<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1995
REGISTRATION NO. 33-56637
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NS GROUP, INC.
AND OTHER REGISTRANTS
(SEE TABLE OF ADDITIONAL REGISTRANTS)
KENTUCKY
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
3312
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
61-0985936
(IRS EMPLOYER
IDENTIFICATION NUMBER)
NINTH AND LOWELL STREETS
NEWPORT, KENTUCKY 41072
(606) 292-6809
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN R. PARKER
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
NINTH AND LOWELL STREETS
NEWPORT, KENTUCKY 41072
(606) 292-6809
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF ALL CORRESPONDENCE TO:
WILLIAM F. SEABAUGH
BRYAN CAVE
ONE METROPOLITAN SQUARE
211 N. BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
GARY L. SELLERS
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
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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 / /
------------------------
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.
<PAGE> 2
<TABLE>
NS GROUP, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................. Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges........................................ Prospectus Summary; Investment
Considerations; Summary Consolidated
Financial Data
4. Use of Proceeds......................................... Use of Proceeds
5. Determination of Offering Price......................... *
6. Dilution................................................ *
7. Selling Security Holders................................ *
8. Plan of Distribution.................................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered.............. Description of the Senior Secured Notes
10. Interests of Named Experts and Counsel.................. *
11. Information with Respect to the Registrants
(a) Description of Business............................ Business
(b) Description of Property............................ Business
(c) Legal proceedings.................................. Business
(d) Common Equity Securities........................... *
(e) Financial Statements............................... Consolidated Financial Statements
(f) Selected Financial Data............................ Selected Consolidated Financial Data
(g) Supplementary Financial Information................ Notes to Selected Consolidated Financial
Data
(h) Management's Discussion and Analysis of Financial
Condition and Results of Operations................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants........................................ *
(j) Directors and Executive Officers................... Management
(k) Executive Compensation............................. Management
(l) Security Ownership................................. Principal Stockholders
(m) Certain Relationships and Related
Transactions....................................... Management; Principal Stockholders;
Compensation Committee Interlocks and
Insider Participation; Certain Transactions
12. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities.............................. *
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<FN>
*Item is inapplicable or answer is in the negative and is omitted from the Prospectus.
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
Prospectus (Subject to Completion Dated February 2, 1995)
$125,000,000
NS GROUP, INC.
% SENIOR SECURED NOTES DUE 2003
NS Group, Inc. (the "Company") is offering (the "Offering") $125,000,000
aggregate principal amount of % Senior Secured Notes due 2003 (the "Senior
Secured Notes"). Interest on the Senior Secured Notes will be payable semi-
annually on and of each year, commencing
, 1995, at the rate of % per annum. Up to 40% of the principal
amount of the Senior Secured Notes will be redeemable with the net proceeds of a
public equity offering at the option of the Company during the first 36 months
after the date of the Offering at % of the principal amount thereof plus
accrued interest; provided that at least $75,000,000 principal amount of Senior
Secured Notes remains outstanding after such redemption. The Senior Secured
Notes will also be redeemable, in whole or in part, at the option of the Company
on and after , 1999, at the redemption prices set forth herein plus
accrued interest.
The Senior Secured Notes will be obligations of the Company and will rank pari
passu with the Company's other unsubordinated Debt. After giving effect to the
Offering and the application of certain cash balances of the Company to the
payment of debt, as of December 31, 1994, the Company (excluding the Company's
Subsidiaries) would have had approximately $154 million of total Debt, of which
$29 million would be subordinated to the Senior 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 December 31, 1994, the aggregate amount of total Debt of the Company's
Subsidiaries would have been approximately $11 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.
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 "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED
WITH AN INVESTMENT IN THE SENIOR SECURED NOTES.
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THE SENIOR SECURED NOTES AND THE GUARANTEES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
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<S> <C> <C> <C>
PER SENIOR SECURED NOTE % % %
TOTAL $ $ $
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<FN>
(1) Plus accrued interest, if any, from , 1995.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
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</TABLE>
The Senior Secured Notes 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 Senior Secured Notes will be made in book-entry form
through the facilities of The Depository Trust Company on or about
, 1995.
CHEMICAL SECURITIES INC. CS FIRST BOSTON
The date of this Prospectus is , 1995
<PAGE> 4
INSIDE COVER PICTURE CAPTIONS
[Stack of finished tubular goods.]
[Overview of electrode and EAF furnace.]
[Detail of continuous slab caster.]
<PAGE> 5
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR SECURED
NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
regional offices of the Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the New York Stock Exchange, on which shares of the Company's Common
Stock are listed, at 20 Broad Street, New York, New York.
The Company and the Subsidiaries have filed with the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Senior Secured Notes, and Guarantees thereof, offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in schedules and exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement, including all exhibits thereto, may
be inspected and copied in the manner and at the sources described above.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. See
"Investment Considerations" for certain factors that should be considered in
connection with an investment in the Senior Secured Notes offered hereby. Unless
the context otherwise requires, all references to the "Company" refer to NS
Group, Inc. and its principal operating subsidiaries, Newport Steel Corporation
("Newport"), Koppel Steel Corporation ("Koppel"), Erlanger Tubular Corporation
("Erlanger") and Imperial Adhesives, Inc. ("Imperial"), and all references to a
fiscal year refer to the fiscal year of the Company which ends on the last
Saturday of September (for example, references to "fiscal 1994" mean the fiscal
year ended September 24, 1994). In October 1993, the Company sold its subsidiary
Kentucky Electric Steel Corporation ("KES"). Except as otherwise noted herein,
all information in this Prospectus relating to the Company's operations for
fiscal 1994 is presented excluding KES. 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.
The Company produces 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 products primarily used in the
manufacture of heavy industrial equipment and off-road vehicles; and (iv) hot
rolled coils which are sold to service centers and other manufacturers for
further processing. The Company is a significant producer of seamless and welded
oil country tubular goods ("OCTG") and line pipe products. In fiscal 1994, the
Company's shipments of these products accounted for approximately 12% of total
shipments by domestic producers.
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 in
excess of 561,000 tons of specialty steel products in fiscal 1994.
Domestic consumption of OCTG products, such as those manufactured by the
Company, declined from approximately 1.9 million tons in 1990 to 1.5 million
tons in the twelve month period ended September 1994. Nonetheless, during this
five year period, the Company was able to increase its shipments of OCTG
products from approximately 119,800 tons to approximately 200,000 tons. The
Company believes it has been able to increase shipments by investing in
additional specialty steel production facilities and to improve its competitive
position by reducing manufacturing costs. The 1991 acquisition of the Koppel
facilities significantly expanded the Company's steel making capacity; total
tons shipped from the Koppel facilities accounted for approximately 61,800 tons
of the Company's total OCTG shipments in fiscal 1994. Since fiscal 1990, the
year before the Company installed a continuous slab caster at its Newport
facilities, manufacturing costs (excluding the costs of depreciation and steel
scrap) at the Newport facilities have declined by approximately 14%, or $40 per
ton shipped. Since fiscal 1992, 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 11%, or $43 per ton shipped.
The Company's specialty steel products shipments increased in the first
quarter of fiscal 1995 by 6% over the fourth quarter of fiscal 1994 to 169,900
tons. The Company also has been successful in realizing price increases for
certain new orders of OCTG, line pipe and SBQ products since the beginning of
fiscal 1995.
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 11% of the Company's net sales for fiscal
1994.
In October 1993, to improve its financial flexibility, the Company sold
KES, a manufacturer of special bar quality products, for cash and stock totaling
$50.4 million. KES had been acquired by the Company in 1986 for approximately
$7.3 million.
SPECIALTY STEEL PRODUCTS
Oil Country Tubular Goods. The Company is a significant producer of
seamless and welded OCTG, which represented 38% of the Company's net sales for
fiscal 1994. OCTG products are used as production
3
<PAGE> 7
tubing, drill pipe and casing in oil and natural gas drilling and production
applications. For fiscal 1994, the Company's shipments of OCTG products
accounted for approximately 13% of total shipments by domestic OCTG producers.
In the seamless production tubing market segment, which represented 11% of the
Company's net sales for fiscal 1994, the Company is one of only two domestic
producers; there are several foreign producers.
Line Pipe. The Company is a significant producer of line pipe, which
represented 14% of the Company's net sales for fiscal 1994. The Company's line
pipe products range in size from 1.9 to 12.75 inches in outside diameter, and
are used in gathering lines for the transportation of oil and natural gas at
drilling sites and in transmission lines by both gas utility and transmission
companies. The Company's shipments represented approximately 15% of total small
diameter shipments of line pipe (16 inches and under in outside diameter) by
domestic producers during fiscal 1994.
Special Bar Quality Products. The Company manufactures special bar quality
("SBQ") products, which represented 21% of the Company's net sales for fiscal
1994. The Company focuses on larger dimension SBQ products which are primarily
used by forgers and original equipment manufacturers of heavy machinery and
off-road vehicles.
Hot Rolled Coils. The Company also manufactures hot rolled coils, which
represented 5% of the Company's net sales for fiscal 1994. These products are
sold to service centers and other manufacturers for use in high strength
applications. The Company significantly increased shipments of hot rolled coils
during fiscal 1994 and, due to the current favorable conditions in this market,
the Company believes it can continue to increase its sales of hot rolled coils
in fiscal 1995.
STRATEGY
The Company's business strategy is to increase its sales and improve its
results by: (i) implementing a three year capital expenditure program; (ii)
utilizing the existing capacity of its steel making facilities more efficiently;
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 fiscal 1994 and the first quarter
of fiscal 1995, the Company implemented operational process changes and cost
saving initiatives that the Company believes will result in an estimated net
annual operating benefit of approximately $1.6 million. The Company has begun
implementation of a three year, $25.8 million capital expenditure program. The
capital expenditure program includes eight 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
(before depreciation) of approximately $13.6 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.
Utilize Existing Capacity Efficiently. Since incorporation in 1981, the
Company has increased its steel making and finishing capacity through the
acquisition of idled operating assets. Since 1990, with the acquisition of the
Koppel facilities, the Company increased the rated capacity of its steel making
facilities from 700,000 tons (excluding KES) to 1,100,000 tons and expanded its
product range to include seamless OCTG and line pipe and SBQ products. As a
result, the Company believes it has been able to increase its market share in
existing product lines and expand its range of products. New finishing capacity
brought on line in the first quarter of fiscal 1995 has enabled the Company to
expand its product 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. In
4
<PAGE> 8
conjunction with the closing of the Offering, the Company will use 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 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.
RECENT DEVELOPMENTS
The Company and other producers announced price increases for seamless and
welded tubular products effective October 1, 1994. In early November 1994, the
Company announced additional price increases for its seamless and welded OCTG
and line pipe products ranging from $20 to $30 per ton for shipments after
January 1, 1995. Similar additional price increases have been announced by other
OCTG and line pipe producers. While the Company believes that insufficient time
has elapsed to determine if the announced price increases will be fully realized
for all products, orders for seamless and welded tubular products received by
the Company in January 1995 have generally achieved price increases in this
range. Average selling prices for product groups may fluctuate due to changes in
product mix.
Following price increases effective October 1, 1994, the Company also
announced a second round of price increases on its SBQ products of $25 per ton
for shipments after January 1, 1995. Similar price increases have been announced
by other SBQ producers. Average selling prices for orders of all SBQ products
received by the Company in January 1995 increased $30 per ton over average
selling prices for the first quarter of fiscal 1995.
The Company and six other U.S. steel companies filed trade cases in June
1994 against seven foreign nations alleging subsidization and dumping of OCTG
imports. In December 1994 and January 1995, the U.S. Department of Commerce
issued certain favorable preliminary determinations concerning the existence and
extent of dumping and subsidization and imposed preliminary tariffs on imports
from Austria, Italy, Japan, Argentina and Korea. Final determinations by the
Department of Commerce and the U.S. International Trade Commission are expected
in the summer of 1995. While the Company cannot predict the outcome of the cases
at this time, the Company believes that a favorable final ruling could continue
to have a positive impact on shipments and selling prices of certain of the
Company's products.
5
<PAGE> 9
THE OFFERING
Securities................. $125,000,000 aggregate principal amount of %
Senior Secured Notes due 2003.
Interest Payment Dates..... The Senior Secured Notes will bear interest from
the date of issuance at the rate of % per
annum and will be payable semi-annually on
and of each year,
commencing , 1995.
Equity Redemption.......... During the first 36 months after the Offering, the
Company may redeem up to 40% of the principal
amount of the outstanding Senior Secured Notes with
the net proceeds of a public offering of common
stock of the Company (the "Common Stock") at %
of the principal amount thereof plus accrued
interest to the redemption date; provided that at
least $75,000,000 principal amount of the Senior
Secured Notes remains outstanding after such
redemption.
Optional Redemption........ The Senior Secured Notes may be redeemed at the
option of the Company, at any time as a whole, or
from time to time in part, on and after
, 1999, initially at % of their
principal amount, plus accrued interest to the date
of redemption, and declining ratably to par on
, 2001.
Security................... The Senior Secured Notes will be secured by 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 (as defined below). 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 million 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 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
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<PAGE> 10
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
Indebtedness that may become payable upon the
occurrence of a Change of Control.
Covenants.................. The Indenture under which the Senior Secured Notes
will be issued will contain certain restrictive
covenants that, among other things, will limit the
ability of the Company to incur additional
indebtedness; create liens; make certain restricted
payments; engage in certain transactions with
affiliates; engage in sale and leaseback
transactions; dispose of assets; issue or sell
stock of its subsidiaries; transfer assets to its
subsidiaries; enter into agreements that restrict
the ability of its subsidiaries to pay dividends
and make distributions; engage in mergers,
consolidations and transfers of substantially all
of the Company's assets; and make certain
investments, loans and advances.
Asset Sale Offers.......... The Net Available Cash (as defined herein) from
sales or other dispositions of Collateral (as
defined herein) shall become subject to the lien of
the Indenture and the Security Documents (as
defined herein). In the event the Net Available
Cash from Asset Sales (with certain exceptions)
equals or exceeds $5,000,000, the Company shall
elect, within 360 days of such date, to either
apply such cash to the acquisition of assets that,
upon purchase, shall become subject to the lien of
the Security Documents if the Net Available Cash
represents Collateral Proceeds (as defined herein),
or to make offers to purchase a portion (calculated
as set forth herein) of the Senior Secured Notes at
a purchase price equal to 100% of the principal
amount thereof, plus accrued interest to the date
of repurchase. Notwithstanding the foregoing, the
Company and its Subsidiaries, in the aggregate,
shall be permitted to retain $1,000,000 of the Net
Available Cash from Asset Sales and all of the Net
Available Cash from the sale of certain non-steel
related assets. Asset Sales and prepayment of the
Senior Secured Notes in connection with Asset Sale
Offers could result in a default under the Credit
Facility.
For a more detailed description of the Senior Secured Notes, see
"Description of the Senior Secured Notes." For a description of certain events
of default under the Credit Facility which could result in the Senior Secured
Notes becoming immediately due and payable, see "Investment
Considerations -- Leverage; Certain Restrictions; Deficiency of Earnings to
Fixed Charges" and "Description of Certain Indebtedness."
USE OF PROCEEDS
The net proceeds of this Offering will be used for the repayment of
outstanding indebtedness and general corporate purposes. See "Use of Proceeds."
INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the matters set forth under
"Investment Considerations."
7
<PAGE> 11
<TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data should be read in conjunction with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto included elsewhere herein. Unless otherwise
noted (see Note 2 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.
<CAPTION>
FISCAL QUARTER ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
---------------------------- ----------------------------------------------
1994(1) 1993(1) 1994(2) 1993(2) 1992(2)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 93,489 $ 71,959 $ 303,380 $ 353,082 $ 281,242
Cost of products sold.................... 81,999 64,168 278,161 310,586 250,189
Selling and administrative expenses...... 6,932 5,980 24,530 30,824 29,652
Operating income (loss).................. 4,558 1,811 689 11,672 1,401
Net interest income (expense)............ (4,824) (4,552) (18,297) (20,819) (21,075)
Gain on sale of subsidiary............... -- 35,292 35,292 -- --
Provision (credit) for income taxes...... 48 13,078 7,382 (3,382) (6,058)
Extraordinary items...................... -- -- -- (1,095) (2,542)
Cumulative effect of a change in
accounting principle................... -- 1,715 1,715 -- --
Net income (loss)........................ 75 21,741 13,208 (6,991) (15,900)
BALANCE SHEET DATA:
Working capital.......................... $ 39,484 $ 63,214 $ 45,202 $ 39,060 $ 40,676
Total assets............................. 315,906 339,668 315,327 317,242 319,079
Total debt............................... 179,922 189,726 182,525 192,155 193,753
Common shareholders' equity.............. 75,872 84,986 76,464 62,622 68,574
OTHER FINANCIAL AND
STATISTICAL DATA:
EBITDA(3)................................ $ 9,809 $ 42,160(4) $ 55,326(4) $ 30,078 $ 19,793
Capital expenditures..................... 2,987 1,242 11,760 6,080 4,148
Depreciation and amortization............ 5,020 4,661 18,789 19,093 18,711
Ratio of EBITDA to net interest
charges(6)............................. 2.0x 9.3x(4) 3.0x(4) 1.4x 0.9x(7)
Ratio of earnings to fixed charges(8).... 1.0x 7.6x(4) 1.9x(4) -- --
Deficiency of earnings to cover fixed
charges................................ $ -- $ --(4) $ --(4) $ (9,278) $ (19,416)
Sources and uses of cash flows:
Net cash flows from operating
activities........................... $ 2,523 $ 745 $ (4,329) $ 2,392 $ 8,515
Net cash flows from investing
activities........................... (1,857) 1,106 7,379 (4,254) (1,373)
Net cash flows from financing
activities........................... (3,272) 2,883 (4,442) (1,055) (3,526)
Tons shipped:
Tubular products
Welded OCTG.......................... 50,200 35,800 138,200 142,100 112,000
Seamless OCTG........................ 20,600 14,600 61,800 48,700 20,500
Welded line pipe..................... 20,700 17,500 82,800 110,900 88,500
Seamless line pipe................... 2,500 900 10,700 14,400 10,400
SBQ products........................... 42,800 33,900 147,900 102,500 72,000
Hot rolled coil products............... 8,800 9,100 38,800 6,600 100
Other products(9)...................... 24,000 18,700 80,800 78,600 69,800
------------ ------------ ------------ ------------ ------------
Total tons shipped (excluding KES)..... 169,600 130,500 561,000 503,800 373,300
KES tons shipped....................... -- -- -- 244,400 217,900
------------ ------------ ------------ ------------ ------------
Total tons shipped..................... 169,600 130,500 561,000 748,200 591,200
=============== =============== ========== ========== ==========
Average selling price per ton:
Tubular products
Welded OCTG.......................... $ 490 $ 462 $ 467 $ 447 $ 469
Seamless OCTG........................ 805(10) 904(10) 832 881 906
Welded line pipe..................... 473 444 453 427 434
Seamless line pipe................... 590(10) 600(10) 576 591 644
SBQ products........................... 454 424 439 396 399
Hot rolled coil products............... 391 353 354 340 340
Other products(9)...................... 380 402 382 353 421
<CAPTION>
1991 1990
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 212,471 $ 249,871
Cost of products sold.................... 201,751 204,649
Selling and administrative expenses...... 28,897 25,852
Operating income (loss).................. (18,177) 19,370
Net interest income (expense)............ (14,117) (410)
Gain on sale of subsidiary............... -- --
Provision (credit) for income taxes...... (11,973) 6,291
Extraordinary items...................... -- --
Cumulative effect of a change in
accounting principle................... -- --
Net income (loss)........................ (20,603) 13,047
BALANCE SHEET DATA:
Working capital.......................... $ 48,411 $ 64,858
Total assets............................. 329,889 220,856
Total debt............................... 196,345 72,812
Common shareholders' equity.............. 85,149 107,226
OTHER FINANCIAL AND
STATISTICAL DATA:
EBITDA(3)................................ $ (3,385)(5) $ 26,515
Capital expenditures..................... 16,433 45,011
Depreciation and amortization............ 15,725 6,879
Ratio of EBITDA to net interest
charges(6)............................. --(7) 5.8x
Ratio of earnings to fixed charges(8).... -- 3.2x
Deficiency of earnings to cover fixed
charges................................ $ (38,109) $ --
Sources and uses of cash flows:
Net cash flows from operating
activities........................... $ (13,767) $ 14,250
Net cash flows from investing
activities........................... (112,722) (31,327)
Net cash flows from financing
activities........................... 119,037 25,576
Tons shipped:
Tubular products
Welded OCTG.......................... 92,200 119,800
Seamless OCTG........................ 7,000 --
Welded line pipe..................... 67,000 78,300
Seamless line pipe................... 200 --
SBQ products........................... 14,000 --
Hot rolled coil products............... -- --
Other products(9)...................... 48,700 87,000
------------ ------------
Total tons shipped (excluding KES)..... 229,100 285,100
KES tons shipped....................... 198,300 239,400
------------ ------------
Total tons shipped..................... 427,400 524,500
========== ==========
Average selling price per ton:
Tubular products
Welded OCTG.......................... $ 545 $ 574
Seamless OCTG........................ 905 --
Welded line pipe..................... 511 529
Seamless line pipe................... 685 --
SBQ products........................... 398 --
Hot rolled coil products............... -- --
Other products(9)...................... 363 343
8
<PAGE> 12
- ---------------
<FN>
(1) The three month periods ended December 31, 1994 and December 25, 1993 are
14 and 13 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 quarter 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."
FISCAL QUARTER ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
--------------------------- --------------------------------
1994 1993 1994 1993 1992
------------ ------------ -------- -------- --------
Net sales...................................... $ 93,489 $ 71,959 $303,380 $262,535 $200,803
Cost of products sold.......................... 81,999 64,369 278,362 239,118 186,212
Selling and administrative expenses............ 6,932 5,980 24,530 21,030 21,615
Operating income (loss)........................ 4,558 1,610 488 2,387 (7,024)
EBITDA......................................... $ 9,809 $ 6,668 $ 19,833 $ 20,159 $ 10,606
Capital expenditures........................... 2,987 1,242 11,760 5,404 3,805
Depreciation and amortization.................. 5,020 4,661 18,789 18,328 17,965
(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 quarter and fiscal year of 1994, on a pro forma basis to
exclude the gain on the sale of and the results for KES, EBITDA was $6.7
million and $19.8 million, respectively, the ratio of EBITDA to net
interest charges was 1.5x and 1.1x, respectively, and the ratio of earnings
to fixed charges was not meaningful. Earnings were insufficient to cover
fixed charges by $2.4 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) 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.
(9) Other products include seamless mechanical tubing and products classified
as secondary and limited service.
(10) Average selling prices for all seamless tubular products for the first
quarter of fiscal 1995 declined 10.2% from the first quarter 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 -- Fiscal Quarter Fiscal 1995 Compared with First Quarter Fiscal
1994" and "-- Quarterly Results."
</TABLE>
9
<PAGE> 13
<TABLE>
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following supplemental consolidated financial data includes unaudited
consolidated financial data for the 53 week period ended December 31, 1994 and
unaudited pro forma summary consolidated financial data for fiscal 1994. 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.
<CAPTION>
PRO FORMA
TWELVE MONTHS CONSOLIDATED
ENDED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1994 FISCAL 1994
----------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................................................... $ 324,910 $ 303,380
Cost of products sold........................................................ 295,992 278,362
Selling and administrative expenses.......................................... 25,482 24,530
Operating income............................................................. 3,436 488
Net interest expense......................................................... (18,569) (18,297)
Provision (credit) for income taxes.......................................... (5,648) (6,460)
Loss before cumulative effect of a change in accounting principle............ (8,458) (10,158)
Net loss..................................................................... (8,458)
Loss per share before cumulative effect of a change in accounting
principle.................................................................. $ (.61) $ (.74)
Loss per share............................................................... (.61)
Weighted average shares outstanding.......................................... 13,805,969 13,789,265
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(1).................................................................... $ 22,975 19,833
Capital expenditures......................................................... 13,505 11,760
Depreciation and amortization................................................ 19,148 18,789
Ratio of EBITDA to net interest charges(2)................................... 1.2x 1.1x
Ratio of earnings to fixed charges(3)........................................ -- --
Deficiency of earnings to cover fixed charges(3)........................... $ (14,106) $ (16,618)
Sources and uses of cash flows:
Net cash flows from operating activities..................................... $ (2,551)
Net cash flows from investing activities..................................... 4,416
Net cash flows from financing activities..................................... (10,597)
Tons shipped:
Tubular products
Welded OCTG................................................................ 152,600 138,200
Seamless OCTG.............................................................. 67,800 61,800
Welded line pipe........................................................... 86,000 82,800
Seamless line pipe......................................................... 12,300 10,700
SBQ products................................................................. 156,800 147,900
Hot rolled coil products..................................................... 38,500 38,800
Other products(4)............................................................ 86,100 80,800
----------------- --------------
Total tons shipped........................................................... 600,100 561,000
================= ==============
Average selling price per ton:
Tubular products
Welded OCTG................................................................ $ 474 $ 467
Seamless OCTG.............................................................. 808(5) 832(5)
Welded line pipe........................................................... 460 453
Seamless line pipe......................................................... 577(5) 576(5)
SBQ products................................................................. 446 439
Hot rolled coil products..................................................... 363 354
Other products(4)............................................................ 377 382
<FN>
- ---------------
(1) EBITDA represents earnings before net interest expense, taxes, depreciation
and amortization, and is calculated as net income before extraordinary
items and the cumulative effect of a change in accounting principle plus
net interest expense, taxes, depreciation and amortization. EBITDA provides
additional information for determining the Company's ability to meet debt
service requirements. EBITDA does not represent and should not be
considered as an alternative to net income, any other measure of
performance as determined by generally accepted accounting principles, as
an indicator of operating performance or as an alternative to cash flows
from operating, investing or financing activities or as a measure of
liquidity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of liquidity and operating
results.
(2) 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.
(4) Other products include seamless mechanical tubing and products classified
as secondary and limited service.
(5) Average selling prices for all seamless tubular products for the first
quarter of fiscal 1995 declined 10.2% from the first quarter 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 -- Fiscal Quarter Fiscal 1995 Compared with First Quarter Fiscal
1994" and "-- Quarterly Results."
</TABLE>
10
<PAGE> 14
INVESTMENT CONSIDERATIONS
In addition to the other information set forth in this Prospectus,
prospective investors should carefully consider the following information in
evaluating the Company and its business before making an investment in the
Senior Secured Notes.
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 December 31, 1994, the Company had total Debt of $179.9 million. After
giving effect to the Offering and the application of certain cash balances of
the Company to the payment of debt, as of December 31, 1994, the Company would
have had $165.3 million of total Debt, including the $125 million aggregate
principal amount of the Senior Secured Notes. See "Use of Proceeds," "Summary of
the Refinancing Transaction," and "Capitalization." The Company's gross interest
expense for fiscal 1994, 1993, 1992 and 1991 was $20.0 million, $21.1 million,
$21.8 million and $16.1 million, respectively. The Company's gross interest
expense is not expected to change materially after giving effect to the Offering
and the application of the proceeds therefrom. On a pro forma basis for fiscal
1994 (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 $16.6 million, $9.3 million, $19.4 million and $38.1 million,
respectively. These amounts were calculated including KES for the periods prior
to its sale in October 1993. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." On a pro forma basis for fiscal
1994 (to exclude the gain on the sale of and the results for KES), assuming the
completion of the Offering and the application of certain cash balances on the
first day of such period and the application of the net proceeds of the Offering
on the first day of such period, fixed charges would have been in excess of
earnings by $ million. The Company's ability to make interest payments on
and to repay the principal of the Senior Secured Notes will depend upon the
Company's ability to generate cash sufficient to meet such required payments or
to refinance its debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company's level of indebtedness, together with the restrictive
covenants included in the Indenture and the Credit Facility, may have the effect
of limiting the Company's ability to incur additional indebtedness, sell assets
or acquire other entities, and may otherwise limit the operational and financial
flexibility of the Company. The effect of these restrictions may be to place the
Company at a competitive disadvantage in relation to less leveraged competitors.
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 the 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 December 31, 1994, the
Company had a net worth of approximately $75.9 million. The Company currently
would be, and will be upon the completion of the Offering, in compliance with
all covenants under the Credit Facility. If the Company's results from
operations do not improve over its results for fiscal 1994, then the Company
could be in default under its Credit Facility in the absence of a waiver or
amendment from the lenders. There can be no assurance that the Company would be
able to obtain any necessary waivers or be able to renegotiate the terms of the
Credit Facility.
11
<PAGE> 15
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). At December 31, 1994, assuming completion of
the Offering and the application of certain cash balances of the Company to the
payment of debt, the Company would have had $ million in working capital and
minimal term debt amortization requirements over the next five years. In
addition, the Credit Facility will restrict prepayment of indebtedness,
including the Senior Secured Notes through optional redemptions and Change of
Control Offers.
The Credit Facility will be a borrowing base facility, although the agent
for the lenders may reduce the borrowing base by the amount of reserves such
agent reasonably deems necessary (including reserves for environmental matters).
The Credit Facility will contain certain events of default including, among
others: (i) failure to pay the obligations under the Credit Facility when due;
(ii) breach of any representation or warranty in any of the loan documents;
(iii) failure to comply with terms, provisions, conditions or covenants in any
of the loan documents (which in some cases do not include notice or cure
periods); (iv) issuance of liens or attachment 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 Operation."
DEPENDENCE ON OIL COUNTRY TUBULAR GOODS MARKET
OCTG products represent the Company's principal product lines and largest
source of net sales, representing 38% of the Company's net sales for fiscal
1994. The market for OCTG is primarily dependent upon domestic oil and natural
gas drilling activity, which is largely dependent on current and forecasted oil
and gas prices. The domestic drilling industry has been in a period of
contraction since 1986, with average rig count declining from a high of
approximately 3,970 in 1981 to a low of approximately 718 in 1992, according to
Baker Hughes, Inc. 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 levels of welded and seamless products, competitive
conditions, steel
12
<PAGE> 16
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.
The Company intends to implement a three-year, $25.8 million capital
expenditure program intended to reduce its operating costs, improve quality and
enhance its marketing position. The capital expenditure program is under
continuous review and the Company may, based upon the results of engineering
studies, revisions in budgeted project costs, increases or decreases in
estimated operating benefits, changes in the demand for the Company's products,
or the unavailability of internally generated cash or acceptable external
financing, decide in the future to eliminate, postpone, modify or accelerate
projects, or to substitute new projects for those currently included in the
program. Upon completion of the capital expenditure program, the Company
believes that its steelmaking operations, like those of other steel producers,
will continue to require capital expenditures and additional projects that are
essential to the Company's long-term competitiveness. See "-- Competition" for
information concerning low cost thin slab casting operations. Because the
estimated operating benefits from the Company's expected efficiencies and
planned capital improvements are based upon a number of assumptions, estimated
operating benefits may not necessarily be indicative of the Company's future
financial performance, and increases in the cost of raw materials or other
operating costs may offset any operating benefits causing actual results to vary
significantly. In addition, the Company has based its operating benefits
estimates on fiscal 1994 production and shipment levels and product mix. Any
increase or decrease in actual tons shipped or a change in product mix would
affect the operating benefits realized through the capital expenditure program.
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.
13
<PAGE> 17
COMPETITION
The Company competes with foreign and domestic producers, including both
integrated and mini-mill producers, many of which have substantially greater
assets and larger sales organizations than the Company. The domestic mini-mill
steel industry, particularly with respect to OCTG products, is characterized by
vigorous competition with respect to price, quality and service, as well as
competition to achieve technological advancements that would allow a mini-mill
to lower its production costs. In addition, excess production capacity among
OCTG producers has resulted in competitive product pricing and continued
pressures on industry profit margins. The economics of operating a steel
mini-mill encourage mini-mill operators to maintain high levels of output, even
in times of low demand, which exacerbates the pressures on industry profit
margins.
In the welded OCTG and line pipe market, the Company competes against
certain manufacturers who purchase hot rolled coils for further processing into
welded OCTG and line pipe products. Since these tubular manufacturers acquire
their principal raw material from other producers, they avoid the substantial
investment required to build and operate a melt shop and hot strip mill. The
cost of finished tubular products for these manufacturers is largely dependent
on the market price of hot rolled coils. Depending on market demand for hot
rolled coil, these tubular manufacturers may purchase hot rolled coils at a
lower or higher cost than the Company's cost to manufacture hot rolled coils.
The barriers to entry to the welded tubular market with respect to capital
investment are low by steel industry standards.
Manufacturers with facilities utilizing thin slab casting are expected to
be increasingly strong competitors in the hot rolled coil market. The principal
advantages of thin slab casting over the Company's melting and hot strip mill
operations at the Newport facilities can be reduced capital costs per unit,
lower energy and labor costs per unit and increased economies of scale. Certain
steel facilities are currently utilizing thin slab casting technology and
additional thin slab casting facilities have either been announced or are
currently under construction. The anticipated increase in the use of thin slab
casting technology may result in lower prices to the Company's competitors for
hot rolled coils and closures of excess hot rolled capacity. As a result,
particularly in times of soft demand for hot rolled coil, the Company may be
forced by competitive pressures to lower prices for finished products.
Alternatively, the Company may be required to invest in new technologies not
included in its present capital expenditure program to offset the Newport
facilities' potential cost disadvantages when compared to a low cost thin slab
casting operation.
The domestic steel industry has historically faced significant competition
from foreign steel producers. Many foreign steel producers are owned, controlled
or subsidized by their governments and their decisions with respect to
production and sales may be influenced more by political and economic policy
considerations than by prevailing market conditions. Foreign steel producers'
share of OCTG domestic consumption has increased from approximately 7% in 1992
to approximately 25% for the twelve months ended September 1994. 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 USWA represents substantially all of the Company's hourly 1,184-person
workforce. In 1994, the Company negotiated collective bargaining agreements 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."
14
<PAGE> 18
VOLATILITY IN RAW MATERIAL COSTS
The market for steel scrap, the principal raw material used in the
Company's operations, is highly competitive and subject to price volatility
influenced by periodic shortages (due to increased demand by foreign and
domestic users), freight costs, speculation by scrap brokers and other market
conditions largely beyond the Company's control. Although the domestic mini-mill
industry attempts to maintain its profit margin by attempting to increase the
price of its finished products in response to increases in scrap costs,
increases in the prices of finished products often do not fully compensate for
such scrap price increases and generally lag several months behind increases in
steel scrap prices, thereby restricting the ability of mini-mill producers to
recover higher raw material costs. During periods of declining steel prices,
declines in scrap prices may not be as significant as declines in product prices
and, likewise, a decline in scrap prices may cause a decline in selling prices
for the Company's products. A number of companies have announced plans to open
new facilities, some of which will be located in the same geographic region as
the Company's facilities. Operation of these new mini-mills will increase the
demand for steel scrap and may result in an increase in steel scrap costs to the
Company. In addition, certain existing thin slab casting mini-mills are
expanding capacity which may also significantly increase the cost of steel scrap
to the Company. The Company's steel scrap costs per ton increased by
approximately 20.6% in fiscal 1994 over fiscal 1993.
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's specialty steel and adhesives operations are subject to
various federal, state and local laws and regulations, including, among others,
the Clean Air Act, the 1990 amendments to the Clean Air Act (the "1990
Amendments"), the Resource Conservation and Recovery Act ("RCRA") and the Clean
Water Act and all regulations promulgated in connection therewith, including,
among others, those concerning the discharge of contaminants as air emissions or
waste water effluents and the disposal of solid and/or hazardous waste such as
electric arc furnace dust. Since its inception the Company has spent substantial
amounts to comply with these requirements, and the 1990 Amendments may require
additional expenditures for air pollution control. 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 storage, treatment and
disposal of the radiation contaminated baghouse dust. However, a final
determination as to method of treatment and disposal, cost and further
regulatory requirements cannot be made at this time. Depending on the ultimate
timing and method of treatment and disposal, which will require appropriate
federal and state regulatory approvals, the actual cost of disposal could
substantially exceed current reserves and the Company's insurance coverage.
In September 1994, the Company received a proposed Consent Agreement from
the Environmental Protection Agency ("EPA") relating to an April 1990 RCRA
facility assessment (the "Assessment") completed by the EPA and the Pennsylvania
Department of Environmental Resources. The Assessment was performed in
connection with a RCRA Part B permit pertaining to a landfill that is adjacent
to the Koppel facilities and owned by Babcock & Wilcox Company ("B&W"), the
former owner of the Koppel facilities. The Assessment identified potential
releases of hazardous constituents into the environment from numerous Solid
Waste Management Units ("SWMU's") and Areas of Concern ("AOC's"). The SWMU's and
AOC's identified during the Assessment and the EPA's follow-up investigation are
located at and adjacent to the Company's Koppel facilities. The proposed Consent
Agreement establishes a schedule for investigating, 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
15
<PAGE> 19
Company, B&W and PMAC, Ltd. ("PMAC") at the time of the Company's acquisition of
the Koppel facilities in fiscal 1991, B&W and PMAC agreed to indemnify the
Company against various known and unknown environmental matters. While reserving
its rights against B&W, PMAC has accepted full financial responsibility for the
matters covered by the proposed Consent Agreement other than with respect to a
1987 release of hazardous constituents (the "1987 Release") that the Company
believes could represent the most significant component of any potential
cleanup, and other than with respect to hazardous constituents generated by
Koppel after its acquisition by the Company, if any. B&W, PMAC and Koppel are in
dispute as to whether the indemnification provisions relating to the 1987
Release expire in October 1995. Although B&W has not acknowledged responsibility
for any cleanup measures that may be required as a result of any investigation
(other than with respect to the 1987 Release, in the event certain actions are
taken by the EPA prior to October 1995), B&W and PMAC have agreed to jointly
retain an environmental consultant to assist in negotiating the proposed Consent
Agreement and to conduct the required investigation. The Company believes that
it is entitled to full indemnity for all of the matters covered by the proposed
Consent Agreement from B&W and/or PMAC. However, in the event the indemnifying
parties default on their respective obligations under the applicable agreements
for any reason (including the inability to pay such obligations), or to the
extent any disputes regarding the application of the indemnification provisions
to the 1987 Release are determined adversely to the Company, Koppel will be
obligated to complete any cleanup required by the EPA. Prior to the completion
of the site analysis to be performed in connection with any Consent Agreement,
the Company cannot predict the expected cleanup cost for the SWMU's and AOC's
covered by the proposed Consent Agreement.
PRODUCT LIABILITY
The use of the Company's OCTG and line pipe in the production and
transmission of oil, natural gas and other fluids may subject the Company to
liability for loss and consequential damages in the event of a defect in the
Company's product. Newport is a co-defendant in a claim for breach of implied
warranty in the United States District Court for the Southern District of Texas
arising from the failure of two joints of welded pipe during testing of an
off-shore pipeline. The plaintiff is seeking damages in excess of $5 million for
costs associated with replacing the entire pipeline and lost production
revenues. The trial is scheduled for April 1995. No assurances can be given as
to the outcome of this case or as to the availability of insurance proceeds for
any damage award. The Company is also subject to various other product liability
matters which seek remedies or damages. See "Business--Legal Proceedings."
FRAUDULENT CONVEYANCE ISSUES; HOLDING COMPANY STRUCTURE
The Senior Secured Notes will be obligations of the Company and will be
unconditionally guaranteed, jointly and severally, by the Subsidiaries. Under
applicable provisions of Federal bankruptcy law and comparable provisions of
state fraudulent transfer laws, if it were found that any Subsidiary had
incurred the indebtedness represented by its 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
16
<PAGE> 20
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,
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 December 31, 1994, the net book value of the Collateral was
approximately $147.5 million. There can be no assurance that the proceeds of any
sale of the Collateral pursuant to the Indenture and the Security Documents
following an acceleration after an Event of Default under the Indenture would be
sufficient with respect to amounts owed with respect to the Senior Secured
Notes. The proceeds from the sale of the Collateral would be applied to repay
the Subsidiary's obligations under 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 the Senior Secured Notes -- Security" and "--
Certain Bankruptcy Limitations." In addition, the Trustee for the Senior Secured
Notes will enter into an intercreditor agreement with The Bank of New York
Commercial Corporation, the agent for the lenders under the Credit Facility,
that may delay the sale of the property subject to the lien of the Indenture and
the Security Documents in order to permit the orderly sale of the property
securing the Credit Facility.
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 mortgages securing the Subsidiary Guarantee and the
Intercompany Note of Koppel will be granted in part with respect to the real
property of the Koppel facilities. The Koppel facilities are the subject of a
proposed Consent Agreement 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
17
<PAGE> 21
the Senior Secured Notes tendered and to repay other indebtedness that may
become payable upon the occurrence of a Change of Control. See "Description of
the Senior Secured Notes -- Change of Control."
ABSENCE OF A PUBLIC MARKET FOR THE SENIOR SECURED NOTES
The Senior Secured Notes comprise a new issue of securities for which there
is currently no market. The Underwriters have informed the Company that they
currently intend to make a market in the Senior Secured Notes; however, the
Underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. If the Senior Secured Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities, the performance of the Company and other factors. Therefore, no
assurance can be given as to whether an active trading market will develop or be
maintained for the Senior Secured Notes or at what prices the Senior Secured
Notes will trade.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Secured Notes offered hereby
are estimated at approximately $ million. The Company intends to apply the
net proceeds from the sale of the Senior Secured Notes and available cash
balances as follows: (i) approximately $ million to redeem $70.3 million
principal amount of loans from General Electric Capital Corporation (the "GECC
Loans") (which bear interest rates ranging from 7.99% to 12.54% per annum due
2001) including a premium of approximately $ million and accrued interest of
approximately $0.1 million thereon; (ii) approximately $ million to redeem
$32.0 million principal amount of loans from certain insurance companies (the
"10.65% Notes") (which bear interest at a rate of 10.65% per annum due 1999)
including a premium of approximately $ million and accrued interest of
approximately $0.4 million thereon; (iii) approximately $ million to redeem
other long-term debt of the Company or its Subsidiaries, including accrued
interest of approximately $ million thereon; (iv) approximately $31.3
million to repay $31.0 million in outstanding balances on its existing revolving
credit facilities, including accrued interest of approximately $0.3 million
thereon; and (v) approximately $ million in estimated fees and expenses
(collectively, the "Refinancing Transaction"). The following table summarizes
the sources and uses of funds in the Refinancing Transaction.
<TABLE>
SUMMARY OF THE REFINANCING TRANSACTION
(in thousands)
<S> <C>
Sources of Funds
Cash, cash equivalents and short-term investments................ $
Senior Secured Notes............................................. 125,000
---------
Total....................................................... $
=========
Uses of Funds
Revolving Credit Facilities...................................... $ 30,980
GECC Loans....................................................... 70,174
10.65% Notes..................................................... 31,537
Other long-term debt.............................................
Prepayment penalties and accrued interest........................
Estimated fees and expenses......................................
---------
Total....................................................... $
=========
</TABLE>
18
<PAGE> 22
<TABLE>
CAPITALIZATION
The following table sets forth the cash, cash equivalents and short-term
investments, short-term debt and capitalization of the Company as of December
31, 1994, and as adjusted to reflect the sale of the Senior Secured Notes
offered hereby and the application of the net proceeds and available cash and
short-term investments as described under "Use of Proceeds" and "Summary of the
Refinancing Transaction." This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto
included elsewhere herein.
<CAPTION>
AS OF DECEMBER 31, 1994
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments................... $ 40,366 $
======== ===========
Short-term debt:
Current portion of long-term debt................................. $ 17,368 $
Notes payable
Revolving credit facilities.................................... 30,980 --
Other.......................................................... 251 251
-------- -----------
Total short-term debt..................................... $ 48,599 $
======== ===========
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........ 58,769 --
10.65% Notes due 1999............................................. 26,455 --
11% Subordinated Convertible Debentures due October 2000 through
October 2005................................................... 29,000 29,000
Other long-term debt.............................................. 17,099
-------- -----------
Total long-term debt...................................... 131,323
-------- -----------
Common shareholders' equity:
Common stock, no par value -- 40,000,000 authorized and 13,809,413
shares outstanding............................................. 48,988 48,988
Common stock options and warrants................................. 277 277
Unrealized gain (loss) on available for sale securities........... (806) (806)
Retained earnings................................................. 27,413 (1)
-------- -----------
Total common shareholders' equity......................... 75,872
-------- -----------
Total capitalization...................................... $207,195 $
======== ===========
<FN>
- ---------------
(1) The reduction in retained earnings reflects the $ million prepayment cost
to redeem the GECC Loans and the 10.65% Notes, the write-off of $ million
unamortized debt issuance costs and $ million of interest charges relating
to . This reduction will be reflected in the results of
operations in the fiscal quarter ending April 1, 1995.
</TABLE>
19
<PAGE> 23
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data shown below (other than the data
under the captions "Tons shipped" and "Average selling price per ton") is
unaudited for the fiscal 1995 and 1994 first quarter 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 Note 2 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.
<CAPTION>
FISCAL QUARTER ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
---------------------------- ----------------------------------------------
1994(1) 1993(1) 1994(2) 1993(2) 1992(2)
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 93,489 $ 71,959 $ 303,380 $ 353,082 $ 281,242
Cost of products sold.................... 81,999 64,168 278,161 310,586 250,189
Selling and administrative expenses...... 6,932 5,980 24,530 30,824 29,652
Operating income (loss).................. 4,558 1,811 689 11,672 1,401
Net interest income (expense)............ (4,824) (4,552) (18,297) (20,819) (21,075)
Gain on sale of subsidiary............... -- 35,292 35,292 -- --
Provision (credit) for income taxes...... 48 13,078 7,382 (3,382) (6,058)
Extraordinary items...................... -- -- -- (1,095) (2,542)
Cumulative effect of a change in
accounting principle................... -- 1,715 1,715 -- --
Net income (loss)........................ 75 21,741 13,208 (6,991) (15,900)
BALANCE SHEET DATA:
Working capital.......................... $ 39,484 $ 63,214 $ 45,202 $ 39,060 $ 40,676
Total assets............................. 315,906 339,668 315,327 317,242 319,079
Total debt............................... 179,922 189,726 182,525 192,155 193,753
Common shareholders' equity.............. 75,872 84,986 76,464 62,622 68,574
OTHER FINANCIAL AND
STATISTICAL DATA:
EBITDA(3)................................ $ 9,809 $ 42,160(4) $ 55,326(4) $ 30,078 $ 19,793
Capital expenditures..................... 2,987 1,242 11,760 6,080 4,148
Depreciation and amortization............ 5,020 4,661 18,789 19,093 18,711
Ratio of EBITDA to net interest
charges(6)............................. 2.0x 9.3x(4) 3.0x(4) 1.4x 0.9x(7)
Ratio of earnings to fixed charges(8).... 1.0x 7.6x(4) 1.9x(4) -- --
Deficiency of earnings to cover fixed
charges................................ $ -- $ --(4) $ --(4) $ (9,278) $ (19,416)
Sources and uses of cash flows:
Net cash flows from operating
activities........................... $ 2,523 $ 745 $ (4,329) $ 2,392 $ 8,515
Net cash flows from investing
activities........................... (1,857) 1,106 7,379 (4,254) (1,373)
Net cash flows from financing
activities........................... (3,272) 2,883 (4,442) (1,055) (3,526)
Tons shipped:
Tubular products
Welded OCTG.......................... 50,200 35,800 138,200 142,100 112,000
Seamless OCTG........................ 20,600 14,600 61,800 48,700 20,500
Welded line pipe..................... 20,700 17,500 82,800 110,900 88,500
Seamless line pipe................... 2,500 900 10,700 14,400 10,400
SBQ products........................... 42,800 33,900 147,900 102,500 72,000
Hot rolled coil products............... 8,800 9,100 38,800 6,600 100
Other products(9)...................... 24,000 18,700 80,800 78,600 69,800
---------- ---------- ---------- ---------- ----------
Total tons shipped (excluding KES)..... 169,600 130,500 561,000 503,800 373,300
KES tons shipped....................... -- -- -- 244,400 217,900
---------- ---------- ---------- ---------- ----------
Total tons shipped..................... 169,600 130,500 561,000 748,200 591,200
========== ========== ========== ========== ==========
Average selling price per ton:
Tubular products
Welded OCTG.......................... $ 490 $ 462 $ 467 $ 447 $ 469
Seamless OCTG........................ 805(10) 904(10) 832 881 906
Welded line pipe..................... 473 444 453 427 434
Seamless line pipe................... 590(10) 600(10) 576 591 644
SBQ products........................... 454 424 439 396 399
Hot rolled coil products............... 391 353 354 340 340
Other products(9)...................... 380 402 382 353 421
<CAPTION>
1991 1990
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 212,471 $ 249,871
Cost of products sold.................... 201,751 204,649
Selling and administrative expenses...... 28,897 25,852
Operating income (loss).................. (18,177) 19,370
Net interest income (expense)............ (14,117) (410)
Gain on sale of subsidiary............... -- --
Provision (credit) for income taxes...... (11,973) 6,291
Extraordinary items...................... -- --
Cumulative effect of a change in
accounting principle................... -- --
Net income (loss)........................ (20,603) 13,047
BALANCE SHEET DATA:
Working capital.......................... $ 48,411 $ 64,858
Total assets............................. 329,889 220,856
Total debt............................... 196,345 72,812
Common shareholders' equity.............. 85,149 107,226
OTHER FINANCIAL AND
STATISTICAL DATA:
EBITDA(3)................................ $ (3,385)(5) $ 26,515
Capital expenditures..................... 16,433 45,011
Depreciation and amortization............ 15,725 6,879
Ratio of EBITDA to net interest
charges(6)............................. --(7) 5.8x
Ratio of earnings to fixed charges(8).... -- 3.2x
Deficiency of earnings to cover fixed
charges................................ $ (38,109) $ --
Sources and uses of cash flows:
Net cash flows from operating
activities........................... $ (13,767) $ 14,250
Net cash flows from investing
activities........................... (112,722) (31,327)
Net cash flows from financing
activities........................... 119,037 25,576
Tons shipped:
Tubular products
Welded OCTG.......................... 92,200 119,800
Seamless OCTG........................ 7,000 --
Welded line pipe..................... 67,000 78,300
Seamless line pipe................... 200 --
SBQ products........................... 14,000 --
Hot rolled coil products............... -- --
Other products(9)...................... 48,700 87,000
---------- ----------
Total tons shipped (excluding KES)..... 229,100 285,100
KES tons shipped....................... 198,300 239,400
---------- ----------
Total tons shipped..................... 427,400 524,500
========== ==========
Average selling price per ton:
Tubular products
Welded OCTG.......................... $ 545 $ 574
Seamless OCTG........................ 905 --
Welded line pipe..................... 511 529
Seamless line pipe................... 685 --
SBQ products........................... 398 --
Hot rolled coil products............... -- --
Other products(9)...................... 363 343
20
<PAGE> 24
<FN>
- ---------------
(1) The three month periods ended December 31, 1994 and December 25, 1993 are
14 and 13 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 quarter 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."
FISCAL QUARTER ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
--------------------------- --------------------------------
1994 1993 1994 1993 1992
------------ ------------ -------- -------- --------
Net sales...................................... $ 93,489 $ 71,959 $303,380 $262,535 $200,803
Cost of products sold.......................... 81,999 64,369 278,362 239,118 186,212
Selling and administrative expenses............ 6,932 5,980 24,530 21,030 21,615
Operating income (loss)........................ 4,558 1,610 488 2,387 (7,024)
EBITDA......................................... $ 9,809 $ 6,668 $ 19,833 $ 20,159 $ 10,606
Capital expenditures........................... 2,987 1,242 11,760 5,404 3,805
Depreciation and amortization.................. 5,020 4,661 18,789 18,328 17,965
(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 quarter and fiscal year of 1994, on a pro forma basis to
exclude the gain on the sale of and the results for KES, EBITDA was $6.7
million and $19.8 million, respectively, the ratio of EBITDA to net
interest charges was 1.5x and 1.1x, respectively, and the ratio of earnings
to fixed charges was not meaningful. Earnings were insufficient to cover
fixed charges by $2.4 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) 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.
(9) Other products include seamless mechanical tubing and products classified
as secondary and limited service.
(10) Average selling prices for all seamless tubular products for the first
quarter of fiscal 1995 declined 10.2% from the first quarter 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 -- Fiscal Quarter Fiscal 1995 Compared with First Quarter Fiscal
1994" and "-- Quarterly Results."
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company operates in two separate business segments: specialty steel and
industrial adhesives. Within the specialty steel segment are the operations of
Newport, a manufacturer of welded tubular steel products and hot rolled coils;
Koppel, a manufacturer of seamless tubular steel products, SBQ products and
semi-finished steel products; and Erlanger, a tubular steel product finishing
operation. The Company's specialty steel products consist of: (i) seamless and
welded OCTG products primarily used in oil and natural gas drilling and
production operations; (ii) line pipe used in the transmission of oil, gas and
other fluids; (iii) SBQ products primarily used in the manufacture of heavy
industrial equipment; and (iv) hot rolled coils which are sold to service
centers and other manufacturers for further processing. Within the adhesives
segment are the operations of Imperial, a manufacturer of industrial adhesives
products. See Note 14 to the 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 month periods ended December 31, 1994 and
December 25, 1993 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 quarterly 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 DECEMBER FISCAL YEAR ENDED SEPTEMBER
----------------------------- ----------------------------------------------
1994 1993 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Net sales
Specialty steel, excluding KES..... $ 84,716 $ 63,762 $ 270,441 $ 234,460 $ 175,921
KES................................ -- -- -- 90,547 80,439
------------ ------------ ------------ ------------ ------------
Total specialty steel segment.... 84,716 63,762 270,441 325,007 256,360
Adhesives segment.................. 8,773 8,197 32,939 28,075 24,882
------------ ------------ ------------ ------------ ------------
$ 93,489 $ 71,959 $ 303,380 $ 353,082 $ 281,242
============== ============== ========= ========= =========
Cost of products sold
Specialty steel, excluding KES..... $ 75,210 $ 57,817 $ 252,880 $ 217,215 $ 168,371
KES................................ -- -- -- 71,468 62,248
------------ ------------ ------------ ------------ ------------
Total specialty steel segment.... 75,210 57,817 252,880 288,683 230,619
------------ ------------ ------------ ------------ ------------
Adhesives segment.................. 6,789 6,351 25,281 21,903 19,570
------------ ------------ ------------ ------------ ------------
$ 81,999 $ 64,168 $ 278,161 $ 310,586 $ 250,189
============== ============== ========= ========= =========
Operating income (loss)
Specialty steel, excluding KES..... $ 5,296 $ 2,153 $ 2,909 $ 4,094 $ (5,074)
KES................................ -- -- -- 9,285 8,425
------------ ------------ ------------ ------------ ------------
Total specialty steel segment.... 5,296 2,153 2,909 13,379 3,351
------------ ------------ ------------ ------------ ------------
Adhesives segment.................. 273 241 1,150 1,059 533
------------ ------------ ------------ ------------ ------------
Corporate allocations and income... (1,011) (583) (3,370) (2,766) (2,483)
------------ ------------ ------------ ------------ ------------
$ 4,558 $ 1,811 $ 689 $ 11,672 $ 1,401
============== ============== ========= ========= =========
</TABLE>
22
<PAGE> 26
<TABLE>
Sales data for the Company's specialty steel segment for the three month
periods ended December 31, 1994 and December 25, 1993 and for each of the three
fiscal years in the period ended September 24, 1994 were as follows:
<CAPTION>
FISCAL QUARTER ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
------------------------- ----------------------------------
1994 1993 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tons shipped
Welded tubular................ 86,800 66,700 277,600 308,000 246,500
Seamless tubular.............. 27,900 20,400 92,300 76,900 45,400
SBQ, excluding KES............ 42,800 33,900 147,900 102,500 72,000
Other......................... 12,100 9,500 43,200 16,400 9,400
KES........................... -- -- -- 244,400 217,900
-------- -------- -------- -------- --------
169,600 130,500 561,000 748,200 591,200
======== ======== ======== ======== ========
Net sales ($000's)
Welded tubular................ $ 38,751 $ 27,806 $117,214 $125,132 $103,479
Seamless tubular.............. 21,786 17,750 72,675 62,535 37,819
SBQ, excluding KES............ 19,459 14,346 64,858 40,561 28,756
Other......................... 4,720 3,860 15,694 6,232 5,867
KES........................... -- -- -- 90,547 80,439
-------- -------- -------- -------- --------
$ 84,716 $ 63,762 $270,441 $325,007 $256,360
======== ======== ======== ======== ========
</TABLE>
FIRST QUARTER FISCAL 1995 COMPARED WITH FIRST QUARTER FISCAL 1994
Net sales for the first quarter of fiscal 1995 increased $21.5 million, or
29.9%, from the first quarter of fiscal 1994, to $93.5 million. Specialty steel
segment net sales increased $20.9 million and the adhesives segment net sales
increased $0.6 million. The overall increase in specialty steel segment net
sales was the result of both higher average selling prices and increased
shipment levels. In August and September 1994, the Company followed most other
domestic tubular product manufacturers in announcing selling price increases
ranging from $20 to $40 per ton (depending on the product type) for seamless and
welded OCTG and line pipe products, effective for new orders shipped after
October 1, 1994. The Company also announced a $10 per ton price increase for SBQ
products for new orders shipped after October 1, 1994. The changes in the
Company's average selling prices resulting from the announced price increases
are more fully discussed below. For the Company's OCTG and line pipe products,
the increase in shipments was partially due to a decline in the level of import
activity.
Welded tubular net sales for the first quarter of fiscal 1995 increased
$10.9 million, or 39.4%, on a volume increase of 30.1% from the first quarter of
fiscal 1994. The increase in welded tubular net sales and shipments was due
partially to an overall 7.0% increase in average selling prices for all welded
tubular products and a decline in import levels over the prior fiscal year first
quarter. Fiscal 1995 first quarter overall average selling prices also increased
4.0% over fiscal 1994 fourth quarter. Average selling prices for welded OCTG
products increased $28 per ton, or 6.1% and $16 per ton, or 3.4% over the first
and fourth quarters of fiscal 1994, respectively, to $490 per ton for the first
quarter of fiscal 1995. Average selling prices for welded line pipe increased
$29 per ton, or 6.5% and $10 per ton, or 2.2% over the first and fourth quarters
of fiscal 1994, respectively, to $473 per ton for the first quarter of fiscal
1995.
Seamless tubular net sales for the first quarter of fiscal 1995 increased
$4.0 million, or 22.7% on a volume increase of 36.8% from the first quarter of
fiscal 1994. The increase in seamless tubular net sales and shipments was
partially attributable to increased sales from product line expansion in the
first quarter of fiscal 1995 and a decline in imports compared to the prior
fiscal year first quarter. Average selling prices for all seamless tubular
products for the first quarter of fiscal 1995 declined 10.2% from the first
quarter 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. However, fiscal 1995 first
quarter average selling prices for all seamless tubular products increased 5.7%
from the fourth quarter of fiscal 1994. Average selling prices for seamless OCTG
products declined $99 per ton, or 11.0% from the first quarter of fiscal 1994
but increased
23
<PAGE> 27
$24 per ton, or 3.1% from the fourth quarter of fiscal 1994 to $805 per ton for
the first quarter of fiscal 1995. Average selling prices for seamless line pipe
for the first quarter of fiscal 1995 decreased 1.7% from the first quarter of
fiscal 1994 but increased 1.0% from the fourth quarter of fiscal 1994 to $590
per ton for the first quarter of fiscal 1995.
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 4.5%, from 862 in the first
quarter of fiscal 1994 to 823 in the first quarter of fiscal 1995. The rig
count, however, increased 5.5% from the fourth quarter of fiscal 1994. On June
30, 1994, the Company and six other U.S. steel companies filed antidumping
petitions against imports of OCTG products from seven foreign nations. The cases
ask the U.S. government to take action to offset injury to the domestic OCTG
industry from unfairly traded imports. The antidumping petitions were filed
against OCTG imports from Argentina, Austria, Italy, Japan, Korea, Mexico and
Spain. The Company also joined in filing countervailing duty cases charging
subsidization of OCTG imports from Austria and Italy. 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 December 1994 and January 1995, the International Trade
Administration of the United States Department of Commerce issued certain
favorable preliminary determinations concerning the existence and extent of
dumping and subsidization and imposed significant preliminary tariffs on imports
from Austria, Italy and Japan and minor preliminary tariffs on imports from
Argentina and Korea. Final determinations by the Department of Commerce are
expected in the summer of 1995. The United States ITC will then assess whether
dumping and subsidization have caused or threatened to cause material injury to
the United States OCTG industry. While the Company cannot predict the outcome of
the cases at this time, the Company believes that a favorable final ruling could
continue to have a positive impact on shipments and selling prices of certain of
the Company's products.
Price increases and improvements in tubular product shipments will continue
to also be highly dependent on the level of drilling activity in the United
States and abroad as well as the level of activity in the steel industry and the
general state of the economy.
SBQ product net sales for the first quarter of fiscal 1995 increased $5.1
million, or 35.6% on a volume increase of 26.3% from the first quarter of fiscal
1994. SBQ product average selling prices increased $30 per ton, or 7.2% from the
first quarter of fiscal 1994 to $454 per ton for the first quarter of fiscal
1995. SBQ product volume and prices have increased as a result of stronger
market demand in the first quarter of fiscal 1995 as compared to the fiscal 1994
first quarter. Fiscal 1995 first quarter average selling prices were also up $13
per ton, or 2.9% over the fiscal 1994 fourth quarter. Other product shipments
and sales were primarily attributable to shipments of hot rolled coils. Average
selling prices for hot rolled coils increased $38 per ton, or 10.8% and $43 per
ton, or 12.4% over the first and fourth quarters of fiscal 1994, respectively,
to $391 per ton for the first quarter of fiscal 1995. The increase in average
selling prices of hot rolled coils was primarily attributable to strong market
demand for these products. Increases in shipments and net sales of SBQ products
and hot rolled coils will be largely dependent on the general state of the
economy and the overall strength of the steel industry.
Gross profit for the first quarter of fiscal 1995 increased $3.7 million
from the first quarter of fiscal 1994 for a gross profit margin of 12.3% in
fiscal 1995 compared to 10.8% in the first quarter of fiscal 1994. Gross profit
for the specialty steel segment increased $3.6 million for a gross profit margin
of 11.2% compared to 9.3% in the first quarter of fiscal 1994. The increase in
specialty steel segment gross profit and margin was attributable to improved
operating efficiencies resulting from increased production volume at both Koppel
and Newport as well as an increase in average selling prices of welded tubular
products and SBQ products, as discussed above. These improvements were partially
offset by lower seamless tubular average selling prices and a 3.2% increase in
the Company's average steel scrap costs over the first quarter of fiscal 1994.
The adhesives segment gross profit increased $0.1 million from the first
quarter of fiscal 1994 for a gross profit margin of 22.6%, virtually unchanged
from the first quarter of fiscal 1994.
Selling and administrative expenses increased $1.0 million but declined as
a percentage of net sales from 8.3% in the first quarter of fiscal 1994 to 7.4%
in fiscal 1995. The overall increase in selling and administrative expenses was
primarily attributable to increased production and sales volumes.
24
<PAGE> 28
As a result of the above factors, operating income increased by $2.8
million, from $1.8 million in the first quarter of fiscal 1994 to $4.6 million
in the first quarter of fiscal 1995. The specialty steel segment earned an
operating profit of $5.3 million in the first quarter of fiscal 1995 compared to
$2.2 million in the first quarter of fiscal 1994. Of the $5.3 million specialty
steel operating profit, Newport and Erlanger earned an operating profit of $2.8
million compared to an operating loss of $0.9 million in the first quarter of
fiscal 1994. The improvement was primarily attributable to improved operating
efficiencies due to greater production and sales volume as well as increased
welded tubular average selling prices, as discussed above. Koppel earned an
operating profit of $2.5 million compared to operating profit of $3.1 million in
the first quarter of fiscal 1994. The decline was partially attributable to a
decline in seamless tubular average selling prices as discussed above as well as
increases in the cost of labor and raw materials, partially offset by improved
operating efficiencies from increased production volume. In November 1994, the
Company signed a five year labor agreement, effective November 1, 1994, with the
United Steelworkers of America for the Koppel hourly work force 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 at Koppel of
approximately $0.5 million per year. The adhesives segment earned an operating
profit of $0.3 million, virtually unchanged from the first quarter of fiscal
1994.
Interest expense increased $0.3 million, primarily as a result of an
increase in the average borrowing and interest rates under the Company's lines
of credit. The increase in average borrowings was partially attributable to an
increase in the level of business activity.
As a result of the above factors, net income was $0.1 million, or $.01 per
share in the first quarter of fiscal 1995 compared to $21.7 million in the first
quarter of fiscal 1994. Fiscal 1994 first quarter net income includes a one-time
after-tax gain on the sale of KES of $21.5 million, or $1.57 per share, and
income of $1.7 million, or $.12 per share, relating to the adoption of a new
accounting standard.
On January 3, 1995, the hot strip mill at Newport was shut down when a
5000-HP motor failed, which then necessitated the shutdown of the pipe mills for
approximately ten days. The Company expects the hot strip mill to be back in
operation by the last week of January, when replacement components will be put
in service. In the interim, Newport has acquired hot rolled coils from a third
party to supplement material supply to its pipe mills. In addition, Newport has
continued to produce slabs from its melt shop, some of which have been shipped
to a third party for conversion to coils. The Company has insurance in place for
replacement and installation of the motor and related equipment as well as for
business interruption. The Company estimates that this interruption may
negatively impact sales product mix as well as second quarter shipments by up to
5,000 tons; however, management believes that this interruption will not have a
material impact on the results of operations or cash flows of the Company.
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.
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.
25
<PAGE> 29
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.
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,
26
<PAGE> 30
"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, 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.
27
<PAGE> 31
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.
As of December 31, 1994, the Company has recovered $4.0 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, 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1994 was $39.5 million compared to $45.2
million at September 24, 1994 and $39.1 million at September 25, 1993. The
current ratio at December 31, 1994 was 1.40 to 1 compared to 1.50 to 1 at
September 24, 1994 and 1.45 to 1 at September 25, 1993. At December 31, 1994,
the Company had cash and short-term investments totaling $40.4 million compared
to $44.5 million at September 24, 1994 and $9.3 million at September 25, 1993.
At December 31, 1994, the Company had aggregate lines of credit available for
borrowing of $34.9 million, including a $16.2 million line of credit restricted
for use at Koppel, of which a total of $31.0 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 December 31, 1994, approximately $8.3 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
and (b) the sum of the Eurodollar rate (based on LIBOR) plus 2 3/4% with respect
to Eurodollar rate loans.
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<PAGE> 32
Cash flows from operating activities were $2.5 million in the first quarter
of fiscal 1995 compared to $0.7 million in the first quarter of fiscal 1994. The
Company recorded net income of $0.1 million in the first quarter of fiscal 1995
compared to a fiscal 1994 first quarter net loss of $1.5 million before the
effect of the sale of KES and the adoption of Statement 109, resulting in a $1.6
million increase in operating cash flow over the first quarter of fiscal 1994.
The major use of cash in operating activities in the first quarter of fiscal
1995 was an increase in inventories of $9.4 million that was primarily the
result of unusually low levels of inventory at fiscal year end due to scheduled
maintenance outages at Newport. Offsetting this use was $3.0 million in cash
flows resulting from a decrease in accounts receivable, $5.0 million in non-cash
depreciation charges and $5.9 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 first quarter cash flows from operating activities, before the
effect of the sale of KES and the adoption of Statement 109, was primarily
impacted by a $2.3 million decrease in other current assets resulting from the
sale of land held for development and an increase in accounts payable which were
offset by an increase in inventories. The increase in inventories and accounts
payable was the result of unusually low levels at the end of fiscal 1993,
partially due to the fiscal 1993 fourth quarter shutdown at Newport, as
discussed in "Results of Operations." The increase in accrued liabilities
includes approximately $8.9 million in accrued income taxes related to the gain
on the sale of KES.
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 $6.8 million in cash from the new
entity in satisfaction of a dividend declared by KES prior to the sale. A
portion of the cash proceeds has been utilized to fund the fiscal 1994 operating
loss. The remaining cash proceeds are invested in short-term investments and
will be utilized for general corporate purposes, including capital expenditures,
as necessary. The Company intends to hold as an available-for-sale investment
the common stock acquired in the sale of KES. As of December 31, 1994 and
September 24, 1994, such common stock was recorded at $3.5 million and $4.6
million, respectively, and resulted in a direct after-tax charge to common
shareholders' equity of $0.7 million in the first quarter of fiscal 1995.
The Company incurred $3.0 million in capital expenditures during the first
quarter 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 $14.0 million.
It is anticipated that capital spending will be funded through cash flow from
operations, 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."
Net cash flows used by financing activities were $3.3 million in the first
quarter of fiscal 1995. During the quarter the Company made scheduled payments
on long-term debt obligations of $5.0 million and increased its borrowings under
its lines of credit by $2.4 million. Scheduled long-term debt maturities are
$15.5 million, $19.0 million and $18.6 million for fiscal 1995, 1996 and 1997
respectively. As discussed in "Use of Proceeds," the proceeds of the Offering
will be used to refinance a significant portion of the Company's long-term debt,
which will result in minimal term debt amortization requirements over the next
three years.
Certain of the Company's loan agreements contain covenants restricting the
payment of dividends to its shareholders. Under the most restrictive of these
covenants, retained earnings available for dividends 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. In addition, certain of the Company's loan
agreements contain covenants requiring maintenance of minimum net worth and
fixed charge coverage ratios. As of December 31, 1994, the Company was not in
compliance with such covenants, but received waivers from its lenders as well as
amendments to the agreements that the Company believes will enable it to comply
with such covenants for the foreseeable future.
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.
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<PAGE> 33
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 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
Newport is a co-defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of Texas arising from the
failure of two joints of welded pipe during testing of an off-shore pipeline.
The plaintiff is seeking damages in excess of $5 million for costs associated
with replacing the entire pipeline and lost production revenues. The Company
believes that it has meritorious defenses to this claim, although no assurances
can be given as to the outcome of this case. Insurance may be available for a
portion, but not all, of any award for damages. In addition, the Company is
subject to various other claims, lawsuits and administrative proceedings arising
in the ordinary course of business with respect to commercial, product liability
and other matters, which seek remedies or damages. Based upon its evaluation of
available
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<PAGE> 34
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 these 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.
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 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.
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. 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 December 31, 1994, 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 September 1994, the Company received a proposed Consent Agreement from
the EPA relating to an April 1990 RCRA facility assessment (the "Assessment")
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment was performed in connection with a permit application pertaining
to a landfill that is adjacent to the Koppel facilities. The Assessment
identified potential releases of hazardous constituents at or adjacent to the
Koppel facilities prior to the Company's acquisition of the Koppel facilities.
The proposed Consent Agreement establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases. Contamination
documented as a result of the investigation may require cleanup measures.
Pursuant to various indemnity provisions in agreements entered into at the time
of the Company's acquisition of the Koppel facilities in fiscal 1991, certain
parties agreed to indemnify the Company against various known and unknown
environmental matters. While such parties have not at this time acknowledged
full responsibility for potential costs under the proposed Consent Agreement,
the Company believes that the indemnity provisions provide for it to be fully
indemnified against all matters covered by the proposed Consent Agreement,
including all associated costs, claims and liabilities.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated baghouse dust, the
Company believes it is in compliance in all material respects with all
applicable environmental regulations.
Regulations resulting from the 1990 Amendments that will pertain to the
Company's electric arc furnace operations are currently not expected to be
promulgated until 1997 or later. The Company cannot predict the level of
required capital expenditures resulting from future environmental regulations
such as those forthcoming as a result of the 1990 Amendments. However, the
Company believes that while the 1990 Amendments may require additional
expenditures, such expenditures will not have a material impact on the Company's
business or consolidated financial position for the foreseeable future. Capital
expenditures during fiscal 1995
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<PAGE> 35
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 December 31, 1994, 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 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 $3.0 million;
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 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.
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<PAGE> 36
<TABLE>
QUARTERLY RESULTS
The following table provides certain summary financial information for the
first 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.
<CAPTION>
FISCAL
1995 FISCAL 1994 FISCAL 1993
-------- ----------------------------------------- -----------------------------------------
FIRST FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
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>
Net sales.................... $ 93,489 $ 84,602 $ 80,807 $ 66,012 $ 71,959 $ 93,205 $ 95,363 $ 86,735 $ 77,779
Gross profit................. 11,490 8,394 7,203 1,831 7,791 12,162 12,686 10,282 7,366
Operating income (loss)...... 4,558 1,966 1,377 (4,465) 1,811 4,300 4,904 2,290 178
Net income (loss)............ 75 (960) (1,990) (5,583) 21,741 (1,532) 11 (2,115) (3,355)
Specialty steel net sales:
Tubular products
OCTG products............ 41,178 35,025 27,842 23,351 29,757 29,517 26,820 23,971 26,053
Line pipe products....... 11,237 11,386 14,492 9,461 8,323 11,055 17,491 16,093 11,244
SBQ products............... 19,459 15,848 18,197 16,467 14,346 13,337 10,551 9,142 7,531
Hot rolled coil products... 3,424 4,260 3,669 2,577 3,232 445 1,805 -- --
Other products(1).......... 9,418 9,598 8,015 6,491 8,104 7,243 6,880 7,917 7,365
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total, excluding KES..... 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.................. $ 84,716 $ 76,117 $ 72,215 $ 58,347 $ 63,762 $ 85,154 $ 88,257 $ 80,055 $ 71,541
======== ======== ======== ======== ======== ======== ======== ======== ========
Tons shipped:
Tubular products
Welded OCTG.............. 50,200 45,700 30,800 25,900 35,800 41,000 30,100 29,900 41,100
Seamless OCTG............ 20,600 17,100 16,300 13,800 14,600 13,000 14,600 12,200 8,900
Welded line pipe......... 20,700 20,300 27,600 17,400 17,500 20,000 34,200 32,800 23,900
Seamless line pipe....... 2,500 3,400 3,800 2,600 900 3,900 4,600 3,800 2,100
SBQ products............... 42,800 36,000 41,000 37,000 33,900 32,200 26,900 23,300 20,100
Hot rolled coil products... 8,800 12,300 10,300 7,100 9,100 1,400 5,200 -- --
Other products(1).......... 24,000 25,600 20,900 15,600 18,700 17,900 18,400 22,000 20,300
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total, excluding KES..... 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....... 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............... $ 446 $ 429 $ 418 $ 423 $ 417 $ 412 $ 414 $ 399 $ 401
Seamless tubular
products............... 780 738 776 782 869 801 823 808 823
SBQ products............. 454 441 443 445 424 413 392 393 375
<FN>
- ---------------
(1) Other products include seamless mechanical tubing and products classified as
secondary and limited service.
</TABLE>
The sale of KES increased fiscal 1994 first quarter net income by $21.5
million. In addition, in the fiscal 1994 first quarter, the Company recorded the
cumulative effect of the adoption of 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.
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<PAGE> 37
BUSINESS
GENERAL
The Company produces 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 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 in
excess of 561,000 tons of specialty steel products in fiscal 1994.
A separate subsidiary of the Company, Imperial, manufactures industrial
adhesive products, and accounted for 11% of the Company's net sales for fiscal
1994.
The Company completed an initial public offering of its common stock in
1988. Current executive officers and directors of the Company, as a group,
currently beneficially own 36.9% of the Company's common stock. The Company's
common stock is traded on the New York Stock Exchange under the symbol "NSS."
The address of the Company's principal place of business is Ninth & Lowell
Streets, Newport, Kentucky 41072 and its telephone number is (606) 292-6809.
HISTORY
The Company was incorporated in 1980 for the purpose of purchasing the
idled steel-making facilities of Newport Steel Works from Interlake, Inc. for
approximately $23 million. The Company successfully restarted the Newport
facilities in 1981, and has subsequently made four strategic acquisitions to
increase its steel-making capacity and to extend and diversify its specialty
steel product lines. In each of these acquisitions, the Company purchased idled
and undervalued production facilities where it had identified readily obtainable
cost saving and operating improvement opportunities. Prior to each purchase, the
Company recruited a skilled work force and negotiated new and favorable labor
contracts with flexible work rules. The Company has assumed no legacy costs,
such as retirement or health benefits, with respect to former employees of the
facilities.
In June 1994, the Company acquired a tubular products processing facility
located near Houston in Baytown, Texas ("Baytown") for $2.2 million. The
facility, which commenced operations in October 1994, finishes production
tubing, casing and drill pipe and provides a company-owned stocking location in
the heart of the southwest oil and natural gas drilling region. The Company can
deliver product to Baytown from both Koppel and Newport by barge. The Company
believes that Baytown will lower its finishing costs, increase its product range
and increase the geographic market in which it can competitively offer its
product since it can ship tubular products to Baytown by barge, and then stock
or reship either finished or plain-end tubular products directly to customers in
the southwest by truck.
In October 1990, the Company acquired Koppel Steel Corporation from Babcock
and Wilcox Company for $96.7 million. This acquisition extended the Company's
product line to seamless OCTG and line pipe and SBQ products. The Koppel
tubemaking facility was built in 1977 and the melt shop facilities were built in
1984 at a combined cost significantly in excess of $100 million. B&W built and
operated these facilities until they closed the facilities in 1988 due in part
to labor contract problems. Before reopening the facilities, the Company was
able to negotiate a new and favorable labor contract that afforded the Company
labor costs significantly below the steel industry average. Since restarting the
facility, the Company has successfully implemented a number of productivity and
operational improvements which reduced manufacturing costs. Through the Koppel
facility, the Company believes it has established itself as a significant
producer in the seamless OCTG market.
In August 1986, the Company acquired Kentucky Electric Steel Corporation, a
mini-mill producer of SBQ products located near Ashland, Kentucky, for
approximately $7.3 million. As with Newport and Koppel, at the time of its
acquisition by the Company, KES had been closed due to labor contract problems.
The Company restarted the mill and began shipping products in November 1986.
Although KES had not been
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<PAGE> 38
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.
Koppel is certified by the American Petroleum Institute ("API") enabling
the Company to sell its OCTG products as API-certified. The API establishes
design standards and procedural specifications for producers of OCTG products.
API-certified products are demanded by the major oil and natural gas exploration
and production companies as well as other customers.
Newport Facilities
The Newport facilities located near Newport, Kentucky, which are also
API-certified, consists of a melt shop housing three 100-ton electric arc
furnaces, a modern ladle metallurgy station, a continuous slab caster
35
<PAGE> 39
and a walking-beam slab reheat furnace, a hot strip mill, an 8-inch welded pipe
mill and a 16-inch welded pipe mill. See "-- Specialty Steel Products -- OCTG
Products -- Welded OCTG Products" and "-- Hot Rolled Coils." The ladle
metallurgy station, continuous slab caster and walking-beam slab reheat furnace
were installed in 1990. The 16-inch welded pipe mill was installed in 1984.
Newport is the only mini-mill manufacturing welded tubular products in the
United States with continuous casting capabilities. The Newport facilities also
include a barge loading facility for shipping product by river and inland
waterway.
In addition, the Company recently purchased 34.5 acres of land adjacent to
the Newport facilities which it intends to utilize in the future for unloading
and handling incoming steel scrap by barge. The ability to receive steel scrap
by barge will significantly increase the geographic area from which the Company
can purchase steel scrap at a competitive cost and thereby should insulate the
Company from temporary local supply imbalances. The Company currently receives
its incoming steel scrap at its Newport operations by rail and truck.
The production process for the Company's welded tubular products involves
three separate operations: melting, rolling and pipe making. Steel scrap is
first charged and melted into molten steel utilizing the electric arc furnaces.
The molten steel is then "tapped" from the furnace and refined in a
state-of-the-art ladle metallurgy station. The ladle metallurgy station allows
for the precise control of temperatures and chemistries and enables continuous
production sequencing of the molten steel to the continuous slab caster, thereby
enhancing melt shop productivity. After metallurgical standards have been met,
the molten steel is "cast" into slabs which are cut to length and lifted onto
specially designed rail cars for transport to the adjacent reheat furnace. Slabs
are processed through the walking-beam slab reheat furnace where they are evenly
heated to temperatures of over 2,400 degrees Fahrenheit. Slabs exit directly
from the reheat furnace onto the hot strip rolling mill where they are reduced
to desired thickness and rolled into coils in sizes up to 50-inch maximum width.
Coils are then either slit and formed into welded tubular products at one of
Newport's two pipe making facilities or are sold as hot rolled coils.
Erlanger and Baytown Facilities
The Company processes and finishes a portion of its own welded and seamless
tubular products, and to a lesser extent those of other tubular producers, at
Erlanger and Baytown. The finishing processes at Erlanger include upsetting,
which is a forging process that thickens tube ends; heat treating, which is a
furnace operation designed to strengthen the steel; straightening; coating for
rust prevention; and threading. Currently, Baytown is capable of upsetting,
coating and threading. One of the projects included in the Company's capital
expenditures program is to add heat treating and straightening capabilities at
Baytown. Erlanger and Baytown have approximately 21 and 30 acres, respectively,
available for storage of tubular products.
The waterway locations of Erlanger, near Tulsa, and Baytown, near Houston,
allow the Company to transport its product directly from Newport and Koppel to
the southwest market by barge, the least expensive means of transportation.
After finishing, products are either immediately reshipped to customers or
stored as inventory to enable the Company to respond quickly to customer needs.
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 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
36
<PAGE> 40
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
FISCAL QUARTER ENDED
RATED CAPACITY ENDED SEPTEMBER
FACILITY (IN TONS) DECEMBER 1994 1994
- ----------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
Koppel facilities
Melt shop........................ 400,000 72.1% 69.6%
Bar mill......................... 200,000 89.2% 85.0%
Seamless tube mill............... 200,000 60.2% 50.5%
Newport facilities
Melt shop........................ 700,000 65.0% 52.5%
Hot strip rolling mill........... 750,000 57.1% 47.1%
Welded pipe mills................ 580,000 61.3% 46.5%
</TABLE>
OPERATING COST IMPROVEMENTS
The Company has invested over $80 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 $24.39 for its Newport facilities and $19.53 for its Koppel
facilities for the second half of fiscal 1994. According to the AISI, the
industry average labor cost per hour was $33.36 for the same period. The Company
does not provide retiree benefits.
As indicated in the following table, average manufacturing costs and man
hours per ton shipped have declined at both the Newport and Koppel facilities.
These productivity measures are influenced by the capital improvements and other
operating cost improvements implemented by the Company over the periods
presented. In addition, the level of production and shipments as well as product
mix has a significant influence on these productivity measures. The following
data should be read in conjunction with the more detailed "tons
37
<PAGE> 41
shipped" product volume and sales information included in the "Summary
Consolidated Financial Data" and "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
FISCAL
QUARTER
ENDED
DECEMBER FISCAL YEAR ENDED SEPTEMBER
-------- --------------------------------------------------------
1994 1994 1993 1992 1991(1) 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Manufacturing costs per ton shipped
(2)
Newport facilities (3)............. $231 $252 $254 $273 $333 $292
Koppel facilities (4).............. $365 $353 $379 $396 $560 N/A
Steel scrap costs per ton (5)........ $128 $123 $100 $89 $101 $101
Man hours per ton shipped
Newport facilities (3)............. 2.97 2.95 3.09 3.24 4.07 3.55
Koppel facilities (4).............. 4.71 4.84 5.45 6.91 N/M N/A
Tons shipped
Newport facilities (3)............. 98,800 320,700 324,400 255,800 205,700 285,100
Koppel facilities (4).............. 70,800 240,300 179,400 117,500 23,400 N/A
<FN>
- ---------------
(1) In fiscal 1991, the Company incurred non-recurring start-up costs associated
with converting Newport's steel-making operations from the ingot method of
production to continuous casting. Approximately 81% of Newport's fiscal 1991
production was continuous cast. In addition, in fiscal 1991, the Company
incurred non-recurring costs of $4.2 million prior to the commencement of
production at and in connection with the start-up of its Koppel facilities.
(2) Excludes the cost of steel scrap and depreciation.
(3) Includes both tubular and hot rolled coil products.
(4) Includes both tubular and SBQ products.
(5) Represents the average cost per ton paid by Newport and Koppel for its steel
scrap for the respective periods.
</TABLE>
During fiscal 1994 and the first quarter of fiscal 1995, the Company
continued to invest in its steel making facilities by implementing production
changes and operating efficiency improvements, resulting in total 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, will not increase to offset the
operating benefits achieved by the initiatives previously described. In
addition, changes in product mix, such as increased production levels of hot
rolled coils and SBQ products which are significantly less expensive and time
consuming to manufacture than tubular products, will decrease manufacturing
costs per ton shipped and man hours per ton shipped. There can be no assurance
that the Company's production and shipment levels as well as product mix will
remain at levels sufficient to achieve the above results.
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<PAGE> 42
SPECIALTY STEEL PRODUCTS
The Company's primary specialty steel products are OCTG products, line
pipe, SBQ products and hot rolled coils. The Company believes it is generally
perceived by the marketplace as a high quality producer of specialty steel
products.
The chart below lists the size ranges of specialty steel products
manufactured by the Company.
<TABLE>
<CAPTION>
RANGE OF SIZES
SPECIALTY STEEL PRODUCTS (OUTSIDE DIAMETER) GAUGES
- ---------------------------------------- ---------------------- -----------------
<S> <C> <C>
OCTG Products
Seamless OCTG Products
Production tubing.................. 1.9" to 4.5" 0.145" to 0.560"
Drill pipe......................... 2.375" to 5" 0.287" to 0.500"
Casing............................. 4.5" and 5" 0.205" to 0.500"
Welded OCTG Products
Casing............................. 4.5" to 13.375" 0.196" to 0.480"
Seamless and Welded Line Pipe
Products.............................. 1.9" to 12.75" 0.145" to 0.531"
SBQ Products............................ 2.875" to 6"
Hot Rolled Coil Products................ 28" to 50" in width 0.125" to 0.500"
</TABLE>
OCTG Products
During the twelve month period ended September 1994, total shipments by
domestic OCTG producers were approximately 1.5 million tons, of which
approximately 58% represented seamless products and approximately 42%
represented welded products. During fiscal 1994, the Company shipped
approximately 61,800 tons of seamless OCTG products and approximately 138,200
tons of welded OCTG products. Together, shipments of seamless and welded OCTG
products accounted for 38% of the Company's net sales for fiscal 1994. For
fiscal 1994, the Company's shipments of seamless and welded OCTG products
accounted for approximately 7% and 21%, respectively, of total shipments by
domestic OCTG producers.
Seamless OCTG Products. The Company's seamless OCTG products are used as
drill pipe, casing and production tubing. Drill pipe is used and may be reused
to drill several wells. Casing forms the structural wall of oil and natural gas
wells to provide support and prevent caving during drilling operations and is
generally not removed after it has been installed in a well. Production tubing
is placed within the casing and is used to convey oil and natural gas to the
surface. The Company's seamless OCTG products are sold as a finished threaded
and coupled product in both alloy and carbon grades.
Seamless production tubing represented approximately 54% of the Company's
shipments of seamless OCTG products for fiscal 1994. During fiscal 1994, the
Company shipped approximately 33,300 tons of seamless production tubing to the
OCTG markets, including approximately 28,100 tons of OCTG production tubing
ranging in size from 2.375 to 3.5 inches in outside diameter.
Compared to similar welded products, seamless production tubing and casing
are better suited for use in hostile drilling environments such as off-shore
drilling or deeper wells because of their greater strength and durability. The
production of seamless tubular products with these properties requires a more
costly and specialized manufacturing process than does the production of welded
tubular products. The Company's average selling price was $832 per ton for all
grades and sizes of its seamless OCTG products and was $612 per ton for all
grades and sizes of its threaded and coupled welded OCTG products in fiscal
1994.
Welded OCTG Products. The Company's welded OCTG products are used
primarily as casing in oil and natural gas wells during drilling operations.
Welded OCTG products are generally used when higher strength is not required,
typically in wells less than 10,000 feet in depth. The Company sells its welded
OCTG products as both a plain end and as a finished tubular product. The primary
market for welded OCTG products is the southwest, northeast and central sections
of the United States. The Company's welded OCTG products are sold primarily to
distributors, who in turn sell to end users, such as oil and gas drilling and
production companies. In fiscal 1994, the Company's shipments of welded OCTG
products accounted for 21% of total shipments by domestic producers.
39
<PAGE> 43
Line Pipe Products. The line pipe market consists of both seamless and
welded products, ranging in size from 1 to 80 inches in outside diameter. Line
pipe products are primarily used in gathering lines for the transportation of
oil and natural gas at the drilling site and in transmission lines by both gas
utility and transmission companies. The Company's seamless and welded line pipe
products are in the 1 to 16 inches size segment (smaller sized) and are shipped
as a plain end product and welded together on site. Line pipe shipments
accounted for 14% of the Company's net sales for fiscal 1994. The Company sells
its line pipe products to both distributors and end users.
During fiscal 1994, total shipments by domestic line pipe producers were
approximately 1.1 million tons. Of these 1.1 million tons shipped, 633,000 tons,
or 56%, were smaller sized line pipe. In fiscal 1994, the Company shipped
approximately 93,500 tons, or 15%, of all shipments by domestic producers of
smaller sized line pipe.
Special Bar Quality Steel Products
Unlike the majority of SBQ products which are less than 2 inches in
diameter and are used primarily in passenger car applications, the Company
manufactures SBQ products in a specialized market niche of products ranging in
size from 2.875 to 6 inches. The Company produces its SBQ products from
continuous cast blooms that enable substantial size reductions in the bloom
during processing and provide heavier strength-to-weight ratios. These heavier
size SBQ products are primarily used in critical weight-bearing applications
such as suspension systems, gear blanks, drive axles for tractors and off-road
vehicles, heavy machinery components and hydraulic and pneumatic cylinders. As a
result of recent increased demand for these products, the Company has increased
its total shipments of SBQ products from approximately 102,500 tons in fiscal
1993 to approximately 147,900 tons in fiscal 1994. SBQ shipments accounted for
21% of the Company's net sales for fiscal 1994. Since beginning production at
its Koppel bar facility in March 1991, the Company has consistently increased
SBQ shipments.
Hot Rolled Coils
The Company produces commercial quality grade hot rolled coils, from 28 to
50 inches in width, between 0.125 to 0.500 inches in gauge, and in 15 ton coil
weights. In the past, the Company typically limited its production of hot rolled
coils to the amount required to supply its welded pipe mills for conversion into
welded tubular products. However, as a result of recent strong demand for hot
rolled coils, the Company has begun to utilize its excess melting and rolling
capacity to produce hot rolled coils for direct sale to third parties. The
Company increased its shipments of hot rolled coils from 6,600 tons in fiscal
1993 to approximately 38,800 tons in fiscal 1994. Hot rolled coil shipments
accounted for 5% of the Company's net sales for fiscal 1994. 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 30.6% in fiscal 1989 to 18.8% in fiscal
1994.
STRATEGY
The Company's business strategy is to increase its sales and improve its
results by: (i) implementing capital improvements; (ii) utilizing the existing
capacity of its steel making facilities more efficiently; 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.
40
<PAGE> 44
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 $40 at
Newport since 1990 and of approximately $43 at Koppel since fiscal 1992. Over
the same periods, the Company's man hours per ton have decreased from
approximately 3.55 to 2.95 at Newport and from approximately 6.91 to 4.84 at
Koppel.
Implement Capital Improvement Program
The Company intends to implement a three year, $25.8 million capital
expenditure program designed to further reduce its operating costs, improve
quality and enhance its market position. The program includes eight projects,
each of which will allow the Company to achieve productivity improvements and
reduce operating costs through the elimination of redundant or less efficient
operations and processes. The Company intends to complete four of these projects
in fiscal 1995 for an estimated aggregate cost of approximately $3.4 million.
These projects are anticipated to result in annual operating benefits of
approximately $2.3 million before depreciation. Over the balance of the program,
which is scheduled to be completed by the end of fiscal 1997, the Company
intends to implement four additional projects for an estimated aggregate cost of
approximately $22.4 million. These four projects are anticipated to result in
annual operating benefits of approximately $11.3 million before depreciation.
The Company believes that upon completion, total operating benefits from its
capital expenditure program will result in annual operating benefits of
approximately $13.6 million before depreciation. During implementation of the
capital improvement program, the Company will continue to make other capital
expenditures on its facilities and equipment to maintain these operating assets.
The Company's capital expenditure program is under continuous review and
the Company may, based on the results of engineering studies, revisions in
budgeted project costs, increases or decreases in estimated operating benefits,
changes in the demand for the Company's products, or the unavailability of
internally-generated cash or acceptable external financing, decide in the future
to eliminate, postpone, modify or accelerate projects, or to substitute new
projects for those currently included in the program. Upon completion of the
capital expenditure program, the Company believes that its steel-making
operations, like those of other steel producers, will continue to require
capital expenditures and additional projects that are essential to the Company's
long-term competitiveness. Because the estimated operating benefits from the
Company's expected efficiencies and planned capital improvements are based upon
a number of assumptions, estimated operating benefits may not necessarily be
indicative of the Company's future financial performance, and increases in the
cost of raw materials or other operating costs may offset any operating benefits
causing actual results to vary significantly. In addition, the Company has based
its operating benefit estimates on fiscal 1994 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.
41
<PAGE> 45
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 $ 0.9
Line Pipe Coating Facility................... 1995 1.1 0.6
Upgrade Finish Coiler........................ 1995 0.6 0.4
Seamless Mill Material Handling.............. 1995 0.6 0.4
Heat Treat Furnace and Straightener.......... 1996 4.5 2.1
Controlled Cooling Furnace................... 1997 5.4 1.4
Processing Equipment......................... 1997 2.5 0.5
UHP Electric Arc Furnace..................... 1997 10.0 7.3
----------- ---------
Total........................................ $25.8 $13.6
=========== =========
</TABLE>
Eccentric Bottom Tap -- UHP Furnace. A new furnace bottom shell with an
eccentric bottom tap was installed on the 80 ton UHP electric arc furnace in the
melt shop at the Koppel facility in December 1994. Eccentric bottom tapping is a
more efficient method of removing slag from the production process and virtually
eliminates the need for re-ladling. The installation reduces the time required
to melt and refine scrap which will reduce labor costs, costs of refractory
material, electrode usage, and electric power consumption per ton. The larger
tap opening reduces the time to pour liquid steel into a ladle thereby reducing
labor costs per ton. Based on fiscal 1994 labor costs and shipment levels
(147,900 tons of SBQ products and 92,300 tons of seamless tubular products), the
Company believes it would achieve approximately $0.5 million of annual operating
benefit or $3.80 per ton for SBQ products and approximately $0.4 million of
annual operating benefit or approximately $3.95 per ton for seamless tubular
products.
Line Pipe Coating Facility. The Company 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 completed in
the third quarter of fiscal 1995. Due to its close proximity to the Newport
facilities, this project will result in a substantial reduction in freight
costs. In addition, the Company will receive a commission on all line pipe
coated by L.B. Foster at the new facility. Based on an estimated 48,000 tons of
the Company's welded line pipe coated by third parties during fiscal 1994, the
Company believes it would achieve approximately $0.6 million of annual operating
benefit or approximately $12.40 per ton on these products, including the
commission on that tonnage. The expected operating benefits do not take into
account any commissions the Company may receive on line pipe coating by L.B.
Foster for third parties.
Upgrade Finish Coiler. The finish coiler in the hot strip mill at the
Newport facilities will be upgraded to allow an increase in the weight of hot
rolled coils by approximately 3,300 pounds in average coil weight, which is an
increase of approximately 15% from the finish coiler's current capacity. The
Company anticipates completing the upgrade by the third quarter of fiscal 1995.
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.
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 1995. Currently, seamless tubular products are moved using overhead
cranes. A new transfer car will move tubular products to the off mill area for
upsetting, non-destructive testing and heat treating. The new conveyance system
equipment will 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
42
<PAGE> 46
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.
Heat Treat Furnace and Straightener. Relocation of an existing heat treat
furnace from Koppel to Baytown and installation of a straightener at Baytown
will enable the Company to process and finish all of the seamless OCTG product
that it sells in the southwest market at the Baytown facility, at a lower cost
than outside processors currently charge the Company. The Company anticipates
completing this project by March 1996. Based on fiscal 1994 shipment levels of
heat treated seamless OCTG products sold by the Company in the southwest market
(approximately 23,500 tons of seamless OCTG products), the Company believes it
would achieve approximately $2.1 million of annual operating benefit or
approximately $89.00 per ton.
Controlled Cooling Furnace. A controlled cooling furnace will be installed
in the bar mill at the Koppel facilities to replace its current air cooling
beds. This project is scheduled to begin in fiscal 1996 and is anticipated to be
completed by mid-fiscal 1997. Metallurgical practice calls for slow cooling
certain grades of product produced at the bar mill in order to provide the
necessary hardness and reduce cracking that results from non-uniform, rapid
cooling. Under current operating conditions, slow cooling is accomplished by
moving hot bars into covered pits which requires excessive material handling,
constrains production flow, and results in additional straightening requirements
and additional lab testing. The proposed controlled cooling furnace will reduce
production cost per ton by reducing processing steps and material handling,
eliminating outside straightening expenses and improving quality which will
reduce customer claims and increase prime product yield. Based on fiscal 1994
shipment levels (approximately 147,900 tons of SBQ products), the Company
believes it would achieve approximately $1.4 million of annual operating benefit
or approximately $9.30 per ton. This anticipated annual operating benefit does
not include any benefit resulting from the Company's ability to produce and sell
additional high value SBQ products.
Processing Equipment. Equipment will be installed in the tubemaking
facility at Koppel to provide the finishing capacity for API-certified line pipe
products, mechanical tubing, redraw tubing, and other semi-finished products.
The Company anticipates completing this project in fiscal 1997. The equipment
installation will include a straightener, end-facers, a hydrotester, conveyors
and handling equipment. 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.
Utilize Existing Capacity Efficiently
Since incorporation in 1981, the Company has increased its steel making and
finishing capacity through the acquisition of idled operating assets. Since
1990, with the acquisition of the Koppel facilities, the Company has increased
the rated capacity of its steel making facilities from 700,000 tons (excluding
KES) to 1,100,000 tons 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
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<PAGE> 47
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 first quarter of fiscal 1995, capacity utilization at the
Company's Koppel and Newport tubemaking facilities increased to 60% and 61%,
respectively. Total shipments by domestic SBQ producers increased approximately
8% during the twelve month period ended September 1994 over the comparable
twelve month period ended September 1993. During fiscal 1994, the Company
increased its shipments and average selling price of SBQ products by 26% and 7%,
respectively, excluding KES.
Improve Financial Flexibility and Capital Structure
The Offering is part of the Company's long-term plan to increase its
financial flexibility and reduce its financial leverage. In conjunction with the
closing of the Offering, the Company will use a portion of its existing cash
balances to reduce its total debt outstanding. 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 $ 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
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<PAGE> 48
relationships with many of its larger customers; however, the Company believes
that it is not dependent on any customer and that it could, over time, replace
lost sales attributable to any one customer. In fiscal 1994, the Company's top
five customers accounted for approximately 22% of net sales, and no one customer
accounted for more than 8% of total net sales.
COMPETITION
The markets for the Company's specialty steel products are highly
competitive and cyclical. The Company's principal competitors in its primary
markets include integrated producers, mini-mills, welded 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 December 1994
and January 1995, the International Trade Administration of the United States
Department of Commerce issued certain favorable preliminary determinations
concerning the existence and extent of dumping and subsidization and imposed
significant preliminary tariffs on imports from Austria, Italy and Japan and
minor preliminary tariffs on imports from Argentina and Korea. Final
determinations by the Department of Commerce are expected in the summer of 1995.
The United States ITC will then assess whether dumping and subsidization have
caused or threatened to cause material injury to the United States OCTG
industry. While the Company cannot predict the outcome of the cases at this
time, the Company believes that a final favorable ruling could continue to 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.
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
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<PAGE> 49
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 month
of September 1994 was 802.
Since 1992, there has been a significant change in the oil and natural gas
drilling industry in the United States. Historically, a greater percentage of
wells drilled were for crude oil than for natural gas; however, for the nine
month period ended September 1994, there was more drilling for natural gas than
for crude oil. This shift reflects the increase in well head natural gas prices
due principally to the steady increase in natural gas consumption. The increase
in natural gas drilling has resulted in greater consumption of seamless tubular
products. The United States Department of Energy forecasts in its 1994 Annual
Energy Outlook that domestic annual natural gas consumption will increase from
18.7 trillion cubic feet in 1990 to 24.1 trillion cubic feet in the year 2010.
The forecasted increases are due to regulatory demands for a cleaner
environment, natural gas conversions, new residential construction in which
two-thirds of all new homes use natural gas, new uses for natural gas, such as
space cooling and gas heat pumps and advances in gas fired generation
technology.
Demand for OCTG products is also influenced by the levels of inventory held
by producers, distributors and end users. OCTG product inventory levels have
historically been cyclical with inventories building during periods of high
drilling activity and declining in periods of lower drilling activity. Over the
past ten years demand for OCTG products has been partially satisfied by
drawdowns of existing inventories. In 1993, for the first time in five years,
inventories increased, and in the first six months of 1994 inventory levels were
generally stable.
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The demand for OCTG products produced domestically is also significantly
impacted by the level of foreign imports of OCTG products. The level of OCTG
imports is affected by: (i) the value of the U.S. dollar versus other key
currencies; (ii) overall world demand for OCTG products; (iii) the production
cost competitiveness of domestic producers; (iv) trade practices of and
government subsidies to foreign producers; and (v) the presence or absence of
governmentally imposed trade restrictions in the United States. OCTG market
penetration by imports in the United States increased from 7% in 1992 to 25% for
the twelve months ended September 1994. Seamless tubular products represented
approximately 86% of all imported OCTG product for the nine months ended
September 1994. On July 1, 1994, the Company and six other U.S. steel companies
filed antidumping petitions against imports of OCTG products from seven foreign
nations. The International Trade Commission has issued a favorable preliminary
determination on one aspect of the petitions, although the outcome of the cases
cannot be predicted at this time. See "-- Competition -- Trade Cases."
Line Pipe
The demand for line pipe is only partially dependent on oil and gas
drilling activities. In addition to drilling activities, line pipe demand is
dependent on factors such as pipe line construction activity, line pipe
replacement requirements, utility purchasing programs and new residential
construction. Line pipe demand has grown since 1989 along with the increase in
natural gas usage and the attendant need for gas transportation lines. Overall,
total shipments by domestic line pipe producers reached 1.1 million tons in
twelve month period ended September 1994 and shipments of line pipe product 16
inches in diameter and smaller, the product sizes that the Company produces,
totaled 633,227 tons in that period.
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<PAGE> 51
<TABLE>
TUBULAR PRODUCT INDUSTRY STATISTICS
<CAPTION>
YEAR ENDED DECEMBER
FISCAL ---------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Drilling Activity
Average rig count drilling for:
Natural gas(1)..................... 416 365 329 351 464 403
Crude oil(1)....................... 358 372 373 485 531 453
Total average rig count(1).......... 786 755 718 863 1,008 870
Average well depth(2)............... 5,580 5,463 5,218 4,905 4,787 4,754
Total well completions(2)........... 20,147 23,578 23,258 26,938 31,204 28,055
Total feet drilled(3)............... 112.4 128.3 121.6 141.8 149.4 133.4
International rig count(4)........... 989 971 955 1,036 1,047 1,055
Leading Indicators
Average oil and natural gas prices:
West Texas intermediate crude(5)... $ 16.13 $ 18.17 $ 19.67 $ 20.42 $ 23.17 $ 18.29
U.S. well head natural gas(6)...... $ 1.90 $ 2.01 $ 1.73 $ 1.63 $ 1.70 $ 1.69
U.S. OCTG Consumption(7)
Total U.S. producer domestic
shipments(8)....................... 1,313 1,422 1,005 963 1,297 706
Total imported shipments............ 383 353 101 413 381 429
Inventory (increase) decrease....... (191) (330) 276 275 257 533
----------- ----------- ----------- ----------- ----------- -----------
Total U.S. market consumption....... 1,505 1,445 1,382 1,651 1,935 1,668
========= ====== ====== ====== ====== ======
Imports as percent of U.S.
consumption........................ 25% 24% 7% 25% 20% 26%
U.S. Producer Line Pipe
Shipments(9)........................ 633 623 710 657 634 606
<CAPTION>
1988 1987 1986 1985 1984
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Drilling Activity
Average rig count drilling for:
Natural gas(1)..................... 354 N/A N/A N/A N/A
Crude oil(1)....................... 555 N/A N/A N/A N/A
Total average rig count(1).......... 937 937 970 1,976 2,429
Average well depth(2)............... 4,822 4,551 4,482 4,435 4,341
Total well completions(2)........... 31,902 35,424 39,602 70,481 85,394
Total feet drilled(3)............... 153.3 161.2 177.5 312.6 370.7
International rig count(4)........... 1,222 1,162 1,262 1,604 1,496
Leading Indicators
Average oil and natural gas prices:
West Texas intermediate crude(5)... $ 15.52 $ 18.21 $ 16.44 $ 28.08 $ 29.83
U.S. well head natural gas(6)...... $ 1.68 $ 1.66 $ 1.94 $ 2.51 $ 2.65
U.S. OCTG Consumption(7)
Total U.S. producer domestic
shipments(8)....................... 1,212 1,086 588 1,569 1,729
Total imported shipments............ 988 576 617 1,505 2,214
Inventory (increase) decrease....... (401) 128 721 96 105
----------- ----------- ----------- ----------- -----------
Total U.S. market consumption....... 1,799 1,790 1,926 3,170 4,048
====== ====== ====== ====== ======
Imports as percent of U.S.
consumption........................ 55% 32% 32% 48% 55%
U.S. Producer Line Pipe
Shipments(9)........................ 645 494 432 577 619
<FN>
- ---------------
(1) As reported by Baker Hughes Inc.
(2) In feet, as reported by the Energy Information Administration.
(3) In millions of feet, as reported by the Energy Information Administration.
(4) As reported by Baker Hughes Inc. Excludes U.S. rig activity.
(5) In dollars per barrel, as reported by the Oil and Gas Journal for the years
ended December 1984 through 1993 and as reported by Bloomberg for fiscal
1994.
(6) In dollars per million cubic feet, as reported by the Oil and Gas Journal
for the years ended December 1984 through 1993 and as reported by Bloomberg
for fiscal 1994.
(7) In thousands of tons, as reported by Pipe Logix, Inc.
(8) Net of U.S. producer exports.
(9) In thousands of tons, as reported by AISI. Includes line pipe 16 inches in
diameter and under only.
</TABLE>
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<PAGE> 52
SBQ and Hot Rolled Coils
The bar and flat rolled steel markets represent the largest segments of the
steel market. According to the American Iron and Steel Institute, total 1993
shipments by domestic producers of bar products (which include the Company's SBQ
products) and flat rolled steel products (which include the Company's hot rolled
coils) were approximately 14 million and 27 million tons, respectively. Bar
products are generally categorized into merchant bar quality products and SBQ
products which are used for a wide variety of industrial applications including
automotive, metal working fabrication, construction, farm equipment, heavy
machinery and trucks and off-road vehicles. The hot rolled coils market is
differentiated into three broad categories of quality based on surface quality,
metallurgical purity, formability and strength to weight ratios. The Company
competes in relatively small segments of each of these markets.
Unlike the majority of SBQ products which are primarily used by passenger
car manufacturers, heavy SBQ products such as those produced by the Company are
primarily used in the manufacture of light and heavy trucks and off-road
vehicles.
Hot rolled coils are used in the manufacture of steel pipe and tubular
products and in a number of other manufacturing processes. The demand for hot
rolled coils has significantly increased in recent months as the general market
demand for flat rolled steel has increased. Hot rolled coils can be substituted
for other flat rolled steel in many applications. As a result, in fiscal 1994,
average selling prices for the Company's hot rolled coils increased 4% over
fiscal 1993.
IMPERIAL ADHESIVES
General
Imperial Adhesives, Inc. is a manufacturer of industrial adhesives
products. Imperial maintains over 900 active formulas for the manufacture of
water-borne, solvent-borne, and hot melt adhesives, which are used in product
assembly applications, including footwear, foam bonding, marine and recreational
vehicles, and consumer packaging.
The Company acquired Imperial in 1985 for $2.5 million. The adhesives
company, which had been divested from The United States Shoe Corporation in
1981, afforded the Company an attractive investment opportunity outside of the
steel industry. Since acquisition, Imperial has grown in sales from
approximately $15 million in fiscal 1986 to approximately $32.9 million in
fiscal 1994.
Manufacturing Facilities and Process
Imperial produces adhesives products at manufacturing plants located in
Ohio, Tennessee, Virginia and Michigan. Imperial manufactures its adhesives by
mixing predetermined quantities of raw materials in specially designed mixers.
The physical properties of finished formulas are measured and strictly monitored
by a statistical process control system. Imperial works closely with its
customers to develop adhesives applications designed to meet specific product
requirements.
Strategy
The Company has implemented a business strategy for Imperial designed to
achieve growth in Imperial's revenues through internal development and
acquisition of new products and product lines. Imperial has focused on
developing or acquiring water-borne products that can be used in place of
solvent-based, non-flammable products. In 1995, certain restrictions will be
imposed on the use of solvent-based, non-flammable adhesives by the 1990
Amendments to the Clean Air Act and the regulations promulgated thereunder. In
fiscal 1993, Imperial purchased exclusive U.S. rights to manufacture a
water-borne adhesive, Rapid Stick Dispersion ("RSD"). RSD was developed by SABA
International Lamino B.V. to provide an alternative to solvent-based adhesives
that bond immediately without utilizing oven or forced drying methods. This
product, which is primarily spray-applied, is used in automotive, furniture,
upholstery and marine industries.
Imperial has internally financed its growth and has not required any
additional capital investment by the Company. In addition to continuing to focus
on revenue growth at Imperial, the Company is also improving its cost structure
through facilities consolidation and by reducing the number of products, many of
which have similar properties, that it offers customers.
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<PAGE> 53
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 January
27, 1995, KESI's stock price closed at $10 per share. Until October 6, 1998, the
Company has certain registration rights with respect to its shares of KESI.
Real Estate
The Company owns approximately 40 acres of partially improved land near
Newport, Kentucky. This property, which has a book value of approximately $10.9
million at December 31, 1994, 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 recycles it
through a waste recycling firm using EPA approved processes. The Company also
has on its property at Newport a permitted hazardous waste disposal facility. In
the event of a release of a hazardous substance generated by the Company, the
Company could be responsible for the remediation of contamination associated
with such release.
During the fourth quarter of fiscal 1993, Newport shut down its melt shop
operations for 19 days when it was discovered that a radioactive substance was
accidentally melted, resulting in the contamination of the melt shop's electric
arc furnace emission control facility, or "baghouse facility". A similar
incident, having occurred in the third quarter of fiscal 1992, shut down
Newport's melt shop facilities for 23 days. The source of the radiation in these
incidents was contained in incoming shipments of scrap steel, and was not
detected by monitors that check incoming steel scrap. In response, the Company
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
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<PAGE> 54
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 December 31, 1994, 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 September 1994, the Company received a proposed Consent Agreement from
the EPA relating to an April 1990 RCRA facility assessment (the "Assessment")
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment was performed in connection with a RCRA Part B permit pertaining
to a landfill that is adjacent to the Koppel facilities and owned by B&W, the
former owner of the Koppel facilities. The Assessment identified potential
releases of hazardous constituents into the environment from numerous SWMU's and
AOC's. The SWMU's and AOC's identified during the Assessment and the EPA's
follow-up investigation are located at and adjacent to the Company's Koppel
facilities. The proposed Consent Agreement establishes a schedule for
investigating, monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation may require cleanup
measures. Pursuant to various agreements entered into among the Company, B&W and
PMAC at the time of the Company's acquisition of the Koppel facilities, B&W and
PMAC agreed to indemnify the Company against various known and unknown
environmental matters. While reserving its rights against B&W, PMAC has accepted
full financial responsibility for the matters covered by the proposed Consent
Agreement other than with respect to a 1987 release of hazardous constituents
(the "1987 Release") that the Company believes could represent the most
significant component of any potential cleanup, and other than with respect to
hazardous constituents generated by Koppel after its acquisition by the Company,
if any. B&W, PMAC and Koppel are in dispute as to whether the indemnification
provisions relating to the 1987 Release expire in October 1995. Although B&W has
not acknowledged responsibility for any cleanup measures that may be required as
a result of any investigation (other than with respect to the 1987 Release, in
the event certain actions are taken by the EPA prior to October 1995), B&W and
PMAC have agreed to jointly retain an environmental consultant to assist in
negotiating the Consent Agreement and to conduct the required investigation.
Prior to the completion of the site analysis to be performed in connection with
any Consent Agreement, the Company cannot predict the expected cleanup cost for
the SWMU's and AOC's covered by the proposed Consent Agreement. The Company
believes that it is entitled to full indemnity for all of the matters covered by
the proposed Consent Agreement from B&W and/or PMAC. Pursuant to its contractual
arrangements with PMAC, the Company has a right of offset against the $15
million principal amount of Subordinated Convertible Debentures due October 2000
through 2005 issued to PMAC which are held in escrow to secure PMAC's
indemnification obligations to the Company.
Subject to the uncertainties concerning the proposed Consent Agreement and
the storage and disposal of the radiation contaminated baghouse dust, the
Company believes it is in compliance in all material respects with all
applicable environmental regulations. Regulations resulting from the 1990
Amendments that will pertain to the Company's electric arc furnace operations
are currently not expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures resulting from future
51
<PAGE> 55
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 December 31, 1994, 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 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 $3.0 million;
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 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.
EMPLOYEES
As of fiscal 1994 year end, the Company had 1,568 employees of whom 384
were salaried and 1,184 were hourly. Substantially all of the Company's hourly
employees are represented by the USWA. The Company's union contracts expire as
follows:
<TABLE>
<CAPTION>
BARGAINING UNIT EMPLOYEES
SUBSIDIARY CONTRACT EXPIRATION DATE AS OF SEPTEMBER 24, 1994
- ----------------------------- ------------------------- -------------------------
<S> <C> <C>
Imperial Adhesives, Inc. November 3, 1995 47
Erlanger Tubular Corporation March 6, 1997 52
Newport Steel Corporation April 15, 1999 522
Koppel Steel Corporation August 31, 1999 500
</TABLE>
Since its inception, the Company has successfully negotiated 13 labor
contracts and has experienced only one work stoppage. During fiscal 1994,
Newport experienced a two-day strike when the employees who are represented by
the USWA rejected a proposed new labor contract. The strike necessitated a
two-day shutdown of the welded tubular products facility. The labor contract
which was ultimately agreed upon allows the Company to combine and eliminate
certain job classifications resulting in a reduction of its Newport work force.
In November 1994, the Company signed a five year labor agreement with USWA for
Koppel which includes a net increase in labor costs of approximately 3% per
year. The Company estimates this contract will result in an average increase in
labor costs of approximately $0.5 million per year.
The Company has assumed no legacy costs, such as retirement and health
benefits, with respect to former employees of the facilities it has acquired.
Retirement benefits (including post-retirement health care) represent the most
significant difference between the Company's labor costs and the industry
average as the Company's employees participate in profit sharing plans as
opposed to the typically more costly defined benefit plans prevalent throughout
the industry. The profit sharing plans generally require mandatory contributions
at a specified percentage of pre-tax profits (with a guaranteed minimum based on
hours worked for the bargaining unit employees at Newport). Contribution expense
for Newport for the profit sharing plans was $0.5 million in fiscal 1994.
52
<PAGE> 56
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 40 acres of real estate upon which is
located a tubular processing facility. The facility is located
adjacent to barge facilities. Located on the property are eight
buildings aggregating approximately 65,000 square feet which house
the various finishing operations.
Adhesives
Cincinnati, Ohio The Company owns approximately seven acres of property in Cincinnati,
Kalamazoo, Michigan Ohio, five acres of property in Kalamazoo, Michigan, and 1.5 acres of
Lynchburg, Virginia property in Lynchburg, Virginia for use in its adhesives operations.
Nashville, Tennessee The Cincinnati properties contain five buildings aggregating
approximately 150,000 square feet; the Kalamazoo property consists of
one 24,000 square foot building; and the Lynchburg property consists
of one 10,000 square foot building. The Company also leases
approximately 3.1 acres in Nashville, Tennessee for use in its
adhesives operations, including one building aggregating
approximately 60,000 square feet.
Other
Newport, Kentucky The Company also owns approximately 40 acres of partially developed
land near Newport, Kentucky, acquired in fiscal 1989, 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>
LEGAL PROCEEDINGS
In September 1994, the Company received a proposed Consent Agreement from
the EPA. See "Investment Considerations -- Cost of Compliance with Environmental
Regulations" and "-- Environmental Matters."
Newport is a co-defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of Texas arising from the
failure of two joints of welded pipe during testing of an off-shore pipeline.
The plaintiff is seeking damages in excess of $5 million for costs associated
with replacing the entire pipeline and lost production revenues. The Company
believes that it has meritorious defenses to this claim, although no assurances
can be given as to the outcome of this case. Insurance may be available for a
portion, but not all, of any award for damages.
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<PAGE> 57
In addition, the Company is subject to various other claims, lawsuits and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability and other matters which seek remedies
or damages. The Company believes it has meritorious defenses with respect to
these claims and litigation and that the ultimate disposition of any of the
proceedings, 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. The ultimate effect of these
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.
54
<PAGE> 58
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, Vice President,
Secretary and Chief Administrative Officer;
President of Newport
John R. Parker..................... 50 Vice President, Treasurer and Chief Financial
Officer
</TABLE>
The directors of the Company are elected at each annual meeting of the
shareholders and hold office until their successors have been elected and
qualified. The officers are appointed by the Board of Directors and serve at its
discretion. The Articles of Incorporation provide that at such time as there are
nine or more directors, the Board of Directors may by resolution divide the
Board into three classes with the terms in office of each class ending in
successive years.
BUSINESS BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
CLIFFORD R. BORLAND is a founder of the Company, has been its President and
Chief Executive Officer since its inception, and has been a director since 1981.
He held various positions at United States Steel Corporation from 1960 through
1967. He joined Interlake's Riverdale Works as Chief Metallurgist in 1967,
became Director of Metallurgy for Interlake's Iron and Steel Division in 1978
and served as Plant Manager of the Newport Steel Works from 1977 to 1980. Mr.
Borland is also a director of The Huntington Bank, Inc. (Kenton County,
Kentucky) and Kentucky Electric Steel, Inc.
PATRICK J.B. DONNELLY has been a director of the Company since November 1981.
Since 1972, he has been a partner in the law firm of Niles, Barton and Wilmer
which is based in Baltimore, Maryland.
JOHN B. LALLY has been a director of the Company since November 1981. Mr. Lally
is Chairman of the Board and Chief Executive Officer of L B Industries, Inc., a
privately-owned pipe distributor. He has served as an executive officer of L B
Industries, Inc. and its predecessors for over 27 years.
R. GLEN MAYFIELD has been a director of the Company since November 1981. Mr.
Mayfield is the President of Mayfield & Robinson, Inc., an independent
management and financial consulting firm, which he founded in 1978. For ten
years prior to founding Mayfield & Robinson, Inc., Mr. Mayfield worked for the
First National Bank of Cincinnati. He is also a director of Suburban
Bancorporation, Inc.
RONALD R. NOEL has been a director of the Company since November 1981. He is a
founder of the Company and has been Vice President and Chief Administrative
Officer since its inception. He assumed the position of Secretary of the Company
in November 1989 and the position of President of Newport in March 1994. Mr.
Noel joined Interlake's Newport Steel Works in 1966 and served in various
positions, including Chief Industrial Engineer from 1976 to 1980.
JOHN R. PARKER joined the Company as Treasurer in 1981 and has held the
positions of Vice President, Treasurer and Chief Financial Officer or similar
positions with the Company for more than five years. Prior to joining the
Company, he was a manager with Arthur Andersen LLP.
55
<PAGE> 59
BUSINESS BACKGROUND OF OTHER MANAGEMENT MEMBERS
PAUL C. BORLAND joined the Company as Vice President and General Manager of KES
in 1989. Mr. Borland assumed his current position as President of Koppel in
1990. Mr. Borland joined the Company with over 33 years of steel industry
experience where he held various management positions with Latrobe Steel
Corporation and the Universal Cyclops Specialty Steel Division of Cyclops
Corporation. He also held the position of Vice President and General Manager of
Ohio Steel Tube, a division of Copperweld Corporation, where he also held the
position of Vice President. Paul C. Borland is the brother of Clifford R.
Borland.
RICHARD L. CARTER has been Vice President and General Manager of Erlanger since
1987. Prior to 1987 Mr. Carter held various positions in the industrial
engineering department of Newport.
THOMAS J. DEPENBROCK has been Corporate Controller of the Company since 1987.
Mr. Depenbrock was with the accounting firm of Arthur Andersen LLP from 1978
until 1987.
THOMAS L. GOLATZKI has been Vice President of the Company since 1987. Prior to
1987, Mr. Golatzki was the Director of Engineering and Administrative Services
of the Company.
ROBERT D. JOHNSON joined Imperial in 1970 and has served as its President since
1980.
JACK W. MEHALKO has been Vice President of the Company since March 1994. Mr.
Mehalko was President of Newport from 1989 until March 1994 and Vice President
and General Manager of KES from 1986 to 1989.
DIRECTOR COMPENSATION
Directors who are not employees of the Company are paid an annual retainer
of $16,000 and $1,000 for each meeting of the Board of Directors attended in
excess of four meetings per fiscal year and expenses for attendance at meetings
of the Board and Committees. In addition, such outside Directors are paid $750
($1,000 for Committee Chairmen) for each Committee meeting attended.
EXECUTIVE COMPENSATION
The following table presents summary information concerning compensation
received by the Chief Executive Officer and each of the other executive officers
for each of the last three fiscal years.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ------------
OTHER ANNUAL NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(1)
- ------------------------------ ----- -------- ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 1994 $361,392 $ 0 (2) 41,333 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 1993 181,328 0 (2) 9,750 14,537(3)
and Chief Administrative 1992 178,000 0 0
Officer; President of
Newport
John R. Parker 1994 $173,863 $ 0 (2) 13,420 15,647(3)
Vice President, Treasurer 1993 166,022 0 (2) 9,750 7,131(3)
and Chief Financial Officer 1992 163,000 0 0
<FN>
- ---------------
(1) In accordance with the transitional provisions of the rules on executive
officer compensation adopted by the Securities and Exchange Commission,
amounts under "Other Annual Compensation" and "All Other Compensation" are
excluded for the Company's fiscal 1992.
(2) The named executive officers received certain perquisites in fiscal 1994 and
fiscal 1993, the amount of which did not exceed the lesser of $50,000 or 10%
of any such officer's salary and bonus.
56
<PAGE> 60
(3) Amounts included as "All Other Compensation" consist of insurance premiums
made pursuant to the Company's salary continuation program and in connection
with certain disability insurance policies. Under the Company's salary
continuation program, which the Company funds with insurance policies, the
Company will pay certain employees, including the executive officers, upon
retirement at or after age 62 an amount ranging from 27% to 42% of his
current base salary for life, with payments for a minimum of 10 years either
to each participant or his descendants. During fiscal 1994 and fiscal 1993,
respectively, the Company paid aggregate premiums as follows: $18,933 and
$4,733 for Mr. Borland; $3,143 and $9,430 for Mr. Noel; and $10,911 and
$2,748 for Mr. Parker. The Company has purchased disability insurance
policies for the benefit of certain employees of the Company, including the
named executive officers. In the event an insured is disabled for more than
60 days, he will be paid 70% of his base salary during the term of such
disability up to age 65. During fiscal 1994 and fiscal 1993, respectively,
the Company paid aggregate premiums as follows: $12,817 and $11,915 for Mr.
Borland; $5,500 and $5,107 for Mr. Noel; and $4,736 and $4,383 for Mr.
Parker.
</TABLE>
The following tables present certain information concerning stock
options/SARs granted to and exercised by the executive officers of the Company
during fiscal 1994.
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
TOTAL
OPTIONS/SARS APPRECIATION
GRANTED TO FOR OPTION TERM(3)
EMPLOYEES IN MARKET PRICE
OPTIONS/SARS FISCAL PER SHARE ON DATE EXPIRATION -------------------
NAME GRANTED(1) YEAR(2) EXERCISE PRICE OF GRANT DATE 5% 10%
- -------------------- ------------ ------------ -------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 41,333 9.7 7.25 7.25 12/01/03 188,457 477,588
Ronald R. Noel 13,420 3.2 7.25 7.25 12/01/03 61,188 155,063
John R. Parker 13,420 3.2 7.25 7.25 12/01/03 61,188 155,063
<FN>
- ---------------
(1) Options/SARs were granted pursuant to the NS Group, Inc. Non-Qualified Stock
Option and Stock Appreciation Rights Plan of 1988 (NSO Plan). The options
become exercisable over a five year period in increments of 20% per year
beginning with the third anniversary of the date of grant.
(2) The Company granted options representing 424,135 shares to employees in
fiscal 1994 (135,085 under the NSO Plan and 289,050 under the Company's
Employee Incentive Stock Option Plan).
(3) The amounts shown under these columns are the result of calculations at 5%
and 10% rates as required by the Commission and are not intended to forecast
future appreciation of the stock price of the Company's common stock.
</TABLE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<CAPTION>
TOTAL NUMBER OF SHARES FOR
WHICH UNEXERCISED TOTAL VALUE OF UNEXERCISED,
NUMBER OF OPTIONS/SARS HELD AT IN-THE-MONEY OPTIONS/SARS
SHARES SEPTEMBER 24, 1994 HELD AT SEPTEMBER 24, 1994(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clifford R. Borland 0 $0 18,200 73,133 $ 0 $41,250
Ronald R. Noel 0 0 13,900 36,770 0 26,813
John R. Parker 0 0 14,700 36,970 0 26,813
<FN>
- ---------------
(1) In-the-Money Options/SARs are those where the fair market value of the
underlying securities at fiscal year end exceed the exercise price of the
option or SAR.
</TABLE>
57
<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31, 1994
with respect to the beneficial ownership of shares of Common Stock owned by (a)
each person known by the Company to own beneficially more than 5% of the Common
Stock of the Company, (b) each director or officer of the Company, and (c) all
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME SHARES OWNED OF CLASS
- ---------------------------------------------------------------- ------------ ----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Clifford R. Borland(1).......................................... 2,874,200(2) 20.8
Ronald R. Noel(1)............................................... 1,146,752(2) 8.3
John B. Lally(1)................................................ 677,545(3) 4.9
John R. Parker.................................................. 179,999(2)(4) 1.3
Patrick J.B. Donnelly........................................... 99,375(5) .7
R. Glen Mayfield................................................ 118,795 .9
All Directors and Executive
Officers as a group
(6 persons)..................................................... 5,096,666(2) 36.8
OTHER 5% SHAREHOLDERS:
State of Wisconsin Investment Board(1).......................... 1,315,400 9.5
Pioneering Management Corporation(1)............................ 929,300 6.7
General Electric Capital Corporation(1)......................... 772,481(6) 5.3
PMAC, Ltd. and certain other parties(7)......................... 1,705,881 11.0
<FN>
- ---------------
(1) The address of Messrs. Borland and Noel is NS Group, Inc., Ninth and Lowell
Streets, Newport, Kentucky 41072. The address of Mr. Lally is 100 South
Wacker Drive, Suite 1830, Chicago, Illinois 60606. The address of the State
of Wisconsin Investment Board is P.O. Box 7842, Madison, Wisconsin 53707.
The address of Pioneering Management Corporation is 60 State Street, Boston,
Massachusetts 02109-1820. The address of General Electric Capital
Corporation ("GECC") is 260 Long Ridge Road, Stamford, Connecticut 06927.
(2) Includes, where applicable, shares of Common Stock (a) which may be acquired
within 60 days of December 31, 1994 by Mr. Borland (22,200), Mr. Noel
(17,200), Mr. Parker (18,000) and all Directors and executive officers as a
group (57,400) pursuant to the Company's Non-Qualified Stock Option and
Stock Appreciation Rights Plan of 1988 and (b) owned by Mr. Noel (1,102),
Mr. Parker (1,929) and all Directors and executive officers as a group
(3,031) and held by the trustee of the NS Group, Inc. Salaried Employees'
Flexible Compensation Plan, which shares are voted as directed by the
participants to whose account they are allocated.
(3) Includes 50,855 shares owned by Mr. Lally's wife. Mr. Lally disclaims any
beneficial interest in these shares.
(4) Includes 80,000 shares owned by Mr. Parker's wife. Mr. Parker disclaims any
beneficial interest in these shares.
(5) Includes 32,850 shares owned by Mr. Donnelly's wife and 33,000 shares held
by Mr. Donnelly's wife as custodian for their children. Mr. Donnelly
disclaims any beneficial interest in these shares.
(6) Represents number of shares purchasable upon exercise of warrants, which
have an exercise price of $8.00 per share.
(7) PMAC is a Texas limited partnership for which PM Acquisition Corporation
("PM Corp.") is the general partner. PMAC, PM Corp. and certain other
affiliated persons have filed a Schedule 13D ("PMAC Schedule 13D") with the
Commission indicating on the cover pages thereof the following ownership
numbers and percentages, as updated from information provided by PMAC (some
of which are duplicative as described below): PMAC (and PM Corp.), 882,352
(6.0%); R. Alpert, 1,335,293 (8.8%); R. E. Belfer, 370,588 (2.6%); R. A.
Belfer, 370,588 (2.6%). The shares listed in the PMAC Schedule 13D for R.
Alpert include the shares listed for PMAC and PM Corp. (for which shares R.
Alpert, PMAC and PM Corp. would share voting and dispositive power) and an
additional 452,941 shares (for which R. Alpert would have sole voting and
dispositive power). R. E. Belfer and R. A. Belfer, as co-trustees of certain
trusts, would share voting and dispositive power for 92,647 shares; R. E.
Belfer, as sole trustee of certain other trusts, would hold sole voting and
dispositive power for 92,647 shares; and R. A. Belfer, as sole trustee of a
certain other trust, would hold sole voting and dispositive power for
185,294 shares. The cover pages for the Belfers in the PMAC Schedule 13D
filed (and updated from information obtained from PMAC) indicates that each
one shares voting and dispositive power for 370,588 shares.
All of the shares listed in the PMAC Schedule 13D represent shares issuable
upon conversion of $29 million principal amount of Convertible Debentures,
convertible at a price of $17 per share ("Convertible Debentures"), issued
to PMAC in connection with the Company's purchase of the assets comprising
Koppel Steel Corporation in 1990 ("Koppel Acquisition"). (Of such
Convertible Debentures, $15 million, which are owned by PMAC (and PM Corp.),
are held in escrow as security for contingent indemnification obligations of
PMAC to the Company in connection with the Koppel Acquisition.)
The Convertible Debentures provide that, after the conversion into Common
Stock of all of the Convertible Debentures, so long as PMAC or its
affiliates own 60% of the shares issued upon conversion, the Company will
take certain actions to provide for the election as a director of the
Company of an individual chosen by PMAC (and approved by the Company). As of
October 4, 1990, the Company agreed that R. A. Belfer would be acceptable as
such director. The Convertible Debentures also provide that the holders of
the stock issuable upon conversion thereof will vote for the Company's
nominees for directors (including the nominee designated by
58
<PAGE> 62
PMAC). In addition, the transfer of the Convertible Debentures is subject to
a right of first refusal in favor of the Company; a holder of the shares
issuable upon conversion may not transfer such shares except subject to a
right of first refusal in favor of the Company or pursuant to Rule 144 under
the Securities Act of 1933. Finally, the holders of the Convertible
Debentures and any shares issued upon conversion thereof are subject to
certain "standstill" provisions, including a prohibition against acquiring,
in the aggregate, more than a 15% interest in the voting securities of the
Company.
The address of PMAC, Ltd. and R. Alpert is 15311 Vantage Parkway West, Suite
315, Houston, Texas 77032. The address of R. E. Belfer and R. A. Belfer is
885 Second Avenue, New York, New York 10017.
The information in this footnote and the corresponding information in the
above share ownership table was derived from the PMAC Schedule 13D,
information provided by PMAC and from the terms of the Convertible
Debentures.
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Mayfield, Lally and
Donnelly, none of whom has served as an officer or employee of the Company or
any of its subsidiaries.
John B. Lally owns the controlling interest in L B Industries, Inc. The
Company sells substantially all of its secondary and limited service tubular
products to L B Industries, Inc. Sales to L B Industries, Inc. amounted to
approximately $11.0 million, $10.9 million and $10.3 million in fiscal 1994,
1993 and 1992, respectively. Trade receivables from this customer were $958,000
and $582,000 at the end of fiscal 1994 and 1993, respectively. The Company
believes that its transactions with L B Industries are conducted on an arms-
length basis.
CERTAIN TRANSACTIONS
On September 27, 1993, the Company repaid an $8 million loan from PMAC made
pursuant to a Loan Agreement dated as of October 4, 1990. The Company funded
such repayment with the proceeds of an $8 million capital expenditure loan made
to the Company by GECC. Such loan is payable in 28 quarterly installments of
principal, together with interest at 8 percent.
59
<PAGE> 63
DESCRIPTION OF THE 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 will be filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The Senior
Secured Notes are subject to all such terms, and prospective purchases of the
Senior Secured Notes are referred to the Indenture for a statement thereof. The
following summary does not purport to be a complete description of the Senior
Secured Notes and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the Indenture and the Senior Secured Notes, and is
qualified in its entirety by reference to the Trust Indenture Act of 1939, as
amended ("TIA"), as in effect on the date of the Indenture. The definitions of
certain capitalized terms used in the following summary are set forth below
under "Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The Senior Secured Notes will be obligations of the Company and will rank
pari passu with the Company's other unsubordinated debt obligations. The Senior
Secured Notes will be limited to $125,000,000 aggregate principal amount and
will mature on , 2003. The Senior Secured Notes will be secured by
Intercompany Notes issued in favor of the Company by Newport, Koppel and
Erlanger in an aggregate amount at least equal to the principal amount of the
Senior Secured Notes. The Senior Secured Notes also will be unconditionally
guaranteed, jointly and severally, by each current Subsidiary of the Company.
Each Intercompany Note and 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 , 1995 to the Holders of record of Senior Secured Notes
at the close of business on the and immediately
preceding such interest payment dates. Interest on the Senior Secured Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the original date of issuance (the "Issue Date").
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest will accrue at a rate equal to the
stated rate of interest.
As discussed below, payment of principal of, and interest on, Senior
Secured Notes represented by one or more permanent global Senior Secured Notes
registered in the name of or held by The Depository Trust Company (the
"Depositary") or its nominee will be made in immediately available funds to the
Depositary or its nominee, as the case may be, as the registered owner and
holder of such permanent global Senior Secured Note or Notes. See "-- Same-Day
Settlement and Payment."
OPTIONAL REDEMPTION
Except as described below, the Senior Secured Notes may not be redeemed
prior to , 1999. On and after , 1999, the Company may,
at its option, redeem the Senior Secured Notes, in whole or in part, from time
to time, at the redemption prices set forth below (expressed as a percentage of
the principal amount thereof), in each case together with accrued interest, if
any, to the date of redemption, if redeemed during the twelve-month period
beginning of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------- -----------
<S> <C>
1999............................................. %
2000............................................. %
2001 and thereafter.............................. 100.00%
</TABLE>
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<PAGE> 64
; provided, that if the date fixed for redemption is or
, then the interest payable on such date shall be paid to the Holder
of record on the next preceding or .
During the first 36 months after the Offering, the Company may redeem up to
40% of the principal amount of the Senior Secured Notes with the net proceeds of
a Public Equity Offering of Common Stock at % of the principal amount
thereof plus accrued interest to the redemption date; provided that at least
$75,000,000 of the Senior Secured Notes remain outstanding following the
redemption.
In the event that less than all of the Senior Secured Notes are to be
redeemed at any time, selection of Senior Secured Notes for redemption will be
made by the Trustee on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided, however, that no Senior Secured Notes
of $1,000 or less shall be redeemed in part. Notice of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Senior Secured Notes to be redeemed at its
registered address. If any Senior Secured Note is to be redeemed in part only,
the notice of redemption that relates to such Senior Secured Note shall state
the portion of the principal amount thereof to be redeemed. A new Senior Secured
Note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Senior Secured Note. On and after the redemption date, interest will cease to
accrue on Senior Secured Notes or the portion thereof called for redemption
unless the Company defaults in the payment of the redemption price or accrued
interest. Senior Secured Notes that are optionally redeemed by the Company
(after a Public Equity Offering or otherwise) or that are purchased by the
Company pursuant to an Asset Sale Offer as described under "-- Certain
Covenants-Restrictions on Asset Sales" or pursuant to a Change of Control Offer
as described under "-- Change of Control" will be surrendered to the Trustee for
cancellation.
The Credit Facility contains certain covenants that restrict the ability of
the Company to redeem the Senior Secured Notes without the prior written consent
of the Lenders. See "Description of Certain Indebtedness-Credit Facility."
CHANGE OF CONTROL
The Indenture provides that upon a Change of Control, each Holder shall
have the right to require the Company to repurchase all or any part of such
Holder's Senior Secured Notes at a cash purchase price equal to 101% of the
principal amount plus accrued and unpaid interest, if any, to the date of
repurchase pursuant to the procedures set forth in the Indenture (a "Change of
Control Offer").
Within 30 days following any Change of Control, the Company shall send, by
first class mail, a notice to each Holder, with a copy to the Trustee, which
notice will govern the terms of the Change of Control Offer. This notice will
state, among other things, the repurchase date (which shall not be earlier than
30 days or later than 60 days from the date such notice is mailed) and the
circumstance and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control). Holders electing
to have a Senior Secured Note repurchased will be required to surrender the
Senior Secured Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Senior Secured Note completed, to the paying agent at the
address specified in the notice prior to the close of business on the date of
repurchase. Holders will be entitled to withdraw their election if the paying
agent receives, not later than the close of business on the third Business Day
(or such shorter period as may be required by applicable law) preceding the date
of repurchase, a telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the Senior Secured Notes the
Holder delivered for repurchase, and a statement that such Holder is withdrawing
his election to have such Senior Secured Notes repurchased. Failure to make a
Change of Control Offer as required will constitute a covenant Default under the
Indenture.
In the event a Change of Control occurs and the Holders exercise their
right to require the Company to repurchase the Senior Secured Notes, and
assuming that such repurchase constitutes a "tender offer" for purposes of Rule
14e-1 under the Exchange Act at the time it is required, the Company will comply
with the requirements of Rule 14e-1 as then in effect with respect to such
repurchase.
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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.
RANKING
The Senior Secured Notes will be obligations of the Company. The Senior
Secured Notes will rank pari passu in right of payment with any existing and
future unsubordinated Indebtedness of the Company, including obligations arising
under the Company's 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 Indebtedness of
the applicable Subsidiary, including obligations of each Subsidiary arising
under the Credit Facility.
INTERCOMPANY NOTES AND GUARANTEES OF SENIOR SECURED NOTES
The Senior Secured Notes will be secured by a pledge of Intercompany Notes
issued to the Company by Newport, Koppel and Erlanger in the approximate
respective amounts of $ , $ , and $ , reflecting the
amounts loaned to such Subsidiaries by the Company as part of the Refinancing
Transaction or, in the case of Erlanger, prior intercompany advances. In
addition, each existing and future Subsidiary of the Company (excluding
Non-Recourse Subsidiaries) unconditionally will guarantee (each a "Guarantor"),
jointly and severally, to each Holder and the Trustees, the full and prompt
performance of the Company's obligations under the Indenture and the Senior
Secured Notes, including the payment of principal
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<PAGE> 66
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 "Investment Considerations -- 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 September 24, 1994; (b) approximately 272 acres of
real property at the Koppel and Ambridge facilities, including the melt shop,
bar mill, tube mill, blooming mill, pickling facility, machine and fabricating
shops, storage and repair facilities and administrative offices and all other
buildings, fixtures and improvements thereon, with a net book value of
approximately $11.4 million at September 24, 1994; (c) approximately 40 acres of
real property at the Baytown facility, including the finishing facility and all
other buildings, fixtures and improvements thereon, with a net book value of
approximately $0.5 million at September 24, 1994; (d) the Erlanger lease of
approximately 36 acres of real property at the Port of Catoosa near Tulsa,
Oklahoma and all leasehold improvements thereon with a net book value of
approximately $1.3 million at September 24, 1994; (e) all existing fixtures,
machinery, tools, equipment and similar property at each of the Newport, Koppel
and Ambridge, Baytown and Erlanger facilities with respective net book values at
September 24, 1994 of $56.0 million, $66.8 million, $1.7 million, and $1.9
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
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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 September 24, 1994
was approximately $153.1 million. There can be no assurance that the proceeds of
any sale of the Collateral, in whole or in part, pursuant to the Indenture and
the Security Documents following an Event of Default would be sufficient to
satisfy payments due on the Intercompany Notes and the 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 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 September 1994, the Company received a proposed Consent
Agreement from the EPA relating to an April 1990 RCRA facility assessment
completed by the EPA and the Pennsylvania Department of Environmental Resources.
The Assessment identified potential releases of hazardous constituents into the
environment from numerous SWMU's and AOC's located at and adjacent to the Koppel
facilities. See "Investment Considera-
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tions -- 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 following the
issuance of a notice of enforcement, the Agent may enter upon all or any portion
of the Subsidiaries' premises, use the Collateral to the extent necessary to
complete the manufacture of inventory, collect accounts and sell or otherwise
dispose of the collateral securing the Indebtedness under the Credit Facility;
and (iii) the Collateral Agent will not amend the Indenture or any of the
Security Documents and the Agent will not amend the Credit Facility or any of
the collateral documents relating thereto without the consent of the other if
such amendment would affect adversely the interests of (a) the Agent or the
various Lenders represented by the Agent in the case of a proposed amendment to
the Indenture or any of the Security Documents or (b) the Collateral Agent or
the Holders in the case of a proposed amendment to the Credit Facility or any
related collateral documents.
In addition, prior to the completion of the Offering, the Collateral Agent
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 December 31, 1994, the outstanding balance of the loan from
Dayton to Newport was $6.8 million.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the
Collateral upon the occurrence of an Event of Default would be significantly
impaired by applicable Bankruptcy Law in the event that a bankruptcy proceeding
were to be commenced by or against the Company or the Subsidiaries that have
granted a security 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
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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 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
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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.
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
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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 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
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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 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
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other distributions on its Capital Stock, (ii) make payments in respect of 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 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.
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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 Subsidiaries, provided that such transactions are
not otherwise prohibited, (3) payments of reasonable and customary compensation
for services, directors fees, meeting expenses, insurance premiums and
indemnities to the extent permitted by applicable law, (4) the issuance of stock
options (and shares of stock upon the exercise thereof) pursuant to any stock
option plan approved by the Board of Directors and stockholders of the Company
and (5) loans or advances to employees for relocation or travel related expenses
consistent with ordinary practices of the Company.
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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 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":
(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;
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(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 $1,000,000
(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 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
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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).
If an Event of Default (other than an Event of Default specified in
subparagraph (viii) or (ix) set forth above) occurs and is continuing, the
Trustee or the Holders of at least 25% of the principal amount of the Senior
Secured Notes then outstanding by notice to the Company (and to the Trustee if
such notice is given by the Holders) may declare the principal amount and
accrued interest on the Senior Secured Notes to be immediately due and payable.
If an Event of Default specified in section (viii) or (ix) above occurs, the
principal amount and accrued interest shall ipso facto become and be immediately
due and payable on all outstanding Senior Secured Notes without any declaration
or other act on the party of the Trustee or any Holder. The Holders of a
majority in principal amount of the then outstanding Senior Secured Notes by
notice to the Company and the Trustee may rescind an acceleration and its
consequences if all existing Events of Default, other than the nonpayment of the
principal of the Senior Secured Notes which have become due solely by such
declaration of acceleration, have been cured or waived. The Holders of a
majority in principal amount of the outstanding Senior Secured Notes also have
the right to waive certain past defaults under the Indenture except a default in
the payment of the principal of, premium, if any, or interest on any Senior
Secured Note, or in respect of a covenant or a provision which cannot be
modified or amended without the consent of all Holders.
No Holder has the right to institute any proceeding with respect to the
Indenture, the Security Documents or any remedy thereunder, unless the Holders
of at least 25% in principal amount of the outstanding Senior Secured Notes have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 15 days after receipt of such notice, and the Trustee has not
within such 15-day period received directions inconsistent with such written
request by Holders of a majority in principal amount of the outstanding Senior
Secured Notes. Such limitations do not apply, however, to suits instituted by a
Holder for the enforcement of the payment of the principal of, premium, if any,
or interest on such Senior Secured Note on or after the respective due dates
expressed in such Senior Secured Note.
The Holders of a majority in principal amount of the outstanding Senior
Secured Notes will have the right, subject to certain limitations, to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. The
Indenture will provide that in case an Event of Default shall occur and be
continuing, the Trustee will exercise such of its rights and powers under the
Indenture, and use the same degree of care and skill in their exercise, as a
prudent Person would exercise or use under the circumstances in the conduct of
his or her own affairs. Subject to
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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 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.
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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, 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.
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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 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
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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 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
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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 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.
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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.
"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.
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"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 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
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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 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
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calculated after giving pro forma effect thereto as if such Asset Disposition or
Investment or Asset Acquisition occurred on the first day of such period and (5)
there shall be excluded from Consolidated Interest Expense any Consolidated
Interest Expense related to any Debt which was outstanding during the period but
is not outstanding on the Determination Date, except for Consolidated Interest
Expense actually incurred with respect to Debt borrowed under a revolving credit
or similar arrangement to the extent the commitment thereunder remains in effect
on the Determination Date. For purposes of this definition, whenever pro forma
effect is to be given to an Asset Disposition, an Investment or an Asset
Acquisition, the amount of income or earnings relating thereto, and the amount
of Consolidated Interest Expense associated with any Debt issued, redeemed or
defeased in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of the Company.
If any Debt bears a floating rate of interest and is being given pro forma
effect, the interest of such Debt shall be calculated as if the rate in effect
on the Determination Date had been the applicable rate for the entire period
(taking into account any Interest Rate Protection Agreement applicable to such
Debt if such Interest Rate Protection Agreement has a remaining term in excess
of 12 months).
"Consolidated Income Tax Expense" of any Person for any period means,
without duplication, the aggregate amount of net taxes based on income or
profits for such period of the operations of such Person and its consolidated
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
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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 or stated
value of all outstanding Capital Stock of such Person plus (ii) paid-in capital
or capital surplus relating to such Capital Stock plus (iii) any retained
earnings or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Credit Facility" means the Revolving Credit and Security Agreement dated
, 1995 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
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Debt being deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part on, or prior to, the final
maturity date of the Senior Secured Notes.
"EBITDA" for any period means the Consolidated Net Income for such period
(but without giving effect to adjustments, accruals, deductions or entries
resulting from purchase accounting), plus the following to the extent deducted
in calculating such Consolidated Net Income for such period (i) Consolidated
Income Tax Expense, (ii) Consolidated Interest Expense and (iii) depreciation
and amortization expense determined on a consolidated basis for such Person and
its consolidated 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.
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"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor in respect of the Senior Secured Notes or in any Affiliate of the
Company or such other obligor and (c) is not an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions
to any of the foregoing for the Company or such other obligor or any Affiliate
thereof. Whenever it is provided in the Indenture that any Independent Person's
opinion or certificate shall be furnished to the Trustee, such Person shall be
appointed by the Company and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer has
read this definition and that the signer is Independent within the meaning
thereof.
"Interest Rate Protection Agreement" means any interest rate swap
agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect the Company or any Subsidiary against
fluctuations in interest rates.
"Inventory" means all inventory of the Company and its Subsidiaries which,
in conformity with GAAP, would be set forth opposite the caption inventory or
any like caption on the consolidated balance sheet of the Company and its
Subsidiaries.
"Investment" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, or (ii)
all purchases (or other acquisitions for consideration) by such Person of Debt,
Capital Stock or other securities of any other Person, or (iii) all other items
that would be classified as investments on a balance sheet of such Person
prepared in accordance with GAAP.
"Issue" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing at
the time such Person becomes a Subsidiary (whether by merger, 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
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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 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 $1.1 million
to improve property in connection with a coating facility to be leased to a
third party.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (b) other Liens incidental to the conduct of the Company's and
its Subsidiaries' business or the ownership of its property and assets not
securing any Debt, and which do not in the aggregate materially detract from the
value of the Company's and its Subsidiaries' property or assets when taken as a
whole, or materially impair the use thereof in the operation of its business
(including, without limitation, Liens securing any obligation to landlords,
vendors, carriers, warehousemen, mechanics, laborers and materialmen and other
similar obligations arising by operation of law not yet delinquent or which are
being contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor); (c) Liens with respect to assets of a Subsidiary
granted by such Subsidiary to the Company to secure Debt owing to the Company;
(d) Liens on assets owned by Non-Recourse Subsidiaries to secure Non-Recourse
Debt; (e) Liens on assets not constituting Collateral with an aggregate book
value not in excess of 5% of the book value of the Company's total 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 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
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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, 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.
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"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 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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
The following summary of certain provisions of the Credit Facility is
generalized, does not purport to be complete, and is subject to and is qualified
in its entirety by reference to the provisions of the Credit Facility, a copy of
which will be filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Capitalized terms that are used but not otherwise defined
herein have the meanings assigned to them in the Credit Facility and those
definitions are incorporated herein by reference.
General. Prior to or concurrently with the Offering, Newport, Koppel and
Imperial (collectively, the "Borrowers"), 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 Facility will expire three years after
the Closing Date, but may be terminated earlier or extended for successive one
year periods. Upon termination of the Credit Facility, all amounts outstanding
under the Credit Facility will be due and payable together with all accrued
interest thereon to such date. Borrowings under the Credit Facility will be used
by Borrowers to repay certain outstanding indebtedness, to provide working
capital and for other general corporate purposes.
Interest. Interest on the revolving advances shall accrue at a rate per
annum equal to (a) the sum of the Alternate Base Rate plus one percent (1%) with
respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two
and three quarters percent (2 3/4%) with respect to Eurodollar Rate Loans.
To the extent permitted by law, upon and after the occurrence and
declaration of an Event of Default under the Credit Facility, and during the
continuation thereof, the Borrowers' obligations under the Credit Facility will
bear interest at the applicable revolving interest rate plus two percent (2%)
per annum.
Security. The Advances and the guarantees thereof will be secured by a
first priority perfected security interest in the inventory, accounts and
certain intangible property of each of the Borrowers and the Guarantors. All
proceeds of the foregoing will be required to be deposited in lockbox or
dominion accounts. The Borrowers will deliver an irrevocable letter of
instruction to the lockbox or dominion banks directing such bank to transfer
funds so deposited to the account of the ACM Agent.
Certain Covenants. The Credit Facility and related guarantees and security
agreements each will contain extensive affirmative and negative covenants,
including, among others, covenants (i) prescribing minimum levels of net worth
and working capital; (ii) requiring the maintenance of a certain interest
coverage ratio, current ratio and ratio of total liabilities to net worth; and
(iii) placing limits on the ability of the Company and each of its Subsidiaries
to incur indebtedness, create liens, guarantee indebtedness, make investments,
make loans or extensions of credit, make capital expenditures, declare, pay or
make dividends, substantially change the nature of its business, engage in
transactions with affiliates, enter into leases, and form subsidiaries. The
Credit Facility will require the Company to maintain as of the end of each
fiscal quarter an interest coverage ratio of 1.1 to 1.0 during fiscal 1995, 1.5
to 1.0 during fiscal 1996 and 1.75 to 1.0 during fiscal 1997, measured on a
rolling four-quarter basis. For the fiscal year ended September 24, 1994, the
interest coverage ratio (excluding the gain on the sale of and the results for
KES) was 1.2 to 1.0. In addition, the net worth
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covenant under the Credit Facility will require the Company to maintain a net
worth of at least $70 million, less the after-tax effect of prepayment penalties
associated with the prepayment of debt with the proceeds of the Offering. At
September 24, 1994, the Company had a net worth of approximately $76.5 million.
The Company currently would be, and will be upon completion of the Offering, in
compliance with all covenants under the Credit Facility. If the Company's
results from operations do not improve over its results for fiscal 1994, then
the Company could be in default under its Credit Facility in the absence of a
waiver or amendment from the Lenders. There can be no assurance that the Company
would be able to obtain any necessary waivers or be able to renegotiate the
terms of the Credit Facility.
The Credit Facility will also contain covenants which limit the ability of
the Company and each of its Subsidiaries to sell assets other than sales in the
ordinary course of business, sales of obsolete or idle assets (other than the
collateral under the Credit Facility) and sales of certain non-steel related
assets (in which event the maximum revolving advance amount would be reduced),
and to enter into certain transactions among affiliates, among others. The
Credit Facility does not permit the Company or any of its Subsidiaries to (i)
merge, consolidate or reorganize (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 December 31, 1994, the Company would have had $ million in working
capital and minimal term debt amortization requirements over the next five
years. In addition, the Credit Facility will restrict prepayment of
indebtedness, including the Senior Secured Notes, through optional redemptions,
certain Asset Sale Offers and Change of Control Offers.
Defaults. The Credit Facility will contain certain Events of Default
including, among others, (i) failure to pay the Obligations under the Credit
Facility when due, (ii) breach of any representation or warranty in any of the
loan documents, (iii) failure to comply with terms, provisions, conditions or
covenants in any of the loan documents (which in some cases do not include
notice or cure periods), (iv) issuance of liens or attachment 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.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of the ownership of Senior Secured Notes as of the date hereof.
Except where noted, it deals only with Senior Secured Notes held as capital
assets by United States Holders and does not deal with special situations, such
as those of dealers in securities or currencies, financial institutions, life
insurance companies, persons holding Senior Secured Notes as a part of a hedging
or conversion transaction or a straddle or United States Holders whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended,
and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed below.
The discussion below also assumes that the Senior Secured Notes will not be
issued with original issue discount ("OID"). PERSONS CONSIDERING THE PURCHASE,
OWNERSHIP OR DISPOSITION OF SENIOR SECURED NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
PAYMENTS OF INTEREST
Interest on a Senior Secured Note will generally be taxable to a United
States Holder as ordinary income from domestic sources at the time it is paid or
accrued in accordance with the United States Holder's method of accounting for
tax purposes. As used herein, a "United States Holder" of a Senior Secured Note
means a holder that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
ORIGINAL ISSUE DISCOUNT
The above discussion assumes that the Senior Secured Notes will not be
issued with OID. However, if the Senior Secured Notes are issued at a
substantial discount they will have OID. United States Holders generally will be
required to include OID in gross income in advance of the receipt of cash
attributable to that income. Accordingly, if the Senior Secured Notes are issued
at a substantial discount, United States Holders should consult their own tax
advisors regarding the U.S. federal income tax consequences of the holding and
disposition of such Notes.
MARKET DISCOUNT
If a United States Holder purchases a Senior Secured Note for an amount
that is less than its principal amount (generally other than at its original
issue), the amount of the difference will be treated as "market discount" for
federal income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a United States Holder will be
required to treat any principal payment on, or any gain on the sale, exchange,
retirement or other disposition of, a Senior Secured Note as ordinary income to
the extent of the market discount which has not previously been included in
income and is treated as having accrued on such Senior Secured Note at the time
of such payment or disposition. In addition, the United States Holder may be
required to defer, until the maturity of the Senior Secured Note or its earlier
disposition in a taxable transaction, the deduction of all or a portion of the
interest expense of any indebtedness incurred or continued to purchase or carry
such Senior Secured Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Senior Secured Note,
unless the United States Holder elects to accrue the market discount on a
constant interest method. A United States Holder of a Senior Secured Note may
elect to include market discount in income currently as it accrues (on either a
ratable or constant interest method), in which case the rule described above
regarding deferral of interest deductions will not apply. This election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies and may not be revoked without the consent of the Internal
Revenue Service.
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SALE, EXCHANGE AND RETIREMENT OF SENIOR SECURED NOTES
A United States Holder's tax basis in a Senior Secured Note will, in
general, be the United States Holder's cost therefor, increased by market
discount previously included in income by the United States Holder and reduced
by any amortized premium and any cash payments on the Senior Secured Note other
than qualified stated interest. Upon the sale, exchange or retirement of a
Senior Secured Note, a United States Holder will recognize gain or loss equal to
the difference between the amount realized upon the sale, exchange or retirement
(less any accrued qualified stated interest, which will be taxable as such) and
the adjusted tax basis of the Senior Secured Note. Except with respect to market
discount, such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if at the time of sale, exchange or retirement the Senior
Secured Note has been held for more than one year. Under current law, net
capital gains of individuals are, under certain circumstances, taxed at lower
rates than items of ordinary income. The deductibility of capital losses is
subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest, and premium paid on Senior Secured Notes and to
the proceeds of sale of a Senior Secured Note made to United States Holders
other than certain exempt recipients (such as corporations). A 31 percent backup
withholding tax will apply to such payments if the United States Holder fails to
provide a taxpayer identification number or certification of foreign or other
exempt status or fails to report in full dividend and interest income.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, Chemical Securities Inc. and
CS First Boston Corporation (the "Underwriters"), the Company has agreed to sell
to the Underwriters, and the Underwriters have severally agreed to purchase from
the Company, the following respective principal amounts of the Senior Secured
Notes:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT
------------------------------------------------------------------- ---------------
<S> <C>
Chemical Securities Inc............................................ $
CS First Boston Corporation........................................
---------------
Total......................................................... $ 125,000,000
===============
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Senior Secured Notes
offered hereby if any of the Senior Secured Notes are purchased. The Company has
been advised by the Underwriters that they propose initially to offer the Senior
Secured Notes to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a discount
not in excess of % of the principal amount of the Senior Secured Notes. The
Underwriters may allow, and such dealers may reallow, a concession to certain
other dealers not in excess of % of the principal amount of the Senior
Secured Notes. After the initial public offering, the public offering price,
discount and concession may be changed.
The Senior Secured Notes are a new issue of securities with no established
trading market. The Company does not intend to apply for listing of the Senior
Secured Notes on a national securities exchange, but has been advised by the
Underwriters that the Underwriters intend to make a market in the Senior Secured
Notes, as permitted by applicable laws and regulations. No assurance can be
given, however, that the Underwriters will make a market in the Senior Secured
Notes or as to the liquidity of, or the trading market for, the Senior Secured
Notes.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriters may be required to make in respect thereof.
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LEGAL MATTERS
The validity of the Senior Secured Notes and the Guarantees will be passed
upon for the Company and the Subsidiaries by Bryan Cave, St. Louis, Missouri.
Certain legal matters related to the Offering will be passed upon for the
Underwriters by Simpson Thacher and Bartlett (a partnership which includes
professional corporations), New York, New York. Certain other legal matters will
be passed upon for the Company by Kepley, MacConnell & Eyrich, Cincinnati, Ohio;
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.
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NOTICE TO CALIFORNIA PURCHASERS
The Senior Secured Notes offered hereby 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 of 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.
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<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NS GROUP, INC. AND SUBSIDIARIES
<CAPTION>
PAGE
----
<S> <C> <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 DECEMBER 31,
1994 AND DECEMBER 25, 1993 (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> 101
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> 102
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 24, 1994 AND SEPTEMBER 25, 1993
(Dollars in thousands)
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 4,405 $ 5,797
Short-term investments............................................ 40,071 3,457
Accounts receivable, less allowance for doubtful accounts of $637
and $819, respectively........................................... 42,651 48,602
Refundable income taxes........................................... 195 2,813
Inventories....................................................... 32,290 41,691
Operating supplies and other current assets....................... 11,721 18,358
Deferred tax assets............................................... 4,877 6,004
-------- --------
Total current assets......................................... 136,210 126,722
-------- --------
PROPERTY, PLANT AND EQUIPMENT -- AT COST
Land and buildings................................................ 27,841 27,559
Machinery and equipment........................................... 231,383 234,172
Construction in progress.......................................... 3,497 3,362
Less -- accumulated depreciation.................................. (102,182) (91,627)
-------- --------
Net property, plant and equipment............................... 160,539 173,466
-------- --------
OTHER ASSETS........................................................... 18,578 17,054
-------- --------
Total assets................................................. $315,327 $317,242
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable..................................................... $ 28,872 $ 26,967
Accounts payable.................................................. 27,312 28,300
Accrued liabilities............................................... 19,281 23,263
Current portion of long-term debt................................. 15,543 9,132
-------- --------
Total current liabilities.................................... 91,008 87,662
-------- --------
LONG-TERM DEBT......................................................... 138,110 156,056
-------- --------
DEFERRED TAXES......................................................... 9,745 10,902
-------- --------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000,000 shares authorized,
13,809,413 and 13,696,104 shares issued and outstanding,
respectively..................................................... 48,988 48,284
Common stock options and warrants................................. 262 208
Unrealized gain (loss) on available for sale securities........... (124) --
Retained earnings................................................. 27,338 14,130
-------- --------
Common shareholders' equity..................................... 76,464 62,622
-------- --------
Total liabilities and shareholders' equity................... $315,327 $317,242
======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-3
<PAGE> 103
<TABLE>
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)
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES........................................... $ 303,380 $ 353,082 $ 281,242
COST OF PRODUCTS SOLD............................... 278,161 310,586 250,189
SELLING AND ADMINISTRATIVE EXPENSES................. 24,530 30,824 29,652
----------- ----------- -----------
Operating income............................... 689 11,672 1,401
INTEREST INCOME..................................... 1,733 277 722
INTEREST EXPENSE.................................... (20,030) (21,096) (21,797)
OTHER INCOME (EXPENSE).............................. 1,191 (131) 258
GAIN ON SALE OF SUBSIDIARY.......................... 35,292 -- --
----------- ----------- -----------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
a change in accounting principle............. 18,875 (9,278) (19,416)
PROVISION (CREDIT) FOR INCOME TAXES................. 7,382 (3,382) (6,058)
----------- ----------- -----------
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle.................................... 11,493 (5,896) (13,358)
EXTRAORDINARY ITEMS, NET OF INCOME TAXES............ -- (1,095) (2,542)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE......................................... 1,715 -- --
----------- ----------- -----------
Net income (loss).............................. $ 13,208 $ (6,991) $ (15,900)
========== ========== ==========
PER COMMON SHARE
Income (loss) before extraordinary items and
cumulative effect of a change in accounting
principle.................................... $ .84 $ (.44) $ (.99)
Extraordinary items............................ -- (.08) (.19)
Cumulative effect of a change in accounting
principle.................................... .12 -- --
----------- ----------- -----------
Net income (loss).............................. $ .96 $ (.52) $ (1.18)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING................. 13,789,265 13,552,838 13,483,247
<FN>
See notes to consolidated financial statements
</TABLE>
F-4
<PAGE> 104
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26,
1992
(Dollars in thousands)
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 13,208 $ (6,991) $(15,900)
Adjustments to reconcile net income (loss) to net
cash flows from operating activities:
Depreciation and amortization............... 18,789 19,093 18,711
Decrease in long-term deferred taxes........ (1,157) (1,998) (1,675)
Gain on sale of subsidiary.................. (35,292) -- --
(Gain) loss on disposal of equipment........ (230) 323 381
Increase in accounts receivable, net........ (7,921) (11,461) (11,498)
(Increase) decrease in inventories.......... (3,168) 906 1,430
Decrease in refundable income taxes......... 2,618 2,012 7,067
(Increase) decrease in other current
assets.................................... 2,691 (7,203) (33)
Increase in accounts payable................ 5,782 958 6,442
Increase in accrued liabilities............. 351 6,753 3,590
-------- -------- --------
Net cash flows from operating
activities............................. (4,329) 2,392 8,515
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiary............ 50,426 -- --
Cash dividend from sold subsidiary.......... 6,818 -- --
Purchases of property, plant and
equipment................................. (11,760) (6,080) (4,148)
Proceeds from sale of equipment............. 631 619 1,246
(Increase) decrease in other assets......... (2,122) 999 (774)
(Increase) decrease in short-term
investments............................... (36,614) 208 2,303
-------- -------- --------
Net cash flows from investing
activities............................. 7,379 (4,254) (1,373)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable................... 1,905 6,286 3,989
Proceeds from issuance of long-term debt.... 431 2,012 6,379
Repayments on long-term debt................ (7,246) (9,896) (12,960)
Increase in debt issuance costs............. (236) (388) (259)
Proceeds from issuance of common stock...... 704 931 133
Dividends paid on common stock.............. -- -- (808)
-------- -------- --------
Net cash flows from financing
activities............................. (4,442) (1,055) (3,526)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ (1,392) (2,917) 3,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 5,797 8,714 5,098
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 4,405 $ 5,797 $ 8,714
======== ======== ========
Cash paid during the year for:
Interest.................................... $ 18,964 $ 18,434 $ 18,448
======== ======== ========
Income taxes................................ $ 4,868 $ 291 $ 177
======== ======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-5
<PAGE> 105
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 24, 1994, SEPTEMBER 25, 1993 AND SEPTEMBER 26,
1992
(Dollars in thousands)
<CAPTION>
Unrealized Gain
Common Stock Options (Loss) on
---------------------- and Available for Retained
Shares Amount Warrants Sale Securities Earnings Total
----------- ------- ------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 28, 1991... 13,454,982 $47,220 $ 100 $ 37,829 $ 85,149
Stock option plans............ 49,575 133 133
Net loss...................... (15,900) (15,900)
Common stock dividends ($.06
per share).................. (808) (808)
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 26, 1992... 13,504,557 $47,353 $ 100 $ 21,121 $ 68,574
Stock option plans............ 48,750 181 108 289
Common stock issuance......... 142,797 750 750
Net loss...................... (6,991) (6,991)
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 25, 1993... 13,696,104 $48,284 $ 208 $ -- $ 14,130 $ 62,622
Stock option plans............ 56,145 290 54 344
Common stock issuance......... 57,164 414 414
Unrealized losses on
investments................. (124) (124)
Net income.................... 13,208 13,208
----------- ------- ------- ------- -------- --------
BALANCE, SEPTEMBER 24, 1994... 13,809,413 $48,988 $ 262 $(124) $ 27,338 $ 76,464
========= ======= ======= ============== ======== ========
<FN>
See notes to consolidated financial statements
</TABLE>
F-6
<PAGE> 106
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
capitalized. Included in property,
F-7
<PAGE> 107
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 KES for the eleven days of
fiscal 1994 prior to sale, the Company's pro forma net loss before cumulative
effect of a change in accounting principle for the fiscal year ended September
24, 1994 is $10,158,000, or a $.74 loss per share.
F-8
<PAGE> 108
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: OTHER ASSETS
Other assets at September 24, 1994 and September 25, 1993 includes
approximately $10,528,000 and $13,274,000, respectively, in costs associated
with land near Newport, Kentucky, 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.
<TABLE>
NOTE 4: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands of dollars):
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accrued payroll and payroll taxes......................... $ 5,032 $ 6,339
Accrued interest.......................................... 4,072 4,131
Accrued environmental remediation......................... 4,563 5,766
Accrued income taxes...................................... 711 --
Other..................................................... 4,903 7,027
------- -------
$19,281 $23,263
======= =======
</TABLE>
<TABLE>
NOTE 5: LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt of the Company consists of the following (in thousands of
dollars):
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Term loans due a non-bank financial institution, interest ranging from
11.54% to 12.54%, due in varying quarterly installments through 2001,
secured by property, plant and equipment............................. $ 59,125 $ 61,125
Senior Secured Notes due various insurance companies, interest at
10.65%, due in equal quarterly installments through 1999, secured by
property, plant and equipment........................................ 32,729 37,200
11% Subordinated Convertible Debentures, due in annual installments
from October, 2000 through 2005...................................... 29,000 29,000
Capital Expenditure Loans due a non-bank financial institution,
interest ranging from 7.99% to 11.54%, due in equal quarterly
installments beginning December, 1994 through 2001, secured by
property, plant and equipment........................................ 14,626 14,626
Term loans due various states and municipalities, interest ranging from
3% to 11%, due in varying monthly or quarterly installments through
2010, secured by junior mortgages on property, plant and equipment... 11,613 16,470
Other.................................................................. 6,560 6,767
-------- --------
153,653 165,188
Less -- Current portion................................................ (15,543) (9,132)
-------- --------
$138,110 $156,056
======== ========
</TABLE>
Certain of the loan agreements contain a number of restrictive covenants
including, among other things, maintenance of minimum net worth, minimum fixed
charge coverage ratios, maximum ratios of indebtedness to total capitalization,
minimum current ratio and working capital requirements and restrictions on
transferring assets between affiliated companies. Certain term loans also
require mandatory prepayments in the event Koppel's cash flow exceeds certain
defined levels. In addition, certain of the loan agreements allow for redemption
prior to maturity, at the option of the Company, at amounts in excess of par.
F-9
<PAGE> 109
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain of the loan agreements contain covenants restricting the payment of
dividends. Under the most restrictive of these covenants, retained earnings
available for dividends is computed under a formula which is based in part on
the earnings and losses of the Company after fiscal 1988. Under this covenant,
the Company is currently prohibited from paying dividends.
The Subordinated Convertible Debentures are unsecured obligations of the
Company and are convertible into common shares of the Company at a price of $17
per share, or approximately 1,706,000 shares. Interest is payable quarterly. The
Debentures are redeemable by the Company at 110% of par.
Annual long-term debt maturities are $15,543,000 in fiscal 1995,
$18,952,000 in fiscal 1996, $18,644,000 in fiscal 1997, $21,792,000 in fiscal
1998 and $21,747,000 in fiscal 1999.
The Company has consolidated line of credit agreements with various lenders
totaling $34,915,000, including a $16,165,000 line of credit agreement
restricted for use at Koppel. The lines are secured by inventory and accounts
receivable, with interest rates ranging from 1/2% to 1 1/2% over prime.
Borrowings are due on demand and are limited under the agreements to defined
percentages of eligible inventory and receivable balances, as well as by certain
restrictive covenants. At September 24, 1994, $34,915,000 of the Company's
consolidated lines of credit were available for borrowing, of which $28,197,000
was outstanding. These credit lines expire in fiscal 1995 and 1996.
NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash, cash equivalents and short-term investments -- The carrying amount
approximates fair value because of the short maturity of those instruments.
Other investments -- Other investments, consisting of marketable equity
securities totaling $4,600,000, are reported in other assets and are carried at
market value.
Notes payable -- The carrying amount approximates fair value because of the
short maturity and because such instruments contain interest rates that vary
with the prime rate.
Long-term debt -- The fair value of the Company's long-term debt was
estimated by calculating the present value of the remaining interest and
principal payments on the debt to maturity. The present value computation uses a
discount rate equal to Treasury rates with similar terms at the end of the
reporting period plus or minus the spread between the Treasury rates and the
rate negotiated on the debt at the inception of the loan. The carrying amounts
and fair values of the Company's long-term debt at September 24, 1994 were
$153,653,000 and $154,649,000, respectively.
NOTE 7: PREFERRED STOCK
The Company's authorized stock includes 2,000,000 shares of Class A
Preferred Stock, issuable in one or more series. The rights, preferences,
privileges and restrictions of any series of Class A Preferred Stock, the number
of shares constituting any such series and the designation thereof, are subject
to determination by the Board of Directors.
Four hundred thousand shares of the Class A Preferred Stock has been
designated as Series A Junior Participating Preferred Stock, par value $10 per
share, in connection with the Shareholders Protection Rights Plan (Plan) adopted
in fiscal 1989. Pursuant to the Plan, one Preferred Stock Purchase Right (Right)
is attached to each outstanding share of common stock of the Company.
The Plan includes provisions which are intended to protect shareholders
against certain unfair and abusive takeover attempts by anyone acquiring or
tendering for 30% or more of the Company's common stock.
F-10
<PAGE> 110
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
A summary of transactions in the plans for fiscal 1994 and 1993 follows:
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Options outstanding, beginning of year................. 1,185,525 960,020
Options granted........................................ 289,050 332,550
Options expired........................................ (369,725) (58,295)
Options exercised...................................... (56,145) (48,750)
--------- ---------
Options outstanding, end of year....................... 1,048,705 1,185,525
======== ========
Options exercisable, end of year....................... 509,525 644,500
======== ========
Available for grant.................................... 488,580 674,250
======== ========
</TABLE>
Under the NS Group, Inc. Non-Qualified Stock Option and Stock Appreciation
Rights Plan of 1988 the Company may grant to key employees options to purchase
(or stock appreciation awards corresponding to) an aggregate of 500,000 shares
of the Company's common stock. Options are to be issued at no less than 50% of
market value on the date of grant, are exercisable in yearly increments as
determined by the Stock Option Committee and expire ten years from the date of
grant. At September 24, 1994, options outstanding are priced in a range from
$3.75 to $13.43 per share. Grant prices have ranged from 64% to 110% of the
market price at the date of grant. 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.
<TABLE>
A summary of transactions in the plan for fiscal 1994 and 1993 follows:
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Options outstanding beginning of year..................... 366,760 262,000
Options granted........................................... 135,085 125,760
Options expired........................................... (26,220) (21,000)
Options exercised......................................... -- --
------- -------
Options outstanding, end of year.......................... 475,625 366,760
======= =======
Options exercisable, end of year.......................... 106,700 61,200
======= =======
Available for grant....................................... 24,375 133,240
======= =======
</TABLE>
The Company has common stock warrants outstanding, issued in connection
with the financing of the Koppel acquisition. The warrants are exercisable for
approximately 772,000 shares of the Company's common stock, at a price of $8.00
per share and expire October 4, 2000.
F-11
<PAGE> 111
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-12
<PAGE> 112
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-13
<PAGE> 113
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-14
<PAGE> 114
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-15
<PAGE> 115
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<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 allocations... -- (3,370) 56,546 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated............ $303,380 $ 689 $315,327 $ 18,789 $ 11,760
======== ========== ========== ========== ==========
1993
Specialty steel products........... $325,007 $ 13,379 $271,968 $ 18,691 $ 5,798
Adhesives products................. 28,075 1,059 12,228 402 282
Corporate assets and allocations... -- (2,766) 33,046 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated $353,082 $ 11,672 $317,242 $ 19,093 $ 6,080
======== ========== ========== ========== ==========
1992
Specialty steel products........... $256,360 $ 3,351 $271,477 $ 18,296 $ 3,948
Adhesives products................. 24,882 533 10,845 415 200
Corporate assets and allocations... -- (2,483) 36,757 -- --
-------- ------------ ------------ ------------ ------------
Total consolidated............ $281,242 $ 1,401 $319,079 $ 18,711 $ 4,148
======== ========== ========== ========== ==========
</TABLE>
F-16
<PAGE> 116
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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):
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
Net sales............................................. $71,959 $66,012 $80,807 $84,602
Gross profit.......................................... 7,791 1,831 7,203 8,394
Income (loss) before cumulative effect of a change in
accounting principle................................ 20,026 (5,583 ) (1,990 ) (960 )
Net income (loss)..................................... 21,741 (5,583 ) (1,990 ) (960 )
Income (loss) per common share before cumulative
effect of a change in accounting principle.......... 1.46 (.40 ) (.14 ) (.07 )
Net income (loss) per common share.................... 1.58 (.40 ) (.14 ) (.07 )
1993
Net sales............................................. $77,779 $86,735 $95,363 $93,205
Gross profit.......................................... 7,366 10,282 12,686 12,162
Income (loss) before extraordinary item............... (3,355 ) (2,115 ) 11 (437 )
Net income (loss)..................................... (3,355 ) (2,115 ) 11 (1,532 )
Income (loss) per common share before extraordinary
item................................................ (.25 ) (.16 ) -- (.03 )
Net income (loss) per common share.................... (.25 ) (.16 ) -- (.11 )
</TABLE>
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 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
F-17
<PAGE> 117
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $ 117,555
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> 118
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND SEPTEMBER 24, 1994
(Dollars in thousands)
(Unaudited)
<CAPTION>
December 31 September 24,
1994 1994
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 1,799 $ 4,405
Short-term investments...................................... 38,567 40,071
Accounts receivable, less allowance for doubtful accounts of
$578 and $637, respectively.............................. 39,666 42,651
Inventories................................................. 41,729 32,290
Other current assets........................................ 17,103 16,793
------------ -------------
Total current assets..................................... 138,864 136,210
------------ -------------
PROPERTY, PLANT AND EQUIPMENT--AT COST........................ 265,708 262,721
Less - accumulated depreciation............................. (107,043) (102,182)
------------ -------------
158,665 160,539
------------ -------------
OTHER ASSETS.................................................. 18,377 18,578
------------ -------------
Total assets............................................. $315,906 $ 315,327
============ ============
CURRENT LIABILITIES
Notes payable............................................... $ 31,231 $ 28,872
Accounts payable............................................ 33,234 27,312
Other current liabilities................................... 17,547 19,281
Current portion of long-term debt........................... 17,368 15,543
------------ -------------
Total current liabilities................................ 99,380 91,008
------------ -------------
LONG-TERM DEBT................................................ 131,323 138,110
------------ -------------
DEFERRED TAXES................................................ 9,331 9,745
------------ -------------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000,000 shares authorized;
13,809,413 shares issued and outstanding................. 48,988 48,988
Common stock options and warrants........................... 277 262
Unrealized gain (loss) on available for sale securities..... (806) (124)
Retained earnings........................................... 27,413 27,338
------------ -------------
Total common shareholders' equity........................ 75,872 76,464
------------ -------------
Total liabilities and shareholders' equity............... $315,906 $ 315,327
============ ============
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
F-19
<PAGE> 119
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1994 AND DECEMBER 25, 1993
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
December 31, December 25,
1994 1993
------------ ------------
<S> <C> <C>
NET SALES..................................................... $93,489 $71,959
COST AND EXPENSES
Cost of products sold....................................... 81,999 64,168
Selling and administrative expenses......................... 6,932 5,980
------------ ------------
Operating income............................................ 4,558 1,811
OTHER INCOME (EXPENSE)
Gain on sale of subsidiary.................................. -- 35,292
Interest expense............................................ (5,356) (5,011)
Interest income............................................. 532 459
Other, net.................................................. 389 553
------------ ------------
Income before income taxes and cumulative effect of a change
in accounting principle.................................. 123 33,104
PROVISION FOR INCOME TAXES.................................... 48 13,078
------------ ------------
Income before cumulative effect of a change in accounting
principle................................................ 75 20,026
CUMULATIVE EFFECT, AS OF SEPTEMBER 25, 1993, OF A CHANGE IN
THE METHOD OF ACCOUNTING FOR INCOME TAXES................... -- 1,715
------------ ------------
Net income.................................................. $ 75 $21,741
============ ============
PER COMMON SHARE
Income before cumulative effect of a change in accounting
principle................................................ $.01 $1.46
Cumulative effect of a change in the method of accounting
for income taxes......................................... -- .12
------------ ------------
Net income.................................................. $.01 $1.58
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING........................... 13,809,413 13,742,596
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
F-20
<PAGE> 120
<TABLE>
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1994 AND DECEMBER 25, 1993
(Dollars in thousands)
(Unaudited)
<CAPTION>
December 31, December 25,
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 75 $ 21,741
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization............................ 5,020 4,661
Increase in deferred taxes............................... 4 1,906
Gain on sale of subsidiary............................... -- (35,292)
Decrease in accounts receivable, net..................... 2,985 1,102
Increase in inventories.................................. (9,439) (7,393)
(Increase) decrease in other current assets.............. (310) 2,332
Increase in accounts payable............................. 5,922 4,045
Increase (decrease) in accrued liabilities............... (1,734) 7,643
------------ ------------
Net cash flows from operating activities............ 2,523 745
------------ ------------
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........... (2,987) (1,242)
Increase in other assets................................. (374) (4,777)
(Increase) decrease in short-term investments............ 1,504 (50,119)
------------ ------------
Net cash flows from investing activities............ (1,857) 1,106
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable................................ 2,359 3,593
Proceeds from issuance of long-term debt................. -- 431
Repayments on long-term debt............................. (4,962) (1,733)
Increase in deferred financing costs..................... (669) (50)
Proceeds from issuance of common stock................... -- 642
------------ ------------
Net cash flows from financing activities............ (3,272) 2,883
------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... (2,606) 4,734
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 4,405 5,797
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $1,799 $ 10,531
============ ============
Cash paid during the period for:
Interest................................................. $7,218 $ 4,959
Income taxes............................................. $ 700 $ --
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
F-21
<PAGE> 121
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 periods of fiscal 1995 and 1994 are 14 and 13 week periods,
respectively.
NOTE 2: INVENTORIES
At December 31, 1994 and September 24, 1994, inventories stated at the
lower of LIFO (last-in, first-out) cost or market represent approximately 36%
and 27% of total inventories before the LIFO reserve, respectively. Inventories
consist of the following components ($000's):
<TABLE>
<CAPTION>
December 31, September 24,
1994 1994
------------ -------------
<S> <C> <C>
Raw materials.................................. $ 10,280 $ 6,699
Semi-finished and finished goods............... 33,623 27,695
------------ -------------
43,903 34,394
LIFO reserve................................... (2,174) (2,104)
------------ -------------
$ 41,729 $32,290
============ =============
</TABLE>
NOTE 3: 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 offshore 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
F-22
<PAGE> 122
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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 December 31, 1994, 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 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 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.
F-23
<PAGE> 123
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 December 31, 1994, the Company had environmental remediation reserves
of $4,734,000 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 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 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 4: LONG-TERM DEBT AGREEMENTS
Certain of the Company's loan agreements contain covenants requiring
maintenance of minimum net worth and fixed charge coverage ratios. As of
December 31, 1994, the Company was not in compliance with such covenants, but
received waivers from its lenders as well as amendments to the agreements that
the Company believes will enable it to comply with such covenants for the
foreseeable future.
NOTE 5: SUMMARIZED FINANCIAL INFORMATION
The Senior Secured Notes that the Company is proposing to offer for sale
will be guaranteed 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 December 31, 1994 and September 24, 1994 and for the fiscal
quarters ended December 31, 1994 and December 25, 1993. All significant
intercompany accounts and transactions between the Subsidiary Guarantors.
<TABLE>
<CAPTION>
December 31, September 24,
1994 1994
------------ -------------
<S> <C> <C>
Current assets................................................ $127,789 $ 125,108
Noncurrent assets............................................. 173,991 176,895
Current liabilities........................................... 97,068 88,230
Payable to parent............................................. $ 29,317 $ 31,327
Other noncurrent liabilities.................................. 96,106 102,893
------------ -------------
Total noncurrent liabilities................................ $125,423 $ 134,220
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
December 31, December 25,
1994 1993
------------ -------------
<S> <C> <C>
Net sales..................................................... $ 93,489 $ 71,959
Gross profit.................................................. 11,490 7,791
Income before cumulative effect of a change in accounting
principle................................................... 932 20,738
Net income.................................................... 932 20,738
</TABLE>
F-24
<PAGE> 124
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 3
Investment Considerations 11
Use of Proceeds 18
Summary of the Refinancing Transaction 18
Capitalization 19
Selected Consolidated Financial Data 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Business 34
Management 55
Principal Stockholders 58
Compensation Committee Interlocks and Insider
Participation 59
Certain Transactions 59
Description of the Senior Secured Notes 60
Description of Certain Indebtedness 91
Certain United States Federal Income Tax
Consequences 93
Underwriting 94
Legal Matters 95
Independent Auditors 95
Index to Consolidated Financial Statements F-1
</TABLE>
Prospectus
$125,000,000
NS GROUP, INC.
% SENIOR SECURED NOTES DUE 2003
[INSERT LOGO]
CHEMICAL SECURITIES INC.
CS FIRST BOSTON
Dated , 1995
<PAGE> 125
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...................... $43,104
National Association of Securities Dealers filing fee.................... 13,000
Trustee fees............................................................. *
Blue sky filing and counsel fees and expenses............................ 25,000
Printing and engraving expenses.......................................... *
Accountants' fees and expenses........................................... *
Legal fees and expenses.................................................. *
Rating agency fees....................................................... *
Miscellaneous............................................................ *
-------
Total.......................................................... $ *
=======
<FN>
- ---------------
* To be provided by Amendment.
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 271B.8-500 to 271B.8-589 of the Kentucky Business Corporation Act;
provided 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> 126
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 provide 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 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.
II-2
<PAGE> 127
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 schedules filed as part
of this Registration Statement are as follows:
(a) Exhibits.
See Index to Exhibits.
(b) Consolidated Financial Statement Schedules.
Report of Independent Public Accountants....................... S-1
Schedule I -- Marketable Securities--Other Investments......... S-2
Schedule V -- Property, Plant and Equipment.................... S-3
Schedule VI -- Accumulated Depreciation and Amortization of
Property, Plant and Equipment............................. S-4
Schedule VIII -- Valuation and Qualifying Accounts............. S-5
Schedule IX -- Short-Term Borrowings........................... S-6
Schedule X -- Supplementary Statement of Operations Information S-7
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,
II-3
<PAGE> 128
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrants of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant's hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance on Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 129
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 February 1, 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 February 1, 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, Vice President, Secretary and
Ronald R. Noel Chief Administrative Officer
/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> 130
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 February 1, 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 February 1, 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> 131
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 February 1, 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 February 1, 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> 132
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 February 1, 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 February 1, 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> 133
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 February 1, 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 February 1, 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> 134
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 February 1, 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 February 1, 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> 135
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 February 1, 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 February 1, 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> 136
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NS Group, Inc.:
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of NS Group, Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
October 31, 1994. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedules listed in Item
16(b) are the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
October 31, 1994
S-1
<PAGE> 137
<TABLE>
SCHEDULE I
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
MARKETABLE SECURITIES -- OTHER INVESTMENTS
(Dollars in thousands)
<CAPTION>
Amount at
Which Shown
Market in Balance
Type of Investment Cost Value Sheet
- ----------------------------------------------------------- ------- ------- -----------
<S> <C> <C> <C>
AT SEPTEMBER 25, 1993
Fixed Rate Obligations:
Corporate notes.......................................... $ 527 $ 503 $ 503
Variable Rate Preferred Stocks............................. 1,000 1,000 1,000
U.S. Treasury Securities................................... 1,954 1,954 1,954
------- ------- -----------
Total short-term investments at September 25, 1993.... $ 3,481 $ 3,457 $ 3,457
======= ======= ============
AT SEPTEMBER 24, 1994
Fixed Rate Obligations:
Corporate notes.......................................... $ 527 $ 500 $ 500
Variable Rate Preferred Stocks:
Utilities
Duke Power Company.................................... 1,500 1,500 1,500
Houston Industries, Inc............................... 1,500 1,500 1,500
Kansas City Power & Light Company..................... 1,500 1,500 1,500
Virginia Electric & Power Company..................... 1,500 1,500 1,500
Other Utilities....................................... 6,000 6,000 6,000
Financial
Northern Trust Corp................................... 1,500 1,500 1,500
Konica Capital........................................ 1,000 1,000 1,000
Transamerica Corporation.............................. 1,500 1,500 1,500
Other Financial....................................... 6,000 6,000 6,000
Industrial............................................... 3,000 3,000 3,000
Other Variable Rate Investments
Provident Institutional Funds
Tempcash Fund......................................... 11,995 11,995 11,995
Other.................................................... 2,576 2,576 2,576
------- ------- -----------
Total short-term investments at
September 24, 1994.................................. $40,098 $40,071 $40,071
======= ======= ============
</TABLE>
S-2
<PAGE> 138
<TABLE>
SCHEDULE V
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Year at Cost Retirements Other(a) of Year
- ----------------------------------- ---------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Land and land improvements....... $ 8,320 $ 50 $ (122) $ -- $ 8,248
Buildings........................ 17,788 1,251 (23) -- 19,016
Machinery and equipment.......... 226,498 4,900 (1,863) -- 229,535
Construction in progress......... 6,046 (2,053)(b) -- -- 3,993
---------- --------- ----------- --------- --------
$258,652 $ 4,148 $(2,008) $ -- $260,792
========= ======== =========== ========= ========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Land and land improvements....... $ 8,248 $ 186 $ (12) $ -- $ 8,422
Buildings........................ 19,016 121 -- -- 19,137
Machinery and equipment.......... 229,535 6,404 (1,767) -- 234,172
Construction in progress......... 3,993 (631)(b) -- -- 3,362
---------- --------- ----------- --------- --------
$260,792 $ 6,080 $(1,779) $ -- $265,093
========= ======== =========== ========= ========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Land and land improvements....... $ 8,422 $ 1,210 $ -- $ (682) $ 8,950
Buildings........................ 19,137 756 (283) (719) 18,891
Machinery and equipment.......... 234,172 9,389 (3,993) (8,185) 231,383
Construction in progress......... 3,362 405 (b) -- (270) 3,497
---------- --------- ----------- --------- --------
$265,093 $ 11,760 $(4,276) $(9,856) $262,721
========= ======== =========== ========= ========
<FN>
- ---------------
(a) Reductions due to the sale of subsidiary.
(b) Net change in construction in progress for the year.
</TABLE>
S-3
<PAGE> 139
<TABLE>
SCHEDULE VI
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Classification of Year Expenses Retirements Other(a) of Year
- ----------------------------------- ---------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Land and land improvements....... $ 602 $ 189 $ -- $ -- $ 791
Buildings........................ 2,213 444 (1) -- 2,656
Machinery and equipment.......... 53,772 17,485 (380) -- 70,877
---------- ---------- ----------- -------- --------
$ 56,587 $ 18,118 $ (381) $ -- $ 74,324
========= ========== =========== ======== ========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Land and land improvements....... $ 791 $ 197 $ -- $ -- $ 988
Buildings........................ 2,656 1,015 -- -- 3,671
Machinery and equipment.......... 70,877 16,928 (837) -- 86,968
---------- ---------- ----------- -------- --------
$ 74,324 $ 18,140 $ (837) $ -- $ 91,627
========= ========== =========== ======== ========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Land and land improvements....... $ 988 $ 192 $ -- $ (22) $ 1,158
Buildings........................ 3,671 434 (217) (134) 3,754
Machinery and equipment.......... 86,968 17,409 (3,659) (3,448) 97,270
---------- ---------- ----------- -------- --------
$ 91,627 $ 18,035 $(3,876) $(3,604) $102,182
========= ========== =========== ======== ========
<FN>
- ---------------
(a) Reductions due to the sale of subsidiary.
</TABLE>
S-4
<PAGE> 140
<TABLE>
SCHEDULE VIII
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<CAPTION>
Reserves Deducted from
Assets in Balance Sheets
----------------------------
Allowance
for Allowance
Doubtful for Cash
Accounts(1) Discounts(1)
----------- ------------
<S> <C> <C>
BALANCE, September 28, 1991................................... $ 1,138 $ 97
Additions:
Charged to costs and expenses............................ 632 1,903
Deductions:
Net charges of nature for which
reserves were created.................................. (463) (1,792)
----------- ------------
BALANCE, September 26, 1992................................... $ 1,307 $ 208
Additions:
Charged to costs and expenses............................ 572 2,338
Deductions:
Net charges of nature for which
reserves were created.................................. (1,060) (2,293)
----------- ------------
BALANCE, September 25, 1993................................... $ 819 $ 253
Additions:
Charged to costs and expenses............................ 343 2,298
Deductions:
Sale of subsidiary....................................... (305) --
Net charges of nature for which
reserves were created.................................. (220) (2,245)
----------- ------------
BALANCE, September 24, 1994................................... $ 637 $ 306
=========== ============
<FN>
- ---------------
(1) Deducted from accounts receivable
</TABLE>
S-5
<PAGE> 141
<TABLE>
SCHEDULE IX
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
SHORT-TERM BORROWINGS
(Dollars in thousands)
<CAPTION>
MAXIMUM
AMOUNT AVERAGE WEIGHTED
WEIGHTED OUTSTANDING AMOUNT AVERAGE
BALANCE AVERAGE AT MONTH-END OUTSTANDING INTEREST
CATEGORY OF AGGREGATE AT END INTEREST DURING DURING RATE DURING
SHORT-TERM BORROWINGS(1) OF YEAR RATE THE YEAR THE YEAR(2) THE YEAR(2)
- ----------------------------- ------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
SEPTEMBER 26, 1992:
Lines of credit......... $20,279 7.29% $ 31,744 $24,127 7.62%
Other notes............. 402 5.58 608 297 5.58
------- ------------ -----------
$20,681 7.26 $ 32,352 $24,424 7.59
======= ============ ===========
FOR THE YEAR ENDED
SEPTEMBER 25, 1993:
Lines of credit......... $26,229 7.30% $ 29,729 $25,333 7.30%
Other notes............. 738 5.58 1,137 533 5.58
------- ------------ -----------
$26,967 7.27 $ 30,866 $25,866 7.27
======= ============ ===========
FOR THE YEAR ENDED
SEPTEMBER 24, 1994:
Lines of credit......... $28,197 9.05% $ 33,353 $29,011 7.89%
Other notes............. 675 5.29 855 490 5.58
------- ------------ -----------
$28,872 8.96 $ 34,208 $29,501 7.86
======= ============ ===========
<FN>
- ---------------
(1) Short-term borrowings were under various bank line of credit agreements and
short-term demand notes which are used to finance various insurance
contracts.
(2) Computed on a monthly weighted average basis.
</TABLE>
S-6
<PAGE> 142
<TABLE>
SCHEDULE X
NS GROUP, INC. AND SUBSIDIARIES
------------------------------
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
(Dollars in thousands)
<CAPTION>
CHARGED TO
COSTS AND
ITEM EXPENSES
- ------------------------------------------------------ ----------
<S> <C>
For the Year Ended September 26, 1992:
Maintenance and repairs............................. $ 23,904
==========
For the Year Ended September 25, 1993:
Maintenance and repairs............................. $ 21,703
==========
For the Year Ended September 24, 1994:
Maintenance and repairs............................. $ 21,249
==========
</TABLE>
S-7
<PAGE> 143
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
1.1** Form of Underwriting Agreement between NS Group, Inc. (the "Company")
and Chemical Securities Inc. and CS First Boston Corporation
3.1** Amended and Restated Articles of Incorporation of the Company, 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 Mortgage and Collateral Assignment of Leases from Newport to
the Trustee
4.3* Form of Mortgage and Collateral Assignment of Leases from Koppel to the
Trustee (Pennsylvania)
4.4* Form of Mortgage and Collateral Assignment of Leases from Koppel to the
Trustee (Texas)
4.5* Form of Mortgage and Collateral Assignment of Leases from Erlanger to
the Trustee
4.6* Form of ICN Mortgage and Collateral Assignment of Leases from Newport
to the Company
4.7* Form of ICN Mortgage and Collateral Assignment of Leases from Koppel to
the Company (Pennsylvania)
4.8* Form of ICN Mortgage and Collateral Assignment of Leases from Koppel to
the Company (Texas)
4.9* Form of ICN Mortgage and Collateral Assignment of Leases from Erlanger
to the Company
4.10* Form of Security Agreement between Newport and the Trustee
4.11* Form of Security Agreement between Koppel and the Trustee
4.12* Form of Security Agreement between Erlanger and the Trustee
4.13* Form of ICN Security Agreement between Newport and the Company
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
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 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 Subordination Agreement between the Trustee 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 Credit Facility among Newport, Koppel, Imperial, Bank of New
York Commercial Corporation and PNC Bank Ohio, N.A.
4.22* Form of Guarantee and Security Agreement to be executed by the Company,
Erlanger, Northern Kentucky Air, Inc. and Northern Kentucky Management,
Inc.
5.1 Opinion of Bryan Cave
10.1 Company's Amended Employee Incentive Stock Option Plan, filed as
Exhibit 10(a) to Company's Form 10-K for the fiscal year ended
September 30, 1989, File No. 1-9838, and incorporated herein by this
reference
10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to
Company's Registration Statement on Form S-18, File No. 2-90643, and
incorporated herein by this reference
10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights Plan
of 1988, filed as Exhibit 1 to Company's Proxy Statement dated January
13, 1989, File No. 1-9838, and incorporated herein by this reference
10.4 Rights Agreement dated as of November 17, 1988 between Company and
Pittsburgh National Bank, filed as Exhibit 1 to Company's Form 8-K
dated November 17, 1988, File No. 1-9838, and incorporated herein by
this reference, and Appointment and Amendment Agreement dated July 29,
1994 between Registrant and Registrar and Transfer Company, filed as
Exhibit 10(d) to Company's Form 10-Q dated May 29, 1994, File No.
1-9838, and incorporated herein by reference
10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to
Company's Proxy Statement dated December 22, 1992, File No. 1-9838, and
incorporated herein by this reference
10.6 Transfer Agreement, dated September 29, 1993, filed on September 28,
1993 as Exhibit 10.2 to the Amendment No. 2 to the Registration
Statement on Form S-1 of Kentucky Electric Steel, Inc., File No.
33-67140, and incorporated herein by this reference
10.7 Tax Agreement, dated October 6, 1993, by and among NS Group, Inc.,
Kentucky Electric Steel, Inc. and NSub I, Inc. (formerly Kentucky
Electric Steel Corporation), filed as Exhibit 10(h) to Company's Form
10-K for the fiscal year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.8 Registration Rights Agreement dated October 6, 1993 among Kentucky
Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly
Kentucky Electric Steel Corporation), filed as Exhibit 10(i) to
Company's Form 10-K for fiscal year ended September 25, 1993, File No.
1-9383, and incorporated herein by this reference
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
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------------------------------------------------------------------- ----------
<S> <C> <C>
10.10 Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to
Company's Form 8-K dated October 18, 1990, File No. 1-9838, and
incorporated herein by reference; and First Amendment to Warrant dated
September 26, 1992, filed as Exhibit 4(c) to Company's Form 10-K for
the fiscal year ended September 26, 1992, File No. 1-9838, and
incorporated herein by this reference
12.1** Computation of Earnings to Fixed Charges
21.1** Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Bryan Cave is included in the opinion of Bryan Cave, filed
as Exhibit 5.1
24.1 Powers of Attorney (reference is made to the signature page of this
Registration Statement)
25.1 Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1
27** Financial Data Schedule
<FN>
- ---------------
* To be filed by Amendment
**Previously Filed
</TABLE>
<PAGE> 1
EXHIBIT 5.1
BRYAN CAVE
ONE METROPOLITAN SQUARE
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
FACSIMILIE: (314)259-2020
February 1, 1995
Board of Directors
NS Group, Inc.
Ninth & Lowell Streets
Newport, Kentucky 41072
Gentlemen:
We are acting as special counsel for NS Group, Inc., a
Kentucky corporation (the "Company"), in connection with various legal matters
relating to the filing of a Registration Statement on Form S-1, No. 33-56637
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Act"), covering the offering of $125 million aggregate principal amount
of Senior Secured Notes due 2003 (the "Senior Secured Notes") proposed to be
issued by the Company under an Indenture (the "Indenture") between the Company
and Huntington National Bank, as trustee.
In connection therewith, we have examined and relied as to
matters of fact upon such certificates of public officials, such statements and
certificates of officers of the Company, and originals or copies certified to
our satisfaction of the Amended and Restated Articles of Incorporation and
By-laws of the Company, proceedings of the Board of Directors of the Company
and such other corporate records, documents, certificates and instruments as we
have deemed necessary or appropriate in order to enable us to render the
opinion expressed below.
In rendering this opinion, we have assumed the genuineness of
all signatures on all documents examined by us, the authenticity of all
documents submitted to us as originals and the conformity to authentic
originals of all documents submitted to us as certified or photostatted copies.
Based on the foregoing and in reliance thereon, we are of the
opinion that the Senior Secured Notes (i) have been duly authorized and, upon
execution, authentication and delivery thereof in accordance with the terms and
provisions of the Indenture, will be legally issued, fully paid and
non-assessable and (ii) will constitute binding obligations of the Company
entitled to the benefits provided by the Indenture, except as may be limited by
applicable bankruptcy, insolvency, reorganization, receivership,
rehabilitation, moratorium, fraudulent transfer, and other similar laws
relating to or affecting the rights and
<PAGE> 2
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 or at law.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus filed as a part thereof. We also consent to your
filing copies of this opinion as an exhibit to the Registration Statement with
agencies of such states as you deem necessary in the course of complying with
the laws of such states regarding the offering and sale of the Senior Secured
Notes. In giving this consent, we do not hereby admit that we are in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Securities and Exchange Commission relating
thereto.
Very truly yours,
BRYAN CAVE
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
January 31, 1995
<PAGE> 1
EXHIBIT 25
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2)
------------------------------------
THE HUNTINGTON NATIONAL BANK
(Exact name of trustee as specified in its charter)
31-0966785
(Jurisdiction of incorporation or organization (I.R.S. Employer
if not a U.S. national bank) Identification No.)
41 South High Street
Columbus, Ohio 43215
(Address of principal executive offices) (Zip Code)
Ralph K. Frasier
General Counsel
The Huntington National Bank
41 S. High Street - HC3412
Columbus, Ohio 43215
Tel: (614) 480-4647
(Name, address and telephone number of agent for service)
------------------------------------
NS GROUP, INC.
(Exact name of obligor as specified in its charter)
Kentucky 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Ninth and Lowell Streets
Newport, Kentucky 41072
(Address of principal executive offices) (Zip Code)
------------------------------------
N.S. Group, Inc.
____% Senior Secured Notes Due 2003
(Title of the indenture securities)
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GENERAL
Pursuant to General Instruction B of the Form T-1, the applicant is providing
response to only Items 1, 2 and 16 of Form T-1 since the obligor is not in
default.
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Office of the Comptroller of Currency, Central District, One
Financial Plaza, 440 South LaSalle, Suite 2700, Chicago,
Illinois 60605.
Board of Governors of the Federal Reserve System, Washington,
D.C., 20551 and Federal Reserve Bank of Cleveland, District No.
4, 1455 East Sixth Street, Cleveland, Ohio 44114.
Federal Deposit Insurance Corporation, Chicago Region, 30 South
Wacker Drive, Chicago, Illinois 60505
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the obligor
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
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Item 16.List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect (see Item 16, Exhibit 1 to Form T-1 filed in connection with
Registration Statement No. 33-80080, which is incorporated by
reference).
2. A copy of the Certificates of Authority of the Trustee to Commence
Business (see Item 16, Exhibit 2 to Form T-1 filed in connection with
Registration Statement NO. 33-80080, which is incorporated by
reference).
3. A copy of the authorization of the Trustee to exercise corporate
trust powers (see Item 16, Exhibit 3 to Form T-2 filed in connection
with Registration Statement No. 33-80080, which is incorporated by
reference).
4. A copy of the existing Bylaws of the Trustee (see Item 16, Exhibit
4 to Form T-1 filed in connection with Registration Statement No.
33-80080, which is incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(See Item 16, Exhibit 6 to Form T-1 filed in connection with
Registration Statement No. 33-80080, which is incorporated by
reference).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Huntington National Bank, a national association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Columbus and State of Ohio, on the 10th day of
January, 1995.
THE HUNTINGTON NATIONAL BANK
By /s/ Richard H. Tapke, Jr.
Richard H. Tapke, Jr.
Executive Vice President
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EXHIBIT 7 TO FORM T-1
REPORT OF CONDITION
CONSOLIDATING DOMESTIC AND
FOREIGN SUBSIDIARIES OF
THE HUNTINGTON NATIONAL BANK
of Columbus in the state of Ohio, at the close of business on September 30,
1994, published in response to call made by Comptroller of the Currency, under
title 12, United States Code, Section 161.
Charter Number 7745
Comptroller of the Currency Central District
Statement of Resources and Liabilities
<TABLE>
<CAPTION>
THOUSANDS
OF DOLLARS
ASSETS
<S> <C>
Cash and balances due from
depository institutions:
Noninterest-bearing balance
and currency and coin . . . . . . . . . . . . . . . . . $ 605,210
Interest-bearing balances . . . . . . . . . . . . . . . . 250
Securities:
Held-to-maturity securities . . . . . . . . . . . . . . . 126,592
Available-for-sale securities . . . . . . . . . . . . . . 1,399,177
Federal funds sold and securities purchased under
agreements to resell in domestic offices of the bank
and of its Edge and Agreement subsidiaries, and in IBFs:
Federal funds sold . . . . . . . . . . . . . . . . . . . . 498,610
Securities purchased under agreements to resell . . . . . 196,710
Loans and lease financing receivables:
Loans and leases,
net of unearned income . . . . . . . . . . . 8,128,682
LESS: Allowance for
loan and lease losses . . . . . . . . . . . 154,778
Loans and leases, net of unearned
income, allowance, and reserve . . . . . . . . . . . . . 7,973,904
Assets held in trading accounts . . . . . . . . . . . . . . . . 5,423
Premises and fixed assets
(including capitalized leases) . . . . . . . . . . . . . . 187,240
Other real estate owned . . . . . . . . . . . . . . . . . . . . 48,800
Customers' liability to this bank on
acceptances outstanding . . . . . . . . . . . . . . . . . . . 65,130
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . 49,133
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 277,081
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TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $11,433,260
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</TABLE>
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<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits
In domestic offices . . . . . . . . . . . . . . . . . . . $ 6,781,764
Noninterest-bearing . . . . . . . . . . . . . . 1,444,148
Interest-bearing . . . . . . . . . . . . . . . . 5,337,616
In foreign offices, Edge and Agreement
subsidiaries and IBFs . . . . . . . . . . . . . . . . . . . . 525,640
Interest-bearing . . . . . . . . . . . . . . . . . . 525,640
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of the
bank and of its Edge and Agreement subsidiaries,
and in IBFs:
Federal funds purchased . . . . . . . . . . . . . . . . . . . 363,585
Securities sold under agreements
to repurchase . . . . . . . . . . . . . . . . . . . . . . 536,642
Other borrowed money:
With original maturity of one year or less . . . . . . . . . 1,323,008
With original maturity of more than one year . . . . . . . . 574,531
Mortgage indebtedness and obligations
under capitalized leases . . . . . . . . . . . . . . . . . . 2,169
Bank's liability on acceptance
executed and outstanding . . . . . . . . . . . . . . . . . . 65,130
Subordinated notes and debentures . . . . . . . . . . . . . . . 249,145
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 147,641
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TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . $10,569,255
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EQUITY CAPITAL
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,571
Undivided profits and capital reserves . . . . . . . . . . . . 682,858
Net unrealized holding gains (losses)
on available-for-sale securities . . . . . . . . . . . . . . (14,424)
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TOTAL EQUITY CAPITAL . . . . . . . . . . . . . . . . . . . 864,005
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TOTAL LIABILITIES, LIMITED-LIFE
PREFERRED STOCK AND
EQUITY CAPITAL . . . . . . . . . . . . . . . . . . . . . $11,433,260
===========
</TABLE>
I, Gregg A. Christenson, Senior Vice President of the above-named bank, do
hereby declare that this Report of Condition is true and correct to the best of
my knowledge and belief.
Gregg A. Christenson
October 27, 1994
We, the undersigned directors, attest to the correctness of this statement of
resources and liabilities. We declare that it has been examined by us, and to
the best of our knowledge and belief has been prepared in conformance with the
instructions and is true and correct.
W. Lee Hoskins Directors
Peter H. Edwards
Rodney Wasserstrom
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