<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1995
REGISTRATION NO. 33-56637
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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
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<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>
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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 /
/
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(B)
UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE SECURITIES
ACT REGISTRATION
STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME
OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE
SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION
STATEMENT NUMBER OF
THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C>
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<CAPTION>
<S> <C> <C> <C>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE(1) OFFERING PRICE(1)
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Units(2)................................................ 125,000 $1,000 $125,000,000
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Senior Secured Notes due 2003(2)........................ 125,000 -- --
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Warrants(2)............................................. 1,500,000 -- --
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Common Stock(4)......................................... 1,500,000(5) $3.875(6) $ 5,812,500
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Guarantee(7)............................................ -- -- --
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Total................................................................................................................
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<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
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Units(2)................................................ $ 43,104(3)
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Senior Secured Notes due 2003(2)........................ --
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Warrants(2)............................................. --
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Common Stock(4)......................................... $ 2,004(3)
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Guarantee(7)............................................ --
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Total............................................ $ 45,108(3)
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<CAPTION>
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Each Unit will consist of one Senior Secured Note and Warrants, each
Warrant evidencing the right to purchase one share of Common Stock. The
Senior Secured Notes and Warrants will be offered only in Units.
(3) Previously paid.
(4) Issuable upon exercise of Warrants.
(5) Also registered hereby is an indeterminate number of shares of Common Stock
issuable upon exercise of Warrants as a result of antidilution provisions
contained therein.
(6) Calculated pursuant to Rule 457(c).
(7) Pursuant to Rule 457(a), no separate fee is being paid with respect to this
Guarantee.
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.
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<PAGE> 2
NS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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<C> <S> <C> <C>
1. Forepart of the Registration Statement and Outside Outside Front Cover Page
Front Cover Page of Prospectus......................
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover
Prospectus.......................................... Page
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; Summary
Earnings to Fixed Charges........................... 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 Senior Secured Notes
10. Interests of Named Experts and Counsel.............. *
11. Information with Respect to the Registrants
Business
(a) Description of Business.......................
Business
(b) Description of Property.......................
Business
(c) Legal proceedings.............................
*
(d) Common Equity Securities......................
Consolidated Financial Statements
(e) Financial Statements..........................
Selected Consolidated Financial Data
(f) Selected Financial Data.......................
Notes to Selected Consolidated Financial
Data
(g) Supplementary Financial Information...........
Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
*
(i) Changes in and Disagreements with
Accountants...................................
Management
(j) Directors and Executive Officers..............
Management
(k) Executive Compensation........................
Principal Stockholders
(l) Security Ownership............................
Management; Principal Stockholders;
Compensation Committee Interlocks and
Insider Participation; Certain Transactions
(m) Certain Relationships and Related
Transactions..................................
12. Disclosure of Commission Position on Indemnification *
for Securities Act Liabilities......................
</TABLE>
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*Item is inapplicable or answer is in the negative and is omitted from the
Prospectus.
<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.
SUBJECT TO COMPLETION, DATED JULY 18, 1995
Prospectus
[logo]
NS GROUP, INC.
125,000 UNITS CONSISTING OF
$125,000,000
% SENIOR SECURED NOTES DUE 2003
AND WARRANTS TO PURCHASE SHARES OF COMMON STOCK
NS Group, Inc. (the "Company") is hereby offering (the "Offering") 125,000 units
(the "Units") consisting of $125,000,000 aggregate principal amount of %
Senior Secured Notes due 2003 (the "Senior Secured Notes") and warrants (the
"Warrants") to purchase an aggregate of shares of the Company's common
stock, no par value (the "Common Stock" or "Warrant Shares"). Each Unit will
consist of $1,000 principal amount of Senior Secured Notes and Warrants to
purchase an equal number of shares of Common Stock. The Senior Secured Notes and
the Warrants will be separately transferable commencing on , 1995, or
such earlier date as is determined by the Underwriters (the "Separation Date").
See "Description of Units."
Interest on the Senior Secured Notes will be payable semi-annually on
and of each year, commencing , 1996, 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
closing 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. See "Description of Senior Secured Notes."
The Senior Secured Notes will be obligations of the Company and will rank pari
passu with the Company's other unsubordinated Debt. After giving effect to the
Offering and the application of certain cash balances of the Company to the
payment of debt, as of April 1, 1995, the Company (excluding the Company's
Subsidiaries) would have had approximately $160.2 million of total Debt, of
which $35.2 million would be subordinated to the Senior Secured Notes. 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
"Subsidiary Guarantee"). For each of the Company's steel-making Subsidiaries,
its obligations under the Subsidiary Guarantee will be secured by a first
priority mortgage and security interest and its Intercompany Note will be
secured by a second priority mortgage and security interest in its steel-making
operations, excluding inventory, accounts receivable and certain intangible
property. Each Intercompany Note and the Subsidiary Guarantee will rank pari
passu in right of payment with the unsubordinated obligations of the
Subsidiaries. These obligations include a $45 million working capital facility
which will be secured by a first priority security interest in inventory,
accounts receivable and certain intangible property of the Company and the
Subsidiaries and which will be entered into contemporaneously with the Offering.
After giving effect to the Offering and the application of certain cash balances
of the Company to the payment of debt, as of April 1, 1995, the aggregate amount
of total Debt of the Company's Subsidiaries would have been approximately $10.9
million, all of which would have been unsubordinated and secured. If applicable
covenants are satisfied, the debt agreements of the Company or its Subsidiaries
do not limit the total Debt that may be incurred.
Each Warrant will entitle the holder thereof to purchase one share of Common
Stock at $ per share, subject to adjustment under certain circumstances.
The Warrants offered hereby will entitle the holders thereof to purchase, in the
aggregate, approximately % of the Common Stock on a fully diluted basis upon
consummation of the Offering. The Warrants will be exercisable on or after the
Separation Date and, unless exercised, will automatically expire on ,
. On July 14, 1995, the last reported sales price of the Common Stock on the
New York Stock Exchange ("NYSE") was $4 per share. See "Description of
Warrants."
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. A Change of Control would constitute a
default under the working capital facility to be entered into contemporaneously
with this Offering and, therefore, the Company may be required to repay all of
its outstanding obligations under such working capital facility prior to its
redemption of any of the Senior Secured Notes upon such Change of Control. 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.
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SEE "RISK FACTORS" ON PAGE 18 FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH
AN INVESTMENT IN THE UNITS.
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THE UNITS, THE SENIOR SECURED NOTES, THE WARRANTS AND THE SUBSIDIARY GUARANTEE
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.
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<TABLE>
<S> <C> <C> <C>
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</TABLE>
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
<S> <C> <C> <C>
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PER UNIT % % %
TOTAL $ $ $
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</TABLE>
(1) Plus accrued interest on the Senior Secured Notes, 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 $975,000.
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The Units are offered by Chemical Securities Inc. and CS First Boston (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 Units 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
<PAGE> 4
INSIDE COVER PICTURE CAPTIONS
Newport produces slabs in sizes ranging from 7-10 inches in thickness, 28-55
inches in width and 15-34 feet in length
The Company's seamless and welded tubular products include production tubing,
casing and line pipe in both carbon and alloy grades
Koppel's computer-controlled four-strand continuous bloom/billet caster
Glowing electrodes pulled from Koppel's ultra-high powered electric arc furnace
Newport's computer controlled continuous slab caster
2
<PAGE> 5
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS 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
Units, the Senior Secured Notes and the Subsidiary Guarantee in respect thereof,
the Warrants and the Warrant Shares 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.
---------------------
3
<PAGE> 6
NOTICE TO CALIFORNIA PURCHASERS
The Senior Secured Notes offered hereby as part of the Units will be sold
in California pursuant to a limited qualification obtained from the California
Department of Corporations under the California Corporate Securities Law of
1968. Pursuant to the terms of such limited qualification, the Senior Secured
Notes may only be sold to the following classes of purchasers (and each such
purchaser in making a purchase of a Senior Secured Note will be deemed to have
represented to, and to have agreed with, the Underwriters that it is such a
purchaser):
A. Any bank, any savings and loan association, any trust company, any
insurance company, any investment company registered under the Investment
Company Act of 1940, any pension or profit sharing trust (other than a
pension or profit-sharing trust of the Company, a self-employed individual
retirement plan, or an individual retirement account);
B. Any organization described in Section 501(e)(3) of the Internal
Revenue Code of 1986, as amended, which has total assets (including
endowment, annuity and life income funds) of not less than $5,000,000
according to its most recent audited financial statement, any corporation
which has a net worth on a consolidated basis according to its most recent
audited financial statement of not less than $14,000,000, or any wholly
owned subsidiary of a person described in (A) and (B);
C. The Federal Government, any agency or instrumentality of the
Federal Government, any corporation wholly owned by the Federal Government,
any state, any city, city and county, or county, or any agency or
instrumentality of a state, city, city and county, or county, or any state
university or state college, and any retirement system for the benefit of
employees of any person described in (C);
D. Any "accredited investor," as defined in Rule 501(a) under the
Securities Act;
E. Any person who purchases at least $1,000,000 aggregate principal
amount of the Senior Secured Notes; and
F. Any person who (a) has annual income of at least $65,000 and a net
worth of at least $250,000 or (b) has a net worth of at least $500,000. If
such person is a natural person, such person's net worth shall be
determined by excluding such person's home, home furnishing and personal
automobiles, if any. If such person is not a natural person, (1) annual
income shall be determined on a consolidated basis for such person's last
fiscal year by taking such person's net income and adding back Federal and
state income taxes, depreciation and amortization, and extraordinary items
and (2) net worth shall be determined on a consolidated basis for such
person's last fiscal year by taking such person's total assets and
subtracting therefrom such person's total liabilities.
If any of the foregoing classes of purchasers is purchasing the Senior
Secured Notes on behalf of a beneficial owner in California through the exercise
of investment control or discretion, where such beneficial owner is not one of
the purchasers described in (A) through (F) above, such purchaser exercising
such investment control or discretion must reasonably believe that such
beneficial owner has either (a) an annual income of at least $50,000 and a net
worth of at least $50,000, or (b) a net worth of at least $125,000. If such
beneficial owner is a natural person, such person's net worth shall be
determined by excluding such person's home, home furnishings and personal
automobiles, if any. If such beneficial owner is not a natural person, (1)
annual income shall be determined on a consolidated basis for such person's last
fiscal year by taking such person's net income and adding back state and Federal
income taxes, depreciation and amortization, and extraordinary items and (2) net
worth shall be determined on a consolidated basis for such person's last fiscal
year by taking such person's total assets and subtracting therefrom such
person's total liabilities.
4
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. See
"Risk Factors" for certain factors that should be considered in connection with
an investment in the Units 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"). 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). The twelve month periods ended March 26, 1994 and April 1, 1995 are 52
and 53 week periods, respectively. 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. Unless otherwise noted,
the sources for all steel industry data in this Prospectus are the American Iron
and Steel Institute, an organization which collects and publishes steel industry
data ("AISI"), and Pipe Logix, Inc., an industry source which collects and
publishes data from oil country tubular goods producers.
In order to demonstrate trends in the Company's recent performance, certain
financial information is presented in this Prospectus comparing results for the
twelve months ended March 26, 1994 (on a pro forma basis to exclude the gain on
the sale of and the results for KES) to the results for the twelve months ended
April 1, 1995. As more fully discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", the Company experienced
significant increases in operating results during the first six months of fiscal
1995 compared to the first six months of fiscal 1994. The Company believes that
the supplemental comparative twelve month data, together with the comparative
interim presentation provided in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", presents a balanced view of
these recent trends.
THE COMPANY
The Company produces a diverse group of specialty steel products consisting
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 ("SBQ") products
primarily used in the manufacture of heavy industrial equipment, trucks and off-
road vehicles; and (iv) hot rolled coils which are sold to service centers and
other manufacturers for further processing.
Despite an operating environment for oil and natural gas drilling in which
domestic consumption of oil country tubular goods ("OCTG") products declined
from approximately 1.9 million tons in fiscal 1990 to approximately 1.4 million
tons for the twelve months ended March 31, 1995, the Company has been successful
in increasing its shipments and product pricing, reducing its manufacturing
costs and improving the diversity of its product offerings. These factors have
enabled the Company to achieve improved recent operating results. For the twelve
months ended March 26, 1994, the Company's revenues and earnings before net
interest expense, taxes, depreciation and amortization ("EBITDA") (on a pro
forma basis to exclude the gain on the sale of and the results for KES) were
$278.3 million and $20.3 million, respectively. For the twelve months ended
April 1, 1995, the Company's revenues and EBITDA were $356.0 million and $32.7
million, respectively. The Company's net loss was reduced from $10.9 million for
the twelve months ended March 26, 1994 (on a pro forma basis to exclude the gain
on the sale of and the results for KES) to $2.4 million for the twelve months
ended April 1, 1995.
Increasing Shipments. The Company has consistently increased its shipments
of specialty steel products since 1991; total shipments were 513,300 tons for
the twelve months ended March 26, 1994 and 653,500 tons for the twelve months
ended April 1, 1995, an increase of approximately 27%. Shipments of welded
tubular products increased from 221,900 tons for the twelve months ended March
26, 1994 to 258,000 tons for the twelve months ended April 1, 1995, an increase
of approximately 16%. For the same comparable periods, seamless tubular
shipments
5
<PAGE> 8
increased from 68,000 tons to 88,300 tons, an increase of approximately 30%.
Additionally, SBQ product shipments increased from 130,000 tons to 167,200 tons
for the same comparable periods, an increase of approximately 29%.
Increasing Prices. Since the beginning of fiscal 1995, the Company also
has been successful in realizing price increases for certain new orders of OCTG,
line pipe and SBQ products. Average prices for the Company's welded OCTG
products increased approximately $28 per ton from $467 per ton for fiscal 1994
to $495 per ton for the first six months of fiscal 1995. Average prices for the
Company's welded line pipe products increased approximately $35 per ton from
$453 per ton for fiscal 1994 to $488 per ton for the first six months of fiscal
1995. The Company's average prices for its SBQ products increased approximately
$41 per ton from $439 per ton to $480 per ton for the same periods. These
pricing gains were partially offset by a decrease in the Company's average
prices of its seamless OCTG products which resulted in part from the Company's
continued strategic emphasis on sales of certain seamless production tubing
products which have lower costs to manufacture and lower selling prices. Due in
part to this change in product mix, the average price for seamless OCTG products
decreased from $832 per ton in fiscal 1994 to $794 per ton for the six months
ended April 1, 1995.
Reducing Manufacturing Costs. In addition to increasing its shipments and
product pricing, the Company has also implemented several measures to reduce its
manufacturing costs. 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 16%, or $48 per ton shipped. Since fiscal 1992, the
year after the Company acquired its Koppel facilities, operating improvements
and production and shipment increases at the Koppel facilities have resulted in
a reduction of manufacturing costs (excluding the costs of depreciation and
steel scrap) of approximately 9%, or $35 per ton shipped.
SPECIALTY STEEL PRODUCTS AND PRODUCTION FACILITIES
Oil Country Tubular Goods. The Company is a significant producer of
seamless and welded OCTG, which represented 39% of the Company's net sales for
the twelve months ended April 1, 1995. OCTG products are used as production
tubing, drill pipe and casing in oil and natural gas drilling and production
applications. For the twelve months ended April 1, 1995, the Company's shipments
of OCTG products accounted for approximately 14% of total shipments by domestic
OCTG producers. In the seamless production tubing segment of the OCTG market,
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 15% of the Company's net sales for the twelve months ended April 1,
1995. 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
16% of total small diameter shipments of line pipe (16 inches and under in
outside diameter) by domestic producers for the twelve months ended April 1,
1995.
Special Bar Quality Products. The Company manufactures SBQ products, which
represented 22% of the Company's net sales for the twelve months ended April 1,
1995. The Company focuses on larger diameter SBQ products which are primarily
used by forgers and original equipment manufacturers of heavy machinery, trucks
and off-road vehicles.
Hot Rolled Coils. The Company also manufactures hot rolled coils, which
represented 4% of the Company's net sales for the twelve months ended April 1,
1995. These products are sold to service centers and other manufacturers for use
in high strength applications.
Production Facilities. The Company manufactures its specialty steel
products at its two mini-mills, located in Koppel, Pennsylvania and near
Newport, Kentucky. The Koppel facilities include modern melting and tubemaking
operations, and the Newport facility is the only mini-mill with continuous
casting capabilities manufacturing welded tubular products in the United States.
6
<PAGE> 9
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 10% of the Company's net sales for the
twelve months ended April 1, 1995.
In October 1993, to improve its financial flexibility, the Company sold
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.
STRATEGY
The Company's business strategy is to increase sales and improve operating
results by: (i) implementing a three year capital expenditure program; (ii)
efficiently expanding production; and (iii) improving its overall financial
flexibility and capital structure.
Implement Capital Improvement Program. The Company has consistently
reinvested in its physical facilities and undertaken initiatives to streamline
operations and reduce operating costs. During 1994, the Company implemented
operational process changes and cost saving initiatives that the Company
believes will result in total estimated annual operating benefit (the estimated
increase in operating income, before depreciation) of approximately $1.6
million. The Company has begun implementation of a three year, $21.7 million
capital expenditure program. The capital expenditure program includes nine
projects designed to achieve further productivity improvements and reduce
operating costs through the elimination of redundant or less efficient
operations and processes. The capital expenditure program is anticipated to
result in total estimated annual operating benefits of approximately $18.2
million. The Company intends to complete four of these projects in fiscal 1995.
Implementation of the capital expenditure 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 anticipated operating benefits from the capital expenditure
program and the other cost saving initiatives are based upon fiscal 1994 labor
costs, 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.
Efficiently Expand Production. Since incorporation in 1981, the Company
has increased its steel-making and finishing capacity through the acquisition of
idled operating assets. The fiscal 1991 acquisition of the Koppel facilities
increased the rated capacity of the Company's steel-making facilities from
700,000 tons (excluding KES) in fiscal 1990 to 1,100,000 tons currently. As a
result of this strategy, the Company has been able to increase its market share
in existing product lines and has expanded its lines to include seamless OCTG
and line pipe and SBQ products. Similarly, new finishing capacity brought on
line in the first quarter of fiscal 1995 has enabled the Company to further
expand its lines to include additional grades of seamless OCTG products. The
Company believes it has significant available production capacity 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. The Company has recently
used, and will use in conjunction with the closing of the Offering, a portion of
its existing cash balances to reduce its total debt outstanding, and will have
minimal term debt amortization requirements over the next five years. The
Company also will enter into a $45.0 million three year working capital
facility, which is expected to be undrawn at the closing of the Offering. The
Company may 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 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.
7
<PAGE> 10
THE OFFERING
Securities Offered......... 125,000 Units, each consisting of $1,000 principal
amount of % Senior Secured Notes due 2003 and
Warrants to purchase an equal number of
shares of Common Stock. The Senior Secured Notes
and the Warrants will be separately transferable on
, 1995 or such earlier date as is
determined by the Underwriters. See "Description of
Units" and "Certain United States Federal Income
Tax Consequences."
SENIOR SECURED NOTES:
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 , 1996. See "Description
of Senior Secured Notes."
Equity Redemption.......... During the first 36 months after the closing of 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 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 a
pledge of 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 obligations under the
Subsidiary Guarantee will be secured by a first
priority mortgage and security interest and its
Intercompany Note will be secured by a second
priority mortgage and security interest in its
steel-making operations, excluding inventory,
accounts receivable and certain intangible
property. The Credit Facility (as defined below)
and the guaranty thereof 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
Debt (as defined herein) of the Company, including
obligations arising under the Company's guaranty of
the Credit Facility. Each Intercompany Note and
obligations under the Subsidiary Guarantee will
rank pari passu in right of payment with any
existing and future unsubordinated Debt of the
applicable Subsidiary. Contemporaneously with the
Offering, the Company will enter into a $45,000,000
three year Revolving Credit, Guaranty and Security
Agreement (the "Credit Facility"). The Company and
its Subsidiaries that are not borrowers under the
Credit Facility will guaranty the obligations
arising thereunder. The obligations of each
Subsidiary arising in connection with the Credit
Facility will
8
<PAGE> 11
rank pari passu with each Subsidiary's obligations
under its Intercompany Note and/or Subsidiary
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.
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 its redemption of any of the
Senior Secured Notes 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
Debt 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.
WARRANTS:
Separation Date............ The Senior Secured Notes and the Warrants will be
separately transferrable on , 1995 or
such earlier date as is determined by the
Underwriters or as may result from certain offers
by the Company to purchase Senior Secured Notes
(the "Separation Date"). See "Description of
Units."
9
<PAGE> 12
Exercise of Warrants....... Each Warrant will entitle the holder thereof, on or
after the date 180 days after the issuance of the
Units (the "Exercise Date") and prior to 5:00 p.m.
Eastern Time, on the expiration date set forth
below, to purchase from the Company one share of
Common Stock at a price of $ per share, subject
to adjustment under certain circumstances. See
"Description of Warrants."
Number of Warrants......... Warrants to purchase shares of
Common Stock, subject to adjustment under certain
circumstances, representing approximately % of
the Common Stock on a fully diluted basis, after
giving effect to the exercise of the Warrants.
Expiration Date............ Unless exercised, the Warrants will automatically
expire at 5:00 p.m. Eastern Time, on ,
.
For a more detailed description of the Units, see "Description of Units",
"Description of Senior Secured Notes", "Description of Warrants" and
"Description of Capital Stock." 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 "Risk Factors -- Deficiency of
Earnings to Fixed Charges; Leverage," "--Certain Restrictions Under Credit
Facility" 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."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors."
10
<PAGE> 13
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 (see Notes 2 and 4 below), this data includes KES for all periods prior to
its sale in October 1993. See "Supplemental Consolidated Financial Data." In
addition, this data includes Koppel for all periods from the date of its
acquisition in October 1990.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, -----------------------------------------------------------------
1995(1) 1994(1)(2) 1994(2) 1993(2) 1992(2) 1991 1990
-------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $190,544 $137,971 $ 303,380 $ 353,082 $ 281,242 $ 212,471 $ 249,871
Cost of products sold.......... 168,909 128,349 278,161 310,586 250,189 201,751 204,649
Selling and administrative
expenses..................... 13,620 12,276 24,530 30,824 29,652 28,897 25,852
Operating income (loss)........ 8,015 (2,654 ) 689 11,672 1,401 (18,177) 19,370
Net interest income
(expense).................... (9,374) (9,232 ) (18,297) (20,819) (21,075) (14,117) (410)
Gain on sale of subsidiary..... -- 35,292 35,292 -- -- -- --
Provision (credit) for income
taxes........................ 327 9,586 7,382 (3,382) (6,058) (11,973) 6,291
Extraordinary items............ -- -- -- (1,095) (2,542) -- --
Cumulative effect of a change
in accounting principle...... -- 1,715 1,715 -- -- -- --
Net income (loss).............. 522 14,443 13,208 (6,991) (15,900) (20,603) 13,047
Income (loss) per share before
extraordinary items and
cumulative effect of a change
in accounting principle...... $ .04 $ 1.05 $ .84 $ (.44) $ (.99) $ (1.53) $ .97
Net income (loss) per share.... .04 1.17 .96 (.52) (1.18) (1.53) .97
Cash dividends declared per
share........................ -- -- -- -- .06 .12 .11
BALANCE SHEET DATA:
Working capital................ $ 35,506 $ 53,390 $ 45,202 $ 39,060 $ 40,676 $ 48,411 $ 64,858
Total assets................... 312,613 320,191 315,327 317,242 319,079 329,889 220,856
Total debt..................... 173,813 185,500 182,525 192,155 193,753 196,345 72,812
Common shareholders' equity.... 76,364 79,332 76,464 62,622 68,574 85,149 107,226
OTHER FINANCIAL AND
STATISTICAL DATA:
Sources and uses of cash flows:
Net cash flows from operating
activities................. $ (5,873) $ (5,824 ) $ (4,329) $ 2,392 $ 8,515 $ (13,767) $ 14,250
Net cash flows from investing
activities................. 12,348 9,010 7,379 (4,254) (1,373) (112,722) (31,327)
Net cash flows from financing
activities................. (9,530) (1,303 ) (4,442) (1,055) (3,526) 119,037 25,576
EBITDA(3)...................... $ 19,612 $ 42,270 (4) $ 55,326(4) $ 30,078 $ 19,793 $ (3,385)(5) $ 26,515
Capital expenditures........... 7,317 3,655 11,760 6,080 4,148 16,433 45,011
Depreciation and
amortization................. 9,695 9,307 18,789 19,093 18,711 15,725 6,879
Ratio of EBITDA to net interest
charges(6)................... 2.1x 4.6x (4) 3.0x(4) 1.4x 0.9x(7) --(7) 5.8x
Ratio of EBITDA to pro forma
interest charges(8).......... 1.9x 2.7x
Ratio of earnings to fixed
charges(9)................... 1.1x 3.4x (4) 1.9x(4) -- -- -- 3.2x
Deficiency of earnings to cover
fixed charges(9)............. $ -- $ -- (4) $ --(4) $ (9,278) $ (19,416) $ (38,109) $ --
Pro forma ratio of earnings to
fixed charges(9)............. -- 1.6x
Deficiency of earnings to cover
pro forma fixed charges(9)... $ (597) --
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, -----------------------------------------------------------------
1995(1) 1994(1)(2) 1994(2) 1993(2) 1992(2) 1991 1990
-------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Tons shipped:
Tubular products
Welded OCTG................ 86,300 61,600 138,200 142,100 112,000 92,200 119,800
Seamless OCTG.............. 41,400 28,500 61,800 48,700 20,500 7,000 --
Welded line pipe........... 47,300 34,900 82,800 110,900 88,500 67,000 78,300
Seamless line pipe......... 6,300 3,500 10,700 14,400 10,400 200 --
SBQ products................. 90,200 70,900 147,900 102,500 72,000 14,000 --
Hot rolled coil products..... 16,200 16,300 38,800 6,600 100 -- --
Other products(10)........... 54,800 34,200 80,800 78,600 69,800 48,700 87,000
-------- --------- --------- --------- --------- --------- ---------
Total tons shipped (excluding
KES)....................... 342,500 249,900 561,000 503,800 373,300 229,100 285,100
KES tons shipped............. -- -- -- 244,400 217,900 198,300 239,400
-------- --------- --------- --------- --------- --------- ---------
Total tons shipped........... 342,500 249,900 561,000 748,200 591,200 427,400 524,500
========= ========== ========= ========= ========= ========= =========
Average selling price per ton:
Tubular products
Welded OCTG................ $ 495 $ 463 $ 467 $ 447 $ 469 $ 545 $ 574
Seamless OCTG.............. 794(11) 862 (11) 832 881 906 905 --
Welded line pipe........... 488 452 453 427 434 511 529
Seamless line pipe......... 606 574 576 591 644 685 --
SBQ products................. 480 435 439 396 399 398 --
Hot rolled coil products..... 379 356 354 340 340 -- --
Other products(10)........... 374 400 382 353 421 363 343
</TABLE>
- ---------------
(1) The six month periods ended April 1, 1995 and March 26, 1994 are 27 and 26
week periods, respectively.
(2) On October 6, 1993, the Company sold KES. Certain financial data of the
Company is presented below to exclude the effects from the gain on the sale
of KES in the first quarter and full fiscal year of 1994 and to exclude the
results of KES for the first six months of fiscal 1994 and for fiscal 1994,
1993 and 1992. Fiscal years 1991 and 1990 are not presented as Koppel did
not commence operations until the middle of fiscal 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, ----------------------------------
1995 1994 1994 1993 1992
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................... $190,544 $137,971 $303,380 $262,535 $200,803
Cost of products sold................... 168,909 128,550 278,362 239,118 186,212
Selling and administrative expenses..... 13,620 12,276 24,530 21,030 21,615
Operating income (loss)................. 8,015 (2,855) 488 2,387 (7,024)
EBITDA.................................. $ 19,612 $ 6,778 $ 19,833 $ 20,159 $ 10,606
Capital expenditures.................... 7,317 3,655 11,760 5,404 3,805
Depreciation and amortization........... 9,695 9,307 18,789 18,328 17,965
</TABLE>
(3) 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.
(4) For the first six months of fiscal 1994 and for fiscal 1994, on a pro forma
basis to exclude the gain on the sale of and the results for KES, EBITDA
was $6.8 million and $19.8 million, respectively. On a pro forma basis, for
the first six months of fiscal 1994, EBITDA was insufficient to cover net
interest charges by $2.5 million and for fiscal 1994 the ratio of EBITDA to
net interest charges was 1.1x, and the ratio of earnings to fixed charges
was not meaningful. On a pro forma basis, for the first six months of
fiscal 1994 and for fiscal 1994, earnings were insufficient to cover fixed
charges by $11.5 million and $16.6 million, respectively. See "Supplemental
Consolidated Financial Data."
(footnotes continued on following page)
12
<PAGE> 15
(5) 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.
(6) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(7) EBITDA was insufficient to cover net interest charges by $1.3 million in
fiscal 1992 and $23.0 million in fiscal 1991.
(8) The ratio of EBITDA to pro forma interest charges reflects (a) the
elimination of historical net interest charges for the respective periods;
(b) the addition of interest expense related to the issuance of the Senior
Secured Notes at an assumed rate of 12.50%; and (c) the addition of
interest expense at the stated rates of the remaining $46.1 million of Debt
of the Company as of April 1, 1995, as adjusted for the Refinancing
Transaction, as defined herein.
(9) 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.
The pro forma ratio of earnings to fixed charges assumes an interest rate
of 12.50% on the Senior Secured Notes.
(10) Other products include seamless mechanical tubing and products classified
as secondary and limited service.
(11) Average selling prices for all seamless OCTG products for the first six
months of fiscal 1995 declined 7.9% from the first six months of fiscal
1994, due partially to strong pricing of seamless OCTG products in the
first quarter of fiscal 1994 which then declined during the balance of
fiscal 1994 and to changes in product mix, including the introduction of
new products with lower average selling prices. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Second Quarter and Six Month Fiscal 1995 Compared to Second
Quarter and Six Month Fiscal 1994" and "-- Quarterly Results."
13
<PAGE> 16
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
In order to demonstrate trends in the Company's recent performance, the
following supplemental consolidated financial data includes unaudited financial
data for the 53 week period ended April 1, 1995, and unaudited pro forma summary
consolidated financial data for the 52 week period ended March 26, 1994. On
October 8, 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 the 52 week period
ended March 26, 1994 gives effect to the elimination of the pre-tax gain of
$35.3 million, the related tax effect of $13.8 million and the results of KES
for the period prior to the sale. The Company believes the data presented below,
together with the comparative interim presentation provided in "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
presents a balanced view of the Company's recent operating results. As more
fully discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Company experienced significant increases in
operating results during the first six months of fiscal 1995 compared to the
first six months of fiscal 1994. This supplemental 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.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS TWELVE MONTHS
ENDED ENDED
APRIL 1, 1995 MARCH 26, 1994
------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AND PER TON DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................................................... $ 355,953 $ 278,272
Cost of products sold.......................................................... 318,721 254,301
Selling and administrative expenses............................................ 25,874 22,458
Operating income............................................................... 11,358 1,513
Net interest expense........................................................... (18,439) (19,791)
Provision (credit) for income taxes............................................ (1,877) (6,609)
Loss before extraordinary item and cumulative effect of a change in accounting
principle.................................................................... (2,428) (10,860)
Net loss....................................................................... (2,428)
Loss per share before extraordinary item and cumulative effect of a change in
accounting principle......................................................... $ (.18) $ (.79)
Net loss per share............................................................. (.18)
Weighted average shares outstanding............................................ 13,804,501 13,662,512
OTHER FINANCIAL AND STATISTICAL DATA:
Sources and uses of cash flows:
Net cash flows from operating activities..................................... $ (4,378)
Net cash flows from investing activities..................................... 10,717
Net cash flows from financing activities..................................... (12,669)
EBITDA(1)...................................................................... $ 32,668 $ 20,333
Capital expenditures........................................................... 15,422 5,744
Depreciation and amortization.................................................. 19,177 18,478
Ratio of EBITDA to net interest charges(2)..................................... 1.8x 1.0x
Ratio of EBITDA to pro forma interest charges(3)............................... 1.6x
Ratio of earnings to fixed charges(4).......................................... -- --
Deficiency of earnings to cover fixed charges(4)............................... $ (4,305) $ (17,469)
Pro forma ratio of earnings to fixed charges(4)................................ --
Deficiency of earnings to cover pro forma fixed charges(4)..................... $ (7,765)
Tons shipped:
Tubular products
Welded OCTG.................................................................. 162,800 132,800
Seamless OCTG................................................................ 74,800 56,000
Welded line pipe............................................................. 95,200 89,100
Seamless line pipe........................................................... 13,500 12,000
SBQ products................................................................... 167,200 130,000
Hot rolled coil products....................................................... 38,800 22,800
Other products(5).............................................................. 101,200 70,600
------------- --------------
Total tons shipped............................................................. 653,500 513,300
=============== ===============
Average selling price per ton:
Tubular products
Welded OCTG.................................................................. $ 483 $ 456
Seamless OCTG(6)............................................................. 800 871
Welded line pipe............................................................. 471 440
Seamless line pipe........................................................... 589 596
SBQ products................................................................... 462 420
Hot rolled coil products....................................................... 363 350
Other products(5).............................................................. 372 384
</TABLE>
(footnotes on following page)
14
<PAGE> 17
- ---------------
(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) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(3) The ratio of EBITDA to pro forma interest charges reflects (a) the
elimination of historical net interest charges for the twelve months
ended April 1, 1995 (b) the addition of interest expense related to the
issuance of the Senior Secured Notes at an assumed rate of 12.50%; and
(c) the addition of interest expense at the stated rates of the
remaining $46.1 million of Debt of the Company as of April 1, 1995, as
adjusted for the Refinancing Transaction.
(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. The pro forma earnings to fixed charges assumes an
interest rate of 12.50% on the Senior Secured Notes.
(5) Other products include seamless mechanical tubing and products
classified as secondary and limited service.
(6) Average selling prices for all seamless OCTG products for the twelve
month period ended April 1, 1995 declined 8.2% from the twelve month
period ended March 26, 1994, due partially to strong pricing of
seamless OCTG products in the first three quarters of the twelve month
period ended March 26, 1994, which subsequently declined and to changes
in product mix, including the introduction of new products with lower
average selling prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Second Quarter and Six
Month Fiscal 1995 Compared with Second Quarter and Six Month Fiscal
1994" and "-- Quarterly Results."
15
<PAGE> 18
The table below presents certain unaudited pro forma summary consolidated
financial data for fiscal 1994. As discussed above, 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 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.
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
FINANCIAL DATA
FISCAL 1994
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AND
PER TON DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................................................................. $ 303,380
Cost of products sold.................................................................. 278,362
Selling and administrative expenses.................................................... 24,530
Operating income....................................................................... 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)
Loss per share before cumulative effect of a change in accounting principle............ $ (.74)
Weighted average shares outstanding.................................................... 13,789,265
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(1).............................................................................. $ 19,833
Capital expenditures................................................................... 11,760
Depreciation and amortization.......................................................... 18,789
Ratio of EBITDA to net interest charges(2)............................................. 1.1x
Ratio of earnings to fixed charges(3).................................................. --
Deficiency of earnings to cover fixed charges(3)....................................... $ (16,618)
Tons shipped:
Tubular products
Welded OCTG.......................................................................... 138,200
Seamless OCTG........................................................................ 61,800
Welded line pipe..................................................................... 82,800
Seamless line pipe................................................................... 10,700
SBQ products........................................................................... 147,900
Hot rolled coil products............................................................... 38,800
Other products(4)...................................................................... 80,800
---------
Total tons shipped..................................................................... 561,000
=========
Average selling price per ton:
Tubular products
Welded OCTG.......................................................................... $ 467
Seamless OCTG........................................................................ 832
Welded line pipe..................................................................... 453
Seamless line pipe................................................................... 576
SBQ products........................................................................... 439
Hot rolled coil products............................................................... 354
Other products(4)...................................................................... 382
</TABLE>
(footnotes on following page)
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<PAGE> 19
- ---------------
(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) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(3) 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. The pro forma earnings to fixed charges assumes an
interest rate of 12.50% on the Senior Secured Notes.
(4) Other products include seamless mechanical tubing and products
classified as secondary and limited service.
17
<PAGE> 20
RISK FACTORS
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
Units.
DEFICIENCY OF EARNINGS TO FIXED CHARGES; LEVERAGE
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 April 1, 1995, the Company had total Debt of $173.8 million. After giving
effect to the Offering and the application of certain cash balances of the
Company to the payment of debt, as of April 1, 1995, the Company would have had
$171.1 million of total Debt, including the $125.0 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 the twelve months ended April 1, 1995, the twelve months ended March
26, 1994, and fiscal 1994, 1993, 1992 and 1991 was $20.2 million, $20.5 million,
$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
the twelve months ended April 1, 1995 and on a pro forma basis the twelve months
ended March 26, 1994, and fiscal 1994 (in each case to exclude the gain on the
sale of and the results for KES) and for fiscal years 1993, 1992 and 1991, the
Company's earnings were insufficient to cover fixed charges by $4.3 million,
$17.5 million, $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. 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."
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.
If applicable covenants are satisfied, the debt agreements of the Company or its
Subsidiaries do not limit the total Debt that may be incurred. See "Description
of Senior Secured Notes" and "Description of Certain Indebtedness."
CERTAIN RESTRICTIONS UNDER CREDIT FACILITY
The Credit Facility 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. On a pro forma basis for fiscal 1994
(to exclude the gain on the sale of and the results for KES), the interest
coverage ratio 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 April 1, 1995, the
Company had a net worth of approximately $76.4 million. The Company currently
would be, and will be upon the completion of the Offering, in compliance with
all covenants under 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
18
<PAGE> 21
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 (except that the Company and its Subsidiaries may
merge with each other under certain conditions) 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 $20.0 million
plus scheduled principal payments due within 36 months (excluding obligations
arising under the Credit Facility). At April 1, 1995, 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 $67.6 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, Change of
Control Offers and certain Asset Sale 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 which are not stayed or lifted
within 30 days or entry of judgment (over a threshold level) which is not
satisfied, stayed or discharged of record within 40 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 Operations."
DEPENDENCE ON OIL COUNTRY TUBULAR GOODS MARKET
OCTG products represent the Company's principal product lines and largest
source of net sales, representing 39% of the Company's net sales for the twelve
months ended April 1, 1995. 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, according to Baker Hughes, Inc. For the six months ended April 1, 1995,
average rig count was 768. Any increase in rig count in the future 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
19
<PAGE> 22
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 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.
CYCLICAL INDUSTRY AND SENSITIVITY TO ECONOMIC CONDITIONS
The demand for the Company's OCTG products is cyclical in nature, being
dependent on oil and natural gas drilling activity, industry-wide inventory
levels and general economic conditions. See "-- Dependence on Oil Country
Tubular Goods Market." The demand for the Company's SBQ and hot rolled coil
products is also 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, and additional capital expenditures are required by the Company to
continue to upgrade its facilities. The Company believes that foreign and
domestic producers will 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.
ASSUMPTIONS REGARDING CAPITAL EXPENDITURE PROGRAM
The Company has begun to implement a three-year, $21.7 million capital
expenditure program intended to reduce its operating costs, improve quality and
enhance its marketing position; the program consists of nine projects, one of
which has been completed. 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
20
<PAGE> 23
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. 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, 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.
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 may include 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 23% for the twelve months ended March 31, 1995. See
"Business -- Competition."
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 United Steel Workers of America ("USWA") represents substantially all
of the Company's hourly 1,270-person workforce. In 1994, the Company negotiated
collective bargaining agreements
21
<PAGE> 24
with respect to its hourly workforces at Newport and Koppel, both of which
expire in 1999. Execution of the Newport agreement followed rejection of an
earlier proposal and a two-day strike. The Company's collective bargaining
agreement with the USWA for Imperial expires in November 1995. There can be no
assurance that work stoppages will not occur in the future.
OWNERSHIP CONTROL OF MANAGEMENT
Two of the Company's executive officers are currently directors of the
Company. Executive officers and directors of the Company, as a group, currently
beneficially own 36.8% of the Company's common stock. As a result, the executive
officers have sufficient voting power to influence the election of the Company's
Board of Directors and the policies of the Company. See "Principal
Stockholders."
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. 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 6% for the twelve months ended April 1, 1995 from the comparable
prior year period.
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. In addition, 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.
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
22
<PAGE> 25
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 of $4.4 million. As of April 1,
1995, claims recorded in connection with disposal costs exhaust available
insurance coverage. As of April 1, 1995, the possible range of estimated losses
related to the environmental contingency matters discussed above in excess of
those accrued by the Company is $0 to $3.0 million; however, with respect to the
Consent Order (as discussed below), the Company cannot estimate the possible
range of losses should the Company ultimately not be indemnified.
In March 1995, Koppel entered into a Consent Order with 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 Consent Order 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, 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 Consent Order 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. 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). Koppel and PMAC have jointly retained an environmental consultant
to conduct the required investigation. The Company believes that it is entitled
to full indemnity for all of the matters covered by the Consent Order 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 the Consent Order, the Company cannot predict the
expected cleanup cost for the SWMU's and AOC's covered by the Consent Order.
PRODUCT LIABILITY
Certain losses may result or be alleged to result from defects in the
Company's products, thereby subjecting the Company to claims for consequential
damages. Drilling for oil and natural gas, in particular, involves a variety of
risks. The Company warrants certain of its OCTG, line pipe and SBQ products to
be free of certain defects. There can be no assurance that product liability in
excess of insurance coverage will not be incurred or that the Company will be
able to maintain insurance with adequate coverage levels. The Company recently
settled a case with respect to a product liability claim. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Other Matters -- Legal Matters."
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<PAGE> 26
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 obligations under the Subsidiary
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 Subsidiary Guarantee; (ii) was
rendered insolvent by reason of the Subsidiary 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 the
Subsidiary Guarantee could be avoided or claims in respect of such Subsidiary
could be subordinated to all other debts of such Subsidiary. The Subsidiary
Guarantee will contain a savings clause that limits the amount of the Subsidiary
Guarantee to the maximum amount which can be guaranteed by such Subsidiary under
applicable Federal and state laws relating to the insolvency of debtors. A legal
defense of the Subsidiary 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 the Subsidiary 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 obligations under the Subsidiary Guarantee were
not avoided or held unenforceable. Similarly, the security interest granted by
such Subsidiary to secure its obligations under the Subsidiary Guarantee could
be avoided or held unenforceable. In the event the Subsidiary Guarantee were
avoided or subordinated, the claims of the holders of the Senior Secured Notes
with respect to such Subsidiary 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
and pay dividends with respect to its Common Stock, is dependent upon the cash
flow of its subsidiaries and the payment of funds by those subsidiaries to the
Company.
CERTAIN LIMITATIONS ON THE SECURITY FOR THE SENIOR SECURED NOTES, THE
INTERCOMPANY NOTES AND THE GUARANTEES
The Senior Secured Notes will be obligations of the Company secured by a
pledge of the Intercompany Notes and will be guaranteed, jointly and severally,
by the Subsidiaries. If an Event of Default occurs and is continuing, the
Trustee may declare the principal amount and accrued interest on the Senior
Secured Notes to be immediately due and payable. If the Trustee does not take
such action, a vote of the Holders of at least 25% of the principal amount of
the outstanding Senior Secured Notes is required to accelerate the Senior
Secured Notes.
The right of the Trustee 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 Trustee has foreclosed upon and sold the Collateral. See
"Description of the Notes--Certain Bankruptcy Limitations." For each of Newport,
Koppel and Erlanger, its obligations under the Subsidiary Guarantee will be
secured by a first priority mortgage and security interest and its Intercompany
Note will be secured by a second priority mortgage and 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 April 1, 1995, the net book value of the Collateral was
approximately $147.4 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
24
<PAGE> 27
Collateral would be applied to repay the Subsidiary's obligations under the
Subsidiary 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 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.
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 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. Liability for cleanup costs may be imposed in situations, among
others, where 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. The Subsidiary Guarantee and the Intercompany Note of
Koppel will be secured in part with respect to the real property of the Koppel
facilities. The Koppel facilities are the subject of a Consent Order with the
EPA relating to potential releases of hazardous contaminants into the
environment. See "-- Cost of Compliance with Environmental Matters."
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 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 UNITS, THE SENIOR SECURED NOTES AND THE
WARRANTS
The Units, the Senior Secured Notes and the Warrants comprise new issues 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 Units,
the Senior Secured Notes and the Warrants; however, the Underwriters are not
obligated to do so, and any such market making may be discontinued at any time
without notice. If the Units, the Senior Secured Notes and the Warrants 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 Units, the Senior Secured Notes and the Warrants or at
what prices the Units, the Senior Secured Notes and the Warrants will trade.
25
<PAGE> 28
USE OF PROCEEDS
The proceeds from the sale of the Units offered hereby will be $125.0
million. The Company intends to apply the proceeds from the sale of the Units
and available cash balances as follows: (i) approximately $71.2 million to
redeem $66.8 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 $4.4 million;
(ii) approximately $33.5 million to redeem $30.3 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
$2.8 million and accrued interest of approximately $0.4 million thereon; (iii)
approximately $0.7 million to redeem other long-term debt of the Company or its
Subsidiaries; (iv) approximately $30.3 million to repay $29.9 million in
outstanding balances on its existing revolving credit facilities (which have
interest rates ranging from 1/2% to 1 1/2% over prime), including accrued
interest of approximately $0.4 million thereon; and (v) approximately $4.7
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............... $ 15,436
Units........................................................... 125,000
----------
Total...................................................... $ 140,436
==========
Uses of Funds
Revolving Credit Facilities..................................... $ 29,908
GECC Loans...................................................... 66,823
10.65% Notes.................................................... 30,316
Other long-term debt............................................ 713
Prepayment penalties and accrued interest....................... 7,951
Estimated fees and expenses..................................... 4,725
----------
Total...................................................... $ 140,436
==========
</TABLE>
26
<PAGE> 29
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
The Common Stock began trading on the NYSE in August 1990 under the symbol
of NSS. The following table sets forth the high and low sales prices of the
Common Stock on the NYSE Composite Tape and the cash dividends paid per share of
Common Stock during the periods indicated. No dividends were paid during these
periods. For a recent sale price of the Common Stock on the NYSE, see the cover
page of this Prospectus. As of September 24, 1994, the number of shareholders of
record of the Common Stock was 313.
<TABLE>
<CAPTION>
MARKET PRICE
------------ DIVIDEND
FISCAL PERIOD HIGH LOW PAID
----------------------------------------------------- ---- ---- --------
<S> <C> <C> <C>
1993:
First Quarter........................................ $ 5 $3 1/2 $ --
Second Quarter....................................... 6 3/8 3 5/8 --
Third Quarter........................................ 8 7/8 5 --
Fourth Quarter....................................... 10 3/4 7 5/8 --
1994:
First Quarter........................................ $9 1/2 $5 7/8 $ --
Second Quarter....................................... 7 3/4 6 1/4 --
Third Quarter........................................ 7 1/8 4 7/8 --
Fourth Quarter....................................... 7 5 7/8 --
1995:
First Quarter........................................ $6 3/4 $ 4 $ --
Second Quarter....................................... 5 1/4 3 3/4 --
Third Quarter........................................ 4 5/8 3 3/8 --
Fourth Quarter (through July 13, 1995)............... 4 3/8 3 1/2 --
</TABLE>
The payment of dividends in the future is subject to the discretion of the
Board of Directors and will depend upon general business conditions, legal and
contractual restrictions on the payment of dividends and other factors the Board
of Directors of the Company may deem to be relevant. The Company has not paid a
dividend on its Common Stock since the second quarter of fiscal 1992.
As a holding company, the Company depends on dividends and other permitted
payments from its subsidiaries to pay cash dividends to shareholders of the
Company. The payment of cash dividends will be limited by the terms of the
Indenture and the Credit Facility. See "Description of Senior Secured
Notes--Certain Covenants--Limitation on Restricted Payments" and "Description of
Certain Indebtedness -- Certain Covenants."
27
<PAGE> 30
CAPITALIZATION
The following table sets forth the cash, cash equivalents and short-term
investments, short-term debt and capitalization of the Company as of April 1,
1995, and as adjusted to reflect the sale of the Units 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.
<TABLE>
<CAPTION>
AS OF APRIL 1, 1995
--------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments................ $ 21,432 $ 5,996
========= ============
Short-term debt:
Current portion of long-term debt.............................. $ 17,510 $ 700
Revolving credit facilities.................................... 29,908 --
--------- -----------
Total short-term debt.................................. $ 47,418 $ 700
========= ============
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..... 55,418 --
10.65% Notes due 1999.......................................... 25,101 --
11% Subordinated Convertible Debentures(1)..................... 29,000 29,000
11% Subordinated Notes(2)...................................... 6,217 6,217
Other long-term debt........................................... 10,659 10,137
--------- -----------
Total long-term debt................................... 126,395 170,354
--------- -----------
Common shareholders' equity:
Common stock, no par value -- 40,000,000 authorized and
13,762,013 shares outstanding(3)............................ 48,988 48,988
Common stock options and warrants.............................. 291 291
Unrealized gain (loss) on available for sale securities........ (775) (775)
Retained earnings.............................................. 27,860 22,000(4)
--------- -----------
Total common shareholders' equity...................... 76,364 70,504
--------- -----------
Total capitalization................................... $ 202,759 $ 240,858
========= ============
</TABLE>
- ---------------
(1) Due in annual installments of $4.8 million from October 2000 through October
2005.
(2) Due in equal quarterly installments of $0.4 million from January 1996
through October 1999.
(3) Does not include shares which are reserved for issuance upon
exercise of the Warrants and approximately 3.1 million shares reserved for
outstanding options, warrants and the 11% Subordinated Convertible
Debentures. See "Description of Capital Stock."
(4) The reduction in retained earnings reflects the after-tax effect of the $7.2
million prepayment cost to redeem the GECC Loans and the 10.65% Notes and
the write-off of $1.8 million in unamortized debt issuance costs. This
reduction will be reflected in the results of operations in the fourth
fiscal quarter ending September 30, 1995.
28
<PAGE> 31
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") is
unaudited for the fiscal 1995 and 1994 six month periods. The selected
consolidated financial data 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 (see Notes 2 and 4 below), this data includes KES for
all periods prior to its sale in October 1993. See "Summary Consolidated
Financial Data" and "Supplemental Consolidated Financial Data." In addition,
this data includes Koppel for all periods from the date of its acquisition in
October 1990.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, -----------------------------------------------------------------
1995(1) 1994(1)(2) 1994(2) 1993(2) 1992(2) 1991 1990
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 190,544 $137,971 $ 303,380 $ 353,082 $ 281,242 $ 212,471 $ 249,871
Cost of products sold............ 168,909 128,349 278,161 310,586 250,189 201,751 204,649
Selling and administrative
expenses....................... 13,620 12,276 24,530 30,824 29,652 28,897 25,852
Operating income (loss).......... 8,015 (2,654 ) 689 11,672 1,401 (18,177) 19,370
Net interest income (expense).... (9,374) (9,232 ) (18,297) (20,819) (21,075) (14,117) (410)
Gain on sale of subsidiary....... -- 35,292 35,292 -- -- -- --
Provision (credit) for income
taxes.......................... 327 9,586 7,382 (3,382) (6,058) (11,973) 6,291
Extraordinary items.............. -- -- -- (1,095) (2,542) -- --
Cumulative effect of a change in
accounting principle........... -- 1,715 1,715 -- -- -- --
Net income (loss)................ 522 14,443 13,208 (6,991) (15,900) (20,603) 13,047
Income (loss) per share before
extraordinary items and
cumulative effect of a change
in accounting principle........ $ .04 $ 1.05 $ .84 $ (.44) $ (.99) $ (1.53) $ .97
Net income (loss) per share...... .04 1.17 .96 (.52) (1.18) (1.53) .97
Cash dividends declared per
share.......................... -- -- -- -- .06 .12 .11
BALANCE SHEET DATA:
Working capital.................. $ 35,506 $ 53,390 $ 45,202 $ 39,060 $ 40,676 $ 48,411 $ 64,858
Total assets..................... 312,613 320,191 315,327 317,242 319,079 329,889 220,856
Total debt....................... 173,813 185,500 182,525 192,155 193,753 196,345 72,812
Common shareholders' equity...... 76,364 79,332 76,464 62,622 68,574 85,149 107,226
OTHER FINANCIAL AND
STATISTICAL DATA:
Sources and uses of cash flows:
Net cash flows from operating
activities................... $ (5,873) $ (5,824 ) $ (4,329) $ 2,392 $ 8,515 $ (13,767) $ 14,250
Net cash flows from investing
activities................... 12,348 9,010 7,379 (4,254) (1,373) (112,722) (31,327)
Net cash flows from financing
activities................... (9,530) (1,303 ) (4,442) (1,055) (3,526) 119,037 25,576
EBITDA(3)........................ $ 19,612 $ 42,270 (4) $ 55,326(4) $ 30,078 $ 19,793 $ (3,385)(5) $ 26,515
Capital expenditures............. 7,317 3,655 11,760 6,080 4,148 16,433 45,011
Depreciation and amortization.... 9,695 9,307 18,789 19,093 18,711 15,725 6,879
Ratio of EBITDA to net interest
charges(6)..................... 2.1x 4.6x (4) 3.0x(4) 1.4x 0.9x(7) --(7) 5.8x
Ratio of EBITDA to pro forma
interest charges(8)............ 1.9x 2.7x
Ratio of earnings to fixed
charges(9)..................... 1.1x 3.4x (4) 1.9x(4) -- -- -- 3.2x
Deficiency of earnings to cover
fixed charges(9)............... $ -- $ -- (4) $ --(4) $ (9,278) $ (19,416) $ (38,109) $ --
Pro forma ratio of earnings to
fixed charges(9)............... -- 1.6x
Deficiency of earnings to cover
pro forma fixed charges(9)..... $ (597) --
Tons shipped:
Tubular products
Welded OCTG.................. 86,300 61,600 138,200 142,100 112,000 92,200 119,800
Seamless OCTG................ 41,400 28,500 61,800 48,700 20,500 7,000 --
Welded line pipe............. 47,300 34,900 82,800 110,900 88,500 67,000 78,300
Seamless line pipe........... 6,300 3,500 10,700 14,400 10,400 200 --
SBQ products................... 90,200 70,900 147,900 102,500 72,000 14,000 --
Hot rolled coil products....... 16,200 16,300 38,800 6,600 100 -- --
Other products(10)............. 54,800 34,200 80,800 78,600 69,800 48,700 87,000
--------- --------- --------- --------- --------- --------- ---------
Total tons shipped (excluding
KES)......................... 342,500 249,900 561,000 503,800 373,300 229,100 285,100
KES tons shipped............... -- -- -- 244,400 217,900 198,300 239,400
--------- --------- --------- --------- --------- --------- ---------
Total tons shipped............. 342,500 249,900 561,000 748,200 591,200 427,400 524,500
======== ========= ======== ======== ======== ======== ========
Average selling price per ton:
Tubular products
Welded OCTG.................. $ 495 $ 463 $ 467 $ 447 $ 469 $ 545 $ 574
Seamless OCTG................ 794(11) 862 (11) 832 881 906 905 --
Welded line pipe............. 488 452 453 427 434 511 529
Seamless line pipe........... 606 574 576 591 644 685 --
SBQ products................... 480 435 439 396 399 398 --
Hot rolled coil products....... 379 356 354 340 340 -- --
Other products(10)............. 374 400 382 353 421 363 343
</TABLE>
(footnotes on following page)
29
<PAGE> 32
- ---------------
(1) The six month periods ended April 1, 1995 and March 26, 1994 are 27 and 26
week periods, respectively.
(2) On October 6, 1993, the Company sold KES. Certain financial data of the
Company is presented below to exclude the effects from the gain on the sale
of KES in the first quarter and full fiscal year of 1994 and to exclude the
results of KES for the first six months of fiscal 1994 and for fiscal 1994,
1993 and 1992. Fiscal years 1991 and 1990 are not presented as Koppel did
not commence operations until the middle of fiscal 1991. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, ----------------------------------
1995 1994 1994 1993 1992
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $ 190,544 $137,971 $303,380 $262,535 $200,803
Cost of products sold................................. 168,909 128,550 278,362 239,118 186,212
Selling and administrative expenses................... 13,620 12,276 24,530 21,030 21,615
Operating income (loss)............................... 8,015 (2,855 ) 488 2,387 (7,024)
EBITDA................................................ $ 19,612 $ 6,778 $ 19,833 $ 20,159 $ 10,606
Capital expenditures.................................. 7,317 3,655 11,760 5,404 3,805
Depreciation and amortization......................... 9,695 9,307 18,789 18,328 17,965
</TABLE>
(3) 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.
(4) For the first six months of fiscal 1994 and for fiscal 1994, on a pro forma
basis to exclude the gain on the sale of and the results for KES, EBITDA
was $6.8 million and $19.8 million, respectively. On a pro forma basis, for
the first six months of fiscal 1994, EBITDA was insufficient to cover net
interest charges by $2.5 million and for fiscal 1994 the ratio of EBITDA to
net interest charges was 1.1x, and the ratio of earnings to fixed charges
was not meaningful. On a pro forma basis, for the first six months of
fiscal 1994 and for fiscal 1994, earnings were insufficient to cover fixed
charges by $11.5 million and $16.6 million, respectively. See "Supplemental
Consolidated Financial Data."
(5) 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.
(6) Net interest charges include interest expense, including capitalized
interest, reduced by interest income.
(7) EBITDA was insufficient to cover net interest charges by $1.3 million in
fiscal 1992 and $23.0 million in fiscal 1991.
(8) The ratio of EBITDA to pro forma net interest charges reflects (a) the
elimination of historical net interest charges for the respective periods;
(b) the addition of interest expense related to the issuance of the Senior
Secured Notes at an assumed rate of 12.50%; and (c) the addition of
interest expense at the stated rates of the remaining $46.1 million of Debt
of the Company as of April 1, 1995, as adjusted for the Refinancing
Transaction.
(9) 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.
The pro forma ratio of earnings to fixed charges assumes an interest rate
of 12.50% on the Senior Secured Notes.
(10) Other products include seamless mechanical tubing and products classified
as secondary and limited service.
(11) Average selling prices for all seamless OCTG products for the first six
months of fiscal 1995 declined 7.9% from the first six months of fiscal
1994, due partially to strong pricing of seamless OCTG products in the
first quarter of fiscal 1994 which then declined during the balance of
fiscal 1994 and to changes in product mix, including the introduction of
new products with lower average selling prices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Second Quarter and Six Month Fiscal 1995 Compared to Second Quarter and Six
Month Fiscal 1994" and "-- Quarterly Results."
30
<PAGE> 33
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
machinery, trucks and off-road vehicles; 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 audited annual 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 $45.6 million in cash and 400,000
shares (approximately 8%) of the newly formed public company, then valued at
$4.8 million. Reference is made to Note 2 to the audited annual 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 impact of KES on the Company's operating results for fiscal 1993
and 1992 is reflected in the tables below and the following discussion.
RESULTS OF OPERATIONS
The Company's net sales, cost of products sold and operating results by
industry segment for the three and six month periods ended April 1, 1995 and
March 26, 1994 and for each of the three fiscal years in the period ended
September 24, 1994 are summarized below. The first quarters of fiscal 1995 and
1994 are 14 and 13 week periods, respectively. As such, the increases and
decreases in operating results for the six month comparative periods, as
discussed below, were partially attributable to the additional week of
operations in the first quarter of fiscal 1995.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED FISCAL SIX MONTHS ENDED
----------------------- -------------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, APRIL 1, MARCH 26, ----------------------------------
1995 1994 1995 1994 1994 1993 1992
-------- ---------- --------- ------------ -------- -------- --------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales
Specialty steel, excluding
KES........................... $ 88,227 $ 58,347 $172,943 $122,109 $270,441 $234,460 $175,921
KES............................. -- -- -- -- -- 90,547 80,439
-------- ---------- --------- ------------ -------- -------- --------
Total specialty steel
segment..................... 88,227 58,347 172,943 122,109 270,441 325,007 256,360
Adhesives segment............... 8,828 7,665 17,601 15,862 32,939 28,075 24,882
-------- ---------- --------- ------------ -------- -------- --------
$ 97,055 $ 66,012 $190,544 $137,971 $303,380 $353,082 $281,242
======== ========== ========= ============ ========= ========= =========
Cost of products sold
Specialty steel, excluding
KES........................... $ 79,932 $ 58,138 $155,142 $115,955 $252,880 $217,215 $168,371
KES............................. -- -- -- -- -- 71,468 62,248
-------- ---------- --------- ------------ -------- -------- --------
Total specialty steel
segment..................... 79,932 58,138 155,142 115,955 252,880 288,683 230,619
-------- ---------- --------- ------------ -------- -------- --------
Adhesives segment............... 6,978 6,043 13,767 12,394 25,281 21,903 19,570
-------- ---------- --------- ------------ -------- -------- --------
$ 86,910 $ 64,181 $168,909 $128,349 $278,161 $310,586 $250,189
======== ========== ========= ============ ========= ========= =========
Operating income (loss)
Specialty steel, excluding
KES........................... $ 4,148 $ (3,746) $ 9,444 $ (1,593) $ 2,909 $ 4,094 $ (5,074)
KES............................. -- -- -- -- -- 9,285 8,425
-------- ---------- --------- ------------ -------- -------- --------
Total specialty steel
segment..................... 4,148 (3,746) 9,444 (1,593) 2,909 13,379 3,351
-------- ---------- --------- ------------ -------- -------- --------
Adhesives segment............... 251 131 524 372 1,150 1,059 533
-------- ---------- --------- ------------ -------- -------- --------
Corporate allocations and
income........................ (942) (850) (1,953 ) (1,433) (3,370) (2,766) (2,483)
-------- ---------- --------- ------------ -------- -------- --------
$ 3,457 $ (4,465) $ 8,015 $ (2,654) $ 689 $ 11,672 $ 1,401
======== ========== ========= ============ ========= ========= =========
</TABLE>
31
<PAGE> 34
Sales data for the Company's specialty steel segment for the three and six
month periods ended April 1, 1995 and March 26, 1994 and for each of the three
fiscal years in the period ended September 24, 1994 were as follows:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED FISCAL SIX MONTHS ENDED
----------------------- -------------------------- FISCAL YEAR ENDED SEPTEMBER
APRIL 1, MARCH 26, APRIL 1, MARCH 26, ----------------------------------
1995 1994 1995 1994 1994 1993 1992
-------- ---------- --------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Tons shipped
Welded tubular.................. 78,000 54,600 164,800 121,300 277,600 308,000 246,500
Seamless tubular................ 29,700 20,200 57,600 40,700 92,300 76,900 45,400
SBQ, excluding KES.............. 47,300 37,000 90,200 70,900 147,900 102,500 72,000
Other........................... 17,900 7,600 29,900 17,000 43,200 16,400 9,400
KES............................. -- -- -- -- -- 244,400 217,900
-------- ---------- --------- ------------ -------- -------- --------
172,900 119,400 342,500 249,900 561,000 748,200 591,200
======== ========== ========= ============ ========= ========= =========
Net sales ($000's)
Welded tubular.................. $ 35,487 $ 23,124 $ 74,238 $ 50,930 $117,214 $125,132 $103,479
Seamless tubular................ 22,466 15,825 44,252 33,575 72,675 62,535 37,819
SBQ, excluding KES.............. 23,808 16,467 43,267 30,813 64,858 40,561 28,756
Other........................... 6,466 2,931 11,186 6,791 15,694 6,232 5,867
KES............................. -- -- -- -- -- 90,547 80,439
-------- ---------- --------- ------------ -------- -------- --------
$ 88,227 $ 58,347 $172,943 $122,109 $270,441 $325,007 $256,360
======== ========== ========= ============ ========= ========= =========
</TABLE>
SECOND QUARTER AND SIX MONTH FISCAL 1995 COMPARED WITH SECOND QUARTER AND SIX
MONTH FISCAL 1994
Net sales for the second quarter of fiscal 1995 increased $31.0 million, or
47.0%, from the second quarter of fiscal 1994 to $97.1 million. For the six
month comparable period, net sales increased $52.6 million, or 38.1%, to $190.5
million. Specialty steel segment net sales increased $29.9 million, or 51.2%,
and $50.8 million, or 41.6%, for the three and six month periods, respectively.
Adhesives segment net sales increased $1.2 million, or 15.2%, and $1.7 million,
or 11.0%, for the three and six month periods, respectively. The overall
increase in specialty steel segment net sales was the result of both higher
average selling prices and increased shipment levels as more fully discussed
below.
Welded tubular net sales increased $12.4 million, or 53.5%, on a volume
increase of 42.9%, and $23.3 million, or 45.8%, on a volume increase of 35.9%,
for the comparable three and six month periods, respectively. The increase in
welded tubular net sales for the second quarter was due partially to an overall
7.6% increase in average selling prices for all welded tubular products and an
increase in shipments of both welded OCTG and line pipe products over the second
quarter of fiscal 1994. Shipments in the second quarter of fiscal 1994 were
abnormally low due to customers' resistance to announced price increases that
ultimately failed to take hold, as well as severe winter weather conditions.
Fiscal 1995 second quarter average selling price for welded OCTG products was
$501 per ton, an increase of 7.7% and 2.2% over the second quarter of fiscal
1994 and the first quarter of fiscal 1995, respectively. Fiscal 1995 second
quarter average selling prices for welded line pipe was $500 per ton, an
increase of 8.9% and 5.7% over the second quarter of a year ago and the first
quarter of fiscal 1995, respectively.
Seamless tubular net sales increased $6.6 million, or 42.0%, on a volume
increase of 47.0%, and $10.7 million, or 31.8%, on a volume increase of 41.5%,
for the comparable three and six month periods, respectively. The increase in
seamless tubular net sales for the second quarter was partially attributable to
an increase in shipments, which resulted in large part from product line
expansion in fiscal 1995. Average selling prices for the second quarter of
fiscal 1995 for all seamless tubular products declined 3.1% from the second
quarter of fiscal 1994, due in part to changes in product mix, including the
introduction of new OCTG products with lower average selling prices. Fiscal 1995
second quarter average selling prices for all seamless tubular products declined
by 2.8% from the first quarter of fiscal 1995, due almost entirely to changes in
product mix, primarily the mix of OCTG products. Fiscal 1995 second quarter
average selling price for seamless OCTG products was $784 per ton, a decline of
4.0% and 2.6% from the second quarter of fiscal 1994 and the first
32
<PAGE> 35
quarter of fiscal 1995, respectively. Fiscal 1995 second quarter average selling
price for seamless line pipe products was $617 per ton, an increase of 9.0% and
4.6% from the second quarter of fiscal 1994 and the first quarter of fiscal
1995, respectively.
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. According to
Baker Hughes, Inc., the average number of oil and natural gas drilling rigs in
operation in the United States (rig count) decreased 6.2%, from 760 in the
second quarter of fiscal 1994 to 713 in the second quarter of fiscal 1995. The
rig count decreased 13.4% from the first quarter of fiscal 1995. 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. In August, 1994, the International Trade
Commission (ITC) voted unanimously that there was reasonable indication of
material injury which warranted further investigation of the petitions. In June
1995, the International Trade Administration of the United States Department of
Commerce (the "Department") issued favorable determinations concerning the
existence and extent of dumping and subsidization of OCTG products, and imposed
tariffs on imports from Austria (24.16%), Italy (51.25%), Japan (44.20%), Korea
(0.00% against one producer and 12.17% against all other producers), Argentina
(1.36%), Mexico (23.79%) and Spain (11.95%). In July 1995, the ITC will assess
whether dumping and subsidization have caused or threatened to cause material
injury to the United States OCTG industry. If the ITC determines that such
injury does not exist, the trade cases will be dismissed and the Department will
refund or cancel the previously imposed tariffs. While the Company cannot
predict the outcome of the ITC's determination at this time, the Company
believes that a favorable final ruling could have a positive impact on shipments
and selling prices of certain of the Company's products.
SBQ product net sales increased $7.3 million, or 44.6%, on a volume
increase of 27.8%, and $12.5 million, or 40.4%, on a volume increase of 27.2%,
for the comparable three and six month periods, respectively. Fiscal 1995 second
quarter average selling price for SBQ product was $503 per ton, an increase of
13.0% and 10.8% over the second quarter of fiscal 1994 and the first quarter of
fiscal 1995, respectively. SBQ product volume and prices increased as a result
of stronger market demand in fiscal 1995 as compared to fiscal 1994. Second
quarter selling prices also have increased as a result of the implementation of
surcharges to recover increases in certain raw material costs. Other product
shipments and sales for the second quarter of fiscal 1995 were primarily
attributable to shipments of hot rolled coils and steel slabs. The increase in
shipments was primarily attributable to stronger market demand for these
products and the sale of approximately 5,500 tons of steel slab in the fiscal
1995 second quarter versus none in the prior year quarter. Future levels of
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.
Gross profit for the second quarter of fiscal 1995 increased $8.3 million
from the second quarter of fiscal 1994 for a gross profit margin of 10.5% in
fiscal 1995 compared to 2.8% in the second quarter of fiscal 1994. For the six
month comparable period, gross profit increased $12.0 million for a gross profit
margin of 11.4% compared to 7.0% for the first six months of fiscal 1994. The
specialty steel segment accounted for $8.1 million and $11.6 million of the
increase in gross profit for the second quarter and six month periods,
respectively. The increase in specialty steel segment gross profit and margin
was attributable to improved operating efficiencies resulting from increased
production volume, capital expenditure improvements, including the eccentric
bottom tap project at Koppel, as well as increases in average selling prices, as
discussed above. Gross profit margin for the fiscal 1995 second quarter
declined, however, from a gross profit margin of 12.3% in the first quarter of
fiscal 1995, due in large part to production and shipment interruptions caused
by the failure and subsequent replacement of a 5000-HP motor in Newport's hot
strip mill as well as increases in the cost of raw materials over the first
quarter of fiscal 1995.
33
<PAGE> 36
The adhesives segment gross profit increased $0.2 million and $0.4 million
for the second quarter and six month comparable periods, respectively. Gross
profit margins were virtually unchanged for the comparable periods.
Selling and administrative expenses increased $0.4 million and $1.3 million
for the second quarter and six month comparable periods, respectively. Selling
and administrative expenses declined as a percentage of net sales from 9.5% in
the second quarter of fiscal 1994 to 6.9% in the current quarter and from 8.9%
for the fiscal 1994 six month periods to 7.1% for the current six month period.
The overall increase in selling and administrative expenses was primarily
attributable to increased production and sales volumes as well as costs accrued
in connection with litigation settled subsequent to the end of the fiscal 1995
second quarter. See "Other Matters -- Legal Matters".
As a result of the above factors, operating income increased $7.9 million,
from an operating loss of $4.4 million in the second quarter of fiscal 1994 to
operating income of $3.5 million in the current quarter. For the six month
period, operating income increased $10.7 million, from an operating loss of $2.7
million in fiscal 1994 to an operating profit of $8.0 million in the first six
months of fiscal 1995. The specialty steel segment earned an operating profit of
$4.1 million and $9.4 million for the second quarter and six month periods,
respectively, compared to operating losses of $3.7 million and $1.6 million for
the second quarter and six month periods of fiscal 1994, respectively. The
improvement in operating results from the prior year periods were primarily due
to an overall increase in shipments, as discussed above, as well as increases in
selling prices and improvements in production efficiencies. The Company's second
quarter operating results were negatively impacted, however, by production and
shipment interruptions stemming from a motor failure at Newport's hot strip
mill, as discussed above. The adhesives segment earned an operating profit of
$0.3 million and $0.5 million for the three and six month periods, respectively,
compared to $0.1 million and $0.4 million for the comparative periods of a year
ago.
Interest expense was virtually unchanged from the prior year comparable
periods as a decline in interest expense on long-term obligations was offset by
increases in the average borrowings and interest rates under the Company's
short-term borrowings.
Other income, net was $1.8 million and $2.2 million for the fiscal 1995
second quarter and six month periods, respectively, and increased by $1.7
million and $1.6 million over the prior year comparable periods, respectively,
primarily due to the recording of property claims filed with the Company's
insurance carrier in connection with the motor failure at Newport in the second
quarter.
As a result of the above factors, net income was $0.4 million, or $.03 per
share in the second quarter of fiscal 1995 compared to a loss of $5.6 million,
or a $.40 loss per share in the second quarter of fiscal 1994. For the six month
period, net income was $0.5 million, or $.04 per share compared to $16.2
million, or $1.17 per share. Fiscal 1994 six month net income includes a
one-time after-tax gain on the sale of KES of $21.5 million, or $1.56 per share,
and income of $1.7 million, or $.12 per share, relating to the adoption of a new
accounting standard.
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,
which had fiscal 1993 net sales of $90.5 million.
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.
34
<PAGE> 37
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.
The average rig count increased 3.4%, from 757 for fiscal 1993 to 783 for
fiscal 1994, according to Baker Hughes, Inc. 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.
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 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
was primarily attributable to an increase in shipments of hot rolled coils,
which was a result of stronger market demand for this product over the prior
year.
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. KES had gross
profit in fiscal 1993 of $19.1 million. Gross profit for the specialty steel
segment, excluding KES, increased $0.3 million 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 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, total specialty steel segment operating
income declined $11.0 million primarily due to the sale of KES, which had fiscal
1993 operating income of $9.3 million. 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 $0.8
million 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.
35
<PAGE> 38
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 audited annual
Consolidated Financial Statements included herein.
As a result of the above factors, income before extraordinary item and
cumulative effect of a change in accounting principle was $11.5 million, or $.84
per share, for fiscal 1994, compared to a loss of $5.9 million, or a $.44 loss
per share, for fiscal 1993. Excluding the effect of the after-tax gain on the
sale of KES, the Company incurred a $10.0 million loss before cumulative effect
of a change in accounting principle, or a $.72 loss per share, for fiscal 1994.
The increase in the fiscal 1994 loss over fiscal 1993 was primarily attributable
to the decline in sales in the second quarter as well as the absence of
operating earnings from KES in fiscal 1994, as discussed above. See also
"Quarterly Results."
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 audited annual
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, according to Baker Hughes Inc. 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,
36
<PAGE> 39
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 $0.9 million, 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 $0.9 million 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.
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 $0.8 million 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 $0.5 million in fiscal 1992.
Interest expense decreased $0.7 million 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 incurred capital expenditures to install additional state-of-the-art
radiation 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.
With respect to the 1993 incident, through April 1, 1995, the Company has
recovered $3.9 million through insurance, and expects to recover and has
recorded a $2.1 million receivable relating to insurance claims for the recovery
of disposal costs which will be filed with the Company's insurance company at
the time such disposal costs are incurred. No recovery has been made nor
recorded for the fiscal 1992 incident and the Company is evaluating available
legal remedies. 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, 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.
See "Other Matters" for a further discussion related to these incidents.
As a result of the above factors, the Company incurred a loss before
extraordinary item of $5.9 million, or a $.44 loss per share, for fiscal 1993,
compared to a loss before extraordinary item of $13.4 million, or a $.99 loss
per share, for fiscal 1992. The decline in losses was primarily attributable to
increased specialty steel segment sales and operating income, particularly at
Koppel, as discussed above.
37
<PAGE> 40
LIQUIDITY AND CAPITAL RESOURCES
Working capital at April 1, 1995 was $35.5 million compared to $45.2
million at September 24, 1994 and $39.1 million at September 25, 1993. The
current ratio at April 1, 1995 was 1.35 to 1 compared to 1.50 to 1 at September
24, 1994 and 1.45 to 1 at September 25, 1993. At April 1, 1995, the Company had
cash and short-term investments totaling $21.4 million compared to $44.5 million
at September 24, 1994 and $9.3 million at September 25, 1993. At April 1, 1995,
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 $29.9 million was outstanding. These lines have interest
rates ranging from 1/2% to 1 1/2% over prime and expire in fiscal 1995 and
1996. At April 1, 1995, approximately $8.7 million in cash and short-term
investments were restricted, primarily in connection with cash collateralized
letters of credit. Contemporaneously with the Offering, the Company will enter
into the Credit Facility, which is expected to be undrawn upon completion of the
Offering. The initial term of the Credit Facility is three years, but may be
terminated earlier or extended for successive one year periods. Interest on the
revolving advances shall accrue at a rate per annum of (a) the sum of the
alternate base rate (which is the higher of prime rate or 1/2% over the federal
funds rate) plus 1% with respect to domestic rate loans or (b) the sum of the
Eurodollar rate (based on LIBOR) plus 2 3/4% with respect to Eurodollar rate
loans.
Net cash flow used in operating activities totaled $5.9 million in the
first six months of fiscal 1995, compared to $5.8 million used in the comparable
prior year period. The Company recorded net income of $0.5 million in the first
six months of fiscal 1995 compared to a fiscal 1994 six month net loss of $7.1
million before the effect of the sale of KES and the adoption of Statement 109.
Major uses of cash in operating activities for fiscal 1995 included a $6.4
million increase in trade accounts receivable and a $13.3 million increase in
inventories resulting from an increase in business activity and, for the
increase in inventories, unusually low levels at fiscal year end due to
scheduled maintenance outages at Newport as well as a temporary buildup
associated with production and shipment interruptions at Newport, as previously
discussed. Other current assets increased $2.9 million primarily due to the
recording of various insurance claims. Offsetting these uses were $9.7 million
in non-cash depreciation charges and $6.1 million resulting from an increase in
accounts payable. Accounts payable increased primarily due to the increase in
inventories and a general increase in business activities.
Fiscal 1994 six month cash flows from operating activities, before the
effect of the sale of KES and the adoption of Statement 109, were primarily
impacted by an increase in inventories, offset by a decrease in trade accounts
receivable and other current assets and an increase in accrued liabilities. The
increase in inventories was the result of unusually low levels at the end of
fiscal 1993, due in part to a fiscal 1993 fourth quarter shutdown at Newport, as
discussed in "Results of Operations". The decrease in other current assets
resulted primarily from the sale of land held for development and the increase
in accrued liabilities was primarily attributable to an increase in accrued
income taxes related to the gain on the sale of KES.
The Company incurred $7.3 million in capital expenditures during the first
six months of fiscal 1995, primarily related to improvements to and acquisition
of machinery and equipment in the specialty steel segment. The Company currently
estimates that capital spending in fiscal 1995 will approximate $13.2 million.
It is anticipated that capital spending will be funded through cash flow from
operations and available borrowing sources as well as available cash and
short-term investments. For further information pertaining to the Company's
capital plans for fiscal 1995 and beyond see "Business -- Operating Cost
Improvements" and "Business -- Strategy -- Implement Capital Improvement
Program." During the first six months of fiscal 1995, short-term investments
decreased $20.0 million, due in large part to an increase in net working
capital, particularly the inventory component. Management expects inventory
levels will decline during the remainder of the year as a portion of the
increase was attributable to a temporary inventory buildup associated with
production and shipment interruptions at Newport, as previously discussed.
As a result of the sale of KES in the first quarter of fiscal 1994, the
Company received $45.6 million in cash and $4.8 million in common stock of the
new entity. In addition, the Company received
38
<PAGE> 41
$6.8 million in cash from the new entity in satisfaction of a dividend declared
by KES prior to the sale. As part of the Refinancing Transaction, the Company
intends to use a substantial amount of its available cash balances to repay a
portion of its existing debt. See "Use of Proceeds" and "Summary of the
Refinancing Transaction." The Company intends to hold as an available-for-sale
investment the common stock acquired in the sale of KES. As of April 1, 1995 and
September 24, 1994, such common stock was recorded at $3.5 million and $4.6
million, respectively, and has resulted in a direct after-tax charge to common
shareholders' equity of $0.7 million in the first six months of fiscal 1995.
Net cash flows used by financing activities were $9.5 million in the first
six months of fiscal 1995. The Company made scheduled payments on long-term debt
obligations of $9.8 million during the first six months and increased its
borrowings under its lines of credit by $1.0 million. Scheduled long-term debt
maturities are $15.5 million (inclusive of $9.8 million paid through April 1,
1995), $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 are 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.
Cash flow used in operating activities totaled $4.3 million in fiscal 1994.
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.
Cash flows from operating activities were $2.4 million in fiscal 1993
compared to $8.5 million in fiscal 1992. Major uses of cash in operating
activities in fiscal 1993 included a net loss of $7.0 million, an increase in
accounts receivable of $11.5 million, resulting primarily from an increase in
business activity in the specialty steel segment, and an increase in other
current assets of $7.2 million, resulting primarily from the recording of
insurance claims. Increases in operating cash flows resulted from increases in
accounts payable and accrued liabilities of $1.0 million and $6.8 million,
respectively, which were primarily attributable to the increase in business
activity in the specialty steel segment and the recording of environmental
remediation liabilities.
Major uses of cash in operating activities in fiscal 1992 included a net
loss of $15.9 million and an increase in accounts receivable of $11.5 million
that was primarily attributable to the increase in business activity in the
specialty steel segment, offset by a decrease in refundable income taxes of $7.1
million. In addition, increases in net cash flows of $10.0 million resulted from
increases in accounts payable and accrued liabilities, primarily attributable to
the increase in business activity in the specialty steel segment.
The Company incurred $11.8 million, $6.1 million and $4.1 million in
capital expenditures during fiscal 1994, 1993 and 1992, respectively. Such
capital expenditures were primarily related to the
39
<PAGE> 42
acquisition of machinery and equipment in the specialty steel segment. For
fiscal 1994, the most significant expenditure was the $2.2 million acquisition
of a tubular processing facility located near Houston, Texas. Included in total
capital spending for fiscal 1994, 1993 and 1992 was $0.8 million, $0.3 million
and $0.2 million, respectively, related to the Company's environmental control
facilities.
Net cash flows used by financing activities were $4.4 million in fiscal
1994. During fiscal 1994, 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.
Cash flows from financing activities in fiscal 1993 and 1992 included net
repayments on long-term debt obligations of $7.9 million and $6.6 million,
respectively, and increased borrowings under the Company's lines of credit of
$6.3 million and $4.0 million, respectively.
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.
OTHER MATTERS
Legal Matters
In fiscal 1994, Newport was named as 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. Subsequent to the end of the fiscal 1995
second quarter, the Company reached a settlement for an amount significantly
less than the plaintiff's original claim and the litigation was dismissed. The
settlement was funded in part with insurance proceeds and in part from the
Company's existing cash balances. The Company is subject to various 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, including the above-mentioned
settlement, are likely, individually or in the aggregate, to have a material
adverse effect upon the Company's consolidated financial position, results of
operations or cash flows.
Environmental 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 contracts
with a company for treatment and disposal of the dust at an EPA-approved
facility. The Company also has on its property at Newport a permitted hazardous
waste disposal facility.
The occurrences of accidental melting of radioactive materials previously
discussed 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.
40
<PAGE> 43
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 April 1, 1995, claims recorded in connection with
disposal costs exhaust available insurance coverage. Based on current knowledge,
management believes the recorded gross reserves of $4.4 million for disposal
costs pertaining to these incidents are adequate.
In March 1995, Koppel entered into a Consent Order with the EPA relating to
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 Consent Order 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 Consent Order,
the Company believes that the indemnity provisions provide for it to be fully
indemnified against all matters covered by the Consent Order, including all
associated costs, claims and liabilities.
Subject to the uncertainties concerning the Consent Order 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.
As of April 1, 1995, the Company had environmental remediation reserves of
$4.7 million, of which $4.4 million pertain to accrued disposal costs for
radiation contaminated baghouse dust. As of April 1, 1995, the possible range of
estimated losses related to the environmental contingency matters discussed
above in excess of those accrued by the Company is $0 to $3.0 million; however,
with respect to the Consent Order, the Company cannot estimate the possible
range of losses should the Company ultimately not be indemnified. Based upon its
evaluation of available information, and subject to third party indemnities
discussed above, management does not believe that any of the environmental
contingency matters discussed above are likely, individually or in the
aggregate, to have a material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows. However, the Company
cannot predict with certainty that new information or developments with respect
to the Consent Order or its other environmental contingency matters,
individually or in the aggregate, will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
41
<PAGE> 44
QUARTERLY RESULTS
The following table provides certain summary financial information for the
first and second quarter of fiscal 1995 and for each of the four quarters of
fiscal 1994 and fiscal 1993. Information for fiscal 1993 includes the results of
KES which was sold in October 1993.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1994 FISCAL 1993
------------------ -------------------------------------------- ------------------------------------------
SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......... $ 97,055 $ 93,489 $ 84,602 $ 80,807 $ 66,012 $ 71,959 $ 93,205 $ 95,363 $ 86,735 $ 77,779
Gross profit...... 10,145 11,490 8,394 7,203 1,831 7,791 12,162 12,686 10,282 7,366
Operating income
(loss)........... 3,457 4,558 1,966 1,377 (4,465) 1,811 4,300 4,904 2,290 178
Net income
(loss)........... 447 75 (960) (1,990) (5,583) 21,741 (1,532) 11 (2,115) (3,355)
Specialty steel
net sales:
Tubular products
OCTG
products..... $ 34,387 $ 41,178 $ 35,025 $ 27,842 $ 23,351 $ 29,757 $ 29,517 $ 26,820 $ 23,971 $ 26,053
Line pipe
products..... 15,651 11,237 11,386 14,492 9,461 8,323 11,055 17,491 16,093 11,244
SBQ products..... 23,808 19,459 15,848 18,197 16,467 14,346 13,337 10,551 9,142 7,531
Hot rolled coil
products....... 2,718 3,424 4,260 3,669 2,577 3,232 445 1,805 -- --
Other
products(1).... 11,663 9,418 9,598 8,015 6,491 8,104 7,243 6,880 7,917 7,365
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total,
excluding
KES.......... 88,227 84,716 76,117 72,215 58,347 63,762 61,597 63,547 57,123 52,193
KES.............. -- -- -- -- -- -- 23,557 24,710 22,932 19,348
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total specialty
steel net
sales........ $ 88,227 $ 84,716 $ 76,117 $ 72,215 $ 58,347 $ 63,762 $ 85,154 $ 88,257 $ 80,055 $ 71,541
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Tons shipped:
Tubular products
Welded OCTG.... 36,100 50,200 45,700 30,800 25,900 35,800 41,000 30,100 29,900 41,100
Seamless
OCTG......... 20,800 20,600 17,100 16,300 13,800 14,600 13,000 14,600 12,200 8,900
Welded line
pipe......... 26,600 20,700 20,300 27,600 17,400 17,500 20,000 34,200 32,800 23,900
Seamless line
pipe......... 3,800 2,500 3,400 3,800 2,600 900 3,900 4,600 3,800 2,100
SBQ products..... 47,300 42,800 36,000 41,000 37,000 33,900 32,200 26,900 23,300 20,100
Hot rolled coil
products....... 7,400 8,800 12,300 10,300 7,100 9,100 1,400 5,200 -- --
Other
products(1).... 30,900 24,000 25,600 20,900 15,600 18,700 17,900 18,400 22,000 20,300
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total,
excluding
KES.......... 172,900 169,600 160,400 150,700 119,400 130,500 129,400 134,000 124,000 116,400
KES.............. -- -- -- -- -- -- 62,400 66,100 62,600 53,300
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total tons
shipped...... 172,900 169,600 160,400 150,700 119,400 130,500 191,800 200,100 186,600 169,700
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Average selling
price per ton:
Welded tubular
products..... $ 455 $ 446 $ 429 $ 418 $ 423 $ 417 $ 412 $ 414 $ 399 $ 401
Seamless
tubular
products..... 758 780 738 776 782 869 801 823 808 823
SBQ products... 503 454 441 443 445 424 413 392 393 375
</TABLE>
- ---------------
(1) Other products include seamless mechanical tubing and products classified as
secondary and limited service.
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 Statement 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.
42
<PAGE> 45
BUSINESS
GENERAL
The Company produces a diverse group of specialty steel products consisting
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, trucks 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 modern melting and tubemaking operations
and the Newport facility is the only mini-mill with continuous casting
capabilities manufacturing welded tubular products in the United States. The
Company sold 513,300 tons of specialty steel products in the twelve months ended
March 26, 1994 and 653,500 tons for the twelve months ended April 1, 1995.
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 10% of the Company's net sales for the
twelve months ended April 1, 1995.
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 36.8% 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 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 B&W 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.
43
<PAGE> 46
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 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.
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.
44
<PAGE> 47
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, consist 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 partially
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 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 expand the Company's finishing 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.
According to the Oil and Gas Journal, 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
45
<PAGE> 48
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
--------------------------------
FISCAL YEAR
TWELVE MONTHS ENDED
RATED CAPACITY ENDED SEPTEMBER
FACILITY (IN TONS) APRIL 1, 1995 1994
- ----------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
Koppel facilities
Melt shop........................ 400,000 77.9% 69.6%
Bar mill......................... 200,000 90.8% 85.0%
Seamless tube mill............... 200,000 59.6% 50.5%
Newport facilities
Melt shop........................ 700,000 60.6% 52.5%
Hot strip rolling mill........... 750,000 52.5% 47.1%
Welded pipe mills................ 580,000 55.3% 46.5%
</TABLE>
OPERATING COST IMPROVEMENTS
The Company has invested over $100 million in the last six fiscal years to
maintain and modernize its steel-making facilities. These capital improvements
have enabled the Company to improve operating efficiencies and reduce costs.
For the Newport facilities, major expenditures during that period include:
(i) The completion in fiscal 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 fiscal 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
(iii) The addition in fiscal 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.
For the Koppel facilities, major expenditures during that period include:
(i) The acquisition in fiscal 1994 of the Baytown facility for $2.2
million to extend the Company's finishing capacity and provide access to
the Houston market;
(ii) A $1.3 million rebuild in fiscal 1991 of the tube mill rotary
hearth furnace to enhance the reliability and efficiency of reheating tube
rounds; and
(iii) a $1.1 million rebuild in fiscal 1993 of the bar mill rotary
hearth furnace, to enhance product quality and provide more efficient
reheating of blooms.
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 $24.31 for its Newport facilities and $18.85 for its Koppel
facilities for the first six months of fiscal 1995. According to the AISI, the
industry average labor cost per hour was $33.56 for the same period. The Company
does not provide retiree benefits.
46
<PAGE> 49
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>
TWELVE
MONTHS
ENDED
APRIL
1, FISCAL YEAR ENDED SEPTEMBER
------- --------------------------------------------------------
1995 1994 1993 1992 1991(1) 1990
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Manufacturing costs per ton shipped (2)
Newport facilities (3)............. $244 $252 $254 $273 $333 $292
Koppel facilities (4).............. $361(5) $353 $379 $396 $560 N/A
Steel scrap costs per ton (6)........ $125 $123 $100 $89 $101 $101
Man hours per ton shipped
Newport facilities (3)............. 2.85 2.95 3.09 3.24 4.07 3.55
Koppel facilities (4).............. 4.05 4.84 5.45 6.91 N/M N/A
Tons shipped
Newport facilities (3)............. 377,100 320,700 324,400 255,800 205,700 285,100
Koppel facilities (4).............. 276,400 240,300 179,400 117,500 23,400 N/A
</TABLE>
- ---------------
(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) The increase in manufacturing costs per ton shipped for the twelve months
ended April 1, 1995 over fiscal 1994 was due partially to changes in product
mix as well as increases in certain raw material costs.
(6) Represents the average cost per ton paid by Newport and Koppel for its steel
scrap for the respective periods.
During 1994, the Company continued to invest in its steel-making facilities
by implementing production changes and operating efficiency improvements, which
are expected to result in total annual operating cost improvements of
approximately $1.6 million (based on fiscal 1994 labor costs, product mix and
shipment levels). Operating cost improvements during this period included:
(i) At the Koppel bar mill, the Company implemented operational
changes that substantially eliminated the need to grind blooms, and thereby
reduced production costs for its SBQ products. Based on 1994 shipment
levels, the Company believes these operating changes at Koppel will result
in anticipated annual operating benefits of approximately $0.5 million;
(ii) In April 1994, the Company negotiated a new five year labor
contract with the USWA for Newport, which allowed 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; and
(iii) In October 1994, the Company upgraded the two ladle cranes in
Newport's melt shop to increase the total weight of steel melted in the
furnace ("heat size") 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, the Company believes it would
achieve approximately $0.6 million of annual operating benefits.
There can be no assurance that the Company's current manufacturing costs,
or other costs such as the cost of steel scrap and other raw materials, will not
increase to offset the operating
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<PAGE> 50
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.
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 months ended March 31, 1995, total shipments by domestic
OCTG producers were approximately 1.7 million tons, of which approximately 57%
represented seamless products and approximately 43% represented welded products.
During the twelve months ended March 26, 1994 and April 1, 1995, the Company
shipped approximately 56,000 and 74,800 tons, respectively, of seamless OCTG
products and approximately 132,800 tons and 162,800 tons, respectively, of
welded OCTG products. Together, shipments of seamless and welded OCTG products
accounted for 39% of the Company's net sales for the twelve months ended April
1, 1995. For the twelve months ended April 1, 1995, the Company's shipments of
seamless OCTG products accounted for approximately 8% of total shipments by
domestic OCTG producers and the Company's shipments of welded OCTG products
accounted for 23% 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.
Seamless production tubing represented approximately 65% of the Company's
shipments of seamless OCTG products for the twelve months ended April 1, 1995.
During the twelve months ended March 26, 1994 and April 1, 1995, the Company
shipped approximately 30,700 tons and 48,800 tons, respectively, of seamless
production tubing to the OCTG markets.
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.
48
<PAGE> 51
For the twelve months ended March 26, 1994 and April 1, 1995, the Company's
average selling price was $871 and $800 per ton, respectively, for all grades
and sizes of its seamless OCTG products and was $607 and $636 per ton,
respectively, for all grades and sizes of its threaded and coupled welded OCTG
products. The decline in average selling price for all grades and sizes of
seamless OCTG products was due in part to the Company's continued strategic
emphasis on certain seamless production tubing products which have lower costs
to manufacture and lower average selling prices.
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. For the twelve months ended April 1, 1995, the Company's
shipments of welded OCTG products accounted for 23% 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 range from 1.9 to 12.75 inches in outside diameter and are shipped as a
plain end product and welded together on site. Line pipe shipments accounted for
15% of the Company's net sales for the twelve months ended April 1, 1995. The
Company sells its line pipe products to both distributors and end users.
During the twelve months ended March 31, 1995, total shipments by domestic
line pipe producers were approximately 1.0 million tons. Of these 1.0 million
tons shipped, 697,500 tons, or 66%, were line pipe 16 inches and under. For the
twelve months ended April 1, 1995, the Company shipped approximately 108,700
tons or 16% of all shipments by domestic producers of line pipe 16 inches and
under.
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 130,000 tons for the
twelve months ended March 26, 1994 to 167,200 tons for the twelve months ended
April 1, 1995. SBQ shipments accounted for 22% of the Company's net sales for
the twelve months ended April 1, 1995. 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
49
<PAGE> 52
coils from approximately 22,800 tons for the twelve months ended March 26, 1994
to 38,800 tons for the twelve months ended April 1, 1995. Hot rolled coil
shipments accounted for 4% of the Company's net sales for the twelve months
ended April 1, 1995. While the Company's shipments of hot rolled coils are not
sizable in relation to the total 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 31% in fiscal 1989 to 19% for the twelve
months ended April 1, 1995.
STRATEGY
The Company's business strategy is to increase sales and improve operating
results by: (i) implementing capital improvements; (ii) efficiently expanding
production; and (iii) 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 through fiscal 1994 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 $48 at Newport since 1990 and of
approximately $35 at Koppel since fiscal 1992. Over the same periods, the
Company's man hours per ton have decreased from approximately 3.55 to 2.85 at
Newport and from approximately 6.91 to 4.05 at Koppel.
Implement Capital Improvement Program
The Company has begun to implement a three year, $21.7 million capital
expenditure program designed to further reduce its operating costs, improve
quality and enhance its market position. The program includes nine 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 $3.7 million.
These projects are anticipated to result in annual operating benefits before
depreciation of approximately $5.4 million. Over the balance of the program,
which is scheduled to be completed by the end of fiscal 1997, the Company
intends to implement five additional projects for an estimated aggregate cost of
approximately $18.0 million. These five projects are anticipated to result in
annual operating benefits before depreciation of approximately $12.8 million.
The Company believes that upon completion, total operating benefits from its
capital expenditure program will result in annual operating benefits before
depreciation of approximately $18.2 million. 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.
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
50
<PAGE> 53
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 labor rates, production and
shipment levels and product mix. Any increase or decrease in labor rates, 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.
Significant components of the plan, and estimated costs and operating
benefits, are summarized below. For a more complete description of the projects
listed in the table below and the assumptions underlying the estimated annual
operating benefits calculations, see the discussion following this table.
<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 $ 3.4
Line Pipe Coating Facility................... 1995 1.1 0.6
Upgrade Finish Coiler........................ 1995 0.6 0.4
Width Control and Crop Shear Automation...... 1995 0.9 1.0
Seamless Mill Material Handling.............. 1996 0.6 0.4
Multi-Lance Manipulator...................... 1996 0.9 0.8
Finishing Facility Expansion................. 1996 4.0 3.8
Processing Equipment......................... 1997 2.5 0.5
UHP Electric Arc Furnace..................... 1997 10.0 7.3
----------- ---------
Total........................................ $21.7 $18.2
=========== =========
</TABLE>
Eccentric Bottom Tap -- UHP Furnace. In December 1994, the Company
upgraded the UHP electric arc furnace at Koppel by installing a new furnace
shell with an eccentric bottom tap ("EBT"). Eccentric bottom tapping is a more
efficient method of removing slag from the production process and virtually
eliminates the need for re-ladling. The installation has reduced the time
required to melt and refine scrap which reduces labor costs, costs of refractory
material, electrode usage, and electric power consumption per ton. The larger
tap opening has reduced the time to pour liquid steel into a ladle thereby
reducing labor costs per ton. In addition, the new EBT has resulted in increased
heat sizes. Based on fiscal 1994 shipments (147,900 tons of SBQ products and
92,300 tons of seamless tubular products) and the results of an internal review
of the project for the first two months of its operation, the Company believes
it will achieve approximately $2.1 million of annual operating benefit or
approximately $14.00 per ton for SBQ products and approximately $1.3 million of
annual operating benefit or approximately $14.50 per ton for seamless tubular
products.
Line Pipe Coating Facility. The Company has begun construction of 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
51
<PAGE> 54
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 fourth quarter of fiscal 1995.
Production of larger coils will result in a 10% increase in tons produced per
hour, thereby reducing variable costs per ton including the cost of labor,
maintenance parts, fuels and utilities and other supplies. Based on fiscal 1994
labor costs and 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.
Width Control and Crop Shear Automation. The hot strip mill at the Newport
facility will be upgraded with the installation of width control and crop shear
automation equipment to permit closer monitoring of the width of the strip
during the rolling process. Currently 2.0 inches of excess width are provided
for edge trim prior to a strip being formed into pipe. The enhanced width
monitoring equipment will provide better control of rolled widths and will allow
rolled width to be approximately 0.5 inches narrower than current practice,
which will result in a significant improvement in material yield. In addition,
the crop shear will be automated to permit fully automatic shearing of the head
and tail end of each strip during the rolling process. By automating the crop
shear, the amount of head and tail end scrap removed from each strip will be
reduced, resulting in a yield improvement of approximately 0.5%. The Company
anticipates completing the upgrade during the fourth quarter of fiscal 1995.
Based on fiscal 1994 labor and material costs and shipment levels (277,600 tons
of welded tubular products), the Company believes it would achieve approximately
$1.0 million of annual operating benefit or approximately $3.40 per ton of
welded tubular products shipped.
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 third quarter
of fiscal 1996. 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 improve product flow through the finishing operations costs and
reduce labor costs per ton. Based on fiscal 1994 labor costs and shipment levels
(approximately 92,300 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.
Multi-Lance Manipulator. A double head multiple lance
robotically-controlled manipulator will be installed for use on the UHP electric
arc furnace at the Koppel facility. The Company anticipates completing the
installation of the new manipulator during the second quarter of fiscal 1996.
The multi-lance manipulator, which will replace a single lance manipulator, will
permit efficient simultaneous injection of oxygen and carbon to the furnace and
will reduce electricity consumption, electrode consumption and melt times and
will result in reduced labor costs per ton. Based on 1994 labor costs and
shipment levels (approximately 147,900 tons of SBQ products and 92,300 tons of
seamless tubular products), the Company believes it would achieve approximately
$0.7 million of annual operating benefit or approximately $4.60 per ton for SBQ
products and approximately $0.1 million of annual operating benefit or
approximately $1.30 per ton for seamless tubular products.
52
<PAGE> 55
Finishing Facility Expansion. A new straightener will be installed at
Koppel's tubemaking facility which will allow the Company to completely process
certain alloy API production tubing in-house and substantially reduce outside
processing costs. All of this product is currently produced as plain end tube at
Koppel's tubemaking facility and shipped to outside processors for all finish
processing such as upsetting, heat treating, straightening, threading, coupling
and inspection. At the Baytown facility, unused equipment currently in storage
will be installed, including a PMC threading line, Taylor Wilson Hydrotester and
an in-line coater. The enhanced finishing capacity at Baytown will allow
finishing of all grades of production tubing at significantly lower conversion
costs. The Company anticipates completing the installation of the proposed
equipment during the fourth quarter of fiscal 1996. Based on actual 1995 costs
and fiscal 1994 shipment levels (23,500 tons of certain alloy API production
tubing products) the Company believes it would achieve approximately $3.8
million of annual operating benefit or approximately $163.00 per ton on certain
alloy API production tubing products. This anticipated annual operating benefit
does not include any benefit resulting from the Company's ability to produce and
sell certain new production tubing 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. The installation of the proposed equipment will
consolidate cutting and beveling into one operation and eliminate multiple
product moves using the overhead crane thereby reducing variable costs per ton
including the cost of labor, maintenance parts, fuels and utilities and other
supplies. 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. Significantly shorter
melt times will increase melt shop productivity by reducing variable costs per
ton including the cost of labor, maintenance parts, fuels and utilities and
other supplies. The Company anticipates the new furnace will also lower
production costs through a reduction in electricity and electrode consumption.
Based on fiscal 1994 labor costs and 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.
Efficiently Expand Production
Since incorporation in 1981, the Company has increased its steel-making and
finishing capacity through the acquisition of idled operating assets. The fiscal
1991 acquisition of the Koppel facilities increased the rated capacity of its
steel-making facilities from 700,000 tons (excluding KES) in fiscal 1990 to
1,100,000 tons currently, and expanded its product range to include seamless
OCTG and line pipe and SBQ products. 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. The Company has also sought to increase the range
of products within its principal markets. As a result of new finishing capacity
brought on line in the first quarter of fiscal 1995, the Company was able to
expand its product lines to include additional grades of seamless OCTG products.
The Company believes it has significant available production capability it can
readily access with minimal fixed costs should the OCTG markets improve. In the
OCTG market, even though demand has remained relatively weak, the Company has
increased its shipments of tubular products since 1990. For the twelve month
period ended April 1, 1995, capacity
53
<PAGE> 56
utilization at the Company's Koppel and Newport tubemaking facilities increased
to 60% and 55%, respectively. Total shipments by domestic SBQ producers
increased approximately 11% during the twelve months ended March 1995 over the
comparable prior year period. For fiscal 1994 and for the twelve months ended
April 1, 1995, the Company increased its shipments of SBQ products by 44% and
29%, respectively, and its average selling price of SBQ products by 11% and 10%,
respectively, excluding KES from the comparable prior year periods.
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. The Company has
recently used, and will use in conjunction with the Refinancing Transaction, a
portion of its existing cash balances to reduce its total debt outstanding.
Contemporaneously with the Offering, the Company will enter into the Credit
Facility. Upon completion of the Offering, the Company's aggregate cash,
short-term investments and borrowing capacity under the new credit facility will
total approximately $51.0 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 may 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 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.
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
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<PAGE> 57
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 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 250,000 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 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. The Company also joined in filing
countervailing duty cases charging subsidization of OCTG imports from Austria
and Italy. In August 1994, the United States International Trade Commission
("ITC") voted unanimously that there was reasonable indication of material
injury which warranted further investigation of the petitions. In June 1995, the
International Trade Administration of the United States Department of Commerce
(the "Department") issued favorable determinations concerning the existence and
extent of dumping and subsidization of OCTG products, and imposed tariffs on
imports from Austria (24.16%), Italy (51.25%), Japan (44.20%), Korea (0.00%
against one producer and 12.17% against all other producers), Argentina (1.36%),
Mexico (23.79%) and Spain (11.95%). In July 1995, the ITC will assess whether
dumping and subsidization have caused or threatened to cause material injury to
the United States OCTG industry. If the ITC determines that such injury does not
exist, the trade cases will be dismissed and the Department will refund or
cancel the previously imposed tariffs. While the Company cannot predict the
outcome of the ITC's determination at this time, the Company believes that a
final favorable ruling could have a positive impact on shipments and selling
prices of certain of the Company's products.
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.
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<PAGE> 58
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 1996 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. The Company has no reason to believe that the utility contract expiring
at Koppel in 1996 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.
Overall, OCTG demand in the United States has been cyclical. According to
Baker Hughes Inc., 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 first
six months of fiscal 1995 was 768.
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 year
ended December 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.
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<PAGE> 59
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 for the year ended December 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 23% for
the twelve months ended March 31, 1995. Seamless tubular products represented
approximately 78% of all imported OCTG product for the year ended December 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
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 1.0 million tons for the
twelve months ended March 31, 1995 and shipments of line pipe product 16 inches
in diameter and smaller, the product sizes that the Company produces, totaled
696,700 tons in that period.
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TUBULAR PRODUCT INDUSTRY STATISTICS
<TABLE>
<CAPTION>
TWELVE
MONTHS
ENDED YEAR ENDED DECEMBER
MARCH 31, ---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Drilling Activity
Average rig count drilling for:
Natural gas(1)......... 417 427 364 331 351 464 401 354 N/A N/A N/A
Crude oil(1)........... 332 335 373 373 482 532 453 554 N/A N/A N/A
Total average rig
count(1)............... 762 775 754 721 860 1,010 869 936 936 964 1,980
Average well depth(2)... 5,817 5,699 5,461 5,254 4,887 4,788 4,755 4,820 4,551 4,482 4,435
Total well
completions(2)......... 17,794 18,845 23,474 23,124 29,076 31,202 28,055 31,802 35,424 39,602 70,481
Total feet drilled(2)... 103.5 107.4 128.2 121.5 142.1 149.4 133.4 153.3 161.2 177.5 312.6
International rig
count(3)................ 1,004 990 971 955 1,036 1,047 1,055 1,222 1,162 1,262 1,604
Leading Indicators
Average oil and natural gas prices:
West Texas intermediate
crude(4).............. $17.21 $16.46 $18.17 $19.67 $20.42 $23.17 $18.29 $15.52 $18.21 $16.44 $28.08
U.S. well head natural
gas(5)................ $ 1.60 $ 1.79 $ 2.01 $ 1.73 $ 1.63 $ 1.70 $ 1.69 $ 1.68 $ 1.66 $ 1.94 $ 2.51
U.S. OCTG Consumption(6)
Total U.S. producer
domestic
shipments(7)........... 1,300 1,243 1,422 1,005 963 1,297 706 1,212 1,086 588 1,569
Total imported
shipments.............. 312 342 353 101 413 381 429 988 576 617 1,505
Inventory (increase)
decrease............... (250) (191) (330) 276 275 257 533 (401) 128 721 96
---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total U.S. market
consumption............ 1,362 1,394 1,445 1,382 1,651 1,935 1,668 1,799 1,790 1,926 3,170
=========== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Imports as percent of
U.S. consumption....... 23% 25% 24% 7% 25% 20% 26% 55% 32% 32% 48%
U.S. Producer Line Pipe
Shipments(8)............ 697 652 623 710 657 634 606 645 494 432 577
</TABLE>
- ---------------
(1) As reported by Baker Hughes, Inc. (contained in Monthly Energy Review, May
1995)
(2) As reported by the Energy Information Administration (contained in Monthly
Energy Review, May 1995). Average well depth in feet, total feet drilled in
millions of feet.
(3) As reported by Baker Hughes, Inc. Excludes U.S. rig activity.
(4) In dollars per barrel, as reported by the Oil and Gas Journal.
(5) In dollars per million cubic feet, as reported by the Oil and Gas Journal
for the years ended December 1985 through 1993 and as reported by Bloomberg
for the year ended December 1994 and the twelve months ended March 31, 1995.
(6) In thousands of tons, as reported by Pipe Logix, Inc.
(7) Net of U.S. producer exports.
(8) In thousands of tons, as reported by AISI. Includes line pipe 16 inches in
diameter and under only.
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SBQ and Hot Rolled Coils
The bar and flat rolled steel markets represent the largest segments of the
steel market. According to the AISI, total 1994 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 16
million and 29 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.
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 from recent years 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, for the twelve
months ended April 1, 1995, average selling prices for the Company's hot rolled
coils increased 4% over the comparable prior year period.
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.
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 $34.7 for the twelve
months ended April 1, 1995.
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 manufacture of certain 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
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.
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<PAGE> 62
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 May 31,
1995, KESI's stock price closed at $9 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 $10.8
million at April 1, 1995, is held as investment property and is listed for sale.
The Company also owns approximately 85 acres of additional real estate which is
currently not used in operations and has a book value of approximately $0.8
million.
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 contracts
with a company for treatment and disposal of the dust at an EPA approved
facility. 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 in the third quarter of fiscal 1992, shut down
Newport's melt shop
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<PAGE> 63
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 incurred capital
expenditures to install additional state-of-the-art radiation 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 $3.9 million through insurance, and expects to recover
and has recorded, with respect to the 1993 incident, a $2.1 million receivable
relating to insurance claims for the recovery of disposal costs which will be
filed with the Company's insurance company at the time such disposal costs are
incurred. 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 occurrences of the 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 April 1, 1995, claims recorded in connection
with disposal costs exhaust available insurance coverage. Based on current
knowledge, management believes the recorded gross reserves of $4.4 million for
disposal costs pertaining to these incidents are adequate.
In March 1995, Koppel entered into a Consent Order with the EPA relating to
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 Consent Order 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 Consent Order 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. 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). Koppel and PMAC have
jointly retained an environmental consultant to conduct the required
investigation. Prior to the completion of the site analysis to be performed in
connection with the Consent Order, the Company cannot predict the expected
cleanup cost for the SWMU's and AOC's covered by the Consent Order. The Company
believes that it is entitled to full indemnity for all of the matters covered by
the Consent Order from B&W and/or PMAC. Pursuant to its contractual arrangements
with PMAC, the Company has a right of offset
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<PAGE> 64
against the $15 million principal 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 upon obtaining a final court
order in favor of the Company with respect to a dispute, if any, concerning the
indemnity.
Subject to the uncertainties concerning the Consent Order 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.
As of April 1, 1995, the Company had environmental remediation reserves of
$4.7 million, of which $4.4 million pertain to accrued disposal costs for
radiation contaminated baghouse dust. As of April 1, 1995, the possible range of
estimated losses related to the environmental contingency matters discussed
above in excess of those accrued by the Company is $0 to $3.0 million; however,
with respect to the Consent Order, the Company cannot estimate the possible
range of losses should the Company ultimately not be indemnified. Based upon its
evaluation of available information, management does not believe that any of the
environmental contingency matters discussed above are likely, individually or in
the aggregate, to have a material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows, subject to the third
party indemnities discussed above. However, the Company cannot predict with
certainty that new information or developments with respect to the Consent Order
or its other environmental contingency matters, individually or in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
EMPLOYEES
As of April 19, 1995, the Company had 1,667 employees of whom 397 were
salaried and 1,270 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 APRIL 19, 1995
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
Imperial Adhesives, Inc. November 3, 1995 46
Erlanger Tubular Corporation March 6, 1997 49
Newport Steel Corporation April 15, 1999 557
Koppel Steel Corporation August 31, 1999 537
</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-
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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.
<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 55 acres of real estate upon which
is located a tubular processing facility and barge facility.
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
Kalamazoo, Michigan Cincinnati, Ohio, five acres of property in Kalamazoo, Michigan,
Lynchburg, Virginia and 1.5 acres of property in Lynchburg, Virginia for use in its
Nashville, Tennessee adhesives operations. 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, which is held
as investment property and is listed for sale. The Company also
owns approximately 85 acres of additional real estate which is
currently not used in operations.
</TABLE>
63
<PAGE> 66
LEGAL PROCEEDINGS
In March 1995, Koppel entered into a Consent Order with the EPA. See "Risk
Factors -- Cost of Compliance with Environmental Regulations" and
"-- Environmental Matters."
The Company is subject to various 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,
individually or in the aggregate, to which the Company is currently a party will
not have a material adverse effect on its consolidated financial position,
results of operations or cash flows.
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<PAGE> 67
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<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..................... 54 Director and Vice President; President of
Newport
John R. Parker..................... 51 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 President 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. Mr. Lally is also
Chairman of the Board and Chief Executive Officer of LB Steel Plate Company, a
steel plate processer and distributor.
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 since its inception. He held
the position of Secretary of the Company from November 1989 until February 1995
and the position of President of Newport since 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.
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<PAGE> 68
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 and
Vice President since February 1995. 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 and
Secretary since February 1995. 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.
SUMMARY COMPENSATION TABLE
<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 $31,750
President and Chief 1993 315,921 0 (2) 15,000 16,648(3)
Executive Officer 1992 310,000 0 0
Ronald R. Noel 1994 $188,951 $ 0 (2) 13,420 $ 8,643(3)
Vice President, Secretary and 1993 181,328 0 (2) 9,750 14,537(3)
Chief Administrative Officer; 1992 178,000 0 0
President of Newport
John R. Parker 1994 $173,863 $ 0 (2) 13,420 $15,647(3)
Vice President, Treasurer and 1993 166,022 0 (2) 9,750 7,131(3)
Chief Financial Officer 1992 163,000 0 0
</TABLE>
66
<PAGE> 69
- ---------------
(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.
(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.
The following tables present certain information concerning stock
options/SARs granted to and exercised by the executive officers of the Company
during fiscal 1994. In addition, on May 25, 1995, the Board of Directors
approved the 1995 Stock Option and Stock Appreciation Rights Plan, subject to
shareholder approval at the Company's next annual meeting to be held in February
1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
PERCENT OF AT ASSUMED ANNUAL
TOTAL RATES
OPTIONS/SARS OF STOCK PRICE
GRANTED TO APPRECIATION
EMPLOYEES IN MARKET PRICE FOR OPTION 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
</TABLE>
- ---------------
(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.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF SHARES FOR TOTAL VALUE OF UNEXERCISED,
WHICH UNEXERCISED IN-THE-MONEY OPTIONS/SARS
NUMBER OF OPTIONS/SARS HELD AT HELD AT SEPTEMBER 24, 1994(1)
SHARES SEPTEMBER 24, 1994
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
</TABLE>
- ---------------
(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.
67
<PAGE> 70
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of May 31, 1995 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.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME SHARES OWNED OF CLASS
- -------------------------------------------------------------- ------------ ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Clifford R. Borland(1)........................................ 2,898,200(2) 21.0
Ronald R. Noel(1)............................................. 1,148,952(2) 8.3
John B. Lally(1).............................................. 677,545(3) 4.9
John R. Parker................................................ 150,470(2)(4) 1.1
Patrick J.B. Donnelly......................................... 99,375(5) .7
R. Glen Mayfield.............................................. 116,695 .8
All Directors and Executive
Officers as a group
(6 persons)................................................... 5,091,237(2) 36.8
OTHER 5% SHAREHOLDERS:
State of Wisconsin Investment Board(1)........................ 1,315,400 9.6
Pioneering Management Corporation(1).......................... 977,600 7.1
General Electric Capital Corporation(1)....................... 772,481(6) 5.3
PMAC, Ltd. and certain other parties(7)....................... 1,705,881 11.0
</TABLE>
- ---------------
(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 1207 East
143rd Street, East Chicago, Indiana 46312. 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 share ownership information for State of
Wisconsin Investment Board and Pioneering Management Corporation was derived
from Vicers Corporation Institutional Ownership Report. 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 May 31, 1995 by Mr. Borland (25,200), Mr. Noel (19,400),
Mr. Parker (20,400) and all Directors and executive officers as a group
(65,000) pursuant to the Company's Non-Qualified Stock Option and Stock
Appreciation Rights Plan of 1988 and (b) owned by Mr. Noel (1,102) and all
Directors and executive officers as a group (1,102) 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 65,000 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 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
68
<PAGE> 71
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.
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 $8.0 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%.
DESCRIPTION OF UNITS
Each Unit offered hereby consists of $1,000 principal amount of Senior
Secured Notes and
Warrants, each to purchase one share of Common Stock. The Senior Secured Notes
and the Warrants will not be separately transferable until on or after ,
1995 or such earlier date as the Underwriters may designate to the Company (the
"Separation Date"). The Warrants will be exercisable on or after the date 180
days after the issuance of the Units (the "Exercise Date"). Notwithstanding the
foregoing, in the event that the Company is required to make either an Asset
Sale Offer or a Change of Control Offer (as such terms are defined under
"Description of Senior Secured Notes" below), the Separation Date will be the
date the Company mails the required notice thereof to the Holders. Prior to
separation, the Units will be physically represented by Senior Secured Notes
bearing an endorsement representing beneficial ownership of the related Warrants
on deposit with The Huntington National Bank, as warrant agent (the "Warrant
Agent"), as custodian for the registered holders of the Senior Secured Notes.
Prior to separation, transfer of a Senior Secured Note will also constitute
transfer of a holder's beneficial interest in the related Warrants. On and after
the Separation Date, the registered holder of a Unit may surrender the Senior
Secured Note bearing the endorsement relating to the Warrants to the Warrant
Agent for the exchange of such Unit for a Senior Secured Note and a separately
transferable Warrant certificate (a "Warrant Certificate").
There is currently no market for the Units, the Senior Secured Notes or the
Warrants and the Company does not intend to apply for listing of the Units, the
Senior Secured Notes or the Warrants on the NYSE or any other securities
exchange or market. The Company has been advised by the Underwriters that,
subject to applicable laws and regulations, they presently intend to make a
market in the Units, Senior Secured Notes and Warrants. The Underwriters are not
obligated to do so, however, and any such market making activity may be
discontinued at any time without notice.
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<PAGE> 72
DESCRIPTION OF SENIOR SECURED NOTES
The Senior Secured Notes will be issued under an indenture (the
"Indenture"), between the Company, the Subsidiaries and Huntington National
Bank, as trustee (the "Trustee"), a copy of which has been 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 purchasers 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 the obligations under the Subsidiary 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 obligations under the
Subsidiary Guarantee will be secured by a first priority mortgage and security
interest and its Intercompany Note will be secured by a second priority mortgage
and 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 , 1996 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
70
<PAGE> 73
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>
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 .
During the first 36 months after the closing of 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
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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 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.
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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 Debt of the Company, including obligations arising under
the Company's guaranty 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 Debt 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 a pledge of Intercompany Notes
issued to the Company by Newport, Koppel and Erlanger in the approximate
respective amounts of $47.8 million, $83.6 million, and $9.8 million, 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 the
Subsidiary 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 of existing and/or future creditors of the
Subsidiaries the Subsidiary Guarantee and the liens of the Security Documents.
See "Risk Factors -- Fraudulent Conveyance Issues; Holding Company Structure."
Each Subsidiary that makes a payment or distribution under the Subsidiary
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 obligations under the Subsidiary Guarantee will be released.
SECURITY
As security for the Intercompany Notes and the Subsidiary Guarantee,
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 $7.9 million at April 1, 1995; (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 $12.0 million at April 1, 1995; (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 $0.6 million at April 1, 1995; (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 April 1, 1995; (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
April 1, 1995 of $56.0 million, $66.2 million, $1.6 million, and
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$1.8 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
Subsidiary Guarantee and a second priority security interest with respect to the
Intercompany Notes (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 the Subsidiary Guarantee. The proceeds
from the foreclosure on the Collateral would be applied to repay the
Subsidiary's obligations under the Subsidiary 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 and second
priority mortgages or deeds of trust (the "Mortgages"), subject to the Liens
permitted by the Indenture. See "-- Certain Covenants -- Limitation on Liens."
Each first priority Mortgage executed by a Subsidiary will secure all
obligations arising under the Subsidiary Guarantee, and each second priority
Mortgage executed by a Subsidiary (where applicable) will secure the obligations
arising under its Intercompany Note. Upon issuance of the Senior Secured Notes,
the Collateral Agent 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 first and second priority Liens,
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 April 1, 1995 was
approximately $147.4 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 Subsidiary Guarantee. 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
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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 Subsidiary
Guarantee 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 Notes
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 March 1995, Koppel entered into a Consent Order with 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 "Risk Factors -- 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
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 obligations, with respect to environmental permits, 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
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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 Debt 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
will 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 April 1, 1995 the outstanding balance of the loan from Dayton
to Newport was $6.8 million. The Collateral Agent, on behalf of the Holders,
Koppel and the Commonwealth of Pennsylvania, acting by and through the
Department of Commerce (the "Department"), will enter into an Agreement creating
a reciprocal easement between the Company's Koppel facilities and an idle
portion of the Koppel facilities (and related machinery, equipment and other
property) on which the Department has the mortgage. As of April 1, 1995, the
outstanding balance on the loan from the Department to Koppel was $3.7 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 interest in property to secure its obligations under its
Intercompany Note (where applicable) and its obligations under the Subsidiary
Guarantee prior to the Collateral Agent having repossessed and disposed of the
Collateral. Prior to foreclosing on the property securing an Intercompany Note
or the Subsidiary Guarantee, the Trustee must pursue payment under the relevant
Intercompany Note or the Subsidiary 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 Subsidiary Guarantee 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
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due under the Intercompany Notes and the applicable obligations under the
Subsidiary Guarantee, 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 obligations under the Subsidiary
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, 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 Company 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.
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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 or the Holders, 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 and
the guarantees executed in connection therewith; (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, (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 (c) 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 extensions, 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).
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 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 Recourse 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 Recourse Subsidiary ceasing to be a Wholly Owned Recourse
Subsidiary or any transfer of such Debt to a Person not a Wholly Owned Recourse
Subsidiary will be
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deemed an incurrence of such Debt; (iv) Debt of a Wholly Owned Recourse
Subsidiary issued to and held by the Company or any Wholly Owned Recourse
Subsidiary of the Company; provided, that any subsequent issuance or transfer of
any Capital Stock which results in such Wholly Owned Recourse Subsidiary ceasing
to be a Wholly Owned Recourse Subsidiary or any transfer of such Debt to a
Person not a Wholly Owned Recourse 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, (c) Debt which constitutes a renewal, extension or
refinancing of Debt of Subsidiaries shall be pari passu or subordinated in right
of payment to the Subsidiary Guarantee and (d) 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 Recourse 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 Recourse Subsidiary, except that any subsequent
issuance or transfer of any Capital Stock which results in any Wholly Owned
Recourse Subsidiary ceasing to be a Wholly Owned Recourse Subsidiary or any
transfer of such Preferred Stock to a Person not a Wholly Owned Recourse
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) (other than Preferred Stock which by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable) that is redeemable at the option of the holder thereof or that is
otherwise redeemable, pursuant to sinking fund obligations or otherwise, prior
to the date of redemption or maturity of the Preferred Stock or Debt being so
refunded or refinanced); provided that (a) the liquidation value of such
Preferred Stock so issued shall not exceed the principal amount 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
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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 Recourse 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 accreted 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 Recourse 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
"Restrictions 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 Recourse Subsidiaries. The
Company shall not, and shall not permit any Recourse 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
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any Debt owed to the Company or any of the Company's Recourse Subsidiaries,
(iii) make any loans or advances to the Company or any of the Company's Recourse
Subsidiaries or (iv) transfer any of its property or assets to the Company or
any of the Company's Recourse 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 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 Recourse Subsidiary pursuant to an agreement relating to any Debt
issued by such Recourse Subsidiary on or prior to the date on which such
Recourse 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 Recourse Subsidiary became a Recourse 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 Recourse Subsidiary; and (f) any restrictions with respect to a Recourse
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 Recourse 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 Recourse 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 Recourse Subsidiary in the form of cash or Cash Equivalents; and (c) 100%
of the consideration therefor is received by the Company or such Recourse
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.
Within 360 days of the date that the sum of the Net Available Cash of Asset
Sales by the Company and its Recourse Subsidiaries (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 Recourse 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 Holders; (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 Recourse 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
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may retain the unutilized Available Amount free of the Lien of the Security
Documents. The Company and its Recourse 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 covenants
restricting Asset Sales, Restricted Payments and Transactions with Affiliates,
the Company shall not, and shall not permit any of its Recourse 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
Recourse Subsidiaries, 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 Recourse 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 Recourse
Subsidiaries, or between Wholly Owned Recourse Subsidiaries; provided that upon
either (a) the transfer or other disposition by such Wholly Owned Recourse
Subsidiary of any such lease to a Person other than the Company or another
Wholly Owned Recourse 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 Recourse Subsidiary to a Person other than the Company or
another Wholly Owned Recourse 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 Recourse 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
Recourse 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 Subsidiar-
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ies, 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
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; (ii)
the 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; (iii) immediately
before and after giving effect to such transaction, no Default shall have
occurred and be continuing; (iv) 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 the first
sentence of "Limitation on Debt"; (v) 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; (vi) each Recourse Subsidiary
shall expressly confirm that its obligations under the Subsidiary Guarantee
shall apply to the obligations under the Senior Secured Notes of any successor
to the Company; and (vii) 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 Recourse 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
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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, without limitation, 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";
(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 or any of its Subsidiaries fails to comply with any covenant described
above or with any of its agreements in the Senior Secured Notes, the Indenture or
the Security Documents (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
Holders 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 or its Subsidiaries, as the case may be,
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 or its Subsidiaries, as the
case may be, 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 $2,000,000 (after the
expiration of any applicable grace period with respect thereto);
(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 Debt 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
</TABLE>
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<TABLE>
<S> <C>
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 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 all or any portion of the Subsidiary Guarantee to be in full force and
effect or the declaration of all or any portion of the Subsidiary Guarantee to be
null and void and unenforceable or the finding that all or any portion of the
Subsidiary Guarantee is invalid or the denial of any Guarantor of its liability
under the Subsidiary 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
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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.
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
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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 Subsidiary Guarantee or the
Intercompany Notes, 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 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,
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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
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 principal, premium and 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
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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.
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
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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.
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
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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
The 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 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.
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"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, or (iii) a disposition that constitutes a Restricted Payment or a Sale
and Leaseback Transaction.
"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 its
Subsidiaries 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.
"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
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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 Request" or "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.
"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
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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 Recourse 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 Recourse 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 Recourse Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Recourse Subsidiaries in
connection with such Asset Dispositions for such period (or, if the Capital
Stock of any Recourse Subsidiary is sold, the Consolidated Interest Expense for
such period directly attributable to the Debt of such Recourse Subsidiary to the
extent the Company and its continuing Recourse 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 Recourse Subsidiary (by merger or otherwise) shall have made an
Investment in any Recourse Subsidiary (or any Person which becomes a Recourse
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 Recourse Subsidiary or was merged with or into the Company
or any Recourse 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 Recourse 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
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such Person and its consolidated Recourse 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).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated 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 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 Recourse 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 Recourse Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP; provided, that (a)
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 Recourse 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 its consolidated Recourse 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 Recourse Subsidiary
of such Person or is merged into or consolidated with such Person or any of its
Recourse Subsidiaries or that Person's assets are acquired by such Person or any
of its Recourse Subsidiaries; (iii) the Net Income (if positive), or any portion
thereof, of any Recourse Subsidiary of such Person to the extent that the
declaration or payment of dividends or similar distributions by that Recourse
Subsidiary to such Person or to any other Recourse Subsidiary 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 Recourse Subsidiary, except that (A) the Company's
equity in the Net Income of any such Recourse Subsidiary for such period shall
be included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Recourse 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 Recourse 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 a transaction in connection with the accounting
treatment for a merger, combination or consolidation under the pooling of
interests method; and (vii) foreign currency translation gains and losses and
(b) the Company's equity in the Net Income of a Non-Recourse Subsidiary shall be
included up to the aggregate amount of cash actually distributed by such
Non-Recourse Subsidiary during such period to the Company or a consolidated
Recourse Subsidiary as a dividend or other distribution.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the balance sheet of such Person and its consolidated Recourse 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
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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 to be
entered into among The Bank of New York Commercial Corporation, as lender,
co-agent and ACM agent, PNC Bank 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.
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"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 Recourse Subsidiaries in accordance with GAAP for such period.
"Excluded Assets" means the stock of Kentucky Electric Steel, Inc. held on
the Issue Date by the Company or its Subsidiaries and the stock and assets of
Imperial and the NK Subsidiaries.
"Excluded Company" means any existing or future Subsidiary that does not
execute security agreements and/or mortgages 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 other
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 other 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 deposits in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The amount of any
Guarantee shall be deemed to be an amount equal to the stated or determinable
amount of the primary obligation in respect of which such Guarantee is made
(unless such Guarantee shall be expressly limited to a lesser amount, in which
case such lesser amount shall apply) or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith.
"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
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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, 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 or contingent) attributable to the seller's
indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such Asset Disposition (but excluding any
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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 either the Company, its
Subsidiaries and/or the Collateral Agent or any mortgagee or beneficiary under
the Security Documents relating to damage to, or loss or destruction of,
Collateral, together with interest earned thereon, less expenses related to the
receipt of such Net Insurance Proceeds.
"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) or (b) is directly or indirectly liable;
(ii) the holders of such Debt (other than the Company or any Recourse
Subsidiary) 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 each of 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 Recourse Subsidiary of the Company and such waiver is a legal, valid and
binding obligations of the lender that is enforceable subject to certain
exceptions enumerated in an Opinion of Counsel, 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.
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.
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"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 Hedging 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 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; (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 $1.2 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 consolidated
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
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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; (j) any interest or title of a lessor in the
property subject to any Capital Lease Obligation or operating lease; and (k)
Liens in favor of the Company or the Holders with respect to the Intercompany
Notes.
"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 to 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 Holders 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) issued in
accordance with the provisions of the Indenture; (d) the redemption or
repurchase by a Wholly-Owned Subsidiary of its Capital Stock owned by the
Company or a Wholly-Owned Recourse Subsidiary; (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 thereon; and (f) payments with respect to the Intercompany Notes.
"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,
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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.
"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
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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 WARRANTS
The Warrants will be issued under a warrant agreement (the "Warrant
Agreement") to be entered into between the Company and the Warrant Agent. The
Warrants will be subject to the terms contained in the Warrant Agreement. The
following summary, which describes certain material provisions in the Warrant
Agreement and Warrants, does not purport to be complete, and is subject to, and
is qualified in its entirety by reference to, the Warrant Agreement and
Warrants, including the definitions therein of capitalized terms not defined
herein. A copy of the proposed form of the Warrant Agreement is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
The Warrants will entitle the holders thereof, in the aggregate, to
purchase shares of Common Stock, representing approximately % of the
Company's Common Stock on a fully diluted basis on the date the Warrants are to
be issued, after giving effect to the exercise of the Warrants. Each Warrant
will entitle the holder thereof to acquire one share of Common Stock of the
Company, subject to adjustment, upon payment of the exercise price. The exercise
price will be equal to $ (the "Purchase Price"), subject to adjustment as
described below. All outstanding Warrants will terminate and become void as of
5:00 p.m., Eastern Time, on , (the "Expiration Date"). Warrants
will be exercisable at any time on or after the Exercise Date and prior to 5:00
p.m., Eastern Time, on the Expiration Date, provided, however, all Warrants will
terminate prior to the Expiration Date in the event of a Non-Surviving
Combination (as described below).
NON-SURVIVING COMBINATION
If the Company proposes to enter into a transaction that would constitute a
Non-Surviving Combination if consummated, the Company must give written notice
thereof to the holders of Warrants promptly after an agreement is reached with
respect to the Non-Surviving Combination but in no event less than 30 days prior
to the consummation thereof. As used herein, a "Non-Surviving Combination" means
any merger, consolidation, or other business combination by the Company with one
or more Persons (other than a Wholly-Owned Recourse Subsidiary of the Company)
in which the Company is not the survivor, or a sale of all or substantially all
of the assets of the Company to one or more such other Persons, if, in
connection with any of the foregoing, consideration (other than consideration
which includes Common Stock or securities convertible into, or exercisable or
exchangeable for, Common Stock or rights or options to acquire Common Stock or
such other securities) is distributed to holders of Common Stock in exchange for
all or substantially all of their equity interest in the Company.
In a Non-Surviving Combination, the surviving entity (the "Survivor") will
be obligated to distribute or pay to each holder of the Warrants, upon payment
of the Purchase Price prior to the Expiration Date, the number of shares of
stock or other securities or other property (including any cash) of the Survivor
that would have been distributable or payable on account of the Common Stock if
such holder's Warrants had been exercised immediately prior to such
Non-Surviving
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Combination (or, if applicable, the record date therefor). Following the
consummation of a Non-
Surviving Combination, the Warrants will represent only the right to receive
such shares of stock or other property from the Survivor upon payment of the
Purchase Price prior to the Expiration Date.
No transaction is presently in progress or under negotiation that would
constitute a Non-Surviving Combination.
METHOD OF EXERCISE OF WARRANTS
The Warrant Agreement will provide that Warrants may be exercised on or
after the Exercise Date by surrendering to the Warrant Agent a Warrant
Certificate signed by the registered holder indicating such holder's election to
exercise all or a portion of the Warrants evidenced by the Warrant Certificate
and payment of the Purchase Price. The Warrant Agreement will further provide
that, upon surrender of the Warrant Certificate for exercise and payment of the
Purchase Price, the Warrant Agent will deliver or cause to be delivered, to or
upon the written order of any holder, appropriate evidence of ownership of any
shares of Common Stock or other securities or property (including any money) to
which such holder is entitled, together with Warrant Certificates evidencing any
Warrants not exercised. So long as a book-entry system for the Warrants is in
effect, however, procedures for exercising Warrants will differ, as described
below under "-- Book-Entry Procedures."
Warrant Certificates will be issued in registered form only and no service
charge shall be made for registration of transfer or exchange upon surrender of
any Warrant Certificate at the office of the Warrant Agent maintained for that
purpose. The Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Warrant Certificates.
ADJUSTMENT
The number of shares of Common Stock issuable upon the exercise of each
Warrant and the Purchase Price are subject to adjustment in certain events,
including (a) a dividend or distribution on the Company's Common Stock in shares
of its Common Stock or a combination, subdivision, reorganization, or
reclassification of Common Stock, (b) the issuance of shares of Common Stock for
a consideration per share less than the market price per share at the time of
issuance, (c) the issuance of rights, warrants, or options for the purchase of
Common Stock or for the purchase of securities convertible into or exchangeable
for Common Stock where the aggregate amount of consideration (taking into
account the consideration received for the issuance of such right, warrant or
option plus any consideration to be received upon the exercise thereof and
including, in the case of a right, warrant, or option to purchase a convertible
or exchangeable security, any consideration to be received upon the eventual
conversion or exchange of such security for Common Stock) per share of Common
Stock received or receivable by the Company is less than the market price per
share at the time of issuance of such right, warrant or option, (d) the issuance
of any securities convertible into or exchangeable for Common Stock where the
aggregate amount of consideration (taking into account the consideration
received for the issuance of such convertible or exchangeable security and the
consideration to be received upon the conversion or exchange thereof) per share
of Common Stock received or receivable by the Company is less than the market
price per share of Common Stock on the date of issuance of such convertible or
exchangeable security and (e) a dividend or distribution on the Company's Common
Stock of cash, evidences of indebtedness, other securities, or other properties
or assets (other than any cash dividend which, when aggregated with all other
cash dividends paid in the year prior to the declaration of such cash dividend,
does not exceed 10% of the market price per share of Common Stock on the date of
such declaration). Notwithstanding clause (b) above, no such adjustment shall be
made with respect to shares of Common Stock issued by the Company pursuant to a
firm commitment underwritten public offering at a gross public offering price in
an amount greater than or equal to the market price per share on the date
immediately preceding the date the distribution of such shares commences less
the lesser of (i) fifty cents per share or (ii) five percent of the market price
per share on the
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date immediately preceding the date of such distribution. If the terms of any of
the Company's outstanding rights, warrants or options for the purchase of Common
Stock or securities convertible into or exchangeable for Common Stock change, in
each case where the issuance thereof caused an adjustment in terms of the
Warrants (including by way of expiration of such securities but excluding by way
of antidilution provisions thereof triggering an adjustment of the terms thereof
upon the occurrence of an event that would cause an adjustment of the terms of
the Warrants), then the Purchase Price and the number of shares of Common Stock
issuable upon the exercise of each Warrant shall be readjusted to take account
of such change. Notwithstanding the foregoing, no adjustment in the Purchase
Price or the number of shares of Common Stock issuable upon exercise of Warrants
will be required (i) until cumulative adjustment would result in an adjustment
of at least one percent in the Purchase Price, (ii) for the granting, in a
transaction which would otherwise trigger an adjustment, of any rights, warrants
or options or the issuance of any Common Stock to officers, directors, or
employees of, or consultants or advisors to, the Company where such issuances
may be registered with the Commission on Form S-8, are in the ordinary course of
business and are usual and customary, and do not, in the aggregate, exceed 10%
of the number of shares of Common Stock outstanding (assuming the exercise of
the options so granted and all rights, warrants, options and convertible
securities then outstanding), or (iii) upon the issuance of Common Stock (1)
pursuant to any dividend reinvestment plan where the purchase price of Common
Stock thereunder is no less than 95% of the market price on the date of issuance
or (2) upon conversion or exercise of any convertible securities, options or
warrants.
The Company has authorized and reserved for issuance such number of shares
of Common Stock as shall be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when issued, will be duly and validly
issued and fully paid and nonassessable.
No fractional shares will be issued upon exercise of Warrants, but the
Company will pay an amount in cash equal to the current market value of any
fractional share otherwise issuable.
NO RIGHTS AS SHAREHOLDERS
Holders of Warrants are not entitled, by virtue of being such holders, to
receive dividends or subscription rights, vote, consent, exercise any preemptive
right, or receive notice as shareholders of the Company in respect of any
meeting of shareholders for the election of directors of the Company or any
other matter, or exercise any other rights whatsoever as shareholders of the
Company.
REPORTS TO HOLDERS OF WARRANTS
The Company shall deliver to the Warrant Agent, within 15 days after it
files them with the Commission, and make available to any holder of Warrants
upon request, copies of its annual and other reports (or copies of such portions
thereof as the Commission may by rules and regulations prescribe) which the
Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. If the Company is no longer required to comply with the
reporting requirements of Section 13 or 15(d) of the Exchange Act, it shall
continue to file with the Commission and provide the Warrant Agent, within 15
days after it would have been required to file the same with the Commission, and
shall make available to any holder of Warrants upon request, reports containing
substantially the same information as would have been required to be filed with
the Commission had the Company continued to have been subject to such reporting
requirements.
AMENDMENTS
The Warrant Agreement will provide that the Company may, without the
consent of the holders of the Warrants, make any changes in the Warrant
Agreement (a) to cure any ambiguity or to correct or supplement any provision
therein which may be defective or inconsistent with any other provision therein,
(b) to add to the covenants and agreements of the Company for the benefit of the
holders of Warrants, or surrender any rights or power reserved to or conferred
upon the Company in the Warrant Agreement or (c) that do not adversely affect
the interests of the holders of Warrants in any material respect.
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REGISTRATION
The Warrant Agreement will obligate the Company, on or before the
Separation Date, to have effective a registration statement that includes a
prospectus relating to the Warrant Shares, to make filings under applicable
state securities laws and to keep such registrations effective until expiration
of all the Warrants.
BOOK-ENTRY PROCEDURES
The Depositary will act also as securities depository for the Warrants. On
the Separation Date, one global certificate representing the entire issue of
Warrants will be issued and registered in the name of Cede & Co. and such global
certificate will be deposited with the Depositary or its custodian.
Purchases of, and transfers of beneficial ownership interests in, Warrants
will be effected through the Depositary system in the same manner as for the
Senior Secured Notes, except that prior to the Separation Date, any transfer of
beneficial ownership interests in a Senior Secured Note will also constitute
transfer of the beneficial ownership interests in the related Warrants. See
"Description of Senior Secured Notes -- Book-Entry, Delivery and Form."
Beneficial owners will not receive certificates representing their ownership
interests in Warrants except in the event that use of the book-entry system for
the Warrants is discontinued. The Depositary has no knowledge of the actual
beneficial owners of the Warrants; the Depositary's records reflect only the
identity of the participants to whose accounts such Warrants are credited, which
may or may not be the beneficial owners. Participants in the Depositary's system
will remain responsible for keeping account of their holdings on behalf of their
customers.
Because the Depositary can act only on behalf of direct participants, who
in turn act on behalf of indirect participants, the ability of a holder of
Warrants to pledge Warrants to persons or entities that do not participate in
the Depositary's system, or otherwise to act with respect to such Warrants may
be limited due to the lack of a physical certificate for such Warrants.
Conveyance of notices and other communications by the Depositary to
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
any Warrants. Under its usual procedures, the Depositary mails an Omnibus Proxy
to the Company as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those participants to whose
accounts the Warrants are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
In order to exercise a Warrant, the beneficial owner of the Warrant shall
give notice to elect to exercise such Warrant, through its direct or indirect
participant, to the Warrant Agent, and shall effect delivery of the Warrant
Certificate evidencing such Warrant by causing the direct participant to
transfer its interest in such Warrant on the Depositary's records, to the
Warrant Agent. The requirement for physical delivery of Warrant Certificates in
connection with an exercise request will be deemed satisfied when the ownership
rights in the Warrants are transferred by direct participants on the
Depositary's records.
The Depositary may discontinue providing its services as securities
depository with respect to the Warrants at any time by giving reasonable notice
to the Company. The Company may decide to discontinue use of the system of
book-entry transfers through the Depositary (or a successor securities
depository). Under such circumstances, in the event that a successor securities
depository is not obtained, or if the Depositary (or its successor) ceases to be
a clearing agency registered under the Exchange Act, Warrant Certificates will
be printed and delivered.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, no par value, and 2,000,000 shares of Class A Preferred Stock, par
value $10 per share (the "Preferred Stock"). Four hundred thousand shares of the
Preferred Stock have been designated as Series A Junior Participating Preferred
Stock, par value $10 per share (the "Series A Preferred Stock") in connection
with the Company's Shareholder Protection Rights Plan (the "Rights Plan")
discussed below. The following statements are brief summaries of certain
provisions relating to the capital stock of the Company. Such summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the Company's Restated Articles of Incorporation (the "Articles")
and By-laws and the Preferred Stock Purchase Rights Agreement referred to
herein, including the definition therein of certain terms, a copy of each of
which is filed with the Commission. See "Available Information."
COMMON STOCK
Subject to the prior rights of any outstanding shares of the Company's
Preferred Stock or Series A Preferred Stock, the holders of the Common Stock are
entitled to receive dividends as and when declared by the Board of Directors out
of funds legally available for dividends, and, in the event of liquidation,
dissolution or winding up of the Company, to share ratably in all assets
remaining after payment of liabilities. The holders of the Common Stock are
entitled to vote cumulatively in the election of directors and are entitled to
one vote for each share of Common Stock held of record on all other matters
subject to a vote of the shareholders. The holders of Common Stock have no
pre-emptive rights or conversion rights and are not subject to further calls or
assessments by the Company. There are no redemption or sinking fund provisions
applicable to the Common Stock. The Common Stock currently outstanding is fully
paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue the Preferred Stock in one or more
series. No shares of Preferred Stock are presently outstanding, and no shares of
Preferred Stock have been designated as a series except for the Series A
Preferred Stock. The Board of Directors is authorized, without any further
action by the Shareholders, to determine the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences, sinking fund terms and other rights, preferences, privileges and
restrictions of any additional series of Preferred Stock, the number of shares
constituting any such series, and the designation thereof. The Board of
Directors may, without shareholder approval, issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares are available for future issuance
without stockholder approval. These additional shares may be utilized for a
variety of proper corporate purposes, including future public offerings to raise
additional capital, to facilitate corporate acquisitions and for employee
benefit plans.
One of the effects of the existence of unissued and unreserved Preferred
and Common Stock may be to enable the Board of Directors to issue shares to
persons friendly to current management which could render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
the Company's management. Issuance of Preferred Stock might, under certain
circumstances, deter the acquisition of the Company or its securities by a
person concerned about the terms or effect of such stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sale of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. At May 31, 1995, the Company
had issued and outstanding 13,803,684 shares of Common Stock. Upon exercise of
currently exercisable options, warrants and convertible securities (exclusive of
the Warrants), there would be 16,960,630 shares outstanding as of such date. Of
this total, 678,465 represent shares of Common Stock underlying options, 772,481
represent shares of Common Stock underlying warrants (exercisable at a price of
$8 per share) and 1,706,000 represent shares of Common Stock underlying the
Company's 11% Subordinated Convertible Debentures (convertible at a price of $17
per share). See Footnotes 5 and 8 to the Consolidated Financial Statements. The
warrants and the convertible debentures contain anti-dilution provisions and the
holders have been granted certain registration rights. As of May 31, 1995, all
directors and officers of the Company, as a group, beneficially owned
approximately 36.8% of the Common Stock, and therefore these shares may be
"restricted securities" within the meaning of Rule 144 under the Securities Act.
CLASSIFIED BOARD OF DIRECTORS
The Articles provide 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 of office of each class ending in successive years.
LIMITATIONS ON DIRECTORS' LIABILITY
The Articles provide that no director shall be personally liable to the
Company or its shareholders for monetary damages for breach of his duties as a
director; provided, however, that a director's liability shall not be eliminated
or limited for (i) any transaction in which the director's personal financial
interest is in conflict with the financial interest of the Company or its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or are known to the director to be a violation of law;
(iii) acts which violate Section 271B.8-330 of the Kentucky Business Corporation
Act (regarding unlawful distributions) or (iv) any transaction from which the
director derived an improper personal benefit.
PREFERRED STOCK PURCHASE RIGHTS PLAN
In November 1988, the Board of Directors declared a dividend distribution
of one right (a "Right") for each outstanding share of Common Stock of the
Company. The dividend distribution was payable on November 30, 1988 to the
stockholders of record at the close of business on that date. In addition, the
Board of Directors authorized and directed the issuance of one Right (subject to
adjustment) with respect to each share of Common Stock that becomes outstanding
prior to the earlier of the Distribution Date, as defined below, and the
redemption, exchange or expiration of the Rights.
The Rights Plan provides that until the Distribution Date (or earlier
redemption, exchange or expiration of the Rights) the Rights will be evidenced
only by certificates for, and will be transferred automatically with, the
Company's Common Stock. Each Right entitles the holder to purchase from the
Company under certain circumstances one one-hundredth of a share of the Series A
Preferred Stock at an exercise price of $40 per one one-hundredth of a share,
subject to anti-dilution adjustments. Each one one-hundredth of a share of the
Series A Preferred Stock is designed to approximate the value of one share of
Common Stock. The Rights will become exercisable, and will trade separately from
the Common Stock, on the earlier of (i) 10 days after public announcement, or
the Company has notice, that a person or a group (other than subsidiaries,
employee benefit plans or certain existing shareholders) (an "acquiring person
or group") has become the beneficial owner of 30% or more of the outstanding
Common Stock of the Company, or (ii) 10 days after the commencement of a tender
or exchange offer for 30% or more of the outstanding Common Stock, in either
such case without the prior written consent of the Board of Directors
("Distribution Date").
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After the Distribution Date, separate certificates for Rights will be mailed to
holders of Common Stock of record on the Distribution Date.
If an acquiring person or group acquires 30% or more of the Common Stock,
holders of Rights (other than the acquiring person or group) may purchase from
the Company, at the Right's then exercise price, Common Stock of the Company
having a value at that time of twice such exercise price. Further, at any time
after an acquiring person or group acquires 30% or more (but less than 50%) of
the outstanding Common Stock, the Board may, at its option, exchange the Rights
(other than Rights held by the acquiring person or group), in whole or in part,
at an exchange ratio of one share of Common Stock (or one one-hundredth of a
share of the Preferred Stock) per Right, subject to anti-dilution adjustments.
In addition, in the event that the Company is acquired in a merger, sale of
assets or similar transaction after the Rights become exercisable, holders of
Rights may purchase, at the then exercise price, common stock of the acquiring
entity having a value equal to twice such exercise price.
Prior to the acquisition by an acquiring person or group of beneficial
ownership of 30% or more of the Company's Common Stock, the Rights are
redeemable for one cent per Right at the option of the Board of Directors.
The Board of Directors is authorized to reduce the 30% thresholds referred
to above to not less than 15% or the amount owned by any acquiring person or
group.
If not earlier redeemed or exchanged, the Rights will expire on November
17, 1998.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on redemption of the Rights or on substantially
all of the Rights also being acquired. The Rights should not, however, interfere
with any merger or other business combination approved by the Board of Directors
since the Rights may be redeemed by the Company as described above.
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 has been 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"), the Company and its Subsidiaries that
are not Borrowers will enter into a Revolving Credit, Guaranty 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 guaranty 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 minus
reserves deemed proper and necessary by BNYCC (including reserves for certain
environmental matters). 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. An aggregate amount of $6 million will be available for the
issuance of Letters of Credit under the Credit Facility for the benefit of
Newport and Koppel, to the extent that availability exists under the Credit
Facility. The initial term of the Credit
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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 or (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.
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 twelve month period ended April 1, 1995, the
interest coverage ratio was 1.65 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 April 1, 1995,
the Company had a net worth of approximately $76.4 million. The Company
currently would be, and will be upon completion of the Offering, in compliance
with all covenants under 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 (except that the Company and its Subsidiaries
may merge with each other under certain conditions) 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 excluding obligations
arising under the Credit Facility. After giving effect to the Offering and the
application of certain cash balances of the Company to the payment of debt, as
of April 1, 1995, the Company would have had $67.6 million in working capital
and minimal term debt amortization requirements over the next five years. In
addition, the Credit Facility will restrict
110
<PAGE> 113
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 which are not
stayed or lifted within 30 days or entry of judgment (over a threshold level)
which is not satisfied, stayed or discharged of record within 40 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 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 ACM 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 is a summary of certain federal income tax consequences
associated with the ownership of the Senior Secured Notes and the Warrants by
holders who acquire the Units as of the date hereof. Except where noted, it
deals only with Units held as capital assets held by United States holders (as
defined below) and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, life insurance
companies, persons holding Units, Senior Secured Notes or Warrants as 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
(the "Code"), 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.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF UNITS, SENIOR
SECURED NOTES OR WARRANTS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FEDERAL INCOME TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
This discussion only addresses the treatment of United States holders,
including a citizen or resident of the United States, a corporation, a
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.
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<PAGE> 114
ALLOCATION OF ISSUE PRICE BETWEEN SENIOR SECURED NOTES AND WARRANTS
Each Unit is comprised of $1,000 principal amount Senior Secured Notes and
Warrants. Consequently, the issue price of a Unit must be allocated
between the Senior Secured Notes and the Warrants. Under the Treasury
regulations relating to "original issue discount" ("OID"), the "issue price" of
a Senior Secured Note will equal the first price at which a substantial number
of Units is sold for money, excluding sales to underwriters, placement agents or
wholesalers, less the amount allocable to the Warrants (based on the
relationship of the fair market value of each of the Senior Secured Notes and
the Warrants to the fair market value of the Senior Secured Note and Warrants
taken together as a Unit). The Company will allocate $ to each $
principal amount at maturity of Senior Secured Notes and $ to each
Warrant. The Company's allocation reflects its judgment as to the relative
values of those instruments at the time of issuance, but is not binding on the
Internal Revenue Service (the "IRS").
The Company's allocation of the issue price of the Units will be binding on
holders of the instruments, unless a holder discloses the use of a different
allocation on its federal income tax return for the year including the
acquisition date of such Unit. If a holder acquires a Unit at a price different
from that on which the Company's allocation is based, such holder may be treated
as having acquired its Senior Secured Notes for an amount greater or less than
the amount allocated to such Senior Secured Notes by the Company as set forth
above, thereby resulting in OID, "acquisition premium" or "market discount," as
defined below. United States Holders considering the use of an issue price
allocation different from that used by the Company should consult their tax
advisor as to the consequences thereof.
ORIGINAL ISSUE DISCOUNT
The issuance of the Senior Secured Notes will result in OID in an amount
equal to the excess of the stated redemption price at maturity over the issue
price of such Senior Secured Notes (as discussed above.)
Under the OID regulations, Senior Secured Notes with an "issue price" that
is less than its stated redemption price at maturity (the sum of all payments to
be made on the Senior Secured Notes other than "qualified stated interest") will
be issued with original issue discount if such difference is at least 0.25
percent of the stated redemption price at maturity multiplied by the number of
complete years to maturity. The term "qualified stated interest" means stated
interest that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate or, subject
to certain conditions, based on one or more interest indices. Interest is
payable at a single fixed rate only if the rate appropriately takes into account
the length of the interval between payments.
Holders of Senior Secured Notes with a maturity upon issuance of more than
one year must, in general, include OID in income in advance of the receipt of
some or all of the related cash payments. The amount of OID includible in income
by an initial holder of Senior Secured Notes is the sum of the "daily portions"
of OID with respect to such Senior Secured Notes for each day during the taxable
year or portion of the taxable year in which such holder held such Senior
Secured Notes ("accrued OID"). The daily portion is determined by allocating to
each day in any "accrual period" a pro rata portion of the OID allocable to that
accrual period. The "accrual period" for the Senior Secured Notes may be of any
length and may vary in length over the term of the Senior Secured Notes,
provided that each accrual period is no longer than one year and each scheduled
payment of principal or interest occurs on the first day or the final day of an
accrual period. The amount of OID allocable to any accrual period is an amount
equal to the excess, if any, of (a) the product of the Senior Secured Notes'
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period) over (b) the
sum of any qualified stated interest allocable to the accrual period. OID
allocable to a final accrual period is the difference between the amount payable
at maturity (other than a payment of qualified stated interest) and the adjusted
112
<PAGE> 115
issue price at the beginning of the final accrual period. Special rules will
apply for calculating OID for an initial short accrual period. The "adjusted
issue price" of the Senior Secured Notes at the beginning of any accrual period
is equal to its issue price increased by the accrued OID for each prior accrual
period (determined without regard to the amortization of any acquisition or bond
premium, as described below) and reduced by any payments made on such Senior
Secured Notes (other than qualified stated interest) on or before the first day
of the accrual period. Under these rules, a holder will have to include in
income increasingly greater amounts of OID in successive accrual periods. The
Company is required to provide information returns stating the amount of OID
accrued on Senior Secured Notes held of record by persons other than
corporations and other exempt holders.
Holders of any Senior Secured Notes may elect to treat all interest on any
Notes as OID and calculate the amount includible in gross income under the
constant yield method described above. For the purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount and unstated interest, as adjusted
by any amortizable bond premium or acquisition premium. The election is to be
made for the taxable year in which the holder acquired Senior Secured Notes, and
may not be revoked without the consent of the Internal Revenue Service (the
"IRS"). Holders should consult with their own tax advisors about this election.
MARKET DISCOUNT
If a holder purchases Senior Secured Notes for an amount that is less than
the adjusted issue price for such Senior Secured Notes, 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 holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of,
Senior Secured Notes as ordinary income to the extent of the market discount
which has not previously been included in income and is treated as having
accrued on such Senior Secured Notes at the time of such payment or disposition.
In addition, a holder may be required to defer, until the maturity of the Senior
Secured Notes or its earlier disposition in a taxable transaction, the deduction
of all or a portion of the interest expense on any indebtedness incurred or
continued to purchase or carry such Senior Secured Notes.
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 Notes,
unless the United States Holder elects to accrue on a constant interest method.
A holder of Senior Secured Notes 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 IRS.
ACQUISITION PREMIUM
A holder that purchases Senior Secured Notes for an amount that is greater
than the adjusted issue price of the Senior Secured Notes but equal to or less
than the sum of all amounts payable on the Senior Secured Notes after the
purchase date other than payments of qualified stated interest will be
considered to have purchased such Senior Secured Notes at an "acquisition
premium." Under the acquisition premium rules, the amount of OID which such
holder must include in its gross income with respect to such Senior Secured
Notes for any taxable year will be reduced by the portion of such acquisition
premium properly allocable to such year.
113
<PAGE> 116
SALE, EXCHANGE AND RETIREMENT OF SENIOR SECURED NOTES
A holder's tax basis in Senior Secured Notes will, in general, be the
holder's cost therefor, increased by OID and reduced by any amortized premium
and any cash payments on the Senior Secured Notes other than qualified stated
interest. Upon the sale, exchange or retirement of a Senior Secured Notes, a
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 Notes. Except as 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 Notes have
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.
SALE OR OTHER TAXABLE DISPOSITION OF WARRANTS
The sale or other taxable disposition of a Warrant will result in the
recognition of gain or loss to the holder in an amount equal to the difference
between (a) the amount of cash and fair market value of property received in
exchange therefor and (b) the holder's adjusted tax basis in the Warrant, which
will equal the amount of the issue price of the Units that is properly allocable
to the Warrant as described above. Any gain or loss from the sale or other
disposition of a Warrant will be a capital gain or loss if the Warrant is held
as a capital asset within the meaning of Section 1221 of the Code. Any such
capital gain or loss will be long-term capital gain or loss if the Warrant is
held for more than one year and otherwise will be a short-term gain or loss.
Under Section 305 of the Code, adjustments to the exercise price of the
Warrants which occur under certain circumstances, or the failure to make such
adjustments, may result in a deemed dividend to holders of Common Stock, which
will be taxable to holders to the same extent as would an actual dividend.
Upon expiration of a Warrant, a holder will recognize a loss equal to such
holder's adjusted tax basis in the Warrant. If the Common Stock issuable upon
exercise of the Warrant would have been a capital asset of the holder if
acquired by the holder, such loss will be a capital loss.
EXERCISE OF WARRANT, COMMON STOCK DISPOSITION AND DIVIDENDS
As a general rule, no gain or loss will be recognized to a holder upon the
exercise of a Warrant (except to the extent of cash, if any, received in lieu of
the issuance of fractional shares of Common Stock). The tax basis of a share of
Common Stock so acquired will be equal to the sum of the holder's adjusted tax
basis in the exercised Warrant and the exercise price, but the holding period of
such share will not include the holding period of the Warrant exercised.
Instead, the holding period of each share of Common Stock acquired upon exercise
of a Warrant will commence upon the date of exercise. Any gain or loss
recognized by a holder upon the sale of a share of Common Stock will generally
constitute a long-term capital gain or loss if the share is held for more than
one year, and otherwise will be a short-term capital loss. If any cash is
received in lieu of the issuance of fractional shares of Common Stock, the
holder will recognize gain or loss the amount and character of which will be
determined as if the holder had received such fractional shares and then
immediately sold them for cash.
Cash dividends paid with respect to shares of Common Stock will be included
in the gross income of the holder as ordinary income to the extent paid out of
the Company's current or accumulated earnings and profits, as determined under
the Code. Distributions which exceed the earnings and profits of the Company are
treated as a non-taxable return of capital to the extent of the holder's tax
basis in such Common Stock (reducing the holders remaining basis in such shares)
and, with respect to any distributions in excess of such basis, as taxable
capital gain.
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<PAGE> 117
Cash dividends are generally eligible for the dividends received deduction
allowed to corporations under the Code, subject to the restrictions of Sections
246 and 1059 of the Code relating to limitations on the dividends received
deduction and extraordinary dividends, respectively. Corporate holders of Senior
Secured Notes should consult with their own tax advisors as to the applicability
of the dividends received deduction.
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 amounts of the Units:
<TABLE>
<CAPTION>
UNDERWRITERS UNITS
------------------------------------------------------------------- ---------------
<S> <C>
Chemical Securities Inc............................................
CS First Boston Corporation........................................
---------------
Total......................................................... 125,000
===============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Units offered hereby
if any of the Units are purchased. The Company has been advised by the
Underwriters that they propose initially to offer the Units 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 Units. The Underwriters may allow, and such dealers may
reallow, a concession to certain other dealers not in excess of % of the
principal amount of the Units. After the initial public offering, the public
offering price, discount and concession may be changed.
The Units, the Senior Secured Notes and the Warrants comprise new issues of
securities with no established trading market. The Company does not intend to
apply for listing of the Units, the Senior Secured Notes and the Warrants on a
national securities exchange, but has been advised by the Underwriters that the
Underwriters intend to make a market in the Units, the Senior Secured Notes and
the Warrants, as permitted by applicable laws and regulations. No assurance can
be given, however, that the Underwriters will make a market in the Units, the
Senior Secured Notes and the Warrants or as to the liquidity of, or the trading
market for, the Units, the Senior Secured Notes and the Warrants.
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 Units, the Senior Secured Notes and the Warrants and
the Guarantees will be passed upon for the Company and the Subsidiaries by Bryan
Cave, LLP, St. Louis, Missouri. Certain legal matters related to the Offering
will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a
partnership which includes professional corporations), New York, New York.
Certain
115
<PAGE> 118
other legal matters will be passed upon for the Company by Kepley, MacConnell &
Eyrich, Cincinnati, Ohio; Eckert, Seamans, Cherin & Mellott, Pittsburgh,
Pennsylvania; Brown, Sims, Wise & White, Houston, Texas; and Huffman, Arrington,
Kihle, Gaberino & Dunn, Tulsa, Oklahoma.
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.
116
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117
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118
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NS GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I. CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED 1994, 1993 AND 1992
Report of Independent Public Accountants......................................... F-2
Consolidated Balance Sheets as of September 24, 1994 and September 25, 1993...... F-3
Consolidated Statements of Operations 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
II. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTERS ENDED APRIL 1, 1995
AND MARCH 26, 1994 (UNAUDITED)
Condensed Consolidated Balance Sheets............................................ F-19
Condensed Consolidated Statements of Operations.................................. F-20
Condensed Consolidated Statements of Cash Flows.................................. F-21
Notes to Condensed Consolidated Financial Statements............................. F-22
</TABLE>
F-1
<PAGE> 122
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 operations,
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> 123
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 24, 1994 AND SEPTEMBER 25, 1993
(Dollars in thousands)
<TABLE>
<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
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 124
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26,
1992
(Dollars in thousands, except per share amounts)
<TABLE>
<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
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 125
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)
<TABLE>
<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
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 126
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)
<TABLE>
<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
========== ======= ====== ===== ======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 127
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.
Other investments consist of marketable equity securities and are classified as
"Other Assets" in the accompanying consolidated balance sheets. 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, the Company's investment in a
marketable equity security is classified as "available for sale" and is recorded
at current market value with an offsetting adjustment to common shareholders'
equity; all short-term investments are classified as "trading securities" and
are recorded at current market value, with unrealized gains and losses included
in results of operations. The impact on the Company's consolidated financial
statements from the adoption of Statement 115 was not material.
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):
<TABLE>
<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
F-7
<PAGE> 128
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-8
<PAGE> 129
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, held as investment property and listed for
sale. At September 24, 1994, other assets also include a marketable equity
security with a carrying value of $4,600,000 and a cost basis of $4,800,000.
NOTE 4: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
<TABLE>
<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>
NOTE 5: LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt of the Company consists of the following (in thousands of
dollars):
<TABLE>
<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
F-9
<PAGE> 130
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-10
<PAGE> 131
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
A summary of transactions in the plans for fiscal 1994 and 1993 follows:
<TABLE>
<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. Compensation expense is recorded by the
Company for grants of options with an exercise price less than the market price
of the common stock at the date of grant.
F-11
<PAGE> 132
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of transactions in the plan for fiscal 1994 and 1993 follows:
<TABLE>
<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 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 consolidated financial position,
results of operations or cash flows. The ultimate effect of those matters,
however, individually or in the aggregate, on the Company's consolidated results
of operations and cash flows may be materially impacted by the amount and timing
of charges to operations as well as the amount and timing of cash flow
requirements resulting from new information as it becomes available.
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.
F-12
<PAGE> 133
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The occurrences of the accidental melting of radioactive materials, as
discussed in Note 10, 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 gross reserves of $4,354,000 for disposal costs pertaining to these
incidents are adequate.
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, 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.
As of September 24, 1994, the Company had environmental remediation
reserves of $4,563,000, of which $4,354,000 pertain to accrued disposal costs
for radiation contaminated baghouse dust. As of September 24, 1994, the possible
range of estimated losses related to the environmental contingency matters
discussed above in excess of those accrued by the Company is $0 to $3,000,000;
however, with respect to the proposed Consent Agreement matter, the Company
cannot estimate the possible range of losses should the Company ultimately not
be indemnified. Based upon its evaluation of available information, management
does not believe that any of the environmental contingency matters discussed
above are likely, individually or in the aggregate, to have a material adverse
effect upon the Company's consolidated financial position, results of
F-13
<PAGE> 134
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations or cash flows. However, the Company cannot predict with certainty
that new information or developments with respect to the proposed Consent
Agreement or its other environmental contingency matters, individually or in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
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 incurred capital expenditures to install additional state-of-the-art
radiation 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, with respect to the 1993 incident, a $2,302,000 receivable
relating to insurance claims for the recovery of disposal costs which will be
filed with the Company's insurance company at the time such disposal costs are
incurred. 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.
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 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.
F-14
<PAGE> 135
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<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>
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):
<TABLE>
<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 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>
F-15
<PAGE> 136
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The components of the credit for deferred income taxes for fiscal 1993 and
1992 are as follows (in thousands of dollars):
<TABLE>
<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.
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):
F-16
<PAGE> 137
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<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 alloca-
tions........................ -- (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 alloca-
tions........................ -- (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 alloca-
tions........................ -- (2,483) 36,757 -- --
-------- -------- -------- -------- --------
Total consolidated........ $281,242 $ 1,401 $319,079 $ 18,711 $ 4,148
======== ======== ======== ======== ========
</TABLE>
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations for 1994 and 1993 are as follows (in
thousands of dollars, except per share amounts):
<TABLE>
<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 extraordi-
nary item...................................... (.25) (.16) -- (.03)
Net income (loss) per common share............... (.25) (.16) -- (.11)
</TABLE>
F-17
<PAGE> 138
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 Statement No. 109, which increased net
income by $1,715,000.
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.
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.
NOTE 17: SUMMARIZED FINANCIAL INFORMATION
The Senior Secured Notes that the Company is proposing to offer for sale
will be guaranteed in full by each of the Company's subsidiaries (Subsidiary
Guarantors), each of which is wholly-owned. Full financial statements of the
Subsidiary Guarantors are not presented because they are not deemed material to
investors. The following is summarized financial information of the Subsidiary
Guarantors as of September 24, 1994 and September 25, 1993 and for each of the
three years in the period ended September 24, 1994. All significant intercompany
accounts and transactions between the Subsidiary Guarantors have been
eliminated.
<TABLE>
<CAPTION>
September 24 September 25
1994 1993
------------- -------------
<S> <C> <C>
Current assets............................................ $ 125,108 $ 112,660
Noncurrent assets......................................... 176,895 188,890
Current liabilities....................................... 88,230 86,542
Payable to parent......................................... $ 31,327 $ 30,587
Other noncurrent liabilities.............................. 102,893 121,270
------------- -------------
Total noncurrent liabilities............................ $ 134,220 $ 151,857
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net sales.............................................. $ 303,380 $ 353,082 $ 281,242
Gross profit........................................... 25,219 42,496 31,053
Income (loss) before extraordinary items and cumulative
effect of a change in accounting principle........... 14,689 (1,363) (8,976)
Net income (loss)...................................... 14,689 (2,458) (11,518)
</TABLE>
F-18
<PAGE> 139
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 1, 1995 AND SEPTEMBER 24, 1994
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 1, September 24,
1995 1994
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 1,350 $ 4,405
Short-term investments.................................. 20,082 40,071
Accounts receivable, less allowance for doubtful
accounts of $503 and $637, respectively.............. 49,050 42,651
Inventories............................................. 45,624 32,290
Other current assets.................................... 19,647 16,793
------------ -------------
Total current assets................................. 135,753 136,210
------------ -------------
PROPERTY, PLANT AND EQUIPMENT--AT COST.................... 270,038 262,721
Less - accumulated depreciation......................... (111,569) (102,182)
------------ -------------
158,469 160,539
------------ -------------
OTHER ASSETS.............................................. 18,391 18,578
------------ -------------
Total assets......................................... $312,613 $ 315,327
============== ==============
CURRENT LIABILITIES
Notes payable........................................... $ 29,913 $ 28,872
Accounts payable........................................ 33,454 27,312
Other current liabilities............................... 19,375 19,281
Current portion of long-term debt....................... 17,505 15,543
------------ -------------
Total current liabilities............................ 100,247 91,008
------------ -------------
LONG-TERM DEBT............................................ 126,395 138,110
------------ -------------
DEFERRED TAXES............................................ 9,607 9,745
------------ -------------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000,000 shares
authorized; 13,762,013 shares issued and
outstanding.......................................... 48,988 48,988
Common stock options and warrants....................... 291 262
Unrealized gain (loss) on available for sale
securities........................................... (775) (124)
Retained earnings....................................... 27,860 27,338
------------ -------------
Total common shareholders' equity.................... 76,364 76,464
------------ -------------
Total liabilities and shareholders' equity........... $312,613 $ 315,327
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
F-19
<PAGE> 140
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
APRIL 1, 1995 AND MARCH 26, 1994
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
April 1, March 26, April 1, March 26,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES....................................... $97,055 $66,012 $ 190,544 $137,971
COST AND EXPENSES
Cost of products sold......................... 86,910 64,181 168,909 128,349
Selling and administrative expenses........... 6,688 6,296 13,620 12,276
--------- --------- --------- ---------
Operating income (loss)....................... 3,457 (4,465) 8,015 (2,654)
OTHER INCOME (EXPENSE)
Gain on sale of subsidiary.................... -- -- -- 35,292
Interest expense.............................. (4,938) (5,068) (10,294) (10,079)
Interest income............................... 388 388 920 847
Other, net.................................... 1,819 70 2,208 623
--------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of a change in accounting
principle.................................. 726 (9,075) 849 24,029
PROVISION (CREDIT) FOR INCOME TAXES............. 279 (3,492) 327 9,586
--------- --------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle............. 447 (5,583) 522 14,443
CUMULATIVE EFFECT, AS OF SEPTEMBER 25, 1993, OF
A CHANGE IN THE METHOD OF ACCOUNTING FOR
INCOME TAXES.................................. -- -- -- 1,715
--------- --------- --------- ---------
Net income (loss)............................. $ 447 $ (5,583) $ 522 $ 16,158
========= ========== ========= ==========
PER COMMON SHARE
Income (loss) before cumulative effect of a
change in accounting principle............. $ .03 $ (.40) $ .04 $ 1.05
Cumulative effect of a change in the method of
accounting for income taxes................ -- -- -- .12
--------- --------- --------- ---------
Net income (loss).......................... $ .03 $ (.40) $ .04 $ 1.17
========= ========== ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING (000'S)..... 13,795 13,802 13,803 13,772
</TABLE>
See notes to condensed consolidated financial statements.
F-20
<PAGE> 141
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED
APRIL 1, 1995 AND MARCH 26, 1994
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
April 1, March 26,
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 522 $16,158
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization................................. 9,695 9,307
Increase (decrease) in deferred taxes......................... 261 (1,325)
Gain on sale of subsidiary.................................... -- (35,292)
(Increase) decrease in accounts receivable, net............... (6,399) 1,614
Increase in inventories....................................... (13,334) (5,988)
(Increase) decrease in other current assets................... (2,854) 4,380
Increase in accounts payable.................................. 6,142 647
Increase in accrued liabilities............................... 94 4,675
--------- ---------
Net cash flows from operating activities................. (5,873) (5,824)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiary.............................. -- 50,426
Cash dividend from sold subsidiary............................ -- 6,818
Increase in property, plant and equipment, net................ (7,317) (3,655)
Increase in other assets...................................... (324) (4,818)
(Increase) decrease in short-term investments................. 19,989 (39,761)
--------- ---------
Net cash flows from investing activities................. 12,348 9,010
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable..................................... 1,041 1,317
Proceeds from issuance of long-term debt...................... -- 431
Repayments on long-term debt.................................. (9,753) (3,683)
Increase in deferred financing costs.......................... (818) (50)
Proceeds from issuance of common stock........................ -- 682
--------- ---------
Net cash flows from financing activities................. (9,530) (1,303)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (3,055) 1,883
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................... 4,405 5,797
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 1,350 $ 7,680
========= ==========
Cash paid during the period for:
Interest...................................................... $ 12,059 $ 9,460
Income taxes.................................................. $ 724 $ 2,530
</TABLE>
See notes to condensed consolidated financial statements.
F-21
<PAGE> 142
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: PRINCIPLES OF CONSOLIDATION
The condensed 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. All significant intercompany balances
and transactions have been eliminated.
The accompanying information reflects, in the opinion of management, all
adjustments (which consist only of normal recurring adjustments) necessary to
present fairly the results for the interim periods. Reference should be made to
NS Group, Inc.'s audited annual financial statements and related notes thereto
on pages F-2 through F-18 for additional footnote disclosure, including a
summary of significant accounting policies.
In the first quarter of fiscal 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (Statement 112). The impact on the Company's financial
statements from the adoption of Statement 112 was not material.
The Company's fiscal year ends on the last Saturday of September. The first
quarter and six month periods of fiscal 1995 and 1994 are 14 and 13 week and 27
and 26 week periods, respectively.
NOTE 2: INVENTORIES
At April 1, 1995 and September 24, 1994, inventories stated at the lower of
LIFO (last-in, first-out) cost or market represent approximately 39% and 27% of
total inventories before the LIFO reserve, respectively. Inventories consist of
the following components ($000's):
<TABLE>
<CAPTION>
April 1, September 24,
1995 1994
------- -------------
<S> <C> <C>
Raw materials..................................... $ 8,615 $ 6,699
Semi-finished and finished goods.................. 39,248 27,695
------- -------------
47,863 34,394
LIFO reserve...................................... (2,239) (2,104)
------- -------------
$45,624 $32,290
======== ==============
</TABLE>
NOTE 3: OTHER CURRENT ASSETS
Included in other current assets at April 1, 1995 are receivables for
various property casualty and business interruption insurance claims aggregating
approximately $6.3 million, which the Company believes are realizable under the
terms of its insurance policies.
NOTE 4: COMMITMENTS AND CONTINGENCIES
The Company has various commitments for the purchase of materials, supplies
and energy arising in the ordinary course of business.
In fiscal 1994, Newport was named as 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 offshore pipeline. Subsequent to the end of the fiscal 1995 second
quarter, the Company reached a settlement for an amount significantly less than
the
F-22
<PAGE> 143
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
plaintiff's original claim and the litigation was dismissed. The Company is
subject to various 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,
including the above-mentioned settlement, are likely, individually or in the
aggregate, to have a material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows.
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 contracts
with a company for treatment and disposal of the dust at an EPA-approved
facility. The Company also has on its property at Newport a permitted hazardous
waste disposal facility.
The occurrences of the accidental melting of radioactive materials, as
discussed in Note 10 to the audited annual financial statements, 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 April 1, 1995, claims recorded in connection with
disposal costs exhaust available insurance coverage. Based on current knowledge,
management believes the recorded gross reserves of $4,354,000 for disposal costs
pertaining to these incidents are adequate.
In March 1995, Koppel entered into a Consent Order with 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 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 Consent Order 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 Consent Order, the Company
believes that the indemnity provisions provide for it to be fully indemnified
against all matters covered by the Consent Order, including all associated
costs, claims and liabilities.
F-23
<PAGE> 144
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Subject to the uncertainties concerning the Consent Order and the storage
and disposal of the radiation contaminated dust, 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 fiscal 1995 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.
As of April 1, 1995, the Company had environmental remediation reserves of
$4,718,000 of which $4,354,000 pertain to accrued disposal costs for radiation
contaminated baghouse dust. As of December 31, 1994, the possible range of
estimated losses related to the environmental contingency matters discussed
above in excess of those accrued by the Company is $0 to $3,000,000; however,
with respect to the Consent Order, the Company cannot estimate the possible
range of losses should the Company ultimately not be indemnified. Based upon its
evaluation of available information, management does not believe that any of the
environmental contingency matters discussed above are likely, individually or in
the aggregate, to have a material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows. However, the Company
cannot predict with certainty that new information or developments with respect
to the Consent Order or its other environmental contingency matters,
individually or in the aggregate, will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
NOTE 4: SUMMARIZED FINANCIAL INFORMATION
The Senior Secured Notes that the Company is proposing to offer for sale
will be guaranteed in full by each of the Company's subsidiaries (Subsidiary
Guarantors), each of which is wholly-owned. Full financial statements of the
Subsidiary Guarantors are not presented because they are not deemed material to
investors. The following is summarized financial information of the Subsidiary
Guarantors as of April 1, 1995 and September 24, 1994 and for the three and six
month periods ended April 1, 1995 and March 26, 1994. All significant
intercompany accounts and transactions between the Subsidiary Guarantors.
<TABLE>
<CAPTION>
April 1, September 24,
1995 1994
-------- -------------
<S> <C> <C>
Current assets................................................. $121,663 $ 125,108
Noncurrent assets.............................................. 173,573 176,895
Current liabilities............................................ 98,317 88,230
Payable to parent.............................................. 15,478 $ 31,327
Other noncurrent liabilities................................... 91,369 102,893
-------- -------------
Total noncurrent liabilities................................. $106,847 $ 134,220
-------- -------------
</TABLE>
F-24
<PAGE> 145
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ----------------------
March March
April 1, 26, April 1, 26,
1995 1994 1995 1994
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Net sales.................................... $ 97,055 $66,012 $ 190,544 $137,971
Gross profit................................. 10,145 1,831 21,635 9,622
Income before cumulative effect of a change
in accounting principle.................... 1,185 (4,992) 2,117 15,746(1)
Net income................................... 1,185 (4,992) 2,117 15,746(1)
</TABLE>
- ---------------
(1) Includes an after-tax gain on the sale of KES of $21.5 million.
F-25
<PAGE> 146
The Company's steel-making and finishing facilities
<PAGE> 147
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
<TABLE>
<S> <C>
Prospectus Summary............................... 5
Risk Factors..................................... 18
Use of Proceeds.................................. 26
Summary of the Refinancing Transaction........... 26
Dividends and Price Range of Common Stock........ 27
Capitalization................................... 28
Selected Consolidated Financial Data............. 29
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 31
Business......................................... 43
Management....................................... 65
Principal Stockholders........................... 68
Compensation Committee Interlocks and Insider
Participation.................................. 69
Certain Transactions............................. 69
Description of Units............................. 69
Description of Senior Secured Notes.............. 70
Description of Warrants.......................... 103
Description of Capital Stock..................... 107
Description of Certain Indebtedness.............. 109
Certain United States Federal Income Tax
Consequences................................... 111
Underwriting..................................... 115
Legal Matters.................................... 115
Independent Auditors............................. 116
Index to Consolidated Financial Statements....... F-1
</TABLE>
Prospectus
NS GROUP, INC.
125,000 UNITS CONSISTING OF
$125,000,000
% SENIOR SECURED NOTES DUE 2003
AND WARRANTS TO PURCHASE
SHARES OF COMMON STOCK
[INSERT LOGO]
CHEMICAL SECURITIES INC.
CS FIRST BOSTON
, 1995
<PAGE> 148
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................... $ 44,106
National Association of Securities Dealers filing fee................. 13,000
Trustee fees.......................................................... 5,000
Blue sky filing and counsel fees and expenses......................... 25,000
Printing and engraving expenses....................................... 150,000
Accountants' fees and expenses........................................ 130,500
Legal fees and expenses............................................... 548,000
Rating agency fees.................................................... 50,000
Miscellaneous......................................................... 9,394
--------
Total....................................................... $975,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 271B.8-500 to 271B.8-589 of the Kentucky Business Corporation Act;
provides that, 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.
II-1
<PAGE> 149
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.
Statutory indemnification provisions in the states where the other
subsidiaries of the Company are incorporated, as well as in the bylaws of those
subsidiaries, may also provide for indemnification of the directors and
officers.
Section 1701.13(E) of the Ohio Revised Code provides that a corporation may
indemnify any person who is or has been a director, employee or agent of that
corporation, or of another corporation at the request of that corporation,
against expenses (including attorneys fees) actually and reasonably incurred by
him in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
he was, is or may be made a party because of being or having been such director,
officer, employee or agent, provided that such person is determined to have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation; that, in the case of an action
or suit by or in the right of the corporation, (i) no negligence or misconduct
shall have been adjudged unless a court determines that such person is fairly
and reasonably entitled to indemnity, and (ii) the action or suit is not one in
which the only liability asserted against such director relates to unlawful
loans, dividends and distributions of assets; and that, in the case of a
criminal matter, such person is determined to have had no reasonable cause to
believe that his conduct was unlawful. In any case, to the extent that such
person has been successful on the merits or otherwise in defense of any such
action, suit, or proceeding, or in defense of any claim, issue or matter
therein, he shall be indemnified. Section 1701.13(E) further provides that
unless a corporation has specifically elected to the contrary in its articles of
incorporation or code of regulations, expenses incurred by a director in
defending such an action, suit or proceeding shall be paid by the corporation as
they are incurred in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking (i) to repay such amounts if it is
proved by clear and convincing evidence in a court of competent jurisdiction
that such director acted, or failed to act, with deliberate intent to cause
injury to the corporation or with reckless disregard for the best interests of
the corporation and (ii) reasonably to cooperate with the corporation concerning
said action, suit or proceeding. The indemnification authorized by the statute
is not be exclusive of any other rights that directors, officers or employees
may have.
The Code of Regulations of Imperial Adhesives, Inc., an Ohio corporation,
provides for indemnification of any officer or director under the same
circumstances as defined in the Ohio Revised Code.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
provides that a corporation may indemnify any person, including its directors,
officers and employees who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or proceeding, whether civil,
criminal, administrative or investigative (including actions by or in the right
of the corporation) by reason of the fact that he is or was a representative of
or serving at the request of the corporation, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action or proceedings
if he is determined by the board of directors, or in certain circumstances by
independent legal counsel to the shareholders, to have acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reason to believe his conduct was unlawful. In the case of actions by or in
the right of the corporation, indemnification is not permitted in respect of any
claim, issue or matter as to which the person has been adjudged to be liable to
the corporation except to the extent a court determines that the person is
fairly and reasonably entitled to indemnification. In any case, to the extent
that the person has been successful on the merits or otherwise in defense of any
claim, issue or matter, he shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him or her in connection
therewith. Expenses incurred in defending any action or proceeding may be paid
by the corporation in advance of the final disposition of the action or
proceeding upon receipt of an undertaking to repay the
II-2
<PAGE> 150
amount if it is ultimately determined that he is not entitled to be indemnified.
Subchapter D also provides that the indemnification permitted or required by
Subchapter D is not exclusive of any other rights to which a person seeking
indemnification may be entitled.
The Bylaws of Koppel Steel Corporation, a Pennsylvania corporation, provide
that the corporation shall to the full extent permitted by, and in accordance
with the provisions of the Pennsylvania Business Corporation Law, indemnify each
director or officer of the corporation.
Section 1031 of the Oklahoma General Corporation Act permits (and the
Registrant's Certificate of Incorporation and Bylaws, which are incorporated by
reference herein, authorize) indemnification of directors and officers of the
Registrant and officers and directors of another corporation, partnership, joint
venture, trust or other enterprise who serve at the request of the Registrant,
against expenses, including attorneys fees, judgments, fines and amount paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding in which such person is a party by reason of such
person being or having been a director or officer of the Registrant or at the
request of the Registrant, if he conducted himself in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Registrant may not
indemnify an officer or a director with respect to any claim, issue or matter as
to which such officer or director shall have been adjudged to be liable to the
Registrant, unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem property. To the extent that an officer or director is successful on
the merits or otherwise in defense of any action, suit or proceeding with
respect to which such person is entitled to indemnification, or in defense of
any claim, issue or matter therein, such person is entitled to be indemnified
against expenses, including attorney's fees, actually and reasonably incurred by
him in connection therewith.
The directors and officers of the Company and its subsidiaries are insured
under a policy of directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and consolidated financial statements schedule filed as part
of this Registration Statement are as follows:
<TABLE>
<S> <C> <C>
(a) Exhibits.
See Index to Exhibits.
(b) Consolidated Financial Statement Schedule.
Report of Independent Public Accountants.................................... S-1
Schedule II -- Valuation and Qualifying Accounts............................ S-2
</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
II-3
<PAGE> 151
(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-4
<PAGE> 152
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 July 18, 1995.
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director, President and Chief Executive
Clifford R. Borland Officer
PATRICK J. B. DONNELLY* Director
Patrick J. B. Donnelly
JOHN B. LALLY* Director
John B. Lally
R. GLEN MAYFIELD* Director
R. Glen Mayfield
RONALD R. NOEL* Director and Vice President
Ronald R. Noel
/s/ JOHN R. PARKER Vice President, Treasurer and Chief
John R. Parker Financial Officer (Principal Financial and
Accounting Officer)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 153
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 July 18, 1995.
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director
Clifford R. Borland
RONALD R. NOEL* President
Ronald R. Noel
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Officer)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 154
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 July 18, 1995.
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director
Clifford R. Borland
PAUL C. BORLAND, JR.* President
Paul C. Borland, Jr.
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Officer)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-7
<PAGE> 155
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 July 18, 1995.
ERLANGER TUBULAR CORPORATION
(Registrant)
By:/s/ JOHN R. PARKER
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director and President
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Manager)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-8
<PAGE> 156
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 July 18, 1995.
IMPERIAL ADHESIVES, INC.
(Registrant)
By:/s/ JOHN R. PARKER
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director
Clifford R. Borland
ROBERT D. JOHNSON* President
Robert D. Johnson
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Manager)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-9
<PAGE> 157
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 July 18, 1995.
NORTHERN KENTUCKY AIR, INC.
(Registrant)
By:/s/ JOHN R. PARKER
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director and President
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Manager)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-10
<PAGE> 158
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 July 18, 1995.
NORTHERN KENTUCKY MANAGEMENT, INC.
(Registrant)
By:/s/ JOHN R. PARKER
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 July 18, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- --------------------------------------------
<S> <C>
CLIFFORD R. BORLAND* Director and President
Clifford R. Borland
/s/ JOHN R. PARKER Treasurer (Principal Financial and
John R. Parker Accounting Manager)
* By:/s/ JOHN R. PARKER
John R. Parker
Attorney-In-Fact
</TABLE>
II-11
<PAGE> 159
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 schedule listed in Item
16(b) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states 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> 160
SCHEDULE II
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<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
============ =============
</TABLE>
- ---------------
(1) Deducted from accounts receivable
S-2
<PAGE> 161
INDEX TO EXHIBITS
<TABLE>
<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, filed
January 11, 1990
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"), as amended June 4, 1987
3.4* Code of Regulations of Erlanger, as amended January 2, 1990
3.5* Articles of Incorporation of Imperial Adhesives, Inc. ("Imperial"), as
amended March 27, 1986
3.6* Code of Regulations of Imperial, as amended December 11, 1989
3.7* Articles of Incorporation of Koppel Steel Corporation ("Koppel"),
dated July 9, 1990
3.8* Bylaws of Koppel, as amended January 2, 1990
3.9* Articles of Incorporation of Newport Steel Corporation ("Newport"), as
amended April 15, 1987
3.10* Bylaws of Newport, as amended January 2, 1990
3.11* Articles of Incorporation of Northern Kentucky Air, Inc., dated March
3, 1984
3.12* Bylaws of Northern Kentucky Air, Inc., as amended January 2, 1990
3.13* Articles of Incorporation of Northern Kentucky Management, Inc., dated
May 21, 1981
3.14* Bylaws of Northern Kentucky Management, Inc., as amended January 2,
1990
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 Leasehold and Fee Mortgage, Assignment of Rents and Leases and
Security Agreement from Newport to the Trustee (Kentucky)
4.3* Form of Mortgage, Assignment of Rents and Leases and Security
Agreement from Koppel to the Trustee (Pennsylvania)
4.4* Form of Deed of Trust, Assignment of Rents and Leases and Security
Agreement from Koppel to the Trustee (Texas)
4.5* Form of Leasehold Mortgage, Assignment of Rents and Leases and
Security Agreement from Erlanger to the Trustee (Oklahoma)
4.6* Form of Junior Leasehold and Fee Mortgage, Assignment of Rents and
Leases and Security Agreement from Newport to the Company (Kentucky)
4.7* Form of Junior Mortgage, Assignment of Rents and Leases and Security
Agreement from Koppel to the Company (Pennsylvania)
4.8* Form of Junior Deed of Trust, Assignment of Rents and Leases and
Security Agreement from Koppel to the Company (Texas)
4.9* Form of Junior Leasehold Mortgage, Assignment of Rents and Leases and
Security Agreement from Erlanger to the Company (Oklahoma)
4.10* Form of Subsidiary Security Agreement between Newport and the Trustee
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<S> <C> <C>
4.11* Form of Subsidiary Security Agreement between Koppel and the Trustee
4.12* Form of Subsidiary Security Agreement between Erlanger and the Trustee
4.13* Form of ICN Security Agreement between Newport and the Company
4.14* Form of ICN Security Agreement between Koppel and the Company
4.15* Form of ICN Security Agreement between Erlanger and the Company
4.16* Form of Pledge and Security Agreement between the Company and the
Trustee
4.17* Form of Subsidiary Guarantee
4.18* Form of Intercreditor Agreement between the Trustee and the Bank of
New York Commercial Corporation, as agent under the Credit Facility
4.19* Form of Agreement between the Trustee Koppel, and the Commonwealth of
Pennsylvania, Department of Commerce
4.20* Form of Subordination Agreement between the Trustee and the City of
Dayton, Kentucky
4.21* Form of Revolving Credit, Guaranty and Security Agreement among Bank
of New York Commercial Corporation, PNC Bank Ohio, N.A., Newport,
Koppel, Imperial, the Company, Erlanger, Northern Kentucky Air, Inc.
and Northern Kentucky Management, Inc.
Form of Warrant Agreement between the Company and The Huntington
National Bank, as Warrant Agent.
4.22 Form of Warrant Agreement between the Company and The Huntington
National Bank, as warrant agent.
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
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<S> <C> <C>
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
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, filed as Exhibit 27 to Company's Form 10-Q
for the fiscal quarter ended April 1, 1995, File No. 1-9838, and
incorporated herein by this reference
</TABLE>
- ---------------
*Previously Filed
<PAGE> 1
DRAFT
7/15/95
NS GROUP, INC.
125,000 UNITS CONSISTING OF
______% SENIOR SECURED NOTES DUE 2003
AND
_________ WARRANTS TO PURCHASE COMMON STOCK
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 (a) $125,000,000 aggregate principal amount of its
__% Senior Secured Notes due 2003 (the "Notes") and (b) _______ warrants to
purchase an equal number of shares of the Company's Common Stock, no par value
(the "Common Stock"). The Notes are to be issued under an indenture (the
"Indenture") to be dated as of ______ __, 1995 by and between the Company and
The Huntington National Bank, as Trustee (the "Trustee"). The warrants
comprising part of the unit of the Notes and the warrants are to be issued
under a Warrant Agreement to be dated as of _____ __, 1995 (the "Warrant
Agreement") between the Company and [The Huntington National Bank], as Warrant
Agent (the "Warrant Agent"). All warrants issued under the Warrant Agreement
are herein referred to as the "Warrants," and the shares of Common Stock
issuable upon exercise of the Warrants are herein referred to as the "Warrant
Shares." The Notes and the Warrants will initially be represented by 125,000
units ("Units"), each Unit consisting of $1,000 principal amount of Notes and _
Warrants to purchase an equal number of Warrant Shares. The Notes, the
Warrants forming a part of the Units, the Warrant Shares underlying the
Warrants forming a part of the Units, and the Units, are collectively referred
to herein as the "Securities." The obligations of the Company arising under
and in connection with the Notes shall be unconditionally guaranteed, jointly
and severally, by each of the Company's subsidiaries pursuant to the Subsidiary
Guarantee dated as of the Closing Date (the "Subsidiary Guarantee") by Newport
Steel Corporation ("Newport"), Koppel Steel
<PAGE> 2
Corporation ("Koppel"), Erlanger Tubular Corporation ("Erlanger"), Imperial
Adhesives, Inc. ("Imperial"), Northern Kentucky Management, Inc. and Northern
Kentucky Air, Inc. The obligations of Newport under the Subsidiary Guarantee
will be secured by a Mortgage, Assignment of Rents and Leases and a Leasehold
Mortgage, Assignment of Rents and Leases, each dated as of the Closing Date, 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 the
Closing Date between Newport and the Collateral Agent (the "Newport Security
Agreement"); the obligations of Koppel under the Subsidiary Guarantee will be
secured by a Mortgage, Assignment of Rents and Leases dated as of between
Koppel and the Collateral Agent with respect to certain real property located
in the State of Pennsylvania (the "Pennsylvania Mortgage"), a Deed of Trust,
Assignment of Rents and Leases dated as of the Closing Date 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
the Closing Date between Koppel and the Collateral Agent (the "Koppel Security
Agreement"); and the obligations of Erlanger under the Subsidiary Guarantee
will be secured by a Leasehold Mortgage, Assignment of Rents and Leases dated
as of the Closing Date 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 the Closing Date
between Erlanger and the Collateral Agent (the "Erlanger Security Agreement").
The Notes will be secured by a pledge by the Company of certain intercompany
notes (the "Intercompany Notes") from each of Newport, Koppel and Erlanger.
The Company will pledge each of the Intercompany Notes pursuant to the Pledge
and Security Agreement dated as of the Closing Date to be entered into between
the Collateral Agent and the Company (the "Pledge Agreement") to secure its
obligations arising in connection with the Notes. The Intercompany Note of
Newport will be secured by the ICN Junior Mortgage, Assignment of Rents and
Leases and the ICN Junior Leasehold Mortgage, Assignment of Rents and Leases,
each dated as of the Closing Date, 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 the Closing Date (the "Newport ICN Security
Agreement"); the Intercompany Note of Koppel will be secured by the ICN Junior
Mortgage, Assignment of Rents and Leases dated as of the Closing Date with
respect to certain real property in the State of Pennsylvania (the "ICN
Pennsylvania Mortgage"), the ICN Junior Deed of Trust, Assignment of Rents and
Leases dated as of the Closing Date 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 the Closing Date (the "Koppel ICN Security
Agreement"); and the Intercompany Note of Erlanger will be secured by the ICN
Junior Leasehold Mortgage, Assignment of Rents and Leases dated as of the
Closing Date with respect to certain real property in the State of Oklahoma
(the "ICN Oklahoma Mortgage") and the Erlanger ICN Security Agreement dated as
of the Closing Date (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
<PAGE> 3
3
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 Agreements" 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". The Intercreditor Agreement dated as of the Closing Date between
Newport and the City of Dayton (the "Newport Subordination Agreement") shall be
referred to as the "Subordination Agreement." 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, the Subsidiary Guarantee and the Subordination Agreement 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. 33-56637),
including a form of prospectus, relating to the Securities and the
Subsidiary Guarantee 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 Guarantee 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 Guarantee 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
<PAGE> 4
4
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) 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, (i) 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
<PAGE> 5
5
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.
(d) The Company and its subsidiaries have full right, power
and authority to execute and deliver this Agreement, the Indenture,
the Warrant Agreement, the Notes 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 Warrant Agreement, the Notes 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, the Warrant Agreement 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 Notes, 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, the Warrant Agreement and the Securities conform to the
descriptions thereof contained in the Prospectus.
(f) The Warrants have been duly authorized by the Company
for issuance, and when executed by the Company and countersigned by
the Warrant Agent in accordance with the provisions of the Warrant
Agreement, and delivered to and paid for in accordance with the terms
hereof, will have been duly executed, issued and delivered and will
be entitled to the benefits of the Warrant Agreement and will
constitute valid and binding obligations of the Company enforceable
against the Company 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).
<PAGE> 6
6
(g) The Warrant Shares, when issued in accordance with
the terms and conditions contained in the Warrant Agreement upon
exercise of the Warrants, will be duly authorized, validly issued,
fully paid and non-assessable, will not be subject to any preemptive
or similar rights and will be free and clear of all liens,
encumbrances, equities and claims or restrictions on transferability
(other than those, if any, imposed by the Securities Act and the
securities or "Blue Sky" laws of certain jurisdictions) or voting.
The Warrant Shares have been duly reserved for issuance in accordance
with the terms of the Warrants and the Warrant Agreement.
(h) The issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid and nonassessable; the capital stock conforms to all statements
relating thereto in the Prospectus; the Company has authorized, issued
and outstanding capital stock as set forth under "Description of
Capital Stock" in the Prospectus (except for subsequent issuances
pursuant to the exercise of the Warrants or pursuant to reservations,
agreements, employee benefits plans or the exercise of convertible
securities referred to in the Prospectus); and the stockholders have
no preemptive rights or similar rights with respect to the Common
Stock.
(i) Except as set forth in the Prospectus, there are no
outstanding (i) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (ii)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company to
issue any such convertible or exchangeable securities or obligations,
or any such warrants, rights or obligations.
(j) The Company and each of its subsidiaries have good and
marketable title in fee simple or valid leasehold interests, as the
case may be, to all items of real and personal property subject to the
liens of 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.
(k) The liens granted pursuant to the Security Documents will
constitute perfected liens on the Collateral (as collectively defined
in the Security Documents) in favor of the Collateral Agent or the
Company, as the case may be, which will be prior to all other liens on
the Collateral created by the Company and its subsidiaries and in
existence on the date hereof, excluding liens permitted by the
Indenture upon (i) the recordation of the Kentucky Mortgages, the
Pennsylvania Mortgages, the Texas Mortgages and the Oklahoma Mortgages
and the proper financing statements with [list filing offices] and
(ii) the filing of the releases and termination statements in the
filing and recording offices set forth on Schedule 2 hereto.
<PAGE> 7
7
(l) 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.
(m) The execution, delivery and performance of this
Agreement, the Indenture, the Warrant Agreement, the Notes, the
Warrants, the Units and the Collateral Documents by the Company and
its subsidiaries, the issuance and sale of the Securities 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 except where any of the same would not
reasonably be expected to have a material adverse effect on the
operations of the party to such agreement to which such conflict,
breach, violation or default relates, 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 except where any of the same would not
reasonably be expected to have a material adverse effect on the
operations of the entity to which such violation relates; 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 and recordation 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 Warrant Agreement, the Notes, the
Warrants, the Units or the Collateral Documents by the Company and its
subsidiaries, the issuance and sale of the Securities and the
consummation of the transactions contemplated hereby and thereby.
(n) 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> 8
8
(o) 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.
(p) Except as disclosed in the Registration Statement and the
Prospectus, 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.
(q) 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.
(r) 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 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.
(s) 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)
necessary for the conduct of their respective businesses and are not
aware that the conduct of their respective businesses
<PAGE> 9
9
will conflict with, and have not received any notice of any claim of
conflict with, any such rights of others.
(t) 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.
(u) 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.
(v) 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 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,
<PAGE> 10
10
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.
(w) 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.
(x) Except for General Electric Capital Corporation ("GECC")
and its affiliates, 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; the Company has received an effective waiver of any
registration rights beneficially owned by GECC and its affiliates.
(y) 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.
(z) 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.
(aa) Neither the Company nor any of its subsidiaries other
than Newport, Koppel and Erlanger, own, hold, lease or have any other
rights in any assets used or which may be used in any way in
connection with the manufacture, production or generation of the
products manufactured by the Company and its Subsidiaries (except the
adhesives business), as described in the Prospectus and the
Registration Statement.
(ab) N Sub 1, Inc., formerly a wholly-owned subsidiary of the
Company, was merged into _________ on July __, 1995.
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 number of Units set forth opposite the name of such Underwriter in Schedule
1 hereto at a purchase price of $___ per unit, plus accrued interest with
respect to the Notes, 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> 11
11
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 (with any transfer taxes payable in connection
with the transfer of such Securities to the Underwriters duly paid by the
Company) 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 suspending the use of any prospectus
relating to the Securities or suspending any
<PAGE> 12
12
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 file a post-effective amendment to the Registration
Statement, including a form of prospectus relating to the Warrant
Shares, prepared in conformity with the requirements of the Securities
Act and the Rules and Regulations of the Commission; and to have such
post-effective amendment declared effective prior to _____ __, 1995
and maintain the effectiveness of such post-effective amendment or
registration until ____ __, ____.
(d) 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 Warrant Agreement, 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 (not later than 10:00 A.M., New
York City time, of the day following the execution and delivery of
this Agreement) and any amended or supplemented Prospectus (not later
than 10:00 A.M. New York City time, on the day following the date of
such amendment or supplement);
(e) 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;
(f) 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;
(g) 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)
<PAGE> 13
13
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(h) 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;
(i) 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
(j) 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 or equity 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.
<PAGE> 14
14
(b) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement,
the Securities, the Indenture, the Warrant Agreement, 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 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 special counsel to the Company, addressed to the
Underwriters and dated the Closing Date, in form and substance
reasonably satisfactory to the Representative, to the effect that:
(i) The Registration Statement was declared
effective under the Securities Act and the Indenture was
qualified under the Trust Indenture Act as of the date and
time specified in such opinion; the Prospectus was filed with
the Commission pursuant to the subparagraph of Rule 424(b) of
the Rules and Regulations specified in such opinion on the
date specified therein; and no stop order suspending the
effectiveness of the Registration Statement has been issued
and, to the best of such counsel's knowledge, no proceeding
for that purpose is pending or threatened by the Commission;
(ii) The Registration Statement and the Prospectus
and any further amendments or supplements to the Registration
Statement or the Prospectus made by the Company prior to the
Closing Date (other than the financial statements and related
schedules and the other financial and statistical information
contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations;
(iii) The Indenture complies as to form in all
material respects with the requirements of the Trust Indenture
Act and the rules and regulations of the Commission
thereunder;
(iv) The statements set forth under the caption
"Certain United States Federal Income Tax Consequences" in the
Prospectus, to the extent they represent summaries of legal
matters, fairly summarize such legal matters in all material
respects; and to the best of such counsel's knowledge, there
is no contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit to the Registration Statement, in
either case under the Act or the Rules and Regulations, which
is not so described or filed as required or incorporated
therein by reference as permitted by the Rules and
Regulations;
<PAGE> 15
15
(v) The Indenture, the Warrant Agreement and the
Collateral Documents have been duly authorized, executed and
delivered by the Company and its subsidiaries and constitute
valid and binding agreements of the Company and its
subsidiaries enforceable against the Company and its
subsidiaries in accordance with their terms, except to the
extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership,
rehabilitation, moratorium, fraudulent transfer, and other
similar laws relating to or affecting the rights and remedies
of creditors and others generally and by general principles of
equity, including, without limitation, concepts of
reasonableness, materiality, good faith and fair dealing and
the possible unavailability of specific performance,
injunctive relief or other equitable remedies, regardless of
whether enforceability is considered in a proceeding in equity
of at law.
(vi) The Notes are in the form contemplated by the
Indenture and will constitute valid and binding obligations of
the Company entitled to the benefits of the Indenture and
enforceable in accordance with their terms, except to the
extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership,
rehabilitation, moratorium, fraudulent transfer, and other
similar laws relating to or affecting the rights and remedies
of creditors and by general principles of equity, including,
without limitation, concepts of reasonableness, materiality,
good faith and fair dealing and the possible unavailability of
specific performance, injunctive relief or other equitable
remedies, regardless of whether enforceability is considered
in a proceeding in equity or at law; and the descriptions of
certain provisions of the Indenture, the Warrant Agreement,
the Collateral Documents and the Securities contained in the
Prospectus fairly summarize such provisions of such documents;
(vii) When the Warrants have been duly executed by
the Company and countersigned by the Warrant Agent in
accordance with the provisions of the Warrant Agreement and
duly delivered to and paid for in accordance with the terms of
this Agreement, the Warrants will constitute valid and binding
obligations of the company, entitled to the benefits of the
Warrant Agreement and enforceable against the Company in
accordance with their terms, except that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
receivership, reorganization, receivership, rehabilitation,
moratorium, fraudulent transfer and other similar laws
relating to or affecting the rights and remedies of creditors
and by general principles of equity, including, without
limitation, concept of reasonableness, materiality, good faith
and fail dealing and the possible unavailability of specific
performance, injunctive of relief or other equitable remedies,
regardless of whether enforceability is considered in a
proceeding at law or in equity.
(viii) The execution, delivery and performance of
this Agreement, the Notes, the Warrants, the Units, the
Indenture and the Collateral Documents by
<PAGE> 16
16
the Company and its subsidiaries, the issuance and sale of the
Securities 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 known to such counsel 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 New York or federal statute or any New
York or federal order, rule or regulation known to such
counsel of any New York or federal 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
Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the
Securities by the Underwriters and filings and recordations 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
Warrant Agreement, the Indenture, the Notes, the Warrants, the
Units, or the Collateral Documents by the Company and its
subsidiaries, the issuance and sale of the Securities and the
consummation of the transactions contemplated hereby and
thereby;
(ix) To the best of such counsel's knowledge,
there are no contracts, agreements or understandings between
the Company and any person granting such person the right to
require the Company to include securities owned or to be owned
by such person in the securities registered pursuant to the
Registration Statement, except pursuant to the Warrant
Agreement dated as of ____________ in favor of GECC;
(x) To the best of such counsel's knowledge and
except as set forth in the Prospectus, 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, 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
such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by
others;
<PAGE> 17
17
(xi) the Pledge Agreement creates in favor of the
Collateral Agent, for the benefit of the holders of the
Securities, a legal, valid and enforceable security interest
in all right, title and interest of the Company in the
Intercompany Notes and all proceeds thereof (as such term is
defined in the New York State Uniform Commercial Code in
effect on the date hereof - the "UCC") and the security
interests granted in favor of the Company securing the
Intercompany Notes. Upon delivery of the Intercompany Notes
to the Collateral Agent (for the benefit of holders of the
Securities), and assuming (A) continued possession of the
Intercompany Notes by the Collateral Agent and (B) that the
Collateral Agent takes delivery of the Intercompany Notes in
good faith and neither the Collateral Agent nor any of the
holders of Securities has notice prior to or on the date of
such delivery of any "adverse claim" within the meaning of the
UCC, the security interests relating to the Intercompany Notes
(excluding the security interests granted by certain
subsidiaries of the Company to secure the Intercompany Notes)
constitute perfected security interests in favor of the
Collateral Agent under the Pledge Agreement in all of the
Company's right, title and interest in the Intercompany Notes
and liens related thereto and, with respect to the
Intercompany Notes, will have priority over any conflicting
security interest therein of pledge thereof, except as
follows:
(i) the priority of such security interest
may be subject to claims or liens in favor of the
United States or any State thereof or any agency or
instrumentality of any State thereof given priority
by operation of law, including liens for the payment
of federal, state or local taxes which are given
priority by operation of law and liens under Title IV
of the Employee Retirement Income Security Act of
1974, as amended; and
(ii) in the case of Proceeds, continuation
of perfection of the security interest of the
Collateral Agent therein is limited to the extent set
forth in Section 9-306 of the UCC.
Such counsel has no reason to believe that, as of the effective date
of the Registration Statement, the Registration Statement contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that, as of the effective date of the Registration Statement and as of the date
hereof, the Prospectus contained or contains an untrue statement of a material
fact necessary to make the statement therein, in the light of the circumstances
under which they were made no misleading.
References to the Prospectus in this paragraph (c)
include any supplements thereto at the Closing Date.
(d) Kepley, MacConnell & Eyrich 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 Underwriters, to the effect
that:
<PAGE> 18
18
(i) The Company, Newport, Northern Kentucky Air,
Inc. ("Air") and Northern Kentucky Management, Inc.
("Management") have been duly incorporated and are validly
existing as corporations in good standing under the laws of
the State of Kentucky. Imperial is duly qualified to do
business and is in good standing as a foreign corporation in
the States of North Carolina, Virginia, Tennessee, Michigan,
Indiana and in Puerto Rico. Koppel is duly qualified to do
business and is in good standing as a foreign corporation in
the State of Ohio. Each of the Company, Newport, Air,
Management, Koppel, Erlanger and Imperial have all power and
authority necessary to own or hold their respective properties
and to conduct the businesses in which they are engaged;
(ii) The Company has the authorized capitalization
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; the issuance and sale of the Warrants and the
Warrant Shares is not subject to preemptive rights arising by
operation of law; the stockholders of the Company have no
preemptive rights provided by statute or the certificate of
incorporation of the Company with respect to the Warrants and
the Warrant Shares; the Warrant Shares have been duly reserved
by the Company for issuance upon exercise of all of the
Warrants at the initial number of Warrant Shares deliverable
upon exercise of the Warrants and the issuance of the Warrant
Shares upon exercise of the Warrants has been duly and validly
authorized, and the Warrant Shares, when issued, paid for and
delivered in accordance with the terms of the Warrants and the
Warrant Agreement, will be validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances,
equities and claims or restrictions on transferability or
voting, and to our knowledge no holder of any securities of
the Company has preemptive rights applicable to the Warrants
or the Warrant Shares; and all of the issued 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 (except for directors' qualifying shares)
are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(iii) The Company has the corporate power and
authority to execute and deliver this Agreement, the Notes,
the Warrants, the Units, the Indenture, the Warrant Agreement
and the Collateral Documents and to perform its obligations
hereunder and thereunder; and all corporate action required to
be taken by the Company for the due and proper authorization,
execution and delivery of this Agreement, the Notes, the
Warrants, the Units, the Warrant Agreement, the Indenture and
the Collateral Documents and the consummation of the
transactions contemplated by this Agreement, the Notes, the
Warrants, the Units, the Indenture and the Collateral
Documents have been duly and validly taken;
<PAGE> 19
19
(iv) This Agreement, the Notes, the Warrants, the
Units, the Warrant Agreement, the Indenture and the Collateral
Document to which it is a party have been duly authorized,
executed and delivered by the Company and constitute valid and
binding agreements of the Company in accordance with their
terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar
laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of
good faith and fair dealing;
(v) 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 State 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;
(vi) Upon the filing of certain financing
statements in the Commonwealth of Kentucky, the Collateral
Agent on behalf of the holders of the Notes and the holder of
the Intercompany Notes will have valid and fully perfected
security interests in the Collateral (excluding the real
property other than fixtures subject to the Kentucky
Mortgages) located in the Commonwealth of Kentucky;
(vii) The Kentucky Mortgages, including the
assignment from the Company of its interest in the ICN
Kentucky Mortgage, 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 Intercompany Notes legal, valid
and binding mortgage liens upon the real property described
therein enforceable as such against Newport 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 property described therein and upon the filing of the
applicable financing statements will constitute for the
benefit of the Collateral Agent legal, valid and binding,
perfected liens on such property, enforceable as such against
Newport and all other persons.
(viii) Upon the closing of the transactions
contemplated hereby, the transfer of funds pursuant to the
Company's Company Order dated as of the Closing and the filing
of certain release documents, any and all liens of record in
the State of Kentucky in favor of GECC with respect to a
$10,000,000 Loan
<PAGE> 20
20
Agreement, dated as of October 4, 1990, as amended, and the
holders of 10.65% Senior Secured Notes Due 1999 shall be
released and removed from all public records in the State of
Kentucky;
(ix) The Newport Subordination Agreement, assuming
the due execution by the other party thereto, is effective to
subordinate the security interests and liens in favor of the
City of Dayton, as described therein, to the security
interests and liens created by the Security Documents; and
(x) The courts of the State 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 State 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 Commonwealth of Kentucky.
(e) Eckert, Seamers, Cherin & Mellott 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) Koppel has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Pennsylvania. Imperial is duly
qualified to do business and is in good standing as a foreign
corporation in the Commonwealth of Pennsylvania. Koppel has
all power and authority necessary to own or hold its
respective properties and to conduct the business in which it
is engaged;
(ii) All of the issued shares of capital stock of
Koppel have been duly and validly authorized and issued and
are fully paid and non-assessable and (except for directors'
qualifying shares, if any) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances,
equities or claims;
(iii) Koppel has the corporate power and authority
to execute and deliver the Collateral Documents to which it is
a party and to perform its obligations thereunder; and all
corporate action required to be taken by Koppel for the due
and proper authorization, execution and delivery of the
Collateral Documents to which it is a party and the
consummation of the transactions contemplated by the
Collateral Documents to which it is a party have been duly and
validly taken;
(iv) The Collateral Document to which it is a
party have been duly authorized, executed and delivered by
Koppel and constitute valid and binding agreements of Koppel
in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and
<PAGE> 21
21
similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing;
(v) 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;
(vi) Upon the filing of certain financing
statements in the Commonwealth of Pennsylvania, the Collateral
Agent on behalf of the holders of the Notes and the holder of
the Koppel Intercompany Note will have valid and fully
perfected security interests in the Collateral (excluding the
real property other than fixtures subject to the Pennsylvania
Mortgages) located in the Commonwealth of Pennsylvania;
(vii) 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 Koppel and, upon recordation by the [list filing
office] in its mortgage and conveyance records, all other
persons, whatsoever. The 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 Koppel and all other
persons; and
(viii) Upon the closing of the transactions
contemplated hereby, the transfer of funds pursuant to the
Company's Company Order dated as of the Closing and the filing
of certain release documents, any and all liens of record in
the Commonwealth of Pennsylvania in favor of GECC with respect
to the $90,000,000 Loan Agreement dated as of October 4, 1990,
as amended, shall be released from all public records in the
Commonwealth of Pennsylvania;
(ix) 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
<PAGE> 22
22
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) Brown, Sims, Wise & White 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) Newport, Koppel and Imperial are each duly
qualified to do business and are in good standing as foreign
corporations in the State of Texas. Each of the Newport,
Koppel and Imperial have all power and authority necessary to
own or hold their respective properties and to conduct the
businesses in which they are engaged;
(ii) The execution, delivery and performance by
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 the certain financing
statements;
(iii) Upon the filing of certain financing
statements in the State of Texas, the Collateral Agent on
behalf of the holders of the Notes and the holder of the
Koppel Intercompany Note will have valid and fully perfected
security interests in the Collateral (excluding the real
property other than fixtures subject to the Texas Mortgages)
located in the State of Texas; and
(iv) 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
property described therein enforceable as such against 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 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 and all other
persons; and
(v) The courts of the State of Texas will enforce
those provisions in the Security Agreements which stipulate
that the validity, construction and
<PAGE> 23
23
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) Huffman, Arrington, Kihle, Gaberino & Dunn 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) Erlanger has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Oklahoma. Erlanger has all power and
authority necessary to own or hold its properties and to
conduct the business in which it is engaged;
(ii) All of the issued shares of capital stock of
Erlanger have been duly and validly authorized and issued and
are fully paid and non-assessable and (except for directors'
qualifying shares, if any) are owned directly or indirectly by
the Company, free and clear of all liens, encumbrances,
equities or claims;
(iii) Erlanger has the corporate power and
authority to execute and deliver the Collateral Documents to
which it is a party and to perform its obligations thereunder;
and all corporate action required to be taken by Erlanger for
the due and proper authorization, execution and delivery of
the Collateral Documents to which it is a party and the
consummation of the transactions contemplated by the
Collateral Documents to which it is a party have been duly and
validly taken;
(iv) The Collateral Documents to which it is a
party have been duly authorized, executed and delivered by
Koppel and constitute valid and binding agreements of Erlanger
in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws relating to or affecting
creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and
an implied covenant of good faith and fair dealing;
(v) 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;
<PAGE> 24
24
(vi) Upon the filing of certain financing
statements in the State of Oklahoma, the Collateral Agent on
behalf of the holders of the Notes and the holder of the
Erlanger Intercompany Note will have valid and fully perfected
security interests in the Collateral (excluding the real
property other than the fixtures subject to the Oklahoma
Mortgages) located in the State of Oklahoma;
(vii) The Oklahoma Mortgages are in proper form for
recording in the State of Oklahoma, comply with all applicable
legal requirements and creates for the benefit of the
Collateral Agent and the holder of the Erlanger Intercompany
Note a legal, valid and binding mortgage lien upon the real
property described therein enforceable as such against
Erlanger and, upon recordation by the [list filing office] in
its mortgage and conveyance records, all other persons,
whatsoever. The provisions of the Oklahoma Mortgage 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 and the holder of the Erlanger Intercompany
Note a legal, valid and binding, perfected lien on such
property, enforceable as such against Erlanger and all other
persons; and
(viii) 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 reasonably 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
<PAGE> 25
25
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 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 Notes 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 Notes 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
<PAGE> 26
26
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
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
10.65% 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 related "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
<PAGE> 27
27
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 that the Company will continue to be liable for the
payment of expenses to the extent set forth in Section 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 solely by reason of the default
of one of the Underwriters, the Company shall not be obligated to reimburse the
Underwriters 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
<PAGE> 28
28
out of or 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.
The foregoing indemnity with respect to any untrue statement contained in or
omission from a Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) from whom the person
asserting any such loss, liability, claim, damage or expense purchased any of
the Securities which are the subject thereof if such person was not sent or
given a copy of the Prospectus (or the Prospectus as amended or supplemented)
(in each case exclusive of the documents from which information is incorporated
by reference) at or prior to the written confirmation of the sale of such
Securities to such person and the untrue statement contained in or omission
from such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented), unless such failure resulted from non-
compliance by the Company with Section 4(c) or 4(d).
(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
<PAGE> 29
29
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 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 separate counsel to represent
jointly the Underwriters and their respective controlling persons in any such
action but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the employment thereof has been specifically
authorized by the indemnifying party in writing, (ii) such indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it that are different from or additional to those
available to the indemnifying party or the representation of such indemnified
party and the indemnifying party by the same counsel would be inappropriate
under applicable standards of appropriate conduct due to actual or potential
differing interests between them and in the reasonable judgment of such counsel
it is advisable for such indemnified party to employ separate counsel or (iii)
the indemnifying party has failed to assume the defense of such action and
employ counsel reasonably satisfactory to the indemnified party, in which case,
if such indemnified party notifies the indemnifying party in writing that it
elects to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood that the
Company shall not in connection with any proceeding or related proceeding in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties. 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
<PAGE> 30
30
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 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.
<PAGE> 31
31
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 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.
<PAGE> 32
32
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.
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
<PAGE> 33
33
For itself and as Representative
CS FIRST BOSTON CORPORATION
By ________________________________________________
Authorized Signatory
<PAGE> 34
34
Schedule 1
Underwriters of Securities Amount of Units
- -------------------------- ---------------
Chemical Securities, Inc.
CS First Boston
Total 125,000
<PAGE> 1
STB DRAFT
7/14/95
---------
NS GROUP, INC.
and
_________________________, as
Warrant Agent
___________________________________________
WARRANT AGREEMENT
Dated as of ________________, 1995
___________________________________________
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
ORIGINAL ISSUE OF WARRANTS . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.1 Form of Warrant Certificates . . . . . . . . . . . . . . . 4
Section 2.2 Execution and Delivery of Warrant Certificates . . . . . . 5
Section 2.3 Global Certificate Legend . . . . . . . . . . . . . . . . . 5
ARTICLE III
EXERCISE PRICE; EXERCISE OF WARRANTS GENERALLY;
NON-SURVIVING COMBINATION . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.1 Exercise Price . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.2 Exercise of Warrants . . . . . . . . . . . . . . . . . . . 6
Section 3.3 Expiration of Warrants. . . . . . . . . . . . . . . . . . . 6
Section 3.4 Method of Exercise . . . . . . . . . . . . . . . . . . . . 6
Section 3.5 Non-Surviving Combination . . . . . . . . . . . . . . . . . 7
ARTICLE IV
ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.1 Adjustments of Exercise Price and Number of Shares of Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.2 Notice of Adjustment . . . . . . . . . . . . . . . . . . . 15
Section 4.3 Statement of Warrants. . . . . . . . . . . . . . . . . . . 16
Section 4.4 Fractional Interest . . . . . . . . . . . . . . . . . . . . 16
ARTICLE V
WARRANT TRANSFER BOOKS, TRANSFERS AND EXCHANGES . . . . . . . . . . . . 16
Section 5.1 Warrant Transfer Books, etc. . . . . . . . . . . . . . . . 16
Section 5.2 Transfers of Warrants Prior to Separation of Warrants and Senior
Secured Notes; Separation of Warrants and
Senior Secured Notes . . . . . . . . . . . . . . . . . . . 18
ARTICLE VI
WARRANT HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.1 No Voting Rights . . . . . . . . . . . . . . . . . . . . . 19
Section 6.2 Right of Action . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE> 3
Page
ARTICLE VII
WARRANT AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.1 Nature of Duties and Responsibilities Assumed . . . . . . . 20
Section 7.2 Right to Consult Counsel . . . . . . . . . . . . . . . . . 22
Section 7.3 Compensation and Reimbursement. . . . . . . . . . . . . . . 22
Section 7.4 Warrant Agent May Hold Company Securities . . . . . . . . . 22
Section 7.5 Resignation and Removal; Appointment of Successor . . . . . 22
ARTICLE VIII
COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 8.1 Reservation of Common Stock for Issuance on Exercise of Warrants;
Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 8.2 Reports to Holders . . . . . . . . . . . . . . . . . . . . 24
Section 8.3 Agreements Respecting Warrants . . . . . . . . . . . . . . 24
Section 8.4 Qualification Under the Securities Laws . . . . . . . . . . 25
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.1 Money and Other Property Deposited with the Warrant Agent . 25
Section 9.2 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . 25
Section 9.3 Surrender of Certificates . . . . . . . . . . . . . . . . . 26
Section 9.4 Mutilated, Destroyed, Lost and Stolen Warrant Certificates. 26
Section 9.5 Miscellaneous Rights . . . . . . . . . . . . . . . . . . . 27
Section 9.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.7 Benefit of This Agreement . . . . . . . . . . . . . . . . . 28
Section 9.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.9 Amendments . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 9.10 Termination . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 9.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . 29
Section 9.12 Headings . . . . . . . . . . . . . . . . . . . . . . . . . 30
<PAGE> 4
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of _______ __, 1995, between NS Group, Inc., a
_______ corporation (the "Company"), and ____________________, a ___________,
as warrant agent (the "Warrant Agent").
WHEREAS, the Company proposes to issue and deliver its warrant certificates
(the "Warrant Certificates") evidencing warrants (the "Warrants") to acquire,
under certain circumstances, up to an aggregate of _______ shares, subject to
adjustment, of its Common Stock (as defined below), in connection with an
offering by the Company of 125,000 Units (herein so called) comprised of the
Warrants and $125,000,000 aggregate principal amount of its ___% Senior Secured
Notes Due 2003 (the "Senior Secured Notes");
WHEREAS, the Senior Secured Notes are to be issued under an indenture to be
dated as of ______ __, 1995 (the Indenture") between the Company and Huntington
National Bank, as trustee (the "Trustee");
WHEREAS, each Unit will consist of one Senior Secured Note in the principal
amount of $1,000 and _______ Warrants (each initially entitling the holder
thereof to purchase one share of Common Stock), and, prior to the separation of
Senior Secured Notes from Warrants as described herein, the Units shall be
physically represented by Senior Secured Notes containing thereon an
endorsement (the "Warrant Endorsement") representing beneficial ownership of
the related Warrants on deposit with the Warrant Agent as custodian for the
registered holders of such Senior Secured Notes;
WHEREAS, the Warrants and the Senior Secured Notes shall be separately
transferable commencing on the Separation Date (as defined below); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates and other matters as provided herein;
NOW, THEREFORE, in consideration of the foregoing and for the purpose of
defining the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company, the Warrant Agent and the record holders
from time to time of the Warrants, the Company and the Warrant Agent hereby
agree as follows:
<PAGE> 5
ARTICLE I
DEFINITIONS
Section 1.1 Certain Definitions.
--------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
"Affiliate" of any person means any person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such person. For purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of
voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Change of Shares" shall have the meaning ascribed thereto in Section
4.1(a) hereof.
"Common Equity Securities" means Common Stock and securities convertible
into, or exercisable or exchangeable for, Common Stock or rights or options
to acquire Common Stock or such other securities, excluding the Warrants.
"Common Stock" means the common stock $0.01 par value per share, of the
Company, and any other capital stock of the Company into which such common
stock may be converted or reclassified or that may be issued in respect of,
in exchange for, or in substitution of, such common stock by reason of any
stock splits, stock dividends, distributions, mergers, consolidations or
other like events.
"Common Stock Distribution" shall have the meaning ascribed thereto in
Section 4.1(b) hereof.
"Convertible Securities" shall have the meaning ascribed thereto in
Section 4.1(c) hereof.
"Depository" means a clearing agency registered under the Exchange Act
that is designated by the Company to act as depository for the Warrants.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means __________ __, ____, subject to the provisions
of Section 3.5.
"Global Certificate" or "Global Certificates" means a Warrant
Certificate or Certificates, as the case may be, substantially in the form
attached hereto as Exhibit A, evidencing all or part of the entire issue of
Warrants,
<PAGE> 6
3
issued to the Depository or its nominee, and registered in the name of such
Depository or nominee.
"Holders" means, from time to time, the holders of the Warrants.
"NASD" means the National Association of Securities Dealers, Inc., or
any successor corporation thereto.
"NASDAQ" means the National Association of Securities Dealers, Inc.
Automated Quotation System.
"Non-Surviving Combination" means any merger, consolidation or other
business combination by the Company with one or more persons (other than a
Wholly Owned Recourse Subsidiary) in which the Company is not the survivor,
or a sale of all or substantially all of the assets of the Company to one or
more such other persons, if, in connection with any of the foregoing,
consideration (other than consideration which includes Common Equity
Securities) is distributed to holders of Common Stock in exchange for all or
substantially all of their equity interest in the Company.
"Options" shall have the meaning ascribed thereto in Section 4.1(c)
hereof.
The term "person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Purchase Price" means the purchase price per share of Common Stock to
be paid upon the exercise of each Warrant in accordance with the terms hereof,
which price shall initially be $____________ per share, subject to adjustment
from time to time pursuant to Article IV hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Separated" shall have the meaning ascribed thereto in Section 5.2
hereof.
"Separation" shall have the meaning ascribed thereto in Section 5.2
hereof.
"Separation Date" means __________ 1995 or such earlier date as may be
designated to the Company by the Underwriters; provided, however, in the
event that the Company is required to make either an Asset Sale Offer or a
<PAGE> 7
4
Change of Control Offer, the Separation Date means the date the Company mails
the required notice thereof to the holders of the Senior Secured Notes.
"Survivor" shall have the meaning ascribed thereto in Section 3.5(b)
hereof.
"Underlying Common Stock" means the shares of Common Stock issuable
upon the exercise of the Warrants.
"Underwriters" means Chemical Securities, Inc. and CS First Boston, the
underwriters of the Units.
"Warrant Agent" means __________________, a New York corporation, or the
successor or successors of such Warrant Agent appointed in accordance with
the terms hereof.
"Warrant Agent Office" shall have the meaning ascribed thereto in
Section 5.1 hereof.
"Warrant Certificates" shall have the meaning ascribed thereto in
Section ___ hereof.
"Warrants" shall have the meaning ascribed thereto in Section ___
hereof.
The terms "Asset Sale Offer" and "Change of Control Offer" and
"Wholly-Owned Recourse Subsidiary" shall have the respective meanings
ascribed thereto in the Indenture.
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
Section 2.1 Form of Warrant Certificates.
-----------------------------
The Warrant Certificates (a) shall be issued in registered
form only and substantially in the form attached hereto as Exhibit A, (b) shall
be dated the date of issuance thereof (whether upon initial issuance,
registration of transfer, exchange or replacement), (c) shall show the date of
countersignature and (d) shall have such legends and endorsements, each as
provided by the Company, typed, stamped, printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any law
or with any rule or regulation pursuant thereto or with any rule or regulation
of any securities exchange on which the Warrant may be listed, or to conform to
customary usage. The Warrant Certificates shall be in a format and in a form
reasonably satisfactory to the Warrant Agent.
<PAGE> 8
5
Pending the preparation of definitive Warrant Certificates,
temporary Warrant Certificates may be issued, which may be printed,
lithographed, typewritten, mimeographed or otherwise produced, and which will
be substantially of the tenor of the definitive Warrant Certificates in lieu of
which they are issued.
If temporary Warrant Certificates are issued, the Company will
cause definitive Warrant Certificates to be prepared without unreasonable
delay. After the preparation of definitive Warrant Certificates, the temporary
Warrant Certificates shall be exchangeable for definitive Warrant Certificates
upon surrender of the temporary Warrant Certificates to the Warrant Agent,
without charge to the Holder. Until so exchanged the temporary Warrant
Certificates shall in all respects be entitled to the same benefits under this
Agreement as definitive Warrant Certificates.
Section 2.2 Execution and Delivery of Warrant Certificates.
-----------------------------------------------
Warrant Certificates evidencing Warrants to purchase initially
an aggregate of up to _________ shares of Common Stock shall be executed, on or
after the date of this Agreement, by the Company and delivered to the Warrant
Agent for countersignature, and the Warrant Agent shall thereupon countersign
and deliver such Warrant Certificates upon the order and at the direction of
the Company to the purchasers thereof on the date of issuance. The Warrant
Agent is hereby authorized to countersign and deliver Warrant Certificates as
required by this Section 2.2 or by Section 3.4, Article V or Section 9.4. The
Warrant Certificates shall be executed on behalf of the Company by its Chairman
of the Board, its President or any of its Vice Presidents, either manually or
by facsimile signature printed thereon. The Warrant Certificates shall be
manually countersigned by an authorized signatory of the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In case any
officer of the Company whose signature shall have been placed upon any of the
Warrant Certificates shall cease to be the Chairman of the Board, the President
or a Vice President of the Company before countersignature by the Warrant Agent
and issue and delivery thereof, such Warrant Certificates may, nevertheless, be
countersigned by the Warrant Agent and issued and delivered with the same force
and effect as through such person had not ceased to be such officer of the
Company.
Section 2.3 Global Certificate Legend.
--------------------------
Any Global Certificate issued hereunder shall, in addition to
the provisions contained in Exhibit A, bear a legend on its face in
substantially the following form:
"This Warrant is a Global Certificate within the
meaning of the Warrant Agreement hereinafter referred to and
is registered in the name of a Depository or a
<PAGE> 9
6
nominee of a Depository. This Warrant Certificate is exchangeable for
Warrant Certificates registered in the name of a person other than the
Depository or its nominee only in the limited circumstances described
in the Warrant Agreement, and may not be transferred except as a whole
by the Depository to a nominee of the Depository or by a nominee of
the Depository to the Depository or another nominee of the
Depository."
ARTICLE III
EXERCISE PRICE; EXERCISE OF WARRANTS GENERALLY;
NON-SURVIVING COMBINATION
Section 3.1 Exercise Price.
---------------
Each Warrant Certificate shall, when countersigned by the
Warrant Agent, entitle the Holder thereof, subject to the provisions thereof
and of this Agreement, to receive one share of Common Stock for each Warrant
represented thereby, subject to adjustment as herein provided upon payment of
the Purchase Price for each of such shares. The Purchase Price shall be
payable by certified or official bank check or wire transfer, payable in United
States currency to the order of the Company.
Section 3.2 Exercise of Warrants.
---------------------
Subject to the terms and conditions set forth herein, the
Warrants shall be exercisable at any time on or after the Separation Date and
prior to 5 p.m., New York City time, on the Expiration Date.
Section 3.3 Expiration of Warrants.
-----------------------
The Warrants shall terminate and become void as of 5 p.m., New
York City time, on the Expiration Date; provided, however, that the Warrants
will terminate and become void prior to the Expiration Date in the event of a
Non-Surviving Combination, pursuant to Section 3.5.
The Company shall give notice not less than 90, and not more
than 120, days prior to the Expiration Date to the Holders of all then
outstanding Warrants to the effect that the Warrants will terminate and become
void as of 5 p.m., New York City time, on the Expiration Date; provided,
however, that the failure by the Company to give such notice as provided in
this Section shall not affect such termination and becoming void of the
Warrants as of 5 p.m., New York City time, on the Expiration Date.
Section 3.4 Method of Exercise.
-------------------
In order to exercise a Warrant, the Holder thereof must
surrender the Warrant Certificate evidencing such Warrant to the Warrant Agent
at the Warrant Agent Office, with one of the forms
<PAGE> 10
7
on the reverse of or attached to the Warrant Certificate duly executed, and
tender the Purchase Price therefor in accordance with this Article III.
If fewer than all of the Warrants represented by a Warrant
Certificate are surrendered, such Warrant Certificate shall be surrendered and,
subject to the provisions of Article V, a new Warrant Certificate of the same
tenor and for the number of Warrants that were not surrendered shall be
executed by the Company. The Warrant Agent shall countersign the new Warrant
Certificate, register it in such name or names as may be directed in writing by
the Holder and deliver the new Warrant Certificate to the person or persons
entitled to receive the same.
Upon surrender of a Warrant Certificate and payment of the
Purchase Price in conformity with the foregoing provisions, the Warrant Agent
shall thereupon promptly notify the Company, and the Warrant Agent will deliver
or cause to be delivered to or upon written order of any Holder appropriate
evidence of ownership of any shares of Underlying Common Stock or other
securities or property (including any money) to which the Holder is entitled,
subject to the provisions of Section 9.2.
Section 3.5 Non-Surviving Combination.
--------------------------
(a) If the Company proposes, prior to the Expiration Date, to
enter into a transaction that would constitute a Non-Surviving Combination if
consummated, the Company shall give written notice thereof to the Warrant
Agent and to the Holders of Warrants, promptly after an agreement is reached
with respect to the Non-Surviving Combination but in no event less than 30 days
prior to the consummation thereof. Such notice shall describe the transaction
in reasonable detail and specify the consideration to be received by the
Holders. The Company shall also furnish to each Holder of Warrants all notices
and materials furnished to its stockholders in connection with such
transactions.
(b) The Company agrees that it will not enter into an
agreement providing for a Non-Surviving Combination, unless the party to such
transaction that is the surviving entity (the "Survivor") shall be obligated to
distribute or pay to each Holder of Warrants, upon payment of the Purchase
Price prior to the Expiration Date, the number of shares of stock or other
securities or other property (including any cash) of the Survivor that would
have been distributable or payable on account of the Underlying Common Stock if
such Holder's Warrants had been exercised immediately prior to such
Non-Surviving Combination (or, if applicable, the record date therefor).
Following the consummation of a Non-Surviving Combination, the Warrants shall
represent only the right to receive such shares of stock or other property from
the Survivor upon payment of the Purchase Price prior to the Expiration Date.
<PAGE> 11
8
ARTICLE IV
ADJUSTMENTS
Section 4.1 Adjustments of Exercise Price and Number of Shares of Common
------------------------------------------------------------
Stock.
------
The number and kind of shares purchasable upon the exercise of
Warrants and the Purchase Price shall be subject to adjustment from time to
time as follows:
(a) Changes in Common Stock. In the event the Company shall,
at any time or from time to time after the date hereof, (i) issue any shares of
Common Stock as a stock dividend to the holders of Common Stock, (ii) subdivide
or combine the outstanding shares of Common Stock into a greater or lesser
number of shares or (iii) issue any shares of its capital stock in a
reclassification or reorganization of the Common Stock (any such issuance,
subdivision, combination, reclassification or reorganization being herein
called a "Change of Shares"), then (A) in the case of (i) or (ii) above, the
number of shares of Common Stock that may be purchased upon the exercise of
each Warrant shall be adjusted to the number of shares of Common Stock that the
Holder of such Warrant would have owned or have been entitled to receive after
the happening of such event had such Warrant been exercised immediately prior
to the record date (or, if there is no record date, the effective date) for
such event, and the Purchase Price shall be adjusted to the price (calculated
to the nearest 1,000th of one cent) determined by multiplying the Purchase
Price immediately prior to such event by a fraction, the numerator of which
shall be the number of shares of Common Stock purchasable with one Warrant
immediately prior to such event and the denominator of which shall be the
number of shares of Common Stock purchasable with one Warrant after the
adjustment referred to above and (B) in the case of (iii) above, paragraph (l)
below shall apply. An adjustment made pursuant to clause (A) of this paragraph
(a) shall become effective retroactively immediately after the record date in
the case of such dividend and shall become effective immediately after the
effective date in other cases, but any shares of Common Stock issuable solely
as a result of such adjustment shall not be issued prior to the effective date
of such event.
(b) Common Stock Distribution. In the event the Company
shall, at any time or from time to time after the date hereof, issue, sell or
otherwise distribute (including by way of deemed distributions pursuant to
paragraphs (c) and (d) below) any shares of Common Stock (other than pursuant
to a Change of Shares or the exercise of any Option, Convertible Security (each
as defined in paragraph (c) below) or Warrant) (any such event, including any
deemed distributions described in paragraphs (c) and (d), being herein called a
"Common Stock Distribution"), for a consideration per share less than the
current market price per share of Common Stock (as defined in paragraph (f)
below), on the date of such Common Stock Distribution, then, effective upon
such
<PAGE> 12
9
Common Stock Distribution, the Purchase Price shall be reduced to the price
(calculated to the nearest 1,000th of one cent) determined by multiplying the
Purchase Price in effect immediately prior to such Common Stock Distribution by
a fraction, the numerator of which shall be the sum of (i) the number of shares
of Common Stock outstanding (exclusive of any treasury shares) immediately
prior to such Common Stock Distribution multiplied by the current market price
per share of Common Stock on the date of such Common Stock Distribution, plus
(ii) the consideration, if any, received by the Company upon such Common Stock
Distribution, and the denominator of which shall be the product of (A) the
total number of shares of Common Stock outstanding (exclusive of any treasury
shares) immediately after such Common Stock Distribution multiplied by (B) the
current market price per share of Common Stock on the date of such Common Stock
Distribution.
If any Common Stock Distribution shall require an adjustment
to the Purchase Price pursuant to the foregoing provisions of this paragraph
(b), including by operation of paragraph (c) or (d) below, then, effective at
the time such adjustment is made, the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall be increased to a number
determined by multiplying the number of such shares so purchasable immediately
prior to such Common Stock Distribution by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately
after such adjustment. In computing adjustments under this paragraph,
fractional interests in Common Stock shall be taken into account to the nearest
1,000th of a share.
The provisions of this paragraph (b), including by operation
of paragraph (c) or (d) below, shall not operate to increase the Purchase Price
or reduce the number of shares of Common Stock purchasable upon the exercise of
any Warrant, except by operation of paragraph (j) or (k) below.
(c) Issuance of Options. In the event the Company shall, at
any time or from time to time after the date hereof, issue, sell, distribute or
otherwise grant in any manner (including by assumption) any rights to subscribe
for or to purchase, or any warrants or options for the purchase of, Common
Stock or any stock or securities convertible into or exchangeable for Common
Stock (any such rights, warrants or options being herein called "Options" and
any such convertible or exchangeable stock or securities being herein called
"Convertible Securities"), whether or not such Options or the rights to convert
or exchange such Convertible Securities are immediately exercisable, and the
price per share at which Common Stock is issuable upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (i) the aggregate amount, if any, received or
receivable by the Company as consideration for the issuance, sale,
<PAGE> 13
10
distribution or granting of such Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise of
all such Options, plus, in the case of Options to acquire Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable upon the conversion or exchange of all such Convertible Securities, by
(ii) the total maximum number of shares of Common Stock issuable upon the
exercise of all such Options) shall be less than the current market price per
share of Common Stock on the date of the issuance, sale, distribution or
granting of such Options then, for purposes of paragraph (b) above, the total
maximum number of shares of Common Stock issuable upon the exercise of all such
Options or upon the conversion or exchange of the total maximum amount of the
Convertible Securities issuable upon the exercise of all such Options shall be
deemed to have been issued as of the date of the issuance, sale, distribution
or granting of such Options and thereafter shall be deemed to be outstanding
and the Company shall be deemed to have received as consideration such price
per share, determined as provided above, therefor. Except as otherwise
provided in paragraphs (j) and (k) below, no additional adjustment of the
Purchase Price shall be made upon the actual exercise of such Options or upon
conversion or exchange of the Convertible Securities issuable upon the exercise
of such Options. If the minimum and maximum numbers or amounts referred to in
this paragraph (c) or in paragraph (d) below cannot be calculated with
certainty as of the date of the required adjustment, such numbers and amounts
shall be determined in good faith by the Board of Directors of the Company.
(d) Issuance of Convertible Securities. In the event the
Company shall, at any time or from time to time after the date hereof, issue,
sell or otherwise distribute (including by assumption) any Convertible
Securities (other than upon the exercise of any Option), whether or not the
rights to convert or exchange such Convertible Securities are immediately
exercisable, and the price per share at which Common Stock is issuable upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the aggregate amount, if any, received or receivable by the Company as
consideration for the issuance, sale or distribution of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange of all such
Convertible Securities, by (ii) the total maximum number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the current market price per share of Common
Stock on the date of such issuance, sale or distribution, then, for the
purposes of paragraph (b) above, the total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities
shall be deemed to have been issued as of the date of the issuance, sale or
distribution of such Convertible Securities and thereafter shall be deemed to
be outstanding and the Company shall be deemed to have received as
consideration such price per
<PAGE> 14
11
share, determined as provided above, therefor. Except as otherwise provided in
paragraphs (j) and (k) below, no additional adjustment of the Purchase Price
shall be made upon the actual conversion or exchange of such Convertible
Securities.
(e) Dividends and Distributions. In the event the Company
shall, at any time or from time to time after the date hereof, distribute to
the holders of Common Stock any dividend or other distribution of cash,
evidences of its indebtedness, other securities or other properties or assets
(in each case other than (i) dividends payable in Common Stock, Options or
Convertible Securities and (ii) any cash dividend that, when added to all other
cash dividends paid in the one year prior to the declaration date of such
dividend (excluding any such other dividend included in a previous adjustment
of the Purchase Price pursuant to this paragraph (e)), does not exceed 10% of
the current market price per share of Common Stock on such declaration date),
or any options, warrants or other rights to subscribe for or purchase any of
the foregoing, then (A) the Purchase Price shall be decreased to a price
determined by multiplying the Purchase Price then in effect by a fraction, the
numerator of which shall be the current market price per share of Common Stock
on the record date for such distribution less the sum of (X) the cash portion,
if any, of such distribution per share of Common Stock outstanding (exclusive
of any treasury shares) on the record date for such distribution plus (Y) the
then fair market value (as determined in good faith by the Board of Directors
of the Company) per share of Common Stock outstanding (exclusive of any
treasury shares) on the record date for such distribution of that portion, if
any, of such distribution consisting of evidences of indebtedness, other
securities, properties, assets, options, warrants or subscription or purchase
rights, and the denominator of which shall be such current market price per
share of Common Stock and (B) the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall be increased to a number determined by
multiplying the number of shares of Common Stock so purchasable immediately
prior to the record date for such distribution by a fraction, the numerator of
which shall be the Purchase Price in effect immediately prior to the adjustment
required by clause (A) of this sentence and the denominator of which shall be
the Purchase Price in effect immediately after such adjustment. The
adjustments required by this paragraph (e) shall be made whenever any such
distribution is made and shall be retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
(f) Current Market Price. For the purpose of any computation
under paragraphs (b), (c), (d) and (e) of this Section, the current market
price per share of Common Stock at any date shall be the average of the daily
closing prices for the shorter of (i) the 20 consecutive trading days ending on
the last full trading day on the exchange or market specified in the second
succeeding sentence prior to the Time of Determination and
<PAGE> 15
12
(ii) the period commencing on the date next succeeding the first public
announcement of the issuance, sale, distribution or granting in question
through such last full trading day prior to the Time of Determination. The
term "Time of Determination" as used herein shall be the time and date of the
earlier to occur of (A) the date as of which the current market price is to be
computed and (B) the last full trading day on such exchange or market before
the commencement of "ex-dividend" trading in the Common Stock relating to the
event giving rise to the adjustment required by paragraph (b), (c), (d) or (e).
The closing price for any day shall be the last reported sale price regular way
or, in case no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in each case (1) on the
principal national securities exchange on which the shares of Common Stock are
listed or to which such shares are admitted to trading or (2) if the Common
Stock is not listed or admitted to trading on a national securities exchange,
in the over-the-counter market as reported by NASDAQ or any comparable system
or (3) if the Common Stock is not listed on NASDAQ or a comparable system, as
furnished by two members of the NASD selected from time to time in good faith
by the Board of Directors of the Company for that purpose. In the absence of
all of the foregoing, or if for any other reason the current market price per
share cannot be determined pursuant to the foregoing provisions of this
paragraph (f), the current market price per share shall be the fair market
value thereof as determined in good faith by the Board of Directors of the
Company.
(g) Certain Distributions. If the Company shall pay a
dividend or make any other distribution payable in Options or Convertible
Securities, then, for purposes of paragraph (b) above (by operation or
paragraph (c) or (d) above, as the case may be), such Options or Convertible
Securities shall be deemed to have been issued or sold without consideration
except for such amounts of consideration as shall have been deemed to have been
received by the Company pursuant to paragraphs (c) or (d) above, as
appropriate.
(h) Consideration Received. If any shares of Common Stock
shall be issued and sold in an underwritten public offering, the consideration
received by the Company for such shares of Common Stock shall be deemed to
include the underwriting discounts and commissions realized by the underwriters
of such public offering. If any shares of Common Stock, Options or Convertible
Securities, shall be issued, sold or distributed for a consideration other than
cash, the amount of the consideration other than cash received by the Company
in respect thereof shall be deemed to be the then fair market value of such
consideration (as determined in good faith by the Board of Directors of the
Company). If any Options shall be issued in connection with the issuance and
sale of other securities of the Company, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the
<PAGE> 16
13
parties thereto, such Options shall be deemed to have been issued, sold or
distributed for such amount of consideration as shall be allocated to such
Options in good faith by the Board of Directors of the Company.
(i) Deferral of Certain Adjustments. No adjustments to the
Purchase Price (including the related adjustment to the number of shares of
Common Stock purchasable upon the exercise of each Warrant) shall be required
hereunder unless such adjustment, together with other adjustments carried
forward as provided below, would result in an increase or decrease of at least
one percent of the Purchase Price; provided, however, that any adjustment which
by reason of this paragraph (i) is not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
(j) Changes in Options and Convertible Securities. If the
exercise price provided for in any Options referred to in paragraph (c) above,
the additional consideration, if any, payable upon the conversion or exchange
of any Convertible Securities referred to in paragraph (c) or (d) above, or the
rate at which any Convertible Securities referred to in paragraph (c) or (d)
above are convertible into or exchangeable for Common Stock shall change at any
time (other than under or by reason of provisions designed to protect against
dilution upon an event which results in a related adjustment pursuant to this
Article IV), the Purchase Price then in effect and the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall forthwith be
readjusted (effective only with respect to any exercise of any Warrant after
such readjustment) to the Purchase Price and number of shares of Common Stock
so purchasable that would then be in effect had the adjustment made upon the
issuance, sale, distribution or granting of such Options or Convertible
Securities been made based upon such changed purchase price, additional
consideration or conversion rate, as the case may be, but only with respect to
such Options and Convertible Securities as then remain outstanding.
(k) Expiration Of Options and Convertible Securities. If, at
any time after any adjustment to the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall have been made pursuant to
paragraph (c), (d) or (j) above or this paragraph (k), any Options or
Convertible Securities shall have expired unexercised or, solely with respect
to Options that are rights, are redeemed, the number of such shares so
purchasable shall, upon such expiration or such redemption, be readjusted and
shall thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case may be)
as if (i) the only shares of Common Stock deemed to have been issued in
connection with such Options or Convertible Securities were the shares of
Common Stock, if any, actually issued or sold upon the exercise of such Options
or Convertible Securities and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually
<PAGE> 17
14
received by the Company upon such exercise plus the aggregate consideration, if
any, actually received by the Company for the issuance, sale, distribution or
granting of all such Options or Convertible Securities, whether or not
exercised; provided, however, that (x) no such readjustment shall have the
effect of decreasing the number of shares so purchasable by an amount
(calculated by adjusting such decrease to account for all other adjustments
made pursuant to this Article IV following the date of the original adjustment
referred to above) in excess of the amount of the adjustment initially made in
respect of the issuance, sale, distribution or granting of such Options or
Convertible Securities and (y) in the case of the redemption of any Rights,
there shall be deemed (for the purposes of paragraph (c) above) to have been
issued as of the date of such redemption for no consideration a number of
shares of Common Stock equal to the aggregate consideration paid to effect such
redemption divided by the current market price of the Common Stock on the date
of such redemption.
(l) Other Adjustments. In the event that at any time the
Holders shall become entitled to receive any securities of the Company other
than shares of Common Stock as constituted on the date hereof the number of
such other securities so receivable upon exercise of the Warrants and the
Purchase Price applicable to such exercise shall be adjusted at such time, and
shall be subject to further adjustment from time to time thereafter, in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the shares of Common Stock contained in this Article IV.
(m) Excluded Transactions. Notwithstanding any provision in
this Article IV to the contrary, no adjustment shall be made pursuant to this
Article IV in respect of (i) any change in the par value of the Common Stock,
(ii) the granting of any Options or the issuance of any shares of Common Stock,
in either case, which would otherwise trigger an adjustment under paragraph (b)
above, that may be registered on Form S-8 or any successor form under the
Securities Act, to any officers, directors or employees of, or any consultants
or advisors to, the Company, provided that the granting of any Options or the
issuance of shares of Common Stock pursuant to this clause (ii) are in the
ordinary course of business and are usual and customary, or (iii) the issuance
of Common Stock (A) upon conversion or exercise of any Convertible Securities
or Options of the Company outstanding on the date hereof or (B) pursuant to any
dividend reinvestment plan which provided that the price of the Common Stock
purchased for plan participants from the Company will be no less than 95% of
the average of the high and low sales prices of the Common Stock on the
investment date or, if no trading in the Common Stock occurs on such date, the
next preceding date on which trading occurred (1) on the principal national
securities exchange on which the shares of Common Stock are listed or to which
such shares are admitted to trading or (2) if the Common Stock is not listed or
admitted to trading on a national
<PAGE> 18
15
securities exchange, in the over-the-counter market as reported by NASDAQ or
any comparable system or (3) if the Common Stock is not listed on NASDAQ or a
comparable system, as furnished by two members of the NASD selected from time
to time in good faith by the Board of Directors of the Company for that
purpose. In the absence of all of the foregoing, or if for any other reason
the current market price per share cannot be determined pursuant to the
foregoing provisions of this paragraph, the current market price per share
shall be the fair market value thereof as determined in good faith by the Board
of Directors of the Company. Clause (ii) of this paragraph (m) shall not apply
to any such grant or issuance if, after giving effect thereto, the aggregate
amount of Common Stock issued in all transactions covered by clause (ii) of
this paragraph (m) (assuming the exercise of all then outstanding Options
granted in such transactions) would exceed 10% of the number of shares of
Common Stock then outstanding (after giving effect to the exercise of the
Options so granted and all then outstanding Options or Convertible Securities).
Section 4.2 Notice of Adjustment.
---------------------
Whenever the number of shares of Common Stock or other stock
or property issuable upon the exercise of each Warrant is adjusted, as herein
provided, the Company shall promptly give a written certificate of the Company
to the Warrant Agent of such adjustment or adjustments and shall cause the
Warrant Agent promptly to mail by first class mail, postage prepaid, to each
Holder and the Warrant Agent notice of such adjustment or adjustments. In
addition, the Company at its sole expense shall within 120 calendar days
following the end of each fiscal year of the Company during which any Warrants
remain outstanding, and promptly upon the request of any Holder of a Warrant in
connection with the exercise of any of such Holder's Warrants, cause to be
delivered to the Warrant Agent a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be the
regular accountants employed by the Company) setting forth the number of shares
of Common Stock or other stock or property issuable upon the exercise of each
Warrant after such adjustment, setting forth a brief statement of the facts
requiring such adjustment and setting forth the computation by which such
adjustment was made. The Warrant Agent shall be entitled to rely on such
Certificates and shall be under no duty or responsibility with respect to any
such certificate except to exhibit the same from time to time to any Holder
desiring an inspection thereof during reasonable business hours. The Warrant
Agent shall not at any time be under any duty or responsibility to any Holder
to determine whether any facts exist that may require any adjustment of the
number of shares of Common Stock or other stock or property issuable on
exercise of the Warrants, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed in making such
adjustment or the validity or value (or the kind or amount) of any shares of
Common Stock or other stock
<PAGE> 19
16
or property which may be issuable on exercise of the Warrants. The Warrant
Agent shall not be responsible for any failure of the Company to make any cash
payment or to issue, transfer or deliver any shares of Common Stock or stock
certificates or other common stock or property upon the exercise of any
Warrant.
Section 4.3 Statement of Warrants.
----------------------
Irrespective of any adjustment in the number or kind of shares
issuable upon the exercise of the Warrants, Warrants theretofore or thereafter
issued may continue to express the same number and kind of shares as are stated
in the Warrants initially issuable pursuant to this Agreement.
Section 4.4 Fractional Interest.
--------------------
The Company shall not be required to issue fractional shares
of Common Stock on the exercise of Warrants. If more than one Warrant shall be
presented for exercise in full at the same time by the same Holder, the number
of full shares of Common Stock which shall be issuable upon such exercise shall
be computed on the basis of the aggregate number of shares of Common Stock
acquirable on exercise of the Warrants so presented. If any fraction of a
share of Common Stock would, except for the provisions of this Section, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay any amount in cash calculated by it to be equal to the then
current market price per share multiplied by such fraction computed to the
nearest whole cent. The Holders by their acceptance of the Warrant
Certificates, expressly waive any and all rights to receive any fraction of a
share of Common Stock or a stock certificate representing a fraction of a share
of Common Stock.
ARTICLE V
WARRANT TRANSFER BOOKS, TRANSFERS AND EXCHANGES
Section 5.1 Warrant Transfer Books, etc.
----------------------------
Prior to the Separation Date, the Warrants shall not be
transferable separately but shall be transferable only as a Unit with the
Senior Secured Notes as provided in Section 5.2. The Warrant Certificates shall
be issued in registered form only. The Company shall cause to be kept at the
principal corporate trust office of the Warrant Agent (the "Warrant Agent
Office") a register in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Warrant
Certificates and of transfers or exchanges of Warrant Certificates by the
Warrant Agent as herein provided.
At the option of the Holder thereof, and subject to the
provisions of this Agreement, Warrant Certificates may be exchanged at the
Warrant Agent Office, upon payment of the charges hereinafter provided.
Whenever any Warrant Certificates
<PAGE> 20
17
are so surrendered for exchange, the Company shall execute, and the Warrant
Agent shall countersign and deliver, the Warrant Certificates that the Holder
making the exchange is entitled to receive. Notwithstanding the foregoing, any
Global Certificate shall be exchangeable pursuant to this Section for Warrant
Certificates registered in the names of persons other than the Depository or
its nominee only if (i) the Depository notifies the Company that it is
unwilling or unable to continue as Depository or if at any time such Depository
ceases to be a clearing agency registered under the Exchange Act or (ii) the
Company executes and delivers to the Warrant Agent a written order that such
Global Certificate shall be so exchangeable. Any Global Certificate that is
exchangeable pursuant to the preceding sentence shall be exchangeable for
Warrant Certificates registered in such names as the Depository shall direct.
Notwithstanding any other provision in this Agreement, a
Global Certificate may not be transferred except as a whole by the Depository
to a nominee of the Depository or by a nominee of the Depository to the
Depository or another nominee of the Depository.
None of the Company, the Warrant Agent or any agent of the
Company or the Warrant Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of a Global Certificate or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
All Warrant Certificates issued upon any registration of
transfer or exchange of Warrant Certificates shall be the valid obligations of
the Company, evidencing the same obligations, and entitled to the same benefits
under this Agreement, as the Warrant Certificates surrendered for such
registration of transfer or exchange.
Every Warrant Certificate surrendered for registration of
transfer or exchange shall (if so required by the Company or the Warrant Agent)
be duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Warrant Agent, duly executed by the Holder
thereof or his attorney duly authorized in writing.
No service charge shall be payable by Holders for any
registration of transfer or exchange of Warrant Certificates. The Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Warrant Certificates.
Any Warrant Certificate when duly endorsed in blank shall be
deemed negotiable. The Holder of any Warrant Certificate duly endorsed in
blank may be treated by the Company, the Warrant Agent and all other persons
dealing therewith as the
<PAGE> 21
18
absolute owner thereof for any purpose and as the person entitled to exercise
the rights represented thereby, or to the transfer thereof on the register of
the Company maintained by the Warrant Agent, any notice to the contrary
notwithstanding; but until such transfer on such register, the Company and the
Warrant Agent may treat the registered Holder thereof as the owner for all
purposes. Notwithstanding the foregoing, with respect to any Global
Certificate, nothing herein shall prevent the Company, the Warrant Agent or any
agent of the Company or the Warrant Agent, from giving effect to any written
certification, proxy or other authorization furnished by any Depository (or its
nominee), as a Holder, with respect to such Global Certificate or impair, as
between such Depository and owners of beneficial interests in such Global
Certificate, the operation of customary practices governing the exercise of the
rights of such Depository (or its nominee) as Holder of such Global
Certificate.
Section 5.2 Transfers of Warrants Prior to Separation of Warrants and
---------------------------------------------------------
Senior Secured Notes; Separation of Warrants and Senior
-------------------------------------------------------
Secured Notes.
--------------
The Company, simultaneously with the issue of the Senior
Secured Notes pursuant to the terms of the Indenture, shall deliver to the
Warrant Agent with respect to each $1,000 principal amount of Senior Secured
Notes so issued a Warrant Certificate or Certificates for the purchase of ____
shares of Common Stock. Each such Warrant Certificate may be held either in
the name of the Warrant Agent or in the name of a nominee thereof.
Notwithstanding the provisions of Section 5.1 hereof, all such Warrant
Certificates will be held by the Warrant Agent, as custodian for the holders of
the Units, until such time on or after the Separation Date as the registered
holder of a Senior Secured Note containing a Warrant Endorsement shall have
surrendered such Senior Secured Note to the Warrant Agent at the Warrant Agent
Office for the exchange of such Unit, in whole or in part, for a Warrant
Certificate or Certificates evidencing the underlying Warrants and for a Senior
Secured Note or Senior Secured Notes of a like aggregate principal amount of
authorized denominations and not containing a Warrant Endorsement (such
surrender and exchange being referred to herein as a "Separation" and the
related Warrants being referred to as "Separated"). Prior to Separation,
beneficial ownership of the Warrants will be evidenced by the certificates for
Senior Secured Notes registered in the names of the holders of the Senior
Secured Notes, which certificates will bear thereon a Warrant Endorsement
substantially in the form set forth in Section ____ of the Indenture, and the
right to receive or exercise Warrants will be transferable only in connection
with the transfer of such Senior Secured Notes.
All Senior Secured Notes containing a Warrant Endorsement
presented for Separation shall be duly endorsed by the registered holder or
holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney,
<PAGE> 22
19
and in the case of transfer, such signature shall be guaranteed by an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act, and shall be accompanied by a written instrument or instruments of
exchange or transfer, in form satisfactory to the Company, the Warrant Agent
and the Trustee, The Warrant Agent shall deliver such Senior Secured Notes to
the Trustee pursuant to the provisions of the Indenture, with instructions to
issue new Senior Secured Notes not containing a Warrant Endorsement in
authorized denominations for an aggregate principal amount equal to the
aggregate principal amount of the Senior Secured Notes surrendered in the name
of such registered holder or holders or, if such Senior Secured Notes are also
being presented for registration of transfer, in the name of the transferee or
transferees. The Warrant Agent, as custodian, shall deliver (or cause to be
delivered) the Senior Secured Notes so received from the Trustee and a Warrant
Certificate or Certificates executed by the Company and countersigned by the
Warrant Agent in the name of such registered holder or holders or such
transferee or transferees for such aggregate number of Warrants as shall equal
_____ Warrants for each $1,000 principal amount of Senior Secured Notes so
exchanged for Separation, bearing numbers or other distinguishing symbols not
contemporaneously outstanding, to the person or persons entitled thereto.
Notwithstanding the foregoing provisions of this Section 5.2,
if upon Separation the Warrant Certificates are to be represented by a Global
Certificate and the Senior Secured Notes are to be represented by a global
Senior Secured Note, then Separation of the Warrants and the Senior Secured
Notes may be effected in any other commercially reasonable manner satisfactory
to the Company, the Warrant Agent, the Trustee and the Depository.
The provisions of Article VII hereof shall apply to the
Warrant Agent when acting in its capacity as custodian hereunder with the same
effect as they apply when acting in its capacity as Warrant Agent hereunder.
ARTICLE VI
WARRANT HOLDERS
Section 6.1 No Voting Rights.
-----------------
Prior to the exercise of the Warrants, no Holder of a Warrant
Certificate, as such, shall be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to receive dividends or
subscription rights, the right to vote, to consent, to exercise any preemptive
right, to receive any notice of meetings of stockholders for the election of
directors of the Company or any other matter or to receive any notice of any
proceedings of the Company, except as may be specifically provided for herein.
<PAGE> 23
20
Section 6.2 Right of Action.
----------------
All rights of action in respect of this Agreement are vested
in the Holders of the Warrants, and any Holder of any Warrant without the
consent of the Warrant Agent or any Holder of any other Warrant, may, on such
Holder's own behalf and for such Holder's own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company
suitable to enforce, or otherwise in respect of, such Holder's rights
hereunder, including the right to exercise, exchange or surrender for purchase
such Holder's Warrants in the manner provided in this Agreement.
ARTICLE VII
WARRANT AGENT
Section 7.1 Nature of Duties and Responsibilities Assumed.
----------------------------------------------
The Company hereby appoints the Warrant Agent to act as agent
of the Company as set forth in this Agreement. The Warrant Agent hereby
accepts the appointment as agent of the Company and agrees to perform that
agency upon the terms and conditions herein set forth, by all of which the
Company and the Holders of Warrants, by their acceptance thereof, shall be
bound. The Warrant Agent shall not by countersigning Warrant Certificates or
by any other act hereunder be deemed to make any representation as to validity
or authorization of the Warrants or the Warrant Certificates (except as to its
countersignature thereon) or of any securities or other property delivered upon
exercise of any Warrant, or as to the number or kind or amount of stock or
other securities or other property deliverable upon exercise of any Warrant or
the correctness of the representations of the Company made in such certificates
that the Warrant Agent receives. The Warrant Agent shall not have any duty to
calculate or determine any adjustments with respect to the kind or amount of
shares or other securities or any property receivable by Holders upon the
exercise of Warrants required from time to time, and the Warrant Agent shall
have no duty or responsibility in determining the accuracy or correctness of
any such calculation, other than to apply any adjustment, notice of which is
given by the Company to the Warrant Agent to be mailed to the Holders in
accordance with Section 4.2. The Warrant Agent shall not (a) be liable for any
recital or statement of fact contained herein or in the Warrant Certificates or
for any action taken, suffered or omitted by it in good faith in the belief
that any Warrant Certificate or any other document or any signature is genuine
or properly authorized, (b) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in the Warrant Certificates or (c) be liable for any act or
omission in connection with this Agreement except for its own negligence or
willful misconduct. The Warrant Agent is hereby authorized to accept
instructions with respect to the performance of its duties hereunder from the
<PAGE> 24
21
Chief Executive Officer, the President, any Vice President, the Chief Financial
Officer, the Treasurer, the Secretary or the Assistant Secretary of the Company
and to apply to any such officer for instructions (which instructions will be
promptly given in writing when requested), and the Warrant Agent shall not be
liable for any action taken or suffered to be taken by it in good faith in
accordance with the instructions of any such officer, except for its own
negligence or willful misconduct, but in its discretion the Warrant Agent may
in lieu thereof accept other evidence of such or may require such further or
additional evidence as it may deem reasonable. Any application by the Warrant
Agent for written instructions from the Company may, at the option of the
Warrant Agent, set forth in writing any action proposed to be taken or omitted
by the Warrant Agent under this Agreement and the date on and/or after which
such action shall be taken or such omission shall be effective. The Warrant
Agent shall not be liable for any action taken by, or omission of, the Warrant
Agent in accordance with a proposal included in such application on or after
the date specified in such application (which date shall not be less than three
business days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to any
earlier date) unless prior to taking any such action (or the effective date in
the case of an omission), the Warrant Agent shall have received written
instructions in response to such application specifying the action to be taken
or omitted.
The Warrant Agent may execute and exercise any of the rights
and powers hereby vested in it or perform any duty hereunder either itself or
by or through its attorneys, agents or employees, provided reasonable care has
been exercised in the selection of any such attorney, agent or employee. The
Warrant Agent shall not be under any obligation or duty to institute, appear in
or defend any action, suit or legal proceeding in respect hereof, unless first
indemnified to its satisfaction, but this provision shall not affect the power
of the Warrant Agent to take such action as the Warrant Agent may consider
proper, whether with or without such indemnity. The Warrant Agent shall
promptly notify the Company in writing of any claim made or action, suit or
proceeding instituted against or arising out of or in connection with this
Agreement. No provision of this Agreement shall require the Warrant Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
The Company will perform, execute, acknowledge and deliver or
cause to be performed, executed, acknowledged and delivered all such further
acts, instruments and assurances as may reasonably be required by the Warrant
Agent in order to
<PAGE> 25
22
enable it to carry out or perform its duties under this Agreement.
Except as provided in Section 5.2, the Warrant Agent shall act
solely as agent of the Company hereunder. The Warrant Agent shall not be
liable except for the failure to perform such duties as are specifically set
forth herein, and no implied covenants or obligations shall be read into this
Agreement against the Warrant Agent, whose duties and obligations shall be
determined solely by the express provisions hereof.
Section 7.2 Right to Consult Counsel.
-------------------------
The Warrant Agent may at any time consult with legal counsel
of its selection satisfactory to it (who may be legal counsel for the Company),
and the Warrant Agent shall incur no liability or responsibility to the Company
or to any Holder for any action taken, suffered or omitted by it in good faith
in accordance with the opinion or advice of counsel.
Section 7.3 Compensation and Reimbursement.
-------------------------------
The Company agrees to pay to the Warrant Agent from time to
time compensation for all services rendered by it hereunder as the Company and
the Warrant Agent may agree from time to time in writing, and to reimburse the
Warrant Agent for reasonable expenses and disbursements incurred in connection
with the execution and administration of this Agreement (including the
reasonable compensation and the expenses of its counsel), and further agrees to
indemnify the Warrant Agent for, and to hold it harmless against, any and all
loss, liability, damage, claim or expense incurred without negligence, bad
faith or willful misconduct on its part, arising out of or in connection with
the acceptance and administration of this Agreement, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder. The
provisions of this Section 7.3 shall survive the termination of this Agreement.
Section 7.4 Warrant Agent May Hold Company Securities.
------------------------------------------
Except as may be limited by applicable law, the Warrant Agent
and any stockholder, director, officer or employee of the Warrant Agent may
buy, sell or deal in any of the Warrants or other securities of the Company or
its Affiliates or become pecuniarily interested in transactions in which the
Company or its Affiliates may be interested, or contract with or lend money to
the Company or its Affiliates or otherwise act as fully and freely as though it
were not the Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or for any
other person.
Section 7.5 Resignation and Removal; Appointment of Successor.
--------------------------------------------------
<PAGE> 26
23
(a) No resignation or removal of the Warrant Agent and no
appointment of a successor warrant agent shall become effective until the
acceptance of appointment by the successor warrant agent as provided herein.
The Warrant Agent may assign its duties and be discharged from all further
duties and liability hereunder (except liability arising as a result of the
Warrant Agent's own negligence, bad faith or willful misconduct) after giving
written notice to the Company. The Company may remove the Warrant Agent upon
written notice, and the Warrant Agent shall thereupon in like manner be
discharged from all further duties and liabilities hereunder, except as
aforesaid. The Warrant Agent shall, at the Company's expense, cause to be
mailed (by first class mail, postage prepaid) to each Holder of a Warrant at
his last address as shown on the register of the Company maintained by the
Warrant Agent a copy of said notice of resignation or notice of removal, as the
case may be. Upon such resignation or removal, the Company shall appoint in
writing a new warrant agent. If the Company shall fail to make such
appointment within a period of 30 days after it has been notified in writing of
such resignation by the resigning Warrant Agent or after such removal, then the
Company shall become Warrant Agent until a successor Warrant Agent has been
appointed, and the Holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant
agent, whether appointed by the Company or by such a court, shall be a
corporation doing business under the laws of the United States, any state
thereof or the District of Columbia, in good standing and having a combined
capital and surplus of not less than $50,000,000. The combined capital and
surplus of any such new warrant agent shall be deemed to be the combined
capital and surplus as set forth in the most recent annual report of its
condition published by such warrant agent prior to its appointment, provided
that such reports are published at least annually pursuant to law or to the
requirements of a federal or state supervising or examining authority. After
acceptance in writing of such appointment by the new warrant agent, it shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning or removed Warrant Agent.
Not later than the effective date of any such appointment, the Company shall
give notice thereof to the resigning or removed Warrant Agent. Failure to give
any notice provided for in this Section, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of a new warrant agent, as the case may be.
(b) Any corporation into which the Warrant Agent or any new
warrant agent may be merged or any corporation resulting from any consolidation
to which the Warrant Agent or any new
<PAGE> 27
24
warrant agent shall be a party or any person to whom the Warrant Agent
transfers substantially all of its corporate trust business shall be a
successor Warrant Agent under this Agreement without any further act, provided
that such corporation (i) would be eligible for appointment as successor to the
Warrant Agent under the provisions of Section 7.5(a) or (ii) is a wholly-owned
subsidiary of the Warrant Agent. Any such successor Warrant Agent shall
promptly cause notice of its succession as Warrant Agent to be mailed (by first
class mail, postage prepaid) to each Holder at such Holder's last address as
shown on the register maintained by the Warrant Agent pursuant to Section 5.1.
ARTICLE VIII
COVENANTS OF THE COMPANY
Section 8.1 Reservation of Common Stock for Issuance on Exercise of
-------------------------------------------------------
Warrants; Listing.
------------------
The Company will at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued Common Stock, solely
for the purpose of issuance upon exercise of Warrants as herein provided, such
number of shares of Common Stock as shall then be issuable upon the exercise of
all outstanding Warrants. The Company covenants that all shares of Common
Stock which shall be so issuable shall, upon such issuance, be duly and validly
issued and fully paid and nonassessable, and that upon issuance such shares
shall be listed on each national securities exchange or quotation system
(including NASDAQ), if any, on which any other shares of outstanding Common
Stock of the Company are then listed.
Section 8.2 Reports to Holders.
-------------------
The Company shall deliver to the Warrant Agent within 15 days
after it files them with the SEC, and shall make available to all of the
Holders upon request, copies of its annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) which the Company is
required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act. Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, it shall
continue to file with the SEC, and provide to the Warrant Agent, within 15 days
after it would have been required to file the same with the SEC, and shall make
available to all of the Holders upon request, reports containing substantially
the same information as would have been required to be filed with the SEC had
the Company continued to have been subject to such reporting requirements.
Section 8.3 Agreements Respecting Warrants.
-------------------------------
<PAGE> 28
25
The Company agrees that it will not enter into any agreement
or instrument which would preclude the exercise of the Warrants for shares of
Underlying Common Stock.
Section 8.4 Qualification Under the Securities Laws.
----------------------------------------
On or before the Separation Date, the Company will register or
otherwise qualify the Underlying Common Stock issuable upon exercise of the
Warrants pursuant to the provisions of the Securities Act and pursuant to
applicable state securities laws. So long as any unexpired Warrants remain
outstanding, the Company will file such amendments and/or supplements to any
registration statement under the Securities Act or under any state securities
laws covering the issuance of such Underlying Common Stock and supplement and
keep current any prospectus forming a part of such registration statement as
may be necessary to permit the Company to deliver to each person exercising a
Warrant a prospectus meeting the requirements of the Securities Act and the
regulations of the SEC thereunder, and as may be necessary to comply with any
applicable state securities laws.
ARTICLE IX
MISCELLANEOUS
Section 9.1 Money and Other Property Deposited with the Warrant Agent.
----------------------------------------------------------
Any money, securities and other property which at any time
shall be deposited by the Company or on its behalf with the Warrant Agent
pursuant to this Agreement shall be and are hereby assigned, transferred and
set over to the Warrant Agent in trust for the purpose for which such moneys,
securities or other property shall have been deposited; but such moneys,
securities or other property need not be segregated from other funds,
securities or other property of the Warrant Agent except to the extent required
by law. The Warrant Agent shall distribute any money deposited with it for
payment and distribution to any Holder by mailing by first-class mail a check
in such amount as is appropriate, to such Holder at the address shown on the,
Warrant register maintained pursuant to Section 5.1, or as it may be otherwise
directed in writing by such Holder, upon surrender of such Holder's Warrants.
Any money or other property deposited with the Warrant Agent for payment and
distribution to any Holder that remains unclaimed for two years, less one day,
after the date the money was deposited with the Warrant Agent shall be paid to
the Company upon its request therefor.
Section 9.2 Payment of Taxes.
-----------------
The Company will pay all taxes and other governmental charges
that may be imposed on the Company or on the holders of the Warrants or on the
holders of any securities deliverable upon exercise of Warrants with respect
thereto. The Company will not
<PAGE> 29
26
be required, however, to pay any tax or other charge imposed in connection with
any transfer involved in the issue of any certificate for shares of Common
Stock or other securities underlying the Warrants or payment of cash or other
property to any person other than the Holder of a Warrant Certificate
surrendered upon the exercise thereof, and in case of such transfer or payment,
the Warrant Agent and the Company shall not be required to issue any stock
certificate or security or pay any cash or distribute any property until such
tax or charge has been paid or it has been established to the Warrant Agent's
and the Company's satisfaction that no such tax or other charge is due.
Section 9.3 Surrender of Certificates.
--------------------------
Any Warrant Certificate surrendered for exercise or purchased
or otherwise acquired by the Company shall, if surrendered to the Company, be
delivered to the Warrant Agent and all Warrant Certificates surrendered or so
delivered to the Warrant Agent shall promptly be canceled by the Warrant Agent
and shall not be reissued by the Company. The Warrant Agent shall return such
canceled Warrant Certificates to the Company.
Section 9.4 Mutilated, Destroyed, Lost and Stolen Warrant Certificates.
-----------------------------------------------------------
If (a) any mutilated Warrant Certificate is surrendered to the
Warrant Agent or (b) the Company and the Warrant Agent receive evidence to
their satisfaction of the destruction, loss or theft of any Warrant
Certificate, and indemnity as may be reasonably required by them to save each
of them harmless then, in the absence of notice to the Company or any officer
in the corporate trust department of the Warrant Agent that such Warrant
Certificate has been acquired by a bona fide purchaser, the Company shall
execute and upon its written request the Warrant Agent shall countersign and
deliver, in exchange for any such mutilated Warrant Certificate or in lieu of
any such destroyed, lost or stolen Warrant Certificate, a new Warrant
Certificate of like tenor and for a like aggregate number of warrants.
Upon the issuance of any new Warrant Certificate under this
Section 9.4, the Company may require the payment by the Holder of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and other expenses (including the reasonable fees and expenses
of the Warrant Agent) in connection therewith.
Every new Warrant Certificate executed and delivered pursuant
to this Section 9.4 in lieu of any destroyed, lost or stolen Warrant
Certificate shall constitute an original contractual obligation of the Company,
whether or not the destroyed, lost or stolen Warrant Certificate shall be at
any time enforceable by anyone, and shall be entitled to the benefits of this
Agreement equally and proportionately with any and all other Warrant
Certificates duly executed and delivered hereunder.
<PAGE> 30
27
The provisions of this Section 9.4 are exclusive and shall
preclude (to the extent lawful) all other rights or remedies with respect to
the replacement of mutilated, destroyed, lost or stolen Warrant Certificates.
Section 9.5 Miscellaneous Rights.
---------------------
The rights of Holders upon the occurrence of the events set
forth in this Agreement are cumulative. If more than one such event shall
occur and the periods following the occurrence of such events and prior to the
closing of the transactions that are the subject of such events overlap, each
Holder may exercise such rights arising therefrom as such Holder may elect
without any condition imposed upon such exercise not contained in this
Agreement.
Neither the Company nor any of its Affiliates involved in any
proposed transaction that is the subject of such an event shall have any
obligation to the Holders to consummate any such proposed transaction once an
agreement or agreement in principle or decision to proceed with respect thereto
is reached, whether on the terms first proposed or as revised, or to include
any holder in, or apprise any Holder of, any negotiations or discussions
concerning any such proposed transaction among the prospective parties thereto.
Section 9.6 Notices.
--------
Any notice or communication by the Company or the Warrant
Agent to the other is duly given if in writing and delivered in person, mailed
by first-class mail (registered or certified, return receipt requested), or
sent by telecopier or overnight air courier guaranteeing next day delivery, to
the other's address;
If to the Company:
NS Group, Inc.
__________________________
__________________________
Attention: _______________
If to the Warrant Agent:
_______________________
_______________________
_______________________
Attention: ___________
The Company or the Warrant Agent by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
<PAGE> 31
28
All notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when receipt acknowledged, if telecopied; and the next business day after
timely delivery to the courier, if sent by overnight air courier guaranteeing
next day delivery.
Any notice or communication to a Holder shall be mailed by
first-class mail to the Holder's address shown on the register of the Company
maintained by the Warrant Agent. Failure to mail a notice or communication to
a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the
addressee receives it.
If the Company mails a notice or communication to Holders, it
shall mail a copy to the Warrant Agent at the same time.
Section 9.7 Benefit of This Agreement.
--------------------------
This Agreement shall be binding upon and inure to the benefit
of the Company and the Warrant Agent, and their respective successors and
assigns, and the Holders from time to time of the Warrants. Nothing in this
Agreement is intended or shall be construed to confer upon any person, other
than the Company, the Warrant Agent and the Holders of the Warrants, any right,
remedy or claim under or by reason of this Agreement or any part hereof.
Section 9.8 Counterparts.
-------------
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
Section 9.9 Amendments.
-----------
The Company may, without the consent of the Holders of the
Warrants, by supplemental agreement or otherwise, make any changes or
corrections in this Agreement (a) to cure any ambiguity or to correct or
supplement any provision herein which may be defective or inconsistent with any
other provision herein, (b) to add to the covenants and agreements of the
Company for the benefit of the Holders, or surrender any rights or power
reserved to or conferred upon the Company in this Agreement, or (c) that do not
adversely affect the interests of the Holders in any material respect. The
Warrant Agent shall join with the Company in the execution and delivery of any
such supplemental agreements unless it affects the Warrant Agent's own rights,
duties or
<PAGE> 32
29
immunities hereunder, in which case such party may, but shall not be required
to, join in such execution and delivery. Prior to executing any such
supplemental agreement, the Warrant Agent shall be entitled to receive and
shall be protected in relying upon a certificate of the Company which states
that the proposed supplemental agreement is in compliance with the terms of
this Section 9.9.
Section 9.10 Termination.
------------
This Agreement (other than the Company's obligations with
respect to Warrants previously exercised under Article III, and with respect to
compensation, reimbursement and indemnification under Section 7.3) shall
terminate and be of no further force and effect, provided the Company has
complied with Section 3.5 hereof in the case of a Non-Surviving Combination, on
the earlier of (a) the Expiration Date and (b) the consummation of a
Non-Surviving Combination.
Section 9.11 GOVERNING LAW.
--------------
THIS AGREEMENT AND EACH WARRANT ISSUED HEREUNDER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
<PAGE> 33
30
Section 9.12 Headings.
---------
The headings of the Articles and Sections of this Agreement
have been inserted for convenience of reference only, are not to be considered
a part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
NS GROUP, INC.
By:______________________
Name:
Title:
_________________________, as
Warrant Agent
By:_______________________
Name:
Title:
<PAGE> 34
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
Certificate for _____ Warrants
No.______
WARRANTS TO ACQUIRE COMMON STOCK OF
NS GROUP, INC.
This certifies that ____________, or registered assigns, is
the registered holder of the number of Warrants set forth above (the
"Warrants"). Each Warrant entitles the holder thereof (the "Holder"), subject
to the provisions contained herein and in the Warrant Agreement referred to
below, to acquire from NS Group, Inc., a ________ corporation (the "Company"),
one share of Common Stock, $0.01 par value per share, of the Company (the
"Common Stock") for consideration equal to the Purchase Price (as defined in
the Warrant Agreement) per share of Common Stock. The Warrants evidenced by
this Warrant Certificate shall not be exercisable after and shall terminate and
become void as of 5 p.m., New York City time, on _______ __, ____ (the
"Expiration Date") or as of the closing of any Non-Surviving Combination, if
earlier.
This Warrant Certificate is issued under and in accordance
with a Warrant Agreement dated as of ________ __, 1995 (the "Warrant
Agreement"), between the Company and _____________, as warrant agent (the
"Warrant Agent," which term includes any successor Warrant Agent under the
Warrant Agreement), and is subject to the terms and provisions contained in the
Warrant Agreement, to all of which terms and provisions the Holder of this
Warrant Certificate consents by acceptance hereof. The Warrant Agreement is
hereby incorporated herein by reference and made a part hereof. Reference is
hereby made to the Warrant Agreement for a full statement of the respective
rights, limitations of rights, duties and obligations of the Company, the
Warrant Agent and the Holders of the Warrants. Capitalized terms not defined
herein have the meanings ascribed thereto in the Warrant Agreement. A copy of
the Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company at _______________________, Attention of Chief
Financial Officer.
Subject to the terms and conditions set forth in the Warrant
Agreement, the Warrants shall be exercisable at any time on or after the
Separation Date (which term is defined in the Warrant Agreement as
_____________ 1995 or such earlier date as may be designated to the Company by
the Underwriters or as may result from an Asset Sale Offer or a Change of
Control Offer) and prior to 5 p.m., New York City time, on the Expiration Date
(which term) is defined in the Warrant Agreement as __________
<PAGE> 35
2
__, ____, subject to the provisions of Section 3.5 of the Warrant Agreement).
Prior to the Separation Date, the Warrants shall not be transferable separately
but shall be transferable only as a Unit with the Senior Secured Notes (as such
terms are defined in the Warrant Agreement).
If the Company proposes, prior to the Expiration Date, to enter into a
merger, consolidation, sale of assets or other business combination with one or
more persons (other than a Wholly Owned Recourse Subsidiary of the Company) in
which consideration (other than Common Equity Securities) is distributed to the
holders of Common Stock in exchange for all or substantially all of their
equity interest in the Company (a "Non-Surviving Combination"), the Company
shall give written notice thereof to the Holders promptly after an agreement is
reached but in no event less than 30 days prior to the closing thereof. In the
event the Company enters into a Non-Surviving Combination, upon payment of the
Purchase Price prior to the Expiration Date, the Holder hereof will be entitled
to receive the shares of stock or other securities or other property (including
any money) of the surviving entity in such Non-Surviving Combination as the
Holder would have received had the Holder exercised its Warrants immediately
prior to such Non-Surviving Combination (or, if applicable, the record date
therefor).
In order to exercise a Warrant, the registered holder hereof
must surrender this Warrant Certificate at the office of the Warrant Agent,
with the Exercise Subscription Form on the reverse hereof duly executed by the
Holder hereof, with signature
<PAGE> 36
3
guaranteed as therein specified and tender the Purchase Price therefore.
NS GROUP, INC.
By:______________________
Name.
Title:
[SEAL]
Attest:_________________________________
Secretary
DATED:
Countersigned:
______________________________,
as Warrant Agent
By:___________________________________
Authorized Signatory
Date of Countersignature:
<PAGE> 37
FORM OF REVERSE WARRANT CERTIFICATE
NS GROUP, INC.
This Warrant Certificate and all rights hereunder are
transferable by the registered Holder hereof, in whole or in part, on the
register maintained by the Warrant Agent, upon surrender of this Warrant
Certificate for registration of transfer at the office of the Warrant Agent
maintained for such purpose, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Warrant
Agent, duly executed by the registered Holder hereof or his attorney duly
authorized in writing, with signature guaranteed as specified in the attached
Form of Assignment. Upon any partial transfer, the Company will issue and
deliver to such Holder a new Warrant Certificate or Certificates with respect
to any portion not so transferred. No service charge shall be made for any
registration of transfer or exchange of Warrant Certificates, but the Company
may require payment by the Holder of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
All shares of Common Stock issuable by the Company upon the
exercise of the Warrants shall, upon such issue, be duly and validly issued and
fully paid and nonassessable, and upon issuance such shares shall be listed on
each national securities exchange or quotation system (including NASDAQ), if
any, on which any other shares of outstanding Common Stock are then listed.
Each taker and holder of this Warrant Certificate, by taking
or holding the same, consents and agrees that the holder of this Warrant
Certificate when duly endorsed in blank may be treated by the Company, the
Warrant Agent and all other persons dealing with this Warrant Certificate as
the absolute owner hereof for any purpose and as the person entitled to
exercise the rights represented hereby, or to the transfer hereof on the
register of the Company maintained by the Warrant Agent, any notice to the
contrary notwithstanding, but until such transfer on such register, the Company
and the Warrant Agent may treat the registered Holder hereof as the owner for
all purposes.
The number of shares of Common Stock issuable upon exercise of
the Warrants is subject to adjustment in certain events, including (i) stock
dividends, stock splits and reclassifications affecting the Common Stock, (ii)
the issuance of certain rights, warrants or options, or convertible or
exchangeable securities, to the holders of Common Stock entitling them to
acquire Common Stock at a price per share lower than its then market value and
(iii) sales by the Company of Common Stock at a price per share lower than its
then market value.
The Warrants do not entitle any Holder to any of the rights of
a stockholder of the Company.
This Warrant Certificate and the Warrant Agreement are subject
to amendment as provided in the Warrant Agreement.
<PAGE> 38
2
This Warrant Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by an authorized signatory
of the Warrant Agent.
<PAGE> 39
EXERCISE SUBSCRIPTION FORM
(to be executed only upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise _______
of the Warrants represented by this Warrant Certificate, for the acquisition of
one share each of Common Stock, $0.01 par value per share, of NS Group, Inc.,
on the terms and conditions specified in this Warrant Certificate and the
Warrant Agreement herein referred to, surrenders this Warrant Certificate and
all right, title and interest therein to NS Group, Inc. and directs that the
shares of Common Stock deliverable upon the exercise of such Warrants be
registered or placed in the name and at the address specified below and
delivered thereto.
Date: __________ __, ____
______________________/(3)/
(Signature of Owner)
_________________________
(Street Address)
_________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
_________________________
_____________________
/(3)/ The signature must correspond with the name as written upon the face
of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever, and must be
guaranteed.
<PAGE> 40
FORM OF TRANSFER
FOR VALUE RECEIVED the undersigned registered Holder of this Warrant
Certificate hereby sells, assigns and transfers unto the Assignee(s) named
below (including the undersigned with respect to any Warrants constituting a
part of the Warrants evidenced by this Warrant Certificate not being assigned
hereby) all of the right of the undersigned under this Warrant Certificate,
with respect to the number of Warrants set forth below:
<TABLE>
<CAPTION>
Social Security
or other
identifying
Name of number of Number of
Assignee(s) Address assignee(s) Warrants
- ----------- ------- ---------------- ---------
<S> <C> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint the Warrant Agent as the
undersigned's attorney to make such transfer on the register maintained by the
Warrant Agent for that purpose, with full power of substitution in the
premises.
Date: ____________ __, ____
________________________/(1)/
(Signature of Owner)
________________________
(Street Address)
__________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
__________________________
/(1)/ The signature must correspond with the name as written upon the face
of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever, and must be
guaranteed.
<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.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Cincinnati, Ohio
July 18, 1995
