve technological advancements that would allow a mini-mill
to lower its production costs. In addition, excess production capacity among
OCTG producers has resulted in competitive product pricing and continued
pressures on industry profit margins. The economics of operating a steel
mini-mill encourage mini-mill operators to maintain high levels of output, even
in times of low demand, which exacerbates the pressures on industry profit
margins.
In the welded OCTG and line pipe market, the Company competes against
certain manufacturers who purchase hot rolled coils for further processing into
welded OCTG and line pipe products. Since these tubular manufacturers acquire
their principal raw material from other producers, they avoid the substantial
investment required to build and operate a melt shop and hot strip mill. The
cost of finished tubular products for these manufacturers is largely dependent
on the market price of hot rolled coils. Depending on market demand for hot
rolled coil, these tubular manufacturers may purchase hot rolled coils at a
lower or higher cost than the Company's cost to manufacture hot rolled coils.
The barriers to entry to the welded tubular market with respect to capital
investment are low by steel industry standards.
Manufacturers with facilities utilizing thin slab casting are expected to
be increasingly strong competitors in the hot rolled coil market. The principal
advantages of thin slab casting over the Company's melting and hot strip mill
operations at the Newport facilities can be reduced capital costs per unit,
lower energy and labor costs per unit and increased economies of scale. Certain
steel facilities are currently utilizing thin slab casting technology and
additional thin slab casting facilities have either been announced or are
currently under construction. The anticipated increase in the use of thin slab
casting technology may result in lower prices to the Company's competitors for
hot rolled coils and closures of excess hot rolled capacity. As a result,
particularly in times of soft demand for hot rolled coil, the Company may be
forced by competitive pressures to lower prices for finished products.
Alternatively, the Company may be required to invest in new technologies not
included in its present capital expenditure program to offset the Newport
facilities' potential cost disadvantages when compared to a low cost thin slab
casting operation.
The domestic steel industry has historically faced significant competition
from foreign steel producers. Many foreign steel producers are owned, controlled
or subsidized by their governments and their decisions with respect to
production and sales may be influenced more by political and economic policy
considerations than by prevailing market conditions. Foreign steel producers'
share of OCTG domestic consumption has increased from approximately 7% in 1992
to approximately 25% for the twelve months ended September 1994. In response to
the rising level of foreign imports of tubular products, the Company and six
other domestic steel companies filed antidumping petitions against seven foreign
countries and countervailing duty petitions against two countries charging
subsidization of OCTG imports. In August 1994, the International Trade
Commission ("ITC") voted unanimously that there was reasonable indication of
material injury which warrants further investigation of the petitions. See
"Business -- Competition." There can be no assurance as to the outcome of such
cases.
In the SBQ market, the announced reopening of a previously closed facility
with significant capacity and the announced expansion of existing facilities
could result in an increase in competition for the Company's line of SBQ
products.
UNIONIZED LABOR FORCE
The USWA represents substantially all of the Company's hourly 1,184-person
workforce. In April 1994, the Company negotiated a new five-year collective
bargaining agreement with respect to its hourly workforce at Newport. Execution
of this agreement followed rejection of an earlier proposal and a two-day
strike. In November 1994, the Company negotiated a new five-year collective
bargaining agreement with respect to its hourly workforce at Koppel. The
Company's collective bargaining agreement with the USWA for Imperial expires in
November 1995. While the Company believes it has generally satisfactory
relationships with its unionized workforce, there can be no assurance that work
stoppages will not occur in the future.
15
<PAGE> 18
VOLATILITY IN RAW MATERIAL COSTS
The market for steel scrap, the principal raw material used in the
Company's operations, is highly competitive and subject to price volatility
influenced by periodic shortages (due to increased demand by foreign and
domestic users), freight costs, speculation by scrap brokers and other market
conditions largely beyond the Company's control. Although the domestic mini-mill
industry attempts to maintain its profit margin by attempting to increase the
price of its finished products in response to increases in scrap costs,
increases in the prices of finished products often do not fully compensate for
such scrap price increases and generally lag several months behind increases in
steel scrap prices, thereby restricting the ability of mini-mill producers to
recover higher raw material costs. During periods of declining steel prices,
declines in scrap prices may not be as significant as declines in product prices
and, likewise, a decline in scrap prices may cause a decline in selling prices
for the Company's products. The Company believes it can somewhat mitigate the
negative effect of scrap price increases by limiting its use of higher cost
grades of scrap. See "Business -- Raw Materials." A number of companies have
announced plans to open new facilities, some of which will be located in the
same geographic region as the Company's facilities. Operation of these new
mini-mills will increase the demand for steel scrap and may result in an
increase in steel scrap costs to the Company. In addition, certain existing thin
slab casting mini-mills are expanding capacity which may also significantly
increase the cost of steel scrap to the Company. The Company's steel scrap costs
per ton increased by approximately 20.6% in fiscal 1994 over fiscal 1993.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's specialty steel and adhesives operations are subject to
various federal, state and local laws and regulations, including, among others,
the Clean Air Act, the 1990 amendments to the Clean Air Act (the "1990
Amendments"), the Resource Conservation and Recovery Act ("RCRA") and the Clean
Water Act and all regulations promulgated in connection therewith, including,
among others, those concerning the discharge of contaminants as air emissions or
waste water effluents and the disposal of solid and/or hazardous waste such as
electric arc furnace dust. Since its inception the Company has spent substantial
amounts to comply with these requirements, and the 1990 Amendments may require
additional expenditures for air pollution control.
The Company's mini-mills are classified, in the same manner as similar
steel mills in the industry, as generating hazardous waste due to the production
in the melting operation of dust that contains lead, cadmium and chromium. In
the event of a release of a hazardous substance generated by the Company, the
Company could be responsible for the remediation of contamination associated
with such a release.
During the third quarter of fiscal 1992 and the fourth quarter of fiscal
1993, Newport shut down its melt shop operations for 23 days and 19 days,
respectively, when it was discovered that radioactive substances were
accidentally melted, resulting in the contamination of the melt shop's electric
arc furnace emission control facility, or "baghouse facility." To date, the
accidental melting of radioactive materials has not resulted in any notice of
violations from federal or state environmental regulatory agencies. The Company
is investigating and evaluating various issues concerning storage, treatment and
disposal of the radiation contaminated baghouse dust. However, a final
determination as to method of treatment and disposal, cost and further
regulatory requirements cannot be made at this time. Depending on the ultimate
timing and method of treatment and disposal, which will require appropriate
federal and state regulatory approvals, the actual cost of disposal could
substantially exceed current reserves and the Company's insurance coverage.
In September 1994, the Company received a proposed Consent Agreement from
the Environmental Protection Agency ("EPA") relating to an April 1990 RCRA
facility assessment (the "Assessment") completed by the EPA and the Pennsylvania
Department of Environmental Resources. The Assessment was performed in
connection with a RCRA Part B permit pertaining to a landfill that is adjacent
to the Koppel facilities and owned by Babcock & Wilcox Company ("B&W"), the
former owner of the Koppel facilities. The Assessment identified potential
releases of hazardous constituents into the environment from numerous Solid
Waste Management Units ("SWMU's") and Areas of Concern ("AOC's"). The SWMU's and
AOC's identified during the Assessment and the EPA's follow-up investigation are
located at and adjacent to the Company's Koppel facilities. The proposed Consent
Agreement establishes a schedule for investigating,
16
<PAGE> 19
monitoring, testing and analyzing the potential releases. Contamination
documented as a result of the investigation may require cleanup measures.
Pursuant to various agreements entered into among the Company, B&W and PMAC,
Ltd. ("PMAC") at the time of the Company's acquisition of the Koppel facilities
in fiscal 1991, B&W and PMAC agreed to indemnify the Company against various
known and unknown environmental matters. While reserving its rights against B&W,
PMAC has accepted full financial responsibility for the matters covered by the
proposed Consent Agreement other than with respect to a 1987 release of
hazardous constituents (the "1987 Release") that the Company believes could
represent the most significant component of any potential cleanup, and other
than with respect to hazardous constituents generated by Koppel after its
acquisition by the Company, if any. B&W, PMAC and Koppel are in dispute as to
whether the indemnification provisions relating to the 1987 Release expire in
October 1995. Although B&W has not acknowledged responsibility for any cleanup
measures that may be required as a result of any investigation (other than with
respect to the 1987 Release, in the event certain actions are taken by the EPA
prior to October 1995), B&W and PMAC have agreed to jointly retain an
environmental consultant to assist in negotiating the proposed Consent Agreement
and to conduct the required investigation. The Company believes that it is
entitled to full indemnity for all of the matters covered by the proposed
Consent Agreement from B&W and/or PMAC. However, in the event the indemnifying
parties default on their respective obligations under the applicable agreements
for any reason (including the inability to pay such obligations), or to the
extent any disputes regarding the application of the indemnification provisions
to the 1987 Release are determined adversely to the Company, Koppel will be
obligated to complete any cleanup required by the EPA. Prior to the completion
of the site analysis to be performed in connection with any Consent Agreement,
the Company cannot predict the expected cleanup cost for the SWMU's and AOC's
covered by the proposed Consent Agreement.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated baghouse dust, the
Company believes that it is presently in compliance in all material respects
with the requirements of all relevant governmental agencies in respect of
environmental matters; however, there can be no assurance that environmental
requirements will not change in the future or that the Company will not incur
significant costs in the future to comply with such requirements. See
"Business-- Environmental Matters."
PRODUCT LIABILITY
The use of the Company's OCTG and line pipe in the production and
transmission of oil, natural gas and other fluids may subject the Company to
liability for loss and consequential damages in the event of a defect in the
Company's product. Newport is a co-defendant in a claim for breach of implied
warranty in the United States District Court for the Southern District of Texas
arising from the failure of two joints of welded pipe during testing of an
off-shore pipeline. The plaintiff is seeking damages in excess of $5 million for
costs associated with replacing the entire pipeline and lost production
revenues. The Company believes that it has meritorious defenses to this claim,
although no assurances can be given as to the outcome of this case. In addition,
insurance may be available for a portion, but not all, of any award for damages.
The trial is scheduled for April 1995. See "Business--Legal Proceedings."
FRAUDULENT CONVEYANCE ISSUES; HOLDING COMPANY STRUCTURE
The Senior Secured Notes will be obligations of the Company and will be
unconditionally guaranteed, jointly and severally, by the Subsidiaries. Under
applicable provisions of Federal bankruptcy law and comparable provisions of
state fraudulent transfer laws, if it were found that any Subsidiary had
incurred the indebtedness represented by its Guarantee with an intent to hinder,
delay or defraud creditors or had received less than a reasonably equivalent
value for such indebtedness and: (i) was insolvent on the date of the execution
of the Guarantee; (ii) was rendered insolvent by reason of the Guarantee; (iii)
was engaged or about to engage in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its
business; or (iv) intended to incur or believed that it would incur debts beyond
its ability to pay as such debts matured, the obligations of such Subsidiary
under its Guarantee could be avoided or claims in respect of such Subsidiary
could be subordinated to all other debts of such Subsidiary. Each Guarantee will
contain a savings clause that limits the amount of the Guarantee to the maximum
amount
17
<PAGE> 20
which can be guaranteed by such Subsidiary under applicable Federal and state
laws relating to the insolvency of debtors. A legal defense of a Guarantee on
fraudulent conveyance grounds could, among other things, focus on the benefits,
if any, realized by a Subsidiary as a result of the issuance by the Company of
the Senior Secured Notes. To the extent that a Guarantee were held to be
unenforceable as a fraudulent conveyance or for any other reason, the holder of
a Senior Secured Note would cease to have any direct claim in respect of such
Subsidiary, unless such Subsidiary issued an Intercompany Note, and would be
solely a creditor of the Company and any Subsidiary whose Guarantee was not
avoided or held unenforceable. Similarly, the security interest granted by such
Subsidiary to secure its Guarantee could be avoided or held unenforceable. In
the event a Guarantee were avoided or subordinated, the claims of the holders of
the Senior Secured Notes with respect to such Guarantee would be subordinated to
claims of other creditors of such Subsidiary. In addition, since the operations
of the Company are conducted through subsidiaries, the Company's cash flow and,
consequently, its ability to service debt, including the Senior Secured Notes,
is dependent upon the cash flow of its subsidiaries and the payment of funds by
those subsidiaries to the Company.
The Company believes that none of the Subsidiaries: (i) is insolvent or
will be insolvent as a result of its Guarantee; (ii) is or will be engaged in a
business or transaction for which its remaining assets constitute unreasonably
small capital; or (iii) intends or believes that its debt would be beyond its
ability to pay as such debts matured. Because each of the components of the
question of whether a Guarantee is a fraudulent conveyance is inherently
fact-based and fact-specific, there can be no assurance that a court passing on
such questions would agree with the Company.
CERTAIN LIMITATIONS ON THE SECURITY FOR THE SENIOR SECURED NOTES, THE
INTERCOMPANY NOTES AND GUARANTEES
The Senior Secured Notes will be obligations of the Company secured by the
Intercompany Notes and will be guaranteed, jointly and severally, by the
Subsidiaries. The right of the Collateral Agent under the Security Documents to
foreclose upon and sell the collateral upon the occurrence of a default is
likely to be significantly impaired by applicable bankruptcy laws if a
bankruptcy proceeding were to be commenced by or against the Company or its
Subsidiaries prior to or possibly even after the Collateral Agent has foreclosed
upon and sold the Collateral. See "Description of the Notes--Certain Bankruptcy
Limitations." For each of Newport, Koppel and Erlanger, its Intercompany Note
will be secured by a first priority security interest and its Guarantee will be
secured by a second priority security interest in its steel-making operations,
excluding inventory, accounts receivable and certain intangible property. No
appraisals of any of the Collateral have been prepared in connection with the
Offering by or on behalf of the Company or the Subsidiaries. At September 24,
1994, the net book value of the Collateral was approximately $153.1 million.
There can be no assurance that the proceeds of any sale of the Collateral
pursuant to the Indenture and the Security Documents following an acceleration
after an Event of Default under the Indenture would be sufficient with respect
to amounts owed with respect to the Senior Secured Notes. The proceeds from the
sale of the Collateral would be applied to repay the Subsidiary's obligations
under its Guarantee, which may be an amount less than the obligations
outstanding with respect to the Senior Secured Notes and its Intercompany Note
(where applicable). See "-- Fraudulent Conveyance Issues; Holding Company
Structure." By its nature, some or all of the Collateral will be illiquid and
may have no readily ascertainable market value. Accordingly, there can be no
assurance that the Collateral will be saleable or that it will be able to be
sold in a short period of time. In addition, the ability of the Collateral Agent
to realize upon the Collateral may be subject to certain bankruptcy law and
fraudulent conveyance limitations in the event of a bankruptcy. See "Description
of the Senior Secured Notes -- Security" and "-- Certain Bankruptcy
Limitations." In addition, the Trustee for the Senior Secured Notes will enter
into an intercreditor agreement with The Bank of New York Commercial
Corporation, the agent for the lenders under the Credit Facility, that may delay
the sale of the property subject to the lien of the Indenture and the Security
Documents in order to permit the orderly sale of the property securing the
Credit Facility.
LIMITATIONS ON ABILITY TO PURCHASE THE SENIOR SECURED NOTES FOLLOWING A CHANGE
OF CONTROL
A Change of Control would constitute a default under the Credit Facility.
If a Change of Control were to occur, the Company might be unable to repay all
of its obligations under the Credit Facility, to purchase all of
18
<PAGE> 21
the Senior Secured Notes tendered and to repay other indebtedness that may
become payable upon the occurrence of a Change of Control. See "Description of
the Senior Secured Notes -- Change of Control."
ABSENCE OF A PUBLIC MARKET FOR THE SENIOR SECURED NOTES
The Senior Secured Notes comprise a new issue of securities for which there
is currently no market. The Underwriters have informed the Company that they
currently intend to make a market in the Senior Secured Notes; however, the
Underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. If the Senior Secured Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities, the performance of the Company and other factors. Therefore, no
assurance can be given as to whether an active trading market will develop or be
maintained for the Senior Secured Notes or at what prices the Senior Secured
Notes will trade.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Secured Notes offered hereby
are estimated at approximately $ million. The Company intends to apply the
net proceeds from the sale of the Senior Secured Notes and available cash
balances as follows: (i) approximately $ million to redeem $73.8 million
principal amount of loans from General Electric Capital Corporation (the "GECC
Loans") (which bear interest rates ranging from 7.99% to 12.54% per annum due
2001) including a premium of approximately $ million and accrued interest of
approximately $2.0 million thereon; (ii) approximately $ million to redeem
$32.7 million principal amount of loans from certain insurance companies (the
"10.65% Notes") (which bear interest at a rate of 10.65% per annum due 1999)
including a premium of approximately $ million and accrued interest of
approximately $0.4 million thereon; (iii) approximately $ million to redeem
other long-term debt of the Company or its Subsidiaries, including accrued
interest of approximately $ million thereon; (iv) approximately $28.8
million to repay $28.2 million in outstanding balances on its existing revolving
credit facilities, including accrued interest of approximately $0.6 million
thereon; and (v) approximately $ million in estimated fees and expenses
(collectively, the "Refinancing Transaction"). The following table summarizes
the sources and uses of funds in the Refinancing Transaction.
SUMMARY OF THE REFINANCING TRANSACTION
(in thousands)
<TABLE>
<S> <C>
Sources of Funds
Cash, cash equivalents and short-term investments................ $
Senior Secured Notes............................................. 125,000
---------
Total....................................................... $
=========
Uses of Funds
Revolving Credit Facilities...................................... $ 28,197
GECC Loans....................................................... 73,751
10.65% Notes..................................................... 32,729
Other long-term debt.............................................
Prepayment penalties and accrued interest........................
Estimated fees and expenses......................................
---------
Total....................................................... $
=========
</TABLE>
19
<PAGE> 22
<TABLE>
CAPITALIZATION
The following table sets forth the cash, cash equivalents and short-term
investments, short-term debt and capitalization of the Company as of September
24, 1994, and as adjusted to reflect the sale of the Senior Secured Notes
offered hereby and the application of the net proceeds and available cash and
short-term investments as described under "Use of Proceeds" and "Summary of the
Refinancing Transaction." This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto
included elsewhere herein.
<CAPTION>
AS OF SEPTEMBER 24, 1994
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments................... $ 44,476 $
======== ===========
Short-term debt:
Current portion of long-term debt................................. $ 15,543 $ 810
Notes payable
Revolving credit facilities.................................... 28,197 --
Other.......................................................... 675 675
-------- -----------
Total short-term debt..................................... $ 44,415 $ 1,485
======== ===========
Long-term debt, less current portion:
% Senior Secured Notes due 2003................................. $ -- $ 125,000
GECC Loans, interest ranging from 7.99% to 12.54% due 2001........ 63,972 --
10.65% Notes due 1999............................................. 27,775 --
11% Subordinated Convertible Debentures due October 2000 through
October 2005................................................... 29,000 29,000
Other long-term debt.............................................. 17,363
-------- -----------
Total long-term debt...................................... 138,110
-------- -----------
Common shareholders' equity:
Common stock, no par value -- 40,000,000 authorized and 13,809,413
outstanding shares............................................. 48,988 48,988
Common stock options and warrants................................. 262 262
Unrealized gain (loss) on available for sale securities........... (124) (124)
Retained earnings................................................. 27,338 (1)
-------- -----------
Total common shareholders' equity......................... 76,464
-------- -----------
Total capitalization...................................... $214,574 $
======== ===========
<FN>
- ---------------
(1) The reduction in retained earnings reflects the $ million prepayment cost
to redeem GECC Loans and the 10.65% Notes, the write-off of $ million
unamortized debt issuance costs and $ million of interest charges relating
to . This reduction will be reflected in the results of
operations in the fiscal quarter ending .
</TABLE>
20
<PAGE> 23
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data shown below (other than the data
under the captions "Tons shipped" and "Average selling price per ton") for the
five years in the period ended September 24, 1994 are derived from the audited
consolidated financial statements of the Company. The information 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 and related Notes thereto included elsewhere herein.
Unless otherwise noted, this data includes KES for all periods prior to its
sale in October 1993. See "Supplemental Summary Consolidated Financial Data." In
addition, this data includes Koppel for all periods from the date of its
acquisition in October 1990.
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER
--------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................................... $249,871 $212,471 $281,242 $353,082 $303,380
Cost of products sold............................. 204,649 201,751 250,189 310,586 278,161
Selling and administrative expenses............... 25,852 28,897 29,652 30,824 24,530
Operating income (loss)........................... 19,370 (18,177) 1,401 11,672 689
Net interest income (expense)..................... (410) (14,117) (21,075) (20,819) (18,297)
Gain on sale of subsidiary........................ -- -- -- -- 35,292
Provision (credit) for income taxes............... 6,291 (11,973) (6,058) (3,382) 7,382
Extraordinary items............................... -- -- (2,542) (1,095) --
Cumulative effect of a change in accounting
principle....................................... -- -- -- -- 1,715
Net income (loss)................................. 13,047 (20,603) (15,900) (6,991) 13,208
BALANCE SHEET DATA:
Working capital................................... $ 64,858 $ 48,411 $ 40,676 $ 39,060 $ 45,202
Total assets...................................... 220,856 329,889 319,079 317,242 315,327
Total debt........................................ 72,812 196,345 193,753 192,155 182,525
Common shareholders' equity....................... 107,226 85,149 68,574 62,622 76,464
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(1)......................................... $ 26,515 $ (3,385)(2) $19,793 $ 30,078 $ 55,326(3)
Capital expenditures.............................. 45,011 16,433 4,148 6,080 11,760
Depreciation and amortization..................... 6,879 15,725 18,711 19,093 18,789
Ratio of earnings to fixed charges(4)............. 3.2x N/M(5) N/M(5) N/M(5) 1.9x(3)
Ratio of EBITDA to net interest charges(6)........ 5.8x N/M(7) 0.9x(7) 1.4x 3.0x(3)
Tons shipped:
Tubular products
Welded OCTG................................... 119,800 92,200 112,000 142,100 138,200
Seamless OCTG................................. -- 7,000 20,500 48,700 61,800
Welded line pipe.............................. 78,300 67,000 88,500 110,900 82,800
Seamless line pipe............................ -- 200 10,400 14,400 10,700
SBQ products.................................... -- 14,000 72,000 102,500 147,900
Hot rolled coil products........................ -- -- 100 6,600 38,800
Other products(8)............................... 87,000 48,700 69,800 78,600 80,800
-------- -------- -------- -------- --------
Total tons shipped (excluding KES).............. 285,100 229,100 373,300 503,800 561,000
KES tons shipped................................ 239,400 198,300 217,900 244,400 --
-------- -------- -------- -------- --------
Total tons shipped.............................. 524,500 427,400 591,200 748,200 561,000
========= ========= ========= ========= =========
Average selling price per ton:
Welded tubular products......................... $ 489 $ 484 $ 420 $ 406 $ 422
Seamless tubular products....................... -- 894 833 813 787
SBQ products (excluding KES).................... -- 398 399 396 439
<FN>
- ---------------
(1) EBITDA represents earnings before net interest expense, taxes, depreciation
and amortization, and is calculated as net income before extraordinary items
and the cumulative effect of a change in accounting principle plus net
interest expense, taxes, depreciation and
21
<PAGE> 24
amortization. EBITDA provides additional information for determining the
Company's ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income, any
other measure of performance as determined by generally accepted accounting
principles, as an indicator of operating performance or as an alternative to
cash flows from operating, investing or financing activities or as a measure
of liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of liquidity and
operating results.
(2) Fiscal 1991 results were adversely impacted by several factors, including
primarily the start-up and initial operation of the Koppel facilities; a
decline in welded tubular shipments and KES shipments; and start-up costs
associated with Newport's continuous slab caster, reheat furnace and ladle
metallurgy facilities. The Koppel facilities, which were acquired in the
first quarter of fiscal 1991, commenced operations in the latter part of the
second quarter of fiscal 1991. The Koppel facilities incurred a $13.8
million operating loss in fiscal 1991 including $4.2 million of costs
incurred prior to the commencement of production and in connection with the
start-up of the facilities. The Company also experienced a significant
decline in demand for its welded tubular products and the Newport facilities
incurred a $7.7 million operating loss in fiscal 1991. In addition, the
Newport facilities incurred start-up costs, which are not quantifiable,
associated with its continuous slab caster, reheat furnace and ladle
metallurgy facility. Such costs were incurred primarily during the first
three months of fiscal 1991.
(3) For fiscal 1994, on a pro forma basis to exclude the gain on the sale of and
the results for KES, EBITDA was $19.8 million, the ratio of earnings to
fixed charges was not meaningful and the ratio of EBITDA to net interest
charges was 1.1x. Earnings were insufficient to cover fixed charges by $16.6
million. See "Supplemental Summary Consolidated Financial Data."
(4) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of income before income taxes, extraordinary items and the
cumulative effect of a change in accounting principle plus fixed charges
(excluding capitalized interest) and (b) fixed charges consist of interest
expense, including capitalized interest and amortization of debt expense.
(5) Earnings were insufficient to cover fixed charges by $38.1 million for
fiscal 1991, $19.4 million for fiscal 1992 and $9.3 million for fiscal 1993.
(6) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(7) EBITDA was insufficient to cover net interest charges by $23.0 million in
fiscal 1991 and $1.3 million in fiscal 1992.
(8) Other products include seamless mechanical tubing product and products
classified as secondary and limited service.
</TABLE>
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company operates in two separate business segments: specialty steel and
industrial adhesives. Within the specialty steel segment are the operations of
Newport, a manufacturer of welded tubular steel products and hot rolled coils;
Koppel, a manufacturer of seamless tubular steel products, SBQ products and
semi-finished steel products; and Erlanger, a tubular steel product finishing
operation. The Company's specialty steel products consist of: (i) seamless and
welded OCTG products primarily used in oil and natural gas drilling and
production operations; (ii) line pipe used in the transmission of oil, gas and
other fluids; (iii) SBQ products primarily used in the manufacture of heavy
industrial equipment; and (iv) hot rolled coils which are sold to service
centers and other manufacturers for further processing. Within the adhesives
segment are the operations of Imperial, a manufacturer of industrial adhesives
products. See Note 14 to the Consolidated Financial Statements included herein
for selected financial information by business segment for the fiscal years
1994, 1993 and 1992.
In October 1993, the Company sold KES, a manufacturer of SBQ products, to a
newly formed public company in exchange for $45,626,000 in cash and 400,000
shares (approximately 8%) of the newly formed public company, then valued at
$4,800,000. Reference is made to Note 2 to the Consolidated Financial Statements
included herein concerning the Company's sale of KES and its pro forma effect on
the Company's financial position and results of operations. The following
discussion includes the results of operations of KES for the comparative prior
year periods.
<TABLE>
RESULTS OF OPERATIONS
The Company's net sales, cost of products sold and operating results by
industry segment for each of the three fiscal years in the period ended
September 24, 1994 were as follows (in thousands of dollars):
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales
Specialty steel, excluding KES................. $270,441 $234,460 $175,921
KES............................................ -- 90,547 80,439
-------- -------- --------
Total specialty steel segment............... 270,441 325,007 256,360
Adhesives segment.............................. 32,939 28,075 24,882
-------- -------- --------
$303,380 $353,082 $281,242
======== ======== ========
Cost of products sold
Specialty steel, excluding KES................. $252,880 $217,215 $168,371
KES............................................ -- 71,468 62,248
-------- -------- --------
Total specialty steel segment............... 252,880 288,683 230,619
-------- -------- --------
Adhesives segment.............................. 25,281 21,903 19,570
-------- -------- --------
$278,161 $310,586 $250,189
======== ======== ========
Operating income (loss)
Specialty steel, excluding KES................. $ 2,909 $ 4,094 $ (5,074)
KES............................................ -- 9,285 8,425
-------- -------- --------
Total specialty steel segment............... 2,909 13,379 3,351
-------- -------- --------
Adhesives segment.............................. 1,150 1,059 533
-------- -------- --------
Corporate allocations and income............... (3,370) (2,766) (2,483)
-------- -------- --------
$ 689 $ 11,672 $ 1,401
======== ======== ========
</TABLE>
23
<PAGE> 26
<TABLE>
Sales data for the Company's specialty steel segment for each of the three
fiscal years in the period ended September 24, 1994 were as follows:
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Tons shipped
Welded tubular.................................. 277,600 308,000 246,500
Seamless tubular................................ 92,300 76,900 45,400
SBQ, excluding KES.............................. 147,900 102,500 72,000
Other........................................... 43,200 16,400 9,400
KES............................................. -- 244,400 217,900
-------- -------- --------
561,000 748,200 591,200
======== ======== ========
Net sales ($000's)
Welded tubular.................................. $117,214 $125,132 $103,479
Seamless tubular................................ 72,675 62,535 37,819
SBQ, excluding KES.............................. 64,858 40,561 28,756
Other........................................... 15,694 6,232 5,867
KES............................................. -- 90,547 80,439
-------- -------- --------
$270,441 $325,007 $256,360
======== ======== ========
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 24, 1994 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
25, 1993
Fiscal 1994 specialty steel net sales, excluding KES, increased $36.0
million, or 15.3% from fiscal 1993. Total specialty steel net sales declined
$54.6 million, or 16.8% from fiscal 1993, primarily due to the sale of KES in
October 1993.
Welded tubular net sales declined $7.9 million, or 6.3% on a volume decline
of 9.9%. Fiscal 1994 welded tubular net sales were negatively impacted by a
decline in second quarter shipments that resulted primarily from customers'
resistance to announced price increases. Second quarter welded tubular net sales
declined $7.9 million on a volume decline of 29.8% from the second quarter of
fiscal 1993. The Company adjusted its selling prices in response to the decline
and volume increased in the third quarter. Fiscal 1994 average selling prices
for all welded tubular products increased 3.9% from 1993.
Seamless tubular net sales increased $10.1 million, or 16.2% on a volume
increase of 20.0%. The increase in seamless tubular net sales resulted primarily
from an increase in shipments of seamless OCTG due in part to Koppel's increased
recognition in the marketplace. Fiscal 1994 average selling prices for all
seamless tubular products declined 3.2% due in part to an increased level of
foreign imports of seamless OCTG in fiscal 1994.
Price and volume levels in the domestic tubular market are primarily
dependent on the level of drilling activity in the United States and abroad, the
level of foreign imports as well as general economic conditions. The average
number of oil and natural gas drilling rigs in operation in the United States
(rig count) increased 3.4%, from 757 for fiscal 1993 to 783 for fiscal 1994. The
effects of this increase were offset by an increased level of imported tubular
products resulting in downward pressure on tubular product prices for most of
fiscal 1994.
On June 30, 1994, the Company and six other U.S. steel companies filed
antidumping petitions against imports of OCTG products from seven foreign
nations. The cases ask the U.S. government to take action to offset injury to
the domestic OCTG industry from unfairly traded imports. The antidumping
petitions were filed against OCTG imports from Argentina, Austria, Italy, Japan,
Korea, Mexico and Spain. The Company also joined in filing countervailing duty
cases charging subsidization of OCTG imports from Austria and Italy. The cases
are being handled by the International Trade Administration of the U.S.
Department of Commerce, which is investigating the existence and extent of
dumping and subsidization, and by the U.S. International Trade Commission, which
is assessing whether dumping and subsidization have caused material injury to
the U.S. industry. In August 1994, the International Trade Commissioners voted
unanimously that there was reasonable indication of material injury which
warrants further investigation of the petitions. The existence
24
<PAGE> 27
and extent of unfair trade practices could be determined as early as late
January 1995, and preliminary tariffs could be imposed at that time. Final
determinations regarding unfair practices and any injury caused thereby are
expected in the summer of 1995. While the Company cannot predict the outcome of
the cases at this time, the Company believes that a favorable ITC ruling could
decrease foreign shipments of OCTG products and increase the volume and average
selling prices of the Company's shipments.
Price increases and improvements in tubular product shipments will continue
to also be highly dependent on the level of drilling activity in the United
States and abroad as well as the level of activity in the steel industry and the
general state of the economy.
SBQ product net sales, excluding KES, increased $24.3 million, or 59.9% on
a volume increase of 44.3%. SBQ product average selling prices increased 10.9%
from fiscal 1993. SBQ product volume and prices have increased as a result of
stronger market demand over the prior year, combined with Koppel's increased
recognition in the marketplace. The increase in net sales of "other" products is
primarily attributable to an increase in shipments of hot rolled coils, which is
a result of stronger market demand for this product over the prior year.
Continued improvements in shipments and net sales of SBQ products and hot rolled
coils will be largely dependent on the general state of the economy and the
overall strength of the steel industry.
Adhesives segment net sales increased $4.9 million, or 17.3%. The increase
in adhesives segment net sales over the prior year was primarily the result of
expansion of product lines acquired in fiscal 1993.
Consolidated gross profit decreased $17.3 million from fiscal 1993 for a
gross profit margin of 8.3% compared to 12.0% in fiscal 1993. The decline in
gross profit and margin was primarily due to the sale of KES. Gross profit for
the specialty steel segment, excluding KES, increased $316,000 from fiscal 1993
for a gross profit margin of 6.5% compared to 7.4% in fiscal 1993. The decline
in gross profit margin was partially attributable to a 20.6% increase in the
Company's average steel scrap costs over fiscal 1993. The Company has recovered
a portion of the increase through higher selling prices for its SBQ products and
hot rolled coils; however, it was generally unsuccessful in passing the
increases in scrap costs through to tubular product customers. Newport and
Erlanger's gross profit declined $5.3 million primarily as a result of increased
steel scrap costs and the decline in welded tubular shipments as previously
discussed as well as increased maintenance costs due to severe winter weather in
the second fiscal quarter. Koppel's gross profit increased $5.4 million which
was primarily attributable to improved operating efficiencies due to greater
production and sales volume of SBQ and seamless tubular products, as previously
discussed. These improvements were partially offset by increased steel scrap
costs, lower seamless tubular average selling prices and the effects of severe
winter weather conditions in the second fiscal quarter.
The adhesives segment gross profit increased $1.5 million from fiscal 1993
for a gross profit margin of 23.2%, compared to 22.0% in fiscal 1993. The
increase in gross profit and margin was primarily due to increased volume and
improved selling prices.
Selling and administrative expenses declined primarily as a result of the
sale of KES and declined as a percentage of net sales from 8.7% in fiscal 1993
to 8.1% in fiscal 1994.
As a result of the above factors, the specialty steel segment, excluding
KES, earned an operating profit of $2.9 million in fiscal 1994 compared to $4.1
million in fiscal 1993. Of the $2.9 million specialty steel operating profit,
Newport and Erlanger incurred a $6.1 million operating loss, compared to a
$751,000 loss in fiscal 1993; and Koppel earned a $9.0 million operating profit,
compared to a $4.8 million operating profit in fiscal 1993. The adhesives
segment earned an operating profit of $1.2 million, virtually unchanged from
fiscal 1993.
Interest income increased $1.5 million primarily due to an increase in
average cash and short-term investment balances that resulted primarily from the
sale of KES. Interest expense decreased $1.1 million, primarily as a result of a
decrease in long-term debt obligations, partially offset by an increase in the
average borrowings and interest rates under the Company's lines of credit. Other
income increased $1.3 million primarily due to income on the sale of equipment.
The sale of KES in the first quarter of fiscal 1994 resulted in a pre-tax
gain of $35.3 million and increased net income and earnings per common share by
$21.5 million and $1.56, respectively. See Note 2 to the Consolidated Financial
Statements included herein.
25
<PAGE> 28
In the first quarter of fiscal 1994, the Company recorded an increase to
net income of $1.7 million, or $.12 per share, for the cumulative effect of the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (Statement 109). The adoption of Statement 109 had no impact on
cash flow for fiscal 1994. A valuation allowance has not been recorded against
deferred tax assets as it is estimated that such deferred tax assets will be
realized through a reduction of taxes otherwise payable upon the reversal of
existing taxable temporary differences. See Note 12 to the Consolidated
Financial Statements included herein.
During the first quarter of fiscal 1994, the Company also adopted the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (Statement 115).
Statement 115 requires the Company to mark certain of its investments to market
either through the income statement or directly to common shareholders' equity,
depending on the nature of the investment. The impact on the Company's financial
statements from the adoption of Statement 115 was not material.
FISCAL YEAR ENDED SEPTEMBER 25, 1993 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
26, 1992
Net sales in fiscal 1993 increased $71.8 million, or 25.5% from fiscal
1992, to $353.1 million. The specialty steel segment net sales increased $68.6
million and the adhesives segment net sales increased $3.2 million.
Welded tubular net sales increased $21.7 million, or 20.9% on a volume
increase of 24.9%. The increase in welded tubular shipments resulted generally
from an increase in market share as well as an increase in market activity, as
evidenced by a modest increase in the number of oil and natural gas drilling
rigs in operation in the United States. The rig count, which on average was 701
for fiscal 1992, increased approximately 8% to an average of 757 for fiscal
1993. Overall average selling prices of welded tubular products declined 3.3%
from fiscal 1992; however, prices generally improved quarter to quarter during
fiscal 1993.
Seamless tubular net sales increased $24.7 million, or 65.4% on a volume
increase of 69.4%. Seamless tubular product shipments increased for reasons
similar to those for the increase in welded tubular shipments. Average selling
prices for seamless tubular products declined approximately 2.4%.
SBQ product net sales, excluding KES, increased $11.8 million, or 41.1% on
a volume increase of 42.4%. SBQ product shipments improved as a result of
stronger market demand over the prior year. Average selling prices, however,
remained virtually unchanged.
KES's net sales increased $10.1 million, or 12.6% on a 12.2% increase in
volume. Average selling prices remained virtually unchanged from fiscal 1992.
The increase in shipments resulted from continued improvement in the various
markets served by KES.
Imperial's net sales increased $3.2 million, or 12.8%, primarily the result
of the acquisition of new product lines as well as price increases.
Consolidated gross profit increased $11.4 million from fiscal 1992 to $42.5
million, or a 12.0% gross profit margin compared to 11.0% in fiscal 1992.
Specialty steel gross profit, excluding KES, increased $9.7 million from fiscal
1992 for a gross profit margin of 7.4% compared to 4.3% in fiscal 1992.
Newport and Erlanger's gross profit increased $2.1 million from fiscal
1992. The increase was primarily due to improved operating efficiencies
resulting from increased production volumes, offset by increased steel scrap
costs and lower overall selling prices. Gross profit at Koppel increased $7.6
million as a result of significant improvements in production efficiencies due
to increased production volume for seamless tubular and SBQ products over fiscal
1992. Gross profit at Koppel was also negatively impacted by lower average
selling prices and higher steel scrap costs compared to fiscal 1992. KES's gross
profit increased $888,000, primarily as a result of increased volume as
previously discussed, partially offset by increases in the cost of steel scrap.
The adhesives segment gross profit increased $860,000 for a gross profit
margin of 22.0% compared to 21.3% in fiscal 1992. The increase in gross profit
and margin was primarily due to increased sales volume and operating
efficiencies.
26
<PAGE> 29
Selling and administrative expenses increased $1.2 million, or 4.0% and
declined as a percentage of sales from 10.5% in fiscal 1992 to 8.7% in fiscal
1993. The overall increase in selling and administrative expenses was primarily
attributable to increased production and sales volumes.
As a result of the above factors, the specialty steel segment earned an
operating profit of $13.4 million in fiscal 1993 compared to $3.4 million in
fiscal 1992. Of the $13.4 million specialty steel segment operating profit,
Newport and Erlanger incurred a $751,000 loss, compared to a $2.0 million loss
in fiscal 1992; Koppel earned a $4.8 million profit, compared to a $3.0 million
loss in fiscal 1992 and KES earned a $9.3 million profit, compared to an $8.4
million profit in fiscal 1992. The adhesives segment earned an operating profit
of $1.1 million in fiscal 1993 compared to $533,000 in fiscal 1992.
Interest expense decreased $701,000 primarily as a result of a reduction in
long-term debt obligations.
During the fourth quarter of fiscal 1993, Newport shut down its melt shop
operations for nineteen days when it was discovered that a radioactive substance
was accidentally melted, resulting in the contamination of the melt shop's
electric arc furnace emission control facility, or "baghouse" facility. A
similar incident, having occurred in the third quarter of fiscal 1992, shut down
Newport's melt shop facilities for twenty-three days. The source of the
radiation in these incidents was contained in incoming shipments of scrap metal
and was not detected by monitors that check incoming steel scrap. In response,
the Company has installed additional state-of-the-art radioactive detection
systems in various locations throughout the Newport plant.
The Company incurred estimated losses as a result of the extended outages
and costs to restore the melt shop and related facilities back to operations,
including estimated costs to dispose of the radiation contaminated baghouse
dust, of $7.2 million and $4.1 million, in fiscal 1993 and 1992, respectively.
The Company has recovered $3.5 million through insurance and expects to
recover and has recorded as a receivable an additional $2.3 million in insurance
claims for the fiscal 1993 incident. No recovery has been made nor recorded for
the fiscal 1992 incident and the Company is assessing the possibility of legal
remedies against certain parties.
The losses and costs attributable to these incidents, net of insurance
claims, resulted in an extraordinary charge of $1.1 million, net of applicable
income tax benefit of $662,000, or an $.08 loss per share, in fiscal 1993 and an
extraordinary charge of $2.5 million, net of applicable income tax benefit of
$1.6 million, or a $.19 loss per share, in fiscal 1992.
The occurrences of accidental melting of radioactive materials have not
resulted in any notice of violations from federal or state environmental
regulatory agencies.
The Company is investigating and evaluating various issues concerning
storage, treatment and disposal of the radiation contaminated baghouse dust;
however, a final determination as to method of treatment and disposal, cost and
further regulatory requirements cannot be made at this time. Depending on the
ultimate timing and method of treatment and disposal, which will require
appropriate federal and state regulatory approval, the actual cost of disposal
could substantially exceed current estimates and the Company's insurance
coverage. As of September 24, 1994, claims recorded in connection with disposal
costs substantially exhaust available insurance coverage. Based on current
knowledge, management believes the recorded reserves of $4.4 million for
disposal costs pertaining to these incidents are adequate and the ultimate
outcome will not have a material adverse effect on the Company's consolidated
financial position. The ultimate effect of these matters on the Company's
consolidated results of operations cannot be predicted because any such effect
depends on the amount and timing of charges to operations resulting from new
information as it becomes available.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 24, 1994 was $45.2 million compared to $39.1
million at September 25, 1993. The current ratio at September 24, 1994 was 1.50
to 1 compared to 1.45 to 1 at September 25, 1993. At September 24, 1994, the
Company had cash and short-term investments totaling $44.5 million compared to
$9.3 million at September 25, 1993. At September 24, 1994, the Company had
aggregate lines of credit available for borrowing of $34.9 million, including a
$16.2 million line of credit restricted for use at Koppel, of which a total of
$28.2 was outstanding. These lines expire in fiscal 1995 and 1996. At September
24, 1994,
27
<PAGE> 30
approximately $8.3 million in cash and short-term investments were restricted,
primarily in connection with cash collateralized letters of credit. The Company
is negotiating a new three year $45.0 million working capital facility which
would replace its existing credit line agreements. The Company will enter into
the new working capital facility either prior to or contemporaneously with the
completion of the Offering.
Cash flow used in operating activities totaled $4.3 million. Major
components include a net loss before the effect of the gain on the sale of KES
and the adoption of Statement 109 of $10.0 million, a $7.9 million increase in
accounts receivable, a $1.2 million decrease in long-term deferred taxes and a
$3.2 million increase in inventories. Partially offsetting these uses of
operating cash flow were non-cash depreciation and amortization charges of $18.8
million, a decrease in refundable income taxes and other current assets of $2.6
million and $2.7 million, respectively, and an increase in accounts payable of
$5.8 million. The increases in accounts receivable, inventories and accounts
payable were primarily attributable to the increase in business activity in the
specialty steel segment. Other current assets decreased primarily due to the
receipt of insurance claims recorded in fiscal 1993. Cash flows from operating
activities were also reduced by $4.9 million for income taxes paid, which
resulted from the sale of KES.
As a result of the sale of KES, the Company received $45.6 million in cash
and $4.8 million in common stock of the new entity. In addition, the Company
received $6.8 million in cash from the new entity in satisfaction of a dividend
declared by KES prior to the sale. A portion of the cash proceeds have been
utilized to fund the current year's operating loss. Remaining cash proceeds are
invested in short-term investments.
The Company incurred $11.8 million in capital expenditures during fiscal
1994, an increase of $5.7 million over fiscal 1993. The Company currently
estimates that capital spending in fiscal 1995 will increase over fiscal 1994
spending.
Net cash flows used by financing activities was $4.4 million. During the
fiscal year, the Company made payments on long-term debt obligations of $7.2
million and increased its borrowings under its lines of credit by $1.9 million.
Scheduled long-term debt maturities are $15.5 million, $19.0 million and $18.6
million for fiscal 1995, 1996 and 1997, respectively. As discussed in "Use of
Proceeds," the proceeds of the Offering will be used to refinance a significant
portion of the Company's long-term debt, which will result in minimal term debt
amortization requirements over the next three years.
Certain of the Company's loan agreements contain covenants restricting the
payment of dividends to its shareholders. Under the most restrictive of these
covenants, retained earnings available for dividends is computed under a formula
which is based in part on the earnings and losses of the Company after fiscal
1988. Under this covenant, the Company is currently prohibited from paying
dividends to its shareholders.
The Company believes that its current available cash and short-term
investments, its cash flow from operations and borrowing sources will be
sufficient to meet its anticipated operating cash requirements, including
capital expenditures, for at least the next twelve months.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations to date. Generally, the Company experiences inflationary
increases in its costs of raw materials, energy, supplies, salaries and benefits
and selling and administrative expenses. Except with respect to significant
increases in steel scrap prices as discussed herein, the Company has generally
been able to pass these inflationary increases through to its customers.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (Statement 112) was issued in November, 1992 and
requires companies to accrue, during the period an employee renders service, the
expense of providing certain postemployment benefits. Currently, the Company
recognizes the expense of such benefits, to the extent provided, at the time
payment is deemed probable. Adoption of Statement 112 is required in fiscal
1995. Management does not expect adoption of Statement 112 to have a material
impact on the Company's financial condition or results of operations.
28
<PAGE> 31
OTHER MATTERS
Newport is a co-defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of Texas arising from the
failure of two joints of welded pipe during testing of an off-shore pipeline.
The plaintiff is seeking damages in excess of $5 million for costs associated
with replacing the entire pipeline and lost production revenues. The Company
believes that it has meritorious defenses to this claim, although no assurances
can be given as to the outcome of this case. Insurance may be available for a
portion, but not all, of any award for damages. In addition, the Company is
subject to various other claims, lawsuits and administrative proceedings arising
in the ordinary course of business with respect to commercial, product liability
and other matters, which seek remedies or damages. Based upon its evaluation of
available information, management does not believe that any such matters are
likely, individually or in the aggregate, to have a material adverse effect upon
the Company's business or consolidated financial position. There can be no
assurance, however, as to the ultimate disposition of these matters.
The Company is subject to federal, state and local environmental laws and
regulations, including, among others, RCRA, the Clean Air Act, the 1990
Amendments, the Clean Water Act and all regulations promulgated in connection
therewith, including those concerning the discharge of contaminants as air
emissions or waste water effluents and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. As such, the Company is from time to
time involved in administrative and judicial proceedings and administrative
inquiries related to environmental matters.
As with other similar mills in the industry, the Company's steel mini-mills
produce dust which contains lead, cadmium, and chromium and is classified as a
hazardous waste. The Company currently collects the dust resulting from its
electric arc furnace operations through emission control systems and recycles it
through a waste recycling firm using EPA-approved processes. The Company also
has on its property at Newport a permitted hazardous waste disposal facility.
In September, 1994, the Company received a proposed Consent Agreement from
the EPA relating to an April 1990 RCRA facility assessment (the "Assessment")
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment was performed in connection with a permit application pertaining
to a landfill that is adjacent to the Koppel facilities. The Assessment
identified potential releases of hazardous constituents at or adjacent to the
Koppel facilities prior to the Company's acquisition of the Koppel facilities.
The proposed Consent Agreement establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases. Contamination
documented as a result of the investigation may require cleanup measures.
Pursuant to various indemnity provisions in agreements entered into at the time
of the Company's acquisition of the Koppel facilities in fiscal 1991, certain
parties agreed to indemnify the Company against various known and unknown
environmental matters. While such parties have not at this time acknowledged
full responsibility for potential costs under the proposed Consent Agreement,
the Company believes that the indemnity provisions provide for it to be fully
indemnified against all matters covered by the proposed Consent Agreement,
including all associated costs, claims and liabilities.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated baghouse dust, the
Company believes it is in compliance in all material respects with all
applicable environmental regulations.
Regulations resulting from the 1990 Amendments that will pertain to the
Company's electric arc furnace operations are currently not expected to be
promulgated until 1997 or later. The Company cannot predict the level of
required capital expenditures resulting from future environmental regulations
such as those forthcoming as a result of the 1990 Amendments. However, the
Company believes that while the 1990 Amendments may require additional
expenditures, such expenditures will not have a material impact on the Company's
business or consolidated financial position for the foreseeable future. Capital
expenditures during fiscal 1995 for the Company's environmental control
facilities are not expected to be material; however, such expenditures could be
influenced by new and revised environmental laws and regulations.
29
<PAGE> 32
<TABLE>
QUARTERLY RESULTS
The following table provides certain summary financial information for each
of the four quarters of fiscal 1993 and fiscal 1994. Information for fiscal 1993
includes the results of KES which was sold in October 1993.
<CAPTION>
FISCAL 1993 FISCAL 1994
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $ 77,779 $ 86,735 $ 95,363 $ 93,205 $ 71,959 $ 66,012 $ 80,807 $ 84,602
Gross profit.............. 7,366 10,282 12,686 12,162 7,791 1,831 7,203 8,394
Operating income (loss)... 178 2,290 4,904 4,300 1,811 (4,465) 1,377 1,966
Net income (loss)......... (3,355) (2,115) 11 (1,532) 21,741 (5,583) (1,990) (960)
Specialty steel net sales:
Tubular products
OCTG products......... 26,053 23,971 26,820 29,517 29,757 23,351 27,842 35,025
Line pipe products.... 11,244 16,093 17,491 11,055 8,323 9,461 14,492 11,386
SBQ products............ 7,531 9,142 10,551 13,337 14,346 16,467 18,197 15,848
Hot rolled coil
products.............. -- -- 1,805 445 3,232 2,577 3,669 4,260
Other products(1)....... 7,365 7,917 6,880 7,243 8,104 6,491 8,015 9,598
-------- -------- -------- -------- -------- -------- -------- --------
Total, excluding
KES................. 52,193 57,123 63,547 61,597 63,762 58,347 72,215 76,117
KES..................... 19,348 22,932 24,710 23,557 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total specialty steel
net sales........... $ 71,541 $ 80,055 $ 88,257 $ 85,154 $ 63,762 $ 58,347 $ 72,215 $ 76,117
========= ========= ========= ========= ========= ========= ========= =========
Tons shipped:
Tubular products
Welded OCTG........... 41,100 29,900 30,100 41,000 35,800 25,900 30,800 45,700
Seamless OCTG......... 8,900 12,200 14,600 13,000 14,600 13,800 16,300 17,100
Welded line pipe...... 23,900 32,800 34,200 20,000 17,500 17,400 27,600 20,300
Seamless line pipe.... 2,100 3,800 4,600 3,900 900 2,600 3,800 3,400
SBQ products............ 20,100 23,300 26,900 32,200 33,900 37,000 41,000 36,000
Hot rolled coil
products.............. -- -- 5,200 1,400 9,100 7,100 10,300 12,300
Other products(1)....... 20,300 22,000 18,400 17,900 18,700 15,600 20,900 25,600
-------- -------- -------- -------- -------- -------- -------- --------
Total, excluding
KES................. 116,400 124,000 134,000 129,400 130,500 119,400 150,700 160,400
KES..................... 53,300 62,600 66,100 62,400 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total tons shipped.... 169,700 186,600 200,100 191,800 130,500 119,400 150,700 160,400
========= ========= ========= ========= ========= ========= ========= =========
Average selling price per
ton:
Welded tubular
products............ $ 401 $ 399 $ 414 $ 412 $ 417 $ 423 $ 418 $ 429
Seamless tubular
products............ 823 808 823 801 869 782 776 738
SBQ products.......... 375 393 392 413 424 445 443 441
<FN>
- ---------------
(1) Other products include products classified as secondary and limited service.
</TABLE>
The sale of KES increased fiscal 1994 first quarter net income by $21.5
million. In addition, in the fiscal 1994 first quarter, the Company recorded the
cumulative effect of the adoption of FAS No. 109, "Accounting for Income Taxes,"
which increased net income by $1.7 million.
Fiscal 1994 second quarter results were negatively affected by a decline in
welded tubular shipments that resulted primarily from customers' resistance to
announced price increases. Fiscal 1994 second quarter welded tubular sales
declined by approximately $7.9 million from the comparable fiscal 1993 quarter.
The Company adjusted its welded tubular selling prices in response to the
decline and volume recovered in the third quarter of fiscal 1994. In addition,
fiscal 1994 second quarter results were negatively impacted by severe winter
weather conditions.
30
<PAGE> 33
BUSINESS
GENERAL
The Company is a leading producer of specialty steel products. The
Company's specialty steel products consist of: (i) seamless and welded tubular
goods primarily used in oil and natural gas drilling and production operations;
(ii) line pipe used in the transmission of oil, natural gas and other fluids;
(iii) SBQ products primarily used in the manufacture of heavy industrial
equipment and off-road vehicles; and (iv) hot rolled coils which are sold to
service centers and other manufacturers for further processing. The Company
manufactures these specialty steel products at its two mini-mills, located in
Koppel, Pennsylvania and near Newport, Kentucky. The Koppel facilities include
one of the most modern tubemaking operations in the world and the Newport
facility is the only mini-mill with continuous casting capabilities
manufacturing welded tubular products in the United States. The Company sold in
excess of 561,000 tons of specialty steel products in fiscal 1994.
The Company is a significant producer of seamless and welded OCTG products,
which represented 38% of the Company's net sales for fiscal 1994. OCTG products
are used as production tubing, drill pipe and casing in oil and natural gas
drilling and production applications. For fiscal 1994, the Company's shipments
of OCTG products accounted for approximately 13% of total shipments by domestic
OCTG producers. In the market segment of seamless production tubing, which
represented 11% of the Company's net sales, the Company is one of only two
domestic producers; there are several foreign producers.
The Company is a significant producer of line pipe, which represented 14%
of the Company's net sales for fiscal 1994. The Company's line pipe products
range in size from 1.9 to 12.75 inches in outside diameter, and are used in
gathering lines for the transportation of oil and natural gas at drilling sites
and in transmission lines by both gas utility and transmission companies. The
Company's shipments represented approximately 15% of total small diameter
shipments of line pipe (16 inches and under in outside diameter) by domestic
producers during fiscal 1994.
The Company manufactures SBQ products, which represented 21% of the
Company's net sales for fiscal 1994. The Company focuses on larger dimension SBQ
products which are primarily used by forgers and original equipment
manufacturers of heavy machinery and off-road vehicles.
The Company also manufactures hot rolled coils, which represented 5% of the
Company's net sales for fiscal 1994. These products are sold to service centers
and other manufacturers for use in high strength applications. The Company
significantly increased its shipments of hot rolled coils during fiscal 1994
and, due to the current favorable conditions in this market, the Company
believes it can continue to increase its sales of hot rolled coils in fiscal
1995.
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 11% of the Company's net sales for fiscal
1994.
In October 1993, to improve the Company's financial flexibility, the
Company sold one of its subsidiaries, KES, a manufacturer of SBQ products, for
cash and stock totaling $50.4 million. KES had been acquired by the Company in
1986 for approximately $7.3 million.
The Company completed an initial public offering of its common stock in
1988. Current executive officers and directors of the Company, as a group,
currently beneficially own 36.9% of the Company's common stock. The Company's
common stock is traded on the New York Stock Exchange under the symbol "NSS."
The address of the Company's principal place of business is Ninth & Lowell
Streets, Newport, Kentucky 41072 and its telephone number is (606) 292-6809.
HISTORY
The Company was incorporated in 1980 for the purpose of purchasing the
idled steel-making facilities of Newport Steel Works from Interlake, Inc. for
approximately $23 million. The Company successfully restarted the Newport
facilities in 1981, and has subsequently made four strategic acquisitions to
increase its steel-making capacity and to extend and diversify its specialty
steel product lines. In each of these acquisitions, the Company purchased idled
and undervalued production facilities where it had identified readily obtainable
cost
31
<PAGE> 34
saving and operating improvement opportunities. Prior to each purchase, the
Company recruited a skilled work force and negotiated new and favorable labor
contracts with flexible work rules. The Company has assumed no legacy costs,
such as retirement or health benefits, with respect to former employees of the
facilities.
In June 1994, the Company acquired a tubular products processing facility
located near Houston in Baytown, Texas ("Baytown") for $2.2 million. The
facility, which commenced operations in October 1994, finishes production
tubing, casing and drill pipe and provides a company-owned stocking location in
the heart of the southwest oil and natural gas drilling region. The Company can
deliver product to Baytown from both Koppel and Newport by barge. The Company
believes that Baytown will lower its finishing costs, increase its product range
and increase the geographic market in which it can competitively offer its
product since it can ship tubular products to Baytown by barge, and then stock
or reship either finished or plain-end tubular products directly to customers in
the southwest by truck.
In October 1990, the Company acquired Koppel Steel Corporation from Babcock
and Wilcox Company for $96.7 million. This acquisition extended the Company's
product line to seamless OCTG and line pipe and SBQ products. The Koppel
tubemaking facility was built in 1977 and the melt shop facilities were built in
1984 at a combined cost significantly in excess of $100 million. B&W built and
operated these facilities until they closed the facilities in 1988 due in part
to labor contract problems. Before reopening the facilities, the Company was
able to negotiate a new and favorable labor contract that afforded the Company
labor costs significantly below the steel industry average. Since restarting the
facility, the Company has successfully implemented a number of productivity and
operational improvements which reduced manufacturing costs. Through the Koppel
facility, the Company believes it has established itself as a significant
producer in the seamless OCTG market.
In August 1986, the Company acquired Kentucky Electric Steel Corporation, a
mini-mill producer of SBQ products located near Ashland, Kentucky, for
approximately $7.3 million. As with Newport and Koppel, at the time of its
acquisition by the Company, KES had been closed due to labor contract problems.
The Company restarted the mill and began shipping products in November 1986.
Although KES had not been profitable for several years prior to its closing, KES
incurred start-up losses for only the first six months of fiscal 1987 and was
profitable for every quarter thereafter. The Company sold KES in October 1993
for cash and stock totaling $50.4 million. The Company believes the sale
maximized the return on its investment in KES.
In June 1986, the Company acquired Erlanger Tubular Corporation, a tubular
products finishing facility located near Tulsa, Oklahoma, for approximately $4.5
million. Erlanger provides the Company with the capability of heat treating and
end finishing tubular products manufactured either by the Company or by other
tubular products producers and allows the Company to maintain another inventory
site in the southwest.
The Company acquired Imperial Adhesives, Inc. in 1985 for $2.5 million.
Imperial produces water-borne, solvent-borne and hot melt adhesives for a number
of product assembly applications. See "-- Imperial Adhesives."
MANUFACTURING FACILITIES AND PROCESS
Koppel Facilities
The Company manufactures seamless OCTG and line pipe and SBQ products at
facilities located in Koppel and Ambridge, Pennsylvania. The operations consist
of a melting and casting facility and bar mill located in Koppel and a seamless
tubemaking facility located approximately 20 miles away in Ambridge. See "--
Specialty Steel Products -- OCTG Products -- Seamless OCTG Products" and "--
Special Bar Quality Steel Products." The Company believes that Koppel's melting,
casting and tubemaking facilities are among the most modern in the world.
The production of seamless OCTG product is a technically demanding, capital
intensive manufacturing process that requires specialized equipment. The
Company's seamless tubemaking facilities are designed for making OCTG in the
smaller size range from 1.9 to 5.0 inches in outside diameter. The Company is
one of only two producers of seamless production tubing in the United States;
there are several foreign producers.
32
<PAGE> 35
The tubemaking facility located in Ambridge consists of a piercer, a
mandrel mill and a transval mill. The tubemaking facility includes a
highly-automated rotary hearth furnace where round billets ("tube rounds") are
reheated to temperatures over 2,200 degrees Fahrenheit. Tube rounds exit the
furnace to a piercer where a hollow tube is formed. Hollow tubes are then rolled
to a specific size and wall thickness by passing through either the mandrel mill
or transval mill. Seamless tubular products are produced in both carbon and
alloy grades.
The Company's melting and casting facilities at Koppel consist of an 80 ton
Ultra-High Powered ("UHP") electric arc furnace, a ladle refining station and a
computer-controlled four-strand continuous bloom/billet caster. Select grades of
steel scrap are melted utilizing the UHP furnace. Molten steel, reaching
temperatures of approximately 3,000 degrees Fahrenheit, is tapped from the UHP
furnace into a ladle and transported to the ladle refining station. The ladle
refining station allows for the addition of alloys, thereby providing precise
chemical compositions, while maintaining the molten steel at proper temperatures
for the caster. Once the chemistries are analyzed and conformed to metallurgical
standards, the ladle is carried by crane to the continuous bloom/billet caster.
The continuous bloom/billet caster is capable of casting 9-inch square blooms or
5.5-inch round billets. Blooms and billets are further processed at the
tubemaking facilities into seamless tubular products or at the bar facilities
into SBQ products, or they can be sold to third parties as "as cast"
(unfinished) product.
At the bar mill, blooms are reheated in a highly-automated rotary hearth
furnace to temperatures over 2,200 degrees Fahrenheit. Upon exiting the furnace,
blooms pass through a series of rolls, reshaping the steel into round bars.
Koppel is one of four bar making facilities capable of producing blooms that are
in a size range suitable for larger dimension SBQ products.
Koppel is certified by the American Petroleum Institute ("API") enabling
the Company to sell its OCTG products as API-certified. The API establishes
design standards and procedural specifications for producers of OCTG products.
API-certified products are demanded by the major oil and natural gas exploration
and production companies as well as other customers.
Newport Facilities
The Newport facilities located near Newport, Kentucky, which are also
API-certified, consists of a melt shop housing three 100-ton electric arc
furnaces, a modern ladle metallurgy station, a continuous slab caster and a
walking-beam slab reheat furnace, a hot strip mill, an 8-inch welded pipe mill
and a 16-inch welded pipe mill. See "-- Specialty Steel Products -- OCTG
Products -- Welded OCTG Products" and "-- Hot Rolled Coils." The ladle
metallurgy station, continuous slab caster and walking-beam slab reheat furnace
were installed in 1990. The 16-inch welded pipe mill was installed in 1984.
Newport is the only mini-mill manufacturing welded tubular products in the
United States with continuous casting capabilities. The Newport facilities also
include a barge loading facility for shipping product by river and inland
waterway.
In addition, the Company recently purchased 34.5 acres of land adjacent to
the Newport facilities which it intends to utilize in the future for unloading
and handling incoming steel scrap by barge. The ability to receive steel scrap
by barge will significantly increase the geographic area from which the Company
can purchase steel scrap at a competitive cost and thereby should insulate the
Company from temporary local supply imbalances. The Company currently receives
its incoming steel scrap at its Newport operations by rail and truck.
The production process for the Company's welded tubular products involves
three separate operations: melting, rolling and pipe making. Steel scrap is
first charged and melted into molten steel utilizing the electric arc furnaces.
The molten steel is then "tapped" from the furnace and refined in a
state-of-the-art ladle metallurgy station. The ladle metallurgy station allows
for the precise control of temperatures and chemistries and enables continuous
production sequencing of the molten steel to the continuous slab caster, thereby
enhancing melt shop productivity. After metallurgical standards have been met,
the molten steel is "cast" into slabs which are cut to length and lifted onto
specially designed rail cars for transport to the adjacent reheat furnace. Slabs
are processed through the walking-beam slab reheat furnace where they are evenly
heated to temperatures of over 2,400 degrees Fahrenheit. Slabs exit directly
from the reheat furnace onto the hot strip rolling mill where they are reduced
to desired thickness and rolled into coils in sizes up to 50-inch maximum
33
<PAGE> 36
width. Coils are then either slit and formed into welded tubular products at one
of Newport's two pipe making facilities or are sold as hot rolled coils.
Erlanger and Baytown Facilities
The Company processes and finishes a portion of its own welded and seamless
tubular products, and to a lesser extent those of other tubular producers, at
Erlanger and Baytown. The finishing processes at Erlanger include upsetting,
which is a forging process that thickens tube ends; heat treating, which is a
furnace operation designed to strengthen the steel; straightening; coating for
rust prevention; and threading. Currently, Baytown is capable of upsetting,
coating and threading. One of the projects included in the Company's capital
expenditures program is to add heat treating and straightening capabilities at
Baytown. Erlanger and Baytown have approximately 21 and 30 acres, respectively,
available for storage of tubular products.
The waterway locations of Erlanger, near Tulsa, and Baytown, near Houston,
allow the Company to transport its product directly from Newport and Koppel to
the southwest market by barge, the least expensive means of transportation.
After finishing, products are either immediately reshipped to customers or
stored as inventory to enable the Company to respond quickly to customer needs.
Approximately 60% of all oil and natural gas wells drilled in the United States
(as measured by total feet drilled) from 1991 to 1993 were located in Texas,
Oklahoma, Louisiana and New Mexico. The Company believes it gains strategic
marketing and cost advantages by having finishing, stocking and distribution
locations in the heart of the U.S. drilling market. In addition, by operating
its own finishing facilities, the Company is able to control product quality and
cost, respond quickly to customer shipment requirements and effectively control
inventory.
Capacity Utilization
Due to adverse conditions in the OCTG market, which is the Company's
largest primary end-user market, the Company has been operating its facilities
at less than optimal capacity utilization rates as indicated in the table below.
The Company has excess production capacity that it believes it can access
quickly and with minimal additional fixed costs, if and when the OCTG market
improves.
<TABLE>
<CAPTION>
CAPACITY UTILIZATION FOR
FISCAL 1994
RATED CAPACITY -------------------------
FACILITY (IN TONS) TONS PRODUCED PERCENT
- ----------------------------------- -------------- ------------- -------
<S> <C> <C> <C>
Koppel facilities
Melt shop........................ 400,000 278,300 69.6%
Bar mill......................... 200,000 169,900 85.0%
Seamless tube mill............... 200,000 100,900 50.5%
Newport facilities
Melt shop........................ 700,000 367,300 52.5%
Hot strip rolling mill........... 750,000 353,200 47.1%
Welded pipe mills................ 580,000 269,900 46.5%
</TABLE>
OPERATING COST IMPROVEMENTS
The Company has invested over $80 million in the last six fiscal years to
maintain and modernize the Newport facilities. These capital improvements have
enabled the Company to improve operating efficiencies and reduce costs. Major
expenditures during that period include:
(i) The completion in 1990 of a $45 million continuous slab caster,
including a walking-beam slab reheat furnace, to replace the less efficient
method of ingot production, resulting in a significant improvement in prime
product yield, lower reheat costs and greater productivity in the hot strip
rolling mill;
(ii) The completion in 1990 of a $4 million ladle metallurgy station
which allows the steel refining process to occur in the ladle rather than
the furnace, providing for a more precise metallurgical control and
improved equipment efficiency, material yield and product quality; and
34
<PAGE> 37
(iii) The addition in 1989 of a $6 million baghouse facility to
improve electric arc furnace dust collection and enable the melt shop to
simultaneously operate all three electric arc furnaces.
In addition, in October 1994, the Company upgraded the two ladle cranes in
Newport's melt shop to allow an increase in the heat size (the total weight of
steel melted in the furnace at one time) from 80 to 90 tons. The increase in
heat size will improve productivity, increase yields and reduce refractory
costs. Based on fiscal 1994 shipment levels (277,600 tons of welded tubular
products and 38,800 tons of hot rolled coils), the Company believes it would
achieve approximately $0.5 million, or $1.95 per ton, of annual operating
benefit for welded tubular products and approximately $0.1 million, or $1.75 per
ton, of annual operating benefit for hot rolled coils.
Since the Company acquired Koppel in fiscal 1991 for $97 million, the
Company has invested an additional $21 million in capital expenditures and has
successfully implemented a number of productivity improvements and cost cutting
measures. Capital expenditure projects have included (i) the acquisition of the
Baytown facilities for $2.2 million; (ii) a $1.3 million rebuild of the tube
mill rotary hearth furnace to enhance reliable and efficient reheating of tube
rounds; (iii) a $1.1 million rebuild of the bar mill rotary hearth furnace, to
enhance product quality and provide more efficient reheating of blooms; (iv) a
$0.3 million upgrade to the tube mill computer controls to consolidate functions
and enhance efficiencies; (v) the purchase of a $0.5 million state-of-the-art
computerized non-destructive testing inspection system at the tube mill; and
(vi) the purchase of a $0.2 million high pressure water descaling system that
improves surface quality of SBQ products.
In addition to achieving operating cost improvements through modernizing
the steel-making facilities, the Company has consistently focused on ways to
reduce its labor costs. The Company's average labor cost per hour (including all
benefits) was $24.39 for its Newport facilities and $19.53 for its Koppel
facilities for the second half of fiscal 1994. According to the American Iron
and Steel Institute, the industry average labor cost per hour was $33.43 for the
same period. In April 1994, the Company negotiated a new five year labor
contract with the USWA for Newport, which allows Newport to consolidate and
eliminate certain jobs and, along with changes in incentive and benefit plans,
will result in annual labor cost savings in excess of $1.0 million per year
beginning in fiscal 1995. In November 1994, the Company signed a five year labor
agreement with the USWA for Koppel which includes a net increase in labor costs
of approximately 3% per year. The Company estimates this contract will result in
an average increase in labor costs of approximately $0.5 million per year. The
Company does not provide retiree benefits.
As indicated in the following table, average manufacturing costs and man
hours per ton shipped have declined at both the Newport and Koppel facilities.
These productivity measures are influenced by the capital improvements and other
operating cost improvements implemented by the Company over the periods
presented. In addition, the level of production and shipments as well as product
mix has a significant influence on these productivity measures. The following
data should be read in conjunction with the more detailed "tons shipped" product
volume and sales information included in the "Summary Consolidated Financial
Data" and "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER
--------------------------------------------------------
1990 1991(1) 1992 1993 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Manufacturing costs per ton shipped
(2)
Newport facilities (3)............. $292 $333 $273 $254 $252
Koppel facilities (4).............. N/A $560 $396 $379 $353
Steel scrap costs per ton (5)........ $101 $101 $89 $100 $123
Man hours per ton shipped
Newport facilities (3)............. 3.55 4.07 3.24 3.09 2.95
Koppel facilities (4).............. N/A N/M 6.91 5.45 4.84
Tons shipped
Newport facilities (3)............. 285,100 205,700 255,800 324,400 320,700
Koppel facilities (4).............. N/A 23,400 117,500 179,400 240,300
35
<PAGE> 38
<FN>
- ---------------
(1) In fiscal 1991, the Company incurred non-recurring start-up costs associated
with converting Newport's steel-making operations from the ingot method of
production to continuous casting. Approximately 81% of Newport's fiscal 1991
production was continuous cast. In addition, in fiscal 1991, the Company
incurred non-recurring costs of $4.2 million prior to the commencement of
production at and in connection with the start-up of its Koppel facilities.
(2) Excludes the cost of steel scrap and depreciation.
(3) Includes both tubular and hot rolled coil products.
(4) Includes both tubular and SBQ products.
(5) Represents the average cost per ton paid by Newport and Koppel for its steel
scrap for the respective periods.
There can be no assurance that the Company's current manufacturing costs,
or other costs such as the cost of steel scrap, will not increase to offset the
operating benefits achieved by the initiatives previously described. In
addition, changes in product mix, such as increased production levels of hot
rolled coils and SBQ products which are significantly less expensive and time
consuming to manufacture than tubular products, will decrease manufacturing
costs per ton shipped and man hours per ton shipped. There can be no assurance
that the Company's production and shipment levels as well as product mix will
remain at levels sufficient to achieve the above results.
</TABLE>
SPECIALTY STEEL PRODUCTS
The Company's primary specialty steel products are OCTG products, line
pipe, SBQ products and hot rolled coils. The Company believes it is generally
perceived by the marketplace as a high quality producer of specialty steel
products.
The chart below lists the size ranges of specialty steel products
manufactured by the Company.
<TABLE>
<CAPTION>
RANGE OF SIZES
SPECIALTY STEEL PRODUCTS (OUTSIDE DIAMETER) GAUGES
- ---------------------------------------- ---------------------- -----------------
<S> <C> <C>
OCTG Products
Seamless OCTG Products
Production tubing.................. 1.9" to 4.5" 0.145" to 0.560"
Drill pipe......................... 2.375" to 5" 0.287" to 0.500"
Casing............................. 4.5" and 5" 0.205" to 0.500"
Welded OCTG Products
Casing............................. 4.5" to 13.375" 0.196" to 0.480"
Seamless and Welded Line Pipe
Products.............................. 1.9" to 12.75" 0.145" to 0.531"
SBQ Products............................ 2.875" to 6"
Hot Rolled Coil Products................ 28" to 50" in width 0.125" to 0.500"
</TABLE>
OCTG Products
During the twelve month period ended September 1994, total shipments by
domestic OCTG producers were approximately 1.5 million tons, of which
approximately 58% represented seamless products and approximately 42%
represented welded products. During fiscal 1994, the Company shipped
approximately 61,800 tons of seamless OCTG products and approximately 138,200
tons of welded OCTG products. For fiscal 1994, the Company's shipments of
seamless and welded OCTG products accounted for approximately 7% and 21%,
respectively, of total shipments by domestic OCTG producers.
Seamless OCTG Products. The Company's seamless OCTG products are used as
drill pipe, casing and production tubing. Drill pipe is used and may be reused
to drill several wells. Casing forms the structural wall of oil and natural gas
wells to provide support and prevent caving during drilling operations and is
generally not removed after it has been installed in a well. Production tubing
is placed within the casing and is used to convey oil and natural gas to the
surface. The Company's seamless OCTG products are sold as a finished threaded
and coupled product in both alloy and carbon grades.
36
<PAGE> 39
Seamless production tubing represented approximately 54% of the Company's
shipments of seamless OCTG products for fiscal 1994. During fiscal 1994, the
Company shipped approximately 33,300 tons of seamless production tubing to the
OCTG markets, including approximately 28,100 tons of OCTG production tubing
ranging in size from 2.375 to 3.5 inches in outside diameter.
Compared to similar welded products, seamless production tubing and casing
are better suited for use in hostile drilling environments such as off-shore
drilling or deeper wells because of their greater strength and durability. The
production of seamless tubular products with these properties requires a more
costly and specialized manufacturing process than does the production of welded
tubular products. The Company's average selling price was $832 per ton for all
grades and sizes of its seamless OCTG products and was $612 per ton for all
grades and sizes of its threaded and coupled welded OCTG products in fiscal
1994.
Welded OCTG Products. The Company's welded OCTG products are used
primarily as casing in oil and natural gas wells during drilling operations.
Welded OCTG products are generally used when higher strength is not required,
typically in wells less than 10,000 feet in depth. The Company sells its welded
OCTG products as both a plain end and as a finished tubular product. The primary
market for welded OCTG products is the southwest, northeast and central sections
of the United States. The Company's welded OCTG products are sold primarily to
distributors, who in turn sell to end users, such as oil and gas drilling and
production companies. In fiscal 1994, the Company's shipments of welded OCTG
products represented 21% of total shipments by domestic producers.
Line Pipe Products. The line pipe market consists of both seamless and
welded products, ranging in size from 1 to 80 inches in outside diameter. Line
pipe products are primarily used in gathering lines for the transportation of
oil and natural gas at the drilling site and in transmission lines by both gas
utility and transmission companies. The Company's seamless and welded line pipe
products are in the 1 to 16 inches size segment (smaller sized) and are shipped
as a plain end product and welded together on site. The Company sells its line
pipe products to both distributors and end users.
During fiscal 1994, total shipments by domestic line pipe producers were
approximately 1.1 million tons. Of these 1.1 million tons shipped, 633,200 tons,
or 56%, were smaller sized line pipe. In fiscal 1994, the Company shipped
approximately 93,500 tons, or 15%, of all shipments by domestic producers of
smaller sized line pipe.
Special Bar Quality Steel Products
Unlike the majority of SBQ products which are less than 2 inches in
diameter and are used primarily in passenger car applications, the Company
manufactures SBQ products in a specialized market niche of products ranging in
size from 2.875 to 6 inches. The Company produces its SBQ products from
continuous cast blooms that enable substantial size reductions in the bloom
during processing and provide heavier strength-to-weight ratios. These heavier
size SBQ products are primarily used in critical weight-bearing applications
such as suspension systems, gear blanks, drive axles for tractors and off-road
vehicles, heavy machinery components and hydraulic and pneumatic cylinders. As a
result of recent increased demand for these products, the Company has increased
its total shipments of SBQ products from approximately 102,500 tons in fiscal
1993 to approximately 147,900 tons in fiscal 1994. Since beginning production at
its Koppel bar facility in March 1991, the Company has consistently increased
SBQ shipments.
Hot Rolled Coils
The Company produces commercial quality grade hot rolled coils, from 28 to
50 inches in width, between 0.125 to 0.500 inches in gauge, and in 15 ton coil
weights. In the past, the Company typically limited its production of hot rolled
coils to the amount required to supply its welded pipe mills for conversion into
welded tubular products. However, as a result of recent strong demand for hot
rolled coils, the Company has begun to utilize its excess melting and rolling
capacity to produce hot rolled coils for direct sale to third parties. The
Company increased its shipments of hot rolled coils from 6,600 tons in fiscal
1993 to approximately 38,800 tons in fiscal 1994. While the Company's shipments
of hot rolled coils are not sizable in relation to the total
37
<PAGE> 40
market, the Company focuses its production on the much smaller niche market for
high carbon hot rolled coils. These products are sold to service centers and to
others for use in high-strength applications.
Other Products
The Company's OCTG products are inspected and tested to ensure that they
meet API specifications. Products that do not meet specifications are classified
as secondary or limited service products and are sold at substantially reduced
prices. With the implementation of the ladle metallurgy station and continuous
slab caster as well as other capital improvements at the Newport facilities, the
Company reduced its secondary and limited service shipments as a percentage of
total welded product shipments from 30.6% in fiscal 1989 to 18.8% in fiscal
1994.
STRATEGY
The Company's business strategy is to increase its sales and improve its
results by: (i) implementing capital improvements; (ii) continuing to reduce its
operating costs; (iii) positioning the Company to take advantage of potential
upturns in its end user markets; and (iv) improving its overall financial
flexibility and capital structure.
Since its inception, the Company has consistently reinvested in its
operating facilities, introduced operating efficiencies and reduced its
manufacturing costs per ton. Over the last six years, the Company has spent
approximately $80 million at the Newport facilities for capital improvements,
including a new continuous slab caster, a new ladle metallurgy station and a new
electric arc furnace dust collection facility. The Company has spent
approximately $21 million since fiscal 1991 to implement a number of capital
improvements in the Koppel facilities. These improvements included rebuilding
the rotary hearth furnaces at both the tube mill and bar mill and installing a
water descaling system at the bar mill. The Company's capital and operating
improvements as well as increases in its production and shipments have resulted
in a reduction in manufacturing costs per ton shipped (excluding depreciation
and the cost of steel scrap) of approximately $40 at Newport since 1990 and of
approximately $43 at Koppel since fiscal 1992. Over the same periods, the
Company's man hours per ton have decreased from approximately 3.55 to 2.95 at
Newport and from approximately 6.91 to 4.84 at Koppel.
Implement Capital Improvement Program
The Company intends to implement a three year, $25.8 million capital
expenditure program designed to further reduce its operating costs, improve
quality and enhance its market position. The program includes eight projects,
each of which will allow the Company to achieve productivity improvements and
reduce operating costs through the elimination of redundant or less efficient
operations and processes. The Company intends to complete four of these projects
in fiscal 1995 for an estimated aggregate cost of approximately $3.4 million.
These projects are anticipated to result in annual operating benefits of
approximately $2.3 million before depreciation. Over the balance of the program,
which is scheduled to be completed by the end of fiscal 1997, the Company
intends to implement four additional projects for an estimated aggregate cost of
approximately $22.4 million. These four projects are anticipated to result in
annual operating benefits of approximately $11.3 million before depreciation.
The Company believes that upon completion, total operating benefits from its
capital expenditure program will result in annual operating benefits of
approximately $13.6 million before depreciation. During implementation of the
capital improvement program, the Company will continue to make other capital
expenditures on its facilities and equipment to maintain these operating assets.
38
<PAGE> 41
Significant components of the plan, and estimated costs and operating
benefits, are summarized below. The information provided below is calculated
based upon fiscal 1994 shipment levels and product mix.
<TABLE>
<CAPTION>
ESTIMATED TOTAL ESTIMATED
FISCAL YEAR ESTIMATED ANNUAL
OF CAPITAL OPERATING
PROJECT COMPLETION EXPENDITURE BENEFIT
- --------------------------------------------- ----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Eccentric Bottom Tap -- UHP Furnace.......... 1995 $ 1.1 $ 0.9
Line Pipe Coating Facility................... 1995 1.1 0.6
Upgrade Finish Coiler........................ 1995 0.6 0.4
Seamless Mill Material Handling.............. 1995 0.6 0.4
Heat Treat Furnace and Straightener.......... 1996 4.5 2.1
Controlled Cooling Furnace................... 1997 5.4 1.4
Processing Equipment......................... 1997 2.5 0.5
UHP Electric Arc Furnace..................... 1997 10.0 7.3
----------- ---------
Total........................................ $25.8 $13.6
=========== =========
</TABLE>
Eccentric Bottom Tap -- UHP Furnace. A new furnace bottom shell with an
eccentric bottom tap will be installed on the 80 ton UHP electric arc furnace in
the melt shop at the Koppel facility. The Company currently anticipates
completing all on-site work during a routine maintenance shutdown scheduled for
December 1994. Eccentric bottom tapping is a more efficient method of removing
slag from the production process and virtually eliminates the need for
re-ladling, reduces power consumption, reduces electrode use and refractory
consumption and increases productivity. Based on fiscal 1994 shipment levels
(147,900 tons of SBQ products and 92,300 tons of seamless tubular products), the
Company believes it would achieve approximately $0.5 million of annual operating
benefit or $3.80 per ton for SBQ products and approximately $0.4 million of
annual operating benefit or approximately $3.95 per ton for seamless tubular
products.
Line Pipe Coating Facility. The Company will construct a line pipe coating
facility in Newport, Kentucky. The new facility will be operated by L.B. Foster,
a line pipe coating company and a distributor of line pipe and other tubular
products. The facility is currently anticipated to be completed in the third
quarter of fiscal 1995. Due to its close proximity to the Newport facilities,
this project will result in a substantial reduction in freight costs. In
addition, the Company will receive a commission on all line pipe coated by L.B.
Foster at the new facility. Based on an estimated 48,000 tons of the Company's
welded line pipe coated by third parties during fiscal 1994, the Company
believes it would achieve approximately $0.6 million of annual operating benefit
or approximately $12.40 per ton on these products, including the commission on
that tonnage. The expected operating benefits do not take into account any
commissions the Company may receive on line pipe coating by L.B. Foster for
third parties.
Upgrade Finish Coiler. The finish coiler in the hot strip mill at the
Newport facilities will be upgraded to allow an increase in the weight of hot
rolled coils by approximately 3,300 pounds in average coil weight, which is an
increase of approximately 15% from the finish coiler's current capacity. The
Company anticipates completing the upgrade by the third quarter of fiscal 1995.
The larger coils will result in improved productivity at the hot strip mill.
Based on fiscal 1994 shipment levels (approximately 277,600 tons of welded
tubular products), the Company believes it would achieve approximately $0.4
million of annual operating benefit or approximately $1.50 per ton for welded
tubular products.
Seamless Mill Material Handling. Material handling equipment will be
installed in the Koppel tubemaking facility to provide automatic lift, handling,
and conveying systems to move tubular products to the off mill area for further
processing. The Company anticipates completing this project in the second
quarter of fiscal 1995. Currently, seamless tubular products are moved using
overhead cranes. A new transfer car will move tubular products to the off mill
area for upsetting, non-destructive testing and heat treating. The new
conveyance system equipment will reduce delays and increase productivity. Based
on fiscal 1994 shipment levels (approximately 93,200 tons of seamless tubular
products), the Company believes it would achieve approximately $0.4 million of
annual operating benefit or approximately $3.85 per ton on these products.
39
<PAGE> 42
Heat Treat Furnace and Straightener. Relocation of an existing heat treat
furnace from Koppel to Baytown and installation of a straightener at Baytown
will enable the Company to process and finish all of the seamless OCTG product
that it sells in the southwest market at the Baytown facility. The Company
anticipates completing this project by March 1996. Currently, the Company pays
outside processors to provide heat treating and threading of OCTG product sold
by the Company in the southwest market. Based on fiscal 1994 shipment levels of
heat treated seamless OCTG products sold by the Company in the southwest market
(approximately 23,500 tons of seamless OCTG products), the Company believes it
would achieve approximately $2.1 million of annual operating benefit or
approximately $89.00 per ton.
Controlled Cooling Furnace. A controlled cooling furnace will be installed
in the bar mill at the Koppel facilities to replace its current air cooling
beds. This project is scheduled to begin in fiscal 1996 and is anticipated to be
completed by mid-fiscal 1997. Metallurgical practice calls for slow cooling
certain grades of product produced at the bar mill in order to provide the
necessary hardness and reduce cracking that results from non-uniform, rapid
cooling. Under current operating conditions, slow cooling is accomplished by
moving hot bars into covered pits which requires excessive material handling,
constrains production flow, and results in additional straightening requirements
and additional lab testing. The proposed controlled cooling furnace will replace
pit cooling and thereby eliminate certain material handling and straightening
requirements and will result in increased bar mill productivity and capacity,
reduced production costs and improved quality. Based on fiscal 1994 shipment
levels (approximately 147,900 tons of SBQ products), the Company believes it
would achieve approximately $1.4 million of annual operating benefit or
approximately $9.30 per ton. This anticipated annual operating benefit does not
include any benefit resulting from the Company's ability to produce and sell
additional high value SBQ products.
Processing Equipment. Equipment will be installed in the tubemaking
facility at Koppel to provide the finishing capacity for API-certified line pipe
products, mechanical tubing, redraw tubing, and other semi-finished products.
The Company anticipates completing this project in fiscal 1997. The equipment
installation will include a straightener, end-facers, a hydrotester, conveyors
and handling equipment. Currently, these products are finished through
multi-stage processes requiring large amounts of material handling. Based on
fiscal 1994 tons finished (approximately 24,100 tons), the Company believes it
would achieve approximately $0.5 million of annual operating benefit or
approximately $20.50 per ton on these products.
UHP Electric Arc Furnace. A UHP electric arc furnace will be installed in
the Newport melt shop to replace the existing three furnaces. The furnace will
have a rated annual capacity of 750,000 tons of hot metal and have a melting
capacity of 110 to 120 tons per hour. The furnace will also include an eccentric
bottom tap to permit slag free tapping. The Company currently anticipates
completing final engineering studies on the project in December 1995 and
estimates completing the installation during fiscal 1997. The Company
anticipates the new furnace will enable it to achieve significantly lower
production costs through a reduction in power consumption and electrode use, and
improved productivity through significantly faster melt times. Based on fiscal
1994 shipment levels (277,600 tons of welded tubular products and 38,800 tons of
hot rolled coils), the Company believes it would achieve approximately $6.5
million of annual operating benefit or approximately $23.40 per ton for welded
tubular products and approximately $0.8 million of annual operating benefit or
approximately $21.15 per ton for hot rolled coils.
The Company's capital expenditure program is under continuous review and
the Company may, based on the results of engineering studies, revisions in
budgeted project costs, increases or decreases in estimated operating benefits,
changes in the demand for the Company's products, or the unavailability of
internally-generated cash or acceptable external financing, decide in the future
to eliminate, postpone, modify or accelerate projects, or to substitute new
projects for those currently included in the program. Upon completion of the
capital expenditure program, the Company believes that its steel-making
operations, like those of other steel producers, will continue to require
capital expenditures and additional projects that are essential to the Company's
long-term competitiveness. Because the estimated operating benefits from the
Company's expected efficiencies and planned capital improvements are based upon
a number of assumptions, estimated operating benefits may not necessarily be
indicative of the Company's future financial performance, and increases in the
cost of raw materials or other operating costs may offset any operating benefits
causing actual results to vary significantly. In addition, the Company has based
its operating benefit estimates on fiscal 1994
40
<PAGE> 43
production and shipment levels and product mix. Any increase or decrease in
actual tons shipped or change in the product mix would affect the operating
benefits realized through the capital expenditure program. Although the Company
believes its assumptions with respect to its planned capital expenditure program
to be reasonable, there can be no assurance that the estimated operating
benefits of the Company's capital expenditure program will actually be achieved,
that demand for tubular products, hot rolled coils and SBQ products will
continue to support fiscal 1994 production and shipment levels, as well as
product mix, that other difficulties will not be encountered in completing the
capital expenditure program, or that the projects can be installed or
constructed at the estimated costs.
Reduce Operating Costs
The Company has consistently reinvested in its physical facilities and
undertaken initiatives to streamline operations and reduce operating costs. In
addition to its capital reinvestments, the Company has consistently strived to
reduce other operating costs such as labor, raw material and transportation
expenses. Prior to commencing operations at each of the steel-making facilities
the Company has acquired, it has negotiated a new and favorable labor contract
with the union employees of such facility.
In addition, in October 1994, the Company upgraded the two existing ladle
cranes in Newport's melt shop to allow an increase in the heat size (the total
weight of steel melted in the furnace at one time) from 80 to 90 tons. The
increase in heat size will improve productivity, increase yields and reduce
refractory costs. The Company also implemented changes at the ladle metallurgy
facility at Koppel to reduce the non-metallic content of the surface and
subsurface of its SBQ products which eliminates the need to grind blooms. Based
on 1994 shipment levels, the Company believes that this change will result in an
anticipated annual operating benefit of approximately $0.5 million. During
fiscal 1995, the Company intends to implement changes in Koppel's melt shop to
increase furnace productivity from current operating levels. These changes will
increase and accelerate heat input to the UHP furnace, and should result in
improved production rates per hour. A team of management and hourly personnel
has been formed to study, recommend and implement changes in melting practices
to improve productivity.
Position for Market Upturns
The Company's operating strategy is to maintain an active market presence
through all phases of its customers' business cycles. During market downturns,
the Company has endeavored to follow this strategy by maintaining production
while at the same time reducing costs and investing in its facilities. This
strategy has allowed the Company to maintain and improve its market presence and
customer relationships during difficult market conditions, and as a result the
Company believes it is well-positioned to take advantage of market upturns as
they occur. For example, total shipments by domestic SBQ producers increased
approximately 8% during the twelve month period ended September 1994 over the
comparable twelve month period ended September 1993. During fiscal 1994, the
Company increased its shipments and average selling price of SBQ products by 44%
and 11%, respectively, excluding KES. In the OCTG market, even though demand has
remained relatively weak, the Company has increased its shipments of tubular
products since 1990. The Company's Koppel and Newport tubemaking facilities
operated at approximately 51% and 47% of capacity, respectively, for fiscal
1994. Consequently, the Company has significant excess production capacity that
it believes it can readily access with minimal additional fixed costs should the
OCTG market improve.
Improve Financial Flexibility and Capital Structure
The Offering is part of the Company's long-term plan to increase its
financial flexibility and reduce its financial leverage. In conjunction with the
closing of the Offering, the Company will use a portion of its existing cash
balances to reduce its total debt outstanding. Prior to or concurrently with the
Offering, the Company will enter into a $45 million three year working capital
facility, which is expected to be undrawn upon completion of the Offering. Upon
completion of the Offering, the Company's aggregate cash, short-term investments
and borrowing capacity under the new credit facility will total approximately
$ million and based on the Company's debt outstanding after the Offering, it
will have minimal term debt amortization requirements over the next five years.
The Company also intends to further reduce its financial leverage in the future
by raising funds through the issuance of additional equity to retire a portion
of its long-term debt. The Company intends to pursue such equity offering at
such time that its financial results and general market
41
<PAGE> 44
conditions support an acceptable equity offering. There can be no assurances,
however, when or if and for what amount the Company will complete an equity
offering.
MARKETS AND DISTRIBUTION
The Company sells its specialty steel products to its customers through an
in-house sales force which is supplemented by a number of independent sales
representatives. The primary end markets for the Company's seamless tubular
products has been the southwest United States and certain foreign markets.
Nearly all of the Company's OCTG products are sold to domestic distributors,
some of whom subsequently sell the Company's products into the international
marketplace. The Company estimates that the final destination for its seamless
OCTG products included five different foreign countries in fiscal 1994. The
Company has historically marketed its welded tubular products in the east,
central and southwest regions of the United States, in areas where shallow oil
and gas drilling and exploration activity utilize welded tubular products. The
Company sells its SBQ products to customers located generally within 400 miles
of the Koppel facilities.
All of the Company's steel-making and finishing facilities are located on
or near major rivers or waterways, enabling the Company to transport its tubular
products into the southwest by barge. Barge transportation is the least
expensive form of transportation and provides the Company with an advantage over
competitors outside the southwest market who do not have similar access to barge
facilities. Shipping by barge also enables the Company to be cost competitive
with producers located in or near the southwest market. For example, barge
transportation costs from Newport to the Houston market can reach as low as $9
per ton, while rail transportation to that market can cost approximately $25 per
ton. The Company ships substantially all of its welded OCTG products destined
for the southwest region by barge, and with the addition of Baytown, the Company
will be shipping substantially all of its seamless OCTG product destined for the
southwest by barge as well.
CUSTOMERS
The Company has approximately 300 specialty steel product customers. The
Company's OCTG and line pipe products are used by major and independent oil and
natural gas exploration and production companies in drilling and production
applications in the United States, Canada, Mexico and overseas. Line pipe
products are also used by gas utility and transmission companies. The majority
of the Company's OCTG and line products are sold to domestic distributors and
directly to end users. The Company sells its SBQ products to service centers,
cold finishers, forgers and original equipment manufacturers, and primarily
sells its hot rolled coils to service centers and other manufacturers for
further processing. The Company has long-standing relationships with many of its
larger customers; however, the Company believes that it is not dependent on any
customer and that it could, over time, replace lost sales attributable to any
one customer. In fiscal 1994, the Company's top five customers accounted for
approximately 22% of net sales, and no one customer accounted for more than 8%
of total net sales.
COMPETITION
The markets for the Company's specialty steel products are highly
competitive and cyclical. The Company's principal competitors in its primary
markets include integrated producers, mini-mills, welded and seamless tubular
product processing companies as well as foreign steel producers. The Company
believes that the principal competitive factors affecting its business are
price, quality and customer service.
The Company's principal domestic competitors in the welded tubular market,
which includes both OCTG and line pipe products, are Lone Star Steel Company,
LTV Corporation, IPSCO Steel, Inc., USS/Kobe Steel Company and Maverick Tube
Corporation. In the seamless OCTG market, the Company's principal competitors
include the USS/Kobe Steel Company in Lorain, Ohio, the only domestic
competitor, which has approximately 300,000 to 400,000 tons of annual capacity,
and a number of foreign producers. With respect to its SBQ products, the Company
competes with a number of steel manufacturers, including USX Corporation, CSC
Industries, Inc., Republic Engineered Steels, Inc., Inland Steel Industries,
Inc., Bethlehem Steel Corporation, MacSteel Division of Quanex Corporation,
North Star Steel Company, Inc. and Atlantic
42
<PAGE> 45
Steel Company. The Company believes that it has been able to compete
successfully in the SBQ market by virtue of its focus on a narrow range of
quality products.
Trade Cases
Imports into the U.S. have captured a significant portion of the OCTG
market. From 1984 to 1992, a series of voluntary restraint agreements with
various countries limited the amount of OCTG products those countries would
export into the United States. These agreements expired March 31, 1992. See
"-- Industry."
In response to the rising level of foreign imports of OCTG products, on
June 30, 1994, the Company and six other U.S. steel companies (Bellville Tube
Division of Quanex Corporation, IPSCO Steel, Inc., Maverick Tube Corporation,
North Star Steel Company, Inc., USX Corporation, and USS/Kobe Steel Company)
filed antidumping petitions against imports of OCTG products from seven foreign
nations. The cases ask the United States government to take action to offset
injury to the domestic OCTG industry from unfairly traded imports. The
antidumping petitions were filed against OCTG imports from Argentina, Austria,
Italy, Japan, Korea, Mexico and Spain. In 1993, the seven foreign countries
comprised approximately 82% of all OCTG products imported into the United
States. The Company also joined in filing countervailing duty cases charging
subsidization of OCTG imports from Austria and Italy. The cases are being
handled by the International Trade Administration of the United States
Department of Commerce, which is investigating the existence and extent of
dumping and subsidization, and by the United States ITC which is assessing
whether dumping and subsidization have caused material injury to the United
States OCTG industry. In August 1994, the International Trade Commissioners
voted unanimously that there was reasonable indication of material injury which
warrants further investigation of the petitions. The existence and extent of
unfair trade practices could be determined as early as late January 1995, and
preliminary tariffs could be imposed at that time. Final determinations
regarding unfair trade practices and any injury caused thereby are expected in
the summer of 1995. While the Company cannot predict the outcome of the cases at
this time, the Company believes that a favorable ruling could decrease foreign
shipments of OCTG products and increase the volume and average selling price of
the Company's shipments.
RAW MATERIALS
The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition, railroad and other steel
scrap sources. Steel scrap is purchased by the Company either through scrap
brokers or directly in the open market.
The cost of steel scrap is subject to market forces, and is primarily
affected by the expected production levels of other mini-mill steel producers.
The cost of steel scrap to the Company can vary significantly, and product
prices cannot always be adjusted in the short term to recover increases in steel
scrap costs. The Company utilizes numerous grades of steel scrap in its
production process to minimize its use of higher cost grades. Historically, the
Company has been able to increase SBQ product prices to recover a substantial
portion of such increases; however, the Company has not consistently been able
to increase its tubular product prices to recover increases in steel scrap
costs.
The long-term demand for steel scrap and its importance to the domestic
steel industry may be expected to increase as steel-makers continue to expand
steel scrap-based electric arc furnace and thin slab casting capacities. For the
foreseeable future, however, the Company believes that supplies of steel scrap
will continue to be available in sufficient quantities at competitive prices.
The Company recently acquired land adjacent to the Newport mill which, with
minor modification, can be used as a barge loading facility. This facility will
allow Newport to have steel scrap delivered by barge, rather than by rail and
truck as is currently done, which will substantially expand the geographic
region from which Newport can acquire scrap. In addition, a number of
technologies exist for the processing of iron ore into forms which may be
substituted for steel scrap in electric arc furnace-based steel-making
operations. Such forms include direct-reduced iron, iron carbide and
hot-briquette iron. While such forms may not be cost competitive with steel
scrap at present, a sustained increase in the price of steel scrap could result
in increased implementation of these alternative technologies.
The Company's steel manufacturing facilities consume large amounts of
electricity. The Company purchases its electricity from utilities near its
steel-making facilities pursuant to contracts that expire in 1995
43
<PAGE> 46
for Koppel and 2001 for Newport. The contracts contain provisions that provide
for lower priced demand charges during off-peak hours and known maximums in
higher cost firm demand power. Also, the Company receives discounted demand
rates in return for the utilities' right to periodically curtail service during
periods of peak demand. These curtailments are generally limited to a few hours
and historically have had a negligible impact on the Company's operations. The
Company has no reason to believe that the utility contract expiring at Koppel in
1995 will not be renewed upon substantially similar terms.
The Company also consumes smaller quantities of additives, alloys and flux
which are purchased from a number of suppliers.
INDUSTRY
Oil Country Tubular Goods
The demand for domestic OCTG products is primarily dependent on the number
and depth of oil and natural gas wells being drilled in the United States. The
level of drilling activity is largely a function of the current prices of oil
and natural gas and the industry's future price expectations. On average, eleven
tons of OCTG products are used per thousand feet drilled.
Overall, OCTG demand in the United States has been cyclical. The average
monthly rig count, the most common measure of drilling activity in the U.S.,
reached a peak of approximately 3,970 in 1981 and a low of approximately 718 in
1992. The average monthly rig count for the month of September 1994 was 802.
Since 1992, there has been a significant change in the oil and natural gas
drilling industry in the United States. Historically, a greater percentage of
wells drilled were for crude oil than for natural gas; however, for the nine
month period ended September 1994, there was more drilling for natural gas than
for crude oil. This shift reflects the increase in well head natural gas prices
due principally to the steady increase in natural gas consumption. The increase
in natural gas drilling has resulted in greater consumption of seamless tubular
products. The United States Department of Energy forecasts in its 1994 Annual
Energy Outlook that domestic annual natural gas consumption will increase from
18.7 trillion cubic feet in 1990 to 24.1 trillion cubic feet in the year 2010.
The forecasted increases are due to regulatory demands for a cleaner
environment, natural gas conversions, new residential construction in which
two-thirds of all new homes use natural gas, new uses for natural gas, such as
space cooling and gas heat pumps and advances in gas fired generation
technology.
Demand for OCTG products is also influenced by the levels of inventory held
by producers, distributors and end users. OCTG product inventory levels have
historically been cyclical with inventories building during periods of high
drilling activity and declining in periods of lower drilling activity. Over the
past ten years demand for OCTG products has been partially satisfied by
drawdowns of existing inventories. In 1993, for the first time in five years,
inventories increased, and in the first six months of 1994 inventory levels were
generally stable.
The demand for OCTG products produced domestically is also significantly
impacted by the level of foreign imports of OCTG products. The level of OCTG
imports is affected by: (i) the value of the U.S. dollar versus other key
currencies; (ii) overall world demand for OCTG products; (iii) the production
cost competitiveness of domestic producers; (iv) trade practices of and
government subsidies to foreign producers; and (v) the presence or absence of
governmentally imposed trade restrictions in the United States. OCTG market
penetration by imports in the United States increased from 7% in 1992 to 25% for
the twelve months ended September 1994. Seamless tubular products represented
approximately 86% of all imported OCTG product for the nine months ended
September 1994. On July 1, 1994, the Company and six other U.S. steel companies
filed antidumping petitions against imports of OCTG products from seven foreign
nations. The International Trade Commission has issued a favorable preliminary
determination on one aspect of the petitions, although the outcome of the cases
cannot be predicted at this time. See "-- Competition -- Trade Cases."
Line Pipe
The demand for line pipe is only partially dependent on oil and gas
drilling activities. In addition to drilling activities, line pipe demand is
dependent on factors such as pipe line construction activity, line pipe
44
<PAGE> 47
replacement requirements, utility purchasing programs and new residential
construction. Line pipe demand has grown since 1989 along with the increase in
natural gas usage and the attendant need for gas transportation lines. Overall,
total shipments by domestic line pipe producers reached 1.1 million tons in
twelve month period ended September 1994 and shipments of line pipe product 16
inches in diameter and smaller, the product sizes that the Company produces,
totaled 633,227 tons in that period.
<TABLE>
TUBULAR PRODUCT INDUSTRY STATISTICS
<CAPTION>
YEAR ENDED DECEMBER
-----------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Drilling Activity
Average rig count drilling for:
Natural gas(1)..................... N/A N/A N/A N/A 354 403 464 351
Crude oil(1)....................... N/A N/A N/A N/A 555 453 531 485
Total average rig count(1).......... 2,429 1,976 970 937 937 870 1,008 863
Average well depth (in ft.)(2)...... 4,341 4,435 4,482 4,551 4,822 4,754 4,787 4,905
Total well completions(2)........... 85,394 70,481 39,602 35,424 31,902 28,055 31,204 26,938
Total feet drilled(2)(3)............ 370.7 312.6 177.5 161.2 153.3 133.4 149.4 141.8
International rig count(1)(4)........ 1,496 1,604 1,262 1,162 1,222 1,055 1,047 1,036
Leading Indicators
Average oil and natural gas prices:
West Texas intermediate crude
($/barrel)(5)..................... $29.83 $28.08 $16.44 $18.21 $15.52 $18.29 $23.17 $20.42
U.S. well head natural gas
($/McF)(5)........................ $ 2.65 $ 2.51 $ 1.94 $ 1.66 $ 1.68 $ 1.69 $ 1.70 $ 1.63
U.S. OCTG Consumption (000/tons)(6)
Total U.S. producer shipments....... 1,729 1,569 588 1,086 1,212 706 1,297 963
Total imported shipments............ 2,214 1,505 617 576 988 429 381 413
Inventory (increase) decrease....... 105 96 721 128 (401) 533 257 275
------ ------ ------ ------ ------ ------ ------ ------
Total U.S. consumption.............. 4,048 3,170 1,926 1,790 1,799 1,668 1,935 1,651
====== ====== ====== ====== ====== ====== ====== ======
Imports as percent of U.S.
consumption........................ 55% 48% 32% 32% 55% 26% 20% 25%
U.S. Producer Line Pipe Shipments
(000/tons)(7)....................... 619 577 432 494 645 606 634 657
<CAPTION>
YEAR ENDED DECEMBER
----------------------------------
1992 1993 FISCAL 1994
------ ------ ------------
<S> <C> <C> <C>
U.S. Drilling Activity
Average rig count drilling for:
Natural gas(1)..................... 329 365 416
Crude oil(1)....................... 373 372 358
Total average rig count(1).......... 718 755 786
Average well depth (in ft.)(2)...... 5,218 5,463 5,580
Total well completions(2)........... 23,258 23,578 20,147
Total feet drilled(2)(3)............ 121.6 128.3 112.4
International rig count(1)(4)........ 955 971 993
Leading Indicators
Average oil and natural gas prices:
West Texas intermediate crude
($/barrel)(5)..................... $19.67 $18.17 $ 16.13
U.S. well head natural gas
($/McF)(5)........................ $ 1.73 $ 2.01 $ 1.90
U.S. OCTG Consumption (000/tons)(6)
Total U.S. producer shipments....... 1,005 1,422 1,313
Total imported shipments............ 101 353 383
Inventory (increase) decrease....... 276 (330) (191)
------ ------ ------------
Total U.S. consumption.............. 1,382 1,445 1,505
====== ====== ==========
Imports as percent of U.S.
consumption........................ 7% 24% 25%
U.S. Producer Line Pipe Shipments
(000/tons)(7)....................... 710 623 633
<FN>
- ---------------
(1) As reported by Baker Hughes, Inc.
(2) As reported by the Energy Information Administration.
(3) In millions of feet.
(4) Excludes U.S. rig activity.
(5) As reported by the Oil and Gas Journal.
(6) In thousands of tons, as reported by Pipe Logix, Inc., an industry source.
(7) As reported by American Iron and Steel Institute. Includes 16 inches in
diameter and under only.
</TABLE>
45
<PAGE> 48
SBQ and Hot Rolled Coils
The bar and flat rolled steel markets represent the largest segments of the
steel market. According to the American Iron and Steel Institute, total 1993
shipments by domestic producers of bar products (which include the Company's SBQ
products) and flat rolled steel products (which include the Company's hot rolled
coils) were approximately 14 million and 27 million tons, respectively. Bar
products are generally categorized into merchant bar quality products and SBQ
products which are used for a wide variety of industrial applications including
automotive, metal working fabrication, construction, farm equipment, heavy
machinery and trucks and off-road vehicles. The hot rolled coils market is
differentiated into three broad categories of quality based on surface quality,
metallurgical purity, formability and strength to weight ratios. The Company
competes in relatively small segments of each of these markets.
Unlike the majority of SBQ products which are primarily used by passenger
car manufacturers, heavy SBQ products such as those produced by the Company are
primarily used in the manufacture of light and heavy trucks and off-road
vehicles. Industry analysts estimate that light trucks require approximately 10%
to 30% more SBQ per unit than passenger cars, and heavy and off-road vehicles
consume substantially more SBQ products per unit.
Hot rolled coils are used in the manufacture of steel pipe and tubular
products and in a number of other manufacturing processes. The demand for hot
rolled coils has significantly increased in recent months as the general market
demand for flat rolled steel has increased. Hot rolled coils can be substituted
for other flat rolled steel in many applications. As a result, in fiscal 1994,
average selling prices for the Company's hot rolled coils increased 4% over
fiscal 1993.
IMPERIAL ADHESIVES
General
Imperial Adhesives, Inc. is a manufacturer of industrial adhesives
products. Imperial maintains over 900 active formulas for the manufacture of
water-borne, solvent-borne, and hot melt adhesives, which are used in product
assembly applications, including footwear, foam bonding, marine and recreational
vehicles, and consumer packaging. Although it is not a significant participant
in the overall adhesives industry, Imperial believes that it is a significant
participant in the domestic footwear assembly market, the foam bonding market
and the marine and recreational vehicle market.
The Company acquired Imperial in 1985 for $2.5 million. The adhesives
company, which had been divested from The United States Shoe Corporation in
1981, afforded the Company an attractive investment opportunity outside of the
steel industry. Since acquisition, Imperial has grown in sales from
approximately $15 million in fiscal 1986 to approximately $32.9 million in
fiscal 1994.
Manufacturing Facilities and Process
Imperial produces adhesives products at manufacturing plants located in
Ohio, Tennessee, Virginia and Michigan. Imperial manufactures its adhesives by
mixing predetermined quantities of raw materials in specially designed mixers.
The physical properties of finished formulas are measured and strictly monitored
by a statistical process control system. Imperial works closely with its
customers to develop adhesives applications designed to meet specific product
requirements.
Strategy
The Company has implemented a business strategy for Imperial designed to
achieve growth in Imperial's revenues through internal development and
acquisition of new products and product lines. Imperial has focused on
developing or acquiring water-borne products that can be used in place of
solvent-based, non-flammable products. In 1995, certain restrictions will be
imposed on the use of solvent-based, non-flammable adhesives by the 1990
Amendments to the Clean Air Act and the regulations promulgated thereunder. In
fiscal 1993, Imperial purchased exclusive U.S. rights to manufacture a
water-borne adhesive, Rapid Stick Dispersion ("RSD"). RSD was developed by SABA
International Lamino B.V. to provide an alternative to
46
<PAGE> 49
solvent-based adhesives that bond immediately without utilizing oven or forced
drying methods. This product, which is primarily spray-applied, is used in
automotive, furniture, upholstery and marine industries.
Imperial has internally financed its growth and has not required any
additional capital investment by the Company. In addition to continuing to focus
on revenue growth at Imperial, the Company is also improving its cost structure
through facilities consolidation and by reducing the number of products, many of
which have similar properties, that it offers customers.
Markets and Distribution
Imperial markets its adhesives products throughout the United States and
the Caribbean basin through a sales force of approximately 35 people, some of
whom are independent sales representatives. Products are distributed from
Imperial's four manufacturing sites, a warehouse in Puerto Rico and a number of
public warehouses across the United States.
Competition
Competition in the industrial adhesives products market is
highly-fragmented. The Company believes that it competes in this market on the
basis of price, product performance and customer service. Imperial's ability to
meet diverse customer needs for water-borne, solvent-borne, and hot-melt
adhesives enables it to compete with numerous small or comparably-sized
companies, as well as major adhesives producers such as H.B. Fuller Company and
National Starch and Chemical Corporation.
OTHER ASSETS
KESI Stock
In October 1993, the Company sold KES to Kentucky Electric Steel, Inc.
("KESI") for $45.6 million in cash and 400,000 shares (approximately 8% of the
outstanding shares) of KESI. See Note 2 to the fiscal 1994 Consolidated
Financial Statements. KESI is traded on the NASDAQ National Market. On November
21, 1994, KESI's stock price closed at $10 per share. Until October 6, 1998, the
Company has certain registration rights with respect to its shares of KESI.
Real Estate
The Company owns approximately 40 acres of partially improved land near
Newport, Kentucky. This property, which has a book value of approximately $10.5
million, is being improved and is listed for sale.
ENVIRONMENTAL MATTERS
The Company's specialty steel and adhesives operations are subject to
various federal, state and local environmental laws and regulations, including,
among others, the Clean Air Act, the 1990 Amendments, the Clean Water Act and
RCRA and all regulations promulgated in connection therewith, including, among
others, those concerning the discharge of contaminants as air emissions or waste
water effluents and the disposal of solid and/or hazardous wastes such as
electric arc furnace dust. The Company is from time to time involved in
administrative and judicial proceedings and administrative inquiries related to
environmental matters.
As with other similar mills in the industry, the Company's steel mini-mills
produce dust which contains lead, cadmium and chromium, and is classified as a
hazardous waste. The Company currently collects the dust resulting from its
electric arc furnace operations through emission control systems and recycles it
through a waste recycling firm using EPA approved processes. The Company also
has on its property at Newport a permitted hazardous waste disposal facility. In
the event of a release of a hazardous substance generated by the Company, the
Company could be responsible for the remediation of contamination associated
with such release.
During the fourth quarter of fiscal 1993, Newport shut down its melt shop
operations for 19 days when it was discovered that a radioactive substance was
accidentally melted, resulting in the contamination of the melt shop's electric
arc furnace emission control facility, or "baghouse facility". A similar
incident, having occurred
47
<PAGE> 50
in the third quarter of fiscal 1992, shut down Newport's melt shop facilities
for 23 days. The source of the radiation in these incidents was contained in
incoming shipments of scrap steel, and was not detected by monitors that check
incoming steel scrap. In response, the Company has installed additional
state-of-the-art radioactivity detection systems in various locations throughout
the Newport plant.
The Company incurred estimated losses as a result of the extended outages
and costs to restore the melt shop and related facilities back to operation,
including estimated costs to dispose of the radiation contaminated baghouse
dust, of $7.2 million and $4.1 million in fiscal 1993 and 1992, respectively.
The Company has recovered $3.5 million through insurance and expects to recover
and has recorded as a receivable an additional $2.3 million in insurance claims
for the fiscal 1993 incident. No recovery has been made nor recorded for the
fiscal 1992 incident and the Company is assessing the possibility of legal
remedies against certain parties. The losses and costs attributable to these
incidents, net of insurance claims, resulted in an extraordinary charge of $1.1
million, net of applicable income tax benefit of $0.7 million in fiscal 1993 and
an extraordinary charge of $2.5 million, net of applicable income tax benefit of
$1.6 million in fiscal 1992. To date, the occurrence of the accidental melting
of radioactive materials has not resulted in any notice of violations from
federal or state environmental regulatory agencies.
The Company is investigating and evaluating various issues concerning
storage, treatment and disposal of the radiation contaminated baghouse dust;
however, a final determination as to method of treatment and disposal, cost and
further regulatory requirements cannot be made at this time. Depending on the
ultimate timing and method of treatment and disposal, which will require
appropriate federal and state regulatory approval, the actual cost of disposal
could substantially exceed current estimates and the Company's insurance
coverage. As of September 24, 1994, claims recorded in connection with disposal
costs substantially exhaust available insurance coverage. Based on current
knowledge, management believes the recorded reserves of $4.4 million for
disposal costs pertaining to these incidents are adequate and the ultimate
outcome will not have a material adverse effect on the Company's consolidated
financial position. The ultimate effect of these matters on the Company's
consolidated results of operations cannot be predicted because any such effect
depends on the amount and timing of charges to operations resulting from new
information as it becomes available.
In September 1994, the Company received a proposed Consent Agreement from
the EPA relating to an April 1990 RCRA facility assessment (the "Assessment")
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment was performed in connection with a RCRA Part B permit pertaining
to a landfill that is adjacent to the Koppel facilities and owned by B&W, the
former owner of the Koppel facilities. The Assessment identified potential
releases of hazardous constituents into the environment from numerous SWMU's and
AOC's. The SWMU's and AOC's identified during the Assessment and the EPA's
follow-up investigation are located at and adjacent to the Company's Koppel
facilities. The proposed Consent Agreement establishes a schedule for
investigating, monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation may require cleanup
measures. Pursuant to various agreements entered into among the Company, B&W and
PMAC at the time of the Company's acquisition of the Koppel facilities, B&W and
PMAC agreed to indemnify the Company against various known and unknown
environmental matters. While reserving its rights against B&W, PMAC has accepted
full financial responsibility for the matters covered by the proposed Consent
Agreement other than with respect to a 1987 release of hazardous constituents
(the "1987 Release") that the Company believes could represent the most
significant component of any potential cleanup, and other than with respect to
hazardous constituents generated by Koppel after its acquisition by the Company,
if any. B&W, PMAC and Koppel are in dispute as to whether the indemnification
provisions relating to the 1987 Release expire in October 1995. Although B&W has
not acknowledged responsibility for any cleanup measures that may be required as
a result of any investigation (other than with respect to the 1987 Release, in
the event certain actions are taken by the EPA prior to October 1995), B&W and
PMAC have agreed to jointly retain an environmental consultant to assist in
negotiating the Consent Agreement and to conduct the required investigation.
Prior to the completion of the site analysis to be performed in connection with
any Consent Agreement, the Company cannot predict the expected cleanup cost for
the SWMU's and AOC's covered by the proposed Consent Agreement. The Company
believes that it is entitled to full indemnity for all of the matters covered by
the proposed Consent Agreement from B&W and/or PMAC. Pursuant to its contractual
arrangements with PMAC, the Company has a right of offset against the $15
million principal
48
<PAGE> 51
amount of Subordinated Convertible Debentures due October 2000 through 2005
issued to PMAC which are held in escrow to secure PMAC's indemnification
obligations to the Company.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated baghouse dust, the
Company believes it is in compliance in all material respects with all
applicable environmental regulations. Regulations resulting from the 1990
Amendments that will pertain to the Company's electric arc furnace operations
are currently not expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures resulting from future
environmental regulations such as those forthcoming as a result of the 1990
Amendments, however, the Company believes that while the 1990 Amendments may
require additional expenditures, such expenditures will not have a material
impact on the Company's business or consolidated financial position for the
foreseeable future. Capital expenditures for the Company's environmental control
facilities are anticipated to total approximately $1.0 million through fiscal
1997 and $3.0 to $5.0 million through fiscal 1999; however, such expenditures
could be influenced by new and revised environmental laws and regulations.
EMPLOYEES
As of fiscal 1994 year end, the Company had 1,568 employees of whom 384
were salaried and 1,184 were hourly. Substantially all of the Company's hourly
employees are represented by the USWA. The Company's union contracts expire as
follows:
<TABLE>
<CAPTION>
BARGAINING UNIT EMPLOYEES
SUBSIDIARY CONTRACT EXPIRATION DATE AS OF SEPTEMBER 24, 1994
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
Imperial Adhesives, Inc. November 3, 1995 47
Erlanger Tubular Corporation March 6, 1997 52
Newport Steel Corporation April 15, 1999 522
Koppel Steel Corporation August 31, 1999 500
</TABLE>
Since its inception, the Company has successfully negotiated 13 labor
contracts and has experienced only one work stoppage. During fiscal 1994,
Newport experienced a two-day strike when the employees who are represented by
the USWA rejected a proposed new labor contract. The strike necessitated a
two-day shutdown of the welded tubular products facility. The labor contract
which was ultimately agreed upon allows the Company to combine and eliminate
certain job classifications resulting in a reduction of its Newport work force.
In November 1994, the Company signed a five year labor agreement with USWA for
Koppel which includes a net increase in labor costs of approximately 3% per
year. The Company estimates this contract will result in an average increase in
labor costs of approximately $0.5 million per year.
The Company has assumed no legacy costs, such as retirement and health
benefits, with respect to former employees of the facilities it has acquired.
Retirement benefits (including post-retirement health care) represent the most
significant difference between the Company's labor costs and the industry
average as the Company's employees participate in profit sharing plans as
opposed to the typically more costly defined benefit plans prevalent throughout
the industry. The profit sharing plans generally require mandatory contributions
at a specified percentage of pre-tax profits (with a guaranteed minimum based on
hours worked for the bargaining unit employees at Newport). Contribution expense
for Newport for the profit sharing plans was $0.5 million in fiscal 1994.
PROPERTIES
The Company's principal operating properties are listed in the table below.
The Company believes its facilities are adequate and suitable for its present
level of operations.
49
<PAGE> 52
<TABLE>
<CAPTION>
LOCATION PROPERTY
- ----------------------- ---------------------------------------------------------------------
<S> <C>
Specialty Steel
Newport, Kentucky The Company owns approximately 250 acres of real estate upon which
are located a melt shop, hot strip mill, two welded pipe mills,
machine and fabricating shops and storage and repair facilities
aggregating approximately 636,000 square feet, as well as the
Company's administrative offices.
Koppel, Pennsylvania The Company owns approximately 227 acres of real estate upon which
are located a melt shop, bar mill, blooming mill, pickling facility,
machine and fabricating shops, storage and repair facilities and
administrative offices aggregating approximately 900,000 square feet.
Ambridge, Pennsylvania The Company owns approximately 45 acres of real estate upon which are
located a seamless tube making facility and seamless tube finishing
facilities aggregating approximately 659,000 square feet.
Tulsa, Oklahoma The Company leases approximately 35.7 acres of property upon which is
located a tubular processing facility. The facility is located at the
Tulsa Port of Catoosa where barge facilities are in close proximity.
Located on this property are six buildings aggregating approximately
119,000 square feet which house the various finishing operations.
Baytown, Texas The Company owns approximately 40 acres of real estate upon which is
located a tubular processing facility. The facility is located
adjacent to barge facilities. Located on the property are eight
buildings aggregating approximately 65,000 square feet which house
the various finishing operations.
Adhesives
Cincinnati, Ohio The Company owns approximately seven acres of property in Cincinnati,
Kalamazoo, Michigan Ohio, five acres of property in Kalamazoo, Michigan, and 1.5 acres of
Lynchburg, Virginia property in Lynchburg, Virginia for use in its adhesives operations.
Nashville, Tennessee The Cincinnati properties contain five buildings aggregating
approximately 150,000 square feet; the Kalamazoo property consists of
one 24,000 square foot building; and the Lynchburg property consists
of one 10,000 square foot building. The Company also leases
approximately 3.1 acres in Nashville, Tennessee for use in its
adhesives operations, including one building aggregating
approximately 60,000 square feet.
Other
Newport, Kentucky The Company also owns approximately 40 acres of partially developed
land near Newport, Kentucky, acquired in fiscal 1989, for use as
investment property.
</TABLE>
LEGAL PROCEEDINGS
In September 1994, the Company received a proposed Consent Agreement from
the EPA. See "Investment Considerations -- Cost of Compliance with Environmental
Regulations" and "-- Environmental Matters."
Newport is a co-defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of Texas arising from the
failure of two joints of welded pipe during testing of an off-shore pipeline.
The plaintiff is seeking damages in excess of $5 million for costs associated
with replacing the entire pipeline and lost production revenues. The Company
believes that it has meritorious defenses to this claim, although no assurances
can be given as to the outcome of this case. Insurance may be available for a
portion, but not all, of any award for damages.
In addition, the Company is subject to various other claims, lawsuits and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability and other matters which seek remedies
or damages. The Company believes it has meritorious defenses with respect to
these claims and litigation and that the ultimate disposition of any of the
proceedings to which the Company is currently a party will not have a material
adverse effect on its consolidated financial position. There can be no
assurance, however, as to the ultimate disposition of these matters.
50
<PAGE> 53
<TABLE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------- ---- ---------------------------------------------
<S> <C> <C>
Clifford R. Borland................ 57 Director, President and Chief Executive
Officer
Patrick J.B. Donnelly.............. 58 Director
John B. Lally...................... 58 Director
R. Glen Mayfield................... 53 Director
Ronald R. Noel..................... 53 Director, Vice President,
Secretary and Chief Administrative Officer;
President of Newport
John R. Parker..................... 50 Vice President, Treasurer and Chief Financial
Officer
</TABLE>
The directors of the Company are elected at each annual meeting of the
shareholders and hold office until their successors have been elected and
qualified. The officers are appointed by the Board of Directors and serve at its
discretion. The Articles of Incorporation provide that at such time as there are
nine or more directors, the Board of Directors may by resolution divide the
Board into three classes with the terms in office of each class ending in
successive years.
BUSINESS BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
CLIFFORD R. BORLAND is a founder of the Company, has been its President and
Chief Executive Officer since its inception, and has been a director since 1981.
He held various positions at United States Steel Corporation from 1960 through
1967. He joined Interlake's Riverdale Works as Chief Metallurgist in 1967,
became Director of Metallurgy for Interlake's Iron and Steel Division in 1978
and served as Plant Manager of the Newport Steel Works from 1977 to 1980. Mr.
Borland is also a director of The Huntington Bank, Inc. (Kenton County,
Kentucky) and Kentucky Electric Steel, Inc.
PATRICK J.B. DONNELLY has been a director of the Company since November 1981.
Since 1972, he has been a partner in the law firm of Niles, Barton and Wilmer
which is based in Baltimore, Maryland.
JOHN B. LALLY has been a director of the Company since November 1981. Mr. Lally
is Chairman of the Board and Chief Executive Officer of L B Industries, Inc., a
privately-owned pipe distributor. He has served as an executive officer of L B
Industries, Inc. and its predecessors for over 27 years.
R. GLEN MAYFIELD has been a director of the Company since November 1981. Mr.
Mayfield is the President of Mayfield & Robinson, Inc., an independent
management and financial consulting firm, which he founded in 1978. For ten
years prior to founding Mayfield & Robinson, Inc., Mr. Mayfield worked for the
First National Bank of Cincinnati. He is also a director of Suburban
Bancorporation, Inc.
RONALD R. NOEL has been a director of the Company since November 1981. He is a
founder of the Company and has been Vice President and Chief Administrative
Officer since its inception. He assumed the position of Secretary of the Company
in November 1989 and the position of President of Newport in March 1994. Mr.
Noel joined Interlake's Newport Steel Works in 1966 and served in various
positions, including Chief Industrial Engineer from 1976 to 1980.
JOHN R. PARKER joined the Company as Treasurer in 1981 and has held the
positions of Vice President, Treasurer and Chief Financial Officer or similar
positions with the Company for more than five years. Prior to joining the
Company, he was a manager with Arthur Andersen LLP.
51
<PAGE> 54
BUSINESS BACKGROUND OF OTHER MANAGEMENT MEMBERS
PAUL C. BORLAND joined the Company as Vice President and General Manager of KES
in 1989. Mr. Borland assumed his current position as President of Koppel in
1990. Mr. Borland joined the Company with over 33 years of steel industry
experience where he held various management positions with Latrobe Steel
Corporation and the Universal Cyclops Specialty Steel Division of Cyclops
Corporation. He also held the position of Vice President and General Manager of
Ohio Steel Tube, a division of Copperweld Corporation, where he also held the
position of Vice President. Paul C. Borland is the brother of Clifford R.
Borland.
RICHARD L. CARTER has been Vice President and General Manager of Erlanger since
1987. Prior to 1987 Mr. Carter held various positions in the industrial
engineering department of Newport.
THOMAS J. DEPENBROCK has been Corporate Controller of the Company since 1987.
Mr. Depenbrock was with the accounting firm of Arthur Andersen LLP from 1978
until 1987.
THOMAS L. GOLATZKI has been Vice President of the Company since 1987. Prior to
1987, Mr. Golatzki was the Director of Engineering and Administrative Services
of the Company.
ROBERT D. JOHNSON joined Imperial in 1970 and has served as its President since
1980.
JACK W. MEHALKO has been Vice President of the Company since March 1994. Mr.
Mehalko was President of Newport from 1989 until March 1994 and Vice President
and General Manager of KES from 1986 to 1989.
DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid an annual retainer
of $16,000 and $1,000 for each meeting of the Board of Directors attended in
excess of four meetings per fiscal year and expenses for attendance at meetings
of the Board and Committees. In addition, such outside Directors are paid $750
($1,000 for Committee Chairmen) for each Committee meeting attended.
EXECUTIVE COMPENSATION
The following table presents summary information concerning compensation
received by the Chief Executive Officer and each of the other executive officers
for each of the last three fiscal years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ------------
OTHER ANNUAL NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(1)
- ------------------------------ ----- -------- ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 1994 $361,392 $ 0 (2) 41,333 (3)
President and Chief 1993 315,921 0 (2) 15,000 (3)
Executive Officer 1992 310,000 0 0
Ronald R. Noel 1994 $188,951 $ 0 (2) 13,420 (3)
Vice President, Secretary 1993 181,328 0 (2) 9,750 (3)
and Chief Administrative 1992 178,000 0 0
Officer; President of
Newport
John R. Parker 1994 $173,863 $ 0 (2) 13,420 (3)
Vice President, Treasurer 1993 166,022 0 (2) 9,750 (3)
and Chief Financial Officer 1992 163,000 0 0
<FN>
- ---------------
(1) In accordance with the transitional provisions of the rules on executive
officer compensation adopted by the Securities and Exchange Commission,
amounts under "Other Annual Compensation" and "All Other Compensation" are
excluded for the Company's fiscal 1992.
(2) The named executive officers received certain perquisites in fiscal 1994 and
fiscal 1993, the amount of which did not exceed the lesser of $50,000 or 10%
of any such officer's salary and bonus.
52
<PAGE> 55
(3) Amounts included as "All Other Compensation" consist of insurance premiums
made pursuant to the Company's salary continuation program and in connection
with certain disability insurance policies. Under the Company's salary
continuation program, which the Company funds with insurance policies, the
Company will pay certain employees, including the executive officers, upon
retirement at or after age 62 an amount ranging from 27% to 42% of his
current base salary for life, with payments for a minimum of 10 years either
to each participant or his descendants. During fiscal 1994 and fiscal 1993,
respectively, the Company paid aggregate premiums as follows: $18,933 and
$4,733 for Mr. Borland; $3,143 and $9,430 for Mr. Noel; and $10,911 and
$2,748 for Mr. Parker. The Company has purchased disability insurance
policies for the benefit of certain employees of the Company, including the
named executive officers. In the event an insured is disabled for more than
60 days, he will be paid 70% of his base salary during the term of such
disability up to age 65. During fiscal 1994 and fiscal 1993, respectively,
the Company paid aggregate premiums as follows: $12,817 and $11,915 for Mr.
Borland; $5,500 and $5,107 for Mr. Noel; and $4,736 and $4,383 for Mr.
Parker.
</TABLE>
The following tables present certain information concerning stock
options/SARs granted to and exercised by the executive officers of the Company
during fiscal 1994.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES
TOTAL OF STOCK PRICE
OPTIONS/SARS APPRECIATION
GRANTED TO FOR OPTION
EMPLOYEES IN MARKET PRICE TERM(3)
OPTIONS/SARS FISCAL PER SHARE ON DATE EXPIRATION -------------------
NAME GRANTED(1) YEAR(2) EXERCISE PRICE OF GRANT DATE 5% 10%
- -------------------- ------------ ------------ -------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 41,333 9.7 7.25 7.25 12/01/03 188,457 477,588
Ronald R. Noel 13,420 3.2 7.25 7.25 12/01/03 61,188 155,063
John R. Parker 13,420 3.2 7.25 7.25 12/01/03 61,188 155,063
<FN>
- ---------------
(1) Options/SARs were granted pursuant to the NS Group, Inc. Non-Qualified Stock
Option and Stock Appreciation Rights Plan of 1988 (NSO Plan). The options
become exercisable over a five year period in increments of 20% per year
beginning with the third anniversary of the date of grant.
(2) The Company granted options representing 424,135 shares to employees in
fiscal 1994 (135,085 under the NSO Plan and 289,050 under the Company's
Employee Incentive Stock Option Plan).
(3) The amounts shown under these columns are the result of calculations at 5%
and 10% rates as required by the Commission and are not intended to forecast
future appreciation of the stock price of the Company's common stock.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<CAPTION>
TOTAL NUMBER OF SHARES FOR
WHICH UNEXERCISED TOTAL VALUE OF UNEXERCISED,
NUMBER OF OPTIONS/SARS HELD AT IN-THE-MONEY OPTIONS/SARS
SHARES SEPTEMBER 24, 1994 HELD AT SEPTEMBER 24, 1994(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 0 $0 18,200 73,133 $ 0 $41,250
Ronald R. Noel 0 0 13,900 36,770 0 26,813
John R. Parker 0 0 14,700 36,970 0 26,813
<FN>
- ---------------
(1) In-the-Money Options/SARs are those where the fair market value of the
underlying securities at fiscal year end exceed the exercise price of the
option or SAR.
</TABLE>
53
<PAGE> 56
<TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 24, 1994
with respect to the beneficial ownership of shares of Common Stock owned by (a)
each person known by the Company to own beneficially more than 5% of the Common
Stock of the Company, (b) each director or officer of the Company, and (c) all
directors and officers of the Company as a group.
<CAPTION>
NUMBER OF PERCENTAGE
NAME SHARES OWNED OF CLASS
- ---------------------------------------------------------------- ------------ ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Clifford R. Borland(1).......................................... 2,885,200(2) 20.9
Ronald R. Noel(1)............................................... 1,143,452(2) 8.3
John B. Lally(1)................................................ 688,090(3) 5.0
John R. Parker.................................................. 176,699(2)(4) 1.3
Patrick J.B. Donnelly........................................... 99,375(5) .7
R. Glen Mayfield................................................ 118,795 .9
All Directors and Executive
Officers as a group
(6 persons)..................................................... 5,111,611(2) 36.9
OTHER 5% SHAREHOLDERS:
State of Wisconsin Investment Board(1).......................... 1,315,400 9.5
Pioneering Management Corporation(1)............................ 934,000 6.8
General Electric Capital Corporation(1)......................... 772,481(6) 5.3
PMAC, Ltd. and certain other parties(7)......................... 1,705,881 11.0
<FN>
- ---------------
(1) The address of Messrs. Borland and Noel is NS Group, Inc., Ninth and Lowell
Streets, Newport, Kentucky 41072. The address of Mr. Lally is 100 South
Wacker Drive, Suite 1830, Chicago, Illinois 60606. The address of the State
of Wisconsin Investment Board is P.O. Box 7842, Madison, Wisconsin 53707.
The address of Pioneering Management Corporation is 60 State Street, Boston,
Massachusetts 02109-1820. The address of General Electric Capital
Corporation ("GECC") is 260 Long Ridge Road, Stamford, Connecticut 06927.
(2) Includes, where applicable, shares of Common Stock (a) which may be acquired
within 60 days of September 24, 1994 by Mr. Borland (18,200), Mr. Noel
(13,900), Mr. Parker (14,700) and all Directors and executive officers as a
group (46,800) pursuant to the Company's Non-Qualified Stock Option and
Stock Appreciation Rights Plan of 1988 and (b) owned by Mr. Noel (1,102),
Mr. Parker (1,929) and all Directors and executive officers as a group
(3,031) and held by the trustee of the NS Group, Inc. Salaried Employees'
Flexible Compensation Plan, which shares are voted as directed by the
participants to whose account they are allocated.
(3) Includes 50,855 shares owned by Mr. Lally's wife. Mr. Lally disclaims any
beneficial interest in these shares.
(4) Includes 80,000 shares owned by Mr. Parker's wife. Mr. Parker disclaims any
beneficial interest in these shares.
(5) Includes 32,850 shares owned by Mr. Donnelly's wife and 33,000 shares held
by Mr. Donnelly's wife as custodian for their children. Mr. Donnelly
disclaims any beneficial interest in these shares.
(6) Represents number of shares purchasable upon exercise of warrants, which
have an exercise price of $8.00 per share.
(7) PMAC is a Texas limited partnership for which PM Acquisition Corporation
("PM Corp.") is the general partner. PMAC, PM Corp. and certain other
affiliated persons have filed a Schedule 13D ("PMAC Schedule 13D") with the
Commission indicating on the cover pages thereof the following ownership
numbers and percentages, as updated from information provided by PMAC (some
of which are duplicative as described below): PMAC (and PM Corp.), 882,352
(6.0%); R. Alpert, 1,335,293 (8.8%); R. E. Belfer, 370,588 (2.6%); R. A.
Belfer, 370,588 (2.6%). The shares listed in the PMAC Schedule 13D for R.
Alpert include the shares listed for PMAC and PM Corp. (for which shares R.
Alpert, PMAC and PM Corp. would share voting and dispositive power) and an
additional 452,941
54
<PAGE> 57
shares (for which R. Alpert would have sole voting and dispositive power).
R. E. Belfer and R. A. Belfer, as co-trustees of certain trusts, would share
voting and dispositive power for 92,647 shares; R. E. Belfer, as sole
trustee of certain other trusts, would hold sole voting and dispositive
power for 92,647 shares; and R. A. Belfer, as sole trustee of a certain
other trust, would hold sole voting and dispositive power for 185,294
shares. The cover pages for the Belfers in the PMAC Schedule 13D filed (and
updated from information obtained from PMAC) indicates that each one shares
voting and dispositive power for 370,588 shares.
All of the shares listed in the PMAC Schedule 13D represent shares issuable
upon conversion of $29 million principal amount of Convertible Debentures,
convertible at a price of $17 per share ("Convertible Debentures"), issued
to PMAC in connection with the Company's purchase of the assets comprising
Koppel Steel Corporation in 1990 ("Koppel Acquisition"). (Of such
Convertible Debentures, $15 million, which are owned by PMAC (and PM Corp.),
are held in escrow as security for contingent indemnification obligations of
PMAC to the Company in connection with the Koppel Acquisition.)
The Convertible Debentures provide that, after the conversion into Common
Stock of all of the Convertible Debentures, so long as PMAC or its
affiliates own 60% of the shares issued upon conversion, the Company will
take certain actions to provide for the election as a director of the
Company of an individual chosen by PMAC (and approved by the Company). As of
October 4, 1990, the Company agreed that R. A. Belfer would be acceptable as
such director. The Convertible Debentures also provide that the holders of
the stock issuable upon conversion thereof will vote for the Company's
nominees for directors (including the nominee designated by PMAC). In
addition, the transfer of the Convertible Debentures is subject to a right
of first refusal in favor of the Company; a holder of the shares issuable
upon conversion may not transfer such shares except subject to a right of
first refusal in favor of the Company or pursuant to Rule 144 under the
Securities Act of 1933. Finally, the holders of the Convertible Debentures
and any shares issued upon conversion thereof are subject to certain
"standstill" provisions, including a prohibition against acquiring, in the
aggregate, more than a 15% interest in the voting securities of the Company.
The address of PMAC, Ltd. and R. Alpert is 15311 Vantage Parkway West, Suite
315, Houston, Texas 77032. The address of R. E. Belfer and R. A. Belfer is
885 Second Avenue, New York, New York 10017.
The information in this footnote and the corresponding information in the
above share ownership table was derived from the PMAC Schedule 13D,
information provided by PMAC and from the terms of the Convertible
Debentures.
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Mayfield, Lally and
Donnelly, none of whom has served as an officer or employee of the Company or
any of its subsidiaries.
John B. Lally owns the controlling interest in L B Industries, Inc. The
Company sells substantially all of its secondary and limited service tubular
products to L B Industries, Inc. Sales to L B Industries, Inc. amounted to
approximately $11.0 million, $10.9 million and $10.3 million in fiscal 1994,
1993 and 1992, respectively. Trade receivables from this customer were $958,000
and $582,000 at the end of fiscal 1994 and 1993, respectively. The Company
believes that its transactions with L B Industries are conducted on an arms-
length basis.
CERTAIN TRANSACTIONS
On September 27, 1993, the Company repaid an $8 million loan from PMAC made
pursuant to a Loan Agreement dated as of October 4, 1990. The Company funded
such repayment with the proceeds of an $8 million capital expenditure loan made
to the Company by GECC. Such loan is payable in 28 quarterly installments of
principal, together with interest at 8 percent.
55
<PAGE> 58
DESCRIPTION OF THE SENIOR SECURED NOTES
The Senior Secured Notes will be issued under an indenture (the
"Indenture"), between the Company and Huntington National Bank, as trustee (the
"Trustee"), a copy of which will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Senior Secured Notes are
subject to all such terms, and prospective purchases of the Senior Secured Notes
are referred to the Indenture for a statement thereof. The following summary
does not purport to be a complete description of the Senior Secured Notes and is
subject to the detailed provisions of, and qualified in its entirety by
reference to, the Indenture and the Senior Secured Notes, and is qualified in
its entirety by reference to the Trust Indenture Act of 1939, as amended
("TIA"), as in effect on the date of the Indenture. The definitions of certain
capitalized terms used in the following summary are set forth below under
"Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The Senior Secured Notes will be obligations of the Company and will rank
pari passu with the Company's other unsubordinated debt obligations. The Senior
Secured Notes will be limited to $125,000,000 aggregate principal amount and
will mature on , 2003. The Senior Secured Notes will be secured by
Intercompany Notes issued in favor of the Company by Newport, Koppel and
Erlanger in an aggregate amount at least equal to the principal amount of the
Senior Secured Notes. The Senior Secured Notes also will be unconditionally
guaranteed, jointly and severally, by each current Subsidiary of the Company.
Each Intercompany Note and Guarantee will rank pari passu in right of payment
with the unsubordinated obligations of the Subsidiaries, including obligations
arising in connection with the Credit Facility. For each of Newport, Koppel and
Erlanger, its Intercompany Note will be secured by a first priority security
interest and its Guarantee will be secured by a second priority security
interest in its steel-making operations, excluding inventory, accounts
receivable and certain intangible property.
Interest on the Senior Secured Notes will accrue at the rate of % per
annum and will be payable semi-annually on each and ,
commencing , 1995 to the Holders of record of Senior Secured Notes
at the close of business on the and immediately
preceding such interest payment dates. Interest on the Senior Secured Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the original date of issuance (the "Issue Date").
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest will accrue at a rate equal to the
stated rate of interest.
As discussed below, payment of principal of, and interest on, Senior
Secured Notes represented by one or more permanent global Senior Secured Notes
registered in the name of or held by The Depository Trust Company (the
"Depositary") or its nominee will be made in immediately available funds to the
Depositary or its nominee, as the case may be, as the registered owner and
holder of such permanent global Senior Secured Note or Notes. See "-- Same-Day
Settlement and Payment."
OPTIONAL REDEMPTION
Except as described below, the Senior Secured Notes may not be redeemed
prior to , 1999. On and after , 1999, the Company may,
at its option, redeem the Senior Secured Notes, in whole or in part, from time
to time, at the redemption prices set forth below (expressed as a percentage of
the principal amount thereof), in each case together with accrued interest, if
any, to the date of redemption, if redeemed during the twelve-month period
beginning of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------- -----------
<S> <C>
1999............................................. %
2000............................................. %
2001 and thereafter.............................. 100.00%
</TABLE>
; provided, that if the date fixed for redemption is or
, then the interest payable on such date shall be paid to the Holder
of record on the next preceding or .
56
<PAGE> 59
During the first 36 months after the Offering, the Company may redeem up to
40% of the principal amount of the Senior Secured Notes with the net proceeds of
a Public Equity Offering of Common Stock at % of the principal amount
thereof plus accrued interest to the redemption date; provided that at least
$75,000,000 of the Senior Secured Notes remain outstanding following the
redemption.
In the event that less than all of the Senior Secured Notes are to be
redeemed at any time, selection of Senior Secured Notes for redemption will be
made by the Trustee on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided, however, that no Senior Secured Notes
of $1,000 or less shall be redeemed in part. Notice of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Senior Secured Notes to be redeemed at its
registered address. If any Senior Secured Note is to be redeemed in part only,
the notice of redemption that relates to such Senior Secured Note shall state
the portion of the principal amount thereof to be redeemed. A new Senior Secured
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Senior Secured Note. On and after the redemption date, interest will cease to
accrue on Senior Secured Notes or the portion thereof called for redemption
unless the Company defaults in the payment of the redemption price or accrued
interest. Senior Secured Notes that are optionally redeemed by the Company
(after a Public Equity Offering or otherwise) or that are purchased by the
Company pursuant to an Asset Sale Offer as described under "-- Certain
Covenants-Restrictions on Asset Sales" or pursuant to a Change of Control Offer
as described under "-- Change of Control" will be surrendered to the Trustee for
cancellation.
The Credit Facility contains certain covenants that restrict the ability of
the Company to redeem the Senior Secured Notes without the prior written consent
of the Lenders. See "Description of Certain Indebtedness-Credit Facility."
CHANGE OF CONTROL
The Indenture provides that upon a Change of Control, each Holder shall
have the right to require the Company to repurchase all or any part of such
Holder's Senior Secured Notes at a cash purchase price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase pursuant to the procedures set forth in the Indenture (a "Change of
Control Offer").
Within 30 days following any Change of Control, the Company shall send, by
first class mail, a notice to each Holder, with a copy to the Trustee, which
notice will govern the terms of the Change of Control Offer. This notice will
state, among other things, the repurchase date (which shall not be earlier than
30 days or later than 60 days from the date such notice is mailed) and the
circumstance and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control). Holders electing
to have a Senior Secured Note repurchased will be required to surrender the
Senior Secured Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Senior Secured Note completed, to the paying agent at the
address specified in the notice prior to the close of business on the date of
repurchase. Holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the third Business Day
(or such shorter period as may be required by applicable law) preceding the date
of repurchase, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Senior Secured Notes the
Holder delivered for repurchase, and a statement that such Holder is withdrawing
his election to have such Senior Secured Notes repurchased. Failure to make a
Change of Control Offer as required will constitute a covenant Default under the
Indenture.
In the event a Change of Control occurs and the Holders exercise their
right to require the Company to repurchase the Senior Secured Notes, and
assuming that such repurchase constitutes a "tender offer" for purposes of Rule
14e-1 under the Exchange Act at the time it is required, the Company will comply
with the requirements of Rule 14e-1 as then in effect with respect to such
repurchase.
A Change of Control under the Indenture will constitute a default under the
Credit Facility. Therefore, upon the occurrence of a Change of Control, the
Lenders will have the ability to accelerate their loans and the Company may be
required to repay all of its outstanding obligations under the Credit Facility
prior to the
57
<PAGE> 60
payment of the principal of any of the Senior Secured Notes that the Company is
required to repurchase pursuant to the Indenture. See "Description of Certain
Indebtedness-Credit Facility."
With respect to the disposition of assets, the phrase "all or substantially
all" as used in the Indenture varies according to the facts and circumstances of
the subject transaction, has no clearly established meaning under New York law
(which governs the Indenture) and is subject to judicial interpretation.
Accordingly, in certain circumstances there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the assets of the Company, and therefore it may be
unclear as to whether a Change of Control has occurred and whether the Holders
have the right to require the Company to repurchase Senior Secured Notes.
None of the provisions relating to a repurchase upon a Change of Control
are waivable by the Board of Directors of the Company. The Company could, in the
future, enter into certain transactions, including certain recapitalizations of
the Company, that would not constitute a Change of Control with respect to the
Change of Control purchase feature of the Senior Secured Notes, but would
increase the amount of Indebtedness outstanding at such time.
If a Change of Control were to occur, there can be no assurance that the
Company would be able to repay all of its obligations under the Credit Facility,
to purchase all of the Senior Secured Notes tendered and to repay other
indebtedness that may become payable upon the occurrence of such Change of
Control. After giving effect to the Offering and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds," the
Company would not have sufficient funds available to repurchase all of the
outstanding Senior Secured Notes pursuant to a Change of Control Offer. In the
event that the Company were required to repurchase outstanding Senior Secured
Notes pursuant to a Change of Control Offer, the Company expects that it would
need to seek third-party financing to the extent it does not have available
funds to meet its repurchase obligations, although there can be no assurance
that the Company would be able to obtain such financing. Accordingly, it is
possible that a prospective acquiror would, in order to avoid the occurrence of
an Event of Default under the Credit Facility, the Indenture and the Senior
Secured Notes, either fund the Company's purchase of the Senior Secured Notes
tendered in the Change of Control Offer following such acquisition or seek to
refinance the Senior Secured Notes, which funding or refinancing may have the
effect of delaying, discouraging or preventing an acquisition. Consequently, the
obligation of the Company to make a Change of Control Offer and repurchase
tendered Senior Secured Notes upon a Change of Control could have the effect of
preventing or delaying the ability of other persons or entities to acquire
control of the Company.
RANKING
The Senior Secured Notes will be obligations of the Company. The Senior
Secured Notes will rank pari passu in right of payment with any existing and
future unsubordinated Indebtedness of the Company, including obligations arising
under the Company's guarantee of the Credit Facility. Each Intercompany Note and
Guarantee will rank pari passu with respect to the payment in full of the
principal and interest on all existing and future unsubordinated Indebtedness of
the applicable Subsidiary, including obligations of each Subsidiary arising
under the Credit Facility.
INTERCOMPANY NOTES AND GUARANTEES OF SENIOR SECURED NOTES
The Senior Secured Notes will be secured by Intercompany Notes issued to
the Company by Newport, Koppel and Erlanger in the approximate respective
amounts of $ , $ , and $ , reflecting the amounts
loaned to such Subsidiaries by the Company as part of the Refinancing
Transaction or, in the case of Erlanger, prior intercompany advances. In
addition, each existing and future Subsidiary of the Company (excluding
Non-Recourse Subsidiaries) unconditionally will guarantee (each a "Guarantor"),
jointly and severally, to each Holder and the Trustees, the full and prompt
performance of the Company's obligations under the Indenture and the Senior
Secured Notes, including the payment of principal of and interest on the Senior
Secured Notes. The obligations of each Subsidiary are limited to the maximum
amount which will result in the obligations of such Subsidiary under its
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. Various fraudulent conveyance laws enacted for the
protection of creditors may be utilized by a court of competent jurisdiction to
avoid or subordinate in favor
58
<PAGE> 61
of existing and/or future creditors of the Subsidiaries the Guarantees and the
liens of the Security Documents. See "Investment Considerations -- Fraudulent
Conveyance Issues; Holding Company Structure." Each Subsidiary that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in an amount pro rata based on the net assets of each
Subsidiary, determined in accordance with GAAP.
Subject to the terms and conditions of the Indenture, each Recourse
Subsidiary may consolidate with or merge into or sell its assets to the Company
or another Recourse Subsidiary. See "-- Certain Covenants -- Transfer of Assets
to Subsidiaries." In the event all of the capital stock of a Guarantor is sold
by the Company to a Person that is not a Recourse Subsidiary, or the surviving
party of a merger involving a Guarantor is not a Recourse Subsidiary, and such
sale or merger complies with the covenants set forth in the Indenture, then such
Subsidiary's Guarantee will be released.
Separate financial statements of the Subsidiaries are not included herein
because such Subsidiaries are jointly and severally liable with respect to the
Company's obligations pursuant to the Senior Secured Notes, and the aggregate
net assets, earnings and equity of the Subsidiaries and the Company are
substantially equivalent to the net assets, earnings and equity of the Company
on a consolidated basis.
SECURITY
As security for the Intercompany Notes and the Guarantees, Newport, Koppel
and Erlanger will assign and pledge and grant a security interest in the
following property and assets: (a) the real property interests in the
approximately 250 acres of real property at the Newport facility, including the
melt shop, hot strip mill, two welded pipe mills, machine and fabricating shops,
storage and repair facilities and administrative offices, and all other
buildings, fixtures and improvements thereon with a net book value of
approximately $7.7 million at September 24, 1994; (b) approximately 272 acres of
real property at the Koppel and Ambridge facilities, including the melt shop,
bar mill, tube mill, blooming mill, pickling facility, machine and fabricating
shops, storage and repair facilities and administrative offices and all other
buildings, fixtures and improvements thereon, with a net book value of
approximately $10.0 million at September 24, 1994; (c) approximately 40 acres of
real property at the Baytown facility, including the finishing facility and all
other buildings, fixtures and improvements thereon, with a net book value of
approximately $0.5 million at September 24, 1994; (d) the Erlanger lease of
approximately 36 acres of real property at the Port of Catoosa near Tulsa,
Oklahoma and all leasehold improvements thereon with a net book value of
approximately $1.3 million at September 24, 1994; (e) all existing fixtures,
machinery, tools, equipment and similar property at each of the Newport, Koppel
and Ambridge, Baytown and Erlanger facilities with respective net book values at
September 24, 1994 of $56.0 million, $73.9 million, $1.7 million, and $2.0
million, and all future real estate, fixtures, machinery, tools, equipment and
similar property owned by such Subsidiaries; and (f) all proceeds and products
of any and all of the foregoing, except as described under "Possession, Use and
Release of Property" (the property and assets described under clauses (a)-(f)
are collectively referred to as "Collateral"). The security interest will not
extend to the inventory, accounts receivable and certain intangible property of
the Subsidiaries as these assets secure the obligations of the Subsidiaries
under the Credit Facility and the related guarantees. Further, the security
interest will not extend to the Excluded Assets. The security interest in the
Collateral will be a first priority interest with respect to the Intercompany
Notes and a second priority security interest with respect to the Guarantees (to
the extent attainable by filing or possession), subject to certain permitted
encumbrances or Liens that, in the judgment of the Company, will not materially
adversely affect the value of the Collateral. Each future Subsidiary of the
Company (other than Non-Recourse Subsidiaries) will also pledge their real
property, fixtures, machinery, tools, equipment and similar property to secure
its obligations under its Guarantee. The proceeds from the foreclosure on the
Collateral would be applied to repay the Subsidiary's obligations under its
Guarantee, which may be enforceable for an amount less than the obligations
outstanding with respect to the Senior Secured Notes and its Intercompany Note
(where applicable).
The real property Collateral will be pledged pursuant to first mortgages or
deeds of trust (the "Mortgages"), subject to the Liens permitted by the
Indenture. See "-- Certain Covenants -- Limitation on Liens." Each Mortgage
executed by a Subsidiary will secure all obligations arising under its
Intercompany Note (where applicable) and its Guarantee. Upon issuance of the
Senior Secured Notes, the Collateral Agent
59
<PAGE> 62
will receive mortgagee's title insurance policies in satisfactory form. The
personal property to be included within the Collateral will be pledged by the
Subsidiaries pursuant to security agreements (the "Security Agreements") and
will constitute a first priority Lien, subject to the Liens permitted by the
Indenture (the "Security Documents"). See "-- Certain Covenants -- Limitation on
Liens." Upon the occurrence of an Event of Default under the Indenture, the
Senior Secured Notes or the Security Documents, the Collateral Agent will have
the customary rights and remedies of a secured party with respect to the
Collateral assigned by a Subsidiary.
No appraisals of any of the Collateral have been prepared by or on behalf
of the Company in connection with the issuance and sale of the Senior Secured
Notes. In addition, the fair market value of the Collateral is subject to
fluctuations based on factors that include, among others, the condition of the
steel industry, the ability to sell the Collateral in an orderly sale, the
condition of the national and local economy, the availability of buyers and
similar factors. The net book value of the Collateral as of September 24, 1994
was approximately $153.1 million. There can be no assurance that the proceeds of
any sale of the Collateral, in whole or in part, pursuant to the Indenture and
the Security Documents following an Event of Default would be sufficient to
satisfy payments due on the Intercompany Notes and the Guarantees. To the extent
that third parties enjoy Liens permitted by the Indenture, such third parties
have or may exercise rights and remedies with respect to the property subject to
such Lien that could adversely affect the value of such Collateral and the
ability of the Collateral Agent, Trustee or the Holders to realize or foreclose
on such Collateral. In addition, the ability of the Trustee and Collateral Agent
to realize upon the Collateral may be subject to certain bankruptcy law
limitations in the event of a bankruptcy. See "-- Certain Bankruptcy
Limitations" below.
The collateral release provisions of the Indenture permit the release of
Collateral in connection with Asset Sales of Collateral and in other
circumstances upon compliance with certain conditions. See "-- Possession, Use
and Release of Collateral." As described under "-- Certain Covenants --
Restrictions on Asset Sales," the Net Available Cash from such Asset Sales,
above prescribed amounts and subject to certain exceptions, are required to be
deposited in the Collateral Account prior to the making of an offer to purchase
Senior Secured Notes in an Asset Sale Offer or a Permitted Related Acquisition
(each as defined below). To the extent an Asset Sale Offer is not subscribed to
by Holders, the unutilized Net Available Cash may be retained by the Company or
the applicable Subsidiary free of the Lien of the Indenture and the Security
Documents. In addition, the Collateral release provisions of the Indenture
permit the sale, lease, transfer or other disposition of tangible personal
property that, in the reasonable judgment of the Company, has become worn out,
obsolete or no longer necessary to the operation of the Subsidiaries' business
and which is disposed in the ordinary course of business, subject to certain
limitations.
If an Event of Default has occurred and is continuing and the Trustee has
been directed by the Holders of at least 25% in aggregate principal amount of
Senior Secured Notes to enforce the Intercompany Notes and the Guarantees and
foreclose upon all or any part of the Collateral, the Collateral Agent will take
such action to foreclose upon the Collateral as is consistent with such
directions. The Collateral Agent will thereupon foreclose upon the Collateral in
accordance with instruction from such representatives, unless Holders of a
majority in aggregate principal amount of the Senior Secured Note shall have
given contrary instructions, in each case as provided in the Security Documents.
The proceeds received by the Collateral Agent will be applied by the Collateral
Agent first to pay the expenses of such foreclosure and fees and other amounts
then payable to the Trustee under the Indenture, and thereafter to pay, pro
rata, the principal of, premium, if any, and interest on the Senior Secured
Notes. Dispositions of Collateral may be subject to delay as a result of the
Intercreditor Agreement.
Real property pledged as security may be subject to known and unforeseen
environmental risks. In September 1994, the Company received a proposed Consent
Agreement from the EPA relating to an April 1990 RCRA facility assessment
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment identified potential releases of hazardous constituents into the
environment from numerous SWMU's and AOC's located at and adjacent to the Koppel
facilities. See "Investment Considerations -- Cost of Compliance with
Environmental Regulations" and "Business -- Environmental Matters." Under the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
("CERCLA"), a secured party may be held liable, in certain limited
circumstances, for the costs of
60
<PAGE> 63
remediating or preventing releases or threatened releases of hazardous
substances at a mortgaged property. There may be similar risks under various
other federal laws, state laws and common law theories. Such liability has been
imposed where a secured party has become sufficiently involved in the operations
of the borrower so that its "participation in the management" of the borrower
meets the test set out in CERCLA and elaborated in a number of court decisions.
Liability for cleanup costs has also been imposed if a secured party takes title
to property by foreclosure, thereby becoming the owner of the property and
losing the security interest exemption contained in CERCLA. Additionally,
foreclosure may result in a lender becoming subject to substantial requirements,
including permitting obligations, under environmental laws.
Under the Indenture, the Trustee may, prior to taking certain actions,
request the Holders to provide an indemnification against its costs, expenses,
and liabilities. It is possible that CERCLA (or analogous) cleanup costs could
become a liability of the Trustee in its capacity as Collateral Agent and cause
a loss to any Holders that provided an indemnification. In addition, such
Holders may act directly rather than through the Trustee, in specified
circumstances, in order to pursue a remedy under the Indenture. If Holders
exercise that right, they could be deemed to be secured parties that are subject
to the risks discussed above.
INTERCREDITOR AGREEMENT; SUBORDINATION AGREEMENTS
Prior to the consummation of the Offering, the Collateral Agent, on behalf
of the Holders of the Senior Secured Notes, will enter into an intercreditor
agreement (the "Intercreditor Agreement") with BNYCC, as agent for the Lenders
under the Credit Facility (in such capacity, the "Agent"). The Intercreditor
Agreement will provide, among other things, that (i) the Collateral Agent and
the Agent will provide notices to each other with respect to a default under the
Senior Secured Notes or the Indebtedness under the Credit Facility, as the case
may be, and the commencement of any action to enforce the rights of the Holders,
the Collateral Agent, the Lenders or the Agent; (ii) for a period following the
issuance of a notice of enforcement, the Agent may enter upon all or any portion
of the Subsidiaries' premises, use the Collateral to the extent necessary to
complete the manufacture of inventory, collect accounts and sell or otherwise
dispose of the collateral securing the Indebtedness under the Credit Facility;
and (iii) the Collateral Agent will not amend the Indenture or any of the
Security Documents and the Agent will not amend the Credit Facility or any of
the collateral documents relating thereto without the consent of the other if
such amendment would affect adversely the interests of (a) the Agent or the
various Lenders represented by the Agent in the case of a proposed amendment to
the Indenture or any of the Security Documents or (b) the Collateral Agent or
the Holders in the case of a proposed amendment to the Credit Facility or any
related collateral documents.
In addition, prior to the completion of the Offering, the Collateral Agent,
on behalf of the Holders, will obtain the written consent of the Commonwealth of
Pennsylvania, acting by and through the Department of Commerce (the
"Department"), to permit the Offering and the related security interests in and
mortgages on the Koppel facilities. It is anticipated that the Department will
retain its first priority security interest and mortgage on an idle portion of
the Koppel facilities and will subordinate its remaining mortgage on certain
real property at Koppel and its remaining security interest in certain
machinery, equipment and other tangible property at Koppel to the liens in favor
of the Holders. As of September 24, 1994, the outstanding balance of the loan
from the Department to Koppel was $3.9 million. The Collateral Agent will also
enter into a subordination agreement with the City of Dayton, Kentucky
("Dayton"). Dayton has a mortgage on certain Newport property and security
interests in certain machinery and equipment located at Newport and such
mortgage and security interests will be subordinated to the liens in favor of
the Holders. As of September 24, 1994, the outstanding balance of the loan from
Dayton to Newport was $6.9 million. The Collateral Agent will also obtain from
the Fifth Third Bank, as Trustee and Bondholder of the $3,000,000 Economic
Development Revenue Bond issued by the County of Hamilton, Ohio ("Hamilton") for
the benefit of Imperial, waivers of certain provisions of the loan agreement and
related documents executed in connection with such bonds. As of September 24,
1994, the outstanding balance on the loan from Hamilton was $0.8 million.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the
Collateral upon the occurrence of an Event of Default would be significantly
impaired by applicable Bankruptcy Law in the event that a bankruptcy proceeding
were to be commenced by or against the Company or the Subsidiaries that have
granted a security
61
<PAGE> 64
interest in property to secure its obligations under its Intercompany Note
(where applicable) and its Guarantee prior to the Collateral Agent having
repossessed and disposed of the Collateral. Prior to foreclosing on the property
securing an Intercompany Note or a Guarantee, the Trustee must pursue payment
under the relevant Intercompany Note or Guarantee. Upon the commencement of a
case for relief under Title 11 of the United States Code, as amended (the
"Bankruptcy Code"), a secured creditor, such as the Collateral Agent, is
prohibited from repossessing its security from a debtor in a bankruptcy case, or
from disposing of security repossessed from such debtor, without bankruptcy
court approval. Moreover, the Bankruptcy Code permits the debtor to continue to
retain and use collateral even though the debtor is in default under the
applicable debt instruments provided that the secured creditor is given
"adequate protection." The meaning of the term "adequate protection" may vary
according to circumstances, but it is intended in general to protect the value
of the secured creditor's interest in the collateral and may include cash
payments or the granting of additional security for any diminution in the value
of the collateral as a result of the stay of repossession or disposition or any
use of the collateral by the debtor during the pendency of the bankruptcy case.
A bankruptcy court may determine that a secured creditor may not require
compensation for a diminution in the value of the collateral if the value of the
collateral exceeds the debt it secures.
In view of the broad equitable powers of a bankruptcy court, it is
impossible to predict how long payments under the Senior Secured Notes, the
Intercompany Notes and the Guarantees could be delayed following commencement of
a bankruptcy case, whether or when the Collateral Agent could repossess or
dispose of the Collateral, the value of the Collateral at the time of a
bankruptcy petition or whether or to what extent Holders would be compensated
for any delay in payment or loss of value of the Collateral through the
requirement of "adequate protection." Any disposition of the Collateral would
also require approval of the bankruptcy court. Furthermore, in the event a
bankruptcy court determines the value of the Collateral is not sufficient to
repay all amounts due under the Intercompany Notes and the Guarantees, the
Collateral Agent, on behalf of the Holders, would have a secured claim to the
extent of the value of the Collateral securing an Intercompany Note (where
applicable) or a Guarantee, and unsecured claims with respect to any shortfall.
The Bankruptcy Code permits the payment and/or accrual of post-petition
interest, costs and attorney's fees to the Collateral Agent during a debtor's
bankruptcy case only to the extent the value of the Collateral is determined by
the bankruptcy court to exceed the aggregate obligation under such Intercompany
Note or Guarantee, as the case may be.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Subsidiaries will have the right to remain in possession and retain exclusive
control of the Collateral securing the Intercompany Notes and the Guarantees
(other than Trust Moneys and other personal property held by, or required to be
deposited or pledged with, the Collateral Agent under the Indenture or any
Security Document), to freely operate the Collateral and to collect, invest and
dispose of any income thereon. In case a Default or an Event of Default shall
have occurred and be continuing, the Subsidiaries, while in possession of the
Collateral (other than cash and other personal property held by, or required to
be deposited or pledged with, the Collateral Agent under the Indenture or any
Security Document or with any trustee, mortgagee or other holder of a prior Lien
permitted under the Security Documents), may do any of the things enumerated in
the "Release of Collateral" provisions described below only if the Trustee, in
its discretion, or the Holders of a majority in aggregate principal amount of
the outstanding Senior Secured Notes, shall consent to such action.
Release of Collateral. The Subsidiaries will have the right to sell,
exchange or otherwise dispose of any of the Collateral (excluding Trust Moneys)
(the "Released Collateral") upon delivery to the Trustee of certain documents
that may include, among others, a Company Order, an Officers' Certificate, all
documentation required by the TIA prior to the release of the Released
Collateral by the Collateral Agent, and an Opinion of Counsel. Subject to
certain exceptions for obsolete assets and certain amounts the Company and its
Subsidiaries are permitted to retain pursuant to "-- Certain Covenants --
Restrictions on Asset Sales," all cash or Cash Equivalents received by the
Collateral Agent upon an Asset Sale with respect to Collateral will be held by
the Collateral Agent as Trust Moneys under the Indenture prior to application as
provided in "Use of Trust Moneys" below and "-- Certain Covenants --
Restrictions on Asset Sales." All purchase money,
62
<PAGE> 65
chattel paper, instruments and other obligations received as part of the net
proceeds by the Collateral Agent pursuant to these "Release of Collateral"
provisions shall be held by the Collateral Agent.
As long as no Event of Default shall have occurred and be continuing, the
Subsidiaries, collectively, may, without any release or consent by the
Collateral Agent, sell or otherwise dispose of any machinery, equipment,
furniture, apparatus, tools or implements or other similar property subject to
the Lien of the Security Documents, which in the opinion of such Subsidiary may
have become worn out, obsolete or no longer necessary to the operation of such
Subsidiary's business ("Obsolete Assets"), not exceeding individually, in fair
market value, $25,000.
Use of Trust Moneys. All Trust Moneys shall be held by the Collateral Agent
as part of the Collateral securing the obligations of the Subsidiaries under the
applicable Intercompany Note and Guarantee, and, so long as no Event of Default
shall have occurred and be continuing, may either, at the direction of the
Company, upon delivery to the Trustee of certain documents that may include,
among others, a Company Order, an Officer's Certificate, all documentation
required by the TIA and an Opinion of Counsel, be applied by the Collateral
Agent from time to time to a Permitted Related Acquisition or to the payment of
the principal, premium, if any, and interest on any Senior Secured Notes at
maturity or to the repurchase of Senior Secured Notes in an Asset Sale Offer,
each of the foregoing being performed by the Company in accordance with the
Indenture.
CERTAIN COVENANTS
The following is a summary of certain covenants that will be contained in
the Indenture. Such covenants will be applicable (unless waived or amended) so
long as any of the Senior Secured Notes are outstanding.
Limitation on Liens. The Company shall not, and shall not permit, cause or
suffer any of its Subsidiaries to, create, incur, assume or suffer to exist any
Liens of any kind upon any property or assets of the Company or any Subsidiary,
whether now owned or hereafter acquired, except for (i) Liens in favor of the
Collateral Agent of the Noteholders, including Liens created by the Senior
Secured Notes, the Indenture and the Security Documents (ii) Liens on accounts
receivable, inventory and certain intangibles to secure the Credit Facility;
(iii) Permitted Liens; (iv) Liens on the property of the Company or any of its
Subsidiaries created solely for the purpose of securing purchase money
obligations for property acquired in the ordinary course of business; provided,
that (a) such property so acquired for use in the ordinary course of business is
for use in lines of business related to the Company's or its Subsidiaries'
business as it exists immediately prior to the issuance of the related debt and
(b) no such Lien shall extend to or cover other property or assets of the
Company and its Subsidiaries other than the respective property or assets so
acquired and the principal amount of Debt secured by any such Lien shall at no
time exceed the original purchase price of such property or assets; (v) Liens on
the property or assets of a Subsidiary acquired after the Issue Date or on
property or assets acquired in an asset purchase transaction with a Person that
is not an Affiliate created solely to secure the obligations that financed the
acquisition of such Subsidiary or such property and assets; provided that (a) no
such Lien shall extend to or cover property or assets of the Company and its
Subsidiaries other than the property or assets of the Subsidiary so acquired or
the property or assets so acquired and (b) no such Lien shall extend to the
Capital Stock of any Subsidiary so acquired and (c) the principal amount of Debt
secured by any such Lien shall not exceed the original purchase price of such
Subsidiary or such property or assets; (vi) Liens on the assets of any entity
existing at the time such entity or assets are acquired by the Company or any of
its Subsidiaries, whether by merger, consolidation, purchase of assets or
otherwise provided, that such Liens (a) are not created, incurred or assumed in
connection with, or in contemplation of, such assets being acquired by the
Company or any of its Subsidiaries and (b) do not extend to any other property
of the Company or any of its Subsidiaries; (vii) Liens securing Industrial
Revenue Bonds ; (viii) Liens on assets specified in the Indenture securing
Government Loans; (ix) Liens in existence on the date of the Indenture; and (x)
any extension, renewal or replacement (or successive extension, renewals or
replacements), in whole or in part, of any Lien referred to in the foregoing
clauses; provided, that the principal amount of Debt secured thereby shall not
exceed the principal amount of Debt so secured immediately prior to the time of
such extension, renewal or replacement (or with respect to the Credit Facility,
the maximum amount permitted to be borrowed thereunder), and that such
extension, renewal, or replacement Lien shall be limited to all or a part of the
property which secured the Lien so extended, renewed or replaced (plus
improvements on such property).
63
<PAGE> 66
Limitation on Debt. The Company shall not and will not permit any
Subsidiary to Issue, directly or indirectly, any Debt (including Acquired Debt)
unless the pro forma Consolidated EBITDA Coverage Ratio exceeds 2.0 to 1.0.
Notwithstanding the above, the Company and its Subsidiaries may issue the
following Debt: (i) Debt evidenced by the Senior Secured Notes, the Guarantees
and the Security Documents; (ii) Debt issued pursuant to the Credit Facility in
the aggregate principal amount outstanding at any time not to exceed the greater
of (a) $50 million or (b) the sum of (1) 85% of the aggregate face amount of
Accounts Receivable plus (2) 50% of the aggregate book value of Inventory, in
each case, measured as of the end of the
most recent fiscal month for which information regarding Accounts Receivable and
Inventory is then available; (iii) Debt of the Company issued to any Wholly
Owned Subsidiary; provided, that (a) any such Debt is unsecured and is
subordinated to the Senior Secured Notes and (b) that any subsequent issuance or
transfer of any Capital Stock which results in any Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any transfer of such Debt to a Person
not a Wholly Owned Subsidiary will be deemed an incurrence of such Debt; (iv)
Debt of a Wholly Owned Subsidiary issued to and held by the Company or any
Wholly Owned Subsidiary of the Company; provided, that any subsequent issuance
or transfer of any Capital Stock which results in such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any transfer of such Debt to a Person
not a Wholly Owned Subsidiary will be deemed an incurrence of such Debt; (v)
Debt in existence following the issuance of the Senior Secured Notes and the
application of the proceeds of the Senior Secured Notes in the manner set forth
under "Use of Proceeds"; (vi) Debt evidenced by Industrial Revenue Bonds
(including Pollution Control Bonds) as such terms are defined under the Internal
Revenue Code of 1986, as amended, or Government Loans in an aggregate principal
amount not to exceed $20,000,000; (vii) Debt issued pursuant to (a) Interest
Rate Protection Agreements in respect of Debt of the Company or any of its
Subsidiaries to the extent the notional principal amount of such obligation does
not exceed the aggregate principal amount of the Debt to which such Interest
Rate Protection Agreements relate, and (b) Hedging Agreements in respect of
foreign exchange or commodity exposures incurred by the Company or any of its
Subsidiaries in the ordinary course of its business; (viii) Non-Recourse Debt of
a Non-Recourse Subsidiary; provided, however, that if any such Debt thereafter
ceases to be Non-Recourse Debt of a Non-Recourse Subsidiary, then such event
shall be deemed to constitute the issuance of such Debt by the issuer thereof;
(ix) Debt incurred with respect to the deferred purchase price of machinery and
equipment (including all capitalized costs incurred in connection therewith,
such as engineering studies and installation thereof) related to the business of
the Company or its Subsidiaries at the time of purchase and other purchase money
obligations (including Capital Lease Obligations) not to exceed, in the
aggregate, $20 million outstanding at any time; provided, that the maturity of
any such obligation does not exceed the anticipated useful life of the asset
being financed; and (x) any renewal, extension or refinancing (and subsequent
renewals, extensions or refinancings) of any Debt permitted at the time incurred
of the Company and its Subsidiaries; provided, however, that (a) the principal
amount of the Debt so issued shall not exceed the maximum principal amount of
the Debt so exchanged, refunded or refinanced, (b) Debt which constitutes a
renewal, extension or refinancing of Debt of the Company shall be pari passu or
subordinated in right of payment to the Senior Secured Notes and (c) the Debt so
issued (1) shall not mature prior to the maturity of the Debt so exchanged,
refunded or refinanced and (2) shall have an Average Life equal to or greater
than the remaining Average Life of the Debt so exchanged, refunded or
refinanced; and provided, further, that in no event may Debt be renewed,
extended or refinanced by means of Debt of any Subsidiary of the Company if such
Debt was originally incurred by the Company.
Limitation on Preferred Stock of Subsidiaries. The Company will not permit
any of its Recourse Subsidiaries to issue, directly or indirectly, any Preferred
Stock, except (i) Preferred Stock issued to and held by the Company or a Wholly
Owned Subsidiary, except that any subsequent issuance or transfer of any Capital
Stock which results in any Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any transfer of Preferred Stock to a Person not a Wholly Owned
Subsidiary will be deemed an issuance of Preferred Stock; (ii) Preferred Stock
issued by a Person prior to the time (a) such Person became a Subsidiary, (b)
such Person merges with or into a Subsidiary or (c) another Person merges with
or into such Person (in a transaction in which such Person becomes a
Subsidiary), in each case if such Preferred Stock was not issued in anticipation
of such transaction; and (iii) Preferred Stock issued in exchange for, or the
proceeds of which are used to refund Debt or refinance Preferred Stock issued
pursuant to clauses (i) or (ii); provided that (a) the liquidation value of such
Preferred Stock so issued shall not exceed the principal amount
64
<PAGE> 67
or the liquidation value of the Debt or Preferred Stock, as the case may be, so
refunded or refinanced and (b) the Preferred Stock so issued (i) shall have a
stated maturity not earlier than the stated maturity of the Debt or Preferred
Stock being refunded or refinanced and (2) shall have an Average Life equal to
or greater than the remaining Average Life of the Debt or Preferred Stock being
refunded or refinanced.
Limitation on Restricted Payments. The Company shall not, and shall not
permit any Subsidiary, directly or indirectly to, declare, pay or set apart for
payment, any Restricted Payment, if after giving effect thereto: (i) a Default
shall have occurred and be continuing (or would result therefrom); or (ii) the
aggregate amount of such Restricted Payment and all other Restricted Payments
since the date on which the Senior Secured Notes were originally issued would
exceed the sum of (a) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the first day of the fiscal
quarter succeeding the date on which the Senior Secured Notes were originally
issued to the end of the most recent fiscal quarter ending prior to the date of
such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); (b) the aggregate Net Cash Proceeds
received by the Company from the issue or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the date on which the Senior Secured Notes
were originally issued (other than to a Subsidiary of the Company or an employee
stock ownership plan or similar trust), including Net Cash Proceeds from the
exercise of warrants; (c) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) to an employee stock ownership plan subsequent to the date on which the
Senior Secured Notes were originally issued; provided, that if such employee
stock ownership plan issues any Debt, only to the extent that any such proceeds
are equal to any increase in the Consolidated Net Worth of the Company resulting
from principal repayments made by such employee stock ownership plan with
respect to Debt issued by it to finance the purchase of such Capital Stock; and
(d) the aggregate Net Cash Proceeds received by the Company from the issuance of
its Capital Stock upon the conversion of or exchange for (other than by a
Subsidiary of the Company), securities evidencing Debt of the Company subsequent
to the date on which the Senior Secured Notes were originally issued, calculated
on the assumption that the gross proceeds from such issuance are equal to the
aggregate principal amount (or if discounted Debt, the accredited principal
amount) of Debt evidenced by such securities converted or exchanged, plus any
additional sums payable upon conversion or exchange (less the amount of any
cash, or the fair market value of other property, distributed to the holder of
such Debt by the Company or any of its Subsidiaries upon such conversion or
exchange).
Notwithstanding the foregoing, this provision shall not prevent (i) the
payment of any dividend within 60 days after the date of its declaration (if the
declaration of such dividend was permitted by the foregoing provision at the
time of such declaration); or (ii) the repurchase, retirement or other
acquisition of any shares of the Company's Capital Stock, or any option, warrant
or other right to purchase shares of the Company's Capital Stock, or the
repayment of any Debt of the Company solely in exchange for shares of, or out of
the proceeds of a substantially contemporaneous issuance of, Capital Stock
(other than Disqualified Stock).
Limitation on Issuance and Sale of Capital Stock of Subsidiaries. The
Company shall not sell any Capital Stock of a Recourse Subsidiary, and shall not
permit any Recourse Subsidiary to issue or sell any Capital Stock, or permit any
Person, other than the Company and its Recourse Subsidiaries, to own or hold any
such interest, other than any interest owned or held on the date of issue of the
Senior Secured Notes by a Person other than the Company and its Recourse
Subsidiaries in any Capital Stock of any Recourse Subsidiary (other than a Joint
Venture); provided, that the foregoing limitation shall not apply to (i) the
sale of 100% of the Capital Stock of any Subsidiary made in accordance with
"Limitation on Sales of Assets," (ii) the sale or issuance of any Capital Stock
of Imperial and (iii) issuances of Preferred Stock permitted pursuant to clauses
(i) or (iii) of "Limitation on Preferred Stock of Subsidiaries."
Limitation on Restrictions on Distributions from Subsidiaries. The Company
shall not, and shall not permit any Subsidiary to, create or permit to exist or
become effective any encumbrance or restriction on the ability of any Recourse
Subsidiary to (i) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock, (ii) make payments in respect of any Debt
owed to the Company or any of the Company's Subsidiaries, (iii) make any loans
or advances to the Company or any of the Company's Subsidiaries or (iv) transfer
any of its property or assets to the Company or any of the Company's
Subsidiaries, except: (a) any encumbrance or restriction pursuant to the Senior
Secured Notes, the Indenture or the Security Documents; (b) any encumbrance or
restriction pursuant to an agreement in effect at or
65
<PAGE> 68
entered into on the date the Senior Secured Notes are issued (including without
limitation the Credit Facility); (c) any encumbrance or restriction with respect
to a Subsidiary pursuant to an agreement relating to any Debt issued by such
Subsidiary on or prior to the date on which such Subsidiary was acquired by the
Company (other than Debt issued as consideration in, or to provide all or any
portion of the funds utilized to consummate, the transaction or series of
related transactions pursuant to which such Subsidiary became a Subsidiary or
was acquired by the Company) and outstanding on such date; (d) any encumbrance
or restriction pursuant to an agreement effecting a refinancing of Debt issued
pursuant to an agreement referred to in clause (b) or (c) or contained in any
amendment to an agreement referred to in clause (b) or (c); provided, however,
that the encumbrances and restrictions contained in any such refinancing
agreement or amendment are no more restrictive than encumbrances and
restrictions contained in the refinanced or amended agreements; (e) customary
non-assignment provisions restricting subletting or assignment of any lease or
assignment entered into by a Subsidiary; and (f) any restrictions with respect
to a Subsidiary of the Company imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary.
Restrictions on Asset Sales. The Company will not, and will not permit any
of its Recourse Subsidiaries to, make any Asset Sale, unless (a) the Company (or
its Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value of the Capital Stock or
assets to be sold (as determined in good faith by its Board of Directors); (b)
at least 85% of the consideration therefor is received by the Company or such
Subsidiary in the form of cash or Cash Equivalents; and (c) 100% of the
consideration therefor is received by the Company or such Subsidiary in the form
of cash, Cash Equivalents or instruments with respect to which a security
interest therein may be perfected by possession; provided that the limitations
set forth in (b) and (c) above shall not be applicable to the sale of the
Excluded Assets.
With respect to Recourse Subsidiaries, within 360 days of the date that the
sum of the Net Available Cash of Asset Sales (excluding the Net Available Cash
(i) previously applied to the acquisition of property and assets used in lines
of business related to the Company's or the Subsidiaries' business at such time
(each a "Permitted Related Acquisition") and (ii) from the sale of Obsolete
Assets not exceeding an aggregate fair market value of $1,000,000 in any year),
together with Condemnation Awards and Net Insurance Proceeds (the "Available
Amount"), equals or exceeds $5,000,000, the Company will elect to either (a)
apply or cause to be applied the Available Amount to a Permitted Related
Acquisition or the commencement thereof (provided that such project is completed
within a reasonable time of the commencement thereof), (b) make an offer to
purchase Senior Secured Notes (an "Asset Sale Offer") from all Holders up to an
amount equal to the Available Amount (rounded to the next lowest multiple of
$1,000) at a purchase price equal to 100% of the principal amount thereof plus
accrued interest thereon, if any, to the date of purchase or (c) any combination
of clauses (a) and (b) above; provided, that (i) property acquired at any time
as a Permitted Related Acquisition that has been acquired with Collateral
Proceeds shall be subject to a first priority Lien in favor of the Collateral
Agent for the benefit of the Trustee and the Noteholders; (ii) pending
application to a Permitted Related Acquisition or an Asset Sale Offer, the
Collateral Proceeds, together with all Condemnation Awards and Net Insurance
Proceeds received by the Collateral Agent, will be retained by the Collateral
Agent in a collateral account; and (iii) notwithstanding the foregoing, the
Company and its Subsidiaries, in the aggregate, shall be permitted to retain (x)
$1,000,000 of Net Cash Proceeds from Asset Sales other than sales of Obsolete
Assets and (y) the Net Available Cash from the sale of the Excluded Assets. To
the extent that Holders do not subscribe to an Asset Sale Offer, the Company may
retain the unutilized Available Amount free of the Lien of the Security
Documents. The Company and its Subsidiaries collectively may retain the Net Cash
Proceeds from the sale of Obsolete Assets in an aggregate amount not to exceed
$1,000,000 in any year.
The Credit Facility contains certain covenants that restrict the ability of
the Company to sell assets other than certain non-steel assets and obsolete
assets, and does not permit the prepayment of the Senior Secured Notes with the
proceeds of any such sales without the prior written consent of the Lenders. See
"Description of Certain Indebtedness -- Credit Facility."
Transfer of Assets to Subsidiaries. Notwithstanding the covenant
restricting Asset Sales, Restricted Payments and transactions with Affiliates,
the Company shall not, and shall not permit any of its Recourse
66
<PAGE> 69
Subsidiaries to, make any sale, transfer or other disposition (including by way
of Sale and Leaseback Transaction) to any of its Subsidiaries (other than in the
ordinary course of business) of (i) any assets of the Company or its Recourse
Subsidiaries or (ii) any shares of Capital Stock of any of the Company's
Subsidiaries directly owned by the Company, in either case with a fair market
value in excess of $1,000,000 (as determined in good faith by the Company)
unless the Company or its Subsidiaries shall receive consideration from the
Subsidiary acquiring such assets or Capital Stock by way of any such sale,
transfer or otherwise in cash or Cash Equivalents equal to the amount in excess
of $1,000,000 (the fair market value of such assets or Capital Stock to be
determined in good faith by an Independent Appraiser or Independent Financial
Advisor, as the circumstances dictate, with respect to a transaction with a fair
market value in excess of $1,000,000); provided that there shall be no
restriction on the transfer of assets of Erlanger to either Koppel or Newport;
and provided further that assets may not be transferred by any Recourse
Subsidiary to any Excluded Company.
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any of its Recourse Subsidiaries to, enter into, directly or
indirectly, any Sale and Leaseback Transaction, with respect to any real or
tangible personal property, other than (i) a Sale and Leaseback Transaction
entered into between the Company and any one of its Wholly Owned Subsidiaries,
or between Wholly Owned Subsidiaries; provided that upon either (a) the transfer
or other disposition by such Wholly Owned Subsidiary of any such lease to a
Person other than the Company or another Wholly Owned Subsidiary or (b) the
issuance, sale, lease, transfer or other disposition of Capital Stock (including
by way of consolidation or merger) of such Wholly Owned Subsidiary to a Person
other than the Company or another Wholly Owned Subsidiary, the provisions of
this clause (i) shall no longer be applicable to such lease and such lease shall
be deemed for purposes of this paragraph to constitute the entering into of such
Sale and Leaseback transaction by the parties thereto; and (ii) Capital Lease
Obligations permitted to be incurred by the Company or any of its Subsidiaries
pursuant to the limitations on Debt.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit any Recourse Subsidiary to, conduct any business or enter into
or permit to exist any transaction or series of related transactions (including,
without limitation, any loan, advance, Guarantee or capital contribution to, or
for the benefit of, or any purchase, sale, lease, exchange or other disposition
of any property or the rendering of any service, or any other direct or indirect
payment, transfer or other disposition) with any Affiliate of the Company or any
legal or beneficial owner of 5% or more of any class of Capital Stock of the
Company or with an Affiliate of any such owner unless the terms of such
business, transaction or series of transactions are (i) set forth in writing,
(ii) as favorable to the Company or such Recourse Subsidiary as terms that would
be obtainable at the time for a comparable transaction or series of similar
transactions in arms-length dealings with an unrelated third person and (iii)
the Board of Directors has, by resolution, determined in good faith that such
business or transaction or series of transactions meets the criteria set forth
in (ii) above; except that (a) the requirements of clauses (i) and (iii) shall
not apply to transactions involving the sale of goods and services in the
ordinary course of business that are consistent with the Company's and its
Subsidiaries' past practices and (b) the foregoing shall not prohibit (1)
Restricted Payments, Permitted Investments and Permitted Payments otherwise
permitted by the Indenture, (2) transactions between the Company and one or more
of its Wholly Owned Recourse Subsidiaries, provided that such transactions are
not otherwise prohibited, (3) payments of reasonable and customary compensation
for services, directors fees, meeting expenses insurance premiums and
indemnities to the extent permitted by applicable law, (4) the issuance of stock
options (and shares of stock upon the exercise thereof) pursuant to any stock
option plan approved by the Board of Directors and stockholders of the Company
and (5) loans or advances to employees for relocation or travel related expenses
consistent with ordinary practices of the Company.
Limitation on Mergers and Consolidation. The Company shall not consolidate
with or merge with or into any Person (other than a Recourse Subsidiary that is
not an Excluded Company), and the Company will not, and will not permit any of
its Subsidiaries to, sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of the Company's consolidated assets in one
transaction or a series of transactions to any other Person or Persons (other
than a Recourse Subsidiary that is not an Excluded Company), or permit any
Person (other than a Recourse Subsidiary) to consolidate with or merge into the
Company, or convey, sell, assign, transfer or lease all or substantially all of
such Person's properties and assets in one transaction or a series of
67
<PAGE> 70
transactions to the Company, unless: (i) the resulting, surviving or transferee
Person shall be a solvent Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and such
resulting, surviving or transferee Person (if not the Company) shall expressly
assume, by an indenture supplemental to the Indenture, executed and delivered to
the Trustee, all the obligations of the Company under the Senior Secured Notes,
the Indenture and the Security Documents; (ii) immediately before and after
giving effect to such transaction, no Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction or series
of transactions (including, without limitation any Debt incurred or anticipated
to be incurred in connection with or in respect of the transaction or series of
transactions), the resulting, surviving or transferee Person would be able to
incur at least $1.00 of Debt pursuant to Section (a) of the "Limitation on
Debt"; (iv) immediately after giving effect to such transaction, the resulting,
surviving or transferee Person shall have Consolidated Net Worth in an amount
which is not less than the Consolidated Net Worth of the Company prior to such
transaction; (v) each Recourse Subsidiary shall expressly confirm that its
Guarantee shall apply to the obligations under the Senior Secured Notes of any
successor to the Company; and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture, and
an Opinion of Counsel as required by the Indenture.
Notwithstanding the foregoing, the Company and its Recourse Subsidiaries
may not consolidate with or merge into a Non-Recourse Subsidiary or any Excluded
Company or convey, sell, assign, transfer or lease all or substantially all of
their properties and assets (determined, with respect to the Company, on a
consolidated basis for the Company and its Recourse Subsidiaries taken as a
whole) in one transaction or a series of transactions to any Non-Recourse
Subsidiary or Excluded Company, or unless such transaction satisfies the
restrictions under "Limitation on Debt," "Limitation on Restricted Payments" and
the other covenants (treating, under each covenant, any Non-Recourse Debt as
Recourse Debt), permit any Non-Recourse Subsidiary to consolidate with or merge
into the Company or any of its Recourse Subsidiaries or convey, sell, assign,
transfer or release all or substantially all of such Non-Recourse Subsidiary's
properties and assets in one transaction or a series of transactions to the
Company or any of its Recourse Subsidiaries.
Limitations as to Non-Recourse Subsidiaries. The Company will not permit
any Non-Recourse Subsidiary to Issue, create, assume, incur, Guarantee or
otherwise become liable in respect of any Debt other than Non-Recourse Debt.
Neither the Company nor any of its Subsidiaries will sell, lease, convey or
otherwise transfer to any Non-Recourse Subsidiary any asset which is essential
to the steel-making operations of the Company or its Recourse Subsidiaries. The
Company will not permit any Non-Recourse Subsidiary to acquire from any Person
any asset essential to the steel-making operations of the Company or its
Recourse Subsidiaries or all or any portion of its Recourse Subsidiaries.
SEC Reports. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the Securities and Exchange Commission and
provide the Trustee and Noteholders with such annual reports and such
information, documents and other reports specified in Sections 13 and 15(d) of
the Securities Exchange Act of 1934, as amended.
EVENTS OF DEFAULT
The following will be defined in the Indenture as "Events of Default":
<TABLE>
<S> <C>
(i) The Company defaults in any payment of interest on any Senior Secured Note when the
same becomes due and payable, and such default continues for a period of 30 days;
(ii) The Company (a) defaults in the payment of the principal, or premium, if any, of
any Senior Secured Note when the same becomes due and payable at maturity, upon
redemption, upon acceleration or otherwise; or (b) fails to redeem or purchase
Senior Secured Notes when required pursuant to the Indenture and the Senior Secured
Notes (including failure to make payments when due pursuant to a Change of Control
Offer or Asset Sale Offer);
(iii) The Company fails to comply with the covenant described under "Limitation on
Mergers and Consolidation";
</TABLE>
68
<PAGE> 71
<TABLE>
<S> <C>
(iv) The Company fails to comply with any of its covenants or agreements described under
"Restrictions on Asset Sales" or "Change of Control," and such failure continues
for a period of five days after the Company has received notice of such
noncompliance;
(v) The Company fails to comply with any covenant described above or with any of its
agreements in the Senior Secured Notes or the Indenture (other than those referred
to in (i), (ii), (iii) or (iv) above) and such failure continues for 60 days after
there has been given to the Company by the Trustee or has been received by the
Company and the Trustee from the Noteholders of at least 25% of the principal
amount of the Senior Secured Notes then outstanding a written notice specifying
such default, demanding that it be remedied and stating that the notice is a
"Notice of Default", unless, with respect to defaults under the Security Documents,
the remedy or cure of such default requires work to be performed, acts to be done
or conditions to be removed which cannot, by their nature, reasonably be performed,
done or removed within such 60-day period, or if such remedy or cure is prevented
by causes outside of the control or responsibility of the Company, in which case no
"Event of Default" shall be deemed to exist for a period of 90 days after such
written notice so long as the Company shall have commenced cure within such 90-day
period and shall diligently prosecute the same to completion;
(vi) A default in the payment of principal at final maturity under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Debt of the Company or any of its Recourse Subsidiaries
(or the payment of which is Guaranteed now or hereafter by the Company or any of
its Recourse Subsidiaries), whether such Debt or Guarantee now exists or shall be
created hereafter, in a principal amount of at least $1,000,000;
(vii) A default occurs under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Debt (including any
interest thereon) of the Company or its Recourse Subsidiaries (or the payment of
which is Guaranteed now or hereafter by the Company or any of its Recourse
Subsidiaries), whether such Indebtedness or Guarantee now exists or shall be
created hereafter, if (i) as a result of such event of default the maturity of such
Debt has been accelerated prior to its stated maturity and (ii) the principal
amount of such Debt, together with the principal amount of any other Debt of the
Company and its Recourse Subsidiaries the maturity of which has been so
accelerated, aggregates $5,000,000 or more;
(viii) The Company or any Subsidiary (other than a Non-Recourse Subsidiary, unless such
action or proceeding has a Material Adverse Effect on the interests of the Company
or any Recourse Subsidiary) pursuant to or within the meaning of any Bankruptcy
Law: (a) commences a voluntary case or proceeding; (b) consents to the entry of an
order for relief against it in an involuntary case or proceeding; (c) consents to
the appointment of a Custodian of it or for all or substantially all of its
property; (d) makes a general assignment for the benefit of its creditors; or (e)
admits in writing its inability to pay its debts as the same become due;
(ix) A court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that remains unstayed and in effect for 60 days and: (a) is for relief against
the Company or any Subsidiary in an involuntary case; (b) appoints a Custodian of
the Company or any Subsidiary for all or substantially all of its property; or (c)
orders the liquidation of the Company or any Subsidiary; provided, that clauses
(a), (b) and (c) shall not apply to a Non-Recourse Subsidiary unless such action or
proceeding materially and adversely affects the interests of the Company or any
Recourse Subsidiary;
(x) The Company or any Recourse Subsidiary shall fail to discharge any one or more
judgments not covered by insurance (from which no further appeal may be taken) in
excess of $1,000,000, and either (A) an enforcement proceeding has been commenced
by any creditor upon such judgments or (B) such judgments shall remain in force,
undischarged, unsatisfied, unstayed and unbonded for more than 30 days;
(xi) The Security Documents shall cease, for any reason, to be in full force and effect
or shall cease to be effective to grant a perfected Lien on the Collateral with the
priority purported to be created thereby (unless the cessation of effectiveness is
due to the failure by the Trustee (or any agent or representative of the Trustee)
to file continuation statements or similar filings or due to the gross
</TABLE>
69
<PAGE> 72
<TABLE>
<S> <C>
negligence of the Trustee) with respect to any Collateral that, individually or in
the aggregate, represents more than 1% of the book value of the consolidated assets
of the Company and the Recourse Subsidiaries constituting Collateral or is material
to the lines of business in which the Company and the Recourse Subsidiaries are
engaged; or
(xii) Cessation of any Guarantee to be in full force and effect or the declaration of any
Guarantee to be null and void and unenforceable or the finding of any Guarantee to
be invalid or the denial of any Guarantor of its liability under its Guarantee
(other than by reason of release of a Guarantor in accordance with its terms).
</TABLE>
If an Event of Default (other than an Event of Default specified in
subparagraph (viii) or (ix) set forth above) occurs and is continuing, the
Trustee or the Holders of at least 25% of the principal amount of the Senior
Secured Notes then outstanding by notice to the Company (and to the Trustee if
such notice is given by the Holders) may declare the principal amount and
accrued interest on the Senior Secured Notes to be immediately due and payable.
If an Event of Default specified in section (viii) or (ix) above occurs, the
principal amount and accrued interest shall ipso facto become and be immediately
due and payable on all outstanding Senior Secured Notes without any declaration
or other act on the party of the Trustee or any Holder. The Holders of a
majority in principal amount of the then outstanding Senior Secured Notes by
notice to the Company and the Trustee may rescind an acceleration and its
consequences if all existing Events of Default, other than the nonpayment of the
principal of the Senior Secured Notes which have become due solely by such
declaration of acceleration, have been cured or waived. The Holders of a
majority in principal amount of the outstanding Senior Secured Notes also have
the right to waive certain past defaults under the Indenture except a default in
the payment of the principal of, premium, if any, or interest on any Senior
Secured Note, or in respect of a covenant or a provision which cannot be
modified or amended without the consent of all Holders.
No Holder has the right to institute any proceeding with respect to the
Indenture, the Security Documents or any remedy thereunder, unless the Holders
of at least 25% in principal amount of the outstanding Senior Secured Notes have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 15 days after receipt of such notice, and the Trustee has not
within such 15-day period received directions inconsistent with such written
request by Holders of a majority in principal amount of the outstanding Senior
Secured Notes. Such limitations do not apply, however, to suits instituted by a
Holder for the enforcement of the payment of the principal of, premium, if any,
or interest on such Senior Secured Note on or after the respective due dates
expressed in such Senior Secured Note.
The Holders of a majority in principal amount of the outstanding Senior
Secured Notes will have the right, subject to certain limitations, 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 on the Trustee. The
Indenture will provide that in case an Event of Default shall occur and be
continuing, the Trustee will exercise such of its rights and powers under the
Indenture, and use the same degree of care and skill in their exercise, as a
prudent Person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to certain provision of the Indenture, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any of the Holders unless they have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request. The Trustee may withhold from Holders notice of any continuing default
(except a default in payment) if it determines in good faith that the
withholding of such notice is in the interest of such Holders.
Under the Indenture, the Company will be required to furnish to the Trustee
annually (i) a statement by certain officers of the Company to the effect that
to the best of their knowledge the Company is not in default in the fulfillment
of any of its obligations under such Indenture or, if there has been such
default, specifying each such default and (ii) an Opinion of Counsel either
stating that action has been taken with respect to any filing, refiling,
recording or re-recording with respect to the Security Documents as is necessary
to maintain the Lien of the Security Documents or that no such action is
necessary to maintain such Lien.
70
<PAGE> 73
MODIFICATION OF THE INDENTURE
From time to time, the Company, when authorized by resolutions of its Board
of Directors, and the Trustee and the Collateral Agent (if a party thereto) may
amend, waive or supplement the Indenture, the Security Documents or the Senior
Secured Notes for certain specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies, making any change that does not
adversely affect the rights of any Holder, giving effect to the release of any
Released Collateral, evidencing the succession of another Person to the Company
or any Subsidiary of the Company and the assumption by any such successor of the
covenants of the Company or such Subsidiary, as the case may be, to evidence the
release and discharge of the obligations of any Subsidiary of the Company the
Capital Stock of which has been sold or otherwise disposed of in accordance with
the applicable provisions of the Indenture, pledging or granting a security
interest in favor of the Collateral Agent as additional security for the payment
and performance of the obligations under the Indenture, in any property or
assets, including any which are required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted, to the
Collateral Agent pursuant to any Security Document or otherwise; provided, that
the Company delivers to the Trustee an Opinion of Counsel as required by the
Indenture. Other amendments and modifications of the Indenture, the Senior
Secured Notes or the Security Documents may be made by the Company, the
Collateral Agent (if a party thereto) and the Trustee with the consent of the
Holders of not less than a majority of the aggregate principal amount of the
outstanding Senior Secured Notes; provided, that no such modification or
amendment may, without the consent of the Holder of each outstanding Senior
Secured Note affected thereby, (i) reduce the principal amount of, change the
time or place for payment, extend the final maturity of, alter the redemption
provisions of, or alter the provisions with respect to Change of Control Offers
or Asset Sale Offers for the Senior Secured Notes, (ii) change the currency in
which any Senior Secured Notes or any premium thereon is payable, (iii) reduce
the percentage in principal amount of outstanding Senior Secured Notes that must
consent to an amendment, supplement or waiver or consent to take any action
under the Indenture, the Senior Secured Notes or the Security Documents, (iv)
impair the right to institute suit for the enforcement of any payment on or with
respect to the Senior Secured Notes, (v) waive a default in payment with respect
to the Senior Secured Notes, (vi) reduce or change the rate or time for payment
of interest on the Senior Secured Notes, (vii) affect the ranking of the Senior
Secured Notes or the security for the Guarantees, or (viii) modify any of the
foregoing provisions or reduce the principal amount of outstanding Senior
Secured Notes necessary to waive any covenant or past Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company at any time may terminate (i) all its obligations under the
Senior Secured Notes, the Indenture and the Security Documents ("legal
defeasance option") or (ii) its obligations to comply with certain restrictive
covenants, including certain of the covenants described under "-- Certain
Covenants" above ("covenant defeasance option"). The Company may exercise its
legal defeasance option notwithstanding its prior exercise of its covenant
defeasance option.
If the Company exercises its legal defeasance option, payment of the Senior
Secured Notes may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Senior Secured
Notes may not be accelerated because of certain Events of Default described
under "Events of Default" above (not including Events of Default relating to
non-payment, bankruptcy and insolvency events, among others) or because of the
failure of the Company to comply with certain covenants specified in the
Indenture.
The Company may exercise its legal defeasance option or its covenant
defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal and interest on
the Senior Secured Notes to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent certified public accountants
expressing their opinion that the payments of principal and interest when
due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times
and in such amounts as will be
71
<PAGE> 74
sufficient to pay principal and interest when due on all the Senior Secured
Notes to maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the 123-day
period no Default relating to bankruptcy and insolvency events with respect
to the Company occurs which is continuing at the end of the period;
(4) no Default has occurred and is continuing on the date of such
deposit and after giving effect thereto;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that (i) the trust resulting from the deposit does not constitute,
or is qualified as, a regulated investment company under the Investment
Company Act of 1940, (ii) the Holders have a valid first priority perfected
security interest in the trust funds, and (iii) after passage of 123 days
following the deposit (except, with respect to any trust funds for the
account of any Holder who may be deemed to be an "insider" for purposes of
the Bankruptcy Code, after one year following the deposit), the trust funds
will not be subject to the effect of Section 547 of the Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced by
or against the Company under either such statute, and either (A) the trust
funds will no longer remain the property of the Company (and therefore,
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally) or
(B) if a court were to rule under any such law in any case or proceeding
that the trust funds remained property of the Company, (x) assuming such
trust funds remained in the possession of the Trustee prior to such court
ruling to the extent not paid to Holders, the Trustee will hold, for the
benefit of the Holders, a valid first priority perfected security interest
in such trust funds that is not avoidable in bankruptcy or otherwise except
for the effect of Section 552(b) of the Bankruptcy Code on interest on the
trust funds accruing after the commencement of a case under such statute
and (y) the Holders will be entitled to receive adequate protection of
their interests in such trust funds if such trust funds are used in such
case or proceeding.
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of the Indenture there has been a
change in the applicable U.S. Federal income tax law or a regulation
clarifying existing law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders will not
recognize income, gain or loss for U.S. Federal income tax purposes as a
result of such defeasance and will be subject to U.S. Federal income tax on
the same amounts, in the same manner and at the same time as would have
been the case if such defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders will not recognize income, gain or loss for U.S. Federal income tax
purposes as a result of such covenant defeasance and will be subject to
U.S. Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; and
(8) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Senior Secured Notes have
been complied with.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect (except as to the
surviving rights of registration of transfer or exchange of Senior Secured
Notes, as expressly provided for in the Indenture, and as otherwise expressly
provided for in the Indenture) when either (i) all such Senior Secured Notes
theretofore authenticated and issued have been delivered (except lost, stolen or
destroyed Senior Secured Notes which have been replaced or paid, or Senior
Secured Notes for whose payment money has been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Trustee or
discharged from such trust) to the Trustee for cancellation or (ii) all such
Senior Secured Notes not theretofore delivered to the Trustee for cancellation
72
<PAGE> 75
have become due and payable or will become due and payable within one year and
the Company has irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay at maturity or redemption the entire
indebtedness on such Senior Secured Notes not theretofore delivered to the
Trustee for cancellation, including interest thereon, and the Company has paid
all sums payable by it under the Indenture. The Trustee is required to
acknowledge satisfaction and discharge of the Indenture on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company.
BOOK-ENTRY, DELIVERY AND FORM
Upon issuance, the Senior Secured Notes will be represented by a permanent
global Senior Secured Note or Senior Secured Notes. Each permanent global Senior
Secured Note will be deposited with, or on behalf of, the Depositary and
registered in the name of a nominee of the Depositary. Except under the limited
circumstances described below, permanent global Senior Secured Notes will not be
exchangeable for definitive certificated Senior Secured Notes.
Ownership of beneficial interests in a permanent global Senior Secured Note
will be limited to institutions that have accounts with the Depositary or its
nominee ("participants") or persons that may hold interests through
participants. In addition, ownership of beneficial interests by participants in
such permanent global Senior Secured Note will be evidenced only by, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depositary or its nominee for such permanent global Senior
Secured Note. Ownership of beneficial interests in such permanent global Senior
Secured Note by persons that hold through participants will be evidenced only
by, and the transfer of that ownership interest within such participant will be
effected only through, records maintained by such participant. The Depositary
has no knowledge of the actual beneficial owners of the Senior Secured Notes.
Beneficial owners will not receive written confirmation from the Depositary of
their purchase, but beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the participants through which the beneficial
owners entered the transaction. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such laws may impair the ability to transfer beneficial
interests in such permanent global Senior Secured Note.
The Company has been advised by the Depositary that upon the issuance of a
permanent global Senior Secured Note and the deposit of such permanent global
Senior Secured Note with the Depositary, the Depositary will immediately credit,
on its book-entry registration and transfer system, the respective principal
amounts represented by such permanent global Senior Secured Note to the accounts
of such participants.
Payment of principal of, and interest on, Senior Secured Notes represented
by a permanent global Senior Secured Note registered in the name of or held by
the Depositary or its nominee will be made to the Depositary or its nominee, as
the case may be, as the registered owner and holder of the permanent global
Senior Secured Note representing such Senior Secured Notes. The Company has been
advised by the Depositary that upon receipt of any payment of principal of, or
interest on, a permanent global Senior Secured Note, the Depositary will
immediately credit, on its book-entry registration and transfer system, accounts
of participants with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such permanent global Senior
Secured Note as shown in the records of the Depositary. Payments by participants
to owners of beneficial interests in a permanent global Senior Secured Note held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the sole
responsibility of such participants, subject to any statutory or regulatory
requirements as may be in effect from time to time.
None of the Company, the Trustee or any other agent of the Company or the
Trustee will have any responsibility or liability for any aspect of the records
of the Depositary, any nominee or any participant relating to, or payments made
on account of, beneficial interests in a permanent global Senior Secured Note or
for maintaining, supervising or reviewing any of the records of the Depositary,
any nominee or any participant relating to such beneficial interests.
73
<PAGE> 76
A permanent global Senior Secured Note is exchangeable for definitive
Senior Secured Notes registered in the name of, and a transfer of a permanent
global Senior Secured Note may be registered to, any person other than the
Depositary or its nominee, only if:
(a) the Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for such permanent global Senior Secured Note or
if at any time the Depositary ceases to be a clearing agency registered
under the Exchange Act;
(b) the Company in its sole discretion determines that such permanent
global Senior Secured Note shall be exchangeable for definitive Senior
Secured Notes in registered form; or
(c) there shall have occurred and be continuing an Event of Default
under the Senior Secured Notes.
Any permanent global Senior Secured Note that is exchangeable pursuant to
the preceding sentence will be exchangeable in whole for definitive Senior
Secured Notes in registered form, of like tenor and of an equal aggregate
principal amount as the permanent global Senior Secured Note, in denominations
of $1,000 and integral multiples thereof. Such definitive Senior Secured Notes
will be registered in the name or names of such persons as the Depositary shall
instruct the Trustee. It is expected that such instructions may be based upon
directions received by the Depositary from its participants with respect to
ownership of beneficial interests in such permanent global Senior Secured Note.
With respect to definitive Senior Secured Notes, any principal and interest will
be payable, the transfer of the definitive Senior Secured Notes will be
registerable and the definitive Senior Secured Notes will be exchangeable at the
office of the Trustee in Covington, Kentucky, provided that payment of interest
may be made at the option of the Company by check mailed to the address of the
person entitled thereto and as shown on the register for the Senior Secured
Notes.
Except as provided above, owners of beneficial interests in such permanent
global Senior Secured Note will not be entitled to receive physical delivery of
Senior Secured Notes in definitive form and will not be considered the holders
thereof for any purpose under the Indenture, and no permanent global Senior
Secured Note shall be exchangeable except for another permanent global Senior
Secured Note of like denomination and tenor to be registered in the name of the
Depositary or its nominee. Accordingly, each person owning a beneficial interest
in such permanent global Senior Secured Note must rely on the procedures of the
Depositary and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a Holder under the permanent global Senior Secured Note.
The Company understands that, under existing industry practices, in the
event that the Company requests any action of Holders, or an owner of a
beneficial interest in such permanent global Senior Secured Note desires to give
or take any action that a Holder is entitled to give or take under the Senior
Secured Notes, the Depositary would authorize the participants holding the
relevant beneficial interests to give or take such action, and such participants
would authorize beneficial owners owning through such participants to give or
take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
The Depositary has advised the Company that the Depositary is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered under
the Exchange Act. The Depositary was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to the Depositary and its participants are on
file with the Commission.
74
<PAGE> 77
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Secured Notes will be made in immediately
available funds. So long as the Senior Secured Notes are represented by a
permanent global Senior Secured Note or Notes, all payments of principal,
premium, if any, and interest will be made by the Company in immediately
available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. So long as the Senior
Secured Notes are represented by a permanent global Senior Secured Note or Notes
registered in the name of the Depositary or its nominee, the Senior Secured
Notes will trade in the Depositary's Same-Day Funds Settlement System, and
secondary market trading activity in the Senior Secured Notes will therefore be
required by the Depositary to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on the trading activity in the Senior Secured Notes.
REGARDING THE TRUSTEE AND THE COLLATERAL AGENT
Huntington National Bank will serve the Trustee under the Indenture and
will act as Collateral Agent under the Security Documents.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
Directors, officers, employees or stockholders of the Company will not have
any liability for any obligations of the Company under the Senior Secured Notes,
the Indenture or the Security Documents or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder, by
accepting a Senior Secured Note, waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the Senior
Secured Notes.
REPORTS
The Company will furnish the Trustee with copies of all quarterly and
annual reports, and any other documents it is required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act, within five days
after it files the same with the Commission.
GOVERNING LAW
The Indenture, the Security Documents and the Senior Secured Notes shall be
governed by, and construed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Accounts Receivable" means all accounts of the Company and its
Subsidiaries which, in conformity with GAAP would be set forth opposite the
caption accounts receivable, or any like caption on the consolidated balance
sheet of the Company and its Subsidiaries (after giving effect to any allowance
for doubtful accounts).
"Acquired Debt" means Debt of a Person existing at the time such Person
becomes a Subsidiary of the Company or assumed in connection with an Asset
Acquisition by such Person, including, without limitation, Debt incurred in
connection with, or in anticipation of, such Person becoming a Subsidiary of the
Company or such acquisition.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director or
officer (A) of such specified Person, (B) of any subsidiary of such specified
Person or (C) of any Person described in clause (i) above or (iii) any Person in
which such Person has, directly or indirectly, a 5% or greater voting or
economic interest or the power to control. For purposes of this definition,
control of a
75
<PAGE> 78
Person means the power, direct or indirect, to direct or cause the direction of
the management or policies of such Person whether through the ownership of
voting securities or by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Appraiser" means a Person who in the course of its business appraises
property and, where real property is involved, who is a member in good standing
of the American Institute of Real Estate Appraisers, recognized and licensed to
do business in the jurisdiction where the applicable real property is situated,
and who may be employed by the Company.
"Asset Acquisition" means (i) any capital contribution (by means of
transfer of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Capital Stock by the Company or any of its Subsidiaries in any
other Person, in either case pursuant to which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with or
into the Company or any of its Subsidiaries or (ii) any acquisition by the
Company or any of its Subsidiaries of the assets of any Person which constitute
substantially all of an operating unit or business of such Person.
"Asset Disposition" or "Asset Sale" means any sale, lease, transfer or
other disposition (or series of related sales, leases, transfers or
dispositions) of shares of Capital Stock of a Subsidiary (other than directors'
qualifying shares), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction, other than (i) a disposition by a Subsidiary to the Company
or by the Company or a Subsidiary to a Wholly Owned Recourse Subsidiary, (ii) a
disposition of property or assets at fair market value in the ordinary course of
business, (iii) a disposition that constitutes a Restricted Payment or a Sale
and Leaseback Transaction; or (iv) a disposition of Accounts Receivable as
contemplated by clause (iii) of "Permitted Investments".
"Average Life" means, as of the date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing (i) the sum of the
products of the numbers of the years from the date of determination to the dates
of each successive scheduled principal payment of such Debt or redemption or
similar payment with respect to such Preferred Stock multiplied by the amount of
such payment by (ii) the sum of all such payments.
"Bankruptcy Law" means Title 11, United States Code or any similar Federal
or state law for the relief of debtors, as amended.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company or its Subsidiaries, as the case may
be, to have been duly adopted by the Board of Directors of the Company or its
Subsidiaries, as the case may be, and to be in full force and effect on the date
of such certification, and delivered to the Trustee.
"Business Day" means any day that is not a Saturday, a Sunday or a day on
which banking institutions are required to close in the State of New York, the
State of Ohio or the State of Kentucky.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with GAAP; the amount of
such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP.
"Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participation or other equivalents of or interest in (however
designated and whether voting or non-voting) corporate stock of a corporation
and any and all equivalent ownership interests in a Person (other than a
corporation), in each case whether outstanding on the date of issuance of the
Senior Secured Notes or thereafter issued, including any Preferred Stock.
76
<PAGE> 79
"Cash Equivalents", means (i) investments in U.S. Government Obligations
maturing within 180 days of the date of acquisition thereof, (ii) investments in
certificates of deposit maturing within 90 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States or any state thereof having capital, surplus and undivided
profits aggregating in excess of $250,000,000, (iii) investments in commercial
paper rated at least A-1 by Standard & Poor's Corporation, Inc. and P-1 by
Moody's Investors Service, Inc. and maturing not more than 180 days from the
date of acquisition thereof, (iv) securities issued or fully guaranteed by any
state, commonwealth or territory of the United States, or by any political
subdivision or taxing authority thereof, which mature in the hands of the
Company within 180 days of acquisition thereof, and rated at least "A" by
Standard & Poor's Corporation, Inc. or "A" by Moody's Investors Service, Inc.
and (v) money market and auction rate preferred stocks which, at the date of
acquisition and at all times thereafter, are accorded ratings of at least AA- by
Standard and Poor's Corporation, Inc. or Aa3 by Moody's Investors Service, Inc.
"Change of Control" means the occurrence of one or more of the following
events:
(a) the direct or indirect sale, lease, exchange or other transfer of
all or substantially all of the assets of the Company to any Person or
entity or group of Persons or entities acting in concert as a partnership
or other group (a "Group of Persons") other than a Person described in
clause (i) of the definition of Affiliate;
(b) the consummation of any consolidation or merger of the Company
with or into another corporation with the effect that the stockholders of
the Company immediately prior to the date of the consolidation or merger
hold less than 51% of the combined voting power of the outstanding voting
securities of the surviving entity of such merger or the corporation
resulting from such consolidation ordinarily having the right to vote in
the election of directors (apart from rights accruing under special
circumstances) immediately after such merger or consolidation;
(c) the stockholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company;
(d) a Person or Group of Persons acting in concert as a partnership,
limited partnership, syndicate or other group shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise, have become the direct or indirect beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of
the Company representing 30% or more of the combined voting power of the
then outstanding securities of the Company ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in
the election of directors; and
(e) a Person or Group of Persons, together with any Affiliates
thereof, shall succeed in having a sufficient number of its nominees
elected to the Board of Directors of the Company such that such nominees,
when added to any existing director remaining on the Board of Directors of
the Company after such election who is an Affiliate of such Person or Group
of Persons, will constitute a majority of the Board of Directors of the
Company;
provided that the Person or Group of Persons referred to in clauses (a), (d) and
(e) shall not mean Clifford Borland or any Group of Persons the majority of the
voting equity interests of which is beneficially owned by Clifford Borland.
"Collateral" means, collectively, all of the property and assets that are
from time to time subject to the Liens of the Security Documents, including,
without limitation, Trust Moneys.
"Collateral Account" means the collateral account to be established
pursuant to the Indenture.
"Collateral Agent" means the Trustee acting in its capacity as agent for
the Noteholders with respect to the Collateral under the Security Documents.
"Collateral Proceeds" means the Net Available Cash received by the Trustee
from the sale of Collateral.
"Company Order" means a written request or order signed in the name of the
Company by its Chairman of the Board, its Vice Chairman of the Board, its
President or a Vice President, and by its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Trustee.
77
<PAGE> 80
"Condemnation Awards" means any proceeds, award or payment paid to the
mortgagee or beneficiary under the Security Documents relating to any taking of
the Collateral subject to such Security Document by Condemnation or eminent
domain or similar action, together with interest accrued thereon.
"Consolidated EBITDA Coverage Ratio" as of any date of determination (the
"Determination Date") means the ratio of (i) the aggregate amount of EBITDA for
the period of the most recent four consecutive fiscal quarters ending prior to
the date of such determination to (ii) Net Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Subsidiary has
issued any Debt since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated EBITDA
Coverage Ratio is an issuance of Debt, or both, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro forma
basis to such Debt as if such Debt had been issued on the first day of such
period and as if the discharge of any other Debt repaid, repurchased, defeased
or otherwise discharged with the proceeds of such new Debt had occurred on the
first day of such period, (2) if since the beginning of such period the Company
or any Subsidiary shall have made any Asset Disposition which constitutes all or
substantially all of an operating unit of a business, the EBITDA for such period
shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if negative),
directly attributable thereto for such period, and Consolidated Interest Expense
for such period shall be reduced by an amount equal to the Consolidated Interest
Expense directly attributable to any Debt of the Company or any Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Subsidiaries in connection with such Asset
Dispositions for such period (or, if the Capital Stock of any Subsidiary is
sold, the Consolidated Interest Expense for such period directly attributable to
the Debt of such Subsidiary to the extent the Company and its continuing
Subsidiaries are no longer liable for such Debt after such sale), as if such
Asset Disposition occurred on the first day of such period, (3) if since the
beginning of such period the Company or any Subsidiary (by merger or otherwise)
shall have made an Investment in any Subsidiary (or any person which becomes a
Subsidiary) or an Asset Acquisition, including any acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto (including the issuance of any
Debt) as if such Investment or Asset Acquisition occurred on the first day of
such period, (4) if since the beginning of such period any Person (that
subsequently became a Subsidiary or was merged with or into the Company or any
Subsidiary since the beginning of such period) shall have made any Asset
Disposition or any Investment or Asset Acquisition that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Disposition or Investment or Asset Acquisition occurred on the first day
of such period and (5) there shall be excluded from Consolidated Interest
Expense any Consolidated Interest Expense related to any Debt which was
outstanding during the period but is not outstanding on the Determination Date,
except for Consolidated Interest Expense actually incurred with respect to Debt
borrowed under a revolving credit or similar arrangement to the extent the
commitment thereunder remains in effect on the Determination Date. For purposes
of this definition, whenever pro forma effect is to be given to an Asset
Disposition, an Investment or an Asset Acquisition, the amount of income or
earnings relating thereto, and the amount of Consolidated Interest Expense
associated with any Debt issued, redeemed or defeased in connection therewith,
the pro forma calculations shall be determined in good faith by a responsible
financial or accounting officer of the Company. If any Debt bears a floating
rate of interest and is being given pro forma effect, the interest of such Debt
shall be calculated as if the rate in effect on the Determination Date had been
the applicable rate for the entire period (taking into account any Interest Rate
Protection Agreement applicable to such Debt if such Interest Rate Protection
Agreement has a remaining term in excess of 12 months).
"Consolidated Income Tax Expense" of any Person for any period means,
without duplication, the aggregate amount of net taxes based on income or
profits for such period of the operations of such Person and its consolidated
Subsidiaries actually payable with respect to such period, determined in
accordance with GAAP (to the extent such income or profits were included in
computing Consolidated Net Income).
78
<PAGE> 81
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries (other than
Non-Recourse Subsidiaries), including, without duplication, (i) interest expense
attributable to Capital Lease Obligations, (ii) amortization of debt discount
and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest
payment or accruals, (v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (vi) net
costs under Interest Rate Protection Agreements and Hedging Agreements
(including amortization of fees), (vii) Preferred Stock dividends paid in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Recourse Subsidiary, (viii) amortization of other financing fees
and expenses and the interest portion of any deferred payment obligations and
(ix) interest actually paid by the Company or any of its consolidated
Subsidiaries (other than Non-Recourse Subsidiaries) under any Guarantee of Debt
or other obligation of any other person.
"Consolidated Interest Income" means, for any period, all amounts that
would be included under interest income on a consolidated income statement of
such Person and its consolidated Subsidiaries determined in accordance with
GAAP, less accreted amounts attributable to original issue discount securities
prior to the receipt thereof and other non-cash interest payments.
"Consolidated Net Income" of any Person for any period means the Net Income
of such Person and its consolidated Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP; provided, that there shall be
excluded (i) the Net Income of any Person (other than a consolidated Recourse
Subsidiary) in which such Person or any of its consolidated Subsidiaries has a
joint interest with a third party except to the extent of the amount of
dividends or distributions actually paid to such Person or a Subsidiary during
such period; (ii) except to the extent includable pursuant to the foregoing
clause (i), the Net Income of any Person accrued prior to the date it becomes a
Subsidiary of such Person or is merged into or consolidated with such Person or
any of its Subsidiaries or that Person's assets are acquired by such Person or
any of its Subsidiaries; (iii) the Net Income (if positive), or any portion
thereof, of any Subsidiary of such Person to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary to such Person
or to any other Subsidiary (excluding Non-Recourse Subsidiaries) of such Net
Income is not at the time permitted by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary, except that (A) the
Company's equity in the Net Income of any such Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Subsidiary during such period to the Company or
another Recourse Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to a Recourse Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity in a net loss
of any such Subsidiary for such period shall be included in determining such
Consolidated Net Income; (iv) without duplication, any gains or losses
attributable to Asset Sales; (v) Net Income (if positive), arising from the
adoption of changes in accounting policy to comply with GAAP or voluntarily by
the Company with the consent of its independent auditors that so qualify under
Regulation S-X of the Securities Act; (vi) Net Income arising for periods prior
to the date of the transaction in connection with the accounting treatment for a
merger, combination or consolidation under the pooling of interests method;
(vii) Net Income (or loss) of any Non-Recourse Subsidiary, except that the
Company's equity in the Net Income of any such Non-Recourse Subsidiary for such
period shall be included in Consolidated Net Income up to the aggregate amount
of cash actually distributed by such Non-Recourse Subsidiary during such period
to the Company or a Recourse Subsidiary as a dividend or other distribution; and
(viii) foreign currency translation gains and losses.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of such Person prior to the taking of any action for
the purpose of which the determination is being made, as (i) the par or stated
value of all outstanding Capital Stock of such person plus (ii) paid-in capital
or capital surplus relating to such Capital Stock plus (iii) any retained
earnings or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Credit Facility" means the Revolving Credit and Security Agreement dated
November , 1994 among The Bank of New York Commercial Corporation, as
lender, co-agent and ACM agent, PNC Bank
79
<PAGE> 82
Ohio, National Association, as lender and co-agent, Newport, Koppel and
Imperial, and any renewals, extensions or refinancings thereof.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Debt" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such person
and all obligation of such person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through (iii)
above) entered into in the ordinary course of business of such person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the third
Business Day following receipt by such person of a demand for reimbursement
following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (the
amount of Debt represented by any Disqualified Stock will be the
liquidation preference, plus accrued and unpaid dividends);
(vi) to the extent not otherwise included, all obligations under
Interest Rate Protection Agreements and Hedging Agreements;
(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons and all dividends of other persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; and
(viii) all obligations of the type referred to in clauses (i) through
(vii) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person);
provided, that if recourse with respect to such Debt is limited to such
asset, the amount of such Debt being deemed to be the lesser of the value
of such property or assets or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part on, or prior to, the final
maturity date of the Senior Secured Notes.
"EBITDA" for any period means the Consolidated Net Income for such period
(but without giving effect to adjustments, accruals, deductions or entries
resulting from purchase accounting), plus the following to the extent deducted
in calculating such Consolidated Net Income for such period (i) Consolidated
Income Tax Expense, (ii) Consolidated Interest Expense and (iii) depreciation
and amortization expense determined on a consolidated basis for such Person and
its consolidated Subsidiaries in accordance with GAAP for such period.
"Excluded Assets" means the stock of Kentucky Electric Steel, Inc. held on
the date of this Prospectus by the Company or its Subsidiaries and the stock and
assets of Imperial and the NK Subsidiaries.
80
<PAGE> 83
"Excluded Company" means any existing or future Subsidiary that does not
execute a security agreement and/or mortgage in favor of the Collateral Agent
for the benefit of the Holders relating to substantially all of its real
property, fixtures, machinery, tools, equipment and similar property.
"Financial Advisor" means an investment banking firm of national reputation
which (except as otherwise expressly provided in the Indenture) may be employed
by the Company.
"GAAP" means generally accepted accounting principles in the United States
as in effect from time to time, including, without limitation, those set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are applicable as of the
date of determination.
"Government Loans" means any Debt issued, guaranteed or otherwise sponsored
by any state or local governmental entity that carries an annual interest rate
not in excess of the rate which is 2% less than the prime rate of interest
charged by the Trustee at the time such Debt is incurred.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Debt or other obligation of any Person
and any obligation, direct or indirect, contingent or otherwise, of such person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or other obligation of such person (whether arising by virtue of
partnership arrangements, or by agreement to keepwell, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Hedging Agreement" means any foreign exchange or commodity, hedge,
exchange or similar agreement designed to protect the Company or its
Subsidiaries against fluctuations in foreign currency exchange rates or
commodity prices in respect of foreign exchange or commodity exposures incurred
by the Company or its Subsidiaries in the ordinary course of business.
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor in respect of the Senior Secured Notes or in any Affiliate of the
Company or such other obligor and (c) is not an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions
to any of the foregoing for the Company or such other obligor or any Affiliate
thereof. Whenever it is provided in the Indenture that any Independent Person's
opinion or certificate shall be furnished to the Trustee, such Person shall be
appointed by the Company and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer has
read this definition and that the signer is Independent within the meaning
thereof.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Company or any Subsidiary against
fluctuations in interest rates.
"Inventory" means all inventory of the Company and its Subsidiaries which,
in conformity with GAAP, would be set forth opposite the caption inventory or
any like caption on the consolidated balance sheet of the Company and its
Subsidiaries.
"Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, or (ii)
all purchases (or other acquisitions for consideration) by such Person of Debt,
Capital Stock or other securities of any other Person, or (iii) all other items
that would be classified as investments on a balance sheet of such Person
prepared in accordance with GAAP.
"Issue" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a person existing at
the time such person becomes a Subsidiary (whether by merger,
81
<PAGE> 84
consolidation, acquisition or otherwise) shall be deemed to be issued by such
Subsidiary at the time it becomes a Subsidiary.
"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided,
that as to any such arrangement in corporate form, such corporation shall not,
as to any Person of which such corporation is a Subsidiary, be considered to be
a Joint Venture to which such Person is a party.
"Lenders" means the lenders who are from time to time parties to the Credit
Facility.
"Lien" means, with respect to any property, any mortgage, deed of trust,
lien, pledge, security interest, lease, easement, restriction, covenant,
right-of-way, charge, encumbrance, conditional sale or other title retention
agreement or other similar lien. For purpose of the Indenture and the Security
Documents, the Company and its Subsidiaries shall be deemed to own subject to a
Lien any property which they have acquired or hold subject to the interests of a
vendor or lessor under any conditional sales agreement, capital lease or other
title retention agreement relating to such property.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or prospects
of the Company and its Recourse Subsidiaries taken as a whole, (b) the ability
of the Company and its Subsidiaries to perform their respective obligations
under the Senior Secured Notes and the Security Documents or (c) the validity or
enforceability of the Senior Secured Notes or any of the Security Documents.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received (including any cash received upon sale or disposition of such note or
receivable), but excluding any other consideration received in the form of
assumption by the acquiring person of Debt or other obligations relating to such
properties or assets or received in any other non-cash form) therefrom, in each
case net of all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be accrued as a liability under GAAP, as a consequence
of such Asset Disposition, and in each case net of appropriate amounts to be
provided by the Company or its Subsidiaries as a reserve, in accordance with
GAAP, against any liabilities associated with such assets and retained by the
Company or any Subsidiary after such Asset Disposition, including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters and the after-tax cost of any
indemnification payments (fixed and contingent) attributable to seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Disposition (but excluding any
payments, which by the terms of the indemnities will not, under any
circumstances, be made during the term of the Senior Secured Notes) and net of
all payments made on any Debt which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by its
terms, or in order to obtain a release of such Lien or a necessary consent to
such Asset Disposition, or by applicable law be repaid out of the proceeds from
such Asset Disposition, and net of all distributions and other payments required
to be made to minority interest holders in Subsidiaries or Joint Ventures as a
result of such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts and
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Income" of any Person for any period means the net income (loss) of
such Person for such period, determined in accordance with GAAP, except that
extraordinary, unusual and non-recurring gains and losses as determined in
accordance with GAAP shall be excluded.
"Net Insurance Proceeds" means all proceeds paid to the Collateral Agent or
any mortgagee or beneficiary under the Security Documents relating to damage to,
or loss or destruction of, improvements constituting Collateral, together with
interest earned thereon, less expenses related to the receipt of such Net
Insurance Proceeds.
82
<PAGE> 85
"Net Interest Expense" means the difference between Consolidated Interest
Expense and Consolidated Interest Income; provided that such amount shall not be
less than zero.
"NK Subsidiaries" means Northern Kentucky Management, Inc. and Northern
Kentucky Air, Inc.
"Non-Recourse Debt" means Debt or the portion of Debt of a Non-Recourse
Subsidiary (i) as to which neither the Company nor any Recourse Subsidiary (a)
provides credit support or a Guarantee (including any undertaking, agreement or
instrument which would constitute Debt), (b) is directly or indirectly liable,
or (c) constitutes the lender; (ii) the holders of such Debt expressly waive all
claims and any recourse which they may have, in law, equity or otherwise,
whether based on misrepresentation, control, ownership or otherwise, to the
Company and any Recourse Subsidiary, including, without limitation, a waiver of
the benefits of the provisions of Section 1111(b) of the Bankruptcy Code on or
in respect of such Debt against the Company or any Subsidiary of the Company and
such waiver is a legal, valid and binding obligations of the lender that is
enforceable subject to certain exceptions, and the Company has delivered to the
Trustee an Opinion of Counsel by a law firm reasonably acceptable to the Trustee
and a board resolution confirming the foregoing, in each case in form and
substance satisfactory to the Trustee; and (iii) no default with respect to such
Debt (including any rights which the holder thereof may have to take enforcement
action against such Non-Recourse Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Debt of the Company or any Recourse
Subsidiary to declare a default on such other Debt or cause the payment thereof
to be accelerated or payable prior to its stated maturity; provided that,
Non-Recourse Debt shall not include any loan or advance given to a Non-Recourse
Subsidiary by the Company or any Recourse Subsidiary which is a Permitted
Investment. Notwithstanding the foregoing, a Non-Recourse Subsidiary may pledge
its assets as security for any Non-Recourse Debt issued by any Non-Recourse
Subsidiary.
"Non-Recourse Subsidiary" means a Subsidiary of the Company or any of its
Subsidiaries formed to acquire securities or assets of a third party and which
(i) has no Debt other than Non-Recourse Debt, (ii) does not, directly or
indirectly, own any Debt, stock or securities of, and has no Investment in, the
Company or any Recourse Subsidiary and (iii) has not acquired any assets from
the Company or any of its Recourse Subsidiaries that are essential to the
steelmaking operations of the Company and its Recourse Subsidiaries.
"Obsolete Assets" means machinery, equipment, furniture, apparatus, tools
or implements or other similar property which have become worn out, obsolete or
no longer necessary to the operation of the business of the Company or its
Subsidiaries, as the case may be.
"Officers' Certificate" means, when used with respect to the Company, a
certificate signed by the Chairman of the Board, the President, a Vice Chairman
of the Board or the Chief Financial Officer of the Company (or any other officer
identified by any of the foregoing officers in an Officers' Certificate to be an
executive officer of the Company) and the Secretary, an Assistant Secretary or
the Controller of the Company.
"Opinion of Counsel" means an opinion in writing signed by legal counsel,
who may be an employee of or of counsel to the Company, or who may be other
counsel reasonably satisfactory to the Trustee.
"Permitted Investments" means (i) Cash Equivalents; (ii) Investments in a
Wholly Owned Recourse Subsidiary of the Company (other than a Restricted
Subsidiary) or a person that will become a Wholly Owned Recourse Subsidiary of
the Company (other than a Restricted Subsidiary) as a result of such Investment;
provided that any Person that becomes a Wholly Owned Recourse Subsidiary is
engaged in lines of businesses which the Board of Directors in good faith
determines to be related to those of the Company on the Issue Date; (iii) the
Company and its Subsidiaries may make advances and loans to officers and
employees in the ordinary course of business not to exceed $50,000 to any one
officer or employee or $100,000 in the aggregate at any one time outstanding;
(iv) the Company and its Subsidiaries may make payroll advances in the ordinary
course of business; (v) the Company may make advances or loans in connection
with Currency Agreements provided such agreements are made in the ordinary
course of business; (vi) the Company may make advances or loans in connection
with Interest Rate Protection Agreements provided such agreements are made in
the ordinary course of business; (vii) the Company and its Subsidiaries may make
Investments representing the non-cash consideration received in connection with
the sale of assets disposed of in accordance with the provisions described under
"-- Restrictions on Asset Sales"; (viii) the Company and
83
<PAGE> 86
its Subsidiaries may make Investments in the form of advances, extensions of
credit, progress payments and prepayments for asset purchases by it in the
ordinary course of business; and (ix) accounts receivable arising and trade
credit granted in the ordinary course of business and any securities received in
satisfaction or partial satisfaction thereof from financially troubled account
debtors to the extent reasonably necessary in order to prevent or limit loss;
(x) Investments in Senior Secured Notes; and (xi) an Investment, if any, of up
to $1 million to improve property in connection with a coating facility to be
leased to a third party.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (b) other Liens incidental to the conduct of the Company's and
its Subsidiaries' business or the ownership of its property and assets not
securing any Debt, and which do not in the aggregate materially detract from the
value of the Company's and its Subsidiaries' property or assets when taken as a
whole, or materially impair the use thereof in the operation of its business
(including, without limitation, Liens securing any obligation to landlords,
vendors, carriers, warehousemen, mechanics, laborers and materialmen and other
similar obligations arising by operation of law not yet delinquent or which are
being contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor); (c) Liens with respect to assets of a Subsidiary
granted by such Subsidiary to the Company to secure Debt owing to the Company;
(d) Liens on assets owned by Non-Recourse Subsidiaries to secure Non-Recourse
Debt; (e) Liens on assets not constituting Collateral with an aggregate book
value not in excess of 5% of the book value of the Company's total assets as
shown on the Company's most recent consolidated balance sheet; (f) pledges and
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (g)
deposits made to secure the performance of tenders, bids, leases, statutory
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (h) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of the business
of the Company or its Subsidiaries; (i) Liens arising out of judgments or awards
against the Company of any Subsidiary with respect to which the Company or such
Subsidiary is prosecuting an appeal or proceeding for review and the Company or
such Subsidiary is maintaining adequate reserves in accordance with GAAP; and
(j) any interest or title of a lessor in the property subject to any Capital
Lease Obligation or operating lease.
"Permitted Payments" means, with respect to the Company or any of its
Subsidiaries, (a) any dividend on shares of Capital Stock payable solely in
shares of Capital Stock (other than Disqualified Stock) or in options, warrants
or other rights to purchase Capital Stock (other than Disqualified Stock); (b)
any dividend, other distribution, loan or advance to the Company by any of its
Subsidiaries or by a Subsidiary to another Subsidiary (except a Non-Recourse
Subsidiary or a Restricted Subsidiary); (c) any defeasance, redemption,
repurchase or other acquisition for value of any Debt of the Company with the
proceeds from the issuance of (i) Debt which is subordinate to the Senior
Secured Notes at least to the extent and in the manner as the Debt to be
defeased, redeemed, repurchased or otherwise acquired is subordinate in right of
payment to the Senior Secured Notes; provided, that (1) such newly-issued
subordinated Debt provides for no payments of principal by way of sinking fund,
mandatory redemption, defeasance or otherwise by the Company or its Subsidiaries
(including, without limitation, at the option of the holder thereof other than
an option given to a holder pursuant to a "Change of Control" covenant which (x)
is no more favorable to the holders of such Debt than the provisions in favor of
the Noteholders and (y) such Debt provides that the Company or its Subsidiaries
will not repurchase such Debt pursuant to such provisions prior to the Company's
repurchase of the Senior Secured Notes required to be repurchased by the Company
upon a Change of Control) prior to the maturity of the Debt being replaced and
(2) the proceeds of such new Debt are utilized for such purpose within 45 days
of issuance or (ii) Capital Stock (other than Disqualified Stock); (d) the
redemption or repurchase by a Wholly-Owned Subsidiary of its Capital Stock owned
by the Company or a Wholly-Owned Recourse Subsidiary; and (e) the redemption by
the Company of up to $12 million aggregate principal amount of the issue titled
"11% Subordinated Convertible Debenture Due October 4, 2005" relating to
principal payments due following maturity of the Senior Secured Notes, plus any
accrued interest.
84
<PAGE> 87
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now or hereafter outstanding, and
includes, without limitation, all classes and series of preferred or preference
stock.
"Public Equity Offering" means an underwritten public offering of Common
Stock of the Company for cash pursuant to an effective registration statement
under the Securities Act; provided that the Common Stock is not a Disqualified
Stock.
"Recourse Debt" means any Debt other than Non-Recourse Debt.
"Recourse Subsidiary" means any Subsidiary other than a Non-Recourse
Subsidiary.
"Restricted Payment" means, with respect to any Person, (a) any dividend or
other distribution on any shares of such Person's Capital Stock (other than
dividends or distributions payable in Capital Stock that is not Disqualified
Stock); (b) any payment on account of the purchase, redemption, retirement or
other acquisition of (i) any shares of such Person's Capital Stock or (ii) any
option, warrant or other right to acquire shares of such Person's Capital Stock;
(c) any defeasance, redemption, repurchase or other acquisition or retirement
for value prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Debt ranked pari passu or subordinate in right of payment to
the Senior Secured Notes and having a maturity date subsequent to the maturity
of the Senior Secured Notes; or (d) any Investment other than a Permitted
Investment; provided, that "Restricted Payments" shall not include any payment
described in (a), (b) and (c) above made by a Subsidiary to the Company or a
Wholly Owned Recourse Subsidiary of the Company. Notwithstanding the foregoing,
Restricted Payment shall not include any Permitted Payment.
"Restricted Subsidiary" means any Subsidiary subject to consensual
restrictions, other than pursuant to the Credit Facility, direct or indirect, on
the declaration or payment of dividends or similar distributions by that
Subsidiary to the Company or any other consolidated Subsidiary of the Company.
"Sale and Leaseback Transaction" means, with respect to any Person, an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Subsidiaries of any property or asset of Person or any of
its Subsidiaries which has been or is being sold or transferred by such Person
or such Subsidiary to such lender or investor or to any person to whom funds
have been or are to be advanced by such lender or investor on the security of
such property or asset.
"Security Documents" means, collectively, (i) the mortgages, (ii) the
security agreements, (iii) the subsidiary guarantees, (iv) the Intercompany
Notes and the pledge relating thereto and (v) the collateral agency and
intercreditor agreement entered into in connection with the offering of the
Senior Secured Notes.
"Subsidiary" means any corporation, association, partnership or other
business entity of which 50% or more of the total voting power of shares of
Capital Stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) the Company, (ii) the Company and one or more
Subsidiaries or (iii) one or more Subsidiaries.
"Trust Moneys" means all cash or Cash Equivalents received by the
Collateral Agent (a) as Net Cash Proceeds received by the Company and its
Subsidiaries from Asset Sales to be subject to the Lien of the Security
Documents in accordance with "-- Restrictions on Asset Sales"; or (b) as
Condemnation Proceeds with respect to all or any part of the Collateral; or (c)
as Net Insurance Proceeds with respect to all or any part of the Collateral; or
(d) as proceeds of any other sale or other disposition of all or any part of the
Collateral by or on behalf of the Collateral Agent or any collection, recovery,
receipt, appropriation or other realization of or from all or any part of the
Collateral pursuant to the Security Documents or otherwise.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
85
<PAGE> 88
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of principal
of or interest on the U.S. Government Obligation evidenced by such depository
receipt.
"Wholly Owned Recourse Subsidiary" means a Wholly Owned Subsidiary that is
a Recourse Subsidiary.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares), or in the case of a non-corporate
Subsidiary, other equity interests having ordinary voting power for the election
of directors or other governing body of such Subsidiary, is owned by the Company
or another Wholly Owned Subsidiary.
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
The following summary of certain provisions of the Credit Facility is
generalized, does not purport to be complete, and is subject to and is qualified
in its entirety by reference to the provisions of the Credit Facility, a copy of
which will be filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Capitalized terms that are used but not otherwise defined
herein have the meanings assigned to them in the Credit Facility and those
definitions are incorporated herein by reference.
General. Prior to or concurrently with the Offering, Newport, Koppel and
Imperial (collectively, the "Borrowers") will enter into a Revolving Credit and
Security Agreement with The Bank of New York Commercial Corporation ("BNYCC")
and PNC Bank Ohio, N.A., as co-agents, and BNYCC as ACM Agent (the "Credit
Facility"). The Company and the Subsidiaries (other than the Borrowers) will
guarantee the Borrowers' obligations under the Credit Facility. The Credit
Facility will provide that at any one time, the Borrowers may in the aggregate
borrow up to the lesser of the Maximum Revolving Advance Amount and the Formula
Amount. The Maximum Revolving Advance Amount will initially be $45 million but
may increase to $50 million if another lender agrees to lend at least an
additional $5 million on the terms of the Credit Facility. The Formula Amount
will be based on a percentage of the Borrowers' inventory and accounts
receivable which qualify for inclusion therein under certain tests contained in
the Credit Facility minus reserves deemed proper and necessary by BNYCC
(including reserves for certain environmental matters). An aggregate amount of
$6 million will be available for the issuance of Letters of Credit under the
Credit Facility, to the extent that availability exists under the Credit
Facility. The initial term of the Credit Facility will expire three years after
the Closing Date, but may be terminated earlier or extended for successive one
year periods. Upon termination of the Credit Facility, all amounts outstanding
under the Credit Facility will be due and payable together with all accrued
interest thereon to such date. Borrowings under the Credit Facility will be used
by Borrowers to repay certain outstanding indebtedness, to provide working
capital and for other general corporate purposes.
Interest. Interest on the revolving advances shall accrue at a rate per
annum equal to (a) the sum of the Alternate Base Rate plus one percent (1%) with
respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two
and three quarters percent (2 3/4%) with respect to Eurodollar Rate Loans.
To the extent permitted by law, upon and after the occurrence and
declaration of an Event of Default under the Credit Facility, and during the
continuation thereof, the Borrowers' obligations under the Credit Facility will
bear interest at the applicable revolving interest rate plus two percent (2%)
per annum.
86
<PAGE> 89
Security. The Advances and the guarantees thereof will be secured by a
first priority perfected security interest in the inventory, accounts and
certain intangible property of each of the Borrowers and the Guarantors. All
proceeds of the foregoing will be required to be deposited in lockbox or
dominion accounts. The Borrowers will deliver an irrevocable letter of
instruction to the lockbox or dominion banks directing such bank to transfer
funds so deposited to the account of the ACM Agent.
Certain Covenants. The Credit Facility and related guarantees and security
agreements each will contain extensive affirmative and negative covenants,
including, among others, covenants (i) prescribing minimum levels of net worth
and working capital; (ii) requiring the maintenance of a certain interest
coverage ratio, current ratio and ratio of total liabilities to net worth; and
(iii) placing limits on the ability of the Company and each of its subsidiaries
to incur indebtedness, create liens, guarantee indebtedness, make investments,
make loans or extensions of credit, make capital expenditures, declare, pay or
make dividends, substantially change the nature of its business, engage in
transactions with affiliates, enter into leases, and form subsidiaries. The
Credit Facility will require the Company to maintain as of the end of each
fiscal quarter an interest coverage ratio of 1.1 to 1.0 during fiscal 1995, 1.5
to 1.0 during fiscal 1996 and 1.75 to 1.0 during fiscal 1997, measured on a
rolling four-quarter basis. For the fiscal year ended September 24, 1994, the
interest coverage ratio (excluding the gain on the sale of and the results for
KES) was 1.2 to 1.0. In addition, the net worth covenant under the Credit
Facility will require the Company to maintain a net worth of at least $70
million, less the after-tax effect of prepayment penalties associated with the
prepayment of debt with the proceeds of the Offering. At September 24, 1994, the
Company had a net worth of approximately $76.5 million. The Company currently
would be, and will be upon completion of the Offering, in compliance with all
covenants under the Credit Facility. If the Company's results from operations do
not improve over its results for fiscal 1994, then the Company could be in
default under its Credit Facility in the absence of a waiver or amendment from
the lenders. There can be no assurance that the Company would be able to obtain
any necessary waivers or be able to renegotiate the terms of the Credit
Facility.
The Credit Facility will also contain covenants which limit the ability of
the Company and each of its subsidiaries to sell assets other than sales in the
ordinary course of business, sales of obsolete or idle assets (other than the
collateral under the Credit Facility) and sales of certain non-steel related
assets (in which event the maximum revolving advance amount would be reduced),
and to enter into certain transactions among affiliates, among others. The
Credit Facility does not permit the Company or any of its Subsidiaries to (i)
merge, consolidate or reorganize or (ii) acquire all or substantially all of the
stock or assets of any entity unless the Company has working capital after such
transaction of no less than the sum of $20,000,000 plus scheduled principal
payments due within 36 months. At September 24, 1994, assuming completion of the
Offering and the application of certain cash balances of the Company to the
payment of debt (on a pro forma basis), the Company would have had $ million
in working capital and minimal term debt amortization requirements over the next
five years. In addition, the Credit Facility will restrict prepayment of
indebtedness, including the Senior Secured Notes through optional redemptions,
certain Asset Sale Offers and Change of Control Offers.
Defaults. The Credit Facility will contain certain Events of Default
including, among others, (i) failure to pay the Obligations under the Credit
Facility when due, (ii) breach of any representation or warranty in any of the
loan documents, (iii) failure to comply with terms, provisions, conditions or
covenants in any of the loan documents (which in some cases do not include
notice or cure periods), (iv) issuance of liens or attachment or entry of
judgment (over a threshold level) which are not satisfied, stayed or lifted
within 30 days, (v) certain events of insolvency or bankruptcy or the written
admission of inability to pay debts when due, (vi) Liens created under the
Credit Facility ceasing to be first priority, perfected security interests or
any portion of the Collateral being seized, (vii) material defaults under other
agreements to which the Borrowers or any member of the Holdings Group are a
party which have a material adverse effect on the Company, (viii) Change of
Ownership, (ix) revocation, suspension, adverse modification or termination (or
the institution of proceedings to do so) of any material license, permit,
patent, trademark or tradename, (x) certain ERISA violations, and (xi)
interruption of business operations. In addition, any change in any Borrower's
condition or affairs (financial or otherwise) which in the lenders' reasonable
opinion materially impairs the Collateral or
87
<PAGE> 90
the ability of the Borrowers, taken as a whole, to perform their Obligations
under the Credit Facility will constitute an Event of Default.
Upon the occurrence of the Event of Default relating to bankruptcy or
insolvency of a Borrower, all the Obligations under the Credit Facility will
become immediately due and payable and the Lenders' obligations to make Advances
will be terminated. Upon the occurrence of any other Event of Default, at the
option of a certain percentage of Lenders, all the Obligations under the Credit
Facility will become immediately due and payable and the Lenders' obligations to
make Advances will be terminated. Upon the filing of a petition against any
Borrower in any involuntary case under any state or federal bankruptcy laws, the
obligation of Lenders to make Advances under the Credit Facility will be
terminated other than as required by an appropriate order of the bankruptcy
court having jurisdiction over any Borrower. Upon the occurrence of an Event of
Default, the Agent may exercise other rights and remedies as provided under the
Credit Facility and applicable law.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the ownership of Senior Secured Notes as of the date hereof.
Except where noted, it deals only with Senior Secured Notes held as capital
assets by United States Holders and does not deal with special situations, such
as those of dealers in securities or currencies, financial institutions, life
insurance companies, persons holding Senior Secured Notes as a part of a hedging
or conversion transaction or a straddle or United States Holders whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended,
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below.
The discussion below also assumes that the Senior Secured Notes will not be
issued with original issue discount ("OID"). PERSONS CONSIDERING THE PURCHASE,
OWNERSHIP OR DISPOSITION OF SENIOR SECURED NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
PAYMENTS OF INTEREST
Interest on a Senior Secured Note will generally be taxable to a United
States Holder as ordinary income from domestic sources at the time it is paid or
accrued in accordance with the United States Holder's method of accounting for
tax purposes. As used herein, a "United States Holder" of a Senior Secured Note
means a holder that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
ORIGINAL ISSUE DISCOUNT
The above discussion assumes that the Senior Secured Notes will not be
issued with OID. However, if the Senior Secured Notes are issued at a
substantial discount they will have OID. United States Holders generally will be
required to include OID in gross income in advance of the receipt of cash
attributable to that income. Accordingly, if the Senior Secured Notes are issued
at a substantial discount, United States Holders should consult their own tax
advisors regarding the U.S. federal income tax consequences of the holding and
disposition of such Notes.
MARKET DISCOUNT
If a United States Holder purchases a Senior Secured Note for an amount
that is less than its principal amount (generally other than at its original
issue), the amount of the difference will be treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a United States Holder will be
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, a Senior Secured Note as ordinary income to
the extent of the market discount which has not previously been included in
income and is treated as having
88
<PAGE> 91
accrued on such Senior Secured Note at the time of such payment or disposition.
In addition, the United States Holder may be required to defer, until the
maturity of the Senior Secured Note or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense of any
indebtedness incurred or continued to purchase or carry such Senior Secured
Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Senior Secured Note,
unless the United States Holder elects to accrue the market discount on a
constant interest method. A United States Holder of a Senior Secured Note may
elect to include market discount in income currently as it accrues (on either a
ratable or constant interest method), in which case the rule described above
regarding deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies and may not be revoked without the consent of the Internal
Revenue Service.
SALE, EXCHANGE AND RETIREMENT OF SENIOR SECURED NOTES
A United States Holder's tax basis in a Senior Secured Note will, in
general, be the United States Holder's cost therefor, increased by market
discount previously included in income by the United States Holder and reduced
by any amortized premium and any cash payments on the Senior Secured Note other
than qualified stated interest. Upon the sale, exchange or retirement of a
Senior Secured Note, a United States Holder will recognize gain or loss equal to
the difference between the amount realized upon the sale, exchange or retirement
(less any accrued qualified stated interest, which will be taxable as such) and
the adjusted tax basis of the Senior Secured Note. Except with respect to market
discount, such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if at the time of sale, exchange or retirement the Senior
Secured Note has been held for more than one year. Under current law, net
capital gains of individuals are, under certain circumstances, taxed at lower
rates than items of ordinary income. The deductibility of capital losses is
subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest, and premium paid on Senior Secured Notes and to
the proceeds of sale of a Senior Secured Note made to United States Holders
other than certain exempt recipients (such as corporations). A 31 percent backup
withholding tax will apply to such payments if the United States Holder fails to
provide a taxpayer identification number or certification of foreign or other
exempt status or fails to report in full dividend and interest income.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, Chemical Securities Inc. and
CS First Boston Corporation (the "Underwriters"), the Company has agreed to sell
to the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective principal amounts of the Senior Secured
Notes:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------------------------------------------------------------- ---------------
<S> <C>
Chemical Securities Inc............................................ $
CS First Boston Corporation........................................
---------------
Total......................................................... $ 125,000,000
===============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Senior Secured Notes
offered hereby if any of the Senior Secured Notes are purchased. The Company has
been advised by the Underwriters that they propose initially to offer the Senior
Secured Notes to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a discount
not in excess of % of the principal amount of the Senior Secured Notes. The
Underwriters may allow, and such dealers may reallow, a concession to certain
other
89
<PAGE> 92
dealers not in excess of % of the principal amount of the Senior Secured
Notes. After the initial public offering, the public offering price, discount
and concession may be changed.
The Senior Secured Notes are a new issue of securities with no established
trading market. The Company does not intend to apply for listing of the Senior
Secured Notes on a national securities exchange, but has been advised by the
Underwriters that the Underwriters intend to make a market in the Senior Secured
Notes, as permitted by applicable laws and regulations. No assurance can be
given, however, that the Underwriters will make a market in the Senior Secured
Notes or as to the liquidity of, or the trading market for, the Senior Secured
Notes.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Senior Secured Notes and the Guarantees will be passed
upon for the Company and the Subsidiaries by Bryan Cave, St. Louis, Missouri.
Certain legal matters related to the Offering will be passed upon for the
Underwriters by Simpson Thacher and Bartlett (a partnership which includes
professional corporations), New York, New York. Certain other legal matters will
be passed upon for the Company by Kepley, MacConnell & Eyrich, Cincinnati, Ohio
and Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pennsylvania.
INDEPENDENT AUDITORS
The audited financial statements and schedules of the Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
90
<PAGE> 93
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NS GROUP, INC. AND SUBSIDIARIES
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of September 24, 1994 and September 25, 1993........... F-3
Consolidated Statements of Income for the years ended September 24, 1994, September
25, 1993, and September 26, 1992.................................................... F-4
Consolidated Statements of Cash Flows for the years ended September 24, 1994,
September 25, 1993, and September 26, 1992.......................................... F-5
Consolidated Statements of Common Shareholders' Equity................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 94
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NS Group, Inc.:
We have audited the accompanying consolidated balance sheets of NS Group,
Inc. (a Kentucky corporation) and subsidiaries as of September 24, 1994 and
September 25, 1993, and the related consolidated statements of income, common
shareholders' equity and cash flows for each of the three years in the period
ended September 24, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NS Group, Inc. and
subsidiaries as of September 24, 1994 and September 25, 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended September 24, 1994 in conformity with generally accepted accounting
principles.
As explained in Note 12 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective September
26, 1993.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
October 31, 1994
F-2
<PAGE> 95
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 24, 1994 AND SEPTEMBER 25, 1993
(Dollars in thousands)
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 4,405 $ 5,797
Short-term investments............................................ 40,071 3,457
Accounts receivable, less allowance for doubtful accounts of $637
and $819, respectively........................................... 42,651 48,602
Refundable income taxes........................................... 195 2,813
Inventories....................................................... 32,290 41,691
Operating supplies and other current assets....................... 11,721 18,358
Deferred tax assets............................................... 4,877 6,004
-------- --------
Total current assets......................................... 136,210 126,722
-------- --------
PROPERTY, PLANT AND EQUIPMENT -- AT COST
Land and buildings................................................ 27,841 27,559
Machinery and equipment........................................... 231,383 234,172
Construction in progress.......................................... 3,497 3,362
Less -- accumulated depreciation.................................. (102,182) (91,627)
-------- --------
Net property, plant and equipment............................... 160,539 173,466
-------- --------
OTHER ASSETS........................................................... 18,578 17,054
-------- --------
Total assets................................................. $315,327 $317,242
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable..................................................... $ 28,872 $ 26,967
Accounts payable.................................................. 27,312 28,300
Accrued liabilities............................................... 19,281 23,263
Current portion of long-term debt................................. 15,543 9,132
-------- --------
Total current liabilities.................................... 91,008 87,662
-------- --------
LONG-TERM DEBT......................................................... 138,110 156,056
-------- --------
DEFERRED TAXES......................................................... 9,745 10,902
-------- --------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000,000 shares authorized,
13,809,413 and 13,696,104 shares issued and outstanding,
respectively..................................................... 48,988 48,284
Common stock options and warrants................................. 262 208
Unrealized gain (loss) on available for sale securities........... (124) --
Retained earnings................................................. 27,338 14,130
-------- --------
Common shareholders' equity..................................... 76,464 62,622
-------- --------
Total liabilities and shareholders' equity................... $315,327 $317,242
======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-3
<PAGE> 96
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26, 1992
(Dollars in thousands, except per share amounts)
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES........................................... $ 303,380 $ 353,082 $ 281,242
COST OF PRODUCTS SOLD............................... 278,161 310,586 250,189
SELLING AND ADMINISTRATIVE EXPENSES................. 24,530 30,824 29,652
----------- ----------- -----------
Operating income............................... 689 11,672 1,401
INTEREST INCOME..................................... 1,733 277 722
INTEREST EXPENSE.................................... (20,030) (21,096) (21,797)
OTHER INCOME (EXPENSE).............................. 1,191 (131) 258
GAIN ON SALE OF SUBSIDIARY.......................... 35,292 -- --
----------- ----------- -----------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
a change in accounting principle............. 18,875 (9,278) (19,416)
PROVISION (CREDIT) FOR INCOME TAXES................. 7,382 (3,382) (6,058)
----------- ----------- -----------
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle.................................... 11,493 (5,896) (13,358)
EXTRAORDINARY ITEMS, NET OF INCOME TAXES............ -- (1,095) (2,542)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE......................................... 1,715 -- --
----------- ----------- -----------
Net income (loss).............................. $ 13,208 $ (6,991) $ (15,900)
========== ========== ==========
PER COMMON SHARE
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle.................................... $ .84 $ (.44) $ (.99)
Extraordinary items............................ -- (.08) (.19)
Cumulative effect of a change in accounting
principle.................................... .12 -- --
----------- ----------- -----------
Net income (loss).............................. $ .96 $ (.52) $ (1.18)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING................. 13,789,265 13,552,838 13,483,247
<FN>
See notes to consolidated financial statements
</TABLE>
F-4
<PAGE> 97
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26, 1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 13,208 $ (6,991) $(15,900)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization............... 18,789 19,093 18,711
Decrease in long-term deferred taxes........ (1,157) (1,998) (1,675)
Gain on sale of subsidiary.................. (35,292) -- --
(Gain) loss on disposal of equipment........ (230) 323 381
Increase in accounts receivable, net........ (7,921) (11,461) (11,498)
(Increase) decrease in inventories.......... (3,168) 906 1,430
Decrease in refundable income taxes......... 2,618 2,012 7,067
(Increase) decrease in other current
assets.................................... 2,691 (7,203) (33)
Increase in accounts payable................ 5,782 958 6,442
Increase in accrued liabilities............. 351 6,753 3,590
-------- -------- --------
Net cash flows from operating
activities............................. (4,329) 2,392 8,515
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiary............ 50,426 -- --
Cash dividend from sold subsidiary.......... 6,818 -- --
Purchases of property, plant and
equipment................................. (11,760) (6,080) (4,148)
Proceeds from sale of equipment............. 631 619 1,246
(Increase) decrease in other assets......... (2,122) 999 (774)
(Increase) decrease in short-term
investments............................... (36,614) 208 2,303
-------- -------- --------
Net cash flows from investing
activities............................. 7,379 (4,254) (1,373)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable................... 1,905 6,286 3,989
Proceeds from issuance of long-term debt.... 431 2,012 6,379
Repayments on long-term debt................ (7,246) (9,896) (12,960)
Increase in debt issuance costs............. (236) (388) (259)
Proceeds from issuance of common stock...... 704 931 133
Dividends paid on common stock.............. -- -- (808)
-------- -------- --------
Net cash flows from financing
activities............................. (4,442) (1,055) (3,526)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ (1,392) (2,917) 3,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 5,797 8,714 5,098
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 4,405 $ 5,797 $ 8,714
======== ======== ========
Cash paid during the year for:
Interest.................................... $ 18,964 $ 18,434 $ 18,448
======== ======== ========
Income taxes................................ $ 4,868 $ 291 $ 177
======== ======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-5
<PAGE> 98
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26, 1992
(Dollars in thousands)
<CAPTION>
Unrealized Gain
Common Stock Options (Loss) on
---------------------- and Available for Retained
Shares Amount Warrants Sale Securities Earnings Total
----------- ------- ------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 28, 1991... 13,454,982 $47,220 $ 100 $ 37,829 $ 85,149
Stock option plans............ 49,575 133 133
Net loss...................... (15,900) (15,900)
Common stock dividends ($.06
per share).................. (808) (808)
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 26, 1992... 13,504,557 $47,353 $ 100 $ 21,121 $ 68,574
Stock option plans............ 48,750 181 108 289
Common stock issuance......... 142,797 750 750
Net loss...................... (6,991) (6,991)
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 25, 1993... 13,696,104 $48,284 $ 208 $ -- $ 14,130 $ 62,622
Stock option plans............ 56,145 290 54 344
Common stock issuance......... 57,164 414 414
Unrealized losses on
investments................. (124) (124)
Net income.................... 13,208 13,208
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 24, 1994... 13,809,413 $48,988 $ 262 $(124) $ 27,338 $ 76,464
========= ======= ======= ============== ======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-6
<PAGE> 99
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NS Group,
Inc. and its wholly-owned subsidiaries (the Company): Newport Steel Corporation
(Newport), Koppel Steel Corporation (Koppel), Erlanger Tubular Corporation
(Erlanger), Imperial Adhesives, Inc. (Imperial), Northern Kentucky Management,
Inc., Northern Kentucky Air, Inc and NSub I, Inc., formerly known as Kentucky
Electric Steel Corporation. See Note 2. All significant intercompany accounts
and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash includes currency on hand and demand deposits with financial
institutions. Cash equivalents consist of investments with original maturities
of three months or less. Amounts are stated at cost, which approximates market
value.
SHORT-TERM AND OTHER INVESTMENTS
Short-term investments consist primarily of auction rate preferred stocks
and money market mutual funds for which market value approximates cost. At
September 24, 1994, approximately $8,309,000 in short-term investments were
restricted, primarily in connection with cash collateralized letters of credit.
During the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (Statement 115). Under Statement 115, certain of the
Company's investments are classified as "available for sale" and are recorded at
current market value with an offsetting adjustment to common shareholders'
equity. The impact on the Company's consolidated financial statements from the
adoption of Statement 115 was not material.
<TABLE>
INVENTORIES
At September 24, 1994 and September 25, 1993, inventories stated at the
lower of LIFO (last-in, first-out) cost or market represent approximately 27%
and 23% of total inventories before the LIFO reserve, respectively. All other
inventories are stated at the lower of average cost or market, or the lower of
FIFO cost or market. Inventory costs include labor, material and manufacturing
overhead. Inventories consist of the following components (in thousands of
dollars):
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Raw materials............................................. $ 6,699 $ 5,736
Semi-finished and finished goods.......................... 27,695 37,830
------- -------
34,394 43,566
LIFO reserve.............................................. (2,104) (1,875)
------- -------
Total inventories......................................... $32,290 $41,691
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
For financial reporting purposes, plant and equipment are depreciated on a
straight-line method over the estimated useful lives of the assets. Depreciation
claimed for income tax purposes is computed by use of accelerated methods.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for equipment renewals which extend the life of an asset are
capitalized. Included in property, plant and equipment at September 24, 1994,
are assets with a net book value of approximately $5,910,000 which are not
currently being used in the business. In management's opinion, the values
assigned to such assets are realizable.
F-7
<PAGE> 100
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
At September 24, 1994, deferred income tax balances represent the tax
effect of temporary differences between the financial reporting basis and the
tax basis of certain assets and liabilities. In fiscal 1993 and 1992, the
provision for deferred income taxes represents the tax effect of income and
expense items reported in one period for financial statement purposes and in
another period for tax reporting purposes. See Note 12.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation costs are accrued, except to the extent
capitalizable, when incurrence of such costs is probable and the costs can be
reasonably estimated. Environmental compliance costs include maintenance and
operating costs associated with pollution control facilities, costs of ongoing
monitoring programs, permit costs and other similar costs. Such costs are
expensed as incurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (Statement 112) was issued in November, 1992 and
requires companies to accrue, during the period an employee renders service, the
expense of providing certain postemployment benefits. Currently, the Company
recognizes the expense of such benefits, to the extent provided, at the time
payment is deemed probable. Adoption of Statement 112 is required in fiscal
1995. Management does not expect adoption of Statement 112 to have a material
impact on the Company's consolidated financial condition or results of
operations.
FISCAL YEAR-END
The Company's fiscal year ends on the last Saturday of September.
EARNINGS PER SHARE
Earnings per share are calculated using the weighted average number of
shares outstanding during the period. The effect of common stock equivalents
arising from stock options and warrants on the computation of earnings per share
is not significant.
NOTE 2: SALE OF SUBSIDIARY
On October 6, 1993, the Company sold all of the assets and liabilities of
its wholly-owned subsidiary, Kentucky Electric Steel Corporation (KES), to a
newly formed public company in exchange for $45,626,000 in cash and 400,000
shares (approximately 8%) of the new entity, valued at $4,800,000. In addition,
the Company received $6,818,000 in cash from the new entity in satisfaction of a
dividend declared by KES prior to the sale.
Subsequent to the sale, the Company changed the name of KES to NSub I,
Inc., which currently holds a portion of the proceeds from the sale. The
accompanying consolidated financial statements include the financial position,
results of operations and changes in cash flows of KES for the periods prior to
the sale.
The sale of KES resulted in a pre-tax gain of $35,292,000. After giving
effect to the elimination of the pre-tax gain of $35,292,000, the related tax
effect of $13,764,000 and $123,000 of net income of KES for the eleven days of
fiscal 1994 prior to sale, the Company's pro forma net loss before cumulative
effect of a change in accounting principle for the fiscal year ended September
24, 1994 is $10,158,000, or a $.74 loss per share.
F-8
<PAGE> 101
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: OTHER ASSETS
Other assets at September 24, 1994 and September 25, 1993 includes
approximately $10,528,000 and $13,274,000, respectively, in costs associated
with land near Newport, Kentucky, for use as development property. Other assets
also include marketable equity securities totaling $4,600,000.
<TABLE>
NOTE 4: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accrued payroll and payroll taxes......................... $ 5,032 $ 6,339
Accrued interest.......................................... 4,072 4,131
Accrued environmental remediation......................... 4,563 5,766
Accrued income taxes...................................... 711 --
Other..................................................... 4,903 7,027
------- -------
$19,281 $23,263
======= =======
</TABLE>
<TABLE>
NOTE 5: LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt of the Company consists of the following (in thousands of
dollars):
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Term loans due a non-bank financial institution, interest ranging from
11.54% to 12.54%, due in varying quarterly installments through 2001,
secured by property, plant and equipment............................. $ 59,125 $ 61,125
Senior Secured Notes due various insurance companies, interest at
10.65%, due in equal quarterly installments through 1999, secured by
property, plant and equipment........................................ 32,729 37,200
11% Subordinated Convertible Debentures, due in annual installments
from October, 2000 through 2005...................................... 29,000 29,000
Capital Expenditure Loans due a non-bank financial institution,
interest ranging from 7.99% to 11.54%, due in equal quarterly
installments beginning December, 1994 through 2001, secured by
property, plant and equipment........................................ 14,626 14,626
Term loans due various states and municipalities, interest ranging from
3% to 11%, due in varying monthly or quarterly installments through
2010, secured by junior mortgages on property, plant and equipment... 11,613 16,470
Other.................................................................. 6,560 6,767
-------- --------
153,653 165,188
Less -- Current portion................................................ (15,543) (9,132)
-------- --------
$138,110 $156,056
======== ========
</TABLE>
Certain of the loan agreements contain a number of restrictive covenants
including, among other things, maintenance of minimum net worth, minimum fixed
charge coverage ratios, maximum ratios of indebtedness to total capitalization,
minimum current ratio and working capital requirements and restrictions on
transferring assets between affiliated companies. Certain term loans also
require mandatory prepayments in the event Koppel's cash flow exceeds certain
defined levels. In addition, certain of the loan agreements allow for redemption
prior to maturity, at the option of the Company, at amounts in excess of par.
F-9
<PAGE> 102
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain of the loan agreements contain covenants restricting the payment of
dividends. Under the most restrictive of these covenants, retained earnings
available for dividends is computed under a formula which is based in part on
the earnings and losses of the Company after fiscal 1988. Under this covenant,
the Company is currently prohibited from paying dividends.
The Subordinated Convertible Debentures are unsecured obligations of the
Company and are convertible into common shares of the Company at a price of $17
per share, or approximately 1,706,000 shares. Interest is payable quarterly. The
Debentures are redeemable by the Company at 110% of par.
Annual long-term debt maturities are $15,543,000 in fiscal 1995,
$18,952,000 in fiscal 1996, $18,644,000 in fiscal 1997, $21,792,000 in fiscal
1998 and $21,747,000 in fiscal 1999.
The Company has consolidated line of credit agreements with various lenders
totaling $34,915,000, including a $16,165,000 line of credit agreement
restricted for use at Koppel. The lines are secured by inventory and accounts
receivable, with interest rates ranging from 1/2% to 1 1/2% over prime.
Borrowings are due on demand and are limited under the agreements to defined
percentages of eligible inventory and receivable balances, as well as by certain
restrictive covenants. At September 24, 1994, $34,915,000 of the Company's
consolidated lines of credit were available for borrowing, of which $28,197,000
was outstanding. These credit lines expire in fiscal 1995 and 1996.
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash, cash equivalents and short-term investments -- The carrying amount
approximates fair value because of the short maturity of those instruments.
Other investments -- Other investments, consisting of marketable equity
securities totaling $4,600,000, are reported in other assets and are carried at
market value.
Notes payable -- The carrying amount approximates fair value because of the
short maturity and because such instruments contain interest rates that vary
with the prime rate.
Long-term debt -- The fair value of the Company's long-term debt was
estimated by calculating the present value of the remaining interest and
principal payments on the debt to maturity. The present value computation uses a
discount rate equal to Treasury rates with similar terms at the end of the
reporting period plus or minus the spread between the Treasury rates and the
rate negotiated on the debt at the inception of the loan. The carrying amounts
and fair values of the Company's long-term debt at September 24, 1994 were
$153,653,000 and $154,649,000, respectively.
NOTE 7: PREFERRED STOCK
The Company's authorized stock includes 2,000,000 shares of Class A
Preferred Stock, issuable in one or more series. The rights, preferences,
privileges and restrictions of any series of Class A Preferred Stock, the number
of shares constituting any such series and the designation thereof, are subject
to determination by the Board of Directors.
Four hundred thousand shares of the Class A Preferred Stock has been
designated as Series A Junior Participating Preferred Stock, par value $10 per
share, in connection with the Shareholders Protection Rights Plan (Plan) adopted
in fiscal 1989. Pursuant to the Plan, one Preferred Stock Purchase Right (Right)
is attached to each outstanding share of common stock of the Company.
The Plan includes provisions which are intended to protect shareholders
against certain unfair and abusive takeover attempts by anyone acquiring or
tendering for 30% or more of the Company's common stock. The Company may redeem
the Rights for one cent per Right at any time before a 30% position has been
acquired. The Rights will expire in November 1998.
F-10
<PAGE> 103
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: STOCK OPTIONS AND WARRANTS
The Company has Employee Incentive Stock Option Plans which provide for the
issuance of shares of common stock of the Company upon exercise of options
granted to certain employees. Under the terms of these plans, options have been
granted at fair market value at the grant date and are exercisable on a pro rata
basis over a period of nine years beginning one year after the date of grant. At
September 24, 1994, options outstanding are priced in a range from $3.25 to
$14.125 per share. Of the options expired in fiscal 1994, 295,030 options
expired in connection with the sale of KES.
<TABLE>
A summary of transactions in the plans for fiscal 1994 and 1993 follows:
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Options outstanding, beginning of year................. 1,185,525 960,020
Options granted........................................ 289,050 332,550
Options expired........................................ (369,725) (58,295)
Options exercised...................................... (56,145) (48,750)
--------- ---------
Options outstanding, end of year....................... 1,048,705 1,185,525
======== ========
Options exercisable, end of year....................... 509,525 644,500
======== ========
Available for grant.................................... 488,580 674,250
======== ========
</TABLE>
Under the NS Group, Inc. Non-Qualified Stock Option and Stock Appreciation
Rights Plan of 1988 the Company may grant to key employees options to purchase
(or stock appreciation awards corresponding to) an aggregate of 500,000 shares
of the Company's common stock. Options are to be issued at no less than 50% of
market value on the date of grant, are exercisable in yearly increments as
determined by the Stock Option Committee and expire ten years from the date of
grant. At September 24, 1994, options outstanding are priced in a range from
$3.75 to $13.43 per share. Grant prices have ranged from 64% to 110% of the
market price at the date of grant.
<TABLE>
A summary of transactions in the plan for fiscal 1994 and 1993 follows:
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Options outstanding beginning of year..................... 366,760 262,000
Options granted........................................... 135,085 125,760
Options expired........................................... (26,220) (21,000)
Options exercised......................................... -- --
------- -------
Options outstanding, end of year.......................... 475,625 366,760
======= =======
Options exercisable, end of year.......................... 106,700 61,200
======= =======
Available for grant....................................... 24,375 133,240
======= =======
</TABLE>
The Company has common stock warrants outstanding, issued in connection
with the financing of the Koppel acquisition. The warrants are exercisable for
approximately 772,000 shares of the Company's common stock, at a price of $8.00
per share and expire October 4, 2000.
NOTE 9: COMMITMENTS AND CONTINGENCIES
The Company has various commitments for the purchase of materials, supplies
and energy arising in the ordinary course of business.
Newport is a co-defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of Texas arising from the
failure of two joints of welded pipe during testing of an off-shore pipeline.
The plaintiff is seeking damages in excess of $5 million for costs associated
with replacing the
F-11
<PAGE> 104
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
entire pipeline and lost production revenues. The Company believes that it has
meritorious defenses to this claim. Insurance may be available for a portion,
but not all, of any award for damages. In addition, the Company is subject to
various other claims, lawsuits and administrative proceedings arising in the
ordinary course of business with respect to commercial, product liability and
other matters, which seek remedies or damages. Based upon its evaluation of
available information, management does not believe that any such matters are
likely, individually or in the aggregate, to have a material adverse effect upon
the Company's business or consolidated financial position.
The Company is subject to federal, state and local environmental laws and
regulations, including, among others, the Resource Conservation and Recovery Act
(RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act (the 1990
Amendments), the Clean Water Act and all regulations promulgated in connection
therewith, including those concerning the discharge of contaminants as air
emissions or waste water effluents and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. As such, the Company is from time to
time involved in administrative and judicial proceedings and administrative
inquiries related to environmental matters.
As with other similar mills in the industry, the Company's steel mini-mills
produce dust which contains lead, cadmium and chromium, which is classified as a
hazardous waste. The Company currently collects the dust resulting from its
electric arc furnace operations through emission control systems and recycles it
through a waste recycling firm using EPA-approved processes. The Company also
has on its property at Newport a permitted hazardous waste disposal facility.
Reference is made to Note 10 for information regarding the disposal of radiation
contaminated dust at Newport.
In September 1994, the Company received a proposed Consent Agreement from
the EPA relating to an April 1990 RCRA facility assessment (the Assessment)
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment was performed in connection with a permit application pertaining
to a landfill that is adjacent to the Koppel facilities. The Assessment
identified potential releases of hazardous constituents at or adjacent to the
Koppel facilities prior to the Company's acquisition of the Koppel facilities.
The proposed Consent Agreement establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases. Contamination
documented as a result of the investigation may require cleanup measures.
Pursuant to various indemnity provisions in agreements entered into at the time
of the Company's acquisition of the Koppel facilities, certain parties have
agreed to indemnify the Company against various known and unknown environmental
matters. While such parties have not at this time acknowledged full
responsibility for potential costs under the proposed Consent Agreement, the
Company believes that the indemnity provisions provide for it to be fully
indemnified against all matters covered by the proposed Consent Agreement,
including all associated costs, claims and liabilities.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated dust, as discussed in
Note 10, the Company believes that it is currently in compliance with all known
material and applicable environmental regulations.
Regulations under the 1990 Amendments to the Clean Air Act that will
pertain to the Company's operations are currently not expected to be promulgated
until 1997 or later. The Company cannot predict the level of required capital
expenditures or operating costs resulting from future environmental regulations
such as those forthcoming as a result of the 1990 Amendments. However, the
Company believes that while the 1990 Amendments may require additional
expenditures, such expenditures will not have a material impact on the Company's
business or consolidated financial position for the foreseeable future.
Capital expenditures for the succeeding fiscal year relating to
environmental control facilities are not expected to be material, however, such
expenditures could be influenced by new and revised environmental regulations
and laws.
F-12
<PAGE> 105
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EXTRAORDINARY ITEMS
During the fourth quarter of fiscal 1993, Newport shut down its melt shop
operations for nineteen days when it was discovered that a radioactive substance
was accidentally melted, resulting in the contamination of the melt shop's
electric arc furnace emission control facility, or "baghouse facility". A
similar incident, having occurred in the third quarter of fiscal 1992, shut down
Newport's melt shop facilities for twenty-three days. The source of the
radiation in these incidents was contained in incoming shipments of scrap steel
and was not detected by monitors that check incoming steel scrap. In response,
the Company has installed additional state-of-the-art radioactive detection
systems in various locations throughout the Newport plant.
The Company incurred estimated losses as a result of the extended outages
and costs to restore the melt shop and related facilities back to operation,
including estimated costs to dispose of the radiation contaminated baghouse
dust, of $7,156,000 and $4,100,000, in fiscal 1993 and 1992, respectively.
The Company has recovered $3,460,000 through insurance and expects to
recover and has recorded as a receivable an additional $2,302,000 in insurance
claims for the fiscal 1993 incident. No recovery has been made nor recorded for
the fiscal 1992 incident and the Company is assessing the possibility of legal
remedies against certain parties.
The losses and costs attributable to these incidents, net of insurance
claims, resulted in an extraordinary charge of $1,095,000, net of applicable
income tax benefit of $662,000, or an $.08 loss per share, in fiscal 1993 and an
extraordinary charge of $2,542,000, net of applicable income tax benefit of
$1,558,000, or a $.19 loss per share, in fiscal 1992.
The occurrence of the accidental melting of radioactive materials has not
resulted in any notice of violations from federal or state environmental
regulatory agencies.
The Company is investigating and evaluating various issues concerning
storage, treatment and disposal of the radiation contaminated baghouse dust;
however, a final determination as to method of treatment and disposal, cost and
further regulatory requirements cannot be made at this time. Depending on the
ultimate timing and method of treatment and disposal, which will require
appropriate federal and state regulatory approval, the actual cost of disposal
could substantially exceed current estimates and the Company's insurance
coverage. As of September 24, 1994, claims recorded in connection with disposal
costs substantially exhaust available insurance coverage. Based on current
knowledge, management believes the recorded reserves of $4,354,000 for disposal
costs pertaining to these incidents are adequate and the ultimate outcome will
not have a material adverse effect on the Company's consolidated financial
position. The ultimate effect of these matters on the Company's consolidated
results of operations cannot be predicted because any such effect depends on the
amount and timing of charges to operations resulting from new information as it
becomes available.
NOTE 11: PROFIT SHARING PLANS
The Company has established various profit sharing plans at the operating
companies which are based on the earnings of the respective companies.
Generally, the plans require mandatory contributions at a specified percentage
of pretax profits (with a guaranteed minimum based on hours worked at Newport)
for the bargaining unit employees, and allow for a discretionary contribution
set by the Board of Directors for salaried employees. Expense for contributions
was approximately $497,000, $1,244,000 and $1,119,000 in fiscal years 1994, 1993
and 1992, respectively.
NOTE 12: INCOME TAXES
Effective September 26, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes
("Statement 109"). Prior to adoption of Statement 109, deferred tax expense was
based on items of income and expense that were reported in different years in
the financial statements and tax returns and were measured at the tax rate in
effect in the year the difference
F-13
<PAGE> 106
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
originated. Under Statement 109, deferred tax liabilities and assets are based
upon differences in the basis of assets and liabilities for financial statements
and tax returns and are determined based on the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The cumulative
effect of the change in accounting increased net income by $1,715,000, or $.12
per share.
<TABLE>
The provision (credit) for income taxes, including $662,000 and $1,558,000
allocated to extraordinary items in fiscal 1993 and 1992, respectively, consists
of the following (in thousands of dollars):
<CAPTION>
1994 1993 1992
------ ------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $5,100 $(2,000) $ (4,000)
State....................................... 323 (851) (287)
------ ------- --------
5,423 (2,851) (4,287)
------ ------- --------
Deferred:
Federal..................................... 739 (1,526) (3,470)
State....................................... 1,220 333 141
------ ------- --------
1,959 (1,193) (3,329)
------ ------- --------
Provision (credit) for income taxes.............. $7,382 $(4,044) $ (7,616)
====== ======= ========
</TABLE>
<TABLE>
The income tax provision (credit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss), including
extraordinary items, before income taxes for the following reasons (in thousands
of dollars):
<CAPTION>
1994 1993 1992
------ ------- --------
<S> <C> <C> <C>
Income tax provision (credit) at statutory tax rate of
35% in fiscal 1994 and 34% in fiscal 1993 and
1992................................................ $6,606 $(3,752) $ (7,995)
Change in taxes resulting from:
State income taxes, net of federal effect........ 1,003 (342) (96)
Dividend income exclusion........................ (200) (6) (14)
Other, net....................................... (27) 56 489
------ ------- --------
Total provision (credit) for income taxes............. $7,382 $(4,044) $ (7,616)
====== ======= ========
</TABLE>
The following represents the components of deferred tax liabilities and
assets at September 24, 1994. A valuation allowance has not been recorded
against deferred tax assets as it is estimated that such deferred tax
F-14
<PAGE> 107
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets will be realized through a reduction of taxes otherwise payable upon the
reversal of existing taxable temporary differences.
<TABLE>
<CAPTION>
1994
-----------------
(in thousands of
dollars)
<S> <C>
Deferred tax liabilities:
Property, plant and equipment....................... $ 27,774
Other items......................................... 2,222
-----------------
29,996
-----------------
Deferred tax assets:
Reserves and accruals............................... 3,904
Net operating tax loss carryforward................. 11,690
Alternative minimum tax and other tax credit
carryforwards..................................... 7,629
Other items......................................... 1,905
-----------------
25,128
-----------------
Net deferred tax liability............................... $ 4,868
=================
</TABLE>
For federal income tax purposes, the Company has alternative minimum tax
credit carryforwards of approximately $7,237,000, which are not limited by
expiration dates, and other tax credit carryforwards of approximately $392,000,
which expire beginning in 2000. The Company also has net operating tax loss
carryforwards of approximately $33,399,000, which expire beginning in 2007.
<TABLE>
The components of the credit for deferred income taxes for fiscal 1993 and
1992 are as follows (in thousands of dollars):
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Excess of tax over book depreciation...................... $ 4,097 $ 7,778
Koppel start-up costs deferred for income tax purposes.... 177 533
Reserves and accruals not currently deductible............ (299) (1,439)
Alternative minimum tax and other tax credit
carryforwards........................................... 1,684 (780)
Net operating tax loss carryforward....................... (7,034) (8,134)
Other, net................................................ 182 (1,287)
------- -------
Total........................................... $(1,193) $(3,329)
======= =======
</TABLE>
NOTE 13: RELATED PARTY TRANSACTIONS
One of the Company's directors/shareholders has a controlling interest in a
company which purchases certain reject and limited service tubular products from
Newport. Sales to this customer were approximately $10,984,000, $10,914,000 and
$10,356,000 for fiscal years 1994, 1993, and 1992, respectively. Trade
receivables from this customer were $958,000 and $582,000 at the end of fiscal
1994 and 1993, respectively.
NOTE 14: BUSINESS SEGMENT INFORMATION
The Company operates primarily in two separate business segments:
Specialty Steel Products -- Includes welded tubular steel products and hot
rolled coils manufactured at a mini-mill located near Newport, Kentucky;
seamless tubular steel products, special bar quality products and semi-finished
steel products manufactured at a mini-mill located in western Pennsylvania and a
pipe finishing operation located near Tulsa, Oklahoma.
Adhesive Products -- Includes industrial adhesives manufactured principally
at plants in Cincinnati, Ohio and Nashville, Tennessee.
F-15
<PAGE> 108
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
The operations of both segments are conducted principally in the United
States. The Company grants trade credit to customers, the most significant of
which are distributors serving the oil and natural gas exploration and
production industries which purchase tubular steel products from the Specialty
Steel Products segment. The following table sets forth selected financial
information by business segment for fiscal 1994, 1993 and 1992 (in thousands of
dollars):
<CAPTION>
Operating Depreciation
Net Income Identifiable and Capital
Sales (Loss) Assets Amortization Expenditures
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1994
Specialty steel products........... $270,441 $ 2,909 $246,295 $ 18,373 $ 11,380
Adhesives products................. 32,939 1,150 12,486 416 380
Corporate assets and allocations... -- (3,370) 56,546 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated............ $303,380 $ 689 $315,327 $ 18,789 $ 11,760
======== ========== ========== ========== ==========
1993
Specialty steel products........... $325,007 $ 13,379 $271,968 $ 18,691 $ 5,798
Adhesives products................. 28,075 1,059 12,228 402 282
Corporate assets and allocations... -- (2,766) 33,046 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated $353,082 $ 11,672 $317,242 $ 19,093 $ 6,080
======== ========== ========== ========== ==========
1992
Specialty steel products........... $256,360 $ 3,351 $271,477 $ 18,296 $ 3,948
Adhesives products................. 24,882 533 10,845 415 200
Corporate assets and allocations... -- (2,483) 36,757 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated............ $281,242 $ 1,401 $319,079 $ 18,711 $ 4,148
======== ========== ========== ========== ==========
</TABLE>
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
Quarterly results of operations for 1994 and 1993 are as follows (in
thousands of dollars, except per share amounts):
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
Net sales............................................. $71,959 $66,012 $80,807 $84,602
Gross profit.......................................... 7,791 1,831 7,203 8,394
Income (loss) before cumulative effect of a change in
accounting principle................................ 20,026 (5,583 ) (1,990 ) (960 )
Net income (loss)..................................... 21,741 (5,583 ) (1,990 ) (960 )
Income (loss) per common share before cumulative
effect of a change in accounting principle.......... 1.46 (.40 ) (.14 ) (.07 )
Net income (loss) per common share.................... 1.58 (.40 ) (.14 ) (.07 )
1993
Net sales............................................. $77,779 $86,735 $95,363 $93,205
Gross profit.......................................... 7,366 10,282 12,686 12,162
Income (loss) before extraordinary item............... (3,355 ) (2,115 ) 11 (437 )
Net income (loss)..................................... (3,355 ) (2,115 ) 11 (1,532 )
Income (loss) per common share before extraordinary
item................................................ (.25 ) (.16 ) -- (.03 )
Net income (loss) per common share.................... (.25 ) (.16 ) -- (.11 )
</TABLE>
F-16
<PAGE> 109
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The sale of KES increased fiscal 1994 first quarter net income by
$21,528,000. In addition, in the fiscal 1994 first quarter, the Company recorded
the cumulative effect of the adoption of FAS No. 109, "Accounting for Income
Taxes", which increased net income by $1,715,000.
NOTE 16: PROPOSED OFFERING OF DEBT SECURITIES
The Company is currently pursuing a refinancing of a significant portion of
its long-term debt through the registration and sale of $125 million Senior
Secured Notes due 2003 (the Offering), which would substantially reduce
principal amortization requirements on term debt until the maturity of the
Senior Secured Notes. Completion of the Offering is subject to the Securities
and Exchange Commission allowing the registration of the Senior Secured Notes to
become effective, the entering into a firm commitment with the underwriters and
the existence of market conditions satisfactory to the Company.
All subsidiaries of NS Group, Inc. would jointly and severally guarantee
the Senior Secured Notes. No separate financial statements or financial data of
the subsidiaries are included because the subsidiaries would be jointly and
severally liable; and aggregate assets, liabilities, earnings and equity of the
subsidiaries are substantially the same as those of the Company on a
consolidated basis; and the separate financial statements and other disclosures
concerning the subsidiaries are not deemed material to potential investors in
the Senior Secured Notes.
F-17
<PAGE> 110
<TABLE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------------------------------------
TABLE OF CONTENTS
<S> <C>
Summary 3
Investment Considerations 12
Use of Proceeds 19
Summary of Refinancing Transaction 19
Capitalization 20
Selected Consolidated Financial Data 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Business 31
Management 51
Principal Stockholders 54
Compensation Committee Interlocks and Insider
Participation 55
Certain Transactions 55
Description of the Senior Secured Notes 56
Description of Certain Indebtedness 86
Certain United States Federal Income Tax
Consequences 88
Underwriting 89
Legal Matters 90
Independent Auditors 90
Index to Consolidated Financial Statements F-1
PROSPECTUS
$125,000,000
NS GROUP, INC.
% SENIOR SECURED NOTES DUE 2003
CHEMICAL SECURITIES INC.
CS FIRST BOSTON
DATED , 1995
</TABLE>
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee) fees and expenses in connection with the offering
described in this Registration Statement.
<S> <C>
Securities and Exchange Commission registration fee...................... $43,104
National Association of Securities Dealers filing fee.................... 13,000
Trustee fees.............................................................
Blue sky filing and counsel fees and expenses............................ 25,000
Printing and engraving expenses..........................................
Accountants' fees and expenses...........................................
Legal fees and expenses..................................................
Rating agency fees.......................................................
Miscellaneous............................................................
-------
Total.......................................................... $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following is a summary of Sections 271B.8-500 to 271B.8-589 of the
Kentucky Business Corporation Act:
Subject to restrictions contained in the statute, a corporation may
indemnify any person made or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he 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, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or employee benefit plan. A person, who has been
successful on the merits or otherwise in any suit or matter covered by the
indemnification statute, shall be indemnified against expenses (including
attorneys' fees) reasonably incurred by him in connection therewith.
Indemnification is authorized upon a determination that the person to be
indemnified has met the applicable standard of conduct required. Such
determination shall be made by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding; or if such a quorum cannot be obtained, by a majority vote of a
committee of the board, duly designated to so act by a majority of the full
board, consisting solely of two or more directors who are not parties to the
action; or by special legal counsel selected by the board or a committee
thereof; or by the shareholders who are not parties to such action, suit or
proceeding. Expenses incurred in defense may be paid in advance upon receipt by
the corporation of a written affirmation by the director of his good faith
belief that he has met the applicable standard of conduct required, a written
undertaking by or on behalf of the director to repay such advance if it is
ultimately determined that he did not meet the standard of conduct, and a
determination that the facts then known to those making the determination would
not preclude indemnification under the statute. The indemnification provided by
statute shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors, or otherwise, which shall inure to the
benefit of the heirs, executors and administrators of such a person. Insurance
may be purchased on behalf of any person entitled to indemnification by the
corporation against any liability incurred in an official capacity regardless of
whether the person could be indemnified under the statute. References to the
corporation include all constituent corporations absorbed in a consolidation or
merger as well as the resulting or surviving corporation and anyone seeking
indemnification by virtue of acting in some capacity with a constituent
corporation would stand in the same position as if he had served the resulting
or surviving corporation in the same capacity.
The By-Laws of the Company provide for indemnification of directors and
officers of the Company to the maximum extent permitted by the Kentucky Business
Corporation Act.
II-1
<PAGE> 112
The directors and officers of the Company are insured under a policy of
directors' and officers' liability insurance.
The subsidiaries of the Company are additional registrants and, in addition
to Kentucky, such subsidiaries are incorporated under the laws of Oklahoma, Ohio
and Pennsylvania. Indemnification provisions contained in Oklahoma, Ohio and
Pennsylvania statutes, as well as the bylaws for each additional registrant, may
also be applicable and provide for indemnification of directors and officers of
the additional registrants.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
The exhibits and consolidated financial statements schedules filed as part
of this Registration Statement are as follows:
<S> <C> <C>
(a) Exhibits.
See Index to Exhibits.
(b) Consolidated Financial Statement Schedules.
Report of Independent Public Accountants..................................... S-1
Schedule I -- Marketable Securities--Other Investments....................... S-2
Schedule V -- Property, Plant and Equipment.................................. S-3
Schedule VI -- Accumulated Depreciation and Amortization of Property, Plant
and Equipment........................................................... S-4
Schedule VIII -- Valuation and Qualifying Accounts........................... S-5
Schedule IX -- Short-Term Borrowings......................................... S-6
Schedule X -- Supplementary Income Statement Information..................... S-7
</TABLE>
All other consolidated financial statement schedules are omitted due to the
absence of conditions under which they are required or because the information
is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the provisions of Item 14 or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrants 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, each 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 of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(b) The undersigned registrant's hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance on Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 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 of 1933, 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.
II-2
<PAGE> 113
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
NS GROUP, INC.
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
John R. Parker
Vice President, Treasurer and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director, President and Chief Executive
- --------------------------------------------- Officer
Clifford R. Borland
/s/ PATRICK J. B. DONNELLY Director
- ---------------------------------------------
Patrick J. B. Donnelly
/s/ JOHN B. LALLY Director
- ---------------------------------------------
John B. Lally
/s/ R. GLEN MAYFIELD Director
- ---------------------------------------------
R. Glen Mayfield
/s/ RONALD R. NOEL Director, Vice President, Secretary and
- --------------------------------------------- Chief Administrative Officer
Ronald R. Noel
/s/ JOHN R. PARKER Vice President, Treasurer and Chief
- --------------------------------------------- Financial Officer (Principal Financial and
John R. Parker Accounting Officer)
</TABLE>
II-3
<PAGE> 114
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
NEWPORT STEEL CORPORATION
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
John R. Parker
Treasurer (Principal Financial
and Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director
- ---------------------------------------------
Clifford R. Borland
/s/ RONALD R. NOEL President
- ---------------------------------------------
Ronald R. Noel
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Officer)
John R. Parker
</TABLE>
II-4
<PAGE> 115
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
KOPPEL STEEL CORPORATION
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
John R. Parker
Treasurer (Principal Financial
and Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director
- ---------------------------------------------
Clifford R. Borland
/s/ PAUL C. BORLAND, JR. President
- ---------------------------------------------
Paul C. Borland, Jr.
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Officer)
John R. Parker
</TABLE>
II-5
<PAGE> 116
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
ERLANGER TUBULAR CORPORATION
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
Treasurer (Principal Financial
and Accounting Manager)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director and President
- ---------------------------------------------
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Manager)
John R. Parker
</TABLE>
II-6
<PAGE> 117
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
IMPERIAL ADHESIVES, INC.
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
Treasurer (Principal Financial
and Accounting Manager)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director
- ---------------------------------------------
Clifford R. Borland
/s/ ROBERT D. JOHNSON President
- ---------------------------------------------
Robert D. Johnson
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Manager)
John R. Parker
</TABLE>
II-7
<PAGE> 118
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
NORTHERN KENTUCKY AIR, INC.
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
Treasurer (Principal Financial
and Accounting Manager)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director and President
- ---------------------------------------------
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Manager)
John R. Parker
</TABLE>
II-8
<PAGE> 119
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 Newport, Commonwealth of
Kentucky, on November 29, 1994.
NORTHERN KENTUCKY MANAGEMENT, INC.
(Registrant)
By: /s/ JOHN R. PARKER
--------------------------------
Treasurer (Principal Financial
and Accounting Manager)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clifford R. Borland and John R. Parker and any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 29, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
/s/ CLIFFORD R. BORLAND Director and President
- ---------------------------------------------
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
- --------------------------------------------- Accounting Manager)
John R. Parker
</TABLE>
II-9
<PAGE> 120
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NS Group, Inc.:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of NS Group, Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
October 31, 1994. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules listed in Item
16(b) are the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
October 31, 1994
S-1
<PAGE> 121
<TABLE>
SCHEDULE I
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
MARKETABLE SECURITIES -- OTHER INVESTMENTS
(Dollars in thousands)
<CAPTION>
Amount at
Which Shown
Market in Balance
Type of Investment Cost Value Sheet
- ----------------------------------------------------------- ------- ------- -----------
<S> <C> <C> <C>
AT SEPTEMBER 25, 1993
Fixed Rate Obligations:
Corporate notes.......................................... $ 527 $ 503 $ 503
Variable Rate Preferred Stocks............................. 1,000 1,000 1,000
U.S. Treasury Securities................................... 1,954 1,954 1,954
------- ------- -----------
Total short-term investments at September 25, 1993.... $ 3,481 $ 3,457 $ 3,457
======= ======= ============
AT SEPTEMBER 24, 1994
Fixed Rate Obligations:
Corporate notes.......................................... $ 527 $ 500 $ 500
Variable Rate Preferred Stocks:
Utilities
Duke Power Company.................................... 1,500 1,500 1,500
Houston Industries, Inc............................... 1,500 1,500 1,500
Kansas City Power & Light Company..................... 1,500 1,500 1,500
Virginia Electric & Power Company..................... 1,500 1,500 1,500
Other Utilities....................................... 6,000 6,000 6,000
Financial
Northern Trust Corp................................... 1,500 1,500 1,500
Konica Capital........................................ 1,000 1,000 1,000
Transamerica Corporation.............................. 1,500 1,500 1,500
Other Financial....................................... 6,000 6,000 6,000
Industrial............................................... 3,000 3,000 3,000
Other Variable Rate Investments
Provident Institutional Funds
Tempcash Fund......................................... 11,995 11,995 11,995
Other.................................................... 2,576 2,576 2,576
------- ------- -----------
Total short-term investments at
September 24, 1994.................................. $40,098 $40,071 $40,071
======= ======= ============
</TABLE>
S-2
<PAGE> 122
<TABLE>
SCHEDULE V
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Year at Cost Retirements Other(a) of Year
- ----------------------------------- ---------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Land and land improvements....... $ 8,320 $ 50 $ (122) $ -- $ 8,248
Buildings........................ 17,788 1,251 (23) -- 19,016
Machinery and equipment.......... 226,498 4,900 (1,863) -- 229,535
Construction in progress......... 6,046 (2,053 )(b) -- -- 3,993
---------- --------- ----------- --------- --------
$258,652 $ 4,148 $(2,008) $ -- $260,792
========= ======== =========== ========= ========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Land and land improvements....... $ 8,248 $ 186 $ (12) $ -- $ 8,422
Buildings........................ 19,016 121 -- -- 19,137
Machinery and equipment.......... 229,535 6,404 (1,767) -- 234,172
Construction in progress......... 3,993 (631 )(b) -- -- 3,362
---------- --------- ----------- --------- --------
$260,792 $ 6,080 $(1,779) $ -- $265,093
========= ======== =========== ========= ========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Land and land improvements....... $ 8,422 $ 1,210 $ -- $ (682) $ 8,950
Buildings........................ 19,137 756 (283) (719) 18,891
Machinery and equipment.......... 234,172 9,389 (3,993) (8,185) 231,383
Construction in progress......... 3,362 405 (b) -- (270) 3,497
---------- --------- ----------- --------- --------
$265,093 $ 11,760 $(4,276) $(9,856) $262,721
========= ======== =========== ========= ========
<FN>
- ---------------
(a) Reductions due to the sale of subsidiary.
(b) Net change in construction in progress for the year.
</TABLE>
S-3
<PAGE> 123
<TABLE>
SCHEDULE VI
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Classification of Year Expenses Retirements Other(a) of Year
- ----------------------------------- ---------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Land and land improvements....... $ 602 $ 189 $ -- $ -- $ 791
Buildings........................ 2,213 444 (1) -- 2,656
Machinery and equipment.......... 53,772 17,485 (380) -- 70,877
---------- ---------- ----------- -------- --------
$ 56,587 $ 18,118 $ (381) $ -- $74,324
========= ========== =========== ======== ========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Land and land improvements....... $ 791 $ 197 $ -- $ -- $ 988
Buildings........................ 2,656 1,015 -- -- 3,671
Machinery and equipment.......... 70,877 16,928 (837) -- 86,968
---------- ---------- ----------- -------- --------
$ 74,324 $ 18,140 $ (837) $ -- $91,627
========= ========== =========== ======== ========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Land and land improvements....... $ 988 $ 192 $ -- $ (22 ) $ 1,158
Buildings........................ 3,671 434 (217) (134 ) 3,754
Machinery and equipment.......... 86,968 17,409 (3,659) (3,448 ) 97,270
---------- ---------- ----------- -------- --------
$ 91,627 $ 18,035 $(3,876) $(3,604 ) $102,182
========= ========== =========== ======== ========
<FN>
- ---------------
(a) Reductions due to the sale of subsidiary.
</TABLE>
S-4
<PAGE> 124
<TABLE>
SCHEDULE VIII
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<CAPTION>
Reserves Deducted from
Assets in Balance Sheets
----------------------------
Allowance
for Allowance
Doubtful for Cash
Accounts(1) Discounts(1)
----------- ------------
<S> <C> <C>
BALANCE, September 28, 1991................................... $ 1,138 $ 97
Additions:
Charged to costs and expenses............................ 632 1,903
Deductions:
Net charges of nature for which
reserves were created.................................. (463) (1,792)
----------- ------------
BALANCE, September 26, 1992................................... $ 1,307 $ 208
Additions:
Charged to costs and expenses............................ 572 2,338
Deductions:
Net charges of nature for which
reserves were created.................................. (1,060) (2,293)
----------- ------------
BALANCE, September 25, 1993................................... $ 819 $ 253
Additions:
Charged to costs and expenses............................ 343 2,298
Deductions:
Sale of subsidiary....................................... (305) --
Net charges of nature for which
reserves were created.................................. (220) (2,245)
----------- ------------
BALANCE, September 24, 1994................................... $ 637 $ 306
=========== ============
<FN>
- ---------------
(1) Deducted from accounts receivable
</TABLE>
S-5
<PAGE> 125
<TABLE>
SCHEDULE IX
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
SHORT-TERM BORROWINGS
(Dollars in thousands)
<CAPTION>
MAXIMUM
AMOUNT AVERAGE WEIGHTED
WEIGHTED OUTSTANDING AMOUNT AVERAGE
BALANCE AVERAGE AT MONTH-END OUTSTANDING INTEREST
CATEGORY OF AGGREGATE AT END INTEREST DURING DURING RATE DURING
SHORT-TERM BORROWINGS(1) OF YEAR RATE THE YEAR THE YEAR(2) THE YEAR(2)
- ----------------------------- ------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Lines of credit......... $20,279 7.29% $ 31,744 $24,127 7.62%
Other notes............. 402 5.58 608 297 5.58
------- ------------ -----------
$20,681 7.26 $ 32,352 $24,424 7.59
======= ============ ===========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Lines of credit......... $26,229 7.30% $ 29,729 $25,333 7.30%
Other notes............. 738 5.58 1,137 533 5.58
------- ------------ -----------
$26,967 7.27 $ 30,866 $25,866 7.27
======= ============ ===========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Lines of credit......... $28,197 9.05% $ 33,353 $29,011 7.89%
Other notes............. 675 5.29 855 490 5.58
------- ------------ -----------
$28,872 8.96 $ 34,208 $29,501 7.86
======= ============ ===========
<FN>
- ---------------
(1) Short-term borrowings were under various bank line of credit agreements and
short-term demand notes which are used to finance various insurance
contracts.
(2) Computed on a monthly weighted average basis.
</TABLE>
S-6
<PAGE> 126
<TABLE>
SCHEDULE X
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Dollars in thousands)
<CAPTION>
CHARGED TO
COSTS AND
ITEM EXPENSES
- ------------------------------------------------------ ----------
<S> <C>
For the Year Ended September 26, 1992:
Maintenance and repairs............................. $ 23,904
==========
For the Year Ended September 25, 1993:
Maintenance and repairs............................. $ 21,703
==========
For the Year Ended September 24, 1994:
Maintenance and repairs............................. $ 21,249
==========
</TABLE>
S-7
<PAGE> 127
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
1.1 Form of Underwriting Agreement between NS Group, Inc. (the "Company")
and Chemical Securities Inc. and CS First Boston Corporation
3.1 Amended and Restated Articles of Incorporation of the Company, dated
November 14, 1991, filed as Exhibit 3(a) to Company's Form 10-K for the
fiscal year ended September 28, 1991, File No. 1-9383, and incorporated
herein by this reference
3.2 Amended and Restated By-laws of the Company, dated November 14, 1991,
filed as Exhibit 3(b) to Company's Form 10-K for the fiscal year ended
September 28, 1991, File No. 1-9383, and incorporated herein by this
reference
3.3* Articles of Incorporation of Erlanger Tubular Corporation ("Erlanger")
3.4* Bylaws of Erlanger
3.5* Articles of Incorporation of Imperial Adhesives, Inc. ("Imperial")
3.6* Bylaws of Imperial
3.7* Articles of Incorporation of Koppel Steel Corporation ("Koppel")
3.8* Bylaws of Koppel
3.9* Articles of Incorporation of Newport Steel Corporation ("Newport")
3.10* Bylaws of Newport
3.11* Articles of Incorporation of Northern Kentucky Air, Inc.
3.12* Bylaws of Northern Kentucky Air, Inc.
3.13* Articles of Incorporation of Northern Kentucky Management, Inc.
3.14* Bylaws of Northern Kentucky Management, Inc.
4.1* Form of Indenture (including form of Senior Secured Note) between the
Company and Huntington National Bank, as trustee (the "Trustee")
4.2* Form of Mortgage and Collateral Assignment of Leases from Newport to
the Trustee
4.3* Form of Mortgage and Collateral Assignment of Leases from Koppel to the
Trustee (Pennsylvania)
4.4* Form of Mortgage and Collateral Assignment of Leases from Koppel to the
Trustee (Texas)
4.5* Form of Mortgage and Collateral Assignment of Leases from Erlanger to
the Trustee
4.6* Form of ICN Mortgage and Collateral Assignment of Leases from Newport
to the Trustee
4.7* Form of ICN Mortgage and Collateral Assignment of Leases from Koppel to
the Trustee (Pennsylvania)
4.8* Form of ICN Mortgage and Collateral Assignment of Leases from Koppel to
the Trustee (Texas)
4.9* Form of ICN Mortgage and Collateral Assignment of Leases from Erlanger
to the Trustee
4.10* Form of Security Agreement between Newport and the Trustee
4.11* Form of Security Agreement between Koppel and the Trustee
4.12* Form of Security Agreement between Erlanger and the Trustee
4.13* Form of ICN Security Agreement between Newport and the Trustee
4.14* Form of ICN Security Agreement between Koppel and the Trustee
4.15* Form of ICN Security Agreement between Erlanger and the Trustee
4.16* Form of Pledge Agreement between the Company and the Trustee
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
4.17* Form of Subsidiary Guarantee between Newport and the Trustee
4.18* Form of Subsidiary Guarantee between Koppel and the Trustee
4.19* Form of Subsidiary Guarantee between Erlanger and the Trustee
4.20* Form of Subsidiary Guarantee between Imperial and the Trustee
4.21* Form of Subsidiary Guarantee between Northern Kentucky Management, Inc.
and the Trustee
4.22* Form of Subsidiary Guarantee between Northern Kentucky Air, Inc. and
the Trustee
4.23* Form of Intercreditor Agreement between the Trustee and the Bank of New
York Commercial Corporation, as agent under the Credit Facility
4.24* Form of Subordination Agreement between the Trustee and the
Commonwealth of Pennsylvania, Department of Commerce
4.25* Form of Subordination Agreement between the Trustee and the City of
Dayton, Kentucky
4.26* Form of Credit Facility among Newport, Koppel, Imperial, Bank of New
York Commercial Corporation and PNC Bank, Ohio, N.A.
4.27* Form of Guarantee and Security Agreement to be executed by the Company,
Imperial, Northern Kentucky Air, Inc. and Northern Kentucky Management,
Inc.
5.1* Opinion of Bryan Cave
10.1 Company's Amended Employee Incentive Stock Option Plan, filed as
Exhibit 10(a) to Company's Form 10-K for the fiscal year ended
September 30, 1989, File No. 1-9838, and incorporated herein by this
reference
10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to
Company's Registration Statement on Form S-18, File No. 2-90643, and
incorporated herein by this reference
10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights Plan
of 1988, filed as Exhibit 1 to Company's Proxy Statement dated January
13, 1989, File No. 1-9838, and incorporated herein by this reference
10.4 Rights Agreement dated as of November 17, 1988 between Company and
Pittsburgh National Bank, filed as Exhibit 1 to Company's Form 8-K
dated November 17, 1988, File No. 1-9838, and incorporated herein by
this reference, and Appointment and Amendment Agreement dated July 29,
1994 between Registrant and Registrar and Transfer Company, filed as
Exhibit 10(d) to Company's Form 10-Q dated May 29, 1994, File No.
1-9838, and incorporated herein by reference
10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to
Company's Proxy Statement dated December 22, 1992, File No. 1-9838, and
incorporated herein by this reference
10.6 Transfer Agreement, dated September 29, 1993, filed on September 28,
1993 as Exhibit 10.2 to the Amendment No. 2 to the Registration
Statement on Form S-1 of Kentucky Electric Steel, Inc., File No.
33-67140, and incorporated herein by this reference
10.7 Tax Agreement, dated October 6, 1993, by and among NS Group, Inc.,
Kentucky Electric Steel, Inc. and NSub I, Inc. (formerly Kentucky
Electric Steel Corporation), filed as Exhibit 10(h) to Company's Form
10-K for the fiscal year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.8 Registration Rights Agreement dated October 6, 1993 among Kentucky
Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly
Kentucky Electric Steel Corporation), filed as Exhibit 10(i) to
Company's Form 10-K for fiscal year ended September 25, 1993, File No.
1-9383, and incorporated herein by this reference
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
10.9 Form of 11% Subordinated Convertible Debenture due 2005, filed as
Exhibit 4.1 to Company's Form 8-K dated October 18, 1990, File No.
1-9838, and incorporated herein by this reference
10.10 Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to
Company's Form 8-K dated October 18, 1990, File No. 1-9838, and
incorporated herein by reference; and First Amendment to Warrant dated
September 26, 1992, filed as Exhibit 4(c) to Company's Form 10-K for
the fiscal year ended September 26, 1992, File No. 1-9838, and
incorporated herein by this reference
12.1 Computation of Earnings to Fixed Charges
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Bryan Cave is included in the opinion of Bryan Cave, filed
as Exhibit 5.1
24.1 Powers of Attorney (reference is made to the signature page of this
Registration Statement)
25.1* Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1
27 Financial Data Schedule
<FN>
- ---------------
*To be filed by Amendment
</TABLE>
<PAGE> 1
EXHIBIT 1.1
NS GROUP, INC.
$125,000,000
______% SENIOR SECURED NOTES DUE 2003
FORM OF UNDERWRITING AGREEMENT
------------------------------
_________ __, 1995
CHEMICAL SECURITIES INC.,
as Representative of the Underwriters
270 Park Avenue
New York, New York 10017
CS FIRST BOSTON
Park Avenue Plaza
55 East 52nd Street
New York, New York 100121
Dear Sirs:
NS Group, Inc., a Kentucky corporation (the "Company"), proposes to issue
and sell $125,000,000 principal amount of its ______% Senior Secured Notes due
2003 (the "Securities"). The Securities are to be issued pursuant to an
Indenture dated as of _________ __, 1995 (the "Indenture") to be entered into
between the Company and ____________________, as trustee (the "Trustee"), the
form of which has been filed as an exhibit to the Registration Statement (as
defined below). The obligations of the Company arising under and in connection
with the Securities shall be unconditionally guaranteed, jointly and severally,
by each of the Company's subsidiaries pursuant to the Subsidiary Guarantees
dated as of __________ __, 1995 (the "Subsidiary Guarantees") by Newport Steel
Corporation ("Newport"), Koppel Steel Corporation ("Koppel"), Erlanger Tubular
Corporation ("Erlanger"), Imperial Adhesives Inc. ("Imperial"), NSub I, Inc.,
Northern Kentucky Management, Inc. and Northern Kentucky Air, Inc. The
Subsidiary Guarantee of Newport will be secured by a [Mortgage and Collateral
Assignment of Leases] dated as of _________ __, 1995 by Newport to the Trustee
in its capacity as collateral agent (the "Collateral Agent") with respect to
certain real property located in the State of Kentucky (the "Kentucky
Mortgage") and the Newport Security Agreement dated as of __________ __, 1995
between Newport and the Collateral Agent (the "Newport Security Agreement");
the Subsidiary Guarantee of Koppel will be secured by a [Mortgage and
Collateral Assignment of Leases] dated as of _________ __, 1995
<PAGE> 2
2
between Koppel and the Collateral Agent with respect to certain real property
located in the State of Pennsylvania (the "Pennsylvania Mortgage"), a [Mortgage
and Collateral Assignment of Leases] dated as of _________ __, 1995 between
Koppel and the Collateral Agent with respect to certain real property located
in the State of Texas (the "Texas Mortgage") and the Koppel Security Agreement
dated as of __________ __, 1995 between Koppel and the Collateral Agent (the
"Koppel Security Agreement"); and the Subsidiary Guarantee of Erlanger will be
secured by a [Mortgage and Collateral Assignment of Leases] dated as of
_________ __, 1995 between Erlanger and the Collateral Agent with respect to
certain real property located in the State of Oklahoma (the "Oklahoma
Mortgage") and the Erlanger Security Agreement dated as of _________ __, 1995
between Erlanger and the Collateral Agent (the "Erlanger Security Agreement").
The Securities will be secured by intercompany notes (the "Intercompany Notes")
from each of Newport, Koppel and Erlanger. The Company will pledge each of the
Intercompany Notes pursuant to the Company Pledge Agreement dated as of
__________ __, 1995 to be entered into between the Collateral Agent and the
Company (the "Pledge Agreement") to secure its obligations arising in
connection with the Securities. The Intercompany Note of Newport will be
secured by the ICN [Mortgage and Collateral Assignment of Leases] dated as of
__________ __, 1995 with respect to certain real property located in the State
of Kentucky (the "ICN Kentucky Mortgage") and the Newport ICN Security
Agreement dated as of __________ __, 1995 (the "Newport ICN Security
Agreement"); the Intercompany Note of Koppel will be secured by the ICN
[Mortgage and Collateral Assignment of Leases] dated as of __________ __, 1995
with respect to certain real property in the State of Pennsylvania (the "ICN
Pennsylvania Mortgage"), the ICN [Mortgage and Collateral Assignment of Leases]
dated as of __________ __, 1995 with respect to certain real property located
in the State of Texas (the "ICN Texas Mortgage") and the Koppel ICN Security
Agreement dated as of __________ __, 1995 (the "Koppel ICN Security
Agreement"); and the Intercompany Note of Erlanger will be secured by the ICN
[Mortgage and Collateral Assignment of Leases] dated as of __________ __, 1995
with respect to certain real property in the State of Oklahoma (the "ICN
Oklahoma Mortgage") and the Erlanger ICN Security Agreement dated as of
__________ __, 1995 (the "Erlanger ICN Security Agreement"). The "ICN Kentucky
Mortgage" and the "Kentucky Mortgage" are collectively referred to as the
"Kentucky Mortgages"; the "ICN Pennsylvania Mortgage" and the "Pennsylvania
Mortgage" are collectively referred to as the "Pennsylvania Mortgages"; the
"ICN Texas Mortgage" and the "Texas Mortgage" are collectively referred to as
the "Texas Mortgages"; the "ICN Oklahoma Mortgage" and the "Oklahoma Mortgage"
are collectively referred to as the "Oklahoma Mortgages"; the "ICN Newport
Security Agreement" and the "Newport Security Agreement" are collectively
referred to as the "Newport Security Agreements"; the "ICN Koppel Security
Agreement" and the "Koppel Security Agreement" are collectively referred to as
the "Koppel Security Agreements"; and the "ICN Erlanger Security Agreement" and
the "Erlanger Security Agreement" are collectively referred to as the "Erlanger
Security Agreements". Collectively, the Pledge Agreement, the Kentucky
Mortgages, the Pennsylvania Mortgages, the Texas Mortgages, the Oklahoma
Mortgages, the Newport Security Agreements, the Koppel Security Agreements, the
Erlanger Security Agreements and the Intercompany Notes shall be referred to as
the "Security Documents." The Security Documents and the Subsidiary
<PAGE> 3
3
Guarantees shall be collectively referred to as the "Collateral Documents."
This is to confirm the agreement concerning the purchase of the Securities from
the Company by Chemical Securities Inc. and CS First Boston Corporation (the
"Underwriters").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) A registration statement on Form S-1 (No. 33-_____), including a form
of prospectus, relating to the Securities and the Subsidiary Guarantees has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission"), and has been filed by the Company with the
Commission. The Company may have filed one or more amendments thereto,
including the related Preliminary Prospectus, each of which has previously
been furnished to you. The Company will next file with the Commission either
(i) prior to effectiveness of such registration statement, a further
amendment to such registration statement (including the form of final
prospectus) or (ii) after effectiveness of such registration statement, a
final prospectus in accordance with Rules 430A and 424(b)(1) or (4). In the
case of clause (ii), the Company has included in such registration statement,
as amended at the Effective Time (as defined below), all information (other
than information permitted to be omitted from the registration statement when
it becomes effective pursuant to Rule 430A ("Rule 430A Information"))
required by the Securities Act and the Rules and Regulations to be included
in the final prospectus with respect to the Securities and the Subsidiary
Guarantees and the offering thereof. As filed, such amendment and form of
final prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, with respect
to the Securities and the Subsidiary Guarantees and the offering thereof and,
except to the extent the Representative shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to
the Underwriters prior to the execution of this Agreement or, to the extent
not completed at such time, shall contain only such specific additional
information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company has advised you, prior to the
execution of this Agreement, will be included or made therein. For purposes
of this Agreement, "Effective Time" means the date and time as of which such
registration statement, or the most recent post-effective amendment thereto,
if any, was or is declared effective by the Commission. "Preliminary
Prospectus" means each prospectus included in such registration statement, or
amendments thereof, before it becomes effective under the Securities Act, any
prospectus filed with the Commission by the Company pursuant to Rule 424(a)
and the prospectus included in the Registration Statement at the Effective
Time that omits Rule 430A Information. Such registration statement, as
amended at the Effective Time, including all Rule 430A Information, if any,
is hereinafter referred to as the "Registration Statement", and the form of
prospectus relating to the Securities, as first filed with the Commission
pursuant to and in accordance with Rule 424(b)
<PAGE> 4
4
or, if no such filing is required, as included in the Registration Statement
is hereinafter referred to as the "Prospectus".
(b) (i) At the Effective Time, the Registration Statement did or will, the
Prospectus, if not filed pursuant to Rule 424(b), will or otherwise, the
Preliminary Prospectus, did, (ii) when the Prospectus (and any supplements
thereto) is first filed (if required) in accordance with Rule 424(b) will,
and (iii) on the Closing Date, the Prospectus (and any supplements thereto)
will, in the case of each of clauses (i), (ii), and (iii) comply in all
material respects with the applicable requirements of the Securities Act and
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and
the respective rules thereunder; at the Effective Time, the Registration
Statement did not or will not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein not misleading; at the Effective Time
and on the Closing Date, the Indenture did or will comply in all material
respects with the applicable requirements of the Trust Indenture Act and the
rules and regulations of the Commission thereunder; and, at the Effective
Time, the Prospectus, if not filed pursuant to Rule 424(b), did not or will
not, and otherwise, at the Effective Time, on the date of any filing pursuant
to Rule 424(b) and on the Closing Date, the Preliminary Prospectus or the
Prospectus, as the case may be, (together with any supplement thereto) did
not or will not, include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The preceding sentence does not apply to (i) that part of the Registration
Statement which shall constitute the Statement of Eligibility and
Qualification (Form T-1) of the Trustee under the Trust Indenture Act or (ii)
information contained in or omitted from the Registration Statement or the
Prospectus (or any supplement thereto) in reliance upon and in conformity
with written information furnished to the Company through the Representative
by or on behalf of the Underwriters specifically for use therein (the
"Underwriters' Information"). The parties acknowledge and agree that the
Underwriters' Information consists solely of the material included under the
caption "Underwriting" in the Prospectus.
(c) The Company and each of its subsidiaries have been duly incorporated
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation, are duly qualified to do
business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of property or the
conduct of their respective businesses requires such qualification, and have
all power and authority necessary to own or hold their respective properties
and to conduct the businesses in which they are engaged, except where the
failure to so qualify or have such power or authority would not have,
singularly or in the aggregate, a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects of the
Company and its subsidiaries taken as a whole.
<PAGE> 5
5
(d) The Company and its subsidiaries have full right, power and authority
to execute and deliver this Agreement, the Indenture, the Securities and the
Collateral Documents and to perform their respective obligations hereunder
and thereunder; and all corporate action required to be taken for the due and
proper authorization, execution and delivery of this Agreement, the
Indenture, the Securities and the Collateral Documents and the consummation
of the transactions contemplated by this Agreement, the Indenture, the
Securities and the Collateral Documents have been duly and validly taken.
(e) This Agreement, the Indenture and the Collateral Documents, when duly
executed by the proper officers of the Company and its subsidiaries and
delivered by the Company and its subsidiaries, will constitute valid and
binding agreements of the Company and its subsidiaries enforceable against
the Company and its subsidiaries in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law); and the
Securities, when duly executed, authenticated, issued and delivered as
provided in the Indenture, will be duly and validly issued and outstanding
and will constitute valid and binding obligations of the Company entitled to
the benefits of the Indenture and the Collateral Documents and enforceable in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally and by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law); and the Indenture, the Collateral Documents
and the Securities conform to the descriptions thereof contained in the
Prospectus.
(f) The Company and each of its subsidiaries have good and marketable title
in fee simple to all items of real and personal property subject to the liens
permitted by the Security Documents, and have good and marketable title in
fee simple to, or have valid rights to lease or otherwise use, all other
items of real or personal property which are material to the business of the
Company and its subsidiaries taken as a whole, in each case, except as
permitted by the Indenture, free and clear of all liens, encumbrances, claims
and defects that may materially interfere with the condition (financial or
otherwise), results of operations, business or prospects of the Company and
its subsidiaries taken as a whole.
(g) The liens granted pursuant to the Security Documents will constitute
perfected liens on the Collateral (as defined in the Security Documents) in
favor of the Collateral Agent, which are prior to all other liens on the
Collateral created by the Company and in existence on the date hereof,
excluding liens permitted by the Indenture or liens to be discharged on the
Closing Date on the repayment of the related indebtedness, upon the filing of
the Kentucky Mortgages, the
<PAGE> 6
6
Pennsylvania Mortgages, the Texas Mortgages and the Oklahoma Mortgages and
proper financing statements with [list filing offices].
(h) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus.
(i) All of the outstanding shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued and are fully
paid and non-assessable and are owned directly or indirectly by the Company
through one or more wholly-owned subsidiaries, free and clear of any claim,
lien, encumbrance, security interest, restriction upon voting or transfer or
any other claim of any third party and are in the possession of the Company.
(j) The execution, delivery and performance of this Agreement, the
Indenture, the Securities and the Collateral Documents by the Company and its
subsidiaries and the consummation of the transactions contemplated hereby and
thereby will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of the property
or assets of the Company or any of its subsidiaries is subject, nor will such
actions result in any violation of the provisions of the charter or by-laws
of the Company or any of its subsidiaries or any statute or any order, rule
or regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties or
assets; and except for the registration of the Securities under the
Securities Act, the qualification of the Indenture under the Trust Indenture
Act, such consents, approvals, authorizations, registrations or
qualifications as may be required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and applicable state securities laws in
connection with the purchase and distribution of the Securities by the
Underwriters and filings as are necessary in connection with the perfection
of the liens created by the Security Documents, no consent, approval,
authorization or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Indenture, the Securities or the
Collateral Documents by the Company and its subsidiaries and the consummation
of the transactions contemplated hereby and thereby.
(k) The financial statements (including the related notes and supporting
schedules) filed as part of the Registration Statement or included in the
Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the
periods indicated, and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved.
<PAGE> 7
7
(l) There are no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations and which
have not been so described or filed.
(m) There are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which,
singularly or in the aggregate, if determined adversely to the Company or any
of its subsidiaries, are reasonably likely to have a material adverse effect
on the condition (financial or otherwise), results of operations, business or
prospects of the Company and its subsidiaries taken as a whole; and to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(n) Neither the Company nor any of its subsidiaries (i) is in violation of
its charter or by-laws, (ii) is in default in any material respect, and no
event has occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance of any term,
covenant or condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a party
or by which it is bound or to which any of its property or assets is subject
or (iii) is in violation in any respect of any law, ordinance, governmental
rule, regulation or court decree to which it or its property or assets may be
subject, except any violation or default that would not have a material
adverse effect on the condition (financial or otherwise), results of
operations, business or prospects of the Company and its subsidiaries taken
as a whole.
(o) The Company and each of its subsidiaries possess all material licenses,
certificates, authorizations and permits issued by, and have made all
declarations and filings with, the appropriate state, federal or foreign
regulatory agencies or bodies which are necessary or desirable for the
ownership of their respective properties or the conduct of their respective
businesses as described in the Prospectus, except where the failure to
possess or make the same would not have, singularly or in the aggregate, a
material adverse effect on the condition (financial or otherwise), results of
operations, business or prospects of the Company and its subsidiaries taken
as a whole, and the Company has not received notification of any revocation
or modification of any such license, authorization or permit and has no
reason to believe that any such license, certificate, authorization or permit
will not be renewed.
(p) The Company and each of its subsidiaries own or possess adequate rights
to use all material patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations, copyrights,
licenses and know how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures)
<PAGE> 8
8
necessary for the conduct of their respective businesses and have no reason
to believe that the conduct of their respective businesses will conflict
with, and have not received any notice of any claim of conflict with, any
such rights of others.
(q) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or, to the best of the Company's knowledge, is imminent
which might be expected to have a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects of the
Company and its subsidiaries taken as a whole.
(r) No "prohibited transaction" (as defined in Section 406 of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code")) or
"accumulated funding deficiency" (as defined in Section 302 of ERISA) or any
of the events set forth in Section 4043(b) of ERISA (other than events with
respect to which the 30-day notice requirement under Section 4043 of ERISA
has been waived) has occurred with respect to any employee benefit plan which
could have a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Company and
its subsidiaries taken as a whole; each employee benefit plan is in
compliance in all material respects with applicable law, including ERISA and
the Code; the Company has not incurred and does not expect to incur liability
under Title IV of ERISA with respect to the termination of, or withdrawal
from, any "pension plan"; and each "pension plan" (as defined in ERISA) for
which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which could
cause the loss of such qualification.
(s) Except as disclosed in the Registration Statement and the Prospectus,
there has been no storage, generation, transportation, handling, treatment,
disposal, discharge, emission, or other release of any kind of toxic or other
wastes or other hazardous substances by, due to, or caused by the Company or
any of its subsidiaries (or, to the best of the Company's knowledge, any
other entity for whose acts or omissions the Company or any of its
subsidiaries is or may be liable) upon any of the property now or previously
owned or leased by the Company or any of its subsidiaries, or upon any other
property, in violation of any statute or any ordinance, rule, regulation,
order, judgment, decree or permit or which would, under any statute or any
ordinance, rule (including rule of common law), regulation, order, judgment,
decree or permit, give rise to any liability, except for any violation or
liability which would not have, singularly or in the aggregate with all such
violations and liabilities, a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects of the
Company and its subsidiaries taken as a whole; except as disclosed in the
Registration Statement and the Prospectus, there has been no disposal,
discharge, emission or other release of any kind onto such property or
<PAGE> 9
9
into the environment surrounding such property of any toxic or other wastes
or other hazardous substances with respect to which the Company or any of its
subsidiaries have knowledge, except for any such disposal, discharge,
emission, or other release of any kind which would not have, singularly or in
the aggregate with all such discharges and other releases, a material adverse
effect on the condition (financial or otherwise), results of operations,
business or prospects of the Company and its subsidiaries taken as a whole.
(t) The Company (i) does not have any material lending or other
relationship with any banks or lending affiliates of the Underwriters, and
(ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any affiliates of
the Underwriters.
(u) There are no persons with registration or other similar rights either
to have any securities registered pursuant to the Registration Statement or
to have any securities otherwise registered by the Company under the
Securities Act in connection with or as a result of the execution, delivery
and performance of this Agreement.
(v) Neither the Company nor any of its subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), and the rules and regulations of the
Commission thereunder.
(w) The Company and its affiliates are not party to any contract that
requires the payment of finder's fees or creates rights in any other party
with respect to the offering of the Securities, except with respect to the
letter dated _________ and amended __________.
(x) As described in the Registration Statement and the Prospectus, the
Company has adopted the capital expenditure program described in the
Registration Statement and the Prospectus.
2. PURCHASE BY THE UNDERWRITERS. On the basis of the representations,
warranties and agreements contained herein, and subject to the terms and
conditions set forth herein, the Company agrees to issue and sell to each of
the Underwriters, severally and not jointly, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, the principal
amount of Securities set forth opposite the name of such Underwriter in
Schedule 1 hereto at a purchase price equal to __% of the principal amount
thereof plus accrued interest, if any, from _________ __, 1995 to the Closing
Date (as hereinafter defined).
The Company shall not be obligated to deliver any of the Securities except
upon payment for all the Securities to be purchased as provided herein.
<PAGE> 10
10
3. DELIVERY OF AND PAYMENT FOR THE SECURITIES. Delivery of and payment for
the Securities shall be made at the office of Simpson Thacher & Bartlett, 425
Lexington Avenue, New York, New York 10017, or at such other place as shall be
agreed upon by the Representative and the Company, at 10:00 A.M., New York City
time, on _________ __, 1995, or at such other date or time, not later than
seven full business days thereafter, as shall be agreed upon by the
Representative and the Company (such date and time being referred to herein as
the "Closing Date"). On the Closing Date, the Company shall deliver or cause
to be delivered to the Representative for the account of each Underwriter
through the book-entry facilities of The Depository Trust Company (the
"Depositary") the Securities against payment of the purchase price to the
Company [or to other persons upon the order of the Company] by certified or
official bank check or checks payable in New York Clearinghouse (next day)
funds or similar next day funds. Time shall be of the essence, and delivery at
the time and place specified pursuant to this Agreement is a further condition
of the obligation of each of the Underwriters hereunder. The Securities so to
be delivered will be represented by one or more permanent global notes
registered in the name of the Depositary or its nominee. The Company shall
make the certificates for the Securities available for inspection by the
Underwriters and delivery to the Depositary in New York, New York, not later
than two full business days prior to the Closing Date.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with each of the
Underwriters:
(a) That, if the Effective Time is prior to the execution and delivery of
this Agreement, to file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to by
the Representative, subparagraph (4)) of Rule 424(b) within the time period
prescribed by such rule and will provide evidence satisfactory to the
Representative of such timely filing;
(b) To advise the Representative promptly of any proposal to amend or
supplement the registration statement as filed or the related prospectus or
the Registration Statement or the Prospectus and not to effect such amendment
or supplementation without the consent of the Representative; to advise the
Representative promptly of the receipt of any comments from the Commission
and of the effectiveness of the Registration Statement (in each case if the
Effective Time is subsequent to the execution and delivery of this Agreement)
and of any amendment or supplementation of the Registration Statement or the
Prospectus, or of any request by the Commission therefor, and of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose;
to advise the Representative promptly of any order preventing or suspending
the use of any prospectus relating to the Securities, of the suspension of
the qualification of such Securities for offering or sale in any jurisdiction
and of the initiation or threatening of any proceeding for any such purpose;
and to use best efforts to prevent the issuance of any stop order or of any
such order preventing or
<PAGE> 11
11
suspending the use of any prospectus relating to the Securities or suspending
any such qualification and, if any such stop order or order of suspension is
issued, to obtain the lifting thereof at the earliest possible time;
(c) To furnish promptly to each of the Underwriters and counsel for the
Underwriters a signed copy of the Registration Statement as originally filed
with the Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith; and to deliver promptly
without charge to the Underwriters such number of the following documents as
the Underwriters may from time to time reasonably request: (i) conformed
copies of the Registration Statement as originally filed with the Commission
and each amendment thereto (in each case excluding exhibits other than this
Agreement, the Indenture, the Collateral Documents, the computation of the
ratio of earnings to fixed charges and the computation of other ratios) and
(ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus;
(d) If the delivery of a prospectus is required at any time in connection
with the sale of the Securities and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such Prospectus is
delivered, not misleading, or if for any other reason it shall be necessary
at such time to amend or supplement the Prospectus in order to comply with
the Securities Act, to notify the Representative immediately thereof, and to
promptly prepare and file with the Commission an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission or
effect such compliance;
(e) To file promptly with the Commission any amendment to the Registration
Statement or the Prospectus or any supplement to the Prospectus that may, in
the judgment of the Company or the Representative, be required by the
Securities Act or requested by the Commission or advisable in connection with
the distribution of the Securities;
(f) As soon as practicable to make generally available to the Company's
security holders and to deliver to the Representative an earning statement of
the Company and its subsidiaries (which need not be audited) complying with
Section 11(a) of the Securities Act and the Rules and Regulations (including,
at the option of the Company, Rule 158);
(g) For so long as any of the Securities are outstanding, to furnish to the
Underwriters copies of all materials furnished by the Company to its
shareholders and all public reports and all reports and financial statements
furnished by the Company to the Commission pursuant to the Exchange Act or
any rule or regulation of the Commission thereunder;
<PAGE> 12
12
(h) Promptly from time to time to take such action as the Representative
may reasonably request to qualify the Securities for offering and sale under
the securities laws of such jurisdictions as the Representative may request
and to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Securities; provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction; and
(i) For a period of __ days from the date of the Prospectus, to not offer
for sale, sell, contract to sell or otherwise dispose of, directly or
indirectly, or file a registration statement for, or announce any offering
of, any debt securities of the Company (other than the Securities) without
the prior written consent of the Representative.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of
each of the Underwriters hereunder are subject to the accuracy, when made and
on the Closing Date, of the representations and warranties of the Company
contained herein, to the accuracy of the statements of the Company made in any
certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder, and to each of the following additional
terms and conditions:
(a) If the Effective Time is not prior to the execution and delivery of
this Agreement, the Registration Statement shall have become effective and
the Indenture shall have been qualified under the Trust Indenture Act, and
the Representative shall have received notice thereof, not later than (i)
6:00 p.m. New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 p.m. New
York City time on such date or (ii) 12:00 noon New York City time on the
business day following the day on which the offering price was determined if
such determination occurred after 3:00 p.m. New York City time on such date.
If the Effective Time is prior to the execution and delivery of this
Agreement, the Prospectus shall have been timely filed with the Commission in
accordance with Section 4(a) of this Agreement. Prior to the Closing Date,
no stop order suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied with to the
reasonable satisfaction of the Representative.
(b) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Securities, the
Indenture, the Collateral Documents, the Registration Statement and the
Prospectus, and all other legal matters relating to this Agreement and the
transactions contemplated hereby, shall be reasonably satisfactory in all
material respects to counsel for the Underwriters, and the Company shall have
furnished to such counsel all
<PAGE> 13
13
documents and information that they may reasonably request to enable them to
pass upon such matters.
(c) Bryan Cave shall have furnished to the Underwriters their written
opinion, as counsel to the Company, addressed to the Underwriters and dated
the Closing Date, in form and substance reasonably satisfactory to the
Representative, in the form of Exhibit A hereto.
(d) _________________________ shall have furnished to the Underwriters
their written opinion, as special counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance reasonably
satisfactory to the Underwriters, to the effect that:
(i) The execution, delivery and performance by Newport of the Newport
Security Agreements and the Kentucky Mortgages, and the creation of the
liens provided for therein (a) do not and will not violate any existing law
or governmental rule or regulation of the Commonwealth of Kentucky and (b)
do not and will not require any license, permit, authorization or other
approval of, any exemption by, or any registration, recording or filing
with, any court, administrative agency or other governmental authority of
the Commonwealth of Kentucky, except for the filing of the Kentucky
Mortgages and certain financing statements;
(ii) Upon the filing of certain financing statements in the Commonwealth of
Kentucky, the Collateral Agent on behalf of the holders of the Securities
and the holder of the Newport Intercompany Note will have valid and fully
perfected security interests in the Collateral (excluding the real property
subject to the Kentucky Mortgages) located in the Commonwealth of Kentucky;
(iii) The Kentucky Mortgages are in proper form for recording in the
Commonwealth of Kentucky, comply with all applicable legal requirements and
create for the benefit of the Collateral Agent and the holder of the Newport
Intercompany Note legal, valid and binding mortgage liens upon the real
property described therein enforceable as such against the Company and, upon
recordation by the [name filing office], in its mortgage and conveyance
records, all other persons, whatsoever. The provisions of the Kentucky
Mortgages are effective to create in favor of the Collateral Agent and the
holder of the Newport Intercompany Note legal, valid and binding security
interests in all personal property described therein and upon the filing of
the applicable financing statements will constitute for the benefit of the
Collateral Agent and the holder of the Newport Intercompany Note legal,
valid and binding, perfected liens on such property, enforceable as such
against the
<PAGE> 14
14
Company and all other persons. The liens created by the Kentucky Mortgages
in the real property of the Company are superior in all respects to any lien
of record in favor of General Electric Capital Corporation ("GECC") with
respect to a $10,000,000 Loan Agreement, dated as of October 4, 1990, as
amended, the holders of 10.40% Senior Secured Notes Due 1999 and the [UDAG
Loan]; and
(iv) The courts of the Commonwealth of Kentucky will enforce those
provisions in the Newport Security Agreements which stipulate that the
validity, construction and enforceability of such documents will be governed
by the laws of the State of New York, except to the extent that the laws of
the Commonwealth of Kentucky shall govern the perfection and effect of
perfection of the security interests created thereunder and the
enforceability of the security interest in the Collateral located in the
State of Kentucky.
(e) _______________ shall have furnished to the Underwriters their written
opinion, as special Pennsylvania counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance reasonably
satisfactory to the Underwriters, to the effect that:
(i) The execution, delivery and performance by Koppel of the Koppel
Security Agreements and the Pennsylvania Mortgages, and the creation of the
liens provided for therein (a) do not and will not violate any existing law
or governmental rule or regulation of the Commonwealth of Pennsylvania and
(b) do not and will not require any license, permit, authorization or other
approval of, any exemption by, or any registration, recording or filing
with, any court, administrative agency or other governmental authority of
the Commonwealth of Pennsylvania, except for the filing of certain financing
statements;
(ii) Upon the filing of certain financing statements in the Commonwealth of
Pennsylvania, the Collateral Agent on behalf of the holders of the
Securities and the holder of the Koppel Intercompany Note will have valid
and fully perfected first security interests in the Collateral (excluding
the real property subject to the Pennsylvania Mortgages) located in the
Commonwealth of Pennsylvania, with the exception of certain liens permitted
by the Indenture;
(iii) The Pennsylvania Mortgages are in proper form for recording in the
Commonwealth of Pennsylvania, comply with all applicable legal requirements
and create for the benefit of the Collateral Agent and the holder of the
Koppel Intercompany Note legal, valid and binding mortgage liens upon the
real property described therein enforceable as such against the Company and,
upon recordation by the [list filing office] in its mortgage and conveyance
records, all other persons, whatsoever. The
<PAGE> 15
15
provisions of the Pennsylvania Mortgages are effective to create in favor of
the Collateral Agent and the holder of the Koppel Intercompany Note legal,
valid and binding security interests in all personal property described
therein and upon the filing of the applicable financing statements will
constitute for the benefit of the Collateral Agent and the holder of the
Koppel Intercompany Note legal, valid and binding, perfected liens on such
property, enforceable as such against the Company and all other persons. The
liens created by the Pennsylvania Mortgages in the real property of the
Company are superior in all respects to any lien of record in favor of GECC
with respect to the $90,000,000 Loan Agreement dated as of October 4, 1990,
as amended, [and the Pennsylvania Department of Commerce with respect to the
$4,000,000 Sunny Day Loan];
(iv) The courts of the Commonwealth of Pennsylvania will enforce those
provisions in the Koppel Security Agreements which stipulate that the
validity, construction and enforceability of such documents will be governed
by the laws of the State of New York, except to the extent that the laws of
the Commonwealth of Pennsylvania shall govern the perfection and effect of
perfection of the security interests created thereunder and the
enforceability of the security interest in the Collateral located in the
Commonwealth of Pennsylvania.
(f) _______________ shall have furnished to the Underwriters their written
opinion, as special Texas counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance reasonably
satisfactory to the Underwriters, to the effect that:
(i) The execution, delivery and performance by Koppel of the Texas
Mortgages, and the creation of the liens provided for therein (a) do not and
will not violate any existing law or governmental rule or regulation of the
State of Texas and (b) do not and will not require any license, permit,
authorization or other approval of, any exemption by, or any registration,
recording or filing with, any court, administrative agency or other
governmental authority of the State of Texas, except for the filing of
certain financing statements;
(ii) Upon the filing of certain financing statements in the State of Texas,
the Collateral Agent on behalf of the holders of the Securities and the
holder of the Koppel Intercompany Note will have valid and fully perfected
security interests in the Collateral located in the State of Texas, with the
exception of certain liens permitted by the Indenture; and
(iii) The Texas Mortgages are in proper form for recording in the State of
Texas, comply with all applicable legal requirements and create for the
benefit of the Collateral Agent and the holder of the Koppel Intercompany
Note legal, valid and binding mortgage liens upon the real
<PAGE> 16
16
property described therein enforceable as such against the Company and, upon
recordation by the [list filing office] in its mortgage and conveyance
records, all other persons, whatsoever. The provisions of the Texas
Mortgages are effective to create in favor of the Collateral Agent and the
holder of the Intercompany Note of Koppel legal, valid and binding security
interests in all personal property described therein and upon the filing of
the applicable financing statements will constitute for the benefit of the
Collateral Agent and the holder of the Koppel Intercompany Note legal, valid
and binding, perfected liens on such property, enforceable as such against
the Company and all other persons; and
(iv) The courts of the State of Texas will enforce those provisions in the
Koppel Security Agreements which stipulate that the validity, construction
and enforceability of such documents will be governed by the laws of the
State of New York, except to the extent that the laws of the State of Texas
shall govern the perfection and effect of perfection of the security
interests created thereunder and the enforceability of the security interest
in the Collateral located in the State of Texas.
(g) _______________ shall have furnished to the Underwriters their written
opinion, as special Oklahoma counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance reasonably
satisfactory to the Underwriters, to the effect that:
(i) The execution, delivery and performance by Erlanger of the Erlanger
Security Agreements and Oklahoma Mortgages, and the creation of the liens
provided for therein (a) do not and will not violate any existing law or
governmental rule or regulation of the State of Oklahoma and (b) do not and
will not require any license, permit, authorization or other approval of,
any exemption by, or any registration, recording or filing with, any court,
administrative agency or other governmental authority of the State of
Oklahoma except for the filing of the Oklahoma Mortgages and certain
financing statements;
(ii) Upon the filing of certain financing statements in the State of
Oklahoma, the Collateral Agent on behalf of the holders of the Securities
will have a valid and fully perfected first security interest in the
Collateral (excluding the real property subject to the Oklahoma Mortgages)
located in the State of Oklahoma, with the exception of certain liens
permitted by the Indenture;
(iii) The Oklahoma Mortgages are in proper form for recording in the State
of Oklahoma, complies with all applicable legal requirements and creates for
the benefit of the Collateral Agent a legal, valid and binding mortgage lien
upon the real property described therein enforceable as such against the
Company and, upon recordation by the [list filing
<PAGE> 17
17
office] in its mortgage and conveyance records, all other persons,
whatsoever. The provisions of the Oklahoma Mortgages are effective to create
in favor of the Collateral Agent a legal, valid and binding security interest
in all personal property described therein and upon the filing of the
applicable financing statements will constitute for the benefit of the
Collateral Agent a legal, valid and binding, perfected lien on such property,
enforceable as such against the Company and all other persons; and
(iv) The courts of the State of Oklahoma will enforce those provisions in
the Erlanger Security Agreements which stipulate that the validity,
construction and enforceability of such documents will be governed by the
laws of the State of New York, except to the extent that the laws of the
State of Oklahoma shall govern the perfection and effect of perfection of the
security interests created thereunder and the enforceability of the security
interest in the Collateral located in the State of Oklahoma.
(h) The Representative shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to such matters as the Underwriters may reasonably
require, and the Company shall have furnished to such counsel such documents
as they request for enabling them to pass upon such matters.
(i) The Company shall have furnished to the Representative a letter (the
"bring-down letter") of Arthur Andersen & Co., addressed to the Underwriters
and dated the Closing Date confirming, as of the date of the bring-down
letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is given in
the Prospectus, as of a date not more than five days prior to the date of the
bring-down letter), the conclusions and findings of such firm with respect to
the financial information and other matters covered by a letter delivered to
the Representative concurrently with the execution of this Agreement.
(j) The Company shall have furnished to the Representative a certificate,
dated the Closing Date, of its Chairman of the Board, its President or a Vice
President and its chief financial officer stating that (i) such officers have
carefully examined the Registration Statement and the Prospectus, (ii) in
their opinion, as of the Effective Time, the Registration Statement did not,
and as of its date and the Closing Date, the Prospectus did not and does not
include any untrue statement of a material fact and does not and did not omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading and since the Effective Time, no event
has occurred which should have been set forth in a supplement or amendment to
the Registration Statement or the Prospectus and (iii) to the best of his or
her knowledge after reasonable
<PAGE> 18
18
investigation, as of the Closing Date, the representations and warranties of
the Company in this Agreement are true and correct, the Company has complied
with all agreements and satisfied all conditions on its part to be performed
or satisfied hereunder at or prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or, to the best of
his or her knowledge, are contemplated by the Commission, and subsequent to
the date of the most recent financial statements in the Prospectus, there has
been no material adverse change in the financial position or results of
operation of the Company and its subsidiaries, or any change, or any
development including a prospective change, in or affecting the condition
(financial or otherwise), results of operations, business or prospects of the
Company and its subsidiaries taken as a whole, except as set forth in the
Prospectus.
(k) Subsequent to the execution and delivery of this Agreement or, if
earlier, the dates as of which information is given in the Registration
Statement (exclusive of any amendment thereof) and the Prospectus (exclusive
of any supplement thereto), there shall not have been any change in the
capital stock or long-term debt of the Company or any of its subsidiaries or
any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), results of operations,
business or prospects of the Company and its subsidiaries taken as a whole,
the effect of which, in any such case described above, is, in the judgment of
the Representative so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated in the Prospectus
(exclusive of any supplement).
(l) Subsequent to the execution and delivery of this Agreement (i) no
downgrading shall have occurred in the rating accorded the Securities or any
of the Company's other debt securities by any "nationally recognized
statistical rating organization," as that term is defined by the Commission
for purposes of Rule 436(g)(2) of the Rules and Regulations, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review (other than an announcement with positive implications of a possible
upgrading), its rating of the Securities or any of the Company's other debt
securities.
(m) Subsequent to the execution and delivery of this Agreement there shall
not have occurred any of the following: (i) trading in securities generally
on the New York Stock Exchange, the American Stock Exchange or the
over-the-counter market shall have been suspended or limited, or minimum
prices shall have been established on either of such exchanges or such market
by the Commission, by such exchange or by any other regulatory body or
governmental authority having jurisdiction, or trading in securities of the
Company on any exchange or in the over-the-counter market shall have been
suspended or (ii) a general moratorium on commercial banking activities shall
have been declared by Federal or New York State authorities or (iii) an
outbreak or escalation of hostilities or a
<PAGE> 19
19
declaration by the United States of a national emergency or war or such a
material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of
the Representative impracticable or inadvisable to proceed with the public
offering or the delivery of the Securities on the terms and in the manner
contemplated in the Prospectus.
(n) The receipt by the Company and its Subsidiaries of written commitments
for the satisfaction and discharge of the Company's and its subsidiaries
obligations relating to (i) the 10.40% Senior Secured Notes Due 1999 and the
security documents (including mortgages) relating thereto, (ii) the Loan
Agreement dated as of October 4, 1990 between GECC and Newport, as amended,
and the security documents (including mortgages) relating thereto; and (iii)
the Loan Agreement dated as of October 4, 1990 between GECC and Koppel, as
amended, and the [Take or Pay arrangements] and security documents (including
mortgages) relating thereto.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
6. TERMINATION. The obligations of the Underwriters hereunder may be
terminated by the Underwriters, in their absolute discretion, by notice given
to and received by the Company prior to delivery of and payment for the
Securities, if, prior to that time, any of the events described in Sections
5(k), 5(l) or 5(m) shall have occurred or the events in 5(n) shall not have
occurred by the date of pre-closing.
7. DEFAULTING UNDERWRITERS. If, on the Closing Date, either Underwriter
defaults in the performance of its obligations under this Agreement, the
Representative may make arrangements for the purchase of such Securities by
other persons satisfactory to the Company and the remaining non-defaulting
Underwriter, but if no such arrangements are made by the Closing Date, then the
remaining non-defaulting Underwriter shall be obligated to purchase the
Securities which the defaulting Underwriter agreed but failed to purchase on
the Closing Date; provided, however, that the remaining non-defaulting
Underwriter shall not be obligated to purchase any of the Securities on the
Closing Date if the aggregate principal amount of Securities which the
defaulting Underwriter agreed but failed to purchase on such date exceeds
one-eleventh of the aggregate principal amount of the Securities to be
purchased on the Closing Date, and the remaining non-defaulting Underwriter
shall not be obligated to purchase in total more than 110% of the principal
amount of the Securities which it agreed to purchase on the Closing Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded and
the remaining Underwriter or other underwriters satisfactory to the
Representative and the Company do not elect to purchase the Securities which
the defaulting Underwriter agreed but failed to purchase, this Agreement shall
terminate without liability on the part of the non-defaulting Underwriter or
the Company, except
<PAGE> 20
20
that the Company will continue to be liable for the payment of expenses to the
extent set forth in Sections 8 and 12 and except that the provisions of
Sections 9 and 10 shall not terminate and shall remain in effect. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context otherwise requires, any party not listed in
Schedule 1 hereto who, pursuant to this Section 7 purchases Securities which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have for damages caused by its default. If other underwriters
are obligated or agree to purchase the Securities of a defaulting Underwriter,
either the remaining non-defaulting Underwriter or the Company may postpone the
Closing Date for up to seven full business days in order to effect any changes
that in the opinion of counsel for the Company or counsel for the Underwriters
may be necessary in the Registration Statement, the Prospectus or in any other
document or arrangement, and the Company agrees to file promptly any amendment
or supplement to the Registration Statement or the Prospectus that effects any
such changes.
8. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) notice shall have been
given pursuant to Section 6 preventing this Agreement from becoming effective,
(b) the Company shall fail to tender the Securities for delivery to the
Underwriters for any reason permitted under this Agreement or (c) the
Underwriters shall decline to purchase the Securities for any reason permitted
under this Agreement, the Company shall reimburse the Underwriters for the fees
and expenses of their counsel and for such other out-of-pocket expenses as
shall have been reasonably incurred by them in connection with this Agreement
and the proposed purchase of the Securities, and upon demand the Company shall
pay the full amount thereof to the Underwriters. If this Agreement is
terminated pursuant to Section 7 by reason of the default of one of the
Underwriters, the Company shall not be obligated to reimburse the defaulting
Underwriter on account of those expenses.
9. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Securities Act (collectively referred to for the purposes of
this Section 9 and Section 10 as an Underwriter) against any loss, claim,
damage or liability, joint or several, or any action in respect thereof, to
which that Underwriter may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of or is based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and shall reimburse each Underwriter for any legal or other expenses reasonably
incurred by that Underwriter in connection with investigating or preparing to
defend or defending against or appearing as a third party witness in connection
with any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action
arises out of or
<PAGE> 21
21
is based upon an untrue statement or alleged untrue statement in or omission or
alleged omission from any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter specifically for use therein which the parties hereto agree is
limited to information set forth in the "Underwriting" section of the
Registration Statement, the Preliminary Prospectus and the Prospectus.
(b) Each Underwriter, severally and not jointly, shall indemnify and hold
harmless the Company, each of its directors, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively referred to for
the purposes of this Section 9 and Section 10 as the Company), against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which the Company may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of or is based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto or (ii)
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that the untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
that Underwriter specifically for use therein, and shall reimburse the Company
for any legal or other expenses reasonably incurred by the Company in
connection with investigating or preparing to defend or defending against or
appearing as third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred; provided that the
parties hereto hereby agree that such written information provided by the
Underwriters consists solely of the information appearing in the "Underwriting"
section of the Registration Statement, the Preliminary Prospectus and the
Prospectus.
(c) Promptly after receipt by an indemnified party under this Section 9 of
notice of any claim or the commencement of any action, the indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under this Section 9, notify the indemnifying party in writing of the
claim or the commencement of that action; provided, however, that the failure
to notify the indemnifying party shall not relieve it from any liability which
it may have under this Section 9 except to the extent it has been materially
prejudiced by such failure; and, provided, further, that the failure to notify
the indemnifying party shall not relieve it from any liability which it may
have to an indemnified party otherwise than under this Section 9. If any such
claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it wishes, jointly with any
other similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the
<PAGE> 22
22
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representative shall have the right to employ counsel to represent jointly
the Underwriters and their respective controlling persons who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the Underwriters against the Company under this Section 9 if, in the
reasonable judgment of the Representative, it is advisable for the Underwriters
and their respective controlling persons to be jointly represented by separate
counsel, and in that event the fees and expenses of such separate counsel shall
be paid by the Company. Each indemnified party, as a condition of the indemnity
agreements contained in Sections 9(a) and 9(b), shall use all reasonable
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall be liable for any settlement of
any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with its written consent or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against
any loss or liability by reason of such settlement or judgment.
The obligations of the Company and the Underwriters in this Section 9 and in
Section 10 are in addition to any other liability which the Company or the
Underwriters, as the case may be, may otherwise have.
10. CONTRIBUTION. If the indemnification provided for in Section 9 is
unavailable or insufficient to hold harmless an indemnified party under Section
9(a) or (b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in
respect thereof, (i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Securities or (ii) if the allocation
(even if the Underwriters were treated as one entity for such purpose) provided
by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and the
Underwriters on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Securities
purchased under this Agreement (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by
the Underwriters with respect to the Securities purchased under this Agreement,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to
<PAGE> 23
23
correct or prevent such untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 10 were to be determined by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 10 shall be deemed
to include, for purposes of this Section 10, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 10, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Securities underwritten by
it and distributed to the public were offered to the public less the amount of
any damages which such Underwriter has otherwise paid or become liable to pay
by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations to contribute as provided in this Section 10
are several in proportion to their respective underwriting obligations and not
joint.
11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of and be binding upon the Underwriters, the Company, and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 9 and 10
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
12. EXPENSES. The Company agrees with the Underwriters to pay (a) the
costs incident to the authorization, issuance, sale, preparation and delivery
of the Securities and any taxes payable in that connection; (b) the costs
incident to the preparation, printing and filing under the Securities Act of
the Registration Statement and any amendments and exhibits thereto; (c) the
costs of distributing the Registration Statement as originally filed and each
amendment thereto and any post-effective amendments thereof (including, in each
case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment
or supplement to the Prospectus, all as provided in this Agreement; (d) the
costs of printing, reproducing and distributing this Agreement and any other
underwriting and selling group documents by mail, telex or other means of
communications; (e) the filing fees incident to securing any required review by
the National Association of Securities Dealers, Inc. of the terms of sale of
the Securities; (f) the fees and expenses of qualifying the Securities under
the securities laws of the several jurisdictions as provided in Section 4(h)
and of preparing, printing and distributing Blue Sky Memoranda and Legal
Investment Surveys (including related fees and expenses of
<PAGE> 24
24
counsel to the Underwriters); (g) any fees charged by securities rating
services for rating the Securities; (h) all fees and expenses of the Trustee,
the Collateral Agent and any agent thereof; and (i) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement (including without limitation legal fees and expenses of counsel
to the Company); provided that, except as otherwise provided in this Section 12
and in Section 8, the Underwriters shall pay their own costs and expenses,
including the costs and expenses of their counsel, any transfer taxes on the
Securities which they may sell and the expenses of advertising any offering of
the Securities made by the Underwriters.
13. SURVIVAL. The respective indemnities, rights of contribution,
representations, warranties and agreements of the Company and the Underwriters
contained in this Agreement or made by or on behalf on them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Securities and shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement or any investigation made by or
on behalf of any of them or any person controlling any of them.
14. NOTICES, ETC. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Representative, shall be delivered or sent by mail, telex or
facsimile transmission to Chemical Securities Inc., 270 Park Avenue, New
York, New York 10017, Attention: Daniel Tredwell;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: John R. Parker;
provided, however, that any notice to an Underwriter pursuant to Section 9(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representative, which address will be supplied to any other party hereto by the
Representative upon request.
Any such statements, requests, notices or agreements shall take effect at
the time of receipt thereof. The Company shall be entitled to act and rely
upon any request, consent, notice or agreement given or made on behalf of the
Underwriters by the Representative.
15. DEFINITIONS OF CERTAIN TERMS. For purposes of this Agreement, (a)
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the
Rules and Regulations.
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 25
25
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
18. HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing is in accordance with your understanding of the agreement
between the Company and the several Underwriters, kindly indicate your
acceptance in the space provided for that purpose below.
Very truly yours,
NS GROUP, INC.
By ___________________________
Name:
Title:
Accepted:
CHEMICAL SECURITIES INC.
By ________________________
Authorized Signatory
For itself and as Representative
CS FIRST BOSTON CORPORATION
By ________________________
Authorized Signatory
<PAGE> 26
26
Schedule 1
Principal Amount of Senior
Underwriters of Securities Secured Notes
-------------------------- --------------------------
Chemical Securities, Inc. $
CS First Boston $
Total $ 125,000,000
<PAGE> 1
<TABLE>
EXHIBIT 12.1
NS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
29, 1990 28, 1991 26, 1992 25, 1993 24, 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earnings Available:
Income (loss) before income
taxes, extraordinary items and
change in accounting
principle..................... $19,338 $ (32,576) $ (19,416) $(9,278) $18,875
Interest charges on debt,
less interest
capitalized.............. 2,747 16,142 21,797 21,096 20,030
----------- ----------- ----------- ----------- -----------
Total available....... $22,085 $ (16,434) $ 2,381 $11,818 $38,905
=========== =========== =========== =========== ===========
Fixed Charges:
Interest charges on debt........ $ 6,946 $ 21,675 $ 21,797 $21,096 $20,030
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges... 3.18x N/M(1) N/M(1) N/M(1) 1.94x
=========== =========== =========== =========== ===========
<FN>
- ---------------
(1) Earnings were insufficient to cover fixed charges by $38,109,000 for fiscal
1991, $19,416,000 for fiscal 1992 and $9,278,000 for fiscal 1993.
</TABLE>
<PAGE> 1
<TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF NS GROUP, INC.
(ALL ARE WHOLLY-OWNED)
<CAPTION>
NAME STATE OF INCORPORATION
- ----------------------------------------------- -------------------------
<S> <C>
Erlanger Tubular Corporation................... Oklahoma
Imperial Adhesives, Inc. ...................... Ohio
Koppel Steel Corporation....................... Pennsylvania
Newport Steel Corporation...................... Kentucky
Northern Kentucky Management, Inc. ............ Kentucky
Northern Kentucky Air, Inc. ................... Kentucky
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
November 25, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NS GROUP,
INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULES AS OF AND FOR THE FISCAL YEAR ENDED SEPTEMBER 24,
1994, INCLUDED IN THIS REGISTRATION STATEMENT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
</LEGEND>
<CIK> 0000745026
<NAME> NS Group, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-24-1994
<PERIOD-START> SEP-26-1993
<PERIOD-END> SEP-24-1994
<CASH> 4,405
<SECURITIES> 40,071
<RECEIVABLES> 43,288
<ALLOWANCES> 637
<INVENTORY> 32,290
<CURRENT-ASSETS> 136,210
<PP&E> 262,721
<DEPRECIATION> 102,182
<TOTAL-ASSETS> 315,327
<CURRENT-LIABILITIES> 91,008
<BONDS> 153,653
<COMMON> 48,988
0
0
<OTHER-SE> 27,476
<TOTAL-LIABILITY-AND-EQUITY> 315,327
<SALES> 303,380
<TOTAL-REVENUES> 303,380
<CGS> 278,161
<TOTAL-COSTS> 278,161
<OTHER-EXPENSES> 24,530
<LOSS-PROVISION> 343
<INTEREST-EXPENSE> 20,030
<INCOME-PRETAX> 18,875
<INCOME-TAX> 7,382
<INCOME-CONTINUING> 11,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,715
<NET-INCOME> 13,208
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
</TABLE>
