-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SeviCTZ6cF26Il5f3C9NhqaHIpH1aUGyOfaDUwIWZJctxxg872EH16cOqEVWUXV0 SLcl061Aw69aTmzdByU1JA== 0000745026-98-000037.txt : 19981221 0000745026-98-000037.hdr.sgml : 19981221 ACCESSION NUMBER: 0000745026-98-000037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NS GROUP INC CENTRAL INDEX KEY: 0000745026 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 610985936 STATE OF INCORPORATION: KY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09838 FILM NUMBER: 98772007 BUSINESS ADDRESS: STREET 1: NINTH & LOWELL STS CITY: NEWPORT STATE: KY ZIP: 41072 BUSINESS PHONE: 6062926809 MAIL ADDRESS: STREET 1: PO BOX 1670 CITY: NEWPORT STATE: KY ZIP: 41072 FORMER COMPANY: FORMER CONFORMED NAME: NEWPORT STEEL CORP/KY DATE OF NAME CHANGE: 19870514 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1998 COMMISSION FILE NUMBER 1-9838 NS GROUP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0985936 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) Ninth and Lowell Streets, Newport, Kentucky 41072 (Address of principal executive offices) Registrant's telephone number, including area code (606) 292-6809 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, no par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Based on the closing sales price of November 30, 1998, as reported in The Wall Street Journal, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $97.7 million. The number of shares outstanding of the registrant's Common Stock, no par value, was 22,632,570 at November 30, 1998. Documents Incorporated by Reference Parts I, II and III incorporate certain information by reference from the Annual Report to Shareholders for the fiscal year ended September 26, 1998 ("1998 Annual Report to Shareholders"). Part III also incorporates certain information by reference from the Company's Proxy Statement dated December 21, 1998 for the Annual Meeting of Shareholders on February 11, 1999. Table of Contents PART I Page Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6. Selected Consolidated Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12 Item 8. Financial Statements and Supplementary Data 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 PART I ITEM 1. BUSINESS General The Company was incorporated in Kentucky in 1980 as Newport Steel Corporation. The Company changed its name to NS Group, Inc. in 1987. As used herein, the terms "Company" and "NS Group" refer to NS Group, Inc. and its subsidiaries, unless otherwise required by the context. NS Group conducts business in two industry segments, the specialty steel segment and the adhesives segment. Incorporated herein by reference from the 1998 Annual Report to Shareholders is the segment data included in Management's Discussion and Analysis of Financial Condition and Results of Operations in "Results of Operations" and Note 13 to the Consolidated Financial Statements, which contains additional information pertaining to industry segment data. Specialty Steel Segment The Company is a producer of specialty steel products serving the energy industry. These products are produced at its two mini-mills, Newport Steel Corporation (Newport) and Koppel Steel Corporation (Koppel), and include welded and seamless tubular goods, primarily used in oil and natural gas drilling and production operations, referred to as oil country tubular goods (OCTG); and line pipe, used in the transmission of oil, natural gas and other fluids. Both Newport and Koppel are certified by the American Petroleum Institute (API) for production of these products. The Company also produces special bar quality products, primarily used in the manufacture of heavy industrial equipment; and hot rolled coils, which are sold to service centers and other manufacturers for further processing. The term mini-mill connotes a smaller, relatively low-cost mill that typically uses steel scrap as its basic raw material and offers a relatively limited range of products. Manufacturing Facilities and Processes - Specialty Steel Segment Newport Facilities The Company manufactures welded OCTG and line pipe products and hot rolled coils at its facilities located near Newport, Kentucky. The production process for Newport's welded tubular products includes three separate operations: melting, rolling and pipe-making. Steel scrap is melted into molten steel utilizing electric arc furnaces. Molten steel, reaching 3,000 degrees Fahrenheit, is tapped from the furnaces into ladles. The ladles are then moved to an auxiliary stir station where an argon lance stir process improves steel quality through consistent metal deoxidation and desulfurization. Steel refining continues at the ladle metallurgical station (LMS). The LMS, which serves a dual role, allows for the precise control of temperature and chemistry and enables continuous production sequencing of the molten steel to the continuous slab caster, thereby optimizing melt shop productivity. Once strict metallurgical standards have been met, the molten steel is "cast" into slabs that range in size from 7 to 10 inches in thickness, 28 to 55 inches in width and 15 to 34 feet in length. Slabs are cut to length and lifted onto specially designed rail cars for transportation to the adjacent reheat furnace. At Newport's hot strip rolling mill, slabs are processed through the walking beam slab reheat furnace where they are evenly heated to temperatures 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 a maximum of 50 inches in width. Coils are either slit and formed into welded tubular products at one of the two pipe-making facilities or are sold as hot rolled coils. Newport's welded tubular products range in size from 4.5 to 13.375 inches in outside diameter and are available in both carbon and alloy grades. Newport is currently installing a new AC electric arc furnace that will replace the three furnaces it is currently utilizing. The project will cost approximately $25 million and is estimated to be completed in the second quarter of fiscal 1999. For fiscal 1998, the Newport facilities' rated capacities and capacity utilization were as follows: Rated Capacity Capacity (in tons) Utilization Melt shop 700,000 47% Hot strip rolling mill 750,000 49% Welded pipe mills 580,000 54% Koppel Facilities The Company manufactures seamless OCTG, line pipe products and SBQ products at its facilities located in Koppel and Ambridge, Pennsylvania and Baytown, Texas. The operations consist of a melting and casting facility and bar mill located in Koppel, a seamless tubemaking facility located approximately 20 miles away in Ambridge, and finishing facilities located in Baytown, Texas. The melting and casting facilities at Koppel consist of an AC electric arc furnace, a ladle refining station and a four-strand continuous bloom/billet caster. Select grades of steel scrap are melted utilizing the furnace. Once the molten steel reaches temperatures of approximately 3,000 degrees Fahrenheit, it is tapped from the 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, and it maintains the molten steel at proper temperatures for the caster. Once the chemistries are analyzed and conform to metallurgical standards, the ladle is carried by crane to the continuous caster. The continuous 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 as "as cast" (semi-finished) product. Koppel's tubemaking facility includes a 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 mandrell mill or transval mill. Seamless tubular products are produced in both carbon and alloy grades in sizes ranging from 1.875 to 8.5 inches in outside diameter. At Koppel's bar mill, blooms are reheated in a rotary hearth furnace to temperatures over 2,200 degrees Fahrenheit. Blooms, upon exiting the furnace, pass through a series of rolls, where they are reshaped into round bars. SBQ products are available in both carbon and alloy grades in sizes measuring 2.875 to 6 inches in diameter. For fiscal 1998, the Koppel facilities' rated capacities and capacity utilization were as follows: Rated Capacity Capacity (in tons) Utilization Melt shop 450,000 78% Seamless tube mill 250,000 60% Bar mill 200,000 86% Finishing Facilities The Company processes and finishes its welded and seamless tubular products at facilities located at the Port of Catoosa, near Tulsa, Oklahoma (Erlanger Tubular Corporation, or Erlanger); at Baytown, Texas, located near Houston, Texas (Baytown); and at the Koppel facilities located in Pennsylvania. The finishing processes include upsetting, which is a forging process that thickens tube ends; heat treating, which is a furnace operation designed to strengthen the steel; straightening; non-destructive testing; coating for rust prevention; and threading. Products - Specialty Steel Segment OCTG Products The Company's welded OCTG products, which are produced by Newport, are used primarily as casing in oil and natural gas wells during drilling operations. 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. 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 in both carbon and alloy grades. The Company's seamless OCTG products, which are produced by Koppel, are used as drill pipe, casing and production tubing. Drill pipe is used and may be reused to drill several wells. Production tubing is placed within the well 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 carbon and alloy grades. Compared to similar welded products, seamless production tubing and casing are better suited for use in hostile drilling environments such as deeper wells or off-shore drilling 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 majority of the Company's seamless OCTG product sales are production tubing in sizes ranging from 1.9 inches to 5 inches in outside diameter. Demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current prices of oil and natural gas and expectations of future prices. In addition, shipments by domestic producers of OCTG products are influenced by the levels of inventory held by producers, distributors and end users as well as the level of foreign imports of OCTG products. The average number of oil and natural gas drilling rigs in operation in the United States was 905, 906 and 759 in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, the average quarterly rig count ranged from a high of 997 in the first fiscal quarter to a low of 794 in the fourth fiscal quarter. Line Pipe Products The Company's line pipe products, which are produced by both Newport and Koppel, are used primarily 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. Line pipe products are coated and shipped as a plain end product and welded together on site. The majority of the Company's line pipe sales are welded products. The demand for line pipe is only partially dependent on oil and gas drilling activities. Line pipe demand is also dependent on factors such as the level of pipeline construction activity, line pipe replacement requirements, new residential construction and gas utility purchasing programs. Special Bar Quality Products The Company manufactures a specialized market niche of SBQ products at Koppel in sizes ranging from 2.875 to 6.0 inches in diameter. The Company produces its SBQ products from continuous cast blooms that enables substantial size reduction in the bloom during processing and provides greater strength-to-weight ratios. These 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. Koppel's SBQ products are ISO 9002 certified. The demand for the Company's SBQ products is cyclical in nature and is sensitive to general economic conditions. Hot Rolled Coils The Company produces commercial quality grade hot rolled coils at Newport, from 28 to 50 inches in width, between 0.125 and 0.500 inches in gauge, and in 15 ton coil weights. These products are sold to service centers and to others for use in high-strength applications. The demand for these products is cyclical in nature and is sensitive to general economic conditions. Other Products The Company's OCTG products are inspected and tested to ensure that they meet or exceed API specifications. Products that do not meet specification are classified as less than prime products and are sold at substantially reduced prices. Markets and Distribution - Specialty Steel Segment The Company sells its specialty steel products to its customers through an in-house sales force. The primary end markets for the Company's seamless tubular products have been the southwest United States and certain foreign markets, including offshore applications. 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. 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 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. The Company ships substantially all of its seamless and welded OCTG products destined for the southwest region by barge. Customers - Specialty Steel Segment 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. Line pipe products are also used by gas utility and transmission companies. The majority of the Company's OCTG products are sold to domestic distributors. Line pipe products are sold to both domestic distributors and directly to end users. The Company sells its SBQ products to service centers, cold finishers, forgers and original equipment manufacturers. Hot rolled coils are sold primarily to service centers and other manufacturers for further processing. The Company has long-standing relationships with many of its larger customers; however, the Company believes that it is not dependent on any customer and that it could, over time, replace lost sales attributable to any one customer. In fiscal 1998, no one customer accounted for more than 10% of total net sales. Competition - Specialty Steel Segment The markets for the Company's specialty steel products are highly competitive and cyclical. The Company's principal competitors in its primary markets include domestic and foreign integrated producers, mini-mills and welded tubular product processing companies, many of which have substantially greater assets and larger sales organizations than the Company. The Company believes that the principal competitive factors affecting its business are price, quality and customer service. 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. 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 coils, these tubular manufacturers may purchase hot rolled coils at a lower or higher cost than the Company's cost to manufacture hot rolled coils. Increases in imports of hot rolled coils can impact the market price for hot rolled coils. During fiscal 1998, increases in imports of hot rolled coils contributed significantly to lower market prices for hot rolled coils in the U.S compared to fiscal 1997. In the small diameter seamless OCTG market in which Koppel competes, its principal competitors include the USS/Kobe Steel Company and a number of foreign producers. With respect to its SBQ products, Koppel competes with a number of steel manufacturers, including USS/Kobe Steel Company, CSC Industries, Inc., Republic Engineered Steels, Inc., Inland Steel Industries, Inc., Qualitech, Inc., Bar Technologies, Inc., MacSteel Division of Quanex Corporation, North Star Steel Company, Inc. and The Timken Company. Newport's principal domestic competitors in the welded tubular market are Lone Star Steel Company, LTV Corporation, IPSCO Steel, Inc. and Maverick Tube Corporation. Since 1995, the U.S. government has been imposing duties on the imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. The duties are subject to annual reviews by the U.S. Department of Commerce through 2000. The Company believes the imposition of the duties have had a positive effect on its shipments and pricing of certain of its seamless tubular products; however, it cannot predict the U.S. government's future actions regarding import duties or other trade restrictions on imports of OCTG products. Raw Materials and Supplies - Specialty Steel Segment 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 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. 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. The Company's steel manufacturing facilities consume large amounts of electricity. The Company currently purchases its electricity from utilities near its steel-making facilities pursuant to separate contracts entered into by Koppel and Newport. Koppel's contract expired in 1996 and, since such time, Koppel has been operating under monthly extensions of the prior contract. In connection with the deregulation of the purchase of electricity in Pennsylvania effective January 1999, Koppel is currently seeking proposals from multiple suppliers for its electricity needs for the future. Newport's contract expires in 2001. The contracts contain provisions that provide for lower priced demand charges during off-peak hours and known maximums in higher cost firm demand power. Also, the Company receives discounted demand rates in return for the utilities' right to periodically curtail service during periods of peak demand. These curtailments are generally limited to a few hours and historically have had a negligible impact on the Company's operations. The Company also consumes smaller quantities of additives, alloys and flux which are purchased from a number of suppliers. Adhesives Segment The Company, through its wholly-owned subsidiary, Imperial Adhesives, Inc. (Imperial), is a custom manufacturer of water-borne, solvent borne and hot melt adhesives and footwear finishes. These products are manufactured at plants located in Cincinnati, Ohio; Nashville, Tennessee and Lynchburg, Virginia. Manufacturing Process - Adhesives Segment Imperial's adhesives products are manufactured by combining and mixing predetermined quantities of raw materials. The raw materials are measured according to specific formulas and mixed in numerous specially designed industrial mixers. Raw materials are available from multiple sources and consist primarily of petrochemical-based materials. Pricing of raw materials generally follows trends in the petrochemical markets. The physical properties of finished formulas are measured and monitored by a statistical process control system. Imperial works closely with its customers to develop adhesive applications designed to meet their specific product requirements. Products and Markets - Adhesives Segment Imperial maintains approximately 950 active formulas for the manufacture of water-borne, solvent-borne and hot-melt adhesives products and approximately 500 active formulas for the manufacture of footwear finishes. Its multiple product lines are used primarily in product assembly applications within such industries as footwear, foam bonding, marine and recreational vehicles, consumer packaging, construction, furniture, and transportation. In fiscal 1998, approximately 18% of Imperial's sales were to the footwear industry. The Company's industrial adhesives products are marketed throughout the United States and Caribbean basin through an in-house sales force as well as a number of independent sales representatives. Products are distributed from Imperial's manufacturing sites and a number of public warehouses across the United States and in Puerto Rico. Competition in the industrial adhesives industry includes several major producers, as well as numerous small and mid-sized companies comparable to Imperial. Imperial competes on the basis of price, product performance and customer service and believes that its diversity and ability to develop applications to meet customers' specific needs allows it to compete effectively with all adhesives producers in its markets. Environmental Matters 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 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 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 steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. In August 1998, Newport received separate Notices of Violation (NOV) from the Kentucky Division of Waste Management and the Kentucky Division of Water relating to a release of oil into the Licking River and certain related actions taken by Newport in connection therewith. Newport understands that there is a federal criminal investigation underway relating to this matter. Based upon the information available to date, the Company is unable to determine the extent of civil penalties which may be assessed, or whether criminal charges will be filed, in connection with this incident. In November 1996, Koppel received an NOV from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. The conditions which contributed to the alleged violations were corrected and Koppel has demonstrated compliance with air emission regulations. At this time, the Company is unable to determine the extent of civil penalties which the EPA may assess. In March 1995, Koppel and the EPA signed a Consent Order 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. In accordance with the Consent Order, investigation, monitoring, testing and analysis of the potential releases has been completed and a final report has been forwarded to the EPA; however, additional remediation may be required. 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. To date the Company has been fully indemnified against all matters pertaining to the Consent Order and the Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the Consent Order, including all associated costs, claims and liabilities. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company has entered into a contract with a company to dispose of the dust at an EPA - approved facility. Completion of the project is expected by the second quarter of fiscal 1999. The Company expects to recover and has recorded a $1.2 million receivable relating to insurance claims for the recovery of disposal costs which will be filed with the applicable insurance carrier at the time such disposal costs are incurred. The Company believes the recorded gross reserves of $2.4 million for disposal costs pertaining to these incidents are adequate. Subject to the uncertainties concerning the storage of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are expected to be approximately $2.5 million; however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 26, 1998, the Company had environmental remediation reserves of $2.7 million, which pertain primarily to the accrued disposal costs for radiation contaminated dust. 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 its 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 September 26, 1998, the Company had 1,801 employees, of whom 444 were salaried and 1,359 were hourly. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under contracts expiring in 1999 for Newport and Koppel; 2000 for Erlanger; and 2001 for Imperial. ITEM 2. PROPERTIES The Company's principal operating properties are listed below. The Company believes its facilities are adequate and suitable for its present level of operations. Also, see "Manufacturing Facilities and Processes - Specialty Steel Segment - Newport Facilities and - Koppel Facilities" contained herein for a description of facilities together with rated capacities and utilization rates. Location and Properties Specialty Steel Segment: Newport, Kentucky - Newport owns approximately 250 acres of real estate upon which is located a melt shop, hot strip mill, two welded pipe mills, a barge facility, machine and fabricating shops and storage and repair facilities aggregating approximately 675,000 square feet, as well as administrative offices. The facilities are also located adjacent to rail lines. Tulsa, Oklahoma - Erlanger leases approximately 36 acres of real estate 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. Koppel, Pennsylvania - Koppel owns approximately 227 acres of real estate upon which are located a melt shop, bar mill, machine and fabricating shops, storage and repair facilities and administrative offices aggregating approximately 900,000 square feet. The facilities are located adjacent to rail lines. Ambridge, Pennsylvania - Koppel 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. The facilities are located adjacent to rail lines and river barge facilities. Baytown, Texas - Koppel owns approximately 55 acres of real estate upon which are located a tubular processing facility and barge facilities. Located on the property are eight buildings aggregating approximately 82,000 square feet which house the various finishing operations. Adhesives Segment: Cincinnati, Ohio; Lynchburg, Virginia; Nashville, Tennessee - Imperial owns approximately seven acres of property in Cincinnati, Ohio; 1.5 acres of property in Lynchburg, Virginia and 3.1 acres in Nashville, Tennessee for use in its adhesives and finishes operations. The Cincinnati properties contain five buildings aggregating approximately 150,000 square feet; the Lynchburg property consists of one 10,000 square foot building and the Nashville property contains one building aggregating approximately 60,000 square feet. Other: Newport, Kentucky - The Company owns approximately 20 acres of partially developed land near Newport, Kentucky, which is held as investment property and is listed for sale. Information regarding encumbrances on the Company's properties is included in Note 4 to the Consolidated Financial Statements of the 1998 Annual Report to Shareholders, and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS See Item 1, Business, "Environmental Matters" regarding the Consent Order entered into by Koppel and the EPA in March 1995, the NOV received by Koppel from the EPA in November 1996, and the NOV's received by Newport from the Commonwealth of Kentucky in August 1998. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the 1998 Annual Report to Shareholders, "Corporate Information - Stock Market Information" and "Corporate Information - Stock Price" and Note 4 to the Consolidated Financial Statements. As of November 30, 1998 there were approximately 217 record holders of Common Stock. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Incorporated herein by reference from the 1998 Annual Report to Shareholders, "Consolidated Historical Summary". ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the 1998 Annual Report to Shareholders, "Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference from the 1998 Annual Report to Shareholders, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Notes 3, 4 and 5 to the Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from the 1998 Annual Report to Shareholders, "Consolidated Statements of Operations"; "Consolidated Balance Sheets"; "Consolidated Statements of Cash Flows"; Consolidated Statements of Common Shareholders' Equity"; "Notes to Consolidated Financial Statements"; "Report of Management" and "Report of Independent Public Accountants". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference from the Company's Proxy Statement dated December 21, 1998 for the Annual Meeting of Shareholders on February 11, 1999, under the caption "Election of Directors - Nominees for Election as Directors"; "Share Ownership of Certain Beneficial Owners and Management - footnote (5)"; "Information Regarding Meetings and Committees of the Board of Directors - Committees of the Board "; and "Section 16(a) Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's Proxy Statement dated December 21, 1998 for the Annual Meeting of Shareholders on February 11, 1999, under the caption "Information Regarding Meetings and Committees of the Board of Directors - Director Compensation"; "Executive Compensation"; and "Compensation Committee Interlocks and Insider Participation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's Proxy Statement dated December 21, 1998 for the Annual Meeting of Shareholders on February 11, 1999, "Share Ownership of Certain Beneficial Owners and Management". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's Proxy Statement dated December 21, 1998 for the Annual Meeting of Shareholders on February 11, 1999, under the caption "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements - Audited consolidated financial statements required by this item are incorporated by reference and listed in Part II, Item 8. 2. Consolidated Financial Statement Schedule - The financial statement schedule required to be filed as a part of this report is included herein: - Report of Independent Public Accountants on Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts 3. Exhibits - Reference is made to the Index to Exhibits, which is included herein as part of this report. (b) Reports on Form 8-K - None. Report of Independent Public Accountants on Financial Statement Schedule To NS Group, Inc.: We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in NS Group, Inc. and subsidiaries annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 2, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a) 2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Cincinnati, Ohio ARTHUR ANDERSEN LLP November 2, 1998 SCHEDULE II NS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Allowance Doubtful for Cash Accounts(1) Discounts(1) BALANCE, September 30, 1995 $1,021 $ 529 Additions: Charged to costs and expenses 744 3,487 Deductions: Net charges of nature for which reserves were created (1,008) (3,675) BALANCE, September 28, 1996 $ 757 $ 341 Additions: Charged to costs and expenses 1,050 7,414 Deductions: Net charges of nature for which reserves were created (1,095) (7,124) BALANCE, September 27, 1997 $ 712 $ 631 Additions: Charged to costs and expenses 1,319 5,143 Deductions: Net charges of nature for which reserves were created (1,279) (5,622) BALANCE, September 26, 1998 $ 752 $ 152 (1) Deducted from accounts receivable SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NS GROUP, INC. Date: December 11, 1998 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 each 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 to this Annual Report on Form 10-K 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 Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: December 11, 1998 /s/Clifford R. Borland Clifford R. Borland, President, Chief Executive Officer, Chief Operating Officer and Director Date: December 11, 1998 /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) Date: December 11,1998 /s/Thomas J. Depenbrock Thomas J. Depenbrock Vice President and Corporate Controller (Principal Accounting Officer) Date: December 11, 1998 /s/Ronald R. Noel Ronald R. Noel Vice President and Director Date: December 11, 1998 /s/Paul C. Borland, Jr. Paul C. Borland, Jr., Director Date: December 11, 1998 /s/John B. Lally John B. Lally, Director Date: December 11, 1998 /s/Patrick J. B. Donnelly Patrick J. B. Donnelly, Director Date: December 11, 1998 /s/R. Glen Mayfield R. Glen Mayfield, Director INDEX TO EXHIBITS Number Description 3.1 Amended and Restated Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Amendment No. 1 to Registrants' Form S-1 dated January 17, 1995, File No. 33-56637, and incorporated herein by this reference 3.2 Amended and restated By-Laws of Registrant, dated December 4, 1995, filed as Exhibit 3.2to Company's Form 10-K for the fiscal year ended September 30, 1995, File No. 1-9838, and incorporated herein by this reference Exhibit 4.1 through 4.17 were filed as exhibits under their respective Exhibit numbers to Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and are incorporated herein by this reference 4.1 Indenture (including form of Senior Secured Note) between the Company and The Huntington National Bank, as trustee (the "Trustee") 4.2 Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Trustee (Kentucky) 4.3 Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Pennsylvania) 4.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Texas) 4.5 Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Trustee (Oklahoma) 4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Company (Kentucky) 4.7 Junior Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Pennsylvania) 4.8 Junior Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Texas) 4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Company (Oklahoma) 4.10 Subsidiary Security Agreement between Newport and the Trustee 4.11 Subsidiary Security Agreement between Koppel and the Trustee 4.12 Subsidiary Security Agreement between Erlanger and the Trustee 4.13 ICN Security Agreement between Newport and the Company 4.14 ICN Security Agreement between Koppel and the Company 4.15 ICN Security Agreement between Erlanger and the Company 4.16 Pledge and Security Agreement between the Company and the Trustee 4.17 Subsidiary Guarantee 4.18 Agreement between the Trustee, Koppel and the Commonwealth of Pennsylvania, Department of Commerce, filed as exhibit 4.19 to the Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and incorporated herein by this reference 4.19 Warrant Agreement between the Company and The Huntington National Bank, as warrant agent, filed as Exhibit 4.22 to Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and incorporated herein by this reference 4.20 Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated July 31, 1998, filed herewith 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 November 17, 1998 between Company and Registrar and Transfer Company, filed as Exhibit 1 to Company's Form 8-K dated November 5, 1998, File No. 1-9838, and incorporated herein by this 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 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 10.7 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 10.8 Company's Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan, filed as Exhibit A to Company's Proxy Statement dated December 21, 1998, File No. 1-9838, and incorporated herein by this reference* 10.9 Form of Change of Control Severance Agreement, filed herewith* 10.10 Form of Salary Continuation Agreement, filed herewith* 10.11 Consulting Agreement between the Company and Paul C. Borland, Jr. dated June 16, 1998, filed herewith* 13 1998 Annual Report to Shareholders (not deemed "filed" except for portions which are expressly incorporated by reference), filed herewith 21 Subsidiaries of Registrant 23 Consent of Independent Public Accountants 24 Power of Attorney (contained on Signature Page) 27 Financial Data Schedule * Indicates management contracts or compensatory plans or arrangements in which one or more directors or executive officers of the Company participates or is a party. EX-4 2 Exhibit 4.20 CREDIT AGREEMENT Dated as of July 31, 1998 among NS GROUP, INC., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent, and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO TABLE OF CONTENTS Page ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . 1 1.01 Certain Defined Terms. . . . . . 1 1.02 Other Interpretive Provisions. . 19 1.03 Accounting Principles. . . . . 20 ARTICLE II THE CREDITS. . . . . . . . . . . . . . . . . . 20 2.01 Amounts and Terms of Commitments 20 2.02 Loan Accounts. . . . . . . . . . 20 2.03 Procedure for Borrowing. . . . . . 21 2.04 Conversion and Continuation Elections. 22 2.05 Voluntary Termination or Reduction of Commitments. . . . . . 23 2.06 Optional Prepayments . . . . . . . . . 23 2.07 Mandatory Prepayments of Loans; Mandatory Commitment Reductions; Asset Dispositions . . . . . . . . . . . 24 2.08 Repayment. . . . . . . . . . . .. . . . . 24 2.09 Interest . . . . . . . . . . . .. . . . . 24 2.10 Fees . . . . . . . . . . . . . .. . . . . 25 (a) Closing Fee . . . . . . . .. . . . . 25 (b) Agency Fee. . . . . . . . .. . . . . 26 (c) Commitment Fees . . . . . .. . . . . 26 2.11 Computation of Fees and Interest . .. . . 27 2.12 Payments by the Company. . . . . . . .. . 27 2.13 Letter of Credit Fees. . . . . . . . . . 28 2.14 Letter of Credit Issuance Request. . . .. 28 2.15 Issuance of Letters of Credit. . . . . . 29 2.16 Disbursements. . . . . . . . . . .. . . . 29 2.17 Reimbursement. . . . . . . . . . .. . . . 30 2.18 Deemed Disbursements . . . . . . . . . .. 30 2.19 Nature of Reimbursement Obligations. . . 31 2.20 Payments by the Banks to the Agent . .. . 31 2.21 Sharing of Payments, Etc.. . . .. . . . . 32 2.22 Security and Guaranty. . . . . . . . . . 33 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY . . 33 3.01 Taxes. .. . . . . . . . . . .. . . . . . 33 3.02 Illegality .. . . . . . .. . . . . . . . 34 3.03 Increased Costs and Reduction of Return. 35 3.04 Funding Losses .. . . . . . . . . . . . . 36 3.05 Inability to Determine Rates. . . . . . . 36 3.06 Reserves on Offshore Rate Loans. . . . 37 3.07 Certificates of Banks. .. . . . . . . . . 37 3.08 Substitution of Banks. . .. . . . . . . . 37 3.09 Survival . . . . . . . . . . . . . . . . 37 ARTICLE IV CONDITIONS PRECEDENT . . . . . . . . . . . . . . 37 4.01 Conditions of Initial Loans and Letters of Credit. . . . . . . 37 (a) Credit Agreement and Notes.. . . . . 37 (b) Resolutions; Incumbency. . . . . . . 38 (c) Organization Documents; Good Standing . . . . . . . . . . 38 (d) Legal Opinions.. . . . . . . . . . . 38 (e) Payment of Fees . .. . . . . . . . . 38 (f) Collateral Documents. .. . . . . . . 38 (g) Insurance Policies. .. . . . . . . . 39 (h) Environmental Review.. . . . . . . . 39 (i) Certificate .. . . . . . . . . . . . 39 (j) Certain Senior Indebtedness .. . . . 40 (k) Financial Projections .. . . . . . . 40 (l) Other Documents . .. . . . . . . . . 40 4.02 Conditions to All Borrowings . . . . . . 40 (a) Notice of Borrowing or Conversion/Continuation . . . . . . 40 (b) Continuation of Representations and Warranties . . . . . . 40 (c) No Existing Default . . . .. . . . . 40 (d) No Future Advance Notice. .. . . . . 40 ARTICLE V REPRESENTATIONS AND WARRANTIES . . . . . . . . . 41 5.01 Corporate Existence and Power. . . . . . 41 5.02 Corporate Authorization No Contravention. .. . . . . . 41 5.03 Governmental Authorization . . . . . . . 41 5.04 Binding Effect . . . . . . . . . . . . . 42 5.05 Litigation . . . . . . . . . . . . . 42 5.06 No Default . . . . . . . . . . . . . . . 42 5.07 ERISA Compliance . . . . . . . . . . . . 42 5.08 Use of Proceeds; Margin Regulations. . . 43 5.09 Title to Properties. . . . . . . . . . . 43 5.10 Taxes. . . . . . . . . . . . . . . . . . 43 5.11 Financial Condition. . . . . . . . . . . 43 5.12 Environmental Matters. . . . . . . . . . 44 5.13 Collateral Documents . . . . . . . . . . 45 5.14 Regulated Entities . . . . . . . . . . . 45 5.15 No Burdensome Restrictions . . . . . . . 45 5.16 Copyrights, Patents, Trademarks and Licenses, et . . . 45 5.17 Subsidiaries . . . . . . . . . . . . . . 45 5.18 Insurance. . . . . . . . . . . . . . . . 46 5.19 Solvency . . . . . . . . . . . . . . . 46 5.20 Full Disclosure. . . . . . . . . . . . . 46 ARTICLE VI AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . 46 6.01 Financial Statements . . . . . . . . . . 46 6.02 Certificates; Other Information. . . . . 47 6.03 Notices. . . . . . . . . . . . . . . . 48 6.04 Preservation of Corporate Existence, Et 49 6.05 Maintenance of Property. . . . . . . . . 49 6.06 Insurance. . . . . . . . . . . . . . . . 50 6.07 Payment of Obligations . . . . . . . . . 50 6.08 Compliance with Laws . . . . . . . . . . 50 6.09 Compliance with ERISA. . . . . . . . . . 50 6.10 Inspection of Property and Books and Records . . . .. . . . . 51 6.11 Environmental Laws . . . . . . . . . . . 51 6.12 Use of Proceeds. . . . . . . . . . . . . 51 6.13 Further Assurances . . . . . . . . . . . 51 ARTICLE VII NEGATIVE COVENANTS . . . . . . . . . . . . . . . 52 7.01 Limitation on Liens. . . . . . . . . . . 52 7.02 Disposition of Assets. . . . . . . . . . 54 7.03 Consolidations and Mergers . . . . . . . 54 7.04 Loans and Investments. . . . . . . . . . 55 7.05 Limitation on Indebtedness . . . . . . . 56 7.06 Transactions with Affiliates . . . . . . 56 7.07 Use of Proceeds. . . . . . . . . . . . . 56 7.08 Contingent Obligations . . . . . . . . . 56 7.09 Joint Ventures . . . . . . . . . . . . . 57 7.10 Lease Obligations. . . . . . . . . . . . 57 7.11 Restricted Payments. . . . . . . . . . . 57 7.12 ERISA. . . . . . . . . . . . . . . . . 57 7.13 Capital Expenditures . . . . . . . . . . 57 7.14 Debt to Cash Flow Ratio. . . . . . . . . 58 7.15 Interest Coverage Ratio. . . . . . 58 7.16 Working Capital Ratio. . . 58 7.17 Minimum Adjusted Net Worth ... . . . . . 58 7.18 Change in Business . . . . . . . . . . . 58 7.19 Accounting Changes . . . . . . . . . . . 58 ARTICLE VIII EVENTS OF DEFAULT. . . . . . . . . . . . . . . . 58 8.01 Event of Default . . . . . . . . . . . . 58 (a) Non-Payment . . . . . . . . . . . . 58 (b) Representation or Warranty. . . . . 58 (c) Specific Defaults . . . . . . . . . 59 (d) Other Defaults. . . . . . . . . . . 59 (e) Cross-Default . . . . . . . . . . . 59 (f) Insolvency; Voluntary Proceedings . 59 (g) Involuntary Proceedings . . . . . 60 (h) ERISA . . . . . . . . . . . . . . . 60 (i) Monetary Judgments. . . . . . . . . 60 (j) Non-Monetary Judgments. . . . . . . . 60 (k) Change of Control . . . . . . . . . . 60 (l) Loss of Licenses. . . . . . . . . . . 60 (m) Adverse Change. . . . . . . . . . . . 61 (n) Guarantor Defaults. . . . . . . . . . 61 (o) Collateral. . . . . . . . . . . . . . 61 8.02 Remedies . . . . . . . . . . . . . . . . 61 8.03 Rights Not Exclusive . . . . . . . . . .. 62 8.04 Certain Financial Covenant Defaults. . . 62 ARTICLE IX THE AGENT. . . . . . . . . . . . . . . . . . . . 62 9.01 Appointment and Authorization; "Agent" . 62 9.02 Delegation of Duties . . . . . . . . . . 63 9.03 Liability of Agent . . . . . . .. . . . . 63 9.04 Reliance by Agent. . . . . . . . . .. . . 63 9.05 Notice of Default. . . . . . . .. . . . . 64 9.06 Credit Decision. . . . . . . . .. . . . . 64 9.07 Indemnification of Agent . . . .. . . . . 65 9.08 Agent in Individual Capacity . . . . .. . 65 9.09 Successor Agent. . . . . . . . .. . . . . 65 9.10 Withholding Tax. . . . . . . . . . . . 66 9.11 Collateral Matters . . . . . . . . . .. . 67 ARTICLE X MISCELLANEOUS. . . . . . . . . . . . . . . . . . 68 10.01 Amendments and Waivers . . . . . . . . . 68 10.02 Notices. . . . . . . . . . . . . . . . . 69 10.03 No Waiver; Cumulative Remedies . .. . . . 70 10.04 Costs and Expenses .. . . . . . . . . . . 70 10.05 Company Indemnification.. . . . . . . . . 70 10.06 Marshalling; Payments Set Aside. .. . . . 72 10.07 Successors and Assigns. . . . . . . . . . 72 10.08 Assignments, Participations, et.. . . . . 72 10.09 Confidentiality. .. . . . . . . . . . . . 74 10.10 Set-off. . . .. . . . . . . . . . . . . . 74 10.11 Automatic Debits of Fees. . . . . . . . . 74 10.12 Notification of Addresses, Lending Offices, Et . . . . . . . . . . . 75 10.13 Counterparts. . . . . . . . . . . . . . . 75 10.14 Severability . . . . . . . . . . . . . . 75 10.15 No Third Parties Benefited .. . . . . . . 75 10.16 Governing Law and Jurisdiction . . . . . 75 10.17 Waiver of Jury Trial .. . . . . . . . . . 76 10.18 Entire Agreement . .. . . . . . . . . . . 76 CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of July 31, 1998 , among NS GROUP, INC., a Kentucky corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a secured revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1.01 Certain Defined Terms. The following terms have the following meanings: "Accounts Receivable" means any right of the Company and its Subsidiaries to payment for goods sold or leased or services rendered in the ordinary course of business, minus any bad debt or similar reserves, as determined on a consolidated basis in accordance with GAAP. "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Adjusted Net Worth" means the consolidated shareholders' equity of the Company and its Subsidiaries (which shall exclude any amount at which shares of the capital stock of the Company appear as treasury stock) as determined on a consolidated basis in accordance with GAAP. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 9.09. "Agent-Related Persons" means BofA and any successor agent arising under Section 9.09, together with their respective Affiliates and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 10.02 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Applicable Margin" means the percentage per annum specified below opposite the Pricing Ratio (which shall be calculated as of the end of the immediately preceding fiscal quarter for the four fiscal quarters ended on such date): If the Pricing Applicable Margin Applicable Ratio is with respect to Margin with Base Rate Loans respect to Offshore Rate Loans greater than or equal to 2.50 0.25% 0.875% greater than or equal to 2.00 and less than 2.50 0.125% 0.75% greater than or equal to 1.50 and less than 2.00 0.00% 0.625% greater than or equal to 1.00 and less than 1.50 0.00% 0.50% less than 1.00 0.00% 0.375% The Applicable Margin shall be determined as of the end of each fiscal quarter and shall be effective on the date that falls 45 days after the end of such fiscal quarter. "Assignee" has the meaning specified in subsection 10.08(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Cincinnati, New York City or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Expenditures" means, for any period and with respect to any Person,the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries, less net proceeds from sales of fixed or capital assets received by such Person or any of its Subsidiaries during such period. For the purpose of this definition, the purchase price of equipment which is purchased simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment for such equipment being trade in at such time, or the amount of such proceeds, as the case may be. "Capital Lease" means any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease. "Cash Equivalents" means: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof and backed by the full faith and credit of the United States; (b) certificates of deposit, time deposits, Eurodollar time deposits, repurchase agreements, reverse repurchase agreements, or bankers' acceptances, issued by the Agent, or by any U.S. commercial bank or any branch or agency of a non-U.S. bank licensed to conduct business in the U.S. having combined capital and surplus of not less than $100,000,000 whose short term securities are rated at least A-2 by Standard & Poor's Corporation or P-2 by Moody's Investors Service, Inc.; (c) commercial paper of an issuer rated at least A-2 by Standard & Poor's Corporation or P-2 by Moody's Investor Service Inc.; (d) debt instruments rated better than CCC+ by Standard & Poor's Corporation or Moody's Investor Service Inc. "CERCLA" has the meaning specified in the definition of "Environmental Laws." "Change of Control" means the acquisition by any Person or "group" (as defined in Section 13(d)(3) of the Exchange Act) of more than 50% of the Voting Stock of the Company, including any acquisition by merger or consolidation. "Closing Date" means the date on which all conditions precedent set forth in Section 4.01 are satisfied or waived by all Banks (or, in the case of subsection 4.01(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Collateral" means all property and interests in property and proceeds thereof now owned or hereafter acquired by the Company in or upon which a Lien now or hereafter exists in favor of the Banks, or the Agent on behalf of the Banks, whether under this Agreement or under any other documents executed by any such Person and delivered to the Agent or the Banks. "Collateral Documents" means, collectively, (i) the Security Agreement, the Guaranty and all other security agreements, mortgages, deeds of trust, patent and trademark assignments, lease assignments, guarantees and other similar agreements between the Company (or, in the case of the Guaranty, the Guarantors) and the Banks or the Agents for the benefit of the Banks now or hereafter delivered to the Banks or the Agent pursuant to or in connection with the transactions contemplated hereby, and all financing statements (or comparable documents now or hereafter filed in accordance with the Uniform Commercial Code or comparable law) against the Company as debtor in favor of the Banks or the Agent for the benefit of the Banks as secured party, and (ii) any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Commitment", as to each Bank, has the meaning specified in Section 2.01. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Debt" means, as of any date of determination, all Indebtedness for borrowed money of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "Consolidated Net Interest Expense" means, for any period, gross consolidated interest expense for the period (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) for the Company and its Subsidiaries, plus (a) the portion of the up front costs and expenses for Rate Contracts (to the extent not included in gross interest expense) fairly allocated to such Rate Contracts as expenses for such period, less (b) interest income for that period and Rate Contracts payments received, all as determined in accordance with GAAP. "Consolidated Rental Expense" means, for any period, total expense of the Company and its Subsidiaries on a consolidated basis in accordance with GAAP with respect to all operating leases. "Contingent Obligation" means, as to any Person, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; or (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations, shall be equal to the maximum reasonably anticipated liability in respect thereof. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Core Cash Balances" means, for any period, Total Cash Balances of the Company and its Subsidiaries at the end of such period, minus Funded Debt of the Company and its Subsidiaries at the end of such period, as determined on a consolidated basis in accordance with GAAP, provided that Core Cash Balances shall not be less than zero. "Current Liabilities" means, for any period, all current liabilities of the Company and its Subsidiaries at the end of such period as determined on a consolidated basis in accordance with GAAP. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Disbursement" has the meaning specified in Section 2.19. "Disposition" means (i) the sale, lease, conveyance or other disposition of property, other than sales or other dispositions expressly permitted under subsection 7.02(a), 7.02(b) or 7.02(e) and (ii) the sale or transfer by the Company or any Subsidiary of the Company of any equity securities issued by any Subsidiary of the Company and held by such transferor Person other than a sale permitted under subsection 7.02(e). "Dollars", "dollars" and "$" each mean lawful money of the United States. "EBITDA" means, for any period, for the Company and its Subsidiaries on a consolidated basis, determined in accordance with GAAP, the sum of (a) net income (or net loss) for such period plus (b) all amounts treated as expenses for interest to the extent included in the determination of such net income (or loss), plus (c) all accrued taxes on or measured by income to the extent included in the determination of such net income (or loss) plus (d) all amounts treated as expenses for depreciation and the amortization of intangibles of any kind to the extent included in the determination of such net income (or loss), provided, however, that net income (or loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; and (c) a Person that is primarily engaged in the business of commercial banking and that is(i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment or threat to public health, personal injury (including sickness, disease or death), property damage, natural resources damage, or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedial or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non-accidental, placement, spills, leaks, discharges, emissions or releases) of any Hazardous Material. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, and the Emergency Planning and Community Right-to-Know Act. "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Estimated Remediation Costs" means all costs associated with performing work to remediate contamination of real property or groundwater, including engineering and other professional fees and expenses, costs to remove, transport and dispose of contaminated soil, costs to "cap" or otherwise contain contaminated soil, and costs to pump and treat water and monitor water quality. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.01. "Event of Loss" means, with respect to any property, any of the following: (a) any uninsured loss, destruction or damage of such property which could reasonably result in a Material Adverse Effect; (b) any pending or threatened institution of any proceedings for the condemnation or seizure of such property or for the exercise of any right of eminent domain which could reasonably result in a Material Adverse Effect; or (c) any actual condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, of such property, or confiscation of such property or the requisition of the use of such property which could reasonably result in a Material Adverse Effect. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "Funded Debt" of any Person means, without duplication, (i) all obligations of such Person for or with respect to (including, without limitation, all fees, prepayment premiums actually payable, if any, costs or unpaid accrued interest) borrowed money or for the deferred purchase price of property or services (other than property or services purchased on ordinary trade terms therefor) which purchase price is payable over a period in excess of six months (in the event such purchase price exceeds $2.5 million) or one year (in the event such purchase price is equal to or less than $2.5 million) or is evidenced by a note, invoice or similar written instrument with a maturity in excess of six months (in the event such purchase price exceeds $2.5 million) or one year (in the event such purchase price is equal to or less than $2.5 million), (ii) all obligations of such Person created or arising under any conditional sale or other title retention agreements with respect to any property acquired by such Person and all obligations created or arising under such agreement even though the rights and remedies of the seller or lender thereunder are limited to repossession or sale of such property in the event of default; and (iii) all obligations of such Person under Capital Leases. "Funded Debt" with respect to the applicable period shall include all such obligations due and owing by any Person at the end of such period. "Further Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges (including, without limitation, net income taxes and franchise taxes), and all liabilities with respect thereto, imposed by any jurisdiction on account of amounts payable or paid pursuant to Section 3.01. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means Newport Steel Corporation, a Kentucky corporation, Koppel Steel Corporation, a Pennsylvania corporation, Erlanger Tubular Corporation, an Oklahoma corporation, or Imperial Adhesives, Inc., an Ohio corporation (collectively, the "Guarantors"). "Guaranty" means a guaranty, of even date herewith, executed by the Guarantors for the benefit of the Agent, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Hazardous Materials" means all those substances that are regulated by, or which may form the basis of liability under, any Environmental Law, including any substance identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities" has the meaning specified in Section 10.05. "Indemnified Person" has the meaning specified in Section 10.05. "Independent Auditor" has the meaning specified in subsection 6.01(a). "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan, provided, however, that if any Interest Period for an Offshore Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond the Termination Date. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Issuance Request" means a request and certificate duly executed by the chief financial or appropriate Responsible Officer of the Company, such request and certificate to be substantially in the form of Exhibit G. "Joint Venture" means a single-purpose corporation, partnership, limited liability company, joint venture or other similar legal arrangement (whether created by contract or conducted through a separate legal entity) now or hereafter formed by the Company or any of its Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.02, or such other office or offices as the Bank may from time to time notify the Company and the Agent. "Letter of Credit" has the meaning specified in Section 2.14. "Letter of Credit Outstandings" means, on any date, an amount equal to the sum of (a) the then aggregate Stated Amount of all applicable Letters of Credit, plus (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations with respect to such Letters of Credit. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, the Notes, the Collateral Documents, and all other documents delivered to the Agent or any Bank in connection with the transactions contemplated by this Agreement. "Loan Year" means the twelve-month period beginning on the Closing Date, and each twelve-month period beginning on an anniversary date thereof, as applicable. "Majority Banks" means at any time Banks then holding in excess of 60% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having in excess of 60% of the Commitments. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Material Adverse Effect" means a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole. "Material Subsidiary" means, at any time, any Subsidiary having at such time either (i) total (gross) revenues for the preceding four fiscal quarter period in excess of $25,000,000 or (ii) total assets, as of the last day of the preceding fiscal quarter, having a net book value in excess of $25,000,000, in each case, based upon the Company's most recent annual or quarterly financial statements delivered to the Agent under Section 6.01. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Net Issuance Proceeds" means, as to any issuance of debt or equity by any Person, cash proceeds and non-cash proceeds received or receivable by such Person in connection therewith, net of reasonable out-of-pocket costs and expenses paid or incurred in connection therewith in favor of any Person not an Affiliate of such Person, such costs and expenses not to exceed 5% of the gross proceeds of such issuance. "Net Proceeds" means, as to any Disposition by a Person, proceeds in cash, checks or other cash equivalent financial instruments as and when received by such Person, net of: (a) the direct costs relating to such Disposition, (b) sale, use or other transaction taxes paid or payable by such Person as a direct result thereof, and (c) amounts required to be applied to repay principal, interest and prepayment premiums and penalties on Indebtedness secured by a Lien on the asset which is the subject of such Disposition. "Net Proceeds" shall also include proceeds paid on account of any Event of Loss, net of (i) all money actually applied to repair or reconstruct the damaged property or property affected by the condemnation or taking, (ii) all of the costs and expenses reasonably incurred in connection with the collection of such proceeds, award or other payments, and (iii) any amounts retained by or paid to parties having superior rights to such proceeds, awards or other payments. "Non-Use Fee Rate" means the rate defined in Section 2.10. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to subsection 2.02(b), in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/16th of 1%) determined by the Agent as follows: Offshore Rate equals IBOR divided by (1.00 minus Eurodollar Reserve Percentage) Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and "IBOR" means the rate of interest per annum determined by the Agent as the rate at which dollar deposits in the approximate amount of BofA's Offshore Rate Loan for such Interest Period would be offered by BofA's Grand Cayman Branch, Grand Cayman B.W.I. (or such other office as may be designated for such purpose by BofA), to major banks in the offshore dollar interbank market at their request at approximately 11:00 a.m. (New York City time) two Business Days prior to the commencement of such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" means any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Participant" has the meaning specified in subsection 10.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)subject to Title IV of ERISA which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 7.01. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Pricing Ratio" means, with respect to the applicable period of four consecutive fiscal quarters for the Company and its Subsidiaries as determined on a consolidated basis in accordance with GAAP, the ratio of (a) Funded Debt at the end of such period, minus Core Cash Balances at the end of such period, to (b) EBITDA for that period. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Rate Contracts" means swap agreements (as such term is defined in Section 101 of the Bankruptcy Code), cap agreements and any other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. "Reimbursement Obligation" has the meaning specified in Section 2.17. "Replacement Bank" has the meaning specified in Section 3.08. "Reportable Event" means, any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, the president or the chief financial officer of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Security Agreement" means the Security Agreement, of even date herewith, between the Company and the Agent. "Senior Indebtedness" means, for any period, the Obligations and all Indebtedness owed to any Person at the end of such period. "Solvent" means, as to any Person at any time, that (a) the fair value of the property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy Code and, in the alternative, for purposes of the Illinois Uniform Fraudulent Transfer Act; (b) the present fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital. "Stated Amount" of any Letter of Credit means, from time to time and at any time, the total amount then available to be drawn under such Letter of Credit. "Stated Expiry Date" means, with respect to any Letter of Credit, the relevant expiry date for such Letter of Credit in accordance with Section 2.14. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Taxes" means any and all present or future taxes, levies, assessments, imposts, duties, deductions, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, respectively, taxes imposed on or measured by its net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Termination Date" means the earlier to occur of: (a) July 31, 2003; and (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Total Cash Balances" means, for any period, all cash and Cash Equivalents of the Company and its Subsidiaries at the end of such period as determined on a consolidated basis in accordance with GAAP. "Type" has the meaning specified in the definition of "Loan." "UCC" means the Uniform Commercial Code as in effect in the State of Illinois. "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Voting Stock" means the shares of capital stock or other securities of the Company entitled to vote generally in the election of directors of the Company. "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. 1.02 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (iv) The term "property" includes any kind of property or asset, real, personal or mixed, tangible or intangible. (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of the Agent or the Banks by way of consent, approval or waiver shall be deemed modified by the phrase "in its/their sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.03 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II THE CREDITS 2.01 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to (i) make loans to the Company (each such loan, a "Loan") from time to time on any Business Day during the period from the Closing Date to the Termination Date, and (ii) purchase from the Agent a participation in the Letters of Credit and make Disbursements in accordance with this Article II, in an aggregate amount not to exceed at any time outstanding, the amount set forth on Schedule 2.01 (such amount as the same may be reduced under Section 2.05 or as a result of one or more assignments under Section 10.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing of Loans or issuance of any Letter of Credit, the aggregate principal amount of all outstanding Loans plus the then aggregate amount of all Letter of Credit Outstandings shall not at any time exceed the combined Commitments; provided, however, that the Agent shall not be required to issue any Letter of Credit if, after giving effect thereto, the Letter of Credit Outstandings would exceed $30,000,000. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay under Section 2.06 and reborrow under this Section 2.01. Subject to the terms hereof, the Company may from time to time request the issuance of Letters of Credit, allow Letters of Credit to expire undrawn or, if drawn upon, repay Reimbursement Obligations relative thereto and request the issuance of new Letters of Credit. 2.02 Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (Chicago time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) one Business Day prior to the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $500,000 or any multiple of $100,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. provided, however, that with respect to the Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 12:00 p.m. (Chicago time) on the Closing Date and such Borrowing will consist of Base Rate Loans only. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (Chicago time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent by wire transfer in accordance with written instructions provided to the Agent by the Company of like funds as received by the Agent. (d) After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than six different Interest Periods in effect. 2.04 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.04(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $500,000, or that is in an integral multiple of $100,000 in excess thereof) into Loans of any other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $500,000, or that is in an integral multiple of $100,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $500,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (Chicago time) at least (i) two Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) one Business Day in advance of the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Majority Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than six different Interest Periods in effect. 2.05 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $10,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans plus the aggregate amount of all Letter of Credit Outstandings would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.06 Optional Prepayments. Subject to Section 3.04, the Company may, at any time or from time to time, on any Business Day, ratably prepay Loans in whole or in part, in minimum amounts of $500,000 or any multiple of $100,000 in excess thereof. The Agent will promptly notify each Bank of such Bank's Pro Rata Share of such prepayment. 2.07 Mandatory Prepayments of Loans; Mandatory Commitment Reductions; Asset Dispositions. (a) If the Company or any Subsidiary shall at any time or from time to time make or agree to make a Disposition, or shall suffer an Event of Loss, then (i) the Company shall promptly notify the Agent of such proposed Disposition or Event of Loss (including the amount of the estimated Net Proceeds to be received by the Company or such Subsidiary in respect thereof) and (ii) promptly upon, and in no event later than 30 days after, receipt by the Company or the Subsidiary of the Net Proceeds of such Disposition or Event of Loss, the Company shall prepay Loans in an aggregate amount equal to the amount of such Net Proceeds. (b) General. Any prepayments pursuant to this Section 2.07 shall be applied first to any Base Rate Loans then outstanding and then to Offshore Rate Loans with the shortest Interest Periods remaining; provided, however, that if the amount of Base Rate Loans then outstanding is not sufficient to satisfy the entire prepayment requirement, the Company may, at its option, place any amounts which it would otherwise be required to use to prepay Offshore Rate Loans on a day other than the last day of the Interest Period therefor in an interest-bearing account pledged to the Agent for the benefit of the Banks until the end of such Interest Period at which time such pledged amounts will be applied to prepay such Offshore Rate Loans. The Company shall pay, together with each prepayment under this Section 2.07, accrued interest on the amount prepaid and any amounts required pursuant to Section 3.04. (c) Reduction of Commitment. Upon the making of any mandatory prepayment under this Section 2.07, the Commitment of each Bank shall automatically be reduced by an amount equal to such Bank's ratable share of the aggregate of principal repaid, effective as of the earlier of the date that such prepayment is made or the date by which such prepayment is due and payable hereunder. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.08 Repayment. The Company shall repay to the Banks on the Termination Date the aggregate principal amount of Loans outstanding on such date. 2.09 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04), plus the Applicable Margin. Each Reimbursement Obligation shall bear interest from the date such Reimbursement Obligation is to be paid pursuant to Section 2.16 at a rate per annum equal to the Base Rate plus the Applicable Margin. (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.06 or 2.07 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. Interest accrued on the principal amount of each Reimbursement Obligation after the date such amount is due and payable (whether pursuant to Section 2.16 or otherwise) shall be payable upon demand. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Obligations, at a rate per annum which is determined by adding 3% per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 3%; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 3%. (d) Notwithstanding subsection (a) of this Section, if any amount of principal of or interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document is not paid in full when due (whether at stated maturity, by acceleration, demand or otherwise), the Company agrees to pay interest on such unpaid principal or other amount, from the date such amount becomes due until the date such amount is paid in full, and after as well as before any entry of judgment thereon to the extent permitted by law, payable on demand, at a fluctuating rate per annum equal to the Base Rate plus 3%. (e) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.10 Fees. (a) Closing Fee. On the Closing Date, the Company shall pay to the Agent for the account of each Bank a closing fee in the amount of $10,000. (b) Agency Fee. The Company shall pay an annual agency fee to the Agent for the Agent's own account in the amount of $10,000 in the event that any one or more financial institutions other than BofA becomes a "Bank" for purposes of this Agreement as of the Closing Date or pursuant to Section 10.08. Such agency fee shall be due and payable on the date the first such other financial institution becomes a "Bank" for purposes of this Agreement and on each anniversary date thereof while there remains one or more "Banks" other than BofA through the Termination Date. (c) Commitment Fees. The Company shall pay to the Agent for the account of each Bank a commitment fee equal to the Non-Use Fee Rate multiplied by the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent. For purposes of calculating the "unused portion" of each Bank's Commitment pursuant to this Section 2.10, Letter of Credit Outstandings shall be included as a usage of the Commitment. The "Non-Use Fee Rate" means the percentage per annum specified below opposite the Pricing Ratio (which shall be calculated as of the end of the immediately preceding fiscal quarter for the four fiscal quarters ended on such date): If the Pricing Ratio is Non-Use Fee Rate greater than or equal to 2.50 0.25% greater than or equal to 2.00 and less than 2.50 0.225% greater than or equal to 1.50 and less than 2.00 0.20% greater than or equal to 1.00 and less than 1.50 0.175% less than 1.00 0.15% The Non-Use Fee Rate shall be determined as of the end of each fiscal quarter and shall be effective on the date that falls 45 days after the end of such fiscal quarter. Such commitment fee shall accrue from the Closing Date to the Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December commencing on September 30, 1998, through the Termination Date (each a "Quarterly Payment Date"), with the final payment to be made on the Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.05 or Section 2.07, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. 2.11 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. The Agent will, at the request of the Company or any Bank, deliver to the Company or the Bank, as the case may be, a statement showing the quotations used by the Agent in determining any interest rate and the resulting interest rate. 2.12 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 12:00 p.m. (Chicago time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 12:00 p.m. (Chicago time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.13 Letter of Credit Fees. The Company agrees to pay to the Agent for the account of each Bank, (a) with respect to each Letter of Credit a credit fee equal to the Applicable Margin for Loans which are Offshore Rate Loans per annum, on or prior to the date which is two days after the Company's receipt of an invoice from the Agent for the period ending on each Quarterly Payment Date following the issuance date for such Letter of Credit, during the period from the later of (w) the Closing Date, (x) the issuance date of such Letter of Credit, and (y) the next preceding Quarterly Payment Date to (but, in the case of the Stated Expiry Date thereof, including) the earliest of (A) such Quarterly Payment Date, (B) the Disbursement Date of such Letter of Credit, and (C) the Stated Expiry Date of such Letter of Credit; and (b) for the account of the Agent, upon demand from time to time, all customary fees and administrative expenses of the Agent as set forth in the Agent's published schedule of such fees and expenses then in effect which are charged or incurred from time to time in connection with the issuance, maintenance, modification (if any), negotiation and administration of each Letter of Credit. 2.14 Letter of Credit Issuance Request. By delivering an Issuance Request to the Agent at or before 10:00 a.m., Chicago time, on any Business Day, the Company may request, prior to the Termination Date, on not less than two Business Days' notice (or such lesser number of Business Days' notice as the Agent may consent to in its sole discretion), that Agent issue, on any such Business Day on or after the Closing Date (if such date is prior to the Termination Date), an irrevocable letter of credit in such form as may be requested by the Company and reasonably approved by the Company (a "Letter of Credit"), solely as required by the Company in the ordinary course of business. The Company shall deliver each Issuance Request to the Agent by either (1) delivering or telecopying to the Agent an Issuance Request or (2) giving telephonic notice thereof to the Agent, in each case at or before 10:00 a.m., Chicago time, and, in the case of any such telephonic notice, promptly confirming such notice by delivering or telecopying an Issuance Request therefor, signed by a Responsible Officer of the Company, to the Agent, on any Business Day. Each Letter of Credit shall by its terms: (i) be issued in a Stated Amount which, when added to the then aggregate amount of Letter of Credit Outstandings, would not exceed $30,000,000; and (ii) be stated to expire on a date no later than the earlier of (A) 30 days prior to the Termination Date, and (B) the first anniversary of the date of issuance of such Letter of Credit. 2.15 Issuance of Letters of Credit. (a) Subject to the terms and conditions of this Agreement (including Article IV), the Agent shall issue a Letter of Credit in accordance with the Issuance Request made therefor. Prior to the issuance of any Letter of Credit, the Company shall have properly completed all of the Agent's required standard letter of credit documentation. If the Company so requests in its Issuance Request, the Agent will deliver to the beneficiary under such Letter of Credit the original of any Letter of Credit which it issues hereunder. If the Company does not so request, the Agent will make available to the beneficiary thereunder the original of any Letter of Credit which it issues hereunder. (b) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby agrees to, have irrevocably purchased from the Agent a participation in such Letter of Credit and agreed to make Disbursements in connection therewith in an amount equal to such Bank's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. 2.16 Disbursements. (a) The Agent will notify the Company promptly of each demand or presentment for payment under any Letter of Credit issued by the Agent, together with notice of the date (the "Disbursement Date") on which such payment shall be made. Subject to the terms and provisions of such Letter of Credit and this Agreement, the Agent shall make such payment to the beneficiary (or its designee) of such Letter of Credit (a "Disbursement"). Prior to 10:00 a.m., Chicago time, on the first Business Day following the Disbursement Date, the Company will reimburse the Agent and the Banks for all amounts which the Agent and the Banks have disbursed under such Letter of Credit, together with interest thereon, prior to an Event of Default, at a rate per annum equal to the Base Rate plus the Applicable Margin, from time to time in effect for the period from the Disbursement Date to the date of such reimbursement. (b) The Agent shall notify the Borrower of any Disbursement under a Letter of Credit as promptly as practicable after such Disbursement is made, and the Borrower shall, immediately after receipt of such notice, to the extent that the Borrower is permitted to borrow Loans under the terms of this Agreement, (A) in the case of a Borrowing of Loans in an aggregate amount less than $100,000, be deemed to have submitted a Notice of Borrowing for Loans, and (B) in the case of a Borrowing of Loans in an amount equal to or greater than $100,000 submit a Notice of Borrowing for Loans, in amounts necessary to repay the amounts which were so disbursed. 2.17 Reimbursement. The Company's obligation (the "Reimbursement Obligation") under Section 2.16 to reimburse the Agent with respect to any Disbursement (including interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Company may have or have had against the Agent, any Bank or the beneficiary of such Letter of Credit, including any defense based upon the occurrence of any Event of Default, any draft, demand, certificate or other document proving to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, the failure of any Disbursement to conform to the terms of the applicable Letter of Credit or any non-application or misapplication by the beneficiary under such Letter of Credit of the proceeds of such Disbursement, or the legality, validity, form, regularity or enforceability of such Letter of Credit; provided that nothing herein shall adversely affect the right of the Company, after paying in full its Reimbursement Obligation hereunder to commence any proceeding against the Agent for any wrongful Disbursement made by the Agent under a Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Agent. 2.18 Deemed Disbursements. Upon the occurrence and during the continuance of an Event of Default, then: (a) automatically in the case of an Event of Default described in subsections 8.01(a) or 8.01(f), an amount equal to that portion of the Letter of Credit Outstandings attributable to the then aggregate amount which is undrawn and available under all outstanding Letters of Credit shall, without demand upon or notice to the Company, be deemed to have been paid or disbursed by the Agent (notwithstanding that such amount may not in fact have been so paid or disbursed); provided that the interest rate specified in subsection 2.09(d) shall not apply to any Letter of Credit if and to the extent that the Company shall have deposited cash in the amount of such deemed Disbursement, together with interest accrued thereon, with the Agent to be held as collateral security for the Obligations in connection with any Letter of Credit with respect to which a Disbursement shall have been deemed to have occurred; and (b) upon notification by the Agent to the Company of its obligations under this Section 2.18, the Company shall be immediately obligated to reimburse the Agent for the amount deemed to have been so paid or disbursed by the Agent. Any amounts so payable by the Company pursuant to this Section 2.18 shall be deposited in cash with the Agent and held as collateral security for the Obligations in connection with any Letter of Credit and shall be invested by the Agent in Cash Equivalents the interest on which shall be applied to pay such Obligations then due and unpaid. At such time when the Event of Default shall have been cured or waived, the Agent shall return to the Company all amounts then on deposit with the Agent pursuant to this Section 2.18 (including any income from investments in Cash Equivalents), net of any amounts applied to the payment of any Reimbursement Obligations. Any Disbursement deemed to have occurred pursuant to this Section 2.18 shall not constitute a "Reimbursement Obligation" as defined in Section 2.17. 2.19 Nature of Reimbursement Obligations. The Company shall assume all risks of the acts, omissions or misuse of each Letter of Credit by the beneficiary thereof. The Agent (except to the extent of its own gross negligence or willful misconduct) shall not be responsible for: (a) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit issued by it or any document submitted by any party in connection with the application for an issuance of such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason; (c) failure of the beneficiary under any Letter of Credit to comply fully with conditions required in order to demand payment under such Letter of Credit; (d) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; or (e) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under any such Letter of Credit. None of the foregoing shall affect, impair, limit or prevent the vesting of any of the rights or powers granted to the Agent or any Agent hereunder (including pursuant to Section 9.05). In furtherance and extension, and not in limitation or derogation, of any of the foregoing, any action taken or omitted to be taken by the Agent in good faith and without gross negligence shall be binding upon the Company and shall not put the Agent under any resulting liability to the Company. 2.20 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date or any Disbursement, at least one Business Day prior to the Borrowing Date or Disbursement Date, as applicable, that such Bank will not make available as and when required hereunder to the Agent the amount of that Bank's Pro Rata Share of the Borrowing or the Disbursement, as applicable, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date or the Disbursement Date, as applicable, and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company or the beneficiary (or its designee) of the Letter of Credit, as applicable, on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company or the beneficiary (or its designee) of the Letter of Credit, as applicable, such amount, that Bank shall on the Business Day following such Borrowing Date or such Disbursement Date, as applicable, make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available with respect to a Borrowing, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent with respect to a Borrowing, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date or to make available to the Agent the amount of that Bank's Pro Rata Share of any Disbursement on the Disbursement Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date or to make available to the Agent the amount of that Bank's Pro Rata Share of any Disbursement on the Disbursement Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date or to make available to the Agent the amount of that Bank's Pro Rata Share of any Disbursement on the Disbursement Date. 2.21 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Obligations in its favor any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Obligations in their favor as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.22 Security and Guaranty. (a) All obligations of the Company under this Agreement, the Notes and all other Loan Documents shall be secured in accordance with the Collateral Documents. (b) All obligations of the Company under this Agreement, each of the Notes and all other Loan Documents shall be unconditionally guaranteed by the Guarantors pursuant to the Guaranty; provided, however, that upon the sale or other disposition of the capital stock or assets of Imperial Adhesives, Inc. pursuant to Section 7.02(e), then, in the absence of a Default or an Event of Default, the Agent shall release Imperial Adhesives, Inc. from its obligations under the Guaranty. ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes. (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Company shall pay all Other Taxes. (b) If the Company shall be required by law to deduct or withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that, after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section), such Bank or the Agent, as the case may be, receives and retains an amount equal to the sum it would have received and retained had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or further Taxes had not been imposed. (c) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the amount that the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes, Other Taxes or Further Taxes had not been imposed, and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (d) Within 30 days after the date of any payment by the Company of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank or the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to such Bank or the Agent. (e) If the Company is required to pay any amount to any Bank or the Agent pursuant to subsection (b) or (c) of this Section, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the sole judgment of such Bank is not otherwise disadvantageous to such Bank. 3.02 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. (c) If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.03 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitments, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 3.04 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.06; (d) the prepayment (including pursuant to Section 2.07) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.04 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under subsection 3.03(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the IBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.05 Inability to Determine Rates. If the Agent determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.09(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 3.06 Reserves on Offshore Rate Loans. The Company shall pay to each Bank, as long as such Bank shall be required under regulations of the FRB to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as "Eurocurrency liabilities"), additional costs on the unpaid principal amount of each Offshore Rate Loan equal to the actual costs of such reserves allocated to such Loan by the Bank (as determined by the Bank in good faith, which determination shall be conclusive), payable on each date on which interest is payable on such Loan, provided the Company shall have received at least 15 days' prior written notice (with a copy to the Agent) of such additional interest from the Bank. If a Bank fails to give notice 15 days prior to the relevant Interest Payment Date, such additional interest shall be payable 15 days from receipt of such notice. 3.07 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.08 Substitution of Banks. Upon the receipt by the Company from any Bank (an "Affected Bank") of a claim for compensation under Section 3.03, the Company may: (i) request the Affected Bank to use its best efforts to obtain a replacement bank or financial institution satisfactory to the Company and to the Agent (a "Replacement Bank") to acquire and assume all or a ratable part of all of such Affected Bank's Loans and Commitment, (ii) request one more of the other Banks to acquire and assume all or part of such Affected Bank's Loans and Commitment; or (iii) designate a Replacement Bank. Any such designation of a Replacement Bank under clause (i) or (iii) shall be subject to the prior written consent of the Agent (which consent shall not be unreasonably withheld). 3.09 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. ARTICLE IV CONDITIONS PRECEDENT 4.01 Conditions of Initial Loans and Letters of Credit. The obligation of each Bank to make its initial Loan hereunder and of the Agent to issue the initial Letter of Credit is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company and each Guarantor authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Person; and (ii) A certificate of the Secretary or Assistant Secretary of the Company and each Guarantor certifying the names and true signatures of the officers of the Company or such Guarantor authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company and each Guarantor as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of such Person as of the Closing Date; and (ii) a good standing and tax good standing certificate for the Company and each Guarantor from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation and each state where the Company or such Guarantor is qualified to do business as a foreign corporation as of a recent date, together with a bring-down certificate by facsimile, dated the Closing Date; (d) Legal Opinions. An opinion of Bryan Cave, LLP, counsel to the Company and addressed to the Agent and the Banks, substantially in the form of Exhibit D; (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of the Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent); including any such costs, fees and expenses arising under or referenced in Sections 2.10 and 10.04; (f) Collateral Documents. The Collateral Documents, executed by the Company and the Guarantors, as applicable, in appropriate form for filing, where necessary, together with (i) acknowledgment copies of all UCC-l financing statements filed, registered or recorded to perfect the security interests of the Agent for the benefit of the Banks, or other evidence satisfactory to the Agent that there has been filed, registered or recorded all financing statements and other filings, registrations and recordings necessary and advisable to perfect the Liens of the Agent for the benefit of the Banks in accordance with applicable law; (ii) written advice relating to such Lien and judgment searches as the Agent shall have requested, and such termination statements or other documents as may be necessary to confirm that the Collateral is subject to no other Liens in favor of any Persons (other than Permitted Liens); (iii) evidence that all other actions necessary or, in the opinion of the Agent or the Banks, desirable to perfect and protect the first priority security interest created by the Collateral Documents have been taken; (iv) funds sufficient to pay any filing or recording tax or fee in connection with any and all UCC-1 financing statements; (v) evidence that all other actions necessary or, in the opinion of the Agent or the Banks, desirable to perfect and protect the first priority Lien created by the Collateral Documents, and to enhance the Agent's ability to preserve and protect its interests in and access to the Collateral, have been taken. (g) Insurance Policies. Standard lenders' payable endorsements with respect to the insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Company in accordance with Section 6.06; (h) Environmental Review. An environmental site assessment with respect to any real property owned, leased or otherwise used by the Company and its Subsidiaries, dated as of a recent date prior to the Closing Date, prepared by a qualified firm acceptable to the Agent and the Banks, stating, among other things, that such real property is free from Hazardous Materials and that operations conducted thereon are in compliance with all Environmental Laws and showing any Estimated Remediation Costs; (i) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; (ii) no Default or Event of Default exists or would result from the initial Borrowing; and (iii) there has occurred since March 31, 1998, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect; (j) Certain Senior Indebtedness. Copies of all documents, instruments and agreements evidencing or otherwise pertaining to Senior Indebtedness owed to any Person other than the Banks, which shall be acceptable to the Agent and its counsel as to form and substance; (k) Financial Projections. Copies of financial projections for the Company and its Subsidiaries for the current fiscal year through the Termination Date, which shall be acceptable to the Agent as to form and substance; (l) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may request. 4.02 Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) or to continue or convert any Loan under Section 2.04 is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date: (a) Notice of Borrowing or Conversion/Continuation. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable; (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct on and as of such Borrowing Date or Conversion/Continuation Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date; (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion; and (d) No Future Advance Notice. Neither the Agent nor any Bank shall have received from the Company any notice that any Collateral Document will no longer secure on a first priority basis future advances, future Loans or future Letter of Credit Obligations to be made or extended under this Agreement. Each Notice of Borrowing and Notice of Conversion/Continuation submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date or Conversion/Continuation Date, as applicable, that the conditions in this Section 4.02 are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 5.01 Corporate Existence and Power. The Company and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.02 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company and its Subsidiaries of this Agreement and each other Loan Document to which such Person is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of that Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or (c) violate any Requirement of Law. 5.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority (except for filings in connection with the Liens granted to the Agent under the Collateral Documents) is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company or any of its Subsidiaries of the Agreement or any other Loan Document. 5.04 Binding Effect. This Agreement and each other Loan Document to which the Company or any of its Subsidiaries is a party constitute the legal, valid and binding obligations of the Company and any of its Subsidiaries to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.05 Litigation. Except as specifically disclosed in Schedule 5.05, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if determined adversely to the Company or its Subsidiaries, would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company or from the grant or perfection of the Liens of the Agent and the Banks on the Collateral. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 8.01(e). 5.07 ERISA Compliance. Except as specifically disclosed in Schedule 5.07: (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the best knowledge of the Company, nothing has occurred which would cause the loss of such qualification. The Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Company, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 5.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans and the Letters of Credit are to be used solely for the purposes set forth in and permitted by Section 6.12 and Section 7.07. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. 5.09 Title to Properties. The Company and each Subsidiary have good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the property of the Company and its Subsidiaries is subject to no Liens, other than Permitted Liens. 5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect. 5.11 Financial Condition. (a) The audited consolidated financial statements of the Company and its Subsidiaries dated September 30, 1997, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 5.11, show all material indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) Since September 30, 1997, there has been no Material Adverse Effect. 5.12 Environmental Matters. (a) Except as specifically disclosed in Schedule 5.12, the on-going operations of the Company and each of its Subsidiaries comply in all respects with all Environmental Laws, except such non-compliance which would not (if enforced in accordance with applicable law) result in liability in excess of $1,000,000 in the aggregate. (b) Except as specifically disclosed in Schedule 5.12, the Company and each of its Subsidiaries have obtained all licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for their respective ordinary course operations, all such Environmental Permits are in good standing, and the Company and each of its Subsidiaries are in compliance with all material terms and conditions of such Environmental Permits. (c) Except as specifically disclosed in Schedule 5.12, none of the Company, any of its Subsidiaries or any of their respective present property or operations, is subject to any outstanding written order from or agreement with any Governmental Authority, nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material. (d) Except as specifically disclosed in Schedule 5.12, there are no Hazardous Materials or other conditions or circumstances existing with respect to any property of the Company or any Subsidiary, or arising from operations prior to the Closing Date, of the Company or any of its Subsidiaries that would reasonably be expected to give rise to Environmental Claims with a potential liability of the Company and its Subsidiaries in excess of $1,000,000 in the aggregate for any such condition, circumstance or property. In addition, (i) neither the Company nor any Subsidiary has any underground storage tanks (x) that are not properly registered or permitted under applicable Environmental Laws, or (y) that are leaking or disposing of Hazardous Materials off-site, and (ii) the Company and its Subsidiaries have notified all of their employees of the existence, if any, of any health hazard arising from the conditions of their employment and have met all notification requirements under Title III of CERCLA and all other Environmental Laws. 5.13 Collateral Documents. (a) The provisions of each of the Collateral Documents are effective to create in favor of the Agent for the benefit of the Banks, a legal, valid and enforceable first priority security interest in all right, title and interest of the Company in the collateral described therein; and financing statements have been filed in the offices in all of the jurisdictions listed in the schedule to the Security Agreement. (b) All representations and warranties of the Company and any of its Subsidiaries party thereto contained in the Collateral Documents are true and correct. 5.14 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.15 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.16 Copyrights, Patents, Trademarks and Licenses, etc. The Company or its Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the best knowledge of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any Subsidiary infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 5.05, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Company, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect. 5.17 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in part (a) of Schedule 5.17 hereto and has no equity investments in any other corporation or entity other than those specifically disclosed in part (b) of Schedule 5.17. 5.18 Insurance. The properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Subsidiary operates. 5.19 Solvency. The Company and each of its Material Subsidiaries are Solvent. 5.20 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Company to the Banks prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 6.01 Financial Statements. The Company shall deliver to the Agent, in form and detail satisfactory to the Agent and the Majority Banks, with sufficient copies for each Bank: (a) as soon as available, but not later than 120 days after the end of each fiscal year, a copy of the audited consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated and consolidating statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of a nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records and shall be delivered to the Agent pursuant to a reliance agreement between the Agent and Banks and such Independent Auditor in form and substance satisfactory to the Agent; (b) as soon as available, but not later than 45 days after the end of each fiscal year, a copy of an unaudited consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidating statement of income, shareholders' equity and cash flows for such year, certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 6.01(a); (c) as soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; (d) as soon as available, but not later than 60 days after the end of each fiscal year , a copy of the annual budget for the Company and its Subsidiaries for the next fiscal year, certified by an appropriate Responsible Officer. 6.02 Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in subsection 6.01(a), a certificate of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in subsections 6.01(a) and (c), a Compliance Certificate executed by a Responsible Officer; (c) promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC; and (d) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Bank, may from time to time reasonably request. 6.03 Notices. The Company shall promptly notify the Agent and each Bank: (a) of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default; (b) of (i) any breach or non-performance of, or any default under, any Contractual Obligation of the Company or any of its Subsidiaries which could result in a Material Adverse Effect; and (ii) any dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority which could result in a Material Adverse Effect; (c) of the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary (i) in which the amount of damages claimed is $10,000,000 (or its equivalent in another currency or currencies) or more, (ii) in which injunctive or similar relief is sought and which, if adversely determined, would reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any Loan Document; (d) upon, but in no event later than 10 days after, becoming aware of (i) any and all enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Company or any Subsidiary or any of their respective properties pursuant to any applicable Environmental Laws which could reasonably result in a Material Adverse Effect, (ii) all other Environmental Claims which could reasonably result in a Material Adverse Effect, and (iii) any environmental or similar condition on any real property adjoining or in the vicinity of the property of the Company or any Subsidiary that could reasonably be anticipated to cause such property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such property under any Environmental Laws which could reasonably result in a Material Adverse Effect; (e) of any other litigation or proceeding affecting the Company or any of its Subsidiaries which the Company would be required to report to the SEC pursuant to the Exchange Act, within four days after reporting the same to the SEC; (f) of the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the Agent and each Bank a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: (i) an ERISA Event; (ii) a material increase in the Unfunded Pension Liability of any Pension Plan; (iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or (iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability. (g) of any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries; Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 6.03(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated. 6.04 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Subsidiary to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except in connection with transactions permitted by Section 7.03 and sales of assets permitted by Section 7.02; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect. 6.05 Maintenance of Property. The Company shall maintain, and shall cause each Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, except as permitted by Section 7.02. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. 6.06 Insurance. In addition to insurance requirements set forth in the Collateral Documents, the Company shall maintain, and shall cause each of its Subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons; including workers' compensation insurance, public liability and property and casualty insurance which amount shall not be reduced by the Company in the absence of 30 days' prior notice to the Agent. All property and casualty insurance maintained by the Company covering the Collateral shall name the Agent as loss payee and all liability insurance shall name the Agent as additional insured, in each case for the benefit of the Banks, as their interests may appear. Upon request of the Agent or any Bank, the Company shall furnish the Agent, with sufficient copies for each Bank, at reasonable intervals (but not more than once per calendar year) a certificate of a Responsible Officer of the Company (and, if requested by the Agent, any insurance broker of the Company) setting forth the nature and extent of all insurance maintained by the Company and its Subsidiaries in accordance with this Section or any Collateral Documents (and which, in the case of a certificate of a broker, were placed through such broker). 6.07 Payment of Obligations. The Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; and (b) all lawful claims which, if unpaid, would by law become a Lien upon its property except those obligations not yet delinquent or otherwise being contested in good faith and properly reserved for in accordance with GAAP. 6.08 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 6.09 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.10 Inspection of Property and Books and Records. The Company shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the expense of the Company and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. The Company's payment and reimbursement obligations under this Section 6.10 with respect to inspections shall be limited to $2,000 in any fiscal year provided no Default or Event of Default occurs or is continuing during such fiscal year. 6.11 Environmental Laws. (a) The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws. (b) Upon the written request of the Agent or any Bank, the Company shall submit and cause each of its Subsidiaries to submit, to the Agent with sufficient copies for each Bank, at the Company's sole cost and expense, at reasonable intervals, a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice or report required pursuant to subsection 6.03(d), that could, individually or in the aggregate, result in liability in excess of $1,000,000. 6.12 Use of Proceeds. The Company shall use the Letters of Credit and the proceeds of the Loans solely as follows: (i) to pay off certain Indebtedness; (ii) to finance Acquisitions but only to the extent such Acquisitions are permitted by Section 7.04(d); and (iii) for working capital and other general corporate purposes not in contravention of any Requirement of Law or of any Loan Document. 6.13 Further Assurances. (a) The Company shall ensure that all written information, exhibits and reports furnished to the Agent or the Banks do not and will not contain any untrue statement of a material fact and do not and will not omit to state any material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and will promptly disclose to the Agent and the Banks and correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement or recordation thereof. (b) Promptly upon request by the Agent or the Majority Banks, the Company shall (and shall cause any of its Subsidiaries to) do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Agent or such Banks, as the case may be, may reasonably require from time to time in order (i) to carry out more effectively the purposes of this Agreement or any other Loan Document, (ii) to subject to the Liens created by any of the Collateral Documents any of the properties, rights or interests covered by any of the Collateral Documents, (iii) to perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby, and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Agent and Banks the rights granted or now or hereafter intended to be granted to the Banks under any Loan Document or under any other document executed in connection therewith. ARTICLE VII NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: 7.01 Limitation on Liens. The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien (other than a Lien on the Collateral) existing on property of the Company or any Subsidiary on the Closing Date and set forth in Schedule 7.01 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.07, provided that no notice of lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA and other than on the Collateral) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens (other than Liens on the Collateral) on the property of the Company or its Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business, provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; (g) Liens (other than Liens on the Collateral) consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such liens in the aggregate at any time outstanding for the Company and its Subsidiaries do not exceed $20,000,000; (h) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and its Subsidiaries; (i) Liens on assets of corporations which become Subsidiaries after the date of this Agreement, provided, however, that such Liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (j) purchase money security interests on any property acquired or held by the Company or its Subsidiaries in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property; provided that (i) any such Lien attaches to such property concurrently with or within 20 days after the acquisition thereof, (ii) such Lien attaches solely to the property so acquired in such transaction, (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such property, and (iv) the principal amount of the Indebtedness secured by any and all such purchase money security interests shall not at any time exceed $25,000,000; (k) Liens securing obligations in respect of capital leases on assets subject to such leases, provided that such capital leases are otherwise permitted hereunder; (l) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Subsidiary to provide collateral to the depository institution; (m) in addition to Liens permitted under subsections (b) through (l) above, Liens (other than Liens on the Collateral) given to secure Indebtedness of the Company provided that the aggregate principal amount of such Indebtedness shall not at any time exceed, together with the Senior Indebtedness but not including in such calculation the Obligations, $125,000,000. 7.02 Disposition of Assets. The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business; (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; (c) dispositions of inventory or equipment by the Company or any Subsidiary to the Company or any Subsidiary pursuant to reasonable business requirements; (d) dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, (ii) 50% of the aggregate sales price from such disposition shall be paid in cash, and (iii) the aggregate value of all assets so sold by the Company and its Subsidiaries, together, shall not exceed in any fiscal year $5,000,000; and (e) the sale or other disposition of the capital stock or substantially all of the assets of Imperial Adhesives, Inc., which is a Subsidiary of the Company. 7.03 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Subsidiary to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Subsidiaries, provided that if any transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation; (b) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly-Owned Subsidiary; (c) any sale or other disposition permitted under Section 7.02; and (d) any Acquisition or Investment permitted under Section 7.04. 7.04 Loans and Investments. The Company shall not purchase or acquire, or suffer or permit any Subsidiary to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person, or make or commit to make any Acquisitions, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including any Affiliate of the Company (together, "Investments"), except for: (a) Investments held by the Company or Subsidiary in the form of Cash Equivalents or short term marketable securities; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business; (c) extensions of credit by the Company to any of its Wholly-Owned Subsidiaries or by any of its Wholly-Owned Subsidiaries to the Company or another of its Wholly-Owned Subsidiaries; (d) Investments incurred in order to consummate Acquisitions otherwise permitted herein, provided that (i) the Person or business so acquired (the "Acquiree") is primarily engaged in similar or related lines of business as those lines of business carried on by the Company and its Subsidiaries, (ii) after the consummation of the Acquisition the Company and its Subsidiaries continue to comply with the financial covenants set forth in Sections 7.14 through 7.17, (iii) such Acquisitions are undertaken in accordance with all applicable Requirements of Law; and (iv) the prior, effective written consent or approval to such Acquisition of the board of directors or equivalent governing body of the Acquiree is obtained. 7.05 Limitation on Indebtedness. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement; (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 7.08; (c) Indebtedness existing on the Closing Date and set forth in Schedule 7.05 and any renewals and refinancings thereof; (d) the Senior Indebtedness and any renewals and refinancings thereof; and (e) additional Indebtedness, provided that at the time of incurrence thereof and after giving effect thereto and to the application of the proceeds thereof, the Company shall be in compliance with the financial covenant set forth in Section 7.15. 7.06 Transactions with Affiliates. The Company shall not, and shall not suffer or permit any Subsidiary to, enter into any transaction with any Affiliate of the Company (other than the Company or any Wholly-Owned Subsidiary), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary. 7.07 Use of Proceeds. The Company shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock except in accordance with Regulations G, T, U and X of the FRB, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock except in accordance with Regulations G, T, U and X of the FRB, or (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock except in accordance with Regulations G, T, U and X of the FRB. 7.08 Contingent Obligations. The Company shall not, and shall not suffer or permit any Subsidiary to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the ordinary course of business; (b) Contingent Obligations of the Company and its Subsidiaries existing as of the Closing Date and listed in Schedule 7.08; (c) Contingent Obligations with respect to Surety Instruments incurred in the ordinary course of business and not exceeding at any time $1,000,000 in the aggregate in respect of the Company and its Subsidiaries together; and (d) Contingent Obligations related to Indebtedness incurred by the Company or any Subsidiary pursuant to Section 7.05. 7.09 Joint Ventures. The Company shall not, and shall not suffer or permit any Subsidiary to enter into any Joint Venture, other than in the ordinary course of business or otherwise in connection with an Investment permitted under Section 7.04. 7.10 Lease Obligations. The Company shall not, and shall not suffer or permit any Subsidiary to, create or suffer to exist any obligations for the payment of rent for any property under lease or agreement to lease, except for: (a) leases of the Company and of Subsidiaries in existence on the Closing Date and any renewal, extension or refinancing thereof; (b) operating leases entered into by the Company or any Subsidiary after the Closing Date in the ordinary course of business; (c) leases entered into by the Company or any Subsidiary after the Closing Date pursuant to sale-leaseback transactions permitted under subsection 7.02(d); (d) Capital Leases other than those permitted under clauses (a) and (c) of this Section, entered into by the Company or any Subsidiary after the Closing Date to finance the acquisition of equipment; provided that the aggregate annual rental payments for all such capital leases shall not exceed in any fiscal year $2,500,000. 7.11 Restricted Payments. The Company shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding, unless at the time thereof and after giving effect thereto the Company shall be in compliance with the financial covenant set forth in Section 7.17. 7.12 ERISA. The Company shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Company in an aggregate amount in excess of $1,000,000 ; or (b) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 7.13 Capital Expenditures. The Company and its Subsidiaries shall not make or commit to make Capital Expenditures in an amount greater than (a) $100 million in the aggregate during the first three Loan Years, (b) $25 million in the aggregate during the fourth Loan Year, and (c) $25 million in the aggregate during the fifth Loan Year plus the difference between (i) $25 million, minus (ii) the amount of Capital Expenditures made or committed by the Company and its Subsidiaries in the aggregate during the fourth Loan Year. 7.14 Debt to Cash Flow Ratio. The Company shall not, as of the last day of any fiscal quarter, permit its ratio of (i) Funded Debt minus Core Cash Balances, to (ii) EBITDA for the four fiscal quarters ending on such date, to exceed 2.5 to 1.0. 7.15 Interest Coverage Ratio. The Company shall not, as of the last day of any fiscal quarter, permit its ratio of (i) EBITDA, to (ii) Consolidated Net Interest Expense, for the four fiscal quarters ending on such date, to be less than 2.5 to 1.0. 7.16 Working Capital Ratio. The Company shall not, as of the last day of any fiscal quarter, permit its ratio of (i) Total Cash Balances plus Accounts Receivable, to (ii) the aggregate outstanding principal balance of Revolving Loans plus the aggregate amount of Letter of Credit Outstandings, to be less than 1.25 to 1.0. 7.17 Minimum Adjusted Net Worth. The Company shall not, as of the last day of any fiscal quarter, permit its Adjusted Net Worth to be less than the sum of (i) $200 million, plus (ii) an amount equal to 50% of the net income of the Company and its Subsidiaries as determined on a consolidated basis in accordance with GAAP for the four fiscal quarters ending on such date. 7.18 Change in Business. The Company shall not, and shall not suffer or permit any Subsidiary to, engage in any material line of business substantially different from those lines of business carried on by the Company and its Subsidiaries on the date hereof. 7.19 Accounting Changes. The Company shall not, and shall not suffer or permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change the fiscal year of the Company or of any Subsidiary. ARTICLE VIII EVENTS OF DEFAULT 8.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to make, (i) when and as required to be made herein, payments of any amount of principal of any Loan or any Reimbursement Obligation, or (ii) within five (5) days after the same becomes due, payment of any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company or any Subsidiary made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer,furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Section 6.01,6.02, 6.03 or 6.09 or in Article VII (other than Sections 7.04, 7.06 and 7.08); or (d) Other Defaults. The Company or any Subsidiary party thereto fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such failure or (ii)] the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (A) fails to make any payment in respect of the Senior Indebtedness, or any Indebtedness or Contingent Obligation (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) which individually or in the aggregate exceeds $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise), and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (B) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to the Senior Indebtedness or any such other Indebtedness or Contingent Obligation which individually or in the aggregate exceeds $10,000,000, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of the Senior Indebtedness or such other Indebtedness or beneficiary or beneficiaries of the Senior Indebtedness or such other Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause the Senior Indebtedness or such other Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; (f) Insolvency; Voluntary Proceedings. The Company or any Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course other than in connection with a sale permitted by Section 7.02; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) ERISA. (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $1,000,000; or (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $1,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $1,000,000 ; or (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $1,000,000 or more, and the same shall remain unvacated and unstayed pending appeal for a period of 10 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) Change of Control. There occurs any Change of Control; or (l) Loss of Licenses. Any Governmental Authority revokes or fails to renew any material license, permit or franchise of the Company or any Subsidiary, or the Company or any Subsidiary for any reason loses any material license, permit or franchise, or the Company or any Subsidiary suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise the effect of which could reasonably result in a Material Adverse Effect; or (m) Adverse Change. There occurs a Material Adverse Effect; or (n) Guarantor Defaults. The Guarantors fail in any material respect to perform or observe any term, covenant or agreement in the Guaranty; or the Guaranty is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or the Guarantors or any other Person contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder; or any event described at subsections (f) or (g) of this Section occurs with respect to either Guarantor; or (o) Collateral. (i) any provision of any Collateral Document shall for any reason cease to be valid and binding on or enforceable against the Company or any Subsidiary party thereto or the Company or any Subsidiary shall so state in writing or bring an action to limit its obligations or liabilities thereunder; or (ii) any Collateral Document shall for any reason (other than pursuant to the terms thereof) cease to create a valid security interest in the Collateral purported to be covered thereby or such security interest shall for any reason cease to be a perfected and first priority security interest subject only to Permitted Liens. 8.02 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, (a) declare the commitment of each Bank to make Loans to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; (c) terminate any Letter of Credit that may be terminated in accordance with its terms; (d) direct the Company to pay (and the Company agrees that upon receipt of such notice, or upon the occurrence of any Event of Default specified in paragraph (f) or (g) of Section 8.01 above, it will pay) to the Agent such additional amount of cash, to be held as security by the Agent for the account of the Banks, as is equal to the aggregate Stated Amount of all Letters of Credit then outstanding; and (e) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.01 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 8.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. 8.04 Certain Financial Covenant Defaults. In the event that, after taking into account any extraordinary charge to earnings taken or to be taken as of the end of any fiscal period of the Company (a "Charge"), and if solely by virtue of such Charge, there would exist an Event of Default due to the breach of any of Sections 7.14 through 7.17 of such fiscal period end date, such Event of Default shall be deemed to arise upon the earlier of (a) the date after such fiscal period end date on which the Company announces publicly it will take, is taking or has taken such Charge (including an announcement in the form of a statement in a report filed with the SEC) or, if such announcement is made prior to such fiscal period end date, the date that is such fiscal period end date, and (b) the date the Company delivers to the Agent its audited annual or unaudited quarterly financial statements in respect of such fiscal period reflecting such Charge as taken. ARTICLE IX THE AGENT 9.01 Appointment and Authorization; "Agent". Each Bank hereby irrevocably (subject to Section 9.09) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. 9.02 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.03 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or for the value of or title to any Collateral, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 9.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Section 4.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. 9.05 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.06 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, the value of and title to any Collateral, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.07 Indemnification of Agent. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.08 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans and the other Obligations, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 9.09 Successor Agent. The Agent may, and at the request of the Majority Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent for the Banks; provided, however, that in the absence of a Default or an Event of Default, the Majority Banks shall obtain the consent of the Company to such appointment, which consent shall not be unreasonably withheld. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks; provided, however, that in the absence of a Default or an Event of Default, the Agent shall obtain the consent of the Company to such appointment, which consent shall not be unreasonably withheld. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns,grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. 9.11 Collateral Matters. (a) The Agent is authorized on behalf of all the Banks, without the necessity of any notice to or further consent from the Banks, from time to time to take any action with respect to any Collateral or the Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Collateral Documents. (b) The Banks irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations known to the Agent and payable under this Agreement or any other Loan Document; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which the Company or any Subsidiary owned no interest at the time the Lien was granted or at any time thereafter; (iv) constituting property leased to the Company or any Subsidiary under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Company or such Subsidiary to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Majority Banks or all the Banks, as the case may be, as provided in subsection 10.01(f). Upon request by the Agent at any time, the Banks will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this subsection 9.11(b), provided that the absence of any such confirmation for whatever reason shall not affect the Agent's rights under this Section 9.11. (c) Each Bank agrees with and in favor of each other (which agreement shall not be for the benefit of the Company or any Subsidiary) that the Company's obligation to such Bank under this Agreement and the other Loan Documents is not and shall not be secured by any real property collateral now or hereafter acquired by such Bank. ARTICLE X MISCELLANEOUS 10.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent at the written request of the Majority Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.02); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan or Reimbursement Obligation, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.14, or any provision herein providing for consent or other action by all Banks; or (f) discharge any Guarantor, or release any portion of the Collateral having a book value in excess of $1,000,000 except as otherwise may be provided in the Collateral Document or except where the consent of the Majority Banks only is specifically provided for; and, provided further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document. 10.02 Notices. (a) All notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.02, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.02; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Articles II or IX to the Agent shall not be effective until actually received by the Agent. (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans and the Letter of Credit Outstandings shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.04 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (including in its capacity as Agent) within five Business Days after demand (subject to subsection 4.01(e)) for all costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent and each Bank within five Business Days after demand (subject to subsection 4.01(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans and the Letters of Credit, and including in any Insolvency Proceeding or appellate proceeding); and (c) pay or reimburse BofA (including in its capacity as Agent) within five Business Days after demand (subject to subsection 4.01(e)) for all reasonable appraisal (including the allocated cost of internal appraisal services), audit, environmental inspection and review (including the allocated cost of such internal services), search and filing costs, fees and expenses, incurred or sustained by BofA (including in its capacity as Agent) in connection with the matters referred to under subsections (a) and (b) of this Section. 10.05 Company Indemnification. (a) Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the other Obligations and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Obligations or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all of the Obligations. (b) (i) The Company shall indemnify, defend and hold harmless each Indemnified Person, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Attorney Costs and the allocated cost of internal environmental audit or review services), which may be incurred by or asserted against such Indemnified Person in connection with or arising out of any pending or threatened investigation, litigation or proceeding, or any action taken by any Person, with respect to any Environmental Claim arising out of or related to any property owned, leased or used by the Company or its Subsidiaries. No action taken by legal counsel chosen by the Agent or any Bank in defending against any such investigation,litigation or proceeding or requested remedial, removal or response action shall vitiate or any way impair the Company's obligation and duty hereunder to indemnify and hold harmless the Agent and each Bank. (ii) In no event shall any site visit, observation, or testing by the Agent or any Bank (or any contractee of the Agent or any Bank) be deemed a representation or warranty that Hazardous Materials are or are not present in, on, or under, the site, or that there has been or shall be compliance with any Environmental Law. Neither the Company nor any other Person is entitled to rely on any site visit, observation, or testing by the Agent or any Bank. Neither the Agent nor any Bank owes any duty of care to protect the Company or any other Person against, or to inform the Company or any other party of, any Hazardous Materials or any other adverse condition affecting any site or property. Neither the Agent nor any Bank shall be obligated to disclose to the Company or any other Person any report or findings made as a result of, or in connection with, any site visit, observation, or testing by the Agent or any Bank. (c) The obligations in this Section shall survive payment of all of the Obligations. At the election of any Indemnified Person, the Company shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's sole discretion, at the sole cost and expense of the Company. All amounts owing under this Section shall be paid within 30 days after demand. 10.06 Marshalling; Payments Set Aside. Neither the Agent nor the Banks shall be under any obligation to marshall any assets in favor of the Company or any other Person or against or in payment of any or all of the Obligations. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. 10.08 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Agent and, in the absence of a Default or an Event of Default, the Company, which consent shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Agent or the Company shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $1,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with he interest so assigned to an Assignee until (A) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (B) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Assumption in the form of Exhibit E ("Assignment and Assumption") together with any Note or Notes subject to such assignment and (C) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of 1% of the amount so assigned by such Bank to the Assignee. (b) From and after the date that the Agent notifies the assignor Bank that it has received and provided its consent with respect to an executed Assignment and Assumption and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Assumption, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Assumption, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Assumption and payment of the processing fee, the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Assumption, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 10.01. In the case of any such participation, the Participant shall not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.09 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Company and provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) with the Company's consent (in the absence of a Default or an Event of Default), to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 10.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.11 Automatic Debits of Fees. With respect to any commitment fee, agency fee, or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Agent or BofA under the Loan Documents, the Company hereby irrevocably authorizes BofA to debit any deposit account of the Company with BofA in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in BofA's sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off. 10.12 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.13 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.14 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.15 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent- Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.16 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. 10.17 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.18 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in Chicago, Illinois by their proper and duly authorized officers as of the day and year first above written. NS GROUP, INC. By: /s/John R. Parker Title: Vice President and Treasurer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/Jay McKeown Title: Assistant Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: /s/Edmund H. Lester Title: Senior Vice President SCHEDULE 2.01 COMMITMENTS AND PRO RATA SHARES Bank Commitment Pro Rata Shares Bank of America National Trust and Savings Association $50,000,000 100% SCHEDULE 10.02 OFFSHORE AND DOMESTIC LENDING OFFICES ADDRESSES FOR NOTICES BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent Bank of America National Trust and Savings Association 231 South LaSalle Street Chicago, Illinois 60697 Attention: Edmund H. Lester Telephone: (312) 828-5969 Facsimile: (312) 974-2108 Agent's Payment Office: Bank of America National Trust and Savings Association 231 South LaSalle Street Chicago, Illinois 60697 Attention: Edmund H. Lester Telephone: (312) 828-5969 Facsimile: (312) 974-2108 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank Domestic and Offshore Lending Office: Bank of America National Trust and Savings Association 231 South LaSalle Street Chicago, Illinois 60697 Attention: Edmund H. Lester Telephone: (312) 828-5969 Facsimile: (312) 974-2108 Notices (other than Borrowing notices and Notices of Conversion/Continuation): Bank of America National Trust and Savings Association 231 South LaSalle Street Chicago, Illinois 60697 Attention: Edmund H. Lester Telephone: (312) 828-5969 Facsimile: (312) 974-2108 EX-10 3 Exhibit 10.9 FORM OF CHANGE OF CONTROL SEVERANCE AGREEMENT AGREEMENT by and between NS Group, Inc., a Kentucky Corporation (the "Company), and ____________________ (the "Employee"), dated as of the _______ day of __________________, 1998. The Company wishes to assure that it will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Company believes it is imperative to diminish the inevitable distraction of the Employee by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control, to encourage the Employee's full attention and dedication to the Company upon a Change of Control, and to provide the Employee with compensation arrangements upon a Change of Control which provide the Employee with individual financial security and which are competitive with those of other corporations and, in order to accomplish these objectives, the Company desires to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: Certain Definitions "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 percent or greater voting or economic interest or the power to control. For the 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. "Agreement Period" shall mean the period as defined in Section 2 of this Agreement. "Board of Directors" shall mean the Board of Directors of the Company as constituted from time to time. "Change of Control" shall mean: 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: 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; the stockholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; 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 Securities Exchange Act of 1934, as amended ("the Exchange Act")) ("Beneficial Owner") 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; a Person or Group of Persons, together with any Affiliates thereof, shall succeed in having a sufficient number of its nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate of such Person or Group of Persons, will constitute a majority of the Board of Directors of the Company; provided that the Person or Group of Persons referred to in clauses (i), (iv) and (v) shall not mean Clifford Borland or any Group of Persons with respect to which Clifford Borland is the Beneficial Owner of the majority of the voting equity interests. "Cause" for termination of the Employee's employment shall be deemed to exist if the Board of Directors of the Company should determine that the Employee has committed any of the following: (i) fraud; (ii) misappropriation of Company property or funds; (iii) embezzlement; (iv) malfeasance in office; (v) misfeasance in office which is willful or grossly negligent; or (vi) nonfeasance in office which is willful or grossly negligent. "Company" as used herein includes NS Group, Inc. and any of its subsidiaries and divisions and, as provided by Section 12(b) hereof, any successor. "Date of Termination" shall be the date on which the Notice of Termination is actually perceived by the addressee, or alternatively, if the Notice of Termination specifies a date other than the date of receipt of such notice then that specified date shall be the Date of Termination. "Effective Date" shall mean the first date on which a Change of Control occurs; provided, however, that if the Employee's employment is terminated by the Company prior to the date on which a Change of Control occurs, and the Employee can reasonably demonstrate that such termination by the Company was in contemplation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination. "Good Reason" means: (i) any material change in compensation; (ii) substantial decrease in the nature or scope of the Employee's duties, responsibilities, powers, authority, title, position or status; (iii) unreasonable travel requirements; (iv) any relocation required on the part of Employee, without his consent, outside of a 50-mile radius from the place of his employment on the Effective Date; or (v) material breach by the Company of an employment, compensation or similar agreement between the Employee and the Company. "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 within the meaning of Section 13(d)(3) or 14(d) (2) of the Exchange Act. "Reduce Amount" as used herein shall mean the maximum amount which could be paid to the Employee under this Agreement without any portion of such amount being nondeductible by the Company by virtue of Section 280G of the Internal Revenue Code of 1986, as amended. "Voting Power" shall mean the voting power of all securities of a Person then outstanding generally entitled to vote for the election of directors of the Person (or, where appropriate, for the election of persons performing similar functions). Agreement Period The Company hereby agrees to provide the Employee with the protections and benefits enumerated in Section 3 of this Agreement for the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. Obligations of the Company Upon Termination Notice of Termination. Any termination after the Effective Date by the Company or by the Employee shall be communicated by Notice of Termination, within ten (10) business days after the later of the date of employment termination or the date of Change of Control, to the other party hereto given in accordance with Section 13(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment, and (ii) if the termination date is other than the date of receipt of such notice, specifies the termination date. (b) Termination by the Company for Cause; Termination by the Employee for Other Than Good Reason. If, during the Agreement Period, the Company shall terminate the Employee's employment other than for Cause, or the employment of the Employee shall be terminated by the Employee for Good Reason, the Employee shall be entitled to the following payments and benefits: (i) The Company shall pay to the Employee in a lump sum in cash within thirty (30) days after the Date of Termination the aggregate of two (2) times the amount of the Employee's base salary in effect on the Date of Termination and two (2) times the average amount of the Employee's bonus payments made in the five (5) years prior to the Date of Termination, plus a payment equal to a pro rata portion (based on the whole number of months worked in the fiscal year by the Employee prior to the Date of Termination and, if applicable performance targets have not been met on the Date of Termination, based on a reasonable estimate of the amount of bonus to be earned for the full year) of the Employee's annual bonus for the year of termination. (ii) For two (2) years after the Date of Termination, the Company shall continue providing medical, dental, life and disability insurance benefits to the Employee in an amount equivalent to that which would have been provided to the Employee had the Employee's employment not been terminated. The Employee shall not be obligated to pay higher fees for such benefits than he or she was paying at the Date of Termination. In the event it is not possible to provide this continued coverage, the Company shall provide the Employee with a cash payment in the amount necessary for the Employee to purchase equivalent insurance for two (2) years after the Date of Termination. (iii) Within ten (10) business days after the later of the date of employment termination or the date of Change of Control, the Company shall provide, at no cost to the Employee, individual outside assistance for the Employee in finding other employment. Such obligation may be fulfilled by the Company through the retention of an outplacement service for use by the Employee. Reduction of Termination Benefits In the event the Company's independent auditors (the "Accounting Firm") shall determine that any payment or distribution by the Company to or for the benefit of the Employee made pursuant to Section 3 of this Agreement would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement shall be limited to the Reduced Amount. If the Accounting Firm makes such a determination, the Company shall promptly provide the Employee with notice to that effect as well as a copy of both the detailed calculation thereof and the Reduced Amount. Funding of Grantor Trust The Board of Directors of the Company shall have the option to establish a so-called "Rabbi Trust" upon the occurrence, or in anticipation, of a Change of Control to secure for the Employee the benefits provided pursuant to Section 3 of this Agreement. If the Board of Directors elects to do so, the Company shall, immediately upon the occurrence of a Change of Control, make an irrevocable contribution to the Rabbi Trust in an amount that is sufficient to pay the Employee the benefits to which such Employee would be entitled pursuant to the terms of this Agreement as of the date on which the Change of Control occurred. Non-exclusivity of Rights Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights that the Employee may have under any stock option or other agreements with the Company. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. No Setoff; Cooperation The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others. Confidential Information The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its businesses, which shall have been obtained by the Employee during the Employee's employment by the Company and which shall not be public knowledge. After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company, communicate or divulge any secret or confidential information, knowledge or data to anyone other than the Company and those designated by it. Non-Solicitation The Employee agrees that, during the Agreement Period, the Employee will not: (i) solicit, raid, entice, or induce any present or prospective employee of the Company to be employed by any competitor of the Company, or (ii) assist a competitor in taking such action. Remedies. The Employee agrees that any breach or threatened breach or alleged breach or alleged threatened breach by the Employee of any provision of Sections 8 or 9 will entitle the Company, in addition to any other legal remedies available to it, to apply to any court of competent jurisdiction to enjoin the breach or threatened breach or alleged breach or alleged threatened breach, it being acknowledged and agreed that any such material breach will cause irreparable injury to the Company and that any damages will not provide adequate remedies to the Company. The parties understand and intend that each restriction agreed to by the Employee will be construed as separable and divisible from every other restriction, and that the unenforceability, in whole or in part, of any restriction will not affect the enforceability of the remaining restrictions and that one or more or all of such restrictions may be enforced in whole or in part as the circumstances warrant. No waiver of any one breach of the restrictions contained herein will be deemed a waiver of any future breach. 10. Exclusive Remedy The Employee's rights to severance benefits pursuant to Section 3 hereof shall be the Employee's sole and exclusive remedy for any termination of the Employee's employment by the Company without Cause or by the Employee for Good Reason. The payments, severance benefits and severance protections provided to the Employee pursuant to this Agreement are provided in lieu of any severance payments, severance benefits and severance protections provided in any other plan or policy of the Company, except as may be expressly provided in writing under the terms of any plan or policy of the Company, or in a written agreement between the Company and the employee entered into after the date of this Agreement. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. 11. Statement of Intention It is the intention of the parties hereto that, prior to the Effective Date, this Agreement shall not create any rights or obligations in the Employee or the Company , or require any payments by the Company to the Employee. Successors The Employee. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives. The Company. This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall include any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Miscellaneous Interpretation. This Agreement shall be governed by and construed in accordance with the laws of the State of Kentucky, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Legal Fees. In the event of any litigation involving this Agreement, and if the Employee is successful in such litigation, the Company will reimburse the Employee for all legal fees and expenses paid by the Employee in prosecuting or defending such litigation. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed to the Employee at the Employee's address on the payroll records of the Company and to the Company as follows: NS Group, Inc. Ninth & Lowell Streets P.O. Box 1670 Newport, Kentucky 41072 Attention: President And to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. No Waiver. The failure of the Employee or the Company to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. Entire Agreement. This Agreement contains the entire understanding of the Company and the Employee with respect to the subject matter hereof. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. Dispute to Resolution Procedures. If any question shall arise in regard to the interpretation of any provision of this Agreement or as to the rights and obligations of either of the parties hereunder, the Employee and a designated representative of the Company shall meet with each other to negotiate and attempt to resolve such question in good faith. The Employee and such representative may, if they so desire, consult outside experts for assistance in arriving at a resolution. In the event that a resolution is not achieved within fifteen (15) days after their first meeting, then either party may submit the question for final resolution by binding arbitration in accordance with the rules and procedures of the American Arbitration Association applicable to commercial transactions, and judgment upon any award thereon may be entered in any court having jurisdiction thereof. The arbitration shall be held in Covington, Kentucky. In the event of any arbitration, the Employee shall select one arbitrator, the Company shall select one arbitrator and the two arbitrators so selected shall select a third arbitrator, any two of which arbitrators together shall make the necessary determinations. All out-of-pocket costs and expenses of the parties in connection with such arbitration, including, without limitation, the fees of the arbitrators and any administration fees and reasonable attorney's fees and expenses, shall be borne by the parties in such proportions as the arbitrators shall decide that such expenses should, in equity, be apportioned. IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement as of the day and year first above written. I HAVE READ THIS CHANGE OF CONTROL SEVERANCE AGREEMENT AND, UNDERSTANDING ALL ITS TERMS, INCLUDING THAT THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES, I SIGN IT AS MY FREE ACT AND DEED. Employee: Company: NS GROUP, INC. SCHEDULE OF DOCUMENTS OMITTED The following agreements are substantially identical to the Form of Change of Control Severance Agreement shown here, except for the identity of the employee, dates of execution and, except that under paragraph 3.(c)(i), Mr. C.R. Borland's payment would be the aggregate of three times the amount of his then current base salary and three times the average amount of his bonus payments in the prior five years. These documents are not filed as separate documents in accordance with Exchange Act rule 12b-31. Employee: Clifford R. Borland Ronald R. Noel John R. Parker EX-10 4 Exhibit 10.10 FORM OF SALARY CONTINUATION AGREEMENT (Retirement or Death) This Agreement is entered into as of July 16, 1998 between NS Group, Inc., a corporation having its corporate office in Newport, Kentucky (herein called the "Company"), and __________________, herein called the "Employee"). WITNESSETH: WHEREAS, Employee is employed by the Company in the capacity of ___________________ of ________________and by reason thereof, has acquired experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to Employee to remain in its employ by compensating him beyond his regular salary for services which he had rendered or will hereafter render; and WHEREAS, Employee is willing to continue in the employ of the Company until his retirement, or until it is mutually agreed by both the Company and the Employee, that his services are no longer necessary. NOW THEREFORE, it is mutually agreed as follows: (1) As of the date of this Agreement, Employee is employed by the Company in the capacity of ________________ of ______________, and Employee hereby agrees to continue such employment upon the terms and conditions set forth in this Agreement. Employee is an "at will" employee of the Company and this Agreement does not impose any obligation for the employment relationship to continue for a specified period of time. (2) As compensation for his services, the Company hereby agrees to pay Employee and Employee hereby agrees to accept from the Company, a yearly salary to be determined by the Board of Directors of the Company. (3) In the event that Employee remains in the continuous employ of the Company to his sixty-second (62) birthday, he shall retire from active employment on that date, unless by action of the Board of Directors of the Company, his period of active employment shall be shortened or extended. (4) Upon Employee's retirement from Company as specified in paragraph (3) above, commencing with the first day of the month following the date of such retirement, the Company shall pay Employee Amount $__________ per month for life. In the event that the Employee dies after his retirement from the Company as specified in paragraph (3) above, but prior to the date that one hundred twenty (120) monthly payments have been made by the Company, the Company shall continue such monthly payments of $_________ to Employee's spouse or such other person as Employee has designated (the "Designee"), until all the one hundred twenty (120) monthly payments have been made by the Company. (5) In the event Employee dies while in the active employ of the Company, the Company shall pay to Employee's spouse or Designee, one hundred twenty (120) monthly payments of Amount $ . Such payments shall commence on the first day of the month following Employee's death. (6) This Agreement, together with all of the rights and obligations created hereunder, shall terminate in the event that Employee's employment with the Company ceases for any reason other than: (a) retirement in accordance with paragraph (3) above; or (b) death prior to reaching age 62 (or any other age specified by the Board of Directors of the Company pursuant to paragraph (3) above). (7) Employee agrees that, without the written consent of the Board of Directors of the Company, he will not, during the term of his employment with the Company or any business entity controlling, controlled by or under common control with the Company (an "Affiliate"), directly or indirectly engage in any activity, or in any manner be connected with or employed by any person, firm, corporation, or any other entity, in competition with the Company or any Affiliate. Employee also agrees that during the term of his employment with the Company or any Affiliate, he will not call upon, solicit, divert, or take away or attempt to solicit, divert, or take away any of the customers or employees of the Company or any Affiliate. Employee also agrees that this restriction against competition and solicitation will also remain in effect for the later of five (5) years after his employment with the Company ends, or for as long as the monthly payments to him are made by the Company pursuant to paragraph (4) of this Agreement. Employee further agrees that he will not, during the term of his employment with the Company or any Affiliate and for a period of five (5) years thereafter, disclose to anyone not legally entitled thereto any confidential or proprietary information or trade secrets relating to the business of the Company. (8) Employee agrees that, if he breaches any covenant of paragraph (7) above, no further payments shall be due or payable by the Company hereunder either to Employee or to Employee's spouse or Designee and the Company shall have no further liability or obligation hereunder. (9) The benefits provided hereunder shall be in addition to Employee's annual salary, as determined by the Board of Directors of the Company and shall not affect the right of the Employee to participate in any current or future Company retirement plan or in any supplemental compensation arrangement which constitutes a part of the Company's regular compensation structure. Upon Employee's termination of employment, his annual base salary and other benefits shall cease upon commencement of the benefits provided hereunder, except as required by applicable law. (10) It is agreed that neither Employee nor Employee's spouse or Designee shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be non-transferable. In the event that Employee or Employee's spouse or Designee takes any action or agrees to take any action in violation of paragraph (10), the Company shall have no further liability or obligation hereunder. (11) If the Company acquires an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood by Employee and agreed to by him, that neither Employee nor Employee's spouse or Designee shall have any right with respect to or claim against, such policy or asset, except as expressly provided by the terms of such policy or in the title to such asset. Such policy or asset: (a) shall not be deemed to be held under any trust for the benefit of Employee or Employee's spouse or Designee; (b) shall not be held in any way as collateral security for the fulfillment of the obligations of the Company under this Agreement, except as may be expressly provided by the terms of such policy or title to such asset; and (c) shall be, and remain, a general unpledged, unrestricted asset of the Company. (12) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, permitted assigns and other legal representatives. Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any other persons other than the Company, each of the Company's Affiliates, Employee, Employee's spouse or any Designee, and their respective successors, permitted assigns and other legal representatives. (13) This Agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. (14) This Agreement may be executed simultaneously in two counterparts, each of which shall be deemed an original but both of which taken together shall constitute one and the same instrument. (15) Whenever the singular number is used herein it shall include the plural if the context so requires and reference to the masculine gender herein shall be deemed to refer to all genders. (16) The Company, or any successor thereto, may not amend or terminate this Agreement at any time, without the written consent of the Employee. (17) The Company shall use its best efforts to cause this Agreement to be assumed by any successor to the Company by virtue of a sale of substantially all of its assets or otherwise. (18) This Agreement shall supersede any previous agreement between Employee and the Company with regard to salary continuation benefits. IN WITNESS WHEREOF, Employee and the Company, by its duly authorized officer, have executed this Agreement as of _____________. Attest: NS GROUP, INC. By: Witness Title: EMPLOYEE Witness SCHEDULE OF DOCUMENTS OMITTED The following agreements are substantially identical to the Form of Salary Continuation Agreement shown here, except for the identity of the employees and the amount of the monthly benefit. These documents are not filed as separate documents in accordance with Exchange Act rule 12b-31. Employee Monthly Benefit Clifford R. Borland $16,406 Paul C. Borland, Jr. 9,000 Ronald R. Noel 8,333 John R. Parker 7,438 EX-10 5 EXHIBIT 10.11 CONSULTING AGREEMENT THIS AGREEMENT, is made this 16th day of June, 1998 ("Agreement"), by and between NS GROUP, INC. ("Company") and PAUL C. BORLAND, JR. ("Consultant"). WHEREAS, Consultant has been employed by the Company as President of Koppel Steel Corporation ("Koppel") and as President and Chief Operating Officer of the Company; and WHEREAS, Consultant is retiring as an officer of the Company, effective July 31, 1998; and WHEREAS, the Company has requested that Consultant remain available to oversee and direct the operations of Koppel after his retirement from active employment; NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows: 1. Consultant will be retained by the Company, effective August 1, 1998, to oversee and direct the operations of Koppel until this Agreement is terminated by either party pursuant to paragraph 4. 2. For his services, Consultant will receive a consulting fee of $1,500.00 per day, plus reasonable expenses incurred by Consultant in providing such service, payable on the last business day of each month. Consultant will be available as needed, but will provide such services no more than fifteen (15) days per month, without his prior agreement to work a greater number of days. A day in which Consultant spends four (4) hours or less in performing such service will count as one-half day; a day in which he spends more than four (4) hours, but no more than eight (8) hours, will count as a full day. If Consultant works more than eight (8) hours in a day, the excess hours will be credited toward another day of service. 3. In performing such service, Consultant will act as an independent contractor and will not be an employee of the Company or Koppel. He will report on a regular basis and when requested to the Chairman of the Board and Chief Executive Officer of the Company. 4. This Agreement may be terminated by either party on or after November 1, 1998, upon thirty (30) days prior written notice to the other party. Any notice given pursuant to this Agreement is to be sent via first-class mail or fax as follows: TO THE COMPANY: Mr. Clifford R. Borland FAX: (606) 292-6825 Chairman and C.E.O. NS Group, Inc. Ninth & Lowell Streets Newport, Kentucky 41072 TO THE CONSULTANT: Mr. Paul C. Borland, Jr. Fax: (724) 625-9551 403 Appleridge Ct. Gibsonia, Pennsylvania 15044 5. This Agreement will be binding upon and inure to the benefit of the parties and shall not be assigned by either party without the prior written consent of the other party. 6. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Kentucky. 7. This Agreement contains the entire agreement between the parties with respect to this matter and supersedes any previous understandings or agreements, written or oral, regarding such consulting services. Items numbered (3) and (6) of the Compensation Package for Consultant, which was approved by the Board of Directors of the Company on January 10, 1996, will remain in effect. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed individually and by a duly authorized representative as of the date first set forth above. NS GROUP, INC. By: /s/ Clifford R. Borland Clifford R. Borland Chairman and C.E.O. CONSULTANT By: /s/ Paul C. Borland Jr. Paul C. Borland, Jr. EX-13 6 Exhibit 13 The following are the excerpted portions of the NS Group, Inc. Annual Report to Shareholders for the fiscal year ended September 26, 1998 which are expressly incorporated by reference into Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of financial condition and results of operations of the Company should be read in conjunction with the audited Consolidated Financial Statements and related Notes of the Company. The matters discussed or incorporated by reference in this report that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. Such risks and uncertainties include, but are not limited to: (i) the level and cyclicality of domestic as well as worldwide oil and natural gas drilling activity; (ii) general economic conditions; (iii) product demand, inventory levels, and industry capacity; (iv) industry pricing; (v) the level of imports and the presence or absence of governmentally imposed trade restrictions; (vi) manufacturing efficiencies; (vii) volatility in raw material costs, particularly steel scrap; (viii) costs of compliance with environmental regulations; and (ix) product liability or other claims. These risks and uncertainties may cause the actual results or performance of the Company to differ materially from any future results or performance expressed or implied by such forward-looking statements. General The Company operates in two business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Newport Steel Corporation (Newport), a manufacturer of welded tubular steel products and hot rolled coils, and Koppel Steel Corporation (Koppel), a manufacturer of seamless tubular steel products and special bar quality (SBQ) products. The Company's specialty steel products consist of: (i) welded and seamless tubular goods used primarily in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products used primarily 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 Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives products. See Note 13 to the Consolidated Financial Statements included herein for selected financial information by business segment. Results of Operations Recent Results Demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current prices of oil and natural gas and expectations regarding future prices. In addition, shipments by domestic producers of OCTG products are influenced by the levels of inventory held by producers, distributors and end users, as well as the level of foreign imports of OCTG products. Demand for the Company's OCTG products began to soften in the latter part of the fiscal 1998 second quarter and continued to decline through the end of fiscal 1998. The decline in sales and shipments was attributable to a decline in U.S. drilling activity coupled with excess industry-wide OCTG and line pipe inventories. The average number of oil and natural gas drilling rigs in operation in the United States (rig count) in the fourth quarter of fiscal 1998 declined 8.2% from the third quarter of fiscal 1998. Rig count in the fourth quarter of fiscal 1998 declined 19.8% from the fourth quarter of fiscal 1997. The fiscal 1998 fourth quarter gross losses and operating losses of Newport and Koppel were due to lower shipment volumes and declines in the average selling prices of OCTG and line pipe products. Fiscal 1998 fourth quarter average tubular selling prices for Newport and Koppel declined 9.6% and 6.7%, respectively, from the fourth quarter of fiscal 1997. Fiscal 1998 fourth quarter gross margins were also negatively impacted by significantly reduced operating levels at both Newport and Koppel, as production was curtailed in response to lower market demand. Newport's melt shop and pipe mill capacity utilization was 32.4% and 32.7%, respectively, in the fourth quarter of fiscal 1998 compared to 62.1% and 82.6%, respectively, for the fourth quarter of fiscal 1997. Koppel's melt shop and tube mill capacity utilization was 48.1% and 29.5%, respectively, in the fourth quarter of fiscal 1998 compared to 83.4% and 81.3%, respectively, for the fourth quarter of fiscal 1997. The Company anticipates that, at least for the first half of fiscal 1999, energy market conditions will continue to be weak, resulting in continued low levels of shipments and operations, particularly as compared to the first half of fiscal 1998. The following table sets forth certain information with respect to the Company and its Newport and Koppel operations for the quarterly periods of fiscal 1998 and 1997. Reference is also made to Note 14: Quarterly Financial Data (Unaudited) of the Notes to Consolidated Financial Statements for further quarterly data. Fiscal 1998 Fourth Third Second First Quarter Quarter Quarter Quarter (Dollars in thousands) Net sales Newport $ 23,942 $32,638 $ 50,469 $ 54,781 Koppel 30,837 53,565 63,633 59,428 $ 54,779 $86,203 $114,102 $114,209 Gross profit (loss) Newport $ (7,869) $ 84 $ 5,315 $ 8,053 Koppel 454 6,616 8,472 7,114 $ (7,415) $ 6,700 $ 13,787 $ 15,167 Operating income (loss) Newport $ (9,172) $(1,628) $ 3,162 $ 6,262 Koppel (1,586) 4,571 6,825 5,465 $(10,758) $ 2,943 $ 9,987 $ 11,727 Tons shipped Newport 51,000 67,600 98,800 104,600 Koppel - tubular 19,500 39,100 46,900 46,500 Koppel - SBQ 31,900 45,700 45,700 36,800 102,400 152,400 191,400 187,900 Rig count 794 865 966 997 Fiscal 1997 Fourth Third Second First Quarter Quarter Quarter Quarter (Dollars in thousands) Net sales Newport $ 60,199 $ 64,052 $ 48,244 $48,086 Koppel 62,119 57,980 52,655 46,894 $122,318 $122,032 $100,899 $94,980 Gross profit (loss) Newport $ 9,466 $ 8,225 $ 7,050 $ 6,380 Koppel 8,643 8,228 6,181 3,522 $ 18,109 $ 16,453 $ 13,231 $ 9,902 Operating income (loss) Newport $ 7,420 $ 6,503 $ 5,281 $ 5,021 Koppel 6,816 6,562 4,517 1,640 $ 14,236 $ 13,065 $ 9,798 $ 6,661 Tons shipped Newport 117,300 127,900 97,800 101,500 Koppel - tubular 50,900 47,200 40,400 33,600 Koppel - SBQ 36,700 40,200 39,500 36,000 204,900 215,300 177,700 171,100 Rig count 990 930 856 846 The Company's net sales, gross profit and operating results by industry segment for each of the three fiscal years in the period ended September 26, 1998 are summarized below. (In thousands) 1998 1997 1996 Net sales: Specialty steel segment Newport $161,830 $220,581 $173,615 Koppel 207,463 219,648 195,851 369,293 440,229 369,466 Adhesives segment 40,562 40,941 39,916 $409,855 $481,170 $409,382 Gross profit: Specialty steel segment Newport $ 5,583 $ 31,121 $ 3,966 Koppel 22,656 26,574 26,251 28,239 57,695 30,217 Adhesives segment 11,004 10,630 9,580 $ 39,243 $ 68,325 $ 39,797 Operating income (loss): Specialty steel segment Newport $ (1,376) $ 24,225 $ (4,855) Koppel 15,275 19,535 19,741 13,899 43,760 14,886 Adhesives segment 2,302 1,799 1,597 Corporate allocations (5,256) (4,591) (4,430) $ 10,945 $ 40,968 $ 12,053 Shipment and sales data for the Company's specialty steel segment for each of the three fiscal years in the period ended September 26, 1998 were as follows: 1998 1997 1996 Tons shipped: Newport Welded tubular products 298,400 418,300 348,900 Hot rolled coils and other products 23,600 26,200 43,300 Koppel Seamless tubular products 152,000 172,100 157,400 SBQ products 160,100 152,400 133,700 634,100 769,000 683,300 Net sales ($000's): Newport Welded tubular products $151,986 $210,245 $157,385 Hot rolled coils and other products 9,844 10,336 16,230 Koppel Seamless tubular products 134,860 152,146 133,446 SBQ products 72,603 67,502 62,405 $369,293 $440,229 $369,466 Fiscal Year Ended September 26, 1998 compared with Fiscal Year Ended September 27, 1997 Net sales in fiscal 1998 decreased $71.3 million, or 14.8%, from fiscal 1997. Specialty steel segment net sales decreased $70.9 million, or 16.1%, and the adhesives segment net sales decreased $0.4 million, or 0.9%, from fiscal 1997. The overall decrease in specialty steel segment net sales was primarily attributable to a decline in shipments of the Company's tubular products as more fully discussed below. Welded tubular net sales decreased $58.3 million, or 27.7%, on a volume decrease of 28.7%. Average selling price for all welded tubular products was $509 per ton, a 1.2% increase from fiscal 1997. The decline in shipments was attributable to welded OCTG products, which was driven by a decline in drilling activity as well as an increase in industry inventory levels compared to fiscal 1997. The rig count for fiscal 1998 was 905, virtually unchanged from fiscal 1997. While the quarterly rig count increased throughout fiscal 1997, fiscal 1998 quarterly rig count declined from a high of 997 in the first fiscal quarter to a low of 794 in the fourth fiscal quarter. Seamless tubular net sales decreased $17.3 million, or 11.4%, on a volume decrease of 11.7%. Average selling price for all seamless tubular products was $887 per ton, virtually unchanged from fiscal 1997. Like welded tubular products, the decline in seamless tubular shipments was attributable primarily to seamless OCTG products, caused by the decline in drilling rig activity and an increase in industry inventory levels. Since 1995, the U.S. government has been imposing duties on the imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. The duties primarily pertain to the import of seamless OCTG products and are subject to annual review by the U.S. Department of Commerce through 2000. During fiscal 1998, imports of welded OCTG and line pipe increased over fiscal 1997, negatively affecting product pricing and shipments. The Company cannot predict the U.S. government's future actions regarding import duties or other trade restrictions on imports of OCTG and line pipe products. SBQ product net sales increased $5.1 million, or 7.6%, on a volume increase of 5.1%. Fiscal 1998 average selling price for SBQ products increased 2.5% from fiscal 1997. Other product shipments and sales for fiscal 1998 were primarily attributable to sales of hot rolled coils. The demand for the Company's SBQ and hot rolled coil products is cyclical in nature and is sensitive to general economic conditions. Gross profit for fiscal 1998 decreased $29.1 million from fiscal 1997, for a gross profit margin of 9.6% in fiscal 1998 compared to 14.2% in fiscal 1997. The specialty steel segment gross profit decreased $29.5 million from fiscal 1997. This segment had a gross profit margin of 7.6% in fiscal 1998 versus 13.1% in fiscal 1997. Newport's gross profit margin for fiscal 1998 decreased to 3.4% from 14.1% in fiscal 1997, and Koppel's margin decreased to 10.9% from 12.1% in fiscal 1997. The decreases were due to lower OCTG product shipments which caused lower operating efficiencies resulting from reduced production levels. Following the successful installation and start-up of a new electric arc furnace, scheduled for completion in the second quarter of fiscal 1999, Newport will be abandoning its existing three electric arc furnaces, together with related property and equipment. See Note 1: Summary of Significant Accounting Policies - Property, Plant and Equipment and Depreciation, to the Notes to the Consolidated Financial Statements. As such, in the fourth quarter of fiscal 1998, Newport recorded to cost of products sold a non-cash impairment loss of $3.2 million. The adhesives segment gross profit increased $0.4 million from fiscal 1997 due to slightly lower raw material costs, a streamlining of its manufacturing processes and a change in product mix resulting from the elimination of certain non-strategic, low margin product lines. Gross profit margin for this segment was 27.1% in fiscal 1998 compared to 26.0% in fiscal 1997. Fiscal 1998 selling and administrative expenses increased $0.9 million from 1997 and increased as a percent of sales to 6.9% from 5.7% in fiscal 1997. As a result of the above factors, operating income decreased $30.0 million to $10.9 million in fiscal 1998 from $41.0 million in fiscal 1997. The decrease was solely attributable to the specialty steel segment and was primarily due to decreased shipments of OCTG products as well as reduced operating efficiencies. Investment income increased $7.3 million from fiscal 1997 and interest expense decreased $11.6 million for the same period. The increase in investment income and the decrease in interest expense is the result of increased average cash and investment balances and a decrease in long-term debt obligations, respectively, which resulted from the Company's September 1997 public offering and related retirement of long-term debt (see Notes 4 and 6 to the Notes to Consolidated Financial Statements.) Other income, net was $0.5 million and $1.5 million for fiscal 1998 and fiscal 1997, respectively. Both years included gains from the sale of certain development property and settlement of insurance claims. The Company's combined federal and state effective tax rate for fiscal 1998 was 36.4%. This rate is lower than the combined federal and state statutory rates primarily due to the utilization of net operating loss carryforwards for which certain deferred tax valuation allowances had been previously recorded. The Company is currently paying federal taxes at the alternative minimum tax rate of 20%. As a result of the above factors, the Company reported fiscal 1998 net income before extraordinary item of $4.5 million, or $.19 per basic and diluted share, compared to net income before extraordinary item of $13.7 million, or $.97 per basic share ($.92 diluted), in fiscal 1997. In connection with the favorable resolution of an environmental contingency matter provided for as an extraordinary charge in previous years, the Company recorded an extraordinary credit of $0.7 million, net of taxes of $0.3 million, or $.03 per basic and diluted share, in fiscal 1998. See Note 9 to the Notes to Consolidated Financial Statements. Fiscal Year Ended September 27, 1997 compared with Fiscal Year Ended September 28, 1996 Net sales in fiscal 1997 increased $71.8 million, or 17.5%, from fiscal 1996. Specialty steel segment net sales increased $70.8 million, or 19.2%, and the adhesives segment net sales increased $1.0 million, or 2.6%, from fiscal 1996. The overall increase in specialty steel segment net sales was primarily attributable to increased shipments and average selling prices of the Company's tubular products as more fully discussed below. Welded tubular net sales increased $52.9 million, or 33.6%, on a volume increase of 19.9%. The increase in total welded tubular net sales was primarily due to an increase in shipments and average selling price of welded OCTG products. The increase in welded OCTG shipments and prices were the result of increased drilling activity. Average selling price for all welded tubular products was $503 per ton, an 11.5% increase from fiscal 1996. Seamless tubular net sales increased $18.7 million, or 14.0%, on a volume increase of 9.3%. The increase in total seamless tubular net sales was primarily due to increased shipments of seamless OCTG products, attributable to increased domestic and international drilling activity, including off-shore drilling. Average selling price for all seamless tubular products was $884 per ton, a 4.2% increase from fiscal 1996, resulting primarily from changes in product mix. The average number of oil and natural gas drilling rigs in operation in the United States was 906 in fiscal 1997, up from 759 in fiscal 1996. SBQ product net sales increased $5.1 million, or 8.2%, on a volume increase of 14.0%. Fiscal 1997 average selling price for SBQ products declined 5.1% from fiscal 1996. While shipments of SBQ products were above prior year levels, market and competitive conditions resulted in lower pricing. Other product shipments and sales for fiscal 1997 were primarily attributable to sales of hot rolled coils. Gross profit for fiscal 1997 increased $28.5 million from fiscal 1996, for a gross profit margin of 14.2% in fiscal 1997 compared to 9.7% in fiscal 1996. The specialty steel segment gross profit increased $27.5 million from fiscal 1996. This segment had a gross profit margin of 13.1% in fiscal 1997 versus 8.2% in fiscal 1996. The increase in specialty steel segment gross profit and margin was attributable to Newport's welded tubular operations, where gross profit margins rose from 2.3% in fiscal 1996 to 14.1% in fiscal 1997. The increase was the result of increased shipments of welded OCTG products, higher average selling prices for all tubular products, improved operating efficiencies and cost reduction initiatives. Koppel's gross profit margin decreased to 12.1% from 13.4% in fiscal 1996, primarily due to a decrease in SBQ selling prices. The adhesives segment gross profit increased $1.1 million from fiscal 1996 due to slightly lower raw material costs. The gross profit margin was 26.0% compared to 24.0% in fiscal 1996. Fiscal 1997 selling and administrative expenses decreased $0.4 million from 1996 and decreased as a percentage of sales from 6.8% in fiscal 1996 to 5.7% in fiscal 1997. As a result of the above factors, operating income increased $28.9 million, from $12.1 million in fiscal 1996 to $41.0 million in fiscal 1997. The increase in operating income was almost solely attributable to the specialty steel segment and was primarily due to increases in Newport's shipments and average selling prices for welded OCTG products and improvements in Newport's operations. Investment income increased $0.4 million from fiscal 1996 as a result of increased average invested cash and short-term investment balances during fiscal 1997. Interest expense for fiscal 1997 was virtually unchanged from fiscal 1996 at $24.3 million. Other income, net was $1.5 million and $0.6 million for fiscal 1997 and fiscal 1996, respectively. Fiscal 1997 includes gains from the sale of certain development property and settlement of insurance claims, while fiscal 1996 also includes gains from insurance claims, offset by a loss on the sale of a non-steel segment fixed asset. The Company's combined federal and state effective tax rate for fiscal 1997 was 28.6% and was lower than the combined federal and state statutory rates primarily due to the utilization of net operating loss carryforwards for which certain deferred tax valuation allowances had been previously recorded. As a result of the above factors, the Company reported fiscal 1997 net income before extraordinary item of $13.7 million, or $.97 per basic share ($.92 diluted), compared to a net loss of $10.5 million, or a $.76 loss per basic and diluted share, in fiscal 1996. In connection with a fiscal 1997 fourth quarter refinancing, the Company incurred prepayment costs and wrote off unamortized debt discount and debt issuance costs which resulted in an extraordinary charge of $9.3 million, net of applicable income tax benefit of $2.3 million, or $.65 per basic share and $.62 per diluted share. See Note 4 to the Notes to Consolidated Financial Statements. Liquidity and Capital Resources Working capital at September 26, 1998 was $147.0 million compared to $226.9 million at September 27, 1997. The decline in working capital was largely attributable to the use of cash and short-term investments to make net investments of $73.2 million in long-term investments. The current ratio at September 26, 1998 was 3.79 to 1 compared to 2.64 to 1 at September 27, 1997. At September 26, 1998, the Company had cash and investments totaling $142.1 million, including $75.6 million in long-term investments. At September 26, 1998, the Company had no outstanding advances against its $50.0 million revolving credit facility (Credit Facility); however, $1.4 million of the Credit Facility was utilized to collateralize various letters of credit. Net cash flows provided by operating activities totaled $30.6 million in fiscal 1998. The Company recorded net income of $5.2 million in fiscal 1998. Major sources of cash from operating activities in fiscal 1998 included $19.2 million in non-cash depreciation and amortization charges and $3.2 million in a non-cash writedown of assets to be disposed; and decreases of $25.3 million and $8.0 million in accounts receivable and inventory, respectively, resulting from a decline in business activity. The major uses of cash in operating activities included a $7.1 million reduction in accrued debt prepayment fees, and a $26.4 million decrease in accounts payable and accrued liabilities resulting primarily from a decline in business activity. Net cash flows provided by operating activities totaled $9.7 million in fiscal 1997. The Company recorded net income of $4.4 million in fiscal 1997. Major sources of cash from operating activities in fiscal 1997 included $23.8 million in non-cash depreciation and amortization charges; a $7.1 million accrual for debt prepayment penalty; a $4.5 million increase in long-term deferred taxes and a $9.6 million increase in accounts payable and accrued liabilities due to increased business activity. The major uses of cash in operating activities included increases of $11.3 million and $21.0 million in accounts receivable and inventory, respectively, resulting from an increase in business activity related primarily to improvements in the OCTG marketplace. Additional uses of cash in operating activities include a $7.6 million increase in other current assets primarily related to increases in the Company's current deferred tax asset and receivables recorded in connection with certain insurance claims. Net cash flows provided by operating activities totaled $11.5 million in fiscal 1996. The Company recorded a net loss of $10.5 million in fiscal 1996. Major uses of cash in operating activities in fiscal 1996 included increases of $6.0 million and $8.6 million in accounts receivable and inventories, respectively, resulting from an increase in business activity. Offsetting these uses were $20.9 million in non-cash depreciation and amortization charges; a $2.5 million increase in long-term deferred taxes; a $2.5 million decrease in operating supplies and other current assets resulting primarily from a decrease in refundable income taxes and the collection of previously filed insurance claims; a $9.0 million increase in accounts payable primarily resulting from the purchase of steel slabs and a general increase in business activity; and a $2.2 million increase in accrued liabilities primarily related to an increase in accrued interest. Included in the fiscal 1996 net loss was a $1.2 million non-cash gain recorded in connection with the settlement of certain warranty claims made by the Company related to the acquisition of Koppel. The Company invested $32.6 million, $7.1 million and $6.5 million in capital expenditures during fiscal 1998, 1997 and 1996, respectively. Such capital expenditures were primarily related to improvements to and acquisitions of machinery and equipment in the specialty steel segment. Of the total spending in fiscal 1998, $8.9 million pertained to the purchase and installation of a new AC electric arc furnace at Newport. Capital spending for fiscal 1998, 1997 and 1996 related to the Company's environmental control facilities was not material. The Company currently estimates that fiscal 1999 capital spending will approximate $31.0 million. Approximately $16.4 million of fiscal 1999 capital expenditures will be used to complete the furnace project at Newport, which is scheduled for start-up in the second quarter of fiscal 1999. Sources for funding capital expenditures include cash flows from operations, available cash and investments, as well as available borrowing sources. The Company also used cash and short-term investments to make net investments of $73.2 million in long-term investments, primarily government and corporate bonds. The Company's long-term investments and long-term debt, all of which are for other than trading purposes, are subject to interest rate risk. Information concerning the maturities and fair value of the Company's interest rate sensitive investments and debt is included in Notes 3, 4 and 5 to the Consolidated Financial Statements. The Company utilizes professional investment advisors and considers its net interest rate risk when selecting the type and maturity of securities to purchase for its portfolio. Other factors considered include, but are not limited to, the timing of the expected need for the funds invested and the repricing and credit risks of the securities. The Company also generated $4.1 million in cash in fiscal 1997 from the sale of certain development property. In September 1997, the Company completed a public offering (Offering) of the Company's common stock. The Company sold six million shares for net proceeds, after expenses, of $169.8 million. In connection with the Offering, an additional 2.2 million shares of common stock were issued upon the conversion of the Company's $28.3 million principal amount 11% Convertible Debentures and the exercise of certain warrants. In October 1997, the underwriters' overallotment was exercised in full, resulting in the issuance of an additional 0.5 million shares of common stock with net proceeds to the Company of $15.4 million. The Company used a portion of the proceeds to retire $9.6 million principal amount of long-term debt and called for redemption $52.4 million principal amount of its outstanding 13.5% Senior Secured Notes (Notes). The redemption was made in October and included a prepayment penalty of $7.1 million, plus accrued interest. Reference is made to Note 4 and Note 6 to the Notes to Consolidated Financial Statements for further information concerning these transactions. During fiscal 1998, the board of directors authorized the repurchase, at management's discretion, of up to three million shares of the Company's common stock through June of 1999. During fiscal 1998, the Company repurchased 1.4 million shares of the Company's common stock for $17.1 million. The Company's annual long-term debt maturities are $0.7 million in fiscal 1999, $0.2 million in fiscal 2000, $0.2 million in fiscal 2001, $0.1 million in fiscal 2002 and $78.7 million in fiscal 2003. Reference is made to Note 4 to the Notes to Consolidated Financial Statements for further information concerning the Company's long-term debt and Credit Facility. Earnings before interest expense, taxes, depreciation and amortization (EBITDA) was $41.1 million for fiscal 1998, $61.1 million for fiscal 1997 and $32.6 million for fiscal 1996. EBITDA is calculated as income before extraordinary items plus 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, as an alternative to cash flows from operating, investing or financing activities or as a measure of liquidity. The Company believes that its current available cash and investments, its cash flow from operations and borrowing sources will be sufficient to meet its anticipated operating cash requirements, including capital expenditures, for at least the next twelve months. Inflation The Company believes that inflation has not had a material effect on its results of operations to date. Generally, the Company experiences inflationary increases in its costs of raw materials, energy, supplies, salaries and benefits and selling and administrative expenses. The Company has generally been able to pass these inflationary increases through to its customers. Impact of Year 2000 Issue The Year 2000 issue results from date sensitive computer programs that use only the last two digits to refer to a year. Such computer programs do not properly recognize a year that begins with "20" instead of "19". This issue impacts the Company and virtually every business that relies on a computer. If not corrected, system failures or miscalculation could occur causing disruption of the Company's operations, including, among other things, a temporary inability to process transactions, manufacture products or engage in similar normal business activities. The Company's subsidiaries operate autonomously and are not dependent on an integrated or centralized corporate-wide data processing system. As such, project teams have been formed at each subsidiary to address the respective subsidiaries' Year 2000 readiness. Information technology (IT) systems, such as any hardware or software used to process daily operational data and information, as well as non-IT systems, such as microcontrollers contained in various manufacturing equipment, are being assessed for Year 2000 compliance. The Company is addressing the Year 2000 issue in a four phase process. The first phase is one of awareness and involves the inventorying of all IT and non-IT systems. The Company is approximately 100% complete in identifying all of its IT and non-IT systems. The second phase of the Company's process is an assessment stage, where it is determined whether each of its identified systems are Year 2000 compliant. The Company is approximately 85% complete in assessing its IT systems and approximately 80% complete in assessing its non-IT systems. Assessment of all systems, together with plans of remediation for those systems found to be Year 2000 non-compliant, is scheduled to be completed by January 1999. The remediation and testing phases of the Company's systems are in various stages of completion. Remediation efforts may include modifications or replacement of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. Approximately 60% of the Company's IT systems have been remediated while remediation on its non-IT systems approximates 50% completion. The Company currently anticipates completion of all remediation and testing of its systems by October 1999. The Company also faces certain risks to the extent that its customers or suppliers of products and services do not become Year 2000 compliant. The Company is evaluating the status of significant customers and suppliers to determine the extent to which the Company is vulnerable to these third parties. Ongoing evaluation will continue through 1999; however, the Company believes its broad customer base and availability of alternative suppliers will mitigate the risks associated with these third parties. The Company has not yet developed a formal contingency plan in the event its Year 2000 efforts are not completed in a timely manner; however, back-up measures are being identified as systems are assessed to determine the most likely contingency plan for each system requiring remediation. For example, the contingency plan for many IT systems would be to revert to a manual record system and, for many non-IT systems, internal clocks could be reset to an earlier date. A formal contingency plan will be developed, as required, as remediation and testing procedures are completed in 1999. Costs associated with the Company's Year 2000 efforts were approximately $1.4 million in fiscal 1998 and estimated costs to complete are $1.9 million. Costs pertain primarily to system software and hardware replacements and upgrades for both its IT and non-IT systems. Although the Company has not yet completed all the necessary phases of its Year 2000 program, it believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made or are not completed in time, or if a material third party fails to properly remediate its Year 2000 issues, or if the costs are higher than expected, the Year 2000 issue could have a material effect on the Company's operations. While the Company is not currently aware of any significant exposure, there can be no assurance that the Year 2000 issue will not have a material impact on the business and operations of the Company. Other Matters See Note 9 to the Notes to Consolidated Financial Statements, "Commitments and Contingencies". See Note 1 to the Notes to Consolidated Financial Statements, "Summary of Significant Accounting Policies - Recently Issued Accounting Standards". Consolidated Statements of Operations For the years ended September 26, 1998, September 27, 1997, and September 28, 1996 (In thousands, except per share amounts) 1998 1997 1996 Net sales $409,855 $481,170 $409,382 Cost of products sold 370,612 412,845 369,585 Selling and administra- tive expenses 28,298 27,357 27,744 Operating income 10,945 40,968 12,053 Investment income 8,358 1,010 637 Interest expense (12,653) (24,261) (24,375) Other income, net 501 1,465 644 Income (loss) before income taxes and extraordinary items 7,151 19,182 (11,041) Provision (credit) for income taxes 2,604 5,478 (584) Income (loss) before extraordinary items 4,547 13,704 (10,457) Extraordinary items, net of income taxes 659 (9,256) - Net income (loss) $ 5,206 $ 4,448 $(10,457) Per common share (basic) Income (loss) before extraordinary items $.19 $ .97 $(.76) Extraordinary items, net of income taxes .03 (.65) - Net income (loss) $.22 $ .31 $(.76) Per common share (diluted) Income (loss) before extraordinary items $.19 $ .92 $(.76) Extraordinary items, net of income taxes .03 (.62) - Net income (loss) $.21 $ .30 $(.76) Weighted average shares outstanding Basic 23,684 14,141 13,809 Diluted 24,511 14,969 13,809 See notes to consolidated financial statements Consolidated Balance Sheets September 26, 1998 and September 27, 1997 (In thousands) 1998 1997 ASSETS Current assets Cash $ 1,783 $ 6,998 Short-term investments 64,689 128,828 Funds held for debt called for redemption - 59,517 Accounts receivable, less allowance for doubtful accounts of $752 and $712, respectively 37,840 63,151 Inventories 65,462 73,474 Operating supplies 14,211 15,657 Deferred tax assets 8,256 10,884 Other current assets 7,341 6,412 Total current assets 199,582 364,921 Property, plant and equipment -- at cost Land and buildings 31,570 30,113 Machinery and equipment 261,441 245,362 Construction in progress 13,889 3,304 Less -- accumulated depreciation (171,700) (154,962) Net property, plant and equipment 135,200 123,817 Long-term investments 75,626 2,800 Other assets 7,800 8,778 Total assets $418,208 $500,316 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and notes payable $ 28,305 $ 48,389 Payments due on debt called for redemption - 59,517 Accrued liabilities 23,608 28,126 Current portion of long-term debt 678 1,958 Total current liabilities 52,591 137,990 Long-term debt 76,325 76,424 Deferred taxes 11,706 13,087 Common shareholders' equity Common stock, no par value, 40,000 shares authorized, 24,334 and 23,310 shares issued, respectively 279,886 261,368 Treasury stock, 1,354 and 0 shares, respectively (15,992) - Common stock options and warrants 898 1,612 Unrealized loss on available for sale securities (2,834) (1,238) Retained earnings 15,628 11,073 Common shareholders' equity 277,586 272,815 Total liabilities and shareholders' equity $418,208 $500,316 See notes to consolidated financial statements Consolidated Statements of Cash Flows For the years ended September 26, 1998, September 27, 1997 and September 28, 1996 (In thousands) 1998 1997 1996 Cash flows from operating activities: Net income (loss) $ 5,206 $ 4,448 $ (10,457) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 18,066 17,609 19,260 Write-down of assets to be disposed 3,215 - - Amortization of debt discount and finance costs 1,172 6,219 1,642 Increase (decrease) in long-term deferred taxes (49) 4,488 2,496 Non-cash gain on settlement of claims - - (1,172) Loss on disposal of equipment 55 206 642 Loss on sales of investments 282 - - (Increase) decrease in accounts receivable 25,311 (11,327) (5,966) (Increase) decrease in inventories 8,012 (20,992) (8,601) (Increase) decrease in operating supplies and other current assets 2,901 (7,641) 2,543 Increase (decrease) in accrued prepayment fees on debt called for redemption (7,079) 7,079 - Increase (decrease) in accounts payable (21,929) 5,820 8,950 Increase (decrease) in accrued liabilities (4,518) 3,750 2,209 Net cash flows from operating activities 30,645 9,659 11,546 Cash flows from investing activities: Purchases of property, plant and equipment (32,576) (7,139) (6,510) Proceeds from sale of equipment 152 382 1,729 Purchases of available for sale securities (112,102) - - Sales of available for sale securities 22,019 - - Maturities of available for sale securities 16,931 - - (Increase) decrease in other assets 120 4,053 (474) Net cash flows from investing activities (105,456) (2,704) (5,255) Cash flows from financing activities: Increase (decrease) in notes payable (480) (157) 370 Proceeds from issuance of long-term debt 55 340 1,277 Repayments on long-term debt (54,397) (11,994) (1,892) Proceeds from issuance of common stock 17,843 182,902 - Purchases of treasury stock (17,081) - - Net cash flows from financing activities (54,060) 171,091 (245) Net increase (decrease) in cash and short- term investments (128,871) 178,046 6,046 Cash and short-term investments at beginning of year 195,343 17,297 11,251 Cash and short-term investments at end of year $ 66,472 $195,343 $ 17,297 Cash paid during the year for: Interest $ 12,738 $ 23,231 $ 22,179 Income taxes, net of refunds received $ 4,493 $ 1,463 $ (4,234) See notes to consolidated financial statements Consolidated Statements of Common Shareholders' Equity For the years ended September 26, 1998, September 27, 1997 and September 28, 1996 (In thousands) Options Common Stock Treasury Stock and Shares Amount Shares Amount Warrants Balance, September 30, 1995 13,809 $ 49,004 - $ - $ 2,737 Stock option plans 37 Unrealized loss on investments Net loss Balance, September 28, 1996 13,809 49,004 - - 2,774 Issuance of common stock 6,000 169,823 Conversion of 11% subordinated debentures 1,665 28,300 Stock option plans 645 6,327 (12) Exercise of common stock warrants 1,191 7,914 (1,150) Unrealized gain on investments Net income Balance, September 27, 1997 23,310 261,368 - - 1,612 Issuance of common stock 540 15,340 Purchase of treasury stock 1,437 (17,081) Stock option plans 94 1,007 (83) 1,089 (102) Exercise of common stock warrants 390 2,171 (612) Unrealized loss on investments Net income Balance, September 26, 1998 24,334 $279,886 1,354 $(15,992) $ 898 Consolidated Statements of Common Shareholders' Equity (continued) For the years ended September 26, 1998, September 27, 1997 and September 29, 1996 (In thousands) Unrealized Gain(Loss) on Available for Sale Retained Securities Earnings Total Balance, September 30, 1995 $(713) $17,082 $68,110 Stock option plans 37 Unrealized loss on investments (574) (574) Net loss (10,457) (10,457) Balance, September 28, 1996 (1,287) 6,625 57,116 Issuance of common stock 169,823 Conversion of 11% subordinated debentures 28,300 Stock option plans 6,315 Exercise of common stock warrants 6,764 Unrealized gain on investments 49 49 Net income 4,448 4,448 Balance, September 27, 1997 (1,238) 11,073 272,815 Issuance of common stock 15,340 Purchase of treasury stock (17,081) Stock option plans (651) 1,343 Exercise of common stock warrants 1,559 Unrealized loss on investments (1,596) (1,596) Net income 5,206 5,206 Balance, September 26, 1998 $(2,834) $15,628 $277,586 See notes to consolidated financial statements 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) and Northern Kentucky Management, Inc. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires that management make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Cash includes currency on hand and demand deposits with financial institutions. Investments Short-term investments consist primarily of money market mutual funds, commercial paper and U.S. treasury securities, for which market value approximates cost. Long-term investments consist primarily of corporate and government bonds which are classified as "available for sale" and carried at fair value, based on quoted market prices. Unrealized gains and losses on available for sale securities are included, net of tax, in common shareholders' equity until disposition. Realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method. Inventories At September 26, 1998 and September 27, 1997, inventories stated at the lower of LIFO (last-in, first-out) cost or market represent approximately 49% and 53% 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. During fiscal 1998, certain inventory quantity reductions caused a liquidation of LIFO inventory values. This liquidation increased net income by $0.3 million, or $.01 per diluted share. Inventories consist of the following: (In thousands) 1998 1997 Raw materials $ 7,921 $10,300 Semi-finished and finished goods 58,120 66,005 66,041 76,305 LIFO reserve (579) (2,831) Total inventories $65,462 $73,474 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. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals which extend the life or increase the productivity or capacity of an asset are capitalized. Following the successful installation and start-up of a new electric arc furnace scheduled for completion in the second quarter of fiscal 1999, Newport will be abandoning its existing three electric arc furnaces together with related property and equipment. As such, in the fourth quarter of fiscal 1998, the Company recorded to cost of products sold a non-cash impairment loss of $3.2 million. The impaired assets were written down to a fair value of $0.2 million based on the estimated salvage value of the assets. The write-down negatively impacted fiscal 1998 income before extraordinary items by $2.0 million, or $.08 per diluted share. Treasury Stock During fiscal 1998 the board of directors authorized the repurchase, at management's discretion, of up to three million shares of the Company's common stock through June of 1999. The Company's repurchases of shares of common stock are recorded as treasury stock at cost and result in a reduction of common shareholders' equity. When treasury shares are reissued, the Company uses average cost to value treasury shares and any excess of average cost over reissuance price is treated as a reduction of retained earnings. Income Taxes Deferred income tax balances represent the estimated future tax effects of temporary differences between the financial reporting basis and the tax basis of certain assets and liabilities. A valuation allowance is established to reduce deferred tax assets to amounts that are more likely than not realizable. Environmental Remediation and Compliance Environmental remediation costs are accrued, except to the extent capitalizable, when incurrence of such costs are 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 In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP 98-1) which addresses the recognition, measurement and disclosure issues for costs of computer software developed for internal use. SOP 98-1 requires companies to capitalize certain costs related to software developed or obtained for internal use. The Company adopted SOP 98-1 in the third quarter of fiscal 1998 and the impact was not material. Fiscal Year-End The Company's fiscal year ends on the last Saturday of September. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted - average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution from securities that could result in additional common shares being issued which, for the Company, includes stock options and warrants only. Securities that could potentially result in dilution of basic EPS through the issuance of 1.1 million and 5.6 million shares of the Company's common stock in fiscal 1998 and 1996, respectively, were not included in the computation of diluted EPS because they were antidilutive. Note 2: Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1998 1997 Accrued payroll and payroll related items $10,554 $11,352 Workers' compensation 3,242 3,530 Accrued interest 2,186 3,742 Accrued environmental remediation 2,675 4,394 Other 4,951 5,108 $23,608 $28,126 Note 3: Long-term Investments At September 26, 1998 and September 27, 1997, the Company's long-term investments, which are all classified as available for sale, consists of the following: 1998 Amortized Gross Unrealized Market (In thousands) Cost Gains Losses Value Corporate bonds $46,945 $163 $ (1,393) $45,715 U.S. government- backed securities 20,337 176 (10) 20,503 Other debt securities 7,997 11 - 8,008 $75,279 $350 $(1,403) $74,226 Equity securities $ 4,800 $ - $(3,400) $ 1,400 1997 (In thousands) Equity securities $ 4,800 $ - $(2,000) $ 2,800 At September 26, 1998, scheduled maturities of the Company's investments in long-term debt securities were as follows: (In thousands) Average Year Amortized Market End Rate Cost Value One year or less 5.55% $28,141 $28,154 One year through five years 6.12% 22,998 23,176 After five years 8.95% 24,140 22,896 $75,279 $74,226 Gross gains and losses of $0.1 million and $0.4 million, respectively, were realized during fiscal 1998. There were no realized gains or losses on available for sale securities in fiscal 1997 and 1996. The Company recorded a net unrealized loss of $1.6 million, net of taxes in fiscal 1998 on its available for sale securities. Net unrealized gains, net of taxes, were not material in fiscal 1997. Note 4: Long-term Debt and Credit Facility Long-term debt of the Company consists of the following: (In thousands) 1998 1997 13.5% Senior Secured Notes due July 15, 2003, interest due semi-annually, secured by property, plant and equipment (net of unamortized discount of $3,712 and $4,237, respectively) $74,946 $74,421 13.5% Senior Secured Notes called for redemption - 52,438 Other 2,057 3,961 77,003 130,820 Less: Current portion (678) (1,958) 13.5% Senior Secured Notes called for redemption - (52,438) $76,325 $76,424 In September 1997, the Company called for redemption $52.4 million principal amount of its outstanding 13.5% Senior Secured Notes due 2003 (Notes). The redemption was made in October 1997 from the proceeds of a public offering (see Note 6) and included a prepayment penalty of $7.1 million, plus accrued interest. The remaining Notes may be redeemed at the option of the Company, at any time, in whole or in part, beginning in 2000, initially at a price of 103.86%, declining to 100% in 2002. The Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries and are secured by the property, plant and equipment of the Company's steel-making operations. The indenture relating to the Notes contains a number of restrictive covenants including, among other things, limitations on the ability of the Company to incur additional indebtedness; create liens; make certain restricted payments, including dividends; engage in certain transactions with affiliates; engage in sale and leaseback transactions; dispose of assets; issue or sell stock of 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. In July 1998, the Company entered into a new $50.0 million revolving credit agreement. Interest rates range from the prime rate to prime plus .25% with respect to domestic rate loans, and interest rates on offshore rate loans (based on LIBOR) range from the offshore rate plus .375% to the offshore rate plus .875%. The credit facility contains certain financial covenants including a maximum ratio of debt to cash flow, a minimum interest coverage ratio, a maximum outstanding loans under the line to working capital and a minimum net worth. The credit facility also has restrictions on capital expenditures and the sale of certain assets. At September 26, 1998 approximately $1.4 million of the credit facility was utilized to collateralize letters of credit and $48.6 million was available for borrowing. The credit facility expires in fiscal 2003. In connection with the retirement of long-term indebtedness in the fourth quarter of fiscal 1997, the Company incurred prepayment costs and wrote off unamortized debt discount and debt issuance costs which resulted in an extraordinary charge of $9.3 million, net of applicable income tax benefit of $2.3 million, or $.65 and $.62 per basic and diluted share, respectively. Annual long-term debt maturities are $0.7 million in fiscal 1999, $0.2 million in fiscal 2000, $0.2 million in fiscal 2001, $0.1 million in fiscal 2002 and $78.7 million in fiscal 2003. As of September 26, 1998 and September 27, 1997 the weighted-average interest rate on outstanding notes payable was 6.1%. Note 5: Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and short-term investments - The carrying amount approximates fair value because of the short maturity of these instruments. Long-term investments - The carrying amount is recorded at fair value which is based upon quoted market prices. Notes payable - The carrying amount approximates fair value because of the short maturity. Long-term debt - The fair value of the Company's Senior Secured Notes is based upon their trading price as of fiscal year-end. The fair value of other 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 based upon current market rates. The carrying amount and fair value of the Company's financial instruments are as follows: 1998 1997 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value Cash and short- term investments $66,472 $66,472 $195,343 $195,343 Long-term investments 75,626 75,626 2,800 2,800 Notes payable 242 242 722 722 Long-term debt 76,325 87,012 130,820 153,856 Note 6: Common Stock Offering In September 1997, the Company completed a public offering (Offering) of the Company's common stock. The Company issued and sold 6.0 million shares, which resulted in net proceeds to the Company of $169.8 million after the underwriters' discount and other Offering expenses. In connection with the Offering, an additional 2.2 million shares of common stock were issued upon the conversion of the Company's 11% Convertible Debentures and the exercise of certain warrants, a substantial portion of which were sold in the Offering. In the first quarter of fiscal 1998, the underwriters' over-allotment option was exercised in full, resulting in the issuance and sale of an additional 0.5 million shares of common stock by the Company and net proceeds to the Company of $15.3 million. Note 7: Preferred Stock The Company's authorized stock includes two million 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. One million shares of the Class A Preferred Stock has been designated as Series B Junior Participating Preferred Stock, par value $10 per share, in connection with a Shareholder Rights Plan (Plan) adopted in November, 1998. 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 20% or more of the Company's common stock. The Company may redeem the Rights for one-half cent per Right at any time before a 20% position has been acquired. The Rights expire in November 2008. Note 8: Stock Options and Warrants The Company has various stock option plans under which the Company may grant incentive and nonqualified stock options and stock appreciation rights to purchase shares of the Company's common stock. All incentive stock options were granted at the fair market value on the date of grant. Incentive stock options generally become exercisable beginning one to three years after the grant date and expire after ten years. Nonqualified stock options become exercisable according to a vesting schedule determined at the grant date and expire no later than ten years after grant. During fiscal 1998, nonqualified stock options were granted at exercise prices approximating the market price on the date of grant. For fiscal 1998 and 1996, the weighted-average fair value of options granted was $9.29 and $1.20, respectively. A summary of transactions in the plans follows: 1998 1997 1996 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 896,755 $ 6.73 1,629,330 $7.22 1,667,055 $7.36 Granted 851,950 14.37 - - 60,000 2.63 Expired (170,132) 13.56 (87,395) 8.01 (97,725) 6.87 Exercised (200,459) 6.32 (645,180) 7.78 - - Outstanding, end of year 1,378,114 $10.67 896,755 $6.73 1,629,330 $7.22 Exercisable, end of year 445,549 $ 6.32 489,504 $7.73 951,428 $8.42 Available for grant 333,440 1,153,230 1,093,825 The Company accounts for these plans in accordance with the intrinsic value method. Pro forma compensation cost, net income (loss) and per share amounts computed as if the Company had accounted for the fiscal 1998 option grants on the fair value method would have been $0.8 million, $4.4 million and $.19 (basic) $.18 (diluted), respectively. Amounts for fiscal 1997 and fiscal 1996 would not have been materially different from reported amounts. The fair value of the granted options were determined using the Black-Scholes option pricing model with the following assumptions for fiscal 1998 and 1996, respectively: no common stock dividends; expected volatility of 59% and 40%; risk-free interest rates of 5.5% and 5.7%; and expected life of 7 years and 8 years. A summary of information about stock options outstanding at September 26, 1998 follows: Options Outstanding Options Exercisable Range of Average Average Average Exercise Exercise Remaining Exercise Prices Shares Price Life Shares Price $2.63 - $5.94 287,104 $ 4.21 6.4 218,368 $ 4.19 $6.125 - $9.75 308,085 7.29 4.3 197,706 7.51 $13.25 - $14.38 782,925 14.37 9.3 29,475 14.20 1,378,114 $10.67 7.6 445,549 $ 6.32 At September 26, 1998, the Company had common stock warrants outstanding, exercisable for approximately 272,000 shares of the Company's common stock at a price of $8.00 per share and 453,000 shares at a price of $4.00 per share. The warrants expire October 4, 2000 and July 15, 2003, respectively. 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. In connection with its capital expenditure program, the Company will spend approximately $16.4 million in fiscal 1999 to complete the purchase and installation of a new AC electric arc furnace at Newport. The furnace is scheduled for start-up in the second quarter of fiscal 1999. The Company has change of control severance agreements with certain of its key employees. The agreements contain provisions that would entitle each officer to receive an amount ranging from two to three times his base salary plus two to three times his five year average bonus, and continuation of certain benefits, if there is a change of control (as defined) of the Company and a termination of his employment. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers' compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. The Company accrues for the cost of such matters when the incurrence of such costs is probable and can be reasonably estimated. 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 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 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 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 steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. In August 1998, Newport received separate Notices of Violation (NOV) from the Kentucky Division of Waste Management and the Kentucky Division of Water related to a release of oil into the Licking River and certain related actions taken by Newport in connection therewith. The Company understands that there is a federal criminal investigation underway relating to this matter. Based upon the information available to date, the Company is unable to determine the extent of civil penalties which may be assessed or whether criminal charges will be filed in connection with this incident. In November 1996, Koppel received an NOV from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. The conditions which contributed to the alleged violations were corrected and Koppel has demonstrated compliance with air emission regulations. At this time, the Company is unable to determine the extent of civil penalties which the EPA may assess. In March 1995, Koppel and the EPA signed a Consent Order 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. In accordance with the Consent Order, investigation, monitoring, testing and analysis of the potential releases has been completed and a final report has been forwarded to the EPA; however, additional remediation may be required. 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. To date, the Company has been fully indemnified against all matters pertaining to the Consent Order and the Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the Consent Order, including all associated costs, claims and liabilities. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. In the fourth quarter of fiscal 1998, the Company entered into a contract with a company to dispose of the dust at an EPA - approved facility. The project is expected to be completed by the second quarter of fiscal 1999. Pursuant to the contract, the Company expects disposal costs to approximate $2.4 million and further, expects to receive $1.2 million in insurance claims which will be filed as disposal costs are incurred. As such, the Company adjusted its reserves and receivable to such amounts and recorded an extraordinary credit of $0.7 million, net of taxes of $0.3 million, or $.03 per basic and diluted share. Subject to the uncertainties concerning the storage of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are expected to be approximately $2.5 million, however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 26, 1998, the Company had environmental remediation reserves of $2.7 million which pertain primarily to accrued disposal costs for radiation contaminated dust. 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 its 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: Employee Benefit 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) for the bargaining unit employees, and discretionary contributions for salaried employees. The Company also has several defined contribution plans covering substantially all of its employees and a non-qualified deferred compensation plan covering certain employees. Expense for these plans was approximately $3.3 million, $2.8 million and $1.9 million in fiscal years 1998, 1997, and 1996, respectively. Note 11: Income Taxes The provision (credit) for income taxes, including $0.3 million and ($2.3) million allocated to extraordinary items in fiscal 1998 and fiscal 1997, respectively, consists of the following: (In thousands) 1998 1997 1996 Current $1,235 $ 2,780 $(2,112) Deferred 1,247 (897) 1,528 Tax benefit of employee stock option exercises allocated to equity 474 1,281 - Provision (credit) for income taxes $2,956 $ 3,164 $ (584) 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) 1998 1997 1996 Income tax provision (credit) at statutory tax rate of 35% $2,857 $2,664 $(3,864) Change in taxes resulting from: State income taxes, net of federal effect 471 95 (926) Change in valuation allowance (139) 542 4,156 Other, net (233) (137) 50 Provision (credit) for income taxes $2,956 $3,164 $ (584) The following represents the components of deferred tax liabilities and assets at September 26, 1998 and September 27, 1997: (In thousands) 1998 1997 Deferred tax liabilities: Property, plant and equipment $28,862 $30,517 Other items 152 671 29,014 31,188 Deferred tax assets: Reserves and accruals 7,913 6,327 Net operating tax loss carryforward 14,076 16,730 Alternative minimum tax and other tax credit carryforwards 5,933 6,122 Deferred financing costs - 1,641 Unrealized loss on investments 1,663 700 Other items 538 2,163 30,123 33,683 Valuation allowance (4,559) (4,698) Net deferred tax assets 25,564 28,985 Net deferred tax liability $ 3,450 $ 2,203 For federal income tax purposes, the Company has alternative minimum tax credit carryforwards of approximately $5.8 million, which are not limited by expiration dates, and net operating tax loss carryforwards of approximately $40.2 million, which expire beginning in 2008. The Company has recorded deferred tax assets related to these carryforwards, net of a deferred tax asset valuation allowance. In estimating the amount of the valuation allowance required, the Company has considered future taxable income related to the reversal of temporary differences in the tax and financial reporting basis of assets and liabilities. Note 12: Related Party Transactions One of the Company's directors has a controlling interest in a company which purchases secondary and limited service tubular products from Newport. Sales to this customer were approximately $13.2 million, $15.6 million and $16.8 million for fiscal years 1998, 1997 and 1996, respectively. Trade receivables from this customer were $1.0 million at the end of fiscal 1998 and 1997. Note 13: Business Segment Information The Company operates in two 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 and Koppel, a manufacturer of seamless tubular steel products and special bar quality (SBQ) products. The Company's specialty steel products consist of: (i) welded and seamless tubular goods used primarily in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products used primarily 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 and footwear finishes products. 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. In fiscal 1997, one customer accounted for 10.3% of net sales. The following table sets forth selected financial information by business segment for fiscal 1998, 1997 and 1996. (In thousands) Depre- ciation Oper- Identi- and Capital 1998 Net ating fiable Amorti- Expen- Sales Income Assets zation ditures Specialty steel segment $369,293 $13,899 $242,244 $17,484 $31,996 Adhesives segment 40,562 2,302 14,570 582 580 Corporate assets and allocations - (5,256) 161,394 - - Total consoli- dated $409,855 $10,945 $418,208 $18,066 $32,576 1997 Specialty steel segment $440,229 $43,760 $271,510 $16,954 $ 6,589 Adhesives segment 40,941 1,799 13,505 655 550 Corporate assets and allocations - (4,591) 215,301 - - Total consoli- dated $481,170 $40,968 $500,316 $17,609 $ 7,139 1996 Specialty steel segment $369,466 $14,886 $245,642 $18,595 $ 6,279 Adhesives segment 39,916 1,597 15,338 665 231 Corporate assets and alloca- tions - (4,430) 39,054 - - Total consol- idated $409,382 $12,053 $300,034 $19,260 $ 6,510 Note 14: Quarterly Financial Data (Unaudited) Quarterly results of operations for fiscal 1998 and 1997 are as follows: (In thousands, except per share amounts) First Second Third Fourth 1998 Quarter Quarter Quarter Quarter Net sales $123,733 $123,566 $96,882 $65,674 Gross profit (loss) 17,591 16,179 9,753 (4,280) Income (loss) before extraordinary item 6,537 5,736 1,189 (8,915) Net income (loss) 6,537 5,736 1,189 (8,256) Net income (loss) per common share before extraordinary item Basic .27 .24 .05 (.39) Diluted .26 .23 .05 (.39) Net income (loss) per common share Basic .27 .24 .05 (.36) Diluted .26 .23 .05 (.36) 1997 Net sales $105,167 $111,110 $132,853 $132,040 Gross profit 12,343 15,737 19,354 20,891 Income before extra- ordinary item 249 2,169 4,930 6,356 Net income (loss) 249 2,169 4,930 (2,900) Net income per common share before extra- ordinary item Basic .02 .16 .36 .42 Diluted .02 .15 .33 .37 Net income (loss) per common share Basic .02 .16 .36 (.19) Diluted .02 .15 .33 (.13) Reference is made to Note 1: Summary of Significant Accounting Policies - Property, Plant and Equipment and Depreciation regarding a fiscal 1998 fourth quarter impairment loss. Also, reference is made to Notes 4 and 9 to the Consolidated Financial Statements for a discussion of extraordinary items in fiscal 1997 and 1998, respectively. Note 15: Summarized Financial Information The Company's Senior Secured Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries (Subsidiary Guarantors), each of which is wholly-owned. Separate 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 26, 1998 and September 27, 1997 and for each of the three years in the period ended September 26, 1998. All significant intercompany accounts and transactions between the Subsidiary Guarantors have been eliminated. (In thousands) September September 26,1998 27, 1997 Current assets $130,129 $168,412 Noncurrent assets 140,942 131,526 Current liabilities 43,990 70,871 Payable to parent $174,316 $174,495 Other noncurrent liabilities 1,379 2,003 Total noncurrent liabilities $175,695 $176,498 Fiscal Year Ended (In thousands) 1998 1997 1996 Net sales $409,855 $481,170 $409,382 Gross profit 39,243 68,325 39,797 Income (loss) before extra- ordinary items 3,320 8,209 (5,816) Net income (loss) 3,979 8,209 (5,816) Report of Management The accompanying consolidated financial statements have been prepared by the management of NS Group, Inc., in conformity with generally accepted accounting principles and, in the judgment of management, present fairly and consistently the Company's consolidated financial position and results of operations. These statements necessarily include amounts that are based on management's best estimates and judgments. The financial information contained elsewhere in this report is consistent with that contained in the consolidated financial statements. In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls. These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements. These systems are enhanced by written policies, an organizational structure that provides division of responsibilities and careful selection and training of qualified people. In connection with their annual audit, independent public accountants perform an examination in accordance with generally accepted auditing standards, which includes a review of the system of internal accounting control and an expression of an opinion that the consolidated financial statements are fairly presented in all material respects. The Board of Directors, through its Audit Committee composed solely of non-employee directors, reviews the Company's financial reporting and accounting practices. The independent public accountants meet regularly with and have access to this Committee, with or without management present, to discuss the results of their audit work. Clifford R. Borland Chairman, President and Chief Executive Officer John R. Parker Vice President, Treasurer and Chief Financial Officer 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 26, 1998 and September 27, 1997, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the three years in the period ended September 26, 1998. 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 26, 1998 and September 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 26, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cincinnati, Ohio November 2, 1998 Consolidated Historical Summary (Dollars in thousands, except per share amounts) 1998 1997 1996 1995 Summary of Operations Net sales $409,855 $481,170 $409,382 $371,352 Operating income (loss) 10,945 40,968 12,053 7,806 Operating income margin 2.7% 8.5% 2.9% 2.1% Income (loss) before extraordinary items 4,547 13,704 (10,457) (5,056) Net income (loss) 5,206 4,448 (10,457) (10,256) Income (loss) per diluted share before extraordinary items .19 .92 (.76) (.36) Net income (loss) per diluted share .21 .30 (.76) (.74) Dividends per common share Weighted average shares outstanding diluted (000's) 24,511 14,969 13,809 13,809 Other Financial and Statistical Data Working capital $146,991 $226,931 $ 80,905 $ 72,854 Total assets 418,208 500,316 300,034 298,497 Long-term debt 76,325 76,424 164,789 166,528 Common shareholders' equity 277,586 272,815 57,116 68,110 Capital expenditures 32,576 7,139 6,510 12,233 Depreciation and amortization 19,238 23,828 20,902 21,311 EBITDA 41,085 61,052 32,594 31,141 Current ratio 3.79 2.64 2.16 2.27 Debt-to-equity ratio .28 .29 2.93 2.47 Book value per outstanding share 12.08 11.70 4.14 4.93 Steel product shipments (tons) Tubular products 450,000 590,000 506,000 440,000 Special bar quality products and other 184,000 179,000 177,000 216,000 Employees 1,803 1,948 1,774 1,728 * Includes the impact of the sale of Kentucky Electric Steel Corporation ** Assets of Koppel Steel Corporation acquired 1994* 1993 1992 1991** 1990 1989 $303,380 $353,082 $281,242 $212,471 $249,871 $219,414 689 11,672 1,401 (18,177) 19,370 18,469 .2% 3.3% .5% (8.6)% 7.8% 8.4% 13,208 (5,896) (13,358) (20,603) 13,047 12,773 13,208 (6,991) (15,900) (20,603) 13,047 12,773 .95 (.44) (.99) (1.53) .96 .94 .95 (.52) (1.18) (1.53) .96 .94 - - .06 .12 .11 .05 13,843 13,553 13,483 13,449 13,589 13,535 $ 50,682 $ 43,174 $ 44,198 $ 48,411 $ 64,858 $ 55,714 315,327 317,242 319,079 329,889 220,856 177,292 138,110 156,056 164,180 168,822 65,884 24,958 76,464 62,622 68,574 85,149 107,226 95,490 10,394 5,488 4,148 112,573 45,011 28,081 18,789 19,093 18,711 5,725 6,879 6,080 21,566 30,355 20,515 (1,360) 28,852 27,514 1.56 1.49 1.60 1.79 2.90 2.30 2.01 2.64 2.52 2.11 .65 .31 5.54 4.57 5.08 6.33 7.98 7.13 370,000 385,000 292,000 215,000 285,000 209,000 191,000 363,000 299,000 212,000 239,000 262,000 1,568 1,995 1,770 1,705 1,479 1,457 Corporate and Shareholder Information Stock Market Information NS Group, Inc. is listed on the New York Stock Exchange, trading symbol, NSS. Stock Price Fiscal 1998 High Low 1st Quarter $41 1/4 $13 1/4 2nd Quarter 18 12 5/8 3rd Quarter 15 7/16 8 5/16 4th Quarter 10 1/4 5 1/2 Fiscal 1997 High Low 1st Quarter $ 4 3/8 $ 3 2nd Quarter 5 5/8 4 1/8 3rd Quarter 11 7/8 4 3/4 4th Quarter 34 1/4 11 1/2 EX-21 7 EXHIBIT 21 SUBSIDIARIES OF NS GROUP, INC. (all are wholly-owned) Name State of Incorporation Erlanger Tubular Corporation Oklahoma Imperial Adhesives, Inc. Ohio Koppel Steel Corporation Pennsylvania Newport Steel Corporation Kentucky Northern Kentucky Management Kentucky EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 33-24182, 33-24183, 33-51899, 33-28995, 33-37454, 33-39695, 33-56637 and 333-03657. /s/Arthur Andersen LLP Cincinnati, Ohio Arthur Andersen LLP December 15, 1998 EX-27 9
5 This schedule contains summary financial information extracted from NS Group, Inc.'s consolidated financial statements as of and for the fiscal year ended September 26, 1998, included in the Company's Annual Report on Form 10-K and is qualified in its entirety by reference to such consolidated financial statements. 0000745026 NS GROUP, INC. 1 US 12-MOS SEP-26-1998 SEP-28-1997 SEP-26-1998 1 1,783 64,689 38,592 752 65,462 199,582 306,900 171,700 418,208 52,591 76,325 0 0 264,792 12,794 418,208 409,855 409,855 370,612 370,612 0 0 12,653 7,151 2,604 4,547 0 659 0 5,206 .22 .21
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